Operator’s Authority Broadauthority The operator “shall conduct and direct and have full control of all operationson the Contract Area … and shall conduct its activities under this agreement as a reasonably prudent operator” AAPL Model Form, Article V.A.
Operator’s Authority Limitationsto protect non-operators * Require approval of non-operatorsto plug and abandon well
Operator’s LiabilityLimitedliability * Operator liable onlyfor:1. “gross” negligence (failure to use smallestdegree of care)and/or 2. “willful” wrongdoing (intentional)
Liability of Non-OperatorsNon-operator liable only for its owntorts and contractsException: Non-operator actively participates in management or has the right to do so
Drilling CostsAuthority for Expenditure (“AFE”) * Form used to estimate costs- Identifies location, depth, formation - Provides good faith estimateof costs
Drilling Costs“AFE”Parties signAFE = Commitment to payproportionate share of reasonable and necessary costs in drilling to the objective specified in AFE
M&T v. Fuel ResourcesM&T sued to recover unpaid balance of non-operator Fuel Co.’s share of costs ($150,927) M&T won* By signing AFE, Fuel Co. committed to pay its proportionate share of costs* AFE= estimate, notmaximum limit
M&T v. Fuel ResourcesNo right to “go nonconsent” on cost overrunsException: Operating agreement imposes maximum dollar limit on any single project … cost overruns require approval of non-operators AAPL Model Form, Article VII.D.
Additional DevelopmentProposed OperationsA party may elect not to participatein the cost of drilling a well other than the initial well, or the reworking, sidetracking,deepening, recompleting, or plugging back of a well (“go nonconsent”)AAPL Model Form, Article VI.B.
Go “Nonconsent”Consenting parties advance share of costs of nonconsenting parties ANDConsenting parties receive share of production attributable to nonconsenting parties until recover costs incurred plus agreed percentageAAPL Model Form, Article VI.B.