December 2022
PJVA Christmas Social
Joint Venture Analyst Certificate
PJVA Luncheon Discussion
Early Morning Sessions - We Need Hot Topics!
A Nightmare On Pad Street” The Risks Inherent In Shared Well Pads
PJVA Christmas Social
Thursday, December 8, 2022 @ 3:30 pm
The Calgary Petroleum Club, Renfrew Lounge
It's the most wonderful time of year! Mark your calendars and jingle all the way over to The Calgary Petroleum Club to celebrate the Christmas season with your PJVA colleagues. We ho-ho-hope to see your jolly faces! There will be door prizes, cocktails, appetizers, a photo both and whiskey tasting by Eau Claire Distillery! A big thank you to our sponsors, GLJ, Integrity Audit & Accounting and Eau Claire Distillery.
Joint Venture Analyst Certificate
Joint Venture Analyst Level 1 - January 10 through February 9, 2023
Joint Venture Analyst Level 2 - February 21 through March 23, 2023
Classes run Tuesdays and Thursdays 4:30 to 7:00 pm
PJVA strongly recommends this course to all oil & gas industry personnel who have any interest in, exposure to, or involvement with Joint Ventures agreements. PJVA is confident that this offering will provide its graduates with the critical foundational knowledge required to begin taking on, or expanding on a current Joint Venture role.
Joint Venture Analyst Level 1 - CLICK HERE TO REGISTER
Joint Venture Analyst Level 2 - CLICK HERE TO REGISTER
PJVA Luncheon Discussion
Thursday, January 18, 2023 @ 11:30 am - 1:00 pm
The Calgary Petroleum Club, Devonian Room
CCUS - THE STATE OF THE INDUSTRY AND THE PATHWAY TO COMMERCIALITY
Featuring:
Francis Morin,
Geologist and Carbon
Sequestration Specialist at
McDaniel & Associates
Matt Ng,
Senior Geophysicist - P. Geo.
at Entropy Inc.
Alberta sits on some of the largest oil reserves in the world and its geology also gives the province an advantage in carbon capture utilization and storage. CCUS technology is now key to province's hopes of aligning oil sands operations with Canada's current emissions reduction targets. This year, plans for a massive oilsands carbon capture storage hub will be a key talking point at COP 27. According to the Pathways Alliance, it's scope is 10 times larger than any existing CCS project in the world and preliminary work on the proposed project is well underway. It involves a 400 km pipeline to connect 20 or more oil sands facilities transporting carbon from Fort McMurray and Christina Lake for permanent storage in Cold Lake and is just one of twenty-five Alberta carbon hub proposals. Catch our presentations and discussion on CCUS projects- The State of the Industry and the Pathway to Commerciality.
Early Morning Sessions - We Need Hot Topics!
If you have any ideas for an EMS discussion, topics, or presenters, please contact PJVA Director: Doug Klug at (403) 605-3761 or ddklug1@gmail.com.
A Nightmare On Pad Street” The Risks Inherent In Shared Well Pads
By: Jim MacLean, with the assistance of Michael Bruch, Lorraine Grant, Steffany Colvinns, Susan Levy and Beth Swift-Hill
Industry has been drilling increasingly from shared well pads for over 15 years. The foundation of the 2018 PJVA-CAPL Pad Site Sharing Agreement (“PSSA”) is the belief that conventional Land and JV agreements do not suitably address the issues associated with management of well pads in which wells and facilities are not held in common ownership. The project was initiated in 2013 as a consequence of initial discussions by several industry JV and Land personnel who regarded this as an industry problem that required an industry solution, and it became a joint PJVA-CAPL project in 2014. The document was released to industry in September 2018 as a joint PJVA-CAPL document after well over a thousand hours of volunteer time, the distribution of three fully annotated drafts for industry review, significant modifications to reflect industry comments (with customized responses to each comment received in a compilation of industry comments) and a number of presentations to large industry audiences. (The Introduction to the annotated version of the PSSA offers a very good overview of the major principles of the PSSA and a simple schematic of a pad site.)
Although there are a multitude of older and new well pads in which wells and facilities are not held in common ownership, the PSSA has not been used widely by industry to date.
This is something that those of us closely involved with the creation of the PSSA realized was likely to be the case when we were finalizing our work on the project. Although we attempted over the course of the project to increase awareness of the issues and risks associated with shared well pads in which there was not common ownership, we concluded that there would be three major challenges associated with use of the PSSA.
The first challenge is the typical paradigm that pad sharing arrangements are a simple surface sharing arrangement designed to decrease the environmental footprint, to lower construction costs and to enhance operating efficiencies on the well pad. The costs of construction of the pad site and the installation of the associated shared facilities are typically modest relative to the total investment in the wells on the pad site. Once the parties negotiate a logical cost sharing arrangement for the initial construction of the pad site and the installation of shared facilities and the manner in which that work is to be conducted, the effort to create a PSSA and manage it on an ongoing basis can seem large to pad participants relative to the potential benefits of having a PSSA in place. This is particularly the case when one of the common consequences of the prolonged period of weak commodity prices has been a material reduction of Land and JV support levels in many organizations.
The second challenge is the inherent change management associated with the PSSA. Industry experience demonstrates that there is typically a significant change management issue associated with any update to an established industry precedent, such as the CAPL Operating Procedure, the PJVA CO&O Agreement or the PASC Accounting Procedure. The PSSA faces a unique challenge in this regard, though. It is a new type of document. It blends Land and JV concepts for an audience that is typically not familiar with both Land and JV concepts. It is also premised on an enhanced level of ongoing communication between Land and JV personnel.
The third challenge is that it is unlikely that industry will be motivated to use the document until there is an incident that demonstrates convincingly the benefits of having a PSSA in place for a shared well pad relative to the consequences of not having one in place.
This article focuses on the third point, and addresses primarily two scenarios that could quite possibly occur on a shared well pad - (i) a major loss resulting from an activity with respect to the shared facility; and (ii) a major loss resulting from an activity with respect to a well in one interest set that impacts the shared facilities and the wells in a different interest set. The common theme noted below in those scenarios is that Operators are potentially exposed to significantly more potential liability than would otherwise be the case if a PSSA were in place.
Welcome to A Nightmare on Pad Street!
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Loss Resulting From Activity With Respect To Shared Facility
Assume that:- there are four Montney wells held under JOA#1 by A-40%; B-35% and C-25%;
- there are four Montney wells held under JOA#2 by A-45%; D-30%; E-15%; and F-10%;
- the parties funded the pad construction and the installation of $3MM in shared facilities on the basis of an anticipated well count of eight wells (four under each JOA), such that there are respective interests of: A-42.5%; B-17.5%; C-12.5%; D-15%; E-7.5%; and F-5% without any documentation in place for that work above the associated AFE;
- A is the Operator under each Land JOA, holds all surface rights in its own name and manages the pad site; and
- there was a major explosion on the pad site as a result of an activity conducted by A's employee on the shared facility that destroyed the shared facility and that significantly damaged all of the wells on the pad site.
The Operator does not dispute that there was a significant error in judgment that resulted in the loss, but argues that the error was not one that could be categorized as “Gross Negligence or Wilful Misconduct”. Ignoring a potential claim for loss of profits and delay in production, the replacement of the shared facilities and the repairs to the affected wells and associated well specific equipment are anticipated to be ~$25MM.
An analysis of this situation follows in the context of expected outcomes without a PSSA in place and with a PSSA in place.
| Issue | Outcome Without PSSA | Outcome With PSSA |
| Form of claim | The injured parties would initiate a claim that would require them to prove that they suffered damages as a result of the Operator's negligence. | The injured parties would initiate a claim through the contractual liability and indemnification provisions in Article VIII of the PSSA. It includes a cross-indemnity with respect to the different ownership assets located on the well pad. This would address losses suffered with respect to the shared facility and the assets governed by the JOAs. |
| Issue | Outcome Without PSSA | Outcome With PSSA |
| Operator attempts to avoid liability by arguing that the activity of its employee did not constitute “Gross Negligence or Wilful Misconduct” |
The protection typically afforded to an Operator with respect to the “Gross Negligence or Wilful Misconduct” qualification is a creation of contract. The loss related to an activity with respect to the shared facility. It was not conducted under either JOA, and the only contractual relationship in place by the parties for the shared facility was the AFE they initially signed for its construction. In the absence of any applicable agreement in which the parties agreed specifically that the “Gross Negligence or Wilful Misconduct” qualification applied to the determine the liability of the Operator for the conduct of activities with respect to the shared facility, there is no such qualification that would limit the Operator's responsibility for loss. As the loss was caused by the negligence of the Operator's employee, the Operator will be solely responsible for the losses associated with that error in the absence of a successful industry custom and practice defence that survives appeal. |
Assuming that the Operator was correct in its assertion that the applicable negligent act or omission of its employee was not “Gross Negligence or Wilful Misconduct” as defined in the PSSA Operating Procedure, the Operator would not be solely responsible for the loss. The PSSA would see the responsibility for loss borne by the pad owners under Article VIII of the PSSA Operating Procedure in the percentages of their ownership in the shared facilities (i.e., the interests noted in item (iii) above: A-42.5%; B-17.5%; C-12.5%; D-15%; E-7.5%; and F-5%). Those shared damages would include those suffered by the applicable JOA owners with respect to the assets governed under the particular JOA. |
| Issue | Outcome Without PSSA | Outcome With PSSA |
| Claims for loss of profits and delay in production |
Modern agreements typically include an exception for “extraordinary damages” suffered by the parties. That exception would address such damages as loss of profits, business interruption, delay in production and other indirect or consequential damages. The activity in question was not conducted under one of the JOAs, and there was no contract in place governing activities respecting the shared facility beyond the AFE the parties initially signed for its construction. As a result, the normal legal rules on the quantification of damages would apply. It is quite possible that the Operator could be exposed to some level of damages for loss of profits, delay of production and other indirect or consequential losses in the same manner as normally determined by a Court when awarding damages. This would apply to any such losses suffered by the other parties with respect to both their shared interests in the pad site and their interests in the applicable wells and equipment governed by each JOA. |
Clause 804 of the PSSA Operating Procedure is clear that there is no responsibility of the Operator or any other owner for any “Extraordinary Damages” suffered by another owner as a consequence of activities conducted by the Operator under the PSSA. This would cover both losses with respect to their shared pad interests governed by the PSSA and their interests in wells and related equipment governed by the applicable JOA. |
| Issue | Outcome Without PSSA | Outcome With PSSA |
| Insurance |
As there was no contract in place governing activities on the shared facility beyond the AFE the parties initially signed for its construction, there was no requirement for a party to have insurance in place for its assets on the shared pad beyond whatever policy might have been required under the applicable Land Agreement. It is possible that individual owners might have some insurance in place that could potentially offset any losses otherwise unrecoverable from the Operator. This assumes, though, that an owner with insurance coverage would not see any of its claim rejected by its insurer if that owner did not disclose that there was a shared pad site and the close proximity of other wells and equipment to its own wells. |
Article V of the PSSA Operating Procedure requires certain prescribed policies to be in place with respect to “Joint Pad Operations”. The prescribed policies are also required to be maintained by parties with respect to their “Land Activities”, notwithstanding that the applicable JOA might otherwise have included lesser policy requirements and lower coverage limits. Assuming compliance with the insurance obligations of the PSSA, these policies could potentially offset the losses suffered by individual owners in this circumstance. This assumes, though, that an owner would not see any of its claim rejected by its insurer if that owner did not disclose that there was a shared pad site and the close proximity of other wells and equipment to its own wells. |
B. JOA Land Activity Creates Loss To Shared Pad Facility And Other Wells
Assume the same fact situation as above, except that the explosion caused by the error of the Operator’s employee was with respect to a well governed by JOA#1.
| Issue | Outcome Without PSSA | Outcome With PSSA |
| Form of claim |
Insofar as the injured JOA#1 parties suffered a loss with respect to their interests governed by JOA#1, they would initiate a claim through the contractual liability and indemnification provisions of their JOA. For damages with respect to the shared facility or JOA#2, the injured parties would initiate a claim that would require them to prove that they suffered damages as a result of A's negligence. |
As the loss related to a “Land Activity” under JOA#1, JOA#1 would apply to losses suffered by the parties to JOA#1 with respect to the assets governed by JOA#1. Clause 604 of the PSSA Operating Procedure creates a contractual liability and indemnification obligation with respect to losses suffered by owners with respect to the shared facility and the assets governed by JOA#2 as a consequence of “Land Activities” under JOA#1. |
| Issue | Outcome Without PSSA | Outcome With PSSA |
| Operator attempts to avoid liability by arguing that the activity of its employee did not constitute “Gross Negligence or Wilful Misconduct” |
Assuming that JOA#1 included a CAPL Operating Procedure and that the Operator was correct in its assertion that the applicable negligent act or omission of its employee was not “Gross Negligence or Wilful Misconduct” for purposes of that JOA, the Operator would not be solely responsible for the loss suffered by the JOA#1 parties with respect to the assets governed by that JOA. (Note-An Operator would have greater protection under the 2007 and 2015 CAPL Operating Procedures because of the definition of “Gross Negligence or Wilful Misconduct” in those documents.) The assertion that the error did not constitute “Gross Negligence or Wilful Misconduct” is not relevant to losses suffered with respect to the assets held under JOA#2 or the shared facility not governed by any agreement, as there is no overarching contractual arrangement by all pad owners governing the well pad. Subject to an indemnification by A to B and C under JOA#1 if the act or omission were determined to constitute “Gross Negligence or Wilful Misconduct”, any such losses would be borne by the JOA#1 parties in respective shares of A-40%; B-35% and C-25%. This would see all pad owners receiving amounts for losses suffered by them with respect to the shared facility and A, D, E and F receiving amounts for losses suffered by them with respect to JOA#2. |
Same outcome as if there were no PSSA in place. A determination that the error did not constitute “Gross Negligence or Wilful Misconduct” under JOA#1 would be relevant with respect to the JOA#1 parties for losses suffered by them with respect to the assets governed by that JOA, as the Operator would not be solely responsible for those losses. Assuming that the loss was a consequence of a “Land Activity” under JOA#1 in circumstances in which the Operator was not solely responsible for the loss under JOA#1, losses suffered by the owners with respect to the assets held under JOA#2 or the shared facility would be borne by the JOA#1 parties in respective shares of A-40%; B-35% and C-25%. This would see all pad owners receiving amounts for losses suffered by them with respect to the shared facility and A, D, E and F receiving amounts for losses suffered by them with respect to JOA#2. If, on the other hand, it were determined that the Operator's conduct were “Gross Negligence or Wilful Misconduct” (and the Operator were able to pay), the injured JOA#1 parties would ultimately recover from A, as Operator under JOA#1, any amounts they were required to contribute under the PSSA liability and indemnification provisions. This is because of the Operator's duty under JOA#1 to indemnify the other JOA#1 parties with respect to its Gross Negligence or Wilful Misconduct. |
| Issue | Outcome Without PSSA | Outcome With PSSA |
| Claims for loss of profits and delay in production |
As regards the parties to JOA#1, the 1990, 2007 and 2015 CAPL Operating Procedures include limitations on the damages that may be awarded to the parties under the JOA. This would limit any damages that might accrue to them under that JOA if the Operator's action or omission were determined to constitute “Gross Negligence or Wilful Misconduct”. Otherwise, the comments on this topic from Section A would apply to losses respecting the assets governed by JOA#1 (i.e., 1974 or 1981 CAPL Operating Procedure), the shared facility and the assets governed by JOA#2. |
The provisions of JOA#1 would continue to apply to any losses respecting the assets governed by JOA#1. Otherwise, the liability and indemnification provision of Clause 604 of the PSSA Operating Procedure and the referenced application of the Clause 804 Extraordinary Damages qualification would limit the damages that could be awarded with respect to losses to the shared facility and the assets governed by JOA#2. |
| Insurance | See the comments on this topic from Section A. | See the comments on this topic from Section A. |
Other Scary Things Lingering In The Shadows On Pad Street
Here are a few “short snappers” of very unpleasant potential real-world adventures lingering in the shadows of Pad Street that could pose serious problems in due course for pad participants:
Use Of Capacity For Shared Facilities: Many issues can potentially arise respecting the basis for use of the shared facilities. These include: (i) changes in interest as the well count changes; (ii) priorities in use; (iii) processes for acceptance of off-pad substances; (iv) processes for handling non-owner outside substances; (v) the basis on which fees for use of the shared facility would be determined and shared; (vi) the processes to be followed for enlargements and other modifications; and (vii) the possibility that a shared facility might be modified to an extent to which it is governed by a separate CO&O Agreement. These items are addressed in either the PSSA Operating Procedure or a precedent Appendix to the PSSA Operating Procedure that parties are able to customize for their particular fact situation.
End Of Life Issues: There are a number of potential end of life issues as wells on the pad begin to be abandoned. These include: (i) the responsibility for the abandonment of the wellbores as a “Land Activity” outside of the PSSA; (ii) the need to link the applicable wells to any resultant remediation and reclamation activities that extend from the specific well location to other areas of the pad site; (iii) the staged abandonment of the pad site and any intervening reduction of the pad site area; and (iv) a purported withdrawal of an owner from the pad site when the wells in which it was a participant have been abandoned. These issues are addressed in the Abandonment Appendix of the PSSA.
Multiple Operators On A Shared Pad: Assume that: (i) Operator X of one JOA has all of the surface rights in its name; (ii) X allowed Operator Y of another JOA to operate both the wells on site governed by that other JOA and the shared facility; and (iii) there was a serious environmental or safety incident caused by Y's error. As each work site may have only one “Prime Contractor” for purposes of Occupational Health and Safety regulatory requirements, X is going to find itself in the middle of the associated investigation under the regulations and quite possibly determined by the regulator to have primary responsibility for any injuries, death or third party damages, unless the regulator determines that the pad site comprises two distinct work sites. (See the review of the Prime Contractor requirements in the Addendum of Annotations to the PSSA Operating Procedure.)
“Let's Be Careful Out There”
Shared pad sites can mitigate the environmental footprint, lower construction costs and optimize operating efficiencies for construction costs and shared site-specific infrastructure. The paradigm that pad sharing arrangements are a simple front-end arrangement to cover the construction of the pad site and the installation of the initial shared facility does not recognize sufficiently the range of issues and risks inherent in the sharing of a pad site that is not owned in common interests.
Shared pad sites without common interests are useful inventions for which there is not a problem until there is a problem. As shown above, any such problem can quite possibly be significant, and resolution might be very costly and time consuming.
Put simply, a decision not to address risk is a conscious choice to assume risk, which is why the title for a number of our presentations to industry was “Doing Nothing Is Not An Option”. In summary, as they used to say in each episode of the 1980s TV show Hill Street Blues, “Let's be careful out there.”
(See the Resource Centre tab on my website (MacLeanResourceManagement.com) for a collection of PDFs of articles and presentations on a range of topics, including the CAPL Operating Procedure, the CAPL Farmout & Royalty Procedure and the CAPL Property Transfer Procedure.)