Category: Energy Page 25 of 55

By: Nigel Bankes

PDF Version: Net Profits Interest Decision

Case Commented On: Hudson King v Lightstream Resources Ltd, 2020 ABQB 149 (CanLII)

William Hudson (WH) of Texas discovered hydrocarbons in a reservoir near Rocanville, Saskatchewan. Lacking the resources to develop the discovery WH assigned the Rocanville properties to Triton (a Texas based corporation) in 1977 in return for $900,000 and a net profits interest (NPI). The NPI Agreement was executed in favour of a trust that WH and his wife had established for the benefit of their three children EHK, AH and CH. The trust was collapsed in 1986 when the youngest child reached 21 and the three children became the counterparties to the NPI Agreement. AH assigned his interest to ACH Holdings in 2009. I refer to EHK, AH, CH and ACH Holdings as the Hudson parties or as the plaintiffs. On the Triton side of the NPI Agreement the interests in the Rocanville properties passed through several hands including TriStar which continued as Petrobakken Energy which changed its name to Lightstream Resources. In September 2014 Lightstream sold and assigned its entire interest to Crescent Point. Lightstream, Crescent Point and the Hudson parties entered into an assignment and novation agreement (reproduced and discussed further below). In what follows, I sometimes refer for the sake of simplicity to the party from time to time holding the Triton interest in the NPI Agreement as the operator.

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By: Nigel Bankes

PDF Version: Relationship Between a Farmout Agreement and a Joint Operating Agreement

Case Commented On: Apache North Sea Ltd v Euroil Exploration Ltd [2019] EWHC 3241 (Comm) (England and Wales)

Under the terms of a farmout agreement, the farmor, the holder of a working interest in an oil and gas property (i.e. a lease, licence, concession or other form of agreement), affords the farmee an opportunity to earn a share of that working interest in return for performing a work obligation – typically the drilling of a well. In some cases (sometimes termed a farmout and participation agreement) the farmee earns an interest by contributing a share of the costs of a drilling operation to be conducted by the farmor itself rather than the farmee. It is standard practice in either case to attach a joint operating agreement (JOA) to the farmout agreement to address the legal relationship between the farmor and farmee (and perhaps other parties) once the farmee has earned its interest. It is crucial to do this since, once the farmee has earned, the farmor and farmee will then be co-owners of the lease or licence etc, i.e. they will be holders of an undivided interest in that property as tenants in common. But until the farmee earns, the parties are not co-owners. One issue that the parties need to address as clearly as possible in these arrangements is the applicability of the JOA before the farmee has earned. Perhaps a working hypothesis might be that the JOA is of no application until the point of earning since the JOA is fundamentally concerned with co-ownership. However, there is frequently a lot of detail in the JOA that the parties may want to incorporate or make reference to during earning and this may be especially the case where the farmout is better characterized as a farmout and participation agreement rather than a pure farmout where the earning well is drilled at the sole cost, risk and expense of the farmee.

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