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Cotenancy Problems: Is the Gas Balancing Agreement the Answer?

Homer J. Penn, Proceedings of 33d Annual Rocky Mountain Mineral Law Institute (1987)

Cotenancy is common in oil and gas exploration and production.1 It occurs whenever two or more entities own an interest in the same property. This relationship between owners of joint interests in oil and gas properties is best understood if we consider what the relationship would be if a Joint Operating Agreement (JOA) did not exist. Basically, except to the extent that the joint interest owners have contractually modified their positions, the rules of cotenancy apply. Cotenants have an equal and coextensive right to occupy the premises. The only limitation is that they must not exercise such right so as to exclude the other cotenants from their equal right of access.2 The occupying cotenants have the duty to account to the non-occupying tenants for all profits from their use of the premises subject to the recoupment of the expenses of the occupying cotenants relating to the generation of such profits.3 This rule may cause confusion when there is a winding up of the affairs conducted under a JOA. The absence of reference to such a final accounting in the JOA, or the absence of a gas balancing agreement has sometimes resulted in an overproduced party not being sure of the extent of its obligation to account for the proceeds of gas sales to the underproduced party.