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Don't Get Stuck With the Check When It's Not Your Dinner: Indemnity and Insurance Issues Under Joint Operating Agreements

William W. Pugh, Harold J. Flanagan, Jana L. Grauberger, Oil & Gas Agreements: Joint Operations

Oil and gas exploration and development ventures are huge undertakings, often requiring the participation and coordination of numerous entities. In these situations, the proper allocation of financial risks and operational responsibilities among those participants is crucial. In most cases, this allocation is accomplished via a Joint Operating Agreement, or JOA. In the United States today, the most common JOA form governing E&P work is known as the AAPL Model Form Operating Agreement 610.2 The form had its genesis in 1956 as an amalgamation of company-specific forms by the oil company members of the Mid-Continent Oil and Gas Association's Legal Committee. Since that time, the AAPL Model Form Operating Agreement has been revised three times, in 1977, 1982, and 1989.

The fundamental financial proposition of a JOA is that the participants share joint expenses in proportion to their interest in the enterprise. The 1982 version of the AAPL Model Form makes the point in this way:

ARTICLE VII.

EXPENDITURES AND LIABILITY OF PARTIES

A. LIABILITY OF PARTIES:

The liability of the parties shall be several, not joint or collective. Each party shall be responsible only for its obligations, and shall be liable only for its proportionate share of the costs of developing and operating the Contract Area. . . . It is not the intention of the parties to