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Duties and Obligations Revisited -- Who Bears What Risk of Loss?

Milam Randolph Pharo, Oil and Gas Joint Operating Agreement (1990)

The operating agreement, and here we will focus on the AAPL Form 610-Model Form Operating Agreement, may be described as an agreement among several owners which provides for the orderly development of, and sharing of revenues and expenses pertaining to a defined area of land. In the course of this development, numerous responsibilities are prescribed by this agreement on both the operator and the non-operators. In prescribing these duties and obligations, the agreement has the additional effect of defining which parties must bear the risk of loss for various foreseeable events, and it is this bearing of the risk of loss, and ascertaining what that loss may be, that is the central focus of this paper.

In many instances, the risk of loss is not shifted from the party who would otherwise be responsible for such loss, the agreement merely reciting the customary legal relationships. There are other instances, where by joining the agreement, a party may have signed on for obligations not directly attributable to his contributed interest, not within his control, and perhaps, not even within his contemplation. Along with this study of determining who must bear the risk, is the question of the form of the consequence. The risk may involve losing an interest, the payment of money, losing operatorship, or incurring liability to third parties. Under the circumstances contemplated