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panded on and addressed in detail in the definitive agreements
used to evidence and implement the final agreed terms of a
A Joint Development Agreement (JDA) is the key DrillCo
agreement and contains the comprehensive expression of the
rights and obligations of the parties to the DrillCo. The JDA
typically includes some or all of the following exhibits:
• Joint Operating Agreement ( JOA): The JOA is used to govern
operations for each contract area. The contract area may be
defined on a well-by-well basis or a tranche-by-tranche basis,
or anything in between.
• Initial Work Program and Budget (Initial WP&B): The Initial
WP&B is typically deemed approved upon execution of the
JDA. Since capital commitments for DrillCos are typically
made on a tranche-by-tranche basis, each tranche has a
separate work program and budget. The Initial WP&B defines
the investor’s obligation to participate in the initial tranche
of wells, potentially within an established time period.
• Assignment: The Assignment is used to convey to the investor
the interest earned (subject to reversion) in the relevant wells
upon the occurrence of an earning event. Assignments can
be made on a well-by-well basis, on a well tranche basis, or
simply on a periodic basis, as negotiated by the parties. The
working interest earned is typically limited to a well-bore
assignment, and may also be limited to the depths drilled or
being produced under the DrillCo.
• Memorandum of JDA and Memorandum of JOA (collectively,
“Memoranda”): The Memoranda are utilized to put third
parties on notice of the terms and obligations of the parties
under the JDA and each JOA. To achieve this, the Memoranda
are recorded in the real property records in the county or
counties in which the underlying properties are located.
• Tax Partnership Agreement: The Tax Partnership Agreement
is utilized to ensure that the tax benefits derived in connection
with the “carry” component of the investor’s payment obligation may be realized.
• Management Services Agreement (MSA): The MSA sets forth
the arrangement pursuant to which the operator may provide,
for the benefit of the investor, any number of services in connection with the DrillCo activities. The services provided may
include services such as accounting (including production
accounting), authority for expenditure (“AFE”) and joint interest billing (“JIB”) processing and administration, royalty
and tax administration, marketing, regulatory, engineering,
and land (including land administration), but the services
provided will vary from deal to deal. In most situations, the
investor will not be in a position to perform these services for
itself, at least not at the outset.
It is important that outside advisors be engaged early and
often in DrillCo processes to help facilitate the negotiation of
these DrillCo documents. These negotiations are often fairly
time intensive, with issues frequently arising with respect to the
investor’s level of control over operations, transfer restrictions,
“off-ramps” providing certain protections for the investor if a
tranche’s wells are underperforming, and methods for determining whether the IRR Hurdle has been achieved, among many
others. In many cases, DrillCos are not successfully launched
due to the parties’ inability to reach agreement on such terms.
We hope that the first part of this article helps those faced
with the task of working on a DrillCo transaction feel more
prepared for those negotiations, as well as in the implementation
of DrillCos once the definitive agreements have been signed.
ABOUT THE AUTHORS
Justin T. Stolte is a corporate partner in the Houston
office of Gibson, Dunn & Crutcher LLP, and a member of the firm’s Private Equity, Mergers and Acquisitions, and Oil and Gas practice groups.
Michael P. Darden is partner-in-charge of the Houston office of Gibson, Dunn & Crutcher, chair of the
firm’s Oil & Gas practice group, and a member of
the firm’s Energy and Infrastructure and Mergers
and Acquisitions practice groups.