History tells us that the young friends of Virginia O’Hanlon broke the news to her that there was no Santa Claus. When she quizzed her father about Santa’s existence, Dad’s fatherly advice was to ask the local newspaper. ”If you see it in The Sun, it’s so.” You know the rest of that story.
Another mysterious claus(e), the Maintenance of Uniform Interest provision (the “MUI”), exists in your Joint Operating Agreements. (VIII D of A.A.P.L. Form 610 – Model Form Operating Agreement 1989). The MUI has been referred to as “probably the most violated” and “least enforced” provision of the JOA. (See Michael E. Curry, A Look at the Maintenance of Uniform Interest Provision in Joint Operating Agreements, State Bar of Tex., 24th Annual Advanced Oil, Gas and Energy Resources Law Course, 2006). Although seldom discussed, and litigated even less, the MUI exists.
The purpose is to maintain “uniformity of ownership” over the Contract Area. In a nutshell, the MUI prohibits the transfer of an interest covered by a JOA unless such a conveyance includes (i) all of the parties’ interest (e.g., “all of my right, title and interest”) or (ii) a uniform, undivided interest in the Contract Area (e.g. “an undivided 1/2 of my interest in the entire Contract Area”)
The are several rationales for the MUI: (i) protection of the original JOA parties from unwanted third parties, (ii) the inability or cost associated with metering individual wells, and (iii) consistency in voting rights. A standard JOA provides no mechanism for counting votes when ownership is not uniform over the Contract Area. As a result, any breach of the MUI may not be discovered until a voting event arises under the JOA. If, however, a vote is required, a lack of uniformity in ownership will most definitely create an issue.
The scenario for a breach of the MUI is quite common. For example, assume you own a 12.5% working interest in lands covered by a JOA; producing wells are located in the Contract Area. In keeping with the holiday spirit, and in a moment of generosity (or pressure from your beloved), you convey a 5% interest in the #2 Well to your son as a Christmas gift. Although generous and thoughtful, such a conveyance would be a breach of the MUI clause, and it is unlikely the restriction ever crossed your mind as you were enjoying your egg nog. Imagine the same scenario if you sell only specific depths, or certain acreage, or only a couple of leases in the Contract Area. What if the sale was an arms-length trade for which you were paid good money?
The next time you are considering trading an interest in your producing properties, careful review the MUI clause to avoid a breach (and a potential lawsuit). Similar to Virginia’s mysterious Claus, if the MUI clause is in your JOA, it should not be doubted or ignored. Yes, working interest owner, there is a MUI in your JOA.
A holiday greeting: http://www.youtube.com/watch?v=rEyV8gnC4aQ