Author Paul Yale*

In the summer of 2022, the Executive Committee and Board of Directors of the American Association of Professional Landmen approved the first ever Model Form Participation Agreement to be approved by the Association.

So, the basics: A Participation Agreement (PA) typically, it is an agreement by which a participant will buy-in to a drill-ready oil and gas prospect by payment of a “promote” to the prospect generator for having identified a prospect and put a deal together.   

The classic PA is the ”third for a quarter deal” by which the prospect generator gets three other parties to each put up 1/3^rd of the costs of the first well on a prospect in exchange for a 1/4^th interest, with the prospect generator retaining a 1/4^th cost free interest. But there are numerous permeations of that basic structure.

For example, instead of multiple parties, perhaps a single party pays 100% of the costs for a 3/4ths working interest. Perhaps the prospect generator gets more “promote”  by marking up the actual cost of the leases or seismic data. The prospect generator may reserve an override, not only on the original lease block, but on all subsequent lease purchases within an agreed upon Area of Mutual Interest.

PAs are likely as old as the oil and gas industry itself, but until the advent of the new AAPL Model Form, there had never been a standardized form. This slowed the buying and selling of prospects at events such as the North American Prospect Expo as parties had to negotiate from scratch and draft deal specific PAs each time a trade was made.   

In 2017, the AAPL Forms Committee formed a subcommittee, the Participating Agreement Drafting Committee (PADC) to develop a standard form PA. The approach of the PADC was to identify the most common features and alternatives used in PAs and incorporate them into a form that could be customized by filling in blanks and checking boxes.  The result was a 35-page WORD-format document that now appears in the Forms section of the AAPL website.

The PA document is an interesting read; it offers a litany of options and provisions and can serve as a checklist of provisions for landmen and lawyers to consider when negotiating a PA, regardless of whether the form itself is used to document the final deal.

To quote from an article written by the author, “ It is hoped that the introduction of a model form PA will enable documenting well trades at NAPE and elsewhere easier and quicker. It was also the goal of the PADC to develop a model form that would become widespread in use by industry. Only time will tell if the PADC’s goals were met.”

For more details see these articles in Landman Magazine and the State Bar of Texas Oil, Gas & Energy Resources Fall 2024 Section Report and the PA Form (downloaded from the AAPL website).

* Gray Reed Partner Paul Yale is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization and a member of the PADC.  

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