On September 25, 2018, the Petroleum Joint Venture Association (PJVA) and the Canadian Association of Petroleum Landmen (CAPL) released the final version of the Pad Site Sharing Agreement (PSSA). The PSSA responds to an accelerating phenomenon in the E&P space: increasingly, producers are using horizontal drilling technologies and shared well pads to conduct operations that may or may not be independent.
Multi-well, multi-owner pad sites can reduce the environmental footprint of oil and gas development and may lead to substantial cost savings. However, a number of legal and operational challenges arise where the mineral rights, wells, and facilities lack common ownership. Absent a custom agreement, these sites are governed by a multiplicity of independent agreements among the various producers and associated third parties, creating a complex web of relationships that are unlikely to adequately govern joint operations, the use of shared and independent facilities, accident liability, and environmental obligations.
The PSSA seeks to resolve these issues, "blending" certain of the parties' interests and governing those activities that are most easily captured within the scope of a single agreement. In doing so, the PSSA incorporates elements of the 1999 PJVA Construction, Ownership & Operating Agreement (CO&O), the 2015 CAPL Operating Procedure, and the PASC Accounting Guidelines. In terms of form, the PSSA follows the familiar Head Document / Appendix split.
When is the PSSA appropriate?
Not all commercial relationships lend themselves to a pad site sharing agreement. In fact, the drafting committee has stated that the PSSA is intended to address 80% of cases in which parties may wish to make use of a shared pad site. The following two scenarios illustrate the relationships that best accommodate this sort of agreement:
1. Company A has a 100% section (Section 1) and a section in which it has a 75-25% interest with Company B (Section 2). A and B could share a pad site despite the fact that B lacks an interest in Section X. Assuming one well is drilled in each section, A would have an 87.5% blended interest in the shared pad site and B would have the balance.
2. Company A is the appointed operator under various JOAs covering several sections of land in which the respective working interest partners (WIPs) have varying interests. Assuming that only one well is drilled in each section, each company's blended interest in the shared pad site is a reflection of its proportionate interest in the wells.
As the examples above demonstrate, each party's interest in the shared pad site is directly proportionate to its respective working interest in the wells. Having a significant common owner in the wells and underlying mineral interests creates a business synergy that aligns with the purpose of the PSSA and most easily accommodates a singular "Site Operator". Exceptions exist, but this structure reflects the drafters' intention that the PSSA should not be used as a cost-saving measure where the parties lack a natural business relationship. That said, the PSSA does contemplate that the parties' relative interests in the assets can change throughout the period of the agreement.
Note, however, that although the PSSA contemplates that each party's "blended" ownership interest in the pad site is derived from its proportionate working interest in the wells governed by the PSSA, the PSSA neither unitizes nor pools the parties' production from those wells. Each participant owns only those substances attributable to its share of petroleum substances produced from those wells in which it has a working interest.
Single operator structure
The PSSA relies on a single operator model that closely mirrors the "prime contractor" model commonly found in occupational health and safety legislation. Under this approach, the "Site Operator" conducts and controls all operations carried out on the shared pad site and also manages the joint account. To better protect the interests of the parties, however, the Site Operator remains subject to Operating Committee oversight.
Due to the various interests involved in a shared pad site, the PSSA recognizes the differences between well-related activities conducted under the various land agreements and site-related activities that are governed solely by the PSSA. To accommodate this distinction, the Site Operator must function as both a "land operator", conducting well operations on behalf of the various owners of the wells, and a "Site Operator", whose role is to manage the shared pad site. Due to the scope of this operational control, the PSSA does not accommodate independent operations on the shared pad site.
Indemnification and liability
Operations conducted on a shared pad site require the Site Operator to take on a great deal of risk and also require the non-operating parties to comfort themselves with the competency of the Site Operator. The PSSA is responsive to the concerns that arise from this operational structure by:
- protecting the Site Operator from sole liability in all but the most egregious circumstances (gross negligence or wilful misconduct);
- requiring the Site Operator and other parties to the agreement to maintain specific insurance policies in respect of all assets on the shared site;
- incorporating provisions that allow the parties to remove the Site Operator if it enters financial distress; and
- establishing a system of cross-indemnification to ensure that all losses and liabilities subject to indemnification are borne proportionately by the parties.
Importantly, this indemnification and liability framework renders contractual that which would have otherwise been governed by tort, providing the parties with a degree of certainty they would not otherwise have.
Recognizing the increasingly prominent role that environmental liabilities play in oil and gas regulation, the PSSA takes steps to ensure the parties can meet their abandonment and reclamation obligations (ARO). Generally, parties are responsible for the ARO associated with their own wells, and the ARO associated with the pad site is a shared liability. If any party wishes to leave an agreement, it will first have to satisfy its outstanding environmental liabilities and/or provide security capable of safeguarding any consequential costs that may arise (approximately 125% of the estimated quantum).
The PSSA is a complex document, addressing a number of complicated issues and providing parties with a customizable model agreement to govern the development of lands in circumstances that do not neatly fit within the traditional scope of a JOA or CO&O. By incorporating elements from both, the PSSA is at once familiar and new.