Malone Petroleum Consulting



Oil and Gas Department Job Functions

Recommendations for Operating Agreements

We recommend to any and all Non-Operators, and Operators in a Non-Operator status that the following must be inserted at the end of all operating agreements for properties operated by other operators:

Any joint interest review report will be resolved within sixty (60) days by binding arbitration in accordance with the Commercial Arbitration rules of the American Arbitration Association if: 1) The report is not answered by the Operator within one year. 2) The report is not resolved within two years. Each party is responsible for their own arbitration costs. This need is due to A VERY LIMITED NUMBER of Operators have adopted unwritten policies: To overcharge since most investors will not or cannot afford to sue. To make scope limitations, e.g., charges under $1,000 are considered to be immaterial, in order to make unauthorized charges to the Joint Account. To not answer any reports. To answer reports only when pressured. To deny all or most exceptions. To deny any high-dollar or complicated exception. To attempt to make extra profits on Non-Operators (exception hereby is taken). To delay the review process until forgotten. To never resolve reports (even major oil companies). To agree to credits, but never pass them. To not negotiate in good faith during legal mediations.

With the adoption of this phraseology, the Non-Operator will observe an increase in the number of exceptions granted in most reports. This will also help preclude potential lawsuits that are both expensive and ruin excellent working relationship.

If any investor has a large working interest, they should consider obtaining their own comparative bids for: location, rig, equipment, tubulars, frac charges and any other extremely-large, AFE-proposed charges. This is to assure that the forthcoming charges from an operator are not inflated. Also, after an investor has paid an operator for large joint interest billing charges, he should consider requesting documentation from an operator which proves that the largest charges have been paid: otherwise, the investor risks paying the charges twice if an operator goes out of business without paying the vendors who can put a lien on the well. Also, larger discounts might not have been received since some vendors will allow the operator a year to pay e.g., on a $250,000 frac job. This allows an operator use of the investor's money, interest free for a year.

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