Malone Petroleum Consulting



Oil and Gas Tenant in Common Audits Are Critical to Determine Payout

Tenant in Common / Non-consenting Cotenant

This is one of our favorite audits which is related to joint venture audits and joint interest audits since it can get very wild and can have some grey areas that are challenges on the joint interest billings, for instance, the operator owns subsidiaries which are making numerous, significant charges which is a blatant conflict of interest with major, unknown pricing and provision temptations. Also, when you have an Operator to send a horrible and slanted joint operating agreement to a potential Non-Operator who also has ownership in a lease that is being drilled by the Operator, they would be absolutely insane to sign it since it would become a valid, enforceable contract. Once the joint operating agreement is most wisely not signed by the cotenant, the games can then begin and there is not really much control that the cotenant has but set back and wait. In this case it would be insane again to not do an audit in this cotenant situation.

The principal right of a non-consenting cotenant is to receive a share of the oil and gas produced, less cost of discovery and production without sharing in the risk of unsuccessful development. There can be only reasonable and necessary costs of producing and marketing charged. The operator many not receive interest on the monies advanced. The drilling, completion and operating costs are on a per-well basis rather than a per-lease basis. Accounting should always, without fail, be done on a well by well basis which significantly lessen the temptation for the operator to complicate the situation on a lease basis, for example, inflating the charges to slow or stop any lease payout. Texas law prevents recovery of costs for dry holes even if there is other shared production on the lease. Non-producing wells drilled are NOT chargeable to the non-consenting cotenants. Period. If I remember right, it is about the same with Louisiana law if it has not changed - not signing a JOA is one heck of an advantage for the non-consenting cotenant!! If a cotenant drills a dry hole, he does so at his own risk. Any reworking of an existing well or drilling of a new well will not be charged unless production results and the cotenant elects to accept ownership. No unsuccessful reworking operations can be charged (no payout). Obviously, the operator who has all the records has the responsibility to account for the expenses and revenue and provide a payout statement to the cotenant. When the operator fails or refuses to provide a payout statement, this is waving a blatant, red flag to the cotenant and the legal system. All of this can quickly lock-step march towards a very complex lawsuit in front of a court which would logically prefer easier and less-complicated work.

Definition: According to Black's Law Dictionary

An estate held by two or more persons jointly, each having an individual interest in the whole and an equal right to its enjoyment during his or her life.

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