Working Interest, AFE, and Opt out of Control of well insurance?

[deanerandco]

Hello,

We received a document from a company that we have had a Working interest ‘agreement’? with for many years (Before me or the last to managers). From looking through our documents, I cannot find how we originally got into this agreement. The property has been in the family for many years and has been in place for a long time. I took over managing this last year, and this is the first such document I have seen and have some questions:

1. I googled AFE and figured out that this means “Authorization For Expenditure”. So they are requesting approval for us to be a part of a “drill and complete three Producers”?. So I am assuming they want to drill a new well and work on three other wells? Is that correct? Are “producers” other wells that are currently producing oil/gas??

2. They have a check boxes for us to mark “Approved” or “Non-Consent”. My assumption is that if we mark Approved, they will bill us (like they do monthly for our current working interest?). We would like to sign, but what happens if we don’t??

3. They also have a check boxes for “Opt out of Control of Well Insurance” Yes/No. Not sure what this means. Insurance is a good thing, right, but it seems like a double negative?? What are the implications if we choose yes or no?

4. Not knowing or finding any of the original docs, how was working interest agreed upon? Is it at the Section level lease, or at a Well level/property unit agreement? Where might I look to see how we got into the WI vs. RI? My assumption is at the lease level?

Any info would be useful and appreciated. I’ve called two of numbers on the document and left messages, but have not heard back yet.

[Steve_Durrett]

1. Sounds like they want to “Drill and Complete” three new producing wells. Drill and Complete are two separate processes, but both are necessary to get a producing well.

2. Approval means you will pay your Working Interest percentage of the well costs, which may or may not end up being the amount estimated on the AFE. You should only select this option if you are truly able to absorb the costs without hardship. There is considerable risk. If you elect “Non-Consent”, they will drill the well without you and you will not participate in the well until they have recovered their investment plus a “Risk Penalty” which could be 300% or so. It will be specified in the Operating Agreement. You should have a copy of that. If you don’t ask them for one.

3. All parties are required to carry insurance if they participate in the drilling of the well. Many larger Companies have their own insurance so they opt out, but you would probably have a difficult time getting your own insurance, so you would elect to have the Operator carry you on their policy (for a fee of course)

4. The Working Interest would have originally been calculated based on the relative number of acres that each party contributed to the drilling unit. You should ask them to supply you with the original Joint Operating Agreement.

Good luck.

[deanerandco]

Thanks Steve your answers were very helpful. I’ll email them and try and get the docs…

Van Manager Deaner and Co.