Mr. Tooley specializes in complex civil litigation, including arbitrations, trials and appeals.  Mr. Tooley has experience litigating and arbitrating a wide range of contract disputes and business torts involving real property, mineral rights, corporate law, construction claims, oil and gas, employment, insurance coverage, professional malprac...tice, trade secrets, Federal, state and Indian oil and gas royalty audits, and commercial and real property transactions. More

CAUTION: New Federal Oil And Gas Royalty Regulations Take Effect January 1, 2017

The U.S. Department of Interior recently announced new regulations (effective January 1, 2017) governing how federal royalties on oil and gas produced from federal leases are to be calculated. These regulations make some significant changes on how lessees are to value the production of natural gas from federal leases for the purposes of determining federal royalties. Some notable changes, with a focus on natural gas, are briefly addressed below, but the regulations should be viewed in their entirety in light of the specific marketing, transportation and processing circumstances involved.

Valuation of Unprocessed Gas

For non-arm’s length sales of unprocessed gas, the Office of Natural Resources Revenue (ONRR) is eliminating the valuation “benchmarks.” Instead, where a lessee’s sale of natural gas is to an affiliate, the new regulations require the lessee to (1) pay royalties based on the gross proceeds received in the first arm’s-length sale by the lessee’s affiliate or, (2) at the option of the lessee, pay royalties based on an index pricing methodology. For arm’s length sales, the lessee must value unprocessed gas based on its gross proceeds and may not use the index pricing method.

The optional index pricing method for non-arm’s length sales looks to where a lessee’s gas could physically flow. If the gas stream could flow to several index pricing points, the index price method requires the lessee to use “the highest reported monthly bidweek price for the index pricing points to which your gas could be transported for the production month, whether or not there are constraints for that production month.” 30 C.F.R. 1206.41(c)(1)(ii). If a lessee can only transport gas to one index pricing point published in an ONRR-approved publication, value is to be determined by the highest reported monthly bidweek price for that index. 30 C.F.R. 1206.14(cc)(1)(i). For onshore production, the index price value is reduced by 10 percent (but not less than 10 cents per MMBtu or more than 30 cents per MMBtu), to account for transportation and no separate transportation allowance is allowed. Once a lessee selects an ONRR approved publication the lessee may not select a different publication more often than once every two years.

Valuation of Processed Gas

Under the new regulations, where a lessee sells gas under an arm’s length “keepwhole” or “percentage of proceeds” contract, the lessee must calculate royalties for the gas as “processed gas.” 30 C.F.R. 1206.142(a). For example, where a lessee enters into an arm’s length sales contract for the sale of gas prior to processing, but the contract provides for payment to be determined on the basis of the value of any products resulting from processing, including residue gas or natural gas liquids, the gas must be valued as processed gas – namely, based on 100% of the value of residue gas, 100% of the value of gas plant products, plus the value of any condensate recovered downstream of the point of royalty settlement prior to processing, less applicable transportation and processing allowances. The lessee may not deduct, directly or indirectly, costs for boosting residue gas at a processing plant or for fuel associated therewith. The new regulations place increased burdens on lessees who sell gas in an arm’s length contract under a keepwhole or percentage of proceeds agreement to “unbundle” costs and value natural gas liquids and residue gas recovered from processing in order to properly calculate federal royalties.

For non-arm’s length sales of processed gas, the regulations also eliminated the “benchmarks” and require the lessee to value residue gas and gas plant products by using the gross proceeds received under the first arm’s-length sales price or an optional index price method. Again, the index method for processed gas is only available where the lessee did not sell production under an arm’s length contract. The optional Index price methodology includes approved index pricing for natural gas liquids (NGLs) with a stated deduction from the index pricing points to account for processing costs (based on a minimum rather than average processing rate as determined by the ONRR) and a reduction for transportation and fractionation (T&F), also at a stated amount. No separate transportation or processing allowance may be claimed if this option is used.

Firm Cap on Transportation and Processing Allowances and Elimination of Transportation Factors

The new regulations make the 50% value cap on transportation and the 66 and 2/3rd value cap on processing allowances firm. The ONRR no longer has the discretion to permit larger allowances for extraordinary circumstances. ONRR has also eliminated transportation factors (netting of transportation costs as part of sale’s price) and now requires transportation factors to be stated in an equivalent monetary amount and claimed as a transportation allowance.

Marketable Condition

 The new regulations continue to employ the ever expanding “marketable product” rule by providing, among other things, that transportation allowances may not include costs attributable to transporting non-royalty bearing substances commingled in the wellhead gas stream, by requiring royalty to be paid on gas used as fuel, lost or unaccounted for (FL&U) (except FL&U in an arm’s length contract based on a FERC or State approved tariff), and by disallowing deductions for the costs of boosting residue gas during processing, including any fuel used for boosting. In its comments for requiring wet gas sold at the well under percentage of proceeds (POP) contracts to be valued as “processed gas,” for example, Department of Interior asserted:

[P]ast regulations did place the responsibility on lessees who sell their gas at the wellhead under POP-type contracts to place the residue gas and gas plant products into marketable condition at no cost to the Federal Government. Simply selling the gas at the wellhead does not mean the gas is in marketable condition –one must look to the requirements of the main sales pipeline. . . . “Whether gas is marketable depends on the requirements of the dominant end-user, and not those of intermediate processors.” 81 Fed. Reg. 43348 (unreported case citation omitted).

Default Provisions

The new regulations also contain “default” provisions that allow the ONRR to reject a lessee’s valuation or allowances and determine valuation and allowances by looking to other market indicia of value and allowances, and these default provisions will apply if: (1) there is no written sales contract, transportation agreement or processing agreement signed by all parties to the contract, or (2) the ONRR determines the lessee has failed to comply with applicable regulations because of, among other things, (a) misconduct by or between the contracting parties, (b) the lessee breached its duty to market the gas, (c) ONRR determines the value of gas, residue gas or gas plant product is unreasonably low (ONRR may consider a sales price unreasonably low if it is 10 percent less than the lowest reasonable measures of market price, including index prices and prices reported to ONRR for like-quality gas, residue gas or gas plant products) or (d) the lessee fails to provide adequate supporting documentation.

The new federal royalty regulations for natural gas produced from federal leases may require lessees to make significant changes in how they report and pay federal royalties, particularly where a lessee sells gas under percentage of proceeds or keepwhole sales contracts. Application of these new regulations should be carefully reviewed in light of the lessee’s sale, transportation and processing arrangements to avoid potential interest and penalties.

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Assuring Your Covenants “Run with the Land”

Developers and owners of real property typically enter into a variety of contracts concerning the use of real property. This is particularly true in the natural resource extraction industry. Generally, under Colorado law contractual obligations may be deemed personal covenants that bind only the parties signing the agreement, or they may be covenants that “run with the land” and bind successors-in-title. In order for a covenant to run with the land, however, two primary elements must be established: 1) the parties to the covenant intended it to run with the land, and 2) the covenant “touches and concerns” the land (i.e. it must closely relate to the land, its use, or its enjoyment). If either element is not present, the covenant will generally not bind successors-in-title.

If parties to an agreement intend to create covenants that run with the land, it is important the agreement itself contain express language to this effect, together with express language stating that the obligations under the agreement will bind and inure to the benefit of successors and assigns. It is also important that the agreement is recorded in the real property records to put future successors-in-title on record notice of the covenants. “In order for a covenant to run with the land, there must be an intent by the parties to the covenant that it do so,” Cloud v. Ass’n of Owners, Satellite Apt. Bldg., Inc., 857 P.2d 435, 440 (Colo. App. 1992), and such intent “turns on the construction of relevant documents.” Lookout Mountain Paradise Hills Homeowners’ Ass’n v. Viewpoint Assocs., 867 P.2d 70, 74 (Colo. App. 1993). Courts resolve all doubts against the restriction and in favor of free and unrestricted use of property. K9Shrink, LLC v. Ridgewood Meadows Water and Homeowners Ass’n, 278 P.3d 372, 377 (Colo. App. 2011).

Courts have refused to find a covenant runs with the land even when the covenant is included in an instrument that contains a general provision stating the instrument shall be binding upon successors and assigns. In TBI Exploration, Inc. v. Belco Energy Corp., for example, the Fifth Circuit affirmed that under Colorado law, a covenant in a Participation Agreement to drill exploratory wells was not a covenant that ran with the land even where the Participation Agreement contained general language stating the agreement shall be binding upon the parties’ “and their respective successors and assigns.” 220 F.3d 586, 2000 WL 960047, *4 (5th Cir. 2000) (not designated for publication) (applying Colorado law). The Fifth Circuit explained that the requirement that real covenants be expressed in specific and unambiguous terms carries force because “nonparties and successors-in-interest who did not participate in the negotiations to the principal agreement should be able to determine their respective rights and obligations from the face of the principal agreement.” Similarly, in Midcities Metropolitan Dist. No. 1, v. U.S. Bank Nat’l Ass’n, 2013 WL 3200088, at ** 4 and 6 (D. Colo. June 24, 2013) Judge Babcock found as a matter of law that where Deed did not expressly reference any of the covenants in its Article II as being covenants that run with the land or binding on the parties’ successors and assigns, such covenants did not run with the land despite general language stating “[t]his Deed shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns.”).

It is also important to keep in mind Colorado recording statutes, including C.R.S. § 38-35-108, which provides:

When a deed or any other instrument in writing affecting title to real property has been recorded and such deed or other instrument contains a recitation of or reference to some other instrument purporting to affect title to said real property, such recitation or reference shall bind only the parties to the instrument and shall not be notice to any other person whatsoever unless the instrument mentioned or referred to in the recital is of record in the county where the real property is located. Unless the same is so recorded, no person other than the parties to the instrument shall be required to make any inquiry or investigation concerning such recitation or reference.

Because parties are presumed to contract with knowledge of applicable law, the failure to record a contract or instrument in the real property records to put successors-in-title on record notice thereof is evidence that the parties to the agreement did not intend for contractual covenants to bind successors-in-title at the time it was entered. This holds true even if a later successor-in-title had actual knowledge of the covenant when it acquired the property because the intent of the parties at the time of contracting is controlling. Thus, parties who intend for a covenant to run with the land should not rely on a mere reference to the contract in a recorded instrument but should record the agreement itself, or some memorandum reciting the material terms, in the real property records and include express language in the agreement as to their intent for the covenants to run with the land.

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Changes to the Operator’s Rights and Obligations under the New 2015 A.A.P.L. Model Form JOA

The American Association of Professional Landmen recently released its 2015 Model Form Operating Agreement. The A.A.P.L form 610 - Model Form Operating Agreement has established the operating framework within the United States since 1956, and the last major modifications to the Model Form occurred in 1989. The 2015 Model Form contains notable changes to provisions governing the appointment and removal of the Operator, access to records, assignments, authority of the Operator to communitize and pool, and the Operator’s standard of conduct. This summary is not comprehensive. There are many other substantive changes to the 2015 Model Form, including, but not limited to, changes related to horizontal drilling, which are not discussed in this summary.

Operator’s Standard of Conduct. The 2015 JOA revises the Operator’s standard of conduct. It now provides in pertinent part:

Operator shall conduct its activities under this agreement as a reasonably prudent operator, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and regulations. However, in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred in connection with authorized or approved operations under this agreement except such as may result from gross negligence or willful misconduct. (Art. V.A, emphasis added)

Notably, the insulation of liability except for gross negligence or willful misconduct applies only to “authorized or approved operations” and not to all Operator activities such as accounting and other administrative functions. This is a significant change from the 1989 JOA form which broadly states that in no event shall Operator have “any liability as Operator to the other parties for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct.” (Emphasis added.)

Non-Owning Operators. Article V of the 2015 Model Form maintains the general requirement that the Operator must own an interest in the Contract Area, except it allows the parties to decide the percentage of ownership the Operator must own and maintain and also allows a non-owning person to serve as Operator provided the putative non-owning operator and the Non-Operators enter into a separate agreement, or insert Article XVI provisions to the agreement to govern the relationship between them. Absent such separate agreement or Article XVI provisions, a non-owning operator shall be bound by all terms and conditions of the agreement applicable to Operator. Further, the failure of a non-owning operator and Non-Operators to enter into such a separate agreement or Article XVI provisions “shall disqualify said non-owning operator from serving as Operator, and a party owning an interest in the Contract Area must instead be designated as Operator.” Unless the parties have otherwise agreed, a non-owning Operator may also be removed at any time, with or without cause, by the affirmative vote of parties owning a majority interest. If good cause for removal of such non-owning Operator exists, the non-owning Operator may also be removed by the affirmative vote of Non-Operators owning a majority interest after excluding the voting interest of any non-operator who is an Affiliate of the non-owning Operator. Operatorship is “neither assignable nor forfeited” except in accordance with the provisions of Article V. The 2015 Model Form states that “a change of a corporate name or type of business entity” shall not be deemed to constitute resignation of Operator, but no longer includes the 1989 language that a “transfer of Operator’s interest to any single subsidiary, parent or successor corporation shall not be the basis for removal of Operator.” Whether courts will interpret this language to be a material change remains to be determined.

Removal of Operator. Article V.B.4 maintains the language in the 1989 JOA providing that an Operator may be removed for good cause by the affirmative vote of Non-Operators owning a majority interest after excluding the voting interest of Operator, and continues to provide that such vote is not effective until a written notice has been delivered to Operator by a Non-Operator detailing the alleged default and Operator has failed to cure within 30 days from its receipt of the notice (or 48 hours if the default concerns an operation then being conducted). The definition of “good cause,” however, is slightly broadened. The 1989 Form provides that good cause “shall mean not only gross negligence or willful misconduct but also the material breach of or inability to meet the standards of operations contained in Article V.A. or material failure or inability to perform its obligations under this agreement.” The new 2015 JOA form now states “good cause” shall “include, but not be limited to (i) Operator’s gross negligence or willful misconduct, (ii) the material breach of or inability to meet the standards of operation contained in Article V.A or (iii) material failure or inability to perform its obligations or duties under the agreement.” Art. V.B.4

Selection of Successor Operator. The 2015 Model Form generally maintains the 1989 Model Form provisions governing the selection of a successor Operator but clarifies that an assignee of the Operator’s interests is allowed to vote. Upon the resignation or removal of Operator, a successor Operator shall be selected by the affirmative vote of one or more parties owning a majority interest including the vote of the former Operator “and/or any transferee of the former Operator’s interest,” but if an Operator who has been removed or is deemed to have resigned fails to vote or votes only to succeed itself, the successor Operator shall be selected by the affirmative vote of the party or parties owning a majority interest remaining after excluding the voting interest of the Operator who was removed or resigned. The 2015 Model Form also includes a tie breaker provision: In the event of a tie, “the candidate supported by the former Operator or the majority of its transferee(s), shall become the successor Operator.” Art. V.B.6

Access to Records. Subject to certain exceptions, the 2015 Model Form provides that a Non-Consenting Party is not entitled to access the well and is not entitled to well information and reports solely relating to such non-consented operation until the earlier of full recoupment by the Consenting Parties or two years following the date the non-consented operation was commenced. Art. V.D.5. Prior to payout, however, a Non-Consenting Party who is not otherwise in default is generally entitled to review the joint account records pertaining to non-consented operations to the extent necessary to conduct an audit of the payout account. Under the 2015 Model Form, Operator is obligated to send “to the Consenting Parties” instead of “Non-Operators” (as used in the 1989 Model Form) such reports, test results and notices regarding the progress of operations on the well as the Consenting Parties may reasonably request, including daily drilling reports, completion reports and well logs. See Articles IV.A and V.D.5.

Operator Authority to Pool and Communitize. Article V.A and the Recording Supplement to the 2015 Model Form JOA now include provisions appointing the Operator as attorney-in-fact for executing declarations of pooling and communitization agreements on behalf of the Non-Operators. This provision eliminates some legal uncertainty related to whether an Operator can pool a lease in which it owns no interest (i.e., a lease owned by a Non-Operator), and addresses recent BLM actions which have denied communitization agreement proposals because not all the working interest owners signed the application.

Assignments. Article VIII.D of the 2015 Model Form JOA provides that, after expiration of a 30 day period, a transferor will not be liable for costs of operations conducted after that period. However, a recent Wyoming decision confirms the general rule that, with respect to those who are not parties to the JOA, the assignor remains liable under other contracts, such as leases or surface use agreements, absent an express novation or an agreement releasing the transferor of future liability upon assignment of interests.

Article VI. of the 2015 Model Form JOA also provides that any interests assigned to non-abandoning parties upon abandonment of a well by some but not all the owners will be made free of Subsequently Created Interests.

The 2015 Model Form JOA contains numerous other changes addressing horizontal drilling and other matters and should be carefully reviewed and modified depending on the intentions of the parties.

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Baseball Arbitration

Now that Spring Training is in full swing, let’s talk some baseball! Okay, not that kind of baseball, but another topic in our series on arbitration - “baseball arbitration.”

Some parties are reluctant to submit disputes to arbitration because they worry about “split the difference” awards. Arbitrators are generally selected, directly or indirectly, and paid by the parties. This leads to a perception that arbitrators have an interest in rendering decisions that will maximize the chances that they will be chosen again in future disputes by “splitting the difference” between the parties to avoid offending either side. For parties who are reluctant to submit disputes to arbitration for these reasons or for parties who may want more control over how a compromise is reached, “Final Offer Arbitration,” also known as “baseball arbitration,” is an option worth exploring.

Final Offer Arbitration requires an arbitrator to view all of the unresolved issues as a package and select one party’s package over the other party’s package. It is known as “baseball arbitration” because each side submits a figure or proposed remedy and the arbitrator is required to select one offer or the other. The arbitrator cannot formulate a compromise or choose the midpoint between the two.

The idea behind Final Offer Arbitration is that each party, conscious of the risk that an unreasonable proposal will have little chance of acceptance by the arbitrator, will make concessions in order to submit what it believes is the most reasonable offer. If one of the two proposals is too extreme, the other side essentially wins by default. The two sides are more likely to bargain in good faith in hopes of reaching a settlement if they fear that the arbitrator may view the other side’s offer as more reasonable. Unlike conventional arbitration where parties may take aggressive positions designed to influence the arbitrator’s compromise, Final Offer Arbitration has the advantage of incentivizing the parties to move toward the middle. If the final offers are close, it may not matter that much which of the two proposals the arbitrator chooses. If the offers are far apart but one side has submitted a ridiculous offer, the arbitrator’s decision is relatively easy. The disadvantage in removing an arbitrator’s flexibility is, of course, that if both offers are far apart and equally ludicrous, the arbitrator’s hands are tied.

Final Offer Arbitration has advantages, but there are a number of issues that should be carefully considered before electing this route. The provisions of the arbitration agreement should be tailored to the nature of potential disputes and the parties’ desires. The arbitration agreement should clearly spell out, among other matters, when and how offers may be made, the deadline for modifying offers, when the offers are shown to the arbitrator, and the type of relief that may be included in an offer. The parties may provide, for example, that at any time prior to the close of the arbitration hearing, the parties may exchange revised written proposals or demands, which shall supersede all prior proposals. Or they may provide that final offers must be submitted within a certain number of days before the arbitration hearing commences. In some instances, the process of submitting the offers moves the parties so close together that the dispute is settled before the hearing or before the arbitrator makes a decision. There are also variations the parties might want to explore, such as “night baseball” arbitration, which requires the arbitrator to make a decision without the benefit of seeing the parties’ proposals and then to make the award to the party whose proposal is closest to that of the arbitrator. Another variation is to have Final Offer Arbitrations on an issue-by-issue or claim-by- claim basis.

Final Offer Arbitration works well where the parties are only seeking monetary relief or where the dispute involves pricing or valuation disputes. It can also be used for non-monetary awards in the nature of specific performance, declaratory relief or injunctive relief, but in such cases extra scrutiny should be exercised when drafting the arbitration agreement. Parties should always consult with experienced counsel when drafting Final Offer Arbitration agreements and before signing such agreements to make sure the arbitration agreement will achieve the intended results and benefits. Properly drafted, Final Offer Arbitration provides a powerful incentive for the parties to move toward the middle and expeditiously resolve their disputes.
For more on arbitration, see our earlier posts.

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Summary of The Colorado Oil and Gas Task Force Final Report

The Colorado Oil and Gas Task Force submitted its Final Report on February 27, 2015 making nine recommendations to the Governor that received two-thirds of the vote of the Task Force members as required by Executive Order 2014-005 to constitute recommendations of the Task Force.

1. Collaboration of local governments, the COGCC and Operators relative to oil and gas locations and urban planning.

    The Task force recommended that the COGCC should initiate rule-making to define and adopt a process of enhancing local government participation during the COGCC application for Permit to Drill process concerning locations of “Large Scale” oil and gas facilities in “Urban Mitigation Areas.” The recommendation contemplates giving local governments an opportunity to address location of right-of-way for pipelines, facility consolidation, access routes and mitigation measures within an Urban Mitigation Area and would require operators to consult with the local government. Operators would be required to indicate whether such consultation has taken place when submitting Form 2A, Oil and Gas Location Assessment, and to state whether there has been local government approval. A local government’s request concerning location should be based on an established set of reasonable standards or criteria. COGCC staff and local government liaison would be charged with convening meetings to consider alternative locations and encourage locations that consider distances between building units and/or high occupancy units. If a compromise cannot be reached, the Operator may offer to engage in mediation with the local government which process shall conclude within 45 days. If no agreement is reached, the COGCC will conduct a hearing and hear evidence from the local government, the Operator and the staff before the Oil and Gas Location Assessment may be approved.

2. Including future oil and gas drilling and production facilities in existing local comprehensive planning processes.

   The Task Force recommended that operators register with Local Government Designees (LGD), and upon the request of the LGD, submit operational information for purpose of incorporating potential oil and gas development into local comprehensive plans. The Operator would be required to provide the LGD a good faith estimate of the number of wells that the operator intends to drill in the next five years in the municipal jurisdiction, corresponding to the operator’s internal analysis of reserves classified as “proved undeveloped” for SEC reporting purposes, along with a map showing the location of the operator’s existing well sites and related production facilities, sites for which operator has made application for COGCC permits, and sites identified for development on the operator’s current drilling schedule for which it has not yet made application for COGCC permits. The plan may be changed at the operator’s sole discretion and shall be updated by the operator if materially altered. The Local Government Planning Department will prepare a comprehensive map of potential future drilling and production sites within its jurisdiction, and identify sites that it considers compatible with the current and planned future uses of the area, sites where minor issues may need to be resolved by negotiation, and sites where it anticipates significant conflicts with current and planned future uses as indicated in the Comprehensive Plan.

3. Enhancing Local Government Liaison and Local Government Designee Roles and Functions.

    The Task Force recommends the COGCC should undertake a review that would include outreach to local governments to better understand barriers to greater utilization of the LGD/LGL functions, enhancing education to local governments on how to engage the LGD/LGL process, expanding on LGD comment period on APDS and appropriate Conditions of Approval to 60 days, offering financial and other support to train LGDs, and apply for Energy and Mineral Impact Assistance Funds to assist local governments with the creation of LCD positions.

4. Increase COGCC full time staff, including inspectors, field operations, enforcement and permitting staff.

    The Task Force recommend the General Assembly should authorize COGCC to hire 12 additional full time employees to inspect wells, conduct environmental investigations and response actions, conduct intake of and track citizen complains, process permit applications, and perform data analysis to respond to data and information requests from the legislature, media, public, industry, and other stakeholders.

5. CDPHE staffing, a health complaint line, a human health risk assessment and a mobile air quality monitoring program.

    The Task Force supports the Colorado Department of Public Health and Environment’s (CDPHE) request to the General Assembly to convert five temporary employees to permanent status to continue its air monitoring and leak detection activities and to establish a health complaint and information line. The Task Force also encourages CDPE to seek funding for mobile air quality monitoring unit and funding to conduct a human health risk assessment in compliance with current scientific standards.

6. Creation of an Oil and Gas Information Clearinghouse

    The Task Force recommends the establishment of a clearinghouse on a user-friendly interactive website to communicate information regarding Colorado’s oil and gas industry that would be available to local governments, the general public, oil and gas operators and other interested persons, including information on permit review and consultation, drilling and completion practices, testing and monitoring practices, regulatory enforcement, repository of memorandums of understanding, and impact studies and analysis.

7. Recommendation to reduce truck traffic for oil and gas activities.

    The Task Force recommends that COGCC and CDOT take the lead to convene a working group to investigate any and all steps that can and should be taken by government and industry to reduce the use of large trucks and trailers in oil and gas activities.

8. Recommendation regarding air quality rules.

    The Task Force recommends the General Assembly continue the new state air quality regulations for oil and gas methane.

9. Compliance Assistance Program

    The Task Force recommends the COGCC should implement and emphasize a compliance assistance program to help operators comply with operating rules and policies, and to assure that inspectors are enforcing those rules and policies in a consistent manner.

The Minority Report. Other proposals considered but not receiving the two-thirds approval necessary to become recommendations of the Task Force are encompassed in the minority report, and include recommendations (1) to require residential drilling plans; (2) to coordinate Local government land use processes with issuance of state oil and gas permits; (3) to create a statutory oil and gas dispute resolution panel ; (4) to acknowledge local government siting authority; (5) to change standing and notice requirements (6) to allow local governments to assess fees to fund inspections and monitoring of the oil and gas industry; (7) to facilitate planning for oil and gas development and provide flexibility in locating wells; (8) to amend COGCC Rules and the Oil and Gas Conservation Act to acknowledge local government regulatory authority; (9) to enact legislation to improve the operational conflict preemption standard; (10) to clarify the balanced responsibilities of the Commission and acknowledge the important role of local government land use regulation; (11) to encourage the use of memoranda of understandings; (12) to amend comprehensive drilling plan rules to harmonize state and local authority; (13) to expand the statutory procedure for notification and consultation with mineral owners/lessees when significant surface development projects are being prepared for local land use approval; (14) to conduct a review of the negative health impacts from fracking and drilling, (15) to provide adequate compensation to affected surface owners; (16) to provide public disclosures of chemicals used in oil and gas operations and removing trade secret protections; (17) to require disclosure of hydraulic fracturing process; (18) to allow counties to regulate noise associated with oil and gas operations and to amend existing rules regulating noise; (19) to require down-gradient groundwater water quality and soil monitoring for oil and gas processing facilities; and (20) to delay further rulemaking in subject areas recently studied or which new rules have already been adopted.

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Arbitration Pitfalls – Broad or Narrow Scope

Arbitration Series - Part 3 of 3:  When drafting an arbitration provision, careful attention should be given to the language describing the scope of disputes to be arbitrated. Unless the parties intend to arbitrate all disputes that may touch on or collaterally relate to the contract, the arbitration clause should contain express language specifically identifying and narrowly describing the scope of disputes to be arbitrated. In determining whether a given dispute falls within the scope of a contractual arbitration provision, courts first determine whether the arbitration clause is broad or narrow. Chelsea Family Pharmacy, PLLC v. Medco Heath Solutions, Inc., 567 F.3d 1191, 1196 (10th Cir. 2009). “Under a narrow arbitration clause, a dispute is subject to arbitration only if it relates to an issue that is on its face within the purview of the clause, and collateral matters will generally be beyond its purview. “ Id., at 1262. In contrast, where an arbitration clause is broad, “there arises a presumption of arbitrability and arbitration of even a collateral matter . . .if the claim alleged implicates issues of contract construction or the parties' rights and obligations under it.” Id. The precise wording of an arbitration clause does matter and should be carefully considered.

“Arising Out Of” “Relating To” or “Connected With:” The arbitration clauses recommended by the American Arbitration Association (“AAA”) call for arbitration of “any controversy or claim arising out of or relating to this contract, or the breach thereof.” Such language has universally been construed to be a broad arbitration clause. C & L Enters., Inc. v. Citizen Band Potawatomi Indian Tribe of Okla., 532 U.S. 411, 415 (2001); Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1071 (9th Cir. 2013); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir. 2012); Fallo v. High-Tech Inst., 559 F.3d 874, 876 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1369 (Fed. Cir. 2006); Terminix Int'l Co. v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1329 (11th Cir. 2005); Getzelman v. Trustwave Holdings, Inc., No. 13-cv-02987-CMA, 2014 WL 3809736 *3 (D.Colo. Aug. 1, 2013). The use of such terms as “related to” or “connected with” extends the scope of the arbitration provision beyond claims under the contract. Julian v. Julian, No. 4137-VGP, 2009 WL 2937121 at *5 (Del. April 23, 2009) (“related to” language “explicitly extends the scope of the arbitration provision ‘beyond the four corners of’” the agreement); Brown v. Coleman Co., Inc., 220 F.3d 1180, 1184 (10th Cir. 2000) (arbitration clause encompassing “all disputes or controversies arising under or in connection with this Agreement” constituted “a broad arbitration clause as it covers not only those issues arising under the employment contract, but even those issues with any connection to the contract.”). Similarly, contracts that call for arbitration of “any dispute between the parties” without limiting language have also been construed to be broad arbitration clauses. Qwest Corp. v. New Access Communications, LLC, No. 03-N-1278, 2004 U.S. Dist. LEXIS 28523, * 3 (D. Colo. Mar. 31, 2004) (arbitration clause covering “any claim, controversy or dispute between the parties” with no restriction found to be broad)

Disputes “Under” or “Arising Under” the Agreement: Courts have split over the interpretation of arbitration clauses limiting arbitration to disputes “under” or “arising under” an agreement. Some courts construe such clauses to be relatively narrow. See Cape Flattery Ltd. v. Titan Mar., LLC, 647 F.3d 914, 924 (9th Cir. 2011) (“arising under” language signals a narrow arbitration clause); Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464 (9th Cir.1983) (phrase “arising under” deemed relatively narrow); Carro Rivera v. Parade of Toys, Inc., 950 F. Supp. 449, 453 (D.P.R. 1996) (because tort claims did not relate to contract interpretation and performance, they did not “arise under” the agreement); B.C. Rogers Poultry, Inc. v. Wedgeworth, 911 So.2d 483, 488 (Miss. 2005) (arbitration of disputes “arising under this agreement” is narrow and focused only on those disputes actually “under” the agreement). Many other courts, however, have found clauses requiring arbitration of any dispute “arising under” the agreement to constitute a broad arbitration clause. Cook v. PenSa, Inc., No. 13-CV-03282-RM-KMT, 2014 WL 3809409 *13-14 (D. Colo. Aug. 1, 2014) (determining that “the Tenth Circuit would follow the majority of federal circuits and give the phrase ‘arising under’ a broad construction based on strong federal policy in favor of arbitration.”); Viaero Wireless v. Nokia Solutions Network U.S. LLC, No. 13-CV-00866-RM-CBS, 2013 WL 5366402, at *5 (D. Colo. Sept. 25, 2013) (unpublished) (noting that “arbitration provision extends to ‘any dispute under this Agreement . . . ,’ and therefore, the presumption in favor of arbitration extends to peripheral matters relating to the parties' obligations”); Dialysis Access Center, LLC v. RMS Lifeline, Inc.,638 F.3d 367, 382 (1st Cir. 2011) (giving broad construction to provision requiring arbitration of “any dispute that may arise under this [Master Service] Agreement”); Consol. Brokers Ins. Servs., Inc. v. Pan-Am. Assur. Co., Inc., 427 F. Supp. 2d 1074, 1083 (D. Kan. 2006) (finding arbitration clause, which encompassed “[a]ny dispute arising between the parties under this Contract,” to be “a broad provision”).

Drafting Narrow Arbitration Clauses: Given the strong presumption in favor of arbitration, unless the parties intend to arbitrate all disputes related to their contract, including collateral and peripheral matters that may merely implicate issues of contract construction or the parties' rights and obligations under it, extreme care should be taken to limit the arbitration clause to specific, narrowly defined types of disputes. The parties should include express language identifying with specificity the type of disputes they agree to arbitrate. The parties also may want to recite their intention that the arbitration clause is intended to be narrow, that the agreement to arbitrate only covers those categories of disputes specifically listed, and the parties do not intend to arbitrate statutory, tort or other claims that merely touch on or collaterally relate to the agreement.

In addition, where the parties intend to arbitrate only a limited category of disputes but want those disputes, but only those disputes, to be resolved under an arbitration organization’s arbitration rules, those rules should be carefully reviewed, specifically identified in the contract, and express language should be included in the arbitration clause excluding the application and operation of any arbitration rule that would otherwise extend the scope of arbitrable disputes beyond what the parties intend. Arbitration rules adopted by an arbitration association such as the AAA, for example, typically provide that: (1) the parties shall be deemed to have made such rules a part of their arbitration agreement whenever they have provided for arbitration under such rules; (2) the arbitrator shall have the power to determine disputes over the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim; and (3) the arbitrator shall have the power to determine the validity of a contract of which an arbitration clause forms a part, and that such arbitration clause shall be treated as an agreement independent of the other terms of a contract. See, e.g., AAA Commercial Arbitration Rules R-1 and R-7. While courts recognize that arbitration is purely a matter of contract, any ambiguities will be construed in favor of arbitration. Parties should draft their arbitration clauses accordingly.

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Arbitration Pitfalls – Failing to Specify Duration

Arbitration Series - Part 2 of 3:  Arbitration clauses are often contained in purchase and sales agreements, underwriting agreements, earn-in agreements, and other contracts covering specific transactions or limited to a specific performance period. See prior post. Parties may have intended the arbitration clause to only cover disputes concerning the performance or interpretation of the contract. However, parties who incorporate broad arbitration clauses in their contracts, such as clauses calling for arbitration of any dispute “arising out of,” “related to” or “connected with” the agreement, may be forced to arbitrate post-contract disputes they did not intend to arbitrate.

Federal courts have held an arbitration clause in a contract is presumed to survive the expiration of the contract. Newmont U.S.A. Ltd. v. Insurance Co. of North America, 615 F.3d 1268 (10th Cir. 2010); Riley Mfg. Co., Inc. v. Anchor Glass Container Corp., 157 F.3d 775 (10th Cir. 1998). The Tenth Circuit governing most of the Rocky Mountain states has held that this presumption in favor of continuing arbitrability will only disappear in two situations:

     1) if the parties expressly or clearly imply an intent to repudiate post-expiration arbitrability, or
     2) if the dispute cannot be said to arise under the previous contract.

In Riley, the Tenth Circuit held that to “arise under” a contract means the dispute involves rights which “to some degree” have vested or accrued during the life of the contract and merely ripened after termination, or the dispute relates to events which have occurred “at least in part” while the agreement was still in effect. 157 F.3d at 781.

Given the strong presumption in favor of arbitration, any implied intent to repudiate post-expiration arbitrability must be clear. Several courts, for example, have found the presumption in favor of arbitration applies even though only certain provisions in the contract survive closing or termination of the contract and the arbitration clause is not listed as one of the provisions that survive. In Huffman v. Hilltop Companies, LLC., 747 F.3d 391 (6th Cir. 2014), for example, the court held an arbitration clause covering any claim arising out of or related to an agreement was broad and gave rise to the presumption of arbitrability, even though the arbitration clause was not listed among those provision that survived the termination of the contract. The court ruled the strong presumption in favor of arbitration applied absent an indication that the parties clearly intended for the survival clause to serve as an exhaustive list of the provisions that would survive expiration of the agreement. See also, W. Liberty Foods, L.L.C. v. Moroni Feed Co., 753 F.Supp.2d 881, 885 (S.D.Iowa 2010) (holding that an arbitration clause did not expire despite the fact that it was not listed in the contract's survival clause). These courts have reasoned that if the parties had intended to extinguish the arbitration provision upon the termination of the agreement they could have done so expressly.

When parties negotiate the terms of an arbitration clause, they should consider whether they want to arbitrate disputes between them after the contract is completed or terminates. If the parties intend to limit arbitration to disputes that arise during contract performance, they should pay careful attention to the language of their arbitration clause and include express language narrowly describe the scope of disputes that will be subject to arbitration and specifying any durational limitation on their agreement to arbitrate.

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Arbitration Pitfalls – Failing to Specify Who Decides Arbitrability

Arbitration Series - Part 1 of 3:  Agreements to arbitrate are often viewed favorably during contract negotiations as way to avoid litigation and minimize costs and expense should a dispute arise between the parties. Frequently, however, arbitration may be just as expensive and lead to uncertainties and consequences never contemplated. A party should carefully consider and understand the terms of any arbitration clause and avoid rubber stamping general arbitration clauses, such as those calling for the arbitration of any dispute arising under or relating to the contract under the Rules of the American Arbitration Association (“AAA”). One threshold issue the parties should clearly understand and address is who will have jurisdiction to resolve disputes about whether a given claim falls within the scope of the parties’ arbitration agreement.

The U.S. Supreme Court has ruled that the question of whether a particular dispute is arbitrable is presumptively a question for the court to decide absent “clear and unmistakable” evidence that the parties agreed that the arbitrator would decide this question. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944-45 (1995). Following this decision, arbitration associations amended their arbitration rules to provide that the arbitrator has jurisdiction to decide whether a given dispute is arbitrable. Rule R-7 of the AAA Commercial Arbitration Rules, for example, provides that the arbitrator “shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or the arbitrability of any claim or counterclaims.” All the various sets of arbitration rules promulgated by the AAA now contain a similar rule. A line of cases from federal district and circuit courts subsequently developed (now the majority view) holding that when the parties use a broadly worded arbitration clause incorporating a set of arbitration rules which confers upon the arbitrator the power to determine his own jurisdiction, they “clearly and unmistakably” agree to arbitrate whether a given dispute is arbitrable. Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1071 (9th Cir. 2013); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir. 2012); Fallo v. High-Tech Inst., 559 F.3d 874, 876 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1369 (Fed. Cir. 2006); Terminix Int'l Co. v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1329 (11th Cir. 2005); Contec Corp. v. Remote Solution, Co., Ltd, 398 F.3d 205, 208 (2d Cir. 2005). Thus, where a dispute, whether sounding in tort, equity, contract or statute has any arguable connection to the agreement, the arbitrator instead of the courts may have the power to determine if the dispute is arbitrable.

It is important to recognize that arbitrators are usually private practitioners engaged in the business of providing legal services for a fee. They may face significant financial and competitive pressures to earn more money and handle more cases. That is true for many arbitrators suitable for commercial disputes, but is not the case for the judiciary. Most parties would expect that a judge's compensation does not depend on how that judge decides an issue, but they may not appreciate that conferring the power on an arbitrator to determine whether a given dispute is arbitrable or not could have such an effect.

Where parties only intend to arbitrate certain types of disputes but want to have those specific disputes, and only those disputes, resolved by an established arbitration organization and under its established arbitration rules, it is critical that the parties carefully define and narrow what disputes are arbitrable. Unless parties want to arbitrate whether a given dispute is in fact arbitrable, they should also specifically address in the body of the arbitration clause itself the question of who will determine whether a given dispute falls within the scope of their arbitration agreement. The same applies if the parties intend an arbitrator to decide whether a given dispute is arbitrable. Failure to do so may lead to complicated and expensive disputes concerning the scope of the arbitration clause or lead to results the parties never focused on or intended.

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