John F. (Jeff) Welborn specializes in serving as a mediator/facilitator in disputes that involve (U.S. and international) oil and gas, mining or other natural resource matters.  He has almost 40 years of experience in oil & gas and mining transactions and matters, both in the U.S. and globally, in natural resource regulatory matters and in... negotiating and drafting natural resource development agreements, financing arrangements, and conveyance documents. More

Thoughts on Non-Administered Arbitration

Non-administered arbitration (“NAA”) is an informal dispute resolution process designed to proceed without the involvement of a separate administering entity. The arbitrator and parties administer the proceedings.

The proceedings may be guided by a procedure the parties define, or the parties may agree to use institutional rules and procedures such as Rules for Non-Administered Arbitration published by the International Institute for “alternative” Conflict Prevention and Resolution (“CPR”). The objective is a dispute resolution process that is truly alternative – more efficient, flexible and expeditious than both adversarial litigation and formal administered arbitration.

I was recently an arbitrator in an NAA proceeding under the CPR Rules. This posting provides some of my reactions.

Avoid litigation in disguise

The effectiveness of the NAA alternative is only as good as the joint effort of all participants – the parties, their representatives and the arbitrator. Everyone involved in a non-administered arbitration proceeding must share the objective and make certain that the speed, flexibility and efficiency that the NAA process offers are realized and that the proceeding doesn’t devolve into litigation in disguise.

Parties who agree contractually to resolve their disputes in an NAA process seek a non-appealable, binding, just and fair result. That’s the low hanging fruit. Those contracting parties also deserve fruit higher up the tree – they deserve a dispute resolution proceeding that is focused, flexible, and less costly and time-consuming than formal administered arbitration or litigation. Everyone involved has an obligation to work to that end.

The approach

An important factor in meeting that obligation is how each participant approaches the NAA proceeding. Helena Tavares Erickson, a Senior Vice President at CPR, published an article on point some time ago (2006). Among her several valuable messages is the view that those involved must approach the dispute “as a problem to be solved, not a contest to be won.”

I agree. Contests to win are more expensive, more time consuming and less controllable than joint problem solving efforts. The benefits of an NAA proceeding are best realized in a problem solving context.

The schedule – agree and stick to it

As soon as the parties acknowledge the existence of a dispute to be arbitrated under NAA rules, they engage a mutually acceptable arbitrator. Then all concerned, including the arbitrator, should quickly (within days, not weeks or months) confer and agree to a date for a substantive hearing on the issues. This date should be written in stone, i.e., should be changed only (i) due to force majeure events and (ii) if and when not changing the date would mean genuine prejudice to a party.

The date should be realistic in terms of time needed for preparation. The original agreement which calls for dispute arbitration may provide unrealistic timing, e.g., 60 days to select and appoint an arbitrator and get to hearing on complicated factual/legal matters. It’s fine to override that prior agreement in the face of an actual dispute.

What shouldn’t be overridden is the clear intent of the parties to have the dispute heard and resolved quickly. Not getting to a substantive hearing on the merits of the dispute many months or more after arbitrator appointment is not the expeditious, economical dispute resolution process the parties originally bargained for.

Core issues – early identification and focus

Identification of the core issues in dispute, and early focus on those issues, can and should happen in arbitration, especially NAA. The flexibility to make this happen is a major advantage of the NAA process.

To get there, the parties and their representatives need to find the courage to work together to prioritize the factual and legal issues that comprise the dispute. This makes it possible to bring these core issues to the arbitrator for preliminary, non-binding review, or perhaps even for formal determination. Either way, the expertise of the arbitrator, the primary reason he/she was retained, is taken advantage of early on, and the possibility of mediation, or even settlement, of the entire dispute is increased.

If the parties and their representatives are reluctant to single out core issues for early scrutiny, the arbitrator should be ready to encourage them in that direction. The arbitrator needs to be sensitive to the time/cost value of bringing his/her expertise into the dispute in a constructive way early on.

This preliminary issue review requires two things:

1. Confidence on the part of the arbitrator -- the ability to express a high level opinion (make a call) based on the experience and expertise that he/she is bringing to the table without first having to see every possible bit of data or hear every possible legal argument.
2. Parties and party representatives who are willing to listen and act on the arbitrator’s early stage opinion regardless of whether they agree that this preliminary arbitrator opinion is binding.

Atmosphere – informal, open

This is a challenge, especially for lawyers trained in the courtroom. I’m not suggesting that everyone arrive at each session in blue jeans and flip-flops. I am suggesting that the participants strive for an atmosphere that is conducive to problem solving, that fosters professionalism as well as mutual respect and friendliness, and that leaves room for important openness and listening.

For the parties and their representatives, this requires:

• Self-control in terms of what each participant brings to the table,
• Fewer motions and objections in response to what has been put on the table,
• The courage to make their own conscience-guided determinations of what is truly relevant and helpful to the effort, and
• Confidence that the arbitrator is good enough not to need formal motions in order to see every weakness in what has been presented.

For the arbitrator, this is about not letting evidentiary issues get in the way. Let your experience, judgment and expertise (the qualities that brought you to this proceeding in the first place) tell you what you don’t need to know or listen to in order to do your job.

The record – do we need one?

The reasons for making a record in a formal dispute resolution proceeding don’t exist in an NAA proceeding. There won’t be an appeal on the merits of the final award, so that’s not a reason. Preserving a possible challenge to the final award based on arbitrator conflict or bias is also not a valid reason for a record. The potential for such a challenge should be raised and resolved long before the proceeding commences. That leaves the possible need for a record for reference purposes for final briefing and arguments to the arbitrator, and the making of the record can be tailored to that need.

So, this is not to advocate that NAA proceedings not be recorded. I am suggesting that the participants first work together to determine why a record is needed. They should then tailor the making of the record to the identified need before engaging in the expense and the additional logistics of making a record of all evidentiary presentations.

CPR is a leading NAA advocate. Their website is a valuable tool for those interested.

In summary

To repeat –

  1.      • The benefits of an NAA proceeding are best realized in a flexible, problem solving context.
         • The judicial process, the formal administered arbitration process, and all of the evidentiary and other rules and procedures that go along with those processes, are designed for          win-lose contests. They don’t allow for the flexibility that is an important benefit of an NAA proceeding, and they cost money and consume time.
         • Participants (parties, representatives and arbitrators) who are committed to the expediency and effectiveness of the NAA process must avoid engaging in litigation in disguise.            They should welcome and take full advantage of the flexibility that comes from working together to solve a problem.
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The Conservation Basics
A primary objective of the Colorado Oil & Gas Conservation Act (the “Act”) has always been conservation through prevention of waste and enforcement of efficient drilling and production practices. In other words, traditionally the Act served one important god – the resource conservation god.

Since 1994, however, the Act and those who work with it have had to serve an additional important god -- the god of public health, safety and welfare, and this one has become increasingly demanding.

Colorado mineral owners, explorers and producers, and those of us who represent them, all have a duty to make certain that the one god does not eclipse the other – to make certain that the conservation god does not become a second-class citizen in the world of oil & gas exploration, development and production in Colorado.

The Quiz – Test your knowledge of the basics
Which of the following statements are true, false, or close enough?
Question 1: The Rule of Capture…..
1. Allowed old Englishmen to pursue foxes off their land as long as the chase started on their land.
2. Came to this country on the Mayflower and helped Buffalo Bill make his name, but died with the buffalo long before oil or gas were discovered in Colorado.
3. Played a significant role in early oil & gas exploration and production in Colorado.
4. Was eliminated by passage of the Colorado Oil & Gas Conservation Act in 1951.
5. Survived passage of the original Colorado Oil & Gas Conservation Act, but was eroded by subsequent amendments to that Act.
6. Was effectively eliminated from Colorado common law by the 1994 amendments to the Colorado Oil & Gas Conservation Act
7. Has always been and remains a viable part of the Colorado common law applicable to oil & gas exploration and production.
8. With slight modification due to well location rules, applies to any well drilled in Colorado absent an applicable COGCC spacing order.
9. Says I’m entitled to produce and own whatever oil or gas I can find so long as I produce product to which I have a legal right from operations anywhere on lands that I own or have the right to be on.
Answer to Question 1: These statements are true except
• A-2 and A-4 are definitely false
• A-5 and A-6 are the difficult ones. These two are, in principle, also false, but the question is whether under COGCC practice, post 1994, the Rule of Capture has the same stature it used to have. More to the point, does it have the stature it should have if we are to serve the resource conservation god with the same fervor that the god of public health, safety and welfare is served.

Question 2: Waste
Under Colorado law, Waste of oil and gas in development and production operations is NOT which of the following?
1. Prohibited.
2. OK if necessary to protect public health, safety and welfare.
3. Any practice that leaves producible oil or gas in the ground.
4. The improper use or dissipation of reservoir energy.
5. Well spacing that is not sufficiently dense to drain the area drilled.
6. Drilling more than one well where one well can efficiently and economically do the job.
7. Tempered by market demand for produced product, i.e., it’s not waste if there’s no economic market.
Answer to Question 2: With the exceptions of #s 2 and 7, everything listed above is an accurate statement about Waste under the Act.
• 7 is easy to peg as a misstatement; the Act (unlike conservation laws in other states) specifically provides that market demand is not a factor in determining Waste.
• 2 is not so easy. It may be that in a post-1994 direct conflict the god of conservation loses the battle. It is at least food for thought by today’s COGCC practitioners, although maybe it’s not a practical issue because of modern technological advancements in production practices.

Question 3: What’s missing from the above list, i.e., what else does Colorado law categorize as waste?

Answer to Question 3: The abuse of correlative rights. The Act clearly defines abuse of correlative rights to be Waste, and that gets us to 4.

Question 4: True or False?
Protection of correlative rights means if you don’t own 100%...
1. You can still keep what you produce unless your cousin-in-law is the mineral cotenant.
2. You have to account retroactively to the other owners for their share, regardless of whether they participated in the cost of production.
3. You can still keep it all if you get there first because you’re protected by the Rule of Capture.
4. Each owner and producer in a common pool or source of supply of oil and gas is to have an equal opportunity to obtain and produce its just and equitable share of the oil and gas underlying such pool or source of supply.
Answer to Question 4: Statement 1 is definitely false, and Statement 4 is definitely true. However, the answers to Statements 2 and 3 are more challenging. Statement 2 is incorrect because the Act does not require backwards accounting at least for would-be participants who had (reasonable) notice of the drilling and production activity and who elected not to, or failed to, participate. For that reason Statement 3 is arguably correct, at least under the right circumstances. The Rule of Capture is still alive in Colorado, as long as each mineral owner had the same opportunity to produce/participate in production. This is really about the conservation god rewarding the risk-taker and is what is behind the force pooling provisions of the Act which have the effect of penalizing the non-risk taker.

The issues explored above are not pedantic. Nor should they be seen to be the atavistic ramblings of an ancient who worked closely with the COGCC in the old days (before 1994). These three basic concepts -- The Rule of Capture, Waste and Protection of Correlative Rights – remain essential to proper conservation of a waning resource. They are grounded in a good scientific and economic understanding of how to maximize oil and gas production while maintaining efficiency.
The irony is that serving this conservation god does not necessarily mean conflict with the duty to serve the god of public health, safety and welfare. Good resource conservation and production efficiency serve both gods. These practices not only incentivize the production of more product at less cost, they also serve to minimize surface and environmental impact in the process.

So, the message continues to be the same – oil and gas conservation basics are important for all of us involved in the Colorado oil and gas industry to understand and apply.

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Mediation in a Nutshell

Mediation typically occurs at some stage of the adversarial process. That process involves parties who are focused on the strengths of their respective positions/cases, and who are committed to convincing a decision maker that the other side should be defeated. The challenge for mediation is that these same parties are suddenly asked to shift gears, slow down, take a breath and come at resolution of the dispute in a very different way.
What mediation isn’t
The mediation session is not a trial or an arbitration, and the mediation process is not about deciding who’s right and who’s wrong. In a way, the mediation process is the inverse of a trial in that the parties themselves are the decision makers.
Perhaps most important, mediation is not about outdoing the other side. It’s not about winning or losing in the classic courtroom sense. The mediation process is a negotiation that may, or may not, result in agreement and dispute resolution. The negotiated result, if there is one, must seem (feel) fair on all sides to be acceptable and sustainable.
What mediation is
Thus, if the mediation process is to have a hope of being successful, each party must accept the challenge to identify and then focus on and evaluate its own weaknesses. Further, each party must be willing to listen to, accept, and evaluate the other party’s strengths.
The common perspective among the parties must be the following:
• Mistakes were made and things could have been done better.
• There is no pride of authorship.
• Each party had some participation in those mistakes.
• The dispute would not have arisen otherwise.

Those mistakes come at a collective cost that must be shared (compromised) if there is to be a mediated resolution. The benefit of a mediated resolution is that it avoids the cost and risk of litigation. This benefit must entice each party to stop looking back (except to define lessons learned), swallow hard, get on the right scale and commit to resolving the issues and moving on.
So, the victory in the mediation process, if any, is in resolution of the dispute. To get to that victory, each party and their counsel must accept the fact that a well-advised resolution may be seem painful, may feel like an abdication of principle, but it manages and avoids otherwise unmanageable and unavoidable risk. A mediated resolution also minimizes opportunity cost so that resources can be put back to constructive use in the life of each party. In short, a mediated resolution, though it may not make everyone happy, puts each party back in control, and therefore, adds value.

Getting There Check List – Mediator
The mediator must
 Bring understanding and creativity to the table
 Be a spokesperson for each side while maintaining credibility and trust
 Be a motivator, not an advocate
 Be the reality checker and manager of expectations
 Be an edge softener, and do so without ego – leave that at the door

Getting There Check List – Parties and Counsel
Each party and their counsel must
 Control their own myopia and their own emotional (and probably economically ill-advised) investment in the rightness of their position.
 Understand their own position weaknesses
 Check (counterproductive) “principles” at the door
 Have the courage, knowledge and authority to accept compromise.
 Know, going in, the perimeters (absolute boundaries) and parameters (variables) of acceptable compromise.
 Be able walk in the other party’s shoes with empathy, without pride of authorship and without personal investment in a litigated win.
 Get on the right scale and stay there - listen to Pogo: "We Have Met The Enemy And He Is Us"

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