CAPL Farmout & Royalty Procedure-Introduction & Context
The 2015 CAPL Farmout & Royalty Procedure and the related 2015 CAPL Overriding Royalty Procedure are the second versions of those documents.
The initial creation of the CAPL Farmout & Royalty Procedure and the CAPL Overriding Royalty Procedure reflected three overarching beliefs. The first was that it was inherently inefficient for our industry to address similar concepts in a multitude of different ways. The second was that intervention was required on an industry basis by CAPL because of the increasing expectation of employers that land personnel “do more with less”. The third was that the document must reflect a balance between the needs of farmors and farmees and between larger companies and smaller companies.
The 1997 versions became widely accepted by early 1998, and have fundamentally changed the way in which our industry has documented earning agreements in Western Canada.
Users have found that the documents: (i) dramatically reduced the cycle time and effort required to complete appropriate documentation; (ii) focused negotiations on key business components of transactions; (iii) streamlined administrative processes, while increasing document and data integrity; and (iv) focused resources on additional value creation opportunities.
Relatively straightforward transactions for which it commonly took more than six months to complete the final agreement previously were routinely completed in under two weeks with minimal comments by using the 1997 CAPL documents as the foundation for the agreement. The changes to the 2015 documents were designed to enhance the document efficiencies further in this regard to accommodate a greater level of complexity in transactions. This is demonstrated by the sample Case Studies included in the annotated 2015 CAPL Farmout & Royalty Procedure.
The foundation design principle of the CAPL Farmout & Royalty Procedure that was a breakthrough relative to prior industry farmout document standardization attempts was to separate the boilerplate, procedural elements of an earning agreement from the transaction specific terms. In essence, there was a realization early in the 1997 project that efficiencies would be optimized if the transaction specific Head Agreement revolved as much as possible around the Farmout & Royalty Procedure, rather than accepting the traditional paradigm that a Schedule must always revolve around the Head Agreement.
To illustrate, a concept with transaction dependent elements, such as an Area of Mutual Interest, was historically addressed on a custom basis in the Head Agreement because it included a number of negotiated elements.
The CAPL Farmout & Royalty Procedure, on the other hand, included an optional Area of Mutual Interest Article of generally accepted supporting procedural processes to address the possibility that the parties had negotiated an Area of Mutual Interest in their agreement. The Head Agreement content was then focused solely on the specific transaction dependent elements (i.e., description of the AMI, the AMI interests, the AMI term and any special provisions). The supporting procedural platform for the Area of Mutual Interest was addressed in the Farmout & Royalty Procedure without need for several pages of additional custom content in the Head Agreement.
The second major design principle of the CAPL Farmout & Royalty Procedure was that the negotiator must always retain control of the significant negotiated elements of a transaction. The document was designed to be able to accommodate 80-90% of typical negotiated transactions with relatively modest customization by providing the user with a moderate number of optional “lanes” from which to choose. Users would be required to manage exceptions to the more typical outcomes for those portions of their transactions for which the Farmout & Royalty Procedure does not provide the desired handling.
Inherent in this is a key point that may not be fully understood by casual users. The document is ultimately a “power tool” that allows a skilled user to be much more efficient. Users must always remember, though, that there are significant potential dangers for personnel who attempt to use it as a simple “fill in the blanks” document without involving experienced land personnel.
The major 2015 update reflected the need to modify the document to address changes that were warranted based on industry’s experiences with the 1997 document, and are analogous to a transition from an older model “Blackberry” to a modern “Smartphone”. The changes reflected five other major factors.
The need to address issues associated with evolving business needs (e.g., more “straight up” earning and re-entry deals, more multi-zone projects, horizontal wells, changes to drilling density restrictions, larger scale, more complex earning agreements and a better platform for shale projects).
Changes required because of completion of the 2007 CAPL Operating Procedure and the 2015 update, to optimize alignment between the documents.
Increased clarity and the inclusion of reasonable solutions to reasonably foreseeable problems to increase the breadth and depth of coverage to an extent not feasible with the initial 1997 documents.
A desire to apply “plainer language” principles to simplify the presentation in the document and make the material more accessible to users without sacrificing required content.
A significant expansion of the annotations to provide greater insights for users of all experience levels on a real-time basis as they worked with the document.
As is the case with all of the major CAPL documents, it will typically be helpful for a user with a potential problem under the 1997 document (or a pre-CAPL farmout or royalty agreement) to look at the text and annotations of the 2015 document. The applicable 2015 document will often offer additional insights on an issue that might provide a platform for an early stage resolution (or an internal de-escalation of an emerging issue) because of the possibility that the current handling of the issue will be regarded as reflecting current generally accepted industry standards.
The module on the 2015 document also includes reference information about the evolution of the handling of several key topics associated with farmouts over time. These materials relate to: (i) deductions against Overriding Royalties; and (ii) payout accounts.