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Maine Stephan Goodfellow, George F Goolsby

shall be made by Operator without first giving the non-taking party ten days written
notice of such intended purchase or sale and the price to be paid or the pricing basis to
be used. Operator shall give notice to all parties of the first sale of Gas from any well
under this Agreement.
All parties shall give timely written notice to Operator of their Gas marketing
arrangements for the following month, excluding price, and shall notify Operator
immediately in the event of a change in such arrangements. Operator shall maintain
records of all marketing arrangements, and of volumes actually sold or transported,
which records shall be made available to Non-Operators under reasonable request.
Note that while a fair amount of detail is included in this provision, it still leaves
many questions unanswered and engenders uncertainty respecting potential
imbalances. Indeed, the only remedy is the invitation to the operator either to
purchase the imbalance volumes or to market those volumes on behalf of the nontaker. But the operator has the option, and not the duty, to step in and take the
excess gas in his role as operator. Specifically, the operator is granted limited
authority (but does not have the obligation) to take possession of the oil and natural
gas production of any party who does not plan to take its share of current production
and either (i) purchase that share of production or (ii) market the hydrocarbons on
behalf of the non-taking party.18 By so doing, an imbalance is avoided because the
operators actions provide an alternative way for the party who has not made plans
to take its share to rely on the operator to take and dispose of its share of the
hydrocarbons on a current basis. Significantly, however, the operators authority to
market for the non-operator is limited by the terms of the joint operating agreement.
These limitations derive from industry practice and are shaped by two federal tax
rulings.19
To comply with the tax requirements, the joint operating agreement states that
the operators authority to purchase or sell is revocable and is limited to a reasonable
period, not to exceed one year.20 More fundamentally, however, many operators will
not opt to take any excess production under this provision because of two very
significant risks: first, under the on behalf of provision, the operator acts as agent
for the owner and may be subject to fiduciary duties that make acting as the nontakers agent legally unacceptable; and secondly, controversies about whether the
price the operator paid (if it purchases the gas) or received (if it markets the gas on
behalf of the non-operator) are quite common. For these reasons, a careful operator
will refuse to exercise its rights as operator under this provision unless it enters into
18
19

20

Eugene Kuntz, Gas Balancing Rights and Remedies in the Absence of a Balancing Agreement, 35 Rocky Mtn
Min L Inst. 13-16 (1989); see also AAPL, Form 610 art VI(G)).
If the operator does not limit its marketing to the terms specified in the joint operating agreement by,
for example, violating the rule against marketing beyond the one-year period stated in the agreement,
the parties who are involved in the sale risk being taxed as an association taxable as a corporation (I.T.
3930, 19482 C.B. 126; I.T. 3948, 19491 C.B. 161). Simply stated, the parties involved in the sale could
be treated as if they have formed a type of business association which is taxed as if a separate corporation
owned by them is making the sale. The result is to create an extra layer or level of federal taxation: their
corporation pays taxes and, once they receive their individual proceeds from their corporation, they
are taxed again on what they receive. There have been changes to the tax code which, if used, avoid this
result, but the failure to realise that these kinds of tax structuring decisions must be made can prove
costly.
Kuntz, at 13-17.

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