The 2017 CAPL Property Transfer Procedure
By Jim MacLean
The package on the CAPL web page includes: (I) an overview of the project scope and the major changes relative to the 2000 PTP; (ii) a detailed matrix hat outlines all material changes relative to the 2000 PTP and their rationale; (iii) a clean copy of the text and annotations; (iv) a 34 page coded comment matrix that presents the detailed verbatim comments we received from a modest number of commenting parties, together with our responses to each individual comment; (v) a redline of the second draft relative to the initial July draft; and (vi) a redline of the second draft relative to the 2000 PTP. While we do not expect that the redline to the 2000 document will be reviewed in any detail, we believe that even a cursory glance at that document will demonstrate convincingly the thought and effort that has been invested in the 2017 document over the last 11 months by our 15-member committee.
As noted in my earlier November, 2016 article in The Negotiator, the Addendum to the draft includes five case studies that were prepared to provide a compelling case for use of the 2017 PTP for the low to modest value transactions for which it has been designed. To a large degree, those case studies will determine the willingness of companies to allocate resources to the review of the document and the pace at which the PTP will ultimately be accepted by industry. They show the potential use of the PTP for: (I) a simple sale of a producing property; (ii) a simple swap involving producing properties; (iii) a simple sale of an undeveloped property; (iv) a more complex sale of an undeveloped property involving reserved rights and the reservation of an ORR; and (v) a simple swap of undeveloped properties. The common theme was that use of the schedule of elections from the draft 2017 PTP allowed the head agreement for each of those case studies to be not greater than two pages, as shown for item (iii) in the November article.
This month’s article offers additional context and an updated perspective on the path forward for the project in the context of the informal and formal feedback we received on the initial draft.
“Making Simple Transactions Simple Again”
Our committee is a diverse one, with representation from smaller companies, intermediate sized companies and larger companies. Our members represent not only CAPL, but also our partners in CAPLA, EPAC, PADA, PASC and the Legal Community. Despite our differences in background and functional expertise, we are united by a common belief-that our industry does not efficiently process our low to modest value, straightforward A&D transactions.
One of the major contributing factors to this is the lack of standardization in our agreements. We currently have hundreds of different companies saying basically the same thing in many ways. This lack of consistency is apparent when we see the deficiencies in agreements presented to us and when we recall the bias in the documents we often see proposed. It is most apparent, though, when we consider the additional effort and associated delays respecting many of our low to modest value, straightforward transactions because of labour intensive reviews of different presentations of similar concepts and a tendency to debate how best to say basically the same thing as what had been originally proposed.
Put simply, we, as industry, have done a remarkable job of making simple transactions much more complex than they should be, than they must be in a business environment that requires us to do more with even less.
We believe that our work demonstrates that there is, in fact, a better path available to us for low to modest value, straightforward transactions. We believe that current industry conditions create an appetite for efficiency, effectiveness and change. Most importantly, however, we believe that a critical mass of the smaller and intermediate sized companies will quickly embrace the 2017 CAPL Property Transfer Procedure as “first followers” for the transactions for which it is designed.
This strong existing undercurrent of support for “making simple transactions simple again” is why we have dedicated so much of our effort on this project to target the smaller and intermediate sized companies and why we believe that use of the 2017 PTP will cascade quickly within at least that segment of potential users. (For a fun context on “first follower” theory, do a search and watch the three minute You Tube video “First Follower: Leadership Lessons from Dancing Guy.”)
But Don’t Confuse Simpler Transactions with a Lack of Quality
The PTP is analogous to the CAPL Operating Procedure and the CAPL Farmout & Royalty Procedure. Each document is basically a “car manual” that offers a breadth and depth of coverage that addresses reasonably foreseeable issues in a way that is logical and reasonably complete. The resultant simplicity in the ability to complete transactions is not because those documents are simple-they are inherently complex. The efficiency gain they offer is a common platform of process and language that allows us to complete transactions much more simply than would be the case if those documents did not exist.
While we have tried to use “plainer language” in the PTP to simplify the presentation of the content, we did so without ever sacrificing the quality or depth of coverage for the transactions for which the PTP has been primarily designed. In fact, a cursory review of the materials comparing the 2017 draft to the 2000 PTP will show that the breadth and depth of coverage in the 2017 PTP are vastly superior to the corresponding content in the 2000 PTP.
The 2000 PTP is Already Obsolete
As shown in the case studies in the Addendums, much of the former head agreement content contemplated for the 2000 PTP has been shifted to the 2017 PTP, and the number of elections has been significantly reduced, even though there are five new elections included in the 2017 document. More importantly, the handling of the concepts is much stronger than in the 2000 PTP because of a combination of feedback on the 2000 document, the intervening evolution in the way industry addresses issues in A&D agreements and our aggressive editing of the document.
Some companies that have been using the 2000 PTP have already begun to use the 2017 draft for new transactions, as modified for any changes they require for their transaction. They include both a schedule of elections and modifications and a copy of the draft document to provide context for that schedule. The significant mutual benefits to be obtained from use of the current draft are such that parties that would otherwise use the 2000 PTP for a transaction should consider possibly using this approach for their current transactions.
Parties considering this approach must be aware of a key qualification, though. The PTP needs to be supplemented with custom provisions if there are any issues associated with the transfer of regulatory licenses for the reasons explained in the next article of this series. (For the moment, see the annotations on Paragraph 6.02(q) of the draft for an explanation about why this key business issue was not addressed within the PTP.)
A Completed 2017 CAPL Property Transfer Procedure in Early Fall
Fewer companies provided comments on the initial draft than we had hoped. However, the informal feedback was uniformly very supportive of the project, and the specific comments were both positive and very thorough. The combination of those comments and our own aggressive editing efforts resulted in the second draft being a greatly improved document.
We have requested industry comments by April 12. This positions us to issue the third industry draft in the spring, have any required iterations with commenting parties by early September and move to closure on the document in the late September to mid-October window.
A Riddle That Offers Perspective
As noted by the American inventor Charles Kettering, “The world hates change, yet it is the only thing that has brought progress.”
In speaking to a skeptical industry audience in late 1996 about an early draft of the 1997 CAPL Farmout & Royalty Procedure, I asked the audience the following riddle, “What do landing a man, on the moon and the standardization of the procedural aspects of industry earning agreements have in common?” Not surprisingly, the audience thought that it was a very odd question. They were right, of course, since it was a trick question. I reinforced my point about our ability to implement major change in the way we conducted our business by reminding the audience that only one of them had been done.
That question puts the project to create the 2017 CAPL Property Transfer Procedure into perspective.
We cannot continue to manage low to modest value, straightforward A&D transactions in the traditional way when we are expected to optimize organizational efficiencies. How can we justify using a 35-65-page head agreement on a straightforward swap of non-operated properties when we can handle that transaction just as well with a two-page head agreement and the 2017 PTP? How can we rationalize using a 10-25-page head agreement on a straightforward purchase of a five section, 100% interest lease for $200K that can be handled just as well with a one page head agreement and the 2017 PTP?
We are confident that the final product we submit to the CAPL Board for endorsement in due course will be a very good document that will enhance significantly industry’s ability to process the typical low to modest value, straightforward transactions for which the PTP has been designed. It will be a better document, though, if you choose to participate in the comment process and offer your insights.
Together, we are going to “make simple transactions simple again” with the 2017 CAPL Property Transfer Procedure
Published: The Negotiator, March 2017
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