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Overview Of CAPL Operating Procedure AFE Processes
Jim MacLean, MacLean Resource Management Ltd., March, 2021
For context, the author is the principal draftsman of the 1990, 2007 and 2015 CAPL Operating Procedures. This document was created as an
introductory reference document to assist users to understand the AFE processes included in the various versions of the CAPL Operating Procedure.
It should not be regarded as a document of the CAPL or, given the summary nature of the presentation of the materials, as purporting to be definitive
with respect to the subject matter.
The principal provisions are found in Clause 301 or 3.01, as applicable, and Article VII or 7.00, as applicable, of the respective versions of the document.
Part 1-Clause 301/3.01 Authorities
This Part addresses the principal concepts relating to the Operator’s financial authorities. It provides a context for the Operator’s general permissible
financial authority, the emergency scenario, the regulatory requirement scenario and the overexpenditure scenario.
The introductory annotations on Clause 3.01 of the 2015 CAPL Operating Procedure provide insights about the evolution of this provision of the
Operating Procedure over time.
The evolution of the role of the Operator to the manager of the Joint Property on behalf of the Parties is apparent by comparing the
corresponding provisions in the 1971, 1974, 1981 and 1990 versions of the Operating Procedure.
1971 –“The Operator is hereby delegated the exclusive control and management of the exploration, development and operation of the joint
lands for the discovery and production of petroleum substances for the joint account.”
1974 –“The Operator is hereby delegated the exclusive control and management of the exploration, development and operation of the joint
lands for the joint account.”
1981 – “The Operator is hereby delegated the exclusive control and management of the exploration, development and operation of the joint
lands for the joint account, provided it shall consult with the Joint-Operators from time to time with respect to decisions to be made for the
exploration, development and operation of the joint lands, and keep the Joint-Operators informed with respect to operations planned or
conducted for the joint account.”
1990 - “The Operator shall consult with the Joint-Operators from time to time with respect to decisions to be made for the exploration,
development and operation of the joint lands and the construction, installation and operation of any production facilities, and the Operator
shall keep the Joint-Operators informed with respect to operations planned or conducted for the joint account. Subject to the provisions
hereof, the Operator is hereby delegated the management of the exploration, development and operation of the joint lands and the
construction, installation and operation of any production facilities for the joint account on behalf of the Joint-Operators.”
This evolution continued in the 2007 and 2015 documents to this version of what is now Subclause 3.01A:
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Management Of Operations-The Operator will consult with the Parties periodically about the exploration, development and operation of the
Joint Lands, the construction, installation and operation of any Production Facility and management of the Joint Property. It will keep them
informed in a timely manner about Joint Operations planned or conducted by it. Subject to the Agreement, the Parties delegate to the Operator,
on their behalf, management of the exploration, development and operation of the Joint Lands and management of the other Joint Property.
However, the Operator does not have any obligation to initiate or optimize the exploration and development of the Joint Lands, except insofar
as the Agreement includes specific obligations to the contrary.
Those annotations also offer additional context about the overarching manner in which approvals are handled in the CAPL Operating Procedure
relative to other project based agreements. This basically reflects the degree to which the CAPL Operating Procedure is ultimately a document of
efficiency that has been designed largely to facilitate the ability of the owners to advance projects through a collection of individual operations for which
investment decisions and the resultant implementation of work programs can be modified on relatively short notice.
One of the fundamental differences between the conventional CAPL Operating Procedure and Western Canadian production agreements,
Canadian frontier agreements, project based agreements for certain scale sized Canadian shale developments and the typical international
agreement is the use of an operating committee to provide direction in those other documents.
Ignoring the Independent Operation mechanism in Article 10.00 and the expenditure approval process, the role of the Non-Operators in
setting exploration strategy might seem minimal under the conventional CAPL Operating Procedure. (Subclause 3.01A includes a simple
duty to consult, and Clause 5.04 gives a Non-Operator the right to require the Operator to provide the Non-Operators with a forecast of
anticipated expenditures over the next 12-month period.) However, it is not feasible to include an operating committee provision in the
document. A typical Operator will be operating a multitude of blocks with varying partners, interests, tenures, prospectivity, maturity and
activity, and the resultant administrative burden would be high. Moreover, the mechanism would not be workable in many instances anyway
because of the likelihood that one Party would hold more than a 50% interest or that there would only be two interest holders. In practice,
the Independent Operations Article and the expenditure approval process included in the document provide the Non-Operators with significant
control over the exploration and development of the Joint Lands.
There are basically two types of expenditures addressed in this Clause-those that the Operator is permitted to make for the Joint Account without the
prior approval of the other parties and those that require prior approval of the parties to be a charge for the Joint Account.
The most significant changes in the handling of the permissible expenditures that do not require prior approval of the parties over time have been with
respect to the clear authority to address regulatory requirements and the handling of the expenditures required to effect an approved abandonment,
as noted in the table below.
The most significant changes relating to the requirement to obtain approvals of the parties have related to the handling of overexpenditures in the
various versions of the document. Of particular importance in this regard was the shift as of the 1990 document to an outcome in which a Supplementary
AFE was for informational purposes, assuming that there was not a change in scope in the operation. There was significant case law on this issue,
particularly with respect to the handling in the 1981 document, as noted in detail in the annotations on Subclause 3.01C of the 2015 document.
Additional changes introduced in the 2007 document and enhanced significantly in the 2015 document offer guidance with respect to activities that are
inherently within scope of an approved well and the degree to which discretionary changes to the trajectory of a Horizontal Well are permitted without
first obtaining the consent of the parties participating in that well.
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Clause 301/3.01 1971& 1974 CAPL 1981 CAPL 1990 CAPL 2007 CAPL 2015 CAPL (Differences
Concepts re Authorities from 2007 noted)
(1) Operator’s permissible Operator may make Operator may make Operator may make an Operator may make an Same as 2007, with recognition that
authority-general financial an expenditure for a an expenditure for a expenditure for a single expenditure for a single the Parties might have modified
authority single undertaking single undertaking operation estimated to cost operation estimated to cost their Agreement with special
estimated to cost not estimated to cost not not more than $25,000 not more than $50,000 or approval processes with respect to
Note: (i) This discretionary more than $10,000, more than $25,000 (Subclause 301(b)) such other amount as is a Multiple Well Drilling Program, a
authority has been with a proviso in the (Clause 301) prescribed by the Multiple Well Completion Program
included to enable the 1971 document that Accounting Procedure or the development of any of the
Operator to make relatively the total of those (Subclause 3.01B) Joint Lands.
minor capital expenditures expenditures in any
without need to obtain prior 30-day period will Note: Qualifications like that noted
approval of the other not exceed $15,000 above are included in a number of
parties. In practice, this is without the approval provisions of the 2015 document to
designed to provide the of the parties. address the possibility that parties
Operator with the ability to (Clause 301) might choose to include special
make minor expenditures provisions in their Agreements to
to address normal day-to- accommodate shale development
day operational needs to projects.
maintain production, such
as the replacement of a
minor piece of wellhead
equipment.
(ii) The Operator’s authority
in all versions is linked to its
estimate of the cost of the
activity. Insofar as the
actual cost is higher, it does
not eliminate the
Operator’s authority. In
other words, an Operator
making what it thought was
going to be a $23K
expenditure under the
1990 document does not
lose its authority for the
expenditure if it ultimately
turns out to be $26K. This
assumes, of course, that
the estimate was a bona
fide reasonable estimate,
rather than a number
picked out of the air to be
within the authority.
Insofar as there is an
overexpenditure above the
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Clause 301/3.01 1971& 1974 CAPL 1981 CAPL 1990 CAPL 2007 CAPL 2015 CAPL (Differences
Concepts re Authorities from 2007 noted)
estimated amount, the
supplementary AFE
requirements of the 1981-
2015 versions of the
document do not apply, as
the original authority was
not obtained under an AFE.
That being said, it would be
inappropriate not to
communicate with the
other owners if the
expenditure turned out to
be much larger than
anticipated (e.g., $100K
when the original estimate
was $23K).
(2) Operator’s permissible Notwithstanding the Notwithstanding the Notwithstanding the Notwithstanding the Same as 2007, except that an
authority-emergency prescribed financial prescribed financial prescribed financial prescribed financial informational AFE is to be included
scenario authority, the authority, the authority, the Operator authority, the Operator may with the notification contemplated at
Operator may make Operator may make may make an expenditure make an expenditure the end of Subclause 3.01B.
Note: While not stated in an expenditure an expenditure reasonably considered insofar as it “reasonably
the 1971, 1974 and 1981 considered considered necessary by it “by reason determines that an
documents, there is an necessary by it “by necessary by it “by of an event endangering emergency exists (or is
inherent expectation that reason of an event reason of an event life or property”. The imminent) and the
there be a reasonable endangering life or endangering life or Operator is to advise the expenditure is then
basis for the conclusion property”. There is a property”. There is a other owners promptly of required: (i) for safety or the
that an emergency exists. duty to advise the duty to advise the the nature of the event and protection of life or property;
other owners other owners the associated or (ii) to prevent or mitigate
Although not included as a promptly of the promptly of the expenditure. (Subclause pollution or other
requirement in the 1971, particulars of the particulars of the 301(b)) Environmental Liabilities.”
1974 and 1981 documents, event. (Clause 301) event. (Clause 301) The Operator is to notify the
the notification of other owners promptly in
particulars in those reasonable detail of the
documents should also event and the nature, scope
identify the nature of the and schedule of the
work that is being done to expenditure and the
correct the problem, its associated costs.
timing and the associated (Subclause 3.01B)
estimated costs.
The preferred approach is
to distribute an
informational AFE to
supplement the
explanation for the
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