Rights of First Refusal and Package Oil and Gas Transactions

Rick G. Strange, Cotton, Bledsoe, Tighe & Dawson
Thomas L. Fahring, State of Texas

Abstract

Rights of First Refusal and Package Oil and Gas Transactions

Package transactions – the sale of multiple oil and gas properties collectively, are fast becoming the norm in the oil and gas industry. Most operators use a model operating agreement prepared by the American Association of Petroleum Landmen. The AAPL forms contain a preferential purchase provision which allows the parties to buy any interest in the contract area being offered for sale on the same terms and conditions as offered by a third party. In a single-asset transaction, this is a relatively simple transaction. It becomes much more complicated if the burdened interest is sold as part of a package because the parties must address whether the preferential right even applies and, if so, what are the parties’ rights and duties?

The article addresses these questions by considering which states hold a preferential right attaches and which do not. For those states that do recognize the rightholder’s preferential right, the article addresses how the purchase price is allocated to the burdened property, whether the rightholder can be required to meet noncompensatory terms being imposed upon the third-party purchaser, what notice the owner must provide, and what the rightholder must do to protect its interest. The article then addresses the issues likely to arise in litigation over a preferential purchase right in a package transaction such as the burden of proof and the various remedies recognized by different states.