ETHICAL AND CONTRACTUAL CONSIDERATIONS : CONFIDENTIALITY AND NON-COMPETITION

1. ETHICAL AND CONTRACTUAL CONSIDERATIONS: CONFIDENTIALITY AND NON-COMPETITION RESPONSIBILITIES FOR FIELD LANDMEN Presented by Roger A. Soape, CPL Houston Association of Professional Landmen Technical Workshop April 28, 2011 Roger A. Soape, Inc. 450 Gears Road, Suite 780 Houston, Texas 77067-4513 281-440-6347 www.rasoape.com

2. Often -- perhaps most often -- exploration companies and land service providers enter into written agreements to govern their relationship. Agreements of this type may take many forms. Some may be very simple one-page documents while others may be elaborate contracts with a host of provisions spanning many pages. In this presentation, we will focus on two key common provisions: confidentiality and non-competition. We will review and discuss these provisions to help us better understand what the parties may logically expect from an ethics perspective where no written agreement exists. While the matter of ethics is present with or without a written agreement, we often think of the study of ethics as having the most application to provide guidance where no clear written contract can be found.

3. Examples of contractual confidentiality provisions • A. AAPL’s master land services contract • B. Major oil company contract • Large independent oil company contracts • Examples of contractual non-competition provisions • A. AAPL’s master land services contract • B. Major oil company contract • Large independent oil company contracts • Expectations of the parties where no written contract exists • A. Confidentiality • B. Ownership of reports • C. Non-competition area restrictions • Non-competition time restrictions • Review of recent AAPL ethics cases related to confidentiality and non-competition • V. Discussion of relative positions of the parties and fairness • VI. Observations, suggestions and recommendations

4. EXAMPLES OF CONTRACTUAL CONFIDENTIALITY PROVISIONS • Commonly, companies and land service providers enter into written contracts to govern confidentiality of the data provided by the company and/or the work product generated by the land service provider. Some examples of confidentiality provisions are provided: • A. AAPL Master Land Services Contract “Unless otherwise designated by Company, all work-related information, title information, areas of interest, maps, letters, memoranda, and other information provided by Company, and all other materials, plans, and negotiations with third parties concerning the services requested of Contractor under any Work Order are proprietary to Company and shall be held strictly confidential by Contractor, its employees and permitted subcontractors during the period that such Work Order is effective and for twelve (12) months thereafter. Contractor shall take all reasonable steps to identify all such confidential information to its employees and permitted subcontractors, and to ensure that those parties observe the provisions of this paragraph.” This provision seems to speak more to the information provided by the company than it does to the work product the contractor may generate. Still, it is quite time-specific.

5. B. Major Oil Company Contract • “The services contemplated by this Agreement relate to information that is highly proprietary and is considered of value to the Company. During the periods which Contract Landman is performing work for Company, Contract Landman agrees…to keep all information, records, maps, title information, areas of interest, memoranda, plans, conversations, negotiations, any information from Company files and all other materials pertaining to such work strictly confidential both during the period of work and thereafter until the release of such information and data is authorized by Company in writing.” • This provision is broader in scope than the AAPL model form. It is also more restrictive on the contract landman and could result in a perpetual confidentiality period -- especially if the company never authorizes the release of information.

6. Large Independent Oil Company Contracts • “Sub-Broker is retained to perform services that relate to information which is highly proprietary and of considerable value to Company….Therefore,. Sub-Broker agrees to hold all of the aforementioned information and related work product strictly confidential Sub-Broker shall take all necessary steps to honor the obligations of this covenant and to prevent any of this information from being divulged to third parties. Upon the completion or termination of Sub-Broker’s services to Broker in the work area, Sub-Broker shall deliver to Company any and all of the aforementioned information and work product related to the services rendered by Sub-Broker. Sub-Broker shall be entitled to retain a copy of such materials for its records, subject to Sub-Broker’s obligation of confidentiality.” “Contractor recognizes that Client may provide Contractor with confidential information as to plans, operations and activities and Contractor agrees to keep any and all such information confidential.”

7. “Contractor recognizes and agrees that during the term of this Agreement, Client may provide Contractor with access to certain confidential information, including, without limitation, production reports, drilling and exploration plans, lease information, reservoir evaluations, operational information and business activities and Contractor agrees to keep any and all such information confidential. In addition, Contractor agrees that all correspondence exchanged between Contractor and Client and all work product produced by Contractor for Client, including, without limitation, the Reports [ownership reports and the like], shall constitute confidential information for the purpose of this Agreement. Contractor covenants, warrants and agrees that during the term of this Agreement and for a six (6) month period of time following the termination of this Agreement, Contractor shall not disclose or reveal, either directly or indirectly, any such confidential information, including without limitation, the information contained in the Reports, to any third party, without Client’s prior written consent.” • Frankly, I think any and all proprietary information provided by the company to the land service provider should forever be held in confidence (or at least until such information is generally available to the public). Similarly, I am persuaded that the reports and other work products generated by the land service provider at the behest of the company exclusively belong to the company. For these reasons, as a land service provider, I have no objection to even the most restrictive example shown above. • What are your views?

8. EXAMPLES OF CONTRACTUAL NON-COMPETION PROVISIONS Commonly, companies and land service providers include in their written contracts provisions which restrict future competition by the land service provider with the company. Some examples of non-competition provisions are provided: • AAPL Master Land Services Contract “During the period that any Work Order is in effect, and for twelve months (12) thereafter, Contractor shall not negotiate for nor purchase oil, gas or mineral leases, royalties, fee or mineral interests, options for any of the foregoing, or seismic permits, nor perform for third parties any services which are the subject matter of this Contract, in the geographic area covered by the Work Orderwithout Company’s written consent.” Obviously the period of the Work Order is going to be important.

9. B. Major Oil Company Contract • “Contract Landman further agrees that for a period of two (2) years following the term of this Agreement or one (1) year following the end of the primary term of any lease acquired by Company pursuant to the terms hereof, whichever is the later date, Contract Landman will not acquire, directly or indirectly, any interest in, option on or contract for any leasehold, mineral or royalty interest in any lands within the work area assigned by Company to Contract Landman or within one mile of the exterior boundary of any lease acquired by the company or for the Company within said work area, for Contract Landman’s own account or for the account of others, without first obtaining Company’s prior written consent.” • The restricted period could be quite long if leases are acquired. Note, too, the addition of a one mile “halo” around the work area.

10. Large Independent Oil Company Contracts “…Sub-Broker agrees that, for a period of two (2) years following the completion of the brokerage assignment in a particular work area, Sub-Broker will not acquire, directly or indirectly, any interest in, option on, or contract for any leasehold, mineral or royalty interest in any lands with the work area, for the account of any other person or entity for whom Broker may be provided land services, without first obtaining Company’s prior written consent, which shall not be unreasonably withheld. In the event Sub-Broker is subsequently working for a third party account, Sub-Broker shall not be required to divulge the identity of said outside account as a condition of Company’s consent. During the term of this Agreement and during the non-competition period above, Sub-Broker will not acquire, directly or indirectly, any interest in, option on, or contract for any leasehold, mineral, royalty, overriding royalty, working interest or other interest in any lands within the work area for Sub-Broker’s own account or for the account of any affiliated party, without first obtaining Company’s prior written consent. Company’s consent may be withheld in Company’s sole discretion.

11. As used in the preceding sentence, ‘affiliated party’ means any member of Sub-Broker’s family, by blood or marriage, any participant in a common business enterprise with Sub-Broker, and/or any entity in which Sub-Broker or any such person owns, or has the prospect of acquiring, directly or indirectly, any financial or equity interest.” The consent provision allows the contract landman some possible relief but this could be awkward or difficult.

12. “Contractor agrees that during the term of this Agreement and for at least one year thereafter it shall not, for its individual benefit or for the benefit of any third party, undertake the leasing or buying of any oil and gas interests located within the geographic area of any prospect designated by Client.” • “…Contractor further covenants, warrants and agrees that during the term of this Agreement and for a six (6) month period of time following the termination of this Agreement, Contractor shall not contact any landowner, mineral right owner or owner of real property identified in a Report [ownership report and the like] for any purpose, including possible leasing or buying of any oil and gas interests on behalf of or for the benefit of any party other than Client, without Client’s prior written consent.”

13. “…during the [one year] term of this Agreement and for a period of thirty-six (36) months thereafter, Contractor will not, directly or indirectly, for Contractor’s own account or for the account of a third party, compete with the Company within the lands to which the Company Information provided to or made accessible to Contractor, or the Services performed under this Agreement, relates by owning or acquiring a royalty, overriding royalty, mineral interest or servitude, surface interest, working interest or interest of any kind or character in such lands, or by performing work for some third party relating to such lands. Company will not withhold permission for Contractor to work for a third party if the situation for land and/or mineral ownership is no longer competitive. The Contractor shall ensure compliance with this Section by Contractor’s employees and invitees and Contractor’s representatives, subcontractors and their employees.” What do you think of these? Are the time restrictions reasonable? What about the geographic area? How about if the work the landman performs is short term or limited?

14. Reasonable Expectations and Ethical Considerations • Where No Written Contract Exists We have considered situations where the company and the land service provider have written agreements to govern confidentiality and competition. But what about the all-too-frequent occasions where the parties do not have a written understanding? Ethics, it has been said, is doing the right thing even when nobody is watching. But what is the right thing when it comes to non-competition and confidentiality in landwork? It is in these circumstances where the Code of Ethics and Standards of Practice of the American Association of Professional Landmen (AAPL) can provide some guidance. Among these tenets are the following excerpts from AAPL’s Code of Ethics: • “A Land professional shall not betray his partner’s, employer’s, or client’s trust by directly turning confidential information to personal gain.” • “The Land Professional shall exercise utmost good faith and loyalty to his employer (or client) and shall not act adversely or engage in any enterprise in conflict with the interest of his employer (or client).”

15. AAPL’s Standards of Practice expand upon these principles. Included among the elements of the Standards of Practice are the following instructions: • “In accepting employment, the land professional pledges himself to protect and promote the interests of his employer or client.” • “The land professional shall not accept compensation from more than one principal for providing the same service….” • “The land professional shall not acquire for himself or others an interest in property which he is called upon to purchase for his principal, employer or client without the consent of said principal, employer or client.” • “The land professional shall avoid business activity which may conflict with the interest of his employer or client or result in the unauthorized disclosure or misuse of confidential information.” • Another source of guidance is determining what is industry practice. This is why we spent so much time reviewing common contract provisions. They help us frame our consideration of ethical behavior in connection with confidentiality and non-competition where no written contract exists.

16. Confidentiality • What types of information should be subject to confidentiality? • Should there be a time limit? • Ownership of reports • Who owns the reports generated by the service provider for the company? • Is there a time limit? • What about the use or ownership of instruments in the public record? • Non-Competition Area restrictions • What is a reasonable area? • Consider the impact of large regional lease checks and the like. • Non-Competition time restrictions • How long? • Under what circumstances (and should that matter)?

17. Review of Recent AAPL Ethics Cases Related to Confidentiality and Non-Competition • A. Cases all involve situations where no written contract exists. • B. Some are undisputed. It is clear to see the ethics breach. • C. Most disputed cases involve very large (sometimes multi-county) areas. • Landmen asked to identify open acreage, then submit to company for approval to lease. • After acquiring some leases, company cuts back group of field landmen to only 2 or 3. Eventually company turns over work to a different set of field landmen. • Original field landmen several months later acquire leases within the large area and flip them to another company.

18. The original company demands the leases, saying the original field landmen breached their responsibilities and AAPL’s Code of Ethics. • Did they? Why or why not? • Discussion of Relative Position of the Parties and Fairness • Does either the company or the contract landman have an advantage over the other? • Should you sign an agreement you think is overly unfair?

19. Observations, Suggestions and Recommendations • A. Company-generated contracts are becoming more detailed and more restrictive on confidentiality and non-competition (and other areas). • B. Always use written contracts but take the time to understand and discuss them. • C. Include, know and understand the time and area restrictions. Be specific. • D. Land service providers’ contracts with subcontractors should mirror clients’ contracts. Providers will usually be responsible for actions of subcontractors. • E. Hiring only AAPL members adds a larger measure of protection via the Code of Ethics. • F. Establish a system for tracking work areas as they relate to possible future conflicts of interest.