Face Challenges Confidently

533 Roland Oil Co. v. R. R. Comm’n of Texas

Tuesday, December 8th, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Roland Oil Co. v. R.R. Com’n of Texas held that an operator did not establish a good faith claim to a continuing right to operate a lease under the rules of the Railroad Commission of Texas (“TRC”). Beginning in 1994, Roland Oil Company (“Roland”) operated the North Charlotte Field Unit Lease in Atascosa County, Texas, which consisted of thirty-one wells drilled as far back as the 1950s. In 2005, Roland asked the TRC for an extension of time to complete the required testing on certain inactive wells that was required to be completed before the wells could be plugged under Texas Administrative Code § 3.14(b)(2)-(3). The TRC determined that Roland had been delinquent on the required testing since 1994, denied Roland’s request, and issued a February 2005 severance order, which effectively barred Roland from producing any well on the lease. Roland ceased producing from May 2005 to August 2006 (fifteen months), when it finally completed the repairs necessary for the testing, and the TRC then lifted the severance and granted the extension of time to plug. However, in June 2006, a mineral owner under the lease notified the TRC of the mineral owner’s contention that the lease had lapsed during the period of non-production.

Under the TRC’s rules, it could grant an extension to plug only if the operator has a good faith claim to a continuing right to operate the well. A “good faith claim” in this context is defined as a “factually supported claim based on a recognized legal theory to a continuing possessory right in a mineral estate, such as evidence of a currently valid oil and gas lease or a recorded deed conveying a fee interest in the mineral estate.” The TRC notified Roland of the mineral owner’s assertion, asked Roland to provide evidence of its good faith claim to operate the lease, and indicated that its failure to do so would result in a cancellation of the extension to plug. Roland asserted that the repair and testing activities had constituted unit operations under the Unit Agreement and therefore Roland’s lease had not lapsed, or alternatively that the TRC’s severance order had triggered the force majeure clause and suspended its obligation to conduct unit operations. The TRC cancelled the plugging extensions.

The term of the Unit Agreement continued for so long as there were “Unit Operations” without a cessation of more than ninety days. “Unit Operations” was defined in the Unit Agreement as “all operations conducted . . . pursuant to this agreement . . . for or on account of the development and operation of the Unitized Formation for the production of Unitized Substances.” Roland contended that work done on inactive wells was “Unit Operations.” The court disagreed and held that the required operations must be “for production” and that work done in preparation for plugging was not for production. Therefore, the TRC’s legal conclusion as to the meaning of operations was not in error. The work in question was performed on inactive wells to comply with the former Commission Rule 3.14, to prepare for the plugging of those inactive wells, and those inactive wells remained inactive after the required testing. Therefore, Roland’s work did not constitute a good faith effort to produce oil and gas.

There must be some reasonable basis in the record to support the TRC’s finding that the only work done during the May 2005-August 2006 time was done to inactive wells. Though there was testimony by Roland’s principal as to various other work and maintenance that went on at the lease during the gap in production (i.e., “constant” maintenance work, including flow-line and electrical repairs, monitoring for leaks, inspecting roads, fixing pumps, and mowing the grass), the evidence did not specify when the work was done, how often it was performed or whether it was performed on any active wells. Under the substantial evidence rule, there was a reasonable basis in the record to support the agency’s finding.

If the repair and testing activities were found to trigger the force majeure clause, then Roland’s obligations under the Unit Agreement would be suspended. The Unit Agreement’s force majeure provision stated that “[a]ll obligations imposed by this agreement . . . shall be suspended while compliance is prevented, in whole or in part by . . . order of a governmental agency . . . or by any other cause or causes beyond reasonable control of the party.” The provision used the phrase “force majeure” twice and it incorporated the common force majeure concept of listing events beyond the parties’ control and then including a catchall “other” category. A reasonable construction of this force majeure clause is that the catchall “by any other cause or causes beyond reasonable control of the party” must be read in context of the other listed events. The inclusion of “other” was an expression of intent by the drafters of the Unit Agreement that the force majeure clause be triggered by events or orders beyond the reasonable control of the party. The TRC’s order of severance was within the reasonable control of Roland.

This is an administrative appeal which bears only upon the TRC’s determination and the implications it may have as to future matters requiring a showing of a good faith claim to a continuing right to operate a well. It is not a decision that determines or creates title or a right to possession. The significance of the case is limited to those regulatory matters.