Face Challenges Confidently

449 Indian Oil Company, LLC v. Bishop Petroleum Inc.

Tuesday, September 1st, 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.
Indian Oil Co., LLC v. Bishop Petroleum Inc., 406 S.W.3d 644 (Tex. App.—Houston [14th Dist.] 2013, pet. denied) held that in the absence of an express or implied release, a non-operator assigning its interest under a 1989 M.F.O.A. remains liable for operating costs and plugging and abandonment costs.  Bishop Petroleum (“Operator”) was the operator under an A.A.P.L. Form 610—1989 Joint Operating Agreement (“JOA”) for a well in Escambia County, Alabama.  Operator drilled the Scott Paper 27-1 Well which produced from 1993 until 2007.  William E. Trotter, II (“Non-Operator”) was a non-operating working interest owner under the JOA.  In 2002, Non-Operator assigned his 8.5% working interest in the well to Indian Oil Company, LLC (“Assignee”), notified Operator of the assignment, and thereafter, Operator distributed revenues and billed expenses to Assignee.
When the well stopped producing in 2007, Operator eventually proposed a workover under the “July AFE” in the amount of $589,800, which Assignee and various other working interest owners approved, but it was not approved by Non-Operator.  Workover operations started on October 1, 2007, and were more difficult and lengthy than Operator anticipated.  As a result, Operator abandoned the workover efforts in January 2008, after incurring approximately $1.6 million in costs.  In 2009, Operator sent an AFE to the working interest owners in the amount of $243,300 for plugging and abandonment.
Neither Operator nor Assignee paid any expenses associated with the reworking or plugging and abandonment.  Operator sued Non-Operator, Assignee, and various other working interest owners for breach of contract, quantum meruit, and unjust enrichment.  Operator prevailed in the trial court, and only Non-Operator appealed.
Non-Operator contended that Operator had breached the JOA as a matter of law by (1) failing to provide daily workover reports and (2) failing to issue a new AFE when the workover became dramatically more complex and expensive than the original AFE anticipated.  Non-Operator also contended that Non-Operator’s liability for costs incurred should be limited to costs incurred in connection with operations in which Non-Operator agreed to participate prior to Non-Operator’s assignment to Assignee.
Non-Operator’s argument as to daily workover reports was based on Article V.D.7(b) of the JOA, which stated:

Operator will send to Non-Operators such reports, test results, and notices regarding the progress of operations on the well as the Non-Operators shall reasonably request, including, but not limited to, daily drilling reports, completion reports, and well logs.

The court noted that this language requires the operator to provide such reports as non-operators “reasonably request,” and did not require the provision of “any and all requested reports.”  Because Non‑Operator never requested a report, Operator’s failure to provide reports could not be considered breach of contract.  Non‑Operator also alleged that Operator was under a duty to provide daily workover reports because such reports had been requested by one of the other working interest owners.  The court noted that Non-Operator offered no authority for the proposition that “one working interest owner’s request for reports obligated [Operator] to send reports to every working interest owner, including those who made no such request.”  The court held that Non‑Operator did not establish that by failing to provide workover reports, Operator had breached the JOA as a matter of law.
Non-Operator also contended that Operator should have issued a new AFE when the workover operations contemplated by the July AFE became dramatically more expensive than originally anticipated and additional operations were undertaken, and that Operator’s failure to do so was a breach of the JOA.  Non‑Operator contended that the evidence established Operator’s breach as a matter of law, but the court noted that the evidence was contradictory.  An expert witness had testified that issuing a new AFE would have required dismissing the workover rig and that the fishing operations that were conducted were a normal part of the kinds of workover operations contemplated by the July AFE.  Therefore, the court held that Non-Operator had failed to show that Operator had breached the JOA.
The jury found that Non-Operator was liable for $336,393.42 for expenses incurred under the JOA.  Non-Operator argued that there was no evidence to support this amount because (1) Non-Operator had assigned his interest to Assignee in 2002, and Non-Operator was thus not liable for expenses subsequently incurred under the JOA, and (2) Non-Operator had not consented to the July AFE, and therefore, could not have incurred any expenses under it.
The parties’ disagreement on this issue centered on different interpretations of the Texas Supreme Court’s opinion in Seagull Energy E & P, Inc. v. Eland Energy, Inc.  The Eland Court held that an assignor of a working interest subject to a joint operating agreement remained liable for operating expenses when the assignee failed to pay for the operating expenses attributable to that interest (in Eland, plugging and abandonment costs).  Operator asserted that, under Eland, in the absence of an express or implied release, Non-Operator remained liable for all expenses incurred under the JOA, notwithstanding Operator’s assignment to Assignee.  This court distinguished Eland, because the operating agreement construed in Eland did not address the assignor’s liability for expenses incurred subsequent to the assignment.  It was silent as to continuing liabilities.  The JOA in this case was not silent as to a party’s ongoing liability subsequent to an assignment.  The pertinent language from the JOA provided:

[N]o assignment or other disposition of interest by a party shall relieve such party of obligations previously incurred by such party hereunder with respect to the interest transferred, including without limitation the obligation of a party to pay all the costs attributable to an operation conducted hereunder in which such party has agreed to participate prior to making such assignments.

This language made Non-Operator liable for expenses “previously incurred,” i.e., incurred before Non-Operator assigned to Assignee.  Non-Operator conceded that Non-Operator continued to be liable for monthly operating costs and the costs of plugging and abandoning the well.  However, Non-Operator had assigned the working interest to Assignee in 2002, and Operator did not request approval for the workover until 2007.  Under the “previously incurred” language, Non-Operator could not be liable for expenses incurred pursuant to the July AFE.
The amount the jury awarded included workover costs, monthly operating expenses, and plugging and abandonment expenses.  Although the evidence was insufficient to support the entire damage amount awarded against Non-Operator, it was sufficient to support some damages.  The court remanded the case to determine liability and damages.
The significance of the case is that it limits the continuing obligations of non-operators under Eland, at least under the 1989 M.F.O.A., to those obligations “previously incurred.”  This does not mean accrued, but incurred, so the assigning non-operator will continue to be liable for monthly operating costs, plugging and abandonment costs, and other liabilities included in the operating agreement.  Presumably the assigning non-operator will be able to avoid only those subsequent liabilities that require an express subsequent consent.  Although the issues on providing reports under an operating agreement generally went off on evidence points, the opinion suggests that under the 1989 M.F.O.A., the obligation to deliver reports requires a reasonable request and not every operational event of a workover will trigger an obligation to issue a new AFE.