020 Fuller v. Phillips Petroleum Co.

CASE NOTE

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Fuller v. Phillips Petroleum Co., 872 F.2d 655 (5th Cir. 1989), concerned the obligation of the operator, under the terms of the operating agreement, to notify nonoperators of impending lease terminations. Phillips, the operator, owned two leases in the unit area, and Fuller, the nonoperator, owned one lease in the unit area. Production ceased, Phillips’ two leases terminated, and Phillips then gave Fuller notice of its intent to plug and abandon. Fuller’s lease continued in effect because of other production off the unit area.
 
Fuller sued Phillips, claiming that Phillips breached the operating agreement by failing to notify Fuller of its intent to plug and abandon prior to the expiration of Phillips’ two leases. Fuller claimed that such a duty was implied under two provisions of the operating agreement. Article 16 provided that no well shall be abandoned without the consent of all parties and that in the event of disagreement the continuing party could take over the well by paying salvage value. Article 23 provided that the consent of all parties to the operating agreement was required prior to the surrender of any lease in the unit area. These provisions were apparently in an early model form operating agreement, and similar provisions are generic to many operating agreements today.
 
The Fifth Circuit refused to find that such a duty was implied by these express provisions of the operating agreement. Article 16 is express in its terms and mandates notice only of an abandoning party’s intent to plug and abandon a well, not notice by that party of an impending lease termination. Article 23 is express in its terms and requires notice only of a surrendering party’s intent to surrender a well, not notice by that party of an impending lease termination. In the oil and gas industry, the terms “surrender” and “termination” have different meanings.
 
If Fuller had been successful, a new duty would have been imposed by implication under many operating agreements. The significance of the case is that, under the usual form of operating agreement, no party has a duty to inform any other party of impending lease termination. If the parties to an operating agreement deem such notice, to be important, an express provision should be in the agreement.