116 Cross Timbers Oil Co. v. Exxon Corp.

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.
 
Cross Timbers Oil Co. v. Exxon Corporation, d/b/a Exxon Co., U.S.A., 2000 Tex. App. LEXIS 2135 (Tex. App.—Amarillo, no pet. h.), construes the removal-of-operator provisions of a Unitization Agreement and an Operating Agreement. The Unitization Agreement combined various oil and gas properties, and the Operating Agreement described how the unitized properties would be operated. Cross Timbers and Exxon were successors in interest to some of the working interest owners, and Exxon was the Operator under the Operating Agreement.
 
In late 1997, Cross Timbers wanted to replace Exxon as operator. Cross Timbers asserted that two specific provisions, one from the Operating Agreement and one from the Unit Agreement, permitted the working interest owners to remove Exxon as Operator by an affirmative vote of 65% of the working interest owners.  The first provision, found in the Operating Agreement, stated:
 

3.1       Overall  Supervision.    Working Interest Owners shall exercise overall supervision and control of all matters pertaining to Unit Operations pursuant to this agreement and the Unit Agreement . . .

 
The second provision, found in the Unit Agreement, stated:
 

4.3       Change  of Operating Methods.     Nothing herein shall prevent Working Interest Owners from discontinuing or changing in whole or in part any method of operation which, in their opinion, is no longer in accord with good engineering or production practices. Other methods of operation may be conducted or changes may be made by Working Interest Owners from time to time if determined by them to be feasible, necessary, or desirable to increase the ultimate recovery of Unitized Substances.

 
Cross Timbers argued that the effect of these two provisions was to grant the working interest owners authority to remove the Operator as part of their power to “supervise and control . . . operations” and to change the “method of operation.” Cross Timbers persuaded 65% of the working interest owners to join it in voting to remove Exxon as operator.
 
Exxon refused to step down. Exxon relied on Section 7.1 of the Operating Agreement, which stated that “. . . subject to the provisions of this agreement and to instructions from Working Interest Owners, Unit Operator shall have the exclusive right and be obligated to conduct Unit Operations,” and on Section 4.1 of the Unit Agreement, which stated that “. . . Unit Operator shall have the exclusive right to conduct Unit Operations.”
 
Cross Timbers then sued Exxon for breach of contract, contending that Exxon had violated the agreement by failing to step down as Operator. Neither party contended that the agreements were ambiguous. Both Cross Timbers and Exxon moved for summary judgment and the trial court granted Exxon’s Motion for Summary Judgment and denied Cross Timbers’s Motion for Summary Judgment. The Court of Appeals affirmed the judgment of the trial court concluding that Section 3.1 of the Operating Agreement and Section 4.3 of the Unit Agreement did not grant the removal power to the working interest owners when construed in conjunction with the other sections of the two agreements.
 
Article 3.2 of the Operating Agreement contained a non-exclusive list of powers extended to the working interest owners, including “the authority to determine the method of operation [emphasis added]; the wells to be drilled; recompleted, abandoned, or changed; the amount of expenditures in excess of $25,000 which can be made, and the ultimate disposition of unit equipment.” Section 4.3 of the Unit Agreement also uses the phrase “method of operation.” Neither agreement defined “operations” or “method of operation.” However, the Amarillo Court of Appeals had earlier defined “operations” to mean the “overall process aimed at achieving a particular end” in Sun Operating Ltd. v. Holt. 984 S.W.2d 277, 285 (Tex. App.—Amarillo 1998, pet denied.). Thus, “method of operation” as used in this Operating Agreement and Unit Agreement refers to how the unitized tract would be developed and how the minerals would be produced. The Court of Appeals ruled that the working interest owners were given the power to determine what can be done, where it can be done, and when it can be done.
 
However, there was no express reference among the powers extended to the working interest owners as to who would carry out the development and production of the minerals. Section 7.1 of the Operating Agreement and Section 4.1 of the Unit Agreement specifically vested the right to conduct the operations in Exxon to the exclusion of everyone else.
 
The Court of Appeals ruled that the Operating Agreement and Unit Agreement provided that the working interest owners could determine production and development of the minerals while the Operator fulfilled their directives. Although the working interest owners could not remove the Operator, they could determine what the Operator would do, how the Operator would do it, and when the Operator would do it.
 
The model form operating agreements published by the American Association of Petroleum Landmen are the forms most commonly used by the industry. These forms have express provisions governing the removal of Operator. The significance of this case is the holding that control over operations does not necessarily include control over who will operate. If there is no express removal-of-operator provision, then perhaps there will be no removal of Operator.