Face Challenges Confidently

181 EOG Res., Inc. v. Killam Oil Co.

Wednesday, September 2nd, 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.
EOG Resources, Inc. v. Killam Oil Co., LTD., 239 S.W.3d 293 (Tex. App.—San Antonio August 8, 2007, pet. denied), holds that the individual loss provision of a joint operating agreement (“JOA”) operates against the party losing title, regardless of whether the party acquiring title is a third party or another party to the JOA. The case also applies the test adopted in Anadarko Petroleum Corp. v. Thompson for determining whether a well is capable of producing in paying quantities to the issue in this case, which was the application of a retained acreage clause. EOG and Killam were parties to a JOA governing multiple zones. EOG lost title to some of those zones under its farmout from Killam. EOG argued that the continuing JOA (by allocating the right to share in production) created a contractual right in EOG to share in production from those zones which EOG may have lost under the applicable farmout agreement.
The court recognized that this typical JOA identified the parties’ interests and provided that those interests would continue for so long as any of the leases subject to the JOA and included in the Contract Area continued in force. Therefore, the JOA did unambiguously provide that each party’s share of production was based on the percentage of its fractional interest as shown in the JOA. However, the JOA also contained a typical individual loss provision which provided:

The party whose oil and gas lease or interest is affected by the title failure shall bear alone the entire loss . . . and . . . the interests of the parties shall be revised on an acreage basis . . . so that the interest of the party whose lease or interest is affected by the title failure will thereafter be reduced in the Contract Area by the amount of the interest lost . . . .

EOG argued that the failure of title provisions should be interpreted as only applying to failures of title in favor of a third party who was not a party to the JOA. EOG pointed to certain provisions of the article on failure of title which were expressly addressed to third parties. The broad provisions quoted above were not expressly limited to third parties, and the court refused to read such a limitation into the JOA. The court concluded that when the failure of title is in favor of any party or a non-party to the JOA, then such “loss [of title] results in a reduction of [the party or parties] interest from that shown on Exhibit ‘A’.”
EOG also raised as a fact issue the application of the retained acreage clause in the applicable farmout agreement. The clause preserved 640 acres surrounding each well “which is producing or capable of producing.” None of the wells were producing. EOG contended that the proper standard for analyzing “capable of producing” could change depending upon the context in which the phrase is used. The court disagreed and held that the test articulated in Anadarko Petroleum Corp. v. Thompson applied.  Because Killam’s expert affidavit carefully tracked the requirements of the Anadarko test (the well will not flow when the well switch is turned “on”), the wells in this case were, as a matter of law, not capable of producing in paying quantities.
The case is significant because the individual loss provision is found in many form JOA’s, and under the holding, the provision will change the contractual split of the production revenues, even if the person who has the better title is another party to the JOA. The case is also significant because this court seems to hold that unless and until a different standard is articulated for determining when a well is “capable of producing,” the Anadarko standard will be given universal application.