Face Challenges Confidently

104 Holloway v. Atlantic Richfield 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.
Holloway v. Atlantic Richfield Co., 970 S.W.2d 641 (Tex. App.—Tyler 1998, no writ), reviews the duties owed by the operator to the nonoperator when the operator undertakes to market the nonoperator’s gas. The operator entered into a series of favorable gas purchase contracts that were breached by the gas purchaser when oil and gas prices plummeted. The settlement of the ensuing take-or-pay litigation resulted in amendments to the gas purchase contracts for greater takes but lower prices. For a short period of time, the operator continued to market the nonoperator’s gas under the amended contracts, and then, the operator completely stopped marketing the nonoperator’s gas.
The applicable operating agreements had typical language providing that the nonoperator had the right to take in-kind or separately dispose of his oil and gas, and that the operator had the right, but not the obligation, to purchase the oil and gas of the nonoperator if the nonoperator did not take or sell it himself. The operator was obligated to sell the oil and gas, if it did undertake to sell it, “at the best price obtainable in the area of such production.”
The nonoperator contended that the operator breached its fiduciary duty and its contractual duty by amending the gas purchase contracts and by failing to market the gas at the best price obtainable. The nonoperator’s gas was not dedicated, and the Court did not hold the operator to a fiduciary standard. Therefore, the operator owed the nonoperator only the limited duty to account for the monies received for selling his gas, to avoid conflicts of interests, and not to act as an adverse party in its capacity as the seller of the nonoperator’s gas.
The breach of contract claim that the operator had not obtained “the best price obtainable in the area” was founded on the contention that the price in the original gas purchase contracts was the best price obtainable. As a matter of law, when the nonoperator reserves the right to take the production of the gas well in kind, the gas production of the nonoperator is not dedicated. If the gas is not dedicated, the nonoperator cannot contend that the operator is obligated to the nonoperator under the operator’s original gas purchase contract.
The operator offered proof of fair market value for undedicated gas, but market price and best price obtainable are not synonymous terms. Because it is possible that by the exercise of reasonable effort the operator might obtain more favorable terms than market price, the summary judgment on this point was not proper.
Almost all operating agreements reserve to nonoperator the right to take in kind. If a nonoperator reserves the right to take production of a well in kind, as a matter of law, the production of the well is not dedicated. The only duties the operator owes to the nonoperator in selling undedicated nonoperator gas are to account for monies received in selling the nonoperator’s gas, to avoid conflicts of interest, and to not act as an adverse party in the operator’s capacity as seller of the nonoperator’s gas. There may be additional duties imposed by the operating agreement (e.g. to sell at “the best price obtainable in the area”), but the additional duties must be found in the operating agreement, not in operator’s gas contract.