142 Cone v. Fagadau Energy Corp.

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Cone v. Fagadau Energy Corp.¹ is a lengthy opinion construing and applying the A.A.P.L. Form 610-1982 Model Form Operating Agreement (“JOA”) in a dispute between the operator Fagadau Energy Corp. (“FEC”) and one of the small non-operators, Kenneth G. Cone. FEC proposed a water flood and unitization, which was approved by all of the working interest owners, except Cone. FEC proceeded despite Cone’s objections, and production was substantially increased.²
 

Article VII of the JOA titled “Expenditures and Liability of Parties” stated in relevant part:

VII.D.³. Other Operations: Without the consent of all parties, Operator shall not undertake any single project reasonably estimated to require an expenditure in excess of Fifteen Thousand Dollars ($15,000.00) except in connection with a well, the drilling, reworking, deepening, completing, recompleting, or plugging back of which has been previously authorized by or pursuant to this agreement.³

 
The water flood exceeded $15,000, and Cone relied upon this provision to assert that FEC could not institute the water flood without his consent.⁴ The court rejected this argument and held that the contractual provision limiting expenditures did not limit each mineral owner’s underlying right as a co-tenant to extract minerals from common property without first obtaining the consent of his co-tenants.⁵ If a co-tenant owning a small interest in the land had to give consent, that small owner could arbitrarily destroy the valuable quality of the land.⁶ The contractual provision only limited the expenditures which the operator could charge to the other owners. Although it may appear this provision limits activities in the Contract Area, it is only an accounting limitation, not a restriction on operations.⁷ The court expressly rejected the holding in Texstar North American,
 
Inc. v. Ladd Petroleum Corporation,⁸ which found that a similar limitation (“Without the consent of all parties, no well shall be reworked or plugged back”) was a limitation on operations.⁹ The extracting co-tenant would have to account to the non-extracting co-tenant under the usual rules applicable to co-tenancy.¹⁰ The JOA contractual provision is simply a limitation on the non- operator’s exposure to liability for expenses incurred by the operator.¹¹
 
Cone also complained about the conversion of producing wells into water injection wells. He contended that under Article VI.E.2 of the JOA, the wells that were converted were abandoned, and that Cone should have been offered the right to assume control of the wells.¹² The operative language of the provision is the phrase, “any well which has been completed as a producer shall not be plugged and abandoned without the consent of all parties.”¹³ The court rejected Cone’s argument by relying upon the basic meaning of “abandonment,” which involves a relinquishment of possession.¹⁴ The wells continued to be used every day and continued to be used to produce hydrocarbons through the same intervals for which Cone was being compensated.¹⁵
 

The court also construed Art. V.A. of the JOA, which provides:

V.A. Designation and Responsibilities of Operator. [FEC] shall be the Operator of the Contract Area, and shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of this agreement. It shall conduct all such operations in a good and workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, expect such as may result form gross negligence or willful misconduct.¹⁶

 
Although the trial court held Cone to the higher standard of showing gross negligence or willful misconduct, rather than a simple breach of contract standard, the appellate court held that Cone’s  claims  in  the  nature  of  an  accounting  were  simple  contract  claims. The gross negligence/willful misconduct requirement only applied to claims that the operator failed to conduct operations in a good and workmanlike manner.¹⁷

1. 68 S.W.3d 147 (Tex. App.–Eastland 2001, motion filed).
2. Id. at 151.
3. Id. at 157.
4. Id.
5. Id.
6. Id.
7. Id at 157-58
8. 809 S.W.2d 672, 675 (Tex. App.–Corpus Christi 1991, writ den’d.).
9. Id. at 158
10.Id. at 157 n.5.
11.Id. at 158.
12.Id.at 152-53.
13.Id.at 154.
14. Id.
15. Id.
16 Id. at 155.
17Id.