319 Valence Operating Co. v. Anadarko Petroleum 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.

Valence Operating Co. v. Anadarko Petroleum Corp., 303 S.W. 3d 435 (Tex. App.- Texasrkana 2010, no pet.) holds that it is a question of fact as to whether nonconsent operations are timely commenced under a joint operating agreement, if there is doubt or controversy as to the intent of the party claiming to have commenced operations for drilling by performing preparatory acts.  Under the terms of the joint operating agreement, Valence as nonoperator proposed to drill four wells, and the operator, Anadarko, went nonconsent.  Valence became the operator and was required to commence work on the wells by a certain date under Article VI.B.2 of the joint operating agreement.  Before the deadline passed, Valence prepared an AFE, received a topographic map of locations, staked the location, took pictures of well sites, obtained preliminary lists of instruments regarding title, and did other off-site preparatory work. All other work performed by Valence, such as building access roads, restaking well locations, securing title opinions, signing drilling contracts, and the actual commencement of drilling, all occurred after the deadline. When the deadline passed, Anadarko brought suit against Valence for breach of contract.

The principal issue was whether Valence “actually commenced work on its proposed operation” within the time period specified in the joint operating agreement.  The actual act of drilling is not necessary in order for a party to comply with a commencement obligation in a joint operating agreement.  Preparatory activities such as building access roads to the drill site and preparing the drill site for drilling are usually deemed sufficient if the activities are performed with the intent to complete the well.  Valence’s acts could be categorized as “backroom preparations” because there was almost no on-site activity. Although Valence and Anadarko both contended at trial that the issue was a question of law, the trial court concluded that the issue was not established as a matter of law and submitted the issue to the jury.  The appellate court agreed and held that “[i]f there is a doubt or controversy as to the intent of the party claiming to have commenced operations by performing preparatory acts, the question is one of mixed law and fact and should be submitted to the jury.”  The court found that the evidence was sufficient to support the jury’s verdict, and it appears that the key fact was the insignificant on-site activity.

The opinion is silent as to the underlying claim and judgment, but it is likely that the real issue was whether Anadarko would suffer the nonconsent penalty as provided in the joint operating agreement.  Anadarko was awarded a judgment on its contract claim, plus interest at six percent. Although the opinion is sketchy, it suggests that the proposing party who fails to timely commence operations on site is assuming all the risk and risking the loss of the benefit of the nonconsent penalty in the joint operating agreement.