Face Challenges Confidently

354 Red River Res. Inc. v. Wickford

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.
Red River Resources Inc. v. Wickford, Inc., 443 B.R. 74 (E.D. Tex. 2010) (mem. op.), held that a cessation of production caused by a severance order issued by the Texas Railroad Commission (“TRC”) is not a force majeure event unless the issuance of the order was beyond the reasonable control of lessee. Energytec Inc. (“Energytec”) operated the Belcher lease. In March 2008, the TRC issued a severance order on the Belcher lease for improper plugging techniques, and production ceased. The plugging techniques had been approved by the TRC, and the issuance of the severance order was the result of confusion at the TRC. On about December 16, 2008, the TRC notified lessee of production imbalances. On January 16, 2009, the TRC issued a second severance order on the Belcher lease for production imbalances. On January 20, 2009, the first severance order was lifted. On March 25, 2009, the second severance order was lifted. In August 2009, production resumed. Energytec filed for bankruptcy in May 2009, and its debtor in possession lender (“Red River”) defended its interests in this proceeding brought by another lessee asserting lease termination as to the Belcher lease.
Red River argued that the TRC severance orders were force majeure events under the terms of the Belcher lease. A TRC

severance order does not constitute a force majeure event when compliance with the regulation violated was within the reasonable control of the lessee, [because] ‘[t]he parties to an oil and gas lease are presumed to have contracted with knowledge of the law and regulations of the [TRC] concerning the production of oil and gas.

The first severance order, regarding Energytec’s plugging techniques, qualified as a force majeure event and excused the related cessation of production on the Belcher lease. However, because Energytec received warning from the TRC a month before the second severance order was issued and because the production imbalances were within Energytec’s control, the court held that the second severance order did not qualify as a force majeure event. The court found that an unexcused cessation of production occurred and the Belcher lease terminated as of January 20, 2009, the date the first severance order was lifted.
The court also rejected Red River’s argument that the temporary cessation of production doctrine should apply. The doctrine allows a lessee a reasonable amount of time to resume production after a temporary cessation, thereby continuing the lease as if no cessation had occurred. The lessee must show “that the cessation was ‘due to a sudden stoppage of the well or some mechanical breakdown of the equipments used in connection therewith, or the like’; and, second, the lessee must exercise diligence to resume production within a reasonable time.” The court followed Ridge Oil Co. v. Guinn Invs., Inc. in broadly construing the permissible circumstances causing the stoppage and focusing the inquiry on lessee’s response.   The court held that Energytec exercised diligence responding to the first severance order but failed to exercise diligence resuming production after the issuance of the second severance order resulted in a largely unexplained delay of eight months in resuming production.
The case establishes that a TRC severance order (and presumably any other TRC order) may trigger the tolling provision in a lease force majeure clause, but not all force majeure clauses are alike. The text of the clause will be critical, but the cases seem to be trending toward applying or not applying the clause based primarily on whether the event causing the cessation of production was or was not beyond the reasonable control of lessee. Similarly, the application of the temporary cessation doctrine now appears to be focused more upon lessee’s conduct in promptly responding to the cessation rather than an analysis of the original cause of the cessation.