Face Challenges Confidently

303 BoMar Oil & Gas, Inc. v. Loyd

Friday, September 4th, 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.
BoMar Oil & Gas, Inc. v. Loyd, No. 10-08-00016-CV, 2009 WL 2136404 (Tex. App.— Waco Jul. 15, 2009) (mem. op.), modified on reh’g, 298 S.W.3d 832 (Tex. App.—Waco 2009, no pet.) holds that (1) an unleased co-tenant is not a consumer under the Deceptive Trade Practices Act (DTPA) as to the co-tenant’s allocated costs of production, (2) administrative overhead expenses, engineering fees, and supervision fees not related to production should not be charged to an unleased co-tenant, (3) the purchase of well equipment should not be charged to an unleased co-tenant, and (4) expenditures relating to unsuccessful reworking operations or unnecessary fracture stimulation operations should not be charged to an unleased co-tenant. Loyd alleged that “improper expenses were charged against his proportionate share of production” by the Operator, BoMar. Additionally, Loyd alleged violation of the DTPA, claiming consumer status under the Act. At trial the jury found in favor of Loyd. BoMar appealed on multiple issues.
BoMar first argued that Loyd was not a consumer under the DTPA because, as an unleased co-tenant who was not seeking development of oil or gas, Loyd had no obligation to pay costs of development. Loyd contended that a non-consenting co-tenant acquires goods and services, because he is required to reimburse BoMar for a proportionate share of “necessary and reasonable costs of marketing and production.” While the court found that Loyd was correct that “it is the same as if BoMar had been actually instructed by Loyd to expend that much money for him,” it held that this did not make Loyd a consumer for purposes of the DTPA, noting that “[l]ike parties to an operating agreement, who are not consumers under the DTPA, Loyd simply reimbursed BoMar for certain costs incurred on his behalf.”
Second, BoMar contended that overhead fees, supervision fees, and engineering fees were properly charged to Loyd. BoMar’s witnesses testified that overhead fees were consistent with industry practice, that supervision fees resulted from the company president’s presence on location to make decisions and give instructions, and that engineering fees involved “evaluating the well bore, checking pressures, helping design fracture treatments, contacting parties, and other engineering-type work.” BoMar also argued that overhead was a chargeable cost of production, citing a definition of “operating and marketing expenses” from Abraxas Petroleum Corp. v. Hornburg that included overhead. Loyd argued that these expenses were not directly related to production or marketing, but rather were costs assumed by BoMar, and that a distinction existed between overhead relating to production and overhead relating to administrative expenses that continue in the absence of production. The court recognized this distinction, holding that the non-consenting co-tenant “should not be charged with administrative overhead expenses, engineering fees, or supervision fees in this case,” because BoMar did not present any evidence as to whether this overhead was related directly to production.
Third, BoMar argued that certain well equipment purchased when BoMar acquired the well was a necessary and reasonable cost of production. However, Loyd contended that unleased co-tenants are not responsible for “risk costs” incurred by operators before reworking begins. The court cited Abraxas and held that “‘one-time investment expenses, such as drilling and equipping costs, are to be treated as capital expenditures’ and are excluded from the definition of ‘marketing and operating costs.’” The purchase of equipment such as a well head, casing, tubing, and line heater occurs prior to drilling or reworking and, as such, is not an expense for which an unleased co-tenant is responsible.
Finally, BoMar argued that its testing operations in the non-productive shallow zone were proper and subject to reimbursement as operating expenses. Loyd argued that BoMar’s testing procedures were unreasonable and unnecessary as the shallow zone had been previously tested and shown to be unproductive. The court held that Loyd, as an unleased mineral interest owner, was not responsible for the costs of unsuccessful testing.
Similarly, Loyd provided testimony to the effect that the fracture stimulation of the producing zone was unnecessary. Although there was conflicting testimony, the jury was free to believe Loyd, and thus the unleased mineral owner Loyd would not be responsible for any of the expense associated with the fracture stimulation.
The significance of the case is that it continues an emerging line of cases restricting the costs that can be charged to an unleased co-tenant.