MDC Enegy LLC v. Crosby Energy Services Inc. et al. was an indemnity dispute in which the players were many and the facts complicated.

But first

Gray Reed’s own Mitch Ackal and Jeremy Walter will present an entertaining and informative webinar on Texas Business Courts on January 29 at noon. Use this link to learn about the presentation and RSVP.

Here is the report on the case, with lots of details omitted:

There were two Master Services and Supply Contracts:

  • Between MOF as “Contractor” and MDC as “Company”; 
  • Between Crosby as “Contractor” and MDC as “Company”. That agreement included MDC affiliate Reeves in the “Company Group”.

In a suit by an employee of MOF against Crosby and its employee Marrufo, Crosby/Marrufo demanded contractual defense and indemnity from MDC and its related entities. Crosby/Marrufo were performing under both agreements and claimed to be additional insureds as subcontractors under the Crosby-MDC agreement.  

Crosby/Marrufo’s contention: MOF was a Contractor of MDC but also a subcontractor of the MDC entities under the Crosby-MDC agreement and therefore included in the definition of “Company Group”. Because MOF was part of the Company Group, Crosby/Marrufo as “Contractor” were entitled to be indemnified by the MDC entities.

MDC’s contention: It owed no indemnity because MOF was MDC’s Contractor, and “Company Group” included only subcontractors. (The parties agreed that if MOF was not a subcontractor of any entity included in the definition of “Company Group” then the MDC entities were not required to defend Crosby/Marrufo.)  

The Question:

Did MOF fall within the definition of ”Company Group” in the Crosby-MDC agreement? That depended on the interpretation of “subcontractor” as used in the Crosby-MDC agreement.

What is a “subcontractor” anyway?

The Court interpreted the plain and ordinary meaning of the unambiguous contract term “subcontractor”, which Merriam-Webster defines as “an individual or business firm contracted to perform part or all of another’s contract”. Black’s Law Dictionary and the Fifth Circuit pretty much agree.

The Crosby-MDC agreement used “Contractor” to refer to Crosby and “contractor” when the word did not mean Crosby.  “Subcontractor” appeared in both agreements as a defined term in the definition of Contractor Group. “Subcontractor” was defined to mean contractors retained by Crosby.

The record was devoid of evidence that MOF’s work comported with the definition of “subcontractor” under the Crosby-MDC agreement. The evidence demonstrated that MOF was not a subcontractor of any entity listed in the agreement’s definition of “Company Group”. The court referred to “creative but ultimately unpersuasive arguments” to overcome the absence of a contract from which Crosby took a portion.

The Texas mineral lien statute.

MOF did not meet the statute’s definition of “mineral subcontractor’. There was no contractual relationship between MOF or MDC on the one hand and any MDC entity on the other. The statute requires a contractual link between the principal party (Party A), mineral contractor (Party B), and mineral subcontractor (Party C) in order to meet the definition.

The evidence demonstrated that MOF was a Contractor, not a subcontractor. MOF was not included in the definition of Company Group in the Crosby-MDC agreement for whose conduct MDC owed Crosby/Marrufo indemnity.  

The result

MDC had no duty to defend, indemnify and provide insurance coverage to Crosby/Marrufo.

Peter Yarrow RIP

Sam Moore RIP

For the Osage Indian Tribe, it’s more like “IMBY if you pay me”.  In the latest interation of United States and Osage Minerals Council v. Osage Wind LLC et al the US District Court for the Eastern District of Oklahoma awarded a judgment for damages against the defendants. Much more important was the order for injunctive relief in the form of a mandate that defendants remove 84 wind towers from Indian lands in Osage County as the remedy for defendants’ continuing trespass over the land. Removal is estimated by defendants to cost a whopping $259 million.   

The takeaway: Asking for forgiveness later rather than asking for permission first is not always the most clever path to action.

The District Court, affirmed on appeal, had already found the defendants liable on the plaintiff United States and intervenor Osage Mineral Council’s claims of conversion, trespass and continuing trespass. We described the underlying facts and the ruling in our report on the first District Court order.

The Court also awarded damages of $242,000+ for conversion of extracted minerals and $66,000+ for trespass for the value of a mineral lease defendants should have obtained before constructing the 84-tower wind farm.

The Court heard from three experts who testified about the value of extracted mineral material, in particular limestone, and the value of the lease that defendants failed to obtain before extracting material from the mineral estate. The defendants found themselves buried in a literal and figurative hole dug by their very own selves when the Court found in the earlier proceeding that the defendants were liable for continuing trespass by failing to obtain a lease despite repeated requests from the Osage Tribe.

The court denied defendants’ request that it order the removal only of backfill and replace it with substitute materials as a more narrowly tailored remedy for trespass. The court noted that the harm resulting from defendants’ continuing trespass is not only the continued use of backfill but also the interference with the Osage Nation’s sovereignty by the presence of the towers. The court referred to this effort as “a backdoor attempt to seek reconsideration of the prior grant of injunctive relief”.

In response to the defendants’ claim that removal would take 18 months the court allowed 12 months, citing provisions in the surface leases that required defendants to remove all wind power facilities within 12 months of the expiration or termination of the surface lease.

The Court agreed with the defendants that it would not be appropriate to award both injunctive and monetary damages for the continuing trespass.

Considering the upcoming “regime change”, your musical interlude.

It looks like they do. In Held et al v. State of Montana the Montana Supreme Court declared the “MEPA Limitation” unconstitutional. The plaintiffs were 16 youths, ages 2 to 18 at the time of filing.

The MEPA Limitation

The Montana Environmental Policy Act (MEPA) is a regulatory structure first enacted in 1971 for the purpose of protecting the environmental resources of the State. Prior to granting permits for oil, gas and coal activities the State conducts environmental reviews under MEPA.

The MEPA Limitation, enacted in 2023, provides that except for narrowly defined exceptions, those environmental reviews “may not include a review of actual or potential impacts beyond Montana’s borders. It may not include actual or potential impact on the regional, national or global in nature.” After the MEPA Limitation was enacted, state agencies stopped analyzing environmental impacts resulting from permitted activities.

The Constitution

Montana’s Constitution guarantees to each citizen “a fundamental right to a clean and healthful environment”. Plaintiffs’ suit alleged that such right includes “a stable climate system that sustains human lives and liberties” and the right was being violated.

The Constitution further requires the Legislature to “provide adequate remedies for the protection of the environmental life support system from degradation and provide adequate remedies to prevent unreasonable depletion and degradation of natural resources.”

The opinion

Telegraphing where it was headed, the Court opened by citing a federal Ninth Circuit opinion lamenting the perils of climate change, unprecedented global warming, and “overwhelming scientific evidence and consensus” that warming is “a direct result of greenhouse gas emissions, primarily from CO2 released from human extraction and burning of fossil fuels.”

The Court then affirmed this 100+-page Findings of Fact, Conclusions of Law and Order from the district court. The Order included over 60 pages of factual findings, some that appear to be rather far-fetched, including testimony from experts and the plaintiffs themselves and conclusions drawn from a number of sources, including the UN’s Intergovernmental Panel on Climate Change reports. The Supreme Court referred to those findings as ‘undisputed”. It appears that the State made virtually no effort to controvert the plaintiffs’ evidence at the trial court.

The State’s unsuccessful arguments (among others):

  • The framers could not have intended to include an environment degraded from the effects of climate change because they did not specifically discuss climate change or other global issues when adopting the provision.

Rejected. A Constitution “is not a straitjacket but a living thing designed to meet the needs of a progressive society and capable of being expanded to embrace more extensive relations” and cited examples of situations not existing at the adoption of earlier constitutions that were nevertheless covered.  

  • Plaintiffs did not have standing to sue.

Rejected. They had a sufficient personal stake in their inalienable right to a clean and healthful environment to justify the right to sue.

  • Plaintiffs must prove that the MEPA Limitation has in fact caused climate change.

Rejected. The argument was misplaced; that was not the focus of the suit.

  • Even if Montana addressed its contribution to climate change it would still be a problem if the rest of the world will not reduce emissions.

Rejected. Again that was not the focus of the suit.

  • It is only a procedural statute that cannot cause harm to constitutional rights.

Rejected.

Commentary

There will be more of these kinds of suits.

The ruling drew praise from environmentalists and scorn by industry commentators such as Doug Sheridan.

Your musical interlude

In Mistretta v. Hilcorp Energy Company, unleased mineral owner Mistretta sued Hilcorp alleging failure to provide requested production and well cost information pertaining to an oil well operated by Hilcorp. The well was in a unit established in accordance with the Louisiana Conservation Act.  The issue: Do La. R.S 30:103.1 and 103.2 require one notice or two before the operator loses its right to recover costs from the owner?

Under the Act, each mineral owner in a drilling unit is responsible for its share of development and operation costs. To prevent free riding, the Act provides a mechanism for sharing the risk that the well, once drilled, will not produce enough to cover drilling costs. If the operator gives the opportunity to participate in drilling the well and the unleased mineral owner declines, the operator can recover out of production the nonparticipating owner’s share of drilling costs.  

The statute (paraphrased)

103.1: The operator must report to owners of unleased mineral interests by a sworn, detailed itemized statement of costs of drilling, completing and equipping within 90 days from completion of the well. and then send quarterly reports thereafter on costs and revenues, or within 90 calendar days after receiving a request from an unleased mineral owner in writing, whichever is later. Communications must be by certified mail.

103.2:   Whenever the operator permits 90 days to elapse from completion of the well and 30 additional days to elapse from date of receipt of written notice from the owner calling attention to the operator’s failure to comply with 103.1, the operator will forfeit his right to demand contribution from the owner for the costs of the drilling operations of the well.

Operative dates would be helpful:

  • September 3, 2022:  Completion of the well.
  • December 7, 2022: Mistretta’s written notice received.
  • February 16, 2023: Hillcorp’s email response.
  • February 20, 2023: Hillcorp’s certified mail response.
  • There was no second written request from Mistretta

Mistretta contended that express unambiguous language of 103.1 and 103.2 requires that after 90 days had passed following the completion of the well and after 30 days have passed after the operator received notice from the unleased owner requesting reports, 103.2 takes effect resulting in forfeiture of the operator’s right to recover drilling costs. Hillcorp’s response was not timely under 103.2 (coming more than 30 days after receipt of Mistretta’s notice).

The ruling – two requests required

The court did not buy Mistretta’s interpretation of the statute. 103.1 must be read in conjunction with 103.2 and when read together the statute requires two separate notices, an initial request seeking information and another notice advising the operator that it had failed to provide the required information. The operator’s obligation under 103.1 does not arise until the request is made for such a report.103.2 provides for the passage of an additional 30 days after the owner has sent the operator a notice calling attention to its failure to comply with 103.1 before it takes effect and results in forfeiture.

Reading 103.1 in conjunction 103.2, the 103.2 penalty provision was not triggered due to Mistretta’s failure to comply with a second notice requirement mandated by 103.2.

The court added that 103.2 is a penalty statute. Penalty statutes are penal in nature and should be strictly construed.

Your musical interlude

The question in Rock River Minerals, LP and Carr v. v. Pioneer Natural Resources, et al.: Did an assignment of overriding royalty interests in Texas oil and gas leases include a depth limitation? No.

To understand why, we need to study the instrument (Spoiler, see Exhibit A). Cass executed an Assignment of a 2.125% override in favor of Parker & Parsley (which became Pioneer, who assigned to CrownRock). The Assignment conveyed:

  • “all of the rights, interests and properties described… ” in 10 paragraphs listing categories of interests being conveyed.
  • The 10 paragraphs either directly or indirectly referenced Exhibit A to more particularly describe the lands and leases.
  • Exhibit A described “all land from the surface of the earth to all depths located within the geographic boundaries of the North Pembroke Sprayberry Unit as identified in the Unit Agreement … .” (my emphasis)
  • The leases were described in Exhibit A as “all oil and gas leases, royalty interests … included within the [Unit] as to the lands included within such Unit, from the surface of the earth to all depths.” (emphasis mine again.)

Rock River acquired some of Cass’s interests below the Sprayberry. CrownQuest drilled 12 wells within the geographic boundaries of the assigned interests. The wells produce from the Wolfcamp, which is deeper than the Sprayberry.

Cass sought a declaration that he continues to own his interests in depths below the Sprayberry.  Cass/Rock River’s point:  Because the Assignment incorporated the Unit Agreement by reference, it conveyed only the interests that were subject to the Unit Agreement (only the Sprayberry). The geographic boundaries meant not just the horizontal surface boundaries but also the vertical subsurface boundaries of the unitized formation.

Pioneer et al.’s point: There was no depth limitation because Exhibit A stated that the Assignment was to all depths.

The result

Pioneer et al wins. The Assignment conveyed Cass’s override to all geological depths, including depths below the base of Sprayberry, within the geographic boundaries of the Unit.

The parties agreed that an exhibit that describes property can limit the property conveyed. Exhibit A here limited the conveyance to those interests within the geographic boundaries of the Unit.

The Unit Agreement had a map showing the parcels of land which comprise the Unit Area. The Unit Agreement defined the “Unitized Formation” as the “subsurface portion of the Unit Area commonly known as the Sprayberry formation”.

The court concluded that the Unit Agreement determined the boundaries of the surface of the land but not the depth. Incorporation of the Unit Agreement did not necessarily mean that every provision of the Unit Agreement was relevant to the dispute.   

What is “geography”?

Relying on their handy disctionary, the court looked up the plain meaning of “geography” and said it is “a science that deals with the description, distribution and interaction of the diverse physical, biological, and cultural features of the earth’s surface.” Even if geographic boundaries encompass subsurface depth boundaries, the grant was of the interests in all lands from the surface to all depths located within the geographic boundaries of the unit.

Words matter

The parties chose the word “Unit”, not “Unitized Formation” to define the boundaries of the conveyance. The Assignment defined the “Unit Area” as the lands described in certain parcels of land. On the other hand, the Unitized Formation was a subsurface portion of the Unit Area. Had Cass intended to convey only interests in the Unitized Formation he could have said so.

Your musical interlude

Co-author Sean Burns*

In re: EP Energy E&P Company, LP considered three lease maintenance provisions in several oil and gas leases. The federal district court ruled that the leases were maintained in force after cessation of production despite creative (some would say “strained”) lease interpretations by a group of lessors. In sum, the court deemed the lessors’ positions to be contrary to general principles of Texas oil and gas law and concluded that such provisions are complementary, and are not to be interpreted so as to invalidate each other.

Bankruptcy issues

Facing the pandemic-related collapse of oil prices, lessee EP Energy shut in producing wells on the leases. EP drilled new wells throughout the period and resumed production from each shut-in well within 40 days.

EP filed for Chapter 11 bankruptcy. Seeking a stay from the bankruptcy court in order to pursue a state court lawsuit, the lessors claimed that EP’s cessation of production after the primary term resulted in expiration of the leases and reversion of the mineral rights to the lessors. They further argued that EP’s operations after termination constituted trespass.

The bankruptcy court addressed administrative claims, bankruptcy jurisdiction, and the abstention doctrine. Those issues can be significant to parties fighting in bankruptcy court but are beyond our modest purposes here.

The district court affirmed Bankruptcy Judge Marvin Isgur’s holding that, rather than abstain and allow the lessors to pursue their claims in state court, the court would treat them as administrative expense claims that were ripe for adjudication.

Lease interpretation

A continuous development clause (text at p. 14 of the opinion) allowed EP, after expiration of the primary term, to maintain each lease by commencing drilling of an additional well within 120 days after abandonment of a well or completion of a new well.

A retained acreage clause (Paragraph XI(a), opinion p.15) divided each lease by providing that production from or operations on a production unit would maintain the lease in force after the primary term only as to that portion of the premises within that production unit.

As always, harmonize

The court considered the entire lease so as to give effect to all the provisions so that no one provision would be rendered meaningless.

The court rejected the lessors’ asserted that the retained-acreage clause divided the lease at the end of the primary term. That interpretation would read the clause’s “whichever occurs later” language out of the lease and render it meaningless.  This would result in also reading the continuous development clause itself out of the lease. To the contrary, lease termination will occur only upon the latter of cessation of continuous drilling operations or expiration of the primary term.  

The effect of the continuous development clause was that if EP drilled a well within 120 days after expiration of the primary term or 120 days after completion or abandonment of a prior well, EP would continue to maintain the entire lease.

The temporary cessation clause (opinion, p. 17) allowed EP to maintain the lease after cessation of production if operations were conducted or production restored within 120 days. Lessors argued that EP had to drill new wells in order to trigger the clause.

The court rejected that position. Construing that clause as lessors urged would lead to the “odd and perhaps unreasonable result” that EP would be forced to expend additional resources drilling or reworking wells while other wells capable of production were sitting idle. Such a reading would defeat the purpose of the clause and benefit neither party.

EP did not trespass on the leases because it had fulfilled its obligation to either continuously develop the leaseholds by drilling new wells or otherwise maintained the leases by resuming production within 120 days.

Other lease clauses

Leaving no jurisprudential stone unturned, the lessors also urged the court to invoke the shut-in royalty and force majeure clauses (pp.19, 20). Those arguments were also rejected.

Your Christmas interlude

*Sean is a new addition to Gray Reed’s benkrupty/restructuring practice.

Mr./Ms. Negotiator/scrivener/reviewer of Master Service Agreements: When did you last review your go-to indemnity provision? In light of Century Surety Company v. Colgate Operating LLC., perhaps you should do it now. The court deemed an innocuous-seeming indemnity provision to impose a ceiling on indemnity obligations under an MSA. Is your MSA consistent with your intentions?

The MSA

Operator Colgate and consultant Triangle entered into an MSA after Colgate hired Triangle to work on a well in Pecos County, Texas.

The mutual indemnity provision required each party to indemnify the other for claims “… arising out of, resulting from, or in any way incident, to, directly or indirectly, any transaction subject to this Agreement.”

In order to support the indemnity obligations, the MSA required the parties to purchase indemnity insurance with limits of the lesser of (1) not less than $5 million or (2) “the maximum amount which may be required by law, if any, without rendering this mutual indemnification obligation void, unenforceable, or otherwise inoperative.” The MSA complied with the Texas Oilfield Anti-Indemnity Act.  

Colgate purchased a $1 million-dollar general liability insurance policy and a $75 million excess liability policy from Markel. Triangle purchased a $1 million general liability policy from Hallmark and a $5 million excess liability policy from Century.

To settle a suit by an injured employee of a Colgate contractor, Hallmark paid $1 million, Century paid $5 million, and Markel paid $6 million for the benefit of Triangle and Triangle’s consultant. Century, as Triangle’s subrogee, sued Colgate for failure to indemnify Triangle, seeking reimbursement for the $5 million paid towards the settlement.

The district court

The district court concluded that the MSA provided a floor for coverage for mutual indemnity purposes but did not provide a ceiling, invoking the Texas Supreme Court’s “lowest common denominator” rule under a prior version of the statute: When parties agree to provide differing amounts of coverage, the mutual indemnity obligations are limited to the lower amount of insurance. The result was that Century was not entitled to recover the $5 million from Colgate.

Fifth Circuit affirms for a different reason

The current version of the statute limits mutual indemnity obligations to the amount of coverage that each party as indemnitor has agreed to obtain for the benefit of the other party as indemnitee.

The only amount of insurance expressly required by the MSA was $5 million, which served as both a floor and a ceiling.  The words “not less than” stipulated a required minimum and the MSA did not provide a clear maximum.

The district court had turned to the insurance policies to answer the question. The Fifth Circuit said that was not necessary. Triangle’s only rights existed within the MSA and indemnification under the MSA was not the same as insurance coverage. According to TOAIA’s terminology, the remaining $71 million of Colgate’s excess liability coverage was not obtained for the benefit of Triangle. Triangle had no right of indemnity under the Markel policy itself and Colgate was under no obligation to pay any more than the $5 million it agreed to pay under the MSA.

The parties could have spelled out discrete and distinct dollar amounts of insurance that each was required to obtain in general liability and excess coverage but they declined to do so.

Your musical interlude.

COP29 is upon us (Perfidy, thy name is the UNIPCC) being held in the greenwashing Republic of Azerbaijan. And ironically, there are dire warnings from some quarters about the methods “anti-science” Donald Trump will deploy to destroy the planet.

With that in mind, here is a handy list of real scientists, economists and energy professionals you can count on to offer facts, figures, and observations that counterbalance falsehoods embedded in presentations by the UNIPCC, the Mainstream Media, and their co-conspirators the search engines.  Here you go, in alphabetical order.  

David Blackmon, here offering a glimpse of Chris Wright, designated as Secretary of the Department of Energy.

Robert Bryce, author, speaker and substack writer, here discussing the $58,000+ Ford loses on each EV it sells.

Judith Curry, climatologist who has a website in which she discusses many client-related issues and does some fact-checking of the fact-checkers.

Alex Epstein, here talking about the catastrophic cost of government green energy programs.

Stephen Heins, substack writer, here discussing how the Biden administration is undermining LNG exports, to the disadvantage of Europe and our seurity.

Steven Koonin, Senior Fellow at the Hoover Institution, former Obama DOE senior official, here also fact-checking Politico’s fact-checking.

Bjorn Lomborg, Danish economist and political scientist and author of a number of books and articles casting doubt on climate hysteria and the unwise policies resulting therefrom, here speaking about the UN’s overestimates of extreme heat deaths and on the myth of the energy transition.

Daniel Markind, lawyer who writes about climate, here explaining in Forbes one way President Trump could help overcome obstacles to bringing energy to the Northeast. 

Roger Pielke, Jr., college professor, fellow at the  American Enterprise Institute, and substack writer, here chastising advocates’ use of the most implausible scenarios to predict the perils of climate change.

Thomas Shepstone, substack writer, here commenting on the vast sums of money wasted by the Inflation Reduction Act.

Doug Sheridan, commentator and frequent responder to false narratives, here on Linked-in observing Europe’s failing net-zero movement  and challenging Michael Mann and his accusations against Exxon. Follow him on LinkedIn.

Irina Slav, Bulgarian energy writer. Her writings on substack require a subscription but here on Oilprice.com are some of her recent observations on the energy economy

Watts Up With That!, an aggregator of climate reporting, here on vexatious and unsuccessful climate lawsuits.

And finally, an instructional video from long ago on budget deficits, as the past repeats itself.

Your musical interlude.

Q: Is it just me or do we see more honest and varied climate information from the new breed of independent journalists than from the legacy media?

A: Sometimes.

In legal parlance, it was a “remand”, but the result in Energy Transfer, LP et al v. Culberson Midstream LLC et al was the same. According to Judge Bill Whitehill of the Business Court of Texas, First Division, the Texas business court does not have authority over cases filed before September 1, 2024. This one will return to the 193rd District Court in Dallas.  Why? Because the plain language of HB 19 from the 2023 Regular Session, the business court enabling statute, says so.

How the parties got here

Energy Transfer filed suit in April 2022.  The district court’s docket showed 57 pages of activity from April 2022 to August 31, 2024. Energy Transfer removed the case on September 30, 2024. The defendants moved to remand saying that the case is not removable under Government Code §25A.006 because House Bill 19 is restricted to suits commenced on or after September 1, 2024.

The plaintiff made several arguments, all of which were rejected by the court. Lawyers interested in knowing what arguments not to rely on when considering removal of a case to the business court should study this opinion. Those arguments are unnecessarily esoteric to dwell on here.

How to read a Texas statute

The court relied on these rules of statutory construction:

  • Construction of a statute is a legal question.
  • If the statute is not ambiguous the court adopts an interpretation supported by its plain language unless such an interpretation would lead to absurd results.
  • It is presumed that the Legislature included each word in a statute for a purpose and words not included were purposefully omitted.

§25A.006 permits removal of cases to the business court if the case meets jurisdictional requirements but does not address whether cases on file before September 1, 2024, are removable.

The plain language of the statute governs

The wording of the statute was the linchpin of the ruling. §8 of HB 19 could have said the court may begin accepting cases beginning on September 21, 2024, but it does not say that. §8 says, “The changes in law made by this Act apply to civil actions commenced on or after September 1, 2024. The court concluded that it must construe §8 as limiting §25A.006’s removal provisions to cases filed on or after that date.  

The good news

  1. The court was efficient. The matter was removed on September 30, 2024, and remanded by an order on October 30. Prompt justice, one of the advertised advantages of the business courts, was delivered.
  • The parties and future litigants benefited from a written opinion explaining the court’s reasoning. You don’t see that in a typical trial court order due to the workload of those courts.
  • In light of the many as-yet unanswered questions about how this new statute will be interpreted, this case resolved a question about which cases are removable and which aren’t.

For your musical enjoyment, a few Bob Dylan covers:

Lucinda Williams  –  Not Dark Yet

Molly Tuttle – You Ain’t Going Nowhere

Toni Lindgren – Buckets of Rain

New Basement Tapes – When I Get My Hands on You

Author Paul Yale*

In the summer of 2022, the Executive Committee and Board of Directors of the American Association of Professional Landmen approved the first ever Model Form Participation Agreement to be approved by the Association.

So, the basics: A Participation Agreement (PA) typically, it is an agreement by which a participant will buy-in to a drill-ready oil and gas prospect by payment of a “promote” to the prospect generator for having identified a prospect and put a deal together.   

The classic PA is the ”third for a quarter deal” by which the prospect generator gets three other parties to each put up 1/3rd of the costs of the first well on a prospect in exchange for a 1/4th interest, with the prospect generator retaining a 1/4th cost free interest. But there are numerous permeations of that basic structure.

For example, instead of multiple parties, perhaps a single party pays 100% of the costs for a 3/4ths working interest. Perhaps the prospect generator gets more “promote”  by marking up the actual cost of the leases or seismic data. The prospect generator may reserve an override, not only on the original lease block, but on all subsequent lease purchases within an agreed upon Area of Mutual Interest.

PAs are likely as old as the oil and gas industry itself, but until the advent of the new AAPL Model Form, there had never been a standardized form. This slowed the buying and selling of prospects at events such as the North American Prospect Expo as parties had to negotiate from scratch and draft deal specific PAs each time a trade was made.   

In 2017, the AAPL Forms Committee formed a subcommittee, the Participating Agreement Drafting Committee (PADC) to develop a standard form PA. The approach of the PADC was to identify the most common features and alternatives used in PAs and incorporate them into a form that could be customized by filling in blanks and checking boxes.  The result was a 35-page WORD-format document that now appears in the Forms section of the AAPL website.

The PA document is an interesting read; it offers a litany of options and provisions and can serve as a checklist of provisions for landmen and lawyers to consider when negotiating a PA, regardless of whether the form itself is used to document the final deal.

To quote from an article written by the author, “ It is hoped that the introduction of a model form PA will enable documenting well trades at NAPE and elsewhere easier and quicker. It was also the goal of the PADC to develop a model form that would become widespread in use by industry. Only time will tell if the PADC’s goals were met.”

For more details see these articles in Landman Magazine and the State Bar of Texas Oil, Gas & Energy Resources Fall 2024 Section Report and the PA Form (downloaded from the AAPL website).

* Gray Reed Partner Paul Yale is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization and a member of the PADC.  

Your musical interlude. Feel free to consider it sanctimonious, or even corny, but it makes sense during these times. Read into it whatever you want.