As in every year, in 2024 the grinches of law enforcement brought financial and corporal misery to bad guys in energy. Here is a review of the crimes of only a few of the convicted, admitted and alleged bribsters, swindlers and liars who plagued the industry during last year. These acts came with a pronounced Spanish accent. Frequent losers were governments citizens of corrupt Latin American governments.

CREDIT WHERE ITS DUE  

Michael Volkov is a white collar defense lawyer in Washington D.C. I often consult his informative blog for my bad-guy posts.  Check it out.

OIL AND WATER DON’T MIX

Perp: Dennis James Rogers, II, Dallas, TX

Crime: Pled guilty to two counts of securities fraud.

How he did it: Solicited $10 million from an investor, purportedly to purchase fuel. After a promise of a 50 percent return the investor handed over the funds, which Rogers diverted to a private jet service, a custom home builder, a law firm, an investment account, and credit card and other personal expenditures.

Ten months later, he solicited $6.3 million from new investors, telling them that a large fuel company was exiting a position in Brownsville, Texas, and planned to dispose of its fuel via an exclusive, invitation-only auction. The company never held an auction and had no relationship with Rogers. He diverted that money to fund an unrelated investment account, purchase real estate, and pay personal expenses.

Avarice unabated, he then collected $11 million for a purported water-rights deal associated with a dairy farm in New Mexico. He told investors he had an account worth $5 million that could be used as collateral. He never had a relationship with the dairy farmer, the account had no collateral value, and there was never a contract for water rights.

Sentence/penalty: 70 months in prison, $200 fine, $16MM in restitution.

MARK TWAIN KNEW CONGRESS

Alleged Perps: Congressman Enrique Roberto Cuellar and wife Imelda.

Crime: Charged with bribery, honest services, wire fraud, conspiracy, money laundering, and violations of the Foreign Agents Registration Act.

How the government says they did it: This is only an indictment. The Cuellars allegedly accepted $598,000 in bribes from foreign entities, including an oil and gas company owned by the government of Azerbaijan and a Mexico City bank. In exchange, Enrique allegedly performed official acts to benefit these entities, such as influencing legislative measures to benefit Azerbaijan and manipulating legislative activities to favor the Mexican bank.

Sentence/penalty: None yet, if any; potentially lots of years imprisonment.

IF ITS VENAL ITS VENEZUELA

Perp: Luis Fernando Vuteff, a financial manager from Argentina. 

Crime: Pleaded guilty to conspiracy to commit money laundering.

How he did it:  Admitted that he and another asset manager were retained to launder over $200 million of proceeds of a foreign currency exchange scheme using loan contracts with Venezuela’s national oil company, PDVSA, that exploited Venezuela’s fixed foreign currency exchange rate and that were obtained via bribes and kickbacks. More than $9.5 million was transferred to bank accounts in the United States.

Sentence/penalty: 30 months in prison and forfeiture of $4+ million in unlawfully obtained assets, including real estate in Miami, Paraguay, and Spain.

IF ITS VENAL … X2

Perps: Swiss-Portuguese banker Paulo Casquiero Murta and former PDVSA official César David Rincón Godoy

Crimes: Money laundering and bribery of, yep, a Venezuelan official.

How they did it: Accepted bribes from Florida and Texas business owners and paid them to Venezuelan government officials in exchange for assisting those businesses in receiving payment priority and additional PDVSA contracts, then laundered the proceeds through a series of financial transactions, including wire transfers to accounts in the United States and Switzerland. The Fifth Circuit affirmed a dismissal of claims against Murta on procedural grounds but remanded to a different district court judge to determine whether the dismissal should have been with or without prejudice.  

Sentence/penalty: Time served, amid allegations that the government deliberately delayed trial and resolution.

IF ITS VENAL … X3

Perp: Fernando Ardila-Rueda, business partner of Abraham Jose Shiera-Bastidas

Crime: Guilty plea to one count of violating the FCPA and one count of conspiracy to violate the FCPA by paying bribes to officials at (again) PDVSA.

How he did it: While sales director, manager, and partial owner of several of co-conspirator Shiera’s companies, Ardila provided entertainment and offered bribes to PDVSA officials based on a percentage of the value of contracts the officials helped to award. Several PDVSA officials went down as well.

Sentence/penalty: For Aridia-Murta, time served, $100,000 fine, forfeiture of $4.4 million and forfeiture of another $1 million+.

IT TAKES A VILLAGE  …

Perp: Siemens Energy Inc.

Crime: Guilty plea to misappropriation of confidential competitor information obtained during a competitive bidding process

How they did it:  To build a gas turbine plant, Dominion Energy held a closed bid process and received bids from Siemens and others. All bidders executed NDA’s.  A Dominion insider improperly passed sensitive, confidential information on competitors’ bids to a Siemens account manager, who was aware it was confidential. The manager sent it to another Siemens employee for a comparative analysis. Upon discovering that it had submitted a less competitive bid, Siemens resubmitted a more competitive bid. Alas, Siemens won!

Siemens’ conduct resulted in losses of between $65 million and $150 million to the victims of the scheme.

Sentence/penalty: Agreed to pay $104 million. Several employees also pled guilty and were fired.

BRAZIL – KEEPING UP WITH THE VENAL

Perp: Trafigura Beheer BV, Swiss-based international commodities trading company.

Crime: Pled guilty to conspiracy to violate anti-bribery provisions of the FCPA.

How they did it: Paid bribes totalling $19.7 million for the benefit of several officials of Petrobas, Brazil’s national oil company, to secure business, earning $61 million in illicit profits. The bribes were five to ten cents per barrel of oil sales. Agreed-upon price levels were arrived via sham negotiations. Used shell companies and intermediaries to facilitate the payments.

Sentence/penalty: Forfeiture of $46 million+, fine to Brazil, and fine of $53 million+ to the United States.  

BRAZIL – KEEPING UP WITH THE VENAL X2  

Perp: Gary Oztemel, a Connecticut-based oil and gas trader.

Crimes:  Convicted of conspiracy to violate the Foreign Corrupt Practices Act, conspiracy to commit money laundering, and two counts of money laundering.

How he did it: He, and others paid over $1 million in bribes to officials at Petrobras, the Brazilian state-owned oil and gas company, to secure lucrative contracts. Used his companies to conceal the proceeds of the scheme. The conspirators used coded language, personal email accounts, fictitious names, and encrypted messaging applications in furtherance of their scheme.

Sentence/penalty: Two years of probation and $310,000 in fines and forfeiture.

NO STATE LEFT BEHIND – ECUADOR AND MEXICO

Perp: Javier Aguilar, former Vitol oil and gas trader in the Houston office.

Crime:  Violation and conspiracy to violate the FCPA via a “complex” money laundering scheme, as well as Travel Act and money laundering violations.

How he did it: Engaged with officials at state-owned oil entities in Latin America seeking to win lucrative contracts for Vitol. Targeting a $300 million contract with Petroecuador, he arranged to bribe senior officials. In order to circumvent Petroecuador’s restriction against working with private entities, he arranged for the bribes to be paid through a Middle Eastern state-owned intermediary. Following a change in leadership after the 2017 Ecuadorean presidential election, he bribed incoming administration officials as well.

In Mexico, he employed a series of fake contracts, phony invoices, and shell companies incorporated in jurisdictions like Curaçao, Panama, and the Cayman Islands to funnel approximately $600,000 in bribe payments to two Pemex officials. In turn, he secured Vitol contracts worth hundreds of millions.

A scheme to pay bribes to procurement managers at PEMEX Procurement International, Inc. (PPI), a subsidiary of Mexico’s state-owned oil company PEMEX, to secure business advantages.

Sentence/penalty: He agreed to forfeit $7.1 MM. Vitol paid a combined $135MM to US and Brazilian agencies. Co-conspirators forfeited $63MM.

Your musical interlude

Thought you’d heard the last of force majuere cases arising from Winter Storm Uri? Think again.

In Marathon Oil Company v. Koch Services LLC. the question was how to measure damages suffered by Koch for Marathon’s failure to deliver gas.

Under a Base Contract Marathon was obligated to deliver gas at the Bennington Hub. The damages for undelivered gas would be calculated based on a formula utilizing a spot price, which was “under the listing applicable to the geographic location closest in proximity to the Bennington Hub”. Was that location the “OGT Pool index”, 41 miles away measured as the crow flies? Or was it “NGPL Texok index”, which was 128 miles away because it is the closest geographic location that gas can access by pipeline from Bennington Hub. In other words, should it be measured by pipeline length?

Marathon argued that the context of the contract, pertaining to transportation of gas, implied that the measurement must be based on downstream path-of-travel.  The court rejected the argument that measurement must be downstream; the contract was direction neutral. Legal treatises suggest that ordinarily, the shortest straight line would govern most contracts, but sometimes the ordinary, usual and shortest route of public travel may be utilized where the context so indicates. An example is distance provisions in the FMLA, where the focus is on employees’ ability to take advantage of the statute’s protections.

The court concluded that the context of the contract at issue did not indicate that the parties intended a different method than the straight-line distance, which was “the most natural reading”.  FYI, the location was a big deal given the difference in spot prices at the two alternatives.

In Sinclair Refining and Marketing LLC v. NextEra Marketing, LLC. the force majeure provision in a gas contract read:

“Notwithstanding [earlier sections] in no event shall an interruption in, failure of, or unavailability of Gas from, Seller’s normal sources of Gas supply be considered an event of force majeure under this Section 11 as long as Gas is available and trading on the open market at pools or hubs in the Buyer’s market area and from which such Gas could be readily transported to Buyer’s location”. (my emphasis)

More expensive gas was in fact trading on the open market during the time in question but NextEra elected not to buy it to cover its delivery obligations.

What did “available” mean under the contract? According to the Cambridge Dictionary, gas is “available” if it is able to be bought or used. Per Merriam Webster, “available” means “present or ready for immediate use in the context of resources”. None of the definitions hit the standard for practicability for which NextEra argued.

The court concluded that NextEra was asking it to add the word “readily” before “available” to create a new contract. To do that the court would have to rewrite the parties’ contract, which the court declined to do. The force majeure clause was not an “out” for NextEra’s failure to meet its delivery obligatons.

Mom’s musical interlude.

Co-author Gunner West

In In re Pearl Resources LLC, a Houston bankruptcy court rejected the Texas General Land Office’s attempt to partially terminate state oil and gas leases in Pecos County, despite finding the operator had breached offset well obligations.

The court describes the difference between “drilling operations” and “drilling”, explains when failure to comply with an offset well obligation was not a material breach, and upholds the viability of the State’s sovereign immunity.

Overview

Pearl Resources operated 35 leases issued under the Relinquishment Act. The GLO asserted that 27 of these leases had partially terminated as to all but 320 acres around the Garnet State #3 — the only producing well on the acreage — for failure to conduct continuous drilling operations. The GLO demanded partial releases under the retained acreage clauses; Pearl refused; the GLO filed a Designation of Terminated Acreages and Depths; Pearl filed for Chapter 11 bankruptcy.

No “Rolling Termination”

The retained acreage clause stated that leases “in force and effect two (2) years after the expiration date of the primary or extended term” would terminate except for 320 acres around each producing gas well, “or a well upon which lessee is engaged in continuous drilling or reworking operations, … .” The court found this created two distinct termination points: (1) at the conclusion of the secondary term, and (2) two years after the expiration of the secondary term.

The court rejected the GLO’s “rolling termination” theory, explaining that “under Texas law, unless a lease specifically calls for a rolling termination, a retained acreage provision only operates once.” The GLO lease form lacked the clear language needed for rolling termination.

“Drilling Operations” Extend Beyond Actual Drilling

The GLO argued Pearl’s failure to actually drill a well was insufficient to maintain the leases.The court disagreed. Texas Administrative Code broadly includes all “activities designed and conducted in an effort to obtain initial production.” According to Ridge Oil Co. v. Guinn Invs., Inc. “drilling or reworking operations” encompasses more than just drilling.

Pearl’s operations included spudding three horizontal wells, conducting facilities work, engaging contractors, building roads, and performing environmental studies. Each activity was “designed to, and being conducted for the purpose of obtaining, initial production from a well.”

Offset Well Breach was Immaterial

The court found that Pearl breached the lease by failing to timely drill an offset well after a nearby well began producing. But the breach was immaterial for purposes of the GLO’s prior‑material‑breach defense, so it did not excuse the GLO’s performance or support forfeiture or partial termination. The court emphasized that the GLO:

  • had specific statutory remedies available but never pursued the proper forfeiture process under the Texas Natural Resource Code §52.174;
  • could be and was adequately compensated with money damages for drainage; and
  • sought damages rather than forfeiture, demonstrating that Pearl’s breaches could be cured.

The court granted Pearl’s quiet‑title claim, declared the DTAD “invalid and of no force or effect,” and confirmed Pearl’s superior title to all 955.22 acres in dispute.

Damages Barred by Sovereign Immunity

Pearl proved $43,155,664 in damages from the GLO’s improper DTAD filing. The GLO proved $2,578,633 in damages from drainage due to Pearl’s failure to drill an offset well. Te court barred Pearl’s recovery; the GLO had not waived sovereign immunity. Even though the GLO initiated the lawsuit, it “retains its ability to assert whatever rights, immunities or defenses are provided for by its own sovereign immunity law.”

Your musical interlude.

Sewak v. Sutherland Energy Co. Ltd. is of interest for how the court defined terms commonly used in consulting contracts in the oil and gas industry, and how difficult it is to foresee all contingencies when negotiating a contract for services.

The agreement

Sewak agreed to provide geophysicist services to Sutherland Energy (SEC) in conjunction with a seismic survey in Hardeman County. The parties’ agreement provided,

  • The scope of the relationship was “concerning the subject seismic survey and potential drilling and development.”
  • Sewak’s responsibilities “will include but not be limited to design, bidding, contracting, overseeing data acquisition and processing, and interpretation of all of the data. … You will invoice SEC at a rate of $600/ day (or $75/hr)”. Costs of acquiring the survey would be paid by SEC.
  • In a later paragraph, SEC will “ … give [Sewak] an option to invest in drilling opportunities within the subject survey on a ground floor basis for up to 20% of the working interest available to SEC.” The agreement mentioned the Hamrick #3 well.

What happened

By January 2015 the survey data was completed to a point that Sewak and SEC could begin to identify prospects for drilling. Sewak continued providing services through the first half of 2017. SEC failed to pay three invoices, maintaining that after January 2015 Sewak was not acquiring the subject seismic survey but was “prospecting for drilling opportunities within the survey”, which was a separate part of their agreement.

SEC did not give Sewak the opportunity to invest in the Hamrick #3 and #5 wells. Sewak sued for breach of contract for failure to pay his final three invoices and denying him the option to participate in drilling opportunities. SEC prevailed on dueling motions for summary judgment.

Because the agreement was sui generis, little would be gained by a discussion here of the details of the parties’ obligations and performance. The opinion is worth a read if your livelihood depends on services agreements. The court reversed the trial court on payment of the three invoices, rendering judgment in Sewak’s favor.

This court’s definition of a “drilling opportunity”

SEC asserted that the agreement did not give Sewak the right to participate in the Hamrick #3. The court defined a “drilling opportunity” as the opportunity to participate in the drilling of a well. The acquisition of an interest in an oil and gas lease that already had existing production (as was the case here) is not the same as the drilling of a well. To construe the agreement as creating an interest in lease acquisitions would read into the agreement words that did not exist. This, the court declined to do. SEC did not breach the agreement regarding the Hamrick #3.

This court’s definition of a “ground floor basis”

The court agreed that the Hamrick #5 was a drilling opportunity. SEC argued that an investment on a ground floor basis excluded operations within an existing production unit because the owners of the unit would have already incurred substantial expenses of developing the unit. The 160-acre Hamrick Unit had been designated before the agreement at issue and was subject to restrictions in an exploration and farmout agreement between SEC and Dimock, the original owner of the lease.

The court, siding with SEC, construed the term to reflect the intent for Sewak to participate in a new drilling venture at the beginning stages, not an existing production unit.

The court gave the terms “their plain, ordinary, and generally accepted meaning”. I imagine there are industry players who would disagree with the court’s understanding of the generally accepted meaning of those terms.

Your musical interlude

The category is “terms that confuse us” for one hundred dollars. Without resorting to your favorite legal dictionary or lawyer, explain the difference between a reservation and an exception in a Texas warranty deed. Stumped? Valence Operating v. Davidson answers the question.

The deeds

1956: Myrtle and grandson Jackie Ray Briggs conveyed to Edmond and Mildred Coleman the surface in fee of a 64.5 acre tract in Panola County, and 1/2 interest in the minerals, reserving a life estate in the mineral interest to Myrtle.

1964: The Colemans conveyed the tract to the Carters. The warranty deed stipulated, “… all Oil, Gas and other Minerals have been excepted and reserved by former owners.” This is the interest claimed by Valence.

2012: Mildred Coleman conveyed to Dickerson by mineral deed all of her right, title and interest in all of the oil, gas and liquid and gaseous hydrocarbons.

2013: Dickerson conveyed to Smith 1/2 of the minerals. This is the interest Davidson claims.

Valence argued that the provision in the 1964 deed was an exception to both the conveyance and the warranty but only to the extent of the exception and reservation in the 1956 deed.  As a result, the 1964 grantors conveyed all they had gotten in 1956.

Davidson/Smith argued that the 1964 Coleman-to-Carter deed was a reservation to Mildred to which they eventually succeeded.  

The court

The trial court quieted title in favor of Davidson/ Smith. The court of appeals reversed and remanded.  Davidson/Smith could not prove superior title through a chain of title in their trespass to try title claim.

The question for the court of appeals: Whether the grantors in the 1964 Coleman deed reserved an interest in the minerals for themselves or excepted any portion of the mineral estate from the conveyances.

The court explained the difference between exceptions and reservations: “The words ‘exception’ and ‘reservation,’ though at times used interchangeably, each has its own separate meaning.”  … “A reservation is the creation of a new right in favor of the grantor.” … “An exception, by contrast, operates to exclude some interest from the grant.”). …  “[A]ny ‘reservation’ must be ‘by clear language’ and cannot be implied, and a reservation is a form of ‘exception’ through which the grantor excludes for itself a portion of that which would otherwise fall within the deed’s description of the interest granted.”

The Colemans did not reserve ay mineral interest in the 1964 deed; they merely recited that mineral interests were reserved and excepted in the past. The effect was to notify the Carters of the existence of a prior reservation and exempt the Colemans from liability on their warranty of title had there been a previous reservation an exception (which, of course, there was.)

Your musical interlude

Co-author Gunner West

In Bush v. Yarborough Oil & Gas, LP a decades-old tax foreclosure judgment did not affect a previously severed mineral interest not owned by the delinquent taxpayer. The mineral owners were neither named nor served in the foreclosure suit, and the judgment and sheriff’s deed expressly limited the scope to the taxpayer’s interest.

In 1937 property owner Piercy conveyed an undivided 1/2 mineral interest to Vaughn, who later conveyed his interest to Johnson, who conveyed fractional interests to the Vaughn Successors.

Severance and competing claims

Years later, a tax foreclosure suit was filed against Piercy. Some of the taxes had accrued before the 1937 severance. Tax liens attached to her property. Johnson and his grantees were not sued or served.

A default judgment was rendered, and the sheriff executed a tax deed conveying the tract to taxing entities, who later quitclaimed their interest to Bush, whose interest passed to the Bush Successors.

The issue was dormant until 2014, when oil production began on leases from the Bush Successors. Yarborough, a Vaughn Successor, sued for trespass-to-try-title, claiming ownership of a fractional share of the minerals.

Interpreting the scope of the judgment

The court focused on three elements to determine the scope of the judgment: the language of the judgment itself, the contemporary legal context, and corroborating evidence.

According to the decretal language, the tax lien was “foreclosed on each tract of said land against the rights, titles, liens and claims of each and all of the said defendants herein.” The sheriff’s deed conveyed “all the right, title and interest of the said Mrs. M.A. Piercy, … .”

The Bush Successors argued that references to “tract of said land” encompassed the entire mineral estate. But the court found that the express limitation to Piercy’s interest in the judgment and deed could not be disregarded.

The court also rejected arguments that contemporary statutes created a presumption that the judgment foreclosed on the Vaughn Successors’ interest. The Delinquent Tax Act of 1895 speaks in terms of owners being served with process, reflecting its purpose to ensure due process.

The court also cited Texas Supreme Court decisions establishing that a title-based judgment “does not conclude” the interests of owners not joined in the suit.

Extrinsic evidence corroborated the limited scope of the foreclosure. Property records showed that no mineral owners were sued. Bush purchased a fractional mineral interest two months after the tax sale, and the quitclaim deed expressly limited the conveyance to Piercy’s interest only.

Limitations and standing

The court rejected arguments that the Vaughn Successors’ claims were barred by the Tax Code’s one-year limitations period for actions “relating to the title to property . . . against the purchaser of the property at a tax sale.” The court distinguished between a title challenge—covered by the statute—and this case, which sought a declaratory judgment clarifying the scope of a deed. It found no procedural bar to suit.

The court rejected arguments that the Vaughn Successors lacked standing or that policy considerations weighed against allowing title claims after decades. Recording statutes enable owners to prove ownership back to the sovereign, while adverse possession statutes address concerns about endless claims. Further, property owners are on notice of prior claims in their chain of title but not deeds recorded after conveyance to a predecessor.

The judgment did not affect the severed mineral interest, which remained undisturbed due to the interest owners’ absence from the suit and the express limitations in the judgment and sheriff’s deed.

Your two-fer musical interlude: funky/reggaeish, not funky/reggaeish.

Co-author Gunner West

We begin with a word from your sponsor. After enduring several generative AI tutorials, we urge you to keep on reading Energy and the Law. Why? Our blog is more accurate, at least a little “fun”, offers insightful musical interludes to distract you from your daily burdens, it’s free, and we “hallucinate” on our own time. Thank you for reading.

Water is everywhere in current Texas jurisprudence.  A court of appeals overturned a $13 million judgment against a disposal well operator found negligent for drowning out producing oil wells with produced from nearby injection wells.

Basic Energy Services, LP v. PPC Energy LLP, held:

  • The statutory prohibition against waste in the “production, storage, or transportation” of oil and gas applies to disposal well operators, and
  • The operator is entitled to rely on the Natural Resources Code’s reasonably prudent operator standard as a defense when supported by evidence.

The facts

PPC operated nine oil wells in the Matthews Consolidated Field in Reeves County, Texas, producing from the Delaware Mountain Group. These low-volume wells generated significant wastewater. Basic operated a commercial disposal well approximately 6,300 feet from PPC’s nearest well.

PPC’s wells experienced a sudden surge in reservoir pressure and produced, which eventually caused the wells to drop out of production. PPC filed a complaint with the Texas Railroad Commission, which investigated but was “unable to attribute the increased pressure to local commercial disposal operations.”

PPC sued Basic and other disposal well operators. After PPC settled with all defendants except Basic, the jury found Basic negligent and attributed 60% of the fault to Basic, with a judgment for PPC of $13 million.

The jury charge

On appeal Basic challenged the jury charge, arguing the trial court committed two related errors: first by defining negligence to include committing statutory “waste” and then by refusing to include the corresponding statutory “reasonably prudent operator” defense.

In the charge, “negligence” was defined as failure to use ordinary care; that is, failing to do that which a person of ordinary prudence would have done under the same or similar circumstances or doing that which a person of ordinary prudence would not have done under the same or similar circumstances.

The instruction went further: It is negligence to commit “waste.”, which means the drowning with water a stratum or part of a stratum that is capable of producing oil or gas or both in paying quantities or underground loss, however caused.

Waste provisions apply to disposal wells

Basic argued that the Natural Resources Code’s prohibition against “waste” should not apply because its operations are not part of the “production, storage, and transportation of oil and gas” as specified in § 85.045.

The court rejected this narrow interpretation. “Production” in the context of § 85.045 includes the handling of wastewater from oil and gas production. The court reasoned that wastewater is “inherent to the production process” and flooding of producing strata is a “long-recognized form of waste.”

Reasonably prudent operator instruction required

The court also determined that Basic was entitled to an instruction on the reasonably prudent operator defense provided by § 85.321. Pages 17-19 of the opinion cite evidence in the record for Basic’s actions that supported the defense.

The trial court erred by omitting the reasonably prudent operator instruction from the jury charge. The appellate court reversed and remanded the case for a new trial.

The case featured a split between the majority and dissent over whether a defendant can assert the reasonably prudent operator defense by relying solely on the opposing party’s expert testimony to establish the standard of care. We won’t discuss that portion of the opinion.

Your musical interlude

An understanding of Willis v. Barry Graham Oil Service LLC requires knowledge of two principles underlying the Louisiana Anti-Oilfield Indemnity Act:

  • The LOAIA bars an oilfield agreement to the extent that the agreement contains provisions for indemnification for losses caused by the negligence or fault of the indemnitee.  
  • There is the Marcel exception: The prohibition does not apply when an indemnitee fully pays the indemnitor’s insurance premiums for the indemnitee’s coverage.

The contracts

Barry Graham operates vessels in the Gulf of Mexico America MAGA off the coast of Louisiana. There were three contracts:

  • A Marine Services brokerage agreement for Kilgore Marine Services to market Barry Graham’s services.
  • A Master Time Charter Agreement between Kilgore and Fieldwood Energy for Kilgore to provide vessel services to Fieldwood.
  • A Master Services Contract by which Shamrock would perform work as a contractor on Fieldwood’s offshore platform.

The facts

Shamrock employee Willis was injured while working and sued Barry Graham for his injury. Barry Graham third-partied against Shamrock for contractual defense, indemnification and insurance coverage. The MSC committed Shamrock, the “Contractor”, to release and indemnify the “Third-Party Contractor Group” from claims by any member of the “Contractor Group” which included Shamrock/Willis. The MSC defined a “Third-Party Contractor” as “any other contractor used or employed by Fieldwood in connection with the Work”.  Shamrock agreed to support its mutual indemnity obligations with insurance. Kilgore paid Barry Graham’s insurance premium.

If Kilgore was a Third-Party Contractor, by definition Barry Graham would be part of the Third-Party Contractor Group. Willis was working as a crane rigger on Fieldwood’s platform when he was injured. Because Shamrock’s work involved crane rigging and those services were used in offloading the vessel chartered by Kilgore for Fieldwood, Fieldwood used Kilgore “in connection with” Shamrock’s work. Kilgore was plainly a Third Party Contractor under the MSC, rendering Barry Graham just as plainly part of Kilgore’s Third Party Contractor Group.

The insurance puzzle

Shamrock’s obligations applied only to the extent that Third-Party Contractors executed substantially similar indemnifications. That condition was met. To satisfy the reciprocity requirement the Third-Party Contractors must also execute cross-indemnification substantially similar to Shamrock’s. If that happened, then Shamrock’s obligations reached both the Third-Party Contractor and its Group. That included Graham. The Kilgore/Fieldwood Master Charter Agreement’s obligations were essentially identical to Shamrock’s. Kilgore agreed to defend and indemnify Third Party Contractors and Third Party Contractor Group for injuries to members of the Owner Group. Kilgore obtained insurance coverage to that end.

Two questions:

  • Was Kilgore’s payment of Barry Graham’s Marcel premium intended to cover Shamrock’s indemnity obligations to Barry Graham? Yes.
  • Can a third-party contractor that does not itself pay the Marcel premium avail itself of its principal’s payment of a Marcel premium made with the intent to cover the third-party contractor? Yes.

Holding

A third-party contractor (Barry Graham) that does not itself pay the Marcel premium can rely on the premium paid by its principal (Kilgore) to cover the third-party contractor’s indemnity obligations. There is no shifting of the economic burden under the LOAIA when the principal pays the premium for his contractor so long as the indemnitor bears no part of that cost. Shamrock loses. Case remanded

Your musical interlude.  

Co-author Gunner West

The growling and barking presented by a claim for tortious interference is often far worse than the bite. Consider Segundo Navarro Drilling, Ltd. v. Chilton , which is a good example of that phenomenon in an oil and gas transaction. The Dallas Court of Appeals affirmed summary judgment for defendants, holding that:

  • a letter of intent with an at-will termination clause is not “subject to interference” in a claim for interference with an existing contract because the contract was not legally binding and obligatory; and
  • breach of contract does not constitute an “independently tortious or unlawful act” necessary for interference with prospective business relationships. There must be an independently tortious or unlawful act—which breach of contract is not.

The Relationship and Failed Assignment

In 2018, San Roman Ranch Mineral Partners entered into an oil and gas lease in favor of Arkoma Drilling. When Arkoma couldn’t meet drilling requirements it attempted to assign the lease to Segundo. The assignment required San Roman’s prior written consent—not to be “unreasonably withheld or delayed.”

Arkoma and Segundo signed a letter of intent (LOI) that contained a termination clause allowing either party to terminate at-will without further obligations. When Arkoma sought San Roman’s consent, Chilton (San Roman’s president) declined, citing prior litigation with Segundo. Arkoma terminated the LOI.

Segundo sued San Roman and Chilton for tortious interference with an existing contract, tortious interference with a prospective business relationship and civil conspiracy. The trial court granted summary judgment for the defendants on all three claims. Segundo appealed.

No Interference of a Non-Obligatory LOI

Segundo’s tortious interference with existing contract claim failed because the LOI wasn’t subject to the alleged interference. The critical aspect of the LOI: Neither party was obligated to perform. Either party could terminate the LOI at will, at which point the LOI would “have no force and effect” and the parties would “have no further obligations”.

Non-obligatory contract provisions are not subject to interference. Because no provision required either side to proceed with the assignment, it could not be “subject to interference” as a matter of law.

This conclusion negated this essential element of the claim, making judgment appropriate without analysis of the remaining elements.

Contract Breach is Not an “Unlawful” Act

Segundo contended that San Roman’s withholding of consent was a breach of contract that constituted an “unlawful” act, satisfying the dispositive element of the prospective business relationships claim.

Rejecting this argument, the court held that tortious interference with prospective business relationships is limited to a violation of tort or statutory duty. Said the court, “breach of contract is not illegal” and “not necessarily blameworthy.”

The court cited extensive authority establishing that breaching a contract is neither wrongful nor unlawful. A contractual promise simply creates a right to either performance or damages—not a guarantee the promised performance will occur. This distinction delineates the boundary between contract law (where breach of contractual obligations gives rise to remedies in law or equity) and tort law (where breach of legal duties gives rise to liability for damages).

Thus, even if San Roman breached the lease by unreasonably withholding consent—an issue the court did not need to decide—such breach alone could not establish the “independently tortious or unlawful” element required for Segundo’s second claim.

Lastly, Segundo’s civil conspiracy claim necessarily failed when the court dismissed the two underlying claims, as “there can be no independent liability for civil conspiracy” without an underlying tort.

Your musical interlude: Big band C&W? Or a fiddle?

Texas Crude v. Burlington Resources Oil and Gas considers the relationship between the operator and non-operators under Articles V and VI of the 1982 Model Form Joint Operating Agreement.

Burlington owed 87.5.% of a prospect and was the operator. Texas Crude owned 12.5. Warwick acquired a 10% working interest from Texas Crude. That interest was later acquired by Burlington.

The JOA provisions (summarized):

V.A:  Burlington as operator shall conduct all such operations in a “good and workmanlike manner” but would have no liability “ … for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct.”

V.B.1: Authorizes removal of the operator by the affirmative vote of 2 or more non-operators owning a majority interest if operator fails or refuses to carry out his duties.

VI.B.1: The operator shall commence a proposed operation within 90 days if all parties elect to participate. If the operation is not commenced by then, any party desiring to conduct the operation must resubmit the proposal.

What happened

Warwick proposed drilling a total of 39 wells and Burlington and Texas Crude elected to participate. Shortly before expiration of the 90 days, Burlington said it would not be drilling the wells because it would be imprudent to do so.

Warwick and Texas Crude sued for breach of contract and sought a declaration that:

  • Burlington’s refusal to drill was a breach of the JOA,
  • The JOA’s other provisions did not apply and did not excuse Burlington’s breach, and
  • Burlington’s failure to commence subjected Burlington to removal as operator.  

Burlington said it was not required to drill wells a reasonably prudent operator would not drill and any party still desiring to conduct the operation must resubmit the proposal under VI.B.1.

Texas Crude said the resubmittal requirement does not provide a remedy for Burlington’s failure, and the VI.A exculpatory clause does not apply to Burlington’s obligations under VI.B.1.

After several rounds of motions, the trial court ruled:

  • The JOA did not require Burlington to conduct operations in any way other than in a good and workmanlike manner,
  • The JOA required Burlington to commence the proposed operation within the deadline but the resubmittal process gives direction to any party wishing to proceed with a proposed operation that has not been properly commenced.
  • Burlington’s failure to timely commence the operation was not a breach of JOA .

On appeal

 Burlington breached the JOA. “May” is permissive, while the common meaning of “shall” is mandatory. The JOA uses “shall” in VI.B.1.

The exculpatory clause

“Good and workmanlike manner” means an operator owes a duty to perform as a reasonably prudent operator. Burlington contended that that standard applies to decisions whether, when and how to drill. Texas Crude maintained that the clause did not apply to Burlington’s refusal to conduct proposed drilling operations.

In Reeder v. Wood County Energy the Supreme Court held that the exculpatory clause in the 1989 form protects operators from “activities”, which is broader than “operations”. Lower courts have declined to extend Reeder so that the exculpatory clause in the 1982 form excused the operator who failed or refused to perform a mandatory contractual duty.   

The result

The court concluded:

  • The trial court erred in concluding that an operator cannot breach the JOA by failing to timely commence a proposed drilling operation.
  • The resubmittal requirement is not a remedy for an operator’s breach of the JOA; nor does it excuse an operator from fulfilling its contractual duty to commence a well. It does not eliminate a party’s ability to pursue legal remedies for an operator’s breach, such as monetary damages, instead of proceeding with the operation.
  • The case was remanded for the trial court to consider removal of Burlington as operator. (Good luck with that now that Burlington owns Warwick’s interest.)

Jesse Colin Young RIP