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.