There’s no better place in the oil patch to play the blame game than 10,000 feet of leaky wellbore.

What went wrong?

In Justiss v. Oil Country Tubular Corporation, Justiss, a drilling contractor, entered into an IADC model turnkey drilling contract for a well in Beauregard Parish. The contract specified 12,500 feet of intermediate casing to be LTC pipe with buttress threads. The contract depth was 15,000 feet. Justiss purchased the casing from OCTC.

The operation was star-crossed. Justiss discovered a hole in the surface casing, which it repaired by cementing the casing in place. This made it impossible to remove the intermediate casing string when things got bad. Beginning at 3,500 feet the casing wouldn’t maintain adequate pressure and Justiss performed 13 squeeze jobs in an effort to remedy the problem. These and other efforts to fix the leaks lasted five weeks and cost millions of dollars.  At 13,596 feet the casing would not maintain pressure and, for fear of losing well control, the operation was terminated.

Read this if you sell a product or a service Continue Reading Blame Game Fails Louisiana Casing Vendor

A Black Rhino running towards the camera, Kruger National Park

Forest Oil Corporation v. El Rucio Land and Cattle Inc. et al deserves your attention for four reasons:

  • You won’t see another one involving damage to a rhinoceros pen.
  • It confirms that the Texas Railroad Commission does not have exclusive or primary jurisdiction over private claims for environmental contamination. Welcome to the courthouse.
  • The South Texas redistributionist approach to civil justice includes arbitrations.
  • For once, the Texas Supreme Court declined to eviscerate a multi-million dollar plaintiff victory.

Continue Reading Oil Field Contamination Award Upheld

james-cottonHow to distinguish an oil and gas lease from a mineral deed? In Richardson v. Mills, it was a deed when the instrument uses words like “forever” and imposes no duty to explore for and develop minerals.

An instrument from 1906, when Teddy Roosevelt was busting trusts and creating national parks, was between Mills on the one hand and Lindsey and Harris on the other. The document referred to the parties’ “desire” for “development, tests and demonstrations” and for Lindsay and Harris to manage the property so it would be developed for oil and gas or be sold.

The granting language referred to “an undivided one half interest in the oil, gas and other minerals … “ to Harris and Lindsay, and further rights and privileges necessary and proper for the performance of the work of prospecting, testing, operating, etc.

A 1908 release referred to “said contract or lease the time for said development has expired rendering null and void said lease.” There was a relinquishment of any right or claim held by Nacogdoches Land Company.

Trial and the clairvoyant expert – it’s a lease

Mills offered the opinion of an attorney who reviewed the contract (over 100 years after it was executed) and opined about what the (deceased!) parties possibly intended. It’s unknown whether his conclusion was absorbed from the cosmos or the result of a séance with the spirits of the dead.

The trial court determined that the instruments were ambiguous and allowed extrinsic evidence to determine the parties’ intent. Alternatively the 1906 instrument was released when Lindsay and Harris did not perform their obligations.

On appeal – it’s a deed

Reversed and rendered. The 1906 instrument was not ambiguous. It was a deed:

  • Harris and Lindsay had the right but not the duty to develop the minerals.
  • There was no time within which actions must be taken.
  • The consideration was services rendered.
  • The granting clause said “grant, bargain, sell and convey … ”.
  • The habendum and warranty clauses specified “forever”.

This was language of an unconditional conveyance, not for exploitation of minerals.

What about the 1908 release?

The 1908 release referred to an instrument dated July 9, 1907, whereas the document in question was dated July 9, 1906. The 1908 release described the document as a “contract or lease” but not as a deed. There were other discrepancies. No recording information for the 1906 document was mentioned in the 1908 release. Mills argued that there was a latent ambiguity (an ambiguity appearing by reason of some collateral matter). Mills contended that reference to 1907 really meant 1906.

Mills’ efforts were rejected, including the testimony from the lawyer. The 1908 release was unambiguous and there was no connection between the two instruments.

In an odd twist, the parties stipulated that if Mills lost they would nevertheless own a small interest in the property. Thus, Mills took nothing from the court but ended up with four percent of the minerals from the stipulation.

RIP, harmonica great James Cotton. He could do it with Howlin’ Wolf, Muddy Waters or his own band.

maneiri-1A phrase currently in common usage begins with “‘cluster” and ends with a vulgarity that has been around for centuries. Saheid v. Kennedy presents facts that pretty much exemplify the meaning of the phrase:

  • While living in England, start out to buy a hotel in New Orleans,
  • have no experience in Louisiana mineral transactions,
  • when the hotel falls through, buy 1096 acres with 500 wells in northernmost Caddo Parish,
  • do zero title due-diligence,
  • memorialize the $4 million transaction with a one-page handwritten document,
  • close the deal three weeks later with an Act of Credit Sale,
  • pay royalties for four years and then dispute the obligation,
  • when disagreement ensues sign another “contract” that doesn’t really help,
  • sum it all up by testifying as to your “confusion” about the transaction.

The one-pager for the 1096 acres provided: “Seller [Gish] to give a best effort to deliver to Buyer [Saheid] the remaining 12 ½% Gish family oil and gas lease holding.” Saheid’s purchase price would be reduced by $400,000 if Gish couldn’t deliver the minerals within five years. Saheid paid royalty to the Gish relatives for almost four years. Saheid and Gish later entered into a “contract” in which they agreed that the Saheid payment would be reduced and Gish would continue to withhold the 12.5% royalty.

What legal points are at play?

Not much about titles, a lot about parol evidence, which is admissible when:

  • the terms of a contract are susceptible to more than one meaning,
  • there is ambiguity as to its provisions, or
  • the intent of the parties cannot be ascertained from the language used.

Four witnesses sorted out the mess. And as one might expect, the testimony was confusing and contradictory. Saheid had never purchased mineral interests before and said he was unaware of the 12.5% being claimed by the family. His title-examiner expert testified that the public records showed there was no written contract for the 12.5% mineral interest. But he agreed that it was Gish’s right to sell 87.5% and keep the rest if the agreement so specified.

The court concluded that Gish did not intend to sell and Saheid did not intend to buy the entire mineral interest. Gish was selling 100% of the tract and 87.5% of the minerals, which is a reasonable concession for accepting a partial payment and owner financing. The court referred to Saheid’s “imperfect understanding” of the transaction.

Takeaways

  • Due diligence = good business, sloppiness and haste = bad business.
  • Lame, one-page agreements are seldom sufficient for anything, much less a $4 million land and mineral trade.
  • Paying royalties for four years and then saying you thought you owned the minerals = not persuasive.
  • Entering into a contract before you understand it = bad business.

If Saheid had stopped in Opelousas instead of turning north to Shreveport, maybe he could have avoided this mess.

judicial-activistFirst, a promise: I won’t report on another arbitration case until there is more to say than “business as usual”. Second, an opinion: Arbitration is still the right forum in many situations. Third, remember: An award and a result, not litigation, was what Venoco says it bargained for.

That said, knowing only that Denbury Onshore v. Texcal Energy South Texas is an appeal of an arbitration award in Texas, you can predict the outcome. The award was confirmed.

How to vacate an award

The bases for vacating awards are similar under the federal and the Texas arbitration acts. Generally an award must have been procured by:

  • corruption, fraud or undue means,
  • evident partiality or corruption,
  • arbitrator misconduct (willful misbehavior),
  • refusing to postpone the hearing for sufficient cause,
  • refusing to hear material evidence,
  • other misbehavior that prejudices a party’s rights, or
  • the arbitrators exceeded their powers or so imperfectly executed them that a final and definite award was not made.

I’m conflating the two statutes.  They aren’t identical but the result is the same: vacating an award is difficult.

The dispute

Denbury had an option to purchase Venoco’s interests in the Hastings Field. After Denbury achieved payout, Venoco would receive a 25% back-in. Payout was dependent on Denbury’s “CO2 costs”, the direct costs of acquiring (commodity costs) and delivering (transportation costs) CO2.

A three arbitrator panel unanimously declared the meaning of the disputed language of the agreement and issued an award in Venoco’s favor.

Denbury sued to modify and vacate the award for:

  • insufficient evidence,
  • the arbitrators exceeded their authority by making an incorrect value judgment on the contract clause,
  • manifest disregard of the law (in essence, they construed the contract incorrectly), and
  • the parties had contracted for judicial review.

Denbury’s hurdles

All reasonable preferences are indulged in favor of the award, and review of an award is extraordinarily narrow.

Denbury argued that the parties contracted to expand judicial review for reversible error: “An appeal from an order or judgment of the panel shall be taken in the manner and to the same extent as some orders or judgment in civil cases under Texas law.” This was not a clear enough agreement to invoke the appellate process to correct reversible error by the panel.

Did Denbury get what it bargained for?

Under the TAA and FAA an arbitrator exceeds his authority only when he disregards the contract and dispenses his own idea of justice or when he strays from the delegated task of interpreting the contract, not that he performs that task poorly. The panel’s 13-page detailed award satisfied the contractual requirement that the award provide evidentiary references. The award was not so irrational or devoid of authority that the panel was merely dispensing its own idea of justice.

The court concluded that Denbury’s complaint was nothing more than a dispute as to the correctness of the panel’s construction of the provision and an effort to re-argue the merits of the case. Don’t be so sure. I could believe that Denbury believed it could appeal but failed to write the provision clearly enough.  Think about that the next time you write such a provision Better yet: why arbitrate if you can appeal?

A proposal

Let’s criminalize vacuous and inept cultural appropriation. If we were to do that, here is a victim and a misdemeanor. And here is a victim and a major felony. Write your Congressperson.

existential questionWe begin with an existential question:

“The philosophy behind all of the model form agreements is that aggressive drilling under the JOA should be promoted and rewarded.

Agree or disagree?

That was an issue in Talisman Energy v. Matrix Petroleum.  It was not resolved, but the decision is worth your attention because the court enjoined the operator from drilling and proposing wells pending trial on the merits.

The parties were drilling wells in LaSalle County, Texas, under a 1954 Model Form JOA. Section 15 (which the court refers to as Section ”16”; see V.D of the later forms) allows the operator to use its own equipment and tools only on a competitive basis, if it does not exceed prevailing rates, and after an agreement in writing with the non-operators. Evidence was presented that Talisman was exceeding the prevailing market rate and was not confirming the arrangement with Matrix prior to operations.

A procedural hurdle

Procedural wrangling prevented the court from answering our existential question. Talisman’s expert landman, and the source of the statement, was going to show certain customs and usages in the model form and how it is intended to work.

An expert can testify about, for example, the common understanding of “commencement of operations”. But the court viewed the testimony as being offered not to explain the meaning of an industry term, but rather to aid the trial court in construing sections 5 and 8 of the agreement.  A court doesn’t need an expert to help it construe an agreement. That’s what the judge is for. The testimony was not considered.

What about irreparable harm?

Lawyers: The decision discusses why there was irreparable injury and why it didn’t matter that Matrix wasn’t seeking a permanent injunction.

INTERMISSION

We’re usually done by now. Appropriate for an old-timey but still-breathing JOA are old-timey but timeless tunes. Today we have one with roots from 1860, and one originating in 1720 (you can look it up!).

If you elect to participate in a subsequent operation, you may now …

Consider the existential question

I conducted a random and unscientific survey of industry professionals (to-wit, people with whom I have lunch and drink whiskey, often not at the same time). The result: Some agreed with the statement, most did not.

These alternative “philosophies” behind the model form were presented:

  • The JOA is an “outline for honorable men to follow in the development of oil and gas properties.”
  • The purpose … or the “philosophy”, is to control the Operator to a certain extent and to ensure that WI owners understand and agree to costs and when and how payments are to be made.
  • The efficient utilization and maximization of leasehold opportunities, along with effective production management should be the goal. Profit maximization and reasonable adherence to the prudent operator’s implied covenant to develop should govern the drilling philosophy.
  • One of the reasons … [is] … to protect minority owners, to keep the major participants from expensing them out of the Agreement by not orderly and timely proposing drilling, completing and evaluating opportunities and risks … .
  • The goal is to have prudent operations in all respects – financial, engineering, geologic, etc.
  • The reason … is to provide those who elect to participate in the drilling of wells necessary to efficiently drain the reservoir with a proper return for assuming the risk and burden of those partners who elect not to participate.
  • If they choose to do so, the parties can negotiate terms that clearly provide for an active drilling program as their primary objective.
  • If you wanted “aggressive development” the non-consent penalty would be [more than] 300%.  Or there would be no non-consent … .  If the drafters truly wanted to reward “aggressive drilling”, the non-consent would have never been proposed.
  • In contrast to a JOA, it could be argued that “aggressive drilling be promoted and rewarded” is the intent of an Oklahoma Forced Pooling Order [and that] such an Order is designed to punish anyone who does not aggressively drill or expend capital … by taking away subsequent interests.

But I also heard from who agree (including the expert, who stands by his opinion):

  • The generation that came up in the 1950’s, ‘60’s and ‘70’s, plus committee members of the AAPL JOA task force who worked on the 1989 Model Form, asserted their “philosophy” that aggressive drilling is to be promoted and rewarded. That philosophy prevailed. Hence, the non-consent option.
  • Article VI (Drilling & Development) sets forth the conditions for which one party can take on the risk of drilling with or without the participation of all parties. Oklahoma’s forced pooling statute revolves around the JOA. (A contrary view of Oklahoma forced pooling?)
  • The pro-development bias is explained by the fact that any party, no matter how small its interest, can propose a well and force all other parties to either join or go non-consent, subject to the penalty.
  • The alternative is to either 1) carry the non- consenting party  under common law co-tenancy (in which case there is no “penalty”; only recovery of costs), or  2) vote on operations, as with international, offshore, and onshore field wide unitization/secondary recovery.
  • Unlike international or offshore arrangements, in the model forms there are no provisions for voting mechanisms, project teams, committees, and forced collaboration prior to a drilling proposal. Any party can move forward by AFE’ing the others and allowing them to invoke the non-consent penalty.  That reflects the aggressive drilling philosophy.
  • The form certainly doesn’t discourage aggressive drilling. That is reflected in the non-consent option.

Why the discord? 

It’s no surprise. The “disagreers” tend to be smaller operators and non-ops (my eating buddies). The “agreers” tend to be larger, with bigger budgets.  The “small guys” tend to want to rein in the “big guys” and make them go about development in an orderly fashion with maximum collaboration. The big guys tend to favor agreements that allow them drill away; said less charitably, to force operations on the others at-will.

Who says the oil business is monolithic?

nightmareYou might conclude that the but-for-the-grace-of-God-that-could-be-me nightmare presented in In re: RPH Capital Partners is instructive only for lawyers. If so, you would be mistaken. The lesson: If you want to win the lawsuit, pay attention to pesky legalities such as notices of trial settings. Likewise, if you want to protect your hydrocarbons, reinforce your people and processes for maintaining leases and other significant obligations.

RPH sued Peridot and others for failing to make payments under a participation agreement and for selling interests in properties they didn’t own. The defendants didn’t appear for the trial.  A default judgment for $13 million was taken.

After RPH began garnishing bank accounts Peridot filed a petition for bill of review, contending it never received a copy of the judgment. Peridot had only 38 days’ notice of the trial (the law requires 45), so Peridot argued it was deprived of its due process rights.  The trial court ordered a new trial.

Everyone agreed that Peridot did not receive enough notice of the trial, but was the notice so insufficient that it was a violation of fundamental due process rights? No. Peridot waived that complaint when it took no action after it received less than 45 days’ notice.

The case then turned to whether Peridot’s failure to appear was not intentional or the result of conscious indifference, but was due to mistake or accident.  The court never got to whether there was a meritorious defense.

To prove that the failure to appear was not intentional or the result of conscious indifference there must be “some excuse, although not necessarily a good one.”  Forgetfulness alone is insufficient, but excuses that are acceptable are, for example, bad weather and misplacing the citation due to staff turnover.

Peridot’s counsel “did not see” the trial setting and no one in the office docketed the trial date. The deficiency in counsel’s affidavit was that it didn’t explain the failure to appear at trial and offered no description of circumstances that could explain why he took no notice of the trial date.  Finally, the affidavit failed to address other instances showing Peridot had notice of the trial date. Peridot did not establish that its failure to appear was not intentional or a result of conscious indifference.

What does this have to do with me?

The lesson for the lawyer is obvious. What if you run a land department?  You should be good to go if you have people and processes in place to assure that obligations such as delay rentals and royalty payments are made. And while you’re at it, who is paying attention to debilitating lease provisions (the ones the lessor would never even consider enforcing, until he does), such as lease termination for failure to timely pay royalties?

Musical interlude: For the trial judge who has been reversed.

omegaAre Louisiana courts as enamored with arbitration as their Texas counterparts? Looks like it. East of the Sabine, submitting your dispute to arbitration means you are pretty much saying adieu, farewell and bye-bye to a judicial mulligan.

In ExPert Oil & Gas, LLC v. Mack Energy Co., et al an arbitrator’s mistaken calculation did not nullify an arbitration award.

Round one

ExPert was the operator under a participation agreement and JOA. An audit of the joint account found that some expenditures were unauthorized and should be repaid. Neither party agreed with the auditor’s report and the matter was arbitrated. After an eight day hearing the arbitrator rendered a reasoned award ordering ExPert to credit $1.5 million to the joint account.  The district court, First Circuit, and Louisiana Supreme Court confirmed the arbitration award.

The real issue

After the Supreme Court affirmed the judgment confirming the award, the arbitrator revealed “that he committed gross professional negligence when performing the calculation of three categories of credits in the arbitration award” (so said ExPert). Those credits totaled $434,000. Never shirking a good fight, ExPert sued, alleging that the judgment was a relative nullity because of “ill practices”, referring to the arbitrator’s admission of his mistake. Accepting all facts in the petition as true, the question was whether ExPert was legally entitled to relief.  A judgment may be annulled by fraud or ill practices but not for mere error. La. Code Civ. P. 2004(B) is sufficiently broad to encompass all situations in which a judgment is rendered through an improper practice or procedure.

“Ill” practices?

Ill practices includes any improper practice or procedure which operates, even innocently, to deprive a litigant of a legal right. There are two criteria to determine whether a judgment was obtained by actionable fraud or ill practices:

  • The circumstances under which the judgment was rendered showed the deprivation of legal rights of the litigant seeking relief; and
  • Enforcement of the judgment would be unconscionable and inequitable.

The punch line

The court declined to vacate the award: By substituting arbitration for litigation, the parties are presumed to accept the risk of procedural and substantive mistakes by the arbitrator of either fact or law, which are not reviewable by the courts. ExPert failed to state a cause of action for nullity of the original judgment.

Questions, observations and one thing to ponder

  • Would the result have been different if the error had been presented during round one? The reasoning suggests it would not, but the court doesn’t say.
  • Could the error been discovered sooner, especially with a reasoned award?
  • If the amount in controversy allows, go with three arbitrators for a better chance of an error-free award.
  • Despite this unfortunate result, arbitration has its advantages.
  • Should Mack have just acknowledged the injustice and agreed to return the $435,000? Would you?

A musical interlude for the case.

And one for Christmas Advent.

perpetuityToday we venture into Oklahoma, to be instructed on the Supreme  Court’s treatment of the Rule Against Perpetuities. First, the Rule: No property interest is good unless it must vest, if all, not later than 21 years after some life in being at the creation of the interest.

In American Natural Resources LLC v. Eagle Rock Energy Partners LP, et alEagle Rock’s predecessor (Encore) and ANR entered into a participation agreement with an AMI. Eagle Rock drilled and completed 17 wells without allowing ANR to participate. In response to ANR’s tortious interference and breach of contract suit, Eagle Rock said that the Rule Against Perpetuities prevented enforcement of this option: “In all subsequent wells within the AMI, ANR shall have the right to participate in the prospect area with a . . . 25% working interest . . .”

ANR responded: The Rule doesn’t apply to operating agreements and doesn’t apply to the option because oil and gas production is always of limited duration.

The court’s analysis

The court observed that the Rule applies to property rights but not to contracts, which are personal, and found cases involving JOAs and leases that fell on both sides. The question was, Does this option provision create a property right subject to the Rule?  The court’s answer was yes.

Options in mineral leases do not violate the Rule because leases and JOAs have a built duration not necessarily tied to the cessation of production. But this AMI was a stand-alone document, and the option applies to participation in wells drilled in the future, as well as existing leases. ANR could participate in future wells even if production ceased and then restarted.  The option allowed ANR to participate in future wells if production ceased and then restarted under new leases and new JOAs. as well as existing leases. As such it is subject to the Rule.

An LLC is not a “life in being”

ANR argued that a single member limited liability company with a 30 year duration should be disregarded as an entity.  The court responded: A corporation might be a person, but it is not a “life in being”.  The only measurable “life in being” in the case of a corporation is a term not exceeding 21 years.  A provision with an immeasurable life in being that vests or distributes after 21 years violates the Rule and is void. ANR asked the court to rely on the disregarded entity doctrine used for federal tax purposes. The court said they were not dealing with federal taxes, but with contractual rights.  Thus, an Oklahoma LLC is a legal entity separate from its owners.

Speaking of Oklahoma, Leon Russell RIP.

Lagniappe

For extra credit, learn more about the Dakota Access Pipeline.

pancake 3North Shore Energy v. Harkins interpreted an Option Agreement between landowners and a producer over a 400 acre tract. In football they would say the Texas Supreme Court pancaked the plaintiff. In the law, some would call it business as usual.

What the court really did?

A contract interpretation case might have little interest to most readers, what with the “doctrine of last antecedent” and such. The significance is that the court, as it has the power to do, reversed and rendered, substituting its interpretation of a contract in place of two lower courts and a jury verdict awarding the producer $709,000 in actual damages, $1.148 million in punitives, and $400,000 in legal fees.

The heart of the dispute was whether a certain 400 acres was included in the Option.  The trial court construed the contract in favor of the producer. There was a jury trial on the producer’s tortious interference and breach of contact claims. The court of appeal sent the case back to the trial court, holding that the contract was ambiguous and thus, interpretation of the description was a fact issue. The Supreme Court held that the description was not ambiguous and interpreted the contract in favor of the defendant landowners.

The facts 

The agreement described a 1,210 acre tract out of a 1,673 acre tract described in an oil and gas lease with Hammon (sic). So far, so good.  The oil and gas lease described 1,273 acres out of the 1,673, SAVE AND EXCEPT a 400 acre tract.

North Shore exercised the option on 169 acres, which happened to contain a portion of the 400 acres.  North Shore drilled its well on the Hammon tract. Not good.

Along comes Dynamic, who, concluding that North Shore didn’t have the right to lease the 400 acres, took a lease from the family. North Shore sued everybody to quiet title to the Hammon lease tract and to reform the Option Agreement.

The court concluded that the description of land in the Option Agreement did not include the 400 acres.

How the court interprets a contract

The high court considered the contract in light of the circumstances surrounding its execution to determine whether it was ambiguous. North Shore paid $144,000 for 2,886 acres, which is $50 per acre; thus, they concluded that North Shore only optioned 1,210 acres.  This would exclude the 400.

The Option was a legally enforceable selection agreement, but it didn’t give North Shore the option to choose any 1,210 acres out of the 1,673.

The court considered the doctrine of last antecedent (English majors, see page 8 for more). The court then considered the word “being”.  The two “beings” in the description were a correlative pair that refer to the same object – the 1,210 acres.  (See page 7) The court then looked at “and” as a conjunction. The court concluded that the family and Dynamic’s interpretation was the only reasonable one.  The Option referred specifically to the lease, which explicitly excluded the 400 acres. Thus, the plain language of the Option specifically excluded the 400 acres. With that, the damages and attorney fees went away.

Leonard Cohen RIP. IMO his writing was better than his singing, so we have a cover of a wonderful song.