Operating Agreements

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Co-author Rusty Tucker

The threat: You, the operator, are operating unprofitable wells where monthly costs exceed or barely equal revenues, making money on the fixed COPAS overhead charges. Your non-operators are going into the economic hole and they don’t like it.

Yesterday we presented options for the non–operator to stop the financial bleeding. Today we anticipate responses available to the operator.

Yesterday’s caveats still apply.
Continue Reading My Operator is Making Money … Part 2, The Operator’s Response

Co-author Rusty Tucker

With the plunge in commodity prices many formerly profitable wells are now in the red, and we don’t know for how long. This is causing non-operators to question the bona fides of the operations … and of the operator, and to search for a way out of their obligations.

The challenge: The operator is operating unprofitable wells where monthly costs exceed or barely equal revenues, making money on fixed COPAS overhead charges, and non-operators are going into the economic hole.  What can the non–operator do to stop the financial bleeding?
Continue Reading My Operator is Making Money on the Well and I’m Not. What Can I Do? Part 1.

Co-author Rusty Tucker

Jatex Oil & Gas, L.P. v. Nadel & Gussman Permian, L.L.C. presents several teachable moments:

  • The Texas Property Owner Rule does not allow a non-expert to testify on matters requiring expert testimony.
  • The operator may pay proceeds from a well to the lender to whom the working interest owner made a collateral assignment of net revenues from the well.
  • A claim for failure to act as a reasonbly prudent operator for failing to comply with an operating agreement is a contract claim, not a tort claim.

Continue Reading Lessons from an Operating Agreement Dispute

Under Louisiana law, does the operator’s bad faith preclude recovery for the non-operator’s breach of a joint operating agreement if the operator caused the non-operator to breach the JOA but did not itself breach?

Apache’s choice

In Apache Deepwater, LLC v. W&T Offshore, Inc., the litigants were parties to a JOA for operations on offshore deepwater wells. Apache proposed to use two drilling rigs or P&A three wells at a much higher cost than a vessel that had been considered for the operation. W&T contended that Apache’s proposal was for the purpose of offloading to W&T half of $1 million per day stacking costs of a bad rig contract. Apache’s AFE for the P&A using the two rigs was $81 to $104 million, which would be cheaper for them (but not in total) than the alternative. Apache’s story was that the federal regulators would not have approved the original vessel for the operation after Deepwater Horizon.

W&T declined to approve Apache’s AFE. Apache used the two rigs anyway. The work was successful and Apache billed W&T for its 49% share, or $68 million (Note to self: You can’t afford offshore operations). W&T paid $24 million, its share of the original estimate. Apache sued for breach of contract.

The ambiguous JOA

Section 6.2 of the JOA prohibited the operator from conducting any operation costing more than $200,000 without an AFE approved by the non-operator. But Section 18.4 directed the operator to conduct abandonments required by governmental authority and the risks and costs would be shared by the participating parties. No AFE was required.
Continue Reading Louisiana Operator’s Bad Faith Does Not Preclude Recovery

Co-author Ethan Wood

Like breaking into CIA headquarters, sneaking into the Vatican, or hanging off the side of the Burj Khalifa, sometimes getting the deal done seems impossible. The key to any successful mission is planning for disastrous contingencies—be they rats in an air duct, malfunctioning suction gloves, or having to reach out to a third party to finance the bid you just won. Your mission—should you choose to accept it—is to learn how to avoid the fallout of an oil and gas acquisition gone bad by studying Pacific Energy & Mining Co. v. Fidelity Exp. & Prod. Co.
Continue Reading Attempt to Prove a Texas Partnership Fails