Can the Texas lessee perpetuate his oil and gas lease by “constructive participation” in wells drilled by another? Under the facts in Cromwell v. Anadarko E&P Onshore, LLC, the answer is no.
Cromwell and Anadarko’s wells
In 2009 Cromwell obtained the Ferrer and Tantalo leases covering small fractional interests in several sections. Anadarko owned working interests in the same sections. Before Cromwell obtained his leases Anadarko executed joint operating agreements with other working interest owners and was the operator. Cromwell asked for a JOA and to participate in Anadarko’s wells. Anadarko never responded.
Anadarko drilled the 75 – 26 –1 well, which paid out in August 2009. Anadarko sent Cromwell JIB’s for his share of the working interest and revenue checks. Cromwell paid the JIBs, including charges for a variety of operating costs. Anadarko netted Cromwell’s debts against his share of production proceeds in months when costs exceeded revenues. In letters Anadarko addressed Cromwell as a “working interest owner”. Anadarko claimed this was in error.
The primary term of Cromwell’s leases passed in 2012 and 2014 respectively. Anadarko realized this but did not tell Cromwell, and continued sending JIBs and cutting revenue checks and communicating as if his leases were effective. Anadarko said this also was a mistake. Anadarko took leases from Ferrer and Tantalo in January 2017 and in March 2018 informed Cromwell that because it never received an executed well election the leases had expired and had been leased to “third parties”.
Cromwell sued for declaratory judgment, trespass to try title and damages alleging that his leases never expired because he constructively participated in drilling sufficient to perpetuate his leases and that he and Anadarko had formed a partnership. The trial court granted Anadarko’s motion for summary judgment.
Were Cromwell’s leases still valid?
Production had occurred in paying quantities and Cromwell participated in the costs and production. But Anadarko’s production could not be attributed to Cromwell. The court of appeals ruled that Cromwell was required to take some action of his own to cause production on the leased property to keep his leases alive despite the use of the passive voice in the habendam clauses that might indicate otherwise.
The costs Cromwell referred to as his “constructive participation” reflected his proportionate share of operating expenses ordinarily owed by a nonparticipating cotenant. Those costs were not indicative of the parties’ intent that Cromwell shouldered any risk or liabilities inherent in the operation of the well.
Despite Anadarko’s reference to Cromwell as a working interest owner and to the existence of an operating agreement, the parties did not engage in conduct that would otherwise suggest they had a joint operating relationship. Cromwell’s course-of-conduct argument could not overcome the absence of an agreement to share in expenses of development and operation.
Anadarko treated Cromwell as if his leases had not expired after their primary terms lapsed, but the habendam clauses defined the terms under which the leases could be perpetuated. The leases terminated at the end of their primary term. The habendam clause was a special limitation, the failure which does not result in forfeiture.
Was there a partnership?
In a word, no. Of the five factors under the Business Organizations Code to determine whether there is a partnership the court accepted only Cromwell’s receipt of profits as proving a partnership. But this was equally consistent with Anadarko’s accounting to Cromwell as a cotenant.
Also, Cromwell’s evidence could not overcome the statute of frauds. Cromwell and Anadarko were cotenants, not partners.