In this case, Texas Crude Energy, LLC (Texas Crude) and Warwick-Athena, LLC (Warwick) (collectively, the non-operators) sued Burlington Resources Oil & Gas Co., LP (Burlington or the operator) after Burlington refused to drill several proposed wells on the basis that “it would be imprudent to do so.” By way of background, in 2005, Texas Crude and Burlington executed a Joint Operating Agreement (JOA), which was modeled after the AAPL’s 1982 form agreement, to develop the Sugarloaf Prospect Area in Live Oak, Bee, and Karnes Counties. Texas Crude and Burlington agreed that Burlington would be the operator. Subsequently, Warwick acquired a 10% working interest from Texas Crude, reducing Texas Crude’s interest to 2.5%. In 2018 and 2021, Warwick proposed a total of 44 wells. Texas Crude and Burlington elected to participate in each of the proposed wells, but each time Burlington, in its capacity as operator, notified Texas Crude and Warwick that it would not be drilling the wells on the basis that “it would be imprudent to do so.” Each time, the notice came shortly before the expiration of Burlington’s ninety-day deadline to commence operations.
The Collision Course Between Operational Judgment and Contractual Mandates
Burlington argued that it was not required to drill wells it deemed imprudent under Article V.A. of the JOA, which required the operator to “conduct all such operations in a good and workmanlike manner . . . .” It also argued that any party still wanting to drill the proposed wells after Burlington (as the operator) failed to commence drilling operations, was required to resubmit the proposal under Article VI.B.1. of the JOA, which required “written notice proposing same” to be “resubmitted to the other parties in accordance with the provisions hereof as if no prior proposal had been made.”
Texas Crude and Warwick argued that Article VI.B.1. of the JOA required Burlington to timely commence operations on the proposed wells in which all parties had elected to participate and that the resubmittal process did not excuse Burlington’s failure to do so. Further, they claimed that the exculpatory language in Article V.A. did not apply to Burlington’s obligation under Article VI.B.1. to commence drilling operations.
The trial court ruled in favor of Burlington, finding that the JOA did not require Burlington to conduct operations in any manner other than in a “good workmanlike manner” and that “resubmittal” was the only remedy for a party wanting to proceed with the proposed drilling operation that had not been timely commenced. After the trial court’s ruling, Burlington acquired Warwick and non-suited Warwick’s claims.
When Appeals Courts Rewrite the Rules of Operator Immunity
On appeal, the appellate court first held that Article VI.B.1, which provided that the “Operator shall, within ninety (90) days after expiration of the notice period of thirty (30) days . . . actually commence the proposed operation and complete it”, required Burlington to timely commence drilling for a proposal to which all parties consented under the JOA. It noted that JOA’s use of the word “shall” imposed a mandatory, not a discretionary, duty.
Next, the appellate court turned to the exculpatory language in Article V.A. and found that because Burlington’s duty to perform as a reasonable prudent operator was limited to “such operations” in the contract area, the clause did not apply to Texas Crude’s breach of contract claim against Burlington. In doing so, the court differentiated the reference to “such operations” on the contract area in the JOA to exculpatory clauses that protect operators from “its activities,” noting that “‘the use of the term “its activities” include actions under the JOA that are not limited to operation and implicate a broader scope of conduct.’”
The New Landscape for Joint Operating Agreement Enforcement
Finally, the court considered the resubmittal process in Article VI.B.1 and rejected Burlington’s argument that the sole consequence of failing to timely commence drilling operations was the process requiring resubmittal of a proposal to drill a well. Rather, the court found that the provision informs a party still wishing to drill a proposed well on how to proceed, regardless of the reason for the delay.
According to the court, providing a resubmittal process did not foreclose a breach of contract claim (and monetary damages) if any party did not wish to proceed with the proposed operations after a delay. And, even if it could be considered a contractual remedy, the court found that it was not an exclusive remedy because there was no such limiting language in the JOA. Ultimately, the appellate court reversed the trial court and rendered judgment granting Texas Crude’s summary judgment motion.
