Texas Oil and Gas Attorney Blog
In 1994 Roland Oil Co. acquired the North Charlotte Field Unit Lease in Atascosa County, Texas. The Lease contained 31 wells, with the oldest wells drilled sometime in the 1950s. The Lease contained both active and inactive wells. Rule 14 of the Texas Railroad Commission requires that “dry or inactive wells” be plugged within one year of the termination of drilling operations. Delinquent inactive wells are required to be plugged “immediately unless the well is restored to active operation.” Rule 14 also requires structural testing of inactive wells that are more than twenty five years old prior to plugging and abandonment operations. If an operator fails to meet these requirements, the Railroad Commission can prohibit an operator from producing from any wells under the lease.
In 2005, Roland requested an extension of time to complete the required testing on some of the inactive wells on the Lease. The Railroad Commission determined that Roland had been delinquent on the required testing since 1994, denied the request, and also issued an order barring Roland from producing from any well on the Lease. Roland halted production from May 2005 to August 2006 to conduct repairs and to complete the testing required by the Railroad Commission. The Railroad Commission lifted the order barring production in August 2006.
Meanwhile, in June 2006, a mineral owner under the Lease notified the Railroad Commission that the lease had terminated for lack of production. In response, Roland claimed the Lease had not terminated for two reasons: First, the Lease contained a provision stating that the term of the Lease is “for the time that oil and gas are produced in paying quantities and as long thereafter as Unit Operations are conducted without a cessation of more than ninety consecutive days.” Roland argued that repairs and testing activities during the period of non-production met the definition of Unit Operations under the Lease. Secondly, Roland argued that the Railroad Commission order preventing production constituted “force majeure” which kept the Unit Lease alive despite lack of production.
The Railroad Commission rejected both arguments. The Commission found that “Unit Operations” requires work directed at actually producing oil and/or gas. The Commission also held that force majeure provisions only apply when the force majeure event is beyond the reasonable control of the operator and that in this case, it was within the reasonable control of to stay current on the required testing. Roland filed suit for judicial review of the Commission’s order. The district court affirmed the Commission’s final order and Roland appealed.
In the Court of Appeals, Roland claimed that the term Unit Operations should be broadly interpreted to include all operations conducted by an operator. The Court noted that the Lease defined Unit Operations narrowly, as those activities that are performed in a good faith effort to achieve production of oil and gas in paying quantities. The Court determined that the operations that Roland conducted consisted of repairs and testing on inactive wells in preparation for plugging those wells in compliance with Rule 14 and that these activities did not contribute to the production of oil and gas.
Roland also challenged the Railroad Commission’s conclusion that the Railroad Commission’s order to cease production was an “order of a governmental agency” and was within the force majeure clause in the Lease. The Court agreed that the parties must look to the language of the contract but stated that the contract must be considered as a whole, taking the words in context. In this case, the Court found that there was only one reasonable interpretation of the force majeure clause, that the force majeure clause only applied to events beyond the reasonable control of a party. The “order of a governmental agency” to cease production did not trigger the force majeure because the order was based on actions that were within the reasonable control of Roland. Specifically, the compliance by Roland with Railroad Commission regulations was within, rather than outside of, Roland’s control.
Holding:
The Court held that when constructing a written contract it must “ascertain the intent of the parties as expressed in the instrument” and give the language “its plain, ordinary, and generally accepted meaning unless doing so would defeat the parties’ intent”. Consequently, the Court affirmed the Railroad Commission’s order.
This case is important for mineral owners, especially if their leases are not producing, because it demonstrates that the activities of an operator to comply with Railroad Commission regulations are probably not going to be sufficient to comply with what is generally called the “continuous operations” clause in the lease (which can keep a lease alive in the absence of actual production) and because it demonstrates that the doctrine of force majeure has limits and will not be extended to protect an operator who has allowed oil and gas production to cease through its own negligence..