Joint Operating Agreement: Maintenance of Uniform Interest Joint Operating Agreement: Risk Penalty Provision Farmout Agreement: Drill-to-Earn

摘要

ExxonMobil and Valence are successors in interest to companies that executed a joint operating agreement (JOA) in 1983. The JOA contains a maintenance of uniform interest provision limiting their right to transfer or assign their interests. ExxonMobil succeeds to the operatorship of the JOA. In 1996, ExxonMobil enters into a farmout agreement with third parties giving them the right to drill a well to a depth sufficient to test the Cotton Valley Sand formation and to earn a working interest share out of ExxonMobil's interest. The farmees propose two new wells to Valence, a non-operating working interest owner. Valence does not respond since it did not know that the farmees had any relationship to the JOA. Valence, pursuant to the terms of the JOA, is treated as going non-consent as to these two wells and is assessed the contractually agreed-to risk penalty out of production. Valence does participate in three other wells proposed by the farmees "under protest." In March 1998, Valence sues ExxonMobil for breach of contract arguing that the farmout agreement violates the maintenance of uniform interest provision and for damages caused by its being treated as a non-consenting party to the initial two farmout wells. After a series of delays and Rule 11 agreements executed, Valence amends its petition after the date allowed for such amendments pursuant to the Rule 11 agreements. The trial court accepts the amended petition and holds for Valence. Held: affirmed. On the Rule 11 issue, the court finds that the trial court properly interpreted the applicable Rule 11 agreements as not precluding Valence from filing an amended petition when it did. While the JOA was modified by deleting the term "uniform" from the title of the maintenance of uniform interest provision, the court finds that the language that remained still requires that only a party's entire interest in all of the leases or an undivided interest in all leases may be conveyed. In this case the transfer of a portion of the interests in the leases covering only one of the formations included within the JOA area violates the amended JOA maintenance of interest provision. The farmout agreement expressly limits ExxonMobil's duty to convey to limited depths and formations. While the JOA does not require the maintenance of uniform interests, it does prohibit transfers of portions of leasehold interests which are what followed the execution of the farmout agreement. ExxonMobil also appeals the award of damages. There are two elements of the damages award, increased costs in drilling new wells to test the Cotton Valley Sand formation and the non-consent penalty set-offs against production for two of the farmout wells. The court affirms the damage award as to the cost of drilling since Valence presented evidence that it cost substantially more to drill new wells rather than use the existing well bores to achieve production from the Cotton Valley Sand formation. That increased cost which was passed on to Valence as part of its operating costs in the three farmout wells where it participated were consequential damages that could be recovered upon a finding that ExxonMobil, as operator, did not act reasonably or prudently. Likewise the court affirms the damage award relating to the non-consent or risk penalty that was imposed on the two farmout wells where Valence did not respond to the request toparticipate. By failing to comply with the JOA provisions imposing notice requirements on the operator to propose new wells, the non-consent provisions could not be triggered. The obligation upon Valence as a non-operating working interest owner can only be triggered by the required notice being properly given as stated in the JOA.