X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:The dispute centered on the interpretation of various agreements entered into between the parties’ predecessors. Killam & Hurd Ltd., predecessor-in-title to Killam Oil Co. Ltd. and Hurd Enterprises Ltd. (collectively, Killam), are the named lessees in three oil and gas leases located in Webb County. The leases were designated in the various documents as Leases A, B and C. In October 1974, Killam and Northern Natural Gas Co. (NNG) entered into a farmout agreement (the NNG farmout agreement), pursuant to which Killam agreed, if certain conditions were first satisfied, to execute in favor of NNG three assignments of a portion of the working interests in certain zones (the InterNorth zones) under the three leases. In 1981, NNG’s successor-in-interest, InterNorth Inc., expressed an interest in selling its interests in the InterNorth zones. In December 1982, HNG acquired InterNorth’s interests in the InterNorth zones and then assigned 50 percent of those interests to Killam. Although commercial production initially was obtained from the InterNorth zones under the NNG farmout agreement, production terminated between July 1994 and March 1998. In April 1978, Killam and HNG Oil Company (HNG) entered into a farmout agreement, pursuant to which Killam agreed to farmout certain zones covered by the same three leases (the HNG zones) but as to depths deeper than the InterNorth zones. The wells drilled under the HNG farmout agreement were operated pursuant to the terms of a Nov. 20, 1978 operating agreement (OA). Attached to the 1978 OA was Exhibit A, which reflected the parties’ interests in the HNG zones. In April 1983, HNG and Killam executed a letter agreement for the purpose of combining the drilling and production operations in the HNG zones and the InterNorth zones under the 1978 OA. Attached to the 1983 letter agreement was an amended Exhibit A, which reflected the parties’ interests in the HNG zones and the InterNorth zones. Ultimately, Enron Oil & Gas succeeded to HNG’s interests, and EOG Resources Inc. succeeded to Enron’s interests. Killam brought suit against EOG claiming that pursuant to the NNG Farmout Agreement, EOG lost record title in the InterNorth zones as a result of nonproduction from those zones beginning in 1994. EOG counterclaimed for a judgment declaring it had rights to production from the InterNorth zones for so long as the 1978 OA remained operative. The parties filed cross-motions for partial summary judgment. The trial court denied EOG’s motion and granted Killam’s motion. Following trial on the issue of attorneys’ fees, the trial court rendered final judgment in favor of Killam. EOG appealed. HOLDING:Affirmed. An operating agreement “is a contract typical to the oil and gas industry whose function is to designate an”operator, describe the scope of the operator’s authority, provide for the allocation of costs and production among the parties to the agreement, and provide for recourse among the parties if one or more default in their obligations.’” The court found that the 1978 OA provided that its term would last “[s]o long as any of the oil and gas leases subject to this agreement remain or are continued in force as to any part of the Contract Area, whether by production, extension, renewal or otherwise, and/or so long as oil and/or gas production continues from any lease or oil and gas interest.” Under the OA, “contract area” is defined as “all of the lands, oil and gas leasehold interests and oil and gas interests intended to be developed and operated for oil and gas purposes under this agreement . . . described in Exhibit”A.’” The 1978 OA, the court stated, unambiguously provided that each party’s share of production would be based on that party’s respective percentage or fractional interest. Nothing in the 1983 letter agreement, the court stated, indicated that the parties intended to change the terms of the 1978 OA or to waive any party’s right to enforce the failure of title provision contained in the 1978 OA with regard to Leases B or C. Instead, the stated purpose of the 1983 letter agreement was to join all operations in the HNG zones and InterNorth zones under the 1978 OA. Also, the court stated that nothing in the amended Exhibit A indicated the parties intended to change the terms of the 1978 OA. The court concluded the trial court did not err in rendering summary judgment that neither the 1983 letter agreement nor the amended exhibit A changed the terms of the 1978 OA so as to entitle EOG to share in production from the InterNorth zones after EOG’s title to those zones failed in 1994. Next, the court concluded that Killam established as a matter of law that the five identified wells were incapable of production in paying quantities. Accordingly, the court held that the trial court properly rendered summary judgment that EOG did not retain record title to 640 acres surrounding each NNG well as provided under the NNG farmout agreement. Finally, the court found that because EOG’s suit sought relief under the Declaratory Judgment Act and because Killam was the prevailing party, the trial court did not abuse its discretion in awarding attorneys’ fees to Killam. OPINION:Marion, J.; Lopez, C.J., Angelini and Marion, JJ.

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 3 articles* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.