Non-operators have had a lot in common with Br’er Rabbit ever since 2006, when the Texas Supreme Court surprised the industry in Seagull Energy E & P, Inc. v. Eland Energy, Inc. Their tar baby is the ruling that, absent a release from the operator a working interest under a JOA who assigns his interest to a third party remains automatically liable for costs not paid by his successor. Indian Oil Company, LLC v. Bishop Petroleum, Inc. is a step to clarify the extent of the automatic liability prescribed in Seagull.
Bishop, operator and working interest owner, and Trotter, non-operating working interest owner, signed a 1989 Model Form 610 JOA. Trotter assigned his interest to Indian Oil in 2002 and informed Bishop about the assignment. In 2007 the well ceased to produce. Indian Oil and the other working owners approved an AFE for a workover costing $1.6 million to restore production. The workover was unsuccessful and the well was plugged at a cost of $243,300. When Indian Oil refused to pay, Bishop sued Trotter claiming under Seagull that he was automatically liable for all costs not paid by Indian Oil.
The 1989 model form states, “[N]o assignment or other disposition of interest by a party shall relieve such party of obligations previously incurred by such party.” Trotter was held liable for costs which he “previously incurred” prior to assigning his interest in the well to Indian Oil in 2002, such as his pro rata share of P&A costs, but not for costs of reworking operations approved by Indian Oil and not by Trotter. In other words, under the 1989 model form, a working interest owner will not be held liable for expenses which he did not agree to pay.
Indian Oil isn’t a roadmap for all disputes over the automatic liability prescribed in Seagull, but it does establish some relief for former working interest owners.
Takeaways
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Working interest owners who assign their interests continue to be automatically liable for unpaid costs that they agreed to pay.
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Texas courts appear to be reluctant to force working interest owners who sold theirinterests to pay for costs approved after they sell their interest in the well.
Maybe now this plea from a former owner won’t be so desperate.
