Valence Operating Co. v. Anadarko Petroleum

• Decision Date: 15 January 2010
• Docket Number: No. 06-09-00023-CV.,06-09-00023-CV.
• Parties: VALENCE OPERATING COMPANY, Appellant, v. ANADARKO PETROLEUM CORPORATION, Appellee.
• Court: Texas Court of Appeals

303 S.W.3d 435

VALENCE OPERATING COMPANY, Appellant, v. ANADARKO PETROLEUM CORPORATION, Appellee.

No. 06-09-00023-CV.

Court of Appeals of Texas, Texarkana.

Submitted October 21, 2009.

Decided January 15, 2010.

Eric S. Lipper, Joe G. Roady, Hirsch & Westheimer, PC, Houston, for Appellant.

Brandon J. Edmundson, Shayne D. Moses, David A. Palmer, Moses, Palmer & Howell, LLP, Fort Worth, for Appellee.

Before MORRISS, C.J., CARTER and CORNELIUS,^* JJ.

OPINION

Opinion by Justice CORNELIUS(Retired).

This case involves the interpretation of a nonconsent provision in a joint operating agreement to develop oil and gas leases. Although the case presents many issues, the principal question is whether Valence Operating Company (Valence) actually commenced work on its proposed operation to drill four wells within the time frame specified by a joint operating agreement.

Valence entered into a joint operating agreement with Anadarko Petroleum Corporation's (Anadarko) predecessor, Union Pacific Resources Company to develop oil and gas leases in the Ballow Estate Gas Unit No. 1 in Rusk County. Anadarko, which owned a 65.62 percent working interest in the unit, was designated Operator in the Joint Operating Agreement. Valence was a nonoperator, owning an approximate twenty-one percent interest.

Pursuant to Article VI of the Joint Operating Agreement, Valence proposed to drill four wells in the unit. As a nonoperator, Valence's proposal to drill the wells was specifically covered by Article VI.B.1 and 2, which provided:

1. Proposed operations:

Should any party hereto desire to drill any well on the Contract Area other than the (initially proposed well contemplated by the agreement) ... the party desiring to drill, rework, deepen, or plug back such a well shall give the other parties written notice of the proposed operation, specifying the work to be performed, the location, proposed depth, objective formation and the estimated cost of the operation. The parties receiving such a notice shall have thirty (30) days after receipt of the notice within which to notify the parties wishing to do the work whether they elect to participate in the cost of the proposed operation. Failure of a party receiving such notice to reply within the period above fixed shall constitute an election by that party not to participate in the cost of the proposed operation.

2. Operations by Less than All Parties:

If any party receiving such notice elects not to participate in the proposed operation, then, in order to be entitled to the benefits of this article, the party or parties giving the notice and such other parties as shall elect to participate in the operation shall, within sixty (60) days after the expiration of the notice period of thirty (30) days actually commence work on the proposed operation, and complete it with due diligence.

The Joint Operating Agreement also provided that

[t]itle examination shall be made on the drill site of any proposed well prior to commencement of drilling operations.... No well shall be drilled on the Contract Area until after (1) the title to the drill site has been examined as above provided, and (2) the title has been approved by the examining attorney or title has been accepted by all of the parties who are to participate in the drilling of the well.

Pursuant to Article VI.B.1, Valence sent a letter to Anadarko on December 14, 1999, proposing "immediate drilling" of four wells in the contract area. Anadarko received the letter on December 17. Valence gave Anadarko thirty days from its receipt of the letter to consent to the project. Because the cost of the proposed project is only borne by consenting parties, a nonconsenting party relinquishes its interest to consenting parties for a period of time. Also, a nonconsenting party does not enjoy the revenue from a proposed project until all consenting parties have recovered their costs, along with an additional portion of revenue to compensate them for the risks taken in investing in the project. Anadarko did not consent. Therefore, as prescribed by Article VI.B.2, Valence became the operator for the purposes of its proposal, and was mandated to "actually commence work on the proposed operation" by March 17, 2000. Once the project began, Valence was required to "complete it with due diligence" in order to reap the benefits of Anadarko's nonconsent status. When the deadline passed, Anadarko brought suit against Valence for breach of contract, negligence, declaratory judgment, quantum meruit, unjust enrichment, conversion, and an accounting, alleging that Valence failed to perform its obligation to actually commence operations for drilling the proposed wells before March 17, 2000.

Both Valence and Anadarko contended at trial that the issue of Valence's compliance with the requirement of Article VI.B.2 that Valence "actually commence work on the proposed operation" by the prescribed deadline and "complete it with due diligence" was a question of law. The trial court, however, concluded that the issue was not established as a matter of law and submitted the issue to the jury by the following question As to each of the wells in question, did Valence fail to comply with the provision of Article VI.B.2 of the Operating Agreement which states that "the party or parties giving the notice and such other parties as shall elect to participate in the operation shall, within sixty (60) days after the expiration of the notice period of thirty (30) days ... actually commence work on the proposed operation and complete it with diligence?"

The jury answered "yes" as to each well. The trial court rendered judgment for Anadarko on the jury verdict for actual damages, attorneys' fees, and prejudgment interest.

Valence raises fifteen issues on appeal, which we group for discussion as follows:

I. Whether as a matter of law, Valence actually commenced work on the proposed operation before the deadline and completed it with due diligence? (Issues 1, 2, 3, and 4); II. The trial court's failure to give certain instructions and definitions to the jury. (Issues 6, 7, 8, 9, 10, 11, and 12); III. There is insufficient evidence to support the jury's verdict. (Issue 14); IV. The trial court's failure to exclude Owen Barnhill's testimony as to the generally accepted meaning of "commencement of operations" in the oil and gas industry. (Issue 5); V. The trial court's failure to dismiss Anadarko's suit for want of prosecution. (Issue 15); VI. The trial court's alleged error in awarding Anadarko prejudgment interest. (Issue 13). For the reasons set out hereafter, we overrule all these issues and affirm the trial court's judgment.

Valence contends the trial court should have instructed a verdict or rendered judgment non obstante veredicto in its favor because its compliance with Article VI.B.2 of the Joint Operating Agreement was proven as a matter of law. There is no dispute as to what acts Valence performed before the deadline. The dispositive question is whether, within the meaning of Article VI.B.2 those acts constituted commencement of actual work on the proposed operation before the deadline that was completed with due diligence.

Valence did these things before the deadline: On December 10, 1999, an authorization for expenditures was prepared. On January 1, 2000, a topographic map of locations was received. On February 3, surveyor Jack Ward staked locations and took pictures of well sites. On February 18, 2000, a preliminary list of instruments regarding title was obtained. Between February 16 and March 8, 2000, several meetings were held to discuss locations and how to build on the locations. On March 2 and 3, detailed cost and facility estimates were prepared for all wells. Preliminary run sheets were prepared on March 3, and on March 16, 2000, the Texas Railroad Commission issued drilling permits for all four wells. The deadline for commencing actual work on the proposed operation was March 17, 2000. All other work by Valence on the proposed operation, including building access roads, restaking the well locations, securing title opinions, signing drilling contracts, and the actual beginning of drilling, was done after the deadline had passed.

Actual drilling is not necessary in order to comply with an obligation to commence operations for drilling as required by contractual provisions in many oil and gas leases and joint operating agreements. Preparatory activities such as building access roads to the drill site, moving tools and equipment onto the drill site, providing a water supply, and similar activities are usually sufficient if they are performed with the bona fide intention to proceed with diligence to the completion of the well. Dorsett v. Valence Operating Co., 111 S.W.3d 224, 230 (Tex.App.-Texarkana 2003), rev'd on other grounds, 164 S.W.3d 656 (Tex.2005); Petersen v. Robinson Oil & Gas Co., 356 S.W.2d 217, 220 (Tex.Civ.App.-Houston 1962, no writ). If there is doubt or controversy as to the intent of the party claiming to have commenced operations for drilling by performing preparatory acts, the question is one of mixed law and fact and should be submitted to the jury. Forney v. Ward, 25 Tex.Civ.App. 443, 62 S.W. 108 (1901); Dorsett v. Valence Operating Co., 111 S.W.3d at 224, 231 n. 5; Woods v. Bost, 26 S.W.2d 299, 303 (Tex.Civ.App.-Amarillo 1930, writ dism'd); Edgar v. Bost, 14 S.W.2d 364 (Tex.Civ.App.-Amarillo 1929, no writ); Heard v. Pratt, 257 S.W. 660, 663 (Tex.Civ.App.-San Antonio 1923, writ dism'd); Moore v. West, 239 S.W. 710 (Tex.Civ.App.-San Antonio 1922, writ dism'd w.o.j.).

The preliminary activities conducted by Valence in advance of the deadline consisted mostly of acts that are sometimes characterized in the industry as "backroom preparations" and securing drilling permits, with no on-site activity except a preliminary staking of wells. These preliminary activities were not sufficient to constitute, as a matter of law, the actual commencement of...