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Texas Oil and Gas Lawyers and Working Interest Owners: Beware of Those Assignments!

As an oil and gas attorney representing clients throughout Texas, I have had many occasions to draft an assignment of one party’s interest in a well or a joint operating agreement to another, such as when a well is sold and the first operator’s rights under the operating agreement are assigned to the new operator, or when the original owner of a non-operating working interest sells their interest to a new entity. Most assignments contain language that provides that the assignor is no longer liable for claims and expenses in connection with the wells after the date of the assignment, and also provide that the assignee indemnify the assignor for these expenses.

There is an old saying in the oil patch that once you have been involved with an oil or gas well, you are always potentially liable. A Texas Supreme Court case in 2006, as well as a federal court case in 2008, illustrate this point. In the first case, Seagull Energy E & P, Inc. v. Eland Energy, Inc., the Texas Supreme Court held that Eland, as an intermediate assignee of an oil and gas lease, remained liable for costs and expenses arising pursuant to a joint operating agreement, even though the costs occurred after Eland had sold and assigned all of its interest in the leases to an unrelated third party. The Court based its decision on two facts: 1) the joint operating agreement was silent on the question of the liability of a working interest owner after it sold its interest; and 2) the assignment did not contain a release of liability that was agreed to by both Seagull, as operator, as well as the new owner.

DSCF3070.JPG Not surprisingly, after this opinion was issued, oil and gas practitioners made certain that their forms met the criteria described in the Seagull case. Unfortunately, even terminology that met the Seagull criteria failed to protect a working interest owner in GOM Shelf, LLC v. Sun Operating Limited Partnership 2008 WL 901482 (S.D. Tex. 2008). In GOM, despite language in the joint operating agreement like that required by the Seagull decision, the Court held that: 1) the obligation to plug and abandon the wells accrued prior to the date of the assignment; and 2) the plugging and abandonment liability was not expressly released by the release language in the joint operating agreement. As a result, the former interest owner was held liable for plugging costs.

I guess there are really two lessons here. The first is to be careful who you sell your interest to. If the new interest owner is a thinly capitalized sham company trying to make a quick buck, who folds without meeting their obligations under the operating agreement and the Texas Railroad Commission rules, you may get the bill when the Railroad Commission is looking for someone to pay for well plugging and clean up. Secondly, it is probably good insurance to have an oil and gas attorney draft the necessary documents when you are selling or acquiring an interest in oil and gas properties. While in oil and gas law, as in life, there are no guarantees, you will at least have the full benefit of all protections offered by the law at that time. I can guarantee one thing: the cost of proper documentation is light years less than the cost of remediation of an abandoned well site.

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