May the operator of oil and gas leases drill and complete a well before it gives notice to other working interest owners of their right to participate in it?
The Fifth Circuit held last week in Bonn Operating Co. v. Devon Energy Production Co., L.P., No. 09-11040 (5th Cir. July 30, 2010) that, under Texas law, the operator may do just that.
The case concerned a Joint Operating Agreement relating to oil and gas leases in Wyoming. The JOA entitled Devon, the operator, to propose wells to Bonn, which (like Devon) owned 50 percent of the working interest (the right to prospect for, produce, and sell oil and gas) under the leases. But Devon waited until it almost completed the Marquis Federal 15W-12 well before giving Bonn notice of its right to participate by paying its 50 percent share of the costs. The JOA allowed Bonn to elect within 30 days after getting the notice. Bonn chose not to participate (it "went non-consent") despite the fact that the well produced. But Bonn then claimed that Devon's breach of the JOA's notice provisions barred Devon from charging Bonn for any of the drilling, completion, and operating costs.
[The JOA penalized Bonn for going non-consent by entitling Devon to receive from production 100 percent of its operating costs and three times its drilling and completion costs before Bonn would see a penny. After that, Devon and Bonn would split the proceeds of production 50-50. Bonn seems to have hoped to get a 50 percent cut without paying any costs, which position would not likely endear it to the bench.]
The district court granted summary judgment to Devon. The Fifth Circuit affirmed. Devon's delay in sending notice, the court observed, "actually works in favor of Bonn. It had the opportunity to decide its participation in the well after the majority of the risk associated with drilling had been determined." Id., slip op. at 6. The lack of harm to Bonn plus its election to go non-consent precluded it from avoiding paying its share of costs under the JOA.