Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Enduro Operating LLC v. Echo Production, Inc.

Supreme Court of New Mexico

February 15, 2018

ENDURO OPERATING LLC, Plaintiff-Respondent,

          ORIGINAL PROCEEDING ON CERTIORARI Lisa B. Riley, District Judge

          Rodey, Dickason, Sloan, Akin & Robb, P.A. Edward R. Ricco Albuquerque, NM, Cotton, Bledsoe, Tighe & Dawson, P.C. Jared Mark Moore Terry W. Rhoads Midland, TX, Michael J. Henry, Attorney at Law, P.C. Michael J. Henry Forth Worth, TX

          for Petitioners Echo Production, Inc.; Talus, Inc.; Twin Montana, Inc.; Cimarron River Investments, LLC; CMW Interests, Inc.; D2 Resources, LLC; Elger Exploration, Inc.; Plains Production, Inc.; Solis Energy LLC; The Allar Company; and W. Glenn Street, Jr. McCormick, Caraway, Tabor & Byers, L.L.P. Cas. F. Tabor Albuquerque, NM for Petitioner Ken Seligman for Petitioner Ken Seligman

          Hinkle Shanor LLP Andrew J. Cloutier Parker B. Folse Roswell, NM for Respondent



         {¶1} Echo and Enduro are two of several parties to a joint operating agreement[1] (JOA). Under the JOA, Echo, as a party wishing to undertake a new drilling project, had to provide notice of the proposed project to the other parties to the JOA, who then had thirty days to decide whether to opt in or out of the project. By opting in, a party agrees to share in the cost and risk of the project. If a party opts out of the project-as Enduro did in this case-then the party is deemed "non-consenting, " and is exempt from any of the cost or risk associated with the new project, but cannot share in any of the profits from the new project until the consenting parties have recovered four-hundred percent of the labor and equipment costs invested in the new project. For the consenting parties to recover the nonconsenting parties' forfeited share of profits, the consenting parties must "within ninety (90) days after the expiration of the notice period of thirty (30) days . . . actually commence the proposed operation and complete it with due diligence." Together, the JOA's provisions provide the consenting parties with 120 days after proposing the project to "actually commence" the operation, which in this case is the drilling of an oil well. If the consenting parties do not commence the proposed operation within 120 days, but one or more of them "still desires to conduct said operation, " then the parties wishing to proceed with the operation must repropose the operation to the nonconsenting parties "as if no prior proposal had been made."

         {¶2} The question before us is what activities are adequate as a matter of law to satisfy the contractual requirement that a consenting party actually commence the drilling operation. The Court of Appeals in Johnson v. Yates Petroleum Corp., 1999-NMCA-066, ¶ 11, 127 N.M. 355, 981 P.2d 288, held that "any activities in preparation for, or incidental to, drilling a well are sufficient" even if "only the most modest preparations for drilling have been made." (internal quotation marks omitted) (citing Howard R. Williams & Charles J. Meyers, 3 Oil and Gas Law § 618.1 at 320-21 (1998)). In Johnson, the Court of Appeals found the following combination of activities adequate as a matter of law to satisfy the actual commencement requirement: (1) staking and surveying the location, (2) filing for and receiving a permit to drill a well, (3) entering into an agreement with a contractor to have the location of the well prepared for drilling, and (4) beginning the clearing of brush and the leveling of the area. Id. at ¶ 7.

         {¶3} In its opinion below, the Court of Appeals concluded that the language in Johnson indicating that "any" preparatory activities would be sufficient was too permissive. See Enduro Operating LLC v. Echo Prod., Inc., 2017-NMCA-018, ¶¶ 25, 29, 388 P.3d 990. The Court of Appeals was persuaded that Echo's lack of on-site activity at the proposed well site, other than surveying and staking, and lack of a permit to commence drilling was evidence as a matter of law that Echo had not actually commenced drilling operations. Id. ¶¶ 22, 29. The Court of Appeals reversed the district court's grant of summary judgment in favor of Echo and remanded for an entry of summary judgment in favor of Enduro. Id. ¶ 31. We reverse the Court of Appeals and hold that the failure to obtain an approved drilling permit within the relevant commencement period is not dispositive. A party may prove that it has actually commenced drilling operations with evidence that it committed resources, whether on-site or off-site, that demonstrate its present good-faith intent to diligently carry on drilling activities until completion.

         I. DISCUSSION

         A. Commencement of Operations

         1. A party has commenced operations if it engages in actions that demonstrate a present good-faith intent to diligently carry on drilling activities until completion

         {¶4} When resolving a dispute over the meaning of terms in a contract, our goal is to "ascertain the intentions of the contracting parties with respect to the challenged terms at the time they executed the contract." Strata Prod. Co. v. Mercury Expl. Co., 1996-NMSC-016, ¶ 29, 121 N.M. 622, 916 P.2d 822. "[I]f the parties attached different meanings to [disputed] language, the court's task is the more complex one of applying a standard of reasonableness to determine which party's intention is to be carried out at the expense of the other's." Allan E. Farnsworth, Farnsworth on Contracts 285 (3rd ed. 2004). To determine the reasonable construction of contract terms, "[w]ords and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight." Restatement (Second) of Contracts § 202 (1981).

         {¶5} Cases interpreting the meaning of commencement clauses in the context of oil and gas lease agreements provide insight into how we should construe the commencement clause in the parties' JOA. Only a Texas court has interpreted the meaning of the commencement provision in the model-form JOA used by the parties in this case, and the Texas court also relied on several lease agreement cases to determine the meaning of "actually commence" under the model-form JOA. See Valence Operating Co. v. Anadarko Petroleum Corp., 303 S.W.3d 435, 438-41 (Tex. App. 2010).

         {¶6} In the context of lease agreements, the majority rule is that a party has commenced where "modest preparations for drilling have been made" so long as the preparations are "part of a good-faith effort to obtain production." See 3 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers Oil and Gas Law, § 618.1 at 319, 321 (2016). Although actual drilling would obviously suffice as evidence of "actual commencement, " actual drilling is not required. See Eugene Kuntz, A Treatise on the Law of Oil and Gas, § 32.3(b) at 75 & n.4 (1989) (collecting cases supporting the proposition that "it is generally held that acts which are preparatory to drilling are sufficient to constitute the commencement of a well and that it is not essential that the lessee be in the process of making a hole").

         {¶7} Preparatory activity at the well site is also sufficient to prove that a drilling operation has actually commenced. As one treatise explained:

Where the lessee has the ability to drill the well to completion and the lessor can make no showing the lessee lacks a present intent to diligently carry on drilling activities until completion, very little in the way of physical activities must be performed on the site to support a conclusion that the lessee has commenced operations . . . . A minimum of physical activities seems to include the staking ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.