ORIGINAL PROCEEDING ON CERTIORARI Lisa B. Riley, District
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
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
Shanor LLP Andrew J. Cloutier Parker B. Folse Roswell, NM for
L. CHÁVEZ, JUSTICE.
Echo and Enduro are two of several parties to a joint
operating agreement (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
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.
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.
Commencement of Operations
A party has commenced operations if it engages in
actions that demonstrate a present
good-faith intent to diligently carry on drilling activities
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).
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).
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
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