Producer's Edge
Author: Chris Halgren

In the wake of COVID and Winter Storm URI, the phrase “force majeure” has practically become a household term. But handling a force majeure dispute is not for the wary, as a variety of issues and complications can arise. This recent case tackles the issue of causation and serves as a case study for careful drafting.

In this recent case, the Texas Supreme Court held that a lessee could not take advantage of a force majeure clause to extend the life of an oil and gas lease because the alleged force majeure event – a delayed drilling rig – was not the reason the lessee failed to timely commence drilling operations. Instead, according to the Supreme Court, the lessee failed to commence drilling operations because of an internal scheduling error. “After missing the deadline, the lessee discovered its scheduling error and only then invoked the lease’s force majeure clause, referencing an allegedly qualifying event that had occurred nearly a month before the drilling deadline.”

MRC erroneously schedules drilling deadline

MRC Permian, Inc. (“MRC”) was the owner of oil and gas leases covering around 4,000 acres in Loving County, Texas with a primary term that ended in February 2017. Upon termination of the primary term, the leases provided that the leased premises would be subdivided into separate production units, with each well to be attributed to a separate unit and the leases terminating as to all lands not contained in a production unit. MRC could “temporarily suspend automatic termination” of the primary term by engaging in a continuous drilling program. Under that program, MRC was required to spud a new well every 180 days. Failure to strictly adhere to this deadline would result in the primary term expiring, the lease being automatically subdivided into production units for existing wells, and the leases terminating as to all acreage not included in a then-existing production unit.

In early 2017, MRC scheduled to spud a new well – the Toot 211 Well – which would be drilled in order to temporarily suspend the termination of the primary term, which was scheduled to expire in February 2017. To comply with the continuous development deadlines, MRC was required to spud its next well on or before May 21, 2017. However, after the initial schedule was prepared, MRC elected to reschedule the spudding of the Toot 211 Well until June 19, 2017 – a date which was almost a month after the primary term would expire absent compliance with the continuous drilling program.

About two weeks after the primary term expired on May 21, 2017, “MRC discovered its scheduling mistake.” The Supreme Court noted that “MRC concedes it had mistakenly calculated June 19 as the expiration date” based on a mistaken reading of the applicable lease.

MRC invokes force majeure in attempt to avoid partial termination

Although missing the May 21 continuous development deadline, MRC claimed that the leases were maintained by their force majeure clause because the drilling rig needed for the Well was delayed at a prior drilling lo- cation on another lease. According to MRC, the rig planned to be used was “specially equipped to handle the high pressures” found in Loving County. On April 21, about a month before the MRC leases would expire, the rig MRC planned to use for the Well began experiencing “operational issues” while drilling a different well. These “operations issues” were later revealed to be wellbore instability issues that lasted approximately 30 hours.

The MRC leases contained a force majeure clause which provided, in part:

13. Force Majeure. When Lessee’s operations are delayed by an event of force majeure, being a non-economic event beyond Lessee’s control, if Lessee shall furnish Lessor a reasonable writ- ten description of the problem encountered within 60 days after its commencement, and Lessee shall thereafter use its best efforts to overcome the problem, this lease shall remain in force during the continuance of such delay, and Lessee shall have 90 days after the reasonable removal of such majeure within which to resume operations ....

MRC provided written notice of the operational issues experienced by the rig prior to moving onto the lease’s premises. The notice was sent within the 60-day deadline, but weeks after the primary term had already terminated.

SCOTX holds MRC could not invoke force majeure because event did not "cause" missed deadline

The Texas Supreme Court began its analysis with an in-depth review of force majeure clauses under Texas law. “Generally speaking, a force majeure clause is a ‘contractual provision allocating the risk of loss if performance becomes impossible or impracticable, esp[ecially] as a result of an event or effect that the parties could not have anticipated or controlled.’” The Supreme Court explained that force majeure clauses can vary wildly in their definitions, scope, notice requirements, remedial-action requirements, and grace periods.

As with any other lease clause, the force majeure clause must be interpreted on the terms the parties chose. MRC argued that any “delay” was sufficient to trigger the force majeure clauses as written in its leases. Even though the delay here impacted the drilling of a well that was already (mistakenly) scheduled to commence untimely, MRC argued that the delay nevertheless operated to extend the life of the leases. The Supreme Court disagreed, stating that

[w]hen viewed in isolation and taking an unduly literal interpretation, the phrase, ”Lessee’s operations are delayed by and event of force majeure” could be read to support MRC’s position. But we do not read contractual phrases in isolation . . . The MRC Lease repeatedly yokes operations with lease deadlines, which, if not met, result in least termination . . . .

In this case, the Supreme Court found that there was no delay of an operation that would have perpetuated the leases because the spudding of the Toot 211 Well was not scheduled to occur until after the primary term expired. Because it would not have occurred timely, even absent any alleged delay, the force majeure clause could not apply to save the Lease.


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