A scheduling error that a driller linked to a well collapse is insufficient evidence of an unforeseeable circumstance under a contract’s force majeure clause that prevented the driller from meeting a deadline, the Texas Supreme Court said Friday.
Oil and gas lawyers were watching the case for the court’s interpretation of the force majeure clause in the continuous-drilling program required of MRC Permian Company. Point Energy Partners Permian said MRC Permian’s lease was voided when it failed a requirement to drill a new well every 180 days. Point Energy signed a new lease with West Texas mineral owners after the drilling deadline was missed.
The Supreme Court said that force majeure clauses generally exist to allocate risk when a lessee encounters an irresistible force beyond a party’s control that may lead to the harsh result of lease termination. In this case, however, the lease termination derives from a scheduling error, which the clause is not designed to remedy, the court said.
During oral arguments last October, lawyers for MRC said the deadline no longer existed once the driller notified the owners of an unexpected well collapse 60 miles from the leased site, which they characterized as a nature event that delayed operations on the leased site as it shifted resources to respond to the collapse.
But Point Energy’s lawyers said MRC missed the deadline because it miscalculated the drilling deadline.
The court agreed with Point Energy that MRC mistakenly scheduled operations to drill a new well to commence after the deadline to suspend lease termination under the continuous-drilling program.
Justice John Devine wrote the opinion for a unanimous court.
“We hold that, construed in context, ‘Lessee’s operations are delayed by an event of force majeure’ does not refer to the delay of a necessary drilling operation already scheduled to occur after the deadline for perpetuating the lease. The force majeure clause did not save the lease,” said Devine.
The court issued a take-nothing judgment on MRC’s tortious-interference claims to the extent those claims are predicated on the force majeure clause. The case was remanded to the Eighth Court of Appeals to consider other issues, including the size of the production units when the lease terminated and whether evidence raised a fact issue supporting MRC’s claims regarding any leasehold interest in the retained production units.
The dispute involves leases signed in 2014 by MRC Permian to develop oil and gas wells in a six-square-mile area of Loving County. MRC says it invested more than $30 million to drill five successful wells during the three-year primary term of the lease. In 2017, MRC was drilling at a separate site when a well caved in, and the specialized rig it was planning to use for the sixth well on the leased acreage was needed to re-drill over 2,500 feet of wellbore.
The trial court in Loving County held that the wellbore instability did not qualify as a force majeure event, a finding reversed by the court of appeals in 2021.
The Texas Independent Producers & Royalty Owners filed an amicus brief supporting MRC’s position. Written by Anne M. Johnson of Tillotson Johnson & Patton, TIPRO’s brief said that force majeure clauses reflect the oil-field reality that producers often operate on a portfolio of many leases at a time and must allocate and distribute rigs across the portfolio.
In analyzing the force majeure clause in MRC’s lease, Devine said it could be read “in isolation” to support MRC’s position but not when taken in context of the lease deadlines.
“We conclude that an ordinary person using the phrase ‘[w]hen Lessee’s operations are delayed by an event of force majeure,’ given its textual context, would not understand those words to encompass a 30-hour slowdown of an essential operation that was already destined to be untimely due to a scheduling error,” Devine said.
Point Energy was represented at oral arguments by Wallace Jefferson of Alexander Dubose & Jefferson and Robert Vartabedian of Alston & Bird. MRC was represented by D. Patrick Long of Squire Patton Boggs and David M. Gunn of Beck Redden.
The case is number 21-0461.