Few would argue that a hurricane or a weather-related grid meltdown would qualify as an unforeseeable circumstance that could prevent someone from fulfilling a drilling lease. But a more difficult question is now before the Texas Supreme Court: Whether a wellbore collapse 60 miles from the leased site triggered the contract’s force majeure clause.
Lawyers for Point Energy Partners Permian, which signed a new lease with West Texas mineral owners after a drilling deadline was missed, said MRC Permian’s lease was voided when it failed a requirement to drill a new well every 180 days. Wallace Jefferson told the court during oral arguments Tuesday that choices made by MRC after the wellbore collapse, including moving a specific rig to other sites and miscalculating the date of the deadline, failed to preserve the lease.
“MRC missed the deadline, not because of a force majeure event, but because they mis-calendered the deadline. But for that in-house error MRC could have drilled the well in time,” said Jefferson of Alexander Dubose & Jefferson.
Lawyers for MRC said the deadline no longer existed once the driller notified the owners of the unexpected well collapse at the other site. They said decisions that MRC made after the collapse are less important than the initial event.
“The force majeure event doesn’t have to cause somebody to miss a deadline … it merely has to delay operations,” said MRC’s lawyer D. Patrick Long of Squire Patton Boggs. “We have a wellbore collapse which Matador had never experienced before. That’s a nature event.”
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. Lease language required MRC to start a new well every 180 days. If MRC missed the deadline, the lease automatically terminated as to all acreage not in a production unit. The lease had a force majeure clause that could delay the drilling deadline under specific circumstances.
MRC says it invested more than $30 million to drill five successful wells on the leased acreage 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.
When MRC missed its deadline, Point Energy Partners Permian signed a new lease with the mineral owner. MRC’s position is that the deadline was extended under the force majeure clause. Point Energy argues that a scheduling incident was the real cause of the missed deadline and MRC tried to cover its mistake by retroactively declaring a “force majeure event” involving wellbore instability that slowed operations for a single rig operating on a single day.
The trial court in Loving County held that the wellbore instability did not qualify as a force majeure event. The trial court granted partial summary judgment for Point Energy that the leases terminated and were not saved by force majeure. The court denied Point Energy’s summary judgment regarding the size of production units in a horizontal wellbore retained by MRC.
The Eighth Court of Appeals in 2021 reversed and remanded the court’s finding that MRC’s leases terminated. The court of appeals also remanded for trial MRC’s tortious-interference claims and found the production unit issue was not ripe for consideration.
During oral arguments before the Supreme Court, Jefferson urged the court to reverse the court of appeals.
“The reason I believe this case is extremely important is because we have Covid-19 and we have Winter Storm Uri and we have force majeure clauses that are going to be implicated in those instances. So how you define force majeure I think is going to be extremely important,” Jefferson said.
Point Venture was represented by Jefferson and Robert Vartabedian of Alston & Bird. Justice Jane Bland asked them how Point Energy could win the case if the court were to conclude that wellbore instability is a non-economic event triggering the force majeure clause.
Even if the wellbore collapse was a force majeure event, Jefferson said, “MRC responded with economic considerations that were totally in its control.” He said the company could have used another rig to drill the well and meet the deadline.
Long said that while it took MRC only 30 hours to redrill the collapsed well, that delay “had a cascading effect on our drilling program.” He said the deadline miscalculation cited by Point Energy as evidence that MRC wasn’t planning to drill on time doesn’t matter once MRC invoked the force majeure clause.
“When we throw that flag, the lease says it’s saved,” said Long.
David M. Gunn of Beck Redden, who also represents MRC, told the court that crew safety and other considerations required the specialized rig remain at the site of the well collapse. He was asked by Chief Justice Nathan Hecht if there was anything in the 6,000-page summary judgment record to suggest that MRC could not have met the deadline if it had wanted to.
“I don’t think its required. The deadline’s gone, and we’ve got 90 days to get it back going,” said Gunn. He added that one missed well in a multiyear contract is unlikely to have much financial impact on an overall drilling project.
An amicus brief supporting MRC’s position was filed for Texas Independent Producers & Royalty Owners by Anne M. Johnson of Tillotson Johnson & Patton. TIPRO said that force majeure clauses reflect the oil-field reality that producers often operate on a portfolio of many leases at any given time and must allocate and distribute rigs and personnel across the portfolio.
“The simple fact is that events out of lessee-producers’ control occurring on one lease (or even further afield) often have a domino effect that impacts operations on other leases, elsewhere,” said Johnson.
A group of mineral owners lead by Black Stone Minerals submitted an amicus brief backing Point Energy. It said that after resolving the wellbore instability, MRC had nearly one month to drill a lease-preserving well but drilled wells on other leases first, ultimately missing its deadline under the parties’ contract by 66 days.
“MRC’s inaccurate record-keeping and resource mismanagement did that, causing the lease to terminate under its plain terms,” said Danica L. Milios of Jackson Walker for the amici.
The appeal also asks the court to address how far a “wellbore extends horizontally in the producing formation” and whether the case presents a fact issue about tortious interference in contract. Those issues were not discussed extensively during oral arguments but are fully briefed, the lawyers said.
The case is No. 21-0461.