Opinion ID: 521553
Heading Depth: 2
Heading Rank: 2

Heading: Plug and Abandon Clause

Text: 14 To support his position that Phillips breached the operating agreement, Fuller construes Article 16 of the joint operating agreement, entitled Abandonment of Wells, as implying a duty on Phillips to notify Fuller of its intent to plug and abandon a well while the underlying leases of Phillips were still alive. Article 16 of the operating agreement provides: 16. ABANDONMENT OF WELLS 15 No well, other than any well which has been drilled or reworked pursuant to Section 12 hereof for which the Consenting Parties have not been fully reimbursed as therein provided which has been completed as a producer shall be plugged and abandoned without the consent of all parties; provided, however, if all parties do not agree to the abandonment of any well, those wishing to continue its operation shall tender to each of the other parties its proportionate share of the value of the well's salvable material and equipment, determined in accordance with the provisions of Exhibit C, less the estimated cost of salvaging and the estimated cost of plugging and abandoning. Each abandoning party shall then assign to the non-abandoning parties, without warranty, express or implied, as to title or as to quantity, quality, or fitness for use of the equipment and material, all of its interest in the well and its equipment, together with its interest in the leasehold estate as to, but only as to, the interval or intervals of the formation or formations then open to production. The assignments so limited shall encompass the drilling unit upon which the well is located. The payments by, and the assignments to, the assignees shall be in a ratio based upon the relationship of their respective percentages of participation in the Unit Area to the aggregate of the percentages of participation in the Unit Area of all assignees. There shall be no readjustment of interest in the remaining portion of the Unit Area. 16 After the assignment, the assignors shall have no further responsibility, liability, or interest in the operation of or production from the well in the interval or intervals then open. Upon request of the assignees, Operator shall continue to operate the assigned well for the account of the non-abandoning parties at the rates and charges contemplated by this agreement, plus any additional cost and charges which may arise as the result of the separate ownership of the assigned well. 17 (emphasis added). 18 Interpreting the above provision of the instant operating agreement, the district court found that no duty devolved upon Phillips by virtue of Article 16 to notify Fuller of its intent to plug and abandon the Holliday well prior to the expiration of its underlying leases. In so finding, the district court noted that, despite the fact that Phillips' underlying leases had lapsed by their own terms, the Agreement remained in full force and effect beyond the expiration of those leases. In this regard, the district court concluded that Phillips continued to have a duty to notify Fuller of its intent to plug and abandon the Holliday well during the life of the operating agreement despite the expiration of the underlying leases. 19 Further, the district court found the existence of several provisions in the operating agreement recognizing the possibility of the loss of an underlying lease to be indicative of the parties' intent that Phillips was not under an obligation to notify Fuller of an impending lease termination. 1 Recognizing the significance of these provisions, the district court noted that none of the above provisions imposed monetary liability on the party whose lease terminated. Neither did the assignment provision of Article 16 itself impose any type of monetary liability on Phillips for failing to assign a valid lease. In fact, the language of Article 16 expressly excludes any warranty of title with respect to the lease interest to be assigned under the operating agreement stating that the abandoning party shall assign to the non-abandoning party its lease interest without warranty, express or implied, as to title or ... quality.... 20 Finally, and perhaps most importantly, the district court concluded that the expiration of Phillips' two leases covering an undivided two-thirds interest in the Unit Area did not diminish the pre-existing rights of Fuller under his own lease, as Fuller's lease covered an undivided one-third interest in the Unit Area which was held by production on other lands covered by that same lease. 21 We are persuaded by the above reasoning of the district court in its opinion granting Phillips' motion for judgment notwithstanding the verdict. Article 16 of the operating agreement is express in its terms and mandates notice only of an abandoning party's intent to plug and abandon a well, not notice by that party of an impending lease termination. The fact that other provisions in the operating agreement directly address the occurrence of the expiration or loss of a lease only bolsters this conclusion. 2 Accordingly, we affirm the conclusion of the district court that Article 16 did not impose upon Phillips--directly or by implication--a duty to notify Fuller of its intent to plug and abandon the Holliday well while the underlying leases of Phillips were alive. While such notice might have been, and in Fuller's eyes would have been, preferable, the fact remains that Phillips did notify Fuller of its intent to plug and abandon the well in accordance with the terms of Article 16; therefore, Phillips did not breach the operating agreement between the parties.