CHAPTER 3 DUTIES OWED BY AN OPERATOR TO A NON-OPERATOR UNDER VOLUNTARY AGREEMENTS & COMPULSORY ORDERS
| Jurisdiction | United States |
(Jan 1997)
DUTIES OWED BY AN OPERATOR TO A NON-OPERATOR UNDER VOLUNTARY AGREEMENTS & COMPULSORY ORDERS
University of Texas School of Law
Austin, Texas
The duty owed by an operator to non-operators under voluntary and forced pooling and unitization plans is merely one aspect of a series of highly contentious questions in oil and gas law: What standard of conduct is generally required of operators when taking actions that affect non-operators? Is the standard of conduct the same for all actions taken by the operator or is it variable, depending upon the action in question? Does (or should) that standard differ if joint operations are the result of agency compulsion, rather than voluntary agreement? What effect does agency approval of a proposed unitization or pooling plan have on the operator's duties?
I. INTRODUCTION
Virtually all of the litigation and literature on the subject of operator duties have dealt with operations under a joint operating agreement. To a considerable extent, the analysis of duties under that arrangement should be equally applicable to duties under voluntary pooling arrangements. Only the terminally reckless are likely to undertake pooling operations without first entering into an operating agreement and that agreement, more often than not, will be based on one of the standard operating agreement forms developed by the American Association of Professional Landmen. These standard forms are, of course, the usual subject matter of cases construing the JOA.
Extrapolation of cases and theories involving JOAs to unitization agreements is riskier. Agreements for voluntary unitization differ significantly from the standard form operating agreements both in the scope of operations envisioned and in the division of authority among the participants. Provisions for supervision of operations by working interest owners, which are fairly common in
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unitization agreements,1 are virtually unheard of in on-shore JOAs. Such provisions may, however, have a significant effect on the relationship between the operators and nonoperators and the duty owed thereunder.
The problem of determining the level of the operator's duty becomes even more complicated in the instances of forced pooling and unitization. Force pooled and force unitized projects are likely to include participants who have entered into voluntary agreements as well as those who are forced into the unit by agency action. Indeed, most of the parties who participate in force pooled or unitized operations probably do so under negotiated agreements.
The typical pooling statute presupposes that voluntary operating agreements will be entered into after a spacing unit has been designated by the applicable state agencies.2 The Texas statute,3 which is designed to encourage voluntary pooling, effectively reverses the process. Rather than following unit formation, in Texas an attempt at voluntary pooling is a prerequisite to forming a force pooled unit. The Texas statute can be invoked by a working interest owner only if it has first made fair and reasonable offers to other owners within a proposed unit. This requirement is jurisdictional. If the party attempting to invoke forced pooling has not made a fair and reasonable offer for voluntary pooling, the Texas Railroad Commission cannot issue a valid pooling order.4
The same approach is generally true with respect to forced unitization. Compulsory unitization can be initiated in most states only after a minimum percentage of working interest owners have agreed to a plan.5 The form for federal exploratory units, which can include participants who are
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forced into the unit,6 makes specific provision for such an agreement.7
It arguable that the operator of a force pooled or force unitized project may owe different duties to nonoperators dependent upon their status. Its obligations with respect to those who have entered into the operating agreement are governed primarily by the agreement. It may have different duties or owe a different standard of conduct to those who have been forced into the unit.
This paper will focus on the duty owed by an operator in the situation that has received the most attention by courts and commentators: The operator's duty to non-operators in voluntarily pooled units governed by traditional operating agreements. In examining the operator's duty in this context, it will attempt to determine whether that level of duty should be affected if the pooling is forced rather than voluntary, or if the parties have entered into a unitization agreement, either voluntarily or through agency order.
II. THE COMMON LAW FIDUCIARY STANDARD
A. Pooling and Unitization Agreements as Joint Ventures
In the absence of an operating agreement, companies that combine their working interests for the purpose of drilling a unit well or engaging in secondary recovery or other types of unitized activities would almost certainly be deemed to have created a mining partnership or joint venture. Virtually all cases and commentators agree that a mining partnership is formed when persons engage in developing jointly owned mineral property without a formal agreement that creates some other type of arrangement. The factors that give rise to this legal status — co-ownership of mineral property, joint operation, and an intention to share profits and losses — would seem to be invariably present in the case of pooling or unitization.
In some respects the mining partnership may be viewed as merely a specialized version of the more familiar joint venture. The latter, like the former, is commonly stated to require three elements. As articulated by the courts these
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vary slightly from jurisdiction to jurisdiction but are basically similar. For example, in Colorado8 and Oklahoma9 the courts have identified the elements of a joint venture as (1) a joint interest in the particular property or project involved, (2) an express or implied agreement to share in the profits and losses, and (3) acts or conduct reflecting cooperation in the project. In other states, including Texas10 and Mississippi11 , the third element is described as a right of mutual control, rather than mutual cooperation.
Under traditional joint venture theory, each participant in the venture stands in a fiduciary relationship with every other participant with respect to the venture enterprise. This mutual fiduciary relationship precludes any participant from profiting personally from its dealing with the venture properties. As a practical matter, of course, the participant who is most likely to be affected by fiduciary obligations is the one who has legal or de facto control over operations — in other words, the operator. It is the most active participant whose actions are most likely to injure the other participants and who is therefore more likely to be accused of breach of fiduciary obligations.
B. The Effect of Operating Agreements
Several commentators12 and some courts13 have taken the position that the standard operating agreement leaves the joint venture intact. The operator is thereby presumed to be acting in a fiduciary capacity with respect to the venture. To defend against claims of breach of duty, he must establish the presence of other factors that modify or eliminate this standard of conduct with respect to the actions being challenged. This argument has been far from universally
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accepted, however.14 It is especially problematic in jurisdictions where the third element of a joint venture is described as a right of mutual control rather than mutual cooperation. For example in Texas several cases15 have rejected a joint venture analysis on the ground that control is basically in the operator; the non-operators have contractually relinquished whatever right of control they might otherwise have had.
The same argument against the joint venture theory could be advanced with respect to unitization operating agreements that vest all control in the operator. For example the unit agreement for federal exploratory units provides that "no such unit operating agreement shall be deemed to modify any of the terms and conditions of this unit agreement or to relieve the Unit Operator of any right or obligation established under this unit agreement." In the event of any inconsistency between the operating agreement and unit agreement, the unit agreement controls. That agreement, as set out in federal regulations, vests in the unit operator "the exclusive right, privilege, and duty of exercising any and all rights...which are necessary or convenient for prospecting for, producing, storing, allocating and distributing the unitized substances..."16
The joint venture theory is more viable in the case of voluntary unitization agreements involving private and state-owned land. Whereas parties to an operating agreement that envisions drilling a single well on a pooled unit typically entrust virtually all managerial powers to the operator, parties to a unitization agreement, which combines all or almost all of the acreage of an entire field and may involve hundreds of wells, are more likely to retain some supervisory power over the operator and some right of input into decisions. An agreement that provides a mechanism whereby working interest owners "exercise overall supervision and control of all matters pertaining to Unit Operations"17 would seem to satisfy the "right of control"
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requirement necessary for a finding of a joint venture, even in a state like Texas.
It is thus arguable that there is a different over-all standard applicable to an operator under a voluntary pooling agreement than under a voluntary unitization agreement. There is a significant and growing body of law supporting the proposition that the standard operating agreement used by parties to a pooling agreement does not create a mining...
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