Oil and Gas Lawyer Blog
In this case, decided last April, the Texas Supreme Court held that the force majeure clause in an oil and gas lease could not be relied on to extend the date by which a well had to be commenced to keep the lease in force.
The facts are these:
MRC owned a lease covering 4,000 acres in Loving County. The lease provided that, at the end of the primary term, the lease would terminate except as to designated production units around existing wells unless MRC engaged in “continuous drilling”—spudding a well within 180 days after the spud date of the previous well. Prior to the end of the primary term MRC had drilled five wells on the lease. Under continuous drilling clause, MRC had to spud a well by May 21, 2016 to avoid partial termination of the lease.
The lease contained this force majeure clause:
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 written 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 continuation of such delay, and Lessee shall have 90 days after the reasonable removal of such majeure within which to resume operations; provided, however, this paragraph shall not extend this lease or relieve Lessee for liability for any breach thereof for a period in excess of 180 days, and Lessee’s obligation to pay sums due hereunder shall not be affected by an event of force majeure.
MRC had a drilling schedule for Patterson Drilling Rig 295, the rig MRC said should be used to drill the next well on the lease because it could handle high pressures found in Loving County. That schedule provided for a well to be commenced on the lease by June 19, 2016 rather than May 21; MRC had mistakenly thought the lease required the well to be spudded within 180 days of the rig release date of the previous well, rather than its spud date. It did not discover its error until after May 21. On June 13 it sent the required notice of force majeure. MRC claimed that Rig 295 had been delayed while drilling the Dorothy White well (on a different lease) around April 21 that required a reaming operation on that well before drilling could be completed, resulting in a 30-hour delay in the schedule for that rig.
In the meantime, the mineral owners leased the property to Point Energy Partners, who contended the MRC lease had expired except as to the production units around the five existing wells on the lease. So the dispute was between MRC and Point Energy as to the continued existence of MRC’s lease.
MRC’s rig schedule provided that its Rig 295 would spud the Toot 211 well on MRC’s lease by June 19. The rig was drilling the Dorothy White well on April 21 when it ran into the 30-hour delay requiring reaming of the well. The rig schedule provided that Rig 295 would drill two more wells, on its Barnett lease, before moving to drill the Toot 211 well.
Based on these facts, the trial court held that the alleged force majeure event did not extend MRC’s lease beyond May 21, 2016. The court of appeals reversed and remanded, holding that fact issues exist as to whether the force majeure clause applied. The Supreme Court agreed with the trial court.
The Court’s opinion is long and, to me, unnecessarily confusing. In essence, the Court held that the 30-hour delay relied on by MRC did not cause MRC to delay drilling the Toot 211 well beyond May 21. The clause applies only if the operation is “delayed by” a force majeure event; causation is a necessary element to invoke the force majeure clause. Clearly, MRC (had it not misconstrued the lease to provide the well had to be spudded by June 19) could have rescheduled the rig so that it would move directly to the Toot 211 well rather than drilling the two Barnett wells first; had it rescheduled the rig it could have spud the Toot 211 well before May 21 notwithstanding the 30-hour delay. So the extra time spent in drilling the Dorothy White well did not cause it to delay drilling the Toot 211 well until after May 21: the real cause was its mistake in understanding that it had to spud the Toot 211 well by May 21 rather than June 19.
As the Court points out, no two force majeure clauses are alike, and each must be construed based on its language and the applicable facts. But in general, the force majeure event relied on must be beyond the lessee’s control and must be the cause of the delay.