Enduro Operating, LLC, v. Echo Production, Inc., et al, 2016-NMCA-34,581 & 34,918 (NM Ct. App 2016).
Survey and staking of a well site prior to a JOA-defined 30 day consent clause and a 90 day commencement clause (120 days total) combined with back-room operations during the 120 day period did not constitute commencement of operations in satisfaction of the JOA.
Echo Production, Inc. (“Echo”) entered in to an AAPL Model Standard Form Joint Operating Agreement (the “JOA”) April 25, 2006. Art VI of the JOA required any party who proposed drilling operations to provide written notice to all other parties, who in turn had 30 days within which to elect to participate. Art VI.B.2 of the JOA required the proposing party to “…actually commence the proposed operation and complete it with due diligence…” within 90 days after the expiration of the 30 day notice period (30 + 90 = 120 days total; the “commencement period”).
Both parties stipulated to the following facts. On November 29th and 30th, 2010, Echo’s geological engineer surveyed and staked the well. On December 1, 2010, Echo sent its notice of proposed operations to all parties to the JOA. Echo next applied for a drilling permit (received by the New Mexico Oil conservation Division March 31, 2011), which was approved April 13, 2011.
The 120-day commencement period ended April 2, 2011. Echo then contracted to build a well pad and entered in to a drilling contract. Echo spudded the well May 25, 2011, with first production August 5, 2011.
In reviewing the legal standard for commencement of operations, the Appellate Court revisited the standard announced in Johnson v. Yates Petroleum Corp., 1999-NMCA-066, 127 N.M. 355, 981 P.2d 288 (“…any activities in preparation for, or incidental to, drilling a well…” constitute commencement) and applied a “meaningful on-site activity” standard the court considered the facts of Johnson implied. Echo’s lack of any on-site activity during the 120-day period as well as its failure to obtain a drilling permit during such period of time factored heavily in the court’s decision. Ultimately, the court reasoned that “the correct standard to be applied…is that undertaking meaningful on-site actions ancillary to actual drilling can…amount to commencement,” with such determinations to be made on a case-by-case basis.
In concluding its analysis, the court additionally compared the case at bar to Valence Operating Co. v. Anadarko Petroleum Corp., 303 S.W.3d 435 (Tex. App. 2010), which held that back-room preparations cannot substitute for on-site preparations for drilling and thus cannot constitute commencement of drilling. The case, then, appears to apply a very similar, if not identical, standard for commencement of operations in New Mexico as that employed by Texas courts.