Member Article

Several of the currently producing oil fields in the United States have been producing for approximately one hundred years while many other fields have long since ceased production having reached the end of their economic life. As the domestic oil and gas industry matures and many of the once productive fields become depleted, the industry faces what is arguably its most significant challenge. Who will pay for the significant liabilities that remain after an oil and gas property has reached the end of its economic life?

Regulations governing the relationship between the oil and gas industry and the applicable governmental agencies, standard contracts governing the relationships among industry participants, and the expectations of operators and non-operators concerning the sharing of liabilities developed in the context of beginning and on-going operations. In recognition of the finite nature of each pool accessed by the drill bit, provisions were included in regulatory schemes and joint operating agreements to address end of lease liabilities such as plugging and abandonment, reclamation, and remediation of any residual environmental issues. These liabilities were dealt with in the same manner as expenses attributable to on-going lease operations – as part of the joint interest expense to be paid by the current working interest owners of the properties. To a large extent, this approach proved effective during an era when production was increasing, the number of productive wells was greater than the number of wells requiring plugging and abandonment, and the costs associated with end of lease liabilities were a fraction of those costs today.

In the maturing industry of today, once prolific fields are declining and no longer cost effective for major oil companies to produce, are passed down the line to smaller and smaller independents. No minimum bid property auctions facilitate opportunities for the smallest and most under-funded entities to acquire, often for very little consideration, properties that were once significant producers but now bring only the significant residual liabilities (known and unknown) associated with their long histories. When the financial ability of these end of the line acquirers is insufficient to meet these residual liabilities, who pays the price? In today’s changing industry, can an assignor of a working interest in a lease every really shed itself of the liabilities accruing after the date of assignment including end of lease plugging and abandonment costs?

This paper will consider the developing law with respect to these issues in Texas and Louisiana and in the bankruptcy courts.

II. Current Status of Texas Case Law.

In June 2006, the Texas Supreme Court delivered its decision in the closely watched case of Seagull Energy E&P, Inc. v. Eland Energy, Inc. (hereinafter “Seagull”). The opinion was released for publication in late December 2006 upon denial of a rehearing sought by Eland and is published at 207 S.W.3d 342 (Tex. 2006); Tex. LEXIS 550. With the release of this decision, owners of working interests in Texas oil and gas wells became subject to a whole new area of uncertainties, risks and potential liabilities not previously anticipated by the industry. These potential liabilities do not arise from operations on wells in their current inventory of producing properties, drilling procedures on new well locations in which they are engaged or even from industry wide risks such as commodity price fluctuations. These liabilities are attributable to properties previously sold, sometimes many years in the past, and can relate to operations that occurred long after they assigned the properties and to which they never consented and of which they had no knowledge.

The facts in Eland clearly define the issues being faced more and more frequently by operators and non-operators alike as the oil and gas industry continues to mature. The case involves a dispute between the operator of two leases covering Blocks 828 and 831 in the Mustang Island Area of the Gulf of Mexico on the Outer Continental Shelf (“OCS”), offshore Texas. Seagull was the operator of these leases. Eland acquired working interests in these leases many years after each lease was entered into (Respondent Eland’s Response to the Petition for Review filed in the Supreme Court of Texas on August 20, 2004, 13 n.14 (hereinafter “Eland’s Response”)). As part of the assignment by which Eland acquired the working interests, Eland assumed a proportionate part of the obligations created by the existing offshore operating agreements pertaining to each interest. (Id.) Eland owned its interests in the leases for less than two years before selling the interests in an auction process that required no minimum bid. Nor-Tex Gas Corporation was the successful bidder in the auction process paying $500 for each lease. As part of its assignment, Nor-Tex assumed a proportionate part of the obligations created by the existing offshore operating agreements pertaining to the leases. (Eland Energy, Inc. v. Seagull E&P, Inc., 135 S.W.3d 122 (Tex. App. – Houston [14th Dist.] 2004 (hereinafter “Eland’s Appeal”)) One of the wells ceased production shortly after Nor-Tex acquired its interest while production from the other well continued for almost four years prior to cessation. (Eland’s Response 2). Nor-Tex failed to reimburse Seagull, as operator, for its share of the costs relating to the working interests, including the costs of plugging and abandonment as required under the operating agreement. Nor-Tex eventually filed for bankruptcy under Chapter 7 of the United States Bankruptcy Code. Seagull sought to recover the unpaid expenses from Eland. Eland paid all of its costs and expenses attributable to the period of time that it owned the interests, but refused to pay costs incurred after it had conveyed its interest to Nor-Tex.

Seagull sued both Nor-Tex and Eland to recover costs incurred with respect to the working interests after the date of assignment to Nor-Tex asserting that, as a matter of law, Eland and Nor-Tex were jointly and severally liable to it for breach of the applicable joint operating agreements. Eland asserted in the trial court that under the unambiguous language of the operating agreements, Eland had no contractual obligations to reimburse Seagull for costs incurred after Eland assigned its interests to Nor-Tex.

The trial court awarded summary judgment in favor of Seagull finding that, as a matter of law, Eland remained liable for performance of its obligations under the joint operating agreements, even after transfer of its interests in the leases. After a bench trial, the court determined that Eland and Nor-Tex were jointly and severally liable to Seagull for costs and expenses attributable to the working interests after the assignment to Nor-Tex and that Nor-Tex owed Eland indemnification for all amounts awarded against Eland. (Eland’s Appeal at 124.)

On appeal, Eland admitted that it assumed liability under the operating agreements when it acquired interests in the leases but argued that under the clear and unambiguous language of the operating agreements, it owed no obligation to the operator to pay costs and expenses incurred with respect to the working interests after the date Eland conveyed the interests to Nor-Tex. (Id. at 125.) The appellate court agreed with both parties’ assessment that the operating agreements are unambiguous. The agreements are, therefore, subject to the court’s construing, as a matter of law. (Id. at 127.) The court stated that in order for Seagull to succeed in its breach of contract claim against Eland, it was necessary to find language in the operating agreements imposing an obligation on Eland to pay a share of expenses attributable to the interests for periods after its assignment to Nor-Tex. (Id.)

The court explored the language contained in the agreements (the language of each being identical). Section 8.1 of the agreements provides that the “Operator shall pay all costs and each Party shall reimburse Operator in proportion to its Participating Interest.” (Id. at 126.) Participation Interest is defined in Section 2.10 of the agreements as “[t]he respective percentage of participation of each Party electing to participate in each of the operations conducted hereunder, including the production of Oil and Gas, based on ownership in the Lease.” (Id., emphasis added) The court determined that Eland had no Participating Interest (as clearly and unambiguously defined in the agreements) at any time relevant to the dispute. Therefore, under the unambiguous language of the agreements, Eland had no obligation to reimburse the operator for expenses incurred in connection with the working interests attributable to periods of time after it conveyed its Participating Interest. (Id. at 128).

The appellate court considered, but found unpersuasive, Seagull’s argument that Eland remains liable under the agreements, even after assignment of its interests therein, because the parties to the operating agreements never released Eland from its obligations thereunder. If the parties had intended to create such an obligation, the court notes, they could have created such an obligation as part of the language of the agreement, but they did not. Likewise, the appellate court found unpersuasive Seagull’s argument that the agreements provided for a party to withdraw from the agreements, but the withdrawing party remained liable for its share of future well-abandonment and platform-dismantling costs. The court noted that the agreements allow a party to withdraw, but do not require withdrawal in place of assignment. The appellate court was cognizant of and noted the absence in the agreements of common, industry-specific provisions that are typical in other forms of operating agreements such as preferential rights to purchase and provisions that restrict a party’s ability to assign its interests to only financially responsible parties or to parties that can provide additional security for the performance of their obligations under the agreements. Seagull had also argued in the appellate court that, as a matter of public policy, adopting Eland’s interpretation would allow a party to benefit from the interest while it was productive and assign the interest for nominal consideration to an insolvent entity at the end of the life of the lease as a means of avoiding the costs relating to plugging, abandonment, platform removal and site clearance. (Id. at 129.) The appellate court determined, however, that its responsibility “is not to question the wisdom of the agreements, but the clarity and completeness of their terms”, once the agreements are found to be unambiguous, and to enforce the agreements in accordance with those terms. (Id.) The decision of the trial court was reversed and judgment entered at the appellate level that Seagull take nothing.

Seagull based its appeal to the Texas Supreme Court on general principles of Texas contract law providing that an assignor’s contractual obligations survive the assignment of the contract unless the contract expressly provides otherwise or the assignor obtained an express release from those obligations. Because the contracts are silent as to the obligations of the parties after an assignment, Seagull argues there was no express release and general contract law should apply. (Seagull at 4.) Eland argues that the general rule did not apply because of the express language that is contained in the operating agreements that impose liability for expenses only upon current working interest owners. (Id.)

Based upon the parties’ positions, the Court frames its inquiry as “whether the parties to the operating agreement expressly agreed upon the consequences that should follow an assignment of one’s interest to a third party.” (Id.) The Court quickly determines, as did the trial court and the appellate court, that the contract is not ambiguous and therefore its meaning is a matter of law to be determined by the court by ascertaining and giving effect to the intent of the parties as expressed in the contract. (Id..)
The Court acknowledges Eland’s focus on provisions of the contracts that tie a party’s payment obligations to its Participating Interest as tied in the agreements to lease ownership. (Id., emphasis added) However, notwithstanding the contract language linking payment obligations to ownership in the Lease, the Court determines that Eland is erroneous in its conclusion that it is only obligated for expenses so long as it owned a Participating Interest. The Court notes that none of the cost sharing provisions cited by Eland mention the subject of release or the intended consequences upon transfer of the underlying working interest. (Id.) The Court points to the provisions of the agreements dealing with withdrawal and abandonment and the general assignment provision stating that the agreement binds inures to the benefit of the parties and their respective successors and assigns. Although the Court says these provisions deal with the subject of assignment, none of them deals specifically with the intended consequences of the assignment of a working interest to a third party. (Id.)

The Court continues its analysis, however, by noting that even when a contract does not expressly provide for the consequences of the assignment of one’s interest, the contract’s subject or other circumstances may indicate that the obligations were not intended to survive assignment. (Id.) Citing the “Restatement of Prop.: Servitudes” §538, it indicates that promises can be of such a character that they can be satisfactorily performed only by the owner of the land. However, Eland did not argue that the subject of the contract or the circumstances dictate that it should be relieved of its obligations after assignment and, even if it had, it was not clear to the Court why Eland couldn’t fulfill its obligations after assignment. (Id.) (See Kramer, “Follow the Yellow Brick Road – A Selected View of Recent Developments in Texas Oil and Gas Jurisprudence”, Houston Bar Association Oil, Gas and Energy Law Section Luncheon, March 2007 discussion the Court’s gratuitous and erroneous application of common law real covenant theory.) With this, the Court reverses the appellate court because the agreements did not specifically provide that a working interest owners’ obligations would terminate upon assignment, and the absence of an express release from Seagull. Judgment was rendered for Seagull in accordance with the trial court’s original decision. (Id.)

The implications of the Eland decision for the oil and gas industry are enormous. Texas working interest owners have transferred interests in oil and gas properties for the better part of a century under the general understanding that they were responsible for their pro rata share of expenses attributable to the properties while they owned them, but not for those incurred after assignment. With the stroke of the Court’s pen, former owners of oil and gas interests are now liable for expenses attributable to operations not conceived of during their ownership.

Most operators do not provide a party that has assigned its interest in the contract area covered by the operating agreement AFEs and other information required in the operating agreement with respect to operations conducted after the party has assigned. A non-operating interest owner under an operating agreement that does not receive proper notice and the requisite time period within which to consent or non-consent to a proposed operation has recourse against the Operator. (See e.g., Abraxas Petroleum Corporation v. Hornburg, 20 S.W.3d 741 (Tex. App. – El Paso 2000 (dealing with improper AFEs) and Cone v. Fagadau Energy Corporation, 68 W.W.3d 147 (Tex. App. – Eastland 2002) (dealing with improper assessments against the joint interest accounts)) The decision in Seagull however, would result in a party that previously conveyed its interest being liable for expenses attributable to operations it had no notice of, no opportunity to consent or non-consent to, nor any possibility of ever benefiting from. Historically, working interest owners conveying their interests in the underlying oil and gas leases have not negotiated with their buyers to retain basic protections afforded joint interest owners under joint operating agreements with respect to their interests being conveyed. However, an assignor is now left in the position of being stripped of all the contractual protections afforded it under the joint operating agreement and yet held, under the Seagull decision, liable for all of its obligations thereunder as though it still owned the interest.

The oil and gas joint operating agreement is unique. It is an industry specific agreement, designed to deal with the unique issues presented in the long-term management of real property interests that are jointly owned in undivided interests. Most contracts are specific in nature, limited in duration and scope and impose upon each of the parties obligations that are known at the time the contract is executed. Under an oil and gas joint operating agreement however, only very general information is know about the obligations of the parties at the time the contract is executed. The contract exists to manage the process by which the owners of undivided interests in the same properties jointly determine which specific operations will be undertaken. Because the liability to be incurred and the potential reward with respect to any given operation is unknown in advance, the participants are afforded the opportunity, through the consent process to elect, on an on-going basis, which obligations they choose to accept and which they don’t. Typically, the term of a joint operating agreement is for the life of the leases covered by the agreement, a duration that is unknown at the time the agreement is entered into. In Seagull, the relevant agreements had already been in existence for many years before Eland acquired its interest in the underlying leases.

Many joint operating agreements dating from the 1930’s, 1940’s and 1950’s are still in existence in Texas, and parties are operating under them. However, the nature and cost of the operations conducted today on the properties subject to those agreements is vastly different that those contemplated at the time the agreement was executed. To hold a party that executed a joint operating agreement in the 1940’s and sold its interest in the underlying leases in the 1950’s liable for expenses attributable to operations today that likely bear no relation to the geologic concepts being considered in the 1950’s is manifestly unjust. This, however, is the result that the Seagull decision would require.

The Seagull decision has brought, at a minimum, uncertainty to the analysis of the language in an operating agreement used to ascertain the underlying intent of the parties with respect to liabilities retained by an assignor after assignment. Only one of the four AAPL Model Form joint operating agreements published since 1956 deals specifically with the consequences of assignment. The 1989 Model form provides that an assignor shall remain liable for operations conducted during its period of ownership and for operations it authorized prior to assigning its interest. As several commentators have noted, this language seems inconsistent with the notion that the assignor remains liable for all operations subsequent to its assignment. Although the assignor’s release for other post-assignment liabilities may be inferred, the languages does not expressly release assignor. One must wonder whether this language is adequate to meet the Seagull requirement. (Curry, “The Relationship Among Parties to the Oil & Gas Operating Agreement in the Context of Seagull Energy E&P, Inc. v. Eland Energy, Inc.”, Volume 21, Number 2, State Bar of Texas Oil, Gas and Energy Resources Law Section Report 39, 43-45 (2006); Gibson, “Case Law Update”, Advanced Oil and Gas Course, University of Houston Law Center 25-28) (2007).

The Seagull decision dramatically changes most Texas oil and gas producers’ prior understanding of their continuing liability for costs and expenses attributable to properties they have previously assigned. Companies should consider what their contingent liabilities might be with respect to this issue. For public companies, in light of the more stringent reporting requirements of Sarbanes Oxley, this will be a difficult and serious task. The Seagull decision will have a significant impact on the manner in which Texas oil and gas producers and their financiers, investors and insurers conduct their business.

III. Emerging Louisiana Case Law.
A. Current Case Law.
A Louisiana case dealing with the same issues arising from similar facts clearly illustrates the potential for harsh results from the application of the Seagull decision. (See Union Oil Company of California v. Cheyenne Oil Properties, Inc., 839 So.2d 1170 (La. App. [3rd Cir.] 2003).) In the trial court, Unocal sued Cheyenne, its then co-working interest owner, to collect Cheyenne’s pro rata share of expenses relating to an offshore oil and gas lease covering Block 44 of Eugene Island area of the Gulf of Mexico, offshore Louisiana. Unocal later amended its pleading to include IP Petroleum Company, assignor of a portion of the interest owned by Cheyenne. (Id. at 1171.) In February 1996, production from the lease had declined and UMC Petroleum Company, operator at that time of the lease, circulated a letter among the working interest owners recommending plugging and abandoning the existing wells and facilities and advising the parties of the costs associated with these activities. (Id.) By letter of the same date, however, Unocal proposed an alternative plan to conduct additional downhole operations in an effort to restore production and maintain the lease. Both the UMC letter and the Unocal letter went to IP, as a working interest owner in the lease. However, in December of the previous year, IP had transferred its 4.86473% interest to Cheyenne pursuant to an auction process facilitated by The Oil & Gas Asset Clearinghouse. (Id.) IP forwarded Unocal’s proposal to Cheyenne, and Unocal subsequently sent out an additional letter to all interest holders seeking their approval to replace UMC as the operator. Unocal sent this letter directly to Cheyenne instead of IP. Cheyenne voted in favor of Unocal’s proposal and told UMC that it elected not to abandon the well but to conduct further operations. By subsequent letter, UMC informed the working interest owners of its resignation as operator and its support of Unocal as successor operator. (Id. at 1172.) Unocal assumed operations, but a number of the working interest owners declined to participate in Unocal’s proposed additional operations. Pursuant to the terms of the operating agreement, the remaining working interest owners were given the opportunity to increase their working interest ownership proportionately. Cheyenne elected to participate in the work-over activities and to increase its working interest ownership to 44.52214% by acquiring its pro rata share of the non-consenting parties’ interests. (Id. at 1173.)

Prior to Cheyenne’s acquisition at auction, the President of Cheyenne executed various documents required by the auctioneer, including a Qualified Bidder Registration form in which Cheyenne asserted that it was qualified to participate in the transaction. Cheyenne’s president also executed a document called “Buyer’s Terms and Conditions of Purchase” which contained the following language:

5. COMPLIANCE WITH AGREEMENTS AND REGULATIONS: Buyer must comply with and shall be bound by any and all leases, operating agreements, farmout agreements and other contracts, as well as all governmental laws and regulations to which the properties may be subject. In addition, prior to bidding on any property which may include the right to operate or involves governmental leases, Bidder must be qualified to assume such rights or hold such leases in accordance with applicable agreements and regulations. Buyer’s failure to comply with all applicable agreements, jurisdictional agency requirements, government regulations and, if applicable, qualify thereunder to the satisfaction of Seller and The Clearinghouse shall result in Seller and The Clearinghouse having the right to nullify the sale. Should Buyer fail or refuse to meet these terms, or the terms of any agreements or regulations, Buyer agrees to forfeit the purchase price as liquidated damages and to re-assign and return the property to Seller free and clear of any encumbrances which were not in existence prior to Seller’s conveyance of the property Buyer. (Id. at 1171-1172.)

Approximately three to four months after Cheyenne had purchased IP’s interest in the lease at auction, the auctioneer notified Cheyenne that, because Cheyenne had not been pre-approved to participate as a working interest owner in a lease on the OCS, the transfer had been rejected. Cheyenne informed the Clearinghouse that it had already elected to participate in work-over activities and to increase its interest from the 4.86473% interest acquired from IP to a 44.52214% interest. According to testimony entered at the trial, Cheyenne never heard again from the Clearinghouse. (Id. at 1173.)

Unocal’s work-over attempts were unsuccessful and it plugged and abandoned the remaining wells on the lease in the last quarter of 1997. When Cheyenne did not pay its pro rata share of the expenses associated with the work-over and plugging and abandonment activities, Unocal filed suit against Cheyenne. Cheyenne asserted in its answer to Unocal’s petition that, because of the problem with the sale related to it by the Clearinghouse, it did not own a working interest in the lease and therefore was not subject to the operating agreement. Unocal then amended its petition to include IP as a defendant asserting that because Cheyenne was denying ownership, IP still owned the interest and was liable for the unpaid amounts. IP responded that Cheyenne did own the working interest which had been conveyed to it for good and valid consideration, that IP had no notice that the transfer was invalid, that it had no opportunity to consent or non-consent to the operations that gave rise to the unpaid charges, and that Cheyenne should be estopped from claiming that the transfer was invalid. (Id. at 1174.) Unocal filed a motion for summary judgment against IP only, and IP filed a cross-claim against Cheyenne. The trial court granted summary judgment in favor of Unocal stating only that IP and Cheyenne were solitarily liable to Unocal.

The appellate court reversed the trial court’s grant of summary judgment and remanded the case for further proceedings based upon its finding of the existence of genuine issues of material fact. In its pleadings that brought IP into the lawsuit, Unocal reiterates its claim against Cheyenne but asserts, as an alternate theory of recovery, a claim against IP based upon Cheyenne’s claim that IP’s working interest was never transferred to it. However, IP claims that its interest was transferred to Cheyenne. Unocal asserted before the trial court, and again on appeal, that Louisiana Civil Code art. 1821 provides the basis for IP’s liability. Article 1821 says that: “An obligor and a third person may agree to an assumption by the latter of an obligation of the former. To be enforceable by the obligee against the third person, the agreement must be made in writing. The obligee’s consent to the agreement does not effect a release of the obligor. The unreleased obligor remains solitarily bound with the third person.” (Id. at 1175.) IP argues however, that even assuming Article 1821 applies to the transfer of an oil and gas working interest, it would only apply to obligations existing at the time of the transfer and not to obligations arising as a result to the assignee’s actions after the transfer. (Id.) The appellate court notes that if Cheyenne is IP’s assignee, IP may have obligations to Unocal regardless of whether it received notice under the operating agreement. However, if Cheyenne is not IP’s assignee, and IP still owns the working interest, there exists a genuine issue of material fact as to whether IP received the appropriate notices required under the operating agreement. Therefore, the resolution of the ownership of the working interest is critical to resolving the issue of liability between the litigants. (Id. at 1176.)

Any subsequent history for this case was rendered moot by Unocal’s ultimate acquisition of IP through a series of mergers and acquisitions. The facts of the case illustrate the harsh and unintended results that can ensue from the application law developed in the context of general contractual relationships to oil and gas industry-specific agreements developed to meet the peculiar needs of the industry. In this case, an assignor is potentially exposed to a far greater percentage of liability (in this case, liability attributable to a 44.52214% interest as opposed to the 4.86473% interest it conveyed) after assignment without so much as even the rights to notice under the operating agreement it had as an owner. This is certainly a result that was not anticipated by the parties to the operating agreement.
Any question after Unocal about whether Article 1821 applies to the transfer of an oil and gas working interest was resolved in Chieftain Int’l (U.S.) v Station Exploration, 2003 U.S. Dist. LEXIS 6553. In this case, Chieftain was the operator of two federal OCS leases off the coast of Louisiana. Statoil previously owned a fractional interest in the leases, but assigned its interest to Tri-Union Development Corporation. Operations on the leases were governed by two joint operating agreements. After Tri-Union failed to pay its pro rata share of operating expenses and ultimately filed for protection under the U.S. Bankruptcy Code, Chieftain sought to hold Statoil liable for Tri-Unions share of operating expenses and plugging and abandonment costs for the two leases (Id at 5). The court enforced its ruling in a prior hearing that under Article 1821, Statoil and Tri-Union are solidarily liable to Chieftain and that Statoil was responsible for Tri-Union’s debt to Chieftain. (Id at 16).
B. Louisiana Third-Party Liability Law.

In considering whether, which and to what extent assignors and assignees of working interests in oil and gas leases covering lands located in Louisiana may bear liability, as among themselves, for end of lease liabilities, it is important to understand the stipulation pour autrui. This is Louisiana third-party liability law. Louisiana draws a clear distinction between the liability of owners of the leasehold interest to the original lessor for cleanup costs, which is deemed to be a real obligation, and the intermediate owners’ liability to each other, which is based upon contractual indemnity provisions deemed to be personal obligations. (Chevron U.S.A., Inc. v. Traillour Oil Company, 987 F.2d 1138, 1149 (5th Cir. 1993)). (See also, Davis Oil Company v. TS, Inc., 145 F.3d 305, dissenting opinion 318 n.4 (5th Cir. 1998)). A real obligation is transferred to each successor who acquires the thing to which the obligation is attached without a special provision to that effect in the documents by which such interest is transferred. (Chevron, 987 F.2d at 1149, citing La. Civ. Code Ann. art. 1766 and Tall Timbers Owners’ Ass’n v. Merritt, 376 So.2d 586, 588 (La. App. 4th Cir. 1979)). However, a successor is not bound by the personal obligation of his transferor with respect to the thing transferred unless he expressly assumes same. (Id.) The intent of the contracting parties to stipulate a benefit in favor of a third party is never assumed, but must be made manifestly clear. (Chevron, 987 F.2d at 1146.) However, a review of Chevron and Davis Oil, both Fifth Circuit cases, makes clear that there is room for reasonable minds to differ as to manifest clarity.

Davis Oil and Chevron deal with similar issues, but the 5th Circuit distinguishes the two cases (wrongly according to the dissent in Davis Oil) without overruling Chevron. The inconsistency in the two cases, and the reason for the dissent in Davis Oil, is that the cases have similar facts, but opposing resolutions. The distinction between the cases results from interpreting the language of the applicable contract to determine whether each clearly contemplates a benefit to the third-party beneficiary as its condition or consideration.

The court in Chevron held that a third-party beneficiary provision was not created when Traillour, the purchaser of Chevron’s interest in an oil field, re-assigned that interest to Rocky Mountain, conditioning Rocky Mountain’s performance on providing a letter of credit to secure the plugging and abandoning of the wells. (Chevron, 987 F.2d at 1147-1148.) Chevron had required Traillour to provide a similar letter of credit when it sold the interest to Traillour. The court found that Rocky Mountain executed a contract to benefit only Traillour, and this benefit could not flow back to Chevron directly. (Id. at 1148.) The opinion also holds that remote investors in the field, who purchased from Traillour and assumed all obligations resulting from their ownership of the conveyed interests, did not execute a stipulation pour autrui on behalf of Chevron. Their contract with Traillour did not clearly contemplate a benefit to Chevron as its condition or consideration. (Id. at 1159-60.)

In Davis Oil, Davis sought to enforce lease cleanup obligations against TS, Inc., the successor of HPC, Inc., the party to whom Davis sold its interest. To do so, since Davis was not a party to the assumption agreements between HPC and TS, Davis had to show that such agreements made TS liable directly to Davis for the lease obligations for which HPC was responsible under the purchase agreement between Davis and HPC. (Davis Oil, 145 F.3d at 309.) Under Louisiana third-party liability laws and Chevron, this required that the assignments between HPC and TS clearly contemplate a benefit directly to Davis. (Id. at 311.) The court found that TS had assumed HPC’s obligations to Davis to perform environmental cleanup of lease lands. It did so by construing a memorandum of understanding between HPC and TS, in conjunction with an option agreement giving rise to succession, that provided for assumption of liabilities arising in the ordinary course of HPC’s business carried on with assets habitually designated as part of HPC’s oil and gas divisions. (Id. at 317.) Therefore, Davis could enforce its assignee’s cleanup obligations against the successor to its assignee, TS. The dissent argues that the relevant documents do not display the clear “intent to benefit” necessary to justify the outcome of the majority opinion. In its analysis, the intent to benefit reflected in the HPC to TS documents is much more vague and unspecific than that in Chevron, which was resolved in the opposite. (Id. at 318-319.)

Under current Louisiana law, it appears that all assignees are obligated to the original lessee because the lease is a real obligation; however, as between subsequent assignors and assignees, the personal obligations to each other are governed by contract law which requires a careful drafting of the contract to ensure that appropriate parties are held responsible. Davis Oil is relatively lenient and Chevron more stringent in the third-party beneficiary analysis, but both are apparently good law. Therefore, an assignor should carefully draft its assignments to require that its assignee specifically provide in any subsequent assignments of the interest that the original assignor is an intended beneficiary of any assumption of liability provisions and that the original assignor is entitled to enforce directly, as a designated third-party beneficiary, any such subsequent assumption provisions.
IV. The Bankruptcy Context.

Many issues relating to responsibility for end of lease liabilities are being played out in the context of the bankruptcy courts, where debtors and creditors struggle over whether and when expenses attributable to these liabilities should be awarded administrative claim status giving them priority over the claims of general unsecured creditors. Many unanswered questions remain as the parties frequently opt for a negotiated business resolution to issues that, if determined as a matter of law, could have significant impact industry wide. The Tri-Union bankruptcy exemplifies the complex struggles currently faced by the oil and gas industry in meeting end of lease obligations. (In Re: Tri-Union Development Corporation, Ch. 11 Case No. 03-44908-H1-11 and In Re: Tri-Union Operating Company, Ch. 11 Case No. 03-44913-H1-11 (jointly administered under Case N. 03-44908-H1-11), Bankr. S.D. Tex. [Houston Div.].) These struggles will become increasingly familiar as more and more fields near the end of their productive life.
A. Tri-Union – The Facts.

Tri-Union owned oil and natural gas reserves located in, among other areas, offshore Louisiana and Texas in the Gulf of Mexico. Pursuant to applicable federal regulations, as an owner and, in some cases, operator, of offshore leases, Tri-Union has certain obligations to the United States Department of the Interior Minerals Management Service (the “MMS”) to plug and abandon offshore wells, remove offshore oil and gas platforms, pipelines, and facilities, conduct site clearance operations, and perform additional decommissioning activities (“Offshore P&A Obligations”). In accordance with these regulations and as a condition precedent to its emergence from a prior bankruptcy, Tri-Union obtained from Greenwich Insurance Company (“Greenwich”) certain offshore surety bonds in the aggregate amount of $9.75 million to secure its Offshore P&A Obligations with respect to the offshore properties it operates (the “Surety Bonds”). It secured the Surety Bonds with $4.5 million of cash collateral. Under the MMS regulations for operations on the Outer Continental Shelf (“OCS”), all of these Offshore P&A Obligations accrued, and, as a result of the prior cessation of production from the leases, were due and owing, prior to Tri-Union filing its petition in the present bankruptcy case. If Tri-Union does not meet its Offshore P&A Obligations and if the Surety Bonds are not called or are insufficient to meet such obligations, under applicable regulations, the MMS may also seek satisfaction of these obligations from Tri-Union’s current co-lessees and predecessors in interest. These parties include Apache Corporation, BP Exploration and Production, Inc. and Mariner Energy, Inc. (collectively, “Co-Lessees and Predecessors in Title”). (Recitation of the facts cited above drawn from Debtors’ Second Amended Objection and Motion to Classify Claim of The Minerals Management Service and for Equitable Marshaling Pursuant to Section 105 of the Bankruptcy Code, May 28, 2004 (“Debtors’ May 28th Objection”)).

The MMS filed a proof of claim in the Tri-Union bankruptcy for $24.1 million (the “MMS Claim”) which the MMS alleges is an administrative expense entitled to priority distribution under the Bankruptcy Code. Greenwich, the Co-Lessees and the Predecessors in Title have also filed proofs of claim relating to Tri-Union’s Offshore P&A Obligations. The Debtor maintains that the MMS Claim should be disallowed as contingent, or reduced and, to the extent allowed, classified as a pre-petition, unsecured claim. Additionally, the Debtor asked the court to compel the MMS to seek recourse against the Surety Bonds required by the MMS under its regulations with any claims remaining after exhaustion of the Surety Bonds being treated as unsecured claims.

B. The Surety Bonds as Collateral.

Although Tri-Union repeatedly requested that the MMS employ the Surety Bonds to address Tri-Union’s Offshore P&A Obligations, the MMS did not pursue the surety company. This may seem an odd course of action for the MMS in light of regulations requiring such bonds as a prerequisite to owning and/or operating an offshore lease and the MMS’ requirement of these Surety Bonds as a prerequisite to Tri-Union’s emergence from its prior bankruptcy. However, what became clear in reviewing the various pleadings filed by the parties and orders issued by the court in Tri-Union, was the unspoken, but powerful need by courts, regulatory agencies and parties alike to find pragmatic business solutions to industry issues that are big today and will continue to grow.

The reality in the industry is that bonds for oil and gas operations are increasingly difficult to obtain and costly. If the MMS begins routinely calling these bonds, the ultimate result may be to effectively eliminate one method of securing prospective Offshore P&A Obligations as bonding companies simply refuse the risk of offering these products. There are, of course, other methods of providing security for these obligations such as the establishment of trust funds or escrow accounts to accumulate, over the life of the leases, an adequate amount to meet the end of life obligations. However, few of the potential alternatives are as cost-effective and relatively simple to administer as the current bonding requirements. Additionally, for many leases that have been producing for a number of years, there simply no longer exists adequate reserves in the ground to fund the amount necessary to meet the plugging and abandonment obligations at the end of the life of the lease. It is little wonder that the MMS is reluctant to call the bonds where it perceives any other available course of action. The OCS regulations provide it with ample opportunity for other recourse against current co-lessees and prior owners. However, as will be seen in the following discussion, sorting out the rights of these parties vis-à-vis the debtor, the MMS and each other carries its own set of complexities.

C. Disallowance of Contingent Claims.

In an order issued on September 3rd, 2004, Judge Isgar, the presiding judge, in Tri-Union, addressed cross motions for summary judgment concerning whether the claims of Greenwich and the Co-lessees and Predecessors in Title must be disallowed under § 502(e) of the Bankruptcy Code as contingent. (Order on Cross Motions for Summary Judgment, September 3, 2004 (the “September 3rd Order”).) Section 502(e) provides, in part,

“the court shall disallow any claim for reimbursement or contribution of an entity that is liable with the debtor on or has secured the claim of a creditor, to the extent that … such claim for reimbursement or contribution is contingent as of the time of allowance or disallowance of such claim for reimbursement or contribution.”

The court notes that the claims relating to the Offshore P&A Liabilities are likely to occur. Therefore, “contingent” in this context means unfunded. Since the MMS has not yet required any of the parties to fund the Offshore P&A Obligations, the claims remain unfunded. Although unfunded, for § 502(e) to be applicable, there must be a shared liability to the same party on the same claim. (September 3rd Order at 5.) Greenwich, the Co-lessees and the Predecessors in Title acknowledge joint liability, but allege that, nonetheless, their claims should not be disallowed under § 502(e) because the Debtor has a direct contractual duty to each of them to perform the Offshore P&A Obligations. As such, § 502(e) should not apply to disallow their claims because their claims do not meet the requirement of “liable with the debtor”. The court provides a lengthy, detailed and pragmatic analysis of these assertions. In arriving at its conclusion, the court notes that if it held that the Respondents’ claims were not subject to §502(e) and allowed the claims, it also would have to allow the claims of the MMS. Even though there would be ultimately only one expenditure to satisfy the Offshore P&A Liabilities, the debtor estate could be taxed as many as five times for what is a single set of claims.
More importantly, however, in disallowing Respondents’ claims, the market risk of the debtor’s failure is placed properly upon the parties that accepted such risk as part of their business negotiations. According to the court, Greenwich accepted the market risk when it priced its fee for the bonds based on the probability of a default. Likewise, when the co-lessees joined in the operating agreement they accepted the market risk that one or more of their group would default. “[T]he co-lessees would have been able to cut different deals if they had had absolute assurances that each co-lessee would have met their responsibilities. It’s built into the market. Distributions in the bankruptcy case ought to be built on the market.” (Transcript of Judge Isgar’s August 5, 2004 ruling in open court subsequently commemorated in September 3rd Order.) (September 3rd Order at 11.)

D. Subrogation and Subordination.

The MMS regulations and similar state regulations in Texas and Louisiana provide the sovereign with certain rights, remedies and powers to assure the satisfaction of end of lease liabilities in the event the operator fails to meet such obligations. Part of the rights and remedies afforded the sovereign under the various regulatory schemes includes the power to seek fulfillment of the obligations through enforcement of any existing bonds or other collateral or through requiring co-working interest owners or predecessors in interest (MMS and Louisiana) to satisfy such obligations. Upon exercise by the sovereign of these rights, the question becomes, to what extent does the party or parties ultimately required to pay become subrogated to the rights of the sovereign.

The September 3rd Order in Tri-Union addresses issues of subrogation and subordination. The parties agreed, as did the court, that payment to the MMS to satisfy the Offshore P&A Obligations resulted in the paying parties being subrogated to the MMS’s claim and priority for the amounts funded. (September 3rd Order at 13.) Greenwich argues however, that 31 U.S.C. § 9309 subrogates the paying parties to the police powers of the MMS as well. Section 9309 provides that:

“[w]hen a person required to provide a surety bond given to the United States Government is insolvent or dies having assets insufficient to pay debts, the surety, or the executor, administrator, or assignee of the surety paying the Government the amount due under the bond – (1) has the same priority to amounts from the assets and estate of the person as are secured for the Government; and (2) personally may bring a civil action under the bond to recover amounts paid under the bond.”

The court finds, based upon a plain reading of § 9309 and a review of case law, that the statute and applicable case law subrogate the respondents only to the claim and priority of the MMS and not to its police powers. (September 3rd Order at 14.) The court does not address which rights constitute police powers to which a paying party is not entitled but presumably they would include the right to assess penalties and interest.
The court next engages in a lengthy analysis of Tri-Union’s claim that Greenwich, even after fully paying the amount of the Surety Bonds, although subrogated to the claim and priority of the MMS, is subordinated to the MMS’ claim until such time as the MMS is paid in full. (Id.) Tri-Union’s claim is based upon § 509 (c) of the Bankruptcy Code which states:
“[t]he court shall subordinate to the claim of a creditor and for the benefit of such creditor an allowed claim, by way of subrogation under this section, or for reimbursement or contribution, of an entity that is liable with the debtor on, or that has secured, such creditor’s claim, until such creditor’s claim is paid in full, either through payments under this title or otherwise.”
Although the court admits that the wording of the statute and the available evidence of the legislative history surrounding the statute would tend to support Tri-Union’s claim, it finds this inadequate to resolve the issue. In the words of the court, “it makes little commercial sense to utilize the Debtors’ interpretation.” (Id. at 17.) Utilizing Debtors’ interpretation would provide a windfall to partially secured creditors at the expense of guarantors. This interpretation violates the purpose of the claim allowance and priority provisions of the Bankruptcy Code as stated in Pepper v. Litton, 308 U.S. 295 (1939), which is to provide an equitable distribution of estate assets. (September 3rd Order at 17.) The court also notes that the “result advocated by the Debtors would drive up the commercial costs of suretyships with no concomitant benefit.” (Id. at 19.) Again, the court took great lengths to arrive at a decision which provides the most pragmatic business resolution.
E. Is the MMS’ Claim Entitled to Administrative Priority Status?

In the bankruptcy arena, the question “… so who pays for this?” is determined, at least as far as the debtor estate is concerned, in the context of assessing priority status among the various claimants of the debtor estate. Section 507 of the Bankruptcy Code determines the priority of claims and § 507(a)(1), administrative expenses allowed under § 503(b), have the highest priority. Section 503(b) describes administrative expenses including “the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case.” (Bankruptcy Code § 503(b)(1)(A).) Therefore, under § 503(b), in order to prove administrative claim status, a claimant must show that their expenses (i) relate to periods post-petition, (ii) are actual and necessary, and (iii) preserve the estate of the debtor. Unsecured claims arising prior to the filing of the bankruptcy petition are afforded general, unsecured status.

Case law interpreting § 503(b) generally holds that the words “actual” and “necessary” should be narrowly construed to minimize administrative expenses and preserve the estate for the benefit of all creditors. (See Broadcast Corp. of Georgia v. Broadfoot (In re Subscription Television of Greater Atlanta), 789 F.2d 1530, 1532 (11th Cir. 1986); In re Lovay, 205 B.R. 85, 86 (Bankr. E.D. Tex. 1997); National Labor Relations Board v. Greyhound Lines, Inc. (In re Eagle Bus Mfg., Inc.), 158 B.R. 421, 435 (S.D. Tex. 1993); and In re Canton Jubilee, Inc., 253 B.R. 770, 775 (Bankr. E.D. Tex. 2000).) Actual and necessary expenses are only those expenses that benefit the estate. (NL Industries, Inc v. GHR Energy Corp., 940 F.2d 957, 966 (5th Cir. 1991); Augusta Mall Partnership v. Twigland Fashions, Inc (In re Twigland Fashions, Inc.), 198 B.R. 199, 200 (Bankr. W.D. Tex. 1996).)

Under applicable federal regulations, Offshore P&A Obligations accrue when a well is drilled, a platform, pipeline or other facility is installed or when you are or become a lessee or the owner of operating rights of a lease on which there is a well that has not been permanently plugged or a platform or other facility which has not been decommissioned. (30 C.F.R. § 250.1702.) Wells must be permanently plugged within one year after the lease terminates. (30 C.F.R. § 250.1710.) In Tri-Union, the Debtors asserted that, pursuant to the applicable statutes, all Offshore P&A Obligations accrued pre-petition. In fact, all production from Debtors’ offshore leases ceased, and the leases terminated, prior to the filing of the current bankruptcy petition. (Debtors’ May 28th Objection at 13-14.) Because all of the Offshore P&A Obligations are attributable to periods pre-petition, Tri-Union claims these expenses can only be afforded general unsecured status. In a similar case, the bankruptcy court for the Southern District of New York held that environmental clean-up costs incurred post-petition under New Jersey environmental statutes that resulted from the debtor’s pre-petition actions were not entitled to administrative expense priority, but rather were general unsecured claims. (In re McCrory Corporation, 188 B.R. 763 (S.D. NY 1995.)

Some courts, however, have accorded administrative expense priority to claims for environmental expenses incurred post-petition but that arise from the pre-petition actions of the debtor. Courts that have done this have relied on an analysis similar to that of the Supreme Court in Midlantic National Bank v. New Jersey Dep’t. of Envtl. Protection, 474 U.S. 494, (1986). The Midlantic analysis involves the creation of a narrow exception to the trustee’s general power to abandon burdensome property. In this case, Quanta Resources Corporation processed waste oil at two facilities, one in New York and one in New Jersey. (Id. at 497.) When the New Jersey Department of Environmental Protection discovered Quanta had illegally accepted and stored oil contaminated with a toxic carcinogen, the company filed for Chapter 11 Bankruptcy. After the NJDEP ordered cleanup of the site, Quanta converted its bankruptcy filing to a Chapter 7 liquidation proceeding. Thereafter, an investigation of Quanta’s New York facility revealed the company had also illegally accepted and stored contaminated oil at that site in deteriorating and leaking containers. (Id.) The trustee abandoned both facilities as “burdensome” and of “inconsequential value to the estate”. The Supreme Court noted in its opinion evidence provided at trial by affidavit of the Deputy Chief Inspector for the New York City Fire Department stating that:

“[t]he trustee was not required to take even relatively minor steps to reduce imminent danger, such as security fencing, drainage and diking repairs, sealing deteriorating tanks, and removing explosive agents. Moreover, the trustee’s abandonment at both sites aggravated already existing dangers by halting security measures that prevented public entry, vandalism, and fire.” (Id. at 499 n.3.)

The Court concluded that the Bankruptcy Court does not have the power to authorize abandonment of property without adequately providing for the protection of the public’s health and safety and held that “a trustee may not abandon property in contravention of a state statute or regulation that is reasonably designed to protect the public health or safety from identified hazards.” (Id. at 507.) The court explains the holding, however, as a narrow one that “does not encompass a speculative or indeterminate future violation of such laws that may stem from abandonment” and is not to be “fettered by laws or regulations not reasonably calculated to protect the public health or safety from imminent and identifiable harm.” (Id. n. 9, emphasis added.)
The Midlantic court notes that the state of New York claimed in the underlying bankruptcy case that its decontamination expenses should be afforded administrative claim status. (Id. at 864 n. 2.) That issue, however was not before the Court in Midlantic and is therefore not addressed in the Court’s decision. However, subsequent cases addressing this issue have held that where the facts of the case warrant a finding under a Midlantic analysis that the trustee is prohibited from abandoning the property, the liability for clean-up costs cannot be avoided and therefore “are actual, necessary costs of preserving the estate” entitled to administrative priority status. (In re McCrory, 188 B.R. at 766, citing United States v. LTV Corp. (In re Chateaugay Corp.), 944 F.2d 997, 1010 (2d Cir. 1991).)

Subsequent cases have determined that although there may be a violation of state environmental laws, if there is not any imminent harm or danger to the public, abandonment is permitted. (Borden, Inc., et al. v. Wells-Fargo Business Credit, Inc. (In re Smith-Douglass), 856 F.2d 12, 16 (4th Cir. 1988).) In In re McCrory, the court found that the debtor had abandoned property that was not in compliance with environmental laws. Nevertheless, a Midlantic analysis would not have precluded the debtor from abandoning the property and so the environmental clean-up costs stemming from McCrory’s pre-petition actions were not entitled to an administrative expense priority. (In re McCrory, 188 B.R.770.)

Notwithstanding the decision in Midlantic and the line of cases following the Midlantic analysis, one Fifth Circuit case appears to hold, independent of a thorough Midlantic analysis, that claims by the State of Texas for costs associated with plugging and abandoning a debtor’s unproductive wells were actual, necessary costs and expenses of preserving the estate and, thus, entitled to administrative priority status. (In re H.L.S. Energy Co., Inc. (In re HLS), 151 F.3d 434 (5th Cir. 1998).) A large part of debtor HLS’s assets were working interests in oil and gas wells. After negotiations with the bankruptcy trustee, the Texas Railroad Commission (the “TRRC”) agreed to plug and abandon certain inactive wells in which HLS was the sole working interest owner. (Id. at 436.) The TRRC then asserted that its claim for the costs associated with such work was entitled to administrative priority status as actual, necessary costs of preserving the estate. (Id.) The court rules that because the cost of plugging the wells in accordance with Texas law was an actual and necessary cost of managing the estate, such cost must be afforded priority as an administrative expense. (Id. at 439.) The court does note, however, that the plugging requirement in this case accrued post-petition, so they do not reach the question of whether post-petition expenses for the remediation of pre-petition environmental liabilities would constitute an administrative expense. (Id.)

A review of the underlying briefing to the Fifth Circuit in In re HLS reveals more to the story, however, than is reflected in the Fifth Circuit’s opinion. In the State of Texas’ Reply Brief to John Patrick Lowe’s Cross-Appeal Brief (“State’s Reply Brief”), 1998 WL 34078334 (5th Cir.), the State says that “because the Railroad Commission found that there was imminent danger of groundwater contamination and other environmental hazards so long as the wells remained unplugged, it authorized the use of State funds for plugging, rather than waiting for the operator (here, the Chapter 11 trustee) to plug the wells.” (Id. at 8.) Later in the State’s Reply Brief, the State notes that:

“the Railroad Commission determined that the violations on the subject wells, on which HLS and the bankruptcy trustee were the operator constituted a ‘hazard to the public health’ … and that ‘usable quality groundwater in the area is likely to be contaminated by migrations or discharges of saltwater and other oil and gas wastes from the subject well. … The probability of pollution from unplugged wellbores is a threat to the public health and safety.’ … There was clearly ‘imminent and identifiable harm’ resulting from the Chapter 11 trustee’s failure to produce or plug the subject wells.’” (Id. at 18.)

The State of Texas, through the TRRC, had obviously engaged in the Midlantic analysis and determined that, in fact, imminent and identifiable harm to the public health or safety existed. The Rooker-Feldman doctrine recognizes the grant of original jurisdiction in state courts that precludes federal district courts from exercising appellate jurisdiction over state court judgments. (See District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983) and Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923).) Therefore, the Fifth Circuit was prevented from further review of this issue, and was bound by the TRRC determination. In re HLS therefore does follow the Midlantic line of cases which finds that burdensome property may be abandoned by the debtor unless such property is in violation of laws or regulations designed to protect the public health and safety from imminent and identifiable harm and, in fact, imminent and identifiable harm is present. If the property may be abandoned under a Midlantic analysis, the costs and expenses associated with environmental remediation or plugging and abandonment are general, unsecured claims. If, however, the property may not be abandoned under a Midlantic analysis, it appears that such costs and expenses are actual, necessary costs of preserving the estate, although the specific issue of plugging and abandonment of oil and gas wells has not yet been directly addressed in this fact pattern.

It is in the context of this prior case law history that the court in Tri-Union was asked to determine whether, when and if allowed as no longer being contingent, the MMS’ claim will be afforded administrative priority status. In the last part of the September 3rd Order, the court admittedly refuses to address this central issue of concern to all of the parties: “are the Debtors required to pay for the [Offshore] P&A Obligations or should the obligations be passed to others?” (September 3rd Order at 21.) The court determines these issues are premature for summary judgment in light of the contradictory affidavits concerning whether the plugging and abandonment issues constitute an imminent threat to the environment requiring immediate attention. The court agreed to look at these issues again at the confirmation in light of how the Debtors’ plan proposes to address the environmental issues. Once again, the court allowed the parties as much leeway as possible to reach a negotiated business resolution to these issues and ultimately that is what happened. Debtors, the MMS, Greenwich, the Co-lessees and the Predecessors in Title reached a negotiated settlement whereby all parties are settling parties have entered into a contract with an independent turnkey operator to perform the Offshore P&A Obligations after confirmation of the plan. The issue of whether the MMS’ claim for expenses relating to end of lease liabilities, including plugging and abandonment, with respect to oil and gas wells where the operator of the properties is bankrupt or insolvent will be afforded administrative priority status remains unanswered.

V. Conclusion.

With the Texas Supreme Court’s decision in Seagull, Texas oil and gas owners can no longer assume that they are free from liabilities accruing to interests after they have been sold. Although an assignor may obtain indemnities and other protections from its assignee, if the assignee does not meet its liabilities attributable to operations after conveyance, including plugging and abandonment costs, under Seagull the assignor will be held responsible unless it has obtained the express written release of the operator. This has not been the understanding for the last one hundred years by industry players responsible for drafting the agreements now being interpreted in a new light. What this means in the big picture is that the industry in Texas must re-look at how it will address the issues of meeting end of lease liabilities in a maturing market. We might do well to consider Louisiana’s regulatory scheme for addressing these issues as provided in their Oilfield Site Restoration Fund (La. R.S. 30:80 et seq.) This legislation provides for site specific trust funds to be established which, when approved by the Commissioner and fully funded, will provide protection to past owners against enforcement actions by the state (La. R.S. 30:88F; see also discussion of these statutes in Yuma Petroleum Company v. Commissioner of Conservation, 731 So.2d 190 (1999).) The statute does not, however, alter or impair any rights or responsibilities established by contract between private parties (La. R.S. 30:81C) In addition, the statute establishes a restoration fund to clean up orphaned sites where the responsible party either cannot be located or is unable to pay. (La. R.S. 30:89)
Alternatively, we in Texas may be relegated to dealing with these issues on a case by case basis to find the best negotiated business resolution to meet the facts at hand as occurred in the context of the Tri-Union bankruptcy. Typically, however, these kinds of resolutions only occur as a measure of last resort. This approach does not provide certainty in the industry nor does it allow a party to accurately assess at any time what its liabilities and potential liabilities are.