Valence Operating Co. v. Dorsett

Justice WAINWRIGHT delivered the opinion of the Gourt.

In this case we construe the meaning of certain notice provisions of a commonly used oil and gás operating agreement. Working interest owner Elmagene Dorsett sued Valence Operating Company in a dispute arising from a joint operating agreement. The trial court granted partial summary judgment against Dorsett on her breach of contract claims, finding that Dorsett failed to consent to participate in the wells at issue, and that a contractual non-consent penalty for that failure was enforceable against her. The court of appeals reversed and rendered judgment in favor of Dorsett, holding that Valence breached contract provisions that required Valence to give notice to Dorsett before commencing drilling operations. Ill S.W.3d 224. The determinative issue before us is whether the agreement requires a thirty-day notice period to expire before the operator can commence work on the proposed operations. Because the non-consent penalty is enforceable and because we find nothing in the agreement prohibiting Valence from commencing work on the proposed operations before the expiration of the notice period, we reverse the court of appeals and render judgment in favor of Valence.

I. Factual and Procedural Background Elmagene Dorsett is a 4.05391 percent working interest owner in 677.04666 acres in the Mobley Gas Unit in Harrison County, Texas. In 1981, Dorsett, with three other minority working interest owners, and TXO Production Corporation, as operator and majority working interest owner, executed a modified 1977 American Associ [*659] ation of Petroleum Landmen Form 610 Model Form Operating Agreement.[1] The Model Form Agreement is a contract between oil and gas lease owners and interest holders for the exploration and development of designated oil and gas within the geographical area described in the Agreement. A.A.P.L. Form 610-1977, preamble (1977). The Model Form Agreement designates a single party as “operator” who is responsible for the management and control of drilling, development, and production activities. Id. preamble, art. V., VIA., C. All other parties are designated “non-operators.” Id. preamble. The parties to the Agreement have the option on each project to share operating costs and liabilities, to own equipment, and, if exercised, to then benefit by sharing in production revenues in proportion to their respective percentages of ownership. In such cases, these participants are called “consenting parties.” Id. art. I.G., VI.B. Parties who elect not to participate in a proposed operation, called “non-consenting parties,” are subject to a “non-consent penalty” which operates as a temporary relinquishment of the interest owner’s share of production revenue from the project to the consenting parties.[2] Id. art. I.H., VI.B. After the consenting parties recoup them investment costs and receive a limited return on their investments, the non-consenting parties share in production revenues in proportion to their ownership interests. Id.