backBy Andrew M. Stakelum
1. Introduction
The permanent plugging and abandonment of wells is a near universal requirement of state and federal agencies—and that of mineral leases. In theory this occurs when a well no longer is economic to produce. In practice, this often occurs much later. Operators are often incentivized to delay the abandonment of well as long as possible for various reasons. A well may have future utility. Oil prices may be forecasted to increase, improving the well’s economics. Improved geosciences or enhanced recovery techniques may allow for additional recovery. An uneconomic well may still have value to, and can be sold to, a different operator with a lower operating cost structure. All of these factors arguably aided by lax enforcement of abandonment requirements by regulators have resulted in a significant amount of older wells that are approaching or are due to be abandoned.
In the normal course, the operator accounts for the cost of abandoning wells and, when necessary, incurs the cost to abandon the well. But more frequently, and especially with aging wells and infrastructure on the Gulf of America’s 1On January 20, 2025, President Trump issued Executive Order 14172 ordering the Secretary of the Interior to “rename as the ‘Gulf of America’ the U.S. Continental Shelf area bounded on the northeast, north, and northwest by the State of Texas, Louisiana, Mississippi, Alabama and Florida and extending to the seaward boundary with Mexico and Cuba in the area formerly named as the Gulf of Mexico.”outer continental shelf, the last operator lacks the funds to abandon wells and decommission facilities (e.g., platforms and pipelines), as well as maintain those wells and facilities pending abandonment. This creates potential safety and environmental risks; and when that company is unable (or unwilling) to abandon the well, regulators use their authority under the regulations to compel a previous owner or operator of the lease to perform this work.
In the Gulf of America, this means that the Bureau of Safety and Environmental Enforcement (“BSEE”) issues a decommissioning order to abandon the well to every company that previously owned or operated the lease and accrued the obligation under the regulations. These prior lessees and operators are known as “predecessors”2See 30 C.F.R. § 250.1700(d) (“Predecessor means a prior lessee or owner of operating rights, or a prior holder of a right-of-use and easement grant or a pipeline right-of-way grant, that is liable for accrued obligations on that lease or grant.”). and the liability that returns to these predecessors is often referred to as a “boomerang” liability. This unexpected liability can be significant.
Boomerang liabilities create a host of issues for predecessors. Putting aside the need to incur a substantial unbudgeted cost, predecessors must navigate daunting logistical, legal, and regulatory issues in responding to a decommissioning order. Where multiple predecessors receive a decommissioning order on a shared, accrued liability, the predecessors must determine, among many issues, who will act as the decommissioning operator and contract for and perform the work, how the well and related production facilities should be abandoned, what costs are allocable, and how those costs should be shared among predecessors. These decisions become even more complicated when parties are required to take action in as few as 30 days from receipt of the decommissioning order. 3
Boomerang liabilities are a creation of regulation, and the compulsion by BSEE to abandon a well or decommission a facility is driven by regulations. Several factors have resulted in a significant increase of decommissioning orders being issued to predecessors in recent years. The oil and gas Majors have received the vast majority of these decommissioning orders given their size, history of early development of the shallow water OCS, and acquisition of other companies that similarly operated on the OCS. Despite the increased frequency of boomerang liabilities, there is, yet, no industry consensus or “best practice” for predecessors to cooperate and resolve these many issues. There are many potential reasons for the absence of a consensus approach among predecessors: managing boomerang liabilities is a relatively new issue for companies; BSEE and the decommissioning regulations do not address how parties should cooperate; and, most significantly, predecessors have taken different approaches to performing the decommissioning work, mitigating costs, and managing risks. Some predecessors want to tightly manage decommissioning projects and control the work, while others prefer to have no involvement other than contributing an agreed share of costs. There are also predecessors that employ strategies in between these two extremes, for example, by contracting with third-party “decommissioning agents” to fully manage and execute the work.
Despite the varied approaches to managing boomerang liabilities, predecessors of a particular lease are frequently not strangers. They each owned a record title interest in the same lease—a lease that was developed and operated under a negotiated contract. This contract most often takes the form a joint operating agreement (“JOA”). This shared history—and contractual relationship—looms in the background and questions often arise regarding the extent to which it still applies when performing boomerang liabilities. Some predecessors may see the practical benefits of performing this work under an agreement that already addresses many of these issues that would otherwise have to be decided. Other predecessors may have good reasons not to work under the JOA. This article explores the potential role of JOAs in cooperatively addressing boomerang liabilities, including whether the JOA remains in effect, the advantages and disadvantages of performing the work under the JOA, and potential paths forward for predecessors to address the increasing frequency of boomerang liabilities.
2. The Offshore Regulatory Framework Applicable to Abandonment and Decommissioning
A hallmark of the offshore regulatory scheme in the Gulf of America is the joint and several liability of all predecessors for abandoning wells and decommissioning facilities that were installed or existed during their period of ownership.430 C.F.R. §§ 556.604(d) and 250.1701(a); see Nippon Oil Expl. U.S.A. Ltd. v. Murphy Expl. & Prod. Co. - USA, 2011 WL 2456358, at *4 (E.D. La. June 15, 2011) (discussing predecessor regulation 30 C.F.R. § 256.62(d) (1999), the court determined that “[o]nce an (sic) lessee accrues decommissioning obligations, it retains those obligations that accrued prior to the approval of the assignment notwithstanding the transfer.”); In re Tri-Union Dev. Corp., 2015 WL 5730745, at *8 (Bankr. S.D. Tex. Sept. 28, 2015) (Predecessor required to “bring the lease into compliance to the extent that the obligation accrued before the Regional Director approved the assignment of your interest in the lease”); Anadarko Petroleum Corporation, 187 IBLA 77, 86 and 93 (Feb. 2, 2016) (Predecessor was only responsible for decommissioning obligations that accrued prior to assignment). These abandonment and decommissioning obligations do not accrue when the asset is no longer useful or at the end of the lease. Rather, these obligations accrue when a record title owner drills a well; installs a platform, pipeline or other facility; creates an obstruction to other offshore users; or acquires a record title or operating rights interest in a lease on which there is an existing well that has not been permanently plugged, or a platform or other facility that has not been decommissioned. 5Id. § 250.1702. Decommissioning obligations also accrue to owners of a pipeline right-of-way on which there is a pipeline, platform, or other facility or obstruction. Id. § 250.1702(e). Put simply, the obligation accrues for lessee(s) that drilled the well or installed the platform and accrues for all subsequent lessees until the well is permanently abandoned or the facility is fully removed to the satisfaction of the regulations. Once the obligation accrues, it can only be extinguished when the obligation is satisfied—i.e., the well has been permanently plugged and abandoned or the facility has been fully decommissioned.6See 30 C.F.R. §250.1701 (“Lessees and owners of operating rights are jointly and severally responsible for meeting decommissioning obligations …, as the obligations accrue and until each obligation is met.”) (emphasis added); see also 30 C.F.R. § 556.710 (“[Y]ou, as the assignor, remain liable … until all such obligations fulfilled.”) (emphasis added). Neither the Interior Board of Land Appeals, which first considers appeals of any decommissioning order, nor any court has interpreted the regulations to release a predecessor of an accrued obligation that has not been satisfied.
Lessees are certainly free to, and invariably do, allocate responsibility for well abandonment and facility decommissioning when leases are assigned. This contractual allocation of responsibility, however, exists only between the parties and does not alter a prior lessee’s liability under the regulations. 7See Fruge ex. rel. Fruge v. Parker Drilling Co., 337 F.3d 558, 563 (5th Cir. 2003) (“The regulations govern the parties' joint and several liabilities vis-à-vis the Government, not amongst themselves.”).
A predecessor’s liability to satisfy a decommissioning obligation under the regulations is not limited to the extent of its interest in the lease. Each and every current and former lessee, regardless of the size of its interest and the duration that it owned its interest, is jointly and severally liable to the U.S. Government for 100% of the cost of satisfying an accrued liability. In doing so, the regulations saddle predecessors that may have owned relatively small interests, held interests for relatively short periods of time, or received relatively minor production with potentially disproportionate responsibility. While arguably inequitable, this is a policy decision aimed at protecting the environment and ensuring the U.S. Government does not bear decommissioning costs.
The regulations do not, however, address how predecessors should cooperate or apportion responsibility amongst themselves. In BSEE’s view, these are issues for the predecessors to resolve and the inability to resolve these issues does not relieve the predecessors from their need to timely comply. Predecessors are left to resolve these issues among themselves through private contracts, including potentially a pre-existing JOA, or according to the applicable state law prescribed by the Outer Continental Shelf Lands Act (“OCSLA”). 8See 43 U.S.C. § 1333(2); see also, e.g., GOM Shelf, LLC v. Sun Operating Ltd. Partnership, 2008 WL 901482 (S.D. Tex. 2008) (applying OCLSA choice of law provision to apply Texas law to interpret JOA covering lease offshore of Texas).
3. Significant Increase in Boomerang Liabilities in Recent Years
The number of decommissioning orders and resulting boomerang liabilities has significantly increased in the past five years. This is a result of factors such as aging wells and facilities in the shallower waters of the OCS, historically lax enforcement of the decommissioning regulations resulting in large numbers of shut-in or temporarily abandoned wells and idle facilities, and a wave of bankruptcy cases that resulted in operators abandoning their interests in leases under the authority of the Bankruptcy Code.
More than 55,000 wells and 7,000 platforms have been installed offshore, the vast majority in the in the waters of the Gulf of America since offshore exploration began in the 1940s.9“Interior Needs to Improve Decommissioning Enforcement and Mitigate Related Risks,” Report to Congressional Requesters, United States Government Accountability Office (GAO-24-106229), p. 1. Nearly half of the approximately remaining 8,000 wells and 1,600 platforms are past or approaching their end of life and must be decommissioned in the near future.10Id. at 1-2. The regulations require that wells be permanently abandoned and platforms be removed only when they are “no longer useful for operations” or within one year of the lease termination. 1130 C.F.R. § 250.1703.For a long time, BSEE and its predecessor agencies allowed an expansive interpretation of what it means to be “no longer useful for operations.” This allowed operators to indefinitely delay incurring decommissioning costs while amassing large inventories of aging wells and platforms that in reality had no future utility.12BSEE has attempted to address this issue through its various “Idle Iron” policies. Guidance most recently issued in 2018 attempted to more narrowly define the circumstances in which BSEE would accept that a well or platform had future utility. See NTL No. 201G03, Idle Iron Decommissioning Guidance for Wells and Platforms. While BSEE began to more aggressively enforce its well abandonment and facility removal regulations in 2010 through its “Idle Iron” policies, the number of wells and facilities due to be abandoned remains very high. 13Id.
The consequences of operators amassing these large inventories of aging oilfield infrastructure were on display in two recent bankruptcies involving some of the largest operators in the Gulf of America. In 2020, Fieldwood Energy, LLC and many affiliates filed a bankruptcy case seeking to reorganize under chapter 11 of the Bankruptcy Code. Fieldwood was one of the largest operators on the OCS with more than 300 operated platforms 14In re Fieldwood Energy, LLC, Case No 20-33948, Dkt. No. 29 at ¶ 19.and interests in more than 350 OCS leases.15Id. at ¶ 23.While Fieldwood had spent approximately $1.4 billion on decommissioning work, including plugging and abandoning over 1,100 wells and decommissioning 380 platforms at the time of the bankruptcy filing, it still had billions of dollars in unperformed decommissioning obligations.16Id. at ¶30. The U.S. Government ultimately asserted claims for more than $9 billion related to Fieldwood’s decommissioning liabilities to the government.17In re Fieldwood Energy, LLC, Case No 20-33948, U.S. Government Proofs of Claim 895, 906, 900, 899, and 897. The bankruptcy court ultimately approved a plan of reorganization that resulted in predecessor lessees incurring billions of dollars of costs to plug and abandon more than a 1000 wells and hundreds of facilities.
Soon after, Cox Oil Offshore and various affiliates filed bankruptcy cases in 2023.18In re MLCJR LLC, Case No 23-90324. Cox held interests in approximately 750 producing wells and 470 structures, including 350 wells that were shut-in or suspended, across 60 fields.19Id. at Dkt. No. 34, ¶¶ 10 and 29. Cox operated nearly 92% of the production from its interests in approximately 400 oil and gas leases. Like Fieldwood, Cox was responsible for billions of dollars in decommissioning obligations.
The bankruptcy cases of Fieldwood and Cox, both of which were significant owners of older wells and facilities in shallower waters, resulted in BSEE issuing hundreds of decommissioning orders to predecessors. Each decommissioning order requires a predecessor to commence monitoring and maintaining any well or facility ordered by BSEE within 30 days; designate a single entity to serve as operator or agent for the decommissioning operations within 90 days; and submit a decommissioning plan within 150 days.2030 C.F.R. § 250.1708(a)(1)-(3).
While some predecessors may still operate assets in the region and be better prepared to respond to orders, other predecessors had made business decisions years earlier to significantly shrink their Gulf of America operations or cease operating in the Gulf of America altogether. These companies with minimal to no offshore presence may lack the historical knowledge and organizational structure to respond to the decommissioning orders and must now determine how they will stand up a new organization to manage significant decommissioning campaigns. It is with this context that companies are now examining the extent to which their prior JOAs may compel—or at least guide—their cooperative responses to decommissioning orders.
4. The Joint Operating Agreement
There are many articles that address in detail how JOAs function and the nuances of their many provisions. This is not one. Rather, for our purposes it is relevant to recall certain key attributes of JOAs. At base, the JOA provides the structure for multiple lessees of the same lease (working interest owners, in JOA terms) to cooperate in the exploration for oil and gas, production oil and gas, and plugging and abandoning wells. The JOA achieves this by putting an agreed structure in place to determine an “operator,” set forth the working interest owners’ rights and obligations vis-à-vis one another and create a mechanism for determining which operating costs are allocable among the working interest owners and how reimbursement of these costs occurs. JOAs are negotiated contracts. While the industry has adopted various JOA forms,21The most widely used form is the American Association of Professional Landmen (“AAPL) Form 610, which was issued in 1956 and subsequently updated in 1977, 1982, and 1989. This form was adapted for use offshore. The first model JOA form created specifically for offshore operations is the American Petroleum Institute (“API”) Model Form 5UU05. The AAPL subsequently acquired the rights to this API form, which was subsequently renamed AAPL Model Form 710-1998. these forms have varied over time, are regularly modified to suit the specific needs of a project or the working interest owners, and are typically amended. The potential irregularity of JOAs is par3sticularly relevant for older leases issued in the shallower portions of OCS, where development first began. These older JOAs tend to vary more than recent JOAs, have problematic provisions that resulted in changes to later forms, and have more amendments.
At base, JOAs have certain common features. The JOA designates a single working interest owner to act as “operator.” In doing so, the operator manages the day-to-day operations of the lease by contracting with third parties to perform services and providing administrative support. The JOA grants the operator with the authority to act on behalf of the other working interest owners, typically subject to cost thresholds and the vote of all working interest parties for significant operating decisions. The parties agree to an accounting and billing methodology through which the operator is entitled to bill the joint interest owners for their share of costs, including overhead.22This is most frequently set out in an accounting addendum using a Council of Petroleum Accountants Societies (“COPAS”) form.The JOA frequently covers operations from the spudding of the well to all end of lease obligations (e.g., well abandonment, facility decommissioning, and site clearance).
The JOA term is co-extensive with the term of the underlying offshore lease. Many offshore JOAs frequently included provisions that expressly provide that the JOA continues after the lease terminates until all property is disposed of and a final accounting is complete.23An example of a term provision from a 1993 JOA for a block offshore of Louisiana provides: Term. This Agreement shall remain in effect so long as the Lease(s) shall remain in effect, and thereafter, until all property belonging to the Parties shall be disposed of and final settlement shall be made under this Agreement.
5. The Issue of “Confusion” and the Extinguishment of the JOA
A frequent boomerang liability fact pattern involves the current lessee ultimately owning 100% of the record title interest at the time the time of filing its bankruptcy case. This is illustrated with the following example in which Companies A, B, C took the original lease from the U.S. Government and as is common practice, executed a JOA to govern the operations conducted on the lease. Then, through a series of assignments over the life of the lease, Company E ultimately acquires 100% of the record title interest becoming the sole lessee.
This frequent fact pattern raises the question of what happens to a multi-party JOA when there becomes only one party owning and operating the lease. The law of confusion may provide an answer. The Louisiana Civil Code provides that “[w]hen the qualities of obligee and obligor are united in the same person, the obligation is extinguished by confusion.”24La. Civ. Code art. 1903 (emphasis added). This paper focuses on Louisiana law. Most OCS leases are offshore of Louisiana, the law of which would apply to any lease disputes because of the OCSLA’s imposition of the law of the adjacent state. But as is frequently the case, it is not necessarily a black and white issue.
A. The Florida Gas Decision
The Florida Gas Transmission Co., LLC v. Texas Brine Company, LLC decision addresses the legal consequences when, through a series of transactions, one party became both the lessor and lessee of a salt lease.252022-0004, 348 So.3d 93 (La.App. 1 Cir. 8/3/22), writ denied 352 So.3d 85. This case is one of many arising out of the collapse of the Assumption Parish salt mine cavern in 2012.26Id. at 96. Occidental Petroleum owned the land located above the salt dome and entered into a lease with Texas Brine for the mining of salt.27Id. at 97. Texas Brine thereafter assigned the lease to Legacy Vulcan, which became the new lessee of the lease.28Id. at 97.Texas Brine and Legacy Vulcan then entered into two agreements with Texas Brine: a facilities lease, in which Texas Brine agreed to construct certain facilities on the lease; and an operating agreement, in which Texas Brine agree to operate the mining facilities and transport the salt to Legacy Vulcan’s plant.29Id. The terms of these two agreements expressly tied back to the term of the salt lease.30Id. In 2008, Occidental Petroleum subsequently acquired Legacy Vulcan’s interests in the salt lease and two ancillary agreements.31Id.
The court and the parties generally agreed that Occidental Petroleum’s acquisition of Legacy Vulcan’s interests in 2008 resulted in confusion occurring but disagreed on the effect of confusion. The court first observed that confusion extinguishes obligations rather than contracts.32Id. at 100. But when Occidental Petroleum became both the lessee and lessor under the salt lease, the court noted:
[Occidental Petroleum] essentially became obligor and obligee of all the obligations contained within the lease, and therefore, confusion extinguished all obligations and the entire legal relationship set forth in the Salt Lease such that the Salt Lease no longer served as a source of all obligations.33Id.
If a solidary obligor becomes an obligee (or vice versa), confusion extinguishes the obligation only for the portion of that obligor (or obligee, as the case may be).34La. Civ. Code. Art. 1905. This occurs, for example, where three obligors are solidary liable for the payment of a note to an obligee. If one of the solidary obligors acquires the rights of the obligee, confusion occurs only as that portion of the debt of the acquiring obligor. The debts of the two other obligors are not extinguished. The Florida Gas court rejected the application of this exception finding that “Occidental was not a solidary obligor that became an obligee, nor a solidary obligee that also became an obligor, but the sole obligee that became an obligor.”35Florida Gas Transmission Co., LLC, 348 So.3d at 101.
The Florida Gas court next examined the effect of confusion extinguishing the salt lease on the two ancillary contracts. Those two contracts whose terms were expressly tied to the term of the salt lease were cross extinguished on the date of confusion when the obligations of the salt lease were extinguished. The separate “Assignment of the Salt Lease,” which contained its own independent obligations, was not extinguished due to confusion. It, however, was extinguished because it lost its legal cause when the salt lease extinguished.36Id. at103 (citing 5 La. Civ. L. Treatise, Law of Obligations, 16.61 (2d ed.), citing La. Civ. Code art. 1966; 1 Litvinoff, Obligations 399 (1969) (“A reading of the Assignment of Salt Lease makes clear that it exists for the sole purpose of transferring the rights and obligations of the Salt Lease from Texas Brine to Legacy Vulcan. Without a Salt Lease, there can be no assignment thereof. Therefore, this contract likewise cross-extinguished on March 27, 2008.”)).
Extinguishment of a contract due to confusion does not necessarily mean the contract never existed. The Florida Gas court rejected Legacy Vulcan’s expansive argument that “the extinguishment of the entire legal relationship between the parties, including all correlative rights and duties which precludes their enforcement forevermore, whether performed or unperformed, matured or unmatured, liquidated or unliquidated.”37Id. at 104. Texas Brine argued that pre-termination breaches may still be asserted after termination of the contract.38Id. 105 citing Sewerage & Water Board of New Orleans v. Bertucci, 65 So.2d 377, 384 (La. App. Orleans 1953). Moreover, Texas Brine argued that neither Texas Brine nor Legacy Vulcan were the parties that became both the obligor and obligee of any of the obligations at issue.39Id.The court ultimately found that Legacy Vulcan failed to carry its burden on summary judgment because “[t]his court has not found, and Legacy Vulcan has not provided, any support for the argument that an actionable obligation cannot be enforced once extinguishment occurs, when the parties to the obligations were not the cause of the extinguishment.”40Id.
Applying the Florida Gas court’s analysis to our example, Company E’s acquisition of 100% of the record title interest likely results in the obligations contained in the JOA being extinguished as of the date of acquisition. Moreover, because there are no other solidary obligors or obligees remaining, the unification of all obligations under Company E likely results in the entirety of the obligations under the JOA being extinguished.
If the JOA no longer exists, then the JOA agreement arguably cannot govern the abandonment of wells and removal facilities by predecessors. This result also makes sense from a practical standpoint. A party to a JOA typically must have an interest in the lease, but the receipt of a decommissioning order does not vest or revert record title of the lease back to the predecessor. It is merely an agency order compelling prior lessees to satisfy their regulatory obligations to the U.S. Government—not a private contractual obligation owed to another co-lessee.41In many cases, the lease has already terminated resulting in there being no record title interests. As such, with no record title interest vested in the predecessor (or even existing in the case of a terminated lease), there is no legal mechanism for a former party to a JOA to become a party to the JOA. This does not even consider the fact that predecessors, absent exceptional circumstances, avoid taking actions that cause them to reacquire record title interest in a lease. This is because reacquiring a record title interest would make the predecessor (1) the now-current lessee primarily liable for all decommissioning costs and (2) accrue liability for additional wells and facilities drilled or installed after the time it previously owned an interest.
B. An Argument for the Continued Application of the JOA to Apply to Boomerang Liabilities
The extinguishment of the JOA, however, does not mean the JOA never existed. There is at least some support for an argument that boomerang liabilities relate back to the working interest parties’ accrued obligations under the JOA and, therefore, are subject to the JOA.
The Florida Gas court recognized that claims may still exist under the JOA even after its obligations are extinguished by confusion.42See Florida Gas Transmission Co., LLC, 348 So.3d at 105. The mere act of assigning one’s interest in the lease (and rights under the JOA) does not relieve the assigning party from its accrued obligations absent an express release by the other parties to the JOA of the assigning party’s liability.43See La. Civ. Code art. 1821; see also Chieftain Intern. (U.S.), Inc. v. Southeast Offshore, Inc., 553 F.3d 817, 819 (5th Cir. 2008) (holding an assignor liable for its accrued obligations under a JOA and noting that “an assignee and assignor remain solidarily liable with regard to the assignor's obligations to a third party unless the third party releases the assignor.”). JOAs infrequently contain such an express release; however, JOAs may include loosely drafted provisions that may support an argument. This issue has been frequently litigated in the context of an operator attempting to recover well abandonment costs from the party that assigned its interest to a current working interest owner that defaulted on its obligations.44See e.g., Chieftain Intern. (U.S.), Inc. v. Southeast Offshore, Inc., 553 F.3d 817, 819 (5th Cir. 2008); Total E&P USA, Inc. v. Marubeni Oil & Gas (USA), Inc., 2018 WL 11469648, at *5 (S.D. Tex. 2018); see also Nippon Oil Exploration USA Ltd. V. Murphy Exploration and Production Co.¸ 2011 WL 2456358 (E.D. La 2011); see also GOM Shelf, LLC v. Sun Operating Ltd., Partnership, 2008 WL 901482 (S.D. Tex. 2008). These disputes almost always involve arguments that the assignor did not “accrue” the cost during its period of ownership and/or was expressly released from future payments. Courts have rejected the argument that the obligation to pay for well abandonment costs accrues at the time of abandonment, determining that such obligations accrue as provided for in the regulations.45Id. Courts also have been reluctant to find an express release of the assignor’s liability.
Referring back to our example, if a predecessor Company A accrued liability under the JOA, can predecessor Company D bring suit under the same JOA assigned both Companies A and C to enforce Company A’s obligation to contribute its proportional share of the costs of the accrued liability? At least one Texas court suggests, maybe, yes. In Republic Petroleum LLC v. Dynamic Offshore Resources NS, LLC, the Houston First District Court of Appeals held that an assignor retains the right to sue for breach of contract for damages incurred based on the rights it held prior to assignment.46474 S.W.3d 424, 430 (Tex. App.—Houston [1st Dist.] 2015, pet. denied) (emphasis added). While the author has not found analogous authority under Louisiana law, the issue addressed by this court under Texas law is not rooted in any peculiarity of Texas law. Republic Petroleum operated a well pursuant to a JOA and then, on behalf of the working interest parties, entered into a production handling agreement with the owners of a nearby platform. The platform owners breached the agreement by overcharging the well owners and failing to maintain the equipment. Republic Petroleum, however, prior to filing suit had assigned its interest in the well. Relying on the principle recognized in both Texas and Louisiana law that an assignor is not relieved of its obligations merely upon assignment, the court broadly stated:
Concomitantly, a party who assigns its interest under a contract has standing to sue for damages that it incurred based on the rights it had prior to the assignment, unless the breaching party's actions caused no damage to the assignor or the assignor right's under the agreement were terminated or otherwise released; liability for the non-assigning party's breach of its obligations do not disappear upon assignment, but remain in place.47Id.
This broad pronouncement, combined with Florida Gas’ recognition that certain rights may survive post confusion, may support an argument that a predecessor can nevertheless proceed under the JOA and assert a claim against another predecessor based on the parties’ then existing rights and obligations under the JOA. This, however, is not without potentially significant hurdles. Any breach of the JOA by a predecessor for non-payment would not occur until after the JOA was extinguished. In contrast, the breaches by the platform owners in Republic Petroleum occurred prior to Republic Petroleum’s assignment of its interest. Moreover, the platform owners continued to communicate with Republic Petroleum post assignment and remained the sole counterparty to the production handling agreement, which the court found to be an evidentiary point supporting capacity but apparently not of legal significance on Republic Petroleum’s right to bring suit.48Id. at 433-434.
Again, while the odds seem long that the JOA remains viable to govern future work or adjust the predecessors’ rights and obligations, the odds are not zero. The unique facts of a particular lease history and decommissioning order may support an argument that the JOA remains relevant in some shape or form.
6.The Potential Pros and Cons of Performing Work under the JOA
The issue of whether the prior JOA applies to boomerang liabilities is different than the issue of whether the prior JOA is the best vehicle for managing the work. Predecessors for various reasons have contemplated simply “reactivating” the JOA to avail themselves of the previously agreed to structure for jointly administering the lease.49A simple agreement among predecessors to perform the work under the JOA would be easy to draft and have the effect of binding the predecessors to all rights and obligations under the JOA. This may be more favorable (or more detrimental) to certain of the predecessors depending on the particular facts. At first blush, this option has merits. The terms of the JOA were acceptable to everyone at one point in time and established a working framework potentially for several decades to operate the lease. But closer scrutiny reveals practical problems and risks that should be considered before the wholesale adoption of the prior JOA. While certain issues can be remedied by amending the JOA, at some point the scope of amendments may prove so great that the parties would have been better suited negotiating a new JOA tailored to the work at hand.
A. Operatorship
The parties would need to select an operator as the prior operator no longer exists. A key benefit of the JOA for operators is that JOAs typically insulate the operator from liability to other parties absent gross negligence or willful misconduct.50The following language is from a 1987 JOA for a block offshore of Louisiana: Workmanlike Conduct. Operator shall conduct all operations in good and workmanlike manner as would a reasonably prudent operator under the same or similar circumstances. Operator shall not be liable to the Parties for losses sustained or liabilities incurred except such as may result from its gross negligence or willful misconduct. Unless otherwise provided, Operator shall consult with the Parties and keep them informed of all important matters. This is particularly advantageous for an operator that is abandoning aging oilfield infrastructure that they had not operated in years, decades, or ever. Well files—to the extent they exist from the defaulting current lessee—often are of little value in understanding the true downhole condition of a well or the extent of corrosion on a platform. The uncertainty of the condition of assets to be decommissioned increases both the cost and risk of the operations.
B. Participating Interests
Rights and obligations under JOAs are several and according to each’s working interest (i.e., record title interest) in a particular lease. But the predecessors do not have an interest in the lease. Reliance on their former interests may be appropriate in some instances, but in many instances there may only be a few viable predecessors of a lease in which many parties formerly held interests. The question then becomes whether predecessors share by “head” or “missing” interests are reallocated according to the proportional interests each previously held.
C. Authority and Control
While the JOA grants the operator the exclusive authority to conduct operations on behalf of the parties, it also imposes limitations on this authority. The JOA typically requires written consent, often through an approved authorization for expenditure (“AFE”), before incurring an expense above a certain threshold. This threshold may be as low as $25,000 in older JOAs and is typically in the range of $100,000 to $250,000 for later JOAs. Agreeing to an older JOA with lower limits may result in the operator frequently having to issue AFEs and be subject to continued negotiations with the other parties to gain approval. This process, which provides a check on the operator’s authority to spend other parties’ money, may create obstacles in timely securing contractors and meeting regulatory deadlines. It also creates a potential problem when different parties employ different decommissioning philosophies. One party may advocate for performing the work at the lowest cost by performing work to satisfy only the minimum regulatory requirements and by using lower-rate contractors. Another party may place a greater emphasis on mitigating risk and protecting its reputation by performing the work to a higher standard and employing more established contractors.
Navigating these competing philosophies is a particular problem for aging oilfield infrastructure. For example, a well abandonment plan that meets the minimum regulatory requirements may increase the risk that the well later turns into a “bubbler”—a situation that occurs when the downhole plugs have not completely isolated the formation, and hydrocarbons subsequently begin bubbling to the surface. When this occurs, the predecessors can receive new orders years later to mobilize and address the well. At this time, the platform is removed and remedying a bubbling well is significantly more complicated and more expensive. Another frequent example occurs in deciding on the size of the abandonment rig to mobilize in the first place. In many instances the downhole condition of the well is not fully understood. While there is a chance a smaller (and less expensive) rig can accomplish the work, parties at times may advocate using a more robust (and more expensive) rig that provides greater assurance that the work can be performed to avoid the time and cost with mobilizing and demobilizing multiple rigs.
D. Accounting and Billing
A significant benefit (and potential detriment) of the JOA is the agreed accounting procedures and joint interest billing regime. While JOAs have historically used COPAS form accounting procedures, those procedures have changed over the decades and may have been tailored to meet the parties’ needs and expectations at the time the JOA was executed.
Specifically, the treatment of overhead has evolved in more recent years with the advent of significant IT infrastructure and more complex in-house engineering. In addition, many older JOAs set fixed overhead rates of less than $1000 per month on a per well basis and variable overhead rates on major construction projects at percentages that are not commensurate with the true engineering, design, and drafting costs to remove a platform. This creates inherent problems in conducting complex well abandonment and facility removal operations in today’s world under yesterday’s rules.
E. Unknowns
While many of the potential benefits and risks of stepping back into the JOA to manage boomerang liabilities are apparent, the issues that are not readily apparent pose a significant risk. Each predecessor was a party to the JOA most often at different times and potentially during times that did not overlap. A predecessor may not have full visibility into all amendments of the JOA and, especially, side letters among all or a subgroup of the parties. The later discovery of material amendments or side letters can significantly change a party’s risks when proceeding under a JOA.
7. Potential Paths Forward
The receipt of a decommissioning order forces predecessors to quickly cooperate to achieve a common goal. If they can’t or won’t quickly cooperate, the risk of litigation significantly increases, as does the risk of violating the decommissioning order. No consensus “best practice” or path forward currently exists for cooperation among predecessors. Each decommissioning order typically results in an ad hoc approach given the mix of predecessors and accrued liabilities. In some instances, predecessors have agreed to a common approach in fields where multiple decommissioning orders have been issued for leases with similar histories. But this largely remains the exception rather than rule. Predecessors continue to explore the following paths forward:
A. Bespoke Operating Agreements
Negotiating bespoke, stand-alone operating agreements may be the best path forward from a legal standpoint, but it may also be the least practical approach. The volume of decommissioning orders being received by companies, the regulatory urgency, the potential one-off nature of the work, and the potential involvement of multiple predecessors all complicate this path. The amount of time required to finalize such an agreement and the risk that one predecessor may be recalcitrant or have rigid, competing philosophies may prove too great to overcome for a single lease or unit.
B. The Former JOA
Reactivating or agreeing to be bound by the former JOA may be least attractive path from a legal standpoint given the inherent problems in applying a contract that was created for a different purpose. This path, however, continues to be attractive to some because of the ease of putting some structure in place, especially a structure for billing costs. Predecessors considering this approach should do so with caution and with a full understanding of the attendant risks.
C. The Letter Agreement Incorporating Certain JOA Terms
This hybrid approach attempts to reach agreement on key issues through the execution of a simple letter agreement that incorporates key provisions of the JOA such as designation of an operator, joint billing, and the accounting procedure. It can be described as a stop-gap measure that allows the work to proceed and regulatory deadlines to be met, while the parties work through other issues.
D. The Contribution Agreement
The path most frequently taken appears to be simple contribution agreements that designate a single predecessor to serve as the decommissioning operator and an agreement to share costs in a certain percentage, which are often the most important issues to be resolved by predecessors. Often left unstated in these agreements are the extent to which costs may be reimbursed (e.g., overheard, internal engineering, etc.) and whether the contributing parties have any check on the authority of the decommissioning operator to incur costs or make significant decisions. The rationale in part may be to avoid protracted negotiations on nuanced issues that may never arise and to simply proceed “at law” in resolving future disagreements.
E. Form Decommissioning Agreement
This path does not currently exist, but the growing demand for such a path may trigger action by industry groups to adopt a form decommissioning agreement. In the author’s view, the unique nature of and increasing prevalence of boomerang liabilities suggest an industry-supported solution is necessary. JOA forms were created to serve as an even-handed starting point for parties to more efficiently negotiate operating structures. An even-handed form decommissioning agreement would serve the same purpose and promote cooperation among predecessors.
8. Conclusion
Boomerang liabilities are a unique creature of regulatory law, and the U.S. Government has made the conscious decision not to get involved with how predecessors work amongst themselves to respond to decommissioning orders. The JOA provides a natural starting point for understanding how predecessors can potentially cooperate to respond. Using the JOA as the framework to perform the work, however, presents many issues—some clear and some unclear. But understanding the JOA framework is essential in knowingly agreeing to proceed under this path or, more preferably, using certain attributes of the JOA to set a new framework going forward.