413 P.3d 866
N.M.2018Background
- Echo and Enduro are parties to a joint operating agreement (JOA) governing proposals to drill a new well; nonconsenting parties (who opt out) forfeit share of profits until consenting parties recover 400% of certain costs.
- Under the JOA, after notice of a proposed operation, consenting parties must “actually commence” the operation within 120 days (30-day notice + 90-day commencement window) or repropose as if no prior proposal had been made.
- Echo proposed the 6H well on Dec. 1, 2010; Enduro (via predecessor) opted out; Echo’s 120-day deadline ended April 2, 2011.
- Before April 2, Echo surveyed and staked the site, arranged engineering and permitting work, submitted a drilling permit application (Mar. 31, 2011), obtained a fracking commitment, and entered into a drilling services agreement with JW Drilling (signed by contractor Mar. 14, 2011; Echo’s signed acceptance undated).
- After April 2 Echo proceeded without reproposing; permit approved Apr. 13, 2011; site work, drilling, fracking, and production followed. District court granted summary judgment for Echo; Court of Appeals reversed for Enduro; New Mexico Supreme Court reversed the Court of Appeals, vacated both summary judgments, and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| What constitutes “actually commence” under the JOA? | Enduro: Only meaningful on-site physical acts (e.g., site preparation, leveling, slush pits, spudding) suffice; off-site "backroom" planning cannot, as a matter of law, prove commencement. | Echo: Off-site commitments (engineering, permitting, securing contractors, signed drilling contract) can demonstrate a present good-faith intent to diligently complete drilling and thus suffice to show commencement. | A party commences operations by actions demonstrating a present good-faith intent to diligently carry operations to completion; physical spudding is conclusive but not required; both on-site acts and off-site enforceable commitments (e.g., binding drilling contract) can suffice. |
| Is obtaining a drilling permit within the commencement period essential? | Enduro: Permit should be required; regulatory language mandates permits before commencing drilling, so lack of permit is dispositive. | Echo: Permit requirement in regulatory code serves a different purpose (state conservation) and should not control private contract meaning; permit not essential to prove contractual commencement. | A permit is not essential to prove commencement under the JOA; absence of an approved permit within the period is not dispositive. |
| Can off-site preparations alone (with only staking/surveying on-site) ever prove commencement as a matter of law? | Enduro: No — relying on Valence, such backroom preparations with only staking should not suffice as a matter of law. | Echo: Yes — especially if there is an enforceable drilling contract or other commitments that irrevocably commit resources. | Off-site preparations may suffice if they show an irrevocable commitment (e.g., enforceable drilling contract) evidencing present intent; otherwise factual issues for the factfinder. |
| Was summary judgment appropriate here based on Echo’s evidence? | Enduro: Echo lacked sufficient on-site activity and no approved permit by deadline; summary judgment for Echo should be affirmed. | Echo: Its combination of off-site and some on-site acts, including a drilling contract and permit application, created no factual dispute entitling it to summary judgment. | There is a genuine factual dispute whether Echo entered into a binding drilling contract before the Apr. 2 deadline; summary judgment was improper. Case remanded for factfinder determination. |
Key Cases Cited
- Johnson v. Yates Petroleum Corp., 981 P.2d 288 (N.M. Ct. App. 1999) (preparatory activities at or near site can suffice to show commencement)
- Valence Operating Co. v. Anadarko Petroleum Corp., 303 S.W.3d 435 (Tex. App. 2010) (backroom preparations with only preliminary staking raise fact issues; not necessarily sufficient as matter of law)
- Gray v. Helmerich & Payne, Inc., 834 S.W.2d 579 (Tex. App. 1992) (regulatory permit requirement should not control private contract meaning; absence of permit does not preclude finding of commencement)
- Henry v. Chesapeake Appalachia, L.L.C., 739 F.3d 909 (6th Cir. 2014) (finding commencement may be proved without an approved permit)