In Ankor Energy, LLC et al v. Merit Management Partners I, L.P. et al a Louisiana federal district court addressed a situation commonly encountered by assignors of oil and gas operating interests: You’ve given up the cheese. How do you get out of the JOA trap?
The facts
The Ankor parties sued the Merit parties to recover unpaid lease operating expenses incurred while Ankor served as operator of two federal offshore oil and gas leases The motions addressed whether a separate claim for day-to-day operating expenses was properly before the Court and whether Merit owed those expenses.
The facts
In 2002 Merit acquired record title and rights in two Joint Operating Agreements in two federal Outer Continental Shelf oil and gas leases (South Pelto 8 and South Pelto 13) located off the coast of Louisiana. Merit assigned those interests to Black Elk effective in 2011.
Ankor acquired interests in the leases and became the operator in 2012. The leases terminated in 2018. During its time as operator Ankor incurred day-to-day lease operating expenses totaling $1,493,418.29. Merit refused to pay.
Because the South Pelto leases are located on the Outer Continental Shelf off Louisiana’s coast, the Court applied the Outer Continental Shelf Lands Act. Under OCSLA, the law of the adjacent state – Louisiana – applied as surrogate federal law. The Court therefore analyzed the parties’ obligations under Louisiana contract law and the two Joint Operating Agreements.
Merit’s procedural defense
The Court’s first order of business was to determine whether Ankor properly pleaded a claim for operating costs. The Court had already ruled in Ankor’s favor on its claim for decommissioning expenses. Repeated references in the complaint to expenses to “operate and decommission” the leases, read liberally as required by the Federal Rules of Civil Procedure, encompassed both types of expenses. The prior summary judgment order addressed only decommissioning costs; the operating expenses claim was still alive.
The substantive issue
The question before the Court was Merit’s obligation – or not – to pay the operating expenses. Merit argued that it was released from ongoing obligations under the Operating Agreements by virtue of the 2011 assignment of its working interests to Black Elk. Merit was not released, said the Court. Under Louisiana law, a mere assignment of an interest is not sufficient to release an assignor from obligations owed to a third party without the obligee’s (Ankor’s) express consent. The unreleased obligor remains solidarily liable with the assignee. The Court found no express release language in the relevant provisions of the Operating Agreements (Articles IV, V and XXVI). The Court found express release language in a different context (relating to well-specific assignments), so the parties knew how to effectuate a release if they had intended to.
Damages: No double recovery
The Court rejected Merit’s contention that because Ankor had recouped the operating expenses from other non-operators, it suffered no actual damages. The Operating Agreements expressly permitted the operator to look to other non-operators to cover a delinquent non-operator’s portion and also required the operator to redistribute any recovered funds to the contributing non-operators. There would be no double recovery. Ankor was abiding by the mechanism established in the Operating Agreements and would be required to distribute Merit’s payment to the non-operators who had previously paid Merit’s share.
Other defenses
Alleged “industry practice” not to charge non-operators after assignment of their interests did not abrogate Louisiana law. An affirmative defense of waiver (by sending certain invoices for decommissioning but not operating costs) also failed.
The Court granted plaintiffs’ partial summary judgment and denied defendants’ cross-motion. Merit was solidarily liable for $1,493,418.29 in unpaid lease operating expenses.
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