Odds are your newly acquired Texas oil and gas lease has a Pugh clause that reads something like: “this lease will be held to be limited to the strata or stratum from which the production of oil or gas is obtained.”   Not to worry, the well on the lease has been producing from that hot formation for a while now, right?  But do the words “strata” and “stratum” really mean what you think they mean? Will the lease be held to that entire producing formation? Or, heaven forbid, just the single producing interval, or bench, within that producing formation?

Although the Texas courts haven’t issued a solid answer, the Texas Supreme Court did touch on “strata” and “stratum” in Amarillo Oil v. Energy-Agri Prods., Inc., 794 S.W.2d 20 (Tex. 1990). Per the amarillo Court, a “stratum” is a

single layer of rock deposited at roughly the same geographical period of time which normally contains only one kind of rock.  Depending upon the particular geological facts, it may be the same as a ‘formation’ if there is only one type of layer of rock that was deposited continuously and under the same general conditions, or it may be a part (one layer) of a formation.”

However, the Amarillo dissenting opinion claimed that “the term ‘stratum’ likely contemplates a formation or group of formations not in communication with other formations.”

Common industry standards don’t provide much help either.  The Schlumberger Oil and Gas Glossary says that a “stratum” is “a layer of sedimentary rock. The plural form is strata.”  And apparently “strata” are made up of “fine layers, called laminae that form thicker layers know as beds.  The thickness of the beds can range from millimeter scale to tens of meters.”

While there is clearly a safest bet as to what the Pugh clause holds, the right counsel and some additionally geological information can protect a lessee from giving up any more than it should.

 

While the blame game for gross negligence continues in Texas, Louisiana law is clear: a party may not contract for indemnification against its own gross negligence.  Under article 2004 of the Louisiana Civil Code “[a]ny clause is null that, in advance, excludes or limits the liability of one party for intentional or gross fault that causes damage to the other party.”  Gross fault includes gross negligence, as well as bad faith breach of contract and fraud.

In Occidental Chemical Corporation v. Elliott Turbomachinery Company, Inc., 84 F. 3d 172 (5th Cir. 1996), the Fifth Circuit applied article 2004 to invalidate a clause indemnifying a subcontractor against its own gross negligence.  Under a subcontract with Occidental’s general contractor, Elliott modified (“rerated”) a compressor owned by Occidental.  The contract limited the duration of Elliott’s warranty for its work and made Elliott “completely immune” from liability for any damages.  When the compressor failed, Occidental was forced to shut down its plant and incurred $7 million in damages.  Occidental sued Elliott and alleged that Elliott had used inferior parts to modify the compressor.  The district court found that under the contract most of Occidental’s claims were untimely.  However, the district court also concluded that under article 2004 any time limit on Elliott’s warranty for gross fault was invalid.

On appeal, Elliott argued that article 2004 did not apply to a warranty duration provision and that invalidating the provision would destroy the parties’ freedom to contract.  In interpreting article 2004, the Fifth Circuit was “convinced that although limitations regarding warranties are permissible in most circumstances, such limitations are prohibited when the obligor is guilty of gross fault. . . . Thus, any contractual clause which operates to limit a plaintiff’s right to redress a violation for gross fault violates Louisiana public policy. . . . [W]hile Louisiana law permits parties to limit, by contract, the duration of a warranty, article 2004 prohibits provisions limiting the duration of a warranty when gross fault is involved.”  Otherwise, good faith in the performance of a contract would be destroyed because “‘gross fault’ involves a certain degree of fraudulent intent.”

Elliott’s further attempts to distinguish between gross fault and gross negligence failed to persuade the court.  “We previously have determined that article 2004 encompasses gross negligence,” the court responded.  “Louisiana opinions . . . have reached the same conclusion.”

Gross fault is broadly defined

Louisiana courts construe the term “fault” more broadly and comprehensively than the term “negligence.”  In Wadick v. General Heating & Air Conditioning, LLC, 14-0187 (La. App. 4 Cir. 7/23/14); 145 So. 3d 586, two homeowners filed suit against General Heating for breach of contract and alleged that General Heating had installed and maintained the homeowners’ air condition in a defective manner, causing mold and mildew.  In response, General Heating sought to enforce a provision of the installation contract that excluded liability for mold.  The trial court dismissed the plaintiffs’ claims, erroneously reasoning that article 2004 applied only to tort claims.

But on appeal, the Louisiana Fourth Circuit reversed.  It held that whether the plaintiffs’ claims were based in contract or tort was not relevant to the application of article 2004.  The court explained that “[u]nder Louisiana law, liability, in both the contractual and delictual [tort] context, is incurred because of fault” and that gross fault under article 2004 “includes both contractual and delictual [tort-based] fault.”  Consequently, gross fault contemplated by article 2004 “includes not only gross negligence, but also bad faith breach of contract or fraud.”  Thus, the Fourth Circuit held the exculpatory provision for mold damage invalid under article 2004.

Indemnification uncertain for gross negligence to a third party

Despite the certainty of Louisiana law on indemnification for gross negligence, it remains unclear how article 2004 may apply to an indemnification agreement benefiting a third party.  While not an official part of the law, a comment to article 2004 suggests that the law does not govern “agreements were parties allocate between themselves, the risk of potential liability towards third persons.”  For example, in Lifecare Hospitals of New Orleans, L.L.C. v. Lifemark Hospitals of Louisiana, Inc., 07-914 (La. App. 5 Cir. 4/15/08); 984 So. 2d 894, the court suggested that an insurer may waive its subrogation right to recover claims paid for gross negligence and that an insured may waive his insurer’s right of subrogation.  A court may even find article 2004 inapplicable to the extent a party can characterize its agreement as one shifting risk, as opposed to completely excluding liability for gross fault.  This is more likely to be true when an agreement requires insurance against the reallocated risk.

A question of public policies

The validity of an indemnification agreement waiving a third-party right of subrogation for gross negligence is a factually intensive inquiry.  Courts will more likely uphold such agreements when the parties are of equal bargaining power and have clearly expressed the intent to reallocate such risk.  As the Louisiana Supreme Court noted in Home Insurance Co. of Illinois v. National Tea Co., 588 So. 2d 361 (La. 1991): “To ensure that the indemnitee is not unjustly enriched at the obligor’s expense, equity dictates that such a provision be enforced only if there is clear evidence that the risk was bargained for and accepted.”  In analyzing jurisprudence on this subject, a federal court noted that the Louisiana Supreme Court upheld a release provision that was clear and express, and where there was no “suggest[ion] that one side had an unfair bargaining advantage over the other.”  McAuslin v. Grinnel Corp., Nos. Civ. A. 97-803, 97-775, 1999 WL 203279 (E.D. La. 1991).  Using that rationale, the federal court maintained a clause in a lease between a city and an industrial lessee where the city waived the subrogation rights of its insurer.  In so finding, the court noted that “this case involves a bargained-for agreement among sophisticated parties.”

Similar to the blame game in Texas, a resolution of this issue in Louisiana will require balancing the state’s public policy on good faith performance of contracts, with the freedom of parties to make their own bargain.  Weighing in on this issue, one federal court suggested that “[t]o nullify one bargained-for clause would upset the balance negotiated by the parties to [a] bona fide commercial transaction.  [A]rticle 2004 does not mandate such a perverse result.”

The past few years have seen some very visible and well publicized protests of pipelines, like the Keystone XL and Dakota Access pipelines.  In one of these protests, demonstrators in North Dakota chained themselves to construction equipment and pitched tents along the pipeline route.  The intent of these actions was obvious—to physically disrupt and delay construction of pipelines.

In response, many oil companies and industry groups lobbied state legislatures to curtail the types of legal protests that can be held near pipeline sites.  These groups’ efforts are paying off, as several states have adopted such legislation and others are considering similar laws.  Proponents of these laws assert they are necessary to counter the increasingly aggressive tactics of activists, which they believe put their employees, property, and investments in danger.  They reject complaints that the laws chill First Amendment rights, which they respond don’t entitle a person to destroy or hinder other persons’ property, commit trespass, or create a public hazard.  As one might expect, environmental activists have not taken kindly to these efforts.  An investigator for Greenpeace has called these efforts an “unholy alliance” and an attempt “to crush resistance to polluting companies.”

So far, these measures have passed in Indiana, Louisiana, North Dakota, Oklahoma, South Dakota, Tennessee, and Texas.  Active campaigns to pass similar laws are ongoing in Illinois, Ohio, and Pennsylvania.  Although the laws are not identical, they generally create a new, more serious category of trespassing when it occurs near energy infrastructure and interferes with construction.  Some include heightened penalties, such as $10,000 fines and felony prison sentences.  Enforcement of these laws is often complicated when ownership of the land is contested, and determining the actual trespasser can prove difficult.  Louisiana’s new laws were utilized to quell protests for the Bayou Bridge Pipeline.  While many claim that the Bayou Bridge Pipeline Company began construction without the legally required permissions, protesters were nevertheless arrested as trespassers.  The pipeline was completed in March 2019 and several protesters were charged with critical infrastructure crimes.

Laws regulating certain activities at or near critical energy infrastructure certainly have legitimate rationales, but some of these new laws could be overbroad.  The oil industry has a right to be protected from violence and trespass and generally from protests that impede them from legally constructing or operating their pipelines and otherwise taking action on their own property.  Also, although some might consider $10,000 fines as disproportionately severe, the delay damage to a pipeline company from an interruption such as occurred in North Dakota will often far exceed the amounts of these fines.  But states need to ensure that they are not overzealous in their enforcement of these laws.  Where ownership/access to the land is disputed, law enforcement cannot simply assume the pipeline companies are in the right and the protestors are in the wrong on every occasion.  Law enforcement must perform some due diligence before making arrests and pursuing criminal charges.  Such overcorrections like this may give credence to detractors’ claims that these laws were intended to stifle dissent and chill First Amendment rights.

The Supreme Court has upheld the right to protest, even when those protests are in poor taste and extremely hurtful to others.  For example, in Snyder v. Phelps, 562 U.S. 443 (2011), the Court upheld the Westboro Baptist Church’s right to protest military funerals.  Admittedly, the Church members weren’t chaining themselves to equipment or otherwise blocking access to the funeral.  But for the oil industry to receive what some might consider special protections from protests that other arguably deserving groups don’t have only plays into the narrative of the undue influence of money in politics.  As I stated earlier, I do see the merit in laws that protect people or companies from protests that physically prevent them from carrying out their legal business activities or that disregard vested property rights.  But these laws should be narrowly tailored to address specific concerns (e.g. violence, trespass, safety, interruption or operations, etc.) and not restricted only to energy operations.  And although any industry would rather not see criticism or protests of its operations, draconian laws that stifle free expression under the guise of “safety” can sometimes go too far and ultimately help foment the negative perception they are trying to prevent.

Litigation over the costs for P&A operations seems never ending.  On July 16, 2019, in Apache Deepwater, LLC v. W&T Offshore, Inc., the Fifth Circuit affirmed a $43.2 million jury award to Apache Deepwater, LLC against W&T Offshore, Inc. for W&T’s unpaid share of the costs to plug and abandon three wells in the Mississippi Canyon area of the Outer Continental Shelf offshore Louisiana.

The facts of the case:

In 1999, Apache signed a joint operating agreement (“JOA”) with W&T’s predecessors for the operation of three offshore deep water oil and gas wells.  After an initial failed attempt at plugging and abandoning the wells, Apache contracted to use a rig called the Helix-534 for the job at an estimated cost of $56,350,000.  However, in the wake of new regulations post-Deepwater Horizon, Apache concluded that government regulators would not approve the Helix for these P&A operations.  In July 2014, W&T discovered that Apache intended instead to use two other drilling rigs at an estimated cost between $81 and $104 million.  Apache had originally contracted for these other two rigs for drilling projects that were ultimately abandoned.

Apache asserted that the rig switch was due to regulatory changes.  But W&T argued Apache was trying to use these rigs rather than leave them idle and, through their use for a job under the JOA, force W&T to split much of the costs for those two rigs.

Apache sought W&T’s approval for use of the rigs through an Authorization for Expenditure (“AFE”), which W&T never approved.  Without an AFE, Apache undertook the work and successfully P&A’d the wells for a total cost of just under $140 million.  Apache then billed W&T for its 49% share.  But W&T paid only $24,860,640, which represented 49% of the original estimate for use of the Helix rig.  Apache then sued W&T for breach of contract.

At trial, the jury found that (1) W&T failed to comply with the contract by failing to pay its proportionate share of the full costs, (2) $43,214,515.83 would compensate Apache for W&T’s failure to pay the balance owing, (3) Apache was not required to obtain W&T’s approval before plugging and abandoning the wells, (4) Apache acted in bad faith, thereby causing W&T not to comply with the contract, and (5) the amount owed by W&T should be reduced by $17,000,000.  The district court, however, held that W&T was not entitled to the $17,000,000 offset under Louisiana law.  W&T appealed and the Fifth Circuit affirmed.

At least on appeal, W&T did not press Apache’s position that the federal regulators would not have allowed Apache to use the cheaper Helix rig for these P&A operations.  Instead, W&T made two main arguments.  First, that the JOA required W&T’s approval before Apache could expend more than $200,000; and second, that the jury’s finding of bad faith on the part of Apache should preclude or reduce Apache’s recovery for breach of contract under Louisiana law.  But neither defense won the day.

W&T’s first defense: Apache breached the contract by performing work without an AFE

This argument relied on the interpretation of two key provisions in the JOA.  Section 6.2 generally provides that the operator (Apache) shall not undertake work costing more than $200,000 without approval.  However, Section 18.4 stated that the operator shall conduct the abandonment and removal of any well required by a governmental authority and that those costs would be shared.  Noting that the consent provision in Section 6.2 contains no exception for government-mandated operations under Section 18.4, W&T argued that its consent was needed even for operations under Section 18.4 and thus that it did not breach the contract because Apache never obtained its consent.

The jury rejected this interpretation, and the Fifth Circuit agreed.  Government-mandated operations like plugging and abandoning wells were authorized under Section 18.4.  Requiring approval from W&T for government-mandated operations would lead to an absurd result because the non-operator could essentially stop the operator from completing a P&A job required by federal law simply to avoid sharing the costs.  Although it is a fair reading of the contract to suggest that Section 18.4’s government-mandated work provision is not constrained by Section 6.2, the court also had a strong sense of public policy guiding the decision.  The court refused to allow Section 6.2 to tie the operator’s hand in plugging and abandoning wells; otherwise, a non-operator could prevent the operator from completing legally required work and leaving unplugged wells on federal lands.

W&T’s second defense: Louisiana Civil Code Article 2003 dictates that the jury’s bad faith finding bars Apache’s recovery for breach of contract

Louisiana Civil Code Article 2003 states that:

An obligee may not recover damages when his own bad faith has caused the obligor’s failure to perform or when, at the time of the contract, he has concealed from the obligor facts that he knew or should have known would cause a failure.

If the obligee’s negligence contributes to the obligor’s failure to perform, the damages are reduced in proportion to that negligence.

The district court ruled, and the Fifth Circuit agreed, that it was bound by the Louisiana Supreme Court’s decision in Lamar Contractors, Inc. v. Kacco, Inc., which concluded that “an obligor cannot establish an obligee has contributed to the obligor’s failure to perform unless the obligor can prove the obligee itself failed to perform duties owed under the contract.” Although Lamar was a case about negligence rather than bad faith, the Fifth Circuit found no reason why the Louisiana Supreme Court would limit the requirement to find a breach to negligence cases and not extend it to bad faith cases.

Before a court can consider whether bad faith bars damage recovery, the obligor must first establish that the obligee failed to perform a contractual obligation that caused the obligor’s failure to perform.  W&T would have had to show that Apache failed in its performance of the contract and that Apache’s failure caused W&T’s breach.  But W&T could point to no actual failure in Apache’s performance.  In other words, a breach by Apache was a threshold requirement to considering Apache’s bad faith.  Although the jury affirmatively responded that Apache was in bad faith, that bad faith still cannot be considered until a breach by Apache is shown to have occurred.  With no breach, the bad faith question was moot, so Apache’s $43.2 million award was affirmed.

It has long been established that the Outer Continental Shelf (OCS) is under federal jurisdiction.  To this end, in 1953, Congress enacted the Outer Continental Shelf Lands Act (OCSLA) to govern activities on the OCS.  A key provision of the OCSLA provides that, while federal law generally applies, the adjacent State’s laws shall apply “[t]o the extent they are applicable and not inconsistent with” OCSLA or other federal law.  43 U.S.C. § 1333(a)(2)(A).  Yet district and circuit courts have differed on when exactly state law should apply on the OCS.  In Parker Drilling Management Services, Ltd. v. Newton, 139 S.Ct. 1881 (2019), the Supreme Court finally provided an answer.

The dispute that brought the issue before the Court arose from Brian Newton’s employment with Parker Drilling on OCS platforms off the coast of California.  Newton’s shifts involved 12 hours per day on duty and 12 hours per day on standby, during which he was not permitted to leave the platform.  Although he was paid above both the federal and California minimum wages, he was not separately paid for his standby time.  Newton filed a class action alleging violation of several California wage-and-hour laws.  In short, Newton claimed that California’s minimum-wage and overtime laws required Parker Drilling to compensate him additional amounts for his standby time.

Both parties agreed that the platforms were subject to the OCSLA.  However, Parker Drilling claimed that under the OCSLA the California laws complained of by Newton did not apply.  Relying on precedent from the Fifth Circuit, the district court held that “state law only applies to the extent it is necessary to fill a significant gap in federal law.”  Because the Fair Labor Standards Act (FLSA) constituted a comprehensive federal wage-and-hour scheme, the district court held that there was no significant gap for state law to fill, and thus rendered judgment in Parker Drilling’s favor.

On appeal, the Ninth Circuit vacated and remanded.  It held that state law is “applicable” under the OCSLA whenever it “pertains to the subject matter at hand.”  According to the Ninth Circuit, if state law is applicable, it governs unless it is “inconsistent,” which the Ninth Circuit interpreted as meaning that the OCSLA and state law were “mutually incompatible, incongruous, [or] inharmonious.”  Under this legal framework, the Ninth Circuit found no inconsistency between the FLSA and the relevant California laws because the FLSA has a savings clause that explicitly permits more protective state wage and hour laws.  With the split between the Fifth and Ninth Circuits, the Supreme Court granted certiorari.

Justice Thomas, writing for a unanimous court, acknowledged that this case presented a “close question of statutory interpretation,” but ultimately found the Fifth Circuit’s approach more persuasive.  This conclusion hinged on a hornbook rule of statutory interpretation that “the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.”  The Court found that under the Ninth Circuit’s approach, if the word “applicable” in the OCSLA meant merely relevant to the subject matter, “then the word adds nothing to the statute, for an irrelevant law would never be ‘applicable’ in that sense.”  The Court held that if federal law addresses the issue at hand, then state law cannot be adopted as federal law on the OCS.  Under this standard, the Court held that Newton’s claims under California law failed because federal law already addresses the issue.  See 29 C.F.R. § 785.23 (“An employee who resides on his employer’s premises on a permanent basis or for extended periods of time is not considered as working all the time he is on the premises.”).

The Supreme Court’s unanimous decision provides significant clarity on when state law applies to disputes arising on the OCS.  This decision should create more predictability about how lower courts will consider OCS disputes in the future; that predictability creates efficiencies that, let’s hope, can benefit all parties.

On May 7, 2019, the Bureau of Safety and Environmental Enforcement (BSEE) issued a Notice to Lessees and Operators (NTL No. 2019-G01) regarding Suspensions of Production (SOPs) and Suspensions of Operations (SOOs).  This new NTL supersedes NTLs No. 2000-G17 and No. 2011-N10 and includes additional clarification on what lessees can and should do to help ensure a suspension is granted in their favor.

In general, lessees and operators are expected to explore, develop and commence production within the primary term of their offshore Federal leases.  A lease may be maintained beyond its primary term through lease-holding operations including drilling, well re-working, or production in paying quantities (30 C.F.R. § 250.180(a)(2)).

If these lease-holding operations are halted, or if a lease is at the end of its primary term with no operations, the lease will expire within one year of the last operation unless either of two things occurs.  (As discussed in an earlier DrillDeeper blog post, this grace period was increased from 180 days to one year in 2017).  First, if lease-holding operations are resumed within one year, the lease will not expire.  Second, if an application for an SOP or SOO is sent to the BSEE Regional Supervisor within that year, and the SOP or SOO is granted, the lease will still be in effect for the time granted (30 C.F.R. § 250.180(d)).

Just as in prior NTLs, BSEE prefers to receive the SOP request approximately three weeks before the scheduled lease expiration date (SOO requests may be received later because the request is based upon unforeseen circumstances beyond a lessee’s control).  The three week rule is not a hard requirement, however.  Under 30 C.F.R. § 250.171, the lessee simply needs to submit the request before the expiration of the lease.  However, if a lease expires while the request is under consideration, a lessee cannot perform any operations on the lease until the suspension is granted.  Therefore, it is wise to submit the request sooner than later to ensure certainty for the future.

To a greater extent than prior versions, NTL No. 2019-G01 gives detailed explanations of what should be included in an SOP request.  It discusses the necessity of demonstrating a firm commitment to production (CTP).  It is absolutely essential to make a commitment to production before the time the lease would otherwise expire.  Under this NTL, a commitment is firm if it is “based on a definitive decision by the operator to bring the discovered hydrocarbons to production.”  Additionally, exploration and delineation drilling must be completed, and the operator must be able to show that the project is an economic venture.  When a CTP relies upon the use of another entity’s production facility, the relevant parties must have committed to such use before the date the lease would otherwise expire.

Although essential, a firm CTP alone is not enough to ensure the SOP is granted.  A request must also justify the need for the suspension by summarizing how the suspension will lead to production and explaining how much additional time is being requested.  This should include a reasonable schedule of work with measureable milestones leading to the commencement or restoration of production.  The NTL provides an example of what such a timeline might look like.

Additional requirements include the identification of a well drilled on the lease that has been determined to be producible, an explanation of the regulatory basis for granting a suspension under 30 C.F.R. §§ 250.172-250.174, and payment of the service fee.  Not submitting the service fee before the lease expires will mean that the suspension request was not timely submitted.  BSEE has no authority to grant late requests so it is imperative that the fee is paid on time.  If a request is the first one for a particular lease, there is the additional requirement of including reservoir structure map(s), isopach map(s), and a reserve estimate.

In the 2011 Statoil (or Julia) decision, the Director of the Department of the Interior’s Office of Hearings and Appeals made it clear that BSEE’s grant an SOP or SOO is discretionary (Statoil Gulf of Mexico LLC, 42 OHA 267).  Thus, even if a lessee technically meets all the requirements for the granting of an SOP or SOO, BSEE could still deny the request.  This is so because such decisions must always consider the national interest using “a balancing of factors according to the circumstances of the case” (Id. at 308). The Statoil decision can be found at https://www.oha.doi.gov:8080/index.html, by searching for DIR-2010-0027 in Directors Decisions (1996-Present).

If the SOP is granted, its duration will depend on the circumstances of the individual case.  NTL No. 2019-G01 differs from the 2000 version regarding duration.  Under 30 C.F.R. § 250.170, no single suspension may be granted for more than five years.  Although NTL 2000-G17 explicitly mentioned this cap, the new NTL does not.  As the 2000 version noted, even with the five year cap, most suspensions are granted for one year or less. The lack of mention of the five year cap is unlikely to be an indication of a shift in BSEE’s policies to allow for longer suspensions.

In addition, NTL No. 2019-G01 provides a much more expansive look at what is required to obtain an SOP for phased development.  Phased development occurs when hydrocarbons have been discovered by wellbore penetration but the operator is waiting for production capacity at the host facility to become available.

Generally, BSEE does not approve suspensions for phased development, but exceptional circumstances may move BSEE to grant one.  In addition to everything needed for a normal SOP, the applicant must also demonstrate, to the Regional Supervisor’s satisfaction, that the project has unique or unusual circumstances, phased development is appropriate, and phased development would not harm ultimate recovery or cause waste.  The NTL enumerates various elements that, if proven, would help to demonstrate these requirements.  There is an important potential economic consequence that any lessee seeking an SOP for phased development should consider: BSEE may require a lessee to execute an agreement that would compensate the federal government should the lease fail to produce as proposed.

The new NTL also provides guidance on SOPs for technology development.  At this time, a request for an SOP (or SOO) solely to provide time for technology to be developed is unlikely to be granted.  Nonetheless, time for technology development can be a factor for granting an SOP where all of the normal requirements for an SOP are met.

Although the requirements for granting SOPs and SOOs have significant crossover, they are two distinct things.  SOOs are granted because of reasons beyond the control of the lessee or operator.  If a lessee has not scheduled operations before the lease is to expire, BSEE will almost certainly deny an SOO request.  More specific requirements for SOOs are set forth in 30 C.F.R. § 250.171 et seq.

With these recent clarifications, it is perhaps easier to know when you might qualify for  and what information you need to provide to receive a suspension on offshore leases.  Nevertheless, the new NTL should not be read in isolation.  When requesting an SOP or SOO, it is important to verify that all of the requirements of 30 CFR 250.169 et seq. are satisfied before lease expiration.

Avanti Exploration, LLC v. Kimberly Robinson, Secretary, Louisiana Department of Revenue, (La 3rd Cir Court of Appeal)

The Louisiana Third Circuit Court of Appeal ruled that an oil producer, Avanti Exploration, LLC, properly remitted severance tax based on the full amounts of its gross receipts received from its first purchasers for crude oil sold at its leases and thus that no severance tax was due on the downward price adjustments in its crude oil sales contracts.  Avanti has served as a test case for dozens of similar cases currently pending before the Louisiana Board of Tax Appeals.

The issue before the Court was the proper application of La. R.S. 47:633(7)(a), which requires that the higher of either gross receipts or posted field price be used to calculate severance tax.  The Court noted throughout its decision that there was no traditional posted price in the field, “which is apparently a practice that has been in disuse for many years,” and thus, Avanti’s gross receipts are determinative of the severance tax.

At issue were Avanti’s contracts with two of its first crude oil purchasers.  Each contract contained a negotiated price formula to establish the sales price to be paid to Avanti for the oil it sold to the purchaser at the lease site. The price formulas began with published, oil market center prices for the month of production and made various positive and negative adjustments, including a final price differential, to arrive at a lower price to be paid for the crude oil being sold at the lease.

Following an audit, the Louisiana Department of Revenue took issue with the “adjustments” to price in Avanti’s sales contracts, specifically the final price differential, and contended that Avanti had impermissibly reduced its gross receipts, and thus its severance tax liabilities, by subtracting transportation costs that were not allowed since it sold its oil on the lease and did not itself transport the oil.   In other words, the Department asserted that Avanti improperly took a transportation deduction by hiding it in the pricing formula as an un-named deduction.  According to the Department, “Avanti and its purchasers conspired to manipulate Avanti’s tax liability by taking a producer’s transportation deduction and hiding it in the pricing formula.”

The Third Circuit rejected the Department’s position.  The court held that Avanti did not take a deduction for the transportation costs paid by its first purchaser to move the oil from the lease.  Rather, the costs of transportation incurred by the oil purchasers were an element of the negotiated price in an arms-length transaction between Avanti and its first purchasers and thus just another fluctuating overhead expense in the cost of doing business.

In so holding, the Court also rejected as “illogical” the Department’s attenuated argument that the differential for transportation or other costs used in the pricing formula was a “thing of value” to Avanti that could be added back to the gross receipts from its sales of oil for the purpose of determining severance tax due.

The court upheld the use of the price formula in the contracts between Avanti and its first purchasers for determining the sales price subject to severance tax (i.e., “the taxable value of oil”) and also ruled that the contracts constituted arms-length transactions.  Moreover, the court seemed to reject the Department’s de facto use of market center index prices without adjustment to calculate severance tax.  In addressing this issue, the court first concluded that, in unilaterally adding back the pricing differentials/deductions from the pricing formulas, the Department did in fact “use the large market center indices to calculate the severance tax owed.”  In rejecting the Department’s method for calculating price, the court relied heavily on Robinson v Mantle Oil & Gas, where the First Circuit held that “a market center price for a field 130 miles away could not be used as a posted field price.”

Ultimately, Avanti was able to show in this case that it paid severance tax on the full amount of its gross receipts in sales to the first purchasers of its oil, and that there were no material issues of fact or law preventing summary judgment in Avanti’s favor.  This decision is helpful to oil producers in Louisiana not only on severance tax issues, but also on royalty issues under State Leases, where the Office of Natural Resources has been taking the same position as the Department in these tax cases.

If you have any questions about this decision or about severance taxes in Louisiana, please contact Martin Landrieu or Caroline Lafourcade.

In Randle v. Crosby Tugs, L.L.C. (5th Cir. 2018), the Fifth Circuit affirmed that a tug owner was neither negligent in providing medical care to an injured seaman nor vicariously liable for the alleged medical malpractice committed by the seaman’s treating physicians.

In September 2014, the plaintiff seaman, Randle, fell ill while working aboard a tug owned by Crosby Tugs, L.L.C.  Upon learning about his illness, the ship’s personnel immediately called 911.  The 911 operator dispatched Acadian Ambulance Service to the vessel, and the Louisiana Emergency Response Network directed Acadian to transport Randle to Teche Regional Medical Center (TRMC).  Although Acadian’s paramedics correctly suspected Randle was suffering from a stroke, the TRMC physicians failed to diagnose his condition as a stroke and instead diagnosed him with a brain mass and transferred him to another facility.  As a result of his stroke, Randle was left permanently disabled and required constant custodial care.

Randle then sued Crosby.  He alleged that, if TRMC had properly diagnosed his condition as a stroke, the TRMC physicians would have administered a medication that would have improved his post-stroke recovery.  Randle alleged that Crosby was directly liable for the crew’s alleged failure to get him prompt medical care and was vicariously liable for TRMC’s alleged medical malpractice.

A shipowner has a nondelegable duty to provide prompt and adequate medical care to its crew.  The degree of this duty depends upon the circumstances of each case, including the seriousness of the injury or illness and the availability of aid.  A shipowner can breach this duty two ways: directly, such as when the shipowner fails to get the seaman to a doctor when it is reasonably necessary and the ship is reasonably able to do so; and vicariously, when the shipowner selects a doctor who acts negligently in treating the seaman for his injuries.

On appeal, the Fifth Circuit affirmed the district court’s partial summary judgment in favor of Crosby.  The court distinguished Randle’s case from prior cases where the shipowner was held to have breached the duty to provide prompt and adequate medical care, such as where the shipowner procured initial treatment and then did nothing as the seaman’s condition continued to deteriorate, or where the shipowner provided an incorrect or an insufficient type of care.  In Randle’s case, the tug owner fulfilled its direct duty to provide medical care under the circumstances by selecting a course of action reasonably calculated to get Randle to a medical facility that would be able to treat him, more specifically, by immediately dialing 911.  The court also affirmed that Crosby was not vicariously liable for TRMC’s alleged medical malpractice, noting that the shipowner’s duty is based upon agency principles, and the case law regarding same is limited to instances where the medical malpractice was attributable to an on-board physician in the hire of the shipowner or onshore physician selected by the shipowner.

Although it was not an issue in the Randle case, it is important to remember that the breach of the duty to provide prompt and adequate medical care is not the sole basis for holding a defendant liable for the negligent medical treatment of a Jones Act seaman.  On the contrary, under a general proximate cause theory under the Jones Act, the seaman’s employer can be held liable for all subsequent injuries stemming from the employer’s negligence, including injuries created or exacerbated by subsequent medical malpractice.  Under the Jones Act’s relaxed causation standard, the employer can be held liable for the full amount of a seaman’s damages, regardless of third-party fault, if the employer’s negligence contributed “in whole or in part” to the seaman’s injury.  Of course, the superseding cause doctrine can apply to insulate or partially insulate the employer, where the employer’s negligence, in fact, substantially contributed to the plaintiff’s injury, but the injury was actually brought about by a later, unforeseeable cause of independent origin.  However, even where the seaman’s damages predominantly stem from the subsequent medical malpractice rather than the employer’s negligence, an employer may nevertheless be responsible for the entire amount of the plaintiff’s damages under the doctrine of joint and several liability.

In sum, determining whether and under what circumstances a Jones Act employer or shipowner can be held liable for the medical malpractice of a doctor, particularly where the treating physician is chosen by someone other than the shipowner, requires an in-depth analysis of the applicable facts and legal theories of recovery.  The analysis is further complicated by issues arising out of state medical malpractice statutes limiting physician liability and federal maritime statutes limiting the liability of shipowners.  When a Jones Act employer potentially faces such issues, it is crucial that the employer promptly retain knowledgeable counsel to assist in its defense.

The Texas Supreme Court has yet to determine whether a party may contract for indemnification against its own gross negligence, and the Court has noted that this issue raises public policy concerns.  The Texas Courts of Appeals are split on this issue.

On the one hand, in Smith v. Golden Triangle Raceway, 708 S.W.2d 574 (Tex. App. 1986), the court refused to honor a provision in a release agreement purporting to release a party from liability for its own gross negligence against an individual.  In Smith, the plaintiff was injured while in the pit area of Golden Triangle Raceway.  Before entering the pit, he signed a release agreeing to indemnify the track owner and operator “from any loss, liability, damage, or cost that they may incur due to the presence of the undersigned in or upon the restricted area . . . whether caused by the negligence of the releasees or otherwise.”  Although the trial court upheld the release, the appellate court threw it out on public policy grounds.  The court acknowledged that it could not find any binding Texas cases on point.  But citing treatises and case law from other states suggesting that indemnity or release for gross negligence would violate public policy, the court concluded that “[t]he rule adopted by the other jurisdictions and supported by the treatises should be the rule in Texas.”  Although the court’s opinion did not indicate that it turned on this point, there is no indication that the release expressly mentioned “gross” negligence.

On the other hand, in Valero Energy Corporation v. M.W. Kellogg Construction Company, 866 S.W.2d 252 (Tex. App. 1993), the court upheld a waiver of liability for gross negligence in an instance when the parties are private entities with relatively equal bargaining power.  Valero Energy hired Ingersoll-Rand, a subcontractor of M.W. Kellogg Construction Company, to supply machinery for the expansion of a Valero refinery.  When the machinery exploded and caused damage to the refinery, Valero filed suit against Kellogg and Ingersoll-Rand for gross negligence.  Like the indemnity provision in Smith, the indemnity provision here did not expressly reference “gross” negligence.  The trial court granted summary judgment in favor of the defendants based upon waiver, indemnity, and hold-harmless provisions of their contract with Valero.

On appeal, Valero argued that a waiver of liability for gross negligence offended Texas public policy.  The court disagreed and noted that when the parties to a contract are private entities with relatively equal bargaining strength, the agreement is usually enforced.

Valero and Kellogg are sophisticated entities, replete with learned counsel and a familiarity with the oil refinery industry. They negotiated their working relationship over the course of almost three years, with Kellogg submitting several proposals for Valero’s review. . . . Valero, having a bargaining power equal to Kellogg’s, agreed to the exculpatory clause in this contract. Valero possessed the resources necessary to ascertain and understand the rights it held on the date of the signing of the contract, and those it would hold in the future. Nevertheless, Valero, of its own accord, negotiated those rights away.

The waiver and indemnity provision absolving Kellogg of all liability sounding in products liability and gross negligence does not offend public policy.

The court likewise found that Ingersoll-Rand, as a Kellogg subcontractor, was also entitled to release under the contract between Valero and Kellogg.

So a clear split still persists in Texas.  And it remains unclear whether all Texas courts would focus on the “relatively equal bargaining power” issue in determining whether to uphold or reject an indemnity or release provision.

Extending the definition of negligence to include gross negligence

In Crown Central Petroleum Corporation v. Jennings, 727 S.W.2d 739 (Tex. App. 1987), the court made the unremarkable holding that a provision in an indemnity agreement excluding negligence of the indemnitee from the scope of the indemnity also excluded its gross negligence

However, in Webb v. Lawson-Avila Construction, Inc., 911 S.W.2d 457 (Tex. App. 1995), the court used the logic from Crown to include indemnification for gross negligence.  In Webb, Lawson-Avila contracted with Palmer Steel to provide raw materials to build a high school.  During construction of the school, a crane lifting steel joists tipped over and dropped its load, resulting in an injury and one fatality.  The family of the injured and the survivors of the deceased filed suit against Lawson-Avila.  A jury found that Lawson-Avila was grossly negligent and awarded the plaintiffs actual and punitive damages.

Based on an indemnity provision in the contract between Lawson-Avila and Palmer, Palmer’s insurer, Employers Casualty Company, paid the actual damage award assessed against Lawson-Avila.  However, Employers refused to pay the punitive damages award, arguing that the indemnity agreement did not specifically obligate Palmer to indemnify Lawson-Avila against its own gross negligence.

On appeal, the court in Webb described the issue before it as “[w]hether an indemnitee is entitled to contractual indemnification for exemplary damages assessed as the consequence of its own gross negligence where the indemnity contract specifically expresses an obligation to indemnify the indemnitee for its own negligence, but is silent about gross negligence.”  The clause at issue required Palmer:

to indemnify and hold harmless [Lawson-Avila] . . . from any and all liability . . . resulting directly or indirectly from or connected with the performance of this agreement, irrespective of whether such liability . . . actually or allegedly, caused wholly or in part through the negligence of [Lawson-Avila] . . . .

(emphasis added).

Palmer argued that since the parties had not expressed any intent to provide indemnification for gross negligence, Palmer was not required to indemnify Lawson-Avila for damages caused by its own gross negligence.  But the court rejected this argument, stating that “when the parties used the term ‘negligence,’ they indicated their intent to indemnify Lawson–Avila from the consequences of all shades and degrees of its own negligence, including gross negligence.” (emphasis added).  This conclusion is consistent with the similar, even if implicit, holding in Valero.

Furthermore, the court was not persuaded by arguments from Palmer that indemnification for one’s own gross negligence violated public policy.  Noting that the Texas Supreme Court had yet to rule on this point, the court distinguished its holding from Crown by noting that at issue in Crown was language governing what was excluded from indemnification, not what was included.

If the Texas Supreme Court determines that indemnification for gross negligence is permissible, then the Court will likely also apply the fair notice requirements.

If the Texas Supreme Court determines that a provision exculpating a party from its own gross negligence is not offensive to public policy, then the Court may nonetheless require such provisions to meet the fair notice requirements applied to indemnification for simple negligence.  In a matter involving a claim for simple negligence, the Court has already acknowledged that indemnification of a party for its own negligence is an “extraordinary shifting of risk” to which the fair notice requirements apply.  Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 2015).

The fair notice requirement has two components: 1) the express negligence doctrine and 2) the conspicuousness requirement.

The express negligence doctrine states that a party seeking indemnity from the consequences of that party’s own negligence must express that intent in specific terms within the four corners of the contract. The conspicuous requirement mandates “that something must appear on the face of the [contract] to attract the attention of a reasonable person when he looks at it.”

Dresser, 853 S.W.2d at 508 (citations omitted).

The Texas Supreme Court has adopted the definition of conspicuousness stated in the Uniform Commercial Code.

A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it.  A printed heading in capitals (as: NON–NEGOTIABLE BILL OF LADING) is conspicuous.  Language in the body of a form is ‘conspicuous’ if it is in larger or other contrasting type or color.  But in a telegram any stated term is ‘conspicuous.’”

. . . .

For example language in capital headings, language in contrasting type or color, and language in an extremely short document, such as a telegram, is conspicuous.

Dresser, 853 S.W.2d at 511 (citing Tex. Bus. & Com. Code Ann. § 1.201(10) (West 2015)).

Whether an agreement provides fair notice of a release provision should be immaterial if the releasing party has actual knowledge of the provision.  “[E]vidence that a party had read a contract constitutes evidence of actual knowledge of any indemnity provisions.”  RLI Ins. Co. v. Union Pac. R.R., Co., 463 F.Supp.2d 646, 650 (S.D. Tex. 2006) (citations omitted).

To be sure, in discussing indemnification for gross negligence, one Texas court declared:

Because gross negligence involves conduct that poses an extreme risk of harm to others and an actor that proceeds with conscious indifference to the rights, safety, or welfare of others, it is difficult to imagine that Texas’s strong public policy against pre-injury releases of negligence would not apply to gross negligence. Accordingly, we conclude the State’s public policy against pre-injury releases of liability for one’s own negligence applies, at a minimum, equally to gross negligence . . . .

Van Voris v. Team Chop Shop, LLC, 402 S.W.3d 915, 924 (Tex. App. 2013).

Although it is unclear whether under Texas law a party may be indemnified against its own gross negligence, there are circumstances where such contracts are more likely to be upheld.  When the parties to an indemnity agreement are corporate entities with relatively equal negotiating power, a court is more likely to find that the indemnitee permissibly renounced obligation for its own gross negligence.  Where an indemnification agreement addresses the negligence of the indemnitee, whether to include or exclude it from under the umbrella of indemnification, a court may find that the indemnitee’s gross negligence is also thereby encompassed.  However, this subsuming of gross negligence is far more likely to be upheld when it is explicitly stated.

If the Texas Supreme Court determines that indemnification of gross negligence is consistent with Texas public policy (or, at least, not inconsistent with Texas public policy), then the Court will probably limit its application to those agreements that satisfy the fair notice requirements.  This is especially likely in pre-injury releases and when there may be an imbalance of information or negotiating strength between the parties to the agreement.

In January, the Louisiana Fifth Circuit Court of Appeal reinstated a permit issued by the Department of Natural Resources (DNR) back in April 3, 2017 to allow a new pipeline, reversing the district court that ordered the DNR to reevaluate the possible environmental effects.  Joseph v. Sec’y, La. Dep’t of Nat. Res., 18-414 (La. App. 5 Cir. 1/30/19); 2019 WL 364466.  This decision clears the way for the proposed pipeline to advance.

On February 22, 2016, Bayou Bridge Pipeline, LLC submitted an application to DNR to construct and operate a new pipeline, which was designed to carry 280,000 barrels or more of light or heavy crude oil per day from the existing Clifton Ridge Terminal in Lake Charles, Louisiana to various crude oil terminals in St. James, Louisiana.  During the evaluation period, DNR made nine different requests on Bayou Bridge for additional information before holding a public hearing.  Based on comments it received after the public hearing, DNR made three additional requests for information.  After completing an analysis of the proposed pipeline and finding that Bayou Bridge had “modified, avoided or reduced all adverse environmental impacts to the maximum extent practical,” DNR issued the permit for the proposed pipeline.

The plaintiffs, several individuals and environmental groups, filed petitions for reconsideration, which the Secretary denied after addressing the concerns in a written response.  The plaintiffs then filed suit for judicial review and alleged that DNR “violated the Louisiana Constitution and its own Guidelines by issuing the proposed permit to Bayou Bridge.”  Specifically, the plaintiffs asserted that DNR (1) did not consider potential adverse environmental impacts of the pipeline; (2) did not consider the cumulative impact of the pipeline; (3) ignored evidence that the people of St. James Parish may be trapped in the event of an emergency; and (4) misapplied its own guidelines.

The district court ruled in favor of the plaintiffs.  The district court found that DNR did not apply Costal Use Guidelines 711(A) and 719(K), and ordered Bayou Bridge “to develop effective environmental protection and emergency or contingency plans relative to evacuation in the event of a spill or other disaster, in accordance with guideline 719(K), PRIOR to the continued issuance of said permit.”  Both DNR and Bayou Bridge appealed.

In analyzing the district court’s judgment, the court of appeal first noted that because the district court was acting as an appellate court in reviewing the decision of DNR, it “was constrained to afford considerable weight to DNR’s reasonable construction and interpretation of its rules and regulations adopted pursuant to the Administrative Procedures Act.”  This set the bar high for the plaintiffs to prevail on appeal.

In granting the permit, DNR found that Guidelines 711(A) and 719(K) were not applicable.  Because those determinations were not unreasonable, the court of appeal held that the district court erred in substituting its own judgment and ruling otherwise.  The court similarly found that “DNR made a reasonable determination, within the permissible scope of its authority, that the submitted emergency response and contingency plan overview constitutes effective environmental protection and emergency or contingency plans for the proposed pipeline,” and that therefore “the district court erred in remanding this matter to DNR for development of further environmental protection and emergency or contingency plans.”

The majority’s decision prompted a dissent from Judge Johnson.  Aside from questioning the court’s appellate jurisdiction, Judge Johnson was concerned that that DNR’s analysis did not adequately consider the overall welfare of the public, as required by the Louisiana Constitution.  Specifically, DNR’s review of alternative sites/methods was based solely on an analysis provided by Bayou Pipeline, which it adopted as its own conclusions.  There was no independent verification of Bayou Pipeline’s submission.  Judge Johnson believed this violated DNR’s duty of public trust, and would have vacated the coastal use permit remanded the matter to DNR for consideration of the public welfare.

The Louisiana Fifth Circuit’s decision indicates that the courts should not get into the business of micromanaging or second-guessing DNR decisions, so long as they are in some way supported by the record.  There is an obvious wisdom to this deference, as DNR officials are arguably better positioned and trained to make such determinations, and almost every pipeline of this magnitude will garner some objection; in fact, environmental groups tried, unsuccessfully, to stop Bayou Bridge’s efforts to construct this pipeline in federal court last summer.  See Atchafalaya Basinkeeper v. United States Army Corps of Eng’rs, 984 F.3d 692 (5th Cir. 2018).   However, Judge Johnson’s dissent raises a valid concern.  When DNR adopts in full the submissions and conclusions of an interested party, without the benefit of other sources, it is only fair to be skeptical.  While the permitting process should not be unduly burdensome, it should not be a rubber stamp either.  But of course the plaintiffs were free to submit their own analyses, so perhaps Judge Johnson’s concern was overblown.  We shall see if the Louisiana Supreme Court decides to take this case up and have the final say on the issue.