Oil And Gas Operator Liability In Texas - What's In Your Contract?

The American Association of Professional Landmen ("AAPL") Model Form Operating Agreement commonly used in the energy industry contains broad exculpatory language protecting the Operator. For example, the 1982 AAPL Model Form Operating Agreement contains the following language:

________ shall be the Operator of the Contract Area, and shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of this agreement. It shall conduct all such operations in a good and workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct.

This form imposes an obligation on the Operator to conduct operations in a good and workmanlike manner. At the same time, it exempts the Operator from liability as Operator, except for gross negligence or willful misconduct. Does this language exempt the Operator from liability for breach of contract? Given the fact that this form has been in common use for 30 years, one might think that the courts would have definitively decided that question long ago. Not so. There has been a split of authority on the issue. In Stine v. Marathon Oil Co., 976 F.2d 254 (5th Cir. 1992), Stine alleged that Marathon breached duties owed him under the JOA in connection with testing and completion of wells; that Marathon tortiously interfered with his gas sale contract; and that Marathon, by failing to drill certain exploratory wells, abandoned a substantial portion of the lease acreage and, therefore, Stine was entitled to an assignment of that acreage. The exculpatory language of the joint operating agreement in Stine was identical to the 1982 model form quoted above. The Fifth Circuit construed it as exempting the Operator from liability for breach of contract unless the Operator was grossly negligent or committed willful misconduct:

It is clear to us that the protection of the exculpatory clause extends not only to "acts unique to the operator," as the district court expressed it, but also to any acts done under the authority of the JOA "as Operator." This protection clearly extends to breaches of the JOA. It also reaches other acts including acts performed "as Operator" under the authority of the JOA that amount to tortious interference with contracts with third parties. We, therefore, hold that the exculpatory clause...