OIL & GAS ALERT: You Sold Your Interest in the Contract Area. Are You Still Liable?

    26 February 2008

    Uncertain about liabilities under your operating agreement? You should be. The decision by the Texas Supreme Court in Seagull Energy v. Eland Energy, (Tex. 2006) continues to resonate through the industry. In essence, it held that a working interest owner continues to be liable under the operating agreement even after it no longer owns an interest in the Contract Area.

    Eland owned a small working interest in an offshore block. As plugging operations were about to start, it sold its interest to a small company that filed for bankruptcy when it could not pay its joint interest billings (JIBs). Seagull, the Operator, sued Eland, who no longer owned an interest in the Contract Area, claiming that, unless one gets a full release, all working interest owners remain liable for liabilities under the joint operating agreement (JOA), forever. The Texas Supreme Court agreed with Seagull.

    So, if you sold all of your interest in a prospect, say, 10 years ago, and the purchaser has gone broke or disappears, there is a potential that the current operator will sue to make your pay the joint interest billings – and collect.