“Anadarko Washout.” Conversely, the Texas Legislature has recently rebuked the washout of certain oil and gas interests. Effective September 1, 2023, T ex . P rop . C ode § 31.001, et seq . creates a cause of action for the bad faith washout of overriding royalty interests. 4 However, no such protection currently exists for the washout of a working interest, whether or not in “bad faith.” Note that in both Cimarex and Cromwell , the habendum clauses of the leases in issue were similar and generic. Each lease provided that it would be held for a fixed primary term and “so long thereafter as oil and gas is produced from said land or from land with which said land is pooled.” As demonstrated below, this “passive” habendum language creates a very much active obligation on lessees. I. Cimarex Energy Co. v. Anadarko Petro. Corp. (2019) Cimarex Energy Co. (“Cimarex”) and Anadarko Petroleum Corp. (“Anadarko”) were cotenants who held separate oil and gas leases on the same property. 5 Anadarko drilled two producing wells on the property, which each paid out during Cimarex’s primary term. 6 Cimarex sued Anadarko for failure to account for its share of production, which resulted in a settlement agreement. 7 Importantly, no operating agreement existed between the parties either prior to or post-settlement. Once Cimarex’s lease expired, Anadarko stopped paying Cimarex under the settlement agreement and took a “top” lease on Cimarex’s mineral interest. 8 As part of its argument that it now had the effective lease, Anadarko asserted that Cimarex’s “bottom” lease required Cimarex to actually drill or operate a well. Cimarex, it argued, was unable to passively rely on Anadarko’s development activities in the absence of an operating agreement. Cimarex argued that it did not have to directly cause production on the property to perpetuate the lease, and it could rely on Anadarko’s production to extend the lease into its secondary term. After all,
it claimed, production was occurring on the lease. Cimarex also contended that the prior settlement agreement served as an operating agreement proxy. 9 The court held that despite the “passive” voice of the habendum clause, Cimarex was required to “take some action to cause production,” and it could not rely on a cotenant’s production to keep its lease alive. 10 The court was not persuaded by evidence that Cimarex had made repeated unsuccessful attempts to enter into an operating agreement with Anadarko. The court noted that an operating agreement would fulfill the lessee’s requirement to cause production, but without such an agreement Cimarex and Anadarko were merely cotenants who owed no duties to each other and were entitled to act independently. 11 Cimarex knowingly took the risk that other tenants on the land might refuse to agree to a joint operating agreement, forcing it to commence production on its own. 12 The Cimarex court also rejected various additional arguments related to the settlement agreement and the parties’ course of conduct in finding for an implicit agreement to operate. This included correspondence referencing an “Operating Agreement” and referring to Cimarex as a “Working Interest Owner.” It remained to be seen whether Cimarex was the new reality, or an oddity relegated to its facts. 4 Under T EX . P ROP . C ODE § 31.001, “bad faith” is defined as “the conscious taking of action for the purpose of washing out all or party of an overriding royalty interest.” “Washout” means the “[intentional] elimination or reduction of an overriding royalty interest in an oil and gas lease by the forfeiture or surrender of the oil and gas lease . . . and the subsequent reacquisition of a lease . . .” 5 574 S.W.3d 73, 80. 6 Id. at 83. 7 Id. at 83-84. 8 Id. at 84. 9 Id.
10 Id . at 93. 11 Id . at 95. 12 Id .
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N at i onal A ssociation of D i v i s i on O rder A nalys t s
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