II.
The court of appeals held that Cimarex squarely applied to the facts of Cromwell , and that Cromwell’s actions were insufficient to “cause production” under his leases. The court rejected the idea of “constructive participation,” finding instead that Cromwell’s payments were ordinary operating expenses owed by a nonparticipating cotenant. Further, correspondence from Anadarko referring to Cromwell as a working interest owner and other “course of conduct” activities did not rise to the level of a constructive agreement between the parties. 20 Cromwell’s bottom leases thus expired at the end of their primary terms, and Anadarko’s top leases took effect.
Cromwell v. Onshore (2023)
David Cromwell (“Cromwell”) was the owner of a small working interest under two oil and gas leases in Loving County. Each lease contained a habendum clause similar to that set forth above ( i.e. , “. . . and so long thereafter as oil and gas is produced from said land”). Anadarko E&P Onshore LLC (“Anadarko”) owned a much larger working interest in the same land. 13 Cromwell submitted his leases to Anadarko and asked multiple times for an operating agreement, but Anadarko never responded. 14 After several successful wells were drilled, Cromwell was presented with – and paid – various joint interest billings (“JIBs”). In some months, Cromwell paid Anadarko and in other months his operational costs were netted out and he received a revenue check. 15 Cromwell also received authorizations for expenditures (“AFEs”) that referred to him as a “Working Interest Owner” and contained elections to participate in various expenditures. 16 Anadarko later claimed that these and other activities were conducted in error. After the primary term of Cromwell’s leases expired, Anadarko top leased Cromwell’s lessors and asserted that Cromwell had never executed an operating agreement. Cromwell sued alleging that a “constructive” operating agreement had been formed based on the activities above. The trial court held for Anadarko on summary judgement and Cromwell appealed. On appeal, both Cromwell and Anadarko agreed that oil and gas was produced in paying quantities on Cromwell’s leases, and that the court must decide whether that production may be attributed to Cromwell. 17 Cromwell attempted to distinguish Cimarex by arguing that he did exactly what Cimarex had not done: he participated in production by sharing in its costs, risks, and liabilities. 18 Cimarex’s chief defense had been that it could rely on Anadarko’s production to perpetuate its lease. Cromwell, on the other hand, argued that his actions amounted to constructive participation and implied an operating agreement. 19
III.
Takeaway from Cimarex and Cromwell
Cimarex was a wakeup call for non- operators in Texas that is further emphasized by Cromwell . It seems that in the absence of a signed operating agreement, the standard “passive” habendum clause in a lease creates an obligation to actually cause the production. This does not, the El Paso Court maintains, run afoul of judicial safeguards preventing surprise forfeitures, because a habendum clause is a special limitation, which is not a forfeiture. Cromwell further expands Cimarex by rejecting arguments in favor of constructive participation, or an implied operating agreement based on the parties’ course of conduct. Thus, stealthy operators appear to have a powerful weapon in the form of the Anadarko Washout.
IV.
Avoiding an Anadarko Washout
Following Cimarex and Cromwell , non- operating lessees should ensure that they enter
13 2023 Tex. App. LEXIS 5848 at 3. 14 Id .
15 Id . at 4. 16 Id . at 5. 17 Id . at 11. 18 Id . at 19. 19 Id. at 26. 20 Id. at 29.
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G rowth T hrough E ducat i on - J uly / A ugus t / S ept ember 2023
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