M & T, Incorporated v. Fuel Resources Development Company

Facts

On May 10, 1973, D, McBride, and certain third parties entered into two written agreements, one entitled 'Agreement' (the 1973 Agreement) and the other entitled 'Operating Agreement' (the 1973 Operating Agreement). The agreements concerned the development of oil and gas leases of the parties. D served as the 'operator' with respect to the drilling of the 25-1 State Well and 42-26. The participants in the drilling of the 42-26 State Well shared the costs and expenses incurred in the drilling of such well in proportion to their ownership interests at the time such costs and expenses were incurred. In 1976, P acquired the entire interest of the parties to the 1973 Agreement and the 1973 Operating Agreement, or their successors in interest, except the interests of D and McBride. In 1977, D, McBride, and P agreed to attempt to establish a 'federal unit' for the purpose of assisting them in the development of their leasehold interests. On July 26, 1977, P, McBride, and D entered into two written agreements concerning federal utilization of the Leaseholds Unit Agreement and Unit Operating Agreement). On December 16, 1977, the USGS approved the federal unit. The Unit Agreement became effective on that date. P, McBride, and D did not expressly agree that the 1973 Agreement and the 1973 Operating Agreement would terminate upon execution of the Unit Agreement and the Unit Operating Agreement. The 1-10 Unit Well was drilled. P served as the operator. It failed to qualify as the 'test well' under the Unit Agreement because it was not drilled at an approved location. The parties shared the expenses of the 1-10 Unit Well as follows: D 25%; McBride 18.75%; and P 56.25%. Another well was drilled, the 1-25 Unit Well qualified as a test well under paragraph 9 of the Unit Agreement, and is the 'initial test well' under Article 3 of the Unit Operating Agreement. P served as the operator. On July 14, 1978, D delivered to P a letter, under which D claimed to make a non-consent election effective at the exact point at which the estimated drilling costs set forth in a document entitled 'Authority for Expenditure' or 'AFE' for the 1-25 Unit Well had been spent. P and McBride continued drilling the 1-25 Unit Well. P and McBride agreed to terminate the drilling of the 1-25 Unit Well at a total depth of 9,401 feet. Prior to the drilling of all the wells the operator prepared and submitted an 'Authority for Expenditure,' (AFE). Each of these AFEs was approved by all parties. For the 1-25 Unit Well the parties agreed to share drilling costs 56.25% P, 25% d and 18.75% McBride. This was in accord with the 1973 Operating Agreement and the course of dealing that the parties or their predecessors had followed from the 42-26 State Well forward. When the costs exceeded the AFE D announced that it would cease to pay its share of the drilling costs

Issues

Rule of Law

Holding and Decision

Legal Analysis

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