Filing an Operator Designation Form Conclusively Establishes Responsibility for Plugging Expenses

The Austin Court of Appeals recently held, in Shoreham Oil & Gas Co., Inc. v. Texas, 260 S.W.3d 249 (Tex.App.—Austin 2008, no pet.), that the fact a company filed a Form P-4 (Producer’s Transportation Authority and Certificate of Compliance), designating itself as the well’s operator in compliance with Texas Natural Resources Code Sec. 89.011, conclusively establishes that company’s control over the well, and its resulting responsibility for expenses related to plugging the well.

The Texas General Land Office (“GLO”) notified Shoreham Oil & Gas Company that its lease of a gas well located in Galveston Bay was forfeited for failure to pay royalty payments on its production from the well. When Shoreham contested the amount of the royalty payments and sought to have the forfeiture rescinded, the GLO agreed so long as Shoreham would sell a majority interest in the lease to another energy company. However, before the sale of the interest could be closed, it was discovered that the well was leaking gas and condensate. When the Railroad Commission was not satisfied with Shoreham’s efforts to stop the leak, it took control of the well and plugged it.

The Court granted the State’s motion for partial summary judgment finding Shoreham was the operator of the well as a matter of law pursuant to its filing of a Form P-4 back in 1996 and again in 2000, designating itself as the well’s operator. As a result of the Court’s ruling, any evidence that Shoreham was not in possession and control of the well during the relevant time period and that it was not liable for plugging expenses incurred by the Railroad Commission was excluded at trial. After a jury trial, the Court entered judgment on a jury verdict in favor of the State. The Austin Court of Appeals affirmed the judgment.

Texas law places the responsibility for plugging a gas well on the operator. Thus, the question of who the operator was during the relevant time period is dispositive. Shoreham’s arguments that it was not the actual operator once the GLO forfeited the lease went unheeded, since the Court held that the Form P-4 was sufficient to determine the operator without any additional proof as to whether Shoreham was in “physical operation and control” of the well. The message to well operators is clear – if control of operations of a well is being transferred to another company, responsibility will stay with the original operator until an amended Form P-4 is filed designating the new company as the operator -- no matter who is in actual control of physical operations.