A jury award of more than $5 million against the Hunt Oil Company for negligent failure to protect a producing oil formation was recently reversed by the Texas appellate court in Hunt Oil Company v. Live Oak Energy, Inc. (No. 05-07-01553-CV) (a copy of which can be found here). It serves as a warning to counsel and companies undertaking oil and gas asset transactions to do their due diligence.
The facts were straightforward: Live Oak acquired certain leasehold interests in the Pettit formation located in the East Haynesville oil field in northwest Louisiana. Prior to its acquisition, Hunt Oil had drilled some fifty wells through the Pettit formation to recover oil from formations below. Live Oak claimed that Hunt Oil had failed to properly case and cement many of those wells, creating a 'leaky bucket' in the Pettit formation above - damaging Live Oak's leasehold interests.
The issue was whether Live Oak's claims were barred by the applicable statute of limitations. The court of appeals held that it was - rejecting the claim by Live Oak that the discovery rule applied to toll the limitations period.
Live Oak argued that discovering the injury would have required unwarranted diligence, stating that "it is unreasonable to expect Live Oak to discover that Hunt's wells were not properly cemented 5,200 feet below the surface by inspecting the property." The court disagreed:
In its purchase of its leasehold interest in 2002, Live Oak averred it had 'been provided sufficient time and access to all records, both public and on hand sufficient to inspect, examine and satisfy itself with regard to the ownership, condition, and operations of the ‘subject interests'....' As a practical matter, when purchasing the property in the hope of producing oil, 'reasonable diligence' would include at least a preliminary determination whether recovery of oil could be undertaken on the site, or whether previous activity or damage precluded the possibility, especially with some fifty visible wells on the surface. (Emphasis is ours.)
According to public records and testimony introduced at trial, Live Oak should have been put on notice about the potential for damage to the formation at the time it acquired its leasehold interests in the Pettit formation. Because that was more than two years before suit was filed, the cause of action accrued outside the limitations period and the discovery rule was inapplicable to save Live Oak's claims.
The court reversed the trial court's judgment, finding that "Live Oak take[s] nothing in its suit."
Be warned: Failure to undertake due diligence could be harmful to your bottom line.