On Thursday, a divided panel of the Texas Court of Appeals in Houston held that the 2014-2015 drop in oil prices is not a force majeure for purposes of general force majeure contractual protection. In TEC Olmos, LLC v. ConocoPhillips, the court addressed a dispute between ConocoPhillips Company and TEC Olmos over a farmout agreement that required Olmos to commence drilling by a specified date. No. 01-16-00579, 2018 WL 2437449 (Tex. App. —Houston May 31, 2018). During the interval between execution of the agreement and commencement of drilling, however, changes in the global supply and demand of oil caused the price of oil to drop significantly. As a result, Olmos was unable to secure financing for drilling and informed ConocoPhillips that it would be unable to meet its drilling obligations. ConocoPhillips filed suit against Olmos and the guarantor of the contract, Terrace Energy Company, for breach of the farmout agreement. The lawsuit sought $500,000 in liquidated damages.
In its defense, Olmos invoked the force majeure clause of the farmout agreement to excuse its inability to perform. It argued that the force majeure clause suspended the drilling obligation for “fire, flood, storm, act of God, governmental authority, labor disputes, war or any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected,” and, therefore, should protect Olmos from the inability to secure financing due to market downturns. Id. at *1 (emphasis added). Olmos asserted that because the global markets and financing were out of Olmos’s reasonable control, the catch-all provision of the force majeure clause should, by its own language, excuse Olmos’s nonperformance. ConocoPhillips disputed the applicability of the catch-all language and argued that, unless specifically included, a foreseeable event cannot qualify as a force majeure. Here, because the downturn in the market was foreseeable, it was not an event contemplated by the force majeure provision and should not be excused.
The court ultimately agreed with ConocoPhillips, finding that, unless expressly included, force majeure provisions do not include foreseeable events and that “fluctuations in the oil and gas market are foreseeable as a matter of law.” Id. at *5. Indeed, the court explained that the role of the force majeure provision is to neutralize unforeseeable risks that the parties could not have bargained for when negotiating the contract. Where a risk is clearly foreseeable, however, the parties are expected to have bargained over who will bear the risk and included it either expressly or implicitly within the terms of the contract. Accordingly, Olmos should not be relieved of liability for “a circumstance that it was aware of, but took no steps to specifically address in the contract.” Id. at *6.
Under this precedent, oil and gas operators should be careful to expressly identify any market-based risks that they want to encompass within force majeure provisions. Even risks beyond an operators control are not necessarily covered by these provisions where they are ostensibly foreseeable, including dramatic fluctuations in the oil and gas markets.
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