Last year, in another dispute over who should bear the cost of decommissioning offshore facilities, the Southern District of Texas held that a former sub-assignee of offshore operating rights was entitled to equitable subrogation from the record title owner and initial assignor.  Sojitz Energy Venture, Inc. v. Union Oil Co. of California, 394 F. Supp. 3d 687 (S.D. Tex. 2019).

The only lessee of the Outer Continental Shelf leases at issue in Sojitz was UNOCAL.  UNOCAL assigned operating rights in the leases to ATP, who later assigned 20% of those rights to Sojitz.  UNOCAL retained rights as to certain depths, but never conducted any lease operations whatsoever at any depth.  UNOCAL also reserved a 3% overriding royalty.  After operating together for six years, Sojitz assigned its 20% interest back to ATP pursuant to an agreement under which Sojitz paid the sum of $4,750,000 in exchange for ATP’s release of all of Sojitz’s liability for decommissioning costs under the operating agreement between the two parties.  Three years later, ATP filed for bankruptcy and notified the Bureau of Safety and Environmental  Enforcement (“BSEE”) that it would not perform any required decommissioning activities related to the leases.  After receiving an order from BSEE, Sojitz decommissioned the leases at its expense and filed suit against UNOCAL to recover the costs.

Judge Hittner held that Sojitz was equitably subrogated to the rights of BSEE to seek reimbursement for its decommissioning costs from UNOCAL.  The court noted while Sojitz had already paid ATP its estimated share of the cost of decommissioning when it reassigned its interest back to ATP, UNOCAL had not paid any amount of the decommissioning costs though it received royalties during the entire production period, including after Sojitz was released.  To prevent Sojitz from paying the cost of decommissioning twice, the court found the balance of the equities demanded that UNOCAL bear 100% of the decommissioning costs.

UNOCAL appealed to the Fifth Circuit, arguing, inter alia, that Sojitz’s claim for equitable subrogation failed as a matter of law because the Outer Continental Shelf Lands Act (“OCSLA”) does not grant BSEE a civil claim for monetary damages based on a party’s failure to perform decommissioning to which Sojitz could subrogate.  In support, UNOCAL cites to a BOEM regulation referring to decommissioning as a “non-monetary obligation,” see 30 C.F.R. § 556.604(d); thus, “[b]ecause BSEE could not pursue a claim for money damages for decommissioning costs, Sojitz cannot do so in BSEE’s name through equitable subrogation.”  UNOCAL also cites to OCSLA and BSEE’s regulations at 30 C.F.R. § 250, Subpart N, as support for the notion that “BSEE’s primary enforcement mechanisms for violations of the decommissioning regulations are civil fines and criminal penalties,” police powers to which Sojitz cannot subrogate.  In the alternative, UNOCAL argues that it should not have to pay 100% of the decommissioning costs, but instead 80%, at the most, based on Sojitz’s prior ownership of 20% of the operating rights, or some lesser amount based on various equitable factors.

Sojitz disputes UNOCAL’s assertion that BSEE has no right to enforce a monetary claim for damages related to decommissioning costs under OCSLA, citing to Fruge v. Parker Drilling Co., 337 F.3d 558, 563 (5th Cir. 2003) (“the regulations govern the parties’ joint and several liabilities vis-à-vis the Government not amongst themselves”) and Total E&P USA, Inc. v. Marubeni Oil & Gas (USA), Inc., 393 F. Supp. 3d 515, 530 (S.D. Tex. 2018) (“parties will always be jointly and severally liable to the government for the cost of decommissioning, no matter what their contract provides”).  In response to UNOCAL’s argument that it could not be subrogated to a federal agency’s rights, Sojitz pointed to In re Tri-Union Dev. Corp., 314 B.R. 611 (Bankr. S.D. Tex. 2004), where the court held that, to the extent a surety company or co-lessee paid the decommissioning obligations of the bankrupt lessee, they would be subrogated to the government’s claim.  Next, Sojitz pointed to the district court’s factual findings (e.g., UNOCAL’s nonpayment of any of the costs of decommissioning in the face of its continuing receipt of royalties and the fact that Sojitz, which never assumed more than 20% of the liability, had already paid ATP for its share of the estimated costs of decommissioning) to show that the court did not abuse its broad discretion in awarding Sojitz 100% of the decommissioning costs.

Oral argument has been tentatively set for the week of April 27, 2020.

Update:  The Fifth Circuit calendared oral argument for April 27.  Although the Court has not canceled oral arguments set on or after April 27, this date is subject to change due to the COVID-19 virus.

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Photo of Jana Grauberger Jana Grauberger

Jana Grauberger is an oil and gas lawyer with more than 20 years experience. Clients turn to her as a trusted advisor in connection with their contract negotiations, regulatory advice and appeals, litigation, and arbitration related to onshore and federal offshore upstream and…

Jana Grauberger is an oil and gas lawyer with more than 20 years experience. Clients turn to her as a trusted advisor in connection with their contract negotiations, regulatory advice and appeals, litigation, and arbitration related to onshore and federal offshore upstream and midstream projects and facilities. Jana has represented clients in negotiating a wide variety of onshore and offshore contracts, including purchase and sale agreements, farmouts, participation agreements, joint operating agreements, production handling agreements, platform use agreements, gathering agreements, connection agreements, construction contracts, transportation contracts, and decommissioning agreements. She also represents clients in connection with regulatory matters involving Department of Interior agencies, including the Bureau of Ocean Energy Management (BOEM), the Bureau of Safety and Environmental Enforcement (BSEE), and the Office of Natural Resources Revenue (ONRR).

Photo of Jillian Marullo Jillian Marullo

Jillian Marullo handles an array of civil litigation matters as both plaintiff and defense counsel, representing clients in many sectors, including the oil and gas, communications infrastructure, and commercial property industries.  She has a diverse commercial litigation practice, with experience in general contractual…

Jillian Marullo handles an array of civil litigation matters as both plaintiff and defense counsel, representing clients in many sectors, including the oil and gas, communications infrastructure, and commercial property industries.  She has a diverse commercial litigation practice, with experience in general contractual disputes, insurance and indemnity matters, and disputes arising under mineral leases, farmout agreements, joint operating agreements, and commercial leases.  This practice includes significant experience in oil and gas lease disputes, including lease maintenance and termination, royalty, implied covenants, offset well/drainage clauses, and other lease disputes.  She also handles toxic tort and environmental litigation, including suits arising under the Clean Air Act, as well as cases involving property damage, trespass, and conversion.

Photo of Cameron Keener Cameron Keener

Cameron Keener is a litigator in the firm’s Houston office. She has experience drafting contracts, motions, petitions, demand and settlement letters, discovery requests and responses, and direct and cross examination questions.

Cameron received her Juris Doctor from the South Texas College of Law…

Cameron Keener is a litigator in the firm’s Houston office. She has experience drafting contracts, motions, petitions, demand and settlement letters, discovery requests and responses, and direct and cross examination questions.

Cameron received her Juris Doctor from the South Texas College of Law where she was a member of the Phi Delta Phi International Legal Honor Society.