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Fifth Circuit Issues Significant Decision Addressing Area of Mutual Interest Provision

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The Fifth Circuit recently addressed the scope and application of an area of mutual interest (“AMI”) provision in Glassell Non-Operated Interests, Ltd. v. EnerQuest Oil & Gas, L.L.C., 927 F.3d 303 (5th Cir. 2019). This decision is particularly significant given its guidance in an important area not addressed by many courts.

As background, an AMI provision obligates participants in a development agreement, or similar type of agreement, to offer a share of interests acquired within a certain area to other participants. In Glassell, the dispute turned on an AMI provision that applied to:

(i) royalty interest, mineral interest, overriding royalty interest, production payment interest, net profits interest, or any other type of interest in oil, gas, or other minerals, (ii) any oil and gas lease, or (iii) any farmout agreement, drilling option agreement, acreage contribution agreement, or acreage support agreement, if such interest, lease, or agreement covers or includes lands located wholly or partly within the AMI and which were or are acquired after August l, 2010 (the “Effective Date”)[.]

The agreement further excluded:  “All interests, leases or agreements owned by a Party prior to the Effective Date.”

One of the parties, EnerQuest, acquired interests from another party to the agreement, who owned the interests before the Effective Date and so were excluded from the AMI. The parties disputed whether these interests remained excluded when EnerQuest acquired those interests.

While recognizing that “AMI provisions are meant to foster cooperation among the parties to acquire and develop interests,” the Fifth Circuit held based on the plain language of the AMI: “What is excluded from the AMI at the outset may never be included without a new agreement,” and if the excluded parties “sought to prohibit the type of activity in which EnerQuest engaged, they could have easily done so through the contract.” The Fifth Circuit reversed and rendered judgment for EnerQuest.

Our firm has extensive experience drafting, evaluating, and litigating AMI provisions. Glassell illustrates the importance of fully vetting AMI provisions and their application—including when negotiating AMI provisions and acquiring rights (such as by assignment) under an AMI. In Glassell, for example, the ultimate result may have been different if the AMI provision contemplated the possibility of exempted interests becoming Acquired Interests subject to the AMI provision.  There are a myriad of complicated situations and questions that can arise from AMI provisions, which impact the value of the AMI and the strength of a claim in any AMI dispute. Companies are best served by having an AMI expert analyzing these issues at the outset so as to minimize unforeseen risks down the road.

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