Get daily industry updates in your inbox. Free.
Your account already exists. Please login first to continue managing your settings.
Sometimes a handshake works. When it doesn't, the results can be painful.
Imagine the oil and gas industry with no confrontations, disagreements or outright shouting matches - just everyone harmoniously engaged in exploration and production to the mutual benefit of all.
While that's an interesting pipe dream, the real world is replete with lawsuits often featuring intriguing issues, colorful characters and outcomes that satisfy one side while infuriating the other. Frequently, everyone, even those on the short end of the stick, can profit from scrutiny of past cases like the ones below.
Case #1: Trade secrets
A large oil company made it known that its management welcomed joint ventures with smaller companies - commonplace enough in the industry. The theory is simple: Small operators bring ideas that the larger ones may never have generated internally in exchange for the larger, financially stable company providing capital to transform the idea into reality.
Theory is occasionally overwhelmed in practice. In one instance, a very small operator had an idea for a property it wanted to purchase. So it and a big company signed a confidentiality agreement stating that the large company would not disclose the information or use it against the interests of the small independent. Comfortable with the groundwork, the independent then divulged the opportunity in a formal presentation detailing its technical and financial analysis of the prospect. The large company then assigned an internal team to conduct an independent analysis, which concurred that it was a good deal, and made an offer to the small operator. The independent, however, deemed the offer to be parsimonious, shopped the opportunity elsewhere, got financing and made his bid on the package. The future looked good for the independent.
Without warning, the rosy picture turned dark. A different group at the same large oil company had been analyzing the same prospect. Through a joint venture in which the large company was a 50% partner, the large company submitted a bid on the prospect that was inconveniently identical to the independent's bid. The seller weighed the offers from the big oil company and the small operator. The seller - probably predictably - chose the financial deep pockets and stability of the large company.
Naturally, the small bidder was crestfallen. When the winning bidder's identity was revealed, the independent couldn't have been more flabbergasted: It suspected that because the bids were identical, the company took its prospect and analyses, handed it to the other group, and dealt directly for the property. The small operator sued alleging theft of trade secrets. It thought it was self-evident.
The result proved otherwise. One of the defense's key arguments was that if it had wanted to cheat, then it would have submitted a slightly higher bid. Therefore, the fact that the bids were identical indicated, said the defense, that one internal team did not know about the other. Second, the tribunal decided that irrespective of potential theft of a trade secret, the independent had not proved any damages: there was no persuasive proof that the value of the prospect exceeded the amount bid. The small operator did not have to fund its bid, so it was in the same net position, with or without the property. The tribunal awarded nominal damages.
Moral: Right and wrong are not always what they appear. Critical analysis of the evidence can change a visceral reaction.
Case #2: Seismic trespass
Farmer Brown owned a tract of land in a rural county where a major planned seismic to determine the exploration potential in the area. The oil company secured permission from surrounding landowners - but not Farmer Brown - and proceeded with seismic work. Brown subsequently claimed the company set up its equipment to shoot directional seismic to see what was under his land, too, without his permission.
After shooting, the oil company decided not to lease anyone's land. That elicited a tirade from Brown, who said not only did they illegally shoot under his land, but also their actions "condemned" his property by effectively broadcasting to the world that there was no worthwhile oil under Brown's land. He claimed that he could have made a fortune from leasing his land if it had not been condemned.
However, the oil company countered that it did indeed shoot seismic of his neighbors' land, as it was entitled to do, but did it not shoot directionally under Brown's land. It said that although the decision not to lease his - or his neighbors' - property may have an adverse impact, that is simply how the process played out. Did the oil company conspire and collude internally to deny Brown just compensation, or was it just bad luck for him?
Unfortunately for Brown, the jury awarded miniscule damages - the value of the lease was not what Brown fantasized.
Moral: If oil company management plans to take seismic up to a boundary beyond which it has no permission, carefully document that directional seismic is not being shot. Also, do not create an appearance of impropriety by having crews working on both sides of the prohibited property at the same time.
Case #3: Lease lapses
Two examples illustrate the legal tussle involved with delay rentals. In the first example, a plaintiff said that the company purchased property that a large oil company had previously leased but had not developed. The company claimed to have sent a certified copy of the deed to the oil company at its headquarters.
In its deposition, the plaintiff said that personnel at the company had written the letter and that the secretary had sent the letter after enclosing a certified copy of the deed and applying proper postage. All very plausible, but it occurred to the oil company's attorney that in this small county, every order for a certified copy had been hand-noted since 1930, and it was discovered that there was no record of the claimed certification. It then had the county clerk lug the big certification book to the courtroom and to declare on the witness stand that no such purchase of a certified copy had occurred. The jury took only a few minutes to find for the oil company.
Moral: Honesty is always the best policy. If one chooses to ignore this rule, careful analysis will always win.
In the second example, a major producer the early 1960s faced a family's claim that the family owned a large property where the company had improperly accounted for production and underpaid them since. Over several decades the production was substantial, so the stakes were high - hundreds of millions of dollars. Unfortunately, the company realized at the outset that it had virtually no witnesses proving how the accounting was set up. These individuals had retired, moved all over the world or died.
Given the extreme exposure, this matter immediately got the board's attention. It demanded that the company's attorneys conduct a mock trial. For secrecy reasons, the company decided that the mock trial would not be conducted in the city where the real trial was scheduled, but rather in a city several states away that was as demographically similar as possible. Four mock juries heard the case with the attorneys switching between plaintiff and defendant roles. No matter who argued the statute of limitations argument, it always succeeded.
The next day, the actual plaintiff's lawyer called and congratulated one of the company's attorneys on his successful statute of limitations defense. When asked how he knew about that, the plaintiff's attorney said, "One of your jurors bragged about the case in the coffee shop where my cousin was having lunch the other day. He heard the trial's description, called me and told me everything - even though the mock trial jurors had signed a confidentiality agreement."
At first blush, that appeared to be bad news for the company. However, as the strength of the well-crafted limitations defense sank in on the plaintiff's attorney, his demand plummeted from US $500 million to nuisance value.
Moral: A couple of lessons bubble to the surface. One is that statute of limitations is not always an unpersuasive defense. The other lesson is that, although usually it's best to keep trial preparations and results secret, if there's a good result, it may actually be very helpful to "accidentally" let the other side know about it.