Oil rig in the Gulf of Mexico. (Photo: Shutterstock)

A dispute between two Gulf of Mexico oil and gas producers over the right equipment and payment for plugging and abandoning wells has ended in a $43.21 million verdict for an affiliate of Houston-based Apache Corp.

The U.S. Court of Appeals for the Fifth Circuit ruling in Apache Deepwater v. W&T Offshore Inc. gives important guidance for offshore oil and gas operators and nonoperators, said a statement by Susman Godfrey partner Geoffrey L. Harrison, who represents Apache Deepwater.

“Companies must comply with their contracts and with federal decommissioning requirements, and safety and sound operational judgment outweighs ill-conceived cost sensitivity,” said Harrison.

The July 16 opinion explained that the dispute involved plugging and abandoning operations of three offshore oil and gas wells in the Gulf of Mexico. Apache Deepwater sued W&T Offshore Inc. seeking payment for the operation, and a jury awarded $43.2 million to Apache after finding that W&T breached an operating agreement.

The two companies disputed the method of how to plug and abandon the wells. W&T was expecting to use an intervention vessel called the Helix for the job but learned in 2014 that Apache planned to use two drilling rigs called the Ocean Onyx and Ensco instead.

While W&T claimed that Apache was just trying to save money by switching to the Onyx and Ensco, Apache countered that using the Helix was not safe and that government regulators would disapprove of it. Apache alleged that W&T resisted using the two drilling rigs—it refused to approve authorizations for expenditures for them—because using the Helix would have been cheaper for W&T.

In the end, Apache moved forward with plugging the wells with the Onyx and Ensco, costing $139.9 million. Apache then billed W&T its 49% share of $68.57 million, but W&T only paid $24.86 million, which represented 49% of the cost if the Helix had been used.

This spurred Apache to sue W&T for breach of contract in December 2014. W&T countered in a motion for summary judgment that the contract required W&T's approval on an authorization for expenditure, which didn't happen. The trial court decided the contract was ambiguous and denied summary judgment for W&T.

At trial, a jury found W&T breached the contract by failing to pay its share of the costs. Apache won a $43.21 million verdict. Yet the jury also found that Apache acted in bad faith and caused W&T's noncompliance with the contract and that the award should be offset by $17 million.

The court's final judgment determined the jury's bad faith finding didn't preclude Apache's breach of contract recovery and that W&T shouldn't get the offset under Louisiana law.

On appeal, W&T contended that a Louisiana law dictated that the jury's bad faith finding should bar Apache's recovery. However, the district court had ruled that Louisiana Supreme Court precedent would have required W&T to prove that Apache failed to perform its end of the contract, which caused W&T to breach the contract. That didn't happen here.

The Fifth Circuit agreed with the district court's reasoning and ruled that Apache wasn't barred in its recovery.

“The question of the obligee's bad faith does not become relevant until there is a determination that the obligee failed to perform a contractual obligation that in turn caused the obligor's failure to perform,” the opinion explained.

W&T also argued on appeal that it did not breach the contract, since it never approved of an authorization for expense, and the contract allowed a short payment in that scenario. However, the judge found the contract was ambiguous and that a jury needed to determine its meaning; the Fifth Circuit ruled this was the correct process.

In the appeal W&T also argued for the reinstatement of its $17 million offset to Apache's recovery. The Fifth Circuit rejected all of its legal arguments and denied the offset.

W&T's attorney, Stephen Kupperman, partner in Barrasso, Usdin, Kupperman, Freeman & Sarver in New Orleans, declined to comment.

Read the Fifth Circuit's opinion: