No Coverage for $12 million Oil Well Loss As Claims Did Not Allege Property Damage

Case: Solstice Oil & Gas I LLC v. OBES Inc.
United States District Court for Eastern District of Louisiana
No. 12-2417, 2015 U.S. Dist. LEXIS 61936 (E.D. La. 05/12/15)

On August 15, 2011, JAM Petroleum, LLC (JAM) and Solstice entered into a Joint Operating Agreement (JOA) for oil and gas leases. The JOA provided that JAM was the Operator of leases, and Solstice was a non-operating interest-holder. JAM contracted with more than eight drilling and servicing companies to drill the Well, including Ole Brook for its directional drilling services. As directional driller, Ole Brook was charged with directing the drilling of the non-vertical wellbore to a predetermined underground target using down hole drilling equipment. JAM hired Nabors Drilling USA, LP (Nabors) to provide the drilling platform and to perform the initial vertical drilling operations.

Nabors drilled the vertical wellbore to roughly 3600 feet, and thereafter, Ole Brook began directionally drilling the Well, until it was discharged from the project after the parties experienced a number of problems drilling the Well. JAM determined that the Well was “damaged” and had deviated drastically from the target bottom hole location, which prevented JAM from using the Well to test the prospect as planned. This deviation and failure necessitated the drilling of a second, side-track well. Alternative directional drillers completed the second well, which successfully reached the target location but resulted in a dry hole.

On October 1, 2012, Solstice filed suit against Ole Brook and its insurers, Seneca and C&I, alleging that Ole Brook did not drill the Well according to specifications, resulting in a misshaped Well and causing “physical injury to the Well and to the integrity of the wellbore.” Solstice claimed Ole Brook breached its obligations under the MSA, industry standards, and the standard of performance required in the MSA. Solstice brought claims against the insurers under the Louisiana Direct Action Statute. Ole Brook denied the allegations and filed counterclaims against Solstice, crossclaims against its insurers, and third-party complaints against other contractors who were engaged in drilling the Well.

Ole Brook’s insurers argued they were entitled to summary judgment on Solstice’s claims and Ole Brook’s crossclaims because their policies did not cover the damages allegedly suffered by Solstice. Particularly, the insurers argued Solstice had not made a claim for “property damage” as defined by the policies but rather had only alleged “economic damages” from Ole Brook’s alleged breach of contract. Solstice responded that the down hole surveys performed by its contractor showed a well that deviated and exhibited “pronounced doglegcrooked or worn places in the wellbore.” JAM’s onsite representative described the Well as so compromised that it could not “run a normal survey...because of the doglegs and the crookedness of the hole,” and another JAM representative testified that the formation was “damaged” by being open to drilling fluids as a result of Ole Brook’s alleged faulty work. Additionally, Solstice asserted that it suffered loss of use of tangible property because it was not able to use the Well that Ole Brook drilled for its intended purpose to test the formation.

The court ruled in favor of the insurers, finding instructive the Fifth Circuit opinion in PPI Tech. Servs, LP v. Liberty Mut. Ins. Co., 515 Fed. App’x 310 (5th Cir. 2013), which held that the plaintiffs in the underlying suit had not made factual allegations of property damage, finding allegations that PPI caused the well to be drilled in the wrong place, and that the alleged property damage arising from such activity injured plaintiffs as owner in the property where the well was incorrectly drilled did not constitute allegations of property damage. Likewise, the court noted that in the case of Mid-Continent Cas. Co. v. Camaley Energy Co., Inc., 364 F. Supp. 2d 600 (N.D. Tex. 2005), the district court relied upon the underlying plaintiffs’ allegation of constructive eviction from their leasehold—rather than the fact that the well had not been drilled in the right location and therefore failed to reach the targeted bottom hole location—in finding that they had alleged loss of use and, therefore, property damage under the policy. The Eastern District Court reasoned that each of the explanations provided by the experts for why the crooked wellbore was problematic was merely because it either deviated from the planned path or prevented the well from reaching its targeted bottom hole location. The court found such facts or circumstances were akin to a failure to reach the targeted bottom hole location, which did not constitute physical injury to tangible property under the PPI or Camaley cases. Moreover, the court noted it was difficult to understand how Solstice’s inability to enjoy the use of a well not yet in existence could constitute loss of use of tangible property and found that Solstice’s inability to use the well that Ole Brook drilled did not constitute property damage under the “loss of use” prong of the definition.