## Facts

- Seagull Energy E & P, Inc. was the designated operator and a lessee under two offshore oil-and-gas leases (Mustang Island Area, Blocks 828 and 831).
- Eland Energy, Inc. acquired small working interests in both blocks and expressly assumed rights and duties under separate operating agreements for each block.
- The operating agreements allocated operating costs among working-interest owners in proportion to their interests and authorized the operator to collect those costs.
- Eland later sold and assigned its working interests, including its rights and obligations under the operating agreements, to Nor-Tex Gas Corporation.
- Nor-Tex failed to reimburse Seagull for its share of operating expenses.
- Seagull sought payment from Eland; Eland refused, asserting it had no further obligation after the assignment.
- Seagull sued Eland and Nor-Tex for breach of the operating agreements.
- The trial court granted partial summary judgment for Seagull, holding Nor-Tex breached and Eland remained liable; the court of appeals reversed; the Supreme Court of Texas granted review.

## Issues

1. Whether a working-interest owner’s sale and assignment of its interest subject to an operating agreement releases the assignor from contractual obligations to the operator absent an express release or contract language providing for release.
2. Whether the operating agreements’ provisions tying reimbursements to a party’s “participating interest” implied a release of the assignor upon assignment.

## Decision

- The Supreme Court of Texas reversed the court of appeals and rendered judgment for Seagull.
- The Court held that Eland’s assignment to Nor-Tex did not, by itself, release Eland from its obligations under the operating agreements.
- Because the agreements did not provide for release upon assignment and Seagull did not expressly release Eland (and no novation occurred), Eland remained liable for the unpaid operating expenses when Nor-Tex defaulted.
- The Court rejected Eland’s argument that “participating interest” language implied release; contractual silence did not create a novation or implied discharge.

## Legal Principles

- An assignor generally remains liable on its contractual obligations after assignment unless the contract provides for release upon assignment or the obligee expressly releases the assignor (including through novation).
- Oil-and-gas operating agreements are contracts governed by ordinary assignment and liability rules; permission to assign does not, without more, substitute the assignee for the assignor.
- A novation requires clear substitution and release; it is not inferred from contract silence or from provisions allocating costs by ownership percentages.

## Conclusion

The Texas Supreme Court held that assigning a working interest subject to an operating agreement does not automatically discharge the assignor’s contractual duties to the operator; absent an express release or novation, the assignor remains liable when the assignee fails to pay operating expenses.


Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (Tex. 2006)