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Ulibarri v. Southland Royalty Co., LLC

United States District Court, D. New Mexico

April 2, 2019

GERALD ULIBARRI and WHITE RIVER ROYALTIES, LLC, Plaintiffs,
v.
SOUTHLAND ROYALTY COMPANY, LLC, Defendant. GERALD ULIBARRI, Plaintiff,
v.
ENERGEN RESOURCES CORPORATION, Defendant.

          MEMORANDUM OPINION AND ORDER

          ROBERT C. BRACK SENIOR U.S. DISTRICT JUDGE

         In this contract dispute over oil and gas royalty payments, the Court takes up the Parties' competing motions to exclude expert testimony in advance of a class certification hearing.[1] The main issue before the Court is whether consideration of how natural gas products are processed, transported, and sold after extraction from specific wells is relevant to the Court's determination of whether class certification is proper in this case.

         In Gerald Ulibarri's and White River Royalties, LLC's (Plaintiffs) Motion to Exclude the Proposed Opinion Testimony of Defendant's Expert Mark Lambert (Doc. 114), Plaintiffs argue that Mr. Lambert's opinions regarding well-specific natural gas quality and composition, post-production activities, and midstream gas processing are not “relevant to any issue related to class certification.” (Id. at 5.) Defendant Southland Royalty Company, LLC (Southland) argues that it specifically sought Mr. Lambert's testimony because Plaintiffs' proffered expert in oil and gas royalty accounting, Donald Phend, offers his opinions on the same topics. In its conditional Daubert Motion to Exclude Testimony of Donald A. Phend, CPA (Doc. 125), Southland urges the Court to exclude Mr. Phend's testimony if it excludes Mr. Lambert's testimony. Having considered the submissions of the parties and relevant law, the Court finds that the testimony of both proffered expert witnesses is admissible at the class certification stage. The Court will thus deny Plaintiffs' motion to exclude Mr. Lambert's testimony and deny as moot Southland's conditional motion to exclude Mr. Phend's testimony.

         I. Background [2]

         A. The Underlying Complaint and Proposed Class

         Southland holds the lessee's interest in numerous oil and gas lease agreements under which it produces natural gas from “gas only” wells in New Mexico. (Docs. 99 at 3; 106 at 11.) Plaintiffs hold the lessor's interest in several such lease agreements. (Doc. 99 at 3-4.) They allege that, since January 1, 2015, Southland has been consistently underpaying royalties it owes on the sales proceeds of natural gas and related products that Southland produces pursuant to their lease agreements. (See Id. at 8.) Plaintiffs argue that Southland has breached the lease agreements by engaging in a common method of calculating royalty payments that “(1) calculates a value for the royalties . . . that is substantially less than the sale proceeds received on the sale of gas, including residue gas, the natural gas liquid products, and condensate, which came from Plaintiffs' and the Class members' Southland Wells;” and also “(2) improperly deducts costs for gathering, compression, processing, [Natural Gas Processors Tax] . . ., natural gas liquids transportation and fractionation, and other costs and expenses.” (Id.)

         Plaintiffs seek to bring this action on behalf of a putative class including all individuals and entities who have been paid royalties by Southland at any time since January 1, 2015, and hold a lessor's interest in a lease agreement that contains one of four different types of royalty payment provisions.[3] (See Id. at 1-2.) The four types of royalty provisions that delineate the proposed class include: “proceeds royalty provisions, ” “gross proceeds royalty provisions, ” “greater of market value or gross proceeds royalty provisions, ” and “gross proceeds without deduction of post-production costs royalty provisions.” (See id.)

         B. Motion to Exclude Testimony of Mark Lambert

         Southland has proffered the testimony of Mr. Lambert as a chemical engineering expert with decades of experience in the oil and gas pipeline and hydrocarbon processing industries. (See Doc. 114-6 at 4.) His experience, education, and training suggest expertise in the oil and gas industry, specifically in the engineering aspects of oil and gas production. (See Id. at 41-46.) Mr. Lambert has experience in consulting regarding “oil [and] gas facilities including engineering, construction, contracts, operations [and] maintenance, and royalty matters.” (Id. at 4.) Mr. Lambert's expert report “focuses on certain claims made by Plaintiffs and their designated accounting expert, Donald A. Phend . . . .” (Id. at 3.) In particular, Mr. Lambert notes that his report responds to Mr. Phend's opinions “concerning the production conditions occurring at or near the well; the gathering, treating, processing, compression, and pipeline transportation operations (sometimes referred to as ‘midstream' or ‘post-production' activities); and the disposition of natural gas, condensate, and natural gas liquids (‘NGL') at the well and at other locations.” (Id.)

         Mr. Lambert's report asserts that “there exist significant differences and variability in the Potential Class Wells due to widely varying facts and circumstances associated with each well[, ]” differences which “have a significant impact with respect to evaluating the claims made by Plaintiffs on a class-wide basis and the ability of Plaintiffs to represent the Class.” (Id. at 10.) Mr. Lambert opines that determining whether post-production costs have been properly deducted from a royalty payment requires an evaluation of various factors, including among others: the lease governing the well from which the gas was produced; the royalty language in the lease and whether it requires different payment obligations if the gas is processed; the processing activities at each well; and the midstream processing agreements applicable to each well, if any. (Id. at 11.)

         Plaintiffs argue that these opinions are “factually and legally irrelevant” and should be excluded. (Doc. 114 at 4.) “None of the 325 Lease Agreements has any royalty provision which provide, in any respect, that the calculation and payment of royalties to the Lessors is dependent upon the quality or composition of the natural gas which is produced from the wells subject to those 325 Lease Agreements.”[4] (Id. at 3.) According to Plaintiffs, the only information necessary to determine Southland's royalty payment obligations is “the dollar amount of proceeds received by Southland from the buyers on its sale of natural gas and natural gas liquids.” (Id.)

         Southland counters that it specifically retained Mr. Lambert to offer his expert testimony “in response to the engineering-type opinions offered by Plaintiff[s'] expert Donald A. Phend[] . . . .” (Doc. 131 at 1.) Southland asserts that while Plaintiffs argue Mr. Lambert's opinions are not relevant to any class certification issues, their own expert, Mr. Phend, “raises in his report issues relating to gas production, gas quality and composition, and gas infrastructure in the San Juan Basin.” (Id. at 4 (citing Doc 140-1 ¶¶ 18, 20-23, 52).) Accordingly, Southland argues that Mr. Lambert's testimony and expert report “directly address[] the facts put at issue by Plaintiffs' expert Mr. Phend[, ]” and “have a tendency to make the facts related to the engineering-type issues raised by Mr. Phend more or less probable than such facts would be without the evidence.” (Id.)

         C. Conditional Motion to Exclude Testimony of Donald Phend

         Mr. Phend is a Certified Public Accountant licensed in Colorado. (Doc. 140-1 ¶ 2.) He has been “continuously employed or engaged in oil and gas accounting and tax matters for over 35 years” and has “extensive experience reviewing gas revenue and gas plant accounting for production and valuation throughout the western United States.” (Id.; see also Doc. 140-1 at 33- 35.) Plaintiffs offer Mr. Phend's expert report and testimony to identify the “accounting methodology used by Southland to calculate . . . Class members' royalties with respect to the sale proceeds received on the sale of gas, including residue gas, natural gas liquid products, and condensate, and the treatment and calculation of these Post-Production Costs as they pertain to such royalty payments.” (Doc. 140-1 ¶ ...


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