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Anderson Living Trust v. Energen Resources Corp.

United States District Court, D. New Mexico

May 6, 2019

THE ANDERSON LIVING TRUST f/k/a THE JAMES H. ANDERSON LIVING TRUST, et al., Plaintiffs,
v.
ENERGEN RESOURCES CORPORATION, Defendant. Volume (MMBTT) Price Value CVEMBTU s Price) Liquids Shrink (130.00)15 $4.8844 (S634.97) Volumes Paid (MMBTU) NRRT's Price Value (MMBTU x Price)

          MEMORANDUM OPINION AND ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT ON NEELY-ROBERTSON REVOCABLE TRUST'S FUEL GAS CLAIM

         THIS MATTER comes before the Court upon Energen's Motion for Summary Judgment on the Neely-Robertson Revocable Trust's Fuel Gas Claim, filed February 28, 2019 (Doc. 216). Having reviewed the parties' pleadings and the applicable law, the Court finds that Defendant's motion is not well-taken and, therefore, is denied.

         BACKGROUND

         This case concerns the calculation and payment of royalties on natural gas produced from wells located in the northwest part of New Mexico and the southwest part of Colorado within the geologic formation known as the San Juan Basin. The New Mexico Plaintiffs (Anderson Living Trust, Pritchett Living Trust and Neely-Robertson Revocable Family Trust) own interests only in wells located in New Mexico. Plaintiff Tatum Living Trust (“Tatum Trust”) owns interests in wells located in Colorado. Defendant Energen Resources Corporation (“Defendant” or “Energen”) is the owner and operator of the natural gas wells on the oil and gas leases at issue in this lawsuit.

         I. Procedural background

         Most of the issues related to the claims in this case have been briefed and addressed by the Court. Docs. 175, 177. Plaintiffs appealed the Court's adverse rulings and the Tenth Circuit Court of Appeals affirmed in part and reversed in part. See Anderson Living Tr. v. Energen Res. Corp., 886 F.3d 826, 847 (10th Cir., Mar. 2, 2018).[1] As a result of the Court's rulings on claims asserted by the other New Mexico Plaintiffs which have been affirmed by the Tenth Circuit, the only remaining New Mexico Plaintiff is the Neely-Robertson Revocable Family Trust (“N-R Trust” or “Trust”) See Doc. 194 at 3 & 5 (table); Doc. 198 at 6.[2]

         In this motion, Energen seeks dismissal of the N-R Trust's claim for additional royalties on gas used as fuel. Relying on New Mexico law regarding post-production costs that are shifted to the lessor, the district court granted summary judgment to Defendant, concluding that Energen was not required to pay royalties on gas used as fuel even though the N-R lease did not contain a “free use” clause. Doc. 175 at 19-20.

         Post-production costs are those costs necessary to make the gas marketable. Anderson Living Tr. v. Energen Res. Corp., 886 F.3d 826, 831 (10th Cir. 2018). New Mexico law does not recognize a “marketable condition rule, ” which imposes on the producer the burden of bearing all costs necessary to render the gas marketable. See Cont'l Potash, Inc. v. Freeport-McMoran, Inc., 115 N.M. 690 (1993) (rejecting the argument that the producer must bear all costs necessary to render the gas “marketable”), cited in Elliott Indus. Ltd. P'ship v. BP Am. Prod. Co., 407 F.3d 1091, 1108 (10th Cir. 2005). Thus, Energen is entitled to deduct post-production costs for its services in getting the gas into a marketable condition. See Doc. 175 at 9; Anderson Living Trust, 886 F.3d at 830.

         On appeal, the Tenth Circuit disagreed with the district court's ruling granting summary judgment to Defendant. The court found that Energen's practice of using fuel gas royalty-free was “not only contrary to the royalty provision of the lease, it also impermissibly reads into the lease a “free use” clause that is not there.” Anderson Living Trust, 886 F.3d at 847. While the Neely-Robertson Trust did not contain a “free use” clause, the Tenth Circuit stated that the royalty provisions in the lease language were “explicit” in stating that royalty is owed on all oil and gas produced from the leased land, and not just on gas that is marketed:

“at the prevailing field market price therefor at the time when produced a royalty in cash or oil amounting to seven and one half (7 ½) percentum of all oil and gas produced from the lands embraced in said primary lease . . .”

Doc. 216-1 at 4. The field market price at “the time when produced” means “the value of the gas at the wellhead, where production occurs, when production occurs”-that is, royalty is to be paid “on all gas emerging from the wellhead of each well within the lease area.” Anderson Living Trust, 886 F.3d at 846-847. The Tenth Circuit found that Energen was entitled to deduct the value of the fuel gas consumed as a post-production cost, but it must still pay royalty on the wellhead value of the fuel gas consumed. Id. (“In calculating [the field market price, ” Energen may deduct the value of the fuel gas consumed as a post-production cost (along with other post-production costs), but it must also pay royalty on the wellhead value of the fuel gas consumed.”).

         The Tenth Circuit stated that the “netback method” should be used to determine the wellhead value of any gas at issue “unless the lease provides otherwise. . . .” 886 F.3d at 847. The court described this method by comparing it to the calculation of a commission paid to a car salesman. Anderson Living Trust, 886 F.3d at 833, n.10. Using that analogy, the value of gas at the wellhead can be determined by deducting the post-production costs from the sales price (market value) of the processed (or non-fuel) gas. The court noted that the “netback method” was “widely accepted as the best means for estimating the market value of gas at the well where no such market exists. Id. at 832 (citing Abraham v. BP America Production Co., 685 F.3d 1196, 1200 (10th Cir. 2012). Because the record on appeal was insufficient from which a determination could be made of the wellhead value of the fuel gas consumed, the Tenth Circuit remanded the N-R fuel gas claim for appropriate factual findings and required calculations” by the district court. Anderson Living Trust, 886 F.3d at 847. Thus, what remains for the fuel gas claim is a calculation of royalties owed to the N-L lessors for Energen's use of gas as fuel, based on the “netback method” of calculation. Following remand, the parties were allowed to re-brief the claim.

         II. Legal Standard

         Summary judgment is appropriate when there are no genuinely disputed issues of material fact and, viewing the record in the light most favorable to the non-moving party, the movant is entitled to judgment as a matter of law. Bruner v. Baker, 506 F.3d 1021, 1025 (10th Cir. 2007); Boling v. Romer, 101 F.3d 1336, 1338 (10th Cir. 1996). Once the party moving for summary judgment properly supports its motion, it is incumbent on the non-moving party to respond with some showing of an issue of genuine material fact. Allen v. Denver Pub. Sch. Bd., 928 F.2d 978 (10th Cir. 1991), overruled on other grounds by Kendrick v. Penske Transp. Svcs., 220 F.3d 1220, 1228 (10th Cir. 2000). The non-moving party may not rest on averments in its pleadings, but instead must establish specific triable issues. Gonzales v. Miller Cas. Ins. Co. of Texas, 923 F.2d 1417 (10th Cir. 1991). The mere existence of some alleged, immaterial factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986).

         DISCUSSION

         Plaintiff's fuel gas claims are alleged in Counts I, II and VII in the Second Amended Complaint (Doc. 70); see Doc. 212 at 2. In this motion, Energen contends that it owes no royalties to Plaintiff after allowing for Plaintiff's share of gathering and processing costs-in other words, Energen's royalty obligations are “precisely equal” to its share of gathering and processing costs. Plaintiff disagrees, claiming that Energen undervalues the fuel gas used in the royalty calculations and disputes the accuracy of the mathematical calculations used by Energen.

         I. Relevant General Facts

         The N-R Trust has an overriding royalty instrument governing minerals in San Juan County, New Mexico. See Ex. A. Prior to March 2015, Energen owned and operated six wells subject to the Trust's overriding royalty interest. See Ex. B. Gas produced from the N-R leasehold wells was gathered by Williams Four Corners (“WFC”), the third party that gathers and processes the gas under contract with Energen. WFC returned the processed residue gas to Energen, which then sells the gas to third parties. Ex. D at 4-5. WFC purchased the natural gas liquids (“NGL”), also known as “shrink, ”[3] less that portion of NGL's that WFC was contractually entitled to retain.

         WFC provided Energen with detailed monthly statements indicating the wellhead volumes of gas produced by Energen, the volumes of natural gas returned to Energen and the gallons of NGL's that WFC purchased from Energen. Exs. G & H. In turn, Energen sent Plaintiff monthly royalty payment statements identifying the volumes of residue gas it sold from the wells and the volumes of NGL's purchased by WFC.

         Energen claims that the difference between the wellhead volumes produced by Energen and the volumes of residue gas sold by Energen are:

(1) the volumes of gas used by WFC for gathering and plant fuel; and
(2) Energen's share of the NGL volumes extracted from the natural gas stream through processing, for which the Trust received a separate payment.

         Defendant claims that no royalties remained as owed after attributing to Plaintiff its “share of gathering and processing costs.” Doc. 216 at 6. Plaintiff admits that its monthly royalty statements identify volumes of residue gas sold, but disputes that the statements it receives from Defendant show all volumes of the NGL's that were derived from the gas in its wells. Plaintiff also claims that Energen substantially undervalues the fuel gas used in order to arrive at its conclusions.

         II. Methodology Used in Calculations by Parties

         To start with, the Court is puzzled by Energen's reference to Plaintiff's “share” of gathering and processing costs, as Defendant does not refer to any lease provision that addresses a “share” that Plaintiff must pay for gathering/processing costs. See Doc. 216 at 2, 4, 6. Defendant does not explain whether it used, or how it used, the “netback” calculation method ordered by the Tenth Circuit as a means of calculating the wellhead value of the gas so that royalties could be calculated on the gas used use as fuel. Energen is also vague about how and when it takes its post-production deductions, including those for the value of fuel gas consumed as a post-production cost.

         Energen is entitled to the “free” use of gas consumed as a post-production cost. 886 F.3d at 846-847. The Tenth Circuit mandate provided explicit instructions that the “netback method” should be used in calculating royalties. Anderson Living Trust, 886 F.3d at 847 (“. . . unless the lease provides otherwise the netback method should be used to determine the wellhead value of any gas at issue”). The court also strongly emphasized that the “netback method” is not a means of cost-shifting marketing expenses to the royalty ...


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