United States District Court, D. New Mexico
THE ANDERSON LIVING TRUST f/k/a THE JAMES H. ANDERSON LIVING TRUST, et al., Plaintiffs,
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
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.
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
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). 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.
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
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.
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.”).
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.
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.
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.
Relevant General Facts
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, ” less that portion of NGL's that WFC
was contractually entitled to retain.
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.
claims that the difference between the wellhead volumes
produced by Energen and the volumes of residue gas sold by
(1) the volumes of gas used by WFC for gathering and plant
(2) Energen's share of the NGL volumes extracted from the
natural gas stream through processing, for which the Trust
received a separate payment.
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.
Methodology Used in Calculations by Parties
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
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 ...