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Anderson Living Trust v. Energen Resources Corp.

United States District Court, D. New Mexico

May 24, 2019

THE ANDERSON LIVING TRUST f/k/a THE JAMES H. ANDERSON LIVING TRUST, et al., Plaintiffs,
v.
ENERGEN RESOURCES CORPORATION, Defendant.

          MEMORANDUM OPINION AND ORDER

         THIS MATTER comes before the Court upon a Motion for Summary Judgment on the Colorado Plaintiff's Fourth Claim for Relief (Doc. 215), filed on February 28, 2019 by Defendant Energen Resources Corporation (“Defendant” or “Energen”).

         BACKGROUND

         This case concerns the calculation and payment of royalties on natural gas produced from wells located in northern New Mexico and southern 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.

         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”). See Doc. 194 at 3 & 5 (table); Doc. 198 at 4, 6.

         In this motion, Defendant seeks dismissal of a claim for “Breach of the Duty to Market Hydrocarbons-Colorado, ” asserted by the sole Colorado Plaintiff in this case. See Sec. Am. Compl. (“SAC”), Doc. 70 at ¶¶59-63. This particular claim has never been briefed by the parties or otherwise addressed by the Court. See Doc. 207 at 5.[2]

         DISCUSSION

         In its Fourth Claim for Relief, Plaintiff Tatum Trust asserts that Energen failed to comply with its obligation to bear all costs associated with placing the natural gas produced from the subject wells located in the State of Colorado in marketable condition, according to the “marketable condition rule” followed by Colorado. See Doc. 70 (SAC), ¶63. In Garman v. Conoco, Inc., the Colorado Supreme Court held that, “absent an assignment provision to the contrary, ” all costs incurred to make the gas marketable must be borne entirely by the lessee and are not deductible from royalty payments. 886 P.2d 653, 654 (Colo. 1994). This means that the producer (or lessee) must bear the expenses incurred in order for the gas to reach marketable condition. See Cont'l Potash, Inc. v. Freeport-McMoran, Inc., 115 N.M. 690 (1993); Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001) (the implied duty to market obligates a producer to bear “the expense of getting the product to a marketable condition and location”). In this case, the Tatum Trust lease expressly addresses the allocation of post-production costs between the Tatum Trust and Energen:

Lessor shall not bear, directly or indirectly, any production or post-production cost or expenses, including without limitation, cost or expenses for storing, separating, dehydrating, transporting, compressing, treating, gathering, or otherwise rendering marketable or marketing the Products, and no deduction or reduction shall be made for any such costs and expenses in computing any payment, or the basis upon which any payment is, to be made to Lessor pursuant to clauses (a), (b) or (c).

Doc. 215-1 (Ex. A, for leases dated Dec. 15, 2000 and Dec. 1, 2003). In addition, the Tenth Circuit recognized that the Tatum Trust leases expressly provide for the allocation of post-production costs and royalties on volumes of gas and liquids not sold by Energen, such as gas used as fuel (Plaintiff's fuel gas claims) and drip condensate. Doc. 177 at 4; see Anderson Living Trust, 886 F.3d at 848:

Colorado prohibits oil and gas well operators like Energen from deducting from the royalty payment the costs necessary to render the gas marketable, unless the lease provides otherwise. See Garman, 886 P.2d at 653-54, 659-60. These leases do not provide otherwise; in fact, they explicitly prohibit Energen from deducting post-production costs from the Trust's royalty.

Anderson Living Trust, 886 F.3d at 848 (emphasis added).[3]

         Plaintiff's Fourth Cause of Action refers to the lease provisions, See Doc. 70 at 60 (“Under the terms of the oil and gas leases and other documents creating the Plaintiffs' interest. . . Energen has a duty and covenant to market production to the mutual advantage of [the parties]”). It asks the Court to find that “Energen owes an implied duty to market under the terms of the subject Colorado leases” to Plaintiffs. Doc. 70, ¶63.

         I. Parties' Positions

         Defendant contends that the implied duty to market has no bearing on the proper calculation of royalties paid to the Tatum Trust because the leases contain express language which allocates post-production costs to Energen, and this language eliminates the need for Plaintiff to rely on the “marketable condition rule.” As a result, ...


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