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Ulibarri v. Energen Resources Corp.

United States District Court, D. New Mexico

August 23, 2019




         This oil and gas royalty dispute centers on the interpretation of leases providing that royalties should be paid on the “proceeds from the sale of the gas, as such.” The Court concludes that this language is ambiguous when describing the point at which the “proceeds” should be calculated-either “at the well” or at the downstream point where the gas is actually sold. It is similarly unclear whether the language requiring royalty payments to be made on “proceeds from the sale of gas” requires paying royalties on gas used as in-kind payments to third-party processing facilities prior to an actual sale generating “proceeds.” The Court thus denies the parties' motions for summary judgment on these issues, but will grant Plaintiff's motion to the extent that his claims under the New Mexico Oil and Gas Proceeds Payment Act (OGPPA) are not barred merely because the leases were originally executed prior to the Act.

         I. Background

         Plaintiff brings this putative class action on behalf of himself and other similarly situated lessors to recover proceeds they are allegedly owed under royalty agreements with Defendant Energen Resources Corporation (Energen), the lessee. Plaintiff filed both his original Class Action Complaint (Doc. 1) and his First Amended Class Action Complaint (Doc. 3 (Am. Compl.)) on March 29, 2018, and filed the currently operative Second Amended Class Action Complaint on March 4, 2019. (Doc. 74 (2d Am. Compl.).) Plaintiff asserts two claims for relief: (1) that Energen breached its obligations under the leases “by failing to pay royalties based upon the proceeds received on the sale of residue gas, natural gas liquids [(NGLs)] and condensate which came from the gas wells subject to Plaintiff's and the Class members' Royalty Agreements[, ]” and (2) that Energen has violated the OGPPA by allegedly underpaying royalties and by failing to make timely payments. (Id. ¶¶ 39, 41-44.)

         The Second Amended Complaint defines the putative class as “[a]ll persons and entities to whom Energen paid royalties on natural gas produced by Energen from wells located in the state of New Mexico between March 29, 2012 and May 31, 2015, pursuant to leases or overriding royalty agreements (collectively, ‘Royalty Agreements') which contain” one of four different royalty payment provisions. (See Id. ¶ 1.) Plaintiff claims that language in each of the four categories of royalty provisions set forth in the class definition prohibit Energen from deducting post-production costs from its royalty payments.[1] However, only one of the four types of royalty provisions is relevant to the parties' cross-motions for summary judgment. Plaintiff's two leases with Energen include “Proceeds Royalty Provisions, ” which require payment of “a specified percentage of the proceeds of the gas, as such, for gas from wells where gas only is found.”[2] (Id.)

         The putative class definition specifically excludes any individuals or entities whose lease agreements provide for royalty payments based on “market value at the well, ” “the prevailing field market price, ” or any other agreement language stating that value should be calculated “at the well.” (Id.) These exclusions are necessary because in Anderson Living Trust v. Energen Resources Corp., the Tenth Circuit held that the “marketable condition rule” does not apply in New Mexico- meaning lessees can “deduct[] from [lessors'] royalty payments their proportionate share of post-production costs-those costs necessary to make the gas marketable.” 886 F.3d 826, 831 (10th Cir. 2018). Natural gas is often not marketable when it is first produced (i.e., “at the well”). See Id. at 832. Thus, when a lease agreement calls for royalties to be calculated based on the value of the gas at the well, producers must determine this value using a “netback” or “workback” method of calculation. See Id. at 832-33. This involves calculating a price for the natural gas “at the well” by selling the natural gas after it has been processed into marketable condition, then deducting the post-production costs that were necessary to prepare it for sale to actually earn that value. See Id. at 832 (explaining that the leases in Anderson Living Trust “set the basis for royalty payments as the ‘market value at the well' or the ‘prevailing field market price.' Determining those amounts, however, is not straightforward, because Energen does not sell the gas it produces on these leased properties ‘at the well'” (citations omitted).)

         The Second Amended Complaint thus asserts that while post-production costs may be deducted when the lease requires calculating royalties based on proceeds “at the well, ” it is still improper to deduct post-production costs from royalties paid under all those leases that don't specify “at the well” valuation and simply provide for payments to be made on proceeds from the sale of gas. (See Doc. 74 ¶¶ 19-30.) Instead, under those types of leases, Plaintiff asserts Energen should base payments on the actual sales proceeds of the natural gas and related products derived from its wells. (See id.)

         II. Legal Standards

         A. Summary Judgment

         Summary judgment is appropriate when the Court, viewing the record in the light most favorable to the nonmoving party, determines “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Garrison v. Gambro, Inc., 428 F.3d 933, 935 (10th Cir. 2005). A fact is “material” if it could influence the determination of the suit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute over a material fact is “genuine” if a reasonable trier of fact could return a verdict for either party. Id. The moving party bears the initial responsibility of showing “an absence of evidence to support the nonmoving party's case.” Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 891 (10th Cir. 1991) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). Once the moving party meets this burden, Rule 56 “requires the nonmoving party to go beyond the pleadings and by affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial.” Celotex, 477 U.S. at 324 (citation and quotation marks omitted).

         B. Oil and Gas Lease Interpretation

         “In New Mexico, oil and gas leases are interpreted under the same principles as any other contract.” King v. Estate of Gilbreath, 215 F.Supp.3d 1149, 1164 (D.N.M. 2016) (citing ConocoPhillips Co. v. Lyons, 299 P.3d 844, 852 (N.M. 2013); Continental Potash, Inc. v. Freeport-McMoran, Inc., 858 P.2d 66, 80 (N.M. 1993); Elliott Indus. Ltd. P'ship v. BP Am. Prod. Co., 407 F.3d 1091, 1112 (10th Cir. 2005)). “The primary objective in construing a contract is to ascertain the intention of the parties.” Continental Potash, Inc., 858 P.2d at 80 (quoting Mobile Inv'rs v. Spratte, 605 P.2d 1151, 1152 (N.M. 1980)).

         When a contractual provision is in dispute, courts must first determine if the provision is ambiguous. “If a court concludes that there is no ambiguity, the words of the contract are to be given their ordinary and usual meaning[, ]” Lyons, 299 P.3d at 852 (quotation omitted), and the court “is limited to interpreting the contract which the parties made for themselves [as a court] may not alter or make a new agreement for the parties.” King, 215 F.Supp.3d at 1164 (quoting Lyons, 299 P.3d at 852). When contractual language is ambiguous, “the jury (or the court as the fact finder in the absence of a jury) resolves the ambiguity as an issue of ultimate fact before deciding issues of breach and damages.” C.R. Anthony Co. v. Loretto Mall Partners, 817 P.2d 238, 243 (N.M. 1991) (citation omitted).

         “Whether a contract contains an ambiguity is a matter of law . . . .” Lyons, 299 P.3d at 852. “A contract term may be ambiguous if it is ‘reasonably and fairly susceptible [to] different constructions.'” Id. (quoting Mark V, Inc. v. Mellekas, 845 P.2d 1232, 1235 (N.M. 1993)). “The standard to be applied in determining whether a contract term is ambiguous and is subject to equally logical but conflicting interpretations is the same standard applied in a motion for summary judgment.” Id. at 849 (quoting Randles v. Hanson, 258 P.3d 1154, 1162 (N.M. 2001) (quotation marks and brackets omitted)). Thus, a court should only consider a provision unambiguous “when the ‘evidence presented is so plain' that it is only reasonably open to one interpretation.” Id. (quoting Randles, 258 P.3d at 1162). In making this determination, “courts may consider ‘evidence of the circumstances surrounding the making of the contract and of any relevant usage of trade, course of dealing, and course of performance.'” Id. (quoting C.R. Anthony Co., 817 P.2d at 242- 43). “[I]f the proffered evidence of surrounding facts and circumstances is in dispute, turns on witness credibility, or is susceptible of conflicting inferences, the meaning must be resolved by the appropriate fact-finder . . . .” Id. (quoting Mark V, 845 P.2d at 1235).

         III. Analysis

         Energen seeks summary judgment on both Plaintiff's claims-arguing (1) that it did not breach its contracts as a matter of law, and (2) that the OGPPA does not apply to Plaintiff's leases. (See Doc. 70.)

         A. The Court will deny summary judgment as to the correct interpretation of the point of valuation in Plaintiff's leases.

         Energen argues that Plaintiff's leases clearly provide that royalties should be paid only on the proceeds of gas that is actually sold and should be calculated on the value of the gas “at the well.” (Id. at 10-13.) Further, it asserts that the circumstances in 1953 when the parties' predecessors in interest executed the leases supports this interpretation (id. at 13-15), and that Plaintiff's course of performance in accepting Energen's calculation method from 2007 to 2015 “supports Energen's interpretation of [the] leases.” (Id. at 15.)

         Plaintiff counters in his cross-motion for summary judgment that caselaw discussing similar lease provisions proves that his leases require royalty payments to be based on the actual sales proceeds without any post-production deductions. (Doc. 89 at 9-14.) He also asserts that Energen's proffered evidence of custom and practice in the oil industry at the time the leases were executed is inadmissible as a matter of law, in part because the opinions proffered by Energen's expert witness, Kris Terry, are not sufficiently supported by a reliable foundation. (Id. at 17-21.) Finally, Plaintiff objects to Energen's attempt to use course of performance evidence ...

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