Anderson Living Trust v. Energen Res. Corp.

161 F.Supp.3d 1055

The Anderson Living Trust f/k/a The James H. Anderson Living Trust; the Pritchett Living Trust; J. Richie Fields; the Tatum Living Trust; and Neely–Robertson Revocable Family Trust, Plaintiffs,

v.Energen Resources Corporation, Defendant.

No. 13–CV–00909 WJ/CG

United States District Court, D. New Mexico.

Filed February 18, 2016

Bradley D. Brickell, Brickell & Associates, PC, Norman, OK, Brian K. Branch, The Law Office of Brian K. Branch, Turner W. Branch, Branch Law Firm, Albuquerque, NM, Cynthia Zedalis, Cohen & Zedalis LLP, Karen Aubrey, Law Office of Karen Aubrey, Santa Fe, NM, for Plaintiffs.

Bradford C. Berge, John C. Anderson, Holland & Hart LLP, Santa Fe, NM, Christopher A. Chrisman, Holland & Hart LLP, Denver, CO, for Defendant.

MEMORANDUM OPINION AND ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT ON PLAINTIFFS' CLAIMS UNDER NEW MEXICO LAW

WILLIAM P. JOHNSON, UNITED STATES DISTRICT JUDGE

THIS MATTER comes before the Court upon Defendant's Motion for Summary Judgment on Plaintiffs' Claims Under New Mexico law, filed April 13, 2015 (Doc. 96) . The Court has reviewed and considered the parties' written submissions, the oral arguments of their counsel and the applicable law. For the reasons stated herein, Defendant's motion is GRANTED.

BACKGROUND

The controversy in this case involves issues relating to the proper payment of royalty income to Plaintiffs, and all others similarly situated, from the production of oil, natural gas and associated hydrocarbons (including drip condensate) from natural gas wells on lands subject to various oil and gas leases in northern New Mexico and southern Colorado all 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, hereinafter, “Anderson–Pritchett” and “Neely–Robertson” “Trust” or “lease”) own interests only in wells located in New Mexico.¹ Plaintiff Tatum Living Trust (“Tatum Trust”) owns interests in wells located in Colorado. In the motions pending before the Court Defendant seeks summary judgment on claims asserted by the New Mexico Plaintiffs in the Motion for Summary Judgment Under New Mexico law (Doc. 96); and partial summary judgment on claims asserted by the Tatum Trust (Doc. 99). This Memorandum Opinion and Order addresses only Plaintiffs' claims asserted under New Mexico law.

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. According to the First Amended Complaint, Defendant produces and sells the production from its wells pursuant to the terms of oil and gas leases and other royalty instruments. Plaintiffs allege that they own royalty and overriding royalty interests under some of these instruments. They also allege that Energen is required to pay monthly royalties to them, and to other owners on the production and sale of oil and natural gas, consistent with the terms of the royalty instruments.

This case is essentially a re-filing of a previous case that was removed to federal court from the 1st Judicial District Court, County of Rio Arriba, State of New Mexico, in April 2012 based on diversity jurisdiction. In that case, United States District Court Judge Judith C. Herrera dismissed Plaintiffs' claims without prejudice. See Anderson Living Trust v. Energen, Civil No. 12–00352 JCH–KBM, Doc. 29 (“previous lawsuit”). This Court has dismissed several claims asserted by the New Mexico Plaintiffs pursuant to Fed.R.Civ. P. 12(b)(6). Doc. 67 (Court's Mem. Opin. & Order) at 35–37. Defendant now seeks summary judgment on the remaining claims. The Second Amended Complaint (Doc. 70) asserts the following claims:

First Cause of Action: Failure to Pay Royalty on values received by Energen, on volumes of hydrocarbons, drip condensate and lawful expenses;

Second Cause of Action: Breach of Duty of Good Faith and Fair Dealing (Dismissed as to Colorado and Re–Pled);²

Fourth Cause of Action (Breach of Duty to Market Hydrocarbons)—Colorado;

Fifth Cause of Action: Violation of the New Mexico Oil and Gas Proceeds Payment Act and Interest Due;

Sixth Cause of Action: Bad Faith Breach of Contract;

Seventh Cause of Action: Declaratory Relief.

Defendant has grouped Plaintiffs' claims asserted in the Second Amended Complaint (“SAC”) into five categories of alleged underpayment or late payment:

(a) deducting unreasonable costs from royalty payments (post-production costs);

(b) failure to pay royalties on gas used as fuel;

(c) failure to pay royalties on “drip condensate”;

(d) late payment of royalties under the New Mexico Proceeds Payment Act, NMSA 1978, § 70–10–1, et seq.

Plaintiffs object to Defendant's characterization of their claims, pointing out that the SAC also asserts claims for breach of contract, including the implied covenant to market, and that different types of damages are alleges as well.³ The Court finds that these distinctions are immaterial because in the end, all of Plaintiffs claims can fairly be described as allegations of royalty underpayment even though the manner of the alleged underpayments may differ. At the January 27, 2016 hearing on Defendant's summary judgment motion, the Court was advised that Plaintiffs have dismissed their claim for underpricing and so this claim will not be addressed. Additionally, the Court will not address the issue of whether Energen must pay royalties in the same manner used to pay royalties to the United States Government under federal oil and gas leases. This issue involves a question of standing, and would be more appropriately addressed in the context of Plaintiffs' pending motion to certify class (Doc. 152).⁴

I. Post–Production Costs

Post-production costs are the expenses associated with processing the gas into a merchantable product, such as gathering, compressing, dehydrating and treating the gas. ConocoPhillips Co. v. Lyons, 299 P.3d 844, 849–50 (N.M.2013) (Lyons ); Creson v. Amoco Prod. Co., 129 N.M. 529, 533, 10 P.3d 853 (2000) (post-production costs are those associated with transporting the gas, expenses of compressing gas so that it can be delivered into a pipeline and other “costs incurred in adding value to the well-head product”). Energen incurs costs for post-production services performed by third parties in order to gather, compress, and process the gas produced from wells situated on lands covered by oil and gas leases in which the New Mexico Plaintiffs' own royalty interests. With respect to the wells owned by Anderson and Pritchett Trusts, Enterprise Fields Services, LLC (“Enterprise”) is the third party that gathers and processes the gas under contract with Energen. Williams Four Corners, LLC (“WFC”) gathers and processes the gas for Energen with respect to the Neely–Robertson Trust.

Energen deducts expenses which it incurs for post-production services performed by these third parties (hereinafter, “third-party processors”) in order to gather, compress, and process the gas produced from the New Mexico Plaintiffs' wells. Plaintiffs acknowledge that Energen does incur costs for post-production expenses as part of the gathering and processing. They do not challenge the reasonableness of these monetary deductions, or argue that these costs are excessive or were not actually incurred by Energen. Plaintiffs object only to those costs being deducted from their royalty payments. As Defendant's counsel noted at the January 27th hearing, Plaintiffs' sole challenge to post-production costs is to the deduction of the cost of the New Mexico natural gas processors tax, which is a “privilege tax” collected from “processors” for the privilege of operating a natural gas processing plant in New Mexico. NMSA 1978, § 733–4. Plaintiffs also object to what they describe as an “in-kind” deduction or compensation to the third-party processors for gathering and processing services by allowing them to use as fuel a portion of the gas produced from the New Mexico wells involved in this litigation.

A. How Royalties Are Paid

The New Mexico Plaintiffs have royalty agreements (or overriding royalty agreements) that provide for the calculation of royalties. The Anderson–Pritchett lease provides for royalties on the “market value [of the gas] at the well. Doc. 97–1, ¶ 4. The comparable provision in the Neely–Robertson Revocable Trust provides for payment on the “prevailing field market price.” Doc. 97–2, ¶ 7 (emphasis added). As Defendant observes, there are no functional differences between the two leases for purposes of calculating royalties because both provisions are based on the market value or price of the gas at the well. This lease language means that before royalties are paid, the market value for gas at the well must be determined.

Energen explains that royalties are paid to Plaintiffs by taking the downstream sale prices for the monthly sale of gas at the tailgate of the third party's processing plant and then reducing that price by Plaintiffs' proportionate share of the gathering and processing expenses incurred under Energen's respective contracts with third-party processors, as well as considering the relevant taxes.⁵ Energen then applies that price to the volumes produced from Plaintiffs' wells, reduced by any liquids retained by the processing plant and any fuel used either on the lease or to gather and process the gas.

Plaintiffs claim that they should be paid royalties based on the volume of the gas at the wellhead, arguing that gas volume is greatly reduced after processing and after reductions that occur from use of plant fuel. In other words, Plaintiffs want to be paid based on the particular number of molecules of gas coming out of the wellhead. However, as Defendant notes, there is no way to pay Plaintiffs an actual “price” for gas from an individual well because the tracing of individual molecules of gas “is physically impossible from the moment the gas enters” the...