Box Elder Kids, LLC v. Anadarko E & P Onshore, LLC

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BOX ELDER KIDS, LLC, C C OPEN A, LLC, and GUEST FAMILY TRUST, by its Trustee CONSTANCE F. GUEST, individually and on behalf of themselves and all others similarly situated, Plaintiffs, v. ANADARKO E & P ONSHORE, LLC, ANADARKO LAND CORPORATION, and KERR-MCGEE OIL AND GAS ONSHORE, LP, Defendants.

Civil Action No. 20-cv-2352-WJM-JPO

United States District Court, D. Colorado

August 27, 2024

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION TO DISQUALIFY EXPERT WITNESS JAMIE JOST

William J. Martinez, Senior United States District Judge

In this oil and gas dispute, Plaintiffs Box Elder Kids, LLC, C C Guest A, LLC, and the Guest Family Trust, by its Trustee Constance F. Guest, individually and on behalf of themselves and all others similarly situated (collectively “Plaintiffs”) move to disqualify expert witness Jamie Jost, proffered by Defendants Anadarko E & P Onshore, LLC, Anadarko Land Corporation, and Kerr-McGee Oil and Gas Onshore, LP (“KMOG”) (collectively “Defendants”). (ECF No. 195.) This issue is fully briefed. (See also ECF Nos. 202, 207.)

For the following reasons, the Court grants in part and denies in part Plaintiffs' motion.

I. PERTINENT BACKGROUND

Plaintiffs own surface land in Weld County, Colorado. (ECF No. 62 at 4.) Box Elder and CC Open A own the surface lands on contiguous pieces of property in Section 25 of Township 2 North, Range 65 West. (Id. at 5.) Guest Family Trust owns the surface lands in the southwest quarter of Section 13, Township 2 North, Range 65 West, which is one mile north of Box Elder's and CC Open A's lands. (Id.)

Anadarko Land owns the interests in the mineral estate under Plaintiffs' lands, but it does not itself develop or operate oil and gas wells. (Id. at 4; ECF No. 72 at 4.) Instead, it leases the right to explore for and develop the mineral estate beneath Plaintiffs' lands to operators, including its affiliate KMOG, an entity that drills and operates oil and gas wells. (ECF No. 62 at 5.) KMOG operates all of the oil and gas wells at issue on Plaintiffs' lands. (Id.) There are 46 wells drilled on Plaintiffs' lands, which produce oil and gas from both inside and outside the boundaries of Plaintiffs' surface lands. (Id.)

A. Relevant Agreements

The minerals under Box Elder's surface lands are subject to an oil and gas lease entered into between Union Pacific Resources Company as lessor and United States Exploration, Inc. as lessee on May 15, 1998. (Id.) The minerals under CC Open A's and Guest Family Trust's surface lands are subject to an oil and gas lease entered into between Union Pacific Railroad Company as lessor and Pan American Petroleum Corporation as lessee on January 8, 1971. (Id.) All of the wells that produce or produced oil and gas from Plaintiffs' lands are subject to one of these two leases. (Id.) Defendants contend that Anadarko Land is the successor-in-interest lessor and KMOG is the successor-in-interest lessee of the two leases. (Id.)

Box Elder's and CC Open A's predecessor-in-title to their respective surface lands, Zelda H. Shaklee, entered into a surface owner agreement (“SOA”) on November 3, 1989, with Anadarko Land's predecessor-in-title to the minerals, Union Pacific Resources. (Id.) Guest Family Trust's predecessors-in-title to the surface lands, Raymond R. Guest and Constance F. Guest, entered into a SOA on June 20, 1973, with Champlin Petroleum Company (now Anadarko E&P). (Id.; ECF No. 72 at 7.)

Section 2 of the Shaklee SOA contains the following payment provision, which gives the surface owner a contractual right to cash payments based on the value of oil and gas produced from or allocated to the lands covered by the SOAs:

[Anadarko] agrees, so long as it is receiving oil and/or gas production from or oil and/or gas royalties upon production from the described premises or allocated thereto under the provisions of a unitization agreement, to pay or cause to be paid to the Landowner in cash the value (which shall never be greater than the amount realized by [Anadarko] from the sale of such production) on the premises of two and one-half percent (2-1/2%) of all the oil and gas and associated liquid hydrocarbons hereafter produced, saved, and marketed therefrom or allocated thereto as aforesaid, . . .

(Id.) The Guest SOA contains a nearly identical payment provision, except that it omits the explanatory parenthetical. (Id.)

The SOAs define the term “unitization agreement” as follows:

[A]ny operating agreement, or any other agreement covering the exploration or development for or the production of oil, gas or associated liquid hydrocarbons, or any pooling, communitization, unit or other agreement whereby the described premises may be included with other lands in proximity thereto as a unit area under a plan of unit or joint exploration, development and operation.

(Id.)

Plaintiffs also entered into Surface Use Agreements and Surface Damage Agreements to compensate them “for any and all normal and customary detriment, depreciation, injury or damage to the Lands or crops growing thereon that may occur as a result of [KMOG's] drilling and completion operations on the Lands.” (Id.)

B. Modification of the SOA Payments

Until 2010, Anadarko paid surface owners whose lands were subject to an SOA 2.5% of the value of all the oil and gas produced from a well located on their lands, including oil and gas allocated to other lands. (Id.) Defendants contend that, as a result, “surface owners without wellheads on their surface lands were not paid on oil and gas produced from and allocated to the minerals underneath their lands produced by a wellhead off their surface lands.” (Id.)

Thereafter, Anadarko sent Plaintiffs letters, which stated the following:

The [SOA] payments have generally been made to the owner of surface upon which a well has been located without consideration to language contained in the [SOA] providing that, under certain circumstances, such payments should be allocated among various surface owners. While in the past this practice may not have resulted in a discrepancy between the recipient(s) of the [SOA] payments despite the applicability of the allocation language, a number of recent developments in the Wattenberg Field have given rise to a different result. Two examples of these recent developments are the increased in-fill drilling and use of directional and horizontal drilling by industry. Other factors which have highlighted the need to consider the allocation language in the [SOA] include the increased surface development in the area, the failure of surface owners to notify Anadarko of sales and transfers of surface interests, the limited production information Anadarko receives from certain of its lessees, and recent regulatory and statutory changes impacting the development of oil and gas resources in the Wattenberg Field.

The numerous unforeseen changes in the legal, business and surface use environments, dictate that Anadarko adjust the calculation of the [SOA] payments to give effect to the language providing for allocation of such payments among certain surface owners. Accordingly, Anadarko has been in the process of reviewing its records to determine how all of the surface owners in the Wattenberg field are being paid under the [SOA]. The [SOA] payments will be adjusted and paid in the proportion that a surface owner's acreage which is (i) covered by a [SOA] and (ii) located within the boundaries of a drilling and spacing unit (as established for each well by the Colorado Oil and Gas Conservation Commission rules and regulations), bears to the total acreage located within the boundaries of such drilling and spacing unit. Anadarko's review of its records and subsequent adjustments to payments may result in a change in how your [SOA] is paid. Your [SOA] payment may be adjusted upward or downward depending on the circumstances. Currently, Anadarko has no plan to make any adjustments or to recoup for [SOA] payments previously paid to you.

(Id.; ECF Nos. 62-9, 62-10).

Defendants contend that, after 2010: (1) KMOG paid Plaintiffs for the oil and gas allocated to the Plaintiffs' lands for each of the 46 wells in direct proportion to each Plaintiff's share of the surface relative to the total area of the applicable spacing or pooling agreement; and (2) Anadarko paid each Plaintiff on the value of oil and gas produced from wells located off Plaintiffs' lands that are allocated to the Plaintiffs' land under a unitization agreement. (ECF No. 62 at 11.) Defendants argue that this payment methodology, which they refer to as the “allocation method,” is derived from a proper interpretation of the contract. (See, e.g., ECF No. 201 at 10.)

Plaintiffs deny that Anadarko paid them the correct value of oil and gas produced from wells located off the Plaintiffs' lands that are allocated to their land under a unitization agreement. (ECF No. 72 at 12.) In Plaintiffs' view, Anadarko is obligated to pay “the surface owner the full 2.5% of production from each well located on their SOA land,” regardless of whether the oil and gas is produced from off their lands. (ECF No. 196 at 18.)

They refer to this interpretation of the contract as the “well-spot method.” (See, e.g., id.)

The Court denied Defendants' first motion for summary judgment, concluding that “Section 2 is ambiguous on its face.” (ECF No. 115 at 10.) Recognizing that the meaning of an ambiguous contract provision “'is generally an issue of fact to be determined in the same manner as other factual issues,'” the Court instructed that, to ascertain the meaning of Section 2 of the SOA, the trier of fact would need to consider “‘competent evidence bearing upon the construction given to the instrument by the parties themselves, by their acts and conduct in its...