Mariner Energy, Inc. v. DEVON ENERGY PRODUCTION

690 F.Supp.2d 558

MARINER ENERGY, INC., et al., Plaintiffs, v. DEVON ENERGY PRODUCTION CO., Defendant.

Civil Action No. H-08-0658.

United States District Court, S.D. Texas, Houston Division.

February 11, 2010.

Bradley Lane Deluca, Johnson Finkel et al, Houston, TX, for Plaintiffs.

Edward John Jack O'Neill, Jr., DLA Piper US LLP, Houston, TX, for Defendant.

MEMORANDUM AND ORDER

LEE H. ROSENTHAL, District Judge.

After a natural disaster, such as a hurricane, litigation often follows to determine who will pay for the consequences. This is such a case. When Hurricane Rita struck the Texas and Louisiana Gulf Coast area in September 2005, it damaged Eugene Island 333 ("EI 333"), an oil and gas block on the Outer Continental Shelf. The decision was made to abandon part of the block, EI 333 A, which required that it be "decommissioned." The decommissioning cost much more than it would have before the hurricane and resulting damage. The increase is from an estimated $5,091,136 before to approximately $200,000,000 after the hurricane. The issue in this suit is whether a prior owner is contractually responsible for its share of all the abandonment costs.

The plaintiffs, Mariner Energy, Inc. and Mariner Energy Resources, Inc., (together, "Mariner"), acquired the Gulf of Mexico interests of Forest Oil Corporation, including its share of liability for the abandonment costs. Mariner has sued the present owner of EI 333, Devon Energy Production. Forest Oil Corporation was one of three owners of EI 333 until February 2002; Devon and Phillips Petroleum were the other owners. Under an agreement executed in February 2002, Devon and Phillips assumed Forest Oil's ownership share of EI 333 effective December 1, 2000. Under the agreement, Forest Oil remained liable for its proportional share (13.333%) of the "Abandonment Expenses" when they were occurred.

By September 2005, when Hurricane Rita hit, Devon had assumed full ownership of EI 333 and Mariner had acquired Forest Oil's oil and gas interests in the Gulf of Mexico, including its liability for the abandonment expenses. Devon and Mariner dispute the extent of Mariner's liability under the agreement executed by Devon, Phillips, and Forest Oil in February 2002. Both sides agree that the agreement is unambiguous and should be interpreted as a matter of law.

The following motions are pending:

• Both Devon and Mariner have filed motions for partial summary judgment on contract interpretation. Devon argues that the unambiguous language of the 2002 agreement makes Mariner liable for Forest Oil's share of the actual expenses incurred in abandoning the platform. (Docket Entry Nos. 30, 34, 46). Mariner argues that the unambiguous language of the agreement limits its responsibility to costs based on the block's condition on the effective date and the scope of work as outlined in a report attached to the contract, and that Devon is responsible for any storm damage costs after the effective date. (Docket Entry Nos. 32, 37, 47).

• Mariner has moved to strike several of the exhibits attached to Devon's summary judgment motion as extrinsic evidence that should not be considered because the contract is unambiguous. (Docket Entry No. 40). Devon has responded, arguing that the evidence is admissible to explain the background circumstances, (Docket Entry No. 41), and Mariner has replied, (Docket Entry No. 45). Mariner does not dispute that extrinsic evidence of background circumstances is admissible but contends that Devon's exhibits are offered to vary the meaning of unambiguous contract terms.

• Devon has moved to strike four of Mariner's summary judgment exhibits as inadmissible extrinsic evidence. (Docket Entry No. 41). Mariner has responded, arguing that the exhibits are admissible because they are not offered to alter, vary, or add to the meaning of the contract. (Docket Entry No. 51). Devon has replied. (Docket Entry No. 53).

• Mariner has moved to strike any portions of the four deposition transcripts offered by Devon that were not referenced in Devon's briefing. (Docket Entry No. 44). Devon has responded. (Docket Entry No. 52).

• Finally, Mariner has asked for rulings on objections it made during the four depositions that Devon has attached as summary judgment exhibits. (Docket Entry No. 49). Devon has responded. (Docket Entry No. 54).

Based on the pleadings; the motions, responses, and replies; the summary judgment record; and the applicable law, this court grants Mariner's motion for partial summary judgment and denies Devon's motion for partial summary judgment. Both motions to strike extrinsic evidence are granted in part and denied in part. Mariner's motion to strike the unreferenced deposition testimony is denied. Mariner's deposition objections are sustained in part and overruled in part. A status conference is set for February 25, 2010 at 9:00 a.m. in Courtroom 11-B.

The reasons for these rulings are explained in detail below.

I. The Record

The relevant facts are undisputed. Effective February 1, 1973, Mobil Oil Corporation, Burmah Oil Development, Inc., Mesa Petroleum Co., Pennzoil Offshore Gas Operators, Inc., and Pennzoil Louisiana and Texas Offshore, Inc. acquired the lease rights to EI 333 from the United States government. (Docket Entry No. 32, Ex. C at 1). The parties entered into a Joint Operating Agreement (the "JOA") on February 1, 1973. Mobil was designated in the JOA as the "Operator" of EI 333. (Id.). As operator, Mobil was to maintain a Joint Account to which all joint operating expenses would be charged and all joint income (other than proceeds from sale of oil and gas) would be credited. (Id. at 4). A set of accounting procedures for administration of the Joint Account, based on a standard form created by the Council of Petroleum Accountants Societies ("COPAS"), were attached to and incorporated into the JOA. (Docket Entry No. 32, Ex. C, Att. A).

Under the JOA, "platforms constructed for the Joint Account and intended for use in the joint development and operation of the Joint Lease ... shall be owned in proportionate shares." (Docket Entry No. 32, Ex. C at 23). With limited exceptions, "all costs, risk, and expense incurred with respect to platforms and facilities ... would be charged to the Joint Account." (Id.). The JOA specified that if the owners of EI 333 agreed in writing that "no further use will be made of any jointly owned platform or facilities in connection with operations on the Joint Lease," the equipment or platform "may be removed from the Joint Lease by the Operator as a charge to the Joint Account." (Docket Entry No. 32, Ex. C at 24).

Federal law requires that offshore oil and gas facilities be "decommissioned" when no longer useful for operations. Decommissioning means permanently plugging all wells, removing all platforms and other facilities, including pipelines, and clearing the seafloor of obstructions. See 30 C.F.R. § 250.1703. The work must be consistent with safety and environmental protection. "Lessees and owners of operating rights are jointly and severally responsible for meeting decommissioning obligations." Such obligations accrue when a well is drilled; a platform, pipeline, or other facility is installed; or a lease under which such obligations have accrued is assumed. 30 C.F.R. §§ 250.1701, 250.1702.

The rights to the EI 333 lease were transferred over time by various assignments. In 2001, EI 333 was owned by Devon, Phillips, and Forest Oil. Devon, the operator, owned a 76 % share; Phillips 10%; and Forest Oil 13.333%. As of July 2001, three platforms, seven pipelines, twenty-nine wells, and other equipment were installed at EI 333.

Forest Oil decided to withdraw from ownership of EI 333. On February 15, 2002, Forest Oil, Devon, and Phillips entered into a Letter Agreement by which Forest Oil assigned its interest in EI 333 to Devon and Phillips. The Letter Agreement stated as follows:

This Letter Agreement is our mutual agreement and understanding regarding Forest Oil Corporation's ("Forest") desire to relinquish its interest in Eugene Island Block 333 (OCS-G 02317 Lease) (the "Block"). Forest agrees it will assign immediately all its right, title and interest in the block, effective December 1, 2000 ("Effective Date"), to Devon Energy Production Company, L.P. ("Devon") and Phillips Petroleum Company ("Phillips") proportionally as to each of their respective working interest shares.

The assignment shall be in the form attached to this Letter Agreement as Exhibit "1" and incorporated by reference.

Notwithstanding anything to the contrary contained herein as to that certain Operating Agreement ("JOA") dated effective February 1, 1973 for the Block, or any other document ... Forest agrees that it will remain obligated to Devon and Phillips under the JOA for its share of all liabilities arising out of its ownership in the Block and its participation in operations conducted on the Block prior to the Effective Date. Devon and Phillips agree that Forest will not be obligated to pay its share of such plugging and abandonment costs, including but not limited to removal and abandonment of platforms, wells, equipment on the Block ("Abandonment Expenses"), until the time such abandonment operations commence on the Block for the amount then due at the time that the Abandonment Expenses are incurred, in accordance with the COPAS attached to the JOA. Forest acknowledges that it has assumed its share of such plugging and abandonment liability under the JOA from Forcenergy, Inc., its predecessor in title to the Block. Devon and Phillips further agree that Forest will be liable only for its proportionate share of Abandonment Expenses for wells, platforms, and equipment on the Block as of the Effective Date and as outlined in the Twachtman Snyder & Byrd, Inc. Decommissioning Liability Report ("Twachtman Report"), attached hereto as Exhibit "2" and incorporated by reference. Any additional plugging and abandonment costs

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