MBI Oil & Gas, LLC v. Royalty Interests P'ship

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MBI Oil and Gas, LLC, Plaintiff, v. Royalty Interests Partnership, LP, and Grayson Mill Bakken, LLC, Defendants.

No. 1:22-cv-00187

United States District Court, D. North Dakota

April 18, 2024

ORDER GRANTING ROYALTY INTERESTS PARTNERSHIP'S MOTION FOR SUMMARY JUDGMENT, GRANTING, IN PART, AND DENYING IN PART, GRAYSON MILL BAKKEN'S MOTION FOR SUMMARY JUDGMENT, AND DENYING MBI OI AND GAS'S MOTION FOR SUMMARY JUDGMENT

DANIEL M. TRAYNOR, DISTRICT JUDGE UNITED STATES DISTRICT COURT.

INTRODUCTION

[¶ 1] THIS MATTER comes before the Court on three Motions for Summary Judgment. Defendants Grayson Mill Bakken LLC,^[1] (“Grayson Mill”) and Royalty Interests Partnership, LP (“Royalty”) filed their Motions for Summary Judgment on January 17, 2024. Doc. Nos. 37, 39. Plaintiff MBI Oil and Gas, LLC (“MBI”) also filed its Motion for Summary Judgment on January 17, 2024. Doc. No 42. Responses were filed on February 7, 2024. Doc. Nos. 45 47, 48. Replies were filed on February 21, 2024. Doc. Nos. 49, 50, 51.

[¶ 2] For the reasons set forth below, Royalty's Motion for Summary Judgment is GRANTED, Grayson Mill's Motion for Summary Judgement is GRANTED, in part, and DENIED, in part, and MBI's Motion for Summary Judgment is DENIED.

BACKGROUND

[¶ 3] The Parties agree the facts necessary to resolve this case are undisputed. This case involves an oil and gas lease (“MBI Lease”) concerning land described in the Lease as:

Township 149 North, Range 98 West of the 5^th P.M.

Section 3: Lot 1 (40.62ac.), Lot 2 (40.66ac.), Lot 3 (40.70ac.), S/2NE/4, E/2SW/4, SE/4NW/4, E/2SE/4 and W/2SE/4

Section 10: NW/4/NW, NE/4NE/4

Doc. No. 38-1. Prior to the formation of the MBI Lease, Continental Resources placed a well in the northern portion of these described lands, which began producing in 2011. Doc. No. 44-3. This well is named “Calhoun #1-3H Well” (the “Calhoun Well”). See id.; Doc. No. 38-1, p. 1. Also in 2011, the North Dakota Industrial Commission (“NDIC”) entered a pooling order for the oil and gas interests in the remaining portions of Sections 3 and 10 not subject to the MBI Lease. Doc. No. Doc. Nos. 38-3, 40-6, 44-2.

[¶ 4] On June 10, 2023, Royalty as Lessor and MBI as Lessee entered into the MBI Lease. Doc. No. 38-1. The purpose of the lease was for MBI to have exclusive right for “mining, exploring by geophysical and other methods, and operating for and producing therefrom all oil, gas and associated minerals of whatsoever nature or kind.” Id. at p. 2. The MBI Lease had two time periods for its effectiveness. First, there was a three-year primary term beginning June 10, 2013, and expiring June 10, 2016. See id. The MBI Lease would continue into its secondary term for “as long thereafter as oil or gas of whatsoever nature or kind is produced in commercial quantities from said leased premises or on acreage pooled therewith, or drilling operations are continued as hereinafter provided.” Id. The MBI Lease was “paid-up,” meaning MBI gave Royalty a cash down payment and MBI was not required “to commence or continue any operations during the primary term.” Id. MBI further agreed to deliver royalty payments to Royalty at a rate of twenty-one percent (21%) from the production of oil and gas from the land subject to the MBI Lease. Id. at pp. 2-3. The Lease specifically exempts the Calhoun Well from the Lease's terms:

RESERVING TO [ROYALTY] ALL OF [ROYALTY'S] RIGHT, TITLE AND INTEREST IN AND TO THE WELLBORE FOR THE CONTINENTAL RESOURCES, INC. - [CALHOUN WELL] THE SURFACE LOCATION BEING LOCATED IN THE NW/4NE/3 OF SECTION 3, T149N, R98W, 5^THP.M., MCKENZIE COUNTY, NORTH DAKOTA, AND ALL ASSOCIATED EQUIPMENT AND PERSONAL PROPERTY (THE “WELLBORE”), TOGETHER WITH SUCH INTEREST OF [ROYALTY] DERIVED FROM THE MINERAL ESTATE, AS ARE NECESSARY TO VEST IN [ROYALTY] OWNERSHIP OF ALL OF [ROYALTY'S] RIGHT, TITLE AND INTEREST IN THE WELLBORE AND THE PRODUCTION THEREFROM. ALONG WITH RIGHTS IN AND TO ALL EXISTING AND EFFECTIVE UNITIZATION, POOLING AND COMMUNITIZATION AGREEMENTS, AND OTHER CONTRACTS, AGREEMENTS AND INSTRUMENTS TO THE EXTENT ONLY THAT THEY RELATE TO OR AFFECT [ROYALTY'S] INTERESTS IN THE WELLBORE. CONCURRENT RIGHTS OF INGRESS AND EGRESS TO THE LANDS, AND IN AND TO SURFACE USE AGREEMENTS, RIGHTS OF WAY, EASEMENTS, SURFACE LEASES AND OTHER SURFACE RIGHTS HELD BY [ROYALTY] IN CONNECTION WITH OWNERSHIP OR OPERATION OF THE MINERAL ESTATE NECESSARY FOR ITS RETENTION OF [ROYALTY'S] INTEREST IN THE WELLBORE.

Id. at p. 2 (emphasis and capitalization in original).

[¶ 5] At the close of the lease's primary term on June 10, 2016, MBI (1) did not have an active well on the leased premises during the primary term and (2) the Calhoun Well was the only producing well on the leased premises until 2020. Doc. No. 38-2, pp. 6, 7. The Calhoun Well was producing oil and gas in commercial quantities at the close of the primary term. See id. at p. 6. MBI had no interest in the Calhoun Well and has never paid Royalty any royalties on the Calhoun Well's production Doc. No. 38-4, ¶ 12. On January 1, 2020, Royalty entered into an oil and gas lease with Ovintiv. (“Ovintiv Lease”). Doc. No. 44-7. The Ovintiv Lease was subsequently recorded on April 27, 2022. Doc. No. 44-8. Under the Ovintiv Lease, Ovintiv drilled multiple wells in 2020. Doc. No. 38-11, ¶ 5.

[¶ 6] On June 17, 2022, Royalty sent a letter to MBI requesting MBI file a release of the MBI Lease in accordance with the terms of the agreement. Doc. Nos. 38-6, 40-16. MBI never filed a release and, instead, MBI filed the Complaint on September 27, 2022, against Royalty and Ovintiv, claiming the Lease is valid and superior to the Ovintiv Lease. Doc. No. 1-4. The case was subsequently removed to this Court on October 31, 2022. Doc. No. 1. Royalty and Ovintiv filed Counterclaims arguing the Lease has expired and the Ovintiv Lease is valid and enforceable.^[2] Doc. Nos. 2, 3. The Parties have filed Motions for Summary Judgment seeking final resolution of this dispute. Doc. Nos. 37, 39, 42. This Court has jurisdiction because there is complete diversity of citizenship and the amount in controversy exceeds $75,000. 28 U.S.C. § 1332.

DISCUSSION

I. Summary Judgment Standard

[¶ 7] The Court will grant summary judgment “if the movant shows 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 Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “An issue is ‘genuine' if the evidence is sufficient to persuade a reasonable jury to return a verdict for the nonmoving party.” Schilf v. Eli Lilly & Co., 687 F.3d 947, 948 (8th Cir. 2012) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). “A fact is material if it ‘might affect the outcome of the suit.'” Dick v. Dickinson State Univ., 826 F.3d 1054, 1061 (8th Cir. 2016) (quoting Anderson, 477 U.S. at 248). Courts must afford “the nonmoving party the benefit of all reasonable inferences which may be drawn without resorting to speculation.” TCF Nat'l Bank v. Mkt. Intelligence, Inc., 812 F.3d 701, 717 (8th Cir. 2016) (quoting Johnson v. Securitas Sec. Servs. USA, Inc., 769 F.3d 605, 611 (8th Cir. 2014)). “At summary judgment, the court's function is not to weigh the evidence and determine the truth of the matter itself, but to determine whether there is a genuine issue for trial.” Nunn v. Noodles & Co., 674 F.3d 910, 914 (8th Cir. 2012) (citing Anderson, 477 U.S. at 249).

[¶ 8] If the movant demonstrates the absence of a genuine issue of material fact, “[t]he nonmovant ‘must do more than simply show that there is some metaphysical doubt as to the material facts,' and must come forward with ‘specific facts showing that there is a genuine issue for trial.'” Torgerson v. City of Rochester, 643 F.3d 1031, 1042 (8th Cir. 2011) (en banc) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986)). “Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial.” Id.

II. MBI Lease

[¶ 9] Grayson Mill argues the MBI Lease terminated in 2016 because the Calhoun Well's production did not perpetuate the MBI Lease into its secondary term. In making this argument, Grayson Mill posits (1) the reservation clause excluded the Calhoun Well's production from qualifying under the MBI Lease and (2) the MBI Lease required MBI to cause production in order to perpetuate the lease into its secondary term. Grayson Mill further contends the NDIC pooling order does not negate the reservation clause. In addition to the arguments raised by Grayson Mill, Royalty argues the Calhoun Well and its production were not on acreage pooled with the Leased Premises.

[¶ 10] MBI argues the lease has not expired and remains in effect, claiming any production of oil and gas on any of the leased premises or acreage pooled therewith perpetuates the lease into the secondary term. In making this argument, MBI contends the Calhoun Well is on the leased premises and produces oil and gas from acreage pooled with the leased premises and the reservation clause does not preclude production from the Calhoun Well from preserving the MBI Lease. Finally, MBI argues the pooling order necessarily requires the Calhoun Well's production to count under the lease.

[¶ 11] In diversity actions, federal courts apply “the substantive law of the forum state, here North Dakota.” Northern Oil and Gas, Inc. v. Moen, 808 F.3d 373 376 (8th Cir. 2015). Under North Dakota law, oil and gas leases are contracts and are interpreted with the ordinary rules of contract interpretation. Northern Oil & Gas, Inc. v. EOG Resources, Inc., 2022 ND 182, ¶ 17, 981 N.W.2d 314; Johnson v. Statoil Oil & Gas LP, 2018 ND 227, ¶ 7, 918 N.W.2d 58 (“The same general...