Raaum Estates v. Murex Petroleum Corp.

Raaum Estates, a North Dakota General Partnership,effective January 1, 1989, by and through its Present Managing Partner,Joseph Dale Raaum a/k/a Dale Raaum Plaintiff, v. Murex Petroleum Corporation, a foreign business corporation,licensed to do business in North Dakota, Defendant.

Case No. 4:14-cv-024

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NORTH DAKOTA NORTHWESTERN DIVISION

July 5, 2017

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENT

FINDINGS OF FACT¹

The parties and their interests

1. Plaintiff Raaum Estates is a North Dakota partnership comprised of five family members: Joseph Dale Raaum ("Dale Raaum"); Katherine E. Raaum; Eileen LaVon Albertson; Lois Raaum; and Clarence Gnoinsky. The Raaum Estates owns several tracts of farm and pasture land in the vicinity of Fortuna, North Dakota. In addition to these tracts, some of the family-member partners have other tracts in the area that are owned separate from the partnership holdings. (Tr. 142-143, 165-170; Ex. P34).²

2. Dale Raaum is the managing partner for the Raaum Estates. He also owns his own land in the vicinity of the partnership land. Raaum began farming in 1962 and had retired by the time of the events relevant to this action beginning in 2008. His formal education ended after the ninth grade. (Id.). Raaum appeared at trial and gave testimony on behalf of the Raaum Estates.

3. Murex Petroleum Corporation ("Murex") is a closely-held oil and gas exploration and production company headquartered in Houston, Texas. It operates in several states, including North Dakota. By the time of trial, it was operating more than two hundred wells and had non-operating interests in several hundred more. In addition, it was operating a handful of saltwater disposal wells. (Tr. 9-12). Nevertheless, in relation to major and medium-sized exploration and production companies, Murex is still a relatively small company.

The principal witnesses for Murex at trial were Don Kessel ("Kessel") and Dave Elder ("Elder"). Kessel was one of the co-founders of Murex and was its Vice-President and Chief Operating Officer during most of the time relevant to this action. Kessel graduated from North Dakota State University with a degree in petroleum engineering. Although Kessel retired several months prior to trial, he still retains a significant ownership interest in the company. (Tr. 9-11, 32).

Elder is Murex's Manger of Acquisitions and Divestitures. He joined the company in 2011 as its land manager and held that position in 2013 when he attempted to negotiate a new agreement with the Raaum Estates as discussed in more detail later. Elder is a member of the American Association of Petroleum Landmen. He has a petroleum land management degree from the University of Houston. (Tr. 239-40, 311).

The Gulf lease

4. Murex is the successor-in-interest to an oil and gas lease dated July 10, 1974, that was granted by Dale Raaum's mother, Hanna Raaum, to the Gulf Oil Corporation and ratified by other members of the Raaum family (the "Gulf Lease"). (Exs. P1 & P2). The Gulf Lease covers the following tracts in Divide County:

Township 162 North, Range 101 West

Section 1: SE¼

Section 8: SW¼

Section 15 SW¼

Section 17: W½, SE¼

Section 20: NE¼

Section 21: SE¼NE¼

Section 22: N½NW¼, SE¼NW¼, NW¼NE¼, N½SW¼, SW¼NW¼

Township 161 North, Range 101 West

Section 6: NE¼SW¼, N½SE¼, SE¼NE¼

In pertinent part, the lease provides:

* * * * That the said lessor, for an in consideration of Ten and more ($10.00+) Dollars cash in hand paid, receipt of which is hereby acknowledged and of the covenants and agreements hereinafter contained on the part of the lessee to be paid, kept and performed, has granted, demised, leased, and let and by these presents does grant, demise, lease, and let unto the said lessee, its successors and assigns, for the sole and only purposes of surveying by geological, geophysical and all other methods, mining and operating for oil, condensate, gas, asphalt, sulphur, and all other minerals and substances, whether similar or dissimilar, that may be produced from any well drilled by lessee on the leased premises hereinafter described, and laying pipelines and building tanks, power stations and structures thereon to produce, save and take care of said products * * * *

It is agreed that this lease shall remain in force for a term of ten years from date, and as long thereafter as oil, condensate, gas, asphalt, sulphur, or other minerals or substances covered hereby, or either or any of them, is produced from said land by the lessee, its successors and assigns.

(Ex. P1). The significance of this language will be addressed later.

As noted above, the Gulf lease covers tracts in eight different sections of land located in two different townships. During the time relevant to this action, the Raaum Estates owned the surface to a number, but not all, of the tracts subject to the Gulf Lease. (Exs. P1 & P35).

The references herein to "on-lease" or "off-lease" refer to whether certain wells or activities were located or took place on land covered by the Gulf Lease or off, including whether any saltwater generated from the activities is either "on-lease" or "off-lease" saltwater.

Murex's development of a commercial saltwater disposal operation in 2009 using land within or adjacent to the State Raaum wellsite together with the Fortuna State well and increasing the capacity of that operation in 2013

5. The State Raaum 1-15 ("State Raaum") is a producing oil well located in the SW ¼ of Section 15, Township 162 North, Range 101 West. The State Raaum was drilled and completed in the early 1980's and Murex became its operator after it acquired its interest in the Gulf Lease. (Tr. 13-16). The State Raaum is an "on-lease" well.

The Raaum Estates is the fee surface owner of the SW¼ of Section 15. (Ex. P34). The dispute in this case arises out of Murex's use of land within or adjacent to the State Raaum wellsite beginning in mid-2009 for the offloading, storage, and pumping of saltwater over to the nearby Fortuna State SWD 16-1 ("Fortuna State") for underground disposal.

6. The Fortuna State is located in the SE¼ of Section 16, Township 162 North, Range 101 West, just across the section line from State Raaum and a short distance to the northwest. (Ex. P30). The Fortuna State is located on land owned by the State of North Dakota that is not subject to the Gulf Lease. (Exs. P1, P12, P34). The Fortuna State was drilled in the early 1980's originally as a producing well.

At some point Murex acquired the Fortuna State. In 2008, Murex decided to convert it to a saltwater disposal well, completing the conversion in July 2009. According to Murex's application for approval for underground injection, the saltwater is to be disposed of in a formation located between 4,408 to 4,812 feet below the surface. (Ex. P9).

A substantial reason for the conversion of the Fortuna State was to provide an outlet for the saltwater being generated by the State Raaum. By piping the saltwater generated from the State Raaum a short distance over to the Fortuna State, Murex would not have to incur the costs of trucking the saltwater to a disposal well operated by a third party and then, on top of that, pay a third-party disposal fee. (Tr. 19-32; 246-47).

7. In order for Murex to inject saltwater into the subsurface at the Fortuna State, it needed a high pressure injection pump. Also, if water trucked from other wells was going to be disposed of in the Fortuna State, there needed to be facilities for offloading the water and tanks for temporary storage. Instead of locating the injection pump, tanks, and offloading equipment at the Fortuna State wellsite, which would usually be the case for a saltwater disposal well, Murex decided to place this equipment at the State Raaum site instead. (Tr. 249-50, 280-83). According to Murex, this was done for safety reasons because the sight lines for the intersection where trucks would otherwise be turning onto or from the access road to the Fortuna State were poor. (Tr. 249).

8. To get the State Raaum-Fortuna State saltwater disposal operation up and running, Murex, in mid 2009, installed the saltwater handling and pumping equipment at or adjacent to the State Raaum wellsite that included two water tanks,³ a triplex injection pump, piping, and a small building erected on a poured slab to house the injection pump. It also installed the pipeline thatwould transport the saltwater unloaded into the tanks at the State Raaum and then pumped under high pressure by the injection pump over to the Fortuna State for injection almost a mile underground. Murex did not install any separate unloading facilities or pumps at the Fortuna State. (Tr. 89-92, 280-84; Exs P29, D108, at pp. 0614-0637).

9. As a result of an explosion of drilling in the Fortuna area by Murex and other companies that began in about 2012, Murex took steps to increase its capacity for saltwater disposal. Beginning in mid-2013, Murex: (1) upgraded its facilities at the State Raaum by installing two additional water storage tanks and replacing the old triplex pump with a larger one; (2) brought online a new saltwater disposal well in Section 4, Township 162 North, Range 101 West (almost three miles north and slightly west of the Fortuna State) known as the Legaard SWD 1 ("Legaard."); and (3) obtained easements for, and eventually installed, a network of saltwater pipelines to connect new production wells generating saltwater for disposal either to the Legaard or the State Raaum, or both.⁴ (Tr. 81- 88; 282-83; Ex. D108, pp. 0646-0662).

Murex's use of the State Raaum-Fortuna State saltwater disposal operation to dispose of both "on-lease" and "off-lease" saltwater

10. Murex began disposing of saltwater generated by production from the State Raaum through the State Raaum-Fortuna State disposal system in July 2009. Beginning as early as August 2009, Murex occasionally accepted for disposal some saltwater from third-party "off-lease" wells and then, beginning...