Tellus Operating Grp., LLC v. Maxwell Energy, Inc.

156 So.3d 255

TELLUS OPERATING GROUP, LLC

v.MAXWELL ENERGY, INC.

No. 2012–CT–00357–SCT.

Supreme Court of Mississippi.

Jan. 22, 2015.

Glenn Gates Taylor, Christy M. Sparks, Ridgeland, attorneys for appellant.

Heather White Martin, Malcolm T. Rogers, Monticello, attorneys for appellee.

EN BANC.

ON WRIT OF CERTIORARI

CHANDLER, Justice, for the Court:

¶ 1. In this case, we review a challenge to a Mississippi Oil and Gas Board pooling order force-integrating various owners' interests in a proposed drilling unit. See Miss.Code Ann. § 53–3–7 (Rev. 2003). We hold that the Board's order was supported by substantial evidence. We also find that one owner's attempt to voluntarily integrate his interest within twenty days of the Board's pooling order did not satisfy Section 53–3–7(2)(g)(iii).

FACTS AND PROCEEDINGS BELOW

¶ 2. In 2006, Tellus Operating Group, LLC, sought to integrate the interests of various owners for the purpose of drilling a well unit in Jefferson Davis County. In accordance with its statutory duty to make a good-faith effort to negotiate the voluntary integration of the owners' interests on reasonable terms, Tellus mailed option forms to the owners in June and July of 2006. The three options for voluntary integration were to lease the interest, farm out the interest, or participate as a working interest owner in the costs and risks of drilling, developing, and operating the well by agreeing in writing to pay the owner's share of the actual costs of drilling, testing, completing, equipping, and operating the well. For the third option of participation, the letter accompanying the option form indicated that the agreement in writing must be evidenced by execution of an Authorization for Expenditure (“AFE”) and Operating Agreement (“JOA”). It further included a summary of some of the terms of the JOA. Upon election of that option, the AFE and JOA would be prepared and sent to the owner for execution.¹

¶ 3. D.E. Maxwell, owner and president of interest owner Maxwell Energy, Inc., checked the third option to participate in the costs of developing the unit. However, he struck through the language on the option form which stated that owner would participate “in accordance with the terms and conditions set out in paragraph (3) of the offer in the attached letter,” and wrote in by hand that he would participate “as to Maxwell Energy, Inc.'s proportionate share of .00971714[%] in accordance with applicable law set out in Miss.Code 53–3–7.” He did not execute the AFE and JOA.

¶ 4. After allowing for the statutorily required ninety days to pass after submitting the options to the owners, Tellus petitioned the Mississippi Oil and Gas Board to integrate the interests of the owners, including a force-integration of Maxwell Energy's interest as a nonconsenting owner subject to alternate-risk penalties.² Twenty-one owners had elected participation and signed off on the terms of the AFE and JOA. With ninety-six percent of the owners' interests voluntarily integrated, Maxwell Energy challenged the pooling petition, seeking recognition that it had consented to be a participating owner, that it wanted more time to negotiate a more favorable JOA, and that it was willing immediately to front its share of the initial anticipated cost of the dry well (calculated by applying its percent interest to the estimated initial dry-well cost outlined in the AFE).

¶ 5. The Board held a hearing on October 18, 2006. Only a few days before the hearing, Maxwell Energy sent Tellus an alternate JOA proposal. D.E. Maxwell appeared at the hearing on the company's behalf. Maxwell requested a continuance of the hearing, stating that he wanted the drilling to go forward as scheduled, but that he wanted time to negotiate the participation terms to meet Tellus “halfway” between the two proposed JOAs. Tellus objected to the continuance, asserting that it had complied with its statutory good-faith requirements and deadlines. It further noted that operations on the well were scheduled to begin prior to the next Board meeting.³ The Board denied the motion to continue.

¶ 6. Maxwell testified, as did Tellus landman James Clark. Tellus's attorney asked Maxwell to go through, point by point, the terms of the JOA he found to be unreasonable. Maxwell conceded that he had entered or was aware of other JOAs that contained similar terms, but he also testified to his personal experience and knowledge of JOAs with more favorable terms, particularly in regard to the high percentage of alternate-risk penalties on subsequent unit projects. Clark testified that Tellus's JOA was based on a standard form developed in 1982 by the American Association of Professional Landmen. The form contains blanks to be filled in based on the needs of the parties, and parties routinely use strike-outs and additions to modify the form. Clark testified that the alternate-risk percentages, while high, are not unusual in the industry, given the increase in recent years of the costs and risks of drilling exploration. Maxwell argued that terms can be unreasonable as applied to some owners and not others, and that the intent of the force-integration statute was not to give operators undue leverage to convince owners to lease their interest without the power to negotiate away from expensive penalties.

¶ 7. In additional support of its argument that the proposed terms were reasonable and offered in good faith, Tellus pointed to the fact that twenty-one other owners, many of them sophisticated in the industry, had agreed to the terms of the JOA. It pointed to the difficulties that could arise if less than one percent of the owners were governed by a significantly different JOA from the other owners. It also pointed to the late date at which Maxwell Energy had gotten back to Tellus with a proposed alternate JOA.

¶ 8. The Board granted the petition to pool the interests, including a force-integration of Maxwell Energy's interest as a nonconsenting owner. After stating that the statutory requirements had been met, the Board's order stated that “the evidence presented at the hearing supports these findings.” Within twenty days of the pooling order, Maxwell Energy sent Tellus a check for $18,277.94 and a letter stating that Maxwell Energy

... elects in writing to participate and join in on the same cost basis as the other consenting owners for its share of the cost and risk of developing and operating of the above unit as described and referenced hereinabove, insofar and only insofar as the same relates to Maxwell's leasehold interest covering mineral interests which are subject to alternate risk charges, and hereby agrees in writing to pay its pro rata share of all the costs associated therewith.

Tellus rejected Maxwell Energy's check, and Maxwell Energy did not consent to any of the options offered prior to the Board's hearing and order.

¶ 9. Maxwell Energy appealed the Board's force-integration order to the Jefferson Davis County Chancery Court. In 2012, the chancery court reversed the Board's order, finding that it was not supported by substantial evidence. The court also found that Maxwell Energy's submission of the check for its share of estimated initial drilling costs, along with the letter stating that it would participate on the same costs basis, satisfied the requirements of Section 53–3–7(2)(g)(iii) for voluntary integration after a pooling order is entered.

¶ 10. Tellus appealed to the Mississippi Court of Appeals, which initially ruled unanimously in Maxwell Energy's favor, affirming the ruling of the chancery court. Then, after granting Tellus's motion for rehearing and receiving numerous amici briefs, the Court of Appeals reversed its decision and issued a unanimous opinion in favor of Tellus, reversing the chancery court judgment and reinstating the Board's pooling order. We granted certiorari review of the Court of Appeals' second opinion.⁴

DISCUSSION

¶ 11. “The standard for judicial review of orders of the State Oil and Gas Board is whether the order is supported by substantial evidence, is arbitrary or capricious, beyond the power of the Board to make, or violates some constitutional right of the complaining party.” Superior Oil Co. v. State Oil & Gas Bd., 220 So.2d 602, 603–04 (Miss.1969). The Board evaluates the weight and credibility of the evidence, and when the Board evaluates conflicting testimony, the reviewing court “may not substitute its opinion for the opinion of the Board.” Boyles v. Mississippi State Oil & Gas Bd., 794 So.2d 149, 156 (Miss.2001). Questions of statutory interpretation are reviewed de novo. Adams v. Mississippi State Oil & Gas Bd., 139 So.3d 58, 67 (Miss.2014).

I. The Mississippi Oil and Gas Board's order was supported by substantial evidence.

¶ 12. The process by which operators offer owners the opportunity to voluntarily integrate their drilling interests is governed by Mississippi Code Section 53–3–7(2)(a), which provides in relevant part:

In the event that one or more owners owning not less than thirty-three percent (33%) of the drilling rights in a drilling unit voluntarily consent to the drilling of a unit well thereon, and the operator has made a good faith effort to (i) negotiate with each nonconsenting owner to have said owner's interest voluntarily integrated into the unit ... and (v) offer each nonconsenting owner the opportunity to lease or farm out on reasonable terms or to participate in the cost and risk of developing and operating the unit well involved on reasonable terms, by agreeing in writing, then the operator may petition the board to allow it to charge alternate charges ...

Miss.Code Ann. § 53–3–7(2)(a) (Rev. 2003).

¶ 13. A plain reading of the statute clearly provides that the agreement in writing is an agreement to the reasonable terms that have been negotiated in good faith. While a JOA specifically is not statutorily required, it is an appropriate...