PETRO PRO, LTD. v. UPLAND RESOURCES, INC. No. 07-05-0327-CV.
279 S.W.3d 743 (2007)
PETRO PRO, LTD., L & R Energy Corporation, Nancy Wilson Briscoe, Judith Brock Seitz, and Carolyn Rogers, Appellants, v. UPLAND RESOURCES, INC., KCS Resources, Inc., Great Lakes Energy Partners, L.L.C., and Steve Zemkoski, Appellees.
Court of Appeals of Texas, Amarillo.
June 14, 2007.
Joe L. Lovell, Brad B. Boyd, Lovell, Lovell, Newsom & Isern, L.L.P., Amarillo, Mitchell Ehrlich, Perryton, for appellants.
Maston C. Courtney, Dusty J. Stockard, Courtney, Countiss, Brian & Bailey, LLP, Amarillo, for appellees.
Before CAMPBELL and HANCOCK and PIRTLE, JJ.
PATRICK A. PIRTLE, Justice.
This appeal concerns a dispute between assignors, assignees, and intervening royalty owners regarding the construction of two oil and gas wellbore assignments, wherein the assignments expressly limited the assigned interest to "rights in the wellbore" of a given well. Presenting similar issues, Appellants, Petro Pro, Ltd. and L & R Energy Corporation, and Intervenors, Nancy Wilson Briscoe, Judith Brock Seitz, and Carolyn Rogers, appeal the denial of their respective motions for summary judgment and the grant of summary judgment in favor of appellees, Upland Resources, Inc., KCS Resources, Inc., Great Lakes Energy Partners, L.L.C., and Steve Zemkoski. By their issues, Appellants and Intervenors contend the trial court misconstrued the nature and scope of the assigned interest. Appellants also appeal the denial of their motion to have funds tendered into the court's registry. We reverse and render judgment declaring the rights of the parties as to those issues before the trial court.
Original Oil and Gas Leases
The two assignments in question pertain to rights in the wellbore of the King "F" No. 2 gas well, located on a 704-acre pooled gas unit in Roberts County. The
"Wellbore Only" Assignments
In 1998, for reasons undisclosed in the record, KCS and MB decided that the King "F" No. 2 well was no longer economically viable. Consequently, in November of that year, KCS and MB sold their interests in the well at an auction of oil and gas properties. The winning bidder, L & R Energy ("L & R"), received the interests from KCS and MB via the two assignments in controversy. The assignments were identical in that they both conveyed the following:
(Emphasis added). Pursuant to the express terms of the assignments, L & R's leasehold interest became effective on December 1, 1998.
New Development Activity
Several years after the assignments, operators in the area began drilling and completing gas wells in the shallower Brown Dolomite formation. In May 2003, pursuant to a farmout agreement with KCS, Upland Resources entered the pooled gas unit and completed a horizontal gas well in the Brown Dolomite formation. The well, dubbed the Skeeterbee No. 1, traversed within 600 feet of the King "F" No. 2 well. By June 2004, Upland Resources had completed two more gas wells within the 704-acre pooled gas unit, the horizontal Skeeterbee No. 2 and the vertical Skeeterbee No. 3. Both those wells were completed in the Brown Dolomite formation.
Meanwhile, in April 2004, L & R assigned its interest in the King "F" No. 2 well to Petro Pro Ltd. (hereinafter individually referred to as "Petro Pro"). Concerned with Upland Resource's drilling activities, Petro Pro sent a letter to Upland Resources and KCS requesting that both parties clarify their respective interests in the pooled gas unit. Both parties promptly responded with letters stating their belief that Petro Pro did not acquire any leasehold interest outside the confines of the King "F" No. 2 wellbore. Petro Pro replied with a letter stating claims for trespass and conversion and demanding that Appellees vacate the leasehold and cease production from the Skeeterbee wells.
Finally, in September 2004, citing Upland Resources and KCS's refusal to resolve
Competing Motions for Summary Judgment
On February 1, 2005, Upland filed a motion for summary judgment contending that Petro's rights were limited to the right to produce gas from the Cleveland formation only and the right to "enhance" that production. Upland further contended that Petro's rights were restricted to the physical confines of the King "F" No. 2 well only, without the right to deepen the well to other zones or horizons, or the right to perforate the wellbore casing for the purpose of producing any other zone or horizon lying between the surface and the presently producing section of the Cleveland formation. Subsequently, Intervenors filed a motion for partial summary judgment contending Petro had the right to produce from any formation subject to governmental regulations, which limited the horizontal extent of Petro's rights to forty acres surrounding the King "F" No. 2 wellbore. Finally, Petro filed their own motion for summary judgment restating their position that they were the exclusive owners of any portion of leasehold estate that could "reasonably be reached and produced" through the King "F" No. 2 wellbore.
The Trial Court's Judgment
Following hearings on the parties' competing motions for summary judgment, the trial court ruled that the King "F" No. 2 wellbore assignments were unambiguous and granted Upland Resources's motion for summary judgment. The judgment further stated that "[j]udgment is entered in favor of [Upland Resources]." The court denied Petro and Intervenors' motions for summary judgment and Petro's motion to have funds from production tendered into the court's registry. The trial court also severed and abated Intervenors' damage claims against Petro.
As drafted, the trial court's judgment does not set forth a declaration of the interest and rights conveyed by the assignments.
In a situation where all parties have moved for summary judgment and one motion is granted and the others are denied, the appellate court should review all parties summary judgment evidence and determine all questions presented. Bradley v. State ex rel. White,
By this appeal, Petro and Intervenors urge us to adopt their respective interpretations of the wellbore assignments and contend they are entitled to judgment as a matter of law. Upland Resources, meanwhile, maintains that the trial court correctly construed the assignments in their favor. As previously stated, the trial court's construction is not readily apparent from the face of the judgment. Because a declaration of the property rights and ownership interests of the parties is a matter of law where the instrument is unambiguous, we will examine the assignment language to determine the actual interest conveyed. In doing so, we begin by determining the applicability of some established canons of contract construction.
Applicability of Canons of Contract Construction
The goal when construing an unambiguous agreement is to determine and give effect to the parties' intent as expressed within the "four corners" of the instrument. See Gulf Ins. Co. v. Burns Motors, Inc.,
At the opposite extreme, Upland contends that the assignments should be construed in light of the facts as they existed at the time of conveyance, thereby restricting Petro's rights to the production of gas from the existing wellbore and the Cleveland formation only. While Intervenors agree that operations should be confined to the existing wellbore, they claim that Petro's rights should be construed in such a way that they are limited, in accordance with Railroad Commission well density rules, to an undetermined forty surface acres surrounding the wellbore. Intervenors further contend that the assignments should be construed so as to allow Petro the right to plug back the wellbore and recomplete the well in the Brown Dolomite formation.
If, after application of the canons of contract construction, an agreement is susceptible of only one reasonable meaning, the contract is unambiguous. The construction of a written, unambiguous instrument is a question of law for the court. See OTC Petroleum Corp. v. Brock Exploration Corp.,
When construing agreements, an agreement which is worded in such a fashion that it can be given a certain or definite legal meaning is not ambiguous and will be enforced as written. HECI Exploration Co. v. Neel,
Nature and Scope of the Assigned Interest
As recited above, the assignment language describes the assigned interest as "[a]ll of Seller's right, title and interest in and to the oil and gas leases ... insofar and only insofar as said leases cover rights in the wellbore of the King "F" No. 2 Well." While the parties agree that this language unambiguously assigns leasehold rights in the King "F" No. 2 wellbore, their interpretations regarding the nature and extent of the estate conveyed differ greatly.
An oil and gas lease conveys an interest in real property, as does the assignment of all or a portion thereof. Cherokee Water Co. v. Forderhause,
Like the phrase "subject to," the phrase "insofar and only insofar" constitutes a limitation of the grant. See, e.g., Walker v. Foss,
To settle this dispute and define the estate conveyed, we must first determine the depth (vertical rights) and area (horizontal rights) covered by the assignments. See Lawrence P. Terrell, Limited Assignments—Who Gets What?, 35 Rocky Mtn. Min. L. Inst. 17, § 17.02 (1989) (explaining that careful consideration of these two elements is essential to defining the interests transferred and retained). See also Kurt M. Peterson, Wellbores: Shedding Light on a Transactional Black Hole, 48 Rocky Mtn. Min. L. Inst. 13, § 13.08[d] (2002). This information, in turn, will allow us to define the extent of assignees' leasehold rights in the King "F" No. 2 wellbore.
Vertical Limit of Assignment
Regarding this issue, Upland contends that the "plain, grammatical meaning" of the words used in the assignments limits the assigned interest to the horizon that was open in the wellbore on the date of the assignments. In other words, Upland claims Petro's rights are strictly limited to the Cleveland formation. But adopting this stance would be inserting language into the assignments that does not exist. Furthermore, it would require a determination of the facts, outside the four corners of the assignment, to ascertain the extent of the interest transferred. Contrary to Upland's contention, the assignments are completely devoid of language limiting Petro's leasehold interest to the Cleveland formation. Without such limiting
Horizontal Limit of Assignment
Similarly, there is a lack of support for Petro's claim that they acquired horizontal rights coextensive with the 704-acre pooled gas unit and Intervenors' claim that Petro acquired leasehold rights in forty surface acres surrounding the King "F" No. 2 wellbore. Just as the assignment language does not restrict Petro's operations to a specific vertical producing interval, it also does not expressly or impliedly convey leasehold rights in any horizontal surface acreage. Cf. David E. Pierce, An Analytical Approach to Drafting Assignments, 44 Sw. L.J. 943, 955 (1990) (explaining that, presumably, the assignee is entitled to the production allocated to the [lease] well even though he owns none of the required leasehold acreage).
On the issue of the horizontal extent of the estate conveyed, Intervenors cite the language in the assignments stating that the assigned interests are "subject to ... governmental regulations." Relying on this "governmental regulations clause," Intervenors contend that, pursuant to Railroad Commission Rule 38, when Petro acquired rights in the King "F" No. 2 wellbore, they also acquired rights in the minimum amount of surface acreage needed to obtain a plug back permit for recompletion in the Brown Dolomite formation. See 16 Tex. Admin. Code §§ 3.5, 3.38 (2007) (Tex. R.R. Comm'n, Application To Drill, Deepen, Reenter, or Plug Back; Well Densities). We disagree.
As Intervenors acknowledge, the Railroad Commission is a regulatory agency and lacks the authority to determine ownership of land or property rights. See, e.g., Amarillo Oil Co. v. Energy-Agri Products, Inc.,
Because the assignments are limited to "rights in the wellbore" we must determine what the parties intended by that term. The assignments do not describe the King "F" No. 2 wellbore or even define the term "wellbore," therefore, we must turn to its generally accepted meaning. A wellbore, sometimes called a borehole, is the hole in the ground created by the process of drilling or boring a well. 8 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers Oil and Gas Law, Manual of Terms, 107, 1207 (9th ed.1998). A well, meanwhile, is defined as the "orifice in the ground made by drilling, boring or any other manner, from which any petroleum or gas is obtained or obtainable...." Id. at 1205. When read in context with the assignment language, these definitions indicate that Petro's leasehold rights extend horizontally only to the area of the hole identified as the King "F" No. 2 well and, by implication, such surface area adjacent thereto as is reasonably necessary to operate the well.
Consistent with the horizontal and vertical limitations of Petro's interest, the assignments also conveyed all rights appurtenant to the underlying oil and gas leases. One of those rights was the right
Another one of the rights assigned was the right to produce. Subject to the duties imposed by the lease (e.g., the duty to pay the original lessor a royalty for oil or gas taken, the duty to pay for damages occasioned by its operations, and the duty to restore the surface upon abandonment of the well), Petro has the exclusive right to produce oil and gas from the King "F" No. 2 well. Conversely, because the assignments in question did not transfer Upland's determinable fee interest in the oil and gas in place outside of the wellbore, Petro does not own an interest in the oil and gas in place outside the confines of the King "F" No. 2 well. For these reasons, completion of the Skeeterbee wells did not constitute a trespass onto property which Petro owned. For these same reasons, the production of gas from the Skeeterbee wells did not constitute conversion of property belonging to Petro. Because Petro does not have an ownership interest in the gas produced from the Skeeterbee wells, Petro is not entitled to a portion of the proceeds or to an accounting.
To the extent that the leases embodied other rights not exclusive to the possession and use of the wellbore in question (e.g., the right to extend the lease by the payment of shut-in royalties), the assignment created a co-tenancy with the other lessees, with each party sharing those incorporeal appurtenant rights.
The practical effect of this construction is that Petro owns the exclusive right to produce any oil, gas, or other minerals that may be produced from the King "F" No. 2 wellbore, consistent with the terms and conditions of the original leases. Subject to governmental regulations, Petro also owns the right to develop the wellbore and conduct any operations within the wellbore that would facilitate or enhance that development and production, including the right to produce from other formations. Upland retained the exclusive right, subject to the terms and conditions of the original leases and any applicable governmental regulations, to produce any oil, gas, or other minerals that may be extracted from the leased premises, other than through the King "F" No. 2 wellbore. Although this construction describes a relatively restrictive leasehold interest, it is consistent with the fact that, from an area standpoint, a wellbore assignment is the narrowest form of oil and gas assignment. Lawrence P. Terrell, Limited Assignments—Who Gets What?, 35 Rocky Mtn. Min. L. Inst. 17, § 17.02 (1989).
Our learned colleague's dissenting opinion states, "Rather than concluding the parties intended to grant Petro the right to recomplete the well to produce gas it does not own, we would construe the assignments' language in a manner consistent with our state's ownership-in-place theory." (emphasis added) While the concept of producing oil and gas that one does not own may seem unfair, it is hardly inconsistent with the ownership-in-place theory of mineral ownership. To the contrary, it is entirely consistent with over a
In summary, we find that the trial court erred in rendering its declaration of the rights of the parties. To that extent, Intervenor's sole issue and Petro's issues one though three are subsumed within the disposition of Petro's fourth issue, which is sustained in part (as to the granting of summary judgment in favor of Upland's construction of the assignments) and overruled in part (as to the denying of Petro's Motion for Partial Summary Judgment and Intervenor's First Amended Motion for Partial Summary Judgment in favor of their respective construction of the assignments). Because we also find that Petro did not have title to the oil and gas in place outside of the King "F" No. 2 wellbore, we conclude that they would not be entitled to an accounting of future production from the Skeeterbee wells.
We reverse the judgment of the trial court and render judgment declaring that the wellbore assignments in question transfer to the assignee an estate that extends to the physical limits of the wellbore, together with all of the appurtenant rights incident to the underlying lease. Accordingly, the plain language of the assignments conveys to Petro the oil, gas and other minerals in place within the confines of the King "F" No. 2 wellbore, together with those rights appurtenant to the original leases as may be necessary to the production of those minerals and to the full use and enjoyment of that wellbore, including, but not limited to the right to produce from any formation traversed by the wellbore. As a result, Petro did not acquire title to the gas in place outside of the King "F" No. 2 wellbore or the right to
CAMPBELL, J., concurring and dissenting.
JAMES T. CAMPBELL, Justice, concurring and dissenting.
There is much in the Court's opinion with which I agree. I do not quarrel with the Court's discussion of the nature of our task, or with its conclusion that the wellbore assignments are unambiguous. I join in the Court's disposition of Petro's claims of trespass, bad faith trespass, conversion, and money had and received, and of Petro's request that production proceeds of the Skeeterbee wells be placed in the registry of the court.
With regard to the declaratory relief, I agree also that the trial court did not err by rejecting Petro's expansive view of its rights under the assignments. I further agree with my colleagues that the Intervenors' declaratory judgment position relying on Railroad Commission well density rules is not persuasive.
My difference with the Court involves its conclusion that the language used by the parties in the wellbore assignments reflects their intention that the assignee was conveyed the right to recomplete the King "F" No. 2 well in the Brown Dolomite formation. From the language used in these assignments, I would not find the parties intended both the assignor and assignee to have the right to produce gas from the same formation.
The Court properly begins its analysis with the axioms that in Texas an oil and gas lease is held to convey a determinable fee, vesting the lessee with title to oil and gas in place, Cherokee Water Co. v. Forderhause,
My conclusion is that the trial court was correct to adopt the position asserted by Upland.
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