CHAPTER 14 LITIGATION TRENDS AFFECTING UPSTREAM AND MIDSTREAM OPERATORS
| Jurisdiction | United States |
(Apr 2018)
LITIGATION TRENDS AFFECTING UPSTREAM AND MIDSTREAM OPERATORS
Hogan Lovells US LP
Denver, CO
Shawn T. Welch
Chelsea J. Davis
Holland & Hart LLP
Salt Lake City, UT
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SHAWN T. WELCH is a partner with Holland & Hart, LLP in Salt Lake City, Utah, where his practice focuses on oil, gas, mining, and public lands litigation. Shawn serves as trial and appellate counsel in lawsuits involving rights-of-way, mineral title, royalties, farmouts, gathering agreements, drilling disputes, and environmental law. Shawn was the president of the natural resources section of the Utah State Bar and has been involved with the Rocky Mountain Mineral Law Foundation for over 16 years. He published and presented a paper on public lands litigation at the 2015 Annual Institute and served as a co-chair of the 2014 Federal Onshore Oil & Gas Pooling & Unitization Special Institute. Shawn graduated Utah State University and earned his law degree from the University of Illinois College of Law. He is admitted to practice in Illinois (inactive), Utah and Wyoming, and before the United States Supreme Court and the United States Court of Appeals for the District of Columbia and Tenth Circuit.
TABLE OF CONTENTS
I. Introduction
II. Royalty Holder Claims - Post-Production Deductions
1. Royalty Holders' Claims for Recovery From Upstream v. Midstream Disputes
a) Phelps Oil & Gas, LLC v. Noble Energy, Inc.
b) PDC Energy, Inc. v. DCP Midstream, LP
2. Royalty Holder Claims for Unjust Enrichment: Abraham v. WPX Prod. Products, LLC and Phelps Oil & Gas, LLC v. Noble Energy, Inc.
3. RICO Claims - Brown v. Access Midstream Partners, L.P.
III. Upstream v. Midstream Disputes
1. Common Carrier Duties
a) Buccaneer Energy (USA) Inc. v. Gunnison Energy Corporation
b) Omimex Canada, Ltd. v. WBI Energy Midstream, LLC
2. Uneconomic Conditions - Bowers Oil and Gas, Inc. v. DCP Douglas, LLC
3. Bankruptcy - In re Sabine Oil & Gas Corp.
IV. Pipeline Eminent Domain Litigation
1. Three State Supreme Court Decisions
a) Colorado
b) Texas
c) Utah
d) A New Federal Challenge
V. Conclusion
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I. Introduction 1
Upstream and midstream companies are integral partners in transforming hydrocarbons into marketable products. As in any dependent relationship, disputes, conflict, and litigation are inevitable. This paper explores of the recent litigation trends affecting oil and gas producers and midstream companies. First, we examine how royalty-holder litigation has evolved to include both producers and midstream companies alike. Next, we examine commercial disputes between producers and midstream companies. Finally, we discuss the most recent trends involving access to pipelines and the availability of eminent domain.
II. Royalty Holder Claims - Post-Production Deductions
Class-action claims by royalty holders claiming improper deduction for post-production costs continue to be frequently litigated. In these cases, royalty holders claim that oil and gas producers underpay royalties because producers improperly deducted post-production costs (for gathering, processing, transportation, etc.) from the gross proceeds upon which royalty payments are calculated. Recently, plaintiff royalty holders are bringing direct claims against midstream companies, in addition to upstream producers, to recover for alleged underpayments stemming from post-production deductions. In some cases, royalty-holder plaintiffs seize upon disputes - either active or resolved - between producers and midstream companies in an effort to recover damages allegedly suffered as a result of the dispute. In other cases, royalty holders allege that actions taken by the producer and the midstream company together have resulted in harm. Because midstream companies typically do not have a contractual relationship with royalty holders, these claims are often based upon quasi contract, tort, or other non-contractual theories. As discussed
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below, federal courts have recently considered whether these types of claims against midstream companies are viable.
1. Royalty Holders' Claims for Recovery From Upstream v. Midstream Disputes.
a) Phelps Oil & Gas, LLC v. Noble Energy, Inc. 2
In Phelps, a putative class of royalty holders brought claims for breach of contract and breach of the duty of good faith and fair dealing against an oil and gas production company, Noble Energy, Inc. ("Noble") and a midstream company, DCP Midstream, LP ("DCP Midstream"). Noble sold gas to DCP Midstream pursuant to percentage of proceeds ("POP") contracts.3 Pursuant to the POP contracts, DCP provides gathering and processing services and receives a percentage of proceeds of the sales of processed residue gas and natural gas liquids ("NGLs") and remits the remaining proceeds to Noble.4
The plaintiffs' claims in this case were derived from two preceding settlement agreements - one involving a 2003 settlement with the royalty holders and Noble, and the other involving a 2010 settlement between Noble and DCP Midstream.5 Noble's settlement with the royalty holders resolved a class-action dispute where the royalty holders claimed underpayment of royalties as a result of Noble's improper deduction of post-production costs from the gas sales proceeds.6 In 2008, Noble conducted an audit of DCP Midstream pursuant to which it identified potential underpayments that Noble initially valued at $34 million dollars.7 In 2010, Noble and DCP Midstream agreed to settle the matter.8 The parties' settlement agreement did two primary things:
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(1) it modified the terms of the POP contracts going forward in a manner designed to increase revenue to Noble, and (2) it required DCP Midstream to spend $17.5 million dollars to improve its gas gathering and processing facilities.9 DCP Midstream and Noble agreed that these improvements were for the primary benefit of Noble.10
The royalty holders then filed suit alleging that Noble breached the 2003 settlement agreement and its related duty of good faith and fair dealing because it failed to pay royalties on the value Noble received from DCP in 2008 settlement agreement.11 Specifically the royalty holders alleged that Noble was required pay royalties "on the amounts which DCP [Midstream] should have paid Noble pursuant to the percentage of proceeds agreements" and pay royalties on the value Noble received pursuant to the settlement agreement with DCP Midstream.12 Noble and Phelps moved for summary judgment on these claims.
As to whether Noble was required to pay royalties on proceeds that it allegedly should have received pursuant to the audit findings, Noble argued that the express terms of the 2003 settlement agreement required royalty payment on sales proceeds "actually received by Noble."13 Phelps, on the other hand, argued that Noble should have received $34 million from DCP Midstream had it pursued its audit claims and that Noble's failure to collect those amounts did not relieve Noble of its royalty payment obligation.14 The court ultimately agreed with Noble and held that neither the express terms of 2003 settlement nor the duty of good faith and fair dealing required payment on the sales proceeds claimed in Noble's audit.15 The court reasoned that, at most, the $34 million
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dollars "was a claim by Noble in a pricing dispute with DCP - a bargaining position asserted by Noble against DCP."16 Because "DCP never paid Noble the 34 million dollars claimed by Noble in the DCP Audit," Noble had no obligations to pay royalties on this amount.17
As to royalty payments on $17.5 million in improvements that DCP Midstream promised to make to its facilities, Noble argued that no royalties were due because DCP Midstream's agreement to invest this amount does not constitute a payment by DCP Midstream to Noble for gas sales.18 Plaintiffs, on the other hand, argued they were owed royalties on this amount. Citing Watts v. Atlantic Richfield Co.,19 the court held that plaintiffs may be owed royalties on the value of the $17.5 million investment that Noble receives.
In Watts, the Tenth Circuit addressed royalties due when a producer, like Noble, settles a pricing dispute with a provider of post-wellhead services, like DCP Midstream.20 In that case, the Tenth Circuit held royalty payments must be made on "'any settlement in which a producer receives consideration for compromising its pricing claim' assuming the pricing claim 'relates to either past or future production actually taken by the settling purchaser.'"21 Therefore, because Noble did not actually receive $17.5 million in value from DCP, no royalties are due on that payment.22 However, based on Watts, the court held that "DCP [Midstream]'s promise in the DCP Settlement to invest 17.5 million dollars in infrastructure, primarily for the benefit of Noble, may
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properly be the basis for a payment of royalties to Phelps."23 And, thus, Noble was not entitled to summary judgment on this aspect of plaintiffs' claim.24
b) PDC Energy, Inc. v. DCP Midstream, LP 25
In this case, a putative class of plaintiff royalty owners attempted to intervene in a dispute between oil and gas producer, PDC Energy, Inc. ("PDC Energy") and DCP Midstream. In that case, PDC Energy brought claims against DCP Midstream asserting underpayment pursuant to the parties' percentage of proceeds contracts. Plaintiff, Baker, attempted to intervene in the federal lawsuit to bring claims against DCP Midstream on behalf of himself and a putative class of royalty holders.26 Baker requested intervention as a matter of right under Federal Rule of Civil Procedure 24(a)(2) and permissive intervention under Rule 24(b)(1)(B).27
Similar to Phelps v. Noble discussed above, PDC Energy had entered into a class action settlement agreement, which resolved a dispute regaridng payment of royalties on...
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