CHAPTER 9 GOING FORWARD METHODOLOGIES IN CLASS ACTION SETTLEMENTS NEGOTIATING A GOING FORWARD CALCULATION AND REPORTING METHODOLOGY AND IMPLEMENTING THE NEGOTIATED METHODOLOGIES
| Jurisdiction | United States |
(Dec 2008)
GOING FORWARD METHODOLOGIES IN CLASS ACTION SETTLEMENTS NEGOTIATING A GOING FORWARD CALCULATION AND REPORTING METHODOLOGY AND IMPLEMENTING THE NEGOTIATED METHODOLOGIES
Davis Graham & Stubbs LLP
Denver, Colorado
Judith M. Matlock is a partner in the energy practice group of Davis Graham & Stubbs LLP in Denver, Colorado. She has been in the private practice of law as an energy attorney since 1982. Ms. Matlock represents a diversity of clients in the oil and gas and electric industries. Her practice includes oil and gas royalty and gas contract litigation; oil and gas acquisitions and divestitures; administrative proceedings before the Minerals Management Service, the Federal Energy Regulatory Commission and state public utility commissions; oil and gas bankruptcies; oil and gas transactional work including preparation of oil and gas leases, assignments, farmout agreements, purchase and sale agreements (both for producing and non-producing properties), natural gas liquids sale agreements, and natural gas purchase, processing, gathering, transportation and sale agreements; preparation of title opinions; conducting due diligence reviews or auditing gas marketing and transportation arrangements; reviewing gas transportation and marketing arrangements and advising clients in connection with federal, Indian, state and fee royalty and tax payment requirements and gas imbalance issues. She also represents companies in connection with electric integrated resource planning bidding and the construction and financing of electric generation projects.
I. Introduction
Many class action lawsuits involve claims for damages for personal injury, defective products, or other "one-time" events. Others, however, involve not only a past claim for damages but also have a going forward component. For example, in a class action discrimination lawsuit, plaintiffs often seek not only damages for past discrimination but also a remedy to prevent future discrimination. In a private royalty class action lawsuit, if the case is settled it is usually the defendant lessee who is interested in avoiding future litigation through a negotiated going forward methodology that addresses how royalties are to be calculated and reported to members of the class on a going forward basis. This paper will discuss the negotiation and implementation of going forward valuation and reporting methodologies in private royalty class action settlements.
II. Why consider a going forward methodology
Whether to include going forward methodologies in a settlement depends upon a number of factors including (1) the extent to which uncertainty regarding how royalties should be calculated or reported was the basis for the lawsuit in the first place, and (2) whether any judicial resolution regarding valuation or reporting issues is expected and, if so, in what time frame, and with what result. Many private royalty class action lawsuits involve a dispute regarding the interpretation of a royalty clause, a royalty payment statute, or case law regarding royalty payments. All of these situations are ripe for going forward methodologies in the settlement agreement.
A. Royalty clause interpretation dispute - One of the common oil and gas lease forms in use in the Powder River Basin in Wyoming and elsewhere contains the following gas royalty clause:
2nd . To pay Lessor one-eighth (1/8) of the gross proceeds each year, payable quarterly, for the gas from each well where gas only is found, while the same is being used off the premises, and if used in the manufacture of gasoline a royalty of one-eighth (1/8), payable monthly at the prevailing market rate for gas.
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3rd . To pay Lessor for gas produced from any oil well and used off the premises or in the manufacture of gasoline or any other product, a royalty of one-eighth (1/8) of the proceeds, at the mouth of the well, payable monthly, at the prevailing market rate.
[Emphasis added.]
The production from the Powder River Basin is coalbed methane gas which is gas produced from a "well where gas only is found." Therefore, clause "3rd " is not applicable. Additionally, this coalbed methane gas does not have any recoverable liquids (i.e, propane, butane, natural gasoline) and, therefore the provision in the 2nd clause regarding gas used in the manufacture of gasoline does not apply. This only leaves the first part of the 2nd clause which provides for royalties on the "gross proceeds" for gas which is "used" off the premises. The problem is, there are no gross proceeds for gas which is used instead of sold.1
Versions of this lease form go back at least to the early 1960's (although it is still in widespread use today, often with an updated lease form number and date). In that era, producers were not generally drilling for natural gas; they were drilling for oil. If natural gas was produced from an oil well, then something had to be done with the natural gas in order to produce the oil. It might be used as fuel for wellhead equipment or vented or flared. It might be processed for the removal of natural gasoline but not, at that time, for lighter hydrocarbons (propane, butane). The clause "3rd " reflects this history; it provides for royalties on gas used off the lease or in the manufacture of natural gasoline. The problems with application of the 2nd clause probably went unnoticed until the natural gas industry became more developed and production of natural gas from gas only wells increased. Adoption of a going forward valuation methodology should seriously be considered in a class action settlement involving leases with ambiguities such as those in this lease form.2
The creation of overriding royalties is another situation in which there can be a royalty payment dispute because of the instrument creating the override. This is because these instruments are commonly silent regarding how the override is to be calculated. For example, Federal Form 3003-3, Assignment of Record Title Interest in a Lease for Oil and Gas or Geothermal Resources, includes a section in which the assignor can reserve an overriding royalty by simply typing in the percent reserved. The form does not include any language about how a reserved overriding royalty is to be calculated. Of course the parties can always type such language in the form or an attachment but many times they don't. Similarly, in typed
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assignments of oil and gas leases in which an overriding royalty is reserved, it is not uncommon for there to be no details regarding how the override is to be calculated.
The lack of detail regarding how the override is to be calculated may be because many parties to these instruments believe that an overriding royalty in an oil and gas lease is to be calculated in the same manner as royalties under the oil and gas lease. If this belief is right, it would mean that an overriding royalty in a federal oil and gas lease would be calculated in accordance with the MMS' federal oil and gas valuation regulations. The courts that have considered the situation of an overriding royalty in a federal lease have not concluded that the federal lease royalty provisions automatically apply to an overriding royalty in the federal lease. In Garman v. Conoco, Inc.,3 the Colorado Supreme Court held that state law governs the rights and obligations of an overriding royalty interest owner in a federal oil and gas lease. This means that, absent express provisions to the contrary in the instrument that creates an overriding royalty, the Colorado Supreme Court's decision in Rogers v. Westerman Farm Company4 will apply to overriding royalties in federal oil and gas leases in Colorado.
In contract, in Followill v. Merit Energy Company,5 the United States District Court for the District of Wyoming interpreted assignments of overriding royalties executed in 1976 in Wyoming federal oil and gas leases and held that, "[w]hen considering all of the evidence, it is clear to the Court that the parties' intent at the time the assignments were made was to compute any ORRI in the same manner as the federal lessor's interest." This decision was based on the intent of the parties to the instruments in dispute and is not a holding applicable to all overriding royalties in federal oil and gas leases in Wyoming.
Thus, including a going forward methodology in a class action settlement that involves overriding royalties can be a very good idea.
B. Dispute regarding statutory interpretation. Ambiguities can also be found in statutes addressing royalty valuation and reporting. The Wyoming Royalty Payment Act6 ("WRPA") is an example of such a statute. Section 304 of the WRPA contains definitions of terms including the terms "overriding royalty" and "royalty," both of which are defined as shares of production free of the "costs of production." Section 304 also defines "costs of production" as follows:
"Costs of production" means all costs incurred for exploration, development, primary or enhanced recovery and abandonment operations, including, but not limited to lease acquisition, drilling and completion, pumping or lifting, recycling, gathering, compressing, pressurizing, heater treating, dehydrating, separating, storing or transporting the oil to the storage tanks or the gas into the market pipeline. "Costs of production" does not include the reasonable and actual direct costs associated with transporting the oil from the storage tanks to market or the gas from the point of entry into the market pipeline or the processing of gas in a processing plant.
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[Emphasis added.] The term "market pipeline" is not defined in the Act. Not surprisingly, plaintiffs lawyers have taken the position that the term "market pipeline" means an interstate or other regulated pipeline. Producers have taken the position that it means the pipeline that transports...
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