REPORTS FROM THE COURTHOUSES IN SELECT STATES WITH RECENT ROYALTY LITIGATION ACTIVITY WYOMING
| Jurisdiction | United States |
(Dec 2008)
REPORTS FROM THE COURTHOUSES IN SELECT STATES WITH RECENT ROYALTY LITIGATION ACTIVITY WYOMING
Schultz & Belcher
Cheyenne, Wyoming
Delissa Hayano
Holland & Hart LLP
Cheyenne, Wyoming
Donald I. Schultz is a Partner at Schultz & Belcher LLP. He represents oil and gas producers, pipelines, refiners and mining companies. Since 1982, his practice has emphasized three primary areas: 1) complex litigation; 2) disputes with construction and service contractors, and 3) mechanical failures. After 25 years with Holland and Hart, Mr. Schultz joined Jim Belcher to form Schultz & Belcher LLP in February 2008. Mr. Schultz serves as court-appointed Liaison Counsel for hundreds of defendants in nearly 100 MDL-consolidated gas measurement and gas valuation lawsuits. He oversees complex databases and provides leading-edge technological communication services. Mr. Schultz has extensive False Claims Act experience and has represented energy producer clients in several state-wide, field-wide and national class action gas royalty lawsuits. He has jury trial and appellate experience in gas measurement disputes, gas contract pricing and take-or-pay disputes, Joint Operating Agreement disputes, and gas balancing claims. Mr. Schultz represents energy owners in litigation of construction disputes involving pipelines, gas plants, refineries, coal mines, trona mines, and resort properties. He has extensive jury and bench trial experience in construction cases. He advises owners in the negotiation and drafting of engineering, procurement and construction contracts and consults on project management issues, claim negotiations, and project lien issues. Proving the cause of mechanical failures is another interesting part of Mr. Schultz's practice. He works with metallurgical and engineering experts on claims arising from oil and gas well blowouts, casing failures, coiled tubing failures, rig brake failures, bearing failures, and pipeline and tank leaks and explosions. He works extensively on lost profits claims arising from plant and well down time.
Delissa L. Hayano is a member of Holland & Hart's Natural Resources practice group. Her practice focuses on regulatory compliance issues and complex commercial litigation for the firm's energy clients, including major coal and uranium producers, oil and gas exploration and production companies, midstream gathering and transportation companies, pipelines, and gas plants. Ms. Hayano counsels the firm's extractive industry clients on royalty and production tax issues and litigates these matters before Wyoming's administrative agencies and courts. She advises coal and uranium producers on mine permit acquisition and compliance, and she assists mining and oil and gas clients with legislative and government relations matters.
Over the past five years, the Wyoming Supreme Court has considered only a handful of cases focused on private oil and gas royalties. The cases address a variety of issues and are discussed below in the first section of this update. The second section of this update identifies oil and gas royalty issues emerging in negotiation and litigation of Wyoming private royalty disputes that have yet to be resolved in published opinions.
A. Four Wyoming Supreme Court Decisions and One Federal Case Applying Wyoming Law
Wadi Petroleum, Inc. v. Ultra Resources, Inc.1 and Double Eagle Petroleum & Mining Corp. v. Questar Exploration & Production Co.2 Both cases present similar factual and legal issues and seek to interpret the meaning of language used in instruments that reserve an overriding royalty interest. The Wyoming Supreme Court determined that where the reservation of an overriding royalty is silent as to proportionate reduction, the reservation is unclear and the court may consider extrinsic evidence to determine whether the overriding interest is subject to proportionate reduction. In both cases, the Wyoming Supreme Court upheld the district court's use of extrinsic evidence to determine that a 3.125% overriding royalty interest reservation was subject to proportionate reduction. The extrinsic evidence used to make this determination included the opinions of experts in oil and gas law such as Richard Hemingway, Howard Williams, and Charles Meyers; expert testimony on industry practices; a division order indicating the quantum of royalty owned by the predecessor in interest; records indicating the quantum of royalty actually received by the predecessor in interest; and several title examinations performed by experienced oil and gas attorneys. Based on a review of this evidence, the Court determined that the reservation was acquired from a party with only a 20% interest in the subject leases, thus the 3.125% overriding royalty was proportionately reduced to only a .625% interest (20% of 3.125% = .625%).
Cabot Oil & Gas Corp. v. Followill.3 In a dispute over private overriding royalty payments on production from federal oil and gas leases, the United States District Court for the District of Wyoming certified to the Wyoming Supreme Court two questions related to the interpretation of the Wyoming Royalty Payment Act (WRPA):4
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(1) What is meant by the term "gathering" as that term is employed in Wyoming Statute Section 30-5-304(a)(vi) in defining "costs of production"?
(2) Do the causes of action for recovery of the one hundred dollar per month penalty imposed under Wyoming Statute Section 30-5-303(c) for failure to provide complete reporting as required by Wyoming Statute Section 30-5-305(b) and for improperly deducting "costs of production" as defined in Wyoming Statute Section 30-5-304(a)(vi) accrue when the statutes are violated or when a plaintiff knows or has reason to know of the existence of the violations?
Cabot, the party responsible for payment of royalties, had contracted with gas transportation companies to transport gas off of the leases to downstream points of sale miles from the wellhead. Cabot calculated royalties by deducting the third party transportation costs from the sales proceeds contending that delivery into the third party transporters' pipelines was delivery "into the market pipeline." Thus, according to Cabot, the pipeline transportation charge was not a gathering cost or cost of production, but...
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