REPORTS FROM THE COURTHOUSES IN SELECT STATES WITH RECENT ROYALTY LITIGATION ACTIVITY OKLAHOMA
| Jurisdiction | United States |
(Dec 2008)
REPORTS FROM THE COURTHOUSES IN SELECT STATES WITH RECENT ROYALTY LITIGATION ACTIVITY OKLAHOMA
Crowe & Dunlevy
Oklahoma City, Oklahoma
Mark D. Christiansen is a shareholder with the law firm of Crowe & Dunlevy, and has practiced law in its Oklahoma City office since 1980. His practice involves the representation of oil and gas producers, purchasers and other sectors of the energy industry. Over the past 15 years, he has spent a substantial portion of his time defending oil and gas companies in statewide, multi-state and nationwide class action royalty lawsuits. Mark is listed in Best Lawyers in America under the practice areas of Natural Resources and Energy Law. He is listed in Oklahoma Super Lawyers as one of the Top 50 lawyers in the State of Oklahoma, and is also listed in the Chambers Directory of Attorneys in the USA as one of the leading attorneys in the area of Energy and Natural Resources Law. He served as the Chair of the Energy and Natural Resources Litigation Committee of the ABA Section of Environment, Energy, and Resources from 2001--2003. Mark served in 2005 - 2007 as a member of the Executive Committee for the Board of Trustees of the Denver-based Rocky Mountain Mineral Law Foundation, and currently serves on the Board of Trustees, and on the Executive Committee, for the Dallas-based Center for American and International Law. When a Joint Senate and House Special Committee of the Oklahoma Legislature conducted special public hearings in 2004 on the subject of lawsuit abuse and class action reform, Mark was designated by the state's two oil and gas industry associations (the Oklahoma Independent Petroleum Association and the Mid-Continent Oil and Gas Association of Oklahoma) as their spokesman to testify on the need for Class Action Lawsuit Reform. From 1985 to the present, Mark has served as lead editor and co-author of annual reports on legal developments in the United States in the area of energy law for the Year in Review publication of the ABA Section of Environment, Energy, and Resources. Some of Mark's other publications include: "Class Actions Pushed to the Extreme: Will Class Action Plaintiff Lawyers Be Permitted to Re-Zone Our Courts for Tract Housing?" 24 Journal of Land, Resources and Environmental Law 77 (2004) (50th Anniversary Issue for the RMMLI); "The Confused State of Oil and Gas Royalty Check Stub Law," 17 Texas Oil & Gas Law Journal 13 (2003) (LexisNexis Matthew Bender); "A Landman's Guide to Drafting Provisions for the Allocation of Gas Marketing-Related Costs Under the Oil and Gas Lease," 45 Rocky Mountain Mineral Law Institute 21 (1999); "Preferential Right of Purchase Issues in Oil and Gas Property Sales," ABA Natural Resources & Environment magazine, Vol. 10, No. 4, at 35 (Spring 1996); "A Comparison of the Model Form Gas Balancing Agreements - Catching Up With a Changing Market Environment," 40 Rocky Mountain Mineral Law Institute 16 (1994); and Co-Author, "COPAS for Landmen and Lawyers," 48 Rocky Mountain Mineral Law Institute (2002).
A. Valuation of Royalties Under Affiliate Marketing Transactions, Check Stub Issues and Fiduciary Duty Claims.
In Howell v. Texaco Inc., 2004 OK 92, 112 P.3d 1154 (Okla. 2004), the plaintiff royalty owners had entered into oil and gas leases with Texaco or its predecessor. Most of the wells involved in this case were not subject to statutory unitization procedures under 52 O.S. 287.1 et seq.; however, a few of the wells were. Some of the wells that were not in unitized fields were in voluntarily communitized areas.
Texaco, as producer of the wells covered by the plaintiffs' leases, gathered the gas and processed it at the Velma Plant which was owned by Texaco's gas plant division. Texaco asserted that the gas was marketable at the wellhead. Texaco's production division and Texaco's gas plant division entered into an "intra-company agreement" for the sale of the gas covered by the plaintiffs' leases at the wellhead. After the gas was processed, Texaco sold the residue gas and the natural gas liquids (NGLs) to third parties.
In addition to the gas that was subject to the intra-company contract, Texaco contracted with unaffiliated third party producers to purchase gas under percent-of-proceeds (POP) contracts under which Texaco, as processor, was paid a percentage of the proceeds from the sale of some of the products after processing. An expert witness for Texaco opined that the amount paid for the gas under the POP contracts was the appropriate "market value" of the gas for purposes of royalty payments.
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Except for a two-year period of time, Texaco computed the royalty payments based on the prices established by the intra-company contract. The intra-company contract was based on the POP contract with the unaffiliated third parties, and the intra-company contract prices were at least as much as the prices Texaco paid to third-party producers who sold their gas at the wellhead under POP contracts for processing at the Velma Gas Plant. Texaco did not measure, account for, or pay royalties on scrubber oil and drip condensate. Texaco asserted that the scrubber oil and drip condensate had been considered in arriving at the percentage paid under both the intra-company and third party POP contracts for the residue gas and NGLs.
The only communication Texaco had with the royalty owners regarding payments was the check stubs which showed a sales price but did not show the purchaser or the terms of the intra-company contract. The royalty owners' check stubs did not show that Texaco was deducting costs for marketing and a profit allowance from the royalty payments. Texaco did not disclose to the plaintiffs that it was calculating royalty payments based on its intra-company contract.
The plaintiff royalty owners sued Texaco and asserted that the market value of the production at the wellhead should be based upon the first arm's-length transaction, which in this case occurred after the gas had been processed. The royalty owners further asserted that Texaco should have paid royalties on the amounts received for the scrubber oil and drip condensate. The plaintiffs alleged that Texaco had breached the oil and gas leases, breached its alleged fiduciary duty to the royalty owners, and committed actual and constructive fraud.
Texaco, in response, argued that the royalties were properly based upon its POP contracts with other producers, which represented the prevailing market price. Texaco asserted that it met its obligation to pay royalties based upon the prevailing market price by paying an amount equal to or more than what other royalty owners whose gas was processed at the Velma Plant were paid. Texaco also argued that, absent special circumstances not present in this case, a producer has no fiduciary duty to royalty owners, and that the royalty owners did not rely on the representations shown on the check stubs except for their delay in filing suit, thus preventing them from recovering damages for fraud.
Texaco moved for partial summary judgment on the breach of fiduciary duty claim as to all owners whose wells were not part of an area subject to a unitization order under 52 O.S. § 287.1 et seq. Texaco also asked for partial summary judgment against all plaintiffs on the issues of actual fraud and constructive fraud. The trial court granted both motions and certified the partial summary judgment orders for immediate appeal.
After a discussion of the holdings in a number of prior oil and gas royalty lawsuits in Oklahoma, the court held among other things as follows:
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1. "When the actual value [of the production] is not obtainable because of a producer's self-dealing, the courts will carefully scrutinize the transactions on which the royalty payments are based. . . . The plaintiffs here are entitled to have their royalty payments based on the prevailing market price or the work-back method, whichever one results in the higher market value. We hold that an intra-company gas sale cannot be the basis for calculating royalty payments." (¶22).
2. "Under the work-back method, the market value at the wellhead is calculated by subtracting allowable costs and expenses from the first downstream, arm's-length sale... When the gas is marketable at the wellhead, the reasonable post-production costs may be charged against the royalty payments [citing Mittelstaedt v. Santa Fe Minerals, Inc., 1998 OK 7, 954 P.2d 1203]. . . [R]oyalty owners are entitled only to the value of the gas that is marketable at the wellhead. The burden is on the producer to justify the costs and expenses." (¶20). In applying the work-back method, "the court must consider [the value of the scrubber oil and drip condensate] in calculating the market value at the wellhead." (¶23).
3. "If the market value at the wellhead is not established by an actual arm's-length sale at the best price available, then the market value may be constructed by evidence of the prevailing market price. . . Arm's-length wellhead sales or offers of purchase [of gas] from the same well and close in time to the sale at issue are proof of the prevailing market price. Proof of arms'-length sales from other wells in the vicinity can also be used to establish the prevailing market price. . . The more similar in quality, quantity, delivery pressure, and geographical location of gas produced from other wells, the more probative and compelling are their sales in determining the prevailing market price." (¶19).
4. The Oklahoma Supreme Court "has not held that [an oil and gas] lease alone creates a fiduciary relationship. . . Texaco had no fiduciary duty to the [royalty owners] based on the leases or the communitization agreement." (¶28). "The trial court properly granted judgment in favor of Texaco on the issue of breach of fiduciary duty as to those wells which are not in an...
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