AFE Oil and Gas, L.L.C. and EXPLO Oil, Inc. v. Charles Armentrout, Susan Armentrout Girvin, Lynn A. Morris, Sally Nelms, and Birds Fort Lake, Ltd. ( 2008 )

COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 2-07-100-CV
AFE OIL AND GAS, L.L.C. AND APPELLANTS
EXPLO OIL, INC.
V.
CHARLES ARMENTROUT, SUSAN APPELLEES
ARMENTROUT GIRVIN, LYNN A.
MORRIS, SALLY NELMS, AND
BIRDS FORT LAKE, LTD.
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FROM THE 48TH DISTRICT COURT OF TARRANT COUNTY
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MEMORANDUM OPINION 1
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Appellants AFE Oil and Gas, L.L.C. and Explo Oil, Inc. appeal from a
judgment in favor of Appellees Charles Armentrout, Susan Armentrout Girvin,
Lynn A. Morris, Sally Nelms, and Birds Fort Lake, Ltd. that a mineral lease had
1
See T EX. R. A PP. P. 47.4.
terminated. In two issues, Appellants argue that the evidence is legally and
factually insufficient to support the jury’s finding that the well at issue was not
capable of producing gas when shut-in royalties were tendered. Because we
hold that the evidence is legally and factually sufficient to support the jury’s
finding, we affirm the trial court’s judgment.
F ACTS AND P ROCEDURAL H ISTORY
Appellees Armentrout, Girvin, Morris, and Nelms executed an oil, gas, and
mineral lease with AFE in 1997. The lease covered approximately 120 acres
of land in the formation known as the Barnett Shale. In February 2002, the
same parties executed successor leases in favor of AFE. One of these leases
covered a 40-acre tract, described as “Tract A”; the Armentrout No. 2 well had
been drilled on this tract while the 1997 lease was in effect. This 2002 lease
is the lease at issue on appeal. AFE assigned a working interest to Explo Oil.
AFE also assigned an interest in the lease to Premium Resources II (“PRII”)
through an agreement under which PRII became the designated operator of the
well and AFE maintained a portion of the working interest.
The lease originally had a primary term of one year; the lease stated that
it would be in effect during the primary term “and as long thereafter as
operations . . . are conducted upon said land with no cessation for more than
2
ninety (90) consecutive days.” 2 The term “operations” was defined as “drilling,
testing, completing, reworking, recompleting, deepening, plugging back or
repairing a well . . . in an endeavor to obtain production of oil, gas, sulphur or
other minerals . . . whether or not in paying quantities.” The lease further
provided that if the well was not actually producing by the end of the primary
term or at any time thereafter, the well could be shut in for up to ninety
consecutive days, and the lease would not terminate if, by the end of the ninety
days, royalties (called “shut-in royalties”) were paid to the lessors.3
On December 16, 2002, the parties executed an agreement to extend the
primary term of the lease on the land on which the well was located. This
agreement stated that the lease would be in force until August 1, 2003, “and
as long thereafter as oil, gas or other minerals are produced f[ro]m the [leased
land] . . . , and as long as operations as prosecuted under the terms of the
Lease.”
2
See Ridge Oil Co., Inc. v. Guinn Investments, Inc., 148 S.W.3d 143,
158-160 (Tex. 2004) (discussing cases construing similar lease provisions and
determining what sort of operations will serve to keep the lease in force).
3
See Reid v. Gulf Oil Corp., 323 S.W.2d 107, 113-14 (Tex. Civ.
App.—Beaumont 1959, no writ), aff’d, 161 Tex. 51, 337 S.W.2d 267 (1960)
(construing a mineral lease in which the payment of shut-in royalties could
constitute constructive production so as to keep the lease in force).
3
PRII began operations on the well on July 30, 2003. In August 2003, the
well was acid perforated, a technique used to stimulate production of a gas
well. In October 2003, PRII and AFE tendered payment of shut-in royalties to
Armentrout, Girvin, Morris, and Nelms, who rejected the payments.
Appellees subsequently brought suit against Appellant AFE seeking a
declaratory judgment that the mineral leases they had executed with AFE had
expired. They also sought to quiet title to the land covered by the leases.
Appellee Birds Fort Lake, Ltd., successor-in-interest to the other Appellees,
currently owns the lands covered by the leases; Appellant Explo Oil intervened
because it had acquired from AFE an interest in the well covered by the leases.
Appellees obtained a partial summary judgment that the 1997 lease had ended
on its own terms, but the parties went to trial over the 2002 lease.
At trial, the parties contested the issue of and produced conflicting
testimony on whether the well could produce natural gas at the time the shut-in
royalties were paid. Appellants contended that the lease was extended when
shut-in royalties were paid if the well was capable at that time of producing in
any quantity. The trial court thus submitted this question to the jury: “Do you
find that in October, 2003, the Armentrout No. 2 Well was not capable of
producing gas?” The trial court instructed the jury that a well is not capable of
producing gas if the well needs further work, repairs, or equipment in order to
4
produce gas. The jury sent a note to the trial judge asking, “[M]ust the gas be
able to flow in order to be considered ‘producible’?” The judge then submitted
this supplemental instruction: “In response to your question, you are instructed
that in order for a gas well to be ‘capable of producing gas’; the gas must be
able to flow.” The jury found that the well was not capable of producing gas,
and the trial court entered final judgment for Appellees.
A NALYSIS
In Appellants’ first issue, they argue that the evidence is legally
insufficient to support the jury’s finding that when shut-in royalties were
tendered, the well was not capable of producing gas. We may sustain a legal
sufficiency challenge only when (1) the record discloses a complete absence of
evidence of a vital fact; (2) the court is barred by rules of law or of evidence
from giving weight to the only evidence offered to prove a vital fact; (3) the
evidence offered to prove a vital fact is no more than a mere scintilla; or (4) the
evidence establishes conclusively the opposite of a vital fact.4 In determining
whether there is legally sufficient evidence to support the finding under review,
we must consider evidence favorable to the finding if a reasonable fact-finder
4
Uniroyal Goodrich Tire Co. v. Martinez, 977 S.W.2d 328, 334 (Tex.
1998), cert. denied, 526 U.S. 1040 (1999); Robert W. Calvert, “No Evidence”
and “Insufficient Evidence” Points of Error, 38 T EX. L. R EV. 361, 362–63
(1960).
5
could and disregard evidence contrary to the finding unless a reasonable fact-
finder could not. 5 Anything more than a scintilla of evidence is legally sufficient
to support the finding.6
A typical gas lease runs for a set period of time—the primary
term—during which the lessee conducts the necessary operations to complete
a producing, and hopefully profitable, well. 7 At the end of the primary term, if
the well is producing gas, then the lease typically extends indefinitely for as
long as the well continues to produce.8 If the well is not producing gas at the
end of the primary term, the lease will usually end automatically.9 To avoid
5
City of Keller v. Wilson, 168 S.W.3d 802, 807, 827 (Tex. 2005).
6
Cont’l Coffee Prods. Co. v. Cazarez, 937 S.W.2d 444, 450 (Tex. 1996);
Leitch v. Hornsby, 935 S.W.2d 114, 118 (Tex. 1996).
7
See Fox v. Thoreson, 398 S.W.2d 88, 91 (Tex. 1966) (“A ‘primary term’
is . . . the period, typically five or ten years, during which a lease may be kept
alive by a lessee by virtue of drilling operations or the payment of rentals, even
though there is no production in paying quantities.”)
8
See Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex.
2002) (“[A] typical habendum clause states that the lease lasts for a relatively
short fixed term of years (primary term) and then ‘as long thereafter as oil, gas
or other mineral is produced’ (secondary term).”)
9
See Fox, 398 S.W.2d at 91 (“A primary term is also a period of time at
the end of which the estate granted will terminate but which estate may be
extended by some other provision, usually one for production.”); see also
Hydrocarbon Mgmt., Inc. v. Tracker Exploration, Inc., 861 S.W.2d 427, 432
(Tex. App.—Amarillo 1993, no writ) (“It is the rule that a lease may be kept
alive after the primary term only by production in paying quantities, or a savings
6
forfeiture of the lease, most gas leases allow for the lease to be extended even
if the well is not producing gas if shut-in royalties are paid and the well is
actually capable of producing gas.10 In other words, if further work on the well
is required before the well will be capable of producing gas, then even paying
shut-in royalties will not prevent the termination of the lease. The term
“capable of production” has been held to mean capable of producing gas in
paying quantities where the lease does not define the term.11
The February 1, 2002, lease, as amended, at issue in this case had a
primary term that expired on August 1, 2003, but the lease could be continued
in force for up to ninety consecutive days without actual production if
operations were being conducted on the land 12 or if the well was capable of
clause, such as a shut-in gas well clause, drilling operations clause, or
continuous operations clause.”).
10
See Hydrocarbon, 861 S.W.2d at 432 (noting that “for a well to be
maintained by the payment of shut-in royalties, it must be capable of producing
gas . . . at the time it is shut-in”); see also Kidd v. Hoggett, 331 S.W.2d 515,
519 (Tex. Civ. App.—San Antonio 1959, writ ref’d n.r.e.) (“Shut-in royalty
payments excuse production only if the well is actually capable of producing
gas in paying quantities.”).
11
Garcia v. King, 139 Tex. 578, 582, 164 S.W.2d 509, 511 (1942)
(holding that, where a lease term was for ten years and “as long thereafter as
oil, gas, and other minerals is produced from said land hereunder,” “produced”
meant “produced in paying quantities”).
12
See, e.g., Reid, 323 S.W.2d at 113 (holding, in construing similar lease
provision, that drilling or reworking operations would keep the lease in force if
7
producing and was shut in for no more than ninety days. The well was shut in
on August 5, 2003, and shut-in royalties were tendered to Appellees in October
2003. Appellants contend that the February 1, 2002, lease required capability
of production but not in paying quantities, that “capable of production” in this
case means that “gas will flow when [the well’s] switch is turned on,” and that
the record conclusively establishes that the well was capable of production
when the shut-in royalties were paid.
At trial, Appellees elicited testimony from several sources that a gas well
in the Barnett Shale will not produce without a fracture stimulation (“frac”), a
different procedure than acid perforation, and that the well at issue had not
been “fraced” by the end of the primary term. The jury could have determined
that Appellants did not successfully refute this allegation of scientific fact.
Appellants elicited some favorable testimony from Sanford Dvorin, who was an
officer and principal of AFE during the relevant time period, is still affiliated with
AFE, and retained an interest in the well at the time of trial. Dvorin testified
that the only way to get a known quantity of gas from the well was to perform
a fracture stimulation of the shale; he made a similar statement in a letter,
the operations were prosecuted in good faith and with due diligence and with
no cessation of more than sixty consecutive days); but see Ridge Oil Co., Inc.,
148 S.W.3d at 158-160 (discussing cases construing similar lease provisions
and determining what sort of operations will serve to keep the lease in force).
8
admitted into evidence, that was written after the well had had an acid
stimulation performed on it. He further testified that with respect to this well,
he would have had to hire a service company, frac the well, and do mechanical
work on it to get the well to produce, all of which had to be done after October
2003.
Appellees’ expert, Nick Steinsberger, testified that in August 2003, the
well was acid perforated and swab tested and would not flow on its own after
that and that the well was at that point incapable of producing. Although he
did testify that the operator report showed that some gas flowed in August
2003, in the context of his testimony, it is clear that his testimony was that he
believed that the gas was CO2, not natural gas. Even without considering his
testimony as to the content of the gas from the well, he reiterates throughout
his testimony his belief that the well could not produce without being “fraced.”
He stated that all Barnett Shale wells are fracture stimulated. Although
Appellants’ brief states that Steinsberger testified that a fracture stimulation
was only required for optimal production, in fact Steinsberger testified that the
well was not capable of producing a single McF 13 of gas without a fracture
13
See Railroad Commission of Texas, Oil and Gas Division, Glossary of Oil
and Gas Terms, http://www.rrc.state.tx.us/divisions/og/glossary.html (last
visited Mar. 5, 2008) (defining “McF” as “[o]ne thousand cubic feet of natural
gas measured at standard pressure and temperature conditions”).
9
stimulation. He testified that prior to the November 20, 2004, frac job, the well
was not capable of producing, that the well still could not produce a month
after that frac, and on August 5 and in late October and November 2003, the
well could not be turned on and begin to flow.
Further, in a letter from June 2004, Carlos Sandoval, president of Explo
Oil, stated that the gas purchase contract on the well required gas samples and
volume tests from the well and that “obviously” the purchaser could have
neither until the well was “fraced.” The jurors may have reasonably taken this
sentence to mean that, in Sandoval’s opinion at least, the well was not capable
of producing as late as June 2004 because the well had not been “fraced” and
the well therefore was not capable of producing when shut-in royalties were
tendered.
Further, the jury could have determined that the testimony and evidence
produced by Appellants was not as reliable as that from Appellees, or in any
event was not any more definitive. 14 Randy Mosley, Appellants’ expert,
testified that there was no metering device on the well when it was shut in and
14
See Turner v. KTRK Television, Inc., 38 S.W.3d 103, 120 (Tex. 2000)
(reviewing court must defer to the credibility determinations of the trier of fact);
Allstate Tex. Lloyds v. Mason, 123 S.W.3d 690, 703 (Tex. App.—Fort Worth
2003, no pet.) (“With competing contentions supported by expert witnesses on
both sides, the burden fell on the jury to determine which contention was more
credible.”).
10
that the estimates he gave at trial as to the production capability of the well
were not based on any measurement of gas produced at the time the well was
shut in. He further testified that when he visited the well site in August 2006,
after a frac job had been completed, he had no information to identify the
components of the gas the well produced on that date.
As for the reliability of Mosley’s testimony, Steinsberger testified that he
had completed “probably about a thousand wells in the last ten years” in the
Barnett Shale. Mosley, on the other hand, testified he had experience with
completing and overseeing only one gas well in the Barnett Shale. And on that
well, he did not design the frac job, and even that well was fracture stimulated.
Steinsberger testified that he has authored numerous papers about the
completion technology in the Barnett Shale, in his belief more than anyone else
on the topic, some of which were for the Journal of Petroleum Technology, an
authoritative journal in the field. Mosley, on the other hand, testified that he
has not written any articles on the Barnett Shale. The jury could have
determined that Steinsberger’s expertise made his testimony more credible with
respect to gas wells in the Barnett Shale.15
15
See Turner, 38 S.W.3d at 120; Allstate Tex. Lloyds, 123 S.W.3d at
703.
11
Further, Mosley’s demeanor on the stand may have affected the jury’s
opinion of his testimony. The court sustained objections multiple times to
Steinsberger’s testimony as being nonresponsive and instructed him to “[b]e
responsive to the question,” but during Mosley’s testimony, the court not only
sustained several objections to Mosley’s nonresponsiveness but admonished
Mosley himself:
THE COURT: And I’m going to instruct you, Mr. Mosley, to answer
the question that you’re asked.
[MOSLEY]: All right.
THE COURT: If you’re not capable of doing that, in the future I’m
going to recess the trial until the morning. Do you understand my
instruction?
[MOSLEY]: Yes, sir, I do.
THE COURT: Then stop giving nonresponsive answers.
[MOSLEY]: All right.
THE COURT: Stop speaking over the interrogator, and stop
directing the interrogator where to start his question at.
Only two questions later, Appellees’ counsel once again objected to the
nonresponsiveness of Mosley’s answer, at which point the court excused the
jury so that it could invite Appellants’ counsel to “visit with” his witness,
presumably to instruct him to be responsive to Appellees’ questions. The court
also admonished Mosley in front of the jury for making an extraneous comment,
12
telling Mosley, “[T]hat’s not called for.” The jury could have determined from
Mosley’s demeanor that his testimony was not as credible as Steinsberger’s
testimony and that Appellants’ evidence overall was not as credible as that of
Appellees.
Considering evidence favorable to the finding if a reasonable fact-finder
could and disregarding evidence contrary to the finding unless a reasonable
fact-finder could not, we hold that the evidence at trial was at least some
evidence that the well was not capable of producing at the time that the well
was shut in and shut-in royalties were paid. The evidence was therefore legally
sufficient to support the jury’s finding. We overrule Appellants’ first issue.
In Appellants’ second issue, they argue that the evidence is factually
insufficient to support the jury’s verdict. An assertion that the evidence is
factually insufficient to support a fact finding means that the evidence
supporting the finding is so weak or the evidence to the contrary is so
overwhelming that the answer should be set aside and a new trial ordered.16
We are required to consider all of the evidence in the case in making this
determination, not just the evidence that supports the finding.17
16
Garza v. Alviar, 395 S.W.2d 821, 823 (Tex. 1965).
17
Mar. Overseas Corp. v. Ellis, 971 S.W.2d 402, 406-07 (Tex.), cert.
denied, 525 U.S. 1017 (1998).
13
Appellants did present testimony contrary to the jury’s verdict. Dvorin
testified that there was a quantity of gas in the well in August 2003, that it
was not true that the well never produced, and that he believed that they could
produce the well. Mosley testified that he had determined that on August 6,
2003, the well was capable of producing and was capable of flowing gas
without additional equipment or repairs. He estimated that the rate of
production would be about 40 McF a day. He further testified that although he
did not visit the well in August 2003, to some extent one can determine the
physical condition of the well at that time based on records from that time of
the pressure in the well. Mosley also testified that the acid perforation done on
the well was sufficient pressure to break the formation and that in his opinion,
if the well had been turned on in October 2003, it would flow, and the
production would be natural gas, or at least a component of it would be.
Steinsberger testified that if he had gone to the well in August 2003 and
opened the valve, gas would have flowed and that in October or November
2003, the well flowed intermittently. Although he testified that, in his opinion,
any gas was likely CO2, the judge instructed the jury that there was no analysis
in the record of whether the gas in the well was CO2 or natural gas.
Finally, although the well operator’s daily operations report for August 3,
2003, reported “no gas or very little,” the report from August 5, 2003, stated
14
that the well was flowing and that there was “240 lbs casing pressure” before
the well was shut in. The operations report listed 330 pounds of casing
pressure on August 6, 2003, and 750 pounds of casing pressure on October
27, 2003.
Despite the conflicting testimony, as discussed above, the jury’s finding
is not so weak or the evidence to the contrary so overwhelming that the finding
should be set aside. As discussed above, the jury could have reasonably
determined that Appellants’ evidence was not as credible as Appellees’
evidence. We thus hold that the evidence was factually sufficient to support
the jury’s finding. We overrule Appellants’ second issue.
C ONCLUSION
Having overruled both of Appellants’ issues, we affirm the trial court’s
judgment.
LEE ANN DAUPHINOT
JUSTICE
PANEL B: LIVINGSTON, DAUPHINOT, and WALKER, JJ.
DELIVERED: March 6, 2008
15