Breton Energy, L.L.C. v. Mariner Energy Resources, Inc.

Case: 13-20307 Document: 00512731357 Page: 1 Date Filed: 08/12/2014
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
No. 13-20307 August 12, 2014
Lyle W. Cayce
Clerk
BRETON ENERGY, L.L.C.; CONN ENERGY, INCORPORATED,
Plaintiffs – Appellants
v.
MARINER ENERGY RESOURCES, INCORPORATED, formerly known as
Mariner Energy, Incorporated, formerly known as Forest Energy Resources,
Incorporated; FOREST OIL CORPORATION; CHEVRON CORPORATION;
CHEVRON U.S.A., INCORPORATED; UNOCAL CORPORATION; UNION
OIL COMPANY OF CALIFORNIA; CHEVRON CORPORATION, doing
business as Union Oil Company of California; UNION OIL COMPANY, doing
business as Unocal; PURE RESOURCES, L.L.C.; IP PETROLEUM
COMPANY, INCORPORATED; INTERNATIONAL PAPER COMPANY;
APACHE CORPORATION; APACHE SHELF, INCORPORATED,
Defendants – Appellees
Appeal from the United States District Court
for the Southern District of Texas
Before JOLLY, GARZA, and HIGGINSON, Circuit Judges.
HIGGINSON, Circuit Judge:
Well-pleaded factual allegations may perfectly shield a complaint from
dismissal under Rule 12(b)(6), and our inquiry’s “emphasis on the plausibility
of a complaint’s allegations does not give district courts license to look behind
those allegations and independently assess the likelihood that the plaintiff will
be able to prove them at trial.” Harold H. Huggins Realty, Inc. v. FNC, Inc.,
634 F.3d 787, 803 n.44 (5th Cir. 2011). Because Appellants successfully plead
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a claim for relief against Appellee IP, but not the other Appellees, we AFFIRM
in part and VACATE in part and REMAND.
FACTS AND PROCEEDINGS
Conn Energy, Inc. (“Conn”) owns a mineral lease named West Cameron
171 (“WC 171”) that is located in the Gulf of Mexico. 1 In 2009, Conn executed
an agreement with Breton Energy, LLC (“Breton”) that permits Breton to
explore WC 171 for hydrocarbons. Conn and Breton (collectively, “Appellants”)
are suing the owners and operators of a neighboring lease named West
Cameron 172 (“WC 172”). Apache 2 operates and is an interest owner in WC
172’s northern half. Apache is Mariner’s 3 successor-in-interest. Before
Mariner, IP, 4 Pure, 5 and Forest 6 all operated and owned interests in WC 172’s
northern half. Significantly, WC 171 and WC 172 share a hydrocarbon
reservoir named the K-1 sands.
In 2010, Breton and Conn planned to reenter a well on WC 171. They
targeted the K-1 sands; specifically, an area known as the “Upper Cib Op
Zone.” Before reentering the well, Breton and Conn requested records from the
Minerals Management Service (“MMS”). 7 MMS records revealed that a well
had been completed 8 in 1999 in the K-2 sands and in a lower zone called the
1 The facts in this section are drawn from Appellants’ Second Amended Complaint.
2 Apache Corporation and Apache Shelf, Inc.
3 Mariner Energy, Inc., Mariner Energy Resources, Inc., f/k/a Mariner Energy, Inc.,
Mariner Energy Resources, and Mariner Energy, Inc. f/k/a Forest Energy Resources.
4 IP Petroleum Company and International Paper Company.
5 Pure Resources, LLC, Union Oil Company, Union Oil Company d/b/a Unocal,
Chevron U.S.A., Inc.
6 Forest Oil Corporation.
7 Now known as the Bureau of Ocean Energy Management, Regulation, and
Enforcement (“BOEMRE”).
8 We have explained that, “[o]ur review of legal authority on the oil and gas industry
shows that the meaning of ‘completion’ assumes that a hole has just been drilled, but the
term is considered to be indefinite and is not explicitly restricted to drilling.” Burns v. La.
Land & Exploration Co., 870 F.2d 1016, 1022 (5th Cir. 1989); see also id. at 1021 (“In sum,
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“Middle Cib Op Zone.” The records, however, did not reflect any completed well
production from the K-1 sands. Breton and Conn therefore spent $6 million to
drill and complete the K-1 sands, but were disappointed with the results. They
allege that the reservoir is depleted.
Appellants allege that IP perforated 9 the K-1 sands. 10 In 1998, IP
operated WC 172 and decided to drill on its northwestern corner. Seismic data
indicated two oil and gas reserves: one in the K-1 sands (Upper Cib Op) and
one in the K-2 sands (Middle Cib Op). IP submitted its drilling plans to MMS
for approval and notified Conn of its intention to drill in an area neighboring
WC 171. Conn objected to IP’s proposed well location (“Well No. 19”), but MMS
approved IP’s plan over Conn’s objection. MMS required, however, that IP
produce the reservoirs as “two separate completions.” Therefore, “IP was not
authorized to proceed with dual completions; it had to select one zone for its
first completion” and then obtain MMS approval for any subsequent
completion (emphasis in original). 11 In 1999, IP informed MMS that it
completed the well in the K-2 sands. But Breton and Conn allege that IP
“actually completed in the K-1 sands at the same time it completed in the K-2
sands.” They reason that IP’s production from the K-2 sands has exceeded IP’s
estimate by almost 30%. 12 Appellants maintain that “[t]his significant
the specialized industry definition of completion is primarily concerned with an event
following drilling; no mention is made of the termination of reworking operations.”).
9 “Perforation” is “[t]he making of holes in casing and cement (if present) to allow
formation fluids to enter the well bore.” 8 Howard R. Williams & Charles J. Meyers, Oil and
Gas Law, at 752 (2013).
10 Appellants alternatively alleged that Forest perforated the K-1 sands, but have
abandoned this theory. Instead, Appellants now rely only on the first theory—that IP
perforated the K-1 sands in 1999.
11 A “[d]ual completion” is “[t]he completion of a well into two separate producing
formations at different depths.” 8 Williams & Meyers, Oil and Gas Law, at 301 (2013).
12 Appellants further allege that IP claimed that the K-2 sands would yield a recovery
of more than 50% than originally expected.
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overproduction suggests that the hydrocarbons in the K-1 sands had become
commingled” with the K-2 sands.
Appellants sued, alleging that Appellees committed “unlawful drainage”
in violation of federal and Louisiana law. Appellees moved to dismiss under
Rule 12(b)(6). The district court dismissed Appellants’ First Amended
Complaint but granted leave to amend. Appellants filed a Second Amended
Complaint that alleged a claim for “waste” in addition to a claim for “unlawful
drainage and trespass.” Appellees moved to dismiss the Second Amended
Complaint, and Appellees’ motion to dismiss remained pending for six months
while discovery proceeded. The district court subsequently dismissed
Appellants’ Second Amended Complaint on the day before the deadlines for
discovery and dispositive motions. 13 Breton and Conn timely appealed.
STANDARD
This Court reviews dismissal under Rule 12(b)(6) de novo, “accepting all
well-pleaded facts as true and viewing those facts in the light most favorable
to the plaintiff.” Toy v. Holder, 714 F.3d 881, 883 (5th Cir. 2013) (internal
quotation marks omitted). “To survive a motion to dismiss, a complaint must
contain sufficient factual matter, accepted as true, to ‘state a claim to relief
that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
DISCUSSION
Appellants’ complaint alleges two counts, one for waste and one for
unlawful drainage and trespass. 14
13 Although the district court entered a final judgment after granting Appellees’
motion to dismiss, Appellees filed a motion for summary judgment the next day.
14 Appellants have abandoned a third count for fraud and negligent
misrepresentation.
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A. Choice of Law
The conduct alleged occurred on the Outer Continental Shelf.
Accordingly, the Outer Continental Shelf Lands Act (“OCSLA”), 43 U.S.C.
§ 1333, controls this dispute. “Under the OCSLA, the law to be applied to the
[Outer Continental Shelf] is exclusively federal, albeit the law of the adjacent
state is adopted as surrogate federal law to the extent that such law is
applicable and not inconsistent with federal law.” Total E & P USA Inc. v. Kerr-
McGee Oil & Gas Corp., 719 F.3d 424, 434 (5th Cir. 2013). Louisiana is the
adjacent state in this case; therefore, it is undisputed that Louisiana law
applies “to the extent” it is “not inconsistent” with federal law. § 1333(a)(2)(A).
The parties do not identify any substantive difference or inconsistency between
federal and Louisiana law as it applies to this case. 15
B. Waste
1. The Rule of Capture and Waste
Louisiana law incentivizes property owners to develop their lands
without concern for collateral effects on neighboring owners. In what is known
as the “Rule of Capture,” Louisiana law provides:
A landowner may use and enjoy his property in the most unlimited
manner for the purpose of discovering and producing minerals,
provided it is not prohibited by law. He may reduce to possession
and ownership all of the minerals occurring naturally in a liquid
or gaseous state that can be obtained by operations on or beneath
his land even though his operations may cause their migration
from beneath the land of another.
15 Applying the federal definition of waste is consistent with this Court’s previous
recognition that “[f]ederal law determines our disposition” of waste claims. La. ex rel. Guste
v. United States, 832 F.2d 935, 943–44 (5th Cir. 1987). The district court applied Louisiana
law, however, likely because the parties do not substantively differentiate between the two
and because the parties do not contend that it makes a practical difference to the case.
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La. Rev. Stat. Ann. § 31:8. Consistent with the Rule of Capture, Louisiana law
prohibits claims for “drainage,” though it carves out a relevant exception:
A landowner has no right against another who causes drainage of
liquid or gaseous minerals from beneath his property if the
drainage results from drilling or mining operations on other lands.
This does not affect his right to relief for negligent or intentional
waste under Articles 9 and 10, or against another who may be
contractually obligated to protect his property from drainage.
La. Rev. Stat. Ann. § 31:14 (emphasis added). 16 In turn, Article 9 establishes
the correlative rights of landowners in a common reservoir, “Landowners and
others with rights in a common reservoir or deposit of minerals have
correlative rights and duties with respect to one another in the development
and production of the common source of minerals,” La. Rev. Stat. Ann. § 31:9,
and Article 10 provides for liability when correlative rights are breached:
A person with rights in a common reservoir or deposit of minerals
may not make works, operate, or otherwise use his rights so as to
deprive another intentionally or negligently of the liberty of
enjoying his rights, or that may intentionally or negligently cause
damage to him. This Article and Article 9 shall not affect the right
of a landowner to extract liquid or gaseous minerals in accordance
with the principle of Article 8.
La. Rev. Stat. Ann. § 31:10.
Restated, Article 10 “provides a remedy to a person with rights in a
reservoir when the value of his rights has been diminished by the negligent or
intentional acts of another.” Mobil Exploration & Producing U.S. Inc. v.
Certain Underwriters Subscribing to Cover Note 95-3317(A), 837 So. 2d 11, 39
(La Ct. App. 2002); Breaux v. Pan Am. Petroleum Corp., 163 So. 2d 406, 413
(La. Ct. App. 1964) (“[A] landowner is not entitled to recover Damages from the
Owner or lessee of adjoining lands on the ground that oil and gas have been
16 Appellants do not allege a contractual obligation between the parties.
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drained from beneath his property by wells located on the adjacent tract,
unless it is established that the oil or gas withdrawn from the common
reservoir has been wasted, that the waste was caused by the negligence of
defendant or by his willful intent to injure plaintiff . . . .”).
Louisiana law further defines “waste” as “‘physical waste’ as that term
is generally understood in the oil and gas industry” and provides that waste
includes:
(a) the inefficient, excessive, or improper use or dissipation of reservoir
energy; and the location, spacing, drilling, equipping, operating, or
producing of an oil or gas well in a manner which results, or tends to
result, in reducing the quantity of oil or gas ultimately recoverable from
a pool; and (b) the inefficient storing of oil; the producing of oil or gas
from a pool in excess of transportation or marketing facilities or of
reasonable market demand; and the locating, spacing, drilling,
equipping, operating, or producing of an oil or gas well in a manner
causing, or tending to cause, unnecessary or excessive surface loss or
destruction of oil or gas. (c) The disposal, storage or injection of any waste
product in the subsurface by means of a disposal well.
La. Rev. Stat. Ann. § 30:3(16). Federal regulations provide a substantively
identical definition of waste. 17 Considering these provisions, no party disputes
that Appellants may properly plead a cause of action for waste in this case. The
only question on this count is whether the allegations in the Second Amended
Complaint sufficiently allege “factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.”
Wilson v. Birnberg, 667 F.3d 591, 595 (5th Cir. 2012).
17 The federal definition provides: “(1) The physical waste of oil, gas, or sulphur; (2)
The inefficient, excessive, or improper use, or the unnecessary dissipation of reservoir energy;
(3) The locating, spacing, drilling, equipping, operating, or producing of any oil, gas, or
sulphur well(s) in a manner that causes or tends to cause a reduction in the quantity of oil,
gas, or sulphur ultimately recoverable under prudent and proper operations or that causes
or tends to cause unnecessary or excessive surface loss or destruction of oil or gas; or (4) The
inefficient storage of oil.” 30 C.F.R. § 250.105.
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2. The Second Amended Complaint States a Claim for Waste
Against IP
Appellants allege that Appellees committed waste by reducing the
quantity of oil and gas recoverable under prudent and proper operations; 18
inefficiently, excessively, or improperly using, or unnecessarily dissipating
reservoir energy; 19 and physically wasting hydrocarbons. 20 We first address
the claims against IP, the defendant alleged to have perforated K-1.
a. Reduction of the quantity of recoverable oil and gas
Appellants’ first theory of waste alleges that Appellees “decreased the
amount of oil ultimately recoverable from the K-1 sands.” The district court
held that Appellants’ allegations did not state a claim for waste because
“[w]aste requires the loss of a considerable amount of hydrocarbons . . . and the
Second Amended Complaint offers only conclusory allegations that the alleged
commingling . . . prevented the maximum recovery of oil and gas.” “[A]ccepting
all well-pleaded facts as true and viewing those facts in the light most favorable
to the plaintiffs,” however, the factual allegations in the complaint (which
incorporate the statements of Apache’s own representative) plausibly state
18 30 C.F.R. § 250.105 (defining waste to include the “producing of any oil, gas, or
sulphur well(s) in a manner that causes or tends to cause a reduction in the quantity of oil,
gas, or sulphur ultimately recoverable under prudent and proper operations”); La. Rev. Stat.
Ann. § 30:3 (16) (defining waste to include the “producing of an oil or gas well in a manner
which results, or tends to result, in reducing the quantity of oil or gas ultimately recoverable
from a pool”).
19 30 C.F.R. § 250.105 (defining waste to include the “inefficient, excessive, or improper
use, or the unnecessary dissipation of reservoir energy”); La. Rev. Stat. Ann. § 30:3 (16)
(defining waste to include “the inefficient, excessive, or improper use or dissipation of
reservoir energy”).
20 30 C.F.R. § 250.105 (defining waste to include “[t]he physical waste of oil, gas, or
sulphur”); La. Rev. Stat. Ann. § 30:3 (16) (defining waste to “mean[] ‘physical waste’ as that
term is generally understood in the oil and gas industry”).
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that IP committed waste. Randall D. Wolcott, M.D., P.A. v. Sebelius, 635 F.3d
757, 763 (5th Cir. 2011).
First, Appellants allege that “IP actually completed in the K-1 sands at
the same time it completed in the K-2 sands.” As support, Appellants allege
that the bottom-hole pressure in K-1 reflects that it has been depleted. Instead
of an expected bottom-hole pressure of 5,900 pounds per square inch (“psi”),
the actual bottom-hole pressure is 1,332 psi. On this point, Appellants’
complaint incorporates statements from Apache’s representative, Paul Gluth.
Although we must accept all factual allegations as true, we need not accept the
portions of Gluth’s statements that are not factual allegations; instead, we
must accept only the factual bases contained in his statements. 21
Appellants allege that Gluth understood that the lower-than-expected
bottom-hole pressure “confirm[ed] ‘substantial drainage’ of the K-1 sands.”
Gluth stated further that he had “not seen or reviewed anything that would
indicate” a natural geological connection between the K-1 sands and another
zone and that the cement bond sealing “would provide adequate isolation
between zones” as to prevent migration. Additionally, Gluth stated that there
would be no other explanation for a substantial depletion of K-1 other than a
21 The incorporation of such a large amount of deposition testimony into the Second
Amended Complaint reflects the unusual posture of this case. As discussed, discovery
proceeded while Appellees’ motion to dismiss the Second Amended Complaint was pending,
and the district court granted the motion the day before the discovery deadline. Indeed,
Appellees moved for summary judgment the day after the district court granted dismissal of
the Second Amended Complaint. Even without Appellees’ motion for summary judgment,
however, the district court had at its disposal Rule 56(f), which provides that after giving
notice and time for the parties to respond, a district court may “consider summary judgment
on its own after identifying for the parties material facts that may not be genuinely in
dispute.” Fed. R. Civ. P. 56(f)(3). Invoking this option may be the most efficient procedure for
district courts when, as here, the parties have conducted significant discovery.
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perforation at the K-1 level. 22 Gluth’s statements therefore include certain
facts that render Appellants’ allegation of IP’s perforation plausible: there was
no geological communication between the zones, there was no defect in the
cement bond sealing, and a perforation between the zones caused the depletion.
Accordingly, we must accept as true the well-pleaded factual allegation that IP
perforated in the K-1 sands.
Second, Appellants allege that there has been “commingling” between K-
1 and K-2. As evidence of “commingling,” Appellants allege that IP will recover
more than 30% than expected from K-2, and that IP has estimated that they
will eventually recover 50% more than expected. “This significant
overproduction,” the complaint alleges, “suggests that the hydrocarbons in the
K-1 sands had become commingled with the hydrocarbons in the K-2 sands.”
Additionally, Appellants allege that the pressure in the K-1 reservoir is
virtually equal to the pressure in the K-2 reservoir, a fact the complaint alleges
“is a telltale signal of communication between the wells.” Gluth also stated: “If
two reservoirs . . . are allowed to communicate, the fluid, whether it’s gas,
water or oil will equalize between them.” We must accept as true Appellants’
22Appellees contend that the complaint mischaracterizes Gluth on this point,
highlighting that “Gluth had testified earlier that he did not know . . . whether there had
been any communication between the K-1 and K-2 sands, and also that his investigation of
the issue went only so far as the well file.” Even assuming that portions of Gluth’s statements
not included in the complaint may be considered at this stage, see Collins v. Morgan Stanley
Dean Witter, 224 F.3d 496, 498–99 (5th Cir. 2000), Gluth’s statements reveal that he
investigated to see if there was any indication of communication between K-1 and K-2. Gluth
stated that he “has not reviewed anything or seen anything to indicate that there is a
communication between K-1 and K-2” after “look[ing] for that . . . [i]n the well file.” This
statement supports Appellants’ allegation that IP perforated K-1. Nonetheless, disputes
about the weight of specific statements are not resolved on a Rule 12(b)(6) motion, as all facts
must be assessed as alleged in the complaint and viewed in the light most favorable to the
plaintiffs. Morris v. Livingston, 739 F.3d 740, 745 (5th Cir. 2014). We therefore must accept
Appellants’ allegations as true, without prejudicing future rulings by the district court.
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well-pleaded factual allegation that there has been commingling between K-1
and K-2.
Third, Appellants allege that “[c]ommingling causes waste” and that the
commingling in this case “prevents the maximum recovery of oil and gas from
each reservoir, constituting waste.” As proof that commingling causes waste
by reducing the maximum recovery of oil and gas, Appellants again rely on
Gluth’s statements. Gluth stated that “[w]hen two zones are commingled that
are not related or not in communication naturally . . . the question arises as to
whether or not you can achieve a full recovery that you—the same recovery
that you may have achieved by producing them separately” and that “you may
no longer be able to produce the same amount of hydrocarbon that you would
if you produced them separately without being affected by one another”
(emphasis added). We must accept as true Appellants’ factual allegation that
commingling causes waste.
Moreover, the MMS permit provided to IP suggests that the danger of
commingling was present as applied to the K-1 and K-2 sands. Cf. Romero v.
Mobil Exploration & Producing N. Am., Inc., 939 F.2d 307, 311 (5th Cir. 1991)
(“While there is no implied cause of action from the mere breach of MMS
regulations, Louisiana law does recognize that applicable federal regulations
may be relevant evidence in weighing a defendant’s culpability.”). As alleged
in the complaint, Conn objected to IP’s plan to drill. MMS granted IP’s permit
over Conn’s objection and required IP to complete the reservoirs on two
separate occasions. MMS explained in a letter to IP that “[t]he reservoirs are
to be produced as two separate completions” and that “Conn’s correlative rights
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have not been violated.” 23 When speaking about the MMS’s dual-completion
requirement for K-1 and K-2, Gluth explained that it “is a matter of
conservation.” Accordingly, the MMS authorization, which purported to protect
Conn’s correlative rights, expressly prohibited a dual completion precisely
because a dual completion threatens the maximum recovery of oil and gas. To
be sure, IP’s MMS violation does not, as Appellees recognize, by itself
constitute waste; instead, it serves as evidence that it has reduced the total
loss of recoverable oil and gas. Romero, 939 F.2d at 311. We accept as true the
allegations that IP violated the dual-completion requirement expressly aimed
at preventing waste.
The allegations in the Second Amended Complaint also plausibly
support the inference that IP acted intentionally or negligently. See La. Rev.
Stat. Ann. § 31:10 (“A person with rights in a common reservoir or deposit of
minerals may not make works, operate, or otherwise use his rights so as to
deprive another intentionally or negligently of the liberty of enjoying his rights,
or that may intentionally or negligently cause damage to him.”). The Second
Amended Complaint alleges that in 1999 IP submitted plans to drill in both
the K-1 and K-2 sands and that “Conn submitted a letter to the MMS objecting
to the proposed location of Well No. 19.” The MMS order overruled Conn’s
objection and purported to protect Conn’s correlative rights by requiring two
separate completions. This dual-completion requirement was a matter of
“conservation.” Accordingly, IP’s alleged breach of this requirement plausibly
supports the inference that IP at least acted negligently—both Conn’s objection
23 While not attached to the complaint, this letter is referenced in the complaint and
central to Appellants’ claims. See Collins, 224 F.3d at 498–99; Walch v. Adjutant General’s
Dep’t of Tex., 533 F.3d 289, 294 (5th Cir. 2008) (considering exhibits attached to an opposition
because “[n]o party questions the authenticity of these two documents and both were
sufficiently referenced in the complaint to permit their consideration on a motion to dismiss”).
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and the MMS order alerted IP to the potential damage that it could cause Conn
by perforating K-1. Appellants have therefore plausibly stated a claim that IP
committed waste.
Our opinion in Guste provides an illustrative contrast. In Guste, the
plaintiff brought a waste claim and “contend[ed] that Samedan’s well spacing
and production practices tend to cause reduction in the quantity of gas
ultimately recoverable.” 832 F.2d at 944. We affirmed summary judgment in
favor of defendants because:
The closest Louisiana got to this issue was expert testimony given
during the hearing on the state’s motion for a preliminary
injunction that coordinated exploration might enhance the amount
of hydrocarbons ultimately recovered. Against that suggestion was
detailed proof by Samedan of prudent operations in accord with
federal regulations and under substantial oversight by the MMS.
Id. (emphasis added). Not only did the Court in Guste review a summary-
judgment record, it specifically noted as material that the defendant was
operating “in accord with federal regulations.” Id. Here, by contrast, we accept
all of Appellants’ factual allegations as true and note that Appellants have
alleged that IP violated an MMS order that was specifically aimed at
conservation. 24 Appellants’ detailed allegations therefore surpass Twombly’s
plausibility hurdle.
Appellees respond by making a number of interrelated arguments. First,
they fault Appellants because “[t]hey do not allege any act by any Defendant
Mobil Exploration, illustrates the type of case allowed to proceed to the merits. In
24
Mobil Exploration, the Louisiana Court of Appeals upheld a trial verdict because “the trial
court had a reasonable evidentiary basis for finding that a considerable amount of
hydrocarbons, that would otherwise have been available for commercial production, were lost
as a result of the underground blowout caused by the negligence of Cliffs and Cliffs’
subsequent faulty efforts to control the blowout.” 837 So. 2d at 39. That “[d]efendants
maintain[ed] such testimony was purely speculative and/or based on defective data,” did not
matter.
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that resulted in the actual physical reduction of the amount of oil or gas
ultimately recoverable from the K-1 sands.” But the Second Amended
Complaint expressly does allege, among other things, that “[w]hen Defendants
completed in both the K-1 and K-2 sands and commingled the reservoirs, they
reduced the recovery of oil and gas.” The Second Amended Complaint further
alleges that “by failing to follow the orders and regulations of the MMS . . .
Defendants improperly used the K-1 reservoir energy and decreased the
amount of oil ultimately recoverable from the K-1 sands, constituting waste.”
IP may ultimately show that there was no waste in this case, but the merits of
Appellants’ claims are not at issue on a motion to dismiss. See Wilson, 667 F.3d
at 600 (“At this stage, [defendants’] rebuttals must be ignored and [plaintiffs’]
assertions taken as true.”).
Second, Appellees argue that the allegations that the K-2 sands are
overproducing are self-defeating because “[p]laintiffs do not allege that the
amount of oil and gas recoverable was reduced; instead, they allege that a
greater than expected amount of oil and gas was recovered” (emphasis in
original). As discussed above, Appellants do allege that “[Appellees] reduced
the recovery of oil and gas.” Moreover, the fact that K-2 is overproducing is
evidence that the K-1 and K-2 sands have been commingled. A claim for waste
concerns the total recoverable amount of oil and gas, and, as Gluth explained,
“[w]hen two zones are commingled that are not related or not in
communication naturally . . . the question arises as to whether or not you can
achieve a full recovery that you—the same recovery that you may have
achieved by producing them separately.” Accordingly, the overproduction of K-
2 supports a commingling theory and is also indicative of a total loss of
recoverable hydrocarbons because once commingled, “you may no longer be
able to produce the same amount of hydrocarbon that you would if you
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produced them separately without being affected by one another.” That K-2 is
producing beyond expectations does not defeat an allegation that the total
recoverable oil and gas in the wells has been reduced.
Third, Appellees argue that “commingling on its own is not waste.” This
is correct, but at this stage the question is whether Appellants have plausibly
alleged that commingling occurred in this case and that the commingling
resulted in the loss of recoverable hydrocarbons. To the extent Appellees’
argument is that commingling could never be waste, it is an argument without
authority and expressly contradicted by Gluth’s statements.
Accordingly, Appellants have adequately alleged that IP “produc[ed] . . .
an oil or gas well in a manner which results, or tends to result, in reducing the
quantity of oil or gas ultimately recoverable from a pool.” La Rev. Stat. Ann.
§ 30:3(16)(a).
b. Inefficiently, excessively, or improperly using, or
unnecessarily dissipating reservoir energy
Appellants, relying on the reduction in reservoir pressure in K-1, argue
that by commingling the reservoirs in violation of the MMS regulations, IP
improperly used and unnecessarily dissipated reservoir energy. Reservoir
energy is “[t]he forces in a reservoir which propel the oil or gas to the well bore.”
8 Williams & Meyers, Oil and Gas Law, at 896 (2013). One treatise explains
that “[w]aste of reservoir energy” is “[t]he failure reasonably to maintain such
energy by artificial means and also the dissipation of gas energy . . . at any
time at a rate or in a manner which would constitute improvident use of the
energy available or result in loss thereof without reasonably adequate recovery
of oil.” Id. at 1135. 25
See also Note, Conservation of Natural Gas and the Federal-State Conflict, 64
25
Colum. L. Rev. 888, 898 (1964) (“[M]ost conservation statutes include in the definition of
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The parties do not distinguish between the “improper use” and
“unnecessary dissipation” of reservoir energy, but Appellants focus on IP’s
alleged MMS violation to sustain their theory that IP “improperly” used
reservoir energy. 26 Appellants allege that “the reservoir pressure that should
have been present had been substantially reduced—reflecting a substantial
depletion of the reservoir” and that the discrepancy in bottom-hole pressure
“confirms ‘substantial drainage’ of the K-1 sands.” Appellants further allege
“[h]ad Defendants produced in the K-1 and K-2 sands separately as the MMS
required, they would have ensured the efficient, reasonable and proper use of
reservoir energy in the K-1 sands.” This theory is plausibly alleged for many of
the same reasons as the “total recovery” theory. Specifically, the MMS
regulations contemplated two separate completions and Appellants have
alleged a drop in expected bottom-hole pressure in the K-1 sands. Accordingly,
it is plausible that by perforating the K-1 sands, IP improperly used and
waste the inefficient, improper, or excessive dissipation of reservoir energy. Reservoir energy
includes, in addition to gas pressure, water motivated by hydrostatic pressure, gravitational
force, and expansion of reservoir oil upon the release of pressure.”); Owen L. Anderson,
Exploratory Unitization Under the 2004 Model Oil and Gas Conservation Act: Leveling the
Playing Field, 24 J. Land Resources & Envt’l L. 277, 278 (2004) (“The resulting ‘flush’
production that resulted from the drilling of too many wells inefficiently dissipated the
natural reservoir energy that pushed the oil and gas through the reservoir and into well
bores, thereby causing underground waste. Because of this rapid dissipation of internal
reservoir pressure, hydrocarbons that would otherwise have been produced became
unrecoverable.”); Brad Secrist, Not All “Units” are Created Equal, 65 Okla. L. Rev. 157, 159
(2012) (“Over-drilling can also damage the natural reservoir energy necessary to extract the
oil and gas and result in irreparable damage to the recoverability of valuable hydrocarbons.
Once the natural reservoir energy has dissipated, extraction of the oil or gas often becomes
economically unfeasible.”).
26 See 1 Summers Oil and Gas § 4:10 (3d ed. 2013) (“In the states defining the waste
of oil and gas as including the waste of reservoir energy, the conservation agencies have the
authority to make rules and regulations governing the use of reservoir energy, including the
authority to require gas-oil ratios and to fix those ratios. . . . These statutes were directed
principally to preventing the waste of gas in the production of oil and authorized conservation
agencies to fix gas-oil production ratios. Some of these statutes defined waste as including
the waste of gas energy and water drive.”).
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dissipated the reservoir energy which has the consequence of reducing the total
amount of recoverable oil and gas.
c. Physical waste
Louisiana law explains that “[w]aste” means “‘physical waste’” as that
term is generally understood in the oil and gas industry” 27 and “[i]ncludes,”
among other things, the “inefficient, excessive, or improper use or dissipation
of reservoir energy; . . . or producing of an oil or gas well in a manner which
results, or tends to result, in reducing the quantity of oil or gas ultimately
recoverable from a pool.” La. Rev. Stat. Ann. § 30:3(16); see also 8 Williams &
Meyers, Oil and Gas Law, at 1133 (2013) (“Physical waste is the loss of oil or
gas that could have been recovered and put to use. Such waste can occur on
the surface or underground . . . Examples of the latter are inefficient use of
reservoir energy . . . .”). Appellants’ physical waste claim is similar to its claim
that IP has reduced the total amount of recoverable hydrocarbons:
“commingling . . . has reduced the amount of hydrocarbons that can be
recovered—leaving a greater quantity of hydrocarbons in the reservoir, which
cannot be extracted now.” As discussed, because the complaint alleges facts
that satisfy the statute’s illustrative examples of physical waste, Appellants’
waste claim may proceed against IP on this ground as well.
3. Claims Against the Non-perforating Defendants
Although the Second Amended Complaint states a waste claim against
IP, the company that allegedly perforated K-1, it insufficiently alleges that the
non-perforating defendants committed waste. Appellants allege that the non-
27 Physical waste “is commonly understood in the oil and gas industry as referring to
operational losses in oil and gas production resulting from either: surface loss or destruction
of oil and gas; or, underground loss or destruction of oil and gas.” Union Pac. Res. Co. v.
Texaco, Inc., 882 P.2d 212, 224 (Wyo. 1994).
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perforating defendants committed waste by failing to submit reports to the
MMS reflecting IP’s perforation of K-1. “Had Defendants submitted such
information to the MMS,” Appellants allege, “it would have prevented
commingling of hydrocarbons from the K-1 and K-2 sands or taken other steps
to protect the correlative rights of adjacent lessees.” These allegations are
defective because they simply conclude that the non-perforating defendants
knew about IP’s perforation of K-1 (alleging for example: “Despite having
actual or constructive knowledge of the completion and production activities in
the K-1 sands . . . .”), and that MMS would have intervened in a way to prevent
the loss of the amount of oil and gas ultimately recoverable or otherwise
prevented waste.
The Second Amended Complaint’s cross-references to Gluth’s statements
reveal its defects. Gluth stated that MMS requires these reports simply
because “they are charged with the overseeing of the natural resource,
particularly from a conservational point of view and also from a revenue-
generating point of view from the government.” This statement says nothing
about the manner in which MMS may respond to violations or its ability to
prevent commingling once it has begun. Moreover, the allegations themselves
equivocate, alleging that MMS “would have prevented commingling of
hydrocarbons from the K-1 and K-2 sands or taken other steps to protect the
correlative rights of adjacent lessees” (emphasis added). No allegation explains
what these “other steps” might be or how they relate to Appellees’ liability for
waste. Nor do Appellants provide any authority supporting their arguments
that failing to report would satisfy any of the other definitions of waste.
Accordingly, the district court properly dismissed the waste claims against the
non-perforating defendants. See, e.g., Blank v. Eavenson, 530 F. App’x 364, 370
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(5th Cir. 2013) (“Speculation, however, is not the applicable pleading
standard.”).
C. Unlawful Drainage
The Second Amended Complaint alleges a claim for “unlawful drainage,”
which Appellants allege is actionable under La. Rev. Stat. Ann. §§ 31:9 28 and
10. 29
1. Article 14 Precludes Drainage Claims
The first obstacle to Appellants’ second cause of action is that Louisiana
law plainly precludes drainage claims:
[a] landowner has no right against another who causes drainage of
liquid or gaseous minerals from beneath his property if the
drainage results from drilling or mining operations on other lands.
This does not affect his right to relief for negligent or intentional
waste under Articles 9 and 10, or against another who may be
contractually obligated to protect his property from drainage.
La. Rev. Stat. Ann. § 31:14 (emphasis added).
In an attempt to avoid Article 14’s plain prohibition on claims for
drainage (and sole listed exception for waste), Appellants argue that “every
violation of correlative rights constitutes ‘waste’ within the meaning of Article
14.” Appellants’ theory, however, blurs the recognized distinction between
viable waste claims and nonviable drainage claims. In Guste, for example, we
explained: “Correlative rights ‘means the right of each lessee to be afforded an
equal opportunity to explore for, develop, and produce, without waste, oil or
28“Landowners and others with rights in a common reservoir or deposit of minerals
have correlative rights and duties with respect to one another in the development and
production of the common source of minerals.”
29 “A person with rights in a common reservoir or deposit of minerals may not make
works, operate, or otherwise use his rights so as to deprive another intentionally or
negligently of the liberty of enjoying his rights, or that may intentionally or negligently cause
damage to him. This Article and Article 9 shall not affect the right of a landowner to extract
liquid or gaseous minerals in accordance with the principle of Article 8.”
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gas, or both, from a common source.’ The definition of correlative rights
excludes claims for drainage losses and is consistent with the rule of capture.”
832 F.2d at 943 (emphasis added). Therefore, we concluded, “Louisiana’s third
cause of action is limited to an assertion that [the defendant] is committing
waste.” Id.
Additionally, if all claims for drainage are indeed claims for waste, then
Article 14’s proclamation that “[a] landowner has no right against another who
causes drainage” would be a nullity; the exception for “negligent or intentional
waste under Articles 9 and 10” would swallow the rule against drainage
actions. See Williams v. Humble Oil & Refining Co., 432 F.2d 165, 171–172
(5th Cir. 1970) (“The general rule in Louisiana is that the landowner has no
cause of action for damages against the owner of the adjoining property or his
lessee for drainage of oil and gas from beneath his land.”); Breaux, 163 So. 2d
at 413 (“[A] landowner is not entitled to recover Damages from the Owner or
lessee of adjoining lands on the ground that oil and gas have been drained from
beneath his property by wells located on the adjacent tract, unless it is
established that the oil or gas withdrawn from the common reservoir has been
wasted, that the waste was caused by the negligence of defendant or by his
willful intent to injure plaintiff . . . .” (emphasis added)). 30
30 See also Knighton v. Texaco Producing, Inc., 762 F. Supp. 686, 689–90 (W.D. La.
1991) (“If Louisiana had adopted the rule in an unmodified form, an owner could have drilled
as many wells on his land as he cared to drill. To avoid actual or perceived drainage, however,
his neighbor could have drilled as many retaliatory wells as he deemed necessary. . . . Society
would not tolerate the unbridled lust for oil and gas to dissipate a natural resource. The
property owner’s unlimited right to explore had to be curtailed in the name of conservation.
Thus, exercising its police power to prevent waste, the Louisiana Legislature passed
conservation measures that were, and are, administered by the Department of Conservation,
headed by a Commissioner of Conservation.” (emphasis added)).
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Appellants’ attempts to reframe their claim for drainage as a general
claim for “violations of correlative rights” under Article 9 and 10 are similarly
unavailing. Their complaint states it is seeking to remedy “unlawful drainage.”
For example, Appellants allege that “[b]ecause Defendants unlawfully drained
minerals from the K-1 sands (acting wastefully and in violation of their own
lease), they are liable to Plaintiffs for unlawful drainage.” Article 14 precludes
claims for drainage, subject to the exceptions discussed below, without
prejudicing distinct claims for waste. See Guste, 832 F.2d at 943 (“The
definition of correlative rights excludes claims for drainage losses and is
consistent with the rule of capture. Therefore, Louisiana’s third cause of action
is limited to an assertion that [Defendant] is committing waste . . . .” (emphasis
added)).
2. The Trespass Exception to the Rule of Capture
It is undisputed that there is an exception to Article 14’s prohibition
against drainage actions when the defendant has committed trespass onto the
aggrieved landowner’s property. This exception is embedded in Article 14’s
text: “[a] landowner has no right against another who causes drainage of liquid
or gaseous minerals from beneath his property if the drainage results from
drilling or mining operations on other lands.” La. Rev. Stat. Ann. 31:14
(emphasis added). If the drainage results from trespass that takes place on the
aggrieved landowner’s property, then Article 14 is inapplicable. Appellants
argue that they have alleged trespass in this case, and, in the alternative, that
Article 14’s Rule of Capture does not apply when a landowner procures
minerals in violation of MMS regulations.
a. Regulatory violations are not trespasses.
Appellants allege that “[d]rainage of minerals in violation of the lease
and applicable law is tantamount to a trespass, and for this reason, is not
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protected by the rule of capture” (emphasis added). Significantly, Appellants
do not allege that Appellees physically trespassed onto their land. Instead,
their claim is that Appellees violated the terms of their own lease “and for that
reason, [they] trespassed on federal property when they took minerals without
permission” (emphasis added).
As an initial matter, Appellants are alleging trespass on behalf of a third
party (in this case the federal government). The trespass exception in Article
14 conditions the Rule of Capture’s applicability to instances when the
“drainage results from drilling or mining operations on other lands.” La. Rev.
Stat. Ann. 31:14. Even if Appellants are correct that Appellees “trespassed”
onto the government’s lands, this would still be “other lands” under the text of
Article 14. Moreover, trespass in these circumstances commonly takes the form
of subsurface trespass. See, e.g., Nunez v. Wainoco Oil & Gas Co., 488 So. 2d
955, 959 (La. 1986) (noting that “subsurface trespass . . . involves bottoming of
a well on the land of another without his consent, and/or invading or intruding
upon the subsurface of another’s land”). Appellants rely on Gliptis v. Fifteen
Oil Co., 16 So. 2d 471, 474 (La. 1943), for the proposition that a regulatory
violation equates to an unlawful trespass. But in Gliptis, “defendant’s well was
drilled at an angle from a vertical or upright line, causing it to pass into and
through, and have its bottom in, property from which plaintiff alone had the
right to extract gas and oil.” Id. at 473. The Court recognized that the Rule of
Capture “necessarily excludes the right of any person to invade the subsurface
of his neighbor’s land and to extract therefrom fugacious minerals, such as oil
and gas. Such invasion would be a trespass.” Id. at 474. Appellants do not
allege that Appellees physically invaded their land; accordingly, Appellants
have not alleged an exception to the Rule of Capture and their drainage claim
is barred.
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b. Regulatory violations do not constitute an exception
to Article 14.
Alternatively, Appellants argue that trespass is not the only exception
to Article 14’s prohibition against drainage claims. They contend that “[t]he
rule of capture does not protect unlawful conduct”; specifically, they argue that
“a party who takes minerals in violation of applicable regulations has engaged
in conduct ‘prohibited by law,’ and cannot hide behind the rule of capture.”
Appellants’ argument contravenes the text of Article 14, which does not
condition its prohibition of drainage actions on regulatory compliance.
Appellants argue that the general codification of the Rule of Capture in Article
8 contains a requirement that the landowner comply with regulations. Article
8 provides that “[a] landowner may use and enjoy his property in the most
unlimited manner for the purpose of discovering and producing minerals,
provided it is not prohibited by law.” La. Rev. Stat. Ann. § 31:8 (emphasis
added). Appellants do not convincingly explain why Article 8’s general
statement of the Rule of Capture should control over Article 14’s specific
prohibition of drainage actions.
Appellants rely on Elliff v. Texon Drilling Co., 210 S.W.2d 558 (Tex.
1948), a Texas case cited in the comments to Article 10. See La. Rev. Stat. Ann.
§ 31:10. Importantly, Appellants’ description of Elliff recognizes that, “[i]n
Elliff, the plaintiffs sued for negligent waste and dissipation of minerals
following the blowout of a well being drilled by defendants on adjacent
property” (emphasis added); see Elliff, 210 S.W.2d at 560 (“[O]ur attention will
be confined to the sole question as to whether the law of capture absolves
respondents of any liability for the negligent waste or destruction of petitioners’
gas and distillate, though substantially all of such waste or destruction
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occurred after the minerals had been drained from beneath petitioners’ lands.”
(emphasis added)).
Appellants extract their proposed rule—that drainage claims can
proceed if the landowner is in violation of regulations—from the following
passage in Elliff:
The landowner is privileged to sink as many wells as he desires
upon his tract of land and extract therefrom and appropriate all
the oil and gas that he may produce, so long as he operates within
the spirit and purpose of conservation statutes and orders of the
Railroad Commission. These laws and regulations are designed to
afford each owner a reasonable opportunity to produce his
proportionate part of the oil and gas from the entire pool and to
prevent operating practices injurious to the common reservoir. . . .
But from the very nature of this theory the right of each land
holder is qualified [sic], and is limited to legitimate operations. . . .
Elliff, 210 S.W.2d at 562 (emphasis added). But Elliff recognizes that a
landowner’s regulatory noncompliance is relevant to waste claims: “In like
manner, the negligent waste and destruction of petitioners’ gas and distillate
was neither a legitimate drainage of the minerals from beneath their lands nor
a lawful or reasonable appropriation of them.” Id. 563 (emphasis added); id.
(“Thus under the common law, and independent of the conservation statutes,
the respondents were legally bound to use due care to avoid the negligent waste
or destruction of the minerals imbedded in petitioners’ oil and gas-bearing
strata.” (emphasis added)). The Court concluded, “[w]e are therefore of the
opinion [that] the Court of Civil Appeals erred in holding that under the law of
capture the petitioners cannot recover for the damages resulting from the
wrongful drainage of the gas and distillate from beneath their lands,” id., but
the opinion maintains the distinction between negligent waste (as evidenced
by unlawful drilling) and drainage, which does not deprive landowners “the
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opportunity to produce his fair share of the recoverable oil and gas beneath his
land.” Id. at 562. 31
Article 14, by its plain terms prohibits the drainage claims Appellants
press in this case: “[a] landowner has no right against another who causes
drainage of liquid or gaseous minerals from beneath his property.” La. Rev.
Stat. Ann. § 31:14 (emphasis added). Appellants’ drainage claim therefore fails.
CONCLUSION
For the above stated reasons, we AFFIRM the district court as to the
claims for waste against all defendants but IP and AFFIRM the district court
as to the claims for drainage against all defendants. We VACATE and
REMAND, however, as to Appellants’ waste claim against IP.
31Appellants also rely on 1 Williams & Meyers, Oil and Gas Law § 204.7 (2013), in
support of their theory of drainage. The treatise explains, “The Louisiana Mineral Code and
case law have clarified that Louisiana’s adoption of a nonownership theory does not preclude
recovery of damages by an adjacent owner for the value of recoverable hydrocarbons
negligently lost. It thus appears that in all of these states a cause of action for damages may
arise in favor of one landowner as the result of the negligent conduct of a neighboring
landowner resulting in the waste of otherwise recoverable hydrocarbons.” Id. at 70–71
(emphasis added). This last clarifying sentence is salient.
25