Total E & P USA, Inc. v. Kerr-McGee Oil & Gas Corp.

Case: 11-30038 Document: 00512171964 Page: 1 Date Filed: 03/12/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
March 12, 2013
No. 11-30038 Lyle W. Cayce
Clerk
TOTAL E&P USA, INC.,
Plaintiff - Appellee
STATOIL GULF OF MEXICO, L.L.C.,
Intervenor Plaintiff - Appellee
v.
KERR-MCGEE OIL AND GAS CORP; LYNN BELCHER; C. DAN BUMP;
CATHY ZEORNES GUY; GARY A. HUMMEL; ALLEN D. KEEL; KEVIN A.
SMALL; WAYNE G. ZEORNES,
Defendants - Appellants
LYNN S. BELCHER; C. DAN BUMP; CATHY ZEORNES GUY; GARY A.
HUMMEL; ALLAN D. KEEL; KEVIN A. SMALL; WAYNE G. ZEORNES,
Plaintiffs - Appellants
v.
STATOIL GULF OF MEXICO, L.L.C.,
Defendant - Appellee
Appeals from the United States District Court
for the Eastern District of Louisiana
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Before GARZA, DENNIS, and HIGGINSON, Circuit Judges.
DENNIS, Circuit Judge:
This case involves a contractual interpretation dispute over whether
overriding royalties are payable out of the initial oil and gas production from a
tract of land on the outer continental shelf adjacent to Louisiana. In 1998,
pursuant to the Outer Continental Shelf Lands Act (“OCSLA”),1 the United
States issued a mineral lease of the tract to oil companies for mineral
exploration. In 1999 and 2001, overriding royalty interests (“ORRI”) were
carved out of the lessees’ working interest in all production and assigned to
seven individuals referred to herein as the “Belcher Group” (ORRIs totalling
0.2625% assigned in 1999) and to Kerr-McGee Oil and Gas Corporation (“Kerr-
McGee”) (ORRI of 3.7373% assigned in 2001).
When production under the lease was obtained in 2009, three oil
companies owned the lessees’ working interests: Chevron USA, Inc. (“Chevron”)
(58% share), Total E&P USA, Inc. (“Total”) (17% share), and Statoil Gulf of
Mexico, L.L.C. (“Statoil”) (25% share). Chevron immediately began paying
overriding royalties out of its share of the production to the Belcher Group and
Kerr-McGee. Total and Statoil, however, took the position that they were not
obliged to immediately begin paying overriding royalties out of their shares of
production. They claimed that no overriding royalties were due because the
ORRI assignment contracts contained “calculate and pay” clauses stating that:
“The overriding royalty interest assigned herein shall be calculated and paid in
the same manner and subject to the same terms and conditions as the
landowner’s royalty under the Lease.”2 Total and Statoil asserted that the
“calculate and pay” clauses were intended to suspend their obligation to pay
1
43 U.S.C. § 1331 et seq.
2
Although the two “calculate and pay” clauses vary slightly in wording, it is undisputed
that they are identical in substance.
2
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overriding royalties out of production whenever payments of the United States’
12½% landowner royalty under the lease were to be suspended pursuant to the
Outer Continental Shelf Deep Water Royalty Relief Act (“DWRRA”).3
It is undisputed that, upon the commencement of production under the
lease in 2009, the payment of the government’s 12½% landowner royalties was
determined to be suspended until 87.5 million barrels of oil equivalent had been
produced, pursuant to the DWRRA. Therefore, Total and Statoil argue, no
overriding royalties are due so long as the payment of the U.S. landowner
royalties are suspended. The Belcher Group and Kerr-McGee disagreed,
contending that the “calculate and pay” clauses were not intended to suspend
overriding royalties under any circumstances but were meant to ensure that
overriding royalties would be calculated using the same methods as required by
the lease for measuring and computing the government’s 12½% landowner
royalties. In other words, they argued that the “calculate and pay” clauses were
intended to specify the manner of calculation and payment of overriding
royalties, not to make the accrual of overriding royalties dependent upon the
payment of landowner royalties to the United States. This litigation ensued.
Because Chevron agreed with the ORRI owners’ interpretation of the “calculate
and pay” clauses and continued to pay overriding royalties to them, Chevron has
not been sued or made a party to this case.4
The district court granted a motion for summary judgment by Total and
Statoil, declaring that the “calculate and pay” clauses in the 1999 and 2001
ORRI assignments clearly and explicitly require that the payment of overriding
3
Pub. L. No. 104-58 (1995) (codified at 43 U.S.C. § 1337(a), and with further uncodified
sections present in notes to 43 U.S.C. § 1337).
4
The district court correctly determined that it had jurisdiction over this action
pursuant to OCSLA’s broad jurisdictional grant, 43 U.S.C. § 1349(b)(1). See, e.g., Tidelands
Royalty “B” Corp. v. Gulf Oil Corp., 804 F.2d 1344, 1347 n.1 (5th Cir. 1986).
3
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royalties shall be suspended during the suspension of the U.S. 12½%
landowner’s royalty under the DWRRA. The district court expressly refused to
engage in further interpretation of the assignment contracts in search of the
parties’ intent or to consider any evidence on that issue.
The Belcher Group and Kerr-McGee appealed. The issue on appeal comes
down to whether the language in the “calculate and pay” clauses providing that
the overriding royalties “shall be calculated and paid in the same manner and
subject to the same terms and conditions as the landowner’s royalty under the
lease” clearly, explicitly, and unambiguously was intended to suspend the
payment of overriding royalties if, upon production, the DWRRA were to result
in a threshold suspension of the payment of landowner royalties to the United
States.
We conclude, under the applicable Louisiana law, that the “calculate and
pay” clauses in the ORRI assignment contracts do not clearly and explicitly
express the intent that overriding royalty payments shall be suspended
whenever the U.S. landowner royalties are suspended under the DWRRA; and
that the “calculate and pay” clauses must be interpreted further in search of the
common intent of the parties to the assignment contracts. Assuming without
deciding that the “calculate and pay” clauses may reasonably be interpreted as
Total and Statoil contend, the clauses are at least ambiguous because a
reasonable inference also may be drawn that the “calculate and pay” clauses
merely refer to the lease terms and conditions for the method of calculating
overriding royalties and that they do not intend for the lessees’ obligation to pay
overriding royalties out of production to be suspended altogether under any
circumstances. Because of this ambiguity and permissible inference, there is a
genuine dispute as to a material issue of fact, viz., the assignment contract
parties’ intentions regarding the “calculate and pay” clauses. Therefore,
because, in reviewing the summary judgment de novo, we must resolve all
4
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ambiguities, permissible inferences, and material issues of fact in favor of the
non-moving parties, the Belcher Group and Kerr-McGee, we conclude that
Total and Statoil are not entitled to a judgment as a matter of law. For these
reasons, we reverse the district court’s summary judgment and remand the case
to it for further proceedings.
BACKGROUND
A. Relevant Federal Statutes, Regulations, and Interpretations
To understand the legal context within which the ORRI assignment
contracts must be interpreted, it is helpful to have a general understanding of
the governing federal statutes and regulations, as they have been interpreted by
this court.5
“[OCSLA] authorizes the Secretary of the [Interior] to grant and manage
leases for recovery of oil, gas, and other minerals from submerged lands located
on the Outer Continental Shelf.” Mesa Operating Ltd. P’ship v. U.S. Dep’t of
Interior, 931 F.2d 318, 319 (5th Cir. 1991). “OCSLA thus vests the federal
government with a proprietary interest in the [outer continental shelf] and
establishes a regulatory scheme governing leasing and operations there.” EP
Operating Ltd. P’ship v. Placid Oil Co., 26 F.3d 563, 566 (5th Cir. 1994).
“OCSLA provides that the [Department of the Interior (‘DOI’)] obtains royalties
from lessees based on the ‘amount or value of the production saved, removed, or
sold.’” Mesa Operating Ltd., 931 F.2d at 319-20 (quoting 43 U.S.C. § 1337(a)(1)).
“OCSLA also vests in the Secretary the sole authority and responsibility
to ‘prescribe such rules and regulations as may be necessary to carry out such
5
Section 1 of the lease provides: “This lease is issued pursuant to the Outer Continental
Shelf Lands Act of August 7, 1953, 67 Stat. 462; 43 U.S.C. § 1331 et seq., as amended (92 Stat.
629), (hereinafter called the ‘Act’). The lease is issued subject to the Act; all regulations issued
pursuant to the Act and in existence upon the Effective Date of the this lease; all regulations
issued pursuant to the statute in the future which provide for the prevention of waste and
conservation of all natural resources of the Outer Continental Shelf and the protection of
correlative rights therein; and all other applicable statutes and regulations.”
5
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[leasing] provisions [of OCSLA].’” Id. at 319 (alterations in original) (quoting 43
U.S.C. § 1334(a)). Pursuant to this authority, the DOI has several times issued
regulations governing how royalties on production from OCSLA leases are to be
computed and how lessees are to record and report production information
relevant to those calculations. The regulations in effect when the lease here was
issued in June 1998 were promulgated by the DOI agency then known as the
Mineral and Mining Service (“MMS”). Those regulations provided, inter alia,
that “[a]ll oil (except oil unavoidably lost or used on, or for the benefit of, the
lease, including that oil used off-lease for the benefit of the lease when such off-
lease use is permitted by the [agency], as appropriate) produced from a Federal
. . . lease . . . is subject to royalty,” 30 C.F.R. § 202.100(b)(1) (1997); and that
“[w]hen paid in value, the royalty due shall be the value, for royalty purposes,
[under the regulations] multiplied by the royalty rate in the lease,” id.
§ 202.100(a)(1).6 These provisions apply to the United States’ landowner’s
royalty owed by OCSLA mineral lessees and not to overriding royalties owed by
lessees to third party ORRI owners.
The DWRRA, enacted in 1995 to stimulate deepwater mineral
exploration,7 authorized the DOI to suspend the collection of oil and gas royalties
6
The regulations also set “[t]he value of oil production from [OCSLA] leases” by
reference to “[t]he lessee’s contemporaneous posted prices or oil sales contract prices used in
arms-length transactions for purchases or sales of significant quantities of like-quality oil in
the same field,” or pursuant to one of several alternative formulas. 30 C.F.R. § 206.102(c)
(1997). “Value [was] based on the highest price a prudent lessee can receive through legally
enforceable claims under its contract.” Id. § 206.102(j). “[U]nder no circumstances [was] the
value of production, for royalty purposes, [to] be less than the gross proceeds accruing to the
lessee for lease production, less applicable allowances.” Id. § 206.102(h). Lessees were
required to “make available, upon request to the authorized [government officials], arm’s-
length sales and volume data for like-quality production sold, purchased, or otherwise
obtained by the lessee from the field or area or from nearby fields or areas.” Id. § 206.102(d).
7
See, e.g., 43 U.S.C. § 1337(a)(3)(B) (providing that the DOI may suspend government
royalties “in order to . . . promote development or increased production on producing or non-
producing leases[] or . . . encourage production of marginal resources” on such leases); 63 Fed.
Reg. 2605-1 (Jan. 16, 1998) (“[The DWRRA’s] purpose is to promote development or increased
6
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by the United States as landowner from certain new and preexisting federal,
deepwater leases until specified threshold volumes of production had been
attained, at which time landowner royalty payments would recommence. See
Santa Fe Snyder Corp. v. Norton, 385 F.3d 884, 888-89 (5th Cir. 2004).
Additionally, for new deepwater leases issued between 1996 and 2000 for specific
areas and depths in the Gulf of Mexico, DWRRA § 304 provided qualified lessees
with relief from royalty payments to the United States until a specific volume
of oil or gas had been produced. Id. at 889. However, in issuing federal leases
during this period, MMS by regulation prescribed that “one royalty suspension
volume [would be] shared by all leases producing from a single field” and
“imposed a requirement for policy reasons that no royalty suspension would be
available to leases in fields when any well in that field produced oil or gas prior
to the enactment of the [DWRRA].” Id. at 891. The agency also “impose[d] price
thresholds requiring the payment of royalties on volumes less than the volume
thresholds set by [the DWRRA].” Kerr-McGee Oil & Gas Corp. v. U.S. Dep’t of
Interior, 554 F.3d 1082, 1083 (5th Cir. 2009). When oil and gas prices moved
above those price thresholds, the DOI sought to collect royalties on these leases,
despite the fact that the congressionally set volume thresholds had not yet been
met. Id.
In Kerr-McGee, an oil company challenged the DOI’s order to pay such
royalties, and this court concluded that the agency did not have the authority to
impose price thresholds requiring the payment of royalties to the government on
volumes less than the volume thresholds set by Congress in the DWRRA. Id.
at 1086-87. The court looked to its 2004 decision in Santa Fe Snyder Corp.,
which had held that DWRRA § 304 extends royalty relief to each new lease at
production, or to encourage production of marginal resources, for [Gulf of Mexico] leases lying
west of 87 degrees, 30 minutes West longitude.”).
7
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statutorily-specified locations and water-depths and that the DOI did not have
the authority to limit this royalty relief to new leases that first resulted in
production from a field. See Kerr-McGee, 554 F.3d at 1085-86. Consequently,
until this court’s 2004 and 2009 decisions interpreting and clarifying the
meaning and application of § 304, it could not be predicted with certainty
whether production from a particular new oil and gas well would definitely
qualify for a suspension of the U.S. landowner’s royalty under the DWRRA.
B. The OCSLA Lease and the ORRI Assignment Agreements
MMS issued Lease OCS-G 20082, to Mariner Energy, Inc., and Westport
Oil and Gas Company, Inc. (“Westport”) pursuant to 43 U.S.C. § 1337 and
effective June 1, 1998. The form lease describes the leased property as “[a]ll of
Block 640, Green Canyon, OCS Official Protraction Diagram, NG 15-3.” The
property is located approximately 190 miles south of New Orleans. The lease
was issued with a lessor’s royalty rate of 12½ per cent. A footnote to this royalty
rate provision states: “This lease may be eligible for royalty suspension pursuant
to PL 104-58. If eligible, Sections 5 and 6 [providing for payment of royalty to
Lessor] of this lease instrument will be suspended by 30 C.F.R. Part 26,
published in the Federal Register on January 16, 1998 (63 FR 2626).”8
On November 3, 1999, Westport executed an assignment conveying to six
of the seven of the Belcher Group appellees ORRIs “payable out of all oil, gas,
and casing head gas and associated substances produced, saved, and marketed
from the lease” (emphasis added) in the following percentages: Wayne G.
Zeornes 0.125%; Gary Al Hummel 0.125%; Kevin A. Small 0.125%; C. Dan Bump
8
Sections 5 and 6 of the form lease are boilerplate provisions specifying, inter alia, that
“[t]he Lessee shall pay the Lessor, at the expiration of each lease year which commences after
a discovery of oil and gas in paying quantities, a minimum royalty” of 12½%; that “[t]he Lessee
shall pay [this] fixed royalty . . . in amount or value of production saved, removed, or sold from
the leased area”; that “[t]he Lessor shall determine whether production royalty shall be paid
in amount or value”; and that “[t]he value of production for purposes of computing royalty on
production from this lease shall never be less than the fair market value of the production.”
8
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0.025%; Allan D. Keel 0.025%; Lynn S. Belcher 0.0625%. These individuals were
Westport geoscientists and landmen whom the company chose to reward with
extra compensation by carving overrides for them out of its working interest.
The six Wesport geoscientists and landmen held on to their overrides, except for
Zeornes, who split his override with his ex-wife, Cathy Zeornes Guy. Kerr-
McGee received a 3.7373% ORRI in 2001 pursuant to an assignment containing
a “calculate and pay” provision substantively identical to that in the Belcher
Group assignment, which stated that “[t]he overriding royalties described herein
shall be calculated and paid in the same manner and subject to the same terms
and conditions as the landowner’s royalty under the Lease.”
C. Production Under the Lease and District Court Litigation
Production under the lease began in May 2009. Chevron then began
paying the ORRI owners their designated overriding royalty shares from its
working interest production and has continued to do so ever since. Total began
approving and issuing payments to the override owners but stopped after paying
the Belcher Group about $54,000 in royalties. Statoil made no payments to the
overriding royalty owners. These refusals to pay overriding royalties were
premised on Statoil and Total adopting the position that they were not obligated
to make any payments to appellants until the lease produced 87.5 million barrels
of oil equivalent, on the theory that the “calculate and pay” provisions subjected
appellants’ ORRIs to suspension along with the U.S. landowner’s royalty under
the DWRRA.
On October 2, 2009, Total filed suit against the ORRI owners, the Belcher
Group and Kerr-McGee, in the U.S. District for the Eastern District of Louisiana
seeking a declaratory judgment embracing Total’s interpretation of the ORRI
assignments. In January 2010, the Belcher Group filed suit against Statoil
seeking declaratory judgment that the lessees were obliged to pay overriding
royalties to the ORRI owners from first and all production. The district court
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consolidated the cases. Through interventions, third-party claims, and
counterclaims, Total and Statoil became aligned against the Belcher Group and
Kerr-McGee.
Total and Statoil moved for summary judgment, contending that the ORRI
assignment contracts’ “calculate and pay” clauses clearly and explicitly
demonstrate the contracting parties’ intent that overriding royalty payments to
ORRI owners shall be suspended whenever the government’s 12½% landowner
royalty becomes suspended under the DWRRA. Total and Statoil did not submit
any affidavits or other evidence in support of their motion for summary
judgment. Instead, they relied upon what they contend to be the clear and
explicit words of the “calculate and pay” clauses of the assignment contracts.
In opposition to appellees’ motion for summary judgment, appellants
submitted affidavits by the individual members of the Belcher Group and by the
Westport official who approved both of the original ORRI assignments, attesting
that the parties to those assignments intended by the “calculate and pay” clauses
to refer to the lease for the purpose of measuring and computing overriding
royalties and not for the purpose of suspending overriding royalties during the
suspension of the U.S. landowner’s royalty under the DWRRA. Also, the
appellants submitted an expert witness’ survey of representatives of other oil
companies operating in the Gulf of Mexico. This survey purportedly identified
at least eighty other overriding royalty instruments containing “calculate and
pay” provisions like that at issue here and determined that no other company
party to such an instrument interpreted these provisions to subject overriding
royalty interests to “royalty suspension” under the DWRRA. Appellants also
submitted other affidavits and sworn statements from individuals familiar with
the Gulf of Mexico oil industry supporting their reading of the “calculate and
pay” provision. Appellants did not cross-move for summary judgment.
10
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On December 14, 2010, the district court granted summary judgment for
the appellees, concluding that the “calculate and pay” provisions clearly and
explicitly express the common intent of the assignment contract parties that the
payment of overriding royalties shall be suspended whenever the payment of the
government’s 12½% landowner’s royalty is suspended under the DWRRA.9 In
sum, the district court reasoned as follows:
[I]t is undisputed that the DWRRA applies to the subject Lease,
and thus, the federal government’s royalty is suspended during
production of the first 87.5 million barrels of oil equivalent. . . . [T]he
subject “calculate and pay” clauses are not ambiguous because they
clearly provide that the overriding royalties “shall be calculated and
paid in the same manner and subject to the same terms and
conditions as the landowner’s [federal government’s] royalty under
the Lease.” Thus, Total’s and Statoil’s payments of the overriding
royalty interest payments are suspended until production reaches
the 87.5 million barrels of oil equivalent.
Total E&P USA, Inc. v. Kerr-McGee Oil & Gas Corp., Nos. 09-CV-6644 &
10-CV-106, 2010 WL 5207591, at *4 (E.D. La. Dec. 14, 2010) (fourth alteration
in original).
The district court refused to consider the opposing affidavits served and
filed by appellants as extrinsic evidence tending to show the original assignment
parties’ intent that the “calculate and pay” clauses refer to the terms and
conditions of the lease for the purpose of measuring and computing the
overriding royalties and not for the purpose of defeating or deferring overriding
royalties while the government’s 12½% landowner’s royalty is suspended under
9
Appellants argue in the alternative that the contract should be reformed on the basis
of mutual mistake because none of the original contracting parties to the assignment of
overriding royalty interests intended that the clause would have the meaning ascribed to it
by the district court. Because we conclude that the ORRI assignment contracts containing the
“calculate and pay” provisions do not clearly and explicitly require that payment of overriding
royalties from production shall ever be suspended because the government’s landowner royalty
is suspended, and that further interpretation is required in search of the assignment parties’
intent, we reverse and remand the case for further proceedings in that regard, without
reaching the appellants’ alternative contract reformation argument.
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the DWRRA. The district court concluded that the provision regarding words of
art and technical terms set forth in Louisiana Civil Code article 204710 did not
apply because “there is no one word or group of words in the subject ‘Calculate
and Pay’ provisions that is subject to a technical meaning.” Total, 2010 WL
520791, at *4. The district court thus stated that it “need not consider extrinsic
evidence to give the words of these provisions their generally prevailing
meaning.” Id. After quoting Civil Code article 2046,11 the district court further
reasoned:
Here, there are no absurd consequences of tying the overriding
royalty owners’ payments to those of the federal government as
landowner, and treating the overriding royalty owner no better or
worse than the federal government. The DWRRA was enacted
several years before either assignment here was executed, and the
original parties to the assignments were charged with the
knowledge of that law before the assignments were executed. If the
original parties to the assignments had intended to provide for
payment of the overriding royalties on the first 87.5 million barrels
when federal royalties on the same production was suspended by
the DWRRA, they were obligated to “expressly state their intent in
[their] agreement.”
Id. at *5 (alteration in original) (citations omitted) (quoting Kenner Indus., Inc.
v. Sewell Plastics, Inc., 451 So. 2d 557, 560 (La. 1984)).
The Belcher Group and Kerr-McGee timely appealed.
DISCUSSION
We review the district court’s grant of summary judgment de novo,
affirming only if the moving party has demonstrated that there is no genuine
issue as to any material fact and that judgment as a matter of law is warranted.
10
Article 2047 provides in part: “Words of art and technical terms must be given their
technical meaning when the contract involves a technical matter.” La. Civ. Code art. 2047.
11
Article 2046 provides: “When the words of a contract are clear and explicit and lead
to no absurd consequences, no further interpretation may be made in search of the parties’
intent.” La. Civ. Code art. 2046.
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McMurray v. ProCollect, Inc., 687 F.3d 665, 669 (5th Cir. 2012); see Fed. R. Civ.
P. 56(c). In determining whether a case presents triable issues of fact, we, like
the district court, may not make credibility determinations or weigh the evidence
and we must resolve all ambiguities and draw all permissible inferences in favor
of the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255
(1986); Int’l Shortstop, Inc. v. Rally’s, Inc., 939 F.2d 1257, 1263 (5th Cir. 1991).
“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.” EP Operating Ltd. P’ship, 26 F.3d at 566. Here, the parties agree
that Louisiana contract law governs the interpretation of the ORRI assignment
contracts at issue, “[t]o the extent that [law is] applicable and not inconsistent
with [OCSLA] or with other Federal laws and regulations,” because Louisiana
is the state adjacent to the portion of the outer continental shelf where the
oilfield is located. See 43 U.S.C. § 1333(a)(2)(A); see also Gardes Directional
Drilling v. U.S. Turnkey Exploration Co., 98 F.3d 860, 865 (5th Cir. 1996)
(explaining that “OCSLA uses state law to fill gaps in federal law”).
“In order to determine state law, federal courts look to final decisions of
the highest court of the state. When there is no ruling by the state’s highest
court, it is the duty of the federal court to determine as best it can, what the
highest court of the state would decide.” Transcont’l Gas Pipe Line Corp. v.
Transp. Ins. Co., 953 F.2d 985, 988 (5th Cir. 1992) (citing, inter alia, Comm’r of
Internal Revenue v. Estate of Bosch, 387 U.S. 456 (1967)).
Under Louisiana law, the essential quality of an overriding oil and gas
royalty is that of a real right to receive and collect a fraction or a percentage of
the production of minerals, carved out of the mineral lessee’s or the servitude
owner’s working interest in production, free of drilling and production costs.
The Louisiana Supreme Court has explained that “[t]he lessor’s royalty is
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distinguished from the mineral royalty and the overriding royalty. The former
is the right to participate in the production of mineral from land or a servitude
belonging to another, La. Rev. Stat. § 31:80, while the latter is carved out of the
lessee’s working interest in the lease.” Frey v. Amoco Prod. Co., 603 So. 2d 166,
171 n.8 (La. 1992); see Plaquemines Parish Comm’n Council v. Delta Dev. Co.,
Inc., 486 So. 2d 129, 134 (La. Ct. App. 1986) (“The overriding mineral royalty is
a passive, non-cost bearing mineral interest carved out of the lessee’s working
interest and is dependent upon the continued existence of the mineral lease.”
(citing, inter alia, Fontenot v. Sun Oil Co., 243 So. 2d 783 (La. 1971)), rev’d on
other grounds, 502 So. 2d 1034 (La. 1987)); Williams & Meyers, Manual of Oil
& Gas Terms (2009) (defining an “overriding royalty” as “[a]n interest in oil and
gas produced at the surface, free of the expense of production, and in addition to
the usual landowner’s royalty reserved to the lessor in an oil and gas lease”).
The Louisiana Supreme Court has consistently applied the Louisiana Civil
Code articles on the interpretation of contracts, along with other applicable
provisions of state law, in deciding cases involving oil and gas lease and royalty
questions. See, e.g., Frey, 603 So. 2d at 172. The court has summarized the
relevant principles as follows:
The purpose of interpretation is to determine the common intent of
the parties. See La. Civ. Code art. 2045. Words of art and technical
terms must be given their technical meaning when the contract
involves a technical matter, see La. Civ. Code art. 2047, and words
susceptible of different meanings are to be interpreted as having the
meaning that best conforms to the object of the contract. See La.
Civ. Code art. 2048. A doubtful provision must be interpreted in
light of the nature of the contract, equity, usages, the conduct of the
parties before and after the formation of the contract, and other
contracts of a like nature between the same parties. La. Civ. Code
art. 2053. When the parties made no provision for a particular
situation, it must be assumed that they intended to bind themselves
not only to the express provisions of the contract, but also to
whatever the law, equity, or usage regards as implied in a contract
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of that kind or necessary for the contract to achieve its purpose. La.
Civ. Code art. 2054.
Frey, 603 So. 2d at 172.
In Louisiana, “[p]arol or extrinsic evidence is generally inadmissible to
vary the terms of a written contract unless there is ambiguity in the written
expression of the parties’ common intent.” Blanchard v. Pan-OK Prod. Co., Inc.,
755 So. 2d 376, 381 (La. Ct. App. 2000). “A contract is considered ambiguous on
the issue of intent when it lacks a provision bearing on that issue or when the
language used in the contract is uncertain or is fairly susceptible to more than
one interpretation.” Id.; accord CLK Co., LLC v. CXY Energy, Inc., 972 So. 2d
1280, 1287 (La. Ct. App. 2007); see Dixie Campers, Inc. v. Vesely Co., 398 So. 2d
1087, 1089 (La. 1981) (“[W]e conclude that the contract in this case is susceptible
to more than one reasonable interpretation rendering it ambiguous and
uncertain as to the intention of the parties.”). “These rules are applicable even
to contracts involving rights in immovable property, such as mineral rights.”
Blanchard, 755 So. 2d at 381.
Accordingly, when a contract provision relating to mineral rights is
ambiguous on a pivotal issue, the Louisiana Supreme Court and Courts of
Appeal have interpreted the provision as having the meaning that best conforms
to the object of the contract, in light of the nature of the contract, equity, and
usages, including extrinsic evidence as to custom and practices in the oil and gas
industry. See, e.g., Musser Davis Land Co. v. Union Pac. Res., 201 F.3d 561, 565-
67 (5th Cir. 2000); Henry v. Ballard & Cordell Corp., 418 So. 2d 1334, 1339-40
(La. 1982).12
12
In Henry, the Louisiana Supreme Court explained: “In ascertaining [the contracting
parties’] intention (where it cannot be adequately discerned from the contract or agreement
as a whole) the circumstances surrounding the parties at the time of contracting are a relevant
subject of inquiry.” Henry, 418 So. 2d at 1339-40 (citing Cooley v. Meridian Lumber Co., 197
So. 255, 258 (La. 1940)); see Frey, 603 So. 2d at 173 (“[In Henry,] we reasoned the ambiguity
in the royalty provision could not be resolved without consideration of the practical and
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No. 11-30038
Applying the foregoing principles, we conclude that the “calculate and pay”
clauses do not clearly and explicitly show that the parties to the assignment
contracts intended that the lessees’ obligation to pay overriding royalties out of
production would ever be suspended under any circumstances. There is no
reference whatsoever to “royalty suspension” or “overriding royalty suspension”
in the assignment contracts. The “calculate and pay” clauses clearly and
explicitly provide only that overriding royalties “shall be calculated and paid in
the same manner and subject to the same terms and conditions as the
landowner’s royalty under the Lease.” Those clauses do not clearly and explicitly
state that payment of overriding royalties shall be suspended during the
temporary or threshold suspension of the payment of the government’s
landowner royalty under the DWRRA. Consequently, under Civil Code article
2046 and the Louisiana cases, a court may not find that the parties intended to
suspend the overriding royalty obligation based exclusively on the words of the
calculate and pay clauses but must interpret the overriding royalty contracts
further in search of the parties’ common intent. See CLK, 972 So. 2d at 1286 (“A
contract is considered ambiguous . . . when it lacks a provision bearing on [a
particular] issue or when the language used in the contract is uncertain or is
economic realities of the oil and gas industry at the time the leases were negotiated . . . .”);
Cooley, 197 So. at 258 (“[W]e must give consideration to the surrounding circumstances
existing at the time the contract was made[.]”). “In interpreting a contract ‘it should be
construed in the light of the circumstances surrounding [the parties] at the time it is made,
it being the duty of the court to place itself as nearly as may be in the same situation of the
parties at the time, so as to view the circumstances as they viewed them, and so to judge the
meaning of the words and the correct application of the language of the contract.” Henry, 418
So. 2d at 1339 n.12 (alteration in original) (quoting C. A. Andrews Coal Co. v. Bd. of Dirs. of
Pub. Schools, Parish of Orleans, 92 So. 303, 304 (La. 1922)). “The custom of the industry may
also be considered in determining the true intent of the parties as to ambiguous contract
provisions.” Id. at 1340 (citing, inter alia, Fee v. Vancouver Plywood Co., Inc., 331 So. 2d 151,
155 (La. Ct. App. 1976)); cf. Wadkins v. Wilson Oil Corp., 6 So. 2d 720, 724-25 (La. 1942)
(affirming cancellation of mineral lease for lessee’s failure to develop leased premises
according to recognized custom and progressive practices among operators in the field).
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fairly susceptible to more than one interpretation.” (quoting Blanchard, 755 So.
2d at 381)).
Our conclusion is further supported by the well-recognized distinction
between overriding royalty interests and a lessor’s royalty. Unlike the
government’s royalty reserved under OCSLA, “[a]n overriding royalty [interest]
is a fractional interest in the gross production of oil and gas under a lease, in
addition to the usual royalties paid to the lessor.” Meeker v. Ambassador Oil Co.,
308 F.2d 875, 882 (10th Cir. 1962) (emphasis added), rev’d on other grounds, 375
U.S. 160 (1963). Thus, an overriding royalty interest “is an interest carved out
of the lessee’s share of the oil and gas, ordinarily called the working interest, as
distinguished from the owner’s reserved royalty interest.” Id. (emphasis added);
see also Frey, 603 So. 2d at 171 n.8 (explaining that “[t]he lessor’s royalty is
distinguished from the . . . overriding royalty” interest, which “is carved out of
the lessee’s working interest in the lease”). Particularly in light of this
longstanding distinction drawn between overriding royalty interests and the
royalties reserved by the landowner, we disagree with the district court’s
reasoning that the contracting parties were obligated to expressly state that
royalty suspension would not apply to appellants’ overriding royalty interests.
See Total, 2010 WL 5207591, at *5. Rather, the absence of any clear indication
anywhere in the assignment contracts, lease, or relevant statutory scheme that
statutory suspension of government royalties was also, counterintuitively,
intended to apply to the overriding royalty interests renders the contracts at
least ambiguous on this issue.
Moreover, the syntax of the ORRI assignments and lease provisions,
without further interpretation or evidence, do not clearly or explicitly require the
reading of them argued for by Total and Statoil. The ORRI assignment contracts
state that the overriding royalty percentages shall be “payable out of all oil, gas,
and casing head gas and associated substances produced, saved, and marketed
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No. 11-30038
from the lease” (emphasis added); and it is undisputed that the lessees’ share of
production begins with and is payable throughout production from the lease.
This reasonably can be read to signify that the overriding royalty shall be
payable from the lessees’ share of production over its entirety, and not only
during periods in which the landowner is entitled to a royalty share of
production. Likewise, the simple affirmative declaration that the overriding
royalty shall be calculated and paid in the same manner and subject to the same
terms and conditions as the landowner’s royalty is calculated and paid under the
lease does not indicate that the overriding royalties paid out of the lessees’ share
of production shall ever be suspended during that production. To require a
suspension of overriding royalties payable from the lessees’ production before the
lessees actually cease to receive production from the lease would add an
exception or condition to the grants of overriding royalties upon which the
lessees and override owners in those contracts did not clearly or explicitly agree.
Furthermore, Total and Statoil tacitly concede that they cannot completely
and finally rely on what they contend to be the clear and explicit words of the
“calculate and pay” clauses. They ultimately contend that reading these clauses
of the assignment contracts together with a footnote in the underlying lease
shows that the assignment parties intended to suspend the override obligation
during any suspension of the United States’ right to collect landowner’s royalty.
This alternative argument’s reading together of three different contracts, one to
which none of the ORRI owners was a party, however, does not produce clear
and explicit words showing an intent by the original lessees and the ORRI
owners to suspend the lessees’ obligation to pay them overriding royalties out of
the lessees’ share of production. It simply adds an indefinite, unclear, and
ambiguous footnote from the lease to the interpretative problem facing the
courts in this case.
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No. 11-30038
The footnote that Total and Statoil seek to rely upon in the underlying
lease between the United States, as lessor, and Mariner Energy and Westport,
as lessees, states: “This lease may be eligible for royalty suspension pursuant to
PL 104-58. If eligible, Sections 5 and 6 of the lease instrument will be
superseded by 30 CFR, Part 26, published to the Federal Register on January
16, 1998 (63 FR 2626).” The footnote does not clearly and explicitly express an
intention by the lessor and lessees that the lease “shall be eligible” for royalty
relief under the DWRRA. Therefore, royalty suspension was not clearly and
explicitly made a term or condition of the lease that was binding on the lease
parties or third parties. For these reasons, and also because the Belcher Group
and Kerr-McGee were not parties to the lease, the footnote expresses no clear
and explicit agreement or intent by the overriding royalty owners to forfeit or
defer any of their rights to overriding royalties payable by the lessees out of any
future production under the lease.13 Furthermore, as we have discussed earlier
in this opinion, in 1999 and 2001 when the ORRI assignments were made,
13
The dissent’s reliance on Petrohawk Properties, L.P. v. Chesapeake Louisiana, L.P.,
689 F.3d 380 (5th Cir. 2012), for the proposition that overriding royalty suspension was
incorporated by reference is unpersuasive, in part because that case is clearly distinguishable.
In Petrohawk, the parties to a new mineral lease explicitly incorporated by reference all but
specifically designated provisions from an earlier lease. We held that the parties thereby
adopted an express exclusion of warranty of title clause from the old lease because it was not
designated for change or deletion in the new lease. Essentially, the same parties expressly
re-adopted the exclusion of warranty of title clause that they had agreed to in their previous
lease contract. See id. at 394. Here, the parties to the ORRI assignments are not the same
as the parties to the mineral lease, and they did not expressly incorporate the subjunctive
footnote in the mineral lease. JS&H Const. Co. v. Richmond Cnty. Hosp. Auth., 473 F.2d 212
(5th Cir. 1973), is inapposite as well. There, a construction sub-contractor entered an
agreement with the prime contractor expressly incorporating by reference the “General
Conditions” of the prime contract which included a provision that the parties would submit
contract disputes to arbitration. We held that the sub-contractor was bound by the arbitration
provision because a strong policy favors arbitration and the subcontractor’s express agreement
to incorporate the “General Conditions” of the prime contract is generally effective when the
provisions so adopted have a reasonably clear and ascertainable meaning. Id. at 214-16.
Here, the situation is different. This case does not involve arbitration of public contract
disputes and the ORRI assignment contract parties did not expressly agree to incorporate any
lease term dictating suspension of overriding royalties.
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No. 11-30038
whether production from a particular eligible lease would receive landowner’s
royalty suspension under the DWRRA, regardless of the fluctuating prices of oil
and gas or of whether the well was the first in its field, was not reasonably
foreseeable until the decisions of this court in Santa Fe Snyder Corp. v. Norton,
385 F.3d 884 (5th Cir. 2004), and Kerr-McGee Oil & Gas Corp. v. U.S. Dep’t of
Interior, 554 F.3d 1082 (5th Cir. 2009). “In interpreting a contract ‘it should be
construed in the light of the circumstances surrounding [the parties] at the time
it is made, it being the duty of the court to place itself as nearly as may be in the
same situation of the parties at the time, so as to view the circumstances as they
viewed them, and so to judge the meaning of the words and the correct
application of the language of the contract.” Henry, 418 So. 2d at 1339 n.12
(alteration in original). Even if we were to presume that the parties to the
assignment contracts could foresee that the lessees would be entitled to
landowner royalty relief under the DWRRA, they still did not subscribe to any
words that clearly and explicitly state any intent to suspend, forfeit, or defer
overriding royalty rights. Consequently, reading the “calculate and pay” clauses
of the ORRI assignment contracts together with the underlying lease’s footnote
does not clearly and explicitly show that the assignment contract parties
intended to suspend the lessees’ obligation to pay overriding royalties to the
ORRI owners whenever the government’s 12½% landowner’s royalty is
suspended under the DWRRA or that the lessees’ obligations to pay overriding
royalties out of production to the override owners would be suspended under any
circumstances.14
14
Moreover, as discussed above, under the implementing regulations in force on the
dates the lease was issued and the assignment contracts were entered, “when production
occur[red] from an eligible lease, the Interior [Department would] determine[] from what field
the lease [was] producing and what royalty suspension volume (if any) applie[d] to the lease,”
and “[n]ew [l]eases only received the benefit of royalty suspension if the lease was determined
to be in a field that had not produced prior to the enactment of the [DWRRA].” Santa Fe
Snyder Corp., 385 F.3d at 889-90. Thus, at the time the form lease was issued, royalty
20
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No. 11-30038
Accordingly, we disagree with the district court, which reached the
opposite result based on the following reasoning:
[I]t is undisputed that the DWRRA applies to the subject Lease, and
thus, the federal government’s royalty is suspended during
production of the first 87.5 million barrels of oil equivalent. Now,
having examined the four corners of the subject Assignments and
interpreting each provision “in light of the other provisions so that
each is given the meaning suggested by the contract as a whole” (La.
Civil Code Art. 2050), the court finds that the subject “Calculate and
Pay” clauses are not ambiguous because they clearly provide that
the overriding royalties “shall be calculated and paid in the same
manner and subject to the same terms and conditions as the
landowner’s [federal government’s] royalty under the Lease.” Thus,
Total’s and Statoil’s payments of the overriding royalty interest
payments are suspended until production reaches the 87.5 million
barrels of oil equivalent.
Total, 2010 WL 5207591, at *4 (second alteration in original).
Of course, the district court is correct that it is now undisputed that the
DRWWA landowner’s royalty relief applies to the subject lease. But as we have
pointed out, that was not so when the subject lease was issued in 1998 or when
the ORRI assignment contracts were entered in 1999 and 2001. Prior to the
litigation that culminated in our decisions in Santa Fe Snyder Corp. in 2004 and
Kerr-McGee in 2009, it was at most speculative whether the lessees under the
subject lease would receive the benefit of DRWWA landowner’s royalty relief if
and when production were obtained. That is likely why the footnote in the lease
suspension was one possible outcome of an administrative process, provided for not by the
lease but by statute and regulation, and which in turn depended on whether the lease was
deemed “eligible” and whether the relevant field had produced prior to the effective date of the
DWRRA. See id. The lease nowhere indicates whether the field in which it is located is one
that had produced prior to that date. Thus, it cannot be said that the footnote constitutes a
clear and explicit term or condition of the lease requiring a suspension of landowner’s royalty.
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No. 11-30038
is indefinite and says only that the lessees “may” be eligible for landowner
royalty relief.15
Furthermore, simply because a lessee is entitled to DRWWA relief from
paying the government landowner royalties until a specified quantity of
production has occurred does not relieve the lessee from the obligation of
measuring, calculating, and accounting for its production of oil and gas from the
leased property. OCSLA and applicable DOI regulations continue to specify how
that production is measured, calculated, and accounted for. See, e.g., 43 U.S.C.
§ 1337(a)(C) (limiting government royalty relief to specific production volumes);
30 C.F.R. §§ 250.1201-03 (setting forth and incorporating by reference
requirements for measuring oil and gas production from OCSLA leases); 30
C.F.R. §§ 1206.100-60 (“explain[ing] how [OCS] lessee[s] must calculate the
value of production for royalty purposes consistent with the mineral leasing
laws, other applicable laws, and lease terms”); cf. Abraham v. BP Am. Prod. Co.,
685 F.3d 1196, 11991203 (10th Cir. 2012) (noting that there are “specific and
comprehensive federal regulations” setting forth “federal royalty calculation
requirements”).16 The lease here was, of course, expressly “issued subject to
15
The dissent contends that there is no “lack of clarity regarding whether the royalty
suspension period was a term of the lease that the overriding royalties became subject to
through the ‘calculate and pay’ clauses.” As already explained, however, the only reference
to the DWRRA in the lease is the indefinite and ambiguous statement that the lease “may” be
eligible for suspension of government royalties under the DWRRA. Moreover, neither the
DWRRA nor its implementing regulations have ever purported to suspend or affect lessees’
obligations to pay overriding royalties to ORRI owners out of production. In arguing that this
“footnote negates the lessee’s duty to make royalty payments,” such that “royalty suspension
is a term or condition of the landowner’s royalty under the lease,” the dissent conflates
overriding royalty with landowner royalty and refuses to acknowledge the crucial legal
distinctions in source and nature of the two kinds of royalty. See, e.g., Frey, 603 So. 2d at 171
n.8.
16
All of this tends to bolster the ORRI owners’ argument that the “calculate and pay”
clauses reasonably can be construed to refer to the federal methods of measuring, calculating
and paying overriding royalties, rather than to any suspension of overriding royalties, and that
the “calculate and pay” clauses are therefore ambiguous and require further interpretation.
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No. 11-30038
[OCSLA] . . . and all . . . applicable statutes and regulations,” including
specifically “all regulations issued pursuant to [OCLSA] . . . which provide for . . .
the protection of correlative rights.” Without clearly stated methods of
measurement, calculation, and accounting, the federal government as landowner
would not have certain knowledge of how much production had occurred or when
its rights to collect landowner’s royalty would recommence. Consequently, the
“calculate and pay” clauses may reasonably be interpreted as intended to entitle
the ORRI owners to their share of the lessees’ production under these same
methods of measurement, calculation, and accounting without relieving the
lessees of their obligation to pay overriding royalties to the ORRI owners out of
the entirety of the lessees’ working interest production.
In other words, the “calculate and pay” clauses reasonably may be
interpreted to mean that the overriding royalty payments shall be calculated and
paid by using the same methods prescribed for the measurement and
computation of the landowner’s royalty under the terms and conditions of the
lease, which is specifically subject to the federal regulations’ provisions for
measuring, calculating, and accounting for production, instead of meaning that
the payment of overriding royalties shall be suspended if the landowner’s royalty
were to be suspended under the DWRRA. Although we have assumed that Total
and Statoil’s contrary interpretation is equally as reasonable for purposes of
their summary judgment motion, we conclude that the clauses are ambiguous
and require further interpretation in search of the parties’ intent.
The district court, on the other hand, did not specifically address the
ORRI owners’ reasonable interpretation of the clauses, despite the ORRI owners’
extensive arguments for it in their opposition to summary judgment.
Consequently, the district court erroneously concluded that the clauses are not
ambiguous but that they clearly and explicitly are meant to suspend overriding
royalties during any suspension of the landowner’s royalty, as well as, or,
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No. 11-30038
instead of, to prescribe the methods for their calculation. The district court
stated that it had examined the assignment contracts, and each of their
provisions together with the others, and had found “that the subject ‘Calculate
and Pay’ clauses are not ambiguous because they clearly provide that the
overriding royalties ‘shall be calculated and paid in the same manner and
subject to the same terms and conditions as the landowner’s [federal
government’s] royalty under the Lease.’” Total, 2010 WL 5207591, at *4
(alteration in original). We do not find the district court’s reasoning persuasive
because the words of the “calculate and pay” clauses are not clear, explicit, and
unambiguous, and the district court did not offer any other reason for finding
these provisions unambiguous.
Because the ORRI owners, the Belcher Group and Kerr-McGee, did not
file a cross motion for summary judgment or ask for any relief here other than
a reversal of the district court’s judgment, we do not reach the parties’ other
arguments or consider the affidavits submitted in opposition to summary
judgment below. Under Louisiana law, interpretation of a contract is the
determination of the common intent of the parties, La. Civ. Code art. 2045, and
when the words of a contract are clear and explicit and lead to no absurd
consequences, no further interpretation may be made in search of the parties’
intent, id. art. 2046. However, the inverse of Article 2046 is also true: when the
words of the contract are not clear and explicit, but are ambiguous, a court
should engage in further interpretation in search of the parties’ intent by
applying the Louisiana Civil Code articles on contractual interpretation and
pertinent Louisiana cases. See, e.g., Henry, 418 So. 2d at 1339-40 (“In
ascertaining th[e] [contracting parties’] intention (where it cannot be adequately
discerned from the contract or agreement as a whole) the circumstances
surrounding the parties at the time of contracting are a relevant subject of
inquiry. . . . The custom of the industry may also be considered in determining
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No. 11-30038
the true intent of the parties as to ambiguous contract provisions.”); Russell v.
City of New Orleans, Dep’t of Prop. Mgmt., 732 So. 2d 66, 70 (La. Ct. App. 1999)
(“The words of the contract are not clear and explicit . . . , so further
interpretation may be made in search of the common intent.”). That is the
situation here. Therefore, we reverse the district court’s grant of summary
judgment and remand the case to it for further proceedings in which it should
consider relevant evidence in interpreting the disputed provisions in accordance
with applicable principles of Louisiana law on the interpretation of contracts.
CONCLUSION
For these reasons, the district court’s judgment is reversed and the case
is remanded to it for further proceedings consistent with this opinion.
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No. 11-30038
HIGGINSON, Circuit Judge, concurring:
I agree with Judge Dennis’ reasoning and outcome, but write to explain in
further detail why I believe the contracts’ language is ambiguous.
The overriding royalty interest (“ORRI”) assignment contracts contain
“calculate and pay” clauses stating: “The overriding royalty interest assigned
herein shall be calculated and paid in the same manner and subject to the same
terms and conditions as the landowner’s royalty under the Lease.” Like many
complex sentences, ambiguity exists in this one’s structure. ORRI is the subject,
and one predicate is the “calculate[ ] and pay” verb phrase.
Appellants imply that the prepositional phrase and subordinate clause
that follow—i.e., “in the same manner and subject to the same terms and
conditions”—modify that verb phrase, cf. Int’l Primate Prot. League v. Adm’rs of
Tulane Educ. Fund, 500 U.S. 72, 79-80 (1991), and because the verb phrase
“calculate[ ] and pay” is affirmative, it logically does not imply its opposite,
nonpayment or suspension. Manners and terms and conditions all contemplate
payment in the first place. In simpler terms, this reading would be less
ambiguous if written as follows: “The ORRI shall be calculated and paid in the
same manner as the landowner’s royalty under the Lease,” persuasively,
therefore, not contemplating suspension altogether, but just regulating payment.
Contrastingly, Appellees’ argument points to meaning from a different
grammatical arrangement, where ORRI itself is modified by the final clause
“subject to the same terms and conditions as the landowner’s royalty,” hence,
plausibly, subject even to nonpayment or suspension altogether. In simpler, less
ambiguous terms: “The ORRI shall be subject to the same terms and conditions
as the landowner’s royalty under the Lease,” even if that condition is suspension
altogether. Indeed, had the sentence separated that dependent clause by
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No. 11-30038
commas—thus: “, and subject to the same terms and conditions,”—Appellees
would have a stronger argument as to clarity of meaning.
Given the language of the contracts, however, I cannot say that, for the
reasons above, the sentence is free of ambiguity.
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No. 11-30038
EMILIO M. GARZA, Circuit Judge, dissenting:
I
Because royalty suspension is a term or condition of royalty payment under
the lease and the “calculate and pay” clauses of the assignment contracts make
the overriding royalty interests subject to the same terms and conditions as the
landowner’s royalty under the lease, I respectfully dissent from the majority’s
conclusion that the assignment contracts are ambiguous.
Royalty suspension is unambiguously a term or condition of the
landowner’s royalty under the lease. The first footnote of the lease states, “This
lease may be eligible for royalty suspension pursuant to PL 104-58.” PL 104-58
refers to Public Law No. 104-58, which includes the Outer Continental Shelf Deep
Water Royalty Relief Act (hereinafter “DWRRA”). According to the DWRRA,
“suspension of royalties shall be set at a volume of not less than . . . 87.5 million
barrels of oil equivalent for leases in water depths greater than 800 meters.”
Pub. L. No. 104-58. It is undisputed that because this lease covered a block of
property located in water depths greater than 800 meters, the landowner’s
royalty is suspended on the first 87.5 million barrels of oil produced under the
lease. The footnote next states, “If eligible, Sections 5 and 6 [providing for
payment of royalty to Lessor] of this lease instrument will be suspended by 30
C.F.R. Part 26 . . . .” 30 CFR Part 2601 refers to Outer Continental Shelf Oil and
Leasing, 43 U.S.C. § 1331 et seq, where the provisions of the DWRRA are
codified. The footnote thus clearly requires that if the lease is eligible for royalty
suspension under the DWRRA, Sections 5 and 6 of the lease will be suspended.
As Sections 5 and 6 of the lease provide instructions for calculating and paying
the landowner’s royalty under the lease, the footnote unambiguously makes
1
Because 30 CFR Part 260 refers to Outer Continental Shelf Oil and Leasing, 43 U.S.C.
§ 1331 et seq, and 30 CFR Part 26 does not exist, the footnote likely intended to refer to 30
CFR Part 260.
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royalty suspension a term or condition of payment of the landowner’s royalty
under the lease.
The majority, however, finds it ambiguous whether the footnote is a term
or condition of the lease because the footnote states the lease “may be eligible”
rather than “shall be eligible.” The majority might be correct if the footnote did
not also state, “If eligible, Sections 5 and 6 of this lease instrument will be
superseded by 30 CFR Part 26. . . .” (emphasis added). Black’s Law Dictionary
defines a “term” as a “contractual stipulation,” BLACK’S LAW DICTIONARY 1608
(9th ed. 2009), and a “condition” as “a future and uncertain event on which the
existence or extent of an obligation or liability depends; an uncertain act or event
that triggers or negates a duty to render a promised performance.” Id. at 333.
The footnote clearly stipulates that the lease’s provisions for payment of
royalties are superseded by the DWRRA if the lease is eligible for royalty
suspension, thus qualifying the lessee’s contractual duty to make royalty
payments to the United States. Where the lease is eligible for royalty
suspension, the footnote negates the lessee’s duty to make royalty payments. As
such, royalty suspension is a term or condition of the landowner’s royalty under
the lease.
The “calculate and pay” clauses in the assignment contracts
unambiguously make the overriding royalty interests subject to the same terms
and conditions as the landowner’s royalty under the lease. The “calculate and
pay” clauses of the Westport Assignment to the Belcher Group state, “The
overriding royalty interest assigned herein shall be calculated and paid in the
same manner and subject to the same terms and conditions as the landowner’s
royalty under the Lease.” The “calculate and pay” clause in the Westport to
Chevron Assignment contains nearly identical language. The majority holds
“the ‘calculate and pay’ clauses in the ORRI assignment contracts do not clearly
and explicitly express the intent that overriding royalty payments shall be
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No. 11-30038
suspended whenever the U.S. landowner royalties are suspended under the
DWRRA.” Ante, at 4. The majority thus finds it ambiguous whether the
assignment contracts apply royalty suspension to overriding royalty interests.
The plain language of the “calculate and pay” clauses state, however, that
payment of the overriding royalties must be subject to the same terms and
conditions as the landowner’s royalty under the lease. The Oxford English
dictionary defines “subject to” as “dependent or conditional upon.” OXFORD
ENGLISH DICTIONARY 1427 (10th ed. 1999); see also WEBSTER’S THIRD NEW
INTERNATIONAL DICTIONARY 2275 (1993) (defining “subject to” as “to be
conditioned, affected, or modified in some indicated way: having a contingent
relation to something and usually dependent on such relation for final form,
validity, or significance”). Thus, the “calculate and pay” clauses clearly and
explicitly import terms and conditions from the lease as limitations on the scope
of the overriding royalty rights.
The majority, emphasizing the longstanding distinction between
overriding royalty interests and royalties reserved by the landowner, holds it is
ambiguous whether the “calculate and pay” clauses require application of royalty
suspension to the overriding royalty interests. Ante at 18–19. The majority
holds the assignment contracts lack “any clear indication” that royalty
suspension was intended to apply to the overriding royalty interests. Id. The
majority is correct that overriding royalty interests are generally paid in
addition to the usual landowner’s royalty reserved to the lessor. 38 AM. JUR. 2D
GAS AND OIL § 201. As such, the parties to overriding royalty interest
assignment contracts are free to set terms for the calculation and payment of
such interests that are distinct from the terms of payment of the landowner’s
royalty. See id. Here, however, the assignment contracts contain a clear
directive that the overriding royalty interests “shall be calculated and paid in the
same manner and subject to the same terms and conditions as the landowner’s
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royalty under the Lease.” If the parties did not intend the clear import of the
contracts’ language, they may seek to reform the contract. Agurs v. Holt, 95 So.
2d 644, 645 (1957). Where, however, the language of a contract is clear and
unambiguous, we lack the authority to look beyond the four corners of the
document in search of the parties’ intent. LA. CIV. CODE ANN. art. 2046; Taita
Chem. Co., v. Westlake Styrene Corp., 246 F.3d 377, 386 (5th Cir. 2001).
The majority relies on the fact that it was not certain the lease would
qualify for suspension of the United States’ landowner royalty under the
DWRRA at the time the lease at issue in this case was signed as a core source
of ambiguity in the “calculate and pay” clauses. The majority correctly notes
that prior to our decisions in Santa Fe Snyder Corp. v. Norton, 385 F.3d 884 (5th
Cir. 2004), and Kerr-McGee Oil & Gas Corp. v. U.S. Dep’t of Interior, 554 F.3d
1082 (5th Cir. 2009), there was some uncertainty surrounding whether a
particular lease would qualify for royalty suspension.2 Nonetheless, this
uncertainty does not translate into ambiguity as to whether the assignment
contracts require the overriding royalty payments to be subject to the same
terms and conditions as the landowner’s royalty under the lease. The majority
assumes that because it was debatable whether royalty suspension would apply,
the parties to the assignment contracts did not intend royalty suspension to be
one of the terms and conditions of payment that the overriding royalties are
subject to. Ante, at 21.
This assumption is unwarranted. The parties to the assignment contract
may have intended exactly what the plain language of the “calculate and pay”
2
See Santa Fe Snyder Corp., 385 F.3d at 892–93 (holding Department of Interior
regulation restricting the DWRRA’s royalty suspension provisions to fields that had not
produced prior to enactment of Act was invalid); Kerr-McGee Oil & Gas Corp., 554 F.3d at
1083 (holding Department of Interior regulation requiring payment of royalties on volumes
less than volume thresholds set by the DWRRA when gas prices reached certain levels was
invalid).
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clauses state: to make the calculation and payment of the overriding royalties
subject to the same terms and conditions as the landowner’s royalty under the
lease. A lack of clarity surrounding when the royalty suspension period would
apply does not evince a lack of clarity regarding whether the royalty suspension
period was a term of the lease that the overriding royalties became subject to
through the “calculate and pay” clauses.
The majority also concludes the “granting” clauses of the assignment
contracts make the meaning of the “calculate and pay” clauses ambiguous. The
granting clause in the Westport Assignment to the Belcher Group states, “The
undersigned . . . does hereby CONVEY, TRANSFER, ASSIGN, AND SET OVER
unto the following parties . . . the interest set out opposite their names, as an
overriding royalty interest payable out of all oil, gas, casinghead gas and
associated substances produced, saved and marketed from the lease.” (emphasis
added). The granting clause in the Westport to Chevron Assignment states,
“The interest assigned herein is subject to . . . an overriding royalty interest
totaling one percent (1%) of 8/8ths . . . of oil and gas production saved, removed,
or sold from the Lease.” (emphasis added). The majority implies that if the
parties intended to require the overriding royalty owners to wait until the lease
produced 87.5 million barrels of oil before receiving royalty payments, the
phrasing of the granting clauses would not have explicitly granted the overriding
royalty owners an interest in all or 8/8ths of production. This is unconvincing.
Even within the four corners of the assignment contract to the Belcher group,
the “granting” clause was clearly never meant to be unqualified. In the ORRI
assignment to the Belcher group, exceptions to royalty due on production are
listed explicitly in the assignment contract. For example, the assignment
contract states,
The overriding royalty interest conveyed shall not, in any event, be
paid or accrued upon any oil, gas, casinghead gas and other
hydrocarbon substances used for operation, development or
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production purposes or unavoidably lost; and no overriding royalty
shall be paid upon gas used in repressuring or recycling operations
or pressure maintenance operations.
Moreover, the clear language of the “calculate and pay” clauses in both of the
assignment contracts qualify the granting clauses by stating that the overriding
royalty interests are to be calculated and paid “subject to the same terms and
conditions as the landowner’s royalty under the lease.” (emphasis added).
The majority also finds the assignment contracts ambiguous because there
is no reference to royalty suspension in the assignment contracts. The lack of
the explicit reference to royalty suspension in the assignment contracts proves
nothing. The “calculate and pay” clauses incorporate the terms and conditions
of the landowner’s royalty under the lease. Even under the proposed
interpretation of the “calculate and pay” clauses that the majority urges, the
terms and conditions the “calculate and pay” clauses allegedly refer to, the so-
called “mechanics” of payment, are not explicitly stated in the assignment
contracts. The fact that the assignment contracts do not both incorporate the
royalty suspension provision by reference to the terms and conditions of the
landowner’s royalty under the lease and mention the royalty suspension
provision by name does not an ambiguity make. Where a term is incorporated
by reference to an extrinsic agreement, the contract need not also mention the
incorporated term within the four corners of the contract. See Petrohawk Props.,
L.P. v. Chesapeake La., L.P., 689 F.3d 380, 394 (5th Cir. 2012) (holding
provisions incorporated by reference have identical force and effect to provisions
within the contract itself).3
3
The majority’s attempt to distinguish Petrohawk Properties is unavailing. Ante at 20
n.13. In that case we held the parties adopted a provision of an earlier lease that was
incorporated by reference in the new lease. Petrohawk Props., 689 F.3d at 394. Importantly,
the new lease did not explicitly mention the provision at issue, an exclusion of the warranty
of title. Id. Rather, the new lease merely incorporated all provisions other than those
explicitly designated. Id. The majority attempts to distinguish Petrohawk Properties on two
grounds. First, the majority notes that in Petrohawk Properties the parties to the new lease
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The majority also finds support for concluding the “calculate and pay”
clauses are ambiguous in the fact that the overriding royalty interest owners
were not a party to the lease. This is puzzling. It is well-established that when
a contract incorporates terms of an extrinsic agreement by reference, the parties
to the contract may not rely on the fact that they are not parties to the extrinsic
agreement as a source of ambiguity. See JS & H Constr. Co. v. Richmond Cnty.
Hosp. Auth., 473 F.2d 212, 216 (5th Cir. 1973) (holding subcontractor bound by
arbitration provision incorporated by reference from the general conditions of
contract between primary contractor and principal).4 Despite the majority’s
were the same parties as the parties to the old lease. This is a distinction without a difference.
Nowhere in Petrohawk Properties did we state or imply the fact the parties to the new lease
and the old lease were identical was relevant to our holding that the exclusion of the warranty
of title was incorporated by reference. Id. Moreover, the majority cites no authority for the
proposition that incorporation by reference is more effective where the parties to both
contracts are identical. Second, the majority states that, unlike here, the parties in Petrohawk
Properties “expressly re-adopted the exclusion of warranty of title clause.” Ante at 20 n13.
This assertion is false. In Petrohawk Properties the new lease stated, “In conjunction with this
correction of the description of the leased premises, of the primary term and with the
additional provisions, Lessor ratifies, adopts, and confirms the Lease, as corrected. . . .”
Record Excerpt of Appellant Petrohawk Properties, L.P. at 80, Petrohawk Props., (No. 11-
30576). Nowhere did the new lease mention the exclusion of warranty of title provision of the
old lease. Id. at 79–81. Moreover, the exclusion of the warranty of title “provision” in the old
lease was hardly a model of clarity. The district court held the old lease had no implied
warranty of title provision because it contained “a scratched through warranty of title
provision.” Chesapeake La., L.P. v. Petrohawk Props., L.P., 5:09-cv-01385-DEW-MLH, No. 09-
1385, Ruling on Merits at 6 (E.D. La. May 27, 2011). Therefore, Petrohawk Properties
supports the proposition I rely on it for: the fact the assignment contracts here did not mention
royalty suspension by name is not a convincing reason for finding it ambiguous whether the
contracts incorporated the royalty suspension provision of the lease.
4
The majority emphasizes that in JS & H Constr. Co. the provision at issue was an
agreement to arbitrate disputes arising under the contract. Ante at 21 n.13. We thus based
our holding that the sub-contractor was bound to arbitrate both on (1) the strong
Congressional policy favoring arbitration and (2) “[t]he . . . undisputed proposition . . . that as
a matter of contract law, incorporation by reference is generally effective to accomplish its
intended purpose where, as here, the provision to which reference is made has a reasonably
clear and ascertainable meaning.” JS & H Const. Co., 473 F.2d 212 at 215. In JS & H Const.
Co. we correctly recognized that under Louisiana law where a contract incorporates terms of
an extrinsic agreement by reference, the fact the identity of the parties to the contract differ
from the parties to the extrinsic agreement does not render the incorporation ineffective. See
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assertions to the contrary, the assignment contracts make a clear and
unambiguous statement that payments of the overriding royalties will be limited
by the terms and conditions of the landowner’s royalty under the lease.
Finally, Judge Higginson’s concurring opinion contends the grammatical
structure of the “calculate and pay” clauses support a finding of ambiguity.
Although I agree with Judge Higginson that grammatically the clauses are
susceptible to two different interpretations, under either reading the “calculate
and pay” clauses unambiguously require application of royalty suspension to the
overriding royalty interests. Admittedly, the prepositional phrase and
subordinated clause “in the same manner and subject to the same terms and
conditions” may modify the “calculate and pay” verb phrase, as Appellants imply,
or may modify the subject of the sentence, “The overriding royalty interest,” as
Total and Statoil urge. Judge Higginson thus asserts it is ambiguous whether
the “calculate and pay” clauses answer the question of whether the overriding
royalty owners are entitled to a royalty payment, or merely provide instructions
for the how to calculate and pay the royalty payments that are due under the
assignment contract. Regardless of whether the lease is eligible for royalty
suspension and the payment due is zero or the lease is ineligible for royalty
suspension and a monetary payment is due, however, royalty suspension is
inextricably linked to the calculation of the amount of payment due to the
landowner under the lease. Thus, even if “terms and conditions” modifies
“calculated and paid,” “terms and conditions” modifies entitlement to the
royalties vel non.
also Harper v. Home Indem. Co., 140 So. 2d 653, 657 (La. Ct. App. 1962) (“[W]e conclude that
all the provisions of the initial contract have been incorporated into and form a part and
portion of the subcontract just as effectively as if fully written and incorporated therein.”).
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II
Appellants also claim that in the event we reject their interpretation of the
“calculate and pay” clauses as unreasonable, the original parties to the
assignment contracts made a mutual mistake in drafting the “calculate and pay”
clauses. The district court cited two reasons for denying Appellants’ claim for
reformation. First, the district court held Appellants were attempting “to make
an end-run around the parole-evidence rule by framing [their] argument as a
request for reformation.” The district court held that because the assignment
contracts were unambiguous, parole evidence is not admissible to create
ambiguity. Second, the district court held that because Total and Statoil, as
non-parties to the original contracts, were entitled to rely on the integrity of the
assignment contracts, reformation would impermissibly prejudice Total and
Statoil. The district court misconstrued Louisiana’s reformation law on both
points.
The district court erred by failing to admit Appellants’ extrinsic evidence
of mutual mistake. When making a claim for reformation the claimant may offer
parole evidence, not to vary the terms of the written instrument, but to show the
“writing does not express the true intent or agreement of the parties.” First
State Bank & Trust Co. of E. Baton Rouge Parish v. Seven Gables, Inc., 501 So.
2d 280, 289 (La. Ct. App. 1986) (citing Valhi, Inc. v. Zapata Corp., 365 So. 2d
867, 870 (La. Ct. App. 1978)). “Even if the language utilized is clear and
unambiguous, parol evidence is admissible to establish that the language does
not embody the essence of the agreement to which there was mutual assent.”
Valhi, Inc., 365 So. 2d at 870. The district court thus erred by refusing to admit
extrinsic evidence of mutual mistake simply because the contract is
unambiguous.
The district court also erred by denying Appellants’ reformation claim on
the grounds that Total and Statoil, as third parties, were entitled to rely on the
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integrity of the assignment contracts. Under Louisiana law, reformation of a
contract is impermissible once third parties have relied on the integrity of the
written instrument. Lewis, 653 So. 2d at 1260. Where, however, the rights of
third parties would not be prejudiced by reformation, reformation is permissible.
See Samuels v. State Farm Mut. Auto. Ins. Co., 939 So. 2d 1235, 1241 (La. 2006);
M.R. Bldg. Corp. v. Bayou Utils., Inc., 637 So. 2d 614, 617 (La. Ct. App. 1994)
(permitting reformation where rights of third party successor in chain of title
would not be prejudiced by reformation). While Louisiana law is clear that third
parties are entitled to rely on the integrity of the contracts, third parties must
have actually relied on the erroneous contract language to be prejudiced. See
Samuels, 939 So. 2d at 1241 (“There are simply no rules of contractual
interpretation that would lead us to ignore the clear intent of the parties to the
fortuitous benefit of a third party insurance company who did not even rely on
this error in issuing its own policy.”); cf. Am. Elec. Power Co. v. Affiliated FM Ins.
Co., 556 F.3d 282, 288 (5th Cir. 2009) (denying claim for reformation where third
party assumed and relied on contract and there was no indication third party
would have known of error). The district court thus erred in denying Appellants’
claim for reformation on the basis that Total and Statoil were entitled to rely on
the unambiguous contract language.
III
Accordingly, I would affirm the district court’s holding that the
assignment contracts unambiguously apply the royalty suspension provision of
the DWRRA to the overriding royalty interest owners. I would reverse the
district court’s grant of summary judgment on Appellants’ claim for reformation,
but only on the grounds specifically stated by the district court.
Respectfully, I dissent.
37