Tellus Operating Group, LLC v. Maxwell Energy, Inc.

IN THE SUPREME COURT OF MISSISSIPPI
NO. 2012-CT-00357-SCT
TELLUS OPERATING GROUP, LLC
v.
MAXWELL ENERGY, INC.
ON WRIT OF CERTIORARI
DATE OF JUDGMENT: 01/31/2012
TRIAL JUDGE: HON. DAVID SHOEMAKE
TRIAL COURT ATTORNEYS: MALCOLM ROGERS
CHRISTY M. SPARKS
COURT FROM WHICH APPEALED: JEFFERSON DAVIS COUNTY CHANCERY
COURT
ATTORNEYS FOR APPELLANT: GLENN GATES TAYLOR
CHRISTY M. SPARKS
ATTORNEYS FOR APPELLEE: HEATHER WHITE MARTIN
MALCOLM T. ROGERS
NATURE OF THE CASE: CIVIL - OTHER
DISPOSITION: THE JUDGMENT OF THE COURT OF
APPEALS IS AFFIRMED. THE JUDGMENT
OF THE CHANCERY COURT OF
JEFFERSON DAVIS COUNTY IS
REVERSED AND RENDERED- 01/22/2015
MOTION FOR REHEARING FILED:
MANDATE ISSUED:
EN BANC.
CHANDLER, JUSTICE, FOR THE COURT:
¶1. In this case, we review a challenge to a Mississippi Oil and Gas Board pooling order
force-integrating various owners’ interests in a proposed drilling unit. See Miss. Code Ann.
§ 53-3-7 (Rev. 2003). We hold that the Board’s order was supported by substantial evidence.
We also find that one owner’s attempt to voluntarily integrate his interest within twenty days
of the Board’s pooling order did not satisfy Section 53-3-7(2)(g)(iii).
FACTS AND PROCEEDINGS BELOW
¶2. In 2006, Tellus Operating Group, LLC, sought to integrate the interests of various
owners for the purpose of drilling a well unit in Jefferson Davis County. In accordance with
its statutory duty to make a good-faith effort to negotiate the voluntary integration of the
owners’ interests on reasonable terms, Tellus mailed option forms to the owners in June and
July of 2006. The three options for voluntary integration were to lease the interest, farm out
the interest, or participate as a working interest owner in the costs and risks of drilling,
developing, and operating the well by agreeing in writing to pay the owner’s share of the
actual costs of drilling, testing, completing, equipping, and operating the well. For the third
option of participation, the letter accompanying the option form indicated that the agreement
in writing must be evidenced by execution of an Authorization for Expenditure (“AFE”) and
Operating Agreement (“JOA”). It further included a summary of some of the terms of the
JOA. Upon election of that option, the AFE and JOA would be prepared and sent to the
owner for execution.1
¶3. D. E. Maxwell, owner and president of interest owner Maxwell Energy, Inc., checked
the third option to participate in the costs of developing the unit. However, he struck through
the language on the option form which stated that owner would participate “in accordance
1
Per Board policy, owners also could request a copy of the proposed JOA for review
prior to electing an option.
2
with the terms and conditions set out in paragraph (3) of the offer in the attached letter,” and
wrote in by hand that he would participate “as to Maxwell Energy, Inc.’s proportionate share
of .00971714 [%] in accordance with applicable law set out in Miss. Code 53-3-7.” He did
not execute the AFE and JOA.
¶4. After allowing for the statutorily required ninety days to pass after submitting the
options to the owners, Tellus petitioned the Mississippi Oil and Gas Board to integrate the
interests of the owners, including a force-integration of Maxwell Energy’s interest as a
nonconsenting owner subject to alternate-risk penalties.2 Twenty-one owners had elected
participation and signed off on the terms of the AFE and JOA. With ninety-six percent of the
owners’ interests voluntarily integrated, Maxwell Energy challenged the pooling petition,
seeking recognition that it had consented to be a participating owner, that it wanted more
time to negotiate a more favorable JOA, and that it was willing immediately to front its share
of the initial anticipated cost of the dry well (calculated by applying its percent interest to the
estimated initial dry-well cost outlined in the AFE).
¶5. The Board held a hearing on October 18, 2006. Only a few days before the hearing,
Maxwell Energy sent Tellus an alternate JOA proposal. D.E. Maxwell appeared at the
hearing on the company’s behalf. Maxwell requested a continuance of the hearing, stating
2
Because nonconsenting owners do not front any of the costs of developing the
drilling unit, they do not risk financial loss if the well is dry or unprofitable. Alternate-risk
penalties have the ultimate effect of diverting a greater share of profits, if any, to the
participating owners who risked a financial loss up front. Statutes like these have been
enacted because “it is unfair for a nonconsenting owner . . . to be relieved of the costs and
risks associated with drilling a producing well, but at the same time reap the benefits of
another’s efforts in extracting oil and gas from beneath his or her land.” Cadeco, LLC v.
Industrial Comm’n of North Dakota, 812 N.W.2d 405, 407-08 (N.D. 2012).
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that he wanted the drilling to go forward as scheduled, but that he wanted time to negotiate
the participation terms to meet Tellus “halfway” between the two proposed JOAs. Tellus
objected to the continuance, asserting that it had complied with its statutory good-faith
requirements and deadlines. It further noted that operations on the well were scheduled to
begin prior to the next Board meeting.3 The Board denied the motion to continue.
¶6. Maxwell testified, as did Tellus landman James Clark. Tellus’s attorney asked
Maxwell to go through, point by point, the terms of the JOA he found to be unreasonable.
Maxwell conceded that he had entered or was aware of other JOAs that contained similar
terms, but he also testified to his personal experience and knowledge of JOAs with more
favorable terms, particularly in regard to the high percentage of alternate-risk penalties on
subsequent unit projects. Clark testified that Tellus’s JOA was based on a standard form
developed in 1982 by the American Association of Professional Landmen. The form contains
blanks to be filled in based on the needs of the parties, and parties routinely use strike-outs
and additions to modify the form. Clark testified that the alternate-risk percentages, while
high, are not unusual in the industry, given the increase in recent years of the costs and risks
of drilling exploration. Maxwell argued that terms can be unreasonable as applied to some
owners and not others, and that the intent of the force-integration statute was not to give
3
Tellus’s attorney indicated to the Board that he had, when the force-integration
statute initially came out, attempted to do the same thing for a client–elect participation
merely by submitting a check for a proportionate share of up-front costs–and that the Board
consistently has rejected that type of attempt to elect participation absent an agreement to
more specific reasonable terms.
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operators undue leverage to convince owners to lease their interest without the power to
negotiate away from expensive penalties.
¶7. In additional support of its argument that the proposed terms were reasonable and
offered in good faith, Tellus pointed to the fact that twenty-one other owners, many of them
sophisticated in the industry, had agreed to the terms of the JOA. It pointed to the difficulties
that could arise if less than one percent of the owners were governed by a significantly
different JOA from the other owners. It also pointed to the late date at which Maxwell
Energy had gotten back to Tellus with a proposed alternate JOA.
¶8. The Board granted the petition to pool the interests, including a force-integration of
Maxwell Energy’s interest as a nonconsenting owner. After stating that the statutory
requirements had been met, the Board’s order stated that “the evidence presented at the
hearing supports these findings.” Within twenty days of the pooling order, Maxwell Energy
sent Tellus a check for $18,277.94 and a letter stating that Maxwell Energy
. . . elects in writing to participate and join in on the same cost basis as the
other consenting owners for its share of the cost and risk of developing and
operating of the above unit as described and referenced hereinabove, insofar
and only insofar as the same relates to Maxwell’s leasehold interest covering
mineral interests which are subject to alternate risk charges, and hereby agrees
in writing to pay its pro rata share of all the costs associated therewith.
Tellus rejected Maxwell Energy’s check, and Maxwell Energy did not consent to any of the
options offered prior to the Board’s hearing and order.
¶9. Maxwell Energy appealed the Board’s force-integration order to the Jefferson Davis
County Chancery Court. In 2012, the chancery court reversed the Board’s order, finding that
it was not supported by substantial evidence. The court also found that Maxwell Energy’s
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submission of the check for its share of estimated initial drilling costs, along with the letter
stating that it would participate on the same costs basis, satisfied the requirements of Section
53-3-7(2)(g)(iii) for voluntary integration after a pooling order is entered.
¶10. Tellus appealed to the Mississippi Court of Appeals, which initially ruled
unanimously in Maxwell Energy’s favor, affirming the ruling of the chancery court. Then,
after granting Tellus’s motion for rehearing and receiving numerous amici briefs, the Court
of Appeals reversed its decision and issued a unanimous opinion in favor of Tellus, reversing
the chancery court judgment and reinstating the Board’s pooling order. We granted certiorari
review of the Court of Appeals’ second opinion.4
DISCUSSION
¶11. “The standard for judicial review of orders of the State Oil and Gas Board is whether
the order is supported by substantial evidence, is arbitrary or capricious, beyond the power
of the Board to make, or violates some constitutional right of the complaining party.”
Superior Oil Co. v. State Oil & Gas Bd., 220 So. 2d 602, 603-04 (Miss.1969). The Board
evaluates the weight and credibility of the evidence, and when the Board evaluates
conflicting testimony, the reviewing court “may not substitute its opinion for the opinion of
the Board.” Boyles v. Mississippi State Oil & Gas Bd., 794 So. 2d 149, 156 (Miss. 2001).
Questions of statutory interpretation are reviewed de novo. Adams v. Mississippi State Oil
& Gas Bd., 139 So. 3d 58, 67 (Miss. 2014).
4
Tellus did not file a motion for rehearing before the Court of Appeals on the second
judgment. In granting certiorari review, this Court waived that procedural requirement in
view of the circumstance such a motion would be a subsequent motion for rehearing after
the case had been reversed on an initial motion for rehearing.
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I. The Mississippi Oil and Gas Board’s order was supported by
substantial evidence.
¶12. The process by which operators offer owners the opportunity to voluntarily integrate
their drilling interests is governed by Mississippi Code Section 53-3-7(2)(a), which provides
in relevant part:
In the event that one or more owners owning not less than thirty-three percent
(33%) of the drilling rights in a drilling unit voluntarily consent to the drilling
of a unit well thereon, and the operator has made a good faith effort to (i)
negotiate with each nonconsenting owner to have said owner’s interest
voluntarily integrated into the unit . . . and (v) offer each nonconsenting owner
the opportunity to lease or farm out on reasonable terms or to participate in the
cost and risk of developing and operating the unit well involved on reasonable
terms, by agreeing in writing, then the operator may petition the board to allow
it to charge alternate charges . . .
Miss. Code Ann. § 53-3-7(2)(a) (Rev. 2003).
¶13. A plain reading of the statute clearly provides that the agreement in writing is an
agreement to the reasonable terms that have been negotiated in good faith. While a JOA
specifically is not statutorily required, it is an appropriate and common vehicle in which the
agreed-on terms are memorialized. Maxwell and Tellus had not entered into a statutorily
sufficient agreement in writing prior to the hearing on Tellus’s integration petition to the
Board.
¶14. The Board heard, point by point, the terms in the JOA Maxwell objected to as
unreasonable as to Maxwell Energy, as well as Tellus’s rebuttal evidence. The Board
members asked extensive questions regarding the terms, common industry practices, and the
witness’s experiences in the industry. Moreover, Maxwell did not present counteroffer terms
until almost the eve of the scheduled Board hearing. Applying our deferential standard of
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review, we find that the Board’s decision that Tellus met all of its statutory requirements for
offering good-faith options for voluntary integration on reasonable terms was supported by
substantial evidence.5
II. Statutory Interpretation of Mississippi Code Section 53-3-
7(2)(g)(iii)
¶15. Mississippi Code Section 53-3-7(2)(g)(iii) provides a last opportunity for
nonconsenting owners to participate following a Board pooling order:
. . . The pooling order if issued shall provide that each nonconsenting owner
shall be afforded the opportunity to participate in the development and
operation of the well in the pooled unit as to all or any part of said owner’s
interest on the same costs basis as the consenting owners by agreeing in
writing to pay that part of the costs of such development and operation
chargeable to said nonconsenting owner’s interest, or to enter into such other
written agreement with the operator as the parties may contract, provided such
acceptance in writing is filed with the board within twenty (20) days after the
pooling order is filed for record with the board . . . .
Miss. Code Ann. § 53-3-7(2)(g)(iii) (Rev. 2003). Maxwell Energy argues that it satisfied this
statute by sending a unilateral letter to Tellus stating that it would participate on the same
costs basis as the consenting owners and by sending Tellus a check for Maxwell Energy’s
estimated share of initial drilling costs. Tellus, consistent with the Board’s longstanding
position, argues that, when the two subsections of Section53-3-7 are read together, Section
53-3-7(2)(g) simply provides a opportunity to elect in writing one of the three offers in
5
We certainly do not find, and Tellus does not suggest, that the terms necessarily must
be uniform among the owners in order to be reasonable. We do not intend to discourage
owners from engaging in negotiations or operators from being flexible within reason to
obtain the goal of voluntary integration.
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Section 53-3-7(2)(a), on the terms the Board found reasonable, or to negotiate an alternate
contract on such terms as the parties can agree on.
¶16. We will engage in statutory construction when a statutory provision is ambiguous due
to two reasonable interpretations. Miss. Methodist Hosp. and Rehab. Ctr., Inc. v. Miss. Div.
of Medicaid, 21 So. 3d 600, 607 (Miss. 2009). Under the doctrine of in pari materia, where
two statutes speak to the same or similar subject matter, “this Court must resolve the
ambiguity by applying the statute consistently with other statutes dealing with the same or
similar subject matter.” State ex rel. Hood v. Madison Cnty. ex rel. Madison Cnty. Bd. Of
Supervisors, 873 So. 2d 85, 91 (Miss. 2004).
¶17. We agree with Tellus and the longtime working position of the Board that, when
Sections 53-3-7(2)(a) and 53-3-7(2)(g)(iii) are read together, Section 53-3-7(2)(g)(iii)
requires a nonconsenting owner, after a pooling order, to enter into a written agreement to
what the Board found to be reasonable terms, or enter into such other written agreement as
the parties may contract. If we construed Maxwell Energy’s actions to satisfy this statute,
then owners who participate under Section 53-3-7(g)(iii) would in effect be exempt from the
requirements of Section 53-3-7(2) for an an agreement in writing to reasonable terms
negotiated in good faith. Section 53-3-7(g)(iii) does not create a loophole whereby an owner
can simply wait until after a pooling order is issued as a way of avoiding being bound to
terms the Board found to be reasonable or avoiding further negotiations to reach mutual
alternative terms with the operator. The absence of contractually agreed-on terms also is
highly impracticable, given the highly complicated and expensive nature of drilling projects
9
that might last decades. We find that the statute is intended to provide certainty of the
reasonable terms to which the parties are bound as the unit(s) are developed.
CONCLUSION
¶18. We hold that the chancellor erred in finding that the Board’s order was not supported
by substantial evidence and also in finding that Maxwell’s actions after the pooling order
operated to integrate his interest voluntarily. The judgment of the Court of Appeals is
affirmed. The chancellor’s order is reversed, and the Board’s pooling order is reinstated.
¶19. THE JUDGMENT OF THE COURT OF APPEALS IS AFFIRMED. THE
JUDGMENT OF THE CHANCERY COURT OF JEFFERSON DAVIS COUNTY IS
REVERSED AND RENDERED.
DICKINSON AND RANDOLPH, P.JJ., LAMAR, KITCHENS, PIERCE, KING
AND COLEMAN, JJ., CONCUR. WALLER, C.J., NOT PARTICIPATING.
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