Occidental Permian Ltd. v. the Helen Jones Foundation, BP America Production Co.

NO. 07-09-00059-CV
IN THE COURT OF APPEALS
FOR THE SEVENTH DISTRICT OF TEXAS
AT AMARILLO
PANEL E
JANUARY 31, 2011
OCCIDENTAL PERMIAN LTD.,
APPELLANT/CROSS-APPELLEE
v.
THE HELEN JONES FOUNDATION, ET. AL.,
APPELLEES/CROSS-APPELLANTS
v.
BP AMERICA PRODUCTION COMPANY, ET. AL.,
CROSS-APPELLEES
___________________________
FROM THE 286TH DISTRICT COURT OF HOCKLEY COUNTY;
NO. 06-01-20302; HONORABLE ANDREW J. KUPPER, JUDGE
Before CAMPBELL and PIRTLE, JJ., and BOYD, S.J.1
OPINION
Owners of royalty interests2 in lands in the Slaughter Field3 brought suit seeking
damages for underpaid royalties on casinghead gas4 against the current lease operator,
1
John T. Boyd, Chief Justice (Ret.), Seventh Court of Appeals, sitting by
assignment.
Occidental Permian Ltd. (“OPL”), and two former operators of the leases. The royalty
2
The plaintiff royalty owners are: the CH Foundation; The Helen Jones
Foundation, representing its own interests and by assignment those of Dorothy Gail
Secrest Unitrust; James C. Arnold, Trustee for Arnold 2002 Trust; Wells Fargo Bank,
Trustee and/or Agent with Power of Attorney for Frances Snyder Flood Testamentary
Trust, Anne Snyder Testamentary Trust, and Dick Snyder Testamentary Trust; Cheryl
Mattison, Executrix for Estate of Myron D. Mattison; LAGH, Ltd.; Community Bank of
Raymore, Trustee and/or Agent with Power of Attorney for William L. Abernathy Trust,
Abbie J. Burton Trust, Lynn G. Fayman Trust, Claudia Kenyon Trust, Kern E. Kenyon
Trust, Milus D. Scruggs Trust, Thomas M. Scruggs, Jr. Trust, David L. Fayman Trust,
and Faith Fayman Strong Trust; Texas Capital Bank Trustee and/or Agent with Power
of Attorney for Dora Lee Langdon Mineral Trust, Jane Byars Roby Mineral Trust, and
Dora Langdon Article V. Trust; Frost National Bank, Trustee and/or Agent with Power of
Attorney for Johnson Oil Control (Trust Entity Incorporating Kathleen L. Webster Trust,
Joseph M. Durkin Trust, Mark L. Johnson Trust, Sheila A. Johnson Trust, Catherine L.
Johnson Tekstar Trust), Karen Hixon Trust, Dora Lee Langdon Article IV Trust, and Lee
Kendall Langdon Trusts (F/B/O Clay Langdon and F/B/O Lee Kendall Langdon); Bank
of America Trustee for J. Lee Johnson, Jr. Trust U/W F/B/O J. Lee Johnson, IV; Mark L.
Johnson, Trustee for J. Lee Johnson III Descendants Revocable Trust and Executor for
Estate of J. Lee Johnson III; KCJ Family Ltd. Partnership; Joseph A. Durkin, Executor
and Trustee for Estate of Catherine J. Durkin; Kathleen D. Webster; Joseph M. Durkin;
Teresa M. Durkin Wilkinson; Jack Wilkinson, Jr., Trustee for Teresa M. Durkin Wilkinson
Trust; J.P. Morgan Chase, Trustee and/or Agent with Power of Attorney for Billie Lucille
Parker Agency, Earle North Parker Irrevocable Trust, Lynsey Alison Edens Recovable
Trust, and William Ashley Edens Recovable Trust; Pamela Allison Parker Clifton for
Ruthie Young Parker Life Estate; Clay A. Parker; Albon Head, Jr.; Michael M. Gibson;
David Chappell; Stanford Harrell; KHM Enterprises Ltd.; Martha Price; Jeanne Van Zant
Sanders (Trustee of the Fred A. Sanders Testamentary Trust; Formerly, Est. of
Frederick A. Sanders); Albert E. Sanders; Paula Day (Executrix of Est. of Sam J. Day);
Winfred Hooper, Jr.; The Plum Foundation, representing the interests of Dorothy Gail
Secrest; Olney Wallis, Trustee for Gary Macklyn Green Grantor’s Trust; William Jewell
College.
3
The leases at issue describe land located in Hockley, Terry and Cochran
Counties, Texas.
4
“Casinghead gas” is statutorily defined as meaning “any gas or vapor
indigenous to an oil stratum and produced from the stratum with oil.” Tex. Nat. Res.
Code Ann. § 86.002(10) (West 2001).
2
owners also asserted a claim against OPL for royalties on carbon dioxide. The trial
court granted summary judgment for the operators on some claims, and a jury heard the
remaining claims. After a verdict in favor of the royalty owners, the trial court signed a
judgment disregarding the jury’s award of attorney’s fees against OPL but otherwise
awarding the damages found by the jury as to OPL. The judgment ordered that the
royalty owners take nothing from the former operators.
The royalty owners appeal the trial court’s grant of summary judgment, its denial
of their attorney’s fees and the take-nothing judgment against the former operators.
OPL appeals the judgment against it.
We will render judgment that the royalty owners take nothing from OPL. We will
affirm the summary judgment, the denial of attorney’s fees and the take-nothing
judgment as to the former operators. We will remand the case for entry of a new
judgment consistent with this opinion and law. We will otherwise affirm the judgment.
Background
As to the royalties on casinghead gas, six oil and gas leases are at issue. The
parties agree that the royalty on casinghead gas under four of the leases is one-eighth
of the “amount realized from such sale” when gas is sold at the wells. The other two
leases, the parties also agree, provide a royalty on casinghead gas of three-eighths of
its “market value in the field.”5
5
See, e.g., Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368, 372 (Tex. 2001)
(distinguishing “market value” and “amount realized” or “proceeds” royalty provisions).
3
The six leases range in date from 1934 through 1944. The Slaughter Field is an
oil-producing field, and the casinghead gas was flared until sometime in the 1940s
when, according to testimony, the Railroad Commission prohibited the practice. In the
late 1940s, eight lessees, including the defendants’ predecessor Stanolind Oil and Gas
Company, jointly constructed the Slaughter Gas Processing Plant. The plant began
operation in 1949.
The lessees individually entered into Casinghead Gas Contracts, beginning in
1947, by which they sold the casinghead gas produced on their leases to the plant
owners. The gas contracts were “percentage of proceeds” contracts, by which the plant
agreed to pay the lessees 50% of the proceeds from the sale of processed residue gas
and 33.3% of the proceeds from the sale of natural gas liquids (NGLs) from the plant.6
The term of these gas sales contracts was for the life of the Slaughter Plant.7
In the 1960s, units were formed for the purpose of conducting secondary
recovery operations, such as waterfloods, to enhance production of oil in the field.
Then in the 1980s tertiary recovery operations were commenced, by which carbon
dioxide is injected into the producing formation, also for the purpose of maintaining and
enhancing production of oil. The injected CO2 becomes commingled with hydrocarbons
6
See Bowden v. Phillips Petroleum Co., 247 S.W.3d 690, 708 (Tex. 2008) (also
describing percentage of proceeds contract).
7
Gas from the six leases at issue here is sold under one of three Casinghead
Gas Contracts, two dated in 1947 and the third in 1954. They have been amended but
the amendments are not germane to the issues in this case. For our purposes, the
three contracts may be considered identical.
4
in the producing formation and comes back to the surface along with the casinghead
gas.
High levels of CO2 interfere with the processing of gas in the Slaughter Plant.8
As the CO2-injection program expanded in the field, levels of CO2 in the casinghead gas
increased. And the injected CO2 migrated to nearby units, so casinghead gas produced
from wells outside the units in which CO2 was being injected also experienced
increased CO2 levels. During the mid-1980s, the owners of the Slaughter Plant
constructed the adjoining Mallet Plant to process gas with high CO2 concentrations.
The CO2 extracted from the gas at the Mallet Plant is returned to the unit operator for
reinjection into the oil-producing formation. The CO2 thus follows a continuous cycle of
injection, recovery, processing and re-injection. The casinghead gas, shorn of CO2, is
piped from the Mallet Plant to the Slaughter Plant for further processing.
In 1996, BP America Production Company, then known as Amoco Production
Company, became operator of the Slaughter and Mallet Plants and operator of the
leases at issue in the litigation. It later was succeeded as operator of the plant and
leases by Altura Energy Ltd. In 2000, OPL acquired both the leases and the plants.
Thus, OPL now is both seller and buyer of the casinghead gas under the gas sales
contracts.
8
According to the testimony of an OPL employee, the Slaughter Plant can
handle gas bearing a “composite” carbon dioxide and hydrogen sulfide content up to
12%.
5
Under the terms of the casinghead gas sales contracts, the casinghead gas is
delivered to the buyer at or near the wellhead. Evidence showed that after the gas is
gathered from the leases, and processed through the Mallet and Slaughter plants, the
NGLs extracted from the gas stream, and the residue gas available for sale after
processing, are transferred to OPL’s affiliated company Occidental Energy Marketing,
Inc. (“OEMI”). OEMI markets the extracted NGLs at Mont Belvieu, Texas, near the
Houston Ship Channel, and the residue gas at Waha, an El Paso Natural Gas Co.
marketing hub in Pecos County.
In their suit against BP America Production Company, Altura Energy Ltd. (who
we will refer to jointly as BP) and OPL, the royalty owners contended (1) BP and OPL
breached the four amount-realized leases by failing to pay royalty calculated on the
actual amount they realized from sale of casinghead gas; (2) BP and OPL breached an
implied covenant in the amount-realized leases by failing to market the casinghead gas
as would a reasonably prudent operator; (3) under the two market-value leases, BP and
OPL did not calculate casinghead gas royalties on its market value in the field; and (4)
OPL failed to pay a royalty on the CO2 separated from the gas at the Mallet Plant. The
royalty owners moved for partial summary judgment seeking a declaration that OPL
owed a royalty on CO2. By cross-motion, OPL sought a declaration that the CO2 was
not subject to its royalty obligation. The trial court agreed with OPL and granted a
partial summary judgment accordingly. The remaining issues were tried to the jury.
The jury found for the royalty owners on all liability theories submitted and
awarded them attorney’s fees. The trial court granted judgment notwithstanding the
6
verdict in favor of BP on its statute of limitations defense9 and in favor of OPL on the
award of attorney’s fees. The court then rendered judgment that the royalty owners
recover $7,064,674 from OPL and take nothing from BP. As noted, both OPL and the
royalty owners appeal.
Analysis
Issues Tried to Jury
Through three issues OPL contends no evidence supported the jury’s findings of
liability and damages for: (1) the failure to pay royalties according to the amount-
realized leases; (2) the breach of the implied duty to market in the amount-realized
leases; and (3) the underpayment of royalties on the market-value leases. BP raises
the same arguments in response to the royalty owners’ cross-appeal.10 By cross-
appeal, the royalty owners argue the trial court erred in granting judgment
notwithstanding the verdict on BP’s statute of limitations defense and in favor of BP and
OPL on the royalty owners’ request for attorney’s fees.
9
The royalty owners filed suit in January 2006, seeking damages for the alleged
wrongful conduct of BP from 1990 to 2000. They asserted the discovery doctrine in
avoidance of the limitations defenses interposed by BP. OPL acquired the leases and
plants in August 2000 but the royalty owners limited their claims against OPL to the
period January 2002 through August 2008.
10
On liability and damage questions like those submitted against OPL, the jury
made affirmative findings against BP. While the jury made findings supporting
application of the discovery doctrine, as noted, the trial court granted judgment
notwithstanding the verdict in favor of BP on limitations grounds. On appeal, BP argues
the trial court correctly disregarded the findings supporting the discovery doctrine’s
application. BP further contends that even were this error, no evidence supported the
liability and damage findings made against BP.
7
When conducting a legal sufficiency review, we view the evidence in a light most
favorable to the judgment and indulge every reasonable inference to support it, crediting
favorable evidence if a reasonable factfinder could, and disregarding contrary evidence
unless a reasonable factfinder could not. City of Keller v. Wilson, 168 S.W.3d 802, 807,
822 (Tex. 2005). Anything more than a scintilla of evidence is legally sufficient to
support the finding. Cont’l Coffee Prods. Co. v. Cazarez, 937 S.W.2d 444, 450 (Tex.
1996). When evidence is so weak as to do no more than create “a mere surmise or
suspicion” that a fact exists, the evidence does not exceed a scintilla. Ford Motor Co. v.
Ridgway, 135 S.W.3d 598, 601 (Tex. 2004) (quoting Kindred v. Con/Chem, Inc., 650
S.W.2d 61, 63 (Tex. 1983)).
The Amount-Realized Leases
As noted, the royalty clause of the four amount-realized, or proceeds, leases
specifies a royalty on casinghead gas sold at the wells of one-eighth of the amount
realized from the sale. OPL contends the evidence conclusively shows it paid royalties
in accordance with the royalty clause, and we agree.
An oil and gas lease is a contract and interpreted accordingly. Tana Oil & Gas
Corp. v. Cernosek, 188 S.W.3d 354, 359 (Tex.App.--Austin 2006, pet. denied). It is a
basic tenet of our law that competent parties enjoy the utmost freedom of contract and
courts will enforce a contract freely and voluntarily made for a lawful purpose.
Crutchfield v. Associates Investment Co., 376 S.W.2d 957, 959 (Tex.Civ.App.--Dallas
1964, writ ref’d). Contract terms are given their plain, ordinary, and generally accepted
8
meanings unless the contract itself shows them used in a technical or different sense.
Valence Operating Company v. Dorsett, 164 S.W.3d 656, 662 (Tex. 2005).
It is undisputed that the casinghead gas is sold at the wells, and that the lessor is
entitled to royalties based on the amount realized from the wellhead sale. See Tana Oil
& Gas Corp., 188 S.W.3d at 360 (applying amount-realized royalty provision); see
generally Exxon Corp. v. Middleton, 613 S.W.2d 240, 242-44 (Tex. 1981) (construing
“gas sold at the wells” royalty provision). “Amount realized” means the proceeds
received from the sale of gas or oil. Tana Oil & Gas, 188 S.W.3d at 360. “At the well”
means before value is added by processing the raw gas for market. Id.
It is further undisputed that, at all times pertinent to this litigation, the life-of-the-
plant gas sales contracts for the sale of the casinghead gas at the wellhead have
remained in place, and that the lessees have paid royalties to the lessors based on the
proceeds received by the lessees for the casinghead gas in accordance with the terms
of the contracts. Nevertheless, the royalty owners contend, and the jury found, that the
lessees failed to pay royalties in accordance with the leases.
The royalty owners’ expert Charles Graham testified to his opinion that the
amount OPL truly realizes for the casinghead gas is not the proceeds it receives under
the wellhead gas sales contracts.11 His opinion focused on the circumstance that OPL,
through its acquisition of sole ownership of both the leases and the Slaughter Plant, is
11
Graham testified that to establish the amount OPL realized from its sale of the
casinghead gas, he looked not to the gas sales contracts but “what the defendants
really realized” less “some costs.”
9
both seller and buyer of the casinghead gas. It follows, according to Graham, that the
determination of the amount realized by OPL is no longer limited to that received under
the gas sales contracts. His opinion was that the amount OPL realizes for the gas at
the wellhead, properly calculated, equals 100% of the proceeds of the downstream
sales of the extracted NGLs and residue gas less certain costs.12 One eighth of that
amount, Graham testified, is the royalty owed by OPL.
We find Graham’s testimony provided no evidence OPL failed to pay royalties as
required by the leases. First, his theory simply does not comport with the plain
language of the leases. Under the four “amount-realized” leases, royalty is calculated
on the amount realized from sale only if the gas is sold at the well; otherwise, royalty is
payable on the market value of the gas. The gas royalty language from the 1934
Christine DeVitt “B” lease is typical of the four amount-realized leases, stating that the
royalty is “on gas produced from said land and sold or used off the land or in the
manufacture of gasoline, including casinghead gas, the market price at the well of one-
eighth of the gas so sold or used, provided that if and when lessee shall sell gas at the
wells lessor’s royalty thereon shall be one-eighth of the amount realized from such
sales.” There is no dispute that the “such sales” referred to are the sales of gas at the
wells. Graham’s theory necessarily makes use of the gas sales contracts to establish
that the casinghead gas is sold at the wellhead (thus triggering the obligation to pay
royalty on the amount realized from “such sales”), then ignores the provisions of the
12
See Bowden, 247 S.W.3d at 702 (describing, in class action certification
appeal, similar distinction between wellhead prices and those received from
downstream sales after processing).
10
contracts13 when determining the amount realized from the sale.14 The royalty owners
cannot have it both ways. If the gas sales contracts are effective to establish that the
lessee is selling the gas at the wells, so as to trigger the obligation to pay royalty on the
amount realized from “such sales,” the terms of the same contracts cannot be
disregarded in the determination of the amount realized from “such sales.”
Moreover, the proceeds to which Graham pointed as the basis for his theory
were not proceeds of the sale of gas as produced at the wellhead, but those of the sale
of natural gas liquids and residue gas after processing. Graham testified that the
amount OPL realized from the wellhead sale equaled the proceeds of OEMI’s sale of
the NGLs at Mont Belvieu and its sale of the residue gas at Waha, less transportation
and fractionation costs. Graham’s version of the amount realized thus includes
amounts OPL realized from its activities beyond the wellhead, including its gathering of
the gas, its processing of the gas at the Mallet and Slaughter Plants and its marketing of
the extracted liquids. Cf. Tana Oil & Gas Corp., 188 S.W.3d at 360-61 (phrase “at the
well” means before value is added by preparing the gas for market). Evidence of
proceeds received by OEMI, an affiliated but different company, from sales of NGLs and
13
Graham straightforwardly acknowledged that his analysis ignored the
percentages stated in the gas sales contracts, opining that the contracts’ percentage of
proceeds formula was “not binding on” the lessors.
14
The royalty owners’ contention here is thus distinguished from that described
in Texas Oil & Gas Corp. v. Hagen, 683 S.W.2d 24 (Tex.App.--Texarkana 1984), writ
dism’d as moot, 760 S.W.2d 960 (Tex. 1988), in which the court of appeals affirmed trial
court findings that a purported wellhead sale of gas by the producer to its wholly-owned
pipeline subsidiary was a sham, and that the “true sale” of the gas was off the lease
premises, making a market-value royalty provision applicable. Id. at 28.
11
residue gas at locations far removed from the wellhead is not evidence of the amount
realized by OPL from a sale of raw gas at the well.15
We agree with OPL the undisputed evidence that royalties have been paid in
accordance with the proceeds received under the casinghead gas sales contracts is
conclusive evidence that royalties have been paid as required by the leases. See
Keller, 168 S.W.3d at 814-15 (discussing conclusive evidence).
The Implied Duty to Market Gas
BP and OPL next challenge the legal sufficiency of evidence supporting the jury’s
findings of liability and damages for failure to reasonably market gas produced under
the amount-realized leases.
If silent on the subject, an oil and gas lease includes an implied covenant by the
lessee to manage and administer the lease. Yzaguirre, 53 S.W.3d at 373. This implied
covenant places on the lessee the duty to market the oil and gas reasonably. Id.;
Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 568 (Tex. 1981) (conduct of lessee is
measured by that of reasonably prudent operator under same or similar circumstances).
The focus in an action for breach of the duty to reasonably market is on the conduct of
15
Note, for example, the issues recited in proposed class litigation brought by
royalty owners against affiliated defendants as including the issue whether the
“corporate separateness” of affiliated defendants should be disregarded. Union Pac.
Res. Group, Inc. v. Hankins, 111 S.W.3d 69, 73 (Tex. 2003). Graham’s opinion
testimony simply assumed that receipt of proceeds by OPL’s affiliate OEMI is to be
equated with their receipt by OPL. The royalty owners do not support such an
assumption by citation to Texas authority.
12
the lessee and not other sales. Union Pac. Res. Group, Inc. v. Hankins, 111 S.W.3d
69, 71 (Tex. 2003).
We begin our discussion by noting our disagreement with one position taken by
OPL. It argues that the Texas Supreme Court has limited breaches of the implied
covenant to market to instances in which the proceeds received by the lessee were the
result of fraud or sham. OPL relies on language in Hankins, 111 S.W.3d at 74, for this
proposition. We do not agree that Hankins so held. As the court pointed out in
Bowden, 247 S.W.3d at 700, the issue with which the court dealt in Hankins was
whether there was a common legal question within a class consisting of lessors of
market-value and proceeds leases. The court began its analysis of that issue in
Hankins by listing the common issues the trial court had identified. 111 S.W.3d at 73.
Searching the list for at least one issue of law or fact that both inhered in the complaints
of all proposed class members and was subject to generalized proof, the court divided
the trial court’s list into a group of issues it found questioned whether the defendants
breached the implied covenant by failing to obtain arm’s length prices and a group it
characterized as questioning whether a defendant had engaged in a sham transaction
with an affiliated company. Id. at 74. Reiterating the holding of Yzaguirre that no
covenant to reasonably market is implied in market-value royalty leases, and finding
that market-value royalty owners are protected from the effects of inter-affiliate
transactions by their entitlement to receive royalty based on the “objective market
value,” the court went on to hold that none of the trial court’s listed issues had
application to market-value leases, depriving the proposed class of commonality. Id. at
74-75. The statement to which OPL points, “the question under a proceeds lease would
13
be whether the proceeds actually received by the lessee were a fraud or a sham,” id. at
74, must be seen in its context of the court’s discussion of the issues identified by the
trial court in that case. We do not believe the Supreme Court intended by the statement
to limit the duty to reasonably market, when implied, to a duty in all cases simply to
avoid fraudulent or sham marketing transactions. Nor do we see anything in the court’s
opinion in Bowden, which OPL also cites, to suggest such a limitation applicable in all
cases. 247 S.W.3d at 700 (noting that “Hankins did involve similar allegations that the
lessee’s intra-affiliate sales transactions were a sham”).
We agree, though, with OPL that in an evaluation of the sufficiency of the
evidence it breached its duty to reasonably market the casinghead gas, our inquiry must
focus on its behavior, not on evidence of other sales. Hankins, 111 S.W.3d at 71. And
we agree that the evidence of its breach of the duty is legally insufficient.
The charge asked whether BP and OPL failed to reasonably market gas
produced from the proceeds leases. In conjunction with the question, the trial court
instructed the jury that BP and OPL had “a duty to act as a reasonably prudent operator
would act under the same or similar circumstances.”
The royalty owners argue the evidence showed that selling the casinghead gas
for such “meager proceeds,” that is, a third of the liquids and half the residue gas,
“breaches the duty to market because [a reasonably prudent operator] would not sell
gas to a plant on such low proceeds – particularly when the [reasonably prudent
operator] owns and controls the plant.” But, as noted, it is undisputed that OPL has
paid royalties according to the proceeds under the percentage gas sales contracts put
14
in place by its predecessors. Moreover, no witness opined that the percentage sales
contracts were unreasonable when signed. Graham testified that the lessees’ entry into
the percentage sales contracts when the Slaughter Plant was built was reasonably
prudent. It is undisputed also that the terms of those contracts extended for the life of
the plant. The allegedly breaching behavior of OPL, then, does not consist of any
action on its part but merely its failure to change the terms of contracts that came with
the properties it purchased.
The royalty owners emphasize the self-dealing nature of the gas sales contracts,
referring to the contracts as OPL’s “left hand” selling the gas to its “right hand.” As a
pattern for their implied covenant analysis, the royalty owners point to Harding v.
Cameron, 220 F. Supp. 466 (W.D. Okla. 1963), a diversity case applying Oklahoma law.
Id. at 467. The royalty owners correctly note that Harding involved a lessee who
occupied both the selling and buying sides of an arrangement for the compression of
natural gas. On a complaint by his lessors of underpaid royalties, the court held the
lessee had breached duties to exercise the diligence of a prudent operator and to obtain
a market for the gas at the best price obtainable. Id. at 470. Citing his self-dealing, the
court found that the lessee had acted primarily in his own interest and without regard to
his obligations to the lessors. Id.
We do not find Harding persuasive authority on the issues involved here. First,
under Oklahoma law, royalty was payable on the “value” or “market price” of the gas,
and Texas does not recognize an implied duty to market under a lease with a market-
15
value royalty provision. Hankins, 111 S.W.3d at 72; Yzaguirre, 53 S.W.3d at 374.16
Second, the actions of the lessee in Harding involved setting up the offending gas
marketing arrangements, not simply acquiring both sides of arrangements that were
prudent when established.17
Certainly Texas implied covenant law takes self-dealing into account. The Texas
Supreme Court has noted that the implied covenant to reasonably market oil and gas
serves to protect a lessor from the lessee’s self-dealing or negligence. Yzaguirre, 53
S.W.3d at 374. But the royalty owners here seem to assume that a showing of self-
dealing is all that is required to show a breach of the implied covenant. In fact, their
evidence of OPL’s breach of the duty to reasonably market the casinghead gas is
dependent on its self-dealing. Under the royalty owners’ theory, OPL has breached its
duty to reasonably market by failing to modify the terms of the gas sales contracts
precisely because it, acting alone, has the ability to do so. The royalty owners
presented no evidence that a reasonably prudent seller of casinghead gas in OPL’s
16
As to the substantial differences in the approaches taken by Texas and
Oklahoma courts to the lessee’s obligation to pay royalty on gas production, see John
Burritt McArthur, A Minority of One? The Reasons to Reject the Texas Supreme Court’s
Recent Abandonment of the Duty to Market in Market-Value Leases, 37 Tex. Tech Law
Rev. 271, 274 (2005) (“Oklahoma requires the lessee to share the price it receives in
any sales contract into which it enters in good faith”); Bruce M. Kramer, Interpreting the
Royalty Obligation by Looking at the Express Language: What a Novel Idea? 35 Tex.
Tech Law Rev. 223, 248-49 (2004) (discussing Tara Petroleum Corp v. Hughey, 630
P.2d 1296 (Okla. 1981)).
17
See Bowden, 247 S.W.3d at 698 (in similar context, the litigation of disputes
over natural gas agreements entered into in the 1940s, the court noting that despite the
passage of decades and marked changes in the ways of marketing of natural gas,
courts “interpret the obligations and rights of the parties according to their expressed
intent when they entered the agreement”).
16
position would have any ability to terminate or modify the life-of-the-plant gas sales
contracts if it were not also the plant owner, nor did they present any evidence that the
terms of a re-negotiated or modified gas sales contract for gas in the Slaughter Field,
negotiated at arms-length, would be better for the seller than those of the existing
contracts.18 While the royalty owners produced substantial blocks of expert testimony
and documentary exhibits supporting their claims, we agree with OPL there was no
proof of what different marketing action was required of a reasonably prudent operator
under the same or similar circumstances. See Migl v. Dominion Oklahoma Texas Expl.
& Prod., Inc., 2007 Tex. App. Lexis 1179, at *18-*19 (Tex.App.--Corpus Christi 2007, no
pet.) (mem. op.) (considering evidence of breach of implied covenant to reasonably
market).
Underpayment of Royalties on Market-Value Leases
By their third cause of action, the royalty owners claimed BP and OPL failed to
pay royalties based on the market value of gas in the field under the market-value
leases. As noted, the royalty clauses of these leases provide a three-eighths royalty of
the market value in the field of gas sold. The jury gave a positive answer to the
question asking whether OPL failed to pay royalty based on market value.
18
The royalty owners do not contend that OPL’s predecessors acted
unreasonably as operators by initiating the CO2 injection program or that OPL’s
maintenance of the injection program is unreasonable. It would seem then that analysis
of the casinghead gas marketing actions required of a reasonably prudent operator
under the same or similar circumstances necessarily would take the consequences of
that program, including the resulting high CO2 content of the gas, into account.
17
The royalty owners relied at trial on the testimony of their market value expert,
Christopher Kay Alguire. BP and OPL objected in the trial court and argue here that
Alguire’s testimony was irrelevant and unreliable, and therefore provided no evidence.
Of the positions they advance supporting their argument,19 we address two: that
Alguire’s definition of market value does not comport with Texas law, and that the gas
sold under the contracts on which she formed her market value opinion was not
comparable in quality to the gas produced on the OPL leases at issue in this litigation.
The market value of property is the price it would bring when offered for sale by
one desiring, but not obligated, to sell and bought by one under no necessity of buying
it. Yzaguirre, 53 S.W.3d at 374 (citing Middleton, 613 S.W.2d at 246). Texas law
recognizes two methods to determine market value of gas sold at the well. Heritage
Res., Inc. v. Nationsbank, 939 S.W.2d 118, 122 (Tex. 1996). The preferred method,
and that used by the royalty owners’ expert Alguire, is that of examining comparable
sales. See id. at 122; Texas Oil & Gas Corp. v. Vela, 429 S.W.2d 866, 872 (Tex. 1968).
To determine its market value, gas is valued as though it is free and available for sale.
Middleton, 613 S.W.2d at 246.
“Market value is generally determined by comparing the sale price to other sales
‘comparable in time, quality, quantity, and availability of marketing outlets.’” Hankins,
111 S.W.3d at 71 (quoting Heritage Res., 939 S.W.2d at 122). A sale of gas of
comparable quality involves gas with similar physical properties such as sweet, sour, or
19
OPL also presents arguments that Alguire’s opinions were based in part on
sales too far removed geographically from those at issue here. We do not reach those
arguments.
18
casinghead gas. Middleton, 613 S.W.2d at 246. Proper expert testimony may make
adjustments between sales of gas with differing physical properties so that the sales
being compared truly are comparable. See id. at 247 (referring to adjustments for gas
of differing BTU content).
One presenting expert testimony must be properly qualified and her opinions
must be relevant and based on a reliable foundation. See Tex. R. Evid. 702; Gammill v.
Jack Williams Chevrolet, Inc., 972 S.W.2d 713, 720 (Tex. 1998) (citing E.I. du Pont de
Nemours & Co. v. Robinson, 923 S.W.2d 549, 556 (Tex. 1995)). In determining
whether an expert’s testimony constitutes some evidence, “an expert’s bare opinion will
not suffice” rather “the substance of the testimony must be considered.” Merrell Dow
Pharms., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex. 1997). The expert must explain the
basis of her statements to link her conclusions to the facts. Earle v. Ratliff, 998 S.W.2d
882, 890 (Tex. 1999). “[A] claim will not stand or fall on the mere ipse dixit of a
credentialed witness.” Burrow v. Arce, 997 S.W.2d 229, 235 (Tex. 1999).
It is the burden of the proponent of scientific or technical evidence to
demonstrate the opinions of its expert are reliable. See Kerr-McGee Corp. v. Helton,
133 S.W.3d 245, 254 (Tex. 2004). Determining reliability of the expert’s opinions
focuses on the principles, research and methodology underlying the conclusions of the
expert. Exxon Pipeline Co. v. Zwahr, 88 S.W.3d 623, 629 (Tex. 2002). “[E]xpert
testimony is unreliable if it is not grounded in the methods and procedures of science
and is no more than subjective belief or unsupported speculation.” Kerr-McGee, 133
S.W.3d at 254 (internal quotation marks and citation omitted). Expert testimony is also
19
unreliable if there is “too great an analytical gap between the data and the opinion
proffered.” Id. (quoting Gammill v. Jack Williams Chevrolet, Inc., 972 S.W.2d 713, 726,
(Tex. 1998)). “If the expert’s testimony is not reliable, it is not evidence.” Kerr-McGee,
133 S.W.3d at 254 (citing Havner, 953 S.W.2d at 713).
Unlike the market-value studies reflected in other reported Texas cases, the
market-value study to which Alguire testified was not conducted by comparing the
dollars-per-Mcf or dollars-per-MMBTU values of the prices on which the royalty owners
received royalty with royalties paid for comparable gas. See, e.g., Middleton, 613
S.W.2d at 247-48; Amoco Prod. Co. v. First Baptist Church, 579 S.W.2d 280, 282
(Tex.App.—El Paso 1979), writ ref’d n.r.e., 611 S.W.2d 610 (1980) (per curiam). Like
their claims under the amount-realized leases, the royalty owners’ case under the
market-value leases complained of the percentages of the post-processing sales prices
allocated to the wellhead sale, not the product sales prices themselves. Their
contention is not that OPL paid royalties based on below-market prices for casinghead
gas but that the allocation of only 33.3% of the NGL revenue and 50% of the residue
gas revenue to the wellhead under the percentage of proceeds contracts resulted in
royalties being paid on something less than the market value of the casinghead gas at
the wellhead. Accordingly, Alguire testified she compared the 33.3% of NGLs, 50% of
residue gas percentage of proceeds terms in place here with percentages of proceeds
being paid under other contracts for casinghead gas gathered to a gas processing plant.
As Alguire described it, her assignment from the royalty owners was “to provide,
annually, percentage of proceeds that were representative of market value for the
casinghead gas in the area.”
20
The results of Alguire’s study were described in the royalty owners’ exhibit 296,
which consisted of charts on which were plotted the percentages of the downstream
resale prices for NGLs and residue gas received by the sellers under various contracts
Alguire had reviewed. By plotting the contracts according to their date of signing,
Alguire calculated a “market value” for percentages of proceeds for each year during the
period 1990 through 2007. As an example, the chart for 1990 shows six contracts
signed during that year for the sale of casinghead gas to a processing plant operator on
a percentage of proceeds basis. Under one contract, the seller received for its
casinghead gas 50% of the proceeds of the downstream sale of NGLs and 75% of the
proceeds of the sale of residue gas. Other percentages reflected on the 1990 chart
ranged from 35% to 75% of NGL proceeds. Based on those results, Alguire determined
that the “market value” for such proceeds in 1990 was 60% of NGL proceeds. By her
determinations, the “market value” proceeds ranged from 60% in the earlier years of her
study to 80% in the years 2001 through 2007. Her conclusion was that “the 33 percent
basis for the percentage of proceeds [under the OPL contracts] was below the range
observed for comparable casinghead gas sales in the area.”
As OPL points out, Alguire’s study never resolves itself to a market value for the
casinghead gas stated in dollars and cents. The study’s premise is that there is a
“market value” for percentages of proceeds. We agree with OPL that Alguire’s study
and testimony provide no evidence OPL failed to pay royalties based on the market
value of the gas in the field.
21
The royalty owners argue that the downstream prices OPL receives for its
processed residue gas and extracted NGLs were not at issue in the litigation and their
amounts and sufficiency were not in dispute. The royalty owners insist that the only
dispute with regard to the market-value leases was whether the 33.3% NGLs, 50%
residue gas proceeds allocated to the wellhead by OPL constitute market value in the
field. We recognize it is common for casinghead gas to be sold on percentage of
proceeds terms,20 and recognize the changes in recent decades in the marketing of
natural gas and NGLs. Nonetheless, it seems to us that comparing percentages begs
the question “percentage of what?” Without evidence of the downstream prices for
which other gas plant operators sold their NGLs and residue gas, it seems to us
impossible to reach a true market value conclusion. Evidence that a seller of gas
received 50% of NGL proceeds is meaningless without knowledge of the amount of the
proceeds.
OPL also contends Alguire’s testimony was unreliable, and thus provided no
evidence, because the casinghead gas sold under other contracts she compared was
not comparable in quality to that produced from the two Slaughter Field market-value
leases. We agree with this contention as well.
One of the two market-value leases is a part of the Slaughter Estate Unit, the
other a part of the Northwest Mallet Unit. For the period the royalty owners claimed
damages, the Slaughter Estate Unit was under CO2 injection. A 2001 revenue audit
report prepared by Alguire described the natural gas production as “extremely
20
See, e.g., Bowden, 247 S.W.3d at 708.
22
contaminated, mostly by carbon dioxide.” The report stated carbon dioxide levels
exceeded 80% of metered production on the Slaughter Estate Unit and “‘roughly 40%’”
on the Northwest Mallet Unit. Alguire’s trial testimony was consistent with her 2001
report. She said gas produced from the Slaughter Estate Unit during the period
contained CO2 levels in the 80-90% range. The Northwest Mallet Unit was not under
CO2 injection until the conclusion of Alguire’s survey period. But carbon dioxide in the
gas produced from this unit increased from the 20-30% range in the mid-1990s to the
60-70% range by 2007. Before injection began on the Northwest Mallet Unit, CO2
migrated there from surrounding properties.
Alguire acknowledged that the comparable sales approach for obtaining market
value requires consideration of the quality of the gas. But Alguire conducted her market
value study on the premise that high levels of injected CO2 should not be included as a
comparability factor in the market value analysis. She explained the rationale for her
methodology:
I was hesitant about including injected CO2 in the comparability standards
because it would be effectively charging the cost of the CO2 operations,
either directly with the CO2 removal fees, which haven’t been charged, or
indirectly by saying this gas isn’t worth anything because it has got all of
this CO2 in it that we put there, even though, in this instance, in the
Northwest Mallet Unit, it wasn’t even put there by the operators. It seeped
in from surrounding areas.
23
Alguire’s intentional21 omission of the high CO2 content of the gas from her
comparability evaluation22 improperly injects an entirely subjective factor into the search
for what Texas law describes as an objective calculation. See Bowden, 247 S.W.3d at
709 (“[m]arket value leases provide an objective basis for calculating royalties . . . .”);
Yzaguirre, 53 S.W. at 374; Hankins, 111 S.W.3d at 72 (both also referring to “objective
basis for calculating royalties” provided by market-value royalty provisions). It
represents, moreover, the kind of outcome-directed methodology condemned in
Robinson. 923 S.W.2d at 559.
Alguire presented lengthy and detailed testimony. But by not considering
contracts for sale of gas with high CO2 content in her evaluation of the market value of
the Slaughter Estate and Northwest Mallet unit gas highly contaminated with CO2,
Alguire omitted a material step in the quality analysis required by the comparable sales
approach. Without a true comparison of hydrocarbon quality, too great an analytical
gap stands between the data, assuming its accuracy, and Alguire’s market value
opinion. See General Electric Co. v. Joiner, 522 U.S. 136, 146, 118 S. Ct. 512, 519, 139
L. Ed. 2d 508 (1997) (opinion evidence connected to existing data by nothing but
21
Alguire’s testimony makes clear that her omission of the injected CO2 content
from her analysis was intentional. It was a part of the instructions she received for
preparation of her study.
22
Alguire candidly acknowledged on cross-examination, for instance, that her
study did not include a single contract for gas containing CO2 in the 50% range with a
percentage of proceeds higher than the 33.3%, 50% percentages on which the royalty
owners were paid royalty. Later in her cross-examination testimony, Alguire made
reference to one contract in New Mexico under which gas containing 25% CO2 was sold
for 88% of proceeds. She acknowledged the contract would not be comparable to the
higher CO2 levels in the Slaughter Estate Unit gas.
24
credentialed expert’s ipse dixit is insufficient). Lacking reliability, the opinion is
incompetent and amounts to no evidence that BP and OPL underpaid royalties on the
market-value leases. In the absence of any additional evidence supporting the jury’s
implicit finding of comparable quality, we conclude its market-value finding is not
supported by any evidence.
Damages
Finding the jury’s affirmative responses to the three questions inquiring of the
liability of BP and OPL were supported by legally insufficient evidence, we turn to the
jury’s corresponding damage findings. “It is well established in Texas that no recovery
is allowed unless liability has been established.” Mitchell v. Bank of Am., N.A., 156
S.W.3d 622, 627 (Tex.App.--Dallas 2004, pet. denied). In the absence of liability
findings, damage findings are immaterial. Fire Ins. Exch. v. Sullivan, 192 S.W.3d 99,
107 (Tex.App.--Houston [14th Dist.] 2006, pet. denied). We therefore sustain OPL’s
first issue concerning the proceeds leases, its sub-issue concerning the implied duty to
market, and its second issue concerning the market-value leases.
The Royalty Owners’ Cross-Appeal
By their second issue on cross-appeal, the royalty owners contend the trial court
erred in rendering judgment notwithstanding the verdict in favor of BP on its limitations
defense. They argue the discovery rule tolls the applicable limitation period until each
royalty owner knew or reasonably should have known facts giving rise to a cause of
action. Because no evidence supports the three affirmative theories of relief the royalty
owners asserted against BP, determining whether their claims were subject to a
25
limitations defense or they could legally assert the discovery doctrine in avoidance of
limitations are questions whose resolution is unnecessary to our disposition of this
appeal. We, therefore, do not address the issue. See Tex. R. App. P. 47.1.
The royalty owners’ third issue on cross-appeal presents the contention the trial
court erred in rendering judgment notwithstanding the verdict in favor of BP and OPL on
the royalty owners’ claim for attorney’s fees, recovery of which they sought under
Chapter 38 of the Civil Practice & Remedies Code. Tex. Civ. Prac. & Rem. Code Ann.
§§ 38.001-38.006 (West 2008).
To recover attorney’s fees under § 38.01, a party must prevail on a cause of
action authorizing recovery of attorney’s fees, and recover damages. Green Int’l, Inc. v.
Solis, 951 S.W.2d 384, 390 (Tex. 1997); Brent v. Field, 275 S.W.3d 611, 621-22
(Tex.App.--Amarillo 2009, no pet.). Because we have concluded the royalty owners
cannot prevail on a cause of action allowing recovery of attorney’s fees they are not
entitled to recover attorney’s fees. For this reason, we overrule their third issue on
cross-appeal.
The Cross-Motions for Partial Summary Judgment
By their first issue on cross-appeal, the royalty owners assert the trial court erred
by denying their motion for partial summary judgment. The royalty owners and OPL
filed cross-motions for partial summary judgment, each seeking a judgment declaring
the character and ownership of CO2 that OPL injects into eight leases included in three
units. Said simply, the royalty owners contended the CO2 was subject to a royalty; OPL
26
argued it was not. The trial court agreed with OPL and rendered partial summary
judgment in its favor.
The movant for summary judgment has the burden of showing there is no
genuine issue of material fact and it is entitled to summary judgment as a matter of law.
Tex. R. Civ. P. 166a(c). Reviewing a summary judgment, we take evidence favorable to
the nonmovant as true, and indulge every inference and resolve every doubt in the
nonmovant's favor. Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548-49
(Tex. 1985). A defendant “who conclusively negates at least one essential element of a
cause of action is entitled to summary judgment on that claim.” IHS Cedars Treatment
Ctr. of Desoto, Tex., Inc. v. Mason, 143 S.W.3d 794, 798 (Tex. 2004) (citing Sw. Elec.
Power Co. v. Grant, 73 S.W.3d 211, 215 (Tex. 2002)). A plaintiff moving for summary
judgment on its own cause of action must conclusively prove each element of the cause
of action. MMP, Ltd. v. Jones, 710 S.W.2d 59, 60 (Tex. 1986) (per curiam).
When parties file cross motions for summary judgment, and one motion is
granted and the other denied, the appellate court reviews the summary judgment
evidence presented by both sides and determines all questions presented. Comm’rs
Court of Titus County v. Agan, 940 S.W.2d 77, 81 (Tex. 1997). If the issue raised is
based on undisputed and unambiguous facts, then the reviewing court may determine
the question presented as a matter of law. Gramercy Ins. Co. v. MRD Invs., Inc., 47
S.W.3d 721, 724 (Tex.App.--Houston [14th Dist.] 2001, pet. denied).
According to the summary judgment record, the CO2 OPL injects into the
hydrocarbon-producing formation to enhance oil recovery is transported to the
27
Slaughter Field from New Mexico and Colorado.23 The CO2 is extracted from the
produced gas stream at the processing plants, returned to the leases, and reinjected as
part of the recovery operation. While the royalty owners agree that the transported CO2
is OPL’s personal property before its injection, they theorize that the extraneous CO2
loses its personal property character on injection, is susceptible to capture in the
producing formation, and OPL is authorized to capture, or recapture, the CO2 through
the grant of the leases and provisions of the unit agreements. As captured, they
contend, the CO2 is subject to OPL’s royalty obligation.24
The royalty owners’ claims to a royalty on the injected CO2 depend entirely on
the correctness of their contention that OPL loses title to its personal-property CO2
when it introduces the substance into the subsurface producing formation. Although the
unit agreements, to which the royalty owners are parties, contain express authorization
for the unit operator to inject substances into the unitized formation,25 and the unit
agreements contain provisions concerning royalty payments, we do not understand the
23
Our discussion of this issue applies to the extraneous CO2 transported to the
field, injected by OPL into the producing formation and recovered along with the
casinghead gas by OPL. The royalty owners contend the summary judgment evidence
raised an issue of fact whether OPL is producing CO2 that is “native” to the leased
lands. We have examined the documents on which the royalty owners rely for the
contention, which are an affidavit of their expert Charles Graham and a memorandum of
one of their attorneys. We do not agree that either of those documents provides
evidence precluding summary judgment on their claims for royalty on CO2.
24
As we understand their theory, the royalty owners contend they are entitled to
royalty each time the CO2 is recycled through the producing formation.
25
The unit agreement for the Slaughter Estate Unit, for example, gives the
working interest owners the right to inject into the unitized formation “any substances in
whatever amounts [they] deem expedient.”
28
royalty owners to contend that the unit agreements contain a commitment by OPL to
pay royalty beyond its royalty obligation under the leases. Before the trial court, the
royalty owners asserted that the provisions of the unit agreements affecting royalties did
not supersede the leases’ royalty clauses, but simply constituted an “overlay”
addressing the manner in which royalty would be paid under unit operations.26 Thus we
consider it undisputed that the unit agreements do not require payment of a royalty not
already required under the leases. Similarly, the royalty owners make no contention
here that the terms of any of the leases entitle them to royalty on the injected CO2
whether or not it became subject to the rule of capture on its injection. Our inquiry,
then, is whether, under Texas law, the rule of capture operates to subject extraneous
CO2 injected and recovered by OPL to a royalty obligation under its leases.
The “rule of capture” is a well established doctrine in Texas which holds
that a landowner is entitled to produce the oil and gas in place beneath his
land, as well as the oil and gas which flows to the land as the result of
physical conditions and natural laws relating to the migratory nature of oil
and gas. Recognizing that oil and gas are fugitive minerals that will
migrate throughout a reservoir without regard to property lines, the rule of
capture provides that a landowner owns all the oil and gas produced by a
legally drilled well located on his land, even though the well may be
draining minerals from nearby properties.
SWEPI, L.P. v. Camden Resources, Inc., 139 S.W.3d 332, 341 (Tex.App.--San Antonio
2004, pet. denied) (citations omitted).
26
Unit agreements for the Central Mallet Unit and the Slaughter Estate Unit, for
example, contain provisions limiting royalties on certain “outside substances” injected
into the unitized formation until other events occur. The parties disagree on the effect of
that language but, as noted, we do not read the royalty owners’ briefing to contend it
would have the effect of requiring payment of royalty not required under the leases.
29
While no Texas case directly addresses title and ownership of extraneous CO2
injected into a formation for production enhancement, the ownership of extraneous
natural gas injected into a storage formation was at issue in Humble Oil & Refining Co.
v. West. 508 S.W.2d 812 (Tex. 1974). OPL urges that our analysis of the claims to
royalty on the injected CO2 here should begin and end with Humble Oil, and a case on
which it relied, Lone Star Gas Co. v. Murchison. 353 S.W.2d 870 (Tex.Civ.App.--Dallas
1962, writ ref’d n.r.e.).
In Humble Oil, deeds by the Wests to Humble in part recited “that the Wests
‘except from this conveyance and retain unto themselves. . . . those certain royalties on
oil, gas and other minerals which may be produced and saved from the lands hereby
conveyed.’” Concerning gas, the conveyances described the retained royalty as “‘a
royalty equal to the market value at the well of one-sixth (1/6) of the dry gas so sold or
used; provided that on such dry gas sold at the wells the royalties shall be one-sixth
(1/6) of the amount realized from such sale.’” Id. at 813.
As the field reservoir approached depletion, Humble obtained Railroad
Commission authorization to use the reservoir for gas storage. Id. The Wests sued
Humble for injunctive and declaratory relief. The trial court ordered Humble to account
to the Wests for their royalty interests in all gas produced irrespective of whether the
gas was extraneous or native. Id. at 814. The court of civil appeals reversed with
instructions for entry of a permanent injunction restraining Humble from injecting and
storing gas in the reservoir until all native gas was produced. Id.
30
Before the supreme court, the Wests argued because of their royalty on all oil,
gas and minerals produced and saved from the properties, Humble owed a royalty on
all gas produced and saved, whether native or extraneous. Id. at 817. According to the
Wests, a contrary holding would rewrite the conveyance documents. Id.
In its analysis, the court looked to Murchison, 353 S.W.2d 870. There,
Murchison argued Lone Star lost title to extraneous gas it injected into a storage
reservoir as the gas became like a wild animal, subject to capture. Rejecting the notion
that the gas returned to its natural and wild state and was thus subject to the law of
capture, the court in Murchison found the correct rule was “once [severed] from the
realty, gas and oil, like other minerals, become personal property . . . title to natural gas
once having been reduced to possession is not lost by the injection of such gas into a
natural reservoir for storage purposes.” Humble Oil, 508 S.W.2d at 817 (quoting
Murchison, 353 S.W.2d at 878 quoting White v. New York State Natural Gas Corp., et
al., 190 F. Supp. 342, 347, 349 (W.D. Pa. 1960)) (additional quotation marks omitted).27
Relying on Murchison, the Court in Humble Oil concluded the extraneous gas Humble
injected into the storage reservoir was and remained the personal property of Humble.
The Wests argued that the obligation of Humble in the conveyance document to
pay a royalty on all gas produced and saved distinguished Murchison. 508 S.W.2d at
817. Disagreeing, the supreme court found to adopt such reasoning would implicitly
recognize the doctrine of minerals ferae naturae that Murchison rejected. Id. Thus the
27
Relevant to the present facts, the court in Murchison found the law of original
capture, which in general gives the owner of land the right to produce all the oil and gas
that will flow from a well on the land, inapplicable to gas that was originally captured and
subsequently restored. Murchison, 353 S.W.2d at 880.
31
court held, “Humble’s ownership of the gas as personal property is not altered either
upon injection of the gas in the reservoir or upon later production of the gas. The
language of the conveyance does no more than reserve the royalty interest in the native
gas in the reservoir, and Humble’s ownership of the extraneous gas is unaffected
thereby.” Id.
The analogy between stored natural gas and the injected CO2 described in this
record is not exact, but we find Humble Oil and Murchison sufficiently analogous to
guide our decision.28 This record does not describe differences in the injection of
extraneous CO2 to enhance oil production and the injection of natural gas for storage to
require application of a different rule to the dispute before us.29 Both involve injection of
a gaseous substance into a well-defined underground formation with Railroad
Commission approval.30 Nothing suggests OPL has an intent to abandon the CO2 it
injects and recovers. See Murchison, 353 S.W.2d at 870 (also finding no intent to
abandon). Indeed, OPL’s recycling and reinjection of the CO2 removed at the Mallet
Plant belies any intent to abandon the injected and recovered CO2.
28
And we emphasize that we deal here only with a claim for royalty by lessors on
extraneous CO2 injected and recovered by OPL. This case does not involve claims of
trespass or the like, nor does it involve claims to ownership of CO2 recovered by
operators other than OPL. Any such case would involve considerations not present
here.
29
The royalty owners’ argument that language concerning gas or gaseous
substances in the leases and unit agreements binds OPL to a royalty obligation for CO2,
would seem to underscore the similarity between CO2 and natural gas for this purpose.
30
See, e.g., Tex. Nat. Res. Code Ann. §§ 91.171, et seq. (West 2001)
(underground natural gas storage); 16 Tex. Admin Code §§ 3.46 (fluid injection into
productive reservoirs); §§ 3.50 (enhanced oil recovery projects).
32
The royalty owners’ heavy reliance on Corzelius v. Harrell, 143 Tex. 509, 186
S.W.2d 961 (1945) is misplaced. Corzelius concerns Railroad Commission orders
regulating production of natural gas from a field in which a gas recycling operation was
being conducted. 186 S.W.2d at 970. It was cited to the court in Murchison, which
found it dealt with “the law of original capture,” and not applicable to stored extraneous
gas. 353 S.W.2d at 870.
Corzelius is not mentioned by the court in Humble Oil. Corzelius is more often
cited in cases concerning assertions of subsurface trespass. See, e.g., Coastal Oil &
Gas v. Garza Energy Trust, 268 S.W.3d 1, 13 n.37 (Tex. 2008); Railroad Commission of
Texas v. Manziel, 361 S.W.2d 560, 568 (Tex. 1962). Like the court in Murchison, 353
S.W.2d at 870, we find it inapplicable to the question before us.
For these reasons, we find the trial court did not err in granting OPL’s motion for
partial summary judgment and denying that of the royalty owners.
Conclusion
Because no evidence supports the jury’s findings of liability by OPL, we reverse
the judgment of the trial court and render judgment that the royalty owners take nothing
against OPL. We remand the case to the trial court for the entry of a new judgment
consistent with this opinion and law. We otherwise affirm the judgment of the trial court.
James T. Campbell
Justice
33