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Pummill v. Hancock Exploration LLC

Court of Appeals of Oklahoma, Division IV

January 5, 2018


          Mandate Issued: 06/20/2018


          Robert N. Barnes, Patranell Britten Lewis, BARNES & LEWIS, L.L.P, Oklahoma City, Oklahoma

          Kerry Caywood, Angela Caywood Jones, PARK, NELSON, CAYWOOD, JONES, L.L.P., Chickasha, Oklahoma and Bradley E. Beckworth, Jeffrey J. Angelovich, Susan Whatley, NIX, PATTERSON & ROACH, L.L.P., Daingerfield, Texas, for Plaintiffs/Appellees.

          Richard B. Noulles, Bradley W. Welsh, GABLEGOTWALS, Tulsa, Oklahoma.

          Jeromy E. Brown, McCALLA BROWN PATEL, LLP, Chickasha, Oklahoma and Nathan K. Davis, SNELL & WILMER, L.L.P., Denver, Colorado, for Defendants/Appellants.

          J. Kevin Hayes, Pamela S. Anderson, Dawson A. Brotemarkle, HALL, ESTILL, HARDWICK, GABLE, GOLDEN & NELSON, P.C., Tulsa, Oklahoma and Craig Rainey, GPA MIDSTREAM ASSOCIATION, Tulsa, Oklahoma, for Amicus Curiae GPA Midstream Association.

          John J. Griffin, Jr., L. Mark Walker, Harvey D. Ellis, CROWE & DUNLEVY, A PROFESSIONAL CORPORATION, Oklahoma City, Oklahoma, for Amicus Curiae Oklahoma Independent Petroleum Association.

          Mark D. Christiansen, McAFEE & TAFT, Oklahoma City, Oklahoma, for Amicus Curiae Oklahoma Oil & Gas Association.

          Rex A. Sharp, REX A. SHARP, P.A., Prairie Village, KS for Amicus Curiae Tony R. Whisenant.

          Terry L. Stowers, Douglas E. Burns, BURNS & STOWERS, P.C., Norman, Oklahoma, for Amicus Curiae Coalition of Oklahoma Surface and Mineral Owners.


         ¶1 Defendants, Hancock Exploration LLC; Yale Oil Association, Inc., Chevron U.S.A., Inc., Cimarex Energy Co., and Cimarex Energy Co. of Colorado, appeal from the district court's entry of a declaratory judgment, following a bench trial on remand, in favor of Plaintiffs, Charles Pummill, Mark Parrish, and Chris Parrish, Jr. The trial court rejected Defendants' claim that they were allowed to proportionately charge certain expenses against Plaintiffs' royalty payments.

         ¶2 The question of consequence on appeal involves Defendants' challenge to the trial court's determination of when the natural gas at issue here became a "marketable product." Finding that the trial court's decision of this fact-intensive issue is supported by competent evidence and is in accord with law, we affirm.


         ¶3 This is the second time this matter has been before the Court of Civil Appeals. In the first appeal, Case No. 111, 096, the Supreme Court vacated an opinion by COCA's Division I, and affirmed in part and reversed in part the trial court's summary judgment in Plaintiffs' favor. After finding that disputed fact issues remained undetermined, the Court remanded the case for trial. See Pummill v. Hancock Exploration LLC, 2014 OK 97, 341 P.3d 69 (corrected order) ("Pummill I").

         ¶4 The record reflects that Plaintiffs, Charles Pummill, Chris Parrish, Jr., and Mark Parrish (collectively, Lessors or Plaintiffs), are descendants of the original mineral interest owners/lessors of two oil and gas leases on 160 acres in the SE/4 of Section 32, Township 9 North, Range 8 West, in Grady County (the property). The property now is part of a 640-acre, drilling and spacing unit from which the Parrish-Novotny No. 1-32 Well (the 1-32 well), has produced natural gas since 1985. Plaintiffs' interests derive from leases entered into in 1966 between the original lessors, Ethel Marie Pummill and Mabel Lee Parrish, and Jules Bloch. The women each retained royalty interests in production. The Parrish lease contains a "gross proceeds" royalty clause, while the Pummill lease contains a "market price at the well" clause. [1] Neither party to this litigation contends the language difference in the royalty clauses makes a difference when determining the point at which gas produced under the leases is a "marketable product."

         ¶5 The original lessee, Jules Bloch, assigned leasehold interests that ultimately were acquired by Defendants Hancock, Yale, and Chevron, as well as by Bloch's own company, Bloch Petroleum, LLC, which originally was named as a defendant in this case. [2] Each of these companies is a current lessee and a non-operating working interest owner in the 1-32 well.

         ¶6 Defendant Cimarex Energy Co. of Colorado has been the operator of the 1-32 well since 1999. [3] Cimarex Colorado is a wholly owned subsidiary of Defendant Cimarex Energy Co. (collectively, Cimarex). Cimarex does not own an interest in the 1-32 well, but other wholly-owned subsidiaries of Cimarex Energy own net revenue interests totaling approximately 40%. Since June 2005, Cimarex has marketed production from the 1-32 well and also has calculated and distributed royalty payments to royalty owners, including Plaintiffs.

         ¶7 Plaintiffs filed this action in October 2011, claiming Defendants had improperly interpreted the leases so as to negate the implied covenant to market gas. They claimed Defendants had refused to bear all of the costs necessary to create a marketable product, and had underpaid Plaintiffs by improperly charging certain expenses against Plaintiffs' royalty interests.

         ¶8 Defendants denied Plaintiffs' claims and asserted various affirmative defenses. Cimarex also counterclaimed, disputing Plaintiffs' interpretation of "marketability" and arguing that if the court found the lease provisions did not negate an implied covenant to market, then it should enter judgment declaring that gas from the 1-32 is "marketable at the custody transfer meter" located near the well. The custody transfer meter connects to a pipeline/gathering system owned by a group of entities collectively referred to by the parties as "Enogex/Enable" or "Enogex." [4] At all times relevant here, Enogex/Enable has gathered and transported the 1-32 gas to its off-lease processing plants, where it extracts natural gas liquids (NGLs) and delivers residue gas for sale into high pressure intra- or interstate pipelines. Cimarex specifically requested a declaration that it could proportionately charge Plaintiffs for processing costs incurred at the Enogex/Enable plants, as well as a determination that it could charge "any costs incurred for gas production" from the 1-32 well as long as "the other requisites for charging such costs to royalty owners" have been met under Mittelsteadt v. Santa Fe Minerals, Inc., 1998 OK 7, 954 P.2d 1203. [5]

         ¶9 Plaintiffs moved for summary judgment. As described in Pummill I, the trial court granted Plaintiffs' request and entered a lengthy judgment declaring that (1) neither the "gross proceeds" nor "market price at the well" lease language abrogated the "implied covenant to market" inherent in each lease, and, consequently, gas royalty payments under each lease were "free of all costs to create a marketable product"; (2) Defendants' use of a "percentage of proceeds" (POP) or "percent of index" (POI) form of gas purchase contract or service agreement with third parties instead of a "cash fee gathering agreement," did not change the amount of royalty owed under the leases; and (3) Defendants owed Plaintiffs royalty on gas from the 1-32 well "used off the lease or in the manufacture of products at the gas plant per the terms of the leases." A fourth issue, concerning interest owed by Defendants, was not disputed, and also was included in the court's judgment.

         ¶10 Defendants appealed. In June 2014, COCA Division I, finding the trial court's order adequately explained its decision, unanimously affirmed pursuant to Okla.Sup.Ct.R. 1.202(d). See Case No. 111, 096 (opinion issued June 27, 2014). Defendants sought certiorari, which the Supreme Court granted. It thereafter vacated COCA's opinion, affirmed the trial court's judgment as to statutory interest, reversed its judgment as to the three other issues, and remanded, stating:

The appellants [Defendants] identified four issues in their appeal of the judgment of the district court: Issue 1. The express language of their leases does not abrogate or negate the implied covenant to market in any way; Issue 2. The current or future use of a POP, POI or any other form of contract, instead of a fee based agreement with Enogex, does not change the amount of royalties due under the leases; Issue 3. Appellants are entitled to receive royalties on gas used off the lease or in the manufacture of products at the gas plant; and Issue 4. Appellants owe interest on royalties not timely paid without prior demand from the royalty owners.
The briefs filed and the oral argument held before this Court on November 5, 2014, reveal that facts which could affect the resolution of the district court Issues I through III need to be addressed before the fact-finder, the district court. The parties at the oral argument affirmed that Issue IV was not contested.
Accordingly, certiorari is granted. The opinion of the Court of Civil Appeals is vacated. The judgment of the district court is affirmed in part and reversed in part and remanded with instructions to hear and decide the disputed fact issues.

Pummill I, 2014 OK 97, 341 P.3d 69 (corrected order).

         ¶11 On remand, the parties submitted to the trial court a "Stipulation of Undisputed Facts" (Stipulation), 49 joint exhibits, and numerous other exhibits and evidence. Both sides submitted proposed findings of fact and conclusions of law. Trial occurred in October 2015, at which time the court heard testimony from the parties, expert witnesses, and representatives of "non-party midstream companies" testifying on behalf of Defendants.

         ¶12 The trial court found in favor of Plaintiffs on their claims and against the Cimarex entities on their counterclaim. It entered a 74-page, multiple-part judgment explaining its decision and incorporating almost verbatim Plaintiffs' proposed findings of fact and conclusions of law. Relying heavily on Oklahoma Supreme Court case law, particularly Mittelstaedt and Wood v. TXO Production Corp., 1992 OK 100, 854 P.2d 880, the court held, inter alia, that:

         ¶13 -- None of the language in either lease abrogated the "implied covenant to market" long recognized in Oklahoma, particularly because neither lease describes any costs that may be charged against the lessor's royalty. Because each lease had an implied covenant to market, all gas royalty payments under each lease were "free of costs [required] to create a marketable product," regardless of "whether such costs are incurred on or off the lease." The court noted that, to the extent certain costs - such as those associated with compression, gathering, dehydration and processing - are needed to create a marketable product, if a lessee wants to deduct such costs from a lessor's royalty, it must say so directly in the lease. The court pointed to evidence of other leases entered into by lessees and/or Cimarex "spell[ing] out" that royalty owners are to share in such costs. Order at ¶ 76.

         ¶14 -- Regardless of Defendants' "past, current or future" use of a POP or POI form of contract with a gas gatherer or purchaser, such contracts did not and would not change the amount of royalty due under the leases, as long as the POP and POI contracts involve performing the same services necessary to render the gas capable of being sold on the commercial market. [6]

         ¶15 -- Defendants owed Plaintiffs royalty on gas from the 1-32 well that was used off the lease by Defendants or Enogex/Enable in gas gathering systems, gas plants, and transmission pipelines. The court looked to the "express terms of the Plaintiffs' leases" in reaching this conclusion. It also noted that, since at least 2002, Cimarex's corporate policy was to pay royalty on gas consumed by Enogex/Enable in its gathering system and compressors located off the lease. The court rejected Defendants' claim that they were entitled to deduct in-kind fuel fees resulting from ...

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