Case Title: OSBORN v. ANADARKO PETROLEUM CORP.

Citation: 

Docket Number: 98-27

State: wyoming

Court: Wyoming Supreme Court

Date: 2000-02-02T00:00:00Z

Document:
OSBORN v. ANADARKO PETROLEUM CORP.2000 WY 13996 P.2d 9Case Number: 98-27Decided: 02/02/2000Supreme Court of Wyoming

W. B. 
OSBORN, JR., individually and as trustee of the WILLIAM B.OSBORN, JR. TRUST, OSBORN HEIRS COMPANY, MARCUS 
THURMAN BARRETT, III, WILLIAM OSBORN BARRETT, and BARRETT WYOMING INTERESTS, 
LTD., Appellants (Plaintiffs),

v.

ANADARKO PETROLEUM CORPORATION, a 
Delaware

corporation, Appellee 
(Defendants).

                                 

Appeal from the District Court 
of Campbell County, Honorable

Dan R. Price II, 
Judge.

    Craig Newman of the Law 
Office of Craig Newman, Casper, Wyoming, representing 
appellants.

     
William H. Everett of Williams, Porter, Day & Neville, P.C., Casper, 
Wyoming; and J. Kyle McClain, Houston, Texas, representing 
appellee.

   
Before LEHMAN, C.J., and THOMAS, MACY, GOLDEN, and 
TAYLOR,*

  
JJ.

   *  
Chief Justice at time of expedited conference; retired November 2, 
1998.

    
THOMAS, Justice.

  [¶1]        The only question presented in 
this appeal requires this Court to determine the legal effect of the term 
"abandonment" in a Farmout Agreement when an oil and gas well is converted from 
an extraction well to a water injection well. W. B. Osborn, Jr., individually 
and as trustee of the William B. Osborn, Jr. Trust, Osborn Heirs Company, Marcus 
Thurman Barrett, III, William Osborn Barrett, and Barrett Wyoming Interests, 
Ltd. (collectively the Osborn group), entered into a Farmout Agreement with 
Anadarko Petroleum Corporation (Anadarko) for the drilling of a test well that 
reserved to the Osborn group a right to convert its net overriding royalty 
interest to fifty percent of the working interest earned by Anadarko upon 
abandonment of the well. The Osborn group contends that conversion of the test 
well from an extraction well to a water injection well1 by Anadarko was an abandonment, 
triggering the right of the Osborn group to convert its royalty interest to a 
fifty percent working interest. In the district court, the parties filed cross 
motions for summary judgment, and the district court ruled in favor of Anadarko 
on the ground that the conversion did not constitute abandonment. We hold that 
the conversion of an oil and gas well from an extraction well to a water 
injection well is not an abandonment.  
The Order on Summary Judgment is affirmed.

 [¶2]         In the Brief of Appellants, 
the issue that is raised is:

A. Whether the District Court erred in granting 
Defendant/Appellee's Motion for Summary Judgment, thereby determining that 
Appellants had no right under the Farmout Agreement in controversy to convert 
their overriding royalty interest to a working interest after the Test Well 
drilled under the Farmout Agreement had become uneconomic, Appellee had removed 
production equipment from the well and converted the Test Well to a water 
injection well for purposes of an expanded water flood project benefiting lands 
other than the lands which were the subject of the Farmout 
Agreement.

  This Statement of the Issues is found in 
the Brief of Appellee Anadarko Petroleum Corporation:

A. The one and only issue presented for review by 
this Court is whether or not the District Court correctly granted 
Defendant/Appellee's Motion for Summary Judgment when the District Court 
declared that there was no abandonment of the Bracken Federal A-1 Well when that 
well was included in an expanded unit area and subsequently converted to a 
water-injection well under circumstances where oil production continues to be 
allocated to the Bracken Federal A-1 Well to the benefit of Plaintiffs. The well 
is still utilized for injection of water for the benefit of production from the 
expanded Bracken Minnelusa Unit in furtherance of the State of Wyoming's public 
policy of encouraging maximum, efficient production of oil and gas 
resources.

  (Emphasis in 
original.)

[¶3]          The Osborn group and 
Anadarko agree that there are no disputed issues of fact in this case. On March 
21, 1988, the Osborn group and Anadarko entered into a Farmout Agreement, which 
provided for the drilling of an oil well, the Bracken Federal A-1, by Anadarko 
on land upon which the Osborn group held the oil and gas lease.  Pursuant to the Farmout Agreement, 
Anadarko would operate the well, and the parties would share in the profits as 
provided by that agreement. The essence of the arrangement was that Anadarko was 
entitled to receive from the Osborn group 100% of the leasehold interest of the 
Osborn group in the land covered by the lease subject to the retained overriding 
royalty interest held by the Osborn group. The Farmout Agreement included a 
provision pursuant to which the Osborn group could convert from a royalty 
interest to a working interest:

We reserve the right, at our option, to convert at 
payout or abandonment (following production, but prior to payout) at no cost to 
us, our net overriding royalty interest reserved above, to fifty percent (50%) 
of the working interest earned by you in and to the Test Well, equipment 
appurtenant thereto and production therefrom, and the Farmout 
Lands.

  There 
was no definition in the Farmout Agreement of the term 
"abandonment."

  

 [¶4]        The Bracken Federal A-1 well was 
completed by Anadarko on August 10, 1988. The next month, the Bureau of Land 
Management (BLM) notified Anadarko that the Bracken Federal A-1 well was located 
in the same oil producing formation as, and was in pressure communication with, 
the then existing Bracken Minnelusa Drilling Unit (Minnelusa Unit). The BLM also 
advised Anadarko that it could expand the Minnelusa Unit to include the new 
well.  Anadarko elected to expand 
the Minnelusa Unit, and Anadarko then requested permission from the BLM to convert the 
Bracken Federal A-1 well from oil extraction to water injection. That request 
was approved by the BLM on October 13, 1989. Upon inclusion in the Minnelusa 
Unit, the Bracken Federal A-1 well was allotted 15.92164% of the unit production 
for the life of the unit. That percentage remained the same after the conversion of 
the Bracken Federal A-1 well from oil extraction to water 
injection.

 [¶5]        On June 27, 1989, the Osborn group 
sent a letter to Anadarko in which it attempted to exercise its reserved right 
to convert its royalty interest into a fifty percent working interest. The 
Osborn group contended that Anadarko's plan to use the Bracken Federal A-1 well 
for water injection rather than for oil extraction constituted an abandonment of 
the well. Anadarko responded that the well was not abandoned, and it declined to 
assign fifty percent of the working interest to the Osborn group.  The Osborn group accepted the royalty 
payments under the Farmout Agreement without objection for several 
years.

 [¶6]        On October 11, 1996, however, the 
Osborn group filed an action in the district court, seeking a declaratory 
judgment confirming its right to convert the overriding royalty interest to a 
fifty percent working interest. Cross motions for summary judgment were 
presented by the parties on the issue of abandonment. On December 17, 1997, the 
district court granted Anadarko's motion for summary judgment and denied the 
motion submitted by the Osborn group. In its Order on Summary Judgment, the 
district court found that the "tract of land in question is not unproductive, 
since oil production is being allocated to the tract under the expanded Bracken 
Minnelusa Unit, and that the well in question is not abandoned since it is still 
utilized for injection of water for the benefit of production from the expanded 
Bracken Minnelusa Unit." The Osborn group has appealed from the Order on Summary 
Judgment.

[¶7]          A summary judgment 
appropriately may be granted when there is no genuine issue of material fact and 
the party prevailing on the issue is entitled to judgment as a matter of law. 
Century Ready-Mix Co. v. Campbell County School Dist., 816 P.2d 795, 798 (Wyo. 
1991). In making the determination as to whether any genuine issue of material 
fact exists, we consider the record in the light most favorable to the party who 
opposed the motion. Id. at 799 (quoting Doud v. First Interstate Bank of 
Gillette, 769 P.2d 927, 928 (Wyo. 1989)). In this instance, the parties are in 
accord that there is no genuine issue of material fact, and the case presents only a question of 
law.

[¶8]          A farmout agreement is a 
contract. Moncrief v. Louisiana Land and Exploration Co., 861 P.2d 516, 523 
(Wyo. 1993). In developing our body of contract law, we have said that summary 
judgment is an appropriate remedy when a contract is unambiguous because the 
construction of a contract is a matter of law for the court.  Colorado Interstate Gas Co. v. Natural 
Gas Pipeline Co. of America, 842 P.2d 1067, 1070 (Wyo. 1992); Metropolitan 
Mortg. & Securities Co., Inc. v. Belgarde, 816 P.2d 868, 873 (Wyo. 
1991).  We also know that a summary 
judgment is to be upheld on the record presented and under any proper legal 
theory. Century Ready-Mix Co., 816 P.2d  at 799; Reeves v. Boatman, 769 P.2d 917, 
918 (Wyo. 1989). The parties in their statements of the issues set the stage, 
and, on the record in this case, we deal only with the pure question of law: If 
an oil well is converted from an extraction well to a water injection well, has 
there been an   abandonment?

[¶9]          The question of abandonment 
of oil wells is not a novel one in our jurisdiction. Early last century, we 
quoted the authorities of that day:

  

"Abandonment is the relinquishment or surrender of 
rights or property by one person to another. It includes both the intention to 
abandon and the external act by which the intention is carried into effect." 1 
Enc. Law, 1. "In determining whether one has abandoned his property or rights, 
the intention is the first and paramount object of inquiry, for there can be no 
abandonment without the intention to abandon." 1 Cyc. 5.

  
Phillips v. Hamilton, 17 Wyo. 41, 51, 95 P. 846, 848 
(1908).

[¶10]       In a subsequent case, this 
Court invoked a different authority, saying "[w]hether there has been an 
abandonment is to be determined by all the facts and circumstances surrounding 
each particular case. Mills and Willingham, Law of Oil and Gas, § 117." Boatman 
v. Andre, 44 Wyo. 352, 363, 12 P.2d 370, 374

(1932). These concepts 
relating to abandonment in the oil and gas industry are summarized by a more 
recent treatise:

Abandonment of an oil and gas lease is the 
relinquishment by the lessee of rights under the lease, without intention to 
resume them, or the intentional and voluntary relinquishment of leasehold 
rights. The question of abandonment of an oil and gas lease is, at least 
primarily, one of intention. * * *

The requisite intention and relinquishment, and 
consequent abandonment, may be, and usually are, determined from all the facts 
and circumstances of the particular case, including the acts     and conduct of the 
lessee.

  58 C.J.S. Mines and Minerals § 251(b) at 
235-36 (1998) (footnotes omitted). Since a working interest represents the 
interest of a lessee in an oil and gas lease the concepts of abandonment for a 
lease are the same as those applicable in the case of a working 
interest.

[¶11]       On the basis of these cases 
and treatises, we are satisfied that the word "abandonment," in the context of 
the oil and gas farmout agreement, is unambiguous. It connotes an intention to 
abandon that is coupled with some act of relinquishment. The interpretation of 
the term "abandonment" is a question of law because it is not an ambiguous 
term.

[¶12]      In connection with the elements of 
an abandonment, we recognize that the Farmout Agreement, in Article II(B)(2), 
provided for a protocol to be followed for abandonment:

If you determine to abandon the Well you will 
promptly furnish us with an appropriate electrical log acceptable to us and you 
further agree that you will not abandon the Well as a dry hole until you have 
furnished said electrical log to us and thereafter given us at least 48 hours 
notice of your intention to abandon, unless you consent to an earlier 
abandonment thereof. After consent has been given, you agree to promptly plug 
and abandon the Test Well in accordance with all the requirements of 
any

            
governmental body having jurisdiction.

This protocol was not 
followed which certainly stands as a manifestation of the absence of any 
intention on the part of Anadarko to abandon the Bracken Federal A-1 
well.

[¶13]       The Osborn group and 
Anadarko have not cited, and we have not unearthed, authority specifically 
addressing whether the conversion of a well from an extraction well to an 
injection well results in an abandonment. A federal statute, however, strongly 
supports Anadarko's contention that it does not. The statute 
provides:

When separate tracts cannot be independently 
developed and operated in conformity with an established well-spacing or 
development program, any lease, or a portion thereof, may be pooled with other 
lands, whether or not owned by the United States, under a communitization or 
drilling agreement providing for an apportionment of production or royalties 
among the separate tracts of land comprising the drilling or spacing unit when 
determined by the Secretary of the Interior to be in the public interest, and 
operations or production pursuant to such an agreement shall be deemed to be 
operations or production as to each such lease committed 
thereto.

30 U.S.C.A. § 226(m) at 49 
(Cum.Supp. 1999) (emphasis added).  
The thrust of this statute is that even though a well in a pooled unit 
might not be operative, it would be considered as maintaining operations or 
production.

  

[¶14]       We find further support in a 
state statute, even though we recognize the Minnelusa Unit was formed under 
federal law. The Wyoming statute that is instructive on the question of whether 
such a conversion is an abandonment reads, in pertinent 
part:

All operations, including, but not limited to, the 
commencement, drilling, or operation of a well upon any portion of the unit area 
for all purposes shall be deemed to be the conduct of such operations upon each 
separately owned tract in the unit area by the owner or owners thereof. The 
portion of the unit production allocated to a separately owned tract in a unit 
area shall, when produced, be deemed, for all purposes, to have been actually 
produced from such tract by a well drilled thereon.

  Wyo. 
Stat. Ann. § 30-5-110(k) (Lexis 1999) (emphasis added).

[¶15]       The land upon which the 
Osborn group held a lease and which was included in the Farmout Agreement was 
made a part of the Minnelusa Unit. The Bracken Federal A-1 well was drilled on 
that unit, and oil production on any portion of the Minnelusa Unit is deemed to 
be production upon the land covered by the Farmout Agreement according to both 
the federal and the state statutes.  
Furthermore, the unit production allocated to the Bracken Federal A-1 
well is deemed, "for all purposes," to have been actually produced from that 
well located on the farmout land. These statutes manifest a policy with respect 
to operations and production on pooled units that appears to be antithetical to 
the concept of abandonment when a well is removed from 
production.

 [¶16]     We conclude that even without 
considering the state and federal statutes, the declarations of this Court in 
Phillips, 95 P. 846 and Boatman, 12 P.2d 370 stand as clear articulations of the 
proposition that there can be no abandonment without an intent to abandon and a 
physical relinquishment. Neither an intent to abandon nor a physical 
relinquishment appear in the facts presented to the district court or to this 
Court. We hold, as a matter of law, that the conversion of an oil and gas well 
from extraction to water injection for purposes of secondary recovery 
operations, when that well is part of a pooled unit and retains its share of 
production in the unit, does not constitute abandonment.

[¶17]       The Order on Summary 
Judgment entered in the district court is affirmed.

                   

FOOTNOTES

1Anadarko 
injected water as part of a secondary recovery operation. According to a leading 
treatise on the subject, "[t]he primary purpose of injecting gas or water into a 
reservoir is to cause the injected substances to move from the input wells 
toward the producing wells, driving the oil or wet gas before them." 1 W. L. 
Summers, The Law of Oil and Gas § 76 at 237 (1954).