Title: Roemer Oil Co. v. Aztec Gas & Oil Corp.

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Roemer Oil Co. v. Aztec Gas & Oil Corp.1994 WY 134886 P.2d 259Case Number: 93-266Decided: 12/01/1994Supreme Court of Wyoming
ROEMER OIL COMPANY, a 
Colorado corporation,

Appellant 
(Plaintiff),

 

v.

 

AZTEC GAS & OIL 
CORPORATION a Nevada corporation,

Appellee 
(Defendant).

 

Appeal from District 
Court, Campbell County, Dan R. Price II, J.

 

Joseph E. 
Hallock of Stevens, Edwards & Hallock, P.C., Gillette, Michael Rosenthal of 
Hathaway, Speight, Kunz & Trautwein, Cheyenne, as local counsel; and Timothy 
R. Beyer and Stephen D. Gurr of Baker & Hostetler, Denver, CO, for 
appellant.

Jon B. Huss of 
Brown & Drew, Casper, for appellee.

 

Before 
GOLDEN, C.J., and THOMAS, MACY, and TAYLOR, JJ., and McEWAN, District Judge 
Ret.

TAYLOR, 
Justice.

[¶1]      The primary 
question in this appeal is whether the term "reworking" in an oil and gas 
operating agreement is ambiguous in meaning. The district court determined that 
the term was not ambiguous and that, under the terms of the agreement, appellee 
was entitled to summary judgment.

[¶2]      We reverse. 

I. 
ISSUES

[¶3]      Appellant, Roemer 
Oil Company (Roemer), raises these issues:

1. Whether the trial 
court erroneously determined as a matter of law that the terms "rework" and 
"reworking" contained in Section 11 and Section 12 of the Model Form Operating 
Agreement between the parties are not ambiguous.

2. Whether the definition 
of "reworking" adopted by the lower court improperly nullifies the provisions in 
Section 11(c) of the Operating Agreement and imposes impractical obligations 
upon the Operator contrary to the clear intent of the 
parties.

3. Whether it was error 
for the trial court to enter summary judgment in the face of disputed issues of 
material fact surrounding the parties' understanding of the ambiguous terms 
"rework" and "reworking" contained in Sections 11 and 12 of the Operating 
Agreement.

4. Whether it was error 
for the trial court to enter summary judgment given the genuine triable issues 
of material fact surrounding the determination of whether each of the numerous 
projects performed by Roemer on the Subject Wells constituted "rework" or 
"reworking" under Section 11 or 12 of the Operating 
Agreement.

Appellee, Aztec 
Gas & Oil Corporation (Aztec), summarizes the issues as 
follows:

A. Did the Trial Court 
Err in Granting Summary Judgment for Defendant Aztec?

1. Did Roemer's workovers 
and repairs of oil and gas wells constitute "reworking" a well for purposes of a 
joint operating agreement's consent provisions?

2. Is summary judgment 
for Aztec sustainable on other grounds raised before the trial 
court?

a. Did Roemer violate 
Section 11(c) of the joint operating agreement by failing to provide notice and 
receive prior authorization of projects reasonably expected to exceed $5,000.00 
in cost?

b. Did Aztec have an 
interest in any of the Subject Wells other than Apache No. 
7?

c. Did Roemer breach its 
duty to act as a prudent operator?

d. Are Roemer's unjust 
enrichment and attorneys fees claims flawed?

II. 
FACTS

[¶4]      On August 18, 
1967, Apache Corporation entered into an Operating Agreement with Woods 
Petroleum Corporation. Roemer was successor to Apache and was the operator under 
that agreement from September 1, 1990 through November 1, 1992. Aztec succeeded 
to the interest of Woods Petroleum Corporation by sale executed on March 9, 
1990. At that time, the wells in controversy were shut in. Roemer determined 
that four of the wells were capable of being produced economically and returned 
three of the wells to production in 1991. Roemer did not consider the work it 
was doing to be "reworking" and, pursuant to Section 11(c) of the Operating 
Agreement, submitted joint interest billings to Aztec for its share of the 
expenditures incurred in accomplishing that work. Initially, Aztec paid its 
share of the costs, but then discontinued paying, asserting, in the alternative, 
that it had no interest in some of the wells and that Roemer had failed to seek 
Aztec's approval, as required by the Operating Agreement, prior to accomplishing 
the work for which Aztec was billed. Roemer filed this action to recover from 
Aztec $41,508.10 in unpaid billings.

[¶5]      The controversy 
centers on Sections 11 and 12 of the Operating Agreement:

11. 
LIMITATION ON EXPENDITURES

Without the consent of 
all parties: (a) No well shall be drilled on the Unit Area except any well 
expressly provided for in this agreement and except any well drilled pursuant to 
the provisions of Section 12 of this agreement, it being understood that the 
consent to the drilling of a well shall include consent to all necessary 
expenditures in the drilling, testing, completing, and equipping of the well, 
including necessary tankage; (b) No well shall be reworked, plugged back or 
deepened except a well reworked, plugged back or deepened pursuant to the 
provisions of Section 12 of this agreement, it being understood that the consent 
to the reworking, plugging back or deepening of a well shall include consent to 
all necessary expenditures in conducting such operations and completing and 
equipping of said well to produce, including necessary tankage; (c) Operator 
shall not undertake any single project reasonably estimated to require an 
expenditure in excess of Five Thousand and No/100 Dollars 
($5,000.00) except in connection with a well the drilling, reworking, 
deepening, or plugging back of which has been previously authorized by or 
pursuant to this agreement; provided, however, that in case of explosion, fire, 
flood, or other sudden emergency, whether of the same or different nature, 
Operator may take such steps and incur such expenses as in its opinion are 
required to deal with the emergency and to safeguard life and property, but 
Operator shall, as promptly as possible, report the emergency to the other 
parties. Operator shall, upon request, furnish copies of its "Authority for 
Expenditures" for any single project costing in excess of 
$5,000.00.

12. 
OPERATIONS BY LESS THAN ALL PARTIES

If all the parties cannot 
mutually agree upon the drilling of any well on the Unit Area, or upon the 
reworking, deepening or plugging back of a dry hole drilled at the joint expense 
of all parties or a well jointly owned by all the parties and not then producing 
in paying quantities on the Unit Area, any party or parties wishing to drill, 
rework, deepen or plug back such a well may give written notice of the proposed 
operation, specifying the work to be performed, the location, proposed depth, 
objective formation and the estimated cost of the operation. The parties 
receiving such a notice shall have thirty (30) days (except as to reworking, 
plugging back or drilling deeper, where a drilling rig is on location, the 
period shall be limited to forty-eight (48) hours exclusive of Saturday or 
Sunday) after receipt of the notice within which to notify the parties wishing 
to do the work whether they elect to participate in the cost of the proposed 
operation. Failure of a party receiving such a notice to so reply to it within 
the period above fixed shall constitute an election by that party not to 
participate in the cost of the proposed operation.

Section 12 goes 
on to provide that only consenting parties receive the benefit of any production 
which might result from a given operation. Aztec received its share of 
production, but production amounted to less than one-third of the costs of 
Roemer's work.

[¶6]      Roemer contended, 
and presented affidavits and other evidence, that the jobs it performed were 
merely "projects" to repair production equipment which it reasonably estimated 
to cost less than $5,000.00 per project and, therefore, it did not need advance 
approval from Aztec in order that Aztec be bound to pay its share of the 
expenses incurred. Moreover, Roemer maintains that Aztec knew of Roemer's repair 
projects on the subject wells and did not complain until it became aware of the 
results, i.e., that production was still not economic. Aztec contended, in part, 
that the "projects" done by Roemer were "reworking" and, hence, Roemer was 
obliged to seek Aztec's advance approval in order that it be bound to pay a 
share of the expenses.

[¶7]      Aztec filed a 
motion for summary judgment. Finding there was no genuine issue of material 
fact, the district court granted that motion. The district court reasoned that 
Section 11(b) of the Operating Agreement provided, in basic 
part:

"Without the consent of 
all parties: (b) no well shall be reworked . . . except a well reworked . . . 
pursuant to the provisions of Section 12 of this agreement . . ." Section 12 in 
pertinent part provides as follows: "If all parties cannot mutually agree . . . 
upon the reworking . . . of . . . a well jointly owned by all the parties and 
not then producing in paying quantities . . . any party or parties wishing to . 
. . rework . . . such a well may give the other parties written notice of the 
proposed operation, specifying the work to be performed, the location, proposed 
depth, objective formation and the estimated cost of the operation." * * * The 
expressed provision of Section 11(b) prohibits such a reworking of a well. 
"Reworking" appears to be a term of art in the oil and gas industry and cases 
involving oil and gas. The court was referred to and consulted the Williams and 
Myers [sic] treatise which indicates that reworking is done to restore 
production that has ceased. The record clearly indicates that all six wells 
involved had not been producing for a substantial period of time * * 
*.

* * * * * 
*

Basing the decision as I 
have on Section 11(b) and Section 12 of the Operating Agreement and with 
plaintiff's failure to give notice thereunder, plaintiff cannot now recover from 
defendant. It is unnecessary for the court to rule on any of the parties' other 
contentions.

III. 
DISCUSSION

[¶8]      In evaluating the 
propriety of a summary judgment, we determine whether there are no genuine 
issues of material fact and whether, as a consequence, the prevailing party is 
entitled to judgment as a matter of law. Equality Bank of Evansville, Wyo. v. 
Suomi, 836 P.2d 325, 328 (Wyo. 1992); W.R.C.P. 56(c). Summary judgment is 
appropriate when the terms of the parties' agreement do not raise issues of 
material fact. J & M Investments v. Davis, 726 P.2d 96, 98 (Wyo. 
1986). This court accords no deference to the district court's determination of 
an issue of law. Coones v. F.D.I.C., 848 P.2d 783, 795 (Wyo. 1993) 
(quoting Powder River Oil Co. v. Powder River Petroleum Corp., 830 P.2d 403, 406-07 (Wyo. 1992)). Unless ambiguous, our inquiry is confined to the 
language contained in the contract. Union Pacific Resources Co. v. Texaco, 
Inc., 882 P.2d 212, 220 (Wyo. 1994). The meaning of a word in a contract is 
what the parties intended to convey.

[¶9]      The district 
court appears to have relied upon a very small portion of the definition found 
in the Williams and Meyers treatise, which we set out in its 
entirety:

Reworking 
operations

Work performed on a well 
after its completion, in an effort to secure production where there has been 
none, restore production that has ceased or increase production. Cleaning out a 
hole that has silted up is a typical reworking operation. In Rogers v. 
Osborn, 152 Tex. 540, 261 S.W.2d 311, 2 O. & G.R. 304, 1439 (1953), the 
trial court defined reworking operations as follows:

"`re-working operations' 
. . . means actual work as operations which have theretofore been done, being 
done over, and being done in good faith endeavor to cause a well to produce oil 
and gas or oil or gas in paying quantities as an ordinarily competent operator 
would do in the same or similar circumstances."

The appellate court 
neither approved nor disapproved of this definition. In the same case, the court 
held that Periodic Flowing (q.v.) or bleeding a well could amount to 
reworking operations, where the jury so found.

See also Johnson v. 
Houston Oil Co., 229 La. 446, 86 So. 2d 97, 5 O. & G.R. 1169 (1956); 
Ariz.R.S. § 27-551.

The legal definition of 
the term is important because many leases contain clauses such as or similar to 
the following:

"If prior to discovery of 
oil or gas on the land lessee should drill a dry hole thereon, or if after 
discovery of oil or gas the production thereof should cease, this lease shall 
not terminate if lessee commences additional drilling or reworking 
operations within sixty days thereafter. . . . If at the expiration of 
the primary term, oil, gas or other mineral is not being produced on the land 
but lessee is then engaged in drilling or reworking operations 
thereon, this lease shall remain in force so long as such operations are 
prosecuted with no cessation of more than thirty days. . . 
."

The term "reworking" is 
defined in one agreement form as "all operations designed to secure, restore or 
improve production through some use of a hole previously drilled, including but 
not limited to, mechanical or chemical treatment of any horizon, deepening to 
test deeper strata, plugging back to test higher strata, etc." Myers, The Law 
of Pooling and Unitization § 15.06 at p. 601 (2d ed. 
1967).

Sheffield v. Exxon 
Corp., 
424 So. 2d 1297, 76 O. & G.R. 419 (Ala. 1983), in analyzing the meaning of 
this term, declared:

"The crucial test which 
must be met for an activity to constitute reworking is whether the operation is 
associated or connected with the physical site of the well or the unit. 
Additionally, the operation must be intimately connected with the resolution of 
whatever physical difficulty caused the well to cease 
production."

[¶10]   In Harry Bourg Corp. v. Union 
Producing Co., 197 So. 2d 172, 27 O. & G.R. 20 (La. App. 1967) writ. 
ref'd, 250 La. 903, 199 So. 2d 917, 27 O. & G.R. 28 (1967), the court 
concluded that "the word `rework' has a definite, even though multiple, meaning 
in the oil and gas industry" and it rejected the contention that "reworking" 
required that activities "be of a drilling nature (either sidetracking or 
deepening)." The "reworking" in the instant case involved operations causing a 
well to produce gas from 14,550 feet after the original production from sand at 
14,800 feet ceased.

[¶11]   In Lone Star Producing Co. v. 
Walker, 257 So. 2d 496 at 500, 41 O. & G.R. 350 at 358 (Miss. 1971), the 
court declared that it was not absolutely necessary that a work over rig be on 
the well site as a necessary incident to a reworking operation, and then 
observed that:

"It would be difficult, 
if not impossible, to formulate a rule that would with exactness define 
reworking operations such as those contemplated by the terms of the leases in 
question because the problems of capturing and producing oil and gas located 
thousands of feet below the surface of the earth are many and varied. Reworking 
operations may encompass testing, evaluation and other acts performed necessary 
to reworking a given well, and each case will have to be considered in the light 
of facts peculiar to that operation. One of the prime requirements is that the 
acts of the operator constitute a bona fide effort to rework a given 
well."

Serhienko v. 
Kiker, 
392 N.W.2d 808, 91 O. & G.R. 278 (N.D. 1986), concluded that operations on 
other premises, on the success of which operation on the leasehold was 
contingent, did not constitute reworking operations on the 
leasehold.

Cox v. 
Stowers, 
786 S.W.2d 102, ___ O. & G.R. ___ (Tex. App., Amarillo, 1990), defined this 
term as "any and all actual acts, work or operations in which an ordinarily 
competent operator, under the same or similar circumstances, would engage in a 
good faith effort to cause a well or wells to produce oil or gas in paying 
quantities." Based on this definition, the court concluded that evidence was 
sufficient to justify that the lessee's treatment and activities were sufficient 
to constitute good faith reworking activities.

Burns v. Louisiana Land 
& Exploration Co., 870 F.2d 1016, 106 O. 
& G.R. 547 (5th Cir. 1989), concluded that in the context of the specific 
use of the phrase "completion of a dry hole" in a lease, "completion of a dry 
hole happens after unsuccessful drilling or 
reworking."

Pshigoda v. Texaco, 
Inc., 
703 S.W.2d 416, 90 O. & G.R. 135 (Tex. App., Amarillo, 1986, error ref'd 
n.r.e), concluded that expenses incurred in reworking an oil well were properly 
considered as capital expenses rather than operating and marketing expenses and 
hence were not to be considered in determining whether production was in paying 
quantities for purposes of the habendum clause of the 
lease.

See also Jardell v. 
Hillin Oil Co., 476 So. 2d 1118, 89 O. & G.R. 84 (La. App. 1985), 
rev'd and rendered, 485 So. 2d 919, 89 O. & G.R. 99 (La. 1986), for a 
detailed discussion of what constitutes reworking 
operations.

Del-Ray Oil & Gas, 
Inc. v. Henderson Petroleum Corp., 797 F.2d 1313, 92 O. 
& G.R. 96 (5th Cir. 1986), noted, 47 La.L.Rev. 661 (1987), declared 
that under Jardell reworking need not involve additional drilling and 
that Jardell does not suggest that reworking must take place below the 
ground.

The definition in this 
MANUAL was quoted in House v. Tidewater Oil Co., 219 So. 2d 616 at 
622-623, 33 O. & G.R. 268 at 279 (La. App. 1969), writ 
refused, 253 La. 1081, 221 So. 2d 516 (1969).

8 Howard R. 
Williams and Charles J. Meyers, Oil and Gas Law, Manual of Oil and Gas 
Terms 1071-74 (1991) (emphasis in original); and, see Texstar North 
America, Inc. v. Ladd Petroleum Corp., 809 S.W.2d 672, 677 (Tex. App. 
1991).

[¶12]   In addition, the Williams and 
Meyers treatise refers the reader to the definition for "work overs" in 
connection with "reworking operations." 8 Williams and Meyers, supra, at 
1074. The definition of "work overs" refers the reader to "production 
enhancement procedures." Id. at 1380. Each of these terms seems to shed 
some light on what the parties to this contract might have 
intended.

[¶13]   That, of course, leads us to our 
primary task in an appeal such as this, i.e., a determination of what the 
parties intended by the language employed in their contract. See Union 
Pacific Resources Co., 882 P.2d at 219-20; and Prudential Preferred 
Properties v. J and J Ventures, Inc., 859 P.2d 1267, 1271 (Wyo. 1993). It is 
readily evident from the definition of "reworking" in 8 Williams and Meyers, 
supra at 1071-74 that it has no precise meaning; rather, its meaning is, 
most frequently, a function of the context in which it is used. We are persuaded 
that its meaning in the circumstances of this case is, at best, uncertain and 
should be presented to a fact finder for resolution. See Eisenbarth v. 
Hartford Fire Ins. Co., 840 P.2d 945, 950-51 (Wyo. 1992); 3 Arthur Linton 
Corbin, Corbin on Contracts § 554 (1960) (and see 1993 Supp. by the 
Publisher's Editorial Staff); and 17A C.J.S. Contracts, §§ 300-302(1) 
(1963). It is also important to note that the contract in question was entered 
into on August 18, 1967, and the parties were Apache Corporation and Woods 
Petroleum Corporation. Neither of the litigants was a party to the original 
contract. When that contract was signed, all the wells in question were 
producers. Moreover, it is unmistakable that the $5,000.00 limitation imposed by 
Section 11(c) of the Operating Agreement affected the operator's discretion more 
profoundly in 1991 than it did in 1967.1 It is apparent the Operating 
Agreement contemplated that some limited "projects" could be undertaken without 
obtaining Aztec's consent.2 The line to be drawn between what 
the parties meant by "projects" and what they meant by "reworking" must, of 
necessity, be drawn by a fact finder.

[¶14]   Aztec contends the district court 
can be affirmed on other grounds. It is evident from what we have said above 
that there are disputed facts as to whether Roemer violated Section 11(c) of the 
Operating Agreement, whether its estimates were reasonable, and whether Aztec 
"opted out" of the work done by Roemer. Aztec also contends that it had no 
interest in some of the subject wells; in particular, Apache No. 7. It is 
evident even from Aztec's own argument that the facts in this regard are, at 
least at this juncture, very much in dispute. We need not address the other 
issues posed by Aztec in its appellate brief.

IV. 
CONCLUSION

[¶15]   We hold there are genuine issues of 
material fact which preclude summary judgment. The order on summary judgment, in 
which the district court found generally in favor of Aztec and generally against 
Roemer, is reversed and the matter is remanded to the district court for further 
proceedings consistent with this opinion.

Footnotes

1 Had the 
parties renegotiated this contract in 1991, so as to inflate the $5,000.00 
limitation established in 1967 to a current level, Roemer's discretion to do 
projects would have had to have been increased to approximately 
$20,325.00.

2 Aztec 
misapprehends the wording of Section 11(c) of the Operating Agreement. In its 
appellate brief, Aztec states: "Section 11(c) prohibits the operator from 
undertaking any project expected to cost more than $5,000, unless the project is 
`connected with' a well where reworking, drilling, etc. has already been 
approved." Parsed, that section provides that the operator must obtain consent 
for any project reasonably estimated to cost over $5,000.00, unless it is done 
in connection with drilling, reworking, deepening or plugging back which has 
been previously authorized by the Operating Agreement.