Title: Union Pacific Resources Co. v. Texaco, Inc.

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Union Pacific Resources Co. v. Texaco, Inc.1994 WY 92882 P.2d 212Case Number: 93-223, 93-224Decided: 09/30/1994Supreme Court of Wyoming
UNION 
PACIFIC RESOURCES COMPANY, a Delaware corporation, as Successor in Interest to 
Champlin Petroleum Company,

Appellant 
(Plaintiff),

v.

TEXACO, 
INC., a Delaware corporation; and Wexpro Company, a Utah corporation, as 
Successor in Interest to Mountain Fuel Supply Company,

Appellees 
(Defendants).

 

AMOCO 
PRODUCTION COMPANY, a Delaware corporation,

Appellant 
(Plaintiff),

v.

TEXACO, 
INC., a Delaware corporation; and Wexpro Company, a Utah corporation, as 
Successor in Interest to Mountain Fuel Supply Company,

Appellees 
(Defendants).

Rehearing 
Denied November 2, 1994.

 

Appeal 
from District Court, Laramie County, Edward L. Grant, 
J.

 

Representing 
Appellants:

Loyd 
E. Smith of Lathrop & Rutledge, P.C., Cheyenne, and Gretchen A. VanderWerf 
and Lino S. Lipinsky de Orlov of Hawley and VanderWerf, P.C., Denver, CO, for 
Union Pacific Resources Co.

Bradley 
S. McKim of Amoco Corp., Denver, CO and Stan L. Spangler of Shaw, Spangler & 
Roth, P.C., Denver, CO, for Amoco Production Co.

Representing 
Appellee:

Neil 
J. Short, Casper, and Craig R. Carver of Gibson, Dunn & Crutcher, Denver, 
CO, for Texaco, Inc.

Neil 
J. Short, Casper, for Wexpro Co.

 

Before 
GOLDEN, C.J., and THOMAS, CARDINE,* MACY,** 
and TAYLOR, JJ.

* 
Retired July 6, 1994.

** 
Chief Justice at time of oral argument.

TAYLOR, 
Justice.

[¶1]      The primary 
question in these consolidated appeals concerns the interpretation of a 
contract. The contract is an operating agreement formed by four oil and gas 
companies who own exclusive rights to exploit minerals on certain lands in 
Wyoming. The contract allocates expenses and profits for natural gas exploration 
and production. The allocation of profit varies depending upon the geologic 
formation from which production is achieved. After the parties executed the 
contract, a natural gas well capable of significant production was discovered in 
one formation. Subsequently, the Wyoming administrative agency responsible for 
oil and gas conservation ordered that the size of the drilling unit for that 
formation be enlarged from its former boundaries to protect the correlative 
rights of an adjoining mineral rights owner and the operating rights owners. 
This dispute is focused on whether the order from the administrative agency 
superseded the parties' contract. The district court determined that the 
contract was modified by the administrative agency order.

[¶2]      We 
affirm.

I. 
ISSUES

[¶3]      Appellant, Union 
Pacific Resources Company (Union Pacific), identifies the issues in Appeal No. 
93-223 as:

1. 
Whether the parties' Operating Agreement clearly and unambiguously fixed the 
parties' respective ownership interests in production from the L-2 
Well.

2. 
Whether spacing and compulsory pooling orders entered by the Wyoming Oil and Gas 
Conservation Commission subsequent to the drilling of the L-2 Well modified or 
superseded the parties' private agreement regarding the allocation of production 
set forth in the Operating Agreement.

3. 
Whether the concept of correlative rights embodied in the Wyoming Oil and Gas 
Conservation Act, W.S. §§ 30-5-101, et seq., overrides a private agreement 
voluntarily entered into among working interest owners apportioning production 
among themselves.

4. 
Whether the District Court's finding that the Commission's orders modified the 
Operating Agreement unconstitutionally impaired UPRC's contractual relationship 
with Texaco and Wexpro.

5. 
Whether Texaco and Wexpro are estopped from claiming interests in the L-2 Well 
greater than they bargained for in the Operating 
Agreement.

[¶4]      Appellant, Amoco 
Production Company (Amoco), frames the following issues in Appeal No. 
93-224:

1. 
Does a Wyoming Oil and Gas Conservation Commission order enlarging a drilling 
unit under W.S. § 30-5-109 in and of itself change working interest ownership as 
agreed to in a private operating agreement?

2. 
If the answer to Issue 1 is "No", should summary judgment be entered in Amoco's 
favor on the basis that the Operating Agreement unambiguously fixes the parties' 
working interest ownership?

[¶5]  Appellee, Wexpro Company (Wexpro), finds 
these issues in the consolidated cases:

1. 
Whether the statutory provisions of the Wyoming Conservation Law and the 
regulatory provisions of the Wyoming Oil and Gas Conservation Commission must be 
considered a part of oil and gas contracts for operations in the State of 
Wyoming as though these [statutory] and regulatory provisions were actually 
included in the terms of any such contract.

2. 
Whether the provisions of the subject Operating Agreement * * * incorporated 
into that Operating Agreement the spacing orders entered by the Wyoming Oil and 
Gas Conservation Commission in Docket No. 191-81 for the Frontier formation * * 
* and by the order entered in Docket No. 190-81 for the Dakota formation * * 
*.

3. 
Whether the findings of fact and conclusions of law entered by the Wyoming Oil 
and Gas Conservation Commission in Docket No. 404-90 * * * altered the subject 
Operating Agreement * * * as to the Dakota formation in order to honor the best, 
current scientific data and thereby protect the correlative [rights] of 
appellees Wexpro Company and Texaco, Inc.

4. 
Whether the Operating Agreement * * * is a pooling 
agreement.

[¶6]      Appellee, Texaco, 
Inc. (Texaco), summarizes the issues from both cases:

Whether 
the district court's Order properly interpreted the meaning of the parties' 
Operating Agreement.

 

II. 
FACTS

[¶7]      On September 18, 
1981, the Wyoming Oil and Gas Conservation Commission (Commission) issued two 
orders to regulate exploration for natural gas and associated hydrocarbons (gas) 
on certain Wyoming lands located in Lincoln, Sweetwater and Uinta Counties. The 
orders established drilling units of specified sizes where one well could be 
drilled to extract pools of gas that were believed to exist in distinct 
sedimentary formations beneath the surface. Each order also identified the area 
assigned for the granting of a well permit.

[¶8]      Included in the 
Commission's orders were sedimentary formations located in the Bruff Field of 
the Moxa Arch area of Sweetwater and Lincoln Counties. In the Frontier 
formation, the Commission established an irregularly sized 760-acre drilling 
unit which included all 640 acres of Section 15 and an adjoining 120-acre 
portion of Section 22 of Township 19 North, Range 112 West, 6th P.M. In the 
Dakota formation, the Commission established a 640-acre drilling unit which 
encompassed all of Section 15 of Township 19 North, Range 112 West, 6th P.M. The 
Dakota formation is a geologic zone which is found at a deeper depth than the 
Frontier formation.

[¶9]      Union Pacific, 
Amoco, Wexpro and Texaco (collectively the parties) own oil and gas working 
interests in the Bruff Field. Effective October 7, 1981, the parties, or their 
predecessors in interest, entered into an Operating Agreement to test and 
develop a portion of the Bruff Field. The Operating Agreement defined the 
"subject lands" as including the parties' interests in all of Section 15 of 
Township 19 North, Range 112 West, 6th P.M. (hereinafter Section 15) and the 
parties' interests in the portion of Section 22 of Township 19 North, Range 112 
West, 6th P.M. (hereinafter Section 22) which corresponded with the Commission's 
Frontier formation drilling unit order. The Operating Agreement acknowledged 
that the Commission had established a 760-acre drilling unit for the Frontier 
formation and a 640-acre drilling unit for the Dakota formation. Specifically 
incorporated into the Operating Agreement was an agreement of Operating 
Provisions which was attached as Exhibit "D". The Operating Agreement also 
incorporated another agreement signed by the parties which is styled as a 
Communitization Agreement. Effective October 7, 1981, the Communitization 
Agreement provided exclusively for development of the Frontier 
formation.

[¶10]   The Operating Agreement designated 
Amoco as the operator of the wells on the "subject lands." During 1981, Amoco 
was required to commence drilling of a test well in Section 15 "to adequately 
test the Frontier and Dakota formations" unless conditions prohibited. This test 
well, designated the Champlin 149 Amoco "L" Well # 1 (hereinafter the L-1 Well) 
was located in the southeastern quarter of Section 15. The L-1 Well produced 
commercial quantities of gas from the Frontier formation, but was unproductive 
from the Dakota formation. On April 30, 1982, the L-1 Well was placed in 
commercial production.

[¶11]   In the Operating Agreement, the 
parties agreed to allocate the ownership of production in "working interest 
percentages," which were stated as:



 

 

Dakota

Frontier                           
      

 

[Wexpro]

15.62501%

11.04410%

 

Amoco

46.71052%

53.95750%

 

[Union 
      Pacific]  
      

21.87500%

29.00420%

 

Texaco

15.78947%

5.99420%

Production 
from the L-1 Well was allocated according to these "working interest 
percentages" for the Frontier formation.

[¶12]   On June 29, 1989, Amoco proposed 
drilling the Champlin 149 Amoco "L" Well # 2 (hereinafter the L-2 Well). The L-2 
Well would be located within the southwestern quarter of Section 15 and would be 
drilled to test both the Frontier and Dakota formations. Union Pacific, Wexpro 
and Texaco all signed "Well Authorization" agreements to signify their approval 
of the proposal. These agreements restated that production from the L-2 Well 
would be allocated according to the "working interest percentages" found in the 
Operating Agreement.

[¶13]   The L-2 Well was completed on 
January 23, 1990. The L-2 Well produced substantial quantities of gas from the 
Dakota formation. The amount of production from the L-2 Well exceeded the 
expectations of experts, particularly since the nearby L-1 Well had failed to 
produce commercial quantities of gas from the Dakota 
formation.

[¶14]   The United States Department of the 
Interior, Bureau of Land Management (BLM) owns the mineral rights to the portion 
of the "subject lands" within Section 22. On September 7, 1990, the BLM, as 
lessor, demanded that Texaco and Wexpro, as lessees or operating rights owners, 
act to protect the leased lands from drainage by the L-2 Well. In response, 
Texaco filed two alternative applications for orders from the 
Commission.

[¶15]   The first application sought an 
order to permit Texaco to drill an offset well to prevent the drainage of the 
gas from Section 22. The offset well would have been located in Section 22 only 
800 feet away from the L-2 Well in Section 15. After conducting a hearing on 
November 14, 1990, the Commission denied the application for an offset well 
finding that a prudent operator would not drill at this location because it 
would interfere with the L-2 Well.

[¶16]   On December 13, 1990, the 
Commission granted Texaco's second application which sought an order to enlarge 
the drilling unit for the Dakota formation. The Commission ordered that the 
drilling unit for the Dakota formation be enlarged from 640 acres to 760 acres, 
which included all of Section 15 and the 120-acre portion of Section 22 which 
Texaco and Wexpro leased from the BLM. This enlarged drilling unit precisely 
corresponds with the previously existing drilling unit established for the 
Frontier formation on these same lands. See attached Appendix "A." The 
Commission determined that this enlarged drilling unit would protect the 
correlative rights of the BLM, Texaco and Wexpro. Texaco and Wexpro have an 
obligation, under terms of the Operating Agreement, to pay royalties to the BLM 
from their allocation of the profits from the L-2 Well.

[¶17]   During the November 14, 1990 
hearing to determine if the Commission would grant the application for an 
enlarged drilling unit for the Dakota formation, Amoco presented expert 
testimony, accompanied by an exhibit which was admitted into evidence, 
disclosing the effect on the parties of an enlarged drilling unit. Amoco 
calculated that if the drilling unit was enlarged, Amoco's "working interest 
percentages" for production from the L-2 Well would decrease by 8.5197% and 
Union Pacific's "working interest percentages" would decrease by 4.5796%. 
Meanwhile, Texaco's "working interest percentages" for production from the L-2 
Well would increase by 6.9483% and Wexpro's "working interest percentages" would 
increase by 6.1510%. However, after the Commission issued its order enlarging 
the drilling unit for the Dakota formation, Amoco changed its 
position.

[¶18]   On February 18, 1991, Amoco 
informed Texaco that it was adopting the position that the Commission's enlarged 
drilling unit order did not alter the terms for the allocation of production 
from the Dakota formation contained in the Operating Agreement. "It is Amoco's 
position that the Operating Agreement is binding on all signatory parties, and 
the entry of the Commission's Order respacing the Dakota formation in no way 
changes the party's contractual working interest." Union Pacific joined Amoco in 
claiming that the "working interest percentages" were not altered by the 
Commission's enlarged drilling unit order for the Dakota formation. Texaco 
challenged that it was apparent from reading the Operating Agreement that an 
enlarged drilling unit would alter the "working interest percentages" for the 
Dakota formation. Texaco pointed out that the Operating Agreement specifically 
defined "`Dakota Owners'" as "`the working interest owners, owning the working 
interest in and to the Spacing Unit established for the Dakota formation.'" 
Wexpro supported Texaco's position. The parties did not seek judicial review of 
the Commission's order enlarging the drilling unit.

[¶19]   On April 17, 1991, Texaco filed an 
application with the Commission for a compulsory pooling order to combine the 
parties' interests and allocate production according to the surface acreage each 
party contributed to the enlarged drilling unit for the Dakota formation. On May 
14, 1991, the Commission held a hearing on the compulsory pooling application. 
Union Pacific and Amoco protested the application arguing that the Commission 
lacked authority to interpret the Operating Agreement. Union Pacific and Amoco 
both urged the Commission to defer any action until litigation, which had been 
commenced in Colorado four days before the Commission's hearing, was completed. 
However, on June 13, 1991, the Commission issued a compulsory pooling 
order.

[¶20]   The Commission's compulsory pooling 
order brings together the interests of the parties in the enlarged 760-acre 
drilling unit on the "subject lands" in the Dakota formation. The Commission 
found that under the compulsory pooling order, the parties would have the 
following "working interest percentages" in the L-2 Well:



 

Amoco

45.4379%

 

 

Union 
      Pacific

24.4246%

 

 

Wexpro

17.1950%

 

 

Texaco

12.9425%

 

The 
Commission concluded that, as a matter of law, the parties had not previously 
voluntarily pooled their respective interests in the Dakota formation. However, 
the Commission made this finding "contingent" on the outcome of litigation 
between the parties on the meaning of the Operating Agreement. Therefore, the 
parties, under the Commission's order, may apply for rescission or modification 
of the Commission's order after litigation over the Operating Agreement is 
completed. On September 10, 1991, Union Pacific and Amoco filed an action in the 
District Court for the First Judicial District of Wyoming challenging the 
validity of the Commission's June 13, 1991 compulsory pooling order. Further 
prosecution of this action has been suspended until a decision on this appeal is 
finalized.

[¶21]   At the time the Commission issued 
its compulsory pooling order, the parties were also involved in litigation over 
the Operating Agreement in the District Court for the City and County of Denver, 
Colorado. In January, 1992, however, the Colorado court exercised its 
discretionary power and dismissed the case, without prejudice. The Colorado 
court declined jurisdiction on the basis of forum non 
conveniens.

[¶22]   On January 31, 1992, Union Pacific 
and Amoco sought a declaratory judgment from the District Court for the First 
Judicial District of Wyoming holding that the Operating Agreement fixed the 
parties' "working interest percentages" in the Dakota formation "irrespective" 
of the drilling unit orders of the Commission. Texaco and Wexpro both answered 
and filed counterclaims seeking declaratory judgments in their favor. On June 
19, 1992, Texaco filed a motion for summary judgment, which Wexpro joined. Union 
Pacific and Amoco responded with individual cross-motions for summary 
judgment.

[¶23]   After extensive briefing and oral 
argument, the district court granted a partial summary judgment in favor of 
Texaco and Wexpro. The district court concluded that the terms of the Operating 
Agreement disclosed that the parties shared production "in proportions which 
were equal to the proportions of net mineral acres contributed by each to the 
then applicable spacing units governing production from each formation." The 
district court determined that when the Commission enlarged the drilling unit 
for the Dakota formation, the interests of the parties in the proportion of net 
mineral acres was also altered.

[¶24]   After the partial summary judgment 
was granted, the parties stipulated to the effects of the amended "working 
interest percentages" and established escrow accounts to hold the disputed funds 
until litigation was completed. On September 22, 1993, the district court 
entered a judgment which required Amoco to deposit $1,620,450.09 along with 
future proportional shares of monthly production from the L-2 Well in the escrow 
accounts. The judgment also required Union Pacific to deposit $677,454.40 along 
with future proportional shares of monthly production from the L-2 Well in 
escrow accounts. Union Pacific and Amoco both filed notices of 
appeal.

III. 
DISCUSSION

[¶25]   Summary judgment is appropriate 
when there is no genuine issue of material fact and the prevailing party is 
entitled to a judgment as a matter of law. Lincoln v. Wackenhut Corp., 
867 P.2d 701, 702 (Wyo. 1994); W.R.C.P. 56(c). When the interpretation of a 
contract is at issue, summary judgment is proper when the terms of the parties' 
agreement do not raise issues of material fact and the terms of the agreement 
are unambiguous. Prudential Preferred Properties v. J and J Ventures, 
Inc., 859 P.2d 1267, 1271 (Wyo. 1993). The court interprets the language of 
an unambiguous agreement as a matter of law. Moncrief v. Louisiana Land and 
Exploration Co., 861 P.2d 516, 523 (Wyo. 1993). On appellate review, this 
court accords no special deference to the district court's decisions on issues 
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)).

[¶26]   Using the same standards and same 
materials as the district court, we review the record in the light most 
favorable to the party opposing the motion for summary judgment, giving that 
party the benefit of all favorable inferences which are fairly derived from the 
record. Thunder Hawk By and Through Jensen v. Union Pacific R. Co., 844 P.2d 1045, 1047 (Wyo. 1992). Our review is designed to determine whether an 
issue of material fact remains which precludes the granting of a summary 
judgment as a matter of law. Keehn v. Town of Torrington, 834 P.2d 112, 
114 (Wyo. 1992). When a disputed fact, if proven, would have the effect of 
establishing or refuting an essential element of the cause of action or defense 
asserted by the parties, a genuine issue of material fact remains. Thunder 
Hawk By and Through Jensen, 844 P.2d  at 1047.

[¶27]   Various constructions of the 
Operating Agreement are offered by each party. In the Operating Agreement, Union 
Pacific asserts the parties unambiguously established their "working interest 
percentages" for any well drilled on the "subject lands" in the Dakota 
formation. Union Pacific declares that the express terms of the Operating 
Agreement do not permit subsequent modification. Accordingly, Union Pacific 
explains that the Commission's orders cannot supersede the Operating 
Agreement.

[¶28]   Amoco also maintains that the 
district court erred in ruling that the Commission's orders superseded the 
"working interest percentages" in the Operating Agreement. Amoco offers a policy 
argument suggesting limitations in the doctrine of correlative rights to protect 
contractual rights. Amoco argues that there is no provision in the Operating 
Agreement which would adjust the "working interest percentages" in the event of 
a change in the size of the drilling unit.

[¶29]   Wexpro challenges that the 
Operating Agreement incorporates principles of Wyoming law. Therefore, the 
Commission's orders, according to Wexpro, can supersede provisions in the 
Operating Agreement. Wexpro points out that the Operating Agreement acknowledges 
the drilling unit orders in place at the time the Operating Agreement was 
executed. Wexpro maintains that the Commission exercised its statutory 
obligation to prevent waste and protect correlative rights in enlarging the 
drilling unit for the Dakota formation.

[¶30]   Texaco argues that before this 
dispute, all the parties shared the understanding that "working interest 
percentages" in the Operating Agreement were determined by the amount of surface 
acreage each party contributed to the drilling unit. Texaco insists that the 
Operating Agreement does not fix "working interest percentages" for all time and 
all circumstances. Texaco argues that ambiguity in this language permits the 
court to resort to extrinsic evidence to determine the intent of the 
parties.

[¶31]   In determining if any of these 
varied constructions of the Operating Agreement are correct, we are guided by 
our established rules of contract interpretation. Contract interpretation is the 
process of ascertaining the meaning of the words used by the parties to express 
their intent. Doctors' Co. v. Insurance Corp. of America, 864 P.2d 1018, 
1023 (Wyo. 1993). The instrument which memorializes the agreement must be 
considered as a whole with each part being read in light of the other parts. 
Id.; Amoco Production Co. v. Stauffer Chemical Co. of Wyoming, 612 P.2d 463, 465 (Wyo. 1980). A contract may consist of several documents. Cliff 
& Co., Ltd. v. Anderson, 777 P.2d 595, 598 (Wyo. 1989). An exhibit, 
attached to a contract and the references made to the exhibit in the contract, 
become part of the contract as a whole. Kilbourne-Park Corp. v. 
Buckingham, 404 P.2d 244, 245 (Wyo. 1965).

[¶32]   If the meaning of the contract is 
ambiguous, or not apparent, it may be necessary to resort to extrinsic evidence 
to determine the intention of the parties making interpretation a mixed question 
of law and fact. Wilder v. Cody Country Chamber of Commerce, 868 P.2d 211, 216 (Wyo. 1994). The intent of the parties to an ambiguous contract is 
obscured by indefiniteness of expression or by double meaning. True Oil Co. 
v. Sinclair Oil Corp., 771 P.2d 781, 790 (Wyo. 1989) (quoting Farr v. 
Link, 746 P.2d 431, 433 (Wyo. 1987)). Ambiguity is not created, however, by 
the parties' subsequent disagreement over the meaning of the contract. 
Rainbow Oil Co. v. Christmann, 656 P.2d 538, 542 (Wyo. 1982); Amoco 
Production Co., 612 P.2d  at 465.

[¶33]   When the meaning of a contract is 
unambiguous, extrinsic evidence is not admitted to contradict the plain meaning 
of the terms used by the parties. Prudential Preferred Properties, 859 P.2d  at 1271. Therefore, when the terms of a contract are unambiguous, our 
search for the intent of the parties is confined to the language contained 
within the "four corners" of an integrated contract. Doctors' Co., 864 P.2d  at 1024; Prudential Preferred Properties, 859 P.2d  at 1271. Our 
standard of interpretation for contracts declares that the words used to 
memorialize the intent of the parties are given the plain meaning that a 
reasonable person, in the position of the parties, would understand them to 
mean. Doctors' Co., 864 P.2d  at 1023; Wangler v. Federer, 714 P.2d 1209, 1213 (Wyo. 1986).

[¶34]   Our review of the Operating 
Agreement directs a conclusion that the language is unambiguous as a matter of 
law. True Oil Co., 771 P.2d  at 790. Accordingly, we need not consider 
extrinsic evidence to determine the intent of the parties. Doctors' Co., 
864 P.2d  at 1024; Prudential Preferred Properties, 859 P.2d  at 1271. 
However, the language of the Operating Agreement is not always simple or direct. 
The Operating Agreement was negotiated and drafted by professionals in a 
technical industry, using distinctive terminology for which customary meanings 
are often assumed.

[¶35]   The parties styled their agreement 
as an "Operating Agreement." The term, operating agreement, has come to have a 
plain meaning which reasonable persons in the oil and gas industry understand as 
denoting:

An 
agreement between or among interested parties for the testing and development of 
a tract of land. Typically one of the parties is designated as the operator and 
the agreement contains detailed provisions concerning the drilling of a test 
well, the drilling of any additional wells which may be required, the sharing of 
expenses, and accounting methods. The authority of the operator, and 
restrictions thereon, are spelled out in detail in the typical 
agreement.

8 
Howard R. Williams & Charles J. Meyers, Oil and Gas Law, Manual of Oil 
and Gas Terms, 837 (1991). The provisions of the Operating Agreement conform 
to this standard and disclose the intent of the parties to form this type of 
contract.

[¶36]   After identifying Amoco as the 
operator of the "subject lands," Article 2 of the Operating Agreement contains 
the language which the parties dispute:

2. 
OWNERSHIP OF PRODUCTION; MATERIAL AND EQUIPMENT:

A. 
Production. Subject to Article 6 hereof [dealing with royalties], all gas 
and associated liquid hydrocarbons produced and saved from the Frontier 
formation within the Subject Lands shall be allocated in the proportions of the 
acreage lying outside the participating area and the acreage inside the 
participating area with that portion of the production allocated to the 
participating area to be shared by the working interest owners in the same 
manner as the remainder of the production in the participating area is shared. 
Production allocated to the acreage outside the participating area will be owned 
by the working interest owners and the royalty owners of that acreage. 
Production outside the participating area for the Frontier formation will be 
allocated as provided in the Communitization Agreement attached hereto as 
Exhibit "A." Allocation of production shall be owned by the parties hereto 
in the following "working interest percentages":



 

 

Frontier

Dakota

 

[Wexpro]

15.62501%

11.04410%

 

Amoco

46.71052%

53.95750%

 

[Union 
      Pacific]

21.87500%

29.00420%

 

Texaco

15.78947%

5.99420%

The 
unleased Champlin acreage committed hereto (i.e., the NE/4 of said Section 15) 
shall be treated as though leased subject to a landowner's royalty of 15% owned 
by [Union Pacific].

(Emphasis 
added.)

[¶37]   Article 2 initially distinguishes 
between the acreage located within the "participating area" and the acreage 
located outside the "participating area." The "participating area" is defined 
elsewhere in the Operating Agreement as acreage which is subject to a voluntary 
pooling agreement dated July 14, 1972. The acreage included in the 
"participating area" encompasses all of the northwestern quarter of Section 15 
and a portion of the southwestern quarter of Section 15. The first three 
sentences of Article 2 describe the allocation of production from the acreage 
inside the "participating area" and the acreage outside the "participating 
area." After noting this distinction, Article 2 details the "working interest 
percentages" for the Frontier and Dakota formations.

[¶38]   While the parties focus on the 
language detailing the specific "working interest percentages," our review of 
Article 2, as a whole, discloses the inherent limitations of the Operating 
Agreement. The convoluted language of the first three sentences of Article 2 is 
focused exclusively on the allocation of production from the drilling unit 
established for the Frontier formation. The only mention of allocation of 
production from the drilling unit established for the Dakota formation occurs 
when the "working interest percentages" are detailed. Unfortunately, the parties 
do not explain anywhere in the Operating Agreement the precise method used to 
calculate the "working interest percentages" other than by the reference to 
surface acreage either inside or outside the "participating 
area."

[¶39]   The references in Article 2 to the 
Frontier formation or the Dakota formation may be considered generic; however, 
other provisions of the Operating Agreement illuminate the intent of the parties 
to relate these terms to the drilling units established by the Commission. In 
Article 4, the parties provided for the allocation of drilling costs and 
expenses in detail. The Article 4 definitions refer to the Commission's orders 
establishing drilling units:

A. 
Definition[s]:

"Frontier 
Owners" - the working interest owners owning the working interests in and to the 
Spacing Unit established for the Frontier formation.

"Dakota 
Owners" - the working interest owners, owning the working interest in and to the 
Spacing Unit established for the Dakota formation.

[¶40]   In the Operating Agreement, the 
parties refer, interchangeably, to a "drilling and spacing unit" or to a 
"spacing unit." The terms "spacing unit" or "drilling unit" are used in the oil 
and gas industry to describe the area which an administrative agency has 
determined one well can efficiently drain. See 8 Williams & Meyers, 
supra, at 357-58, 1359-62. Wyoming law refers to drilling units. Wyo. 
Stat. § 30-5-109(a) (1983).

[¶41]   The Operating Agreement contains an 
express reference to the Commission's orders establishing drilling units. After 
identifying the ownership interests of each of the parties in the "subject 
lands," the Operating Agreement includes a recital (hereinafter the drilling 
unit recital), which states:

WHEREAS, 
by Order No. 11, entered September 18, 1981, in Docket No. 191-81, the Oil and 
Gas Conservation Commission of the State of Wyoming established the Subject 
Lands as a 760-acre drilling and spacing unit for the production of natural gas 
and associated liquid hydrocarbons from the Frontier formation; and, by Order 
No. 1 [sic], entered September 9, 1981 [sic], in Docket No. 190-81, the Oil and 
Gas Conservation Commission of the State of Wyoming established the Subject 
Lands on the 640-acre drilling and spacing unit for the production of natural 
gas and associated liquid hydrocarbons from the Dakota 
formation[.]

[¶42]   A "recital" is a formal statement 
in a document of some matter of fact "to explain the reasons for 
the transaction." Wells-Stewart Const. Co. v. Martin Marietta Corp., 103 
Ariz. 375, 442 P.2d 119, 123 (1968) (emphasis in original). See also 
Black's Law Dictionary 1270 (6th ed. 1990). In the law of estoppel, a particular 
and definite recital provides conclusive evidence of the material facts stated. 
Kellogg v. Dennis, 38 Misc. 82, 77 N.Y.S. 172, 175 
(1902).

[¶43]   The language of the drilling unit 
recital is not the model of clarity. However, it is sufficient to disclose that 
the Operating Agreement was formed with the parties' express acknowledgement of 
the Commission's authority to regulate the size of drilling units in the 
Frontier and Dakota formations. The drilling unit recital conclusively 
establishes that the parties formed their agreement to correspond with the 
760-acre drilling unit for the Frontier formation and the 640-acre drilling unit 
for the Dakota formation. These are the drilling units established by the 
Commission's September 18, 1981 orders. However, according to the 
interpretations advanced by Union Pacific and Amoco, the Operating Agreement 
does not acknowledge any subsequent Commission action. We 
disagree.

[¶44]   In Wyoming, the parties to a 
contract are presumed to enter into their agreement in light of existing 
principles of law. Black & Yates, Inc. v. Negros-Philippine Lumber 
Co., 32 Wyo. 248, 258, 231 P. 398, 401 (1924). Accord 4 Walter H.E. 
Jaeger, Williston on Contracts, § 615 at 602 (3rd ed. 1961). These existing 
principles of law enter into and become a part of a contract as though 
referenced and incorporated into the terms of the agreement. Century Ready 
Mix Co. v. Lower & Co., 770 P.2d 692, 696 (Wyo. 1989); Tri-County 
Elec. Ass'n, Inc. v. City of Gillette, 584 P.2d 995, 1007 (Wyo. 1978). We 
could apply this presumption to hold that the principles of law by which Wyoming 
regulates the oil and gas industry became a part of the Operating Agreement. 
However, the parties expressly referenced and incorporated these principles of 
law in the Operating Agreement.

[¶45]   The Operating Agreement 
incorporates a statement of Operating Provisions. The Operating Provisions are 
contained in Exhibit "D" and are referenced in the Operating Agreement so as to 
become a part of the contract as a whole. Kilbourne-Park Corp., 404 P.2d  
at 245. The Operating Provisions state terms for accounting procedures, 
operations of producing wells, and abandonment of wells. Operating Provision 
Number 16 states:

This 
agreement shall be subject to all valid and applicable State and Federal laws, 
rules, regulations and orders, and the operations conducted hereunder shall be 
performed in accordance with said laws, rules, regulations and orders. In 
the event this agreement or any provisions hereof are, or the operations 
contemplated hereby are found to be inconsistent, with or contrary to any such 
law, rule, regulation or order, the latter shall be deemed to control and this 
agreement shall be regarded as modified accordingly and, as so modified, shall 
continue in full force and effect.

(Emphasis 
added.)

[¶46]   We hold that the plain language of 
the Operating Agreement incorporates principles of Wyoming law and provides for 
modifications of the terms of agreement when the terms of the contract are 
contrary to an order of the Commission. Therefore, we must determine what 
modifications to the Operating Agreement resulted from the Commission's December 
13, 1990 order enlarging the drilling unit for the Dakota formation or from the 
Commission's June 13, 1991 compulsory pooling order. This determination requires 
an understanding of the authority which the Commission 
exercises.

[¶47]   In 1951, the legislature enacted 
the Oil and Gas Conservation Act, Wyo. Stat. §§ 30-5-101 to 30-5-104 and §§ 
30-5-108 to 30-5-119 (1983 & Cum.Supp. 1994) (hereinafter the Act) to 
regulate the oil and gas industry in the state. See Mark W. Gifford, 
The Law Of Oil And Gas In Wyoming: An Overview, XVII Land & Water 
L.Rev. 401, 415 (1982). The Act establishes the Commission, Wyo. Stat. § 
30-5-103, and declares that the Commission "has jurisdiction and authority over 
all persons and property, public and private, necessary to 
effectuate the purposes and intent * * *" of the Act. Wyo. Stat. § 30-5-104(a) 
(emphasis added).

[¶48]   The Commission exercises the police 
power of the State of Wyoming when it issues its orders. Big Piney Oil & Gas 
Co. v. Wyoming Oil & Gas Conservation Com'n, 715 P.2d 557, 563 (Wyo. 1986). 
Contract rights and property rights are subject to a reasonable exercise of 
police power. Bulova Watch Co. v. Zale Jewelry Co. of Cheyenne, 371 P.2d 409, 
417 (Wyo. 1962); Delatte v. Woods, 232 La. 341, 94 So. 2d 281, 287 (1957); 
Superior Oil Co. v. Foote, 214 Miss. 857, 59 So. 2d 85, 93 (1952). When the 
police power is exercised to restrict contract rights, we must determine whether 
the restrictions are reasonable and within the scope of the police power. 
Mountain Fuel Supply Co. v. Emerson, 578 P.2d 1351, 1356 (Wyo. 1978). A valid 
conservation agency order directing the establishment or modification of a 
drilling unit does not unconstitutionally impair contract rights. Patterson v. 
Stanolind Oil & Gas Co., 305 U.S. 376, 379, 59 S. Ct. 259, 260, 83 L. Ed. 231 
(1939); Alston v. Southern Production Co., 207 La. 370, 21 So. 2d 383, 386 
(1945); E.H. Schopler, Annotation, Validity Of Compulsory Pooling Or Unitization 
Statute Or Ordinance Requiring Owners Or Lessees Of Oil and Gas Lands To Develop 
Their Holdings As A Single Drilling Unit And The Like, 37 A.L.R.2d 434, 438 
(1954).

[¶49]   The Act does not contain an express 
statement of purpose. However, this court has recognized that we may ascertain 
the intent and general purpose of an act by giving effect to every word, clause 
and sentence and construing all components as a whole. Parker Land and Cattle 
Co. v. Wyoming Game and Fish Com'n, 845 P.2d 1040, 1042 (Wyo. 1993) 
(quoting Ross v. Trustees of University of Wyoming, 31 Wyo. 464, 
489, 228 P. 642, 651 (1924) and City of Laramie v. Facer, 814 P.2d 268, 
270 (Wyo. 1991)).

[¶50]   Our reading of the Act discloses 
that the purpose is to provide a comprehensive regulatory program which prevents 
the waste of Wyoming's oil and gas resources and protects the correlative rights 
of property owners. Wyo. Stat. § 30-5-102; Wyo. Stat. § 30-5-109. The Act, 
therefore, represents a legislative modification to the rule of capture. 
Texaco, Inc. v. Industrial Com'n of State of North Dakota, 448 N.W.2d 621, 623 (N.D. 1989). Under the rule of capture, a land owner acquired title to 
all the oil and gas which the land owner could produce, even when it was proven 
that some of the oil and gas migrated from adjoining lands. 8 Williams & 
Meyers, supra, at 1102-1105 (quoting Hardwicke, The Rule of 
Capture and Its Implications As Applied to Oil and Gas, 13 Texas L.Rev. 391, 
393 (1935)). The Act permits the Commission to establish drilling units to 
protect the public interest by preventing waste and protecting correlative 
rights. Pan Am. Petroleum Corp. v. Wyoming Oil and Gas Conservation 
Com'n, 446 P.2d 550, 551-52 (Wyo. 1968).

[¶51]   The Act defines "waste" broadly as 
occurring under various circumstances:

(i) 
The term "waste" means and includes:

(A) 
Physical waste, as that term is generally understood in the oil and gas 
industry;

(B) 
The inefficient, excessive or improper use, or the unnecessary dissipation of, 
reservoir energy;

(C) 
The inefficient storing of oil or gas;

(D) 
The locating, drilling, equipping, operating, or producing of any oil or gas 
well in a manner that causes, or tends to cause, reduction in the quantity of 
oil or gas ultimately recoverable from a pool under prudent and proper 
operations, or that causes or tends to cause unnecessary or excessive surface 
loss or destruction of oil or gas;

(E) 
The production of oil or gas in excess of (I) transportation or storage 
facilities; (II) the amount reasonably required to be produced in the proper 
drilling, completing, or testing of the well from which it is produced, or oil 
or gas otherwise usefully utilized: except gas produced from an oil well pending 
the time when with reasonable diligence the gas can be sold or otherwise 
usefully utilized on terms and conditions that are just and 
reasonable;

(F) 
Underground or aboveground waste in the production or storage of oil, gas, or 
condensate, however caused, and whether or not defined in other subdivisions 
hereof; and

(G) 
The flaring of gas from gas wells except that necessary for the drilling, 
completing or testing of the well;

(H) 
The drilling of any well not in conformance to a well density and spacing 
program fixed by the commission or other agency, state or federal, as to any 
field or pool during a national emergency when casing or other materials 
necessary to the drilling and operation of wells are rationed or in short 
supply.

Wyo. 
Stat. § 30-5-101(a)(i). "Physical waste" is commonly understood in the oil and 
gas industry as referring to operational losses in oil and gas production 
resulting from either: surface loss or destruction of oil and gas; or, 
underground loss or destruction of oil and gas. 8 Williams & Meyers, 
supra, at 907.

Surface 
loss of oil is due principally to evaporation and surface loss of gas is due 
principally to burning at field flares or blowing into the atmosphere. 
Underground loss is due to failure to recover the maximum quantity which 
theoretically could be produced, as by dissipation of reservoir 
pressure.

Id.

[¶52]   The Act also defines "correlative 
rights:"

(ix) 
"Correlative rights" shall mean the opportunity afforded the owner of each 
property in a pool to produce, so far as it is reasonably practicable to do so 
without waste, his just and equitable share of the oil or gas, or both, in the 
pool.

Wyo. 
Stat. § 30-5-101(a)(ix). Wyoming has recognized that correlative rights and the 
right to produce oil and gas from a pool are limited by a duty not to injure the 
pool and a duty not to cause waste. Trout v. Wyoming Oil and Gas Conservation 
Com'n, 721 P.2d 1047, 1051 (Wyo. 1986); Gilmore v. Oil and Gas 
Conservation Com'n, 642 P.2d 773, 778 (Wyo. 1982). The term "pool," as a 
noun, means "an underground reservoir containing a common accumulation of oil or 
gas, or both." Wyo. Stat. § 30-5-101(a)(iii). Under Wyoming law, each zone of a 
general structure, which is completely separated from any other zone in the 
structure, is also a "pool." Id.

[¶53]   The legislature authorized the 
Commission to "make rules, regulations, and orders * * *" and take other 
appropriate action to effectuate the purposes and intent of the Act. Wyo. Stat. 
§ 30-5-104(c). In Mitchell v. Simpson, 493 P.2d 399, 401-02 (Wyo. 1972), 
this court considered a jurisdictional challenge brought by the owner of a 
royalty interest who argued that he was not subject to the Commission's orders. 
We held that the Commission has the authority to establish a drilling unit to 
"prevent or assist in the prevention of waste or to protect correlative 
rights[.]" Id. at 402. After the drilling unit is established, the 
Commission also has the authority to order the pooling of all interests, 
including royalty interests. Id.

[¶54]   Larsen v. Oil and Gas Conservation 
Com'n, 569 P.2d 87, 89-90 (Wyo. 1977) recognizes that the Commission 
exercises its authority in distinct stages. First, the drilling unit is 
established. This occurs only if the Commission makes a sufficient finding that 
a drilling unit is necessary to prevent waste or protect correlative rights. 
Id. Second, the compulsory pooling order is issued, if necessary. These 
stages are directed by statute. Id.

[¶55]   The legislature provided the 
Commission with the broad authority to establish drilling 
units:

(a) 
When required, to protect correlative rights or, to prevent or to assist in 
preventing any of the various types of waste of oil or gas prohibited by this 
act, or by any statute of this state, the commission, upon its own motion or on 
a proper application of an interested party, but after notice and hearing as 
herein provided shall have the power to establish drilling units of specified 
and approximately uniform size covering any pool.

Wyo. 
Stat. 30-5-109(a). The limitation on this authority is that the acreage 
encompassing the drilling unit and the shape of the drilling unit "shall not be 
smaller than the maximum area that can be efficiently drained by one (1) well." 
Wyo. Stat. § 30-5-109(b).

[¶56]   The legislature also gave the 
Commission continuing authority to modify its orders after a drilling unit is 
established:

(d) 
The commission, upon application, notice, and hearing, may decrease the size of 
the drilling units or permit additional wells to be drilled within the 
established units in order to prevent or assist in preventing any of the various 
types of waste prohibited by this act or in order to protect correlative rights, 
and the commission may enlarge the area covered by the order fixing drilling 
units, if the commission determines that the common source of supply underlies 
an area not covered by the order.

Wyo. 
Stat. § 30-5-109(d). The plain language of this provision expressly authorizes 
the Commission to "decrease the size of the drilling units * * *." Id. 
The legislature also authorized the Commission to "enlarge the area covered by 
the order fixing drilling units * * *" when data is developed that establishes 
the extent of the common source of supply. Id. The legislature, 
therefore, provided for the Commission's continuing authority to protect the 
public interest.

[¶57]   While Wyo. Stat. § 30-5-109(d) does 
not expressly authorize an order enlarging the size of a particular drilling 
unit, the Act grants the Commission implied authority to modify its orders in 
such a manner. Accord Bennion v. ANR Production Co., 819 P.2d 343, 351 
(Utah 1991) (holding administrative agency had implied authority under Utah Oil 
and Gas Conservation Act to modify pooling orders). See also Application of 
Bennett, 353 P.2d 114, 118-19 (Okla. 1960) and Railroad Com'n v. Aluminum 
Co. of America, 380 S.W.2d 599, 602 (Tex. 1964). The legislature authorized 
the Commission to decrease the size of a drilling unit to prevent waste and to 
protect correlative rights. Wyo. Stat. § 30-5-109(d). If, based upon the 
evidence, the Commission determines it is necessary to increase the size of a 
particular drilling unit to prevent waste or to protect correlative rights, the 
Commission has continuing authority to modify its previous orders. Accord 
Amoco Production Co. v. North Dakota Indus. Com'n, 307 N.W.2d 839, 843 (N.D. 
1981) (holding administrative agency has continuing duty and authority to modify 
orders establishing drilling units when necessary to prevent waste or protect 
correlative rights).

[¶58]   The establishment or modification 
of a drilling unit requires the Commission to determine the amount of acreage in 
the unit and the shape of the unit. Larsen, 569 P.2d  at 90. After the 
drilling unit is established, exploitation of the minerals, other than in accord 
with statutory requirements, is prohibited. Wyo. Stat. § 30-5-109(e). The right 
to exploit minerals in a drilling unit is conditioned, however, on the status of 
the ownership of the lands or the mineral interests. Wyo. Stat. § 30-5-109(c) 
and (f).

[¶59]   If the lands or mineral interests 
in a particular drilling unit are held by a single owner, that owner is entitled 
to an opportunity to drill for and produce, as a prudent operator, a just and 
equitable share of the oil or gas in a pool, subject to the conservation 
requirements of the Act. Wyo. Stat. § 30-5-104(d)(iv). If tracts of land or 
mineral interests within a drilling unit are separately owned, the Act requires 
another step before exploitation of the minerals may commence. The Act 
identifies two alternative courses of action, voluntary or compulsory pooling, 
permitting individual owners to exploit their rights to the minerals underlying 
their lands:

(f) 
When two (2) or more separately owned tracts are embraced within a drilling 
unit, or when there are separately owned interests in all or a part of the 
drilling unit, then persons owning such interests may pool their interests for 
the development and operation of the drilling unit. In the absence of voluntary 
pooling, the commission, upon the application of any interested person, may 
enter an order pooling all interests in the drilling unit for the development 
and operation thereof. Each such pooling order shall be made after notice and 
hearing and shall be upon terms and conditions that are just and reasonable. 
Operations incident to the drilling of a well upon any portion of a unit covered 
by a pooling order shall be deemed for all purposes to be the conduct of such 
operations upon each separately owned tract in the unit by the several owners 
thereof. That portion of the production allocated or applicable to each tract 
included in a unit covered by a pooling order shall, when produced, be deemed 
for all purposes to have been produced from such tract by a well drilled 
thereon.

Wyo. 
Stat. § 30-5-109(f). The term "pooling," the present participle of the verb 
"pool," is used to denominate the bringing together of small tracts of land for 
the granting of a well permit within an established drilling unit. 8 Williams 
& Meyers, supra, at 921-22.

[¶60]   Our review of the Act discloses 
that in Wyoming, drilling units are established for the limited purpose of 
controlling the density of drilling to prevent waste and to protect correlative 
rights. Wyo. Stat. § 30-5-109(a). See 5 Eugene Kuntz, A Treatise on the Law 
of Oil And Gas, § 77.3(c) (1991) (distinguishing between effect of various 
types of drilling unit statutes). The Commission's December 13, 1990 order 
enlarging the drilling unit for the Dakota formation follows the requirements of 
the Act. The Commission acted under its implied authority to modify a previous 
drilling unit order. Wyo. Stat. § 30-5-109(d). The Commission concluded, as a 
matter of law, that establishing a 760-acre drilling unit for the Dakota 
formation would prevent waste from the drilling of an offset well in Section 22. 
The Commission also ruled that the correlative rights of the BLM and its 
lessees, Texaco and Wexpro, to produce a just and equitable share of gas from 
Section 22 required protection from the drainage occurring as a result of the 
L-2 Well in Section 15. The Commission found that the L-2 Well was capable of 
efficiently draining the pool underlying the enlarged 760-acre drilling unit. 
These findings of fact and conclusions of law are not subject to collateral 
attack in this appeal.

[¶61]   Except for the due process rights 
accorded "interested parties," the establishment of a drilling unit occurs 
without regard to ownership interests. Wyo. Stat. § 30-5-109(a). There is no 
reference to the allocation of ownership interests in any provision of the Act 
dealing with the establishment or modification of drilling units. Therefore, 
establishing or modifying a drilling unit does not have the effect of 
apportioning production from the unit. Accord Manufacturers Nat. Bank of 
Detroit v. Director of Dept. of Natural Resources, 420 Mich. 128, 362 N.W.2d 572, 579 (1984) (holding under Michigan law, establishment of a drilling unit 
does not pool ownership interests); Rutter & Wilbanks Corp. v. Oil 
Conservation Com'n, 87 N.M. 286, 288, 532 P.2d 582, 584 (1975) (holding 
under New Mexico law, establishment of a drilling unit does not automatically 
result in the proration of oil and gas production); and Schank v. North Am. 
Royalties, Inc., 201 N.W.2d 419, 430-31 (N.D. 1972) (holding under North 
Dakota law, a well spacing order does not operate as a de facto pooling of 
ownership interests). We hold the Commission's order of December 13, 1990 
enlarging the drilling unit for the Dakota formation did not automatically 
apportion production from the unit.

[¶62]   While the enlarged drilling unit 
for the Dakota formation did not result in an apportionment of production, we 
hold the Commission's order of December 13, 1990 superseded some of the terms of 
the Operating Agreement in a reasonable exercise of the police 
power.

[¶63]   Restatement (Second) of Contracts § 
264 (1981) recognizes that performance of a contractual duty may be 
impracticable as a result of government action:

If 
the performance of a duty is made impracticable by having to comply with a 
domestic or foreign governmental regulation or order, that regulation or order 
is an event the non-occurrence of which was a basic assumption on which the 
contract was made.

Other 
jurisdictions acknowledge that when the agency charged with the responsibility 
for oil and gas conservation issues an order which conflicts with contractual 
provisions, the agency order supersedes or supplements the contractual 
provisions. See, e.g., Pacific Enterprises Oil Co. (USA) v. Howell Petroleum 
Corp., 614 So. 2d 409, 414 (Ala. 1993) (holding conservation agency order 
respacing drilling units superseded some provisions of farm-out agreement) and 
Delatte, 94 So. 2d  at 287 (holding conservation agency order establishing 
drilling unit superseded some provisions of lease 
agreement).

[¶64]   Alston, 21 So. 2d  at 384 
illustrates the operation of these principles of law. In Alston, the 
conservation agency increased the size of drilling units which had been 
previously established. Id. The increase in the size of the drilling unit 
was mandated by a federal emergency order issued during World War II which 
restricted the use of material for drilling after 1941. Id. at 386. The 
working interest owners had previously entered into voluntary pooling agreements 
covering the former drilling unit. However, the Supreme Court of Louisiana 
determined that the terms of these agreements had been superseded by the order 
enlarging the drilling unit. Id.

[¶65]   Union Pacific, Amoco, Wexpro and 
Texaco included in the Operating Agreement a drilling unit recital which 
conclusively established a basic assumption on which their agreement was made. 
The parties assumed that the 640 acres in Section 15 would always comprise the 
drilling unit for the Dakota formation. The terms of the Operating Agreement 
anticipated production only from the Dakota formation drilling unit established 
by the Commission's order of September 18, 1981. There is no other reasonable 
construction of the Operating Agreement.

[¶66]   At the time the parties entered 
into the Operating Agreement, the entire drilling unit for the Dakota formation 
in Section 22 was not included within the "subject lands." The parties had no 
exclusive rights to drill and produce from the Dakota formation underlying 
Section 22. The Communitization Agreement incorporated in the Operating 
Agreement and permitting development of the subject lands in Section 22 is 
specifically limited to development of the Frontier formation. Therefore, 
development of the Dakota formation in any part of Section 22 was not 
anticipated by the terms of the Operating Agreement.

[¶67]   The Operating Agreement does not 
provide for the effect of any future changes in the size of the drilling unit 
for the Dakota formation. The Operating Agreement also does not disclose the 
means used by the parties to arrive at the "working interest percentages" 
contained in Article 2. Without such information, reformation of the Operating 
Agreement is impossible. The language of Operating Provision Number 16, however, 
discloses the parties intent to permit modifications of the Operating Agreement 
when any provision is found to be inconsistent with or contrary to a government 
order. We hold that as a result of the Commission's order of December 13, 1990 
enlarging the drilling unit for the Dakota formation, the inconsistent 
provisions of the Operating Agreement were superseded. Pacific Enterprises 
Oil Co. (USA), 614 So. 2d  at 414; Delatte, 94 So. 2d  at 287; 
Alston, 21 So. 2d  at 386. Specifically, the "working interest percentages" 
for the Dakota formation contained in Article 2 were rendered without further 
effect as of December 13, 1990.

[¶68]   Under Wyoming law, the Commission 
exercises its authority to apportion production, allocate costs, and make 
provisions for the drilling and operation of a well only when a compulsory 
pooling order is issued. Wyo. Stat. § 30-5-109(f) and (g). The Commission orders 
compulsory pooling of ownership interests when a drilling unit contains 
separately owned tracts of land or separately owned mineral interests. Wyo. 
Stat. § 30-5-109(f). If the owners have previously entered into a voluntary 
pooling agreement covering the appropriate drilling unit, the Commission need 
not exercise its authority. Id.

[¶69]   Union Pacific erroneously attempts 
to construe the Operating Agreement as a voluntary pooling agreement for the 
enlarged Dakota formation drilling unit. This argument is without merit. The 
Operating Agreement incorporates the October 7, 1981 Communitization Agreement. 
The Communitization Agreement voluntarily pooled the parties' interests in 
Section 15 and Section 22, but only for the Frontier formation. The express 
language of the Communitization Agreement provides: "[T]his agreement shall 
include only the Frontier formation underlying said lands and the natural gas 
and associated liquid hydrocarbons, hereinafter referred to as `communitized 
substances,' producible from such formation." 

[¶70]   There is no plain language in the 
Operating Agreement disclosing an intent to voluntarily pool the parties' 
interests in a 760-acre Dakota formation drilling unit. This is easily 
explained. At the time the parties formed the Operating Agreement, the enlarged 
drilling unit for the Dakota formation had not been established. We hold that 
when the Commission issued its June 13, 1991 compulsory pooling order, there was 
no effective voluntary pooling agreement covering all the parties' interests in 
the enlarged Dakota formation drilling unit.

[¶71]   In the absence of a voluntary 
pooling agreement, the Commission is authorized to issue a compulsory pooling 
order. Wyo. Stat. § 30-5-109(f). Under Wyoming law, a compulsory pooling order 
apportions production among each separately owned tract of land in the drilling 
unit. Id. We offer no opinion on the validity of the Commission's 
compulsory pooling order of June 13, 1991 since that is the subject of separate 
litigation in the district court.

IV. 
CONCLUSION

[¶72]   "When parties make a contract and 
reduce it to writing, they must abide by its plainly stated terms." Colorado 
Interstate Gas Co. v. Natural Gas Pipeline Co. of America, 842 P.2d 1067, 1070 
(Wyo. 1992). However, even plainly stated terms may be the subject of 
significant disputes. The parties to the Operating Agreement are sophisticated 
corporate entities with considerable experience in forming these types of 
agreements. The parties also understand that their business involves a highly 
regulated industry. Despite these skills, the parties failed to anticipate the 
likelihood that a basic fact on which their agreement was premised might change. 
The parties never provided for the allocation of production from a well on a 
760-acre drilling unit in the Dakota formation.

[¶73]   We affirm.