Title: CABOT OIL & GAS CORPORATION v. FOLLOWILL

State: wyoming

Issuer: Wyoming Supreme Court

Document:

CABOT OIL & GAS CORPORATION v. FOLLOWILL2004 WY 8093 P.3d 238Case Number: 02-283Decided: 07/08/2004
APRIL TERM, A.D. 2004

 

                                                                                                            

 

CABOT 
OIL & GAS CORPORATION,

a 
Delaware corporation,

 

Appellant(Defendant),

 

v.

 

DORMAN 
FOLLOWILL, EMIL HECHT,

EVA 
HECHT, EVA OIL AND GAS, LLC,

C. 
DENNIS IRWIN, PDI TRUST DATED

FEBRUARY 
23, 1994, BARTON JOHNSON,

EVERETT 
JOHNSON, LARRY MIZEL,

YOSEMITE 
CREEK OIL AND GAS, LLC,

MARVIN 
WOLF, THE MELVIN AND ELAINE

WOLF 
FOUNDATION, INC., and NORITA M.

WEIGAND,

                                                                                                

Appellees(Plaintiffs).

 

 

Certified 
Question from the United States District Court

 for the District of Wyoming 

The 
Honorable William F. Downes, Judge

 

Representing 
Appellant:

Thomas 
F. Reese, Morris R. Massey, and Drake D. Hill of Brown, Drew & Massey, LLP, 
Casper, Wyoming.  Argument by 
Messrs. Reese and Massey. 

 

Representing 
Appellee:

Dennis 
N. Carnes and Carolyn J. Mitchell of Kuhn, Carnes, & Anderson, P.C., Denver, 
Colorado; Nancy D. Freudenthal and John C. McKinley of Davis & Cannon, 
Cheyenne, Wyoming. Argument by Mr. Carnes.

 

Before 
HILL, C.J., and GOLDEN, LEHMAN, and VOIGT, JJ., and JAMES, 
D.J.

 

 

  

GOLDEN, 
Justice.

[¶1]           
In 
response to a complaint disputing royalty payments for natural gas sales from 
federal oil and gas leases, the federal district court for Wyoming certified 
questions of law concerning the interpretation of Wyoming statutes governing the 
Wyoming Royalty Payment Act (Act).  
The statutes at issue, Wyo. Stat. Ann. § 30-5-301 through § 30-5-305 
(LexisNexis 2004), provide that "gathering" costs are "costs of production" and 
not deductible from royalty payments.  
Appellant Cabot Oil & Gas Corporation (Cabot) contends that the 
transportation costs involved are postproduction costs and properly deductible 
from Appellee royalty owners' royalty payments.

 

 

 

[¶2]           
This 
Court has agreed to answer the following certified 
questions:

 

1. 
What is meant by the term "gathering" as that term is employed in Wyo. Stat. 
Ann. § 30-5-304(a)(vi) in defining "costs of production"?

 

2. 
Do the causes of action for recovery of the one hundred dollar per month penalty 
imposed under Wyo. Stat. Ann. § 30-5-303(c) for failure to provide complete 
reporting as required by Wyo. Stat. Ann. § 30-5-305(b) and for improperly 
deducting "costs of production" as defined in Wyo. Stat. Ann. § 30-5-304(a)(vi) 
accrue when the statutes are violated or when a plaintiff knows or has reason to 
know of the existence of the violations?

 

 

[¶3]           
We 
hold that "gathering" means to collect gas and move it to a point where it can 
be processed or transported to the user.  
All costs associated with that activity are "costs of production" under § 
30-5-304(a)(vi) and nondeductible from royalties.  In answer to the second question, we 
hold that the remedies provided accrue when a royalty owner knows or has reason 
to know of statutory violations.

 

 

FACTS

 

[¶4]           
Appellee 
royalty owners (Owners) are the owners of overriding royalty interests carved 
out of thirteen federal oil and gas leases who are entitled to payment of 
overriding royalties with respect to sales of natural gas produced from some 
ninety-six wells on lands located in three different Wyoming counties.  Cabot is a successor in interest to the 
original lessees and currently responsible for payment of royalties and 
overriding royalties on gas produced and sold from or allocated to these federal 
lands.  The majority of the gas 
produced is transported by unrelated third parties from the wells where the gas 
is produced to delivery points at interconnections with interstate transmission 
systems where the gas is sold.  
Mountain Gas, Inc., Williams Field Services Company, or Questar Gas 
Management Company, third parties who are not affiliated with Cabot, have 
contracts for transporting the gas.  
The transporters invoice Cabot for these services.  Cabot, then in turn, deducts pro rata 
shares of its costs for these services in calculating the amounts owed to the 
respective Owners.

 

 

DISCUSSION

 

[¶5]           
Under 
three agreements between Cabot and its transporters, gas is transported off the 
lease to downstream points of sale, and royalties are calculated on the basis of 
the sales proceeds less the costs of transportation.  Cabot contends that transportation off 
the lease to a point of sale is not part of the nondeductible costs of 
production as defined in the Act.  
Cabot contends that, under the Act, costs described as "in the market 
pipeline" are deductible transportation costs.  Owners contend that Cabot has improperly 
deducted gathering costs from their share of production in violation of common 
law and the Act. Wyo. Stat. Ann. § 30-5-304(a)(vi) (LexisNexis 2004) (emphasis 
added) provides:

 

(vi) 
"Costs of production" means all costs incurred for exploration, development, 
primary or enhanced recovery and abandonment operations including, but not 
limited to lease acquisition, drilling and completion, pumping or lifting, 
recycling, gathering, compressing, pressurizing, heater treating, 
dehydrating, separating, storing or transporting the oil to the storage 
tanks or the gas into the market pipeline.  "Costs of production" does not 
include the reasonable and actual direct costs associated with 
transporting the oil from the storage tanks to market or the gas from 
the point of entry into the market pipeline or the processing of gas in a 
processing plant[.]

 

This 
Act was amended effective July 1, 1989, to include § 304's definitions.  1989 Wyo. Sess. Laws ch. 255 § 3. Cabot 
contends that, historically, costs of transportation of gas from the place of 
production to a processing plant or to a distant point of sale have been shared 
by royalty owners.  The parties' 
contentions require that we determine whether this historical allocation has 
been abrogated by the 1989 amendments to the Act.

 

 

 

[¶6]           
The 
questions certified in this case under W.R.A.P. 11 are questions of law, the 
resolution of which requires interpretation of the applicable statutes.  Statutory interpretation is a question 
of law which we review de novo.  
Chevron U.S.A., Inc. v. State, 918 P.2d 980, 983 (Wyo. 1996).  We first decide whether the statute is 
clear or ambiguous.  This Court 
makes that determination as a matter of law. Id. A "statute is 
unambiguous if its wording is such that reasonable persons are able to agree as 
to its meaning with consistency and predictability."  Allied-Signal, Inc. v. Wyoming State 
Bd. of Equalization, 813 P.2d 214, 220  
(Wyo. 1991).  A "statute is 
ambiguous only if it is found to be vague or uncertain and subject to varying 
interpretations.  Id. at 
219-20.  

 

[¶7]           
If 
we determine that a statute is clear and unambiguous, we give effect to the 
plain language of the statute.  We 
begin by making an "inquiry respecting the ordinary and obvious meaning of the 
words employed according to their arrangement and connection.'" Parker Land 
& Cattle Co. v. Wyoming Game & Fish Comm'n, 845 P.2d 1040, 1042 
(Wyo. 1993) (quoting Rasmussen v. Baker, 7 Wyo. 117, 133, 50 P. 819, 823 
(1897)).  We construe the statute as 
a whole, giving effect to every word, clause, and sentence, and we construe 
together all parts of the statute in pari materia.  State Dep't of Revenue and Taxation 
v. Pacificorp, 872 P.2d 1163, 1166 (Wyo. 1994).  If we determine that the statute is 
ambiguous, we resort to general principles of statutory construction to 
determine the legislature's intent. State v. Bannon Energy Corp., 999 P.2d 1306, 1309 (Wyo. 2000).  

 

 

 

[¶8]           
Owners 
contend that "gathering" as used in § 30-5-304(a)(vi) means an activity of 
collecting natural gas or oil from a well and transporting it to (a) in the case 
of natural gas, the inlet of a processing plant or, if there is no processing 
plant, the point of entry into the market pipeline or, (b) in the case of oil, 
the storage tank.  Owners assert 
that a market pipeline, as that term is employed in the statute, is a pipeline 
that transports gas to (1) a distribution center for delivery to the consumers 
of the gas, (2) an industrial consumer of the gas, or (3) a gas storage 
facility.  Owners further claim that 
a comparison of definitions from treatise writers, the natural gas industry, 
natural gas gathering companies, federal judges, federal agencies, state judges, 
state legislators, and state oil and gas commissions reveals that gathering 
comprises two functions:  collecting 
gas and moving it to a point where it can be processed or transported to the 
user.  Because gathering is an 
activity, Owners contend that Cabot's argument that geography and record title 
ownership must factor into the examination is incorrect.  Owners also reviewed numerous decisions 
that considered the function of gathering and contend that each has defined 
gathering as an activity comprising the two functions of collecting and 
transporting the gas to a point where it can be processed or transported to the 
user.  It is Owners' ultimate 
contention that the legislature has specifically addressed each activity from 
the wellhead to the ultimate user and stated precisely which activity is a cost 
of production and which is not and based on this plain language, Cabot's 
argument must be rejected.  Owners 
further contend that this interpretation fulfills the legislative intent and 
purpose which this Court has stated is remedial and intended to stop producers 
from retaining other people's money for their own use.  

 

[¶9]           
Cabot 
tells us that those gathering costs which are not deductible are the production 
function taking place in the locale of the lease or unit which consists of the 
collection of the gas prior to its introduction into the pipeline systems which 
transport the gas from the fields downstream to distant points.  Transporting the gas from the locale of 
the production to distant delivery points where the gas is sold is a 
post-production function, the costs of which are deductible pro rata from 
royalty payees.  Cabot arrives at 
this conclusion by also reviewing the plain language of the statute and 
contending that all categories included as costs of production are functions 
that occur on the lease or unit and the legislature has thus evidenced its 
intent to limit nondeductible costs to those activities taking place on the 
lease or unit.  Further, Cabot 
contends, the legislative intent that off lease activities, such as transporting 
gas away from the fields where produced to processing facilities or to distant 
markets, are to be considered a postproduction function and deductible from royalty 
payments.

 

[¶10]      We 
have not previously considered this issue although similar arguments were 
addressed in Wold v. Hunt, 52 F. Supp. 2d 1330, 1334 (D.Wyo. 1999).  There, the court determined that the Act 
reflected a "clear legislative purpose of simplifying the computation of 
royalties and providing a mechanism by which the royalty owner is able to 
determine if royalties are paid correctly."  Id. at 1336.  The court found that the statutory 
definition of costs of production "excludes all charges between the wellhead and 
the market pipeline except those specifically excluded from the 
definition."  Id.  The court held that "costs of 
production" includes gathering charges and that the market pipeline is the point 
of delineation for deductibility.  
Id.  Cabot contends 
that Wold v. Hunt reached its decision by deciding that all pipelines 
were gathering lines that the legislature intended to include in nondeductible 
costs of production, and the decision did not answer the certified question 
presented here.  Cabot claims that 
the question remains whether, under the rules of statutory construction, the 
costs of transportating natural gas off the lease are "costs of production" that 
are not deductible from royalty payments.

 

 

Statutory 
Interpretation

 

[¶11]      The 
Act is a remedial statute and, as such, is to be liberally construed to achieve 
its remedial purpose.  Moncrief 
v. Harvey, 816 P.2d 97, 105 (Wyo. 1991).  The Act was enacted in 1982 to stop oil 
producers from retaining other people's money for their own use.  Independent Producers Marketing Corp. 
v. Cobb, 721 P.2d 1106, 1110 (Wyo. 1986).  In 1989, the legislature enacted § 
30-5-304 as part of the Act to specifically define terms in the Act.1  1989 Wyo. Sess. Laws ch. 255 § 1.  Under the statute the costs of 
production cannot be deducted from an overriding royalty or royalty 
payment.  § 30-5-304(a)(v), 
(vii).  The statutory definition of 
nondeductible costs of production includes cost of transporting the gas into the 
market pipeline but does not include transportation costs from the point of 
entry into the market pipeline.  § 
30-5-304(a)(vi).  Properly defining 
the term  "gathering" will 
distinguish between those transportation costs that are nondeductible production 
costs and those that are deductible postproduction costs.

 

[¶12]      Cabot's 
contention that the statute limits gathering to those transportation costs that 
occur on the geographic region of the lease is not supported either by the 
statutory language or any authority.  
As Owners point out, this construction would rely on our deciding that 
all of the activities listed in § 304(a)(vi) could only be accomplished on the 
lease site, and we have no authority that is accurate.  Owners contend that it is not.  Instead, our resolution must rely on the 
precise statutory language demarcating production from postproduction by entry 
to the market pipeline and the definition of market pipeline must be gleaned 
from the statutory language.  We 
find that subjecting royalties to deductions based upon Cabot's determination 
that postproduction costs have begun at an offsite point would inject the 
arbitrariness that the legislature intended to defeat by enactment of the 
Act.  We agree with Wold 
v. Hunt that 
the Wyoming legislature has departed from the methodologies employed by other 
jurisdictions and specifically excluded all charges between the wellhead and the 
market pipeline except those specifically excluded from the definition.  52 F. Supp. 2d  at 1336.  We hold that "gathering" means to 
collect gas and move it to a point where it can be processed or transported to 
the user.  All costs associated with 
that activity are nondeductible under § 30-5-304(a)(vi) and nondeductible from 
royalties.

 

 

Statutory 
Violation

 

[¶13]      The 
Act imposes penalties, costs and fees for violations of its provisions.  Wyo. Stat. Ann. § 30-5-303 (LexisNexis 
2004) provides: 

 

(a) 
Any lessee or operator, purchaser or other party legally responsible for payment 
who violates the provisions of this article is liable to the person or persons 
legally entitled to proceeds from production for the unpaid amount of such 
proceeds, plus interest at the rate of eighteen percent (18%) per annum on the 
unpaid principal balance from the due date specified in W.S. 
30-5-301(a).

 

(b) 
The district court for the county in which a well producing oil, gas or related 
hydrocarbons is located has jurisdiction over all proceedings brought pursuant 
to this article and the prevailing party in any proceedings brought pursuant to 
this article shall be entitled to recover all court costs and reasonable 
attorney's fees.

 

(c) 
Any person who fails to provide royalty information as provided in W.S. 
30-5-305(b) is liable to the affected royalty, overriding royalty or other 
nonworking interest owner in the amount of one hundred dollars ($100.00) per 
month that complete reporting is not provided to the interest 
owner.

 

Cabot 
contends that the royalty owners' remedy provided by this statutory provision is 
subject to the statute of limitations provided in Wyo. Stat. Ann. § 
1-3-105(a)(v)(D) (LexisNexis 2004), which imposes a one year limitation on an 
action "[u]pon a statute for a penalty or forfeiture" and § 1-3-105(a)(ii)(B), 
which imposes an eight year limitation on an action "upon a liability created by 
statute other than a forfeiture or penalty."  The Owners claim that the discovery rule 
applies and the one year statute of limitations begins to run when an accurate 
report is submitted.

 

[¶14]      Wyoming 
is a discovery state in which the statute of limitations is triggered when a 
plaintiff knows or has reason to know of the existence of a cause of 
action.  Amoco 
Production Co. v. EM Nominee Partnership Co., 2 P.3d 534, 542 (Wyo. 2000).  The 
remedial purposes of the Act would be nullified if the discovery rule did not 
apply.  The one year statute of 
limitations related to the penalty for failure to properly report under the 
Royalty Payment Act begins to run if, and when, the producer issues a proper 
report.  As Owners noted, failure to 
apply the discovery rule would encourage producers to omit deductions from 
royalty statements hoping that it could hide the deduction for a year and avoid 
paying a proper royalty amount.  
This result is contrary to the remedial nature of the 
Act.

 

 

CONCLUSION

 

[¶15]      We 
hold that "gathering" means to collect gas and move it to a point where it can 
be processed or transported to the user.  
All costs associated with that activity are "costs of production" under § 
30-5-304(a)(vi) and nondeductible from royalties.  In answer to the second question, we 
hold that the remedies provided accrue when a royalty owner knows or has reason 
to know of statutory violations.

 

FOOTNOTES

1(a) 
As used in this act:

            
(i) "Lessee" means the person entitled under an oil and gas lease to 
drill and operate wells, paying the lessor a royalty and retaining the 
remainder, known as the working interest.  
The lessee pays all costs of production out of his interest, the lessor's 
interest being free and clear of all those costs;

            
(ii) "Lessor" means the mineral owner who has executed a lease and who is 
entitled to the payment of a royalty on production, free and clear of the costs 
of production;

            
(iii) "Operator" means a person engaged in the business of drilling and 
producing wells for oil and gas;

            
(iv) "Other nonworking interest" means any interest in an oil and gas 
lease or well which is not a royalty, overriding royalty or working 
interest;

            
(v) "Overriding royalty" means a share of production, free of the costs 
of production, carved out of the lessee's interest under an oil and gas 
lease;

            
(vi) "Costs of production" means all costs incurred for exploration, 
development, primary or enhanced recovery and abandonment operations including, 
but not limited to lease acquisition, drilling and completion, pumping or 
lifting, recycling, gathering, compressing, pressurizing, heater treating, 
dehydrating, separating, storing or transporting the oil to the storage tanks or 
the gas into the market pipeline.  
"Costs of production" does not include the reasonable and actual direct 
costs associated with transporting the oil from the storage tanks to market or 
the gas from the point of entry into the market pipeline or the processing of 
gas in a processing plant;

            
(vii) "Royalty" means the mineral owner's share of production, free of 
the costs of production;

            
(viii) "Working interest" means the interest granted under an oil and gas 
lease, giving the lessee the right to work on the leased property to search for, 
develop and produce oil and gas and the obligation to pay all costs of 
production;

            
(ix) "This act" means W.S. 30-5-301 through 30-5-305.