Opinion ID: 1829970
Heading Depth: 3
Heading Rank: 1

Heading: Unpaid Volumes

Text: Unpaid volumes account for $15,570,921 of the total award. The auditor hired by DCNR, Saul Solomon, [11] defined unpaid volumes as including both the amount of gas that was understated in the gross volumes reported by Exxon and the fuel produced and used by Exxon. He testified that he uses the full-wellstream-production report to define production and subtracts from that the volumes on which royalties were paid. He then considers that difference to be the lost gas portion of the unpaid volume. Unpaid volume therefore includes both lost gas and fuel gas used in the development and operation of the leased area. According to the analysis provided in Exxon's brief, fuel gas constitutes 56.3% of the State's unpaid volume claim, and lost gas accounts for the 43.7% balance.
As discussed above, lost gas is the gas estimated to exist based on the full-wellstream measurement less the amount of gas accounted for as fuel gas. Exxon's accountant, Dave Borden, [12] confirmed this when he testified at length that there are two issues in the unpaid volume. A portion of Borden's testimony will illuminate and define the dispute: One [of the two issues] is fuel and the other is the measurement point. Now, what ... is still in the unpaid-volume claim that the State has is this difference in measurement between the full wellstream meter and the tailgate residue meter at the exit of the plant. Q. [By attorney for Exxon:] Okay. And have you calculated  in other words, have you done a calculation to remove that metering measurement issue from the unpaid volume claim presented by the State? A. I have. First off, this is Mr. Solomon's analysis. He did an analysis looking at how much of the unpaid volume was attributable to fuel. And in his calculation, he arrived at 53 percent ... of the unpaid volume amount was fuel. And the remaining amount was attributable to other than fuel. Q. So to make sure it's clear, does the State's unpaid-volume claim today actually still contain damages that aren't related to the fuel? A. Yes, they do. . . . . Q. All right. Mr. Borden, we talked about the COPAS [Council of Petroleum Accountants Societies] guidelines. Do they give some guidance in this measurement issue? A. Yes, they do.... [T]hey provide guidance about which meters should be determinative.... [I]n a situation where you have an actual meter like the tailgate residue meter that is more accurate than a projecting meter or an estimated meter like the full wellstream meter, the general guidance  and this is not an all-events type thing, but the general guidance is common sense would tell you that you would look at the most accurate meter. There's general guidance in COPAS when reconciling gas volumes that you start typically at the tailgate of the plant, the residue of the plant, and work backwards towards the source of the gas. That  that's just the way it would typically work, because the tailgate of the plant is where you know what you actually have. The downstream meters are more accurate in measuring actual gas produced than is the wellstream meter, which measures everything that comes out of the well, providing the basis for an estimate of the gas content of the mix. The Alabama Oil and Gas Board (AOGB) [13] refers to the wellstream volume with a wet/dry adjustment as representing a theoretical production volume. AOGB order No. 2003-68. The monthly sampling at the wellstream meter to determine the wet/dry ratio produces a snapshot in time that is extrapolated over the period of production to determine the dry production. In contrast, the tailgate meter of the dry gas plus any flared gas is a more accurate measure of production than is a projection. Under paragraph 5(a) of the leases, royalties are due on gas ... produced ... from the leased area. The tailgate meter measures actual production rather than a theoretical production volume. Therefore, because there is no allegation that the downstream meters were inaccurate and because any inconsistencies between the full-wellstream meters and the downstream meters can be explained by the difference between the estimated production volume, based on monthly samples, and the direct measurement of the gas by the downstream meters, the State has not put forward substantial evidence indicating that any gas has been lost. Accordingly, we hold the trial court erred in denying Exxon's motion for a JML on this issue. We therefore reverse the judgment against Exxon in the amount of $6,804,492, which is 43.7% of the verdict for unpaid volumes.
The fuel-gas portion of the unpaid volumes deals with the gas that is used in the development and operation of the leased area. The State argues that only gas flared for well-testing is to be royalty-free in accord with paragraph 5(a) and only gas used for lift purposes under paragraph 5(d) is subject to a deferred royalty until it is recycled and sold or used in such a manner as to entitle the State to a royalty. Exxon attempts to use the wording of paragraph 5(b) to support its claim that oil and gas leases customarily allow the lessee free use of fuel to develop and operate the lease. Paragraph 5(b) exempts gas used on or off the leased area ... solely in the development and operation of the leased area as provided herein. The State counters, arguing that as provided herein as used in paragraph 5(b) refers to flared gas and recycled gas mentioned in paragraph 5(d) and to no other gas. The lease language is clear on the matter of the fuel-gas claim. Exxon should have been aware that there was nothing customary about the leases it executed and that its reliance on custom would not prevail. Accordingly, although we conclude that the trial court erred in sending this issue to the jury because the evidence was legally sufficient for the trial court to resolve the issue as a matter of law, we nonetheless affirm the judgment for the State in the amount of $8,766,429, which represents 56.3% of the verdict for unpaid volumes.