Opinion ID: 154917
Heading Depth: 2
Heading Rank: 1

Heading: t he r oyalty d ispute and s ettlement a greement

Text: Lease #25, as contained in the record on appeal, is illegible. Leases #26-30 And where gas only is found one-eighth of the value of all raw gas at the mouth of the well, while said gas is being used or sold off the premises . . . Leases #31-36 To pay lessor for gas of whatsoever nature or kind produced and sold or used off the premises . . . one eighth (1/8) at the market price at the well for the gas sold . . . Lease #37 If gas, as above defined, produced from any well is sold by Lessee, then Lessee shall pay Lessor one quarter (1/4) of the proceeds thereof at the well received by the Lessee from the sale . . . All such payments shall be received and accepted by Lessor as full compensation for all such gas. Lease #38 The Lessee shall deliver to the credit of the Lessor as royalty . . . the equal of 1/4 part of all oil produced and saved from the leased premises . . . or at Lessee’s option, Lessee may from time to time purchase such royalty oil by paying to the Lessor for such 1/4 royalty the market price at the well . . . Lease #39 The lessee shall pay lessor, as royalty on gas . . . the market value at the mouth of the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale. . . Leases #40-41 To pay lessor one-eighth (1/8) of the gross proceeds each year, payable quarterly, for the gas from each well where gas only is found. . . App’t. App. at 100-193. -4- Pursuant to a long-term gas purchase contract, ARCO has supplied Arkla, a natural gas pipeline and gas purchaser, with natural gas produced from the Wilburton Field at stipulated prices. In 1988, ARCO and Arkla became involved in litigation over Arkla’s refusal to purchase gas from the Wilburton Field. Arkla contended that it was not obligated to take gas from ARCO’s Wilburton wells because the gas did not meet quality specifications and, therefore, ARCO had improperly classified the wells as § 103 wells under the Natural Gas Policy Act (“NGPA”). See 15 U.S.C. § 3313. Based on Arkla’s refusal to take gas and pay the correct contract price, ARCO brought a claim for breach of contract against Arkla. In its complaint, ARCO sought damages of $279 million, reflecting the highest lawful price Arkla allegedly was obligated to pay for NGPA § 103 gas. During settlement negotiations, ARCO and Arkla became involved in a separate dispute involving Arkla’s gas purchases from a field located off the shore of Louisiana in the Gulf of Mexico, known as the Mississippi Canyon. In 1987, the parties had attempted to resolve the dispute regarding the Mississippi Canyon by entering into a Compromise and Settlement Agreement (“1987 Settlement Agreement”) under which Arkla made a recoupable $30 million prepayment to ARCO for gas from the Mississippi Canyon. The parties, however, continued to dispute their respective obligations under the 1987 Settlement Agreement. -5- On February 8, 1989, ARCO and Arkla entered into a settlement agreement (“1989 Settlement Agreement”) resolving both the Wilburton litigation and the Mississippi Canyon dispute. ARCO agreed to sell gas from the Wilburton Field to Arkla at an initial price of $2.20 per MMbtu to be adjusted later according to a formula. In return, ARCO received: (1) sixty monthly recoupable prepayments of $5 million ($300 million total) for gas from the Wilburton Field, (2) a new gas gathering system in the Wilburton Field, (3) Arkla’s agreement to enter into a gas transportation contract, at specified discount rates, for gas from the Wilburton Field, (4) a $35 million recoupable prepayment for gas from the Mississippi Canyon, and (5) a January 1, 1995 deadline for ARCO to refund any unrecouped portion of the $300 million prepayment for the Wilburton Field, the $35 million prepayment for the Mississippi Canyon, and the $30 million prepayment under the 1987 Settlement Agreement. Since the 1989 Settlement Agreement, ARCO has paid Lessors royalties on gas produced and sold from the Wilburton Field. ARCO, however, has not paid royalties on any of the other settlement proceeds. Lessors brought this suit against ARCO seeking damages for ARCO’s failure to pay royalties on the settlement proceeds. Lessors sought royalties under six separate legal theories: (1) breach of the contractual duty to pay royalties, (2) breach of the implied covenant to market, (3) breach of fiduciary duty, (4) constructive fraud, (5) -6- breach of the duty of good faith, and (6) civil conspiracy. Lessors also sought damages against ARCO for failing to obtain the best price available for Lessors’ gas under the 1989 Settlement Agreement. The district court granted summary judgment to ARCO on both of Lessors’ claims.
In the mid-1980s, ARCO discovered the Arbuckle formation, a large source of natural gas underlying other formations in the Wilburton Field. ARCO is the operator of fourteen of sixteen wells producing gas from the Arbuckle formation pursuant to private joint operating agreements with other working interest owners. 2 On January 31, 1991, the Oklahoma Corporation Commission (“OCC”) issued Field Rules, retroactive to May 1, 1990, recognizing the Arbuckle Formation as a common source of supply, meaning that any one well could ultimately drain all the gas in the formation. The Field Rules established certain limits on the monthly production of each unit, called “allowables.” The OCC determined that because seven of the Arbuckle wells were limited in their ability 2 Each well is composed of a separate 640-acre drilling and spacing unit. See Okla. Stat., tit. 52, § 87.1 91993) (authorizing the Oklahoma Corporation Commission to establish well spacing units to prevent waste and to protect the correlative rights of interested parties in a common source of supply). Unless the OCC grants an exception, only one well is permitted to be drilled in each drilling and spacing unit. -7- to produce gas, the Field Rules were necessary to ensure that each well would produce approximately its fair share of the gas. The Field Rules contained several provisions concerning the treatment of a well that is underproducing its allowable, known as an “underage.” The Field Rules specified that underages accumulated by a well could be carried forward and added onto that well’s monthly allowable, effectively increasing the limit on future production. If a well’s underages exceeded a specified amount, however, those underages would be canceled. The Field Rules contained an “Effective Date” provision as follows: These rules shall be effective May 1, 1990, and the Unit Operator of each Unit shall have the period from the effective date of the rules to December 31, 1991 to adjust any over and under production before it is adjusted in accordance with [the cancellation provision]. App’t. App., Vol. I at 227 (emphasis added). After the Field Rules were issued, three of ARCO’s wells (the Yourman No. 2, the Costilow No. 3, and the Kilpatrick No. 2) began to accrue underages each month and were approaching the point at which their underages would be canceled pursuant to the Field Rules. In early 1991 ARCO performed “workover” operations on the three underproducing wells to increase their deliverability. The successful workovers resulted in increased production in all three wells and permitted two of the wells to make up their underages and meet the allowables established by the Field Rules. -8- Several of the Lessors owning interests in adjacent units contend that the workovers caused the three wells to drain gas from their units, resulting in decreased production relative to the “draining” wells. Before the district court, Lessors sought damages against ARCO for uncompensated drainage, asserting a number of theories including: (1) breach of the implied covenant to protect against drainage, (2) tortious drainage, (3) breach of fiduciary duty, (4) breach of good faith, (5) conversion, and (6) unjust enrichment. In addition, Lessors contended that by selectively performing the workovers on units in which ARCO has a greater working interest, ARCO acted tortiously, wantonly and maliciously, subjecting ARCO to liability for punitive damages. The district court granted summary judgment to ARCO on the basis that the Field Rules bar all of Lessors’ claims.