Opinion ID: 2586675
Heading Depth: 1
Heading Rank: 1

Heading: Continued Existence of the NPI

Text: [¶ 172] The answer to the question of whether the unit NPI survived termination of the Pinedale Unit must be found within the Unit NPI Contract. Stated in its simplest terms, the district court's conclusion was that, although commitment of the Exhibit A leases to the Pinedale Unit was a condition precedent to the obligation to pay the unit NPI, the obligation to pay the NPI was not conditioned upon the continued existence of the Pinedale Unit. The district court further concluded that the unit NPI was lease-based, that it was akin to a royalty interest, and that it was a covenant running with the land. In large part, the district court found the support for these conclusions in the initial Assignment Agreement, where the parties agreed to enter into similar net profit contract[s] for both the unitized leases and the non-unitized leases. In addition, the district court pointed out numerous instances in the Unit NPI Contract where net profits were related to operations on the leases as opposed to unit operations. In coming to a different conclusion, I will discuss those provisions in more detail hereinafter. [¶ 173] I do not disagree with the district court and the plaintiffs that we look to surrounding circumstances when interpreting even an unambiguous contract involving mineral interests. Caballo Coal Co. v. Fid. Exploration & Prod. Co., 2004 WY 6, ¶ 11, 84 P.3d 311, 314-15 (Wyo.2004). Neither do I disagree that, in some circumstances, contemporaneous transaction documents may be construed along with the contract at issue, as an integrated whole. Cliff & Co. v. Anderson, 777 P.2d 595, 598-99 (Wyo.1989); Busch Dev., Inc. v. City of Cheyenne, 645 P.2d 65, 70-71 (Wyo.1982). Those rules of construction do not apply in the instant case, however, where the parties specifically provided that the Assignment Agreement was to have no effect after the leases had been assigned and the net profits contracts had been signed. In that regard, the Assignment Agreement was very much like an executory contract for sale which merges into the deed upon the latter's execution and delivery. See Wadi Petroleum, Inc. v. Ultra Res., Inc., 2003 WY 41, ¶ 15, 65 P.3d 703, 710 (Wyo. 2003); Markstein v. Countryside I, LLC, 2003 WY 122, ¶ 31, 77 P.3d 389, 398 (Wyo. 2003). We must find the parties' intent in the two NPI contracts and in the Pinedale Unit Agreement. [¶ 174] The Area NPI Contract, which might seem to cast the least light on this controversy, actually helps to answer the primary question of whether the Unit NPI Contract was lease-based or unit-based. In its first numbered paragraph, the Area NPI Contract defined the term Net Profits Interest as follows: Subject to the conditions hereinafter set forth, First Parties agree to pay to Novi a sum or sums representing 5% of the net profits (as hereinafter defined), herein referred to as said net profits interest, resulting from operations for oil and gas by First Parties, or any of them, under those certain leases shown on Exhibit A attached hereto and made a part hereof, such leases being herein referred to as said leases. (Emphasis added.) Clearly, this net profit interest is to be calculated from lease-based operations. By contrast, the term Net Profits Interest was defined in the Unit NPI Contract as follows: Subject to the conditions hereinafter set forth, First Parties agree to pay to Novi a sum or sums representing 5% of the net profits (as hereinafter defined), herein referred to as said net profits interest, resulting from operations for oil and gas by First Parties, or any of them, under those certain leases committed to that certain Unit Agreement for the Development and Operation of the Pinedale Unit Area and shown on Exhibit A attached hereto and made a part hereof, such leases being herein referred to as said leases. (Emphasis added.) If the intent of the parties was to create a lease-based, rather than a unit-based, net profits interest in the Unit NPI Contract, there was no need for the additional language concerning leases committed to the Pinedale Unit. [¶ 175] Similar distinctions between the two contracts can be seen by comparing the Computation sections. Net profits were to be computed under paragraph 2 of the Area NPI Contract as follows: Net profits shall be computed on the basis of all operations applicable to said leases. Net profits as used herein shall mean the gross revenue (not required for payment of the overriding royalties shown on Exhibit A and landowners' royalties) from operations allocable to said leases after deduction of all expenses of operations. . . . . (Emphasis added.) By contrast, once again, net profits were to be computed under paragraph 2 of the Unit NPI Contract as follows: Net profits shall be computed on the basis of all operations under the Pinedale Unit applicable to said leases. In the event that leases other than said leases are committed to the Pinedale Unit, the manner of allocating production, revenue and expenses of unit operations shall be determined as provided in the Unit Agreement and such Unit Operating Agreement as First Parties and lessees of such other leases shall enter upon. Net profits as used herein shall mean the gross revenue (not required for payment of the overriding royalties shown on Exhibit A and landowners' royalties) from unit operations allocable to said leases after deduction of all expenses of unit operations (unit operations being construed to include all operations of any of First Parties under said leases) except those charged to the working interest owners, if any, under the said unit other than First Parties. . . . . (Emphasis added.) The express language of the parties leaves no doubt that the unit NPI was unit-based, and not lease-based. By the very terms of the parties' agreement, the NPI cannot be determined without consideration of unit operations' revenue and unit operations' expenses. It would seem to go without saying that, without any such revenue and expenses, given the demise of the Pinedale Unit, the NPI no longer existed. [¶ 176] The Payment paragraphs of the two contracts contain a similar distinction. Under the Area NPI Contract, all accounting for the purpose of determining net profits hereunder shall be upon a consolidated basis involving all operations under said leases.  (Emphasis added.) Under the Unit NPI Contract, however, all accounting for the purpose of determining net profits hereunder shall be upon a consolidated basis involving all operations under said leases and the said Pinedale Unit.  (Emphasis added.) Once again, the unit NPI, unlike the area NPI, is based in Pinedale Unit accounting, and without the Pinedale Unit, there can be no such accounting. [¶ 177] The logic of these provisions that an NPI based upon unit operations would only exist for leases within the unitis directly reflected within the Surrender paragraph of the Unit NPI Contract, wherein it is provided that the First Parties may, without Novi's consent or approval, surrender, assign or release any lease, and that such surrender, assignment, or release, shall terminate the net profits interest herein provided for as to the leasehold interest which is so released and surrendered. In other words, the departure of a lease from the unit ends any unit-related operations on that lease, and therefore ends any unit-related NPI from that lease. [¶ 178] This concept was carried through into the third major agreement among the partiesthe Pinedale Unit Agreement. Novi signed the Pinedale Unit Agreement under the heading Other Parties, presumably because Novi owned no leases or working interests that were being committed to the Pinedale Unit. Novi, it bears repeating, held only the NPI in most of the leases that had been committed to the unit. But the central question remains the same when looking at the Pinedale Unit Agreement as when looking at the Unit NPI Contract; that is, once the leases were committed to the Pinedale Unit, did the NPI become permanently affixed to those leases? In the sense that this question has been presented by the parties, the issue becomes whether the term committed describes an act that occurs at an instant in time, or an act that has a temporal existence until such time as it might end. The district court opted for the former concept in holding that the act of commitment of a lease to the unit was simply a condition precedent to the parties' contract obligations. The defendants argue herein that, within the industry and within these documents, the term committed defines the latter concept because leases can become uncommitted to a unit. [¶ 179] The Unit NPI Contract provided that the NPI would be calculated for those leases listed on Exhibit A and committed to the Pinedale Unit. When the Pinedale Unit Agreement is read in its entirety, it becomes clear that leases committed to it were committed in the temporal sense mentioned above: 1. Lands committed to the agreement were described as unitized land or land subject to this agreement. 2. Lands automatically eliminated after a period for failure to be included in a participating area shall no longer be a part of the unit area and shall no longer be subject to this agreement. 3. The covenants of the agreement were to run[] with the land, but only until this agreement terminates. 4. Surrender or forfeiture of a lease resulted in that lease no longer being committed to the unit unless and until the new owner of the interest re-committed it to the unit. [¶ 180] The intent and effect of these provisions, and others similar to them, was that the benefits and burdens of the Pinedale Unit Agreement were based upon unit operations, and unit operations existed only so long as the unit existed. Inasmuch as these same unit operations were to form the basis for accounting in regard to the Unit NPI Contract, it is only reasonable to conclude that the same parties also intended that the NPI would only exist so long as there were unit operations from which to compute it. Leases did not remain committed to the unit once removed from it through surrender or automatic termination or contraction of the unit, and certainly upon termination of the unit. [26] [¶ 181] I agree with all of the parties and the district court that the Unit NPI Contract is unambiguous in this regard, and I agree with the defendants that its unambiguous intent was to create an NPI that was based upon operations under the Pinedale Unit, for so long as operations were conducted under the Pinedale Unit, and for so long as a particular lease remained committed to the Pinedale Unit. The Pinedale Unit Agreement is similarly unambiguous, and shows similar intent. Unambiguous agreements do not, of course, require construction, so it is inappropriate to apply rules of construction such as the rule disfavoring construction resulting in a forfeiture, which rule was applied by the district court in its analysis. See City of Casper v. J.M. Carey & Bros., 601 P.2d 1010, 1014 (Wyo.1979). [¶ 182] Novi was not a party to the Supplemental Accounting Agreement entered into among the First Parties, so that agreement cannot be utilized to measure Novi's intent in entering into the Assignment Agreement or the NPI contracts. The district court, however, relying upon Mullinnix LLC v. HKB Royalty Trust, 2006 WY 14, ¶ 6, 126 P.3d 909, 914-15 (Wyo.2006), looked to the Supplemental Accounting Agreement as a surrounding circumstance that could help to show the intent of the parties in both NPI contracts. While I agree that surrounding circumstances may be utilized to help determine the purpose and intent of even an unambiguous contract, they may not be utilized to create an ambiguity within the contract, or to contradict the plain meaning of contract language. Gainsco Ins. Co. v. Amoco Prod. Co., 2002 WY 122, ¶ 7, 53 P.3d 1051, 1056 (Wyo.2002); Doctors' Co. v. Ins. Corp. of Am., 864 P.2d 1018, 1024 (Wyo.1993). [¶ 183] This rationale also applies to the testimony of industry experts: Amoco's endeavor to invoke the testimony of experts with respect to industry custom and practice in applying this language inverts our rule with respect to extrinsic evidence. Instead of relying upon the extrinsic evidence to resolve an ambiguity, Amoco seeks to invoke the extrinsic evidence to structure an ambiguity. This would amount to this Court writing a new contract for the parties, and we are foreclosed from that endeavor. Double Eagle Petroleum & Mining Corp. v. Questar Exploration & Prod. Co., 2003 WY 139, ¶ 11, 78 P.3d 679, 684 (Wyo.2003) (quoting Amoco Prod. Co. v. EM Nominee P'ship, 2 P.3d 534, 541 (Wyo.2000)). Partly because the summary judgment motion hearing was followed by a bench trial, the record in the instant case is replete with the testimony of oil and gas experts as to what the parties intended by their contracts. This testimony is not available, however, to change the clear intention of the Unit NPI Contract to tie net profits to Pinedale Unit operations. Summary judgment should not have been granted to the plaintiffs on the issue of the continued existence of the NPI.