Opinion ID: 1158112
Heading Depth: 1
Heading Rank: 6

Heading: The Equitable Conversion Theory.

Text: The issue at the heart of this controversy is whether Moncrief and Yates can be deemed to own or control Amoco's working interest in the 160-acre farmout tract, for purposes of voting that working interest as consenting, at the critical point in time that the majority-minority determination must be made for purposes of selecting the applicable non-consent penalty provision. Moncrief and Yates claim ownership or control of Amoco's working interest by virtue of the Amoco-Moncrief farmout agreement finalized by those two entities on July 26, 1990, or a few days later. Moncrief and Yates concede that when that farmout agreement came into existence in late July 1990, they, as farmees, had a mere option to drill a well. They assert, however, that their mere option to drill a well converted at the precise moment the well was spudded in on August 24, 1990, from the mere option to the ownership of the equitable title of Amoco's 160-acre tract. Under this equitable conversion theory, then, during the time period from May 31, 1990, when Moncrief proposed the well to August 24, 1990, just before Moncrief spudded in the well, Moncrief and Yates did not own or control Amoco's working interest so as to be able to vote it as consenting for purposes of the crucial majority-minority determination. Because Moncrief and Yates had no such ownership or control of Amoco's working interest until the well was spudded in on August 24, 1990, under their equitable conversion theory, in order for them to prevail in this action the majority-minority determination has to be held to occur at that same time, i.e., when the well was spudded in. If that majority-minority determination is held to have occurred before the well was spudded in, then at that earlier time Moncrief and Yates would not have had ownership or control of Amoco's working interest so as to be able to vote it as consenting. Because the spud in date must be the date on which the majority-minority determination is made, for appellants to prevail, they must find language in the Supplemental UOA that supports that position. Ignoring the detailed election procedure provisions in Article 6 of the Supplemental UOA, in which the parties, including these appellants, have set forth a specific timing scheme to govern the sequential elections whether or not to participate that all working interest owners must make, appellants support their position with a slender reed, viz., the definition of the term Consenting Party provided in Section 1.9 of Article 1, the definitions article of the Supplemental UOA. That definition is as follows: Drilling Party or Consenting Party means the    Parties obligated to bear the Costs incurred in Drilling    a well in accordance with the agreement at the commencement of such operation. (Emphasis added). Leaning on this slender reed, appellants assert that a party becomes a consenting party at the commencement of such [drilling] operation. Without citation of authority, appellants claim that at the commencement of such [drilling] operation is synonymous with the spudding in of the well. From this, appellants reason that in order to determine whether the consenting parties constitute a majority in interest, the critical time to calculate the ownership interests of the consenting parties is at the time of the commencement of the drilling operation, i.e., when the well is spudded in. Appellees reject appellants' argument, and so do we for several reasons. First, by relying solely on the definition of the term Consenting Party and by ignoring the detailed election procedure provisions that clearly govern the majority-minority determination process, appellants disregard the basic tenets of contract construction. Appellants urge us to read only an isolated part of the Supplemental UOA. We may not. We read the whole contract and consider the contract as a whole, taking into account relationships between the component parts. True Oil Co. v. Sinclair Oil Corp., 771 P.2d 781, 790 (Wyo.1989). This requires us to consider as well the detailed election procedure provisions set forth in Article 6 of the Supplemental UOA. Were we to follow appellant's urging and ignore those detailed election procedure provisions, we would render those provisions meaningless; we must avoid such construction, since each provision is presumed to have a purpose. Wyoming Game & Fish Comm'n v. Mills Co., 701 P.2d 819, 822 (Wyo.1985). Appellants' construction of the contract, placing its reliance on its view of the meaning of the phrase at the commencement of the drilling operation, seemingly leads to a possible conclusion that inconsistent provisions exist. If reasonably possible, we must avoid a construction of a contract leading to a conclusion that inconsistent provisions exist. Shepard v. Top Hat Land & Cattle Co., 560 P.2d 730, 732 (Wyo.1977). When the critical question to be answered is at what point in time must the determination be made whether the consenting parties or the non-consenting parties constitute a majority in interest, common sense strongly suggests that the answer more likely is found in the detailed election procedure provisions of the parties' agreement than in an isolated general definition of a single term. In giving effect to the parties' intent, as expressed in the language of their written contract, this court abides by the rule that common sense and good faith are the leading characteristics of contract construction. Wangler, 714 P.2d at 1213. Second, appellants place too narrow of a construction on the phrase at the commencement of such [drilling] operation, as it appears within the definition of Consenting Parties. Without citation of authority, they assume that phrase means when the well is spudded in. That gloss does not stand up well against the generally accepted meaning of that phrase. That phrase and subtle variations of it are found in various contexts in drilling clauses. For example, well completion clauses frequently contain a condition that thelessee must have commenced operations for the drilling of a well before the end of the primary term. RICHARD W. HEMINGWAY, LAW OF OIL AND GAS § 6.7, at 362 (3d Ed.1991). Delay rental clauses often call for the commencement of drilling operations before the next ensuing anniversary date of the primary term to suspend the necessity of paying the next delay rental. HEMINGWAY, supra, at 362 n. 292. Such operative language has been generally interpreted to mean that operations for the drilling of a well, and not the actual spudding in or drilling of the hole, must have commenced before the end of the primary term. HEMINGWAY, supra. The cases are laden with examples of preliminary preparatory pre-spudding in activities that qualify as the commencement of drilling operations. HEMINGWAY, supra, at 363. Several Wyoming cases are aligned with this general interpretation. See LeBar v. Haynie, 552 P.2d 1107, 1109-10 (Wyo.1976); True Oil Co. v. Gibson, 392 P.2d 795, 799-801 (Wyo.1964); and Fast v. Whitney, 26 Wyo. 433, 442-43, 187 P. 192, 196-97 (1920). And see 3 EUGENE O. KUNTZ, A TREATISE ON THE LAW OF OIL AND GAS § 32.3, at 75 (1989): [I]t is generally held that acts which are preparatory to drilling are sufficient to constitute the commencement of a well and that it is not essential that the lessee be in the process of making a hole; and LOWE, supra note 5, at 802-03. [14] Third, as appellees point out, the definition of the term Non-Consenting Parties provided in Section 1.10 of Article 1, Supplemental UOA, does not contain the phrase at the commencement of such [drilling] operation. Thus, a non-consenting party is a party who has had the optional right to participate in the drilling    of a well and who has elected not to participate therein. Since the determinations of consenting parties and non-consenting parties are made simultaneously, if those determinations are to be made when the well is spudded in, as appellants contend, it would seem the phrase at the commencement of such [drilling] operation would be found in both definitions. That they are not undermines appellants' contention. Fourth, as appellees point out, the election procedure provisions of Article 6, Supplemental UOA, which appellants have avoided treating, specifically govern the timing of the majority-minority determination. Those provisions set forth clearly the sequence of events which must occur when a party proposes the drilling of an exploratory well. When the well proposer notifies the working interest owners of its intention to drill a well, it also designates the drilling block area. Upon this notification, a thirty-day period comes into existence, within which each working interest owner must elect in writing sent to all other working interest owners whether or not to participate. A party's failure to make the election is deemed a non-participating election. Upon the expiration of this thirty-day first election period, if more than fifteen percent of the affected parties elect not to participate, as happened here, and if a party still wishes to drill the proposed well, as happened here, then that party shall so notify in writing the other parties, as Moncrief did here on July 11. At this point in time, a ten-day period comes into existence. Within that ten-day period the parties must again elect whether or not to participate. As before, a party's failure to make the election within that time period is deemed a non-participation election. Upon the expiration of this ten-day second election period, all of the affected parties shall know at that time which of them have elected to be obligated to bear the costs of the proposed well. From the time Moncrief sent its July 11 letter notifying the parties of its intention to proceed to drill the well, those parties had ten days within which to make their second election to participate or not. Thus, by July 22, the date when that ten-day period expired, all of the affected parties knew which were consenting and which were not. As appellees correctly point out, Amoco and Moncrief had not yet finalized the terms of their farmout agreement on July 22. That finalization did not come until at least four days later, on July 26, when Amoco signed off on the changes Moncrief had proposed in its July 20 letter. There can be no serious question that Amoco's 160-acre tract is part of the Moncrief-designated drilling block area and, therefore, must be included in any calculation of majority-minority interests. In oral argument on the rehearing, Moncrief's counsel asserted that Amoco has to be either fish or fowl, i.e., counted either as consenting or non-consenting. We agree. It would be a curious state of affairs if the working interest owner of the very land on which the exploratory well is proposed is, somehow, excluded from the election procedure. On July 22, 1990, when the ten-day second election period expired, Moncrief had no mere option to drill a well on the Amoco tract, let alone an equitable ownership of it. On that date, only Amoco could make the election whether or not it would participate in the costs of the proposed well. We have carefully examined the record and have not found that Amoco elected to participate. Indeed, Moncrief points out in its initial appellate brief that Amoco chose not to make its own election but, rather, chose to farmout its interest to Moncrief. Moncrief asserts, without supporting authority, that Amoco's farming out of its interest to Moncrief constituted Amoco's authorizing Moncrief to vote the farmout acreage as a consenting interest. We have carefully read the terms of the Amoco-Moncrief farmout agreement finalized on or about July 26, and have found no provision by which Amoco authorized Moncrief to make retroactively Amoco's election to participate. We are left with the fact that Amoco did not elect to participate. According to the election procedure provisions of Article 6, Supplemental UOA, as well as those of the Revised UOA, [15] a party's failure to make the election is deemed an election not to participate. Since, as Moncrief's counsel agreed at oral argument on rehearing, Amoco must be either fish or fowl, i.e., counted as either participating or not participating, Amoco must be deemed not participating. Since we consider the Supplemental UOA as a whole, taking into consideration the relationship between the various parts, we have noted that several of the provisions of Article 10, titled Rights and Obligations of Consenting Party and Non-Consenting Party, shed further light on the question under consideration. Section 10.1, titled Scope of Article, provides that the unit operator shall conduct the non-consent operation (which exists when not all parties elected to participateas here); however, if the unit operator is a non-consenting party, it may elect not to serve as operator for the operation, in which case the Consenting Parties shall elect one of their group to conduct the operation. This provision suggests that the groups of Consenting Parties and Non-Consenting Parties are fixed before operations are commenced. That suggestion is strongly reinforced when one considers the following provision which reads in pertinent part: 10.2 Conduct of Operation. After all notices of election whether to participate in the non-consent operation have been received, Unit Operator shall commence work on such operation with reasonable dispatch (within 90 days thereafter, or as promptly as possible where the drilling rig is on location) and complete it with due diligence. In the event such operation is not commenced within said ninety (90) day period, Unit Operator shall not have the right to Drill such well until notification and response as provided in Article 6 hereof have been again given and received. (Emphasis added). The unambiguous language of this section confirms that the non-consent operation shall not commence until after the election notices referred to in the election procedure provisions of Article 6, which we discussed earlier, have been received. According to the section's first sentence, work on the non-consent operation shall be commenced within ninety days after all election notices whether or not to participate have been received. If work is not commenced within that time period, then the election procedure provisions of Article 6 must be again invoked because, until the notification and response process of those provisions has been again complied with, no right to Drill exists. The word Drill as used in Section 10.2 means, according to Section 1.11 of Article 1, titled DEFINITIONS, Supplemental UOA: to perform all operations reasonably necessary and incident to the Drilling of a well to its projected total depth, including preparation of roads and drill site, testing, logging, and, if productive of Unitized Substances, completing and equipping for Production, including flow lines, treators, separators and tankage, or plugging and abandoning, if dry. (Emphasis added.) Thus, if work on the non-consent operation has not been commenced within the initial ninety-day period following the receiving of the election notices, then no right to engage in preparatory pre-spudding-in activities exists until the election procedure is again initiated and completed. For all of the foregoing reasons, we hold that, according to the unambiguous language of the pertinent provisions of the Supplemental UOA, the majority-minority interest determination must be made upon the expiration of the ten-day second election period as provided in Section 6.4, Article 6, Supplemental UOA.