Opinion ID: 165825
Heading Depth: 4
Heading Rank: 1

Heading: Meaning of At the Well

Text: 40 The district court granted Appellees' motion for summary judgment on its at the well obligations under the royalty contracts. Dist. Ct. Order No. 1 at 2. The court concluded that the meaning of the at the well language is clear and unambiguous: under Creson v. Amoco Production Co., 129 N.M. 529, 10 P.3d 853 (Ct. App.2000), royalties are to be paid on the value of the gas in its unprocessed state as it comes to the surface at the mouth of the well before it is transported and processed. Id. at 7. The adjustment for removing the NGLs so the gas is marketable, the district court said, is consistent with the at the well language of the royalty obligations. Id. at 8. 41 On appeal Elliott argues that the district court erred in reading the terms of the royalty obligations as consistent with the 39% processing charge. Elliott argues that the district court erroneously read Creson as holding that the net proceeds/work-back method is the approved method of calculating royalty payments in New Mexico. Moreover, Elliott contends the district court wrongly decided that, in calculating the royalties owed to Elliott under the work-back method, Appellees could deduct a fictitious 39% fee that was never actually incurred in processing the gas. Elliott asserts that only those actually incurred and reasonable costs can be deducted in calculating the royalty owed. Elliott further argues that, as part of its erroneous decision, the district court improperly concluded that the gas in this case was marketable at the wellhead. 42 Appellees counter that the royalty instruments contain express language governing Appellees' royalty obligations to Elliott. Appellees assert that under the at the well language they are required to pay royalties based on the value of the refined natural gas products less any post-production costs. One of the alleged post-production costs which Appellees deduct from the value of the refined natural gas products is the 39% charge for processing the gas at their jointly-owned Plant. Appellees argue that the district court correctly concluded that New Mexico law does not support Elliott's theory that only those actually incurred and reasonable costs can be deducted. Royalties, Appellees argue, are owed only on the value of the gas as it emerges from the wellhead. Furthermore, Appellees argue that royalty payments are a matter of contract and not dependent upon whether the gas is marketable. 43 As indicated, the posture of this case is unusual in that Elliott declined to bring and affirmatively disclaims a breach of contract claim. Yet, it appears impossible to resolve this case without assessing the meaning of the at the well contractual language. All parties agree that the royalty instruments contain language that requires royalties to be paid based on the market value of the gas at the well as produced (unless they require payment based on a same as fed basis) and nowhere do these instruments specifically mention the 39% figure. 44 The district court did not err in relying on Creson for guidance in determining the meaning of at the well. In Creson, the Court of Appeals of New Mexico recognized that [a] royalty or other nonoperating interest in production is usually subject to a proportionate share of the costs incurred subsequent to production where the royalty or nonoperating interest is payable at the well. 10 P.3d at 857 (quotations omitted). The Creson court reasoned that the phrase net proceeds derived from the sale of Carbon Dioxide Gas at the well is unambiguous and means that Plaintiffs are entitled to royalties based on the value of the carbon dioxide gas as it emerges at the wellhead. Id. Under this language, the Creson court held that royalties for gas sold downstream were subject to deductions for post-production, value-enhancing costs. Id. at 862. Although the instruments in the present case refer to market value as opposed to net proceeds, the Creson court used the terms interchangeably and cited with approval a Fifth Circuit case, Piney Woods Country Life School v. Shell Oil Co., 726 F.2d 225 (5th Cir.1984), which interpreted the meaning of market value. 14 Creson, 10 P.3d at 858. The Creson court therefore appeared to see no difference between the terms net proceeds and market value, but rather focused on the fact that the at the well language means that post-production costs are deducted from the value of the processed carbon dioxide gas in arriving at the proper royalty valuation. Id. 45 The district court concluded that because the phrase at the well means that royalty is paid on the value of unprocessed gas as it emerges at the wellhead, the challenged adjustments result in royalty payments consistent with the value of the gas `as it emerges at the wellhead.' 15 Dist. Ct. Order No. 1 at 8. The at the well royalty obligations do require royalty payments based on the unprocessed gas as it emerges at the wellhead. Whether Appellees complied with these at the well royalty obligations, however, depends upon whether the 39% charge is a post-production cost that may properly be deducted under the net-back or work-back methodology in order to arrive at the correct at the well value. To determine compliance, there would appear to be at least three questions which must be answered: (1) whether the 39% fee is properly characterized as a processing cost such that it is a post-production cost subject to deduction; (2) whether such deductible costs must be actual and reasonable 16 and, if so, whether the 39% is an actual and reasonable cost; and (3) whether the gas is in fact marketable at the wellhead. In Creson, these issues were not disputed. 10 P.3d at 856, 859 (noting that plaintiffs did not dispute the type of cost deducted or whether the costs were not the actual costs or were inflated; plaintiffs conceded the carbon dioxide gas was marketable at the wellhead). 46 Without resolution of these issues, which are substantially factual questions, 17 it is not possible to determine whether the challenged adjustments result in royalty payments consistent with the value of the gas `as it emerges at the wellhead.' Dist. Ct. Order No. 1 at 8. It was therefore improper for the district court to decide that Appellees complied with their at the well royalty obligations. This, however, does not affect our disposition of Elliott's claims. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Elliott's noncontractual claims do not depend upon or require construction or interpretation of the at the well language of the royalty obligations. Indeed, Elliott's claims fail as a matter of law regardless of the meaning of the at the well language. Thus, these outstanding factual questions regarding the proper construction and application of the at the well royalty obligations are neither genuine nor material issues. See Fed.R.Civ.P. 56(c). The district court's grant of summary judgment in favor of Appellees is therefore affirmed. See United States v. Sandoval, 29 F.3d 537, 542 n. 6 (10th Cir.1994) (We are free to affirm a district court decision on any grounds for which there is a record sufficient to permit conclusions of law, even grounds not relied upon by the district court. (quotations omitted)). 47