Court Opinion

ID: 9540653
Source: CourtListenerOpinion
Date Created: 2023-08-07 16:18:36.489576+00
Date Added: 2024-06-11T15:00:08.755698
License: Public Domain

THOMAS, Justice,
dissenting, with whom GOLDEN, Justice, joins.
I am compelled to dissent in this case. I am satisfied the district court correctly ruled that Moncrief, MYCO, and Yates did not constitute a majority in interest at the time the consents were sought for the drilling of the exploratory well in the Madden Deep Unit. I perceive two major fallacies in the majority opinion. The first of these is that, upon analysis, it is clear the majority affords to Moncrief the authority to vote the Amoco acreage prior to the execution of the farmout agreement. That authority must depend upon only the commitment by Amoco to the farmout agreement. The second major fallacy is the extension of the doctrine of equitable conversion to the facts of this case and in a way that requires the equitable conversion to have occurred as early as the time of the commitment to execute the farmout agreement.
For purposes of this case, the commitment to tne farmout agreement by Amoco was of no more significance than a kiss in a courtship. Certainly, a kiss is not going to make anyone pregnant, and Moncrief did not want to risk conception until he believed he had lined up the requisite support for the baby. I am satisfied that Moncrief did not intend to execute the farmout agreement unless he believed that he had secured consents from a majority of the parties to the revised and supplemental unit operating agreements. With that accomplished, he either had adequate contribution to the expense of the drilling of the well or the opportunity for a handsome windfall from forfeited interests if the well were successful.
I find no ambiguity in any of the contractual documents, and I am satisfied these parties made every effort to avoid any language that would necessitate construction of their agreements. There cannot be any doubt that all of the acreage within a drilling block must be counted as consenting or *512non-consenting, and the assertion to the contrary in the majority opinion is forced and illusory. Neither is there any question that the parties were required to advise of their election not to participate within thirty days of the notice provided for in the Supplemental UOA. That does not suggest that the time for determining the assessment of interests is indefinite.
The chronology of this case is important. On May 1, 1967, the parties to this dispute, or their predecessors in interest, entered into a unit operating agreement for the Madden Deep Unit (Unit Agreement) covering about 70,000 acres in Natrona and Fremont Counties. The tract of land at issue in this case, the NE ¼ of Section 12, Township 38 North, Range 89 West, 6th P.M., is included in the Unit Agreement. The well that was drilled pursuant to the farmout agreement with Amoco is located in this quarter-section.
On June 17, 1969, the parties to the Unit Agreement entered into a Revised Unit Operating Agreement (Revised UOA). The parties to the Revised UOA include, among others, appellants, Amoco, and appellees, or their respective predecessors in interest. As to all parties, the Revised UOA governs operations at depths above the base of the Wattman Shale.
On June 2, 1975, some of the parties to the Revised UOA, or their successors in interest, entered into a Supplemental UOA to govern operations at depths greater than 5,500 feet below the base of the Watt-man Shale. The parties to the Supplemental UOA were: (1) Moncrief; (2) Inexco Oil Company; (3) Sohio Petroleum Company; (4) North Central Oil Corporation; (5) W.R. Grace and Company; (6) Colorado Oil & Gas Corporation; (7) Yates; (8) Martin Yates, III (now MYCO’s interest); (9) Harold B. Ehrlich; and (10) Monsanto Company (now BHP Petroleum Company, Inc.).
Several owners of committed working interests in the Unit, who were bound by the Revised UOA, including Amoco, did not execute the Supplemental UOA. Those parties deep rights, the rights below 5,500 feet, continued to be governed by the Revised UOA. Either the Revised UOA or the Supplemental UOA, or both, apply to the Madden Deep Unit operations, depending upon the depth of the drilling and the parties that are participating in the development.
In May of 1990, Moncrief obtained a commitment from Amoco to execute a farmout agreement (Farmout Contract) covering the subject lands. The Farmout Contract was finalized on July 5, 1990. The pertinent language of the Farmout Contract is:
2. Farmee [Moncrief], on or before December 31, 1990, agrees to commence or to participate in, as to Farmer’s interest, the actual drilling of a test well at a legal location in the NE/4 of Section 12, Township 38 North, Range 89 West, Natrona County, Wyoming. Said well, once commenced, shall be continuously prosecuted, with due diligence and in a workmanlike manner, to a subsurface depth of 20,000 feet or to a subsurface depth sufficient to test the Cody formation, whichever is the lesser depth (“contract depth”), and shall then be completed as a producing well, a well capable of production, or plugged and abandoned within ninety (90) days from the date of commencement. Said test well shall be drilled at Farmee’s sole cost, risk and expense. Except as provided in the takeover provision of Paragraph 5 hereof, the costs associated with testing, completing, equipping or plugging and abandoning said test well, as applicable, shall also be borne solely by Farmee. All contributions to the test well shall be owned solely by Farmee.
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6. If Farmee has drilled the test well to contract depth in accordance with the terms of this agreement and has otherwise complied with the terms hereof, Farmor agrees, upon written request within thirty (30) days of the date the test well is (check one) * * * (b) completed as a producing well in paying quantities or as a well capable of producing or is plugged and abandoned, to execute and deliver to Farmee an assignment of all of its right, title and interest in and to *513the Subject Lands, reserving unto Far-mor an overriding royalty of twelve and one-half percent of eight-eights (12.5% of ⅜).
The Farmout Contract was modified by a letter agreement within three weeks, and prior to any drilling, pursuant to which Moncrief advised Amoco:
Enclosed herewith is one fully executed copy of the captioned Agreement dated July 5, 1990 [the Farmout Contract] subject to your acceptance of the following changes thereto:
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5) Farmee [Moncrief] agrees to use his best efforts in accordance with good oil field practice to complete the test well as a producer of oil or gas, but shall not be firmly obligated to drill the well. The only liability or penalty for failure to drill will be the forfeiture of all rights hereunder. (Emphasis added)
Apparently this is among the “later minor modifications not relevant to this dispute’s resolution” alluded to on page-of the majority opinion. With candor, but tellingly, Moncrief admits in his brief:
The Farmout Contract, under which Moncrief has the right (but not the obligation) to earn the lease by drilling the Well, is in the nature of an option. (Emphasis added).
Appellant’s Brief at 19.
By letter dated May 31, 1990, Moncrief notified other working interest owners in the Madden Deep Unit that he had obtained the farmout from Amoco; that he was designating as a “Drilling Block” all of Section 12; and that he was proposing to drill the Well in that section. The letter offered the right to participate in the costs of the Well in order to “earn” participation in Mon-crief’s Farmout Acreage, and gave all parties 30 days to respond. This letter was sent even though the Farmout Contract was not executed until July 5, 1990, some five weeks after Moncrief notified the other working interest owners that he had obtained it.
Moncrief commenced the well on the designated drilling block on August 24, 1990. On April 2, 1991, the well was drilling at a depth below 20,000 feet. Twenty-five percent of the costs of the well were allocable to the NE 1/4 of Section 12, and Moncrief and Yates were bearing those allocable costs. As provided in the Supplemental UOA, the Consenting Parties bore the costs of drilling in proportion to their shares of the drilling acreage.
The penalty for non-consent by the parties to the Supplemental UOA, if they are a minority in interest, is draconian indeed. It is designed to force those who find themselves a minority to participate in the cost of discovery or forfeit their interests. Article 10, Paragraph 10.4, of that agreement reads in pertinent part:
In the event any Party hereto should become a Non-Consenting Party as regards the Drilling of an Exploratory Well as to which a majority in interest hereunder have constituted the Consenting Parties such Party shall, promptly following the Drilling of said well to its total depth in substantial compliance with the proposal, assign to the Drilling Parties in the proportion in which they participate therein all of the right, title, and interest of such Non-Consenting Party in and to the leases owned by it [according to specific instructions].
The alternative for non-consent by parties to the Supplemental UOA, if they are not a minority in interest, is severe in and of itself because they are required to pay a penalty of 1000% of the drilling costs and the cost of newly acquired equipment to and including the wellhead connections.
Pursuant to the letter of May 31, 1990, Moncrief, Yates, MYCO, and Grace Petroleum “consented” to participate in the well. While the Appellees, The Louisiana Land and Exploration Co., BHP Petroleum (Americas) Co., Inc., Inexco Oil Co., and *514North Central Oil Corporation elected not to do so. By letter dated August 30, 1990, Moncrief furnished to all working interest owners a list of which parties had consented to participate in the well and also how Moncrief calculated all parties’ acreage so that it could be determined whether those parties who would drill the well constituted a “majority in interest” in the Drilling Block. According to Moncrief’s calculations, the consenting parties made up a “majority in interest.” In those calculations, Moncrief included all 160 acres subject to the Amoco farmout. Those 160 acres should not be included for the reasons outlined by the district court and as discussed below.
On September 6, 1990, Moncrief brought this action seeking a declaration that, as defined by the Supplemental UOA, the Consenting Parties constituted a “majority in interest” in the 640 acre drilling block.1 In its Decision Letter Opinion filed on September 18, 1991, the district court concluded that “[t]he critical time for assessing the ownership interests was when Moncrief proposed the drilling of the well. * * * The Defendants had a right to consent or not based upon the circumstances as they were prior to commencement of drilling.” In addition, the district court found, as a matter of law, that the farmout acreage should not be counted as consenting acreage and that appellants were therefore a minority in interest. I agree and would affirm the district court.
It is clear that the resolution of this case depends upon whether the Amoco acreage, purportedly voted by Moncrief pursuant to a right to do so under the Farmout Contract is to be counted as consenting or non-consenting. Moncrief counted it as consenting acreage, and the district court found to the contrary. The decision of the district court was correct.
After Moncrief’s letter modifying the terms of the Farmout Contract, the Farm-out Contract was an option-to-drill agreement as discussed on page 505 of the majority opinion. The majority opinion is not correct in asserting that the Farmout Contract became a bilateral contract if Mon-crief exercised the option by commencing drilling prior to December 31, 1990. Mon-crief had no obligation to drill, and he could earn the farmout acreage only by completing the well as required in the agreement. The condition for earning the farmout acreage was that the well had to be drilled to the contract depth. Moncrief’s letter amending the Farmout Contract serves to distinguish this case from Davis v. Zapata Petroleum Corp., 351 S.W.2d 916 (Tex.Civ.App.1961).
The appellants also contend that they have a carried working interest in this acreage. The terms “carried working interest” and “carried interest” are not defined in the Supplemental UOA, but relying on the authority cited in the Brief of Appellees at 15-17,2 I would agree that this particular Farmout Contract does not create a carried working interest of the farmor’s acreage. A carried interest is created from an arrangement between two or more owners of a working interest. Under the Farmout Contract, only Amoco owned the working interest. Moncrief could not obtain any part of the working interest until he fulfilled his contract duties to drill the well. Since only one party, Amoco, owned the working interest, there can be no carried interest.
*515Appellants also argue that the Farmout Contract has been amended to afford to Moncrief title to the working interest in that acreage. The trial court concluded that the proposed amendment was not relevant because the critical time for assessing the ownership interests was when Moncrief proposed the drilling of the well. I am in complete accord with this decision. When Moncrief proposed the drilling of the well by his May 31, 1990 letter, Amoco was the owner of the lease and the working interest in that lease, and Moncrief had only a commitment to enter into a Farmout Contract. Since Moncrief acquired no interest until the completion of the well, he could not vote the farmout acreage with his own acreage in calculating whether there was a consenting majority.
The majority cites one case for the proposition that a farmee can earn equitable title to farmout acreage. See Cities Service Oil Co. v. Pubco Petroleum Corp., 497 P.2d 1368 (Wyo.1972). Commenting on the farmout relationship, the majority quotes: “Colorado [Corporation] had no legal title until the contemplated well had been completed. However, it did have a potential or equitable interest[.]” Based on this tenuous language, the majority extends the doctrine of equitable conversion to farmout contracts. The Cities Service case did not address the doctrine of equitable conversion. It was concerned only with the right of a driller of the well to enforce a lien not only against the interest of the company with which it had contracted, but also against the overriding royalty interest. The entire quote from which language is abstracted by the majority is informative:
Colorado had no legal title until the contemplated well had been completed. However, it did have a potential or equitable interest; and courts recognize equitable liens. But it must be remembered that Colorado’s equitable and future interest or rights were at all times subject to a reservation by Cities of its overriding royalty. Therefore, Pubco could not acquire lien rights against the legal or equitable rights of Colorado, without those rights being subject to Cities’ reservation of its overriding royalty.
Cities Service, 497 P.2d at 1373 (emphasis added).
I do not believe the court contemplated that this language would later be used out of context to support an extension of the doctrine of equitable conversion to farmout contracts.
We held as early as 1914 that the doctrine of equitable conversion does not apply to an option. Olds v. Little Horse Creek Cattle Co., 22 Wyo. 336, 140 P. 1004 (1914). In my judgment the doctrine of equitable conversion could not possibly be applied until the completion of the well. At that juncture, the farmee would have the right to have the acreage transferred, and I would accept the doctrine of equitable conversion at that point. Until the condition of performance was accomplished, however, the contract was unilateral, not bilateral. Amoco could not revoke its offer, but the only way that Moncrief could achieve acceptance was by completion of the well. In this regard, the resolution in Metropolitan Mortgage and Sec. Co., Inc. v. Belgarde, 816 P.2d 868 (Wyo.1991), is clear. That case refutes any suggestion from the general authority cited, and relied upon, in the majority opinion to support the application of the doctrine of equitable conversion. Under his letter amendment to the Farm-out Contract, Moncrief had no obligation to drill the well, and he could only achieve the rights of an equitable owner by completion of the well, the condition precedent to performance by Amoco.
In their brief, the appellees place the matter in perspective when they say:
[T]he language quoted from the two documents makes it quite clear that the *516Farmout was an option contract, which created no duties on Amoco’s part until Moncrief had performed in full. With the clarity of the language in the July 20, 1990 letter, how can Moncrief assert here, as he did in the District Court, that although he had absolutely no obligation to drill the Well and therefore faced no liability if he failed to do so, he nonetheless had already “earned” a valuable property interest at some point prior to completing the Well to “contract depth”? Under this Farmout Contract and at their sole peril, the Appellants could have spent literally millions of dollars and drilled thousands of feet only to have “earned” nothing if they failed to reach contract depth for whatever reason.
Brief of Appellees at 11.
I dissent from the resolution set forth in the majority opinion, and I would affirm the district court.

. In March of 1991, Amoco assigned record title in the lease to Moncrief.

. Howard R. Williams & Charles J. Meyers, Manual of Oil and Gas Terms 104 (6th ed. 1984); Howard R. Williams & Charles J. Meyers, Manual of Oil and Gas Terms 113-14 (7th ed. 1987); Gary B. Co-nine. Rights and Liabilities of Carried Interest and Nonconsent Parties in Oil and Gas Operations, 37 SW.Legal Fdn.Oil & Gas Inst. 3-10 to 3-12 (1986).