Hayes Fund for the First United Methodist Church of Welsh, LLC v. Kerr-McGgee Rocky Mountain, LLC

• Citation: 193 So.3d 1110
• Decision Date: 08 December 2015
• Docket Number: No. 2014–C–2592.,2014–C–2592.
• Parties: HAYES FUND FOR the FIRST UNITED METHODIST CHURCH OF WELSH, LLC, et al. v. KERR–McGEE ROCKY MOUNTAIN, LLC, et al.
• Court: Supreme Court of Louisiana

193 So.3d 1110

HAYES FUND FOR the FIRST UNITED METHODIST CHURCH OF WELSH, LLC, et al.

v.KERR–McGEE ROCKY MOUNTAIN, LLC, et al.

No. 2014–C–2592.

Supreme Court of Louisiana.

Dec. 8, 2015.

KNOLL

, Justice.

This mineral case presents a classic battle of experts, which was resolved through factual findings and credibility determinations by the trier of fact. In its simplest terms, this case was brought by the plaintiffs, mineral royalty owners, against defendants, mineral lessees and working interest owners, for unrecovered hydrocarbons after two wells ceased production. Following a lengthy bench trial, the District Court concluded plaintiffs had not proven the operators caused any loss of hydrocarbons and dismissed their claims with prejudice.

The single issue before us is whether the District Court committed manifest error in ruling in favor of defendants, finding their experts more credible than plaintiffs' expert. The Court of Appeal, Third Circuit, reversed. We granted writ to determine the correctness vel non of the appellate court's manifest error review. Hayes Fund for the First United Methodist Church of Welsh, LLC, v. Kerr–McGee Rocky Mountain, LLC, 14–2592 (La.4/17/15), 168 So.3d 389

.

Manifest error review is not a res nova issue. Indeed, this doctrine and its proper application and analysis are spelled out in our jurisprudence extensively. This case will only add yet one more to the many cases through the many years repeating that which we have already said in-depth to reviewing courts. We recognize an able counsel can make a persuasive argument to the reviewing court pleading for a reversal of the lower court, claiming the trial court committed manifest error. However persuasive the argument, the appellate court does not function as a choice-making court; the appellate court functions as an errors-correcting court. With this lengthy opinion we have meticulously analyzed this case employing the manifest error doctrine to further demonstrate, as guidance, the proper analysis the reviewing court should employ.

For the following reasons, we find the appellate court was incorrect in its analysis of the manifest error review standard. After reviewing the entirety of the record evidence, we find a reasonable basis did exist for the District Court's conclusion on causation, and therefore, its conclusion was not clearly erroneous. Accordingly, we reverse the judgment of the Court of Appeal and reinstate the District Court's judgment of dismissal.¹

FACTS

Plaintiffs herein seek to recover damages for monetary losses they allegedly sustained when defendants mismanaged, or imprudently operated, two oil and gas wells in which plaintiffs had interests—Rice Acres No. 1 (“Rice Acres well”) and Hayes Lumber No. 11–1 (“Hayes Lumber well”). Both wells were located in Jefferson Davis Parish.

Rice Acres, Inc., owned the property on which the wells were located and leased to HS Resources the exclusive right to explore for and produce the minerals from the property in 1999. The Hayes Fund for the First United Methodist Church of Welsh, L.L.C., Hollis Kay Hayes Hassien, Terry Glen Hayes, Cody William Hayes, Jodi Lee Hayes Oliver, and Lori Beth Hayes Lemons, owned royalty interests in the two wells. Named as defendants are Aspect Resources, LLC, Noble Energy, Inc., Crimson Exploration Operating, Inc., Southern G. Holdings, L.L.C., Anadarko Petroleum Corporation, Kerr–McGee Oil & Gas Onshore, LP, and Kerr–McGee Rocky Mountain, LLC (hereinafter “Kerr–McGee” or collectively “defendants”).²

In their suit, Rice Acres, Inc. along with the other plaintiffs (hereinafter “Hayes Fund” or collectively “plaintiffs”) alleged defendants failed to follow the proper, customary, and industry-wide accepted protocol for drilling the two oil and gas wells at issue:

The defendants operated two wells on the plaintiffs' property (the Rice Acres No. 1 well and the Hayes Lumber No. 11–1 well) in an imprudent manner in violation of La. R.S. 31:122

(Mineral Code article 122). This caused damage to the reservoirs beneath the two wells, which in turn caused significant losses of royalty income the plaintiffs otherwise would have received. Under the leases between the parties, the defendants are liable for the plaintiffs' losses, even without a showing of fault.

HS Resources, the original operator and lessee, drilled the Rice Acres well in 1999 and produced hydrocarbons from the Hackberry formation reservoir (9443'–9522') until the well ceased production in 2004. In defendants' first attempt to drill the well, they encountered differential pressure,³ which plaintiffs claimed should have warned them the drill pipe would get stuck in the hole. Despite this, defendants continued to drill without installing intermediate or protection casing, which plaintiffs claimed would have eliminated the risk of differential sticking.⁴

As plaintiffs anticipated, the drill pipe became differentially stuck and could not be moved or removed, forcing the operator to abandon the drill pipe in the hole and drill a sidetrack well just 132 feet away. However, plaintiffs claim the stuck drill pipe prevented defendants from adequately cementing the hole, thus in turn, allowing extraneous water to enter the annulus of the original wellbore (the area outside the pipe) and eventually channel into the unprotected gas zone later produced by the sidetrack well. “This extraneous water caused the reservoir to ‘water out,’ causing the loss of millions of dollars' worth of production—and, of course, the loss of substantial royalties to the plaintiffs.” Plaintiffs calculated their share of lost royalties from this well at $6.5 million.

HS Resources drilled the Hayes Lumber well in 1999 as well. It produced from the lower zones in the Nodosaria formation (9890'–9995') from January 2000 until May 2007. Thereafter, HS Resources performed a workover of the well from May 2007 until January 2008, enabling production from a different location, the upper zone of the Nodosaria formation (9718'–9742'), from March 2008 until production ceased on November 30, 2008.

Regarding this well, plaintiffs asserted defendants' use of a triple permanent packer resulted in the sanding up of the well and loss of the lower zones. Moreover, the use of this packer configuration was, according to plaintiffs, clearly imprudent because defendants knew or should have known the well was likely to sand in, and installation of the recognized method to control sanding—a gravel pack—was not feasible with the use of a permanent packer.

After the sanding issue, the operator moved back up the hole and perforated at a shallower depth, but plaintiffs alleged the defendants were aware the sand produced by the well had sandblasted holes in both the tubing and the well's protective casing—compromising the integrity of the entire casing. Defendants' attempt to repair the damage—by installing a 3 ½–inch liner—came too late, thus exposing the gas formation in the upper zone to shallower water sands. This resulted, according to plaintiffs, in the premature termination of production from the upper perforations and the permanent destruction of the upper zone from vertical communication with the shallower water sands. Plaintiffs calculated their share of lost royalties from this well at $6.9 million ($1.2 million for the lower zone and $5.7 million for the upper zone).

To prove their claims, plaintiffs relied exclusively on the testimony and exhibits of their expert, William Griffin, who was accepted as an expert in the field of petroleum engineering with a subspecialty of drilling, reservoir production, marketing, and economic evaluation and safety, but not as a geologist or geophysicist. His theories of destruction were premised on his belief all three reservoirs were volumetric or depletion driven,⁵ the unitized size of the reservoirs as depicted in the unit orders, and his reading of the production summaries. As the record shows, volumetric reservoirs are not in communication with an aquifer and so have no gas-water contact. Therefore, Griffin opined the presence of water in the production of such reservoirs establishes the communication of the hydrocarbons contained within the reservoir with water from outside the reservoir, i.e., extraneous water, caused more probably than not by defendants' drilling activity. Nevertheless, even if the reservoirs, or more specifically Rice Acres, had a water-drive component, Griffin opined the sudden onset of the water in production was still indicative the water was extraneous and not formation water, which would have taken years to show up and would have been preceded by an increase in oil shortly before it hit.

Following their extensive cross-examination of Griffin, defendants called nine witnesses—four lay and five experts—in their efforts to establish their drilling practices were not unreasonable or imprudent and the water in both the Rice Acres and the Hayes Lumber upper zone was formation water as both reservoirs were water-driven. The record evidence reveals in a water-driven reservoir the hydrocarbon-bearing portion of the reservoir is in direct communication with the water-bearing portion of the same rock body. Once enough hydrocarbons are removed, the water expands up to the wellbore and is produced with the oil and gas, in this case gas condensate. Because the water came from the water-driven reservoirs, defendants' witnesses opined based on the rules of nature and the laws of geophysics defendants more probably than not were not at fault. Defendants through their experts further sought to demonstrate how plaintiffs failed to prove the hydrocarbons allegedly remaining in the lower zones of the Hayes Lumber well were unattainable.

After hearing twenty-five days of testimony conducted over an eleven-month period and receiving hundreds of pages in post-trial memoranda, the District Court ultimately credited defendants' experts over plaintiffs' expert, concluding plaintiffs failed to prove defendants'...