407 F.3d 1091 (10th Cir. 2005), 04-2006, Elliott Industries Ltd. Partnership v. BP America Production Co.

Docket Nº:04-2006, 04-2014.
Citation:407 F.3d 1091
Party Name:ELLIOTT INDUSTRIES LIMITED PARTNERSHIP, a New Mexico limited partnership, Plaintiff-Counter-Defendant-Appellant, v. BP AMERICA PRODUCTION COMPANY, a Delaware corporation, and BP Energy Company, a Delaware corporation, Defendants-Appellees, and Conocophillips Company [*], a Delaware corporation, Defendant-Counter-Claimant-Appellee. Laura Dichter; Ro
Case Date:May 10, 2005
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit
 
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407 F.3d 1091 (10th Cir. 2005)

ELLIOTT INDUSTRIES LIMITED PARTNERSHIP, a New Mexico limited partnership, Plaintiff-Counter-Defendant-Appellant,

v.

BP AMERICA PRODUCTION COMPANY, a Delaware corporation, and BP Energy Company, a Delaware corporation, Defendants-Appellees,

and

Conocophillips Company [*], a Delaware corporation, Defendant-Counter-Claimant-Appellee.

Laura Dichter; Romero Family Limited Partnership, J. Glen Turner, Intervenors.

Attorney General for the State of New Mexico, Amicus Curiae.

Elliott Industries Limited Partnership, a New Mexico limited partnership, Plaintiff-Counter-Defendant-Appellee,

v.

BP America Production Company, a Delaware corporation, and BP Energy Company, a Delaware corporation, Defendant-Appellee,

and

Conocophillips Company, a Delaware corporation, Defendant-Counter-Claimant-Appellee.

Laura Dichter; Romero Family Limited Partnership, J. Glenn Turner, Intervenors-Appellants.

Nos. 04-2006, 04-2014.

United States Court of Appeals, Tenth Circuit

May 10, 2005

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Kerry C. Kiernan, Eaves, Bardacke, Baugh, Kierst & Larson, P.A., Albuquerque, NM (John M. Eaves, Paul Bardacke, Derek V. Larson, Eaves, Bardacke, Baugh, Kierst & Larson, P.A., Albuquerque, NM; Mary E. Walta, White, Koch, Kelly & McCarthy, P.A., Santa Fe, NM; William E. Snead, Law Offices of William E. Snead, P.C., Albuquerque, NM, with him on the briefs), for Plaintiff-Counter-Defendant-Appellant and Plaintiff-Counter-Defendant-Appellee.

Scott S. Barker, Holland & Hart, LLP, Denver, CO (Marcy G. Glenn, Holland & Hart, LLP, Denver, CO; Arnold R. Thomas, Holland & Hart, LLP, Greenwood Village, CO, with him on the briefs), for Defendant-Appellees.

Michael B. Campbell, Michael H. Feldewert, Tanya M. Trujillo, Holland & Hart, LLP, Santa Fe, NM, on the briefs for Defendant-Counter-Claimant-Appellee.

Michael J. Condon (J.E. Gallegos, with him on the briefs), Gallegos Law Firm, P.C., Santa Fe, NM, for Intervenors and Intervenors-Appellants.

Patricia A. Madrid, Attorney General, State of New Mexico, Santa Fe, NM, filed an amicus curiae brief for the Attorney General for the State of New Mexico.

Before SEYMOUR, McKAY, and MURPHY, Circuit Judges.

MURPHY, Circuit Judge.

I. INTRODUCTION

This case involves the payment of royalties on oil and gas leases. Plaintiff-appellant Elliott Industries Limited Partnership, as an individual and as class representative, is appealing the district court's grant of summary judgment in favor of Defendants-appellees ConocoPhillips Company, BP America Production Company, and BP Energy Company. A group of third-party litigants, Laura Dichter, Romero Family Limited Partnership, and J. Glenn Turner, appeal the denial of their motion to intervene and the district court's ruling in favor of defendants asserting that the district court lacked subject matter jurisdiction; they also seek to intervene on appeal. The appeals and the motion to intervene are consolidated and addressed in this opinion. In addition, the State of New Mexico has filed a brief as amicus curiae in support of plaintiffs' claims under New Mexico statutes.

This court exercises jurisdiction over these related appeals pursuant to 28 U.S.C. § 1291. In Case No. 04-2006, this court remands the claims of the class to the district court with instructions to vacate the final judgment with respect to the unnamed members of the plaintiff class, decertify the class, and dismiss the claims of the class without prejudice. As to Elliott Industries in its capacity as an individual plaintiff, the district court's judgment

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on the merits in favor of defendants is affirmed. The motion of the third-party litigants to intervene in the appeal of Case No. 04-2006 is granted and the appeal in Case No. 04-2014 is dismissed.

II. BACKGROUND

A. Facts

Elliott Industries Limited Partnership ("Elliott") is a New Mexico limited partnership with its principal place of business in Roswell, New Mexico. Elliott is the owner of royalty and/or overriding royalty interests in certain oil and gas units, leases, and wells owned or operated by ConocoPhillips Company and/or Amoco Production Company in the San Juan Basin. ConocoPhillips Company is a corporation organized and operated under the laws of Delaware with its principal places of business in Oklahoma and Texas. ConocoPhillips Company is the successor by merger to Conoco, Inc. [hereinafter "ConocoPhillips" unless otherwise specified]. Amoco Production Company and Amoco Energy Trading Corporation are corporations organized and operated under the laws of Delaware with their principal places of business in Illinois and Texas. The Amoco defendants are the predecessors in interest to BP America Production Company and BP Energy Company [hereinafter "BP" unless otherwise specified].

The San Juan Basin, one of the largest natural gas producing fields located in northwest New Mexico and southwest Colorado, was originally developed in the early 1950's by El Paso Natural Gas Company ("El Paso"). The natural gas produced in the San Juan Basin is conventional gas which contains methane (natural gas) and entrained natural gas liquids ("NGLs"), such as ethane and butane. In order to make the gas safe to enter the interstate pipeline, the NGLs must be removed from the gas stream. ConocoPhillips and BP [hereinafter and collectively, "Appellees" unless otherwise specified] own and operate a natural gas processing plant called the San Juan New Blanco Gas Processing Plant (the "Plant"). The Plant is a state-of-the-art cryogenic facility that processes natural gas by extracting the NGLs from the natural gas stream. Appellees are each 50% owners of the Plant.

As a result of prior litigation between El Paso, Conoco, and Amoco's predecessor in interest, Tenneco Oil Company ("Tenneco"), those parties entered into a settlement agreement in 1984. Under the settlement, El Paso assigned leases to Conoco and Tenneco who jointly built the Plant straddling El Paso's pipeline. In return, Conoco and Tenneco obtained a guaranteed gas supply from El Paso, which together with their own gas, would fully supply the Plant for at least twenty years. As part of the settlement, El Paso and Tenneco entered into a Gas Plant Straddle and Processing Agreement whereby Conoco and Tenneco, as owners of the Plant, would retain 39% of all of the NGLs recovered from El Paso's gas as a fee for processing El Paso's gas. Furthermore, Conoco and Tenneco entered into a Construction and Operating Agreement under which they agreed to retain, as compensation for operating the Plant, 39% of the NGLs removed from the natural gas stream, whether or not the gas originated from El Paso's pipeline.

Appellees are owners of working interests in numerous oil and gas leases and wells located within the San Juan Basin, New Mexico. Appellees operate a number of the leases and wells in which they own working interests. The working interests owned by Appellees in their oil and gas units, leases, and wells are burdened by royalty and overriding royalty interests owned by many parties, including members of the class and Elliott. All of ConocoPhillips'

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contracts with Elliott and the class and nearly all of BP's contracts are governed by royalty instruments which require Appellees to remit royalty either on the "market value of the gas at the well" or "in the same manner as royalty is payable to the United States." 1 Appellees provide an accounting on a monthly basis to the owners of royalty and overriding royalty interests burdening their own working interests. To approximate the value of the gas at the wellhead, upon which the "at the well" royalty is based, Appellees deduct their post-production costs, including processing, marketing, transportation, and fractionation costs, from the value of the refined natural gas products. This method of calculation is often referred to as the net-back or work-back methodology. 2 Under this methodology, the "at the well" royalty paid to Elliott and the class members has been calculated based on the value of the refined natural gas products net of various post-production costs specifically including the 39% in-kind assessment retained by Appellees as compensation for processing the gas.

This litigation centers on the 39% of NGLs recovered from gas processed at the Plant that Appellees retain as a fee for processing the gas. Elliott claims this 39% in-kind fee is not a legitimate post-production cost and, by reducing the volume of NGLs and thereby Elliott's share of the gas stream, this hidden "charge" results in the underpayment of royalties owed to Elliott. Appellees argue that the royalties are based on the contracts creating each royalty interest and dispute Elliott's characterization of the 39% as a "charge," insisting the 39% adjustment is a legitimate post-production cost that is deductible for purposes of calculating the value of the gas at the wellhead.

In addition to the dispute over the 39% processing charge or deduction, the parties dispute whether there is an active market at the wellhead for conventional natural gas. Elliott also alleges that even assuming the processing fee is a legitimate post-production cost, the 39% fee charged here is unreasonable and exceeds the actual cost incurred for processing the gas. 3

With regard to the royalties calculated in the "same manner as the federal government," until 1996 ConocoPhillips failed to pay those royalty owners in such a manner. Elliott alleges that...

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