Breton Energy, L.L.C. v. Mariner Energy Res., Inc.

• Decision Date: 12 August 2014
• Docket Number: No. 13–20307.,13–20307.
• Citation: 764 F.3d 394
• Parties: BRETON ENERGY, L.L.C.; Conn Energy, Incorporated, Plaintiffs–Appellants v. MARINER ENERGY RESOURCES, INCORPORATED, formerly known as Mariner Energy, Incorporated, formerly known as Forest Energy Resources, Incorporated; Forest Oil Corporation; Chevron Corporation; Chevron U.S.A., Incorporated; Unocal Corporation; Union Oil Company of California; Chevron Corporation, doing business as Union Oil Company of California; Union Oil Company, doing business as Unocal; Pure Resources, L.L.C.; IP Petroleum Company, Incorporated; International Paper Company; Apache Corporation; Apache Shelf, Incorporated, Defendants–Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

764 F.3d 394

BRETON ENERGY, L.L.C.; Conn Energy, Incorporated, Plaintiffs–Appellants

v.MARINER ENERGY RESOURCES, INCORPORATED, formerly known as Mariner Energy, Incorporated, formerly known as Forest Energy Resources, Incorporated; Forest Oil Corporation; Chevron Corporation; Chevron U.S.A., Incorporated; Unocal Corporation; Union Oil Company of California; Chevron Corporation, doing business as Union Oil Company of California; Union Oil Company, doing business as Unocal; Pure Resources, L.L.C.; IP Petroleum Company, Incorporated; International Paper Company; Apache Corporation; Apache Shelf, Incorporated, Defendants–Appellees.

No. 13–20307.

United States Court of Appeals,Fifth Circuit.

Aug. 12, 2014.

Russell S. Post (argued), Jasdeep Brar, Esq., Murray Jules Fogler, Esq., Beck Redden, L.L.P., Richard Warren Mithoff, Jr., Esq., Mithoff Law Firm, Houston, TX, for Plaintiffs–Appellants.

Emil Thomas Bayko (argued), Joshua James Newcomer, McKool Smith, P.C., Ronald Leslie Oran, Esq., Strasburger & Price, L.L.P., Penn C. Huston, King & Spalding, L.L.P., Houston, TX, Michael Andrew Chernekoff, Jones Walker LLP, New Orleans, LA, Defendants–Appellees.

Appeal from the United States District Court for the Southern District of Texas.

Before JOLLY, GARZA, and HIGGINSON, Circuit Judges.

HIGGINSON, Circuit Judge:

Well-pleaded factual allegations may perfectly shield a complaint from dismissal under Rule 12(b)(6), and our inquiry's “emphasis on the plausibility of a complaint's allegations does not give district courts license to look behind those allegations and independently assess the likelihood that the plaintiff will be able to prove them at trial.” Harold H. Huggins Realty, Inc. v. FNC, Inc., 634 F.3d 787, 803 n. 44 (5th Cir.2011). Because Appellants successfully plead a claim for relief against Appellee IP, but not the other Appellees, we AFFIRM in part and VACATE in part and REMAND.

FACTS AND PROCEEDINGS

Conn Energy, Inc. (“Conn”) owns a mineral lease named West Cameron 171 (“WC 171”) that is located in the Gulf of Mexico.¹ In 2009, Conn executed an agreement with Breton Energy, LLC (“Breton”) that permits Breton to explore WC 171 for hydrocarbons. Conn and Breton (collectively, “Appellants”) are suing the owners and operators of a neighboring lease named West Cameron 172 (“WC 172”). Apache ² operates and is an interest owner in WC 172's northern half. Apache is Mariner's ³ successor-in-interest. Before Mariner, IP,⁴ Pure,⁵ and Forest ⁶ all operated and owned interests in WC 172's northern half. Significantly, WC 171 and WC 172 share a hydrocarbon reservoir named the K–1 sands.

In 2010, Breton and Conn planned to reenter a well on WC 171. They targeted the K–1 sands; specifically, an area known as the “Upper Cib Op Zone.” Before reentering the well, Breton and Conn requested records from the Minerals Management Service (“MMS”).⁷ MMS records revealed that a well had been completed ⁸ in 1999 in the K–2 sands and in a lower zone called the “Middle Cib Op Zone.” The records, however, did not reflect any completed well production from the K–1 sands. Breton and Conn therefore spent $6 million to drill and complete the K–1 sands, but were disappointed with the results. They allege that the reservoir is depleted.

Appellants allege that IP perforated ⁹ the K–1 sands.¹⁰ In 1998, IP operated WC 172 and decided to drill on its northwestern corner. Seismic data indicated two oil and gas reserves: one in the K–1 sands (Upper Cib Op) and one in the K–2 sands (Middle Cib Op). IP submitted its drilling plans to MMS for approval and notified Conn of its intention to drill in an area neighboring WC 171. Conn objected to IP's proposed well location (“Well No. 19”), but MMS approved IP's plan over Conn's objection. MMS required, however, that IP produce the reservoirs as “two separate completions.” Therefore, “IP was not authorized to proceed with dual completions; it had to select one zone for its first completion” and then obtain MMS approval for any subsequent completion (emphasis in original).¹¹ In 1999, IP informed MMS that it completed the well in the K–2 sands. But Breton and Conn allege that IP “actually completed in the K–1 sands at the same time it completed in the K–2 sands.” They reason that IP's production from the K–2 sands has exceeded IP's estimate by almost 30%.¹² Appellants maintain that “[t]his significant overproduction suggests that the hydrocarbons in the K–1 sands had become commingled” with the K–2 sands.

Appellants sued, alleging that Appellees committed “unlawful drainage” in violation of federal and Louisiana law. Appellees moved to dismiss under Rule 12(b)(6). The district court dismissed Appellants' First Amended Complaint but granted leave to amend. Appellants filed a Second Amended Complaint that alleged a claim for “waste” in addition to a claim for “unlawful drainage and trespass.” Appellees moved to dismiss the Second Amended Complaint, and Appellees' motion to dismiss remained pending for six months while discovery proceeded. The district court subsequently dismissed Appellants' Second Amended Complaint on the day before the deadlines for discovery and dispositive motions.¹³ Breton and Conn timely appealed.

STANDARD

This Court reviews dismissal under Rule 12(b)(6) de novo, “accepting all well-pleaded facts as true and viewing those facts in the light most favorable to the plaintiff.” Toy v. Holder, 714 F.3d 881, 883 (5th Cir.2013) (internal quotation marks omitted). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

DISCUSSION

Appellants' complaint alleges two counts, one for waste and one for unlawful drainage and trespass.¹⁴

A. Choice of Law

The conduct alleged occurred on the Outer Continental Shelf. Accordingly, the Outer Continental Shelf Lands Act (“OCSLA”), 43 U.S.C. § 1333, controls this dispute. “Under the OCSLA, the law to be applied to the [Outer Continental Shelf] is exclusively federal, albeit the law of the adjacent state is adopted as surrogate federal law to the extent that such law is applicable and not inconsistent with federal law.” Total E&P USA Inc. v. Kerr–McGee Oil & Gas Corp., 719 F.3d 424, 434 (5th Cir.2013). Louisiana is the adjacent state in this case; therefore, it is undisputed that Louisiana law applies “to the extent” it is “not inconsistent” with federal law. § 1333(a)(2)(A). The parties do not identify any substantive difference or inconsistency between federal and Louisiana law as it applies to this case. ¹⁵

B. Waste1. The Rule of Capture and Waste

Louisiana law incentivizes property owners to develop their lands without concern for collateral effects on neighboring owners. In what is known as the “Rule of Capture,” Louisiana law provides:

A landowner may use and enjoy his property in the most unlimited manner for the purpose of discovering and producing minerals, provided it is not prohibited by law. He may reduce to possession and ownership all of the minerals occurring naturally in a liquid or gaseous state that can be obtained by operations on or beneath his land even though his operations may cause their migration from beneath the land of another.

La.Rev.Stat. Ann. § 31:8. Consistent with the Rule of Capture, Louisiana law prohibits claims for “drainage,” though it carves out a relevant exception:

A landowner has no right against another who causes drainage of liquid or gaseous minerals from beneath his property if the drainage results from drilling or mining operations on other lands. This does not affect his right to relief for negligent or intentional waste under Articles 9 and 10, or against another who may be contractually obligated to protect his property from drainage.

La.Rev.Stat. Ann. § 31:14 (emphasis added).¹⁶ In turn, Article 9 establishes the correlative rights of landowners in a common reservoir, “Landowners and others with rights in a common reservoir or deposit of minerals have correlative rights and duties with respect to one another in the development and production of the common source of minerals,” La.Rev.Stat. Ann. § 31:9, and Article 10 provides for liability when correlative rights are breached:

A person with rights in a common reservoir or deposit of minerals may not make works, operate, or otherwise use his rights so as to deprive another intentionally or negligently of the liberty of enjoying his rights, or that may intentionally or negligently cause damage to him. This Article and Article 9 shall not affect the right of a landowner to extract liquid or gaseous minerals in accordance with the principle of Article 8.

La.Rev.Stat. Ann. § 31:10.

Restated, Article 10 “provides a remedy to a person with rights in a reservoir when the value of his rights has been diminished by the negligent or intentional acts of another.” Mobil Exploration & Producing U.S. Inc. v. Certain Underwriters Subscribing to Cover Note 95–3317(A), 837 So.2d 11, 39 (La.Ct.App.2002); Breaux v. Pan Am. Petroleum Corp., 163 So.2d 406, 413 (La.Ct.App.1964) (“[A] landowner is not entitled to recover Damages from the Owner or lessee of adjoining lands on the ground that oil and gas have been drained from beneath his property by wells located on the adjacent tract, unless it is established that the oil or gas withdrawn from the common reservoir has been wasted, that the waste was caused by the negligence of defendant or by his willful intent to injure plaintiff....”).

Louisiana law further defines “waste” as “ ‘physical waste’ as that term is generally understood in the oil and gas industry” and provides that waste includes:

(a) the inefficient, excessive, or improper use or dissipation of reservoir energy; and the location, spacing, drilling, equipping, operating, or producing of...