Anderson v. Hess Corp..

• Decision Date: 15 August 2011
• Docket Number: No. 10–3116.,10–3116.
• Parties: Jerome C. ANDERSON; Patricia M. Barstad; Joan M. Barstad; Jane C. Craft; Peggy M. Cowan; Jerome Anderson, as Trustee of the Anderson Family Mineral Trust; John C. Anderson; Ray Anderson; Oscar R. Anderson; Beatrice Anderson; Donald Tarczanin; Susan Tarczanin; Cora Anderson, Plaintiffs–Appellants,v.HESS CORPORATION, Defendant–Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

649 F.3d 891

Jerome C. ANDERSON; Patricia M. Barstad; Joan M. Barstad; Jane C. Craft; Peggy M. Cowan; Jerome Anderson, as Trustee of the Anderson Family Mineral Trust; John C. Anderson; Ray Anderson; Oscar R. Anderson; Beatrice Anderson; Donald Tarczanin; Susan Tarczanin; Cora Anderson, Plaintiffs–Appellants,

v.HESS CORPORATION, Defendant–Appellee.

No. 10–3116.

United States Court of Appeals, Eighth Circuit.

Submitted: June 15, 2011.Filed: Aug. 15, 2011.

Rudra Tamm, argued, Bismarck, ND, for appellant.John W. Morrison, argued, Bismarck, ND, for appellee.Before COLLOTON, CLEVENGER,¹ and BENTON, Circuit Judges.CLEVENGER, Circuit Judge.

Jerome C. Anderson, Patricia M. Barstad, Joan M. Barstad, Jane C. Craft, Peggy M. Cowan, Jerome Anderson, as Trustee of the Anderson Family Mineral Trust, John C. Anderson, Ray Anderson, Oscar R. Anderson, Beatrice Anderson, Donald Tarczanin, Susan Tarczanin, and Cora Anderson (collectively, “Andersons”) appeal the grant of summary judgment by the district court ² in favor of Hess Corporation (“Hess”), the successor in interest to and lessee of mineral rights on the Andersons' land in Mountrial County, North Dakota. The Andersons contend that the district court erred in construing the five leases at issue as requiring Hess to engage in “drilling operations” rather than actual “drilling” in order to extend the primary terms of the leases and granting Hess's motion for summary judgment. We affirm.

I

The facts are undisputed. The Andersons signed four mineral leases on May 3, 2004, and one mineral lease on May 10, 2004, providing Diamond Resources, Inc. with mineral rights on 468.8 acres of the Andersons' land in Mountrial County, North Dakota. After a number of transfers and assignments, Hess became the lessee of the property on December 30, 2004.

All five leases are identical and incorporate Pugh and habendum clauses, ³ which contain the language that the parties dispute (underlined here) and respectively state the following:

Notwithstanding the provisions of this lease to the contrary, this lease shall terminate at the end of the primary term as to all of the leased lands except those within a producing or spacing unit prescribed by law or administrative authority on which is located a well producing or capable of producing oil and/or gas or on which lessee is engaged in drilling or reworking operations. However, this lease shall not terminate as to any of the leased lands so long as drilling or reworking operations are being continuously prosecuted, that is, if not more than one (1) year shall elapse between the completion or abandonment of one well and the beginning of operations for the drilling of another well.

1. It is agreed that this lease shall remain in force for a term of Five (5) years from this date and as long thereafter as oil or gas of whatsoever nature or kind is produced from said leased premises or on acreage pooled therewith, or drilling operations are continued as hereinafter provided. If, at the expiration of the primary term of this lease, oil or gas is not being produced on the leased premises or on acreage pooled therewith but Lessee is then engaged in drilling or re-working operations thereon, then this lease shall continue in force so long as operations are being continuously prosecuted on the leased premises or on acreage pooled therewith; and operations shall be considered to be continuously prosecuted if not more than ninety (90) days shall elapse between the completion or abandonment of one well and the beginning of operations for the drilling of a subsequent well. If after discovery of oil or gas on said land or on acreage pooled therewith, the production thereof shall cease from any cause after the primary term, this lease shall not terminate if Lessee commences additional drilling or re-working operations within ninety (90) days from date of cessation of production or from date of completion of dry hole. If oil or gas shall be discovered and produced as a result of such operations at or after the expiration of the primary term of this lease, this lease shall continue in force so long as oil or gas is produced from the leased premises or on acreage pooled therewith.

Joint App'x at 7.

In 2008 and 2009, Hess engaged in activities to prepare for drilling a well on some of the leased land. On October 27, 2008 Hess surveyed and staked a well. On December 28, 2008, Hess submitted an application for a drilling permit to the Oil and Gas Division of the North Dakota Industrial Commission, which was approved on January 2, 2009. On January 23, 2009, Hess moved equipment to the well location and began to prepare the surface. From January 26, 2009 through February 4, 2009, Hess continued to prepare the surface of the well, and on February 6, 2009, Hess leveled and lazered the pad. Encumbered by heavy snow, Hess finished digging the drilling pit on February 13, 2009. It then spread scoria, graveled, and lined the pit. On April 28, 2009, Hess drilled the hole for the main conductor pipe. Hess moved the tanks used to store drilling fluid to the location on April 30, 2009, and drilled the mouse hole ⁴ for the rig on May 1, 2009. According to Hess's records, the well was complete and ready for a rig on May 1, 2009. Problems at another well, however, delayed the arrival of the rig. Hess spud (i.e., completed the first boring of the hole) the well on May 11, 2009. The well was completed on June 30, 2009, and has produced continuously since that date.

On May 7, 2009, Hess contacted the Andersons to negotiate an extension or renewal of the leases. Specifically, Hess offered to increase the Andersons' royalty to 14% in exchange for an extension. The Andersons rejected Hess's offer, but communicated a counteroffer to Hess, agreeing to renew each lease for a one-year term, with a signing bonus of $500 per mineral rights acre, and an 18.75% royalty. Hess did not accept the counteroffer, and the Andersons filed suit to quiet title in state court on September 22, 2009. Hess removed the action to federal court on October 9, 2009.

II

After the close of discovery, both parties filed motions for summary judgment. The Andersons contended that the leases expired on May 3, 2009 and May 10, 2009, because the leases required Hess to be engaged in drilling on the property—not merely drilling operations—in order to extend their primary terms, and Hess was not engaged in drilling at the time. Hess contended that the leases did not expire because it was engaged in drilling operations on the property prior to the expiration of the leases' primary terms. The Andersons also requested that the district court certify a question to the North Dakota Supreme Court, namely:

Under mineral leases that provide for termination of the leases at the end of the primary term as to all of the leased lands except those lands on which lessee is “engaged in drilling”, does the phrase “engaged in drilling” require a lessee to have a drilling bit attached to a drilling rig penetrate the ground before the end of the primary term in order to extend the leases?

Anderson v. Hess Corp., 733 F.Supp.2d 1100, 1104 (D.N.D.2010).

The district court declined to certify the Andersons' question to the state supreme court because it determined that the question posed was not determinative of the proceeding. Id. The court also concluded that it need not engage in speculation or conjecture regarding state law in order to decide the parties' motions for summary judgment. Id.

With respect to the quiet title claim, the court first construed the lease terms “drilling” and “drilling operations,” pointing out the differences between the two terms. Specifically, the court noted that “drilling” requires the drill to actually penetrate the ground and bore a hole, while “drilling operations” require work preparatory to drilling, the capability to drill, and good faith intent to drill and complete the well. Id. at 1106. Having noted the differences between the two terms, the district court next determined that the North Dakota Supreme Court has indicated that the proper meaning of the phrase “drilling or reworking operations” includes “drilling operations” and “reworking operations” rather than “drilling” and “reworking operations.” Id. at 1106–07. The court further found that the plain language of each lease, and more particularly the habendum clause, supported an interpretation of the disputed language that includes “drilling operations” and “reworking operations.” Id. at 1107. The district court explained that the use of “operations” indicates that “drilling” and “reworking” are adjectives that modify the noun “operations.” Id. Thus the district court found the Andersons' contention that Hess had to be “engaged in drilling” to extend the leases “without merit.” Id.

After construing the lease terms, the district court determined that Hess was engaged in drilling operations at the end of the primary lease terms by virtue of its preparatory work. Id. at 1107–08. As a result, the district court granted Hess's motion for summary judgment and denied the Andersons' motion for summary judgment.

III

The Andersons contend that the district court erred in declining to submit their proffered question to the North Dakota Supreme Court, and that the district court's interpretation of the disputed lease language was speculative and conjectural. As a result, they ask this court to reverse the district court's interpretation of the disputed language and certify the following question to the North Dakota Supreme Court:

Under a mineral lease that provides for termination of the lease at the end of the primary term unless the lessee is then “engaged in drilling or reworking operations,” does the phrase “engaged in drilling or reworking operations” require a lessee to spud the well before the end of the primary term, in order to extend the lease?

We review a district court's decision regarding whether to certify a question of law...