Bice v. Petro-Hunt, L.L.C.

• Decision Date: 09 July 2009
• Docket Number: No. 20080265.,20080265.
• Parties: Virginia BICE, Helen A. and Hillis J. Bice, Helen A. Bice Life Estate, Naomi Brew, Patricia Burian Ingman, Myran S. and Mary C. Burian, Estate of Steve Burian, Arnold and Sharon Burian, Connie F. Burian Heck, Jane Elizabeth Kiker, Elmer L. Glovatsky, Timothy Glovatsky, Shirley and Lawrence W. Jablonsky, Leo and Selina Kaiser, Russell L. Kiker, Russell L. Kiker Trust, Sally A. Kiker Trust, Ardyce Burian Palaniuk, Irene E. Scott Mineral Trust, Jane Scott, William D. and Agnes M. Scott, Ervin and Mildred Waldie, Gregory Lynn Waldie, Mary M. Weber, Martin A. Weber, Jerry Zabalotny, William D. Walters, Jr., Imperial Oil Company c/o William D. Walters, Jr., Lillian Hardcastle a/k/a Lillian Kaiser, Robert T. Smith, Carrie W. Smith, Plaintiffs and Appellants v. PETRO-HUNT, L.L.C., J.W. Beavers, Jr., as Trustee of William Herbert Hunt Trust Estate, Defendants and Appellees.
• Court: North Dakota Supreme Court

768 N.W.2d 496

2009 ND 124

Virginia BICE, Helen A. and Hillis J. Bice, Helen A. Bice Life Estate, Naomi Brew, Patricia Burian Ingman, Myran S. and Mary C. Burian, Estate of Steve Burian, Arnold and Sharon Burian, Connie F. Burian Heck, Jane Elizabeth Kiker, Elmer L. Glovatsky, Timothy Glovatsky, Shirley and Lawrence W. Jablonsky, Leo and Selina Kaiser, Russell L. Kiker, Russell L. Kiker Trust, Sally A. Kiker Trust, Ardyce Burian Palaniuk, Irene E. Scott Mineral Trust, Jane Scott, William D. and Agnes M. Scott, Ervin and Mildred Waldie, Gregory Lynn Waldie, Mary M. Weber, Martin A. Weber, Jerry

Zabalotny, William D. Walters, Jr., Imperial Oil Company c/o William D. Walters, Jr., Lillian Hardcastle a/k/a Lillian Kaiser, Robert T. Smith, Carrie W. Smith, Plaintiffs and Appellants v. PETRO-HUNT, L.L.C., J.W. Beavers, Jr., as Trustee of William Herbert Hunt Trust Estate, Defendants and Appellees.

No. 20080265.

Supreme Court of North Dakota.

July 9, 2009.

Owen L. Anderson (argued), Norman, OK, Ronald H. McLean (on brief) and Jane L. Dynes (appeared), Serkland Law Firm, Fargo, ND, Marvin L. Kaiser (on brief), Kaiser Law Firm, Williston, ND, Michael J. Maus (appeared), Hardy, Maus & Nordsven, P.C., Dickinson, ND, for plaintiffs and appellants.

John W. Morrison, Jr. (argued), Crowley Fleck PLLP, Bismarck, ND, for defendants and appellees.

Debra L. Hoffarth (on brief), Pringle & Herigstad, Minot, ND, amicus curiae.

CROTHERS, Justice.

[¶ 1] Plaintiffs, proceeding as a class, appeal from the district court's order granting Petro-Hunt, L.L.C., summary judgment. We affirm, concluding the district court did not err in granting Petro-Hunt summary judgment.

I

[¶ 2] The Little Knife Field was discovered in 1976 by Gulf Oil Corporation ("Gulf"). In the late 1970s, Gulf built the Little Knife Gas Plant to process the sour casinghead gas produced from the Little Knife wells. The Little Knife Gas Plant removes hydrogen sulfide and liquid hydrocarbons from the casinghead gas; the residue gas and other plant products are then sold at or downstream of the plant tailgate. In the early 1980s, a dispute regarding how to value the gas for royalty purposes arose between Gulf and a number of royalty owners. In 1983, the parties entered a settlement agreement which incorporated by reference a separate agreement between Gulf and the North Dakota Tax Commissioner regarding the value of gas for tax purposes. The 1983 settlement agreement stated the royalty for the casinghead gas would be determined by adding all of the sources of revenue from the sale of gas and gas products and subtracting from that total certain costs associated with processing the gas.

[¶ 3] As Gulf's successor by merger, Chevron acquired the Little Knife Gas Plant and its interests in the Little Knife Field in 1985. Chevron sold the Little Knife Gas Plant and its interests in the Little Knife Field to the William Herbert Hunt Trust Estate in 1992. The William Herbert Hunt Trust Estate conveyed its interests in the Little Knife Gas Plant and the Little Knife Field to Petro-Hunt, L.L.C., in 1997.

[¶ 4] Since acquiring its interest in the Little Knife Gas Plant and the Little Knife Field, Petro-Hunt has paid royalty on the casinghead gas on the same basis to each royalty owner regardless of the royalty clause in each owner's lease. The royalty clauses in each royalty owner's lease are not identical, but it is undisputed that the gas royalty clauses are substantially similar and call for gas royalty payments to be calculated based on the market value of the gas at the well.

[¶ 5] In 2001, royalty owners brought suit against Petro-Hunt asserting that underpaid royalties are due to them because Petro-Hunt deducts post-wellhead costs incurred to render the gas marketable. The royalty owners were certified as a Class in 2004. See Bice v. Petro-Hunt, L.L.C., 2004 ND 113, 681 N.W.2d 74. The Class is defined as "[a]ll persons who own, or have owned, any minerals and/or royalty interests or overriding royalty interests located within the Little Knife Field of Dunn, Billings and McKenzie Counties of North Dakota from which gas was processed at the Little Knife Gas Plant."

[¶ 6] In February 2007, Petro-Hunt moved for summary judgment, and the Class also requested partial summary judgment in its favor. On April 30, 2007, the district court granted Petro-Hunt partial summary judgment, determining royalties should be calculated based upon the work-back method. The district court stated that "[b]ecause the gas here has no discernible market value at the well, commercially reasonable processing costs can be deducted before royalties are calculated." The district court refused to rule on the remaining issues because discovery was not complete. After discovery was completed, Petro-Hunt again moved for summary judgment. In July 2008, the district court granted Petro-Hunt summary judgment on the remaining issues.

II

[¶ 7] The Class argues the district court erred as a matter of law in granting Petro-Hunt summary judgment. "Summary judgment is appropriate when either party is entitled to judgment as a matter of law, and no dispute exists as to either the material facts or the inferences to be drawn from undisputed facts, or resolving the factual disputes would not alter the result." Ward v. Bullis, 2008 ND 80, ¶ 14, 748 N.W.2d 397. "Whether a grant of summary judgment was proper is a question of law reviewed de novo by this Court." Red River Wings, Inc. v. Hoot, Inc., 2008 ND 117, ¶ 16, 751 N.W.2d 206. The party seeking summary judgment has the burden of "showing there is no genuine dispute regarding the existence of a material fact." Buchholz v. Barnes County Water Bd., 2008 ND 158, ¶ 15, 755 N.W.2d 472. We have stated that:

"The party opposing the [summary judgment] motion, however, may not simply rely upon the pleadings or upon unsupported, conclusory allegations. Rather, the party resisting the motion must set forth specific facts by presenting competent, admissible evidence, whether by affidavit or by directing the court to relevant evidence in the record, demonstrating a genuine issue of material fact."

Id. (internal citations omitted). "On appeal, the evidence must be viewed in the light most favorable to the opposing party, and that party must be given the benefit of all favorable inferences." Hurt v. Freeland, 1999 ND 12, ¶ 7, 589 N.W.2d 551.

A

[¶ 8] Gas obtained from the Little Knife Field is sour gas which contains hydrogen sulfide and other liquid hydrocarbons. To make the sour gas into sweet gas, which is a usable marketable product, the hydrogen sulfide is extracted from the sour gas. The Little Knife Gas Plant extracts the hydrogen sulfide from the sour gas, and the residue gas and other plant products are sold at or downstream from the tailgate of the Little Knife Gas Plant. Petro-Hunt asserts it can deduct the expenses incurred to make the sour gas marketable sweet gas before calculating the royalty due to the Class because the leases require it to pay royalty on the "market value [of the gas] at the well."

[¶ 9] The district court agreed with Petro-Hunt and granted its motion for summary judgment. In determining summary judgment was appropriate, the district court stated that in North Dakota the work-back method is used to calculate royalties when the lease states the royalties should be based upon the market value of the gas at the well. The court continued by saying that "[i]n accordance with ... [the work-back] method royalties should be based on the fair market value of the gas at the time of production and should be calculated after processing costs have been deducted from gross sales revenues."

[¶ 10] The Class argues the court erred as a matter of law in determining post-production costs could be deducted before royalties are calculated. The Class asks this Court to adopt the first marketable product rule, requiring Petro-Hunt to incur the costs to make the casinghead gas marketable. The Class claims the lease language "market value at the well" supports an adoption of the first marketable product rule because the casinghead gas produced at the wells is not marketable until after it is processed. Thus, the Class argues the logical interpretation of the lease language is to pay royalty on the market value of the gas after it has been made marketable.

[¶ 11] "When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone if possible." N.D.C.C. § 9-07-04. A contract must be construed as a whole to give effect to each provision if reasonably practicable. N.D.C.C. § 9-07-06. "The words of a contract are to be understood in their ordinary and popular sense rather than according to their strict legal meaning, unless used by the parties in a technical sense, or unless a special meaning is given to them by usage, in which case the latter must be followed." N.D.C.C. § 9-07-09.

[¶ 12] Both parties argue the term "market value at the well" is not ambiguous. However, the Class claims that if we do not accept their interpretation of the term "market value at the well," then the term is ambiguous. We have stated the terms of the lease, the nature of the claimed deductible items and the type of royalty determine whether post-production costs are deductible prior to calculating the royalty. West v. Alpar Res., Inc., 298 N.W.2d 484, 490 (N.D.1980) (citation omitted).

[¶ 13] The major treatises on oil and gas law demonstrate the unsettled nature of the law concerning the interpretation of the term "market value at the well." Currently, the majority of states interpret the term "market value at the well" to mean royalty is calculated based on the value of the gas at the wellhead. Byron C. Keeling & Karolyn King Gillespie, The First Marketable Product Doctrine: Just What is the Product?, 37 St. Mary's L.J. 1, 51 (2005); Edward B. Poitevent, II, Post-Production Deductions from Royalty, 44 S. Tex. L.Rev. 709, 716 (2003)...