Concorde Res. Corp.. v. Kepco Energy Inc.

• Decision Date: 23 March 2011
• Docket Number: Division No. 4.,Released for Publication by Order of the Court of Civil Appeals of Oklahoma,No. 107.129,107.129
• Citation: 254 P.3d 734,2011 OK CIV APP 39
• Parties: CONCORDE RESOURCES CORPORATION, Plaintiff/Appellant,v.KEPCO ENERGY, INC., Williams Production Mid–Continent Company, Mahalo Energy (USA), Inc., Defendants/Appellees,Pyle, Carey and Collie, Inc., Smith, Smith and Smith, a general partnership, and Nancy Jackson Dawson, Defendants.
• Court: United States State Court of Criminal Appeals of Oklahoma. Court of Civil Appeals of Oklahoma

254 P.3d 734

2011 OK CIV APP 39

CONCORDE RESOURCES CORPORATION, Plaintiff/Appellant,

v.KEPCO ENERGY, INC., Williams Production Mid–Continent Company, Mahalo Energy (USA), Inc., Defendants/Appellees,Pyle, Carey and Collie, Inc., Smith, Smith and Smith, a general partnership, and Nancy Jackson Dawson, Defendants.

No. 107.129

Released for Publication by Order of the Court of Civil Appeals of Oklahoma

Division No. 4.

Court of Civil Appeals of Oklahoma, Division No. 4.

March 23, 2011.

Appeal from the District Court of McIntosh County, Oklahoma; Honorable Thomas M. Bartheld, Trial Judge.REVERSED AND REMANDED FOR FURTHER PROCEEDINGS.Donald W. Henson, Okmulgee, Oklahoma, for Plaintiff/Appellant, Concorde Resources Corporation.Gregory L. Mahaffey, Travis P. Brown, Raven V. McNeal–Noumane, Mahaffey & Gore, P.C., Oklahoma City, Oklahoma, for Defendant/Appellee, Kepco Energy, Inc.Stephen W. Elliott, Kline Kline Elliott & Bryant, P.C., Oklahoma City, Oklahoma, for Defendant/Appellee, Mahalo Energy (USA), Inc. [now Redbud E & P, Inc.].Mark Banner, Chace W. Daley, Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., Tulsa, Oklahoma, for Defendant/Appellee, Williams Production Mid–Continent Company.KEITH RAPP, Judge.

¶ 1 The plaintiff, Concorde Resources Corporation (Concorde), appeals an order granting summary judgment to the defendants, Kepco Energy, Inc. (Kepco), Williams Production Mid–Continent Company (Williams), and Mahalo Energy (USA), Inc. (Mahalo), and to the defendants, Pyle, Carey & Collie, Inc. (PCC), Smith, Smith and Smith, a general partnership (Smith) and Nancy Jackson Dawson (Dawson).¹ This appeal proceeds under the provisions of Okla. Sup.Ct. Rule 1.36, 12 O.S. Supp.2010, ch. 15, app. 1.

BACKGROUND

¶ 2 PCC, Smith and Dawson, or their predecessors, had previously leased mineral rights to another party and a gas well was drilled in 1981, which was shut-in in 1982. The well was originally named Pyle # 1 and renamed the Connors # 1. Concorde acquired this lease (“Original Lease”) and in 1990, Concorde acquired new oil and gas leases from PCC, Smith and Dawson, or their predecessors in title (New Leases).

¶ 3 In 1990, Concorde deepened the well. From that time to 2008, Concorde did not perform any other activities in connection with the well and expended no funds for operation or maintenance of the well. From 1990 to July of 2008, Concorde sold no gas from Connors # 1. Also, Concorde did no further exploration.²

¶ 4 Concorde states, without contradiction, that there was no pipeline connection available until July 2008. Concorde states that annual shut-in royalties were paid or tendered from 1993 to 2007.³ Since July 2008, according to the appellate record, Concorde sold gas from the well in at least July, August and September of 2008, in an amount of approximately $24,000.00.

¶ 5 In 2006, Kepco, and in 2007, Williams and Mahalo acquired oil and gas leases to the same properties as leased by Concorde.⁴ This resulted in a lawsuit filed by Concorde to quiet title and to obtain damages against only Kepco, Williams and Mahalo. Kepco, Williams and Mahalo counterclaimed to adjudicate Concorde's leases as expired and to quiet their respective titles.

¶ 6 Williams, alone, and Kepco and Mahalo, jointly, moved for summary judgment.⁵

¶ 7 Williams first contended that the New Leases acquired by Concorde had expired by their own terms because Concorde had not commenced drilling or commenced reworking operations for an existing well, which Williams asserts is required by the New Leases.⁶ Concorde's response is that its New Leases are for primary terms and the “continuous drilling” clause relates to the problem occurring when a lessor has begun drilling, but did not complete the operation before the primary term expired. Concorde argued that such clauses provide the opportunity to complete an operation notwithstanding expiration of the primary term.

¶ 8 All Appellees maintained that the New Leases expired because Concorde did not show that the only existing well was capable of producing in paying quantities. Concorde disputed this assertion. Concorde provided an affidavit that its employee checked the well over time and it always had pressure and the Appellees' information about pressure was erroneous because the well was turned off when they checked it. Concorde also provided an early estimate of reserves. Concorde also maintained that sales of gas in 2008, demonstrated the well's capability of production in paying quantities.

¶ 9 Last, all Appellees asserted that the New Leases were forfeited for breach of the Implied Covenant to Market for approximately seventeen years. Concorde argued that: (1) there was no pipeline or source to market the gas; (2) it was excused from the covenant by paying shut-in royalty; and (3) no demand was made by the lessees. The Appellees characterize a 1991 letter from Smith as a demand letter where Smith asked for a release if Concorde was not going to do any more work on the well. The Appellees also argued that a demand was not required because of the length of time involved.

¶ 10 The trial court granted summary judgment by order which was amended to include all trial court defendants.⁷ The original journal entry did not recite any findings or conclusions. Concorde appeals.

STANDARD OF REVIEW

¶ 11 Summary judgment is properly granted “when the pleadings, affidavits, depositions, admissions or other evidentiary materials establish that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Davis v. Leitner, 1989 OK 146, ¶ 9, 782 P.2d 924, 926. When reviewing the grant of summary judgment, this Court must view all inferences and conclusions to be drawn from the evidentiary materials in a light most favorable to the party opposing the motion. Id.

¶ 12 Although a trial court considers factual matters when deciding whether summary judgment is appropriate, its ultimate decision is purely legal: “whether one party is entitled to judgment as a matter of law because there are no material disputed factual questions.” Carmichael v. Beller, 1996 OK 48, ¶ 2, 914 P.2d 1051, 1053. Therefore, the standard of review on appeal is de novo. Id.

ANALYSIS AND REVIEW

A. Whether The Well Drilled Under The Old Lease Will Hold The New Leases.

¶ 13 As noted above, Concorde did not list the Old Lease as a basis for claiming any interest. Nevertheless, Concorde relies upon the fact that a well had been drilled under the Old Lease and was in place when it acquired its New Leases. Concorde maintains that this well was capable of producing in paying quantities and therefore satisfied the provisions of its New Leases so that the New Leases would remain in effect during the primary term “and as long thereafter as oil or gas, or either of them, is produced from said lease by the lessee.”

¶ 14 Williams, the proponent, cites no authority in its summary judgment motion for the proposition that an existing well cannot hold a new lease, if that well meets the criteria for holding a lease. Moreover, the function of a lease's “continuous drilling clause,” such as the one in Concorde's leases and referenced by Williams, is to allow completion of work commenced, but not finished, during the primary term. Steinkuehler v. Hawkins Oil and Gas, Inc., 1986 OK CIV APP 9, ¶ 11, 728 P.2d 520, 522 (Rapp, J. Concurring).

¶ 15 Therefore, Williams argument on this point is rejected. In addition, this contention cannot form the basis for entry of summary judgment because Williams has not demonstrated that it is entitled to judgment as a matter of law, which is a requisite for summary judgment. Rule 13(e), Rules For District Courts, 12 O.S. Supp.2010, 12 O.S. ch. 2, app.⁸

B. Whether New Leases Expired For Not Being Capable Of Production In Paying Quantities.

¶ 16 The New Leases contain habendum clauses that provide for secondary terms “as long thereafter as oil or gas, or either of them, is produced.” The terms “produced” and “produced in paying quantities” have substantially the same meaning. Pack v. Santa Fe Minerals, 1994 OK 23, ¶ 8, 869 P.2d 323, 326. The meaning of that phrase is set out in Smith v. Marshall Oil Corp., 2004 OK 10, ¶ 9, 85 P.3d 830, 833.

In the state of Oklahoma, when the term “produced” is used in a “thereafter” provision of an habendum clause, its meaning is that of “production in paying quantities.” Production in paying quantities is a term defined by Oklahoma case law to mean “production of quantities of oil and gas sufficient to yield a profit to the lessee over operating expenses, even though the drilling costs or equipping costs are never recovered, and even if the undertaking as a whole may result in a loss to the lessee.” The phrase denotes a return in excess of “lifting expenses,” costs associated with lifting the oil from the ground after the well has been drilled (citations omitted).

¶ 17 At this juncture of the analysis, the focus is upon the ability of the well to produce in paying quantities rather than actual production. Pack, 1994 OK 23, ¶ 10, 869 P.2d at 327. Moreover, this focus is shaped by the summary judgment standard of review. Here, Williams, Kepco and Mahalo point to the total absence of production of any sort for seventeen years, together with their assessment of the physical condition of the equipment and lack of well pressure. Concorde disputes the Appellees' characterization of the physical condition of the well equipment and maintains that the well did, in fact, have sufficient pressure. Concorde submitted its reserves estimate. Concorde also argued that the fact it produced and sold approximately $24,000.00 of gas in three months, in 2008, shows that the well was capable of production in paying quantities.

¶ 18 This Court concludes that there are questions of fact regarding the ability of the well to produce in paying quantities. Thus, summary judgment cannot stand on the ground that the well was incapable of...