Conocophillips Co. v. Lyons

• Decision Date: 24 August 2012
• Docket Number: No. 32,624.,32,624.
• Court: New Mexico Supreme Court
• Parties: CONOCOPHILLIPS COMPANY and Burlington Resources Oil & Gas Company, L.P., Plaintiffs–Appellees, v. Patrick H. LYONS, Commissioner of Public Lands of the State of New Mexico, Defendant–Appellant.

299 P.3d 844

CONOCOPHILLIPS COMPANY and Burlington Resources Oil & Gas Company, L.P., Plaintiffs–Appellees,

v.Patrick H. LYONS, Commissioner of Public Lands of the State of New Mexico, Defendant–Appellant.

No. 32,624.

Supreme Court of New Mexico.

Aug. 24, 2012.

The Branch Law Firm, Turner W. Branch, Law Offices of Brian K. Branch, Brian K. Branch, Albuquerque, NM, Gary K. King, Attorney General, Robert Allen Stranahan, IV, Katherine Mary Moss, Santa Fe, NM, Susman Godfrey, L.L.P., Thomas Wallace Patterson, Houston, TX, for Appellant.

Rothstein, Donatelli, Hughes, Dahlstrom, Schoenburg & Bienvenu, L.L.P., Kristina Elena Martinez, Campbell Trial Law, L.L.C., Michael Campbell, Holland & Hart, L.L.P., Mark F. Sheridan, Robert Jackson Sutphin, Jr., Santa Fe, NM, for Appellees.

OPINION

MAES, Chief Justice.

{1} This litigation stems from a dispute over the proper calculation of royalty payments on state oil and gas leases. In New Mexico, the Commissioner of Public Lands (Commissioner) “is hereby authorized to execute and issue in the name of the state of New Mexico, as lessor, leases for the exploration, development and production of oil and natural gas, from any lands belonging to the state of New Mexico, or held in trust by the state under grants from the United States of America.” NMSA 1978, § 19–10–1 (1953). In a typical oil and gas lease, lessees are granted the right to extract and sell oil and gas derived from State lands; in return, lessees pay the State a royalty. Oil and gas leases may specify payment of royalty upon a number of different measures; among them are net proceeds, gross proceeds and market value. See Brian S. Wheeler, Deducting Post–Production Costs When Calculating Royalty: What Does the Lease Provide?, 8 Appalachian J.L. 1, 6 (2008).

{2} In New Mexico the language of the State oil and gas leases is prescribed by statute. Over the years, the Legislature has enacted several versions of the statutory oil and gas lease, and Lessees have entered into “hundreds” of oil and gas leases with the State. Specifically, the New Mexico Legislature enacted statutory oil and gas leases in 1919, 1925, 1927, 1929, 1931, 1945, 1947, and 1984. See 1919 N.M. Laws, ch. 98, § 1; 1925 N.M. Laws, ch. 137, §§ 1–13; 1927 N.M. Laws, ch. 46, §§ 1–4; 1929 N.M. Laws, ch. 125, § 1; 1931 N.M. Laws, ch. 18, § 2; 1945 N.M. Laws, ch. 111, § 1; 1947 N.M. Laws, ch. 200, § 1; 1985 N.M. Laws, ch. 195, § 3.

{3} The present appeal concerns the royalty clauses contained in the 1931 and the 1947 statutory lease forms. 1931 N.M. Laws, ch. 18, § 2 (1931 lease) and 1947 N.M. Laws, ch. 200, § 1 (1947 lease). The royalty clause of the 1931 lease states, in relevant part:

2. The lessee agrees to pay the lessor the one-eighth of the net proceeds derived from the sale of gas from each well. If casing-head gas produced from said land is sold by the lessee, the lessee shall pay the lessor as royalty one-eighth of the net proceeds of said sale; if casing-head gas produced from said lands is utilized by the lessee otherwise than for carrying on the lessee's operations for producing oil or gas from said lands, then the lessee shall pay the lessor the market value in the field of the equal one-eighth part of the casing-head gas so utilized at the time of such utilization. [RP 2352]

1931 N.M. Laws, ch. 18, § 2. The royalty clause of the 1947 statutory lease form provides, in relevant part:

2. Subject to free use without royalty, as hereinbefore provided, the lessee shall pay the lessor as royalty one-eighth of the cash value of the gas, including casinghead gas, produced and saved from the leased premises and marketed or utilized, such value to be equal to the greater of the following amounts:

(a) the net proceeds derived from the sale of such gas in the field, or

(b) five cents ($.05) per thousand cubic feet (m.c.f.) ...; Provided, however, the cash value for the royalty purposes of carbon dioxide gas and of hydrocarbon gas delivered to a gasoline plant for extraction of liquid hydrocarbons shall be equal to the net proceeds derived from the sale of such gas, including any liquid hydrocarbons recovered therefrom. [RP 2362]

1947 N.M. Laws, ch. 200, § 1. Both the 1931 lease and 1947 lease specify that the payment of royalty is to be calculated as a percentage of the “net proceeds” resulting from the sale of gas. By definition, “net proceeds” constitutes “the sum remaining from gross proceeds of sale minus payment of expenses.” Wheeler, supra, at 6. Therefore, it is clear that the statutory lease forms contemplate the deduction of certain costs.

{4} During 2005 and 2006, Commissioner audited ConocoPhillips Company's (ConocoPhillips) and Burlington Resources Oil & Gas Company's (Burlington) (together, Lessees) royalty payments. Following the Audit, Commissioner notified Lessees that they had been underpaying their royalty obligations and issued them assessments for the underpayment.

{5} Commissioner claimed that pursuant to the terms of the statutory lease forms Lessees could not deduct the post-production costs necessary to prepare the gas for the commercial market when calculating their royalty payments. Commissioner claimed that the improper deductions for post-production costs resulted in ConocoPhillips underpaying royalties by approximately $18.9 million and Burlington underpaying by approximately $5.6 million. In response to Commissioner's audit and assessments, Lessees filed a complaint in the district court seeking a declaration that Commissioner's assessment of additional royalty constituted a deprivation of due process, an unconstitutional impairment of contract, and breach of contract. In addition, Lessees claimed that Commissioner had exceeded his constitutional and statutory powers by issuing the assessments and had effectively usurped legislative power by seeking royalty payments under calculation methods not approved by the Legislature. In response, Commissioner alleged a host of counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of the implied covenant to market. In addition, Commissioner sought a declaratory judgment, an accounting, an injunction, and the cancellation of leases. Lessees sought, and the district court granted, summary judgment on several matters.

{6} This appeal centers around three orders granting summary judgment on behalf of Lessees and a fourth order denying Commissioner's motion for reconsideration of the district court's previous dismissal of his counterclaim for breach of the implied covenant to market. The district court certified these orders for interlocutory appeal pursuant to NMSA 1978, Section 39–3–4 (1999). The Court of Appeals then certified this appeal as a matter of “substantial public interest” to this Court pursuant to NMSA 1978, Section 34–5–14(C)(2) (1972) and Rule 12–606 NMRA. We accepted certification, and we now address the district court's four certified orders.

{7} In the first order, the district court granted Lessees' motion for summary judgment on the meaning of three provisions in the 1931 and 1947 leases: the “net proceeds” royalty obligation, the “free use” clause, and Lessees' obligation to pay royalty on drip condensate. In the second order, the district court granted Lessees' motion for summary judgment on the meaning of the maximum price clause found in the 1947 lease form. In the third order, the district court denied Commissioner's motion for reconsideration of the district court's previous dismissal of Commissioner's claim for breach of the implied covenant to market. In the last order, the district court granted Lessees' motion for summary judgment on the deduction of reasonable costs of affiliated transactions in calculating royalty in State oil and gas leases, finding that the cost of post-production services provided by Lessees' affiliates is deductible to the extent it is “reasonable.”

STANDARD OF REVIEW

{8} Because three of the certified orders deal with motions for summary judgment, we first address the standard of review applicable to those motions. This Court reviews “a district court's decision to grant summary judgment de novo.” Maralex Res., Inc. v. Gilbreath, 2003–NMSC–023, ¶ 8, 134 N.M. 308, 76 P.3d 626. Summary judgment is proper when “there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law.” Self v. United Parcel Serv., Inc., 1998–NMSC–046, ¶ 6, 126 N.M. 396, 970 P.2d 582. We review “the pleadings, affidavits, and depositions presented for and against a motion for summary judgment in a light most favorable to the nonmoving party.” Deaton v. Gutierrez, 2004–NMCA–043, ¶ 12, 135 N.M. 423, 89 P.3d 672.

{9} The district court found certain disputed contractual language contained in the 1931 and 1947 lease forms to be “unambiguous.” Whether contractual terms are ambiguous is a question of law, subject to de novo review. Envtl. Control, Inc. v. City of Santa Fe, 2002–NMCA–003, ¶ 14, 131 N.M. 450, 38 P.3d 891. “The standard to be applied in determining whether a contract [term is ambiguous and] is subject to equally logical but conflicting interpretations is the same standard applied in a motion for summary judgment.” Randles v. Hanson, 2011–NMCA–059, ¶ 26, 150 N.M. 362, 258 P.3d 1154 (internal citation omitted). Courts will grant summary judgment and “interpret the meaning as a matter of law” when the “evidence presented is so plain” that it is only reasonably open to one interpretation. Id. ¶ 26. If, however, a court determines that the contract is “reasonably and fairly” open to multiple constructions, then “an ambiguity exists,” summary judgment should be denied, and the jury should resolve all “factual issues presented by the ambiguity.” Id.

{10} In making the threshold determination regarding ambiguity, courts may consider “evidence of the circumstances surrounding the making of the contract and of any relevant usage of trade, course of...