Eog Res. Inc v. Chesapeake Energy Corp.

• Decision Date: 29 April 2010
• Docket Number: No. 09-30363.,09-30363.
• Citation: 605 F.3d 260
• Parties: EOG RESOURCES, INC., Plaintiff-Appellant,v.CHESAPEAKE ENERGY CORP.; Chesapeake Operating, Inc.; Chesapeake Louisiana LP, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

605 F.3d 260

EOG RESOURCES, INC., Plaintiff-Appellant,v.CHESAPEAKE ENERGY CORP.; Chesapeake Operating, Inc.; Chesapeake Louisiana LP, Defendants-Appellees.

No. 09-30363.

United States Court of Appeals Fifth Circuit.

April 29, 2010.

COPYRIGHT MATERIAL OMITTED

Robert Louis Theriot (argued), Liskow & Lewis, Houston, TX, for Plaintiff-Appellant.

Patrick Stephen Ottinger (argued), David Kroll McCrory, Ottinger Hebert, L.L.C., Lafayette, LA, for Defendants-Appellees.

Appeal from the United States District Court for the Western District of Louisiana.

Before REAVLEY, CLEMENT and SOUTHWICK, Circuit Judges.

EDITH BROWN CLEMENT, Circuit Judge:

Appellant EOG Resources, Inc. (“EOG”) and Appellees (collectively, “Chesapeake”) own mineral leases in a unitized pool of natural gas in Bossier Parish, Louisiana. In 2006, Chesapeake drilled three wells without obtaining EOG's permission, in alleged violation of an Operating Agreement between the two. EOG filed suit for breach of contract. Chesapeake argued that it did not breach the Operating Agreement and that the suit was an impermissible collateral attack on orders of the Louisiana Commissioner of Conservation. We reverse the judgment of the district court that the suit was an impermissible collateral attack, vacate the district court's finding as to breach of contract, and remand for further proceedings.

FACTS AND PROCEEDINGS

EOG and Chesapeake each own mineral leases in Section 18 of Bossier Parish, Louisiana and are successors in interest to a 1957 Operating Agreement that formed a joint unit for development of the two leases. Beneath Section 18 are three natural gas zones, as explained by the district court:

The Hosston (Travis Peak) Zone in the Sligo Field, Bossier Parish, Louisiana, was defined in the Louisiana Office of Conservation Order No. 8-B, effective September 1, 1956. That order, as amended and supplemented by the 8-B Series of Orders, established rules and regulations and created drilling and production units for the exploration for and production of gas and condensate from the Hosston (Travis Peak) Zone in the Sligo Field, Bossier Parish, Louisiana. One such unit was a 640-acre unit designated as HOSS TP SUR comprised entirely of Section 18.

The Cotton Valley “D” Zone in the Sligo Field, Bossier Parish, Louisiana, was defined in the Louisiana Office of Conservation Order No. 8-B, effective September 1, 1956. That order, as amended and supplemented by the 8-B Series of Orders, established rules and regulations and created drilling and production units for the exploration for and production of gas and condensate from the Cotton Valley “D” Zone in the Sligo Field, Bossier Parish, Louisiana. One such unit was a 640-acre unit designated as CV D SUAA comprised entirely of Section 18.

The Lower Cotton Valley Zone, Reservoir A, in the Sligo Field, Bossier Parish, Louisiana was defined in the Louisiana Office of Conservation Order No. 8-K, effective October 16, 1990. That order, as amended and supplemented by the 8-K Series of Orders, established rules and regulations and created drilling and production units for the exploration for and production of gas and condensate from the Lower Cotton Valley Zone, Reservoir A, in the Sligo Field, Bossier Parish, Louisiana. One such unit was a 640-acre unit designated as LCV RA SUB comprised entirely of Section 18.

EOG Res., Inc. v. Chesapeake La., No. 07-1246, 2009 WL 891891, at *1 (W.D.La. Mar. 31, 2009). The Operating Agreement covers and affects the parties' “gas and gas rights” in the first and second zones, but not the third. Chesapeake, which holds a 62.5 percent share of the zones, was named “Operator” of the Agreement, with authority to “manage, develop, and operate said leases” subject to the Operating Agreement. The Operating Agreement contains a provision requiring the Operator to obtain the consent of EOG, the Non-Operator, prior to drilling:

No additional well shall be drilled by Operator for the Joint Account unless and until mutually agreed upon in writing by the parties hereto, and no expenditure shall be made by Operator as to any one project or item in excess of the sum of Five Thousand ($5000.00) without the written consent of the Non-Operator....

The Operating Agreement defines “Joint Account” as “the combined interest of the parties” in the unit.

The Operating Agreement governed the parties' development of Section 18 for 50 years. In 2006, Chesapeake filed applications with the Louisiana Office of Conservation seeking to designate alternate unit wells for, among other units, the HOSS TP SUR, the CV D SUAA, and the LCV RA SUB. The Commissioner of Conservation held hearings on the proposed alternate wells in 2006. EOG did not attend the hearings despite receiving notice. After the hearings, the Commissioner issued several orders permitting the drilling of the alternate wells at issue. These orders were each “issued and promulgated by the Commissioner ... as being reasonably necessary to conserve the natural resources of the State, to prevent waste ..., to avoid the drilling of unnecessary wells, and otherwise to carry out” the laws of the State. The Commissioner found that it was “reasonable and in the interest of conservation to permit [Chesapeake] to drill, designate and utilize” the proposed alternate wells. The Commissioner also found that the wells were “necessary and in the interest of conservation” and would efficiently drain the relevant unit.

Meanwhile, Chesapeake sent three letters to EOG proposing to drill three alternate wells pursuant to the Operating Agreement: the Chatman 18-5 Alternate Well, the R.O. Roy 18-8 Alternate Well, and the R.O. Roy 18-9 Alternate Well. These wells were all located in Section 18 and were alternate wells slated to produce gas from all three of the zones described above. EOG never provided written consent for the three wells, but there is some indication in the record that employees of EOG raised objections on its behalf in conversations with Chesapeake representatives. On May 14, 2007, Chesapeake withdrew its proposals to drill the wells pursuant to the Operating Agreement and re-proposed drilling the wells in accordance with provisions of Title 30, Section 10 of the Louisiana Revised Statutes. EOG objected by letter in June 2007. Nonetheless, Chesapeake drilled and completed the three wells. All three were drilled to the depth of the Lower Cotton Valley zone and completed in the Hosston (Travis Peak) and Cotton Valley “D” zones.

Chesapeake suspended EOG's share of revenues from these new wells and offset EOG's portion of the drilling and completion costs. In addition, Chesapeake offset an additional 100 percent risk fee attributable to the wells and completion costs allocable to the Lower Cotton Valley Zone, Reservoir A, which is not subject to the Operating Agreement. This suit followed. EOG argues that its agreement to pay costs is limited by the provisions of the Operating Agreement, including the consent requirement, and that having breached this provision, Chesapeake cannot enforce its right to collect development costs. EOG seeks a declaratory judgment that Chesapeake breached the Operating Agreement and wrongfully withheld its 37.5 percent share of development proceeds. Chesapeake argues that it did not breach the Operating Agreement and that EOG's suit constitutes an impermissible collateral attack on orders of the Commissioner of Conservation.

The district court deferred cross-motions for summary judgment and held a one-day bench trial. At the close of EOG's case, Chesapeake moved for and was granted a Judgment on Partial Findings pursuant to Rule 52(c). The district court issued a Memorandum Ruling containing findings of fact and conclusions of law, and this appeal followed.

STANDARD OF REVIEW

On appeal of a judgment entered pursuant to Federal Rule of Civil Procedure 52(c), findings of fact are reviewed for clear error and conclusions of law de novo. See Samson v. Apollo Res., Inc., 242 F.3d 629, 632-33 (5th Cir.2001). The interpretation of a contract is a matter of law reviewed de novo. Huggs, Inc. v. LPC Energy, Inc., 889 F.2d 649, 651 (5th Cir.1989). In this diversity case we apply Louisiana law.

DISCUSSION

A. Collateral Attack

Louisiana Revised Statutes §§ 30:1 et seq. create a Commissioner of Conservation to prevent the waste of the State's oil and gas resources. The Commissioner has “authority over all persons and property necessary to enforce effectively the provisions of this Chapter and all other laws relating to the conservation of oil or gas.” Id. § 30:4(A). Prior to drilling, a tract owner must obtain a determination from the Commissioner that a proposed well will not waste oil and gas reserves. See Nunez v. Wainoco Oil & Gas Co., 488 So.2d 955, 961 (La.1986) cert. denied, 479 U.S. 925, 107 S.Ct. 391, 93 L.Ed.2d 345 (1986) (describing the Commissioner's powers). The Commissioner has specific powers to

make such inquiries as he thinks proper to determine whether or not waste [of oil and gas] exists or is imminent ... [and] the authority to collect data; to make investigations and inspections; to examine properties, leases, papers, books, and records; to examine, survey, check, test, and gauge oil and gas wells, tanks, refineries, and modes of transportation; to hold hearings; to provide for the keeping of records and the making of reports; to require the submission of an emergency phone number by which the operator may be contacted in case of an emergency; and to take any action [to enforce his powers].

La.Rev.Stat. Ann. § 30:4(B). After notice and hearing, the Commissioner can issue a broad range of orders and regulations aimed at preventing waste. Id. § 30.4(C).

The Commissioner has the obligation to declare drilling units in oil and gas fields i.e., the maximum area that can be efficiently and economically drained by one well. Id. § 30:9(B). Wells may only be drilled within the drilling unit at the site designated by the Commissioner. Id. §...