Exxon Corp.. v. Emerald Oil & Gas Co.

• Decision Date: 01 April 2011
• Docket Number: No. 05–1076.,05–1076.
• Parties: EXXON CORPORATION and Exxon Texas, Inc., Petitioners,v.EMERALD OIL & GAS COMPANY, L.C. and Laurie T. Miesch, et al., Respondents.
• Court: Texas Supreme Court

348 S.W.3d 194

54 Tex. Sup. Ct. J. 761

EXXON CORPORATION and Exxon Texas, Inc., Petitioners,

v.EMERALD OIL & GAS COMPANY, L.C. and Laurie T. Miesch, et al., Respondents.

No. 05–1076.

Supreme Court of Texas.

Argued Feb. 13, 2007.Rehearing Granted Nov. 20, 2009.Delivered April 1, 2011.

Shannon H. Ratliff, Marla Diane Broaddus, Ratliff Law Firm, P.L.L.C., Karen L. Watkins, Patton G. Lochridge, W. Timothy George, McGinnis Lochridge & Kilgore, L.L.P., Austin, S. Jack Balagia Jr., Exxon Mobil Corporation, Byron C. Keeling, Keeling & Downes, P.C., and John E. O'Neill, Howrey, LLP, Houston, for Exxon Corporation.William J. Joseph Jr., Candace Beth Kaiser Eindorf, Howrey, L.L.P., Alice Oliver–Parrott, Alice Oliver–Parrott, P.C., Maria Teresa Arguindegui, Maria Teresa Arguindegui, P.C., Houston, Elana S. Einhorn, University of Texas School of Law, Austin, Deborah G. Hankinson, Hankinson Levinger LLP, Dallas, for Emerald Oil & Gas Company, L.P.William J. Joseph Jr., Candace Beth Kaiser Eindorf, Howrey, L.L.P., Hartley Hampton, Fibich Hampton & Leebron, Houston, Michael James Krueger, Sharpe & Krueger, Kingsville, for Laurie T. Miesch.Michael James Krueger, Sharpe & Krueger, Kingsville, for Other Interested Party Janie Miesch Robertson.

William Guy Arnott III, Winstead PC, Houston, for Amicus Curiae Texas Alliance of Energy Producers.John B. McFarland, Graves Dougherty Hearon & Moody, P.C., Austin, for Amicus Curiae Texas Land and Mineral Owners' Association.Everard A. Marseglia Jr., Liskow & Lewis, PLC, Houston, for Amicus Curiae Texas Oil & Gas Association.David P. Wilson, Darren L. Brown, Provost & Umphrey Law Firm, L.L.P., Beaumont, Eileen F. O'Neill, Ware, Jackson, Lee & Chambers, L.L.P., Houston, for Morgan Francis Dunn O'Connor.David P. Wilson, Provost & Umphrey Law Firm, L.L.P., Beaumont, for T. Michael O'Connor, Brien O'Connor Dunn, Kelly Dunn Scharr, Bridley Dunn Greeson, Dunn–O'Connor Family Trust, Nancy O'Connor.Zachary S. Brady, Zachary S. Brady, P.C., Lubbock, for Amicus Curiae Texas and Southwestern Cattle Raisers Association.William F. Warnick, Texas General Land Office, Austin, for Amicus Curiae Jerry Patterson.Justice WAINWRIGHT delivered the opinion of the Court.

After issuing our opinion, we granted the parties' motions for rehearing on November 20, 2009 and obtained further briefing from the parties. On December 17, 2010, we issued an opinion on rehearing and modified our judgment. Thereafter, the parties filed second motions for rehearing. Today, we deny the parties' motions, but withdraw our opinion of December 17, 2010 and substitute the following opinion. Our judgment remains unchanged from the one issued December 17, 2010.

In this oil and gas dispute, royalty owners and an oil and gas lessee allege that the previous lessee failed to fully develop oil and gas tracts near Refugio, Texas and sabotaged the wells before abandoning the lease. The lessee's claims at issue in this appeal are for negligent misrepresentation, fraud, and tortious interference with business opportunity. The royalty owners' claims are for statutory and common law waste, breach of alleged regulatory duty to plug wells properly, negligence, negligence per se, negligent misrepresentation, tortious interference with economic opportunity, breach of lease, and fraud. The trial court granted summary judgment on lessee's claims not subject to this appeal and directed a verdict against the lessee on its remaining claims and against the royalty owners on their claims for statutory waste, negligence, negligence per se, tortious interference, fraud, and negligent misrepresentation. The remaining royalty owner claims for statutory and common law waste and breach of contract went to verdict. The jury found in favor of the royalty owners. The court of appeals reversed the directed verdict and affirmed the jury verdict. 180 S.W.3d 299. We reverse and remand to the court of appeals. On December 17, 2010, we also issued our opinion on rehearing in the companion case of Exxon Corp. v. Emerald Oil & Gas Co., 331 S.W.3d 419 (Tex.2010) (reh'g op.).¹

I. FACTUAL AND PROCEDURAL BACKGROUND

The royalty owners consist of three families—the Miesches, the O'Connors, and the Dunns (collectively the Miesches).² They owned mineral interests on several thousand acres of land (the O'Connor Field or Field) in Refugio, Texas. In the 1950s, Humble Oil and Refining Company, a predecessor of Exxon Corporation and Exxon Texas, Inc. (collectively Exxon), began acquiring mineral leases from the royalty owners. Exxon derived its interests from four separate but similar mineral leases with the Miesches. The leases (collectively the Lease or the O'Connor Lease) included an atypical fifty percent royalty obligation and a stringent disclosure clause. During the term of the Lease, Exxon drilled 121 wells and produced at least 15 million barrels of oil and more than 65 billion cubic feet of gas, resulting in the payment of more than $43 million in royalties to the Miesches. In the early 1970s and later in the next decade, Exxon attempted to renegotiate a lower royalty because profitability of the operations was declining. As early as 1987, the royalty owners requested that Exxon provide them information and documentation to support Exxon's position that the field was being depleted and was no longer profitable at the fifty percent royalty. By 1989, Exxon had begun plugging some of the thirty-four wells remaining in operation. The Miesches sent a letter, dated August 30, 1990, advising Exxon “that in the event you [Exxon] plug and abandon any wells [in the O'Connor Field] which are producing or capable of producing minerals in paying quantities to [the royalty owners], Exxon will be sued under the terms of the lease and the common law, both for present breach of contract and anticipatory damages....”

Walker and McBroom, Inc., a potential operator for the Miesches whom they engaged to evaluate the amount of reserves remaining in the O'Connor Field, advised them by letter of September 4, 1990, that “Exxon has exhausted any value of the field to them, and created substantial environmental hazards” and suggested that the royalty owners pursue Exxon's geologic information of the Field to aid in its future development, “particularly if oil and gas prices substantially rise in the future.”

On September 12, 1990, the royalty owners demanded by letter that Exxon deliver all data and documents pertaining to the subject wells, “includ[ing] drilling, production, completion and re[-]completion data, well bore production or completion schematics or diagrams and flow line maps and surface facility diagrams or schematics.” In the same letter, the royalty owners warned that “plugging and abandonment of the [six] referenced wells would commit waste and would be contrary to public policy and laws” and that the letter “shall also be considered as formal demand not to plug the above referenced six wells, as such would cause us irreparable harm and commit waste.” The royalty owners further informed Exxon that they had “located a group of oil and gas companies that are willing to accept the plugging obligation” and assignment of the O'Connor Lease.

Initially, the royalty owners asserted that Exxon refused to provide any information, claiming that the information was proprietary. Later, Exxon claimed the information was too difficult to locate and retrieve. Then, Exxon agreed to provide the royalty owners a data room containing the requested information subject to a confidentiality agreement. The data room included a large quantity of information, but apparently did not contain the well logs for the plugged wells and did not contain Exxon's opinions and analysis interpreting the data.

Exxon ultimately concluded that it could no longer profitably afford the O'Connor Lease unless the royalty owners agreed to reduce the royalty obligation or assign the leases to third parties. When negotiations to lower the royalty obligation failed, Exxon continued plugging and abandoning the wells. As required by law, after Exxon plugged each of the wells, it filed a plugging report with the Texas Railroad Commission, the department that regulates oil and gas production. 16 Tex. Admin. Code § 3.14(b)(1) (R.R. Comm'n of Tex., Plugging).³ By letter dated August 16, 1991, Exxon notified the royalty owners that it had completed its plugging operations.

In 1993, after the Lease terminated, the royalty owners entered into a lease agreement with Pace West Production, Ltd. (Pace or Pace West), later known as Emerald Oil & Gas Company, L.C. (Emerald) ⁴, for approximately one-third of the acreage in the O'Connor Lease. In deciding whether to lease the land, Emerald reviewed Exxon's public filings for the Field, including the oil well plugging reports (W–3 forms) that Exxon filed with the Texas Railroad Commission. The W–3 filings seemed to indicate that Exxon properly plugged the wells. However, Emerald encountered problems from the beginning of its attempts to re-enter the plugged wells, including wellbores plugged with improperly cut casing ⁵ and other “junk” in the wells, and plugs in locations other than those listed on the reports. The term “junk” is a term of art used in the oil and gas industry to refer to non-drillable material such as steel or iron in a wellbore. Tarrant County Water Control & Imp. Dist. No. One v. Fullwood, 963 S.W.2d 60, 66 (Tex.1998) (per curiam); see 16 Tex. Admin. Code § 3.14(d)(10) (R.R. Comm'n of Tex., Plugging) (prohibiting, with exceptions, the placement of non-drillable material or junk in the wellbore during plugging operations). Rock Thomas, principal in Re–Entry People, the company hired by Emerald Oil & Gas to re-enter some of the plugged wells on the Lease, explained that “junk” is “something in [the wellbore] that you don't know what it is.” Testimony at trial indicated that nuts, bolts, fiberglass pipe, tubing, packers, environmental contaminants and other...