Kerr-Mcgee Corp. v. Helton

• Decision Date: 30 January 2004
• Docket Number: No. 02-0356.,02-0356.
• Court: Texas Supreme Court
• Parties: KERR-McGEE CORPORATION, et al. v. Jimmy HELTON, et al.

133 S.W.3d 245

KERR-McGEE CORPORATION, et al. v. Jimmy HELTON, et al.

No. 02-0356.

Supreme Court of Texas.

Argued January 22, 2003.

Decided January 30, 2004.

Rehearing Denied May 7, 2004.

J. Harrell Feldt, Vinson & Elkins, Houston, S. Tom Morris, Underwood Wilson Berry Stein & Johnson, P.C., Amarillo, for petitioner.

Robert D. Lemon, Guy Kelly Cooksey, Otis C. Shearer, Lemon Shearer Phillips & Good, P.C., Perryton, for respondent.

Justice SMITH delivered the opinion of the Court, in which Chief Justice PHILLIPS, Justice HECHT, Justice OWEN, Justice JEFFERSON, Justice SCHNEIDER, Justice WAINWRIGHT, and Justice BRISTER joined.

Oil and gas lessors brought suit against lessee for breach of the implied covenant to protect the leasehold against drainage. The case was tried to the bench. At trial, lessors' sole evidence of the amount of damages was the expert testimony of Michael Riley. After cross-examining Riley, lessee objected and moved to strike Riley's testimony as unreliable. The trial court denied the motion and, at the close of trial, rendered judgment for lessors. Concluding, among other things, that the evidence was legally sufficient to support the damages award, the court of appeals affirmed. 134 S.W.3d 204, 2002 WL 110433 We conclude that Riley's testimony regarding the amount of damages is unreliable and is therefore no evidence. Accordingly, because lessors failed to present any competent evidence on an essential element of their cause of action, we reverse the court of appeals' judgment and render judgment that lessors take nothing.

I

Kerr-McGee Corporation acquired sixty-one oil and gas leases from the respondents, who consist of sixty-nine individuals, estates, and trusts (collectively referred to as "Helton"). The leases cover all of Section 10, Block R.E., Roberts and Eddieman Survey, in Wheeler County.¹ Kerr-McGee pooled the leases effective March 28, 1994. Kerr-McGee also owned leases in several sections of the West Park Field surrounding section 10.²

In September 1993, Kerr-McGee began drilling a wildcat well in section 17, which is directly south of section 10. This well, Holmes 17-1, was a deep gas well in the West Park Field, Upper Morrow formation of the Anadarko Basin. It was completed on December 4, 1993. Holmes 17-1 was located 660 feet from the northern and western boundary lines of section 17. It encountered approximately 73 feet of the previously unknown Lower Puryear zone in the Upper Morrow formation and was a very profitable well, producing approximately 8.7 Bcf (billion cubic feet) of gas over its lifetime.

After Holmes 17-1 was drilled, Kerr-McGee drilled several additional wells in the West Park Field, including two wells in section 10 (Mitchell 10-1 and Mitchell 10-2). Mitchell 10-1, which was located 1600 feet from the southern boundary line of section 10, was completed in August 1994, and encountered no Lower Puryear. Kerr-McGee next drilled the Eden 11-1 well in section 11, which is directly west of section 10. Kerr-McGee placed this well 467 feet from the eastern and southern boundary lines of section 11, as close as spacing rules³ would allow to the boundary lines, thereby placing the Eden 11-1 as close as possible to Holmes 17-1. Eden 11-1 encountered 7 feet of Lower Puryear. It was completed in January 1995 in another zone, the Puryear, and will make a reasonable profit.

After completing a seismic survey, Kerr-McGee drilled the Zybach 16-1 well in section 16, the section southwest of section 10. Zybach 16-1 was spudded in February 1996 near the southern boundary line of section 16. It encountered no Lower Puryear. Kerr-McGee then returned to section 10 to drill an additional well, Mitchell 10-2, in June 1996. Although Mitchell 10-2 was 467 feet from the southern boundary line of section 10, it was 2300 feet from the western boundary line, and thus was not very close to Holmes 17-1. Mitchell 10-2 encountered approximately 7 feet of Lower Puryear, was completed in the Lower Puryear and two other zones, and was a marginal producer. It will not make a profit.

In December 1996, Kerr-McGee completed a second well in section 16. This well, Fleetwood Trust 16-1, was located west of Holmes 17-1, 467 feet from the eastern boundary line of section 16. Fleetwood Trust 16-1, which was placed as close as possible to Holmes 17-1, encountered approximately 79 feet of Lower Puryear, produced approximately 7.0 Bcf of gas, and was also a very profitable well. Kerr-McGee drilled three additional wells in the West Park Field, for a total of nine wells.⁴

The parties agree that, in the Upper Morrow formation in the Anadarko Basin hydrocarbon-bearing rock and sands were deposited by streams and rivers and are therefore difficult to find. The area is extremely difficult to map, and deposits are easily missed. Of the nine wells Kerr-McGee drilled in the West Park Field, four wells—Holmes 17-1, Eden 11-1, Mitchell 10-2, and Fleetwood Trust 16-1—encountered the same Lower Puryear reservoir. Holmes 17-1 and Fleetwood Trust 16-1, which were located in the thick part of the reservoir, were both very profitable within that formation.

Although two wells were drilled in section 10, Helton brought suit claiming that Kerr-McGee breached its implied covenant to protect section 10 from drainage from the Holmes 17-1 well. Helton alleged that an offset well should have been drilled in section 10, much nearer to Holmes 17-1 than the Mitchell 10-1 and 10-2 wells, and that a reasonably prudent operator would have had the offset well producing by February 1, 1995. According to Helton, the offset well should have been drilled 467 feet from the southern boundary line and 660 feet from the western boundary line of section 10, placing it 1127 feet directly north of Holmes 17-1. Helton asserts that a reasonably prudent operator who owned only the leases in section 10 would have drilled a protection well as close as possible to a known producer such as Holmes 17-1, but that Kerr-McGee had no economic incentive to do so because it owned leases in the surrounding sections. According to Helton, Kerr-McGee drilled the Mitchell 10-1 and 10-2 wells farther away from Holmes 17-1 in an attempt to find another Lower Puryear deposit rather than to protect section 10 from drainage by Holmes 17-1.

Helton argued that, if drilled as close as possible to Holmes 17-1, the hypothetical offset well would have encountered the same Lower Puryear reservoir as Holmes 17-1 and would have been very profitable. Dr. Dennis Kerr, Helton's petroleum geology expert, testified that the Lower Puryear reservoir from which Holmes 17-1 and Fleetwood Trust 16-1 were draining extended north to the location of the hypothetical offset well, and that there would be approximately 60 feet of Lower Puryear reservoir at that location. Kerr-McGee does not dispute this evidence on appeal.

To establish liability and damages, Helton offered the expert testimony of Michael Riley, a petroleum engineer. Riley's testimony was presented to establish the amount of gas the hypothetical offset well would have produced, that a reasonably prudent operator would have drilled the well, and the amount of royalties Helton would have received. It is undisputed that Helton's "claims for damages have been and are based solely on the royalties that the hypothetical protection well would have yielded [Helton] had it been timely drilled." Although Kerr-McGee challenged the measure of damages in the trial court, arguing that damages should be measured by the amount of gas drained rather than what the hypothetical well would have produced, Kerr-McGee does not challenge Helton's measure of damages on appeal. Riley testified that the hypothetical offset well would have produced approximately 6.1 Bcf of gas, and that Helton, who owned a 3/16 royalty interest, would have received $2,149,299.60.

During cross-examination, Riley testified that he based his projection of the hypothetical well's production on the assumption that the hypothetical well would have produced at the same rate as the Holmes 17-1 well until the Fleetwood Trust 16-1 well began producing, and then the three wells would have produced at the same rate until the reservoir was depleted. When asked if the production from these wells would tell him what the hypothetical well would have produced, he answered: "No, it does not." Further, Riley was asked, "[Y]ou simply do not have any factual basis for projecting the production of that hypothetical well, do you?" He responded, "That is correct." Immediately after Riley was cross-examined and dismissed, Kerr-McGee objected to Riley's testimony as unreliable and moved to strike. The trial court denied the motion. Riley was recalled twice, once during Helton's case-in-chief and once in rebuttal.

Kerr-McGee presented four expert witnesses regarding liability. Ronald Platt, a petroleum engineer, opined that Holmes 17-1 had not drained a substantial amount of gas from underneath section 10. He further opined that the hypothetical offset well would not have produced sufficient gas to recover the costs of drilling and completion (approximately $1.5 million) and, therefore, a reasonably prudent operator would not have drilled the well. In support of those opinions, Platt testified that: (1) the original gas in place in the entire Lower Puryear reservoir was 17.8 Bcf; (2) the original gas in place in the Lower Puryear reservoir below section 10 was .4 Bcf; and (3) the value of the recoverable gas in the Lower Puryear reservoir below section 10 was $640,000. Kerr-McGee's other experts also testified that a reasonably prudent operator would not have drilled the hypothetical well.

At the close of Helton's case-in-chief, Kerr-McGee filed a motion for judgment as a matter of law. Kerr-McGee argued, among other things, that: "Plaintiffs have wholly failed to sustain their burden of proof as to the amount of their damages, if any. There is no competent evidence from which...