Kinder Morgan Prod. Co. v. Scurry Cnty. Appraisal Dist.
|30 December 2021
|KINDER MORGAN PRODUCTION COMPANY, LLC, Appellant v. SCURRY COUNTY APPRAISAL DISTRICT, Appellee
|Texas Court of Appeals
Benjamin Geslison, Amy Pharr Hefley, Houston, Thomas R. Phillips, Austin, Tracy M. Turner, John Brusniak Jr., Dallas, for Appellant.
E. Barry Gaines, Austin, Marjorie Bachman, Ryan James, Kirk Swinney, James Robert Evans Jr., Leander, for Appellee.
Panel consists of: Bailey, C.J., Trotter, J., and Williams, J.
This appeal concerns yet another chapter in the ongoing feud between these parties. Here, the underlying dispute arises from an ad valorem tax suit filed by Kinder Morgan Production Company, LLC (KMPC) in which it appealed the order of the Scurry County Appraisal Review Board (the ARB) and challenged the appraised value of certain mineral interests in Scurry County for the 2019 tax year. The case proceeded to trial rather expeditiously. After KMPC rested its case, the trial court granted a directed verdict in favor of the Scurry County Appraisal District (the Appraisal District) and rendered judgment that KMPC take nothing.
In three issues, KMPC asserts that the trial court abused its discretion when it (1) permitted the Appraisal District's experts to revise or supplement their opinions multiple times, including once less than thirty days before trial commenced, but denied KMPC's only request to allow its experts to supplement their opinions; (2) excluded the testimony of KMPC's experts but allowed the testimony of the Appraisal District's experts when the objections to both parties’ experts involved the proper application of Section 23.175 of the Texas Tax Code ; and (3) overruled KMPC's motions and requests to continue the trial when KMPC's retained lead counsel was ordered by his personal physician not to appear for trial in person during the COVID-19 pandemic and, after lead counsel appeared and attempted to participate remotely, technical difficulties prevented him from fully and effectively representing KMPC. For the reasons stated below, we reverse the trial court's judgment and remand this cause to the trial court for further proceedings consistent with this opinion.
Significant production of oil from the Canyon Reef formation in Scurry County began in 1948. The field was large, covering approximately 56,000 acres, and had an estimated 2.8 billion barrels of original oil in place. All of this oil cannot be recovered with either the extraction techniques that were available and utilized at the time that the field was discovered or that are available and utilized today.
Oil in this formation was initially produced from individual leases through primary production, in which pressure from the formation was sufficient, with or without the aid of a pump jack, to force the oil out of the ground. As oil was produced, the pressure in the formation decreased and the production rate declined. Only about 20% of the original oil in place was recoverable through primary production.
After primary production had "run its course," an additional 20% of the original oil in place could be recovered through secondary recovery, which involved the injection of water into the formation through an injection well in order to increase the pressure and force the oil to the surface in a producing well. With this recovery method, some of the injected water returns to the surface with the oil and gas. However, because it was not possible to control the subsurface flow of the injected water, the water could return in a well that was located on a different lease than the lease on which the injection well was located. Because secondary recovery was not viable on the individual leases in the Canyon Reef formation, the leaseholders unitized the field and, in 1953, began to operate as the Scurry Area Canyon Reef Operators Committee (the SACROC). Secondary recovery through waterflooding began in the SACROC in 1954.
Tertiary recovery, which involved a carbon dioxide or CO2
flood, started in 1971 after the secondary recovery method began to lose its effectiveness. Generally, an additional 10% to 20% of the original oil in place can be recovered through tertiary recovery, which is the final method of recovery that is available when utilizing current technology. In 1973 or 1974, the SACROC reached its peak production of approximately 215,000 barrels of oil per day. However, by the late 1990s, the field was producing less than 10,000 barrels of oil per day.
In Texas, the typical "working interest" in oil and gas production is 7/8th of the net revenue and the typical "royalty interest" is 1/8th of revenue. The working interest bears all the production costs. In 2000, KMPC purchased approximately 97% of the working interest in the SACROC. KMPC also owns royalty and overriding royalty interests in the SACROC. Through significant investment, KMPC expanded the CO2 flood into other areas of the SACROC and continued tertiary recovery in the field through alternating water and gas floods. KMPC developed the SACROC sequentially in defined geographical areas of the field, referred to by KMPC as "projects." Due to the continued investment by KMPC, since 2006 the SACROC has produced approximately 30,000 barrels of oil per day.
For the 2019 tax year, the Appraisal District valued the working interest in the SACROC at $701,351,622. KMPC protested the valuation to the ARB. See TEX. TAX CODE ANN. § 41.41 (West Supp. 2021). The ARB denied the protest and determined that the appraisal records were correct and should not be changed.1 On September 20, 2019, KMPC appealed the ARB's order and determination to the trial court. See id. § 42.01. KMPC alleged in its petition that the value found by the ARB exceeded both the appraised value required by law and the median appraised value of comparable properties; that the owner's name and the property description were incorrect; and that levying a tax based on the incorrect valuation was excessive, unequal, and would cause injury to KMPC.
The Appraisal District answered and filed a motion to consolidate this case with other litigation that was pending between various Scurry County taxing entities and KMPC. During a December 2, 2019 hearing, the trial court granted the Appraisal District's motion, in part, and consolidated the cases for purposes of discovery. On January 10, 2020, the trial court orally issued a June 22, 2020 trial setting for this case; it also signed an order granting the motion to consolidate. On January 14, 2020, the trial court signed a scheduling order in which it ordered and required (1) KMPC to designate its primary expert witnesses by March 15, 2020, (2) the Appraisal District to designate its primary witnesses on "market value" by March 15, 2020, (3) the parties to designate their rebuttal expert witnesses by April 15, 2020, and (4) the parties to complete discovery by April 22, 2020.
KMPC sought mandamus relief from the trial court's consolidation order. See In re Kinder Morgan Prod. Co., LLC , No. 11-20-00027-CV, 2020 WL 1467281, at *1 (Tex. App.—Eastland Mar. 26, 2020, orig. proceeding) (mem. op.). We stayed discovery in the other related litigation and allowed discovery to proceed in this case. On March 26, 2020, we conditionally granted KMPC's petition for writ of mandamus and directed the trial court to vacate the consolidation order, id. at *5, which it later did on March 31, 2020.
The trial court subsequently modified its scheduling order and extended the discovery deadline to May 22, 2020 and granted KMPC's motion to continue the June 22, 2020 trial date; however, voir dire was reset for August 20, 2020, with the trial on the merits to commence on August 24, 2020. On July 10, 2020, the trial court orally granted the Appraisal District's motion to exclude KMPC's primary and rebuttal expert witnesses. Four days later, the trial court signed orders memorializing those rulings.
In response to the trial court's witness-exclusion rulings, KMPC's primary experts prepared a supplemental report, and KMPC filed a motion for leave to file the supplemental report. Because the trial court did not set a hearing on KMPC's motion for leave, KMPC requested that the motion be considered by submission. Nevertheless, the trial court did not rule on KMPC's motion for leave to file the supplemental report.
KMPC moved to continue the August 2020 trial setting on the ground that it had a due process right to be represented by counsel of its choice and that, pursuant to his personal physician's instructions, KMPC's lead counsel could not appear in person during the COVID-19 pandemic. Although the trial court denied the motion for continuance, it allowed KMPC's lead counsel to appear and participate at trial by remote means. After numerous technical difficulties with both Zoom and the audio system arose during trial, KMPC orally re-urged its motion for continuance, and KMPC's lead counsel objected to being restricted and required to participate in the trial under circumstances that prevented him from being able to fully and effectively represent KMPC. The trial court denied KMPC's re-urged continuance request and overruled lead counsel's objection.
At trial, the Appraisal District objected to the presentation of any testimony by KMPC's primary experts based on the trial court's "prior rulings." The trial court sustained the Appraisal District's objections on the ground that it had ruled at the pretrial hearings that the opinions to be offered by KMPC's designated experts were based on an "incorrect application of the law." After KMPC rested its case, the trial court granted the Appraisal District's motion for directed verdict, and rendered judgment that KMPC take nothing. This appeal followed.
We review KMPC's complaints about the trial court's exclusion of KMPC's experts and denial of KMPC's motion for continuance under an abuse-of-discretion...
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