Lee v. Conocophillips Co.
| Decision Date | 05 January 2016 |
| Docket Number | Case No. CIV-14-1391-D |
| Parties | ROBERT E. LEE, JR., et al., Plaintiffs, v. CONOCOPHILLIPS COMPANY, Defendant, v. MARVIN R. MATHIS, Additional Defendant to Counterclaim. |
| Court | U.S. District Court — Western District of Oklahoma |
ROBERT E. LEE, JR., et al., Plaintiffs,
v.
CONOCOPHILLIPS COMPANY, Defendant,
v.
MARVIN R. MATHIS, Additional Defendant to Counterclaim.
Case No. CIV-14-1391-D
UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA
January 5, 2016
MEMORANDUM OPINION AND ORDER
Before the Court is Plaintiffs' Robert E. Lee, Jr. ("Lee"), Hitch Land & Cattle Co. ("Hitch"), Suzanne V. Landess, as Trustee of the Suzanne V. Landess Revocable Trust ("Landess"), and Counterclaim Defendant Marvin Mathis ("Mathis") (collectively "Landowners") Amended Motion for Preliminary Injunction [Doc. Nos. 67 & 72]. Defendant ConocoPhillips ("Conoco") has filed its response in opposition [Doc. No. 69]. An evidentiary hearing was held September 24-25, 2015 and on October 9, 2015, the parties filed their respective closing argument briefs [Doc. Nos. 82-84]. The matter is fully briefed and at issue.
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I. FINDINGS OF FACT
A. THE PARTIES AND SUBJECT LEASES
Pursuant to oil and gas leases executed as far back as the 1930's, Conoco operates gas wells (the Jan #1, Les #1, Elmer 2R and Gertie #1)1 on Landowners' properties. As additional consideration for permitting Conoco to conduct oil and gas exploration, the leases contain a "free gas clause" by which Conoco agreed to furnish gas, free of charge, to Landowners for domestic use. With the exception of some minor grammatical variations, the leases are uniform in that they permit
lessors to have gas free of charge from any gas well on the leased premises for stoves and inside lights in the principal dwelling house on said land by making their own connections with the well, the use of said gas to be at the lessors' sole risk and expense.
The gas was to be provided in its raw, natural state, at its natural pressure. Consequently, the use of such "free gas" carried the risk of Hydrogen Sulfide ("H2S")2 or other impurities being present. Residential gas lines, known as "farm
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taps" or "domestic taps," were subsequently built and connected from Landowners' properties to Conoco's wellheads to allow Landowners to take and use the raw gas. To date, Conoco has provided Landowners with natural gas, free of charge pursuant to the "free gas" lease provision.
Lee has two homes connected to the Jan well. His grandson lives in the principal house and another smaller home is occupied by a hired hand, who leaves during the winter season. Lee receives gas for his irrigation well from Pal Energy, which operates a transmission line approximately three miles from his residence. In August 2014, Lee, with help from Landess, installed a H2S scavenger unit on his farm tap out of concerns for his own safety and warnings from Conoco about the gas's danger (discussed more fully below). Prior to installation of the scavenger unit, there was no H2S treatment and the gas entering the homes was not odorized. Lee is vice-president of Hitch, an agricultural and livestock company operating in the Oklahoma panhandle. Hitch owns two houses connected to the Les well. A ranch hand and his wife live in one of the houses, and the other is vacant. Hitch has an irrigation well that is also serviced by Pal Energy. Another gas source from an unidentified commercial provider exists approximately one block from Hitch's property. A metal hut houses Hitch's farm tap equipment, which has not been inspected for safety. Hitch installed
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a scavenger unit on its pipeline in 2005.
Landess' home is connected to the Jan well, which she also uses to heat her swimming pool. There is no odorizer on the Jan well, and she does not know the pressure of gas which enters the house. Until August 2014, there had been no tests of the H2S entering her home, though subsequent readings of the Jan and Les wells have repeatedly shown low levels of H2S. Landess also has a home connected to the Elmer 2R well, which is occupied by an employee.
Mathis' residence is connected to the Gertie #1 well. His irrigation well receives gas from West Texas Utilities ("WTU"), which also provides gas to homes near his residence. Mathis has the ability to tap into WTU's distribution line, and pay for gas from that source, and, indeed, purchases gas from WTU for the irrigation well. Mathis has a liquid trap and safety regulator on the line entering his house. Mathis periodically inspects his line for leaks by looking for signs such as dead grass. Mathis does not have any device that extracts H2S from the gas that enters his home, nor has he ever had the gas tested for its presence, although he testified that the gas "stinks" when the pilot light goes out.
The Jan, Les, and Gertie wells are approximately seventy years old; the Elmer 2R is approximately twenty-five years old. Oil and gas wells, eventually, experience a gradual drop-off in production over time. This is often referred to as a "decline
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curve" in petroleum engineering parlance. Using this decline curve methodology, one can calculate and estimate a well's future production (the productive life) based on its production history.3
Following execution of the leases, Conoco variably sent letters to Lee, Hitch and Landess (or their predecessors) over the years, which, inter alia, reminded them of the risks associated with taking untreated gas, notified them of rules passed by the U.S. Department of Transportation ("USDOT") that affected their farm taps, and urged Landowners to ensure their lines were properly maintained. The letters were consistent in their repeated urging that Landowners find an alternate source of gas. Beginning in 2004, Conoco informed Landowners that due to the presence of H2S, it would disconnect their farm taps. As compensation for the loss, Conoco offered Landowners the option of accepting either a single cash payment or assistance with the costs of converting to an alternate source. Despite its warnings, Conoco's letters failed to persuade Landowners to find an alternate source of gas and they continued to receive gas free of charge via their farm taps.
The parties' dispute sharpened on July 2, 2014, when Conoco notified Lee and
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Landess that, due to the volatile mixture of untreated elements in the gas, it would disconnect the farm taps no later than December 1, 2014. Conoco provided a list of alternate providers and offered a cash buy-out of $40,000 with a $10,000 "timely acceptance bonus." Conoco sent another letter on September 23, 2014, which informed Landowners that their lines were considered to constitute a "distribution line" subject to federal regulations enacted by the USDOT and administered by the Oklahoma Corporation Commission ("OCC"). Conoco claimed these regulations required Landowners' lines to meet certain regulatory requirements and unless Landowners provided proof of compliance, Conoco would shut off the taps by December 1, 2014. On this occasion, Conoco offered Landowners a $40,000 cash payment, minus the costs of converting their lines to an alternate fuel source.
B. CONOCO'S DOMESTIC GAS TAP BUYOUT
Beginning in 2003, Conoco began a series of initiatives to "eliminate" farm taps and free gas. Citing concerns over H2S levels and what it later considered "onerous state and federal pipeline safety reporting and operational requirements" that were being applied to all farm taps, Conoco devised an incentive plan to persuade Landowners and others using farm taps to waive their rights under the leases, which consisted of the previously mentioned offers of settlement. Conoco's representatives sought funding for these settlements by submitting an Authorization for Expenditure
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("AFE"). In an AFE, Conoco supported the initiative by noting "successful buyouts [would] result in additional natural gas sales revenue." The AFE expressed concern about the program's success rate, since, according to Conoco, "[t]his 'free' gas has been a right for these owners for generations and some owners will not accept an offer, even if higher than currently proposed." The most recent settlement proposal was based on a well production life of twenty-eight (28) years.
Conoco's initiatives have been generally successful; most farm taps on its wells in Oklahoma have been eliminated. Only the farm taps involved in the present litigation remain.
C. THE ADMINISTRATIVE REGULATIONS
The OCC has developed regulations to assure safety in the design, construction, testing, operation, maintenance, and emergency procedures relating to pipeline facilities. It derives its authority over intrastate pipeline operations through statutes and certification agreements with the USDOT. The Pipeline Safety Department of the OCC administers the Commission's intrastate regulatory program to assure the safe transportation of natural gas and other hazardous materials by pipeline. Relevant to these proceedings, the OCC was given authority to enforce Title 49, Part 192 of the Code of Federal Regulations, which, among other things, covers pipeline safety and Gas Distribution Pipeline Integrity Management Plans. This
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provision requires a gas distribution operator to, inter alia, develop and implement a program that includes a written integrity management plan. The plan must contain procedures for developing and implementing the operator's understanding of its system, including identifying and evaluating potential threats and risks to the pipeline, conducting periodic evaluations, measuring performance, and submitting written reports addressing said issues. See 49 C.F.R. § 192.1007.
In addition to administering the federal regulations, the OCC has enacted its own regulations regarding pipeline construction and safety. See OKLA. ADMIN. CODE 165:20-5-34. That provision provides in pertinent part:
(a) Each operator shall have and maintain its system in such condition as will enable it to furnish safe and adequate gas service, subject only to emergency conditions beyond it[s] control....
(b) House piping shall conform to requirements of the applicable city or town ordinances. In towns, villages, and suburban
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