N. Natural Gas Co. v. L.D. Drilling, Inc.

• Decision Date: 03 September 2019
• Docket Number: No. 08-1405-JTM,08-1405-JTM
• Citation: 405 F.Supp.3d 981
• Parties: NORTHERN NATURAL GAS CO., Plaintiff, v. L.D. DRILLING, INC., et al., Defendants.
• Court: U.S. District Court — District of Kansas

405 F.Supp.3d 981

NORTHERN NATURAL GAS CO., Plaintiff,

v.L.D. DRILLING, INC., et al., Defendants.

No. 08-1405-JTM

United States District Court, D. Kansas.

Filed September 3, 2019

Corey A. Neller, Mark D. Coldiron, Pro Hac Vice, Paula M. Jantzen, Pro Hac Vice, Phillip G. Whaley, Pro Hac Vice, Stephen Lee Jantzen, Pro Hac Vice, Ryan Whaley Coldiron Jantzen Peters & Webber PLLC, Oklahoma City, OK, Richard A. Olmstead, Kutak Rock LLP-Wichita, Wichita, KS, for Plaintiff.

L. Mark Walker, Pro Hac Vice, Scott A. Butcher, Pro Hac Vice, Crowe & Dunlevy-OKC, Oklahoma City, OK, Adam S. Davis, Brian J. Madden, Thomas A. Rottinghaus, Wagstaff & Cartmell, LLP, Kansas City, MO, Daniel J. Buller, Foulston Siefkin LLP-OP, Overland Park, KS, for Defendants.

J. Thomas Marten, Judge

MEMORANDUM AND ORDER

A number of the motions are before the court in the present dispute over the effects of the migration of natural gas which plaintiff Northern Natural Gas injected into a storage field. The gas subsequently migrated to other property. Northern brings claims for private nuisance against the Producer defendants who obtained the gas, based on the allegation that the production caused an unreasonable interference with its storage field. It also brings a claim for unjust enrichment against other interest owner defendants, alleging that they unfairly profited from the extraction. The parties have filed motions which seek to exclude certain evidence, as well as motions for summary judgment on various aspects of the case. The court first addresses the evidentiary motions.

A. Evidentiary Motions

1. Motion to Exclude Expert Keeney

Northern (Dkt. 727) moves to exclude the testimony of George N. Keeney, III, an expert retained by L.D. Drilling, and the opinions contained in his October 17, 2018 report, which was subsequently adopted by other defendants in the action. Keeney was retained to assess the damages that Northern claims it incurred in mitigating the alleged nuisance created by the producer defendants. Northern argues that Keeney's opinions are speculative and unreliable.

Effectively conceding that some of Northern's arguments are well-founded, the defendants argue that Northern's request to exclude the entirety of Keeney's testimony is "overreaching" and that the court should not "exclude all of Keeney's testimony and opinions." (Dkt. 752, at 1, 5) (emphasis in original). Having reviewed the pleadings, the court agrees that substantial portions of Keeney's proposed opinions and testimony have not been shown to be reliable and are hereby excluded.

Keeney is a CPA and has been certified by the American Institute of CPAs in Financial Forensics. He has 38 years of experience in the oil and gas industry. He has frequently offered expert opinions in Oklahoma litigation. In his report, Keeney breaks down Northern's claimed damages as falling into six categories:

Gas Purchase	$ 36,629,738
Financial Hedging	16,888,276
Construction & Expansion	20,007,434
Experts and O & M Costs	5,595,775
Experts and O & M Costs Northern in-house	2,800,471
Profits Disgorgement/Unjust Enrichment	30,443,753

He then presents five opinions as to these claimed damages. He believes the gas purchase amounts claimed are invalid because Northern has failed to account for the production by non-defendant producers Phillips and Trisum prior to 1984. (Dkt. 728-1, at 4). Second, he contends that the reason for Northern's gas purchases "was more economic than operational," because the timing of the purchases indicates that Northern bought gas when the market price was high, rather than when it was low. (Id. at 5). Keeney expressly linked this conclusion in his report to a supposed lack of supporting information:

No evidence has been provided that indicates the purchased gas was actually injected into the storage facility; in February of 2010 the purchased volume exceeds the injected volume by 16 times. Inclusion of the entirety of purchased gas in the NNG claim is inappropriate. I have searched, but found no NNG internal documents that support its claim that it was necessary to purchase the gas for operational reasons and/or that such purchases were attributable to Defendants' conduct.

(Id. )

Third, Keeney states that the hedging losses were not the fault of the defendants, but "the result of bad bets" by Northern in the derivatives markets. He founded this conclusion on (a) the fact that derivative markets were "purely speculative" and "costless collars that are not related to the purchases of natural gas" made by Northern, and (b) that the timing of the hedges appeared to be unrelated to the actual purchases of replacement gas. "Why were the hedges necessary?," he asked. "The disconnect between the periods and prices of hedging and the periods when gas was purchased are a clear indication that the hedges were purely speculative and unrelated." (Id. at 5-6).

Fourth, Keeney opines that the cost to improve the Cunningham storage facility overstates the cost of mitigating the nuisance, because it is simply a tally of capital expenditures at the field since 2004. According to Keeney, the work includes costs for containment and storage that Northern would have incurred anyway, or would have incurred as the result of FERC and KCC orders. (Id. at 6-7).

With respect to the expert costs for improving the storage field, Keeney again focuses on the lack of support: "the detail supporting the claim for Expert fees associated with the Cunningham projects is inadequate to allow determination of the activities performed and the nature of the respective engagements." (Id. at 7).

Northern's motion argues that Keeney's opinions are unreliable because they rest on the assumption that Northern lacked documentation for its damages claims, and that the assumption was false. The information supplied by Northern (Dkt. 728, at 3) indicates that it did, indeed, supply defendants with information which would support its damages claims, and that this information was simply ignored by the defendants and its expert.

The defendants in response stress the sheer size of the discovery presented in the case. (Dkt. 752, at 3) (given the "terabytes" of data, "Keeney [could] not possibly review all of the production in this case"). The defendants suggest that Northern bears the fault for Keeney's failure to identify the relevant documents, because it "refused" to identify the specifically relevant documents.¹

The court finds there are two problems with this argument. First, the issue of fault is secondary to the key issue of whether Keeney's opinions are reliable. For the reasons stated below, the court concludes that in important respects they are not, because their central premise is that Northern has no documentary evidence to support its claims. Shorn of this support, Keeney's opinions in many respects fall back on his own ipse dixit. Second, the record does not support the conclusion that Northern refused to identify the relevant documents. Northern communicated with defendants as to its claimed damages, but noting the volume of the underlying invoices and other materials, it proposed "retain[ing] the invoices and backup" absent a "request for production." In October, 2018, defendants requested help in locating certain documents – but not supposedly missing damages documents which later formed an essential part of Keeney's opinions.

A review of Keeney's March 1, 2019 deposition supports the conclusion that a lack of supporting evidence was an important factor in Keeney's opinions. Keeney testified that he relied on defendants' counsel to supply him relevant documentation. He would ask for information, and if none would be supplied, he assumed it did not exist:

Q. Were there any documents that you asked for specifically?

A. Yes.

Q. Okay. And what documents would those be?

A. The -- the native format spreadsheets from virtually all of the experts and the employees that provided information on damages. I asked for copies of contracts with regard to the hedging. I asked for contracts, settlement documents, delivery tickets and so forth with regard to the gas purchases. Most of what I was asking for was backup for -- to substantiate the claim numbers that were being evaluated.

Q. Okay. And were those provided to you?

A. Some were; some weren't.

Q. Okay. Do you know what [documents] weren't provided to you?

A. Any kind of supporting documentation.

Q. Can you elaborate on that?

A. Delivery tickets, invoices, payment stubs, gas analysis to purchase gas, the contracts associated with the hedging with the spreads that were done. Virtually all of that information was simply summarized. It was a spreadsheet and that's all the support that was provided.

Q. Okay. Do you know why the additional documentation wasn't provided to you?

A. No.

Q. Okay.

A. I presume it wasn't available.

Q. If it was available, is it something you would want to review?

A. Absolutely.

As Northern notes, Keeney's basic opinion that Northern was buying gas when it was expensive rather when it was cheap is strongly counterintuitive. Further, the opinion fails to take account of other evidence in the case, such as FERC constraints on when Northern could purchase gas, existing deposition testimony (by Dan Fancler) that the additional gas was in fact purchased in order to meet operating commitments to customers, and that Keeney's opinion as to purchase timing failed to take into account defendants' increasing production after 2010.

Keeney had no opinion as to Northern's actual gas purchases, or as to the volumes of gas purchased by Northern. And, again in each instance, the supposed lack of supporting documents was important to him:

Q. Can you agree reviewing – well, first of all, do you have any reason to dispute that Exhibit No. 10, which was Exhibit 2 to Mr. Fonda's deposition, do you have any reason to dispute that that accurately reflects the physical gas purchases that Northern made?

A. I have no way to verify that. I've asked for the documentation that supports the purchases. I haven't been

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