Newman v. RAG Wyoming Land Co.

• Decision Date: 06 September 2002
• Docket Number: No. 01-209.,01-209.
• Citation: 53 P.3d 540,2002 WY 132
• Parties: Mary NEWMAN, N.D. Morgan, Jr., Marshall Morgan, Karla Denzin, Lynda Morgan, Mitzi Harris, Mike Walters, Jane Cowan, Alice Morgan, Richard Morgan, Jim and Jolene Freeburn, Toni Nelson, Chuck Morgan, Kristi Fluharty, Joanne McGuire, Lisa Sigler and Rock Morgan (the "Morgan Mineral Heirs"), Appellants (Plaintiffs), v. RAG WYOMING LAND COMPANY, a Delaware corporation, and Hi-pro Production, LLC, a Wyoming Limited Liability Company, Appellees (Defendants).
• Court: Wyoming Supreme Court

53 P.3d 540

2002 WY 132

Mary NEWMAN, N.D. Morgan, Jr., Marshall Morgan, Karla Denzin, Lynda Morgan, Mitzi Harris, Mike Walters, Jane Cowan, Alice Morgan, Richard Morgan, Jim and Jolene Freeburn, Toni Nelson, Chuck Morgan, Kristi Fluharty, Joanne McGuire, Lisa Sigler and Rock Morgan (the "Morgan Mineral Heirs"), Appellants (Plaintiffs), v. RAG WYOMING LAND COMPANY, a Delaware corporation, and Hi-pro Production, LLC, a Wyoming Limited Liability Company, Appellees (Defendants).

No. 01-209.

Supreme Court of Wyoming.

September 6, 2002.

Rehearing Denied October 1, 2002.

Representing Appellants: Clay B. Jenkins of Jenkins Law Office, Sheridan, Wyoming.

Representing Appellee RAG Wyoming Land Company: Joseph E. Hallock and James L. Edwards of Stevens, Edwards & Hallock, P.C., Gillette, Wyoming.

Representing Appellee Hi-Pro Production, LLC: Dan B. Riggs, David C. Smith, and Michael C. Steel of Lonabaugh and Riggs, Sheridan, Wyoming.

Before HILL, C.J., and GOLDEN, LEHMAN,¹ KITE, and VOIGT, JJ.

KITE, Justice.

[¶ 1] In 1968, the landowners, who owned both the surface and mineral estate in certain Campbell County property, leased their ranch for oil and gas development. Production occurred, and the lease remained held by that production. The landowners deeded the surface of the ranch and "coal and minerals commingled with [the] coal" to a neighboring coal mine operator in 1974, reserving all "oil, gas, and other minerals" not otherwise conveyed. Twenty years later, development of the gas found within the coal, known as "coalbed methane," became commercially feasible. A coalbed methane operator obtained an assignment of the oil and gas leasehold rights from the surface to a depth of 1,000 feet and began development of the coalbed methane. The successors in interest to the landowners claimed their right to royalties on the coalbed methane; however, the coalbed methane operator paid all royalties to the coal operator. The landowners filed a complaint seeking a declaratory judgment as to the ownership of the coalbed methane and recovery of the unpaid royalties. The district court granted summary judgment in favor of the coal operator. We reverse.

ISSUES

[¶ 2] The Morgan Mineral Heirs present the following issue for our review:

Do deeds which grant:

All coal and minerals co-mingled with coal that may be mined or extracted in association therewith or in conjunction with coal mining operations

But reserve:

All oil, gas and other minerals except as set forth above

Convey coal bed methane gas, or not?

RAG Wyoming Land Company (RAG) restates the issue as: "Was the district court correct in granting summary judgment to Appellees by ruling that coalbed methane gas was conveyed by Appellants through the warranty deeds?" Hi-Pro Production, LLC (Hi-Pro) phrases the issue as:

Do warranty deeds which grant "all coal and minerals commingled with coal that may be mined or extracted in association therewith or in conjunction with such coal operations" and which reserve "all oil, gas and other minerals except as set forth above" convey coalbed methane gas ("CBM") as produced from the Wyodak coal seam?

FACTS

[¶ 3] In 1968, Alfreda M. Morgan and Norvin D. Morgan, Sr. (landowners), the owners of the surface and mineral estate in certain lands in Campbell County and descendants and heirs of the original homesteaders, gave an oil and gas lease to W.R. Gibson, doing business as Powder River Oil Company, granting him the right to produce "oil, gas, and casinghead gas, and other minerals" and retaining a one-eighth royalty interest in the oil and "the proceeds from the sale of the gas, as such, for gas from wells where gas is found." Production occurred on those lands, and royalties were paid to the landowners. In 1971, Meadowlark Farms, Inc. (Meadowlark), predecessor in interest to RAG (coal operator), began surface coal mining operations on state and federal coal leases in the area. In 1974, Meadowlark entered into an Option to Acquire Real Property with the landowners which granted an option for it to acquire the landowners' ranch which consisted of approximately 1,560 acres together with "all coal and minerals co-mingled with coal owned by SELLERS." The landowners owned the coal under approximately 200 acres of the property. The option also provided that, upon execution, the landowners were entitled to lease the surface for farming and ranching purposes upon payment of a sum equal to the assessed property taxes. Meadowlark exercised the option and purchased the property. The warranty deed conveyed the lands and "all coal and minerals commingled with coal that may be mined or extracted in association therewith or in conjunction with such coal operations" and reserved to the grantor "all oil, gas and other minerals except as set forth above."

[¶ 4] Oil and gas production, coal mining, and ranching proceeded simultaneously without dispute, and the landowners received the royalties from all oil and gas production. At some point in time, the oil and gas lease was assigned to Torch Energy Advisors (Torch). In the early 1990s, techniques for the production of gas found within the coal seam, or coalbed methane, were developed and became commercially feasible. Although unclear from the record, it appears that, by 1997, production of coalbed methane had begun with six wells located on federal coal lands and two wells located on the lands subject to the landowners' oil and gas lease. Upon learning of the coalbed methane wells in 1997, Marshall Morgan, one of the heirs of the landowners, wrote a letter to Torch informing it of his interest in the oil and gas and demanding his share of the royalty payments. On the basis of Mr. Morgan's claim, Torch began escrowing the royalty payments which apparently it had been previously sending to the coal operator. As of September 1998, a total of $106,682.09 had been escrowed. Ultimately, RAG, the coal operator, and Torch entered into an indemnity agreement wherein RAG agreed to indemnify Torch from all liability in exchange for its agreement to resume making royalty payments to RAG. Torch assigned a portion of its interest in the oil and gas lease from the surface to 1,000 feet beneath the surface to Hi-Pro effective May 1, 2000.

[¶ 5] RAG entered into two surface use licenses and agreements for coalbed methane development with Hi-Pro which provided for coordination in the development of the coal and coalbed methane resources. In the agreement applicable to the lands subject to the landowners' oil and gas lease, RAG claimed "legal rights in certain coalbed methane gas wells, locations, [and] leases." In exchange for RAG's allowing Hi-Pro access to the area, Hi-Pro agreed to pay RAG forty percent of the market value of the gas produced and agreed its rights were "subordinate to and subject to the continuous and uninterrupted right of RAG ... to mine coal and conduct surface coal mining operations." In the agreement applicable to other lands—presumably the federal coal lands, Hi-Pro agreed to a similar subordination of its interests and a much lower price of one and three-quarters percent on gas from the Wyodak coal seam and two percent on coalbed methane produced from any other coal seam. The agreements also provided for lengthy, detailed procedures and obligations to ensure the coalbed methane development did not interfere with RAG's coal mining operation.

DISCUSSION

[¶ 6] The existence of coalbed methane has been well known for over a century. Paul N. Bowles, Coalbed Gas: Present Status of Ownership Issue and Other Legal Considerations, 1 Eastern Min. L. Inst. § 7.03 (1980). In fact, flash fires occasionally occurred on drilling rigs for many years when wells were drilled through the coal seam, and ventilation of underground mines was necessary to prevent fires and explosions. Michelle D. Baldwin, Book Note, Ownership of Coalbed Methane Gas: Recent Developments in Case Law, 100 W. Va. L.Rev. 673 (1998). Historically, coalbed methane "had long been considered a dangerous waste product of coal mining." Amoco Production Co. v. Southern Ute Indian Tribe, 526 U.S. 865, 871, 119 S.Ct. 1719, 144 L.Ed.2d 22 (1999).

[¶ 7] In the 1970s, the value of coalbed methane was recognized, and government grants became available to encourage its development. Id. In 1981, the Solicitor of the Department of the Interior issued an opinion addressing the ownership of coalbed methane in federal coal deposits concluding the reservation of coal to the United States in patents issued after 1909 did not include coalbed methane. In reliance on that opinion, oil and gas operators began entering into leases to develop coalbed methane with individual landowners who owned the oil and gas. Id. In the early 1990s, techniques for efficient development of coalbed methane, specifically within the coal deposits in the Powder River Basin in Wyoming, were perfected. In 1991, litigation ensued between the federal government and certain Indian tribes which claimed the government's reservation of coal in 1909 and 1910 included the coalbed methane on lands originally owned by the government which now belonged to them. Ultimately, that issue was resolved when the United States Supreme Court held coalbed methane was not included within the reservation of coal and overruled district and circuit court decisions which had concluded coalbed methane was owned by the owner of the coal. Id. at 874.

[¶ 8] Commercial development of coalbed methane in the Powder River Basin began in the early 1990s. Prior to that time, coalbed methane escaped from the coal in the course of the open pit surface mining process, and no attempt was made to capture that gas as a valuable resource.

[¶ 9] A brief discussion of the chemistry and the composition of methane and coal is in order. Coalbed methane is chemically identical (CH4) to gas produced through conventional methods, and each is known as "natural gas." Methane or natural gas originates from the decay of...