Osborn v. Anadarko Petroleum Corp.

• Decision Date: 02 February 2000
• Docket Number: No. 98-27.,98-27.
• Citation: 996 P.2d 9
• Parties: W.B. OSBORN, Jr., individually and as trustee of the William B. Osborn, Jr. Trust, Osborn Heirs Company, Marcus Thurman Barrett, III, William Osborn Barrett, and Barrett Wyoming Interests, Ltd., Appellants (Plaintiffs), v. ANADARKO PETROLEUM CORPORATION, a Delaware corporation, Appellee (Defendants).
• Court: Wyoming Supreme Court

996 P.2d 9

W.B. OSBORN, Jr., individually and as trustee of the William B. Osborn, Jr. Trust, Osborn Heirs Company, Marcus Thurman Barrett, III, William Osborn Barrett, and Barrett Wyoming Interests, Ltd., Appellants (Plaintiffs), v. ANADARKO PETROLEUM CORPORATION, a Delaware corporation, Appellee (Defendants).

No. 98-27.

Supreme Court of Wyoming.

February 2, 2000.

Representing Appellants: Craig Newman of the Law Office of Craig Newman, Casper, Wyoming.

Representing Appellee: William H. Everett of Williams, Porter, Day & Neville, P.C., Casper, Wyoming; and J. Kyle McClain, Houston, Texas.

Before LEHMAN, C.J., and THOMAS, MACY, GOLDEN, and TAYLOR,¹ JJ.

THOMAS, Justice.

The only question presented in this appeal requires this Court to determine the legal effect of the term "abandonment" in a Farmout Agreement when an oil and gas well is converted from an extraction well to a water injection well. W.B. Osborn, Jr., individually and as trustee of the William B. Osborn, Jr. Trust, Osborn Heirs Company, Marcus Thurman Barrett, III, William Osborn Barrett, and Barrett Wyoming Interests, Ltd. (collectively the Osborn group), entered into a Farmout Agreement with Anadarko Petroleum Corporation (Anadarko) for the drilling of a test well that reserved to the Osborn group a right to convert its net overriding royalty interest to fifty percent of the working interest earned by Anadarko upon abandonment of the well. The Osborn group contends that conversion of the test well from an extraction well to a water injection well² by Anadarko was an abandonment, triggering the right of the Osborn group to convert its royalty interest to a fifty percent working interest. In the district court, the parties filed cross motions for summary judgment, and the district court ruled in favor of Anadarko on the ground that the conversion did not constitute abandonment. We hold that the conversion of an oil and gas well from an extraction well to a water injection well is not an abandonment. The Order on Summary Judgment is affirmed.

In the Brief of Appellants, the issue that is raised is:

A. Whether the District Court erred in granting Defendant/Appellee's Motion for Summary Judgment, thereby determining that Appellants had no right under the Farmout Agreement in controversy to convert their overriding royalty interest to a working interest after the Test Well drilled under the Farmout Agreement had become uneconomic, Appellee had removed production equipment from the well and converted the Test Well to a water injection well for purposes of an expanded water flood project benefiting lands other than the lands which were the subject of the Farmout Agreement.

This Statement of the Issues is found in the Brief of Appellee Anadarko Petroleum Corporation:

A. The one and only issue presented for review by this Court is whether or not the District Court correctly granted Defendant/Appellee's Motion for Summary Judgment when the District Court declared that there was no abandonment of the Bracken Federal A-1 Well when that well was included in an expanded unit area and subsequently converted to a water-injection well under circumstances where oil production continues to be allocated to the Bracken Federal A-1 Well to the benefit of Plaintiffs. The well is still utilized for injection of water for the benefit of production from the expanded Bracken Minnelusa Unit in furtherance of the State of Wyoming's public policy of encouraging maximum, efficient production of oil and gas resources.

(Emphasis in original.)

The Osborn group and Anadarko agree that there are no disputed issues of fact in this case. On March 21, 1988, the Osborn group and Anadarko entered into a Farmout Agreement, which provided for the drilling of an oil well, the Bracken Federal A-1, by Anadarko on land upon which the Osborn group held the oil and gas lease. Pursuant to the Farmout Agreement, Anadarko would operate the well, and the parties would share in the profits as provided by that agreement. The essence of the arrangement was that Anadarko was entitled to receive from the Osborn group 100% of the leasehold interest of the Osborn group in the land covered by the lease subject to the retained overriding royalty interest held by the Osborn group. The Farmout Agreement included a provision pursuant to which the Osborn group could convert from a royalty interest to a working interest:

We reserve the right, at our option, to convert at payout or abandonment (following production, but prior to payout) at no cost to us, our net overriding royalty interest reserved above, to fifty percent (50%) of the working interest earned by you in and to the Test Well, equipment appurtenant thereto and production therefrom, and the Farmout Lands.

There was no definition in the Farmout Agreement of the term "abandonment." The Bracken Federal A-1 well was completed by Anadarko on August 10, 1988. The next month, the Bureau of Land Management (BLM) notified Anadarko that the Bracken Federal A-1 well was located in the same oil producing formation as, and was in pressure communication with, the then existing Bracken Minnelusa Drilling Unit (Minnelusa Unit). The BLM also advised Anadarko that it could expand the Minnelusa Unit to include the new well. Anadarko elected to expand the Minnelusa Unit, and Anadarko then requested permission from the BLM to convert the Bracken Federal A-1 well from oil extraction to water injection. That request was approved by the BLM on October 13, 1989. Upon inclusion in the Minnelusa Unit, the Bracken Federal A-1 well was allotted 15.92164% of the unit production for the life of the unit. That percentage remained the same after the conversion of the Bracken Federal A-1 well from oil extraction to water injection.

On June 27, 1989, the Osborn group sent a letter to Anadarko in which it attempted to exercise its reserved right to convert its royalty interest into a fifty percent working interest. The Osborn group contended that Anadarko's plan to use the Bracken Federal A-1 well for water injection rather than for oil extraction constituted an abandonment of the well. Anadarko responded that the well was not abandoned, and it declined to assign fifty percent of the working interest to the Osborn group. The Osborn group accepted the royalty payments under the Farmout Agreement without objection for several years.

On October 11, 1996, however, the Osborn group filed an action in the district court, seeking a declaratory judgment confirming its right to convert the overriding royalty interest to a fifty percent working interest. Cross motions for summary judgment were presented by the parties on the issue of abandonment. On December 17, 1997, the district court granted Anadarko's motion for summary judgment and denied the motion submitted by the Osborn group. In its Order on Summary Judgment, the district court found that the "tract of land in question is not unproductive, since oil production is being allocated to the tract under the expanded Bracken Minnelusa Unit, and that the well in question is not abandoned since it is still utilized for injection of water for the benefit of production from the expanded Bracken Minnelusa Unit." The Osborn group has appealed from the Order on Summary Judgment.

A summary judgment appropriately may be granted when there is no genuine issue of material fact and the party prevailing on the issue is entitled to judgment as a matter of law. Century Ready-Mix Co. v. Campbell County School Dist., 816 P.2d 795, 798 (Wyo.1991). In making the determination as to whether any genuine issue of material fact exists, we consider the record in the light most favorable to the party who opposed the motion. Id. at 799 (quoting Doud v. First Interstate Bank of Gillette, 769 P.2d 927, 928 (Wyo.1989)

). In this instance, the parties are in accord that there is no genuine issue of material fact, and the case presents only a question of law.

A farmout agreement is a contract. Moncrief v. Louisiana Land and Exploration Co., 861 P.2d...