Petro Mex, LLC v. United States

• Decision Date: 20 February 2023
• Docket Number: 14-1024C
• Parties: PETRO MEX, LLC, Plaintiff, v. UNITED STATES, Defendant.
• Court: U.S. Claims Court

PETRO MEX, LLC, Plaintiff, v. UNITED STATES, Defendant.

No. 14-1024C

United States Court of Federal Claims

February 20, 2023

Douglas J. Reynolds, The Reynolds Law Group, Durango, CO. With him was Michelle Der Ohanesian, The Reynolds Law Group Durango, CO.

Kara M. Westercamp, Trial Attorney, Commercial Litigation Branch Civil Division, United States Department of Justice Washington, DC, for defendant. With her were Allison Kidd-Miller, Trial Attorney, Commercial Litigation Branch, Tara K. Hogan, Assistant Director, Commercial Litigation Branch; Patricia M. McCarthy, Director, Commercial Litigation Branch, and Brian M. Boynton, Principal Deputy Attorney General, Civil Division. Philip C. Lowe, Solicitor's Office, United States Department of the Interior, Lakewood, CO, of counsel.

OPINION

MARIAN BLANK HORN, JUDGE

In the above-captioned case, plaintiff Petro Mex, LLC (Petro Mex) filed its complaint in the United States Court of Federal Claims alleging that defendant breached its lease agreement for oil and gas mining. Plaintiff seeks more than $5,000,000.00 in damages, including expectations damages, reliance damages, interest and fees. Specifically, plaintiff “seeks damages for the approximately two-year period in which it was prevented from producing and selling oil and gas and for damage to the wells on the Lease that were caused by the extended shut-in period.” The above captioned case was originally assigned to Judge Nancy B. Firestone. The above captioned case was subsequently reassigned to Judge Robert H. Hodges, before ultimately being reassigned to the undersigned. The undersigned held a trial on plaintiff's breach of contract claims and defendant's offset claims.

FINDINGS OF FACT

The Garfield Lease

The parties have stipulated that "[e]ffective March 1, 1965 Celeste C. Grynberg and the DOI [United States Department of Interior] entered into oil and gas lease number COC-0124705A (Garfield Lease) on public land," and "[t]hrough a series of assignments, Petro Mex acquired record title to the Garfield Lease effective October 1, 2004. At all times relevant to this case, Petro Mex was the owner and the operator of the Garfield Lease."^[1] (alterations in original). Additionally, the parties stipulated that "[a]t all times relevant to this case, Jesus Villalobos was the owner and president of Petro Mex." Mr. Villalobos testified at trial that he is the sole owner of Petro Mex. Mr. Villalobos explained that he founded Petro Mex

[b]ecause I get a chance to come into the -- since I've been in the oilfield business all my life -- I used to have a friend that -- his name was John Durham and he come over and talk to me to buy oil wells in Colorado. Well, he's trying to buy those wells, but he said he can't come up with the money. So he asked me if I can buy them. So that's when I started Petro Mex.

(alteration added).

The Garfield Lease began with a series of "Lease Terms." Section 1 of the Garfield Lease states:

SECTION 1. Rights of Lessee. - The lessee is granted the exclusive right and privilege to drill for, mine extract, remove, and dispose of all the oil and gas deposits, except helium gas, in the lands leased, together with the right to construct and maintain thereupon, all works, buildings, plants, waterways, roads, telegraph or telephone lines, pipelines, reservoirs, tanks, pumping stations, or other structures necessary to the full enjoyment thereof, for a period of 10 years, and so long thereafter as oil or gas is produced in paying quantities; subject to any unit agreement heretofore or hereafter approved by the Secretary of the Interior, the provisions of said agreement to govern the lands subject thereto where inconsistent with the terms of the lease.

(capitalization and emphasis in original).

Section 2(g) of the Garfield Lease provides: "Statements, plats and reports.- At such times and in such forms that the lessor may prescribe, to furnish detailed statements showing the amounts and quality of all products removed and sold from the lease, the proceeds therefrom and the amount used for production purposes or unavoidably lost[.]" (alteration added; emphasis in original).^[2] Section 7 of the Garfield Lease provides:

SEC. 7. Proceedings in case of default. - If the lessee shall not comply with any of the provisions of the act or the regulations thereunder or of the lease, or make default in the performance or observance of any of the terms hereof (except that of payment of annual rental which results in the automatic termination of the lease), and such default shall continue for a period of 30 days after service of written notice thereof by the lessor, this lease may be cancelled by the Secretary of the Interior in accordance with section 31 of the act, except that if this lease covers lands known to contain valuable deposits of oil or gas, the lease may be cancelled only by judicial proceedings in the manner provided in section 31 of the act, but this provision shall not be construed to prevent the exercise by the lessor of any legal or equitable remedy which the lessor might otherwise have. Upon cancellation of this lease, any casing material, or equipment determined by the lessor to be necessary for use in plugging or preserving any well drilled on the leased land shall become the property of the lessor. A waiver of any particular cause of forfeiture shall not prevent the cancellation and forfeiture of this lease for any other cause of forfeiture, or for the same cause occurring at any other time.

(capitalization and emphasis in original).

After the "Lease Terms," the Garfield Lease included an "OFFER TO LEASE AND LEASE FOR OIL AND GAS," (capitalization in original), from the Department of the Interior (DOI), Bureau of Land Management (BLM), which stated:

The undersigned hereby offers to lease all or any of the lands described in item 2 [meets and bounds description] that are available for lease, pursuant and subject to the terms and provisions of the Act of February 25, 1920 (41 Stat. 437, 30 U.S.C. sec. 181),^[3] as amended, hereinafter referred to as the act, and to all reasonable regulations of the Secretary of the Interior now or hereafter in force, when not inconsistent with any express and specific provisions herein, which are made a part hereof.

(alterations added).

The parties stipulated that "[a]t all times relevant to this case, there have been three operational natural gas wells on the Garfield Lease: Federal 15-9; 6-9-8-101; and Government 5."^[4] The parties further stipulated that "[t]he 'minimum royalty' for the Garfield lease was $1,080. The 'royalty on production' for the Garfield lease was 12.5 percent on production removed or sold from the leased land." The royalties were to be paid to the lessor, the BLM.

In an exchange with plaintiff's counsel, Mr. Villalobos testified at trial regarding the operations of Petro Mex and its wells:

[Question by plaintiff's counsel of record Douglas Reynolds] What is it that Petro Mex does? What is the business that Petro Mex is in?

[Answer by Mr. Villalobos] Petro Mex owns leases in Colorado and now we own leases in New Mexico and Utah right now.

Q. Okay. And you're saying they own leases. You're referring to oil and gas leases, right?

A. That's correct, yes, sir.

Q. And does Petro Mex operate those leases as well?

A. Yes, sir.

Q. Okay. And you were here for the testimony yesterday or at least you observed the testimony from Mr. Wilson, Linn Wilson, yesterday, correct?

A. Yes.

Q. And are you familiar with the lease that we were discussing, the Garfield lease?

A. Yes, sir.

Q. Okay. When did Petro Mex purchase that lease?

A. 2003. 2002 or 2003.

Q. Okay. Well, you said that Petro Mex was formed in 2002 or 2003. Did Petro Mex buy that lease essentially right after it was formed?

A. Yes. That's the reason I formed Petro Mex.

Q. Was to buy that lease?

A. Yes, sir.

Q. And there's another lease as well, right?

A. Yes, sir.

Q. In Colorado?

A. Garfield County and Mesa County.

Q. Okay. So there's another lease that Petro Mex owned or operated and that's called the Mesa lease. Is that correct?

A. Yes, sir.

Q. Was there a third lease at that point in time as well?

A. Yeah, we had another lease in Section 2.

Q. Okay.

A. That was terminated.

Q. Okay. When you purchased the Garfield lease, was there a well already in place on the lease?

A. Yeah, that was [sic] three wells in place already, yes.

Q. Okay. Which wells were in place?

A. The 15-9, the number 6 and then number 2.

Q. Okay. And were those wells productive when the lease was purchased?

A. The [sic] was making some gas, yes.

Q. Okay. Were they making enough gas to cover royalties and expenses?

A. Yes, but I had to lay 15 miles of pipeline to be able to produce more. ...

Q. Okay. You said that the lease -- the wells that were in place were the 159, the 6 and the 2. Yesterday, we also heard discussion of a Government 5 well.

A. Yes, sir.

Q. Was that a well you drilled after you purchased the lease?

A. Already -- that well was already drilled. It wasn't hooked up. So I have to do -- redrill it and hook it up to the other system.

Q. Okay. Do those wells produce oil as well, Mr. Villalobos?

A. The only one that produce oil is the 15-9.

Q. Okay. And does it produce very much oil?

A. Not very much.

Q. It's primarily a natural gas oil well?

A. Most -- gas, yes.

Q. Okay. What employee handled most of the day-to-day operations of the wells back in 2007 and 2008?

A. Mr. Linn Wilson.

Q. Okay. Did you do much on a day-to-day basis with regard to those wells?

A. I was doing some of it. I do -- I was doing some work, and I didn't do that much paperwork because I don't know how to do it.

(alterations added). Mr. Wilson, the Operations Manager of Petro Mex, testified at trial that after 2005,...