Pitco Production v. Chaparral Energy

• Decision Date: 21 January 2003
• Docket Number: No. 94,748.,94,748.
• Citation: 63 P.3d 541,2003 OK 5
• Parties: PITCO PRODUCTION COMPANY, Plaintiff-Appellee, v. CHAPARRAL ENERGY, INC., and Cheyenne Petroleum Company, Defendants-Appellants.
• Court: Oklahoma Supreme Court

63 P.3d 541

2003 OK 5

PITCO PRODUCTION COMPANY, Plaintiff-Appellee, v. CHAPARRAL ENERGY, INC., and Cheyenne Petroleum Company, Defendants-Appellants.

No. 94,748.

Supreme Court of Oklahoma.

January 21, 2003.

Gregory L. Mahaffey, Oklahoma City, Oklahoma, for appellants.

James W. Smith, Stigler, Oklahoma, for appellee.¹

OPALA, V.C.J.

¶ 1 The dispositive issue presented on certiorari is whether the terms of a joint operating agreement that designates one party as operator of the unit area and whose language refers to the "operator" in singular form permits the election of more than one unit operator in a Corporation Commission-designated spacing and drilling unit. We answer in the negative.²

I. ANATOMY OF THE LITIGATION

¶ 2 Chaparral and Cheyenne (appellants) and Pitco (appellee) are working interest owners in a Corporation Commission-designated drilling and spacing unit. Two wells have been drilled in the unit area.

¶ 3 At the time the first well (Scott No. 1-23) was drilled in 1980 the working interest owners entered into a Joint Operating Agreement (JOA or contract or agreement), designating Cheyenne as the operator of the unit area. Upon completion of a second well (the Kirkwood No. 1-23) in 1981, Cheyenne assumed operator status of that well in accordance with the provisions of the JOA. In 1998 Cheyenne resigned as operator and sold its interests to Chaparral, invoking the JOA's "new operator" provisions.³ Chaparral sought election to be named unit operator of both wells. Balloting resulted in Chaparral receiving 69.547840% vote of the working interest owners in the Scott well but only 46.129760% vote of the owners in the Kirkwood well. Pitco then offered itself for election as unit operator, and the results of this ballot revealed that it received 51.07738% vote of interests in Kirkwood well.⁴

¶ 4 It is important to note that the resulting vote occurred because of an existing imbalance of ownership interests in the two wells. The imbalance was the consequence of an earlier violation of the Maintenance of Unit Ownership clause⁵ of the JOA. In anticipation of the situation in which today's parties find themselves, the JOA provides that conveyances are to be made so as to maintain the same ratio of ownership throughout the unit area. This provision was breached approximately sixteen (16) years earlier in 1982 when a working interest holder, Samson, conveyed its interest in the Scott well (and not the Kirkwood), thereby creating the imbalance in ownership interests in the two wells.

¶ 5 Pitco requested that Chaparral relinquish operation of the Kirkwood well. Chaparral refused. Pico sought a declaratory decree⁶ naming it as operator of the Kirkwood well. The trial court, after hearing arguments, ruled that the contract did not preclude multiple operators who are elected by a majority vote in interest of the working interest operators.⁷ It directed Chaparral to remain as operator of the Scott well and Pitco to serve as operator of the Kirkwood well. Chaparral appealed from this order. The Court of Civil Appeals [COCA], Division II, reasoned that the trial court's decree construing the contract as not precluding multiple operators was erroneous; only independent, competing operators are prohibited. Because the parties permitted the existence of a condition which led to the election of multiple operators and because the trial court reached a correct result, COCA affirmed the trial court's decree.

II. ARGUMENTS ON CERTIORARI

¶ 6 Chaparral contends the JOA requires an election of one operator for the unit area. The agreement's language and content do indeed contemplate only one unit operator. COCA's reasoning — "the parties permitted the existence of a condition which, by its nature, led to the problem of multiple operators" — is not just incorrect, it is also used by COCA as a basis to allow the breach of one contract provision (the earlier violation of the Maintenance of Unit Ownership Clause) to excuse enforcement of another (the election of a sole unit operator).⁸

¶ 7 Pitco argued before COCA simply that the language of the JOA neither precludes more than one unit operator nor an election of operators on a well-by-well basis.⁹

¶ 8 Both sides presented this controversy as a private-law issue. We have no record support for the notion that the controversy may be affected in any way by the Corporation Commission's regulatory power over production and conservation of oil and gas.¹⁰

III. PERTINENT JOA PROVISIONS

¶ 9 The question before us is one of contract construction. The JOA at issue, an A.A.P.L. Form 610 — Model Form Operating Agreement-1956, is a printed form which is altered by certain deletions and modifications of the parties. The term "operator" is not defined in the agreement. A document entitled "Accounting Procedure Joint Operations," attached as an exhibit and made a part of the JOA, defines "operator" as "the party designated to conduct the Joint Operations."

¶ 10 Two JOA provisions primarily reference the status of unit operator. The first, is paragraph 5, entitled "Operator of Unit."¹¹ At the contract's inception it was agreed by the parties that Cheyenne would be designated operator of the unit area. Paragraph 5 provides "Cheyenne Petroleum Company shall be the Operator of the Unit Area . . ." The second provision whose content primarily addresses the unit operator is one which the contracting parties modified. All of paragraph 19, "Resignation, Removal and Selection of New Operator,"¹² replaced the printed form's paragraph of the same number. That paragraph deals with selection of a new operator. The modified language of this paragraph uses the term "operator" in singular form and describes selection of "a successor operator" in the event of resignation or removal of the existing operator.¹³

¶ 11 All other references to "operator" in the JOA and its exhibits refer to that entity in singular form, often accompanied by singular-form grammatical articles. The JOA contains no specific language which either permits or limits the number of operators in the unit area.

IV. RULES FOR CONSTRUING THE JOA

¶ 12 The JOA is a contract to be construed like any other agreement.¹⁴ If language of a contract is clear and free of ambiguity the court is to interpret it as a matter of law,¹⁵ giving effect to the mutual intent of the parties at the time of contracting.¹⁶ Whether a contract is ambiguous and hence requires extrinsic evidence to clarify the doubt is a question of law for the courts.¹⁷

¶ 13 The essence of Pitco's argument is that the contract's silence on limiting the number of operators supports a construction that permits multiple operators in this unit area. Pitco's landman testified that it is not uncommon industry practice for there to be more than one operator per unit area.¹⁸ Chaparral contends the agreement's language and text permit only one operator for this unit area. Because Pitco introduced testimony of custom of industry, we must determine whether the contract between the parties is ambiguous so as to permit extrinsic evidence.

¶ 14 The parties disagree whether the JOA precludes multiple operators. The mere fact the parties disagree or press for a different construction does not make an agreement ambiguous. A contract is ambiguous if it is reasonably susceptible to at least two different constructions.¹⁹ To decide whether a contract is ambiguous we look to the language of the entire agreement. A contract must be considered as a whole so as to give effect to all its provisions.²⁰ The language in a contract is to be given its plain and ordinary meaning unless some technical term is used in a manner intended to convey a specific technical concept.²¹ If a contract is complete in itself, and when viewed as a totality, is unambiguous, its language is the only legitimate evidence of what the parties intended.²² That intention cannot be divined from extrinsic evidence but must be gathered from a four-corners' examination of the instrument.²³

V. THE JOA — WHILE NEITHER EXPLICIT NOR SILENT CONCERNING THE NUMBER OF OPERATORS TO BE PERMITTED IN THE UNIT — IS NOT AMBIGUOUS

¶ 15 The dispositive factor of our analysis must be whether an examination of the entire JOA text reveals more than one operator for this unit is a reasonable interpretation of the contract's provisions. Our four-corners' examination of the contractual instrument in question reveals the terms and provisions are neither ambiguous nor susceptible to more than one interpretation.

¶ 16 We note at the outset the singular form of the term "operator" (with corresponding singular articles of grammar modifying the term) is used consistently throughout the document. The JOA is a pre-printed model-form operating agreement where the parties complete the document by filling in the blanks with necessary information. While the document shows the parties made some modifications to the contract's provisions, nowhere is the singular term "operator" altered to reflect a plural form of the expression.

¶ 17 The word "operator," while commonly used in the oil and gas industry, conveys no technical significance.²⁴ One requires no special knowledge to impart meaning to the term "operator" (or passages containing the term "operator"), nor is evidence of industry usage for this term necessary to enhance or otherwise clarify the term's tenor.²⁵ The responsibilities of the operator are delineated by various provisions throughout the agreement and are not contested by today's parties. Likewise, the term "unit area" conveys no technical information. The JOA defines unit area,²⁶ and its definition serves to limit those lands, oil and gas leasehold interests and oil and gas interests to be developed under the agreement. Because we hold the JOA's terms plain and unambiguous, we cannot consider Pitco's adduced proof that it is common industry practice to allow more than one operator per unit area.²⁷

¶ 18 Having decided the contract...