Roberts Ranch Co. v. Exxon Corp.

• Decision Date: 04 February 1997
• Docket Number: No. Civ-92-861-R.,Civ-92-861-R.
• Citation: 43 F.Supp.2d 1252
• Parties: ROBERTS RANCH COMPANY, et al., Plaintiffs, v. EXXON CORPORATION, et al., Defendants.
• Court: U.S. District Court — Western District of Oklahoma

43 F.Supp.2d 1252

ROBERTS RANCH COMPANY, et al., Plaintiffs, v. EXXON CORPORATION, et al., Defendants.

No. Civ-92-861-R.

United States District Court, W.D. Oklahoma.

February 4, 1997.

COPYRIGHT MATERIAL OMITTED

Bradley Dean Brickell, R. Bruce Kerr, Christine R. Fritze, Mahaffey & Gore, Oklahoma City, OK, for plaintiffs.

Stanley L. Cunningham, M. Richard Mullins, John R. Morris, Myrna S. Latham, Reid E. Robison, Gary W. Catron, McAfee & Taft, Oklahoma City, OK, for Exxon Corporation, a New Jersey corporation, defendant.

Mark Banner, William G. Bernhardt, J. Kevin Hayes, Hall Estill Hardwick Gable, Golden & Nelson, Tulsa, OK, for El Paso Natural Gas Company, a Delaware corporation, defendant.

J. Kevin Hayes, Hall Estill Hardwick Gable, Golden & Nelson, Tulsa, OK, for El Paso Natural Gas Company, cross-defendant.

ORDER

DAVID L. RUSSELL, Chief Judge.

Before the Court are Defendant Exxon Corporation's Motion for Partial Summary Judgment on the Plaintiffs' Original Breach of Fiduciary Duty Claims and New Claims in Plaintiffs' Fifth Amended Complaint; the Plaintiffs' Motion for Partial Summary Judgment; and the Plaintiffs' Motion to Vacate Prior Order.

I. Plaintiffs' Second Cause of Action — Failure to Account for Royalties on Sales of Sulfur

The Plaintiffs seek summary judgment on their Second Cause of Action, which claims that Exxon failed to properly account for and pay revenues from the sale of sulfur produced from the subject wells.¹ The Plaintiffs have offered evidence that from October 1994 through December 1995, Exxon improperly deducted a 5% surcharge from their sulfur royalty payments. The Plaintiffs' expert avers that from October 1994 through December 1995, "[a] charge equal to 5% of sulfur sales was paid to Exxon Chemical by Exxon Corporation." During this time period, Exxon paid all royalty and overriding royalty owners "based on 95% of the amount of revenue received from the sale of sulfur." According to the Plaintiffs' expert, "[t]he amount due to the royalty and overriding royalty owners for the 5% charge deducted from the price paid for sulfur totals $1,098.93 for the period October, 1994 through December, 1995." (See Affidavit of Cynthia B. Heymans, September 30, 1996, pp. 3-4).

In its response brief, Exxon admits that it initially deducted the 5% surcharge from sulfur royalties for the period October 1994 though January 1996,² but Exxon's accountant claims the amount so deducted was only $1,000.57. Exxon's accountant further contends that Exxon has now made an "adjustment" to the Plaintiffs' royalty payments, to fully compensate for this overcharge. According to the Affidavit of LuAnn M. York, senior accounting specialist in the Controller's department of Exxon Company, U.S.A.:

"The amount due to royalty and overriding royalty owners for the 5% charge deducted from the price paid for the sulfur for the period of October 1994 through January 1996 was $1,000.57. In March and April of 1996, an adjustment was made to compensate the royalty and overriding royalty owners for this amount, which was inadvertently deducted. This error was discovered as a result of an internal accounting review conducted in the ordinary course of business. No additional revenues from the sale of sulfur are due to royalty owners or overriding royalty owners."

Affidavit of LuAnn M. York, October 28, 1996, p. 3.

The Court notes that neither accountant has presented calculations showing how the 5% surcharge on sulfur was computed; thus the Court is unable to determine the amount of the surcharge as a matter of law. Moreover, Exxon has offered evidence raising a question as to whether the full amount of the surcharge has now been paid to the Plaintiffs through the alleged "adjustments" in March and April 1996. Because there is a genuine factual dispute as to the amount owing, if any, for these deductions, the Court denies the Plaintiffs' motion for partial summary judgment on this claim.

II. Plaintiffs' Third Cause of Action for Breach of Fiduciary Duty

Exxon seeks summary judgment on the Plaintiffs' Third Cause of Action, which alleges that Exxon has breached its fiduciary duty by entering into various agreements with Leede Exploration, El Paso Natural Gas and their affiliates to settle El Paso's take-or-pay obligations under certain gas purchase contracts.³ The Court previously held this claim in abeyance pending the ruling of the Supreme Court of Oklahoma in Roye Realty and Developing, Inc. v. Watson, 949 P.2d 1208, 1996 WL 515794 (Okla.1996).

In Roye Realty, supra, the Supreme Court of Oklahoma held that under Oklahoma law a royalty owner, absent clear language to the contrary in the lease, is not entitled to share in take-or-pay settlements. Since the royalty owner Plaintiffs are not entitled to share in the take-or-pay settlement proceeds, it follows that Exxon's compromise of the take-or-pay claims would not violate any fiduciary duty owed to the Plaintiffs. Furthermore, the Plaintiffs now "acknowledge that they are not entitled to any damages against Exxon under [their third] cause of action because subsequent discovery has revealed that, while the subject gas contract (No. 8851) was one of the contracts included in a $42 million take-or-pay settlement between El Paso and Exxon, no portion of such settlement was attributed to Contract No. 8851." (Plaintiffs' Response to Exxon's Request for Partial Summary Judgment, p. 4.)⁴

In light of the Plaintiffs' concessions, and in light of the Oklahoma Supreme Court's ruling in Roye Realty, supra, the Court finds that Exxon is entitled to partial summary judgment with respect to the Plaintiffs' Third Cause of Action.

III. Plaintiffs' Sixth Cause of Action— Royalties On Fuel Consumed in Plant Operations

Both sides seek summary judgment on the Plaintiffs' claim for payment of royalties on the gas consumed in the operation of the Metano Gas Plant.⁵ The Court first notes that the Plaintiffs do not claim that Exxon is required to pay royalties on the gas that has been used on the leased sites for the operation of the wells. (See Second Stipulation, filed January 17, 1997). The Plaintiffs acknowledge that Exxon is entitled to use gas free of cost to operate lifting equipment and other appurtenant machinery on each of the subject well sites. (Plaintiffs' Response to Exxon's Motion for Summary Judgment, p. 5). Thus, the issue presented is whether Exxon is entitled to the uncompensated use of gas to operate the Metano treatment plant.

There are some fifty-five variations in the language of the leases, pooling orders and assignments covering the Plaintiff class members' royalties.⁶ Though the various leases and other instruments use different language,⁷ most of them include "free use" clauses, expressly allowing Exxon, as lessee, to use gas "for the lessee's operations" on the leased premises free of charge, without payment of royalties. Two of the lease forms contain express no free use clause,⁸ and most of the overriding royalty interest conveyances before the Court in this case contain no such clause.⁹ However, even in the absence of an express free use clause, it is generally understood that the granting clause of a mineral lease includes, by implication, all rights and privileges that are necessary for the profitable production of such minerals. See, e.g. Kuntz, The Law of Oil and Gas, Par. 50.2(c), p. 282, in which the author notes that the so-called "free use" clauses are "probably descriptive of the rights of the lessee that exist in the absence of the clause," and that usually the free use clauses simply serve to remove any doubt on the subject. See also Holt v. Southwest Antioch Sand Unit, 292 P.2d 998 (Okla.1955) (lessee has "as incidental to his ownership the rights and privileges that are necessary for profitable production of such minerals"). Exxon relies on the various "free use" clauses, as well as the implied right to the use of gas.

The Plaintiffs rely on the royalty clauses of their leases, which generally provide for royalty to be paid on gas that is used "off the premises" or used in the manufacture of products. The Plaintiffs maintain that the Metano treatment plant is located "off the premises," stating that the plant is over two miles from the McCall No. 1-29 and Baker 2-28 well sites, and located within the "unit" boundary of the Green No. 1-3 (Plaintiffs' Brief in Support of Motion for Partial Summary Judgment, p. 6). Citing Franklin v. Wigton, 132 Okla. 236, 270 P. 1 (1928) and Vogel v. Cobb, 193 Okla. 64, 141 P.2d 276 (1943), the Plaintiffs argue that the gas used in the treatment plant bears royalties because it is being used "off the premises."

In Franklin, supra, the defendant owned an oil well located on land adjoining the plaintiff's land, and also owned the oil well located on the plaintiff's land. The defendant used gas from the well on the plaintiff's land to pump both wells. Both wells were pumped at the same time and with the same power. The plaintiffs sued, claiming that the defendant's use of gas constituted a use of gas off the leased premises, for which royalties were owed. The Oklahoma Supreme Court agreed, holding that the defendant's use of gas to run the well on the adjacent tract was a use "off the premises," within the meaning of the annual rental clause that provided for payment of rentals while gas was being used "off the premises."¹⁰

In Vogel, the lease provided that the lessee was entitled to the free use of water produced on the leased land "for its operations thereon." The Supreme Court of Oklahoma held that this clause did not entitle the lessee to use the water to supply houses located off the leased premises, even though the houses were occupied by persons whose duties included operating the lease on the land from which the water was taken. Vogel, 141 P.2d at 279.

Exxon cites Bingaman v. Oklahoma Corporation Commission, 421 P.2d 635 (Okla.1966), and Holt v. Southwest Antioch Sand Unit, 292 P.2d 998 (Okla.19...