Shell Rocky Mountain Production v. Ultra Resources

• Decision Date: 19 July 2005
• Docket Number: No. 03-8074.,03-8074.
• Citation: 415 F.3d 1158
• Parties: SHELL ROCKY MOUNTAIN PRODUCTION, LLC, a Delaware limited liability company, Plaintiff-Appellee, v. ULTRA RESOURCES, INC., a Wyoming corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

415 F.3d 1158

SHELL ROCKY MOUNTAIN PRODUCTION, LLC, a Delaware limited liability company, Plaintiff-Appellee, v. ULTRA RESOURCES, INC., a Wyoming corporation, Defendant-Appellant.

No. 03-8074.

United States Court of Appeals, Tenth Circuit.

July 19, 2005.

T Brooke Farnsworth of Farnsworth & vonBerg, Houston, TX (Bennett S. Bartlett of Farnsworth & vonBerg, Houston, TX, and John R. Vincent of Riverton, WY, with her on the briefs), for Defendant-Appellant.

Phillip D. Barber of Phillip D. Barber, P.C., Denver, CO (Mark W. Gifford of Casper, WY, with him on the brief), for Plaintiff-Appellee.

Before SEYMOUR, HOLLOWAY, and MURPHY, Circuit Judges.

SEYMOUR, Circuit Judge.

Ultra Resources, Inc. (Ultra) and Shell Rocky Mountain Production, LLC (Shell) operate oil and gas wells on jointly leased properties in Sublette County, Wyoming. Shell filed suit in federal district court requesting a declaration that it is the operator of certain wells on the jointly leased properties pursuant to a previous settlement agreement binding the parties. Ultra then filed a complaint in Wyoming state court seeking damages for breach of that same settlement and reformation of certain relevant joint operating agreements to make them comply with the settlement agreement. Subsequent to removal and consolidation of Ultra's state court lawsuit with this action, the parties filed cross-motions for summary judgment. The district court granted Shell's motion, holding, inter alia, that the parties' settlement agreement granted Shell the right to operate wells located on surface lands in which it held a majority interest irrespective of the depth to which those wells were drilled. Shell Rocky Mountain Prod., LLC v. Ultra Res., Inc., 266 F.Supp.2d 1331, 1336 (D.Wyo.2003). We exercise jurisdiction pursuant to 28 U.S.C. § 1291, and affirm in part, and reverse in part.

I

The predecessors in interest of Shell and Ultra were parties to a federal oil and gas unit located in Wyoming known as the New Fork Unit. Shell's predecessor, the McMurry Oil Company and its partners (McMurry), held an undivided 25% leasehold working interest to all depths in the New Fork Unit. Ultra's predecessor, Meridian Oil, Inc. (Meridian), was the Unit Operator approved by the Bureau of Land Management (BLM) and owner of the remaining 75% leasehold working interest.

In July 1996, McMurry and Meridian entered into a Farmout Agreement which provided McMurry the right to earn 75% of Meridian's 75% working interest in the leases in the New Fork Unit.¹ The properties in which McMurry had the right to earn Meridian's interest were defined and described in the Farmout Agreement by their surface dimensions. Farmout Lands were limited to five quarter sections in a checkerboard-like configuration and referred to as "blocks." According to the agreement, McMurry would earn 75% of Meridian's 75% interest in the designated Farmout Lands from the surface to "Contract Depth" by drilling an "Earning Well" on each block. McMurry also retained its 25% leasehold ownership in all of the New Fork Unit lands.²

Shortly after negotiating the Farmout Agreement, Meridian changed its name to Burlington Resources Oil & Gas Company (Burlington). McMurry and Burlington signed several contracts governing oil and gas operations on the New Fork Unit. In order to provide McMurry the ability to drill and operate wells on the Farmout Lands, the parties entered into a Joint Operating Agreement (JOA) which designated McMurry as the operator of the wells located on those designated tracts. In a separate letter agreement, McMurry and Burlington agreed the JOA would govern all operations on the Unit. Finally, the parties entered into an Agent Operator Agreement in the spring of 1997 by which McMurry executed a Designation of Agent, establishing Burlington as the operator of any well in which it held a majority ownership of the operating rights interest.

In the summer of 1997, Ultra purchased Burlington's interest in the New Fork Unit and McMurry approved the assignment of the Agent Operator Agreement to Ultra. Three years later, McMurry assigned its interest in the Unit leases and the Farmout Agreement to Shell.³ Shortly thereafter, Shell proposed drilling a well, referred to as the Pinedale 4A, on the New Fork Unit. Ultra protested, declaring that it had the operating rights to that particular well under the relevant Agent Operator Agreement. Due to this and other disputes, Shell filed suit in Wyoming state court in November 2000 (Civil Cause No. 6173). The issues in the litigation included, inter alia, who would serve as operator of the wells in the New Fork Unit, how costs and production would be allocated, and whether Shell could drill below the depth to which it had earned interest rights.

On November 2, 2001, the parties entered into a Mutual Release and Settlement Agreement (Settlement). Shell and Ultra agreed to dismiss with prejudice many of the parties' claims and counterclaims (Settled Claims) and submit the remaining claims to binding, non-appealable arbitration (Non-Settled Claims). The companies also decided to terminate the New Fork Unit and enter into new JOAs to govern the lands formerly within the Unit.⁴ According to the Settlement and JOAs, the party with the majority ownership of the jointly held working interests would be the operator of wells drilled on the joint leasehold acreage. Shell holds the majority interest in the Farmout Lands while Ultra holds the majority interest in the remaining property or Non-Farmout Lands.

In the Spring of 2002, Shell proposed drilling a new well, referred to as the Riverside 2-14 Well, to a proposed depth of 12,500 feet in a block where the earnings or contract depth was limited by the Farmout Agreement to 9,931 feet. Because the Riverside 2-14 Well would encroach on lands in which it held a majority interest, Ultra claimed it should operate the well. Shell disagreed. As a result, Ultra filed a Motion to Enforce Settlement Agreement under Civil Cause No. 6173, asking the Wyoming state court to enjoin Shell from drilling and acting as operator of the Riverside 2-14 Well. At the conclusion of an expedited hearing, the court issued an order refusing to resolve the operatorship dispute on the merits and denying Ultra's motion to enforce the Settlement. Ultra and Shell continued to disagree over which party was entitled to be the operator of the Riverside 2-14 Well and of all other wells which have a surface and a bottom-hole location underlying the Farmout Lands.

In June 2002, Shell filed this action in Wyoming federal district court seeking a declaratory judgment to enforce the Settlement and to determine which party is entitled to act as operator of the wells in dispute. Ultra responded to Shell's complaint with a motion to dismiss for lack of subject matter jurisdiction, asserting, inter alia, that Shell and Ultra are not diverse because both parties have their principal places of business in the same state, Texas. The district court denied that motion, concluding that Ultra did not have its principal place of business in Texas and the parties were thus diverse for purposes of federal jurisdiction. Aplt.App., vol. 1, at 60.

In July 2002, Ultra filed a complaint in Wyoming state court seeking damages for Shell's alleged breach of the Settlement and an order requiring compliance with the Settlement. It also sought reformation of the JOAs to bring them into compliance with the terms of the Settlement. Shell filed a timely notice of removal, prompting the district court to order removal and consolidate the cases.

Ultra's answer to Shell's federal complaint included three counterclaims. The first two were identical to Ultra's state court claims as detailed above. The third alleged that Shell breached the JOAs by imposing excessive drilling and operations costs. Both parties moved for summary judgment. The district court granted Shell's motion, holding that (1) the Settlement granted Shell the right to operate the wells that were located on surface lands in which it held a majority interest irrespective of the depth to which those wells are drilled; (2) the Settlement provision addressing directional drilling wells created an exception to the Settlement's general rule for designating well operators; and (3) the exculpatory clauses in the JOAs barred Ultra's excessive costs claim against Shell.

On appeal, Ultra advances several arguments that it claims warrant reversal of the district court's decision to grant Shell's motion for summary judgment. According to Ultra, (1) the district court committed clear error in its determination that Ultra's principal place of business is either Wyoming or Colorado; (2) res judicata or claim preclusion bars Shell's sole claim for declaratory judgment; (3) the district court erred in ruling that the plain terms of the settlement agreement and the applicable JOAs provide Shell the right to operate any well with a surface location on Farmout Lands to all depths; and (4) the district court erred in construing the JOA's exculpatory clause to bar Ultra's claim that Shell breached the competitive rate provisions of the parties' contract. We address each argument in turn.

II Diversity Jurisdiction

Shell brought this civil action against Ultra in Wyoming district court. Ultra filed a motion to dismiss for lack of subject matter jurisdiction on the basis that the parties were not diverse. For purposes of diversity jurisdiction, "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business." Id. § 1332(c)(1).

It is undisputed that Shell is a Delaware limited liability corporation (LLC) and its principal place of business is Houston, Texas. Thus, Shell is a citizen of both Delaware and Texas. It is also undisputed that Ultra is a Wyoming corporation. The parties are in disagreement, however, as to the location of Ultra's principal...