Tellus Operating Grp., LLC v. Maxwell Energy, Inc.

• Decision Date: 08 April 2014
• Docket Number: No. 2012–CA–00357–COA.,2012–CA–00357–COA.
• Citation: 156 So.3d 333
• Court: Mississippi Court of Appeals
• Parties: TELLUS OPERATING GROUP, LLC, Appellant v. MAXWELL ENERGY, INC., Appellee.

156 So.3d 333

TELLUS OPERATING GROUP, LLC, Appellant

v.MAXWELL ENERGY, INC., Appellee.

No. 2012–CA–00357–COA.

Court of Appeals of Mississippi.

April 8, 2014.

Glenn Gates Taylor, Christy Michelle Sparks, Ridgeland, attorneys for appellant.

Malcolm T. Rogers, Monticello, attorney for appellee.

EN BANC.

MODIFIED OPINION ON MOTION FOR REHEARING

CARLTON, J., for the Court:

¶ 1. The motion for rehearing is granted. This Court's original opinion is withdrawn, and this opinion is substituted in lieu thereof. This case involves our appellate judicial review¹ of an administrative executive board decision to determine if the Mississippi State Oil and State Oil and Gas Board (Board) decision is supported by substantial evidence.²

¶ 2. Maxwell Energy Inc. (Maxwell) filed an appeal in the Jefferson Davis County Chancery Court of an order of the Board that allowed the operator of a proposed oil and gas well, Tellus Operating Group LLC (Tellus),³ to charge statutory “alternate charges” to each “nonconsenting owner” of drilling rights, Maxwell included, who did not timely agree in writing to exercise one of its statutory options to participate in drilling a proposed unit well in search of oil and gas.⁴ The chancery court reversed the Board's order, finding that the Board's decision that Tellus offered Maxwell reasonable terms was unsupported by substantial evidence, and that Maxwell had in fact agreed in writing to participate in the drilling of the well.

¶ 3. The current procedural posture before this Court reflects that Tellus then appealed, raising the following issues: (1) whether the Board's finding that Tellus satisfied the statutory requirements for the “force integration” of Maxwell's interest with alternate charges by offering reasonable terms is supported by substantial evidence, and (2) whether the Board correctly rejected Maxwell's argument that Maxwell could avoid alternate charges by simply sending Tellus a check for its share of the costs to drill the well, rather than agreeing in writing to the reasonable terms that are required by statute. Tellus alleges that because substantial evidence existed to support the Board's order, this Court should reverse the decision of the chancery court and reinstate the Board's order.⁵

¶ 4. We acknowledge that the procedural history of this matter before the Board reflects that in September 2006, Tellus filed a petition with the Board to form a drilling unit to drill a new well, the Chianti Well No. 1 (Chianti Well), in Jefferson Davis County, Mississippi. Maxwell owned drilling rights involved with the drilling and operation of the well and drilling unit at issue, but Maxwell gave no consent to Tellus to drill or operate a well involving its interests and drilling rights. Tellus then asked the Board to form the drilling unit pursuant to Mississippi's force-integration statute, Mississippi Code Annotated section 53–3–7 (Rev.2003).⁶ Tellus also requested the Board to authorize Tellus to charge each nonconsenting owner the alternate charges that are allowed by subsection (2) of section 53–3–7.⁷ At the time Tellus filed its petition, the record reflects that the owners of approximately ninety-six percent of the drilling rights in the proposed drilling unit had agreed in writing to lease, to farm out, or to participate in the Chianti Well. However, Maxwell constituted a working-interest owner who had not agreed.⁸

¶ 5. The Board found that Tellus offered Maxwell reasonable terms. However, upon Maxwell's appeal of the Board's decision, the chancellor disagreed, finding the terms unreasonable and reversing the decision of the Board. Upon finding that the chancellor applied an erroneous standard of review, thereby resulting in an arbitrary decision, we find error in the chancery court's judgment, and we reverse and render. See Tex. Pac. Oil Co. v. Petro Grande, Inc., 328 So.2d 660, 663 (Miss.1976) (appellate court will affirm where the Board's decision is supported by substantial evidence).

FACTS

¶ 6. On September 15, 2006, Tellus filed a petition with the Board to “force integrate, with alternate charges, a drilling unit for a proposed gas well, approve an exception well and an exception location, and grant related relief [.]” Tellus asked the Board to form the unit by force integrating all owners and interests, charging each nonconsenting owner of drilling rights in the unit the “alternate charges” allowed by Mississippi Code Annotated section 53–3–7(2).

¶ 7. As required before assessing alternate charges against a nonconsenting owner, and before Tellus filed its petition with the Board, Tellus notified Maxwell by letter of the information required by section 53–3–7(2)(a) and offered the three following statutory options that are prescribed by section 53–3–7(2)(a)(v) : a written agreement to lease out on reasonable terms, or to farm out, or to participate in the cost and risk of developing and operating the proposed unit well. The participation offer was for an owner to sign an operating agreement and authority for expenditure (AFE). The operating agreement offered to Maxwell was a standard industry form agreement addressing not only costs chargeable for drilling and operating, but other matters such as liability, royalties, taxes, and such.

¶ 8. Maxwell contested Tellus's petition to assess alternate charges, and Maxwell took the position that Tellus failed to offer reasonable terms or negotiate in good faith. Maxwell asked that the Board not allow Tellus to charge Maxwell interest with any alternate charges. More specifically, on October 10, 2006, Maxwell filed a notice of contest of Tellus's petition with the Board, alleging that Tellus failed to negotiate with Maxwell in good faith and asking the Board to remove Maxwell's interest from any alternate charges.

¶ 9. The Board heard Tellus's petition at its October 2006 meeting. Tellus presented evidence and two witnesses in support of its petition. D.W. Maxwell, the owner of Maxwell Energy, testified in opposition, but he did not offer any exhibits into evidence, nor did he call any other witnesses. Following the hearing, the Board entered an order on November 1, 2006, which granted Tellus's petition and determined that the evidence presented at the hearing established that Tellus satisfied all of the statutory requirements of section 53–3–7(2) to force integrate the unit and to allow Tellus to charge Maxwell and any other nonconsenting owners with statutory alternate charges recoverable out of production, if any.⁹ The order concluded by stating:

Each non-consenting owner shall be afforded the opportunity to participate in the development and operation of the [w]ell in the pooled unit as to all or any part of said owner's interest on the same cost basis as the consenting owners by agreeing in writing to pay that part of the costs of such development and operation chargeable to said non-consenting owner's interest, or to enter into such other written agreement with the operator as the parties may contract, provided such acceptance in writing is filed with the Board within twenty (20) days after this [o]rder is filed for record with the Board.

(Emphasis added). The order included the statutory language required by section 53–3–7(2)(g), providing that Maxwell possessed twenty days after the Board's order was entered in which to accept and agree in writing to one of the three statutory offers by Tellus, or enter into “such other written agreement with [Tellus] as the parties may contract.”

¶ 10. The record reflects Maxwell failed to accept or agree in writing to any of the three statutory options offered and entered into no other written agreement with Tellus. By letter dated November 14, 2006, Maxwell instead notified Tellus, and also the Board, of its agreement to voluntarily integrate its interest in the unit and to participate and join in the costs of the development, to the extent of Maxwell's own calculation of its estimated proportional share of the all the associated costs. Specifically, the letter stated:

[Maxwell] hereby agrees in writing to voluntarily integrate all of its interests in the unit ... [and] hereby elects in writing to participate and join in on the same cost basis as the other consenting owners for its share of the cost and risk of developing and operating of the ... unit ... insofar and only insofar as the same relates to Maxwell's leasehold interest covering mineral interests which are subject to alternate risk charges, and hereby agrees in writing to pay its pro rata share of all the costs associated therewith.

Maxwell sent a check to Tellus in the amount of $18,277.94 along with the above described letter that explained that the check was for payment of Maxwell's “proportionate share of the dry hole costs for the drilling of the ... well.” The letter stated that Maxwell also agreed

to advance its share of completion costs upon election by Tellus or its affiliates to set casing for a completion attempt and by notifying Maxwell in writing of such election and request for payment of completion costs for Maxwell's share of such costs.

¶ 11. In response, Tellus returned the check to Maxwell with a November 21, 2006 letter. In the letter, Tellus notified Maxwell that the letter and check were insufficient and nonbinding, and failed to constitute compliance with the Board's decision and that to be deemed a consenting owner, Maxwell needed to sign, date, and return the documents previously submitted to Maxwell: the joint operating agreement and the authority for expenditure. Clearly, Maxwell failed to accept Tellus's offer. Moreover, Maxwell's counteroffer failed contain or address the various issues and provisions set forth in the standard form operating agreement provided to it by Tellus. The record reflects that Tellus gave no consent to the terms offered by Maxwell.

¶ 12. On December 27, 2006, Maxwell appealed the Board's order to the Jefferson Davis County Chancery Court. The chancery court reversed the Board's order, finding...