Union Pacific Resources Co. v. Texaco, Inc.

• Decision Date: 30 September 1994
• Docket Number: Nos. 93-223,93-224,s. 93-223
• Citation: 882 P.2d 212
• Parties: UNION PACIFIC RESOURCES COMPANY, a Delaware corporation, as Successor in Interest to Champlin Petroleum Company, Appellant (Plaintiff), v. TEXACO, INC., a Delaware corporation; and Wexpro Company, a Utah corporation, as Successor in Interest to Mountain Fuel Supply Company, Appellees (Defendants). AMOCO PRODUCTION COMPANY, a Delaware corporation, Appellant (Plaintiff), v. TEXACO, INC., a Delaware corporation; and Wexpro Company, a Utah corporation, as Successor in Interest to Mountain Fuel Supply Company, Appellees (Defendants).
• Court: Wyoming Supreme Court

Page 212

882 P.2d 212

UNION PACIFIC RESOURCES COMPANY, a Delaware corporation, as Successor in Interest to Champlin Petroleum Company, Appellant (Plaintiff), v.TEXACO, INC., a Delaware corporation; and Wexpro Company, a Utah corporation, as Successor in Interest to Mountain Fuel Supply Company, Appellees (Defendants).

AMOCO PRODUCTION COMPANY, a Delaware corporation, Appellant (Plaintiff), v.TEXACO, INC., a Delaware corporation; and Wexpro Company, a Utah corporation, as Successor in Interest to Mountain Fuel Supply Company, Appellees (Defendants).

Nos. 93-223, 93-224.

Supreme Court of Wyoming.

Sept. 30, 1994.

Rehearing Denied Nov. 2, 1994.

Loyd E. Smith of Lathrop & Rutledge, P.C., Cheyenne, and Gretchen A. VanderWerf and Lino S. Lipinsky de Orlov of Hawley and VanderWerf, P.C., Denver, CO, for Union Pacific Resources Co.

Bradley S. McKim of Amoco Corp., Denver, CO and Stan L. Spangler of Shaw, Spangler & Roth, P.C., Denver, CO, for Amoco Production Co.

Neil J. Short, Casper, and Craig R. Carver of Gibson, Dunn & Crutcher, Denver, CO, for Texaco, Inc.

Neil J. Short, Casper, for Wexpro Co.

Before GOLDEN, C.J., and THOMAS, CARDINE, ^*MACY, ^** and TAYLOR, JJ.

TAYLOR, Justice.

The primary question in these consolidated appeals concerns the interpretation of a contract.The contract is an operating agreement formed by four oil and gas companies who own exclusive rights to exploit minerals on certain lands in Wyoming.The contract allocates expenses and profits for natural gas exploration and production.The allocation of profit varies depending upon the geologic formation from which production is achieved.After the parties executed the contract, a natural gas well capable of significant production was discovered in one formation.Subsequently, the Wyoming administrative agency responsible for oil and gas conservation ordered that the size of the drilling unit for that formation be enlarged from its former boundaries to protect the correlative rights of an adjoining mineral rights owner and the operating rights owners.This dispute is focused on whether the order from the administrative agency superseded the parties' contract.The district court determined that the contract was modified by the administrative agency order.

We affirm.

I.ISSUES

Appellant, Union Pacific Resources Company(Union Pacific), identifies the issues in AppealNo. 93-223 as:

1.Whether the parties' Operating Agreement clearly and unambiguously fixed the parties' respective ownership interests in production from the L-2 Well.

2.Whether spacing and compulsory pooling orders entered by the Wyoming Oil and Gas Conservation Commission subsequent to the drilling of the L-2 Well modified or superseded the parties' private agreement regarding the allocation of production set forth in the Operating Agreement.

3.Whether the concept of correlative rights embodied in the Wyoming Oil and Gas Conservation Act, W.S. §§ 30-5-101, et seq., overrides a private agreement voluntarily entered into among working interest owners apportioning production among themselves.

4.Whether the District Court's finding that the Commission's orders modified the Operating Agreement unconstitutionally impaired UPRC's contractual relationship with Texaco and Wexpro.

5.Whether Texaco and Wexpro are estopped from claiming interests in the L-2 Well greater than they bargained for in the Operating Agreement.

Appellant, Amoco Production Company(Amoco), frames the following issues in AppealNo. 93-224:

1.Does a Wyoming Oil and Gas Conservation Commission order enlarging a drilling unit under W.S. § 30-5-109 in and of itself change working interest ownership as agreed to in a private operating agreement?

2.If the answer to Issue 1 is "No", should summary judgment be entered in Amoco's favor on the basis that the Operating Agreement unambiguously fixes the parties' working interest ownership?

Appellee, Wexpro Company(Wexpro), finds these issues in the consolidated cases:

1.Whether the statutory provisions of the Wyoming Conservation Law and the regulatory provisions of the Wyoming Oil and Gas Conservation Commission must be considered a part of oil and gas contracts for operations in the State of Wyoming as though these [statutory] and regulatory provisions were actually included in the terms of any such contract.

2.Whether the provisions of the subject Operating Agreement * * * incorporated into that Operating Agreement the spacing orders entered by the Wyoming Oil and Gas Conservation Commission in DocketNo. 191-81 for the Frontier formation * * * and by the order entered in DocketNo. 190-81 for the Dakota formation * * *.

3.Whether the findings of fact and conclusions of law entered by the Wyoming Oil and Gas Conservation Commission in DocketNo. 404-90 * * * altered the subject Operating Agreement * * * as to the Dakota formation in order to honor the best, current scientific data and thereby protect the correlative [rights] of appelleesWexpro Company and Texaco, Inc.

4.Whether the Operating Agreement * * * is a pooling agreement.

Appellee, Texaco, Inc.(Texaco), summarizes the issues from both cases:

Whether the district court's Order properly interpreted the meaning of the parties' Operating Agreement.

II.FACTS

On September 18, 1981, the Wyoming Oil and Gas Conservation Commission(Commission) issued two orders to regulate exploration for natural gas and associated hydrocarbons (gas) on certain Wyoming lands located in Lincoln, Sweetwater and Uinta Counties.The orders established drilling units of specified sizes where one well could be drilled to extract pools of gas that were believed to exist in distinct sedimentary formations beneath the surface.Each order also identified the area assigned for the granting of a well permit.

Included in the Commission's orders were sedimentary formations located in the Bruff Field of the Moxa Arch area of Sweetwater and Lincoln Counties.In the Frontier formation, the Commission established an irregularly sized 760-acre drilling unit which included all 640 acres of Section 15 and an adjoining 120-acre portion of Section 22 of Township 19 North, Range 112 West, 6th P.M.In the Dakota formation, the Commission established a 640-acre drilling unit which encompassed all of Section 15 of Township 19 North, Range 112 West, 6th P.M.The Dakota formation is a geologic zone which is found at a deeper depth than the Frontier formation.

Union Pacific, Amoco, Wexpro and Texaco (collectively the parties) own oil and gas working interests in the Bruff Field.Effective October 7, 1981, the parties, or their predecessors in interest, entered into an Operating Agreement to test and develop a portion of the Bruff Field.The Operating Agreement defined the "subject lands" as including the parties' interests in all of Section 15 of Township 19 North, Range 112 West, 6th P.M.(hereinafter Section 15) and the parties' interests in the portion of Section 22 of Township 19 North, Range 112 West, 6th P.M.(hereinafter Section 22) which corresponded with the Commission's Frontier formation drilling unit order.The Operating Agreement acknowledged that the Commission had established a 760-acre drilling unit for the Frontier formation and a 640-acre drilling unit for the Dakota formation.Specifically incorporated into the Operating Agreement was an agreement of Operating Provisions which was attached as Exhibit "D".The Operating Agreement also incorporated another agreement signed by the parties which is styled as a Communitization Agreement.Effective October 7, 1981, the Communitization Agreement provided exclusively for development of the Frontier formation.

The Operating Agreement designated Amoco as the operator of the wells on the "subject lands."During 1981, Amoco was required to commence drilling of a test well in Section 15"to adequately test the Frontier and Dakota formations" unless conditions prohibited.This test well, designated the Champlin 149 Amoco "L" Well # 1 (hereinafter the L-1 Well) was located in the southeastern quarter of Section 15.The L-1 Well produced commercial quantities of gas from the Frontier formation, but was unproductive from the Dakota formation.On April 30, 1982, the L-1 Well was placed in commercial production.

In the Operating Agreement, the parties agreed to allocate the ownership of production in "working interest percentages," which were stated as:

                      Frontier              Dakota
                [Wexpro]              15.62501%             11.04410%
                Amoco                 46.71052%             53.95750%
                [Union Pacific]       21.87500%             29.00420%
                Texaco                15.78947%              5.99420%
                

Production from the L-1 Well was allocated according to these "working interest percentages" for the Frontier formation.

On June 29, 1989, Amoco proposed drilling the Champlin 149 Amoco "L" Well # 2 (hereinafter the L-2 Well).The L-2 Well would be located within the southwestern quarter of Section 15 and would be drilled to test both the Frontier and Dakota formations.Union Pacific, Wexpro and Texaco all signed "Well Authorization" agreements to signify their approval of the proposal.These agreements restated that production from the L-2 Well would be allocated according to the "working interest percentages" found in the Operating Agreement.

The L-2 Well was completed on January 23, 1990.The L-2 Well produced substantial quantities of gas from the Dakota formation.The amount of production from the L-2 Well exceeded the expectations of experts, particularly since the nearby L-1 Well had failed to produce commercial quantities of gas from the Dakota formation.

The United States Department of the Interior, Bureau of Land Management (BLM) owns the mineral rights to the portion of the "subject lands" within Section 22.On September 7, 1990, the BLM, as lessor, demanded that Texaco and Wexpro, as lessees or operating rights owners, act to protect the leased...