Shell Rocky Mountain Production, LLC v. Ultra Resources, Inc.

Facts

D and P operate oil and gas wells on jointly leased properties. P'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. D'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. The properties were defined and described in the Farmout Agreement by their surface dimensions. 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. 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 of agreement, McMurry and Burlington agreed the JOA would govern all operations on the Unit. 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. D purchased Burlington's interest in the New Fork Unit and McMurry approved the assignment of the Agent Operator Agreement to D. McMurry assigned its interest in the Unit leases and the Farmout Agreement to P. P proposed drilling a well, referred to as the Pinedale 4A, on the New Fork Unit. D protested, declaring that it had the operating rights to that particular well under the relevant Agent Operator Agreement. P filed suit in part over who would serve as operator of the wells in the New Fork Unit, how costs and production would be allocated, and whether P could drill below the depth to which it had earned interest rights. The parties entered into a Mutual Release and Settlement Agreement (Settlement). P and D agreed to submit the remaining claims to binding, non-appealable arbitration (Non-Settled Claims). They also entered into new JOAs to govern the lands formerly within the Unit. The party with the majority ownership of the jointly held working interests would be the operator of wells drilled on the joint leasehold acreage. P holds the majority interest in the Farmout Lands while D holds the majority interest in the remaining property or Non-Farmout Lands. P proposed drilling a new well to a depth of 12,500 feet where the earnings or contract depth was limited by the Farmout Agreement to 9,931 feet. Because the new well would encroach on lands in which it held a majority interest, D claimed it should operate the well. P disagreed. D filed a Motion to Enforce Settlement Agreement and to enjoin P from drilling and acting as operator of the new well (Riverside 2-14). The court refused to resolve the operatorship dispute on the merits and denied D's motion to enforce the Settlement. P then 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. D moved to dismiss for lack of subject matter jurisdiction asserting, that P and D are not diverse because both parties have their principal places of business in the same state, Texas. The district court determined that D did not have its principal place of business in Texas and the parties were thus diverse. D filed a complaint in Wyoming state court seeking damages for P'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. P filed a timely notice of removal, prompting the district court to order removal and consolidate the cases. Both parties moved for summary judgment. The court granted P's motion, holding that (1) the Settlement granted P 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 D's excessive costs claim against Shell. Article V of each JOA includes two relevant provisions to the breach of contract dispute: section A includes a general conduct requirement with an exculpatory clause, while section D includes a specific duty provision. The exculpatory clause o provides that the operator 'shall conduct all such operations in a good and workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct.' The specific duty provision of section D requires that the operator (1) incur costs that are commensurate with those incurred by other operators in the contract area to drill and complete wells and (2) drill and complete wells at the generally prevailing rates. D appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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