Exxon Corporation v. Crosby-Mississippi ( 2000 )

UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 99-60466
EXXON CORPORATION, A New Jersey Corporation,
Plaintiff-Appellant,
VERSUS
CROSBY-MISSISSIPPI RESOURCE, LTD., A Mississippi
Partnership; LYNN CROSBY GAMMILL, General Partner;
STEWART GAMMILL, III, General Partner; STEWART
GAMMILL, III, as Successor Trustee for Stewart,
Gammill IV, Trust No. 2; LUCIUS OLEN CROSBY GAMMILL,
Trust No. 2; JENNIFER LYNN GAMMILL, Trust No. 2; LUCIUS
OLEN CROSBY GAMMILL; STEWART GAMMILL, IV; JENNIFER LYNN
GAMMILL; STEWART GAMMILL, III, as Successor Trustee
for Stewart Gammill, IV; ALL DEFENDANTS,
Defendants-Appellees.
Appeal from the United States District Court
For the Southern District of Mississippi
(3:89-CV-627)
June 14, 2000
Before EMILIO M. GARZA, DeMOSS, and STEWART, Circuit Judges.
PER CURIAM:*
Exxon Corporation (Exxon) appeals the district court’s
*
Pursuant to 5TH CIR. R. 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
decision granting summary judgment in favor of defendants Crosby-
Mississippi Resource, Ltd., et al. (collectively, CMR). This
factually complex oil and gas dispute has been pending for more
than ten years. This Court previously considered an unrelated
issue in a prior appeal. See Exxon v. Crosby-Mississippi
Resources, Ltd., 154 F.3d 202 (5th Cir. 1998). The single issue
presented here is whether Exxon is obligated, by the terms of four
separate joint operating agreements, to pay CMR a portion of a
cost-free 3/16 royalty on some portion of the actual production
from each of four individual oil wells covered by the four
agreements. The district court granted summary judgment in favor
of CMR on this issue, and then certified the issue for immediate
appeal pursuant to Federal Rule of Civil Procedure 54(b). We
affirm, as modified by this opinion, and remand for further
proceedings.
I.
We are here asked to interpret the purportedly unambiguous
terms of four substantively identical contracts between the
parties, Exxon and CMR, and several non-parties, Prosper Energy
Corporation, Petro-Hunt Corporation, and Propel Energy Company
(collectively referred to as Prosper). Our review is de novo, see
Musser Davis Land Co. v. Union Pacific Resources, 201 F.3d 561, 563
(5th Cir. 2000), and the parties agree that the controlling issues
2
are governed by Mississippi state law. Exxon claims that the
district court erred because the unambiguous terms of the contract
require the conclusion that CMR is entitled only to its cost-
bearing working interest on production, and not to any additional
monies in the form of a cost-free royalty on production.
Alternatively, Exxon claims that, even if CMR is entitled to a
royalty, Exxon is entitled to a similar and presumably offsetting
royalty. Finally, Exxon maintains that, even if CMR alone is
entitled to a royalty, the district court miscalculated Exxon’s
proportionate share of that royalty, thus diluting Exxon’s cost-
bearing working interest in production under the four contracts.
CMR defends the district court’s judgment rejecting each of these
arguments. The parties agree that the resolution of this case
depends entirely upon the express terms of these four contracts,
referred to herein as the joint operating agreements or JOAs, and
not upon the terms of any other agreements. We will therefore
begin with an analysis of the relevant contract provisions.
II.
The four JOAs contain identical contract terms, aside from
contract specific information identifying the lands, specifying the
percentage of each parties’ working interest, and providing certain
effective dates. There are several exhibits to each of the four
JOAs, two of which are relevant to the issue presented. Exhibit A
identifies the contract area covered by the particular JOA and
3
purports to define the parties “working interests” in the contract
area. Exhibit B is a form oil, gas, and mineral lease, which
provides for the payment of a 3/16 royalty.
Each JOA states that the parties have “reached an agreement to
explore and develop these leases and/or oil and gas interests for
the production of oil and gas.” The “Definitions” section of the
agreement provides, in relevant part:
* * *
B. The terms “oil and gas lease,” “lease,” and
“leasehold” shall mean the oil and gas leases
covering tracts of land lying within the Contract
area that are owned by the parties to this
agreement.
C. The terms “oil and gas interests” shall mean
unleased fee and mineral interests in tracts of
land lying within the Contract area that are owned
by the parties to this agreement.
* * *
G. The terms “Drilling Party” and “Consenting Party”
shall mean a party who agrees to join in and pay
its share of the cost of any operation conducted
under the provisions of this agreement.
H. The terms “Non-Drilling Party” and “Non-Consenting
Party” shall mean a party who elects not to
participate in a proposed operation.
The “Exhibits” section of each JOA provides that the exhibits
are incorporated by reference. That section further provides, in
relevant part, that:
If any provision of any exhibit, except Exhibits
“E” and “A” is inconsistent with any provision
contained in the body of this agreement, the
provisions in the body of this agreement shall
4
prevail.
Article III is titled “Interests of Parties,” and contains
four subparts; subpart A titled “Oil and Gas Interests,” subpart B
titled “Interests of Parties in Costs and Production,” subpart C
titled “Excess Royalties, Overriding Royalties and Other Payments,”
and subpart D titled “Subsequently Created interests.” Article III
provides, in relevant part:
A. Oil and Gas Interests:
If any party owns an oil and gas interest in the
Contract Area, the interest shall be treated for all
purposes of the agreement and during the term hereof as
if it were covered by the form of oil and gas lease
attached hereto as Exhibit "B" and the owner thereof
shall be deemed to own both the royalty interest reserved
in such lease and the interest of the lessee thereunder.
B. Interests of Parties in Costs and Production:
Unless changed by other provisions, all costs and
liabilities incurred in operations under this agreement
shall be borne and paid, and all equipment and materials
acquired in operations on the Contract Area shall be
owned, by the parties as their interests are set forth in
Exhibit "A". In the same manner, the parties shall also
own all production of oil and gas from the Contract Area
subject to the payment of royalties to the extent of
3/16 which shall be borne as hereunder set forth.
Regardless of which party has contributed the
lease(s) and/or oil and gas interest(s) hereto on which
royalty is due and payable, each party entitled to
receive a share of production of oil and gas from the
Contract Area shall bear and shall pay or deliver, or
cause to be paid or delivered, to the extent of its
interest in such production, the royalty amount
stipulated herein above and shall hold the other parties
free from any liability therefor. No party shall ever be
responsible, however, on a price basis higher than the
price received by such party, (or any other party’s
lessor or royalty owner, and if any such other party’s
lessor or royalty owner shall demand and receive
5
settlement on a higher price basis, the party
contributing the affected lease shall bear the additional
royalty burden attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed
an assignment or cross-assignment of interests covered
hereby.
Thus, each JOA expressly provides for the payment of a 3/16 royalty
in at least two circumstances. First, such a royalty is due to a
party to the joint operating agreement whenever that party also
owns unleased mineral interests in the contract area. Article III
subpart A provides that any party to the JOA, i.e. Exxon, CMR, or
Prosper, that also owns an “oil and gas interest in the contract
area,” shall own “both the royalty interest reserved” in the lease
attached to the JOA as Exhibit B and the “interest of the lessee
thereunder,” which is a cost-bearing working interest in
production. See 8 HOWARD R. WILLIAMS & CHARLES J. MEYERS, OIL AND GAS LAW,
MANUAL OF OIL AND GAS TERMS, at 566, 1193 (1999). Each JOA defines the
term “oil and gas interests” to mean “unleased fee and mineral
interests . . . which are owned by the parties to this agreement.”
Further, the “royalty interest reserved” in the lease attached as
Exhibit B is a cost-free 3/16 royalty on production. Thus, Article
III subpart A, together with the lease attached as Exhibit B,
provides that any party to the JOA, which also owns an unleased
mineral interest in the contract area, is entitled to a 3/16 cost-
free royalty on production (to the extent of that party’s unleased
mineral interest and subject to the terms of the lease attached as
6
Exhibit B) in addition to that party’s working interest under the
JOA.
Second, Article III subpart B recognizes that a 3/16 royalty
may be also be due to a third party, which is not a party to the
JOA, such as the lessor of an oil and gas interest that was leased
to one of the signing parties before the particular JOA was signed.
Article III subpart B also addresses how any 3/16 royalty to be
paid, whether owed to a party pursuant to subpart A or to a non-
party pursuant to subpart B, is to be paid by the parties to the
JOA. Subpart B states that any royalty or other obligation not
exceeding 3/16 of production will be paid by the parties “to the
extent of” or in a manner proportionate to their working interest
in production from the contract area. Subparts C and D essentially
provide that any royalties or other obligations that are in excess
of the 3/16 royalty described in subpart B or that constitute
subsequently created or undisclosed interests will not be shared
proportionate to ownership among the parties, but will remain the
sole obligation of the party currently burdened by the obligation.
Exhibit A describes the contract area, provides the names and
addresses of all parties for notice purposes, and most
significantly, defines the cost-bearing “working interests” of the
parties. Exhibit A provides, in relevant part:
3. Working Interests of Parties:
In determining the interests of the parties hereto,
Prosper, Propel and Petro-Hunt shall first be considered
to be one party; and, similarly, Exxon and CMR, ET AL
7
shall first be considered to be one party
PROSPER, PETRO-HUNT AND PROPEL EXXON AND CMR, ET AL
39.24% 48.26%
If it should be subsequently discovered that the
interest(s) of either Prosper, Propel and Petro-Hunt or
Exxon and CMR et al is incorrect, the interest(s) of the
parties in the Contract Area shall be retroactively
adjusted to reflect the corrected interest in the same
manner as the interest was calculated above. Each
signatory hereto shall alone bear any additional burden
other than that provided in Article III hereof including
but not limited to conversion options and all farm in and
other obligations.
As among Exxon and CMR et al, the working interests in
the Contract Area provided for above, shall be divided as
follows:
EXXON CORPORATION CROSBY-MISSISSIPPI RESOURCES, LTD
76.00000% 24.00000%
The quoted percentages are drawn from one of the JOAs. The
specific percentage of Exxon and CMR’s combined working interest as
compared to Prosper’s, i.e. the figures in the first line of
percentages, varies by contract. The way in which Exxon’s and
CMR’s individual interest in the combined working interest is
divided, however, remains constant, with Exxon owning 76% of the
combined working interest and CMR owning 24% of the combined
working interest. Exxon’s and CMR’s individual working interest is
obtained by multiplying the combined working interest for a
particular JOA by the percentage of the combined working interest
which is owned by each of the parties. For example, the JOA quoted
above covers all of Section 26, Township 2 South, Range 17 West in
8
Pearl River County, on which has been drilled the So. Minerals No.
26-10 oil well. In that well, Exxon owns a 36.6776 percent cost-
bearing working interest in production (calculated as 76 percent of
the 48.26 percent combined working interest), CMR owns an 11.5824
percent cost-bearing working interest in production (calculated as
24 percent of the 48.26 combined working interest), and Prosper
owns a 39.24 percent cost-bearing working interest in production.2
As set forth above, Article III subpart B provides that each
party’s royalty burden is to be determined with reference to and
paid proportionate to its working interest in the contract area.
Thus, for the JOA quoted above, Exxon is responsible for 36.6776
percent of any royalty due, whether to a party owning an unleased
2
The remaining JOAs likewise define the parties’
respective working interests in Exhibit A to the contracts. Under
a JOA covering all of Section 2, Township 3 South, Range 17 West,
on which has been drilled the Leo Flynt 2-7 oil well, Exxon owns a
25.22754 percent working interest in production (calculated as 76
percent of a 33.19413 percent combined working interest), CMR owns
a 7.96659 percent working interest in production (calculated as 24
percent of a 33.19413 percent combined working interest), and
Prosper owns a 21.79688 percent working interest. Under a JOA
covering all of Section 10, Township 2 South, Range 17 West, on
which has been drilled the So. Minerals No. 10-10 oil well, Exxon
owns a 16.01768 percent working interest (calculated as 76 percent
of a 21.0759 percent combined working interest), CMR owns a 5.05822
percent working interest (calculated as 24 percent of a 21.0759
percent combined working interest), and Prosper owns a 76.92410
percent working interest. Finally, under a JOA covering all of
Section 35, Township 2 South, Range 17 West, on which has been
drilled the So. Minerals No. 35-1 oil well, Exxon owns a 35.45025
percent working interest in production (calculated as 76 percent of
the 46.64506 percent combined working interest), CMR owns a
11.19481 percent working interest in production (calculated as 24
percent of the 46.64506 percent combined working interest), and
Propser owns a 40.17785 percent working interest.
9
mineral interest or to a third party lessor or obligor, CMR is
responsible for 11.5824 percent of any such royalties, and Prosper
is responsible for 39.24 percent of any such royalties. Having set
forth the relevant contract terms, we now turn to consideration of
the specific arguments of the parties.
III.
Exxon argues that the district court erred by holding that the
unambiguous terms of the four JOAs provide that CMR is entitled to
a cost-free 3/16 royalty on production, in addition to CMR’s
working interest as defined in Exhibit A to each JOA. Exxon argues
that, contrary to the district court’s conclusion, Exhibit A
defines the parties’ total interest under each of the contracts,
rather than their cost-bearing working interest. This contention,
which Exxon raises in a variety of ways, is belied by the plain
language of Exhibit A, which refers exclusively to the “working
interests” of the parties.
Exxon responds that the term “working interests” in this
context was intended to refer to something Exxon has labeled the
parties’ “gross working interests.” Thus, Exxon maintains that no
party can ever be entitled to more from the well than the
percentage set forth in Exhibit A. Exxon essentially argues that
a joint operating agreement cannot provide for the same party to
own both a cost-free royalty interest in subsequent production, if
any, and a cost-bearing working interest in the same well.
10
Once again, this contention is belied by the plain terms of
the contracts. There is no language in any section of the JOAs
suggesting that the parties intended anything other than that the
terms “royalty interest” and “working interest” would have the
ordinary and well-established meaning given to those terms in oil
field contracts. A working interest is a cost-bearing interest in
production, generally created by an oil and gas lease. See 8 HOWARD
R. WILLIAMS & CHARLES J. MEYERS, OIL AND GAS LAW, MANUAL OF OIL AND GAS TERMS,
at 566, 1193 (1999); see also id. at 952. The term “gross working
interest,” in contrast, has a very particular and specialized
meaning, derived in large part from the context of Department of
Energy reporting. See id. at 474. There is simply no indication
that the parties intended to employ that term, rather than the
plain and unambiguous language used, in this contract. Moreover,
and contrary to Exxon’s suggestion, there is no indication that the
ownership of a working interest is inherently preclusive of any
other interest in the well. To the extent that a contract
reserving both a royalty interest and a working interest in favor
of the same party may be atypical, that does not give us the
authority to avoid an unambiguously worded contract by rewriting
the agreement for the parties. See Otter Oil Co. v. Exxon Co.,
U.S.A., 834 F.2d 531, 534 (5th Cir. 1987); see also Robin v. Sun
Oil Co., 548 F.2d 554 (5th Cir. 1977).
In a related argument, Exxon contends that Exhibit A reflects
11
Exxon’s and CMR’s agreement to pool their interests without
differentiating between them, such that Exxon owns 76 percent of
the combined interests and CMR owns 24 percent of the combined
interests. Thus, Exxon argues, there is no difference between
Exxon and CMR with respect to the combined interests, and the fact
that CMR contributed unleased mineral interests while Exxon
contributed leases is of no moment. Exxon concludes that Exxon
bargained for and owns the precise and unencumbered percentage of
gross working interest set forth in Exhibit A to each JOA.
This argument must fail for similar reasons; that is, because
it is premised upon the theory that Exhibit A both defines
something more than an ordinary working interest and simultaneously
precludes any other interest by the parties. Exhibit A defines the
parties’ working interests. As to those interests, we agree with
Exxon that the JOAs arguably reflect an agreement not to treat
Exxon’s and CMR’s interests differently.3 With respect to royalty,
3
On the other hand, we note that even Exhibit A provides
for a division of the combined working interests of Exxon and CMR,
while not similarly providing for such a division between the
various entities collectively referred to herein as Prosper.
Exxon’s argument that the JOAs reflect an intent not to
differentiate between Exxon’s and CMR’s interests in any manner
might be stronger if Exxon and CMR had entered into the JOAs as a
single entity contributing a single block of undifferentiated oil
and gas interests. But each of the parties signed the agreements
in their individual capacity. Exhibit A provides for a division of
the parties’ combined working interests. Finally, and most
significantly, Exxon has neither disputed that CMR continues to own
unleased mineral interests within the contract areas defined by the
individual JOAs nor clearly alleged that it owns some undivided
portion of such interests itself. Absent such an allegation, the
district court did not abuse its discretion by refusing to allow
12
however, the JOAs unambiguously provide that the owners of unleased
mineral interests are entitled to a royalty interest, in addition
to whatever working interest is retained by the parties.
Exxon acknowledges the separate provision in Article III
subpart A of the JOAs providing for a 3/16 royalty interest to
parties, but argues that the provision is inapplicable for several
reasons. Exxon first maintains that there is an inherent
inconsistency between Article III subpart A and Exhibit A because
the payment of a royalty under the first provision is inconsistent
with its theory that the second provision defines the parties’
total interest under the contract. Exxon then relies upon the
Exhibits section of the JOAs for the proposition that, in the case
of a conflict, Exhibit A should be given controlling effect. The
problem with this argument is that it once more depends upon
Exxon’s theory that Exhibit A defines the parties’ total interest.
Given that we have already rejected that theory, there simply is no
conflict requiring the supremacy of Exhibit A.
Exxon next maintains that non-consenting parties, i.e. parties
which are not participating in the production by bearing their
proportionate share of costs and expenses, are entitled to the
royalty specified in Article III of the JOAs, but that consenting
parties, i.e. parties which have a defined interest under Exhibit
A, are not. There is no dispute about the fact that CMR was a
Exxon to amend its pleadings to include such a claim.
13
consenting party with respect to each of the four wells covered by
the JOAs. The problem with this argument is that Article III
subpart A simply does not distinguish between consenting and non-
consenting interests or parties in any way. To the contrary,
Article III subpart A is expressly provides that a royalty is due
when “any party owns an oil and gas interest.” Exxon’s
interpretation requires that we insert a significant word of
limitation by revising the provision to read that a royalty is due
only when “any [non-consenting] party owns an oil and gas
interest.” Neither the plain language of the applicable provision
nor any other language in the JOAs suggests that the parties merely
omitted this significant limitation when executing Article III
subpart A. The words as written are clear, and provide for the
payment of a royalty to any party which also owns an unleased
mineral interest in the contract area, without regard to whether
that party is also participating in production as a consenting
party.
Finally, Exxon points out that the royalty provision states
that parties owning an oil and gas interest “shall be treated for
all purposes of this agreement” as if the interest were covered by
the lease attached as Exhibit B. Exxon then argues that providing
a consenting party with a royalty interest is not one of the
“purposes” of the JOA. To establish this point, Exxon relies upon
affidavit testimony that was not taken into consideration by the
district court. Even if we were inclined to consider anything
14
other than the plain terms of the contracts between the parties,
Exxon’s argument in this regard must fail. First of all, the
quoted phrase is plainly not intended to limit or define the
purposes of the JOA in any way, but merely to explain that the
royalty interest forms part of the rights and obligations created
by the JOA. More importantly, Exxon’s affidavit testimony is
offered to contradict the plain and unambiguous terms of the
contract. Contrary to Exxon’s argument, Mississippi law would not
permit the admission of such evidence to contradict the plain terms
of an unambiguous contract. See Estate of Parker v. Dorchak, 673
So. 2d 1379, 1381 (Miss. 1996); Ross v. Brasell, 511 So. 2d 492, 494
(Miss. 1987).
In sum, we cannot accept Exxon’s argument that Exhibit A
serves as the sole source of the parties’ interests without
ignoring the plain language of Exhibit A and deleting Article III
subpart A, which has no purpose other than to provide for the
payment of a royalty to parties signing the JOA, out of the
contract. This we cannot do. See, e.g., Aetna Cas. & Sur. Co. v.
Head, 240 So. 2d 280, 282-82 (Miss. 1970). Similarly, we cannot
accept Exxon’s argument that Article III subpart A benefits only
non-consenting parties without writing that significant word of
limitation into the contract. This, we likewise cannot do. See,
e.g., Glantz Contracting Co. v. General Elec. Co., 379 So. 2d 912,
916 (Miss. 1980) (”Courts do not have the power to make contracts
15
where none exist, nor to modify, add to, or subtract from the terms
of one in existence.” (internal quotations omitted)). For these
reasons, we conclude that the district court correctly held that
the terms of the four JOAs unambiguously call for the payment of a
3/16 cost-free royalty to CMR. That royalty is due, not upon all
production, but only to the extent that CMR can establish that it
owns unleased mineral interests in the contract area. We now turn
to the issue of how that royalty burden is to be divided among the
parties to the JOAs.
IV.
In its final point, Exxon maintains that the district court
miscalculated its proportionate share of the royalty due CMR as an
unleased mineral interest owner by holding Exxon responsible for 76
percent of any such royalty due. While the district court’s
writing on this point is not exceptionally clear, we agree with
Exxon that the district court’s decision can be construed to hold
Exxon responsible for 76 percent of the royalty due CMR under the
JOAs. We likewise agree that such a construction would be error.
The JOAs clearly provide that each party bears the burden of
paying any royalty due under Article III, provided that royalty
does not exceed 3/16, only “to the extent of its interest in such
production.” Thus, Exxon’s proportionate share of the royalty
obligation to CMR can never exceed the percentage corresponding to
16
its individual (as opposed to combined) working interest under the
particular JOA. For example, under the JOA quoted in Section II,
Exxon’s proportionate share of any royalty obligation to CMR for
the So. Minerals No. 26-10 well cannot exceed 36.6776 percent of
the total royalty obligation to CMR.
To the extent that the district court held Exxon responsible
for 76 percent of the royalty obligation to CMR, the error appears
to be mathematical. The allocation of Exxon’s and CMR’s combined
working interest between those two parties is 76 percent to Exxon
and 24 percent to CMR. The district court employed that allocation
to reach its apparent conclusion that Exxon must pay 76 percent of
any royalty due. If Exxon’s proportionate share of the royalty
obligation is calculated with reference exclusively to those
figures, however, with Exxon responsible for 76 percent of the
royalty burden and CMR responsible for the remaining 24 percent of
the royalty burden, then the entire burden will be paid by those
parties with none of the royalty burden being allocated to the
remaining parties to the contract, those entities collectively
referred to as Prosper.4 The proper analysis would hold Exxon
responsible for 76 percent of the royalty owed by both Exxon and
4
Although the fact should be obvious from our analysis, we
pause to note for clarification purposes that CMR itself, as a
party signing the JOAs, is likewise obligated to pay a portion of
the 3/16 royalty owed to unleased mineral interest owners. Stated
differently, CMR’s own working interest, as defined in Exhibit A to
each JOA, is burdened by the obligation to pay a percentage of
whatever 3/16 royalty is due, even if that royalty is owed to CMR
itself.
17
CMR on the basis of their combined working interest. For example,
using the JOA quoted in Section II above, Exxon would be
responsible for 76 percent (Exxon’s share of Exxon and CMR’s
combined working interest) of 48.26 percent (Exxon and CMR’s
combined working interest in the JOA covering So. Minerals No. 26-
10), or 36.6776 percent, of whatever sum comprises the 3/16 royalty
due.
For the foregoing reasons, we modify the district court’s
judgment by clarifying that Exxon’s proportionate share of the
obligation to pay CMR a royalty under Article III of the JOAs may
not exceed Exxon’s actual and individual working interest in the
contract area.
CONCLUSION
The decision of the district court granting CMR summary
judgment is AFFIRMED AS MODIFIED to clarify that Exxon’s
proportionate share of any royalty due CMR as an unleased mineral
interest owner is limited to that percentage of the total burden
which corresponds to Exxon’s individual working interest under the
applicable JOA. The district court is in all other respects
AFFIRMED. The extent to which CMR owns an unleased mineral
interest, and therefore the precise royalty obligations of Exxon
and CMR, are matters of proof which are beyond both the issue
presented to this Court for appeal and the competence of the
g:\opin\99-60466.opn 18
existing record. We therefore REMAND to the district court for
further proceedings consistent with this opinion.
g:\opin\99-60466.opn 19