| Opinion: | B&B Buckles Properties v. Oil Producers Inc. of Kansas, 2022 OK CIV APP 34 |
| Subject matter: | Oil and Gas Law |
| Date Decided: | October 19, 2021 |
| Trial Court: | District Court of Woods County; Judge Hadwiger |
| Route to this Court: | Buckles appealed judgment following non-jury trial entered in favor of operator, OPIK, and a group of lessees or working interest owners holding an interest in an oil and gas lease. Trial court found that Buckles did not establish that Defendants failed to act as a reasonably prudent operator, with the exception of Midstates, that Defendants were not liable for the breach, and that Buckles was not entitled to cancellation of the Lease. Buckles also appealed an order denying approval of a partial settlement between Buckles and a portion of the Defendants. |
| Facts: | Buckles acquired mineral interests located in Section 4-25N-13 in 2011, and was successor in interest to rights of lessors in an oil and gas lease dated from 1981, known as the Murrow Lease. OPIK operated a vertical well at the time Buckles acquired the interest. Buckles requested that OPIK construct vertical wells in order to fully capture the reserve minerals in the section. OPIK negotiated a potential agreement with CMX to drill a horizontal well. A group of working interest owners, known as the Pate Group, objected to the CMX proposal and made an agreement with Midstates because the deal required no commission to OPIK and promised free saltwater disposal. Pate testified that Midstates agreed that all working interest owners would receive the same agreement. However, the proposal submitted to OPIK required that it give up its rights in all formations, made no salt water provision, and essentially asked OPIK to walk away from Section 4. Pate and OPIK were not aware of the nature of the deals extended to each other by Midstates. Midstates proceeded to acquire a location exception from the OCC in order to construct a horizontal drilling unit, over OPIK’s protest. Working interest owners then voted to remove OPIK as operator, but the joint operating agreement (JOA) did not enable OPIK’s removal by ballot. Once ensuing litigation began, Midstates acquired an interest in Section 4 through an assignment by another operator. During the operator dispute, CMX’s proposal expired and it no longer wanted to pursue development of the Unit during the dispute. OPIK sought after other entities to drill, but could find none. OPIK then drilled a vertical well in October 2014 (Murrow 2), from which Buckles received royalties. Economic difficulty also rendered a horizontal drill unprofitable in late 2014 according to Defendants’ expert. At trial all the parties, apart from Buckles, acknowledged that a horizontal drill was not economically viable and proceedings sat dormant due to lack of interest in drilling. Buckles filed action in August 2016 against OPIK, and dropped the suit against Midstates after it went bankrupt and the succeeding entity, Amplify Operating, LLC, was no longer involved in the Unit. The only claims left for trial were Buckles’ claim for breach of the implied covenant of further development. The trial court determined that OPIK had acted as a prudent operator would under the circumstances, that Midstates’ offer to OPIK was unconscionable, that Midstates’ actions were a major reason the horizontal well was not drilled when it was economically viable, and that only Midstates had breached the covenant of the duty to develop. |
| Standard of Review: | The demand to cancel the Lease was a matter of equitable cognizance that required two standards of review. Hall v. Galmor, 2018 OK 59, ¶ 11. “We will not reverse the trial court’s factual findings or ultimate decision unless they are clearly against the weight of the evidence. Id. at ¶ 12. However, the Court reviews issues of law de novo according to the Court’s “plenary, independent and non-deferential authority to reexamine a trial court’s legal rulings.” Id. at 13. |
| Analysis: | The Court first responded to Buckles’ argument that the prudent operator standard was incorrectly applied in that the trial court should not have considered the operator dispute under the objective standard of a reasonably prudent operator. It rejected Buckles’ argument that the scope of facts used to determine the reasonable operator should be narrowly construed in the situation, and that the operating dispute was a subjective quandary that was not to be considered by the objective standard because it did not align with Oklahoma jurisprudence requiring that the prudent operator “do whatever in the circumstances would be reasonably expected of operators of ordinary prudence . . . .” Texas Consol. Oils v. Vann, 1953 OK 90, ¶ 45. The record reflected that the operator issue hindered drilling the horizontal well, which was relevant to consider Defendant’s conduct in comparison of a prudent operator in similar circumstances. Next the Court was faced with the argument that the weight of the evidence suggested that OPIK was in breach of the implied covenant to develop even before the 2014 demand letter, and that OPIK’s failure to reach an agreement to drill prior to the operator dispute was due to OPIK, Pate, and Midstates, thus constituting a breach on their part. The Court disagreed with this argument because Defendants did not sit on the Lease after the demand letter, despite the issues that were created by the operator disputes and Midstates’ actions. The Court found that OPIK made efforts to resolve the dispute with Midstates, attempted to find other entities to drill, but was just unsuccessful. OPIK did construct the Murrow 2 vertical well to further develop the Lease during the dispute. Thus, Buckles’ plea to cancel the Lease would not effectuate justice, despite Midstates’ failure to act as a prudent operator and other wrongful acts. The Court determined that Buckles’ request that it hold the trial court erred by failing to enforce a partial settlement agreement between Buckles and Pate had reached before trial was an unappealable order. There were alternative mechanisms available during trial allowing Buckles and Pate to press on this matter. This issue was not raised in the pretrial order, and settlement was not offered as grounds for demurrer or directed verdict of any claim. Thus, Buckles failed to obtain an appealable ruling. |
| Outcome: | Affirmed in part and dismissed in part. |
| Vote: | Fischer, V.C.J. and Hixon, P.J. (author) concur. Rapp, J. concurs in the result. |
| Other: | N/A |