The San Antonio Court of Appeals has reversed a $79 million jury verdict in a dispute between working interest owners in the Cooke Ranch in LaSalle County.
Repsol Oil and Gas USA, LLC, as successor to Talisman Energy USA Inc., Statoil Texas Onshore Properties LLC, and Statoil Pipelines LLC v. Matrix Petroleum, LLC, Matrix Petroleum Holdings, LLC, JAR Resource Holdings, L.P., TMRX Petroleum, LLC, and OGE, LLC (No. 04-18-00411-CV; December 27, 2023) arose from a fallout among the parties to a 1954 Joint Operating Agreement governing production on the Cooke Ranch. In 2010, some of the working interest owners entered into term assignments requiring the parties to commit to drill additional wells. When disagreements arose over the allocation of proceeds from production, plaintiffs (referred to as “Matrix”) filed suit against Talisman and Statoil asserting declaratory judgment and contract claims. The case went to a jury, which awarded more than $67 million against Talisman for “missing volumes” of production sold through a central delivery point (CDP) from which the gas produced from the wells on the Cooke Ranch, as well as on four other leases, was commingled and sold. The trial court entered judgment on the verdict. Talisman appealed.
In an 88-page opinion authored by Chief Justice Martinez, the court of appeals reversed. The primary issue was whether Matrix adequately pleaded its “missing volumes” claim. Under the “fair notice” pleading standard (TRCP 47), a claimant’s pleading must be sufficient to allow “the opposing party to ascertain from the pleading the nature and basic issues of the controversy and what testimony will be relevant” (citations omitted). This is not supposed to be an especially rigorous standard, but in this case it made a big difference because the jury awarded $67,591,369 for what plaintiffs described as a “Humble Oil claim.” The problem, according to defendants, was that plaintiffs failed to plead a “Humble Oil claim,” so defendants were not prepared for it when during trial plaintiffs started putting on their evidence. Defendants objected several times on the basis of the pleadings but were overruled. Hence this appeal.
So what is a “Humble Oil claim”? Humble Oil & Refining Co. v. West, 508 S.W.2d 812 (Tex. 1974) concerned a deed under which the Wests conveyed fee title to certain property but retained royalties from oil and gas “produced and saved” from the lands. When the mineral reservoir under the property began to play out, Humble began injecting extraneous gas into its wells to preserve the reservoir. The Wests sued Humble to stop the injection of the gas and for a declaratory judgment that Humble must account to them for their royalty interest for all gas produced from the reservoir, “whether native or stored.” SCOTX rejected the Wests’ injunction claim and concluded that the “produced and saved” language in the deed “did not more than than reserve the royalty interest in the native gas in the reservoir.”
This determination thus reversed the trial court ruling ordering Humble to account for all the gas, so the question became “whether a confusion-of-goods theory could sustain the trial court’s judgment.” In other words, if Humble intentionally injected extranenous gas into the reservoir, should that “result in the forfeiture of its exclusive rights to the extranenous gas”? SCOTX didn’t answer but remanded to the trial court for further evidentiary development of the issue. On remand, the Court directed, the burden would be on Humble to establish “with reasonable certainty” the volume of native gas in the reservoir upon which the Wests were entitled to royalties “absent the injection of extraneous gas.” (The case ultimately went in Humble’favor, as the Houston [1st] Court of Appeals held that Humble “was not required to account for gas produced in excess of the amount of native gas, as established by expert testimony.)
Plaintiffs argued that under Humble Oil, defendant Talisman failed to “establish the working interest owners’ aliquot share of the hydrocarbons commingled at the CDP,” thus entitling them to the “missing volumes” not attributed to their leases. They based their claim on Talisman’s amended RRC reports from 2013 and 2014 allegedly showing the additional volumes for which they were not paid. Talisman responded that the missing reports were corrective in nature and did “not reflect additional volumes of oil and gas commingled at the CDP.” In any event, Talisman argued, plaintiffs did not give Talisman “fair notice” of the “missing volumes” claims to begin with. The court took up this argument and ran with it. Closely reviewing the record, the court determined that plaintiffs’ pleadings and their evidence at trial spoke to a dispute between plaintiffs and Talisman over the allocation methodology Talisman used to allocate the commingled production. Talisman employed a volumetric method, whereas plaintiffs argued for a flash allocation method, which would have added about $663,000 to plaintiffs’ share. The jury accepted plaintiffs’ argument and awarded the additional money.
But plaintiffs’ witness went further and got into the “missing volumes” issue, testifying that he had reviewed Talisman’s amended RRC reports and discovered that a lot more gas had been produced than originally reported and that Talisman had allocated it to leases other than the plaintiffs’. He averred that this caused a revenue loss to plaintiffs in the neighborhood of $68 million, about what the jury awarded. As the court of appeals determined after closely reviewing the plaintiffs’ live pleadings in the case, however, the court concluded that while plaintiffs pleaded the allocation issue, it failed to plead the “missing volumes” claim. Plaintiffs argued that their cause of action for “improperly commingling” production from their leases with that from other leases and underpaying their royalties on the commingled gas covered the “missing volumes,” but, as the court pointed out, that claim was tied to the allocation formula. Moreover, plaintiffs effort to bring their claim under Humble Oil failed because Humble held that commingling was proper and the only issue was how much. “Nowhere within [plaintiffs’] breach of contract claim,” the court concluded, “is there an allegation that Talisman breached a contract with [plaintiffs] by confusing oil and gas at the CDP and by failing to establish aliquot shares with reasonable certainty.” Everything in the pleadings, in other words, rested on the allocation dispute. Consequently, “[a]n opposing attorney [in this case Talisman’s] of reasonable competence would not ascertain a ‘missing volumes’ claim from [plaintiffs’] examples in its pleading.” Verdict reversed.
In an effort to avoid this rather devastating outcome, plaintiffs tried to argue that Talisman consented to trial of the “missing volumes” theory even if they failed to plead it. Unfortunately, the court’s review of the trial record revealed that the issue was not tried at all. Moreover, Talisman objected during plaintiffs’ witness’s testimony that the testimony concerned “a claim for damges, that’s not in their pleadings and it’s not designated at all.” The trial court overruled the objection and let in plaintiffs’ evidence. This objection alone was enough to defeat trial by consent, even though Talisman scrambled to put on rebuttal evidence thereafter.
There are other issues in the case as well, but they are small potatoes. If you have a stomach for reading an 88-page opinion (which is worth doing, if you can), you will find some informative rulings on factual and legal sufficiency issues and the interpretation of expense allocation language and the term assignments. One issue of significance here is the trial court’s declaration that the JOA, which required unanimous consent of the working interest owners to drill, created three categories of “participating member” (i.e., a consenting member), a “nonparticipating member,” and a “nonconsenting member.” The court held that these categories had no basis in the in the JOA, which merely required unanimous consent “unless the members are obliged to drill [a well without consent] … to prevent drainage, and/or to reasonably develop, or if the balloting and non-consent-penalty provisions of [the JOA] are complied with.” Moreover, the court held, nothing in the term assignments mandated that an assignee consent to drilling a well under the JOA, meaning simply that when plaintiffs refused to consent to certain wells under those assignments, they became subject to the non-consent penalty under the JOA.
The only issue left standing by the court of appeals’ opinion was the attorney’s fee award plaintiffs got from the trial court on their declaratory judgment claim. Since that claim went down, the court remanded for a new trial on attorney’s fees.
We certaintly don’t purport to read every case (as if that were possible) that passes through the courts of appeals, but we don’t remember one in which so much money has hinged on whether a party gave fair notice of a claim in its pleading. While we do see cases under Rules 47 and 301 (trial court judgment must be supported by the pleadings), they rarely have such catastrophic effects on the parties. This opinion should be of great interest not only to oil and gas lawyers (particularly if Humble Oil is an issue), but to anyone involved in complex litigation, particularly litigation with overlapping theories, damages claims, and election of remedies issues. All of these factors came into play here, and the court of appeals patiently went through every one of them in detail.
