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El Petron Enterprises, LLC v. Whiting Resources Corp.

United States District Court, D. North Dakota

March 14, 2018

El Petron Enterprises, LLC, Plaintiff,
v.
Whiting Resources Corporation, Defendant.

          ORDER DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND GRANTING DEFENDANT'S CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT

          Daniel L. Hovland, Chief Judge.

         Before the Court are the parties' cross-motions for partial summary judgment. Plaintiff El Petron Enterprises, LLC (“El Petron”) filed a complaint against Defendant Whiting Resources Corporation (“Whiting”) on April 25, 2016. See Docket No. 1. Whiting filed an answer on June 1, 2016. See Docket No. 14. El Petron moved for partial summary judgment on May 3, 2017. See Docket No. 36. Whiting filed a response and cross-motion for partial summary judgment on June 6, 2017. See Docket Nos. 45 and 49. El Petron filed a combined response and reply brief on July 7, 2017. See Docket Nos. 52 and 53. Whiting filed a reply to El Petron's response on July 28, 2017. See Docket No. 56. For the reasons set forth below, the Court denies El Petron's motion for partial summary judgment and grants Whiting's cross-motion for partial summary judgment.

         I. BACKGROUND

         El Petron is a Texas Limited Liability Company; George Wallace Tilley, Jr. is El Petron's sole member. See Docket No. 41, pg. 1. Whiting is a Colorado corporation with its principal office in Denver, Colorado. See Docket No. 1. El Petron brought this diversity suit against Whiting on April 25, 2016, asserting Whiting has improperly deducted costs and fees from El Petron's overriding royalty interests. The parties' disagreement focuses on language in an overriding royalty reservation. The parties dispute whether Whiting may deduct post-production costs from overriding royalty payments Whiting makes to El Petron, and if so, whether the deductions Whiting has made have been reasonable.

         In 2005 and 2006, El Petron entered into a number of oil and gas leases (“the Leases”) with various mineral owners in McKenzie County, North Dakota. Both parties agree the terms of each of the Leases are substantially similar. See Docket Nos. 41, p. 1 and 46, pgs. 3-4. El Petron has filed one of the Leases as an Exhibit. It reads:

         3. In consideration of the premises the said Lessee covenants and agrees:

1st. To deliver to the credit of Lessor, free of cost, in the pipeline to which Lessee may connect wells on said land, the equal 1/6th part of all oil produced and saved from the leased premises.
2nd. To pay Lessor 1/6th of the gross proceeds each year, payable quarterly, for the gas from each well where gas only is found, while the same is being off the premises, and if used in the manufacture of gasoline a royalty of 1/6th, payable monthly at the prevailing market rate for gas.
3rd. To pay Lessor for gas produced from any oil well and used off the premises or in the manufacture of gasoline or any other product a royalty of 1/6th of the proceeds, at the mouth of the well, payable monthly at the prevailing market rate.

See Docket No. 41-1. On October 27, 2006, El Petron assigned its interests in the Leases (“the Assignment”) to Sonic Oil & Gas, L.P. (“Sonic”). See Docket No. 41. The Assignment contains an overriding royalty reservation (“the Reservation”) that states:

Assignor RESERVES AND EXCEPTS from this Assignment of Oil and Gas leases an overriding royalty interest equal to the difference between existing landowner royalty and overriding royalty burdens as of October 27, 2006 and a total burden of 20% on all oil, gas and casinghead gas, condensate, natural gas liquids, and all other minerals and substances produced from the lands covered by Said Leases. The overriding royalty reserved herein shall be paid or delivered to Assignor free and clear of all costs, except taxes, and shall be calculated in the same manner as is the royalty reserved under the terms of Said Leases.

See Docket No. 41-2, p. 1. The Assignment was later revised to correct certain legal descriptions and fix other errors, but the reservation language remained unchanged. See Docket No. 1, pgs. 2 and 3. Oil and casinghead gas[1] was, and continues to be, produced under the leases. See Docket No. 46-1, p. 1. In 2010, Kodiak Oil & Gas (USA) Inc. (“Kodiak”) obtained Sonic's interests in the Leases. See Docket No. 42, p. 3. In 2014, Whiting purchased Kodiak and acquired Kodiak's interests in the Leases. See Docket No. 40, p. 3. Whiting currently operates a number of oil and gas wells that produce from minerals included in the Leases. See Docket No. 46-1, p. 1.

         Whiting sells oil and gas produced from the wells to third-party companies. These companies charge fees and allocate costs for processing, transportation, and marketing activities. See Docket No. 46-1, p. 1. Whiting pays royalties to El Petron based on the proceeds it receives from the third-party purchasers. See Docket No. 46-1, p. 2. In other words, Whiting's overriding royalty calculation includes deductions for third-party post-production fees and costs associated with processing and marketing. Whiting does not pay El Petron a royalty based on the full market value of the processed oil and gas. Nor does Whiting include any fees or costs associated with production expenses. See Docket No. 46-1, p. 2.

         El Petron's complaint contains claims for: (1) declaratory judgment; (2) breach of covenants; (3) accounting; (4) nonpayment of royalties; and (5) unjust enrichment. See Docket No. 1. El Petron filed a motion for partial summary judgment on May 3, 2017. See Docket No. 36. Whiting ...


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