Forest Oil Corp v. Union Oil Corportion of California

Filing 70

Order on Motion for Partial Summary Judgment, Order on Motion for Summary Judgment

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ALASKA

FOREST OIL CORPORATION,

Case No. 3:05-cv-0078-RRB

Plaintiff,
vs.
UNION OIL COMPANY OF AMERICA,
d/b/a UNOCAL ALASKA,

ORDER DENYING DEFENDANT’S
MOTION FOR PARTIAL SUMMARY
JUDGMENT and GRANTING
PLAINTIFF’S CROSS-MOTION

Defendant.
I.

INTRODUCTION
Defendant Union Oil Company of California (“Unocal”)

moves for partial summary judgment on all claims by Plaintiff
Forest Oil Corporation (“Forest”) relating to the accounting for
the disposal of naturally occurring radioactive material (“NORM”).1
Forest disagrees and argues that its cross-motion for summary
judgment should be granted because Unocal admitted that it breached
the contract in its NORM calculations.2

1

Clerk’s Docket No. 18.

2

Clerk’s Docket No. 35 at 25.

ORDER RE DOCKETS 18 and 35 - 1
3:05-CV-0078-RRB

Alternatively, Forest

argues that Unocal’s motion should be denied because questions of
fact exist.3
Because the Court concludes that Unocal did not follow
the express terms of the contract, Unocal’s Motion for partial
summary judgment is DENIED. Forest’s cross-motion seeking an order
that Unocal breached its duty to charge for NORM disposal in accord
with the Operating Agreements is GRANTED.
II.

FACTS
Forest

and

Unocal

own

working

interests

in

several

offshore oil and gas leases located in Alaska’s Cook Inlet.4
interests comprise the Trading Bay Properties.5

These

There are four

agreements that govern the relationship between Forest and Unocal
regarding

the

Properties.

development

and

operation

of

the

Trading

Bay

These agreements are:

1.

The Trading Bay Unit Operating Agreement
(“TBUOA”).6

2.

The Trading Bay Field Operating Agreement
(“TBFOA”).7

3

Id.

4

Clerk’s Docket No. 18 at 3.

5

Id. Unocal and Forest are the sole working interest owners
of the oil assets underlying the Trading Bay Properties. Id. at 4.
6

Clerk’s Docket No. 23 at Ex. A.

7

Id. at Ex. B.

ORDER RE DOCKETS 18 and 35 - 2
3:05-CV-0078-RRB

3.

The Unit Agreement for the Development
and Operation of the Trading Bay Unit,
State of Alaska (“TB Unit Agreement”).8

4.

The Alignment Agreement
Field/Trading Bay Unit.9

Trading

Bay

The TBUOA and the TBFOA are the relevant agreements for this issue
(the “Operating Agreements”).

Unocal is the Operator under the

Operating Agreements.10
Naturally occurring radioactive material (“NORM”) is “any
waste that has a naturally occurring radioactive reading equal to
or greater than 50 microRems per hour.”11

As a practical matter,

material with emissions equal to or greater than 25 microRems per
hour is treated as NORM by Unocal.12 “Oilfield NORM is created when
naturally occurring radioactive radium salts in the earth are
dissolved by water; as the contaminated water is brought to the
surface, the radioactive solids precipitate out and may collect on
the well tubing walls and inside other production equipment.”13
NORM in the Trading Bay Properties primarily consists of oily

8

Id. at Ex. C.

9

Id. at Ex. A. for Tabler Declaration.

10

Id. at Ex. A at 17 and Ex. B at 11.

11

Clerk’s Docket No. 18 at Hammond Declaration ¶ 2.

12

Id.

13

Id.

ORDER RE DOCKETS 18 and 35 - 3
3:05-CV-0078-RRB

sludge

and

scales

removed

from

equipment

such

as

tanks

and

separator vessels.14
Alaska law has no requirements for treating or disposing
of NORM.

Unocal’s standard is to treat Alaskan NORM pursuant to

Texas and Louisiana regulations.15

In Alaska, Unocal’s practice is

to dispose of NORM into an injection well.16

One option used by

Unocal is to ship the NORM Outside to be injected into a Texas
well.17

When NORM from the Trading Bay Properties is disposed of

locally, Unocal uses the “Grind and Inject” process.18

“First, the

NORM is removed from the equipment that it contaminates and is
placed into containers for transport” to Unocal’s Bruce Platform in
the Cook Inlet.19

“At the Bruce Platform the NORM is ground and

mixed with liquid and other flow improvers to make it easier to
inject.

The NORM is then injected down the well at the Bruce

Platform into the surrounding geological formation at a depth
downhole of 9,240 ft to 10,628 ft, or from 1.75 to 2 miles down.”20

14

Id.

15

Id. at ¶ 3.

16

Id.

17

Id.

18

Id.

19

Id.

20

Id.

ORDER RE DOCKETS 18 and 35 - 4
3:05-CV-0078-RRB

In this instance, Unocal used the Grind and Inject
process to dispose of the NORM at the Bruce Platform in Alaska.21
Unocal charged the Joint Account $275 per barrel.22
Forest filed suit against Unocal for multiple claims,
including Breach of Contract - Imprudent Operations.

This claim

includes the allegations that Unocal imprudently inflated the
charges

for

potential

NORM

disposal

liability.23

and

Unocal

imprudently
now

moves

exposed

for

Forest

partial

to

summary

judgment concerning the NORM allegations only, and not the entire
Breach of Contract claim.

21

Id. at ¶ 6.

22

Id.

23

Complaint at ¶ 24.

Paragraph 24 states:

As one example of such imprudent expenditures, Unocal
charges the joint account $275 per barrel for disposal of
natural occurring radioactive material (“NORM”).
The
$275 per barrel charge imposed by Unocal is derived from
a bid Unocal received for the disposal of such waste at
a disposal site in Texas. Approximately $175 of that bid
amount reflects the cost of transporting NORM from Cook
Inlet to Texas for disposal. Unocal, however, disposes
of NORM from the properties not in Texas but at Unocal’s
own Bruce platform located off-shore in Cook Inlet, just
a few miles from the properties. Thus, Unocal’s charges
for NORM disposal, which run into the millions of
dollars, are artificially and grossly inflated by Unocal,
and imprudently charged by Unocal against the joint
account for the properties. Moreover, by disposing of
the NORM itself, Unocal has exposed Forest to potential
liability for disposal activities, which would not arise
of a third-party were contracted for the disposal. No
justification exists for this imprudent creation of
potential liability.
ORDER RE DOCKETS 18 and 35 - 5
3:05-CV-0078-RRB

III. DISCUSSION
Pursuant to the Operating Agreements, Unocal charged the
Joint Account for disposal of NORM generated from the Trading Bay
Properties.24

The Operating Agreements between Forest and Unocal

expressly incorporated and made part of each agreement identical
documents titled “Accounting Procedure Offshore Joint Operations.”25
The Accounting Procedure Offshore Joint Operations were developed
by the Council of Petroleum Accountants Societies, known as COPAS,
and these accounting procedures are known as the COPAS Procedures.26
The COPAS Procedures governed the accounting for the disposal of
NORM.

Section 7 of the COPAS Procedures provides:
7.
A.

24

Equipment
Operator

and

Facilities

Furnished

by

Operator shall charge the Joint Account
for use of Operator-owned equipment and
facilities, including Shore Based and/or
Offshore
Facilities,
at
rates
commensurate with costs of ownership and
operation. Such rates may include labor,
maintenance, repairs, other operating
expense, insurance, taxes, depreciation
and interest on gross investment less
accumulated
depreciation
not
exceed
twelve percent (12%) per annum.
In
addition, for platform only, the rate may
include an element of the estimated cost
of platform dismantlement.
Such rates

Clerk’s Docket No. 18 at Hammond Declaration ¶ 5.

25

Clerk’s Docket No. 23 at Ex. A at 2 and 53-58 and Ex. B at
6 and 39-44.
26

Clerk’s Docket No. 18 at 8.

ORDER RE DOCKETS 18 and 35 - 6
3:05-CV-0078-RRB

shall not exceed average commercial rates
currently prevailing in the immediate
area of the Joint Property.
B.

In lieu of charges in Paragraph 7A above,
Operator may elect to use average
commercial rates prevailing in the
immediate area of the Joint Property less
twenty percent (20%).
For automative
equipment, Operator may elect to use
rates published by the petroleum Motor
Transport Association.

Here, Unocal did not calculate NORM disposal charges under either
section, though it argues that it followed the procedures in
Paragraph 7B.
Unocal charged the Joint Account $275 per barrel of NORM
in 2002.27

Laura Hammond, the Waste Management Coordinator for

Unocal, stated that the per barrel charge was not a mathematical
evaluation.28

According to Hammond:

The $275 per barrel charge in 2002 was not a
mathematical
average
of
the
much
more
expensive NORM disposal rate ($400 per barrel)
and the less expensive non-NORM disposal rate
($210 per barrel. It must be noted that when
the Unocal Alaska Project Manager for the 2002
Bruce Injection Project, Chris Meyers, set the
charge at $275 in his e-mail dated December 6,
2002 . . . to our accounting staff he did not
perform a rigorous mathematical evaluation of
the commercial cost quotes for the NORM and
the non-NORM minus 20% pursuant to Paragraph
7B of the COPAS Procedures. A quote from that
e-mail says “Don, After reviewing Laura’s two
27

Id. at Hammond Declaration at ¶ 16. Forest only complains
about the rate charged in 2002. Clerk’s Docket No. 35 at 3.
28

Clerk’s Docket No. 18 at Hammond Declaration at ¶ 16.

ORDER RE DOCKETS 18 and 35 - 7
3:05-CV-0078-RRB

files, I think we had a good case to charge a
flat $275 per bbl for disposing of the waste
this year on Bruce.
Looking through the
quotes it becomes apparent that some waste
could be a bit less (+/- $200) while other
waste could be more ($10,000 per 25 bbls norm
safeguard (sic)).
I feel we have a past
history that would allow us to charge the
$275.” Mr. Meyers told me in May of 2005 “We
were not really focusing on how much to charge
them we were just trying to get the waste
disposed of and get a fair cost recovery.”
The $275 per barrel rate which was actually
charged to the Joint Account for both NORM and
non-NORM likely resulted in a significant
undercharge for NORM disposal.”29
Thus, Unocal did not follow the procedures specified in either
paragraph of the COPAS Procedures. Unocal did not calculate the
“average commercial rates prevailing in the immediate area of the
Joint Property,” nor did it subtract twenty percent.30

Unocal also

did not use rates published by the petroleum Motor Transport
Association.
To determine whether this was a breach of contract, the
parties disagree on what standard of care should be applied.
Unocal argues that the correct standard is whether its actions were
grossly negligent or willful misconduct.31

Forest argues that the

29

Id.

30

See also Clerk’s Docket No. 35 at Fischbach Aff. At ¶¶ 6-9.

31

Clerk’s Docket No. 18 at 10.

ORDER RE DOCKETS 18 and 35 - 8
3:05-CV-0078-RRB

correct standard is whether Unocal’s actions were imprudent.32
relevant contract language comes from the TBUOA.

The

Paragraph 8.3.A

provides:
Unit Operator and each Sub-Contractor shall
conduct all Unit operations in a good and
workmanlike manner.
Unit Operator and SubOperators shall not be liable to the Parties
for damages, unless such damages result from
their gross negligence or willful misconduct.33
Paragraph 7.2.A provides:
Operator shall conduct all operations in a
good and workmanlike manner. Operator shall
not be liable to the Parties for damages,
unless such damages result from Operator’s
gross negligence or willful misconduct.34
The parties disagree on the reach of these exculpatory clauses.
Unocal argues that they include both operational and accounting
activity, while Forest argues that these clauses only refer to
operational activity.
It does not appear that Alaska courts have considered the
reach of such exculpatory clauses. However, both the Fifth Circuit
and the Tenth Circuit have considered the reach of clauses very
similar to the ones at issue here, and reached differing results.
The Fifth Circuit held that “an exculpatory clause in an operating
agreement may extend to administrative functions performed by the

32

Clerk’s Docket No. 35 at 12.

33

Clerk’s Docket No. 23 at Ex. A at 20.

34

Id. at Ex. B at 13.

ORDER RE DOCKETS 18 and 35 - 9
3:05-CV-0078-RRB

operator,” including accounting duties.35

In contrast, the Tenth

Circuit held that “the exculpatory clause has no application to
claims that an operator has failed to abide by specific and express
contractual duties assigned in the [operating agreement.”36

The

Tenth Circuit reasoned:
While a higher standard for breach might apply
to drilling, extraction, and other risky
“operations” because most operators have the
same incentive as non-operators to do well in
physical operations, it is nonsensical to
apply such a standard to administrative and
accounting duties where the operator can
profit by cheating, or simply overcharging,
its working interest owners.37
This Court agrees with the holding and reasoning of the Tenth
Circuit.
act

A broader reading of the clause would allow a party to

negligently

(just

not

grossly)

in

following

its

express

contractual administrative and accounting duties. As a result, the
court applies the prudent standard and holds that Forest breached
the contract regarding its duties to charge for NORM disposal.
IV.

CONCLUSION
For the foregoing reasons, Defendant’s Motion is DENIED

and Plaintiff’s cross-Motion for an Order that Defendant breached

35

Stine v. Marathon Oil Co., 976 F.2d 254, 260-61 (5th Cir.

1993).
36

Shell Rocky Mountain Production, LLC v. Ultra Resources,
Inc., 415 F.3d 1158, 1170 (10th Cir. 2005).
37

Id. at 1171.

ORDER RE DOCKETS 18 and 35 - 10
3:05-CV-0078-RRB

its duty to charge for NORM disposal in accord with the Operating
Agreements is GRANTED.

Whether Forest was damaged as a result of

this breach is not here addressed.
ENTERED this 7th day of April, 2006.
/s/ RALPH R. BEISTLINE
UNITED STATES DISTRICT JUDGE

ORDER RE DOCKETS 18 and 35 - 11
3:05-CV-0078-RRB