Wold et al v. Zavanna LLC et al
Filing
78
ORDER by Magistrate Judge Charles S. Miller, Jr. granting 21 Motion for Summary Judgment. (KT)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NORTH DAKOTA
NORTHWESTERN DIVISION
Carmen and Carol Wold, Cordell Wold,
Edith Wold, Kris Wold, Kevin Wold,
and Lyle and Melba Larson as Trustees
of the Larson Family Nominee Trust,
)
)
)
)
ORDER GRANTING DEFENDANTS’
)
MOTION FOR SUMMARY JUDGMENT
)
Plaintiffs,
)
)
vs.
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Case No. 4:12-cv-00043
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Zavanna, LLC, and Zenergy, Inc.
)
)
Defendants.
)
_______________________________________________________________________________
Before the court is a motion for summary judgment filed by defendants (Doc. No. 21). After
the motion was filed, the court held a hearing and allowed plaintiffs time to conduct additional
discovery. The parties have since filed supplemental briefs and affidavits. Unless otherwise
indicated, the facts set forth herein are uncontroverted.
I.
BACKGROUND
A.
The “Subject Leases”
Plaintiffs have an ownership interest in the following tracts of real property located in
McKenzie County, North Dakota:
Township 152 North, Range 97 West
Section 6: Lots 2, 3, 4, 5, 6, 7, 8, 10 (less a 38.00 acre tract more fully described in
Book 11, Page 221)
Township 152 North, Range 98 West
Section 1: Lots 1, 2, 5, 6, 7, 8, 9, 10, 11, 12, SE/4
1
(the “Subject Property”). On February 9, 2005, each of the plaintiffs leased their mineral rights in
the Subject Property to Diamond Resources, Inc. (“Diamond”) by entering into one of six separate
leases (leases or “Subject Leases”). Diamond subsequently assigned its interests in the leases to
Zavanna. Zenergy later acquired an interest in certain of the leases.
The Subject Leases are all printed form leases that bear the notation: “PRODUCERS 88PAID UP, Rev. 5-60 No.2.” The primary term for each lease was three years with an option to
extend the primary term for an additional two years, which option was exercised. This meant the
primary term expired on February 9, 2010, absent either oil or gas being produced from the lease
premises or defendants then being engaged in “drilling or re-working operations” given that the
habendum clause in each of the leases read, in part, as follows:
If, at the expiration of the primary term of this lease, oil or gas is not being produced on the
leased premises or on acreage pooled therewith but Lessee is then engaged in drilling or
re-working operations thereon, then this lease shall continue in force so long as operations
are being continuously prosecuted on the leased premises or on acreage pooled therewith .
...
B.
Pre-drilling development activity and completion of the Rolfsrud Well
No drilling took place on the Subject Property prior to the expiration of the primary term of
the Subject Leases. However, Zenergy had obtained the necessary permits and regulatory approvals
for the drilling of the Rolfsrud 7-6H Well (“Rolfsrud Well”) and had engaged in other development
activity before the primary term expired. In addition, Zenergy began drilling the Rolfsrud Well six
days after the expiration of the primary term, with the well being completed in June 2010 and the
first sales of gas and oil production occurring on June 16 & 17, 2010, respectively.
2
C.
Contentions of the parties
Plaintiffs contend the Subject Leases expired because no drilling took place prior to the
expiration of the primary term or, in the alternative, that the preliminary development activity was
insufficient to hold the leases. They seek a judgment declaring that the Subject Leases are
extinguished and of no further force and effect and monetary relief for the wrongful extraction of
oil and gas after the claimed expiration of the leases.1
In response, defendants contend the development activity that took place prior to the end of
the primary term followed by the drilling and completion of the Rolfsrud Well, together, were
sufficient to extend the Subject Leases under the lease language quoted earlier.
II.
DISCUSSION
A.
This court’s and the Eighth Circuit’s prior construction of the standard form
“drilling or re-working operations” lease language
Before turning to the claims in this case, it is helpful to first consider this court’s and the
Eighth Circuit’s decisions in Anderson v. Hess Corp., 733 F. Supp. 2d 1100 (D.N.D. 2010), aff’d,
649 F.3d 891 (8th Cir. 2011). Much of what was decided in Anderson is ultimately dispositive
here, given the similarity of the issues.
As in this case, the mineral-owner plaintiffs in Anderson claimed the leases in that case,
which used the same “engaged in drilling or re-working operations” language in the habendum
clause, had lapsed because defendant Hess Corporation (“Hess”) had failed to commence drilling
prior to the expiration of the primary lease term. Plaintiffs in Anderson, like the plaintiffs now in
this case, had argued that the foregoing phrase should be read to require ongoing “drilling” or
1
The complaint also contained claims related to the untimely payment of royalty to one plaintiff, but these
were abandoned when the plaintiff agreed the unpaid royalty was the subject of title a dispute that justified the
withholding of payment until it was resolved.
3
“reworking operations” at the expiration of the primary lease term in order to extend the lease and
not “drilling operations” or “reworking operations.” Or, to state it more directly, actual drilling was
required to extend the lease and not simply engagement in “drilling operations.”
This court rejected the Anderson plaintiffs’ construction of the lease language, concluding
that “engaged in drilling or re-working operations” should be read to mean engaged in either
“drilling operations” or “re-working operations.” In reaching this conclusion, the court observed
that, although the North Dakota Supreme Court had not yet construed the language in question, it
had provided some insight as how it likely would rule in Serhienko v. Kiker, 392 N.W.2d 808 (N.D.
1986). Specifically, this court stated:
While the North Dakota Supreme Court has not specifically interpreted the phrase
“drilling or re-working operations,” it has cited case law that reveals the proper
interpretation. In Serhienko v. Kiker, 392 N.W.2d 808 (N.D.1986), the North Dakota
Supreme Court determined whether an oil company was engaged in re-working operations.
The North Dakota Supreme Court cited to Alabama case law that held “principles for
determining what constitutes ‘drilling operations’ are applicable for determining what
constitutes ‘reworking operations’ in lease provisions.” Serhienko, 392 N.W.2d at 812
(citing Sheffield v. Exxon Corp., 424 So.2d 1297, 1303 (Ala. 1982)). The lease at question
in Sheffield contained language similar to the leases in this case:
If at the expiration of the primary term, oil, gas or other mineral is not being
produced on said land, or on acreage pooled therewith, but Lessee is then engaged
in drilling or reworking operations thereon ... the lease shall remain in force so long
as operations are prosecuted with no cessation of more than sixty (60) consecutive
days, and if they result in the production of oil, gas or other mineral, so long
thereafter as oil, gas or other mineral is produced from said land or acreage pooled
therewith.
Sheffield, 424 So.2d at 1300 (emphasis removed) (omission in original). The Alabama
Supreme Court explained:
Many oil, gas, and mineral leases now contain cessation of production clauses.
These clauses generally provide for termination of the lease in the event that certain
time periods expire without the operator or lessees having prosecuted “drilling” or
“reworking” operations. Therefore, we intend to express guidelines as to what types
of operations constitute drilling or reworking under Alabama law, but with the
caveat that each case must be determined by its own particular facts.
Id. at 1302. The Alabama Supreme Court thus read the phrase “drilling or reworking
operations” as referring to “drilling operations” and “reworking operations.” The North
Dakota Supreme Court’s favorable citation to Sheffield, indicates the phrase “drilling or
re-working operations” includes “drilling operations” and “re-working operations.”
4
The Alabama Supreme Court’s interpretation of the phrase is also supported by the
plain language of the lease. * * * *[quotation of lease language omitted]. The use of the term
“operations” after the phrase “drilling or re-working operations” indicates that “drilling” and
“re-working” are adjectives that modify the noun “operations.” The Plaintiffs do not cite any
case law interpreting the phrase “drilling or reworking operations” so as to exclude “drilling
operations.” The Court finds the phrase “drilling or re-working operations” is not ambiguous
and includes both “drilling operations” and “re-working operations.” Thus, the Plaintiffs’
contention that Hess Corporation had to be “engaged in drilling” to extend the leases beyond
the primary term is without merit.
Anderson, 733 F. Supp. 2d at 1106-07.
In addition to concluding that ongoing “drilling operations” would extend the lease, this
court also concluded in Anderson that “drilling” and “drilling operations” mean different things with
the latter being a more expansive term. In particular, the court referenced the work of Professors
Williams and Meyers with respect to how the terms “drilling” and “drilling operations” are used in
the oil and gas industry, stating:
Professors Williams and Meyers define the terms “drilling” and “drilling operations.”
“Drilling” is defined as the “[a]ct of boring a hole through which oil and/or gas may be
produced if encountered in commercial quantities.” Williams & Meyers, Manual of Oil and
Gas Terms (2009). They define “drilling operations” as follows:
Any work or actual operations undertaken or commenced in good faith for
the purpose of carrying out any of the rights, privileges or duties of the lessee under
a lease, followed diligently and in due course by the construction of a derrick and
other necessary structures for the drilling of an oil or gas well, and by the actual
operation of drilling in the ground.
Id. at 1106. Later, the court made the same point relying upon this court’s prior decision in
Murphy v. Amoco Prod. Co., 590 F. Supp. 455, 458 (D.N.D. 1984) (“Murphy”), which discussed
the meaning of “drilling operations,” decisions from the other states, and Professor Summer’s
treatise on oil and gas law. Specifically, the court in Anderson stated:
Hess Corporation contends it was engaged in drilling operations at the end of the
primary term. As noted above, this Court has explained, “Drilling operations commence
when (1) work is done preparatory to drilling, (2) the driller has the capability to do the
actual drilling, and (3) there is a good faith intent to complete the well. It is not necessary
that the drill bit actually penetrate the ground.” Murphy, 590 F.Supp. at 458 (internal
citations omitted). The Alabama Supreme Court held in Sheffield, “The key element” in
5
determining what constitutes drilling operations “is whether the operation is associated or
connected with the physical site of the well or unit.” Sheffield, 424 So.2d at 1302.
In Murphy, the oil company had staked and surveyed the well location, obtained a
drilling permit, worked on the access road, moved a rig onto the site, drilled a hole for the
conductor pipe, and was within hours of spudding the well when it was forced to stop by a
temporary restraining order. Murphy, 590 F.Supp. at 458. This Court held these activities
constituted drilling operations that extended the lease beyond the primary term, noting,
“[S]pudding is not the only act which triggers an automatic extension such as the one in this
lease. Defendant began sufficient preparatory acts a reasonable time before the expiration
date.” Id. at 459.
Courts in other jurisdictions have held activities similar to those conducted in
Murphy to constitute drilling operations. See, e.g., Vickers v. Peaker, 227 Ark. 587, 300
S.W.2d 29, 31-32 (1957) (surveying and clearing site, constructing road, obtaining permit,
bringing material onto site); Allen v. Cont’l Oil Co., 255 So.2d 842, 844-46
(La.Ct.App.1971) (digging slush pit, building road, drilling hole for conductor pipe);
Johnson v. Yates Petroleum Corp., 127 N.M. 355, 981 P.2d 288, 290-91 (1999) (staking and
surveying, obtaining permit, clearing site, working on road); Guleke v. Humble Oil & Ref.
Co., 126 S.W.2d 38, 41-42 (Tex.Ct.Civ.App. 1938) (beginning to erect derrick, bringing
pipe, a drill for digging water well, and other materials onto site). Professor W.L. Summers’
treatise on oil and gas law explains the general rule:
The general rule seems to be that actual drilling in unnecessary, but that the
location of wells, hauling lumber on the premises, erection of derricks, providing a
water supply, moving machinery on the premises and similar acts preliminary to the
beginning of the actual work of drilling, when performed with the bona fide
intention to proceed thereafter with diligence toward the completion of the well,
constitute a commencement or beginning of a well or drilling operations within the
meaning of this clause of the lease. If the lessee has performed such preliminary acts
within the time limited, and has thereafter actually proceeded with the drilling to
completion of a well, the intent with which he did the preliminary acts are
unquestionable, and the court may rule as a matter of law that the well was
commenced within the time specified by the lease.
2 W.L. Summers, Oil and Gas § 349 (1959).
Anderson, 733 F. Supp. 2d at 1107-08.
Finally, after reaching these conclusions, this court addressed whether Hess had engaged in
“drilling operations” at the time of the expiration of the primary term of the leases, which for one
of the leases was May 3, 2004. The court stated:
Prior to the end of the primary term, Hess Corporation surveyed and staked a well,
obtained a permit to drill from the Oil and Gas Division of the North Dakota Industrial
Commission, leveled and lazered the pad, dug the drilling pit and lined it with gravel and
clay, widened the access road to the well, drilled the rat hole for the main conductor pipe,
moved equipment to the location, and drilled the mouse hole. See Docket No. 13. Hess
Corporation performed work preparatory to drilling, and Hess Corporation’s capability to
do the drilling and good faith intent to complete the well are evidenced by the fact the
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company completed the well on June 30, 2009, and the well has continuously produced. See
Murphy, 590 F.Supp. at 458 (explaining the elements of drilling operations). The Court
finds, as a matter of law, that Hess Corporation engaged in drilling operations, thus
extending the leases beyond the primary term.
Id. at 1108.
On appeal, the Eighth Circuit affirmed this court’s interpretation of the “engaged in drilling
or re-working operations” language, stating, among other things, the following:
Finally, W.L. Summers’s leading treatise on oil and gas law sets forth the general principle
regarding drilling or reworking operations:
Various provisions of an oil and gas lease make it necessary to determine what
constitutes the beginning or commencement of a well or of drilling or reworking
operations.... The general rule is that actual drilling is unnecessary, but the location
of well sites, hauling lumber on the premises, erection of derricks, providing a water
supply, moving machinery on the premises and similar acts preliminary to the
beginning of the process of drilling, when performed with the bona fide intention
to proceed with diligence toward the completion of the well, constitute a
commencement or beginning of a well or drilling operations within the meaning of
the lease.
2 W.L. Summers, Oil and Gas § 15:19 (3d ed. 2008) (emphases added). Summers's general
principle further supports our interpretation of the phrase “engaged in drilling or reworking
operations.” Thus, the district court correctly interpreted the disputed lease language and
properly granted summary judgment in favor of Hess on the Andersons' quiet title claim.
Anderson, 649 F.3d at 898 (italics added). Also, the Eighth Circuit refused a request to certify to
the North Dakota Supreme Court the question of how the lease language should be interpreted,
stating:
With respect to the question presented in this appeal, i.e., the meaning of the phrase
“engaged in drilling or reworking operations,” we decline to certify the Andersons’ question
because we do not believe that the issue is close. We further conclude that the North Dakota
Supreme Court has provided enough guidance regarding the meaning of the disputed lease
language to render our decision non-conjectural.
Id. at 895. Finally, in affirming this court’s decision, the only question the Eighth Circuit did not
address was whether Hess had engaged in “drilling operations” prior to expiration of the primary
term of the leases because plaintiffs conceded that point on appeal. The court stated:
7
The Andersons concede that Hess was engaged in drilling operations before the primary
terms expired. Thus, we need not address whether the preparatory activities in which Hess
engaged prior to the expiration of the primary terms constitute drilling operations.
Id. at 899 n.7.
B.
Defendants’ motion for summary judgment and the court’s grant of additional
time for discovery
Defendants filed an early motion for summary judgment contending that this court’s and the
Eighth Circuit’s decision in Anderson are controlling in this case. More particularly, defendants
contended that, even though drilling had not commenced until some six days after expiration of the
primary term, “drilling operations” were underway and the well was actually completed and started
producing some four months later. The activities that had taken place prior to expiration of the
primary term, according to defendants, included the obtaining of a well permit and other regulatory
approvals, surveying, site-specific engineering, staking, and some initial site construction work.
In response to defendants’ motion, plaintiffs argued that Anderson was wrongly decided and
that the lease language required commencement of actual drilling prior to expiration of the primary
term to hold the leases or, in the alternative, that at least equipment capable of drilling the well to
completion needed to be present on site. Plaintiffs contended that they needed to complete
discovery to ascertain exactly what had taken place prior to expiration of the primary term and
whether defendants had proceeded in good faith and with diligent effort to complete the well. They
argued that much of this information was in the control of defendants and could not be
independently gathered. Plaintiffs specifically requested that they be given additional time under
Fed. R. Civ. P. 56(d) to discover and marshal the evidence they claimed was unavailable to them.
After considering the arguments of the parties, the court concluded that a better record of
what had actually transpired would be beneficial not only for this court’s decision but also later in
8
the event of an appeal. Of concern to the court was that, while the occurrence of certain of the
activities relied upon by defendants appeared to be undisputed (including when regulatory approvals
were obtained, when drilling first commenced, and when the well was completed) because they were
based upon public records , the proffered evidence of what physical work had been performed at
the site prior to expiration of the primary term appeared to be conclusory with no indication of
whether it was based on first hand knowledge or was simply hearsay. Further, if defendants were
able to establish through more competent evidence that actual onsite construction activity had taken
place prior to expiration of the lease term, this might obviate the need for the court to decide whether
actual physical site work was required to hold the leases or whether the other preliminary work was
sufficient such as permitting, site specific engineering, and/or staking.2 Consequently, over the
objection of defendants, the court allowed plaintiffs time for additional discovery but limited its
focus initially to what had taken place at the well site prior to the expiration of the primary term and
2
As noted earlier, the court in Anderson listed what the mineral developer had done in that case prior to the
expiration of the primary term, stating:
Prior to the end of the primary term, Hess Corporation surveyed and staked a well, obtained a permit
to drill from the Oil and Gas Division of the North Dakota Industrial Commission, leveled and lazered
the pad, dug the drilling pit and lined it with gravel and clay, widened the access road to the well,
drilled the rat hole for the main conductor pipe, moved equipment to the location, and drilled the
mouse hole.
733 F. Supp. 2d at 1108. Defendants here argued that, in light of this language, mere permitting would have been enough
to hold the leases provided it was followed after the expiration of the primary term by continuous activity performed with
reasonable dispatch leading up to the completion of the well. Hence, according to defendants, additional time for
discovery was not required since there was no dispute over the fact that the well permit and other regulatory approvals
had been obtained before the expiration of the primary term. The problem, however, is that this court did not say in
Anderson that obtaining only a well permit prior to the expiration of the primary term would have been enough. Among
other things, substantial physical activity had taken place at the wellsite prior to expiration of the primary term in
Anderson , so that point did not have to be reached. Further, as already noted, the Eighth Circuit did not decide the point
on appeal.
9
to whether the drilling and other activity thereafter had been more or less continuously prosecuted
and with reasonable dispatch up to the time of completion of the well.3
Following the expiration of the time ultimately allowed for discovery, defendants proffered
more competent affidavit evidence regarding (1) what actually had taken place at the drill site prior
to expiration of the primary term and (2) the activity that took place thereafter leading up to
completion of the well. Plaintiffs offered no countervailing evidence on these subjects.
C.
The uncontroverted facts of this case
1.
Prior to expiration of the primary term
The uncontroverted evidence now before the court establishes the following took place prior
to the expiration of the primary term of the Subject Leases, which was midnight February 9, 2010:4
3
The court agreed with defendants that discovery directed primarily toward eliciting whether defendants had
engaged in their pre-expiration activity with a bona fide intent to proceed with diligence in completing the well was
likely unnecessary. This was because, unlike cases where the initial pre-expiration activity was followed by little or no
activity and or a long period of time before well completion, the undisputed evidence before the court was that the
drilling commenced on the sixth day following expiration of the primary term and, from all appearances, the work
thereafter was continuously prosecuted and completed within a reasonable period of time. Over plaintiffs’ objections,
the court concluded that discovery directed primarily to eliciting the state of mind of defendants prior to expiration of
the primary term would not initially be permitted but would be allowed later if the court concluded there was a legitimate
question as to whether the activity after the expiration of the primary term was prosecuted more or less continuously and
with reasonable dispatch, which turned out not to be the case.
4
Plaintiffs argue that the primary term expired a day earlier, i.e., at midnight February 8, 2010. However, each
of the leases stated that the lease would remain in force for the specified number of years “from this date,” which, in turn,
was a reference to the date of the lease. Generally speaking, the commonly accepted rule for computation of time for
a contractual deadline is to exclude the first day, but include the last, absent the parties having expressed a contrary
intention. This includes contracts that use the terms “from” or “after” in describing when the period of time commences.
See generally 74 Am. Jur. 2d Time §§ 15, 23, & 27 (database updated Nov. 2013); 86 C.J.S. Time §§ 16, 23 (database
updated Dec. 2013).
In applying similar lease language, a number of courts have followed this rule. See, e.g., Winn v. Nilsen, 670
P.2d 588, 590 (Okla. 1983); Wehran v. Helis, 152 So.2d 220, 227-30 (La. Ct. App. 4th Cir. 1963); Eastern Oil Company
v. Coulehan, 64 S.E. 836, 839 (W.V. 1909). And, while it does not appear the North Dakota Supreme Court has
explicitly ruled on the issue, it impliedly recognized the applicability of the general rule when it stated in Woodside v.
Lee stated:
The oil and gas lease with which we are here concerned was executed on April 27, 1950.
Under its terms the lease would terminate one year thereafter unless within that year the lessee
commenced drilling operations or paid a delay rental of $16. No drilling operations were commenced
nor was there any payment or attempt to make payment of delay rentals on or before April 27, 1951.
It follows from what has been said above that the lease terminated on the expiration of that day.
10
C
Zenergy submitted an application for authorization to drill a well on the Subject
Property and for an expansion of the spacing unit to the North Dakota Industrial
Commission (“Industrial Commission”) on November 16, 2009.
C
The Industrial Commission held a hearing on Zenergy’s application on December 17,
2009. On January 25, 2010, the Industrial Commission granted Zenergy’s request
for the creation of a spacing unit on the Subject Property and for authorization to
drill a well on the Subject Property.
C
Uintah Engineering & Land Surveying, on behalf of Zenergy, completed a staking
and survey of the wellsite for the Rolfsrud Well on or about January 16, 2010.
C
Schlumberger Limited, on behalf of Zenergy, completed a drilling profile proposal
for the Rolfsrud Well on or about January 22, 2010.
C
Zenergy submitted Form lH Application for Permit to Drill Horizontal Well for the
Rolfsrud Well to the Industrial Commission on January 25, 2010, and the application
was approved and the permit issued on January 26, 2010.
C
On January 28, 2010, Trotter Construction, Inc. (“Trotter”) began moving equipment
to the Rolfsrud Well site, clearing snow, and stripping and piling of topsoil. Trotter
worked at the Rolfsrud Well site every day from that date through February 4, 2010.
The work activity included continued hauling of equipment and materials to the site
and preparation of the location for drilling by installing culverts and cattle guards,
spreading scoria, and digging a reserve pit.
81 N.W.2d 745, 747 (N.D.1957) (italics added). In addition, this is consistent with North Dakota’s adoption of the same
rule for purposes of statutory deadlines (N.D.C.C. § 1-02-15) as well as for computing time in court proceedings (e.g.,
N.D. R. Civ. P. 6(a)(1)).
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C
On February 7, 2010, the Rolfsrud Well site was 100% ready for the drilling rig.
Also as of that date, approximately 5% of the drilling rig and other equipment
required for drilling had been moved onto the site.
2.
After expiration of the primary term
After the expiration of the primary term of the leases on February 9, 2010, the
uncontroverted evidence is that:
C
Rig moving and erection continued and was completed on February 14, 2010.
C
Cyclone Drilling, Inc. (Zenergy’s drilling contractor) spud the Rolfsrud Well on
February 15, 2010, the sixth day after the expiration of the primary term.5
C
Drilling continued until the well bore reached bottom depth in April 2010.
C
Following the completion of drilling, Zenergy completed and fracked the Rolfsrud
Well, often working twenty-four hours per day, until oil first flowed on June 14,
2010. The first sales of gas and oil production occurred on June 16 & 17, 2010,
respectively.
C
The work activity that took place at the drill site after expiration of the primary term
and leading up to first production was continuously prosecuted and completed with
reasonable dispatch.
D.
The court’s conclusion that Zenergy had engaged in “drilling operations”
sufficient to hold the leases
The facts of this case are materially indistinguishable from those in Anderson with respect
to what took place prior to the expiration of the primary term of the lease. As in Anderson, Zenergy
5
“Spudding in” is the first boring of the hole in the drilling of an oil well. E.g., Anderson, 733 F. Supp. 2d
at 1103 n.4 (citing Williams & Meyers, Manual of Oil and Gas Terms (2009)).
12
had obtained all of the approvals necessary to commence drilling and had engaged in actual on-site
construction activity preparatory to drilling of the well that was more than de minimis. Further, as
in Anderson, Zenergy’s capability to do the drilling and good faith intent to complete the well are
evidenced by the fact that it continuously prosecuted the work needed to complete the well with
reasonable diligence. Consequently, for the reasons set forth in Anderson as well as the authority
cited therein, the court concludes Zenergy’s “drilling operations” extended the Subject Leases
beyond their primary terms.
With that said, the court will turn briefly to plaintiffs’ arguments for why defendants’
summary judgment motion should be denied and why the court has rejected them.
E.
Plaintiffs’ arguments for why summary judgment should be denied
1.
Plaintiffs’ argument that the operative language requires actual drilling
prior to expiration of the primary term to hold the leases
Plaintiffs argue that the North Dakota Supreme Court has still not ruled with respect to how
the “engaged in drilling or re-working operations” language should be grammatically construed and,
even if the relevant construction is that the word “operations” applies to both “drilling” and
“reworking,” what is meant by the term “drilling operations.” Plaintiffs cite to authority that they
claim construes the language in question to require actual drilling. In addition, plaintiffs argue that
the relevant definition of “drilling operations” should be the one adopted by the North Dakota
Legislature in N.D.C.C. § 38-11.1-03(2), which reads as follows:
2. “Drilling operations” means the drilling of an oil and gas well and the production
and completion operations ensuing from the drilling which require entry upon the
surface estate and which were commenced after June 30, 1979, and oil and gas
geophysical and seismograph exploration activities commenced after June 30, 1983.
13
The problem with these arguments, however, is that the “ship has already sailed” regarding
whether the operative language requires actual drilling, given this court’s and the Eighth Circuit’s
decisions in Anderson. Further, even if the court could put aside its obligation to follow the Eighth
Circuit’s decision with respect to that point, the definition of “drilling operations” set forth § 3811.1-03(2) was for an entirely different purpose, and there is no indication the North Dakota
Legislature intended to legislate with respect to language used in oil and gas leases.
2.
Plaintiffs’ arguments that the on-site activity that took place was
insufficient to hold the Subject Leases even if actual drilling was not
required
Plaintiffs argue that, even if actual drilling was not required, the term “drilling operations”
contemplates more than what took place in this case prior to expiration of the primary term. For
authority, plaintiffs cite the following passage from this court’s decision in Murphy:
This Court finds that defendant did not trespass on plaintiff's property, because
defendant’s operations automatically extended the lease term. Drilling operations commence
when (1) work is done preparatory to drilling, (2) the driller has the capability to do the
actual drilling, and (3) there is a good faith intent to complete the well. See Muth v. Aetna
Oil Co., 188 F.2d 844 (7th Cir. 1951); Geier-Jackson Inc. v. James, 160 F.Supp. 524
(E.D.Tex. 1958); LeBar v. Haynie, 552 P.2d 1107 (Wyo. 1976). It is not necessary that the
drill bit actually penetrate the ground. See Humphrys v. Skelly Oil Co., 83 F.2d 989 (5th Cir.
1936).
Prior to the expiration date of the primary term, defendant had undertaken
substantial activities in preparation for spudding the well. The work had progressed so far
that the preliminary drilling for the piping was done. A workover rig capable of spudding
was in place and operating. And defendant had a good faith intent to complete the well, as
evidenced by the advanced stage of drilling operations reached on the eve of expiration and
by defendant's actually and timely completing the well.
590 F. Supp. at 458 (italics added and footnote omitted).
Plaintiffs argue that the italicized language required, at the very least, that the equipment
needed to physically drill the well to completion be on the wellsite prior to the expiration of the
primary term notwithstanding what this court decided later in Anderson, where the drill rig was not
14
on site prior to expiration of the primary term of at least one of the leases. Plaintiffs argue that what
this court decided in Anderson with respect to that point was called into question when the Eighth
Circuit stated in a footnote that it was not ruling on the issue of whether Hess in that case had
performed sufficient activity to be “drilling operations.”
The court rejects this argument for two reasons. First, Murphy is not inconsistent with what
the court later decided in Anderson. While the facts in Murphy were that a drill rig was present prior
to the expiration of the primary term, the court did not say in that case the physical presence of the
drill rig was necessarily required. Rather, the court stated only that the driller have the “capability
to do the actual drilling.” In this case, as in Anderson, Zenergy had the capability of drilling the well
since it had (1) obtained the necessary regulatory approvals, (2) had conducted onsite activity that
was more than de minimis, and (3) had available to it the equipment (including a drill rig) required
to drill the well. In fact, Zenergy commenced drilling on the sixth day following the expiration of
the primary term and completed the well.
Second, even if Murphy should be read as narrowly as plaintiffs suggest, the court concludes
that what this court decided in Anderson is more in accord with the prevailing authority. In fact,
while the Eighth Circuit did not opine on what preparatory activity would be sufficient, the court
did reference much of the same authority that was cited by this court on that subject, including the
discussion in Summers, Oil and Gas, which suggests that having all of the equipment onsite needed
to drill the well prior to expiration of the primary term is not required. Anderson, 649 F.3d at 898
(citing 2 W.L. Summers, Oil & Gas § 15:19 (3d ed. 2008)).
15
3.
Plaintiffs’ argument that “drilling operations” is ambiguous and that
summary judgment is not appropriate because of the need to consider
extrinsic evidence to what the parties intended by use of the term
Finally, plaintiffs argue that the term “drilling operations” is necessarily ambiguous because
rationale arguments can be made for differing positions as to its meaning as evidenced by the fact
that courts around the country are split over whether the term requires actual drilling, and even
where not, over exactly where along a continuum of preparatory activities it actually commences.
Plaintiffs then cite to North Dakota cases holding that, where contract language is ambiguous, the
resolution of the ambiguity is a question of fact. Plaintiffs then argue that summary judgment is
inappropriate because of the need for the factfinder to consider extrinsic evidence as to what the
contracting parties in this case intended by use of the term.6
Also, as part of this same argument, plaintiffs contend that any suggestion in this court’s
decision in Anderson to the contrary is not binding, particularly since the Eighth Circuit restricted
its affirmance only to the issue of whether “drilling operations” required actual drilling and since
it must be determined in this case what preliminary activity short of actual drilling constitutes
“drilling operations.” Plaintiffs argue that the fact this court in Murphy and Anderson had to look
to what other courts had decided was the meaning of the term “drilling operations,” and did not
confine its consideration to the “four corners” of the leases, further demonstrates the ambiguity of
the term.
6
Plaintiffs’ correctly recite the general rules for construction of contracts under North Dakota law. Generally
speaking, contract language is ambiguous under North Dakota law when reasonable arguments can be made for different
positions as to its meaning. E.g., Hillerson v. Bismarck Public Schools, 2013 ND 193, ¶ 18, __ N.W.2d __. In addition,
an ambiguity creates a question of fact to be determined with the aid of extrinsic evidence. Id.
Defendants argue that plaintiffs waived their “ambiguity argument” when they failed to raise it in their initial
briefing. However, plaintiffs did argue in their initial briefing an interpretation of the term “drilling operations” contrary
to that advanced by defendants, which is enough to have preserved the argument. Cf. id. at ¶ 16; Home Instead, Inc. v.
Florance, 721 F.3d 494, 498 n.3 (8th Cir. 2013).
16
Again, the court disagrees. Among other things, plaintiffs’ argument oversimplifies the
process of contract interpretation when dealing with standard form agreements, particularly those
replete with language reflecting the judicial gloss of prior court interpretations like the printed-form
oil and gas leases at issue here. In construing agreements of this nature, courts frequently rely upon
prior judicial constructions of the contract language, particularly when there has been no actual
bargaining over the disputed language. Further, this is true even though the parties may not have
intended the construction suggested by the existing case law and even though the case law may be
in conflict. See, e.g., Kolbe v. BAC Home Loans Servicing, LP, __ F.3d __, 2013 WL 5394192,
at *5 (1st Cir. Sept. 27, 2013) (“Kolbe”) (“When a contract uses uniform language that is contained
in a large number of contracts, as is the case here, it is a well-established common law principle of
contract interpretation that such contracts are interpreted wherever reasonable as treating alike all
those similarly situated, without regard to their knowledge or understanding of the standard terms
of the writing.”) (internal quotation omitted); Bank of New York Trust Co., N.A. v. Franklin
Advisers, Inc., 726 F.3d 269, 276 (2d Cir. 2013) (under New York law boilerplate provisions of
indenture agreements are given a consistent uniform interpretation and do not depend upon the
particularized intention of the parties absent actual bargaining over the provisions); Continental
Casualty Co. v. Wendt, 205 F.3d 1258,1262-63 (11th Cir. 2000) (stating that ambiguity is not
invariably present when a contract requires construction and interpreting language in a standard
form insurance policy in accord with the construction placed on that language by other courts);
United States Fire Ins. Co. v. Schnackenberg, 429 N.E.2d 1203, 1205 (Ill. 1981) (“However, a term
may be unambiguous because it has acquired an established legal meaning. [citation omitted] That
is true here. Though this court has not had occasion to interpret the phrase, our appellate court and
17
a number of other jurisdictions have done so.”); cf. Sauder v. Mid-Continent Petroleum Corp., 292
U.S. 272, 279-81 (1934) (looking to case law for the definition of an implied covenant of
development in an oil and gas lease); see generally Restatement (Second) Contracts § 211(1)-(2)
(1981); E. Allan Farnsworth, Farnsworth on Contracts § 7.11 (3d ed. 2004).
The law in North Dakota appears to be no different.7 An example is the North Dakota
Supreme Court’s recent decision in Bice v. Petro-Hunt, L.L.C., 2009 ND 124, 768 N.W.2d 496. In
Bice, the court was called upon to resolve a dispute between a mineral developer and a class of
plaintiff mineral owners over the meaning of the term “market value at the well” in a standard form
oil and gas lease used by the mineral developer. In resolving the dispute, the court observed that,
while both sides initially claimed the term was unambiguous, they had ascribed a different meaning
to it and that the class members later argued the term must be ambiguous if their interpretation was
not adopted. Id. at ¶ 12. The court then reviewed the case law from other jurisdictions, noting that
the “major treatises on oil and gas law demonstrate the unsettled nature of the law concerning the
interpretation of the term ‘market value at the well’” and that there were competing “majority” and
“minority” positions as to its meaning. Id. at ¶¶ 13-16. The court then discussed why it found
persuasive an Eighth Circuit decision applying North Dakota law that had adopted the majority
position. Id. at ¶¶ 19-20. Finally, and only after consideration of these points, the court declared
7
It appears the North Dakota Supreme Court has not yet specifically embraced Restatement of Contracts
(Second) § 211. However, it has relied upon other parts of the Restatement Second of Contracts for authoritative
guidance in numerous cases. E.g., Thimjon Farms Partnership v. First Intern. Bank & Trust, 2013 ND 160, ¶ 19, 837
N.W.2d 327 (citing § 90); Come Big or Stay Home, LLC v. EOG Resources, Inc., 2012 ND 91, ¶¶ 10-13, 816 N.W.2d
80 (citing §§ 204, 219-221). And, there is no reason to believe it would not consider § 211(1)-(2) to be authoritative in
an appropriate case.
18
the term to be unambiguous, adopted the majority interpretation, and concluded that the trial court
had not erred in granting summary judgment with respect to the issue. Id. at 21.
Also, and perhaps more to the point here, is the North Dakota Supreme Court’s decision in
Serhienko. As noted earlier, Serhienko addressed the same “drilling or re-working operations”
language that appears in the leases in this case. In construing the “re-working operations” portion
of the phrase, the court relied upon the construction afforded the term by other courts to conclude
that “re-working operations” was broader than “re-working” and could include preparatory steps,
such as testing, provided that the preparatory steps were followed by actual reworking activity
performed with reasonable dispatch. Serhienko, 392 N.W.2d at 812-14. In so construing the term,
the court said nothing about it being ambiguous as a matter of law.
In this case, plaintiffs have not proffered any evidence suggesting that the term “drilling
operations” was the subject of actual negotiation between plaintiffs and the original lessee, Diamond
Resources. That being the case, and with standard lease forms being used, what may have been the
individual beliefs of plaintiffs and Diamond Resources as to the meaning of the term is immaterial.
E.g., Kolbe, 2013 WL 5394192, at *5 (“Because uniform contracts are interpreted uniformly across
cases whenever it is reasonable to do so, extrinsic evidence about what a particular party intended
or expected when signing the contract is generally irrelevant.”); see Restatement (Second) Contracts
§ 211(1)-(2); cf. National Bank of Harvey v. International Harvester Co., 421 N.W.2d 799, 804
(N.D. 1988) ( "It is the outward manifestations of assent which govern, not the secret intentions of
the parties."). And, while plaintiffs have submitted affidavits from persons professing to be
knowledgeable about oil and gas leasing practices (including an affidavit from one of the plaintiffs)
who state that the term “drilling operations” as used in the industry means actual drilling, that
19
evidence is of little import here (even for the limited purpose of determining whether there is an
ambiguity) since this court and the Eighth Circuit have already reached a contrary conclusion based
on decisions of other courts and respected treatise authority. In fact, to consider anew the meaning
of the term in each case would undermine the benefits of uniform interpretation and certainty of
meaning that come with using standard form agreements of this kind. See id.8
III.
CONCLUSION AND ORDER
Based on the foregoing, the court concludes Zenergy engaged in “drilling operations”
sufficient to extend the Subject Leases beyond their primary term. Consequently, defendants’
motion for summary judgment (Doc. No. 21) is GRANTED and plaintiffs’ complaint is
DISMISSED WITH PREJUDICE.
IT IS SO ORDERED.
Dated this 31st day of December, 2013.
/s/ Charles S. Miller, Jr.
Charles S. Miller, Jr.
United States Magistrate Judge
8
Mineral owners contemplating executing similar lease agreements, but who are dissatisfied with the judicial
interpretation placed on the standard form language “drilling or re-working operations,” are always free to negotiate other
language, e.g., striking the language in question and inserting language requiring some other benchmark, such as actual
drilling, or including a definition of “drilling operations” that accomplishes the same thing.
20
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