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Equinor USA Onshore Properties Inc. v. Pine Resources, LLC

United States Court of Appeals, Fourth Circuit

March 6, 2019

EQUINOR USA ONSHORE PROPERTIES INC., f/k/a STATOIL USA ONSHORE PROPERTIES, INC., Plaintiff - Appellee,
v.
PINE RESOURCES, LLC, Defendant-Appellant.

          Argued: December 11, 2018

          Appeal from the United States District Court No. 2:14-cv-21169 for the Southern District of West Virginia, at Charleston. Irene C. Berger, District Judge.

         ARGUED:

          David Allen Barnette, JACKSON KELLY, PLLC, Charleston, West Virginia, for Appellant.

          Fields Alexander, BECK REDDEN LLP, Houston, Texas, for Appellee.

         ON BRIEF:

          Michael M. Fisher, Vivian Hatzi Basdekis, JACKSON KELLY, PLLC, Charleston, West Virginia, for Appellant.

          Joel T. Towner, BECK REDDEN LLP, Houston, Texas; Bridget Furbee, Bridgeport, West Virginia, John J. Meadows, STEPTOE & JOHNSON PLLC, Charleston, West Virginia, for Appellee.

          Before GREGORY, Chief Judge, MOTZ, and FLOYD, Circuit Judges.

          GREGORY, CHIEF JUDGE

         This appeal concerns a contractual obligation to "spud" three wells on a tract of land in West Virginia. The parties dispute whether the obligation to "spud" the wells is an obligation only to begin drilling or to complete the wells to the point of mineral production. Following a bench trial, the district court determined that the Purchase and Sale Agreement ("PSA") executed between Petitioner Pine Resources, LLC and the predecessor of Respondent Equinor USA Onshore Properties, Inc. f/k/a Statoil USA Onshore Properties, Inc. contains no requirement that the spudded wells be completed to production. We agree with the district court that the PSA does not require hydrocarbon production. We therefore affirm.

         I.

         A.

         Pine Resources sold its Marcellus mineral rights in 565 acres of land in Barbour County, West Virginia (the "Langley tract") to PetroEdge Energy LLC, a non-party, pursuant to a November 7, 2008 PSA.[1] In addition to documenting the terms of the mineral rights sale, the PSA set forth certain drilling obligations on the Langley tract. Specifically, PetroEdge agreed to apply for a meter tap on a gas transmission line on or before 60 days after executing the PSA, i.e. December 7, 2008. Following installation of that meter tap, the PSA provided for the "spudding" of three wells: the first was to be spudded within one year of the meter tap's installation, and a total of three wells were to be spudded within five years of the meter tap's installation. The PSA permitted PetroEdge to satisfy the spudding obligations by spudding horizontal wells with openings that were off the Langley tract so long as any portion of the well traversed the Langley tract. Pursuant to the PSA, Pine Resources retained an overriding royalty interest ("ORRI") of 18% of the hydrocarbons "produced from or attributable to" the mineral rights that were sold to PetroEdge. J.A. 1734.

         The PSA contained other provisions related to the parties' drilling and surface operations. The parties agreed to meet on a quarterly basis to consult regarding each other's drilling plans and to use reasonable efforts to cooperate with each other in their surface operations. The PSA also established procedures to be used if a party chose to abandon a "producing well" that ceased to produce hydrocarbons. Id.

         A year and a half after the PSA was executed, concern grew that PetroEdge would be unable to meet the deadline for the spudding of the first well due to a delay in installation of the meter tap. PetroEdge had been able to secure only one of two rigs that it needed to drill the first well, which was to be a horizontal well with a surface opening outside of the Langley tract. The second rig was necessary to drill the horizontal portion of the well, which would eventually penetrate the Langley tract. The parties agreed to extend the deadline for spudding of the first well to December 31, 2011 in exchange for $100, 000 in consideration paid to Pine Resources. The parties also agreed that the meter tap installation date would be set at April 1, 2009, regardless of the actual installation date, and that the deadline for spudding of the second and third wells would be April 1, 2014. After a second delay, the parties agreed to amend the PSA a second time to allow PetroEdge until March 31, 2012 to satisfy its contractual obligations in connection with the first well. No additional consideration was paid.

         PetroEdge began drilling the first well, known as Bumgardner 5-2H, in December 2011. The well was drilled to 6, 134 feet and penetrated the Langley tract in March 2012. It was never completed, however, and has never produced hydrocarbons.

         After drilling the first well, the parties continued to meet on a quarterly basis until September 2012, when PetroEdge missed the quarterly meeting. In late 2012, PetroEdge's CEO Larry Richard notified Pine Resources that PetroEdge had sold its mineral interests to Statoil. The PetroEdge-Statoil purchase agreement provided that Statoil would assume responsibility for the "performance of all express and implied obligations" arising from "instruments in the chain of title to the Assets, the Leases, the Contracts and all other orders, contracts and agreements to which the Assets are subject, including the payment of royalties and overriding royalties." J.A. 2440. Schedule 3.25 of that contract listed the Pine Resources-PetroEdge PSA as one of these contracts and indicated: "The first drilling obligation satisfied by drilling the Bumgardner #5-2H Well. Must drill at least two (2) additional wells, vertical or horizontal, on or before April 1, 2014 (may be negotiable)." J.A. 1856.

         After Pine Resources learned of Statoil's purchase of PetroEdge's mineral rights, Pine Resources's principals made several attempts to contact Statoil to schedule quarterly meetings. They initially received no formal response. Months later, on July 11, 2013, Statoil and Pine Resources met. During that meeting, Statoil's Joshua Ozment informed Pine Resources that a second well had been permitted on the same pad as the first well and that Ozment assumed that his company would drill that well.

         Also on July 11, 2013, Pine Resources notified Statoil in writing of what Pine Resources considered to be three ongoing violations of the PSA. First, Pine Resources stated that Statoil had failed to meet its quarterly meeting obligation. Second, Pine Resources considered Statoil's failure to "complete[ ] and turn[ ] into production" the first well a breach of the PSA. J.A. 1823. And third, Pine Resources noted the remaining drilling obligations and requested an update of Statoil's plans to satisfy those obligations. Statoil did not respond to that correspondence, but the company's vice president of business development forwarded Pine Resource's letter internally, stating, "Sounds like we are in some trouble, but maybe you guys get a lot of these." J.A. 1857.

         Pine Resources followed up its July 11, 2013 letter with additional emails and phone calls in an attempt to ascertain Statoil's plans to satisfy its obligations under the PSA. In December 2013, Statoil informed Pine Resources that it would not complete the first well or drill the second or third wells and asked that Pine Resources explain its demands in writing. Pine Resources sent a demand letter to Statoil, stating "[t]here was an immediate requirement to contract with a pipeline for service and a requirement to drill three wells." J.A. 1826. A month later, Statoil responded that it was "not obligated to complete the [first well] until the Langley Meter Tap is ...


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