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Bowers Oil and Gas, Inc., A v. Dcp Douglas

July 31, 2012

BOWERS OIL AND GAS, INC., A COLORADO CORPORATION, APPELLANT (PLAINTIFF),
v.
DCP DOUGLAS, LLC, A COLORADO LIMITED LIABILITY COMPANY; AND KINDER MORGAN OPERATING, L.P. "A", A DELAWARE LIMITED PARTNERSHIP, APPELLEES (DEFENDANTS).



Appeal from the District Court of Converse County The Honorable John C. Brooks, Judge

The opinion of the court was delivered by: Golden, Justice.

Before KITE, C.J., and GOLDEN, HILL, VOIGT, and BURKE, JJ.

NOTICE: This opinion is subject to formal revision before publication in Pacific Reporter Third. Readers are requested to notify the Clerk of the Supreme Court, Supreme Court Building, Cheyenne, Wyoming 82002, of any typographical or other formal errors so that correction may be made before final publication in the permanent volume.

[¶1] Bowers Oil and Gas, Inc. (BOG) entered into a Gas Purchase Contract with Kinder Morgan Operating, L.P. (Kinder Morgan), pursuant to which Kinder Morgan agreed to purchase coal bed methane gas from certain of BOG's wells. Kinder Morgan transferred its interest in the Contract, and Kinder Morgan's successor eventually terminated the Contract pursuant to a provision that allowed either party to terminate if in the terminating party's sole opinion, the sale or purchase of the gas became unprofitable or uneconomical. BOG thereafter filed a complaint in district court asserting claims for breach of contract and breach of the covenant of good faith and fair dealing. Following a bench trial, the district court found no contract breach or covenant breach and ruled in favor of Kinder Morgan and its successor. We affirm.

ISSUES

[¶2] BOG presents the following issues on appeal:

1. Whether the trial court erred in ruling that Appellees did not breach the Gas Purchase Contract?

A) Whether the trial court erred in ruling that Appellees were excused from performance of the Gas Purchase Contract on the basis that the Contract became uneconomical pursuant to paragraph 4 of the Contract?

2. Whether the trial court erred in ruling that the Appellees did not breach the covenant of good faith and fair dealing.

FACTS

[¶3] BOG is an oil and gas developer with interests in a number of states, which interests include coal bed methane wells in Wyoming's Powder River Basin. On May 1, 2004, BOG entered into a Gas Purchase Contract with Kinder Morgan. Kinder Morgan is a provider of midstream services, including the gathering of gas from producers, and the processing and transporting of that gas to market. In 2004, Kinder Morgan owned the Douglas Gathering System, which is a system of collecting lines and main lines that runs from the Gillette area to a processing plant near Douglas, Wyoming. It was through a line connected to the Douglas Gathering System that Kinder Morgan was to accept BOG's coal bed methane gas.

[¶4] Pursuant to the Gas Purchase Contract, BOG agreed to sell gas produced from certain of its wells, and Kinder Morgan agreed to purchase the gas. The Contract made the parties' obligations subject to a number of conditions, including the following:

4. ECONOMIC CONDITIONS: In the event the gas delivered hereunder at any point or points becomes insufficient in volume, quality, pressure or for any reason becomes, in the sole opinion of Buyer or Seller, unprofitable or uneconomical for Buyer to purchase or for Seller to sell, then Buyer or Seller shall have the right to terminate this Contract upon thirty (30) days written notice to the other party as to any or as to all such points.

7. QUANTITY OF GAS:

7.1. Buyer will purchase and take Seller's gas, subject to the demands of Buyer's resale purchaser(s) and the operating conditions and capacity of Buyer's facilities. It is understood that Buyer cannot guarantee the purchase of any particular quantity of Seller's gas which is available for sale. Buyer shall, however, endeavor to purchase gas from the lands covered by this Contract ratably with its purchases of similar gas under other contracts covering gas delivered to Buyer's facilities.

7.2. Seller shall have the right to dispose of any gas not taken by Buyer, subject to Buyer's right to resume purchase at any subsequent time upon thirty (30) days notice.

7.3. Seller shall have agents or employees available at all reasonable times to receive from Buyer's dispatchers advice and requests for changes in the rates of delivery of gas hereunder as required by Buyer from time to time.

10. RESERVATIONS OF SELLER: Seller hereby expressly reserves unto itself, its successors and assigns, the following rights with respect to its interests in the gas properties committed by Seller to Buyer hereunder together with sufficient gas produced to satisfy such rights:

10.1. To operate Seller's gas properties free from any control by Buyer in such manner as Seller, in Seller's sole discretion, may deem advisable, including, without limitation the right, but never the obligation, to drill new wells, shut in wells, to repair and rework old wells, renew or extend, in whole or in part, any lease covering, in whole or in part, the gas properties and to abandon any well or surrender any such lease, in whole or in part, when no longer deemed by Seller to be capable of producing gas in paying quantities under normal methods of operation.

10.2. To use gas produced from the gas properties for developing and operating Seller's gas properties committed hereto in the field in which the gas is produced, for the operation of Seller's pipelines, water stations, camps and other miscellaneous uses incident to the operation of such leases, for reinjection, and to fulfill obligations to Seller's Lessors therein.

[¶5] All but one of BOG's wells were located on surface lands owned by the Antelope Coal Company (ACC), which operates the Antelope Coal Mine. Before entering into the Gas Purchase Contract with Kinder Morgan, BOG, on September 11, 2003, entered into a Surface Use Agreement with ACC. The Agreement contemplated ACC's planned expansion of its coal mine, which neighbored BOG's coal bed methane wells. To accommodate the eventual coal mine expansion, the Surface Use Agreement contained provisions requiring BOG to shut in and abandon any well when ACC's surface disturbance approached within five hundred feet of that well. Specifically, the Agreement provided:

13.) Mining Notice: As to each well drilled and related flow lines pursuant to this Agreement.

a.) OWNER shall give notice in writing to OPERATOR not less than ninety (90) days prior to the anticipated date by which OWNER'S coal surface mining or related operations shall be within One Thousand (1000) feet of an oil and/or gas well drilled by OPERATOR on the Surface Lands.

b.) OPERATOR agrees, at each such time as OWNER shall have mined and/or removed topsoil within Five Hundred (500) feet of such well site location, or to such other distance as may be permitted under the applicable regulations of governmental authorities having jurisdiction over the premises, but in no event later than such time as OWNER shall have mined with[in] Five Hundred (500) feet of such well site location, to suspend operations and to shut-in such well at OPERATOR'S expense and in connection therewith, to:

1.) Remove any and all of OPERATOR'S surface facilities, including pipelines, power lines and gathering lines located on Surface Lands at OPERATOR'S expense. In the event that OPERATOR is required to shut-in a well and remove surface facilities, OPERATOR shall not have the right to require OWNER to purchase from the OPERATOR, the subject well, facilities and remaining recoverable oil, gas or coal bed methane reserves.

2.) Plug and abandon all wells to a depth below the coal seam being mined by OWNER.

3.) OWNER shall not be responsible for any loss of oil, coal bed methane or gas reserves due to mining operations by OWNER.

4.) Upon completion of such operations, OPERATOR shall give OWNER written notice thereof.

[¶6] The Kinder Morgan pipeline that serviced BOG's wells was a ten-inch line that also ran through ACC lands. Kinder Morgan held an easement for its pipeline known as the Litton Easement, which easement was granted and recorded earlier in time than ACC's coal leases on the same lands. Kinder Morgan's sixteen-inch main line also ran through ACC lands.

[¶7] In November 2004, BOG began producing and selling gas to Kinder Morgan. In April 2006, Kinder Morgan sold its gas gathering and pipeline system to MEG Wyoming Gas Service, LLC (MEG) and assigned the BOG Gas Purchase Contract to MEG as part of that transaction. BOG's last delivery of gas pursuant to the Contract occurred in July 2006. In October 2006, BOG shut in its wells because ACC had obtained approval to expand its coal mine and needed to perform work to divert the creek into which BOG was discharging water.

[¶8] During this same timeframe, ACC and MEG entered into negotiations for the relocation and decommissioning of portions of MEG's gathering lines and related facilities that were in the path of ACC's coal mine expansion. On September 25, 2006, ACC and MEG executed an agreement pursuant to which ACC agreed to pay MEG $10,640,163 for the relocation of its main sixteen-inch pipeline. In lieu of payment for relocating MEG's six-inch and ten-inch pipelines, MEG accepted a payment of $955,971 to remove those lines altogether.

[¶9] The removal of the ten-inch and six-inch pipelines cost MEG the ability to accept gas from certain producers in the area, including BOG. In a memorandum outlining the negotiated deal between MEG and ACC to MEG's management committee, MEG's vice president, Steven Huckaby, wrote, in part:

Most of the oil and gas leases in the new coal development areas and the associated pipeline rights-of-way predate coal leases and have precedent. In general, law supports the efficient and economic development of all resources of the country. While precedence is recognized, when push comes to shove the industries must work together. In the case of this specific project, MEG's rights-of-way are superior to the coal leases and if Kennecott wants to develop its lease, it must pay us to move our pipelines. We can't say no and expect to prevail if the mine challenges us.

This project contemplates that MEG will relocate our 16" mainline and will remove various sections of 6" and 10" low pressure gathering system on a cost plus basis.

The 6" and 10" gathering lines gather approximately 280 mcfd of conventional and 170 mcfd of CBM gas adjacent to or located in the mine expansion. The gross margin value of this lost gas would be approximately $0.4 million. The cost to replace the 6" and 10" gathering pipe would be $2.06 million. In lieu of replacing the gathering lines MEG will accept a $0.956 million payment, saving Kennecott $1.10 million. Net profit to MEG will be $0.556 million.

All of the contracts for gas that would be affected by MEG's decision to take a payment in lieu of replacing the gathering lines have "gather's sole opinion" outs for uneconomic operations. When the contract with Kennecott is executed we will notify the producers that we intend to terminate their gathering contracts. We will give them the option to pay to have gathering lines or compression added to facilitate the reconnection of their gas. This may result in renegotiating ...


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