Case: 09-31122 Document: 00511295308 Page: 1 Date Filed: 11/16/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
November 16, 2010
No. 09-31122 Lyle W. Cayce
Clerk
APACHE CORPORATION,
Plaintiff - Appellant,
v.
W & T OFFSHORE, INC.,
Defendant - Appellee.
Appeal from the United States District Court
for the Eastern District of Louisiana
Before STEWART, PRADO, and ELROD, Circuit Judges.
JENNIFER WALKER ELROD, Circuit Judge:
Although the parties submitted over one-hundred pages of briefing, the
issue on appeal is the same straightforward question of contract interpretation
previously before the district court: Does the Farmout Agreement1 require W&T
to bear a proportionate share of the costs of decommissioning an oil platform
1
A farmout agreement is “[a] very common form of agreement between operators,
whereby a lease owner not desirous of drilling at the time agrees to assign the lease, or some
portion of it (in common or in severalty) to another operator who is desirous of drilling the
tract. The assignor in such a deal may or may not retain an overriding royalty or production
payment. The primary characteristic of the farmout is the obligation of the assignee to drill
one or more wells on the assigned acreage as a prerequisite to completion of the transfer to
him.” Howard R. Williams & Charles J. Meyers, Manual of Oil & Gas Terms 389 (9th
ed. 1994).
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located on the federal offshore oil and gas lease designated OCS-G 2951 Main
Pass Block 151 (Block 151). Because we agree with the district court that the
unambiguous language of the Agreement does not create any such obligation, we
AFFIRM.
I.
W&T’s predecessor in interest, the Atlantic Richfield Company (ARCO),
and Apache’s predecessor in interest, the Texoma Production Company
(Texoma), executed the Farmout Agreement on October 31, 1979. Texoma then
had thirty days to commence drilling a test well, which if successful, earned
Texoma an assignment of ARCO’s interest in the OCA-G 2950 Main Pass Block
148 (Block 148) lease subject to an overriding royalty interest. ARCO’s relatively
small overriding royalty interest was free of any obligation to contribute to the
costs of production.
The Farmout Agreement, however, included two election points for ARCO
to convert its 8.33 percent overriding royalty interest into a 33.3 percent cost-
bearing working interest. Generally speaking, the first election point allowed
ARCO to convert its royalty interest in the first well while the second election
point allowed ARCO to convert its royalty interest in any subsequent wells. The
first election point would occur after Texoma recovered “the proportionate costs
of drilling, testing, completing, equipping, and operating the well, including that
portion of the platform costs which shall be allocated to such well on the basis
of the number of slots on the platform.” The second election point would occur
only if Texoma proposed to drill a second well prior to recovering its production
costs in the first well. If Texoma proposed a second well, ARCO would have
thirty days to convert its overriding royalty interest in the second well into a
working interest and participate in the drilling of the second well. Upon
conversion under the second election point, ARCO would be “responsible for the
proportionate share of the platform costs allocated to the total number of wells
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to be drilled for production from said lease under the plan of exploration and
development.” ARCO exercised both options to convert its royalty interest to a
working interest, and pursuant to the Farmout Agreement, the parties entered
into a joint operating agreement (JOA) governing the operations of the Block 148
lease.
No drilling platform was ever constructed on Block 148. Apache, however,
operated the Block 151 platform, which served both the Block 151 lease and the
adjacent Block 148 lease until Hurricane Ivan damaged the platform in 2004,
thereby ending its service life. Because federal regulations require leaseholders
to remove and decommission oil and gas platforms at the end of their service life,
Apache, as the platform operator, began the process of decommissioning the
Block 151 platform. Apache sought reimbursement for such costs from W&T,
contending that the Farmout Agreement requires W&T, which owns a 33.3
percent working interest in Block 148, to pay a proportionate share of the
decommissioning expenses. W&T refused to pay.
Accordingly, on November 25, 2008, Apache filed a complaint in the United
States District Court for the Eastern District of Louisiana (1) seeking a
declaratory judgment that W&T must bear its proportionate share of the total
costs of decommissioning and abandoning the Block 151 platform, (2) alleging
that W&T’s refusal to bear its proportionate share of the decommissioning costs
constitutes a breach of the Farmout Agreement, and (3) alleging, in the
alternative, that “W&T has enjoyed the use of the [Block 151 platform] to its
enrichment without cause at the expense of Apache.” W&T counterclaimed,
seeking indemnity under the Farmout Agreement. Prior to completing
discovery, Apache sought summary judgment “holding W&T liable for its
proportionate share of [Block 151 platform] costs, including decommissioning
costs,” and dismissal of W&T’s counterclaim with prejudice. W&T subsequently
filed a cross-motion for summary judgment seeking dismissal of Apache’s
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complaint, indemnification, and attorneys’ fees. The district court concluded
that
The Farmout Agreement could have required ARCO to agree to pay
a share of the decommissioning costs of the platform located on
Block 151 but it did not. Nowhere in either the Farmout Agreement
or the subsequent JOA is an obligation expressed to pay for the
decommissioning of that platform. Apache cannot meet its burden
of proving such an obligation exists because the unambiguous
language of the agreements does not create one.
Moreover, with respect to W&T’s indemnity claim, the district court found that
“[t]here is nothing in the text to suggest that ARCO was attempting to shift the
costs of a subsequent litigation between the parties to the agreement.”
Accordingly, the district court denied Apache’s summary judgment, granted
W&T’s summary judgment in part, and dismissed Apache’s complaint and
W&T’s cross-claim for indemnification and attorneys’ fees with prejudice.
II.
We review the district court’s summary judgment de novo, applying the
same legal standards used by the district court.2 Moss v. BMC Software, Inc.,
610 F.3d 917, 922 (5th Cir. 2010) (citation omitted). “Summary judgment is
proper ‘if the pleadings, the discovery and disclosure materials on file, and any
affidavits show that there is no genuine issue as to any material fact and that
the movant is entitled to judgment as a matter of law.’” Id. (quoting Fed. R. Civ.
P. 56(c)(2)). “[T]he court views all facts and evidence in the light most favorable
to the non-moving party,” and “[m]ere conclusory allegations are insufficient to
defeat summary judgment.” Id. (citations omitted). Furthermore, “where the
non-moving party fails to establish ‘the existence of an element essential to that
party’s case, and on which that party will bear the burden of proof at trial,’ no
2
The parties dispute the appropriate standard of review but are both incorrect because
they ignore the procedural posture of this case, which is a review of the district court’s
summary judgment.
4
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genuine issue of material fact can exist. Nichols v. Enterasys Networks, Inc., 495
F.3d 185, 188 (5th Cir. 2008) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-
23 (1986)).
III.
A.
The Outer Continental Shelf Lands Act “vests the United States with
jurisdiction over the soil and seabed of the oceans and artificial islands and fixed
structures located thereon, and grants to the United States the mineral
resources that are part of the [Outer Continental Shelf.]” Snyder Oil Corp. v.
Samedan Oil Corp., 208 F.3d 521, 522 (5th Cir. 2000). Furthermore, the Act
provides:
To the extent that they are applicable . . . the civil and criminal laws
of each adjacent State . . . are declared to be the law of the United
States for that portion of the subsoil and seabed of the outer
Continental Shelf . . . and fixed structures erected thereon, which
would be within the area of the State if its boundaries were
extended seaward to the outer margin of the outer Continental
Shelf . . . .
43 U.S.C. § 1333(a)(2)(A). Because both Blocks 148 and 151 are adjacent to
Louisiana, the law of Louisiana controls this court’s interpretation of the
Farmout Agreement.
Under Louisiana law, “interpretation of a contract is the determination of
the common intent of the parties.” La. Civ. Code Ann. art. 2045. “In ascertaining
the common intent, words and phrases in a [contract] are to be construed using
their plain, ordinary and generally prevailing meaning, unless the words have
acquired a technical meaning, in which case the words must be ascribed their
technical meaning.” Sims v. Mulhearn Funeral Home, Inc., 956 So. 2d 583, 589
(La. 2007)) (internal quotation marks and citation omitted). Moreover, “[w]ords
susceptible of different meanings must be interpreted as having the meaning
that best conforms to the object of the contract,” La. Civ. Code Ann. art. 2048,
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and “[e]ach provision in a contract must be interpreted in light of the other
provisions so that each is given the meaning suggested by the contract as a
whole,” La. Civ. Code Ann. art. 2050. In addition, “[w]hen the words of a
contract are clear and explicit and lead to no absurd consequences, no further
interpretation may be made in search of the parties’ intent.” La. Civ. Code Ann.
art. 2046. Thus, “[u]nder Louisiana law, the interpretation of an unambiguous
contract is an issue of law for the court.” Amoco Prod. Co. v. Tex. Meridian Res.
Exploration Inc., 180 F.3d 664, 668 (5th Cir. 1999) (citing Tex. E. Transmission
Corp. v. Amerada Hess Corp., 145 F.3d 737, 741 (5th Cir. 1998)). Accordingly,
this case turns primarily on whether the Farmout Agreement unambiguously
requires W&T to pay for its proportionate share of the costs of decommissioning
the Block 151 platform.
B.
Both parties claim that the Farmout Agrement is unambiguous but reach
opposite conclusions as to whether W&T is obligated to pay its proportionate
share of the Block 151 platform decommissioning costs. This discrepancy does
not, by itself, indicate that the contract is ambiguous. See Amoco Prod. Co., 180
F.3d at 668-69 (holding that “[a] contract provision is not ambiguous where only
one of two competing interpretations is reasonable or merely because one party
can create a dispute in hindsight” (citation omitted)). “In the context of contract
interpretation, only when there is a choice of reasonable interpretations of the
contract is there a material fact issue concerning the parties’ intent that would
preclude summary judgment.” Id. at 669.
Here, the Farmout Agreement is silent about decommissioning costs.
Nevertheless, Apache contends that the term “platform costs” encompasses the
costs of decommissioning the Block 151 platform. “Platform costs” is used twice
in Section VII, which governs ARCO’s (W&T’s predecessor) two election points
for converting its overriding royalty interest into a working interest. The first
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use of the term is in the description of the first election point, which allows
conversion of ARCO’s royalty interest in the first well:
The overriding royalty herein provided for shall be paid until such
time as you have recovered out of the proceeds of production from
the producing well after deducting the royalty, overriding royalty
and taxes paid by you on production, as applicable to ARCO’s
contributed interest, the proportionate costs of drilling, testing,
completing, equipping and operating the well, including that portion
of the platform costs which shall be allocated to such well on the
basis of the number of slots on the platform. The operating costs to
be recovered shall be determined in accordance with the accounting
procedure attached hereto as Exhibit “A”. At such time as you have
recovered the costs therein provided for, ARCO shall have 30 days,
from the receipt of such notice of your recovery of said cost, within
which to elect to convert its overriding royalty interest to a
proportionate 33 1/3 percent working interest in the initial well,
equipment in and on same, production from such well, and that
portion of said lands included in any units.
Two paragraphs later, “platform costs” is used again in the description of the
second election point, which allows conversion of ARCO’s royalty interest in the
second and subsequent wells:
If prior to the payout of the first producing well, as hereinabove
provided, you propose to drill the first development well provided for
under the plan of exploration and development . . . you shall so
notify ARCO in writing. . . . Should ARCO elect to participate in the
drilling of such well it shall convert its overriding royalty to a 33 1/3
percent working interest in said lease and shall join in the
hereinbefore described joint operating agreement and shall be
responsible for its proportionate share of platform costs allocated to
the total number of wells to be drilled for production from said lease
under the plan of exploration and development. However, ARCO’s
election to participate as is set forth, shall not be deemed an election
to convert its overriding royalty in the first producing well, which
election, if so made, shall be as hereinbefore provided, i.e., at the
time of payout of such first producing well.
Both election points can only occur upon the completion of certain
preconditions. For example, the second election point can occur only if Texoma
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elects to drill a second well (i.e., the first development well). If Texoma, for
instance, had elected not to drill any development wells, this election point
would never occur. Similarly, the first election point can occur only when ARCO
has recouped certain expenses, including “platform costs,” related to the initial
producing well. Given this precondition, the term “platform costs” must refer to
the costs of constructing the well platform and not to future decommissioning
expenses that the operator may incur at some unknown time in the future.
Stated differently, if the term “platform costs” included the future
expenses of decommissioning the Block 151 platform, W&T’s election point to
convert its royalty interest in the first well would not occur until after Apache
had decommissioned the well. That is, under Apache’s construction,
decommission costs would not be recoverable until after the platform had been
decommissioned, and once the platform had been decommissioned, it would be
impossible to recover such expenses out of the proceeds of a well that is no longer
operational. This construction is nonsensical. It would be pointless for ARCO
to convert its overriding royalty interest into a working interest following the
decommissioning of the Block 151 platform. Where there is no production, there
are no royalties, regardless of the percentage.
Granted, it would be possible for this election point never to occur. For
example, if the first production well failed to produce in sufficient quantities,
this election point would never occur because Texoma would be unable to recoup
its costs associated with this well. We will not, however, interpret a contract to
render one of its provisions altogether meaningless. Here, the object of the
elections is to provide ARCO with two opportunities to convert its overriding
royalty interest into a working interest, and words “must be interpreted as
having the meaning that best conforms to the object of the contract.” La. Civ.
Code Ann. art. 2048. Therefore, we find that the term “platform costs,” as used
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with reference to the first election point, refers only to the costs of constructing
the platform.3
Under Louisiana law, we interpret the second usage of the term “platform
costs” in light of the preceding use. See La. Civ. Code. Ann. art. 2050. Here, the
two usages occur in the same section of the contract (Section VII), in the same
context (election points), and mere paragraphs apart. Moreover, there are no
modifiers attached to the second usage of “platform costs” to indicate a different
meaning. Accordingly, we agree with the district court that “[i]n both instances,
the term platform costs is in reference to the costs of constructing a well,” and
that “[n]either instance purports to control the management of expenses into the
future.” 4
Furthermore, in that same section, the Farmout Agreement requires the
parties to enter into a joint operating agreement (JOA) providing “provisions as
may be necessary for the operation of the affected properties” upon the exercise
of either election. This is further evidence that the term “platform costs”
includes only fixed, startup costs of constructing a well, not speculative
operational expenses, which are outside the scope of costs contemplated by the
3
Although federal regulations specify that decommissioning obligations accrue when
the platform is installed, 30 C.F.R. § 250.1702, this does not mean that the cost of such
obligations is also realized at this time. The operator accruing the decommissioning
obligations might never incur the costs. For example, the operator might have entered into
a joint operating agreement with another party where that second party agreed to pay the
entire costs of decommissioning.
4
Apache concedes that the term “‘platform costs’ means the same thing in both election
clauses,” but nevertheless maintains that the Farmout Agreement uses the term in two
different contexts in order to achieve two different results. According to Apache, the first
election point, unlike the second, reflects a “snapshot in time.” That is, the first election point
is triggered when Texoma achieves a “payout”—“a time when the value of the production from
the well catches up with the well as defined by the parties.” Apache, however, has abandoned
this argument by failing to raise it in its initial brief on appeal. Accordingly, we need not
consider it. See Cinel v. Connick, 15 F.3d 1338, 1345 (5th Cir. 1994).
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election-point provisions.5 Simply put, Apache’s construction of the term
“platform costs”—that it includes “all costs attributable to the platform from
cradle to grave, construction to dismantlement”—is unsupported by the Farmout
Agreement.
Similarly, the JOA is silent as to the Block 151 platform, and neither
party contends otherwise. The Block 148 JOA specifically defines the extent of
the parties’ obligations for regulatory decommissioning and platform removal,
including hypothetical future platforms on Block 148, but does not even
mention the Block 151 platform. Accordingly, the JOA does not require W&T
to pay to decommission the Block 151 platform. Therefore, we find that neither
the Farmout Agreement nor the JOA requires W&T to pay to decommission the
Block 151 platform.
Moreover, to the extent Apache argues that W&T owns an interest in the
Block 151 platform such that the law requires payment for decommissioning
costs, this argument fails as contrary to Louisiana law. Apache avers that W&T
acquired an interest in Block 151 from its predecessor, Vastar, because the
5
Apache also asserts that (1) “W&T’s obligation to pay its proportionate share of
platform costs was expressly made dependent on Texoma’s development plan, so the provisions
of that plan became part of the agreement between the parties,” and (2) the plan of
development and exploration “‘called for Texoma to jointly develop and produce [the Block 148
and 151 leases] from a single drilling and production platform located on Block 151.’”
Accordingly, Apache argues that W&T, as a party to the plan of exploration and development,
is contractually required to pay for the costs to remove the Block 151 platform. This argument
is unpersuasive. First, the parties dispute whether the Farmout Agreement actually
incorporated the plan of development by reference, and indeed, an inspection of the Agreement
indicates that it was not expressly included. See, e.g., Russellville Steel Co. v. A&R
Excavating, Inc., 624 So. 2d 11 (La. App. 5th Cir. 1993); Action Fin. Corp. v. Nichols, 180
So. 2d 81 (La. App. 2d Cir. 1965). Second, as W&T notes, Texoma’s plan of exploration and
development “is not an agreement, and it creates no rights or obligations.” The plan of
exploration and development was “nothing more than a report which Texoma was required to
submit to the U.S. Geological Survey as the ‘Operator.’” So even if the parties fully
incorporated the plan of exploration and development into the Farmout Agreement, it does not
independently give rise to an obligation to pay for decommissioning costs.
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assignment from Vastar to W&T specifically included all of Vastar’s working
interest in the Block 151 platform. This phrase, however, does not necessarily
mean that Vastar actually owned rights in the Block 151 platform. Rather, it
means that Vastar assigned whatever rights it happened to have in the Block
151 platform out of an abundance of caution. A party cannot assign what it
does not own. See Town of Homer v. United Healthcare of La., Inc., 948 So. 2d
1163, 1169 (La. App. 2d Cir. 2007) (“An assignor cannot assign any rights
greater than that which he held.” (citations omitted)).
In addition, the Block 151 platform, which was a drilling platform
permanently affixed to the seabed, was an immovable under Louisiana law,
Bruyninckx v. Bratten, 554 So. 2d 247, 249 (La. App. 3d Cir. 1989), and
ownership of an immovable can be conveyed only by a written act translative
of title. See Oak Harbor Prop. Owners’ Ass’n v. Millennium Grp. I, L.L.C., 934
So. 2d 814, 818 (La. App. 1st Cir. 2006). Here, neither the Farmout Agreement,
nor the Block 148 JOA mention the Block 151 platform. Because neither
document conveyed ownership of any interest in the platform to ARCO, such
interest could not have passed to W&T. Because W&T owned no interest the
Block 151 platform, federal law does not require W&T to pay decommissioning
costs of the Block 151 platform. 30 C.F.R. § 250.1701(a) (“Lessees and owners
of operating rights are jointly and severally responsible for meeting
decommissioning obligations for facilities on leases, including the obligations
related to lease-term pipelines, as the obligations accrue and until each
obligation is met.”).6
6
Apache argues that the consequence of the district court’s interpretation of the term
“platform costs” “is that W&T has no obligation to pay any share of the millions of dollars it
cost[s] to comply with the government regulations requiring the removal of the [Block 151
platform]. Although Appellant correctly notes that “[a]n outer boundary in interpretation is
to avoid unreasonable consequences or inequitable or absurd results even when the words used
in the contract are fairly explicit,” Dore Energy Corp. v. Prospective Inv. & Trading Co., 570
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Because Apache seeks to enforce a contractual obligation against W&T,
it must first prove that the obligation exists. See Suire v. Lafayette City-Parish
Consol. Gov’t, 907 So. 2d 37, 58 (La. 2005); see also La. Civ. Code Ann. art. 1831
(“A party who demands performance of an obligation must prove the existence
of the obligation.”). Here, Apache has failed to meet its burden. We agree with
the district court: “Apache cannot meet its burden of proving an obligation
exists because the unambiguous language of the agreements does not create
one.” There is no choice of reasonable interpretations presenting a genuine
issue of material fact that precludes summary judgment. See Amoco Prod. Co.,
180 F.3d at 669. Accordingly, we affirm the district court’s summary judgment.
C.
Apache also argues that the district court lacked authority to enter a final
judgment dismissing all of Apache’s claims. Apache contends that it moved for
summary judgment only on its breach-of-contract claims and W&T’s
counterclaim for indemnity, and that “[n]either party moved for summary
judgment on Apache’s declaratory-judgment or enrichment-without-cause
claims.” Apache, however, misconstrues the record. W&T’s cross-motion for
summary judgment prayed for judgment “Dismissing Apache Corporation’s
Complaint” (as opposed to just the contractual claim). Moreover, W&T’s
F.3d 219, 225 (5th Cir. 2009) (internal quotation marks and citation omitted), this is not such
a case. In Dore, the court avoided interpreting a settlement agreement as a “well-forfeiture
agreement.” Id. at 229.
Here, however, the narrower construction of the term “platform costs” merely forces
Apache to pay for decommissioning costs that federal law already obligated it to pay. Had
ARCO never elected to convert its interest, Apache would have faced the decommissioning
obligations alone. Thus, Texoma, Apache’s predecessor, recognized the risk of paying
decommissioning costs when it entered into the Farmout Agreement. When ARCO elected to
convert its overriding royalty interest into a working interest, Texoma became obligated to pay
a greater royalty (33 1/3% as opposed to 8.333%). This increased royalty, however, was
balanced by ARCO’s agreement to enter into a JOA and to pay certain operational expenses
under the JOA. Although Texoma might have negotiated for decommissioning costs, it did not,
and the deal struck hardly results in “unreasonable consequences or inequitable or absurd
results.” Id. at 229.
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memorandum in support of its cross-motion asserted that “W&T is entitled to
summary judgment on all counts as a matter of law.” In addition, the
memorandum further clarified the scope of the motion, stating that “Apache’s
position rests entirely upon its attempts to liberally expand the meaning of the
term ‘platform costs’ as used in a 30-year-old Farmout Agreement.”
Given these statements, Apache had ample notice and opportunity to
object to the scope of relief prayed for in W&T’s motion, but it did not do so.
Unlike the cases cited by Apache, where the parties “were not on notice to
present arguments,” Lozano v. Ocwen Federal Bank, FSB, 489 F.3d 636, 641 (5th
Cir. 2007), W&T affirmatively requested dismissal of the complaint as a whole,
and Apache had two opportunities over twenty-one days to respond.
Accordingly, the district court properly entered a final judgment dismissing
Apache’s complaint with prejudice.
D.
W&T contends that it is “entitled to full immunity from Apache to the
extent that the Farmout Agreement controls.” The indemnity provision of the
Farmout Agreement provides:
In all operations hereunder you shall keep ARCO free and clear of,
and indemnify them against, any loss or liability arising as a result
of your operations involving said lease. The cost and risk of all
operations conducted hereunder shall be solely yours and ARCO
shall never be liable for any portion of the same.
This provision does not indemnify W&T for costs of litigation between the
parties. Rather, as the district court correctly found, “the intent of the parties
as evident from the text was to limit ARCO’s liability for operations occurring
on the lease. There is nothing in the text to suggest that ARCO was attempting
to shift the costs of a subsequent litigation between the parties to the
agreement.” We therefore affirm the district court’s partial denial of W&T’s
summary judgment on the indemnity ground.
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IV.
For the foregoing reasons, we AFFIRM the district court’s final judgment
granting, in part, W&T’s cross-motion for summary judgment and dismissing
Apache’s complaint and W&T’s cross-claim for indemnification and attorneys’
fees with prejudice.
14