Exxon Corporation v. Crosby-Mississippi

UNITED STATES COURT OF APPEALS
For the Fifth Circuit

No. 99-60466

EXXON CORPORATION, A New Jersey Corporation,

Plaintiff-Appellant,

VERSUS

CROSBY-MISSISSIPPI RESOURCE, LTD., A Mississippi
Partnership; LYNN CROSBY GAMMILL, General Partner;
STEWART GAMMILL, III, General Partner; STEWART
GAMMILL, III, as Successor Trustee for Stewart,
Gammill IV, Trust No. 2; LUCIUS OLEN CROSBY GAMMILL,
Trust No. 2; JENNIFER LYNN GAMMILL, Trust No. 2; LUCIUS
OLEN CROSBY GAMMILL; STEWART GAMMILL, IV; JENNIFER LYNN
GAMMILL; STEWART GAMMILL, III, as Successor Trustee
for Stewart Gammill, IV; ALL DEFENDANTS,

Defendants-Appellees.

Appeal from the United States District Court
For the Southern District of Mississippi
(3:89-CV-627)
June 14, 2000
Before EMILIO M. GARZA, DeMOSS, and STEWART, Circuit Judges.

PER CURIAM:*

Exxon Corporation (Exxon) appeals the district court’s

*
Pursuant to 5TH CIR. R. 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
decision granting summary judgment in favor of defendants Crosby-

Mississippi Resource, Ltd., et al. (collectively, CMR). This

factually complex oil and gas dispute has been pending for more

than ten years. This Court previously considered an unrelated

issue in a prior appeal. See Exxon v. Crosby-Mississippi

Resources, Ltd., 154 F.3d 202 (5th Cir. 1998). The single issue

presented here is whether Exxon is obligated, by the terms of four

separate joint operating agreements, to pay CMR a portion of a

cost-free 3/16 royalty on some portion of the actual production

from each of four individual oil wells covered by the four

agreements. The district court granted summary judgment in favor

of CMR on this issue, and then certified the issue for immediate

appeal pursuant to Federal Rule of Civil Procedure 54(b). We

affirm, as modified by this opinion, and remand for further

proceedings.

I.

We are here asked to interpret the purportedly unambiguous

terms of four substantively identical contracts between the

parties, Exxon and CMR, and several non-parties, Prosper Energy

Corporation, Petro-Hunt Corporation, and Propel Energy Company

(collectively referred to as Prosper). Our review is de novo, see

Musser Davis Land Co. v. Union Pacific Resources, 201 F.3d 561, 563

(5th Cir. 2000), and the parties agree that the controlling issues

2
are governed by Mississippi state law. Exxon claims that the

district court erred because the unambiguous terms of the contract

require the conclusion that CMR is entitled only to its cost-

bearing working interest on production, and not to any additional

monies in the form of a cost-free royalty on production.

Alternatively, Exxon claims that, even if CMR is entitled to a

royalty, Exxon is entitled to a similar and presumably offsetting

royalty. Finally, Exxon maintains that, even if CMR alone is

entitled to a royalty, the district court miscalculated Exxon’s

proportionate share of that royalty, thus diluting Exxon’s cost-

bearing working interest in production under the four contracts.

CMR defends the district court’s judgment rejecting each of these

arguments. The parties agree that the resolution of this case

depends entirely upon the express terms of these four contracts,

referred to herein as the joint operating agreements or JOAs, and

not upon the terms of any other agreements. We will therefore

begin with an analysis of the relevant contract provisions.

II.

The four JOAs contain identical contract terms, aside from

contract specific information identifying the lands, specifying the

percentage of each parties’ working interest, and providing certain

effective dates. There are several exhibits to each of the four

JOAs, two of which are relevant to the issue presented. Exhibit A

identifies the contract area covered by the particular JOA and

3
purports to define the parties “working interests” in the contract

area. Exhibit B is a form oil, gas, and mineral lease, which

provides for the payment of a 3/16 royalty.

Each JOA states that the parties have “reached an agreement to

explore and develop these leases and/or oil and gas interests for

the production of oil and gas.” The “Definitions” section of the

agreement provides, in relevant part:

* * *

B. The terms “oil and gas lease,” “lease,” and
“leasehold” shall mean the oil and gas leases
covering tracts of land lying within the Contract
area that are owned by the parties to this
agreement.

C. The terms “oil and gas interests” shall mean
unleased fee and mineral interests in tracts of
land lying within the Contract area that are owned
by the parties to this agreement.

* * *

G. The terms “Drilling Party” and “Consenting Party”
shall mean a party who agrees to join in and pay
its share of the cost of any operation conducted
under the provisions of this agreement.

H. The terms “Non-Drilling Party” and “Non-Consenting
Party” shall mean a party who elects not to
participate in a proposed operation.

The “Exhibits” section of each JOA provides that the exhibits

are incorporated by reference. That section further provides, in

relevant part, that:

If any provision of any exhibit, except Exhibits
“E” and “A” is inconsistent with any provision
contained in the body of this agreement, the
provisions in the body of this agreement shall

4
 prevail.

Article III is titled “Interests of Parties,” and contains

four subparts; subpart A titled “Oil and Gas Interests,” subpart B

titled “Interests of Parties in Costs and Production,” subpart C

titled “Excess Royalties, Overriding Royalties and Other Payments,”

and subpart D titled “Subsequently Created interests.” Article III

provides, in relevant part:

A. Oil and Gas Interests:

If any party owns an oil and gas interest in the
Contract Area, the interest shall be treated for all
purposes of the agreement and during the term hereof as
if it were covered by the form of oil and gas lease
attached hereto as Exhibit "B" and the owner thereof
shall be deemed to own both the royalty interest reserved
in such lease and the interest of the lessee thereunder.

B. Interests of Parties in Costs and Production:

Unless changed by other provisions, all costs and
liabilities incurred in operations under this agreement
shall be borne and paid, and all equipment and materials
acquired in operations on the Contract Area shall be
owned, by the parties as their interests are set forth in
Exhibit "A". In the same manner, the parties shall also
own all production of oil and gas from the Contract Area
subject to the payment of royalties to the extent of
3/16 which shall be borne as hereunder set forth.

Regardless of which party has contributed the
lease(s) and/or oil and gas interest(s) hereto on which
royalty is due and payable, each party entitled to
receive a share of production of oil and gas from the
Contract Area shall bear and shall pay or deliver, or
cause to be paid or delivered, to the extent of its
interest in such production, the royalty amount
stipulated herein above and shall hold the other parties
free from any liability therefor. No party shall ever be
responsible, however, on a price basis higher than the
price received by such party, (or any other party’s
lessor or royalty owner, and if any such other party’s
lessor or royalty owner shall demand and receive

5
 settlement on a higher price basis, the party
contributing the affected lease shall bear the additional
royalty burden attributable to such higher price.

Nothing contained in this Article III.B. shall be deemed
an assignment or cross-assignment of interests covered
hereby.

Thus, each JOA expressly provides for the payment of a 3/16 royalty

in at least two circumstances. First, such a royalty is due to a

party to the joint operating agreement whenever that party also

owns unleased mineral interests in the contract area. Article III

subpart A provides that any party to the JOA, i.e. Exxon, CMR, or

Prosper, that also owns an “oil and gas interest in the contract

area,” shall own “both the royalty interest reserved” in the lease

attached to the JOA as Exhibit B and the “interest of the lessee

thereunder,” which is a cost-bearing working interest in

production. See 8 HOWARD R. WILLIAMS & CHARLES J. MEYERS, OIL AND GAS LAW,

MANUAL OF OIL AND GAS TERMS, at 566, 1193 (1999). Each JOA defines the

term “oil and gas interests” to mean “unleased fee and mineral

interests . . . which are owned by the parties to this agreement.”

Further, the “royalty interest reserved” in the lease attached as

Exhibit B is a cost-free 3/16 royalty on production. Thus, Article

III subpart A, together with the lease attached as Exhibit B,

provides that any party to the JOA, which also owns an unleased

mineral interest in the contract area, is entitled to a 3/16 cost-

free royalty on production (to the extent of that party’s unleased

mineral interest and subject to the terms of the lease attached as

6
Exhibit B) in addition to that party’s working interest under the

JOA.

Second, Article III subpart B recognizes that a 3/16 royalty

may be also be due to a third party, which is not a party to the

JOA, such as the lessor of an oil and gas interest that was leased

to one of the signing parties before the particular JOA was signed.

Article III subpart B also addresses how any 3/16 royalty to be

paid, whether owed to a party pursuant to subpart A or to a non-

party pursuant to subpart B, is to be paid by the parties to the

JOA. Subpart B states that any royalty or other obligation not

exceeding 3/16 of production will be paid by the parties “to the

extent of” or in a manner proportionate to their working interest

in production from the contract area. Subparts C and D essentially

provide that any royalties or other obligations that are in excess

of the 3/16 royalty described in subpart B or that constitute

subsequently created or undisclosed interests will not be shared

proportionate to ownership among the parties, but will remain the

sole obligation of the party currently burdened by the obligation.

Exhibit A describes the contract area, provides the names and

addresses of all parties for notice purposes, and most

significantly, defines the cost-bearing “working interests” of the

parties. Exhibit A provides, in relevant part:

3. Working Interests of Parties:

In determining the interests of the parties hereto,
Prosper, Propel and Petro-Hunt shall first be considered
to be one party; and, similarly, Exxon and CMR, ET AL

7
 shall first be considered to be one party

PROSPER, PETRO-HUNT AND PROPEL EXXON AND CMR, ET AL

39.24% 48.26%

If it should be subsequently discovered that the
interest(s) of either Prosper, Propel and Petro-Hunt or
Exxon and CMR et al is incorrect, the interest(s) of the
parties in the Contract Area shall be retroactively
adjusted to reflect the corrected interest in the same
manner as the interest was calculated above. Each
signatory hereto shall alone bear any additional burden
other than that provided in Article III hereof including
but not limited to conversion options and all farm in and
other obligations.

As among Exxon and CMR et al, the working interests in
the Contract Area provided for above, shall be divided as
follows:

EXXON CORPORATION CROSBY-MISSISSIPPI RESOURCES, LTD

76.00000% 24.00000%

The quoted percentages are drawn from one of the JOAs. The

specific percentage of Exxon and CMR’s combined working interest as

compared to Prosper’s, i.e. the figures in the first line of

percentages, varies by contract. The way in which Exxon’s and

CMR’s individual interest in the combined working interest is

divided, however, remains constant, with Exxon owning 76% of the

combined working interest and CMR owning 24% of the combined

working interest. Exxon’s and CMR’s individual working interest is

obtained by multiplying the combined working interest for a

particular JOA by the percentage of the combined working interest

which is owned by each of the parties. For example, the JOA quoted

above covers all of Section 26, Township 2 South, Range 17 West in

8
Pearl River County, on which has been drilled the So. Minerals No.

26-10 oil well. In that well, Exxon owns a 36.6776 percent cost-

bearing working interest in production (calculated as 76 percent of

the 48.26 percent combined working interest), CMR owns an 11.5824

percent cost-bearing working interest in production (calculated as

24 percent of the 48.26 combined working interest), and Prosper

owns a 39.24 percent cost-bearing working interest in production.2

As set forth above, Article III subpart B provides that each

party’s royalty burden is to be determined with reference to and

paid proportionate to its working interest in the contract area.

Thus, for the JOA quoted above, Exxon is responsible for 36.6776

percent of any royalty due, whether to a party owning an unleased

2
The remaining JOAs likewise define the parties’
respective working interests in Exhibit A to the contracts. Under
a JOA covering all of Section 2, Township 3 South, Range 17 West,
on which has been drilled the Leo Flynt 2-7 oil well, Exxon owns a
25.22754 percent working interest in production (calculated as 76
percent of a 33.19413 percent combined working interest), CMR owns
a 7.96659 percent working interest in production (calculated as 24
percent of a 33.19413 percent combined working interest), and
Prosper owns a 21.79688 percent working interest. Under a JOA
covering all of Section 10, Township 2 South, Range 17 West, on
which has been drilled the So. Minerals No. 10-10 oil well, Exxon
owns a 16.01768 percent working interest (calculated as 76 percent
of a 21.0759 percent combined working interest), CMR owns a 5.05822
percent working interest (calculated as 24 percent of a 21.0759
percent combined working interest), and Prosper owns a 76.92410
percent working interest. Finally, under a JOA covering all of
Section 35, Township 2 South, Range 17 West, on which has been
drilled the So. Minerals No. 35-1 oil well, Exxon owns a 35.45025
percent working interest in production (calculated as 76 percent of
the 46.64506 percent combined working interest), CMR owns a
11.19481 percent working interest in production (calculated as 24
percent of the 46.64506 percent combined working interest), and
Propser owns a 40.17785 percent working interest.

9
mineral interest or to a third party lessor or obligor, CMR is

responsible for 11.5824 percent of any such royalties, and Prosper

is responsible for 39.24 percent of any such royalties. Having set

forth the relevant contract terms, we now turn to consideration of

the specific arguments of the parties.

III.

Exxon argues that the district court erred by holding that the

unambiguous terms of the four JOAs provide that CMR is entitled to

a cost-free 3/16 royalty on production, in addition to CMR’s

working interest as defined in Exhibit A to each JOA. Exxon argues

that, contrary to the district court’s conclusion, Exhibit A

defines the parties’ total interest under each of the contracts,

rather than their cost-bearing working interest. This contention,

which Exxon raises in a variety of ways, is belied by the plain

language of Exhibit A, which refers exclusively to the “working

interests” of the parties.

Exxon responds that the term “working interests” in this

context was intended to refer to something Exxon has labeled the

parties’ “gross working interests.” Thus, Exxon maintains that no

party can ever be entitled to more from the well than the

percentage set forth in Exhibit A. Exxon essentially argues that

a joint operating agreement cannot provide for the same party to

own both a cost-free royalty interest in subsequent production, if

any, and a cost-bearing working interest in the same well.

10
 Once again, this contention is belied by the plain terms of

the contracts. There is no language in any section of the JOAs

suggesting that the parties intended anything other than that the

terms “royalty interest” and “working interest” would have the

ordinary and well-established meaning given to those terms in oil

field contracts. A working interest is a cost-bearing interest in

production, generally created by an oil and gas lease. See 8 HOWARD

R. WILLIAMS & CHARLES J. MEYERS, OIL AND GAS LAW, MANUAL OF OIL AND GAS TERMS,

at 566, 1193 (1999); see also id. at 952. The term “gross working

interest,” in contrast, has a very particular and specialized

meaning, derived in large part from the context of Department of

Energy reporting. See id. at 474. There is simply no indication

that the parties intended to employ that term, rather than the

plain and unambiguous language used, in this contract. Moreover,

and contrary to Exxon’s suggestion, there is no indication that the

ownership of a working interest is inherently preclusive of any

other interest in the well. To the extent that a contract

reserving both a royalty interest and a working interest in favor

of the same party may be atypical, that does not give us the

authority to avoid an unambiguously worded contract by rewriting

the agreement for the parties. See Otter Oil Co. v. Exxon Co.,

U.S.A., 834 F.2d 531, 534 (5th Cir. 1987); see also Robin v. Sun

Oil Co., 548 F.2d 554 (5th Cir. 1977).

In a related argument, Exxon contends that Exhibit A reflects

11
Exxon’s and CMR’s agreement to pool their interests without

differentiating between them, such that Exxon owns 76 percent of

the combined interests and CMR owns 24 percent of the combined

interests. Thus, Exxon argues, there is no difference between

Exxon and CMR with respect to the combined interests, and the fact

that CMR contributed unleased mineral interests while Exxon

contributed leases is of no moment. Exxon concludes that Exxon

bargained for and owns the precise and unencumbered percentage of

gross working interest set forth in Exhibit A to each JOA.

This argument must fail for similar reasons; that is, because

it is premised upon the theory that Exhibit A both defines

something more than an ordinary working interest and simultaneously

precludes any other interest by the parties. Exhibit A defines the

parties’ working interests. As to those interests, we agree with

Exxon that the JOAs arguably reflect an agreement not to treat

Exxon’s and CMR’s interests differently.3 With respect to royalty,

3
On the other hand, we note that even Exhibit A provides
for a division of the combined working interests of Exxon and CMR,
while not similarly providing for such a division between the
various entities collectively referred to herein as Prosper.
Exxon’s argument that the JOAs reflect an intent not to
differentiate between Exxon’s and CMR’s interests in any manner
might be stronger if Exxon and CMR had entered into the JOAs as a
single entity contributing a single block of undifferentiated oil
and gas interests. But each of the parties signed the agreements
in their individual capacity. Exhibit A provides for a division of
the parties’ combined working interests. Finally, and most
significantly, Exxon has neither disputed that CMR continues to own
unleased mineral interests within the contract areas defined by the
individual JOAs nor clearly alleged that it owns some undivided
portion of such interests itself. Absent such an allegation, the
district court did not abuse its discretion by refusing to allow

12
however, the JOAs unambiguously provide that the owners of unleased

mineral interests are entitled to a royalty interest, in addition

to whatever working interest is retained by the parties.

Exxon acknowledges the separate provision in Article III

subpart A of the JOAs providing for a 3/16 royalty interest to

parties, but argues that the provision is inapplicable for several

reasons. Exxon first maintains that there is an inherent

inconsistency between Article III subpart A and Exhibit A because

the payment of a royalty under the first provision is inconsistent

with its theory that the second provision defines the parties’

total interest under the contract. Exxon then relies upon the

Exhibits section of the JOAs for the proposition that, in the case

of a conflict, Exhibit A should be given controlling effect. The

problem with this argument is that it once more depends upon

Exxon’s theory that Exhibit A defines the parties’ total interest.

Given that we have already rejected that theory, there simply is no

conflict requiring the supremacy of Exhibit A.

Exxon next maintains that non-consenting parties, i.e. parties

which are not participating in the production by bearing their

proportionate share of costs and expenses, are entitled to the

royalty specified in Article III of the JOAs, but that consenting

parties, i.e. parties which have a defined interest under Exhibit

A, are not. There is no dispute about the fact that CMR was a

Exxon to amend its pleadings to include such a claim.

13
consenting party with respect to each of the four wells covered by

the JOAs. The problem with this argument is that Article III

subpart A simply does not distinguish between consenting and non-

consenting interests or parties in any way. To the contrary,

Article III subpart A is expressly provides that a royalty is due

when “any party owns an oil and gas interest.” Exxon’s

interpretation requires that we insert a significant word of

limitation by revising the provision to read that a royalty is due

only when “any [non-consenting] party owns an oil and gas

interest.” Neither the plain language of the applicable provision

nor any other language in the JOAs suggests that the parties merely

omitted this significant limitation when executing Article III

subpart A. The words as written are clear, and provide for the

payment of a royalty to any party which also owns an unleased

mineral interest in the contract area, without regard to whether

that party is also participating in production as a consenting

party.

Finally, Exxon points out that the royalty provision states

that parties owning an oil and gas interest “shall be treated for

all purposes of this agreement” as if the interest were covered by

the lease attached as Exhibit B. Exxon then argues that providing

a consenting party with a royalty interest is not one of the

“purposes” of the JOA. To establish this point, Exxon relies upon

affidavit testimony that was not taken into consideration by the

district court. Even if we were inclined to consider anything

14
other than the plain terms of the contracts between the parties,

Exxon’s argument in this regard must fail. First of all, the

quoted phrase is plainly not intended to limit or define the

purposes of the JOA in any way, but merely to explain that the

royalty interest forms part of the rights and obligations created

by the JOA. More importantly, Exxon’s affidavit testimony is

offered to contradict the plain and unambiguous terms of the

contract. Contrary to Exxon’s argument, Mississippi law would not

permit the admission of such evidence to contradict the plain terms

of an unambiguous contract. See Estate of Parker v. Dorchak, 673

So.2d 1379, 1381 (Miss. 1996); Ross v. Brasell, 511 So.2d 492, 494

(Miss. 1987).

In sum, we cannot accept Exxon’s argument that Exhibit A

serves as the sole source of the parties’ interests without

ignoring the plain language of Exhibit A and deleting Article III

subpart A, which has no purpose other than to provide for the

payment of a royalty to parties signing the JOA, out of the

contract. This we cannot do. See, e.g., Aetna Cas. & Sur. Co. v.

Head, 240 So.2d 280, 282-82 (Miss. 1970). Similarly, we cannot

accept Exxon’s argument that Article III subpart A benefits only

non-consenting parties without writing that significant word of

limitation into the contract. This, we likewise cannot do. See,

e.g., Glantz Contracting Co. v. General Elec. Co., 379 So.2d 912,

916 (Miss. 1980) (”Courts do not have the power to make contracts

15
where none exist, nor to modify, add to, or subtract from the terms

of one in existence.” (internal quotations omitted)). For these

reasons, we conclude that the district court correctly held that

the terms of the four JOAs unambiguously call for the payment of a

3/16 cost-free royalty to CMR. That royalty is due, not upon all

production, but only to the extent that CMR can establish that it

owns unleased mineral interests in the contract area. We now turn

to the issue of how that royalty burden is to be divided among the

parties to the JOAs.

IV.

In its final point, Exxon maintains that the district court

miscalculated its proportionate share of the royalty due CMR as an

unleased mineral interest owner by holding Exxon responsible for 76

percent of any such royalty due. While the district court’s

writing on this point is not exceptionally clear, we agree with

Exxon that the district court’s decision can be construed to hold

Exxon responsible for 76 percent of the royalty due CMR under the

JOAs. We likewise agree that such a construction would be error.

The JOAs clearly provide that each party bears the burden of

paying any royalty due under Article III, provided that royalty

does not exceed 3/16, only “to the extent of its interest in such

production.” Thus, Exxon’s proportionate share of the royalty

obligation to CMR can never exceed the percentage corresponding to

16
its individual (as opposed to combined) working interest under the

particular JOA. For example, under the JOA quoted in Section II,

Exxon’s proportionate share of any royalty obligation to CMR for

the So. Minerals No. 26-10 well cannot exceed 36.6776 percent of

the total royalty obligation to CMR.

To the extent that the district court held Exxon responsible

for 76 percent of the royalty obligation to CMR, the error appears

to be mathematical. The allocation of Exxon’s and CMR’s combined

working interest between those two parties is 76 percent to Exxon

and 24 percent to CMR. The district court employed that allocation

to reach its apparent conclusion that Exxon must pay 76 percent of

any royalty due. If Exxon’s proportionate share of the royalty

obligation is calculated with reference exclusively to those

figures, however, with Exxon responsible for 76 percent of the

royalty burden and CMR responsible for the remaining 24 percent of

the royalty burden, then the entire burden will be paid by those

parties with none of the royalty burden being allocated to the

remaining parties to the contract, those entities collectively

referred to as Prosper.4 The proper analysis would hold Exxon

responsible for 76 percent of the royalty owed by both Exxon and

4
Although the fact should be obvious from our analysis, we
pause to note for clarification purposes that CMR itself, as a
party signing the JOAs, is likewise obligated to pay a portion of
the 3/16 royalty owed to unleased mineral interest owners. Stated
differently, CMR’s own working interest, as defined in Exhibit A to
each JOA, is burdened by the obligation to pay a percentage of
whatever 3/16 royalty is due, even if that royalty is owed to CMR
itself.

17
CMR on the basis of their combined working interest. For example,

using the JOA quoted in Section II above, Exxon would be

responsible for 76 percent (Exxon’s share of Exxon and CMR’s

combined working interest) of 48.26 percent (Exxon and CMR’s

combined working interest in the JOA covering So. Minerals No. 26-

10), or 36.6776 percent, of whatever sum comprises the 3/16 royalty

due.

For the foregoing reasons, we modify the district court’s

judgment by clarifying that Exxon’s proportionate share of the

obligation to pay CMR a royalty under Article III of the JOAs may

not exceed Exxon’s actual and individual working interest in the

contract area.

CONCLUSION

The decision of the district court granting CMR summary

judgment is AFFIRMED AS MODIFIED to clarify that Exxon’s

proportionate share of any royalty due CMR as an unleased mineral

interest owner is limited to that percentage of the total burden

which corresponds to Exxon’s individual working interest under the

applicable JOA. The district court is in all other respects

AFFIRMED. The extent to which CMR owns an unleased mineral

interest, and therefore the precise royalty obligations of Exxon

and CMR, are matters of proof which are beyond both the issue

presented to this Court for appeal and the competence of the

g:\opin\99-60466.opn 18
existing record. We therefore REMAND to the district court for

further proceedings consistent with this opinion.

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