Total E & P USA, Inc. v. Kerr-McGee Oil & Gas Corp.
719 F.3d 424
5th Cir.2013Background
- In 1998 the federal government issued OCS lease OCS-G 20082 (12% lessor royalty) for deepwater Gulf of Mexico acreage; the lease contained a footnote stating it "may be eligible" for royalty suspension under the DWRRA.
- Westport carved overriding royalty interests (ORRIs) out of its working interest in 1999 (Belcher Group, total 0.2625%) and 2001 (Kerr‑McGee, 3.7373%). Each assignment contained a "calculate and pay" clause: the ORRI "shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner’s royalty under the Lease."
- Production began in 2009; DOI determined the lease’s 12% landowner royalty was suspended under the DWRRA until 87.5 million BOE were produced. Chevron paid ORRIs from its WI; Total and Statoil withheld ORRI payments, contending the ORRIs were suspended along with the government royalty.
- Total and Statoil won summary judgment in district court; the court held the assignment language unambiguous and that the ORRIs were subject to DWRRA suspension. The ORRI owners (Belcher Group and Kerr‑McGee) appealed.
- The Fifth Circuit (majority) reversed, holding the "calculate and pay" clauses are not clear and explicit to mandate suspension of ORRIs with the landowner royalty; the clause is at least ambiguous and requires further inquiry into parties’ intent under Louisiana contract‑interpretation principles.
Issues
| Issue | Plaintiff's Argument (Total/Statoil) | Defendant's Argument (Belcher/Kerr‑McGee) | Held |
|---|---|---|---|
| Whether the ORRI "calculate and pay" clauses make ORRIs subject to DWRRA suspension | Clause imports the lease's "terms and conditions," which include royalty suspension; thus ORRIs are suspended until the DWRRA threshold | Clause only borrows methods/ mechanics for calculation and payment (measurement, valuation, accounting), not entitlement; no explicit language suspending ORRIs | The clauses are not clear and explicit; ambiguous as to suspension — remand for further factfinding and contract interpretation. |
| Whether extrinsic/parol evidence may be considered | Not needed if clause is unambiguous | Extrinsic evidence (industry practice, affidavits) may show parties intended only calculation mechanics | Because ambiguity exists, extrinsic evidence is admissible on remand under Louisiana law. |
| Whether the lease footnote makes suspension a lease term binding on ORRI assignees | Footnote and DWRRA make suspension a lease term; assignments incorporate lease terms by reference | Footnote says lease "may" be eligible and was indefinite in 1999–2001; assignees were not parties to lease; incorporation does not clearly impose suspension | Footnote does not clearly and explicitly show assignees agreed to have ORRIs suspended; incorporation does not resolve ambiguity. |
| Standard on summary judgment re contract interpretation | Court may decide if language is clear | Ambiguity requires resolving all inferences for non‑movant; summary judgment improper | Summary judgment for Total and Statoil reversed; genuine dispute of material fact exists. |
Key Cases Cited
- Mesa Operating Ltd. P’ship v. U.S. Dep’t of Interior, 931 F.2d 318 (5th Cir. 1991) (OCSLA vests federal government with leasing authority and establishes regulatory scheme)
- EP Operating Ltd. P’ship v. Placid Oil Co., 26 F.3d 563 (5th Cir. 1994) (federal law governs OCS with adjacent‑state law adopted as surrogate federal law)
- Santa Fe Snyder Corp. v. Norton, 385 F.3d 884 (5th Cir. 2004) (interpreting DWRRA royalty relief scope for new leases)
- Kerr‑McGee Oil & Gas Corp. v. U.S. Dep’t of Interior, 554 F.3d 1082 (5th Cir. 2009) (agency exceeded authority by imposing price thresholds that undermined congressional volume thresholds)
- Frey v. Amoco Prod. Co., 603 So.2d 166 (La. 1992) (Louisiana law principles on contract interpretation in oil & gas context; distinguishes lessor’s royalty from ORRIs)
- Anderson v. Liberty Lobby, 477 U.S. 242 (1986) (summary judgment standard — resolve ambiguities and draw inferences for nonmoving party)
- Meeker v. Ambassador Oil Co., 308 F.2d 875 (10th Cir. 1962) (defining ORRI as fractional interest carved from lessee’s working interest)