Sabre Energy Corp. v. Gulfport Energy Corp.

• Court: Court of Appeals for the Sixth Circuit
• Decided: August 8, 2024
• Docket: 23-3684
• Status: Unpublished

Opinion

NOT RECOMMENDED FOR PUBLICATION File Name: 24a0347n.06

No. 23-3684

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT FILED Aug 08, 2024 ) KELLY L. STEPHENS, Clerk ) SABRE ENERGY CORPORATION, ) Plaintiff - Appellant, ON APPEAL FROM THE ) UNITED STATES DISTRICT ) v. COURT FOR THE SOUTHERN ) DISTRICT OF OHIO ) GULFPORT ENERGY CORPORATION; ANTERO ) RESOURCES CORPORATION, OPINION ) Defendants - Appellees. ) )

Before: SILER, COLE, and BUSH, Circuit Judges.

BUSH, J., delivered the opinion of the court in which SILER, J,. joined. COLE, J. (pp. 9– 12), delivered a separate dissenting opinion.

JOHN K. BUSH, Circuit Judge. Sabre Energy Corporation sued Defendants Gulfport

Energy Corporation and Antero Resources Corporation for breach of contract. Sabre Energy owns

Overriding Royalty Interests (“ORRIs”), or fractional shares, in Defendants’ shares of royalties

from their oil and gas leases. Sabre Energy contends that these ORRIs attach to Defendants’

recently developed deep horizontal wells, and so Defendants owe it royalties. Defendants maintain

that Sabre Energy is only entitled to royalties from oil and gas produced by vertical shallow wells

that existed at the time Sabre Energy acquired the ORRIs. The district court granted summary

judgment for Defendants. Because Sabre Energy has no interest in the oil and gas produced from

Defendants’ deep horizontal wells, we affirm. No. 23-3684, Sabre Energy Corp. v. Gulfport Energy Corp., et al.

I

A. Factual Background

In 1993, Sabre Energy obtained its ORRIs through two assignments (“Assignments”) from

Defendants’ predecessor in interest, Transatlantic Energy Company. Each Assignment includes

an attachment, “Exhibit A,” that lists a combined total of 25 wells and identifies the overriding

royalty percentage, drilling permit number, and location of each well. At the bottom of each

“Exhibit A,” a “Note” provides the following:

THIS ASSIGNMENT OF OVERRIDING ROYALTY INTEREST PERTAINS TO THE AFORMENTIONED WELLS AND THE DRILLING UNITS ASSOCIATED THEREWITH AND DOES NOT EXTEND TO THE UNDRILLED ACREAGE ASSOCIATED WITH THE LEASE REFERENCED AND/OR POOLING AGREEMENT.

The 25 wells listed are “vertical shallow wells” that produce oil and gas at depths of 2,500

to 5,500 feet. Following advancements in the oil and gas industry, and almost 20 years after the

Assignments were executed, Defendants began drilling “horizontal deep wells” to produce oil and

gas from the Utica Shale/Point Pleasant formation. Unlike vertical shallow wells, horizontal deep

wells require drillers to lay pipe horizontally, through which the surrounding shale can be

hydraulically fractured and oil or natural gas can be removed. These horizontal wells are usually

deeper than vertical wells, and the typical depth of a fracking production in the Utica Shale/Point

Pleasant formation ranges from 5,000 to deeper than 10,000 feet. Several of Defendants’

horizontal wells “produce from underneath the vertical shallow wells and drilling units on which

Sabre Energy has ORRIs.”

Believing that its ORRIs granted them royalties from the oil and gas captured by not only

the shallow vertical wells, but also any deeper horizontal wells, Sabre Energy demanded royalty

2 No. 23-3684, Sabre Energy Corp. v. Gulfport Energy Corp., et al.

payments from Defendants. Defendants refused, stating that the “assignment did not assign any

rights to the Utica formation.”

B. Procedural Background

Sabre Energy sued, seeking unpaid royalties, a detailed accounting of Defendants’ oil and

gas production and royalty calculations, and a declaratory judgment that the disputed wells fell

within Sabre Energy’s ORRIs. The district court later dismissed Sabre Energy’s claim for

accounting, finding that the Complaint did not sufficiently allege the required elements.

Ultimately, the parties cross-moved for summary judgment, which the district court granted in

Defendants’ favor.

The district court held that a “drilling unit” is a concept “created by Ohio law to require

that wells meet certain spacing requirements,” and that some of Sabre Energy’s interests were

already depth-limited. The district court also held that “undrilled acreage,” when used in the

context of oil and gas, encompasses subsurface as well as surface acreage. Because the

Assignments exclude Sabre Energy’s interests from extending to undrilled acreage, its remaining

interests could not extend to the deeper Utica Shale/Point Pleasant Formation. The district court

concluded that, because the Assignment expressly excluded undrilled acreage from Sabre Energy’s

ORRIs, Sabre Energy lacked an interest in Defendants’ deep horizontal wells. Sabre Energy

timely appealed.

II

This court reviews a district court’s grant of summary judgment de novo. See Morgan v.

Trierweiler, 67 F.4th 362, 366 (6th Cir. 2023). Summary judgment must be granted if “there is no

genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”

Fed. R. Civ. P. 56(a). Because the parties do not dispute the material facts, this appeal is limited

3 No. 23-3684, Sabre Energy Corp. v. Gulfport Energy Corp., et al.

to the interpretation of the Assignments. We agree with the parties that Ohio law applies to this

diversity action. See Wonderland Shopping Ctr. Venture Ltd. P’ship v. CDC Mortg. Cap., Inc.,

274 F.3d 1085, 1092 (6th Cir. 2001).

Under Ohio law, “[w]hen confronted with an issue of contract interpretation, [a court’s]

role is to give effect to the intent of the parties.” Sunoco, Inc. (R&M) v. Toledo Edison Co., 953

N.E.2d 285, 292 (Ohio 2011). A court should “presume” that the parties’ intent is “reflected in

the language of the contract.” Id.

“When the language of a written contract is clear, a court may look no further than the

writing itself to find the intent of the parties.” Id. Yet “‘parol evidence . . . is always admissible

to define and explain the meaning of words or phrases in a written instrument which are technical

or where a word or phrase is used in a peculiar sense that is applicable to a particular industry or

trade.’” Career & Tech. Ass’n v. Auburn Vocational Sch. Dist. Bd. of Educ., No. 2013–L–010,

2014 WL 1478838, at *5 (Ohio Ct. App. April 14, 2014) (quoting Mfg. Mgmt. Sys. v. Data

Solutions, Inc., No. 11-074/76, 1987 WL 8229, at *3 (Ohio Ct. App. Mar. 20, 1987)).

The district court did not err in concluding that the term “drilling unit” as used in the

Assignments restricted Sabre Energy’s interest to a depth of 4,000 feet. Although the Assignments

do not define that term, we read the Assignments alongside state requirements in effect at the time

Sabre Energy acquired its interests, absent clear indications to the contrary. See also Eastwood

Loc. Sch. Dist. Bd. of Edn. v. Eastwood Edn. Assn., 875 N.E.2d 139, 143 (Ohio 2007) (“Except

where a contrary intent is evident, the parties to a contract are deemed to have contracted with

reference to existing law.”). Those requirements make clear the 4,000-feet depth limit.

To explain, we note that Ohio law requires a permit for oil and gas drilling. Ohio Rev.

Code § 1509.05. To obtain the drilling permit, a proposed well must have an adequate drilling

4 No. 23-3684, Sabre Energy Corp. v. Gulfport Energy Corp., et al.

unit, defined as the minimum acreage on which wells of certain depths can be placed. See Ohio

Admin. Code 1501:9-1-04(C); see also Ohio Rev. Code 1509.01(G) (later codifying this

definition).1 A drilling unit is considered adequate if there is sufficient surface acreage for the

well’s proposed depth. Ohio Admin. Code 1501:9-1-04(C).

When Sabre Energy acquired its interests in the wells, Ohio law provided that a well placed

on a drilling unit smaller than 40 acres could not drill below 4,000 feet, whereas a drilling unit

larger than 40 acres could have a proposed well deeper than 4,000 feet. Ohio Admin. Code 1501:9-

1-04(C) (effective 1983). Thus, Sabre Energy’s ORRIs in drilling units smaller than 40 acres do

not attach to the Utica Shale/Point Pleasant formation, but the ORRIs in drilling units larger than

40 acres do.2

The district court also did not err by concluding that the undrilled acreage exception bars

the ORRIs from attaching to the Utica Shale/Point Pleasant formation. While it is generally true

that an interest in oil and gas extends to the core of the Earth, it will not if the assignment of the

interest includes limiting language. See K & D Farms, Ltd v. Enervest Operating, L.L.C., No.

2015CA00038, 2015 WL 6507785, ¶ 29 (Ohio Ct. App. Oct. 26, 2015) (“If a granting clause does

not contain terms limiting the depth or formation, the rights are granted to all depths.”). But see

Chance v. BP Chemicals, Inc., 670 N.E.2d 985, 991–92 (Ohio 1996) (casting doubt that rights are

1 Sabre Energy points to Talmage v. Bradley, 377 F. Supp. 3d 799, 821 (S.D. Ohio 2019) to argue that the oil and gas industry uses drilling units as shorthand for surface acreage, not depth limitations. But, notwithstanding that Talmadge does not bind us, the assignment contracts there limited royalty interests to “well sites,” which the contracts themselves defined. Id. at 822. Here, however, the Assignments do not define the technical term “drilling units.” 2 The dissent argues that the phrase “drilling unit” does not contain any depth limitation, but only delineates a width and length on the surface. But, as an Ohio court recently explained in a similar case, because the “20 acre drill site unit contained a 4,000-foot depth limitation based on the Ohio Administrative Code” the language of the Assignment was “unambiguous” and did not convey rights below 4,000 feet. Hogue v. PP&G Oil Co., Nos. 23 MO 0021 & 23 MO 0023, 2024 WL 3634236, at ⁋ 61 (Ohio Ct. App. Aug. 1, 2024) (internal quotation marks omitted).

5 No. 23-3684, Sabre Energy Corp. v. Gulfport Energy Corp., et al.

granted to all depths). The Assignments limit Sabre Energy’s interests to the aforementioned

“drilling units,” and expressly do not convey interests in “undrilled acreage associated with the

lease referenced.” As the district court noted, “[d]epth is an inherent consideration in oil and gas

leases.” This undrilled acreage exception applies not only to the surface acreage, but also

subsurface.3

Sabre Energy argues that the phrase “undrilled acreage” is often seen in oil and gas leases,

where a “lessee is required to release acreage that is not developed . . . pursuant to a Pugh Clause.”

A Pugh Clause protects lessors when only a small part of a large tract of leased land is being used

for oil and gas production; the clause will sever the non-producing land and will maintain the lease

as to the “lease acreage actually producing.” Summitcrest, Inc. v. Eric Petroleum Corp. 60 N.E.3d

807, 815 (Ohio Ct. App. 2016). Sabre Energy contends that Pugh clauses that are “silent as to

geological strata” only divide “surface acreage, not geological formations.” To support this

argument, Sabre Energy primarily relies on a single case, which reverted “undrilled acreage”

pursuant to a Pugh clause. Neuhart v. TransAtlantic Energy Corp., 121 N.E.3d 802, 813 (Ohio Ct.

App. 2018). But Neuhart alone does not established that “undrilled acreage” is a common phrase

in the oil and gas industry with a fixed meaning, especially given its imperfect fit here: Neuhart

does not address whether the term “undrilled acreage” applies to only surface area or both surface

3 The dissent argues that we incorrectly attribute a third dimension to the word “acreage.” The dissent then argues that a two-dimensional understanding of acreage inherently extends rights to all depths, unless otherwise limited. These two statements, however, are in conflict. The dissent itself recognizes that acreage includes a third dimension unless the conveyance includes a depth limitation. But, unlike the dissent, we do not read “acreage” as the limiting term; instead, in the oil and gas context, acreage necessarily requires consideration of three-dimensional space. See K & D Farms, Ltd, 2015 WL 6507785, ¶ 29 (stating that, because the lease contract “does not contain terms limiting the depth or formation,” the subsurface rights attached to the “acreage” “are granted to all depths”).

6 No. 23-3684, Sabre Energy Corp. v. Gulfport Energy Corp., et al.

and subsurface, and also interprets a Pugh clause in the context of a lease, whereas the Assignments

lack a Pugh clause.4

Sabre Energy argues that that it should have been afforded discovery, rather than the district

court relying on parol evidence to interpret the Assignments, because it was “the intent of the

parties to proceed with discovery if the district court decided the ORRIs were ambiguous.” But

courts may give technical terms their technical meaning, without determining that the term is

ambiguous. Career & Tech. Ass’n., 2014 WL 1478838, at *5. As just explained, even if these

terms were ambiguous, Ohio law permits courts to look to extrinsic evidence to resolve that

ambiguity. Maverick Oil & Gas, Inc. v. Barberton City Sch. Dist. Bd. of Educ., 872 N.E.2d 322,

328 (Ohio Ct. App. April 11, 2007). The parties jointly moved to stay discovery, explaining that

discovery may be unnecessary because the district court’s “ruling on the issues of lease

interpretation . . . may be dispositive of all claims . . . or lead to early resolution of the remaining

issues.” And, by moving for summary judgment, Sabre Energy itself inherently contended that no

genuine fact disputes existed. See Miller v. Maddox, 866 F.3d 386, 389 (6th Cir. 2017) (the moving

party bears the initial responsibility of demonstrating that there are no “genuine issues of material

facts, which it may accomplish by demonstrating that the nonmoving party lacks evidence to

support an essential element of its case.” (internal quotation marks and citation omitted)). By its

own admissions, Sabre Energy knew the potential consequences of staying discovery and moving

for summary judgment.

4 Similarly, Sabre Energy’s reference to Friedrich v. Amoco Production Co.—an out-of-state intermediate appellate court case which held that a Pugh clause silent on geological strata only divided the lease based on the surface—does not alter our view, because the Assignments lack a Pugh clause. 698 S.W.2d 748 (Tex. Ct. App. 1985).

7 No. 23-3684, Sabre Energy Corp. v. Gulfport Energy Corp., et al.

III

Because the Assignments’ language limits the scope of Sabre Energy’s ORRIs, and thus

does not convey to Sabre Energy a royalty interest in Defendants’ deep horizontal wells, we affirm.

8 No. 23-3684, Sabre Energy Corp. v. Gulfport Energy Corp., et al.

COLE, Circuit Judge, dissenting. This case turns on whether the term “acreage” contains

a depth limitation. Because “acreage” is a two-dimensional term that says nothing of depth, I

would reverse the district court’s grant of summary judgment to Gulfport and Antero and grant

summary judgment to Sabre Energy.

Under Ohio law, an interest in oil and gas extends to the core of the Earth unless the

granting clause specifies a depth limitation. K & D Farms, Ltd v. Enervest Operating, L.L.C., No.

2015CA00038, 2015 WL 6507785, ¶ 29 (Ohio Ct. App. Oct. 26, 2015). Here, because the terms

“drilling unit” and “undrilled acreage” do not limit depth, Sabre Energy’s rights extend to the

defendants’ deep, horizontal wells.

Drilling unit. “Drilling unit” is defined in terms of “acreage” under Ohio law. Ohio Rev.

Code 1509.01(G). Specifically,“‘[d]rilling unit’ means the minimum acreage on which one well

may be drilled.” Id. The dictionary definition of “acreage” is “area in acres.” (Op., R. 96, PageID

2155.) Area is two-dimensional. VOCABULARY.COM, http://vocabulary.com/dictionary (last

visited Aug. 1, 2024). An acre is a two-dimensional unit of measurement equal to 43,460 square

feet. Id. As a two-dimensional term, “acreage” delineates width and length, but not depth. Id.

As noted by the district court, at the time of contracting, Ohio well-spacing regulations

generally did not allow drilling below 4,000 feet on drilling units smaller than 40 acres. (Maj. Op.

5 (citing Ohio Admin. Code 1501:9-1-04(C) (effective 1983)).) That these regulations restricted

the depth of drilling permitted within certain drilling units does not change a drilling unit’s

boundaries or the meaning of “drilling unit.” As discussed above, a “drilling unit” is defined in

acres, which are delineated by width and length on the surface. Accordingly, the term “drilling

unit” does not contain a depth limitation. Therefore, without other language limiting the grant’s

depth, a grant of rights by “drilling unit” extends to all depths.

9 No. 23-3684, Sabre Energy Corp. v. Gulfport Energy Corp., et al.

Undrilled acreage. By its terms, the grant “does not extend to the undrilled acreage”

associated with the underlying leases and pooling agreements. (R. 1-1, PageID 13; R. 1-2, PageID

15.) As discussed above, “acreage” is a two-dimensional term. The majority and the district court

conclude that “undrilled acreage” unambiguously refers to subsurface space underneath the wells

and their drilling units. (Maj. Op. 6.) This interpretation incorrectly reads a third-dimensional

depth component into “acreage,” a two-dimensional term.

“Depth is an inherent consideration in oil and gas leases.” (Maj. Op. 6 (quoting Op., R.

96, PageID 2155).) But this inherent consideration does not require us to imply a depth limitation

where none is explicitly stated. Rather, this inherent consideration is why each term outlining area

in acres at the surface must be interpreted to extend below to all depths unless otherwise

specifically limited. See K & D Farms, Ltd, 2015 WL 6507785, ¶ 29.

***

Essentially, Ohio law mandates that the granting clause be read as follows: “The

assignment of overriding royalty interest pertains to the aforementioned wells and the drilling units

associated therewith [to all depths below unless specifically limited here] and does not extend to

the undrilled acreage [to all depths below unless specifically limited here].” See id.; (R. 1-1,

PageId 13; R. 1-2, PageID 15). Because there are no depth-limiting terms, the unambiguous

language here divides the rights to all depths below by delineating boundaries at the surface.

A brief look at the plats for the associated leases and pooling agreements confirms this

interpretation. The granting clause refers to (1) wells, (2) drilling units, and (3) undrilled acreage.

(R. 1-1, PageId 13; R. 1-2, PageID 15.) As shown below, each plat contains (1) a well (below

marked with a circle labeled “Well No. 2”), (2) a drilling unit (marked with dashed lines labeled

10 No. 23-3684, Sabre Energy Corp. v. Gulfport Energy Corp., et al.

“unit line”), and (3) land outside the drilling units and the wells, i.e. “undrilled acreage.” (E.g., R.

67-1, PageID 1279.)

11 No. 23-3684, Sabre Energy Corp. v. Gulfport Energy Corp., et al.

(Id. (the total acreage is 471 and the drilling unit’s acreage is 20, leaving approximately 451

undrilled acres) (highlights in original).)

Here, because the clear, unambiguous language of the granting clause does not have a depth

limitation, Sabre Energy has an interest in the defendants’ deep, horizontal wells. For the foregoing

reasons, I respectfully dissent.