NO. 07-08-00376-CV
IN THE COURT OF APPEALS
FOR THE SEVENTH DISTRICT OF TEXAS
AT AMARILLO
PANEL D
OCTOBER 5, 2010
THE PETROLEUM SYNERGY GROUP, INC., APPELLANT
v.
OCCIDENTAL PERMIAN, LTD., APPELLEE
FROM THE 154TH DISTRICT COURT OF LAMB COUNTY;
NO. 16386; HONORABLE FELIX KLEIN, JUDGE
Before QUINN, C.J., and CAMPBELL and PIRTLE, JJ.
OPINION
This is an oil drainage case. The Petroleum Synergy Group, Inc. (PSG) owns an
overriding royalty interest in a lease in Lamb County operated by Occidental Permian,
Ltd. (OPL). PSG filed suit against OPL alleging OPL breached the implied covenant to
prevent substantial drainage of the leasehold. The jury did not find the occurrence of
substantial drainage and the trial court rendered a take-nothing judgment in favor of
OPL. On appeal, PSG argues it proved substantial drainage as a matter of law and the
trial court reversibly erred by two evidentiary rulings. For the reasons that follow, we will
affirm. Background
The geology of the Anton-Irish (Wolfcamp) Field features two anticlines, referred
to as the eastern and western.1 The parties’ dispute involves the production of oil from
the western anticline. There OPL operates the one-quarter section Snitker lease. PSG
owns an approximate 5.5 percent overriding royalty interest in lease production. OPL
also owns two leases immediately north of the Snitker, the Roach and Stephenson
leases, each containing roughly eighty acres. PSG owns no interest in the Roach or
Stephenson leases.
The Texas Railroad Commission adopted temporary field rules for the Anton-Irish
(Wolfcamp) Field in September 2001. The field rules called for eighty-acre proration
units, a minimum distance of 467 feet separating a well from the nearest lease line, and
a maximum daily oil allowable of 400 barrels for a well on an eighty-acre proration unit.
Another company, Devon Energy Corporation, operates its Lancaster lease, lying
immediately east of OPL’s Snitker lease. Devon completed its Lancaster No. 1 well,
located 467 feet east of the line dividing the Lancaster and Snitker leases, in December
2001. In January 2002, OPL began drilling its first well on the Snitker lease, the Snitker
No. 1. The well site was 467 feet west of the east Snitker lease line. Snitker No. 1 was
1 An anticline is “[a] subsurface, geological structure in the form of a sine curve; that is, the formation rises to a rounded peak.” 8 Howard R. Williams & Charles J. Meyers, Oil and Gas Law, Manual of Terms 49 (Patrick H. Martin & Bruce M. Kramer eds., 1998). “[A]n arch of stratified rock in which the layers bend downward in opposite directions from the crest.” Merriam-Webster’s Collegiate Dictionary 54 (11th ed.). See Texaco, Inc. v. R.R. Comm’n, 583 S.W.2d 307 (Tex. 1979); Pickens v. Railroad Commission of Tex., 387 S.W.2d 35 (Tex. 1965) (both describing oil-producing formations underlying anticlines). 2 completed in February 2002 as an oil well producing at the maximum allowable rate,
400 barrels of oil per day.
In April 2002, Devon completed its Lancaster No. 2 well, north of the Lancaster
No. 1 but also located 467 feet from the Snitker lease line. OPL promptly offset Devon’s
well by drilling its Snitker No. 2, located due north of the Snitker No. 1. When
completed in May 2002, Snitker No. 2 also produced 400 barrels of oil per day.
On the Roach lease, OPL completed the Roach No. 1 as an oil well during July
2002. The surface location of the well is 132 feet north of the Snitker lease line with a
bottom hole location 45 feet from the Snitker lease line. On the Stephenson lease, OPL
completed the Stephenson No. 1 as an oil well during November 2002. The surface
location of the well is 136 feet north of the Snitker lease line with a bottom hole 37 feet
from the Snitker lease line.
To drill the Roach No. 1 and Stephenson No. 1 wells closer than 467 feet from
the Snitker lease line, OPL applied for and obtained exceptions under the Railroad
Commission’s Rule 37.2 Because OPL also was the operator of the Snitker lease, it
was the only party entitled to notice of OPL’s requested exceptions, under the terms of
Rule 37.
An internal OPL document, dated in 2005, lists each of the company’s wells
producing from the western anticline, together with certain information for each well.
Among the information is the company’s estimate of the percentage of the oil originally
2 16 Tex. Admin. Code § 3.37(a)(1) (Lexis 2009) (Tex. R.R. Comm’n, Statewide Spacing Rule). 3 in place each well eventually would produce. According to the estimates, the two
Snitker wells would produce no more than 56 percent of the oil originally in place but the
Roach No. 1 would produce as much as 195 percent, and the Stephenson No. 1 as
much as 285 percent, of the oil originally in place.
PSG brought suit, alleging OPL breached the implied covenant to protect the
Snitker lease against drainage by the Roach and Stephenson wells. The jury
disagreed, finding no substantial drainage of the Snitker. The trial court rendered
judgment that PSG take nothing and denied the motion of PSG for judgment
notwithstanding the verdict. This appeal followed.
Analysis
Issues
Through three issues PSG argues: (1) it proved substantial drainage of the
Snitker lease as a matter of law; (2) the trial court reversibly erred by instructing the jury
to disregard PSG’s testimony in rebuttal to a defensive theory of OPL; (3) the trial court
reversibly erred by allowing an OPL expert to render a previously undisclosed opinion.
Whether PSG made conclusive proof of substantial drainage
PSG first asserts it established substantial drainage as a matter of law. A claim
for breach of the covenant to protect against drainage of the lease requires the plaintiff
to prove substantial drainage and that a reasonable and prudent operator would have
acted to prevent the substantial drainage. Amoco Production Co. v. Alexander, 622
4 S.W.2d 563, 568 (Tex. 1981); Grayson v. Crescendo Res., L.P., 104 S.W.3d 736, 740
(Tex.App.--Amarillo 2003). Here, in its first question to the jury, the court inquired:
“Do you find from a preponderance of the evidence that substantial drainage of oil or gas has occurred from the Snitker lease in the Anton- Irish (Wolfcamp) Field?”
The court defined “substantial drainage” as “the drainage of a sufficient quantity of oil
that would cause a reasonably prudent operator, with the expectation of making a
reasonable profit, to take action to protect it from that drainage.” The jury responded
“no” to the question. Because the remaining questions submitted were conditioned on
an affirmative response to question one, the jury made no further answers.
A party attacking the legal sufficiency of an adverse jury finding on an issue on
which the party bore the burden of proof must demonstrate all vital facts in support of
the issue were established as a matter of law. Dow Chemical Co. v. Francis, 46 S.W.3d
237, 241 (Tex. 2001) (per curiam). The analysis requires we first examine the record in
the light most favorable to the verdict for some evidence supporting the jury’s finding,
crediting evidence favoring the finding if a reasonable fact finder could and disregarding
contrary evidence unless a reasonable fact finder could not. City of Keller v. Wilson,
168 S.W.3d 802, 807, 822 (Tex. 2005). Some evidence, meaning more than a scintilla,
exists when the evidence “rises to a level that would enable reasonable and fair-minded
people to differ in their conclusions.” Merrell Dow Pharms., Inc. v Havner, 953 S.W.2d
706, 711 (Tex. 1997). If, however, no evidence appears to support the finding, we then
examine the entire record to determine whether the contrary proposition is established
as a matter of law. Francis, 46 S.W.3d at 241; Raw Hide Oil & Gas, Inc. v. Maxus 5 Exploration Co., 766 S.W.2d 264, 276 (Tex.App.--Amarillo 1988, writ denied). A
proposition is established as a matter of law when a reasonable fact finder could draw
only one conclusion from the evidence presented. City of Keller, 168 S.W.3d at 814-16;
Brent v. Field, 275 S.W.3d 611, 619 (Tex.App.--Amarillo 2008, no pet.).
The Anton-Irish (Wolfcamp) Field was described in testimony as a water-drive
field.3 Terry Dean Payne, a reservoir engineer, testified for OPL. He categorized the
field as a “very strong water drive field.” According to Payne, impermeable shale
overlies the oil-bearing rock in the anticline. Above the granite “basement” rock, a large
aquifer underlies the eastern and western anticlines. Between the aquifer and the oil-
bearing rock lies a transition zone of oil and water.
Payne told the jury that the weight of the mile-and-a-half of rock resting on top of
the reservoir pressurized the reservoir fluids to 2,600 pounds per square inch. The
volume of oil in the reservoir is small compared to the aquifer, such that production of oil
does not cause a significant change in reservoir pressure. Thus, Payne explained,
production of four million barrels of oil from the western anticline had caused a pressure
decline of only about sixty pounds per square inch. He said that as oil is produced from
the wells, “the aquifer advances up and pushes that oil to the top of the structure so the
oil is essentially replaced with water from underneath.”4
3 The dynamics of oil production in a water-drive field are described in Alexander, 622 S.W.2d at 565-66. See also Pickens, 387 S.W.2d at 40-42 (containing descriptions of effect of water drive on oil production). 4 For demonstrative purposes, the trial court allowed the jury to view a video animation of a water drive pushing oil in an oil field upward to a well bore. By 6 Payne distinguished the pattern of hydrocarbon drainage typically seen in a
“depletion drive” reservoir from that in a reservoir with a water drive present. With the
former, especially when the hydrocarbon-bearing rock has good permeability, fluids
typically flow toward the wellbore in a radial pattern around the well. Payne said such a
radial drainage pattern does not characterize a water drive reservoir. Instead, he said,
the advance of fluids is “from below.”
Testimony described leases overlying the higher part of the anticline geological
structure as “updip” leases and those over the lower part as “downdip.” Payne stated
that in a water-drive field, as oil is produced, wells located in a downdip location at a
point begin to produce an oil-water mixture while those updip on the reservoir continue
producing oil. As time passes, wells higher on the structure are the last to remain in
production. When the volume of water produced by a well becomes so large and the
volume of oil so comparatively small that continued production is infeasible, the well is
said to “water out.”
Wayman Gore, a petroleum engineering expert testifying for PSG, agreed that
the Roach and Stephenson leases are downdip of the Snitker, and that the Snitker is
the “most updip” lease OPL operates on the western anticline. Payne specified that the
accompanying question and answer, Payne narrated. The animation does not portray drainage from updip to downdip areas of the reservoir; rather, it shows water pushing oil upward to well bores. It depicts wells lower on the structure watering out first. Before presentation of the animation the trial court instructed the jury, “It’s being offered only for the purposes of helping you understand a water drive system. It’s not being offered for and you will not consider it for any facts that actually apply to this case. [I]t’s just offered to help you kind of understand the concept behind the water drive system . . . .”
7 Roach No. 1 and Stephenson No.1 wells are eighty or more feet downdip of the Snitker
wells.
Mike Smith, an engineer and OPL’s team leader for development of the field,
also testified. He also described the field as a “bottom water drive reservoir.” As oil is
produced, “you have an endless supply of water underneath that’s continuing to provide
reservoir energy and support and that oil just migrates [its] way up through that
anticline.” He characterized an oil flow from an updip location to one downdip as
“swim[ming] against th[e] flow.” According to Smith, because of the reservoir’s “bottom
water drive” and its resulting upward flow of fluids through the reservoir, “you should not
get a significant amount of supply from updip from across the Snitker lease line.” He
later told the jury he saw no evidence of substantial drainage of the Snitker lease.
Payne also opined that the Snitker lease had not been substantially drained.
Production data provided by Smith showed an increasing percentage of water
production from the Roach lease as compared with the Snitker wells. By September
2005 daily production from the Roach No. 1 was 93 barrels of oil and 656 barrels of
water. At the same time, the Snitker No. 1 yielded daily production of 258 barrels of oil
and 13 barrels of water and the Snitker No. 2 produced 160 barrels of oil and 53 barrels
of water. Smith agreed data of this character is expected in a bottom water drive
reservoir as the water level rises.
Pointing to such evidence as the close proximity of the Roach and Stephenson
wells to the Snitker lease line, the premise underlying the field rules that a well will drain
eighty acres, the favorable permeability of the oil-bearing rock in the area of the Snitker
8 lease, and the internal OPL estimates that the Roach well would produce almost twice
the oil originally in place, and the Stephenson almost three times, PSG contends the
evidence nonetheless conclusively establishes the occurrence of local drainage of the
Snitker lease by the two adjoining wells. Viewing the evidence in the light most
favorable to the verdict, and indulging every reasonable inference in support of the
verdict, City of Keller, 168 S.W.3d at 822, however, we find more than a scintilla of
evidence supports the jury’s negative response to question one. Accordingly, we do not
reach an analysis of the evidence PSG considers conclusive. PSG’s first issue is
overruled.
PSG’s two remaining issues concern rulings of the trial court excluding and
admitting evidence. We review a trial court’s decision excluding or admitting evidence
under an abuse of discretion standard. In re J.P.B., 180 S.W.3d 570, 575 (Tex. 2005).
Even if evidence is improperly excluded or admitted, we will reverse only if the error
probably caused the rendition of an improper judgment. Tex. R. App. P. 44.1(a)(1); see
Bay Area Healthcare Group, Ltd. v. McShane, 239 S.W.3d 231, 234 (Tex. 2007) (citing
Tex. R. App. P. 61.1(a)). To determine if the error of the trial court was harmful, we
review the entire record and require the complaining party to demonstrate the judgment
turns on the particular evidence admitted or excluded. Nissan Motor Co. v. Armstrong,
145 S.W.3d 131, 144 (Tex. 2004); City of Brownsville v. Alvarado, 897 S.W.2d 750,
753-54 (Tex. 1995).
9 Instruction to disregard rebuttal testimony
By its second issue, PSG argues the trial court erred by instructing the jury to
disregard certain testimony of its expert Wayman Gore in rebuttal of a defensive theory
raised by OPL.
According to Gore’s rebuttal testimony and demonstrative exhibits, underlying a
portion of the field, including the Snitker lease, is dolomite rock known for its desirable
porosity. Other areas in the field contain less permeable limestone. Data Gore
attributed to OPL indicated a seventy-one percent oil recovery factor in the dolomite
area of the field while, in his opinion, the limestone area of the field yielded a forty
percent recovery factor. The recovery factor of the Snitker lease was fifty-six percent.
Gore opined the difference between the recovery factor for the Snitker lease and that of
other dolomite leases in the field indicated substantial drainage of the Snitker lease.
OPL objected on the grounds the testimony was not disclosed during discovery
and Gore’s conclusions were not reliable. During a hearing outside the presence of the
jury, the court sustained the objection. When the jury returned, the court gave the
following verbal instruction:
“Ladies and gentlemen, there’s been some testimony related to a 71- percent recovery factor. You will disregard any testimony related to a 71- percent recovery factor and any opinion derived therefrom.”
Announcing its ruling on OPL’s objection, the trial court noted that Gore’s
recovery factor comparison relied in part on the recovery factor of leases on the eastern
anticline. The court further pointed out Gore had testified he had not inspected or
studied the eastern anticline. The court had heard evidence that net recovery 10 calculations are affected by rock porosity and other factors such as the fracturing
present in the rock. Without reliable data showing that the characteristics of the rock
underlying the two anticlines could fairly be compared, the trial court could have
considered Gore’s recovery factor comparison flawed. See Cooper Tire & Rubber Co.
v. Mendez, 204 S.W.3d 797, 800-801 (Tex. 2006) (analyzing reliability of expert
testimony). We agree with OPL that, based on the information before it, the trial court
thus could have found Gore’s conclusions regarding the seventy-one-percent recovery
factor to be unreliable. We are unable to say the trial court abused its discretion by
excluding the evidence of a seventy-one percent recovery factor covered by its
instruction.
Even were we to assume it was error to exclude rebuttal testimony related to a
seventy-one percent recovery factor, our review of the entire record shows the error
harmless. Even if admitted, Gore’s rebuttal testimony would not reduce the probative
force of evidence we have already found legally sufficient to support the jury’s answer to
question one of the charge. The excluded evidence of which PSG here complains did
not cause the rendition of an improper judgment. Tex. R. App. P. 44.1(a)(1). We
overrule the PSG second issue.
Undisclosed expert opinion
By its third issue, PSG urges the trial court erred by allowing OPL expert Brian
Sullivan to testify on a previously undisclosed opinion.
PSG posits OPL did not timely disclose expected expert testimony of Sullivan to
the effect a permit for drilling an offset well requires an operator prove to the Railroad
11 Commission the operator is not receiving its “fair share” of production. This testimony,
PSG urges, left “the jury with the impression that the Snitker had not been substantially
drained.”
The issue arises in the following colloquy.
Q. [counsel for OPL] In a Rule 38 hearing, does one have to demonstrate that the wells they currently have producing on the tract would not recover their fair share of the oil?
A. [Sullivan] Yes, sir, (sic) that is correct. That’s what the test is, and that’s what the commission publishes in its books.
In an amended scheduling order the trial court required OPL to designate rebuttal
experts by February 1, 2008. The court added, “[s]uch designation shall include
disclosures that comply with the requirements of TRCP 194.2(f).” By a writing served
that date, OPL designated Sullivan as a rebuttal witness. PSG deposed Sullivan on
April 22, within thirty days of trial.
PSG does not complain of the substance or sufficiency of Sullivan’s deposition
responses. Rather, it contends at deposition Sullivan provided opinions which were not
previously disclosed. Because expert opinions were obtained by deposition, generally a
pro forma supplementation of a disclosure response with the same information is
unnecessary. Tex. R. Civ. P. 193.5(a)(2). But here the deposition disclosure of
Sullivan’s opinions came within thirty days of trial. As we follow PSG’s complaint, OPL
was obligated to, but did not, obtain a finding of good cause for untimely disclosure or
that the untimely disclosure did not cause unfair surprise or unfair prejudice to PSG.
12 Tex. R. Civ. P. 193.6(a),(b). OPL urged in the trial court that until Gore testified at trial,
it was unable to more specifically disclose Sullivan’s expected rebuttal testimony.
Even were we to assume the trial court erred by allowing the objected-to portion
of Sullivan’s testimony, the record does not demonstrate such testimony probably
caused the rendition of an improper judgment. Tex. R. App. P. 44.1(a)(1). PSG asserts
the jury was left with the “impression” that the Snitker lease had not been substantially
drained. But during its case-in-chief OPL presented the evidence we have outlined
supporting the jury’s negative finding to question one’s inquiry of substantial drainage.
Since this proof was legally sufficient apart from the opinion of Sullivan, the judgment
did not turn on its erroneous admission. Moreover, because evidence of no substantial
drainage was admitted without objection, the complained-of testimony was merely
cumulative and its admission harmless. See In the Interest of W.J.H., 111 S.W.3d 707,
714 (Tex.App.--Fort Worth 2003) (erroneous admission of evidence merely cumulative
of that properly admitted elsewhere is ordinarily harmless). PSG’s third issue is
Conclusion
Having overruled each of the issues of PSG, we affirm the judgment of the trial
court.
James T. Campbell Justice