expertCo-author Matthew Wheatley

Your well consultant just cemented 10,000 feet of tubing inside the casing of your eight million dollar well, … a neighboring operator frac’ed his Eagle Ford well into your Austin Chalk completion, thereby trespassing and contaminating your well. Righteousness and vengeance are yours. The jury will draw and quarter the offender.

Not So Fast

Texokan Operating, Inc. v. Hess Corp. is a reminder: To obtain the justice you so richly deserve you need a reliable expert to testify, and your expert must jump through procedural hoops before his testimony will deliver you to the judicial promised land. Texokan’s suit for well contamination required engineering expertise.

The Question

Under what circumstances are an expert’s opinions admissible?

What Doesn’t Work

Plaintiff’s expert determined the “loss of value” of wells based on his “forecast” of future production. He calculated this forecast using historical data from the wells, oil prices at the time, operating expenses, royalties, taxes, and a present value discount factor based on his “experience and education” evaluating “thousands” of oil wells. He admitted that his approach contained a huge amount of subjective judgment.  He had probably used two or three different approaches but could not remember exactly how he reached his conclusions.

Among other deficiencies, there was no evidence that his approach had been subjected to testing or peer review, he could not identify any standards controlling his procedure, he applied SEC standards inconsistently when calculating damages, and he failed to show how his purely subjective method is generally accepted.

What Works

An expert’s testimony must be the product of reliable principles and methods. Factors are:

  • Whether the theory or procedure has been subjected to testing;
  • Whether it has been subjected to peer review and publication;
  • The rate of error and the existence of standards controlling the theory or procedure; and
  • Whether it has attained general acceptance.

The proponent must:

  • Show that the expert has reliably applied the principles and methods to the facts of the case. The court is not required to accept an expert’s opinion if it is connected to data only by his or her “ipse dixit’, which means “I am an engineering god; trust me.” It is also Latin for “because I said it is so”.
  • Provide evidence establishing that the expert’s opinions were the product of reliable principles and methods reliably applied to the case.
  • Show that the expert sufficiently applied his method to the facts of the case. Here, he did not independently evaluate well expenses. He could not remember time frames or the meaning of certain dates in his calculations. Materials Texokan later cited textbooks to bolster his reasoning that were not in the record or referenced anywhere in the expert’s own reports or testimony.

How (Not) to Use An  Expert – Nine Sure-Fire Ways to Scuttle Your Case:

  • Don’t bother to understand the nature of the expertise you need. A reservoir engineer is just like a completions guy is just like a frac guy, right?
  • Hire a hack. He’s the one who pretty much promises a result before he has seen the materials.
  • Don’t waste time reading his writings on the subject. He would never contradict himself for the sake of a fee, would he?
  • Hire your expert late in the proceeding. That saves time and money. You don’t need his help in determining what he might need from the other side to formulate his opinions. Last minute is preferred.
  • Limit the budget. All you need is for him to throw something together just to scare the other side into settling.
  • Give him the materials you think he needs, not what he asks for.  The bad stuff can only hurt you, correct?
  • Assume the other side is too stupid to figure out what you’re up to.
  • For God’s sake don’t spend too much time in depo prep.  You’ve both done this before, so what’s to gain?
  • When all seems lost at trial, devise and present new and heretofore undisclosed theories, claiming you couldn’t have thought of them any sooner.

Good luck!

Some of you know that I recently had an incident with a crawfish pot. Today’s musical interlude is dedicated to myself.

 

 Here is Something We Know

 A Texas mineral estate owner has an implied easement for reasonable use of the surface estate in developing and extracting the minerals below.

 And a Question

Can the mineral estate owner and his lessee use the easement to produce from a mineral estate that is pooled with the surface estate?

And the Answer

Don’t say yes just yet. Are you thinking that the primary legal consequence of pooling is that production from anywhere on the pooled unit is treated as if it has taken place on each tract in the unit?  And that the easement carries with it the right to use the surface of the tract to produce oil from beneath the surface of that tract regardless of whether oil is comingled with oil from other tracts? You are correct.

BUT, only (and this was the lessee’s/mineral owner’s undoing) if oil is being produced from the subject tract. In Key Operating and Equipment, Inc. v. Hegar, we are reminded that the mere pooling of one tract with another does not guarantee that there is actual production from both pooled tracts.

Contractually, as between a lessor and lessee production from one tract is treated as production from both. BUT, for the purpose of a surface easement there must be actual production from the tract burdened by the easement in order for the mineral owner’s easement to be valid.

The Facts

Hegar purchased the surface estate and 1/4th of the minerals in the Curbo tract, knowing that it was subject to oil and gas leases and that Key used a road on the tract to service wells on the adjoining Richardson tract.

Key had a lease on the Curbo tract, built a road across the tract (part of the larger Rosenbaum-Curbo tract) and in 1994 began using the road to operate wells on the Curbo and Richardson tracts.

The well on the Curbo tract ceased to produce in 2000 and the Rosenbaum-Curbo lease terminated.

The resourceful Key brothers then bought a 1/16th mineral interest in the Curbo tract and leased to Key Operating. They made 40-acre pooled unit—30 acres from the Richardson tract and 10 from Curbo, producing the pooled unit from wells on the Richardson tract, which it accessed using the road across the Curbo tract.

Hegar sued for trespass and for a permanent injunction against continued use of the road. Key argued it could use the road on Hegar’s Curbo tract to access wells on the Richardson tract by virtue of the pooling agreement.

Hegar became unhappy, saying that he couldn’t raise a family “… with a highway running through our property.” (which I recite only as an excuse to offer this musical interlude).

The Accommodation Doctrine

The court found that Key had the same implied easement for use of the Hegar surface estate that existed when it became a lessee of the Curbo tract minerals, and Hegar may not interfere with Key’s right to use the surface estate for the purposes of the easement. But the court invoked the accommodation doctrine to protect Hegar the surface owner from unreasonable use of the surface for Key’s operations.

How was this result accomplished?

It was the evidence. The court accepted testimony of Hegar’s expert that the oil produced from the well on the Richardson tract did not drain from an area beneath the Curbo tract. Incidentally, the expert testified “with reasonable certainty”. The law does not require an expert to testify emphatically that he is absolutely certain of his position.

If you are involved in a royalty case, or plan to be, read Occidental Permian, Ltd. v. French et al. The appellate court decided there was no evidence to support the trial court’s findings that the lessors were underpaid. (See my too-long December 6 post for the underlying facts.)  In this case the plaintiffs were the losers.

Takeways (In a hurry? This all you need.)

  • Reliance by an expert on his ”previous experience” is no evidence. Result: Proponent loses.
  • Reliance by an expert on his “historical knowledge in dealings in the business in the industry”, and not on a specific contract, is no evidence. Result: Proponent loses.
  • Reliance by an expert on a hypothetical fact situation that varies from the facts of the case is no evidence. Result: Proponent loses.
  • If an expert doesn’t include every component of a calculation that must be made in order to arrive at a value, there is no evidence that allows the court to arrrive at the value. Result: Proponent loses.

(Before you say “That all obvious.Why didn’t counsel and the court get it?”,  know that in trial things move fast, very fast. Like the TV sports replay, it looks easy in slo mo).

This suit was different from most royalty suits in that it was not about the price paid, but whether the lessors were paid on the proper volume of gas produced. The essential question was whether the evidence showed that Occidental underpaid royalties by deducting an in-kind processing fee paid to Kinder Morgan (KM) from its royalty calculation. The lessors were paid royalties on the 70% of the NGLs retained by the lessee Occidental after paying the in-kind fee to KM, and nothing on residual gas.

No evidence supported the trial court’s finding of underpayment under the comparable-sales method, said the appellate court. The sale price is compared to other sales that are comparable in time, quality, quantity, and availability of marketing outlets. Kuss, the lessors’ expert, failed to support his opinion with an actual sale contract, but rather on his “historical knowledge in dealings in the business in the industry”, and he had no experience selling gas with similar high CO2 content. Thus, his opinion was meaningless. It was entirely based on a hypothetical native gas (with no impurities) rather than the actual CO2–laden casinghead gas that was actually produced from the well. Accordingly, there was no evidence.

The lessors’ attempt to use the net-back method was also unsuccessful. The testimony failed to allocate costs to all of the production and postproduction activities at the Cynara facility. “If any of the activities that took place at Cynara [were] postproduction activities, there is no evidence in the record to support the market value at the well under the net-back method because there are some postproduction costs that have not been deducted, and [it] could not ascertain those costs from the record.”

Under the Fuller lease (a proceeds lease), because the cost of removing the CO2 (a postproduction activity) was not calculated, there was no evidence of the cost of manufacturing, and thus the net proceeds on which the lessees would be paid.

The trial court found that Occidental breached its implied duty to market under the Codgell lease by deducting the in-kind fee paid to KM, thereby obtaining a financial benefit for itself that was not shared with royalty owners. Having found no underpayment of royalty, the court looked for other evidence to support the finding. Lessors’ expert Kuss testified that a reasonably prudent operator would not have accepted the 70/30 split with KM. Because that testimony was based on hypothetical “native gas”, free from impurities, and not the gas stream at issue, the assumed facts varied from the actual facts.  There was no evidence of a breach of the duty.

Here’s wishing you a merrier Christmas than this fellow:  http://www.youtube.com/watch?v=jGFnSqMFQFo