It is not uncommon for royalty disputes between mineral lessors and operators to increase as oil and natural gas prices decrease. Before mineral lessors go running to the courthouse in Colorado, however, and before operators respond to a lawsuit, both sides should consider the appropriate forum for the dispute. In a recent ruling dismissing a complaint at the outset of litigation, the District Court in Garfield County recognized the role given by the legislature to the Colorado Oil and Gas Conservation Commission (COGCC) to adjudicate certain royalty claims.
In Jolly Family v. Bill Barrett Corporation, the mineral lessors filed a complaint alleging a breach of the lease agreement and demanding an accounting on damages. The lessors alleged that Bill Barrett Corporation (BBC) failed to properly calculate royalties, in part, by failing to fully account for the proceeds from the sale of the gas and the products extracted therefrom; excluding and undervaluing the proceeds received from the sale of NGLs; and excluding volumes of natural gas that had been produced and sold or consumed. BBC responded by filing a motion to dismiss due to the plaintiff’s failure to exhaust administrative remedies before the COGCC, which has the authority to adjudicate disputes over royalty amounts due a lessor by an operator. The Court agreed with BBC and dismissed the complaint.
Colorado’s Administrative Remedy
Colorado law provides that where a statutory administrative remedy is available, the administrative exhaustion doctrine mandates that a plaintiff must first pursue such remedy before seeking judicial review. The Colorado Oil and Gas Conservation Act (the “Act”) provides such a remedy.
Under the Act, mineral lessors are entitled to specific information concerning royalty payments. When a “payer,” the operator or other party responsible for payments fails to provide the required information, then the “payee,” the party entitled to payment, may demand written explanation of any deductions or adjustments, including meter calibration testing and production reporting records. COGCC Rule 329(e) elaborates on this process:
In order to facilitate the resolution of questions regarding the payment of proceeds or sales reconciliation from a well, a payee may submit a Form 37 to the payer requesting additional information concerning the payee’s interest in the well, price of the gas sold, taxes applied to the sale of gas, differences in well production and well sales, and other information as described in § 34-60-118.5, C.R.S. The payer shall return the completed form to the payee within sixty (60) days of receipt. Submittal of this form to the payer shall fulfill the requirement for “written request” described in § 34-60-118.5(2.5), C.R.S., and is a prerequisite to filing a complaint with the Commission.
Upon receiving a Form 37, the payer must then use its best efforts to provide the requested information and attempt in good faith to resolve the dispute. Should these negotiations prove unsuccessful, then the COGCC is then authorized to investigate the complaint and preside over a hearing regarding the proper payment: “Absent a bona fide dispute over the interpretation of a contract for payment, the oil and gas conservation commission shall have jurisdiction to determine […] the amount of the proceeds plus interest, if any, due a payee by a payer.”
Not all royalty claims involve a bona fide dispute over the interpretation of a contract for payment. The Garfield County District Court’s ruling recognized the difference between a dispute about the measurement of gas and NGLs and calculation of royalties, on the one hand, and a dispute over the meaning of a lease term, on the other. It also confirmed that disagreements concerning accounting questions should be handled pursuant to the COGCC’s dispute resolution procedure. So, before answering a complaint alleging underpayment of royalties, operators should closely scrutinize the claims to identify when the mineral lessor should have exhausted administrative remedies prior to seeking judicial relief.