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Royalty Interests and Antitrust: Waggoner v. Denbury Onshore

The United States Court of Appeals for the Fifth Circuit issued an unpublished opinion last year in Waggoner v. Denbury Onshore, LLC, et al. concerning the application of state antitrust law to  royalty payments. It should be noted that while the opinion is instructive on how the 5th Circuit Court of Appeals views the issues discussed, the opinion is explicitly not intended as precedent, except under the limited circumstances set forth in the Fifth Circuit Rule 47.5.4.

Background of the Case:

In 1984, James Waggoner acquired an oil, gas, and mineral lease for a section of a carbon dioxide (CO2) formation in Rankin County, Mississippi. Subsequently, Shell Western E&P Inc., a subsidiary of Royal Dutch Shell Inc., petitioned the Mississippi State Oil and Gas Board for authority to pool the interests in a large section of land, which included Waggoner’s interest. Waggoner entered an agreement with Shell to place 77 acres of his land into the pooled tract of land in exchange for a 6.25% overriding royalty interest in the well until payout with an option to convert the overriding royalty interest into a 40% working interest at a later date. Waggoner and Shell  also entered into an Operating Agreement that dictated that the price of CO2 (upon which royalties were to be calculated) would be the “volume weighted average price”. After the well paid out, Waggoner converted the overriding royalty interest into a working interest, which allowed Waggoner to take either a proportional share of the CO2, or a proportional share of the volume weighted average price of the CO2 that Shell received.

Shell later sold the CO2 field to Airgas Carbonic Enterprises and sold  its enhanced oil recovery fields to J.P. Oil. These two companies then entered into an agreement whereby J.P. Oil would purchase from Airgas Carbonic Enterprises the CO2 to be used for recovery operations in the enhanced oil recovery fields.

In 1999, Denbury Resources purchased the enhanced oil recovery fields from J.P. Oil. Denbury continued to purchase the CO2 for recovery operations from Airgas Carbonic Enterprises under the previous purchasing agreement established between Airgas and J.P. Oil. In 2001, Denbury also purchased the CO2 field from Airgas. Waggoner sued, alleging that Denbury’s acquisition of the CO2 field from Airgas made Denbury the owner of the entire CO2 supply of Mississippi and that this violated Mississippi’s antitrust laws. Specifically, Waggoner alleged that Denbury Onshore paid the royalty and working interest owners … based upon the price Denbury Onshore received from the Denbury subsidiary for the CO2. Denbury then pipes the CO2 to oilfields to be used by Denbury in tertiary oil recovery operations. Denbury Onshore ‘sells’ the CO2 to its subsidiary at an artificially low price and pays its royalty owners based on that artificially low price.


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