## Facts

- Predecessors of Shell Rocky Mountain Production, LLC and Ultra Resources, Inc. were co-lessees in the New Fork Unit in Sublette County, Wyoming, with Meridian (Ultra’s predecessor) as unit operator and majority working-interest owner.
- The parties’ predecessors entered a farmout arrangement under which McMurry (Shell’s predecessor) could earn additional interest in specified unit leases defined by surface descriptions.
- Disputes arose under the farmout and related joint operating agreements (JOAs), leading to a settlement agreement allocating which party would operate certain wells and including cost and liability provisions.
- The settlement/JOA framework allocated operatorship primarily by surface location and majority working interest, with specified exceptions (including certain directional-well scenarios).
- The JOAs included (1) an exculpatory clause limiting operator liability to instances of gross negligence or willful misconduct and (2) an express “excessive cost” provision requiring costs commensurate with other operators and completion at prevailing area rates.
- The disputed wells had surface locations on lands where Shell held the majority interest but were drilled vertically such that bottom-hole locations were in areas where Ultra held the majority interest.
- Shell sought a declaration that it was operator of those wells regardless of depth; Ultra contended operating rights were limited by depth and asserted Shell charged excessive drilling and operating costs.

## Issues

1. Whether the settlement agreement and JOAs unambiguously granted Shell the right to operate wells with surface locations on Shell-majority lands to all depths, or instead limited operating rights by depth or bottom-hole location.
2. Whether Ultra’s claims for excessive drilling and operating costs were barred by the JOAs’ exculpatory clause absent proof of gross negligence or willful misconduct, or could proceed as alleged breaches of express contractual cost obligations.

## Decision

- The court affirmed summary judgment declaring Shell the operator of the wells at issue to all depths based on surface location and majority surface interest.
- The court held the directional-well exception did not apply to the vertical wells at issue.
- The court reversed summary judgment for Shell on Ultra’s excessive-cost claims and remanded.
- The court held the exculpatory clause did not preclude claims premised on breach of specific, express cost-control duties in the agreements.

## Legal Principles

- Unambiguous contract language governing operating rights in oil-and-gas agreements is enforced as written, without resort to extrinsic evidence.
- Where operatorship is allocated by surface location and majority interest, the operator’s authority may extend to all depths absent an applicable contractual limitation.
- Exculpatory clauses in JOAs generally limit liability for negligence-like claims and implied duties, but they do not eliminate liability for breach of specific, express contractual covenants.
- A party may pursue damages for alleged violation of an express cost standard (e.g., “prevailing rates” and costs “commensurate with other operators”) notwithstanding a general operator exculpation provision.

## Conclusion

The Tenth Circuit enforced the agreements’ surface-location operatorship allocation by declaring Shell the operator of the disputed wells to all depths, but it allowed Ultra to pursue excessive-cost claims because the operator exculpation provision did not bar alleged breaches of express contractual cost-control obligations.


Shell Rocky Mountain Prod., LLC v. Ultra Res., Inc., 415 F.3d 1158 (10th Cir. 2005)