Denbury loses $35M verdict appeal


SUBLETTE COUNTY – The Wyoming Supreme Court struck down Denbury Resources’ appeal on Dec. 4 challenging a court order to pay another helium company many millions of dollars.

The Supreme Court opinion upholds rulings by 9th District Court Judge Marv Tyler, who ordered Denbury to pay $35,199,276.79 to APMTG in damages and interest for undelivered helium.

Writing for the court, Justice Keith Kautz said they also did not agree with Denbury’s arguments that two separate “force majeure” events at the Riley Ridge plant made it impossible for Denbury to provide helium to APMTG Helium as contracted.

APMTG filed the civil suit in 9th District Court against Denbury for breach of contract and breach of implied good faith, records show.

Denbury agreed it did not deliver as contracted but claimed the reasons were beyond their control – “the failure of its contractor to complete its natural gas processing plant and the ongoing failure of its supply wells due to sulfur deposition plugging the wellbores.”

Although both events were catastrophic for Denbury, Judge Tyler ruled, and Wyoming Supreme Court justices agreed, that Denbury could have prevented both by exercising “reasonable care and diligence.”

Both agreed that Denbury could only justify 36 days of “nonperformance” due to force majeure, an event out of the operator’s control.

History

The helium plant’s troubled history began before Denbury Resources came on the scene.

In 2009, then majority and minority owners Cimarex Energy Co. and Riley Ridge LLC contracted with APMTG to deliver helium and the owners would design, build and operate the Riley Ridge natural gas processing plant, according to court records.

APMTG would design, build and operate its own processing plant and buy 200 million cubic feet of helium the first and second years, then 400 mcf in following years. Cimarex and Riley Ridge LLC would expand the Riley Ridge plant by the third year. If they failed to deliver, they would have to pay APMTG $8 million a year. Total liquidated damages could not exceed APMTG’s plant construction estimate of $38.6 million to $42.9 million.

APMTG expected helium delivery on Dec. 1, 2010, and required it by Dec. 1, 2011 “absent delays caused by a force majeure.”

Many financial details were sealed in the District Court proceedings but the Supreme Court will not seal records so the appeal record was remanded to District Court for both parties to request limited confidentiality. 

Construction

In 2010, Cimarex hired BCCK Inc. to design and build a “turnkey” Riley Ridge facility. That July, Denbury bought out Riley Ridge LLC and a year later bought Cimarex’s interest, officially taking over BCCK’s design and construction. In 2011, Denbury told APMTG the plant’s construction was delayed. In January 2012, Denbury fired BCCK after finding its work below industry standards. In November 2012, Denbury notified APMTG of “force majeure” under terms of agreement that included performance failure by contractors.

“Denbury has discovered through plant inspections by third-party consultants who were hired to prepare for startup and commissioning … that there remained major uncompleted work at the plant. … The plant was not even close to being in a condition for operations” that satisfied operational safety or regulatory compliance, the company stated.

With a stream of “corrosive and toxic, hazardous constituents” anticipated while processing helium and necessary alarm and emergency systems not even in the design, Denbury started hiring others to redesign, refurbish and revise equipment to start up by July 1, 2013, it said.

APMTG balked and billed Denbury $8 million for failing to deliver helium the first year as contracted.

In April 2013, APMTG and Denbury revised their feedgas contract; Denbury agreed to pay $8 million and $1.1 million for APMTG’s operating expenses. Another contract required Denbury to begin delivering helium by Aug. 1, 2013 at 200 mcf for three years and 400 mcf thereafter with an $8-million damages cap.

Denbury was to expand Riley Ridge by Jan. 1, 2017, which was designed around five wells. Two – the 10-14 and 17-34 – were drilled in 1981 and were to be supply wells. Cimarex drilled 20-14 in 2008-2009 and Denbury drilled 16-24 and 16-31 in 2013-2014.

Both Cimarex and Denbury knew of Exxon’s serious sulfur problems at Shute Creek “and anticipated (wells) could be treated with chemical solvents or a coil tubing (CT) operation,” Justice Kautz noted.

However, the two supply wells were not treated before flow and quickly plugged up with sulfur. Well 10-14 was treated twice and quit on June 15, 2014. Well 17-34 was treated twice and then a CT operation cleaned the sulfur – but the string broke and remained down in 17-34 where it broke apart “due to the harsh downhole environment.”

Denbury claimed force majeure of well failure to APMTG, listing many problems that limited actual helium delivery to only 4.3 mcf. AMPTG argued Denbury was in control, should have used “reasonable care and diligence” and was not expanding the Riley Ridge Plant as agreed.

Appeal filed

APMTG filed the civil suit against Denbury, claiming breach of contract, unjust enrichment and breach of good faith and fair dealing.

Ninth District Judge Tyler ruled in 2019 that Denbury breached its contract and did not prove its helium delivery failures were “a valid force majeure event.”

He also ruled that the contract barred APMTG’s from claiming enrichment and breach of implied good faith, according to Justice Kautz.

Denbury appealed to the Wyoming Supreme Court, filing for Chapter 11 bankruptcy during the appeal and emerging Sept. 18 as Denbury Inc.

Denbury argued that Judge Tyler “erred” in his rulings and “by finding that (Denbury) failed to prove the available options to address the supply well failure force majeure event would have required (Denbury) to incur extraordinary costs and make more than commercially reasonable investments.”

The Denbury appeal stated, “Ultimately, despite several years of diligent efforts and the expenditure of more than $100 million to try and address those multiple force majeure events, uncontested evidence demonstrated that the best available options would still result in a negative present value to Denbury of between $40 million and $100 million additional dollars going forward, and thus were not commercially reasonable investments – a burden the contract expressly allowed Denbury to avoid.”

Denbury was required to try and resolve the force majeure but not to the extent of “extraordinary costs,” it says. “The trial court failed to correctly apply this plain language, resulting in a decision that is riddled with errors of law and contrary to the overwhelming weight of the evidence.”

Decision

The Supreme Court acknowledged Judge Tyler did not include “all findings and/or conclusions supported by the testimony and evidence adduced at trial … (but) the court’s findings more than adequately explained the factual basis for its decision,” wrote Justice Kautz.

“Impossibility of performance” could refer to being actively impossible due to an unforeseen event, he said, to terminate a contract. The possibilities of inadequate construction and well failures were known because they were written into the APMTG-Denbury contracts.

“If the parties’ contract provides for the occurrence of alleged frustration or impossibility, then the parties obviously foresaw the frustration or impossibility,” he said.

Judge Tyler found that Denbury “assumed control of completion of the Riley Ridge Plant on Aug. 1, 2011, becoming its own ‘engineer, designer and general contractor’ assuming the task of bringing (it) to ‘mechanical completion’ when it removed BCCK in January 2012.”

“The district court also correctly found Denbury failed to provide notice of a new force majeure event between May 23 and Dec. 30, 2013,” Kautz wrote. Email exchanges discussed delays but did not say Denbury was declaring force majeure, Kautz said.

Thus, APMTG did not have notice and could not inform its customers, he agreed.

Denbury also said Judge Tyler erred by not extending the well failure force majeure past August but Justice Kautz said Denbury’s letter to APMTG said this new problem would be resolved by mid August. The district court ruled this was due to “mechanical supply well failure,” though, not sulfur deposits.

Denbury knew sulfur problems were “likely” because it consulted with Exxon and installed special tubing to increase flow rates and bring sulfur deposits to the surface to remediate, Justice Kautz noted.

Other ways Denbury could have avoided sulfur issues, as its engineers and experts testified, were to treat the “skin” damage in the older wells, which were perforated but not used for two years, allowing deposits to build, he said. Another was not waiting for warmer weather but starting on Dec. 30, 2013. It also failed to use one as an injection well to boost the formation’s pressure.

Denbury knew it needed more than two supply wells so one could be taken offline for an acid wash or re-perforation – “Denbury did not perform either operation prior to starting up the Riley Ridge Plant.”

“Denbury’s claim it could lose these wells to sulfur deposition ignores the actions available prior to flowing them, which would reduce the chances of sulfur deposition in the wellbores,” Justice Kautz wrote.

“The district court correctly decided Denbury had failed to prove its nonperformance after mid-August of 2014 was excused by a force majeure event,” he concluded. “The district court did not err in (its) findings. … We affirm.”

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