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BP Headed for Trial|Over Royalty Dispute

(CN) - Some 4,000 lease-holders who sued BP America over royalty payments on natural gas leases in New Mexico are not eligible for punitive damages, a federal judge ruled. But the fairness of the company's 25 percent fee to process raw gas at its own plant will be for a jury to decide.

The judge tossed the lease-holders' demand for punitive damages, finding that, though BP may have breached a five-year-old settlement agreement by using unfair fees to underpay royalties, there was no evidence that it did so maliciously.

But the judge said a jury would have to weigh in on the fairness of a 25 percent fee BP charges to extract natural gas liquids (NGLs), such as propane and butane, from the raw gas at a processing plant it partially owns.

The plaintiffs said BP cheated them out of royalties by placing too low of a value on the raw gas "as it emerges from the wellhead," and then charging its "fictitious" 25 percent fee.

In a series of rulings in early January, U.S. Magistrate Judge W. Daniel Schneider denied the lease-holders' motion for summary judgment on their breach of contract claims, but also refused to give BP's royalty payment calculations a stamp of approval.

The judge discarded the plaintiffs' demand for punitive damages, but left the rest of the thorny issues for a future jury.

"In their motion for summary judgment, plaintiffs argue that BP's processing fee of 25 percent of the value of the NGLs is not an actual fee, because BP has an ownership interest in the New Blanco Plant and does not have to pay a fee to process gas there," Schneider wrote.

"While BP does not pay a fee to process gas at the New Blanco Plant, it is beyond question that BP incurs a cost to operate the New Blanco Plant. It is also unquestioned that the function that the plant serves, separating the NGLs from the residual gas stream, adds value to the gas stream, i.e., the combined value of the residue gas and NGLs leaving the New Blanco Plant is greater than the value of the unprocessed gas 'as it emerges at the wellhead.'"

This is the third time around for the parties. A similar class action against BP in Santa Fe County in 2000 won a reduction in the processing fee from 39 percent to the current 25 percent.

Schneider found that while it's up for a jury to decide whether BP breached the parties' contract, there is no evidence that it did so maliciously.

"While factual issues do exist as to whether the contract was breached, for example whether BP's current 25 percent fee represents a reasonable deduction for the value of the processing at the New Blanco Plant, evidence of the necessary culpable mental state needed for punitive damages in a breach of contract case is not present," he wrote. "Plaintiffs have not presented evidence that BP violated a court order arising from the earlier case, or maliciously breached the terms of a settlement agreement in one of the earlier cases."

The judge stopped short of declaring BP's method fair "as a matter of law," however, suggesting that the long-fighting parties will have to go to trial to put that issue to rest.

"These are classic questions of fact to be resolved by the jury," he wrote. "Plaintiffs have presented sufficient evidence that a genuine issue of material fact exists as to the 'reasonableness' issue."

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