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Recently, the U.S. Geological Survey published a new assessment of oil and gas reserves in the Permian Basin in Texas and New Mexico. The assessment, that you can read here, reports undiscovered, technically recoverable, continuous mean resources of 46.3 billion barrels of oil and 281 trillion cubic feet of gas in the Wolfcamp shale and Bone Spring Formation of the Delaware Basin in the Permian Basin Province, southeast New Mexico and west Texas. This means these reserves are the largest in the world.unnamed-file

At the end of 2017, total reserves in the United States were estimated to be 40 billion barrels of crude oil and 465 trillion cubic feet of natural gas. This new assessment therefore reflects a doubling of U.S. crude reserves and a 65% increase in gas reserves.

As these reserves are produced, the economy will benefit in several ways. Mineral owners will be paid royalties. New employees will be hired by oil companies. Tax revenues to local, state and the federal government will increase.

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A recent opinion by the Fifth Circuit Court of Appeals addressed a claim by royalty owners that Devon Energy Production Company LP violated its implied duty to market arising from their oil and gas leases with Devon in the Barnett Shale area. That case is Seeligson et al v. Devon Energy Production Company LP (Case 17-10320 October 16, 2018 Unpublished).

The royalty owners/lessors were attempting to obtain class-action certification. As part of their evidence, they showed that Devon sold the gas produced from their wells to a Devon affiliate for a price of 82.5% of the published industry index value of the residue gas and natural gas liquids. The evidence also showed that payment was never made by Devon to its affiliate. In addition, the affiliate “charged” Devon 17.5% of the value of the gas as a processing fee which was claimed to be substantially higher than the current market rate for processing gas. Again, no money actually changed hands between Devon and its affiliate. The royalty owners claimed that this was a sham transaction that resulted in their receiving lower royalty payments than they would have had Devon paid the market price for the gas produced from their wells.

The District Court certified the Plaintiffs’ claims as a class action and Devon appealed. The Fifth Circuit held that the class certification was not an abuse of discretion by the District Court, but that the District Court had failed to consider the effect of potential statute of limitation defenses by Devon on the class certification. As a result, the case was sent back to the District Court to examine the effect of these to defenses on class certification.

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As many Texas landowners are aware, oil and gas pipelines are being constructed at an almost frantic pace these days. The first time a landowner is aware that they may be asked to sign a pipeline easement is a usually a call from a land man or right-of-way agent requesting permission to conduct a survey on their property.

Many landowners simply give verbal permission or sign the one paragraph form offered to them by the land man or agent. That can be a mistake. If you’re interested in protecting your property, you should consider using an appropriate survey permit to govern the pipeline company’s surveying activities on your property. That is even more true for geophysical or seismic permits.

A survey permit should address at least the following issues:

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In Ridge Natural Resources, LLC v. Double Eagle Royalty, LP, 2018 WL 4057283 (Tex.Civ.App.- El Paso 2018), a case involving a dispute over ownership of mineral interests in Winkler County, Texas,   the El Paso Court of Appeals upheld a mandatory arbitration clause in an oil and gas royalty lease. Ridge Natural Resources is a major decision, likely to be reviewed by the Texas Supreme Court. In this article, part one of two, we discuss the arbitration aspect of the case. If the new trend will be to add arbitration clauses to oil and gas leases, the oil and gas industry is in for a big change and Texas oil and gas lawyers will need to keep informed of these changes. In part two of this series, we will discuss majority’s holding that a contractual prohibition on an award of punitive damages is void as against public policy.

Texas Natural Resources Law: Arbitration and Oil, Gas, and Mineral Leases

In 2016, members of the McDaniel family signed an oil and gas lease with Ridge Natural Resources, LLC (“Ridge”) for their property in Winkler County. In the lease, the parties agreed “… that all disputes between the parties shall be resolved solely by binding arbitration administered by the American Arbitration Association in accordance with its commercial arbitration rules pursuant to the Texas General Arbitration Act.” The provision was lengthy and extensive covering a variety of claims and disputes that would be subject to arbitration. After the lease was signed, Double Eagle Royalty (“Double Eagle”) became the successor-in-interest to the McDaniel family and claimed ownership of the mineral interests, and also separately received an assignment of any claims against Ridge. A dispute arose between Double Eagle and Ridge as to who had title to the mineral interests. Ridge immediately sought to compel arbitration.

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In general, Texas courts will enforce contracts — including oil and gas contracts — as those contracts are written unless the contract violates statutory law or public policy. These principles apply equally to choice of law provisions that may be inserted into oil and gas contracts. A recent case from the Court of Appeals from the Fort Worth district is a good example. In North American Tubular Service, LLC v. BOPCO, L.P., 2018 WL 4140635 (Tex.Civ.App.- Fort Worth, 2018) the Court of Appeals rejected the argument that New Mexico law applied to indemnity provisions in an oilfield master services contract; the parties contracted for Texas law to apply to any disputes and there was no public policy or other reason to reject that contracting choice.

Texas Oil and Gas Contracts: Choice of Law Principles

 In today’s complex economy and given that oil and gas exploration and production is a nation-wide industry, choice of law issues are common. Because each state has its own set of laws, depending on the circumstances of the lawsuit, different state laws might apply to a given circumstance and when a case is filed, courts must choose which state laws apply. Recognizing which law applies can be important, and so it is common for legal practitioners to insert choice of law provisions into contracts as standard “boilerplate.”

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Texas law strongly endorses the concept of freedom to contract and our courts have frequently emphasized this by enforcing the intent of the contracting parties. Indeed, intent of the parties is enforced even if the parties use words erroneously. An example of this comes from the case of Thompson v. Taeda Investments, LLC, 2018 WL 3196628 (Tex. Civ.App.-Tyler 2018, pet. filed).

In that case, a mineral estate management agreement used the words “overriding royalty interest.” The Court of Appeals held that, while those words have “a generally accepted meaning,” the context of the agreement demonstrated that the parties used those words erroneously and that they intended something different than what is generally meant by those words. Despite the erroneous use of the words, because of the context, the parties could have only intended one thing — and that was different than the generally accepted meaning of “overriding royalty interest”. As a result, the management agreement was held to be unambiguous. Furthermore, the lack of ambiguity defeated one party’s claim that there had been a mutual mistake of fact in the use of the word “overriding royalty interest.”

Interpreting Texas Contracts: Language From the Management Agreement 

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The recent case of Devon Energy Production Co. v. Apache Corporation, Case No. 11-16-00105-CV (Tex.Civ.App.- Eastland 2018, pet. filed) addressed a novel question under Texas law about whether an oil company cotenant owed royalty payments to the other co-tenant oil company’s lessors. The trial court said no and the Court of Appeals affirmed.

In Devon Energy, a part-owner — Norma Jean Hester — of a certain mineral interest under lands located in Glasscock County leased her interest to Apache Corporation. The other part-owners (having the remaining two thirds of the ownership) leased their interest to Devon Energy Production Company. Hestor and the other lessors reserved royalty payments of 25% under the two separate leases.

The legal effect of two leases covering the entirety of a mineral estate was to create a co-tenancy relationship between Apache and Devon. This is because, under Texas law, a typical oil and gas lease conveys the mineral estate (less those portions expressly reserved, such as royalty) as a determinable fee. When two production companies share ownership over the same mineral estate, they become co-tenants.

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In 2017, the Texas Legislature passed House Bill 1217, which allows Texas notaries to do remote notarization. Beginning July 1, 2018, commissioned notaries can apply to be commissioned as an Online Notary Public. In August 2017, the Texas Secretary of State published the revised administrative rules that govern the new process.

The new rules require that you first be a licensed notary, and obtain a digital certificate furnished by a third party provider and an electronic seal. In addition, an online notary must maintain an electronic record of the online notarization, including a recording and backup of the audio-visual conference, and must use a third party to perform identify proofing and credential analysis in order to identify the person for whom you are performing the notarization. Further details are available at the Texas Secretary of State website here.

This new process will certainly facilitate online transactions like real estate purchases and oil and gas leases. However, as with all things digital, there is going to be the capacity for fraud. It will be interesting to see how this new process weathers over time.

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The course of dealings between the parties over a period of time can lead to modifications and waivers of provisions within an oil and gas lease and related contracts. A recent Dallas Court of Appeals case, Tollett v. MPI Surface, LLC, Case No. 05-17-00435-CV (Tex.Civ.App.- Dallas, no writ), illustrates that point.

In 2012, Cecelia Tollett entered into a groundwater sales agreement that allowed MPI Surface, LLC (“MPI”) to extract groundwater from Tollett’s land to sell to others for various uses in the oil and gas industry. Among other provisions, the agreement provided that Tollett was to be paid a 25% royalty of the gross sale proceeds with said royalties to be “… due on the same day of each month in which sale proceeds are collected by MPI.” Furthermore, the agreement provided that failing to timely and fully pay the royalties “shall be considered a material breach” allowing Tollett to terminate the agreement. Further, the agreement required MPI to establish and maintain a point of sale meter to record sales. Under the agreement, Tollett could install her own meters if MPI failed to install meters. The agreement also provided that “… MPI’s failure to timely and fully meter the water sales and disposal water shall be considered a material breach” of the agreement allowing Tollett to terminate.

MPI drilled four wells and began making royalty payments. However, MPI never installed any sort of point-of-sale metering system. Tollett did not complain and did not install her own meters. Over the course of the next four years, royalties were paid monthly but not on the same day on which payments were collected from the third-party buyers. MPI intended to pay the royalties on the 20th of each month, but generally was either a couple of days early or a couple of days late. The agreement contained a 60-day grace period. Over the first four years of the agreement, Tollett never complained about the monthly royalty payments and never complained about whether the payments actually fell on the 20th or a few days later.

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A recent case from the Texas Court of Appeals in Waco held that the Texas Statute of Frauds — Tex. Bus. & Com. Code, § 26.01 — rendered a land man’s commission contract unenforceable. The Court also upheld the trial court’s determination that none of the exceptions to the Statute of Frauds applied. The case is Moore v. Bearkat Energy Partners, LLC, 2018 WL 6837542018 (Tex.Civ. App.- Waco, no writ). Land man Moore had an agreement where he was supposed to be paid $600.00 per mineral acre for each and every lease he helped obtain for Bearkat Energy. Moore claims he performed and sued when he did not get paid. He claimed $1 million in damages and asked for $10 million in punitive damages. As noted, Moore lost on summary judgment at the trial level and received nothing. The Court of Appeals affirmed. Although the result may sound harsh, Moore could not meet any of the exceptions to the Statute of Frauds such as the partial or full-performance exceptions.

Texas Statute of Frauds and Exceptions

In general, Texas law requires that certain types of contracts be in writing. Examples include: