Texas Oil and Gas Attorney Blog

In a recent case, the Texas Supreme Court considered whether interest on late royalty payments was supposed to be simple or compound interest.

In Samson Exploration, LLC v. Bordages, 662 S.W.3d 501, 2024 (Tex. June 7, 2024), the Plaintiff’s oil and gas leases had a late charge provision that provided for interest on unpaid royalties at a rate of 18% and said the charge was due and payable on the last day of each month. When Samson paid previously unpaid royalties to the Plaintiff, it included simple interest. The Plaintiff claimed that the interest should be compounded.

The Court looked at cases and laws in other states and said that there is a modern-day general rule that compound interest will not be imposed absent clear and specific contractual or statutory authorization. The Court stated that compound interest is disfavored, and that interest on late royalties should not be compounded absent an express, clear, and specific provision for compound interest. The Court went on to say that language such as “per annum”, “annually”, or “monthly”, by themselves, are insufficient to sustain the assessment of compound interest.

Lithium mining is apparently becoming the next boom activity in Northeast Texas, particularly in Cass, Franklin, Morris and Titus Counties. There are a few things to know about lithium leasing.

First, be aware that Northeast Texas is becoming Ground Zero for lithium production. It is estimated that the lithium contained in brine from the Smackover Formation that underlies Southwest Arkansas and Northeast Texas contains some of the highest lithium concentrations in the country.

Historically, lithium mining involved pumping the brine into huge evaporation ponds on the leased property and retrieving the lithium once the brine evaporated. Brine is much more saline than saltwater, and these ponds were incredibly destructive of property. However, there is a new technique called Direct Lithium Extraction in which the brine is processed in small tanks, either on the property or at another site, to remove the lithium. The leftover brine water is then pumped back into the formation. It is critical that lithium leases prohibit the evaporation pond technique and require the newer Direct Lithium Extraction technique in order to prevent irreparable damage to the property. It is also critical that your lease contain appropriate language that helps prevent other damage to your property and that contains indemnities by the lessee for any damage that does occur.

The Texas Supreme Court recently considered oil and gas leases that involved the interaction of the “free use of gas” clause and the royalty due on gas used off the leased premises.

In Carl v. Hilcorp Energy Co., ___ S.W.3d ___, 2024 WL ___ (Tex. May 17, 2024), individuals brought a class action against Hilcorp, claiming Hilcorp owed royalties on gas used off-lease for post-production activities. According to the leases, royalties were paid based on the value of gas at the well, and this language allows deduction of post-production expenses. The leases stated that Hilcorp must pay as royalties “on gas . . . produced from said land and sold or used off the premises . . . the market value at the well of one-eighth of the gas so sold or used.” The leases also provided that Hilcorp “shall have free use of . . . gas . . . for all operations hereunder.”

The Court was answering two certified questions from the Fifth Circuit. In answering those questions, the Court held that a market-value-at-the well lease containing an off-lease-use-of-gas clause and free-on-lease-use clause can be interpreted to allow for the deduction of gas used off lease in the post-production process. The Court also discussed that the deduction could use either the value per unit of gas, or the units of gas, to determine the gas upon which royalties must be paid, since either calculation yielded approximately the same results.

The Texas Supreme Court is going to hear a case in which the issue is whether the interest to be paid on past due royalties is simple or compound interest.

In the case of Samson Exploration, LLC v. Bordages, 662 S.W.3d 501 (Tex. Civ. App.—Beaumont 2022, pet. granted September 1, 2023), the lessors executed a number of oil and gas leases with Samson. The leases provide for an 18% late-charge penalty on past-due royalties to be calculated each month but do not expressly state whether the interest should be compound or simple.

The specific language in the lease is:

In Hogg v. Blackbeard Operating, 656 S.W.3d 671, 673 (Tex. App.—El Paso 2022, no pet.), the El Paso Court of Appeals evaluated an assignment of leases in Winkler County, Texas.

The owner of the minerals in question executed two leases for their interests, one in 1994 and one in 1998. In 2005, their lessee executed an assignment of leases to Standolind Oil and Gas.  The exhibit to the assignment listed the 1994 lease but not the 1998 lease.

The Court noted that the language of the assignment was broad. It assigned “all of the assignor’s interest in “the land conveyed by the Leases” and lands pooled therewith. The Court held that since 1998 lease covered must of the same land as the 1994 lease, and given the broad language of the assignment, the 1998 lease was covered by the assignment, even though it was not listed in the exhibit describing the property being assigned.

The El Paso Court of Appeals recently interpreted two deeds with conflicting fractions that each exhibited the estate misconception theory. In Davis v. COG Operating, LLC, 658 S.W.3d 784 (Tex.Civ.App.—El Paso 2022, no pet.) the original mineral owners executed two deeds to two different grantees. In the first deed to W. H. Haun, the interest conveyed is described as a “1/32 interest in and to all of the oil, gas, and other minerals.” Another clause described the interest as including “1/4 of all of the oil royalty and gas rentals, or royalty” under an existing lease. Another clause indicated that the deed included “1/4 of the money rentals” to extend the existing lease. Yet another clause stated that, once the lease terminated, the grantee would own a “1/4 interest in all oil, gas and other minerals.” A final clause indicated that a prior version of the deed mistakenly described the interest as “1/8 of said oil, gas and royalty,” but was being corrected to convey “1/4.”

In a second deed to Roberts, it was stated that “1/32 of the oil, gas and other minerals has heretofore been conveyed to W. H. Haun, and this conveyance does not include such mineral interests so conveyed”. This second deed also contained a reservation of “one-fourth (1/4) of the 1/8 royalty usually reserved by…oil and gas leases, so 1/4 of the 1/8 royalty [is] to be paid to us, our heirs or assigns… [and] in the case of production, we are to receive 1/4 of the 1/8 royalty and this conveyance is executed subject to the mineral interest theretofore conveyed to W. H. Haun, and also to the 1/4 royalty interest reserved by us as hereinbefore stated.

The “estate misconception theory” is a theory that reflects the mistaken belief in older deeds that, in entering into an oil-and-gas lease, a lessor retained a 1/8 interest in the minerals, rather than a 1/8 royalty. Thus, in the first deed, the grantor thought they were conveying 1/4 of their 1/8 mineral interest, or 1/32.

The Texas Supreme Court recently decided a case in which an oil company’s withholding of production payments was contested. In Freeport-McMoRan Oil & Gas LLC v. 1776 Energy Partners, LLC, ___ S.W.3d ___, 2023, WL ___ (Tex. May 19, 2023), two oil companies, Ovintiv and 1776 Energy, entered into an agreement to jointly develop and produce minerals from certain leases they owned in Karnes County. Ovintiv  was in charge of distributing production payments.

A third oil company sued 1776 to require it to transfer leases to the third company, and obtained a constructive trust on production payments until the transfer was completed. Because the trust clouded title to the production payments, Ovintiv suspended payments to 1776. 1776 eventually got paid but wanted interest on those payments from Ovintiv.

The Supreme Court held the suspension was authorized by the Texas Natural Resources Code. That Code provides that withholding payments without interest was allowed when a title dispute “would affect distribution of payments.” The Code also states that allows a payor can withhold payments without interest when the payor has reasonable doubt that the payee has clear title to the proceeds. Thus, the Court held 1776 was not entitled to interest.

In Bridges v. Uhl, No. 08-21-00130-CV,  (Tex. App.—El Paso 2022, no pet. h.) the El Paso Court of Appeals added it’s decision to the already substantial volume of court decisions grappling with the question of whether the royalty language in a deed was a fixed or a floating royalty.

The distinction has substantial economic consequences. As the Court describes it: “(A royalty) interest may be conveyed or reserved in one of two ways: ‘as a fixed fraction of total production’ (fractional royalty interest) or ‘as a fraction of the total royalty interest’ (fraction of royalty interest) … A fractional royalty interest is referred to as a fixed royalty because it ‘remains constant’ and is untethered to the royalty amount in a particular oil and gas lease. A fraction of royalty interest is referred to as a floating royalty because it varies depending on the royalty in the oil and gas lease in effect at the time, such that it is calculated by multiplying the fraction in the royalty reservation by the royalty in the (current) lease. Based on interpretation principles, the language used in the conveying or reserving instrument determines whether an interest is fixed or floating.”

In this case, the Court was asked to interpret a 1940 royalty deed that reserved a non-participating royalty interest with this language: