Articles Posted in Oil and Gas Law

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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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Normally, this blog discusses Texas court cases and decisions. However, occasionally, a court decision from one of our sister states is of interest. Such is the case with Briggs v. Southwestern Energy Production Co., 184 A.3d 153 (2018). In Briggs, the Pennsylvania Superior Court — equivalent to our Texas Courts of Appeal — held that a claim for subsurface trespass may be maintained as a result of hydraulic fracturing and that the “rule of capture” does not preclude the cause of action. This is, of course, directly at odds with the rule here in Texas established by Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex.2008). As a reminder, the Coastal Oil decision was a 6-3 split decision by the Texas Supreme Court. As one might expect, the Briggs opinion discussed Coastal Oil at length but concluded that the dissenters in Coastal Oil had the better arguments.

Briggs is another example that oil and gas law is changing — slowly — to reflect the fact that extracting petrochemicals from shale formations is different from extracting petrochemicals from older, more traditional oil fields. In this respect, Texas law is changing, too, as is evidenced by the recent Supreme Court case in Adams v. Murphy Exploration & Production Co.- USA, Case No. 16-0505 (Tex. 2018). In Adams/Murphy Exploration — involving offset wells — the Court highlighted the differences between vertical drilling into an underground reservoir and horizontal drilling into and using hydraulic pressure to extract oil/gas from a shale formation. With a reservoir, oil and gas will migrate across property lines towards any low pressure area created by a production well. However, there is no such migration in shale formations. Partly because of this difference, the Adams/Murphy Exploration court ruled that an offset well satisfied the requirements of the pertinent lease.

Briggs: Facts of Case and Court’s Reasoning

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Last summer, we wrote about an interesting case involving offset wells and covenants (both implied and express) to prevent drainage in shale formations. As discussed in our earlier article, the San Antonio Court of Appeals reversed summary judgment for Murphy Exploration and remanded the case back to the trial court. However, the Texas Supreme Court recently reversed that decision on a close 5-4 decision. See Adams v. Murphy Exploration & Production Co.- USA, Case No. 16-0505 (Tex. 2018). You can read the dissenting opinion here.

At issue was whether Murphy Exploration violated its lease with the plaintiff landowners by drilling an offset will that was drilled 1,800 feet away from the pertinent lease line and 2,100 feet from the triggering well on the neighboring property.

The oil & gas lease between the parties required the drilling of an offset well if a producing well was drilled on a neighboring tract. A well was drilled on a neighboring tract and Murphy Exploration then drilled a new well on the leased tract, which it claimed was the required offset well. As noted, the new well was 2,100 feet from the neighbor’s wellhead and 1,800 feet from the property line. In many cases, a well so far from the neighboring well would not have prevented drainage to the neighboring well. The plaintiff did not believe it did, and brought suit claiming that the well drilled by Murphy Exploration did not constitute an “offset well” as that term is defined and understood in the gas and oil industry. The lease between the parties did not define the term “offset well.”

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The recent Court of Appeals case of Lackey v. Templeton, 2018 WL 3384570 (Tex. Civ.App. — Beaumont, no pet.), provides another illustration of the legal principle that, in Texas, if you are challenging who owns certain real property, you MUST bring a trespass-to-try-title claim. No other cause of action — such as a declaratory judgment action — will suffice. This is in contrast to a recent Texas Supreme Court case — Lance v. Robinson, 543 S.W.3d 723 (Tex. 2018) — in which the Supreme Court held that a declaratory judgment action WAS allowable because the dispute in that case concerned easement rights — not ownership rights.

Texas Property Law: Challenging Ownership

In Texas, causes of action for challenging or asserting ownership of real property — including ownership of mineral estates — are governed by statute. In this regard, Section 22.001(a) of the Texas Property Code states that a “trespass to try title action is the method of determining title to lands, tenements, and other real property.” See Tex. Prop. Code § 22.001(a). Texas courts have interpreted this provision to mean that a trespass-to-try-title cause action is the exclusive remedy for resolving competing claims to ownership of real property.

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A recent decision handed down by the U.S. Fifth Circuit of Appeals makes it clear that great care should be taken with how the consideration clause of Texas oil and gas leases are drafted. The case of In the Matter of: Goodrich Petroleum Corporation, 894 F3d 192 (5th Cir.) illustrates that you should NOT use the standard verbiage with respect to consideration paid if additional consideration for the lease is due. The additional consideration should be fully described, thereby providing notice of record to third parties of the additional consideration due.

Often, almost as a matter of rote, Texas oil and gas leases use language similar to this:

“NOW, THEREFORE, for the promises and covenants exchanged below, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree …”

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A Texarkana Court of Appeals case, Petrohawk Properties, L.P. v. Jones offers some insight into how changes to an oil and gas agreement are analyzed in terms of the statute of frauds. Material changes to the agreement require documentation in writing, but what constitutes a material change to the initial agreement will depend on the circumstances and the specific language used in the agreement. Contracting parties who are concerned about the impact that a modification to a contract can have should take precautions to ensure that the modification of the contract is well documented.

In this case, the Jones family owned some land in Harrison County in East Texas and the family was approached in 2008 by Petrohawk Properties about leasing the oil and gas mineral interests for their property. The parties entered into an agreement that if the Jones could deliver their interests to Petrohawk Properties free and clear of title defects by a closing date of August 15, 2008, the Jones family would be entitled to a leasing bonus of $23,500 per acre. The agreement also provided that Petrohawk would be released from the Agreement if the Jones’s were unable to provide free and clear title to enough acreage to warrant payment of ten million dollars worth of leasing bonuses, which Petrohawk was holding in escrow.

Due to unforeseen delays in preparing the title work, the parties agreed to delay the closing date of the Agreement to August 27, 2008, then to September 17, 2008, then to October 9, 2008, and then to November 6, 2008. Coincidentally, the fall of 2008 was also the time of the United States financial crisis, which prompted Petrohawk to refuse to pay bonus on any acreage supported by title work that was produced by the Jones family more than thirty days after an August 29th closing date on some of the Jones family properties, and terminated the contract. The Jones sued for breach of contract.

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When preparing and executing any type of contract, it is important to be clear on all important terms in the contract. Ambiguities lead to uncertainty, and uncertainty can turn into disputes down the road. Even so, there are times when an oil company has been known to claim an ambiguity, and create a dispute, where none exists. Recently the Texas Supreme Court  considered such a case and had occasion to emphasize that interpretation of contract language should always be reasonable. When the plain language of the contract expressly excludes a portion of land, then that portion of land is not subject to the contract.

In North Shore Energy v. John James Harkins, et al., the Court applied this principle to a gas option contract. In North Shore, the Harkins family signed an option contract with North Shore Energy.   A lease was attached to the contract. North Shore got to choose from among several tracts within a designated tract of land in Goliad County, Texas. The contract had an exhibit that described the land subject to the option as being the land identified in an earlier lease. The land in the earlier lease did not exclude what the parties called the 400.15 acre Hamman lease land. However, the option itself specifically excluded the Hamman lease land.

When North Shore Energy sought to exercise its option contract, it chose a 169.9 acre tract on which to drill. The tract selected by North Shore Energy contained a large portion of the Hamman lease land. A third party, Dynamic Productions Inc., approached the Harkins and requested to lease the Hamman lease land, which included a North Shore Energy well that had been drilled into that Hamman lease land, and the Harkins family obliged and executed a lease for the 400 acre Hamman lease land to Dynamic.

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The oil and gas production industry operates in a tough position. On the one hand, oil and gas production are critical economic drivers in the United States. Oil and gas generates hundreds of thousands of jobs and contributes 8% of the U.S. Gross Domestic Product, according to the American Petroleum Institute.

On the other hand, the Texas oil and gas  industry is constantly grappling with environmental concerns and the threat of even more regulation of their activities by the Texas Railroad Commission and the federal Environmental Protection Agency. The oil and gas industry is already highly regulated, and yet state and federal government agencies consistently add more regulations on top of those that already exist. One of the recent set of regulations that the industry is facing are rules issued by the EPA concerning reducing methane emissions.

The reasons behind state and federal regulations are often good ones, for instance, concerns about air quality. On the other hand, some regulations are too far-reaching and overly aggressive. For example, where regulations require the adaptation of new technology designed to be cleaner and more environmentally conscious, the high cost of implementing those regulations can force smaller oil and gas producers out of business. That means fewer jobs and a decrease in taxes on oil and gas production that are paid to local governments. Another problem, with federal regulations in particular, is that they are often based on faulty (and sometimes nonexistent) science and take a one-size fits all approach that does not take into account local conditions, technologies and regulations. We end up with a mess!

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In 1924, Cora McCrabb (along with two co-owners) owned 1,448.50 acres of farm and pasture land. In that same year, Cora executed her Last Will and Testament, bequeathing all of her “farm lands and pasture lands” equally to her three grandchildren, Jessie, J.F., and Mary Lee McCrabb. Cora gave the residue of her estate to only one of the grandchildren, Jessie.

In 1927, Cora and her co-owners sold the 1,448.50 acres of “farm lands and pasture lands” in fee simple to J. L. Dubose. Dubose simultaneously conveyed to Cora and her co-owners an undivided one-half interest in the oil, gas, and minerals in and under the 1,448.50 acres of farm lands and pasture lands. Cora did not change her Last Will and Testament. Cora died in 1929.

Many years later, in 2013, the heirs of J.F. and Mary McCrabb filed a petition for a declaration that Cora’s share of the undivided mineral interest under the “farm lands and pasture lands” passed equally to all three grandchildren. The heirs of Jessie McCrabb filed a counterclaim asking for a declaration that Cora’s entire mineral interest passed to Jessie McCrabb alone pursuant to the residuary clause in the 1924 Last Will and Testament. The trial court sided with the heirs of Jesse McCrabb.

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A recent Texas case decided by the San Antonio Court of Appeals, Texas Outfitters Limited, LLC v. Nicholson, offers some lessons on an executive rights owner’s fiduciary duties to the non-executive mineral owner in the context of oil and gas leases. At trial, the executive interest owner, Texas Outfitters, was found to have breached its fiduciary duty and a judgment of $867,654.32 was awarded to the non-executive.

What is “The Executive Right”?

Under Texas law and under the laws of most states, real property can have two co-existing estates – the surface estate and the mineral estate (covering minerals, oil, and gas below the surface). As the Texas Supreme Court has held, the property rights granted by the mineral estate are a “bundle” of rights and one of the “sticks” in the bundle is called the “executive right.” In general, the executive right is the right to make decisions affecting the exploration and development of the mineral estate and, more specifically, is the right to decide whether to execute a mineral lease and to determine the terms of the lease. These concepts were discussed by the Texas Supreme Court in Lesley v. Veterans Land Board of Texas, 352 S.W.3d 479 (Tex. 2011). As discussed in this article, holders of the executive rights sometimes owe fiduciary duties to any non-executive co-tenants.