Articles Posted in Oil and Gas Law

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.

Mineral owners in Texas often sign oil and gas leases that include language that requires that oil or gas be produced in commercially paying quantities in order to keep the lease alive. When production falls below that level, the lease may terminate or lapse, and the mineral interest reverts to the landowner, or to other leases with subsequent rights to the property (i.e., top lease holders). In addition, many leases contain what is called a “shut in royalty” clause, which often goes something like this: “where gas from any well or wells capable of producing gas . . . is not sold or used during or after the primary term and this lease is not otherwise maintained in effect, the lessee may pay or tender … shut-in royalty . . . , and if such shut-in royalty is so paid or tendered

and while lessee’s right to pay or tender same is accruing, it shall be considered that gas is being produced in paying quantities, and this lease shall remain in force during each twelve-month period for which shut-in royalty is so paid or tendered . . .” . It is important to notice that the shut in royalty clause can only be invoked if the well in question is capable of producing in paying quantities.

BP America Production Co. v. Red Deer Resources LLC is a case involving a marginal well operated by BP that was producing at very low levels. BP invoked the shut-in royalty clause of their lease  with the mineral owners. However, questions arose as to whether BP’s use of the shut in royalty clause was valid and whether the lease had actually terminated.

When an oil and gas well is no longer producing (or if it needs major repairs but the production is not sufficient to justify the cost of repairs), Texas Railroad Commission rules require that the well must be plugged. The plugging procedure (which you can read about here) involves cementing the wellbore and is designed to be permanent. The plugging is designed specifically to protect against leaks into aquifers. Unfortunately, occasionally a production or waste water well gets plugged improperly or negligently, and salt water from these wells leaks out over time and on to the adjacent property, resulting in very unhappy property owners. Salt water leakage can cause damage to the surface of the property, such as contaminating the land so that crops can no longer be grown, or can seep through the ground to contaminate aquifers beneath the surface. Of course, plugged wells should not leak, and if they do, the property owner may have an actionable claim against the company that plugged the well.

The case of Ranchero Esperanza, Ltd. v. Marathon Oil Co. addressed a number of issues that arise in this kind of case. Some of these issues, such as standing (i.e., the right to sue), the statute of limitations, the applicability of the discovery rule and when a cause of action accrues, were addressed by the Texas Eighth Court of Appeals in El Paso in the Ranchero Esperanza case.

In connection with standing, the Court repeated the well-known legal precept that a cause of action for injury to land is a personal right belonging to the person owning the property at the time of the injury. A subsequent owner can’t recover for an injury committed before their ownership unless they received an express assignment of the cause of action from the former owner. In this case, the injury did not occur until saltwater was released from the plugged well onto the surface of the property in July 2008. Since Ranchero Esperanza was the owner of the property at that time, it had standing.

When parties enter into agreements concerning the conveyance of mineral royalty interests in Texas, it is extremely important that the language of the conveyance is clear and that the parties know exactly what they are agreeing to in terms of how the royalty interest is structured. The San Antonio Court of Appeals addressed the issue of fixed versus floating royalties in the case of Leal v. Cuanto Antes Mejor LLC.

The case involved forty acres of land in Karnes County, Texas. Phillips sold the land to the Leals, but reserved for himself all minerals and royalties, except for conveying a one fourth “non-participating royalty interest in and to all of the royalty paid on production,” which was conveyed to the Leals. Later, Phillips signed an oil and gas lease with Cuanto Antes Mejor LLC. The Leals and Cuanto Antes Mejor LLC got into a dispute over how the Leals’ royalties should be calculated. The Leals claimed that their royalty interest was a fixed royalty entitling them to royalties for one fourth of production. Cuanto Antes Mejor LLC contended that the Leals were only entitled to a floating royalty.

A Royalty Interest Can Be Conveyed in Two Ways

When a mineral estate and a surface estate co-exist, there is sometimes conflict. Under Texas law, the owner of the mineral estate is considered to be the “dominant” estate over the surface estate because the mineral owner has the right to use as much of the surface “as is reasonably necessary to produce and remove the minerals” whether the surface owner consents or not. What is “reasonably necessary” has led the Texas courts to develop what is known as the “Accommodation Doctrine.” Often, the mineral estate wins when the rights are weighed under the Accommodation Doctrine, but not always. In the recent case of Virtex Operating Co. v. Bauerle in the San Antonio Court of Appeals, the owner of the surface estate prevailed.

Facts of the Case:

The case involved application of the accommodation doctrine to the Todos Santos Ranch in Dilley, Texas. The Todos Santos Ranch covers approximately 8,500 acres in Frio and Zavala Counties. The surface estate is owned by Robert and Cynthia Bauerle. The mineral estate is owned by ExxonMobil which executed an oil and gas lease with VirTex. Pursuant to the lease, VirTex drilled various wells and now has nine oil-producing wells on the Ranch. There are plans to expand the drilling to 45 wells.

I get calls every week from folks who have received a letter in the mail offering to purchase their Texas mineral interests. I tell all my clients (and anyone else who will listen) never to sell their mineral interests. There are a number of reasons why:

1. About 99.9% of the companies who claim to buy mineral interests are scams. What often happens is that they send you a solicitation letter which makes an incredibly high monetary offer for your mineral interests. They ask you to sign a deed, which is either enclosed with the letter or that they send you if you contact them, and request that you send the signed and notarized deed back to them. They then file the deed in the deed records. Then, they contact you and say there were certain ambiguous “problems” with your title to your minerals, or the market for mineral interests has changed, or some other nonsense. They then tell you they will pay you, not what they offered in the letter, but a tiny fraction of what they offered. If you don’t take it, you are stuck with the deed filed in the deed records that shows you sold your mineral interest to them. In many cases, I’ve had clients have to sue the company to force them to cancel the deed. Even if the company cannot be found or has gone out of business, you will still probably have to file a lawsuit to get a court order cancelling the filed deed. Given the expense of litigation, this can be a huge burden.
2. One way to tell if a company is a legitimate concern or not is to tell them that you might be interested in selling your minerals but your requirements are: 1) they need to send you a written      contract of sale with a specific price and an earnest money deposit; 2) the deed will be prepared by your attorney; 3) the transaction will be closed in a title company or through your attorney; and 4) they will be required to deposit the balance of the purchase price in good funds with the title company before they receive the deed. Most of these companies will tell you that is an unnecessary expense, or “they don’t do it that way”. This is a huge red flag. However, in my experience, even some of the scam artists will agree to this, but once you have paid your attorney to draft the deed and it’s time for them to put the purchase price in escrow, they will disappear or pull out.

When it comes to U.S. energy policy, federal government regulations unquestionably limit competition and innovation, and the people who suffer for it are the consumers and taxpayers. While the availability of new and abundant energy sources, such as natural gas, has caused a shift in the energy industry from coal to more economical fuel sources, federal regulations have also helped cause the cutbacks in the coal industry.

Federal regulations place a serious burden on the coal industry. For instance, the Mercury Air & Toxics Standards regulation caused some thirty percent of the U.S. coal production retirement in 2015 according to The Heritage Foundation. Compliance with the regulations would have cost approximately ten billion dollars a year, so the most economical alternative was to simply retire coal production rather than to comply with the federal regulations. Other federal regulations are aimed at the oil and gas industry.

So, it is important to ask: are the federal regulations really doing anything to help the environment? Some would say no. Other regulations exist that would achieve the same amount of environmental value, so what is the point of adding more regulation if it is only going to stamp out players in the energy sector and generates only a negligible environmental effect? Perhaps it’s just politics – and that might just be bad for average Americans.

Texas mineral owners contact me from time to time and ask why an oil company is drilling on their land when they haven’t signed an oil and gas lease. The answer to these questions lies in the Texas law regarding co-tenants. An interesting opinion was recently issued in the case of Radcliffe v. Tidal Petroleum, Inc. that addresses Texas co-tenancy law and how it relates to oil and gas leases.

Law of Co-Tenants

With respect to oil, gas, and minerals, the law of co-tenancy in Texas strongly favors exploitation and extraction of the natural resources. As a result, it has long been the law that a co-tenant has the right to extract minerals from property owned jointly by one or more co-tenants without first obtaining the consent of all co-tenants. The rule goes back to a case decided in 1912 and affirmed by the Texas Supreme Court in 1917.  The oft-quoted rationale is this:

The staff of the Texas Railroad Commission is proposing amendments to the pipeline safety rules for oil and gas and other pipelines in Texas. These amendments will affect rules 18.1, 18.4 and 18.11. The amendments remove a reference to “intrastate” pipelines to make clear that the Commission now has safety jurisdiction over interstate (between states) as well as intrastate (within the state of Texas) pipelines. Additional amendments to bring the rules into compliance with federal law are new requirements that required excavator who damages a pipeline to notify the pipeline operator at the “earliest practical moment” but not later than one hour after the damage, and a requirement that the excavator must report any release of product from a damage pipeline by calling 911. The full text of the amendments can be viewed here.

The amendments are expected to appear in the Texas Register on November 24, 2017 and there will be a two week public comment period.

The Commission has been especially attentive to pipeline safety in Texas, given the highly publicized pipeline breaks in Texas and other states over the past few years.