Articles Posted in Oil and Gas Law

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I recently had occasion to review the Texas Supreme Court’s decision on a long-running dispute between BP America and Laddex, Ltd. The case is centered around a disagreement of the terms in a decades old lease and its result has been significant for the energy industry. The case, known as  BP America Production Co. v. Laddex, Ltd., began in 2007. British Petroleum America (BP) had been producing out of a single well on property in Roberts County, Texas since 1971, however Laddex believed BP’s lease expired and signed a top lease with the mineral owners.  BP believed they still had rights to the land and so Laddex filed suit.

Arguments

This case reached the Texas Supreme Court after both the initial jury and the Court of Appeals in Amarillo, Texas ruled in favor of Laddex. However, BP argued that the jury’s findings were incorrect as there was not sufficient evidence to support the jury’s verdict. BP also contended that Laddex’s lease is void under the Texas rule against perpetuities. Laddex argued that BP’s well had not been producing “payable quantities of oil” for 15 months and therefore any “prudent operator” would have halted all operations. Thus, according to Laddex, the terms of the BP lease stated that should BP’s production stop, the lease would be terminated and the rights given back to the lessor, allowing Laddex the right to sign a new lease and assume operations on the property.

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Recently the Texas Supreme Court decided an interesting case in which it examined whether a will had given a surface estate or a mineral estate to the beneficiaries of the will. In ConocoPhillips et al v. Leon Oscar Ramirez Jr. et al,  the testatrix, Leonor Juan, executed a will in 1987 and died the next year. The will devised a life estate in “all of [her] right, title and interest in and to

Ranch ‘Las Piedras’”to her son Leon Oscar Sr. with the remainder to his living children in equal shares and devised the residual of her estate equally to her three children, Leon Oscar Sr.,

Ileana, and Rodolfo. In this case, Leon Oscar Sr.’s children claim that Leonor’s residual estate did not include the mineral interest in Las Piedras Ranch but that it passed to Leon Oscar Sr. as part of his life estate.

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picspree-1121808-300x202Texas has been, unfortunately, home to a number of oil and gas scams over the years. One of the most common is the company who wants to buy your mineral interests and who has you sign a deed before they pay you. Once they have a signed deed in hand, they then decide that your minerals are worth much less than what they originally offered, and they send you a check for a fraction of the purchase price they originally offered.

A more recent scam is the use of “oil and gas royalty leases”. The document the scammers ask you to sign is designed to look like an oil and gas lease and it is actually worded as if it were an oil and gas lease. For example, they often call the purchase price a “bonus”. In fact, the document is a deed for your nonparticipating royalties. Of course, nonparticipating royalty owners cannot sign leases, as a matter of law, but many people do not know this.

I have heard that the scammers in one case admitted that their so-called royalty lease was purposely designed as a lease instead of as a deed because people were afraid to sign deeds but would more readily sign leases.

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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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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