Articles Posted in Oil and Gas Law

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.

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 

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.

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.

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

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.”

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.

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 …”