Articles Posted in Oil and Gas Law

The Texas Supreme Court decided a case recently involving an assignment of an overriding royalty interest (ORRI) in minerals located in Wheeler County, Texas. That case is Piranha Partners et al v. Joe Neuhoff et al.

In 1975, Neuhoff Oil & Gas purchased an undivided two-thirds interest in a mineral lease known as the Puryear Lease. The lease was between the Puryears (and others) as lessors and Marie Lister as the lessee. The lease covered all of the minerals under a tract of land referred to as Section 28. A few years later, Neuhoff Oil sold and assigned its two-thirds interest, but reserved for itself a 3.75% ORRI on all production under the Puryear Lease. An ORRI is an interest that is created out of the working interest (the oil company’s or operator’s interest) in the lease. It is a fractional, undivided interest with the right to participate or receive proceeds from the sale of oil and/or gas. It is not an interest in the minerals, but an interest in the proceeds or revenue from the oil & gas minerals sold. The interest is limited to a specific tract of land and is bound by the term of the existing lease. If the underlying lease expires, the ORRI expires.

Only one well was completed on the property, the Puryear B #1-28. At some point, Neuhoff Oil & Gas sold its ORRI to Piranha Partners. A bit later, Neuhoff Oil & Gas went out of business and assigned its assets to individual members of the Neuhoff family.

The Commissioners of the Texas Railroad Commission recently voted unanimously to amend Rule 3.40, which has to do with the assignment of acreage to pooling and proration units. The current rule provides that “… acreage assigned to a well for drilling and development, or for allocation of allowable, shall not be assigned to any other well or wells completed or projected to be completed in the same field; such duplicate assignment of acreage is not acceptable”.  According to the Commission’s press release:

The rule restricted exploration in unconventional fracture treated (UFT) fields when oil and gas mineral ownership is divided at different depths below the surface. A UFT field is a field in which horizontal drilling and hydraulic fracturing must be used to recover oil and gas. To take advantage of technological advances that can tap into once inaccessible hydrocarbon resources in UFT fields, Commissioners voted to allow assignment of acreage to multiple wells in these fields. This rule revision will further protect mineral owner interest and allow access to additional resources.

The amendment to Rule 3.40 will probably result in increased drilling and production in fields where there is multiple ownership at different depths below the surface of the property. That means there will be increased royalties for mineral interest owners.The amended rule goes into effect on March 3, 2020

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.

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.

Texas 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.

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:

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.