Articles Posted in Oil and Gas Law

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 …”

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.

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.