Articles Posted in Oil and Gas Law

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.

Given the increase in production of natural gas in Texas, some residents end up living close to a gas compressor stations. These stations are necessary to pump natural gas under pressure over long distances, but they can be large, noisy and produce offensive odors. Some Texans who live close to these stations have sued the oil and gas producers claiming nuisance or trespass.

In Texas, the elements of a trespass cause of action are: (1) the claimant has a lawful right to possess the property, (2) the defendant physically enters the property, (3) the entry was intentional and voluntary, and (4) the defendant‟s trespass causes an injury to the claimant‟s right of possession.  The Texas Supreme Court has noted a trespass of aerial space above the complainant‟s property may be committed by causing something to physically enter or crossover the land, such as the discharge of pollutants, soot, or carbon.

A cause of action for nuisance requires evidence of  a regularly recurring condition that “substantially interferes with the use and enjoyment of land by causing unreasonable discomfort or annoyance to a person of ordinary sensibilities.”

Collecting royalties from oil and gas production is one of the ways that a Texas landowner can generate revenue from their real estate.  Texas property owners who own their minerals can sign an oil and gas lease so that oil and gas can be produced from the land, in exchange for regular monetary payments, or royalties. However, oil and gas reservoirs are not often confined to just a single individual’s property, but instead  often stretch across multiple surface boundaries. When disputes arise over royalty payments, there is a sometimes an issue as to whether a lawsuit can be brought by just one individual landowner, or if neighboring owners who are also collecting royalties from the same oil and gas producer must necessarily be a part of the lawsuit as well. The Texas Supreme Court considered this very issue in the case of Crawford v. XTO Energy which was been appealed from the Amarillo Court of Appeals.

Why Must All Necessary Parties Be Joined in a Lawsuit?

The problem with not joining all necessary parties to a lawsuit is that a defendant could be exposed to conflicting judgements. For instance, if landowner A sues oil and gas producer X, and there is a specific outcome, and later adjacent landowner B sues oil and gas producer X, but there is a different second outcome, and the two outcomes may be inconsistent. Failure to join all necessary parties in a lawsuit can also be judicially wasteful since the court has to revisit the same issues in more than one case.

As we discussed recently regarding the Texas Supreme Court case of Hysaw v. Dawkins, 483 SW 3d 1 (2016), old deeds, oil and gas leases, and other documents containing “1/8th royalty” clauses continue to be the source of confusion among the public, lawyers, and sometimes courts.

For decades, the standard oil royalty in Texas was one-eighth of the total royalty. The standard was so prevalent that the words “one-eighth” or “one-eighth royalty” came to be synonymous with — and a proxy for — “the total royalty interest.” In the Hysaw case, decided in 2016, the Texas Supreme Court held that the words “1/8 royalty” was used in this historical manner to mean the “total of the royalty.”

The San Antonio Court of Appeals reached a similar result in the case of Kardell v. Acker, 492 S.W.3d 837 (Tex. App.-San Antonio 2016).

The question of “fractional royalty” vs “fraction of royalties” has historically been the source of enormous confusion for Texas mineral owners and oil and gas attorneys. The Texas Supreme Court recently provided more guidance on the question in the case of Hysaw v. Dawkins, 483 SW 3d 1 (2016). This case involved a will written in 1947, but the lessons of the case apply equally to deeds, oil and gas leases and other forms of conveyance.

The teaching provided by Hysaw concerning these “1/8th royalty” clauses is that courts and lawyers must use a case-by-case and fact specific approach to resolving questions of fractional vs. fraction of royalty questions. The courts are to effectuate the intent of the drafters; not apply a mechanistic “multiplication of double fractions” formula.

Why is This an Issue?

When you ask a Texas oil and gas or real estate attorney to draft a deed for you, one of the first things they will ask you is just what do you want to convey: the surface, the water rights, the mineral interest, only royalties from the mineral interest or some combination of these? The reason is that a properly prepared deed must be specific about what is conveyed, and must use the correct language to do so. Otherwise, you or your heirs could end up in court over the deed’s meaning. Recently, the Texas Court of Appeals decided a case that demonstrates the confusion that occurs when the language in the deed is not clear.

In Reed v. Maltsberger/Storey Ranch, LLC, the court examined a 1942 deed in order to determine whether it meant to convey a mineral interest or simply a royalty interest.The deed said it conveyed “an undivided one-fourth (1/4) interest in and to all of the oil, gas and other minerals in and under and that may be produced from” certain lands in LaSalle County, Texas. The 1942 deed acknowledged that, at the time the deed was signed, the described lands were subject to an existing oil and gas lease:

And said above described lands being now under an oil and gas lease originally executed in favor of L.V. Chenoweth, Trustee and now held by said L.V. Chenoweth, Trustee, it is understood and agreed that this sale is made subject to said lease, but covers and includes one-fourth (1/4) of all the oil royalty and gas rental or royalty due and to be paid under the terms of said lease, insofar as it covers the above described property. (Emphasis added)