Articles Posted in Oil and Gas Law

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)

Texas oil and gas lawyers occasionally find themselves representing non-executive mineral owners. A non-executive mineral or royalty owner is someone who owns oil or gas royalty rights to a particular area of land, but who does not have the right to negotiate or sign a lease for the minerals and who usually does not have the right to receive bonus payments. The executive rights owner is the person who is has the exclusive right to execute oil and gas leases on a particular area of land and to receive bonus. Commonly, these relationships are created by a reservation in a deed, such as when someone sells their surface and mineral rights, including the right to negotiate an oil and gas lease, but reserves a non-participating royalty interest.

Recently, the Texas Supreme Court considered what duties are owed by the owner of an executive interest in minerals to the owners of the non-executive interests in the case of KCM Financial LLC v. Bradshaw. In this case, Bradshaw was the non-executive royalty owner and KCM Financial was the executive.

In this case, two deeds were executed in 1960 that reserved a non-participating royalty interest for Bradshaw of an undivided one-half of any future royalty, but not less than one-sixteenth share of gross production. In 2005, the executive KCM bought the land, and in 2006 KCM leased the land to lessee Range Resources for a one-eighth royalty interest and a 13 million dollar bonus. Nice payday for KCM!

Texas oil companies, mineral owners and oil and gas attorneys are all familiar with the Texas Railroad Commission. The Commission regulates oil and gas drilling and production and oil and gas pipelines in Texas. The Commission is pretty diligent in making sure abandoned wells are properly plugged. Unfortunately, on one occasion, they apparently plugged the wrong well!

The well was located on a tract owned and operated by American Coastal Energy. American Coastal Energy filed for bankruptcy. Gulf Energy held a lease on the area containing  the well and reached an agreement with the Commission to take over the well. In exchange, Gulf Energy provided $400,000 to cover the cost of eventually plugging the well if and when Gulf Energy decided to abandon the well. The Commission agreed to postpone plugging the well.

The Commission hired Superior Energy Services, LLC to plug other abandoned wells in the same tract as the Gulf Energy well. While plugging the other wells in the area, Superior Energy also plugged the Gulf Energy well, apparently at the specific instruction of the Commission staff. Due to a clerical error, someone at the Commission transposed the coordinates for the Gulf Energy well with another well.

Texas landowners and oil and gas attorneys have been watching Senate Bill 740 with interest. This bill, introduced by several Texas senators, would have increased landowner protections in the event a pipeline company sought to obtain an easement on their property using eminent domain. You can read the full text of the bill here.

The bill contains amendments to the “Bill of Rights” contained in the Texas Government Code and numerous amendments to the Texas Occupations Code dealing with right-of-way agents, but most importantly, it contains amendments to the Texas Property Code dealing with offers to land owners by pipeline companies seeking pipeline easements. Examples of the new provisions are:

• a requirement pipeline company must provide any new, amended or updated appraisals to the property owner within a specific time

There is a controversy between the Texas Railroad Commission and the US Army Corps of Engineers that is being followed closely by many Texas oil and gas attorneys and mineral owners. The Texas Railroad Commission is the state’s oil and gas regulator, and last year it bumped heads with the U.S. Army Corps of Engineers concerning whether the Corps has the authority to implement rules about where oil wells and injection wells can be drilled.  The dispute surrounds the Joe Pool Lake, located in Tarrant County, Dallas County and Ellis County, and specifically whether drilling and injecting should be permitted within a certain distance of the dam.

Injection Wells Linked to Increases in Seismic Activity

There have been claims asserted in some circles that fracing or the use of injection wells to dispose of waste water has been linked to an increase in seismic activity near drill sites. The Corp recently obtained a study concerning the impact induced seismic activity could have on the structural integrity of the Joe Pool Lake dam. The study concluded that with respect to production, a 5,000-foot standoff distance — which is slightly larger than the one set by the Army Corps — had little effect on subsidence, or caving and settling, at the dam. In fact, the study did not recommend any change in the current ban area. Somehow, despite the study’s conclusions, the Army Corps is concerned that drilling within four thousand feet of the Joe Pool Lake dam or hydraulic fracturing within five miles of the dam could increase the risk of man-made earthquakes in the area, which could in turn structurally damage the dam. (There is already a drilling ban in effect within three thousand feet of the dam). The expansion of the ban area would encompass land from the cities of Grand Prairie, Arlington and Dallas.

The Texas Supreme Court recently delivered an opinion that was not surprising to Texas oil and gas attorneys in the case of Forest Oil Corporation v. El Rucio Land and Cattle Co. The Court originally denied the review of the Corpus Christi Appeals Court decision affirming a $15 million dollar arbitration award against Forest Oil Corporation (now Sabine Oil & Gas), however, after a motion for rehearing the Court granted the petition for review. The primary issue is who has jurisdiction of a landowner’s claim against an oil and gas company for the contamination of a landowner’s property.

Background

Forest Oil leased roughly 1500 acres from McAllen Ranch (owned by James McAllen) in the mid-1980’s, where it has been producing and processing natural gas. About a decade after the lease was signed, McAllen Ranch and Forest Oil entered into another agreement in which Forest agreed to remove and clean up any hazardous materials from the lease site. The parties agreed that any disputes would be resolved by arbitration rather than by going to court.

A case that has gained attention in the Texas oil and gas industry is the case of Samson Exploration v. T.S. Reed Properties which is currently awaiting a decision by the Texas Supreme Court. The case involves three gas wells and two mistakenly overlapping pooling units in Hardin County, Texas.  The boundaries of the first unit were amended by the well operator, but the boundaries of the second unit were not. The two main issues, as stated by the Texas Ninth Court of Appeals, are : “First, whether the stakeholders participating in (the first unit) can recover damages from the operator of the unit when the operator amended the boundaries of the unit to exclude a well that was within the boundaries of the original unit, and where the stakeholders accepted royalties attributable to the amended unit without challenging the operator’s authority to amend the original unit’s boundaries. Second, whether the stakeholders in (the second unit), based on their claims for breach of contract, can recover damages from the operator due to the operator’s failure to pay royalties on oil and gas produced from a well that the operator contends was (originally)  included in that unit by mistake”.

In October 2015, the Texas Ninth Court of Appeals opinion ruled that the stakeholders in the first unit had ratified the amendment to the unit by accepting royalties attributable to the amended first unit. Therefore, those stakeholders should recover nothing. The Ninth Circuit further determined that the stakeholders in the second unit could recover damages from the well operator for the operator’s failure to file an amendment to the description defining the pooling unit’s boundaries, but that the award of damages in the trial court was excessive because it awarded royalties for prior to the time the unit existed.

Many in the Texas oil and gas industry, like Texas Alliance of Energy Producers, support Samson’s claim that the royalty owners in the first gas unit ratified the unit amendment by accepting royalties after the unit was amended, and that they should not be required to pay royalties from one well to lessors in both gas units.