Texas Oil and Gas Attorney Blog

The United States Court of Appeals for the Fifth Circuit issued an unpublished opinion last year in Waggoner v. Denbury Onshore, LLC, et al. concerning the application of state antitrust law to  royalty payments. It should be noted that while the opinion is instructive on how the 5th Circuit Court of Appeals views the issues discussed, the opinion is explicitly not intended as precedent, except under the limited circumstances set forth in the Fifth Circuit Rule 47.5.4.

Background of the Case:

In 1984, James Waggoner acquired an oil, gas, and mineral lease for a section of a carbon dioxide (CO2) formation in Rankin County, Mississippi. Subsequently, Shell Western E&P Inc., a subsidiary of Royal Dutch Shell Inc., petitioned the Mississippi State Oil and Gas Board for authority to pool the interests in a large section of land, which included Waggoner’s interest. Waggoner entered an agreement with Shell to place 77 acres of his land into the pooled tract of land in exchange for a 6.25% overriding royalty interest in the well until payout with an option to convert the overriding royalty interest into a 40% working interest at a later date. Waggoner and Shell  also entered into an Operating Agreement that dictated that the price of CO2 (upon which royalties were to be calculated) would be the “volume weighted average price”. After the well paid out, Waggoner converted the overriding royalty interest into a working interest, which allowed Waggoner to take either a proportional share of the CO2, or a proportional share of the volume weighted average price of the CO2 that Shell received.

On May 12, 2016, the United States Environmental Protection Agency (EPA) issued its final Methane Rule,  mandating new limits on methane gas emissions, volatile organic compounds (VOCs) emissions and other by-products such as benzene associated with oil and natural gas production wells and storage tanks. The new EPA rule is meant to apply to new as well as existing, reconstructed and modified oil and gas wells and even those wells producing fewer than 12 b/d of oil. Methane is a major component of natural gas. The stated goal of the new rule is to reduce methane and other toxic gas emissions by 40% to 45% of 2012 levels by the year 2025.

Unfortunately, but not unexpectedly, the EPA’s Methane Rule is a one-size fits all scheme that is meant to be adopted across the board by oil and gas producers in all states. When the EPA announced its final rule on this matter, many groups were openly and adamantly critical of the new rule. Many in the oil and natural gas industry voiced concern about the financial stress that the new rule would put on producers. For instance, the rule is especially burdensome for stripper and marginal well operators, and given the low price of oil and gas these days, there are many more marginal well operators these days.

Fifteen States Object to the EPA’s New Rule And File A Lawsuit

In 1994 Roland Oil Co. acquired the North Charlotte Field Unit Lease in Atascosa County, Texas. The Lease contained 31 wells, with the oldest wells drilled sometime in the 1950s. The Lease contained both active and inactive wells. Rule 14 of the Texas Railroad Commission requires that “dry or inactive wells” be plugged within one year of the termination of drilling operations. Delinquent inactive wells are required to be plugged “immediately unless the well is restored to active operation.” Rule 14 also requires structural testing of inactive wells that are more than twenty five years old prior to plugging and abandonment operations. If an operator fails to meet these requirements, the Railroad Commission can prohibit an operator from producing from any wells under the lease.

In 2005, Roland requested an extension of time to complete the required testing on some of the inactive wells on the Lease. The Railroad Commission determined that Roland had been delinquent on the required testing since 1994, denied the request, and also issued an order barring Roland from producing from any well on the Lease. Roland halted production from May 2005 to August 2006 to conduct repairs and to complete the testing required by the Railroad Commission. The Railroad Commission lifted the order barring production in August 2006.

Meanwhile, in June 2006, a mineral owner under the Lease notified the Railroad Commission that the lease had terminated for lack of production. In response, Roland claimed the Lease had not terminated for two reasons: First, the Lease contained a provision stating that the term of the Lease is “for the time that oil and gas are produced in paying quantities and as long thereafter as Unit Operations are conducted without a cessation of more than ninety consecutive days.” Roland argued that repairs and testing activities during the period of non-production met the definition of Unit Operations under the Lease. Secondly, Roland argued that the Railroad Commission order preventing production constituted “force majeure” which kept the Unit Lease alive despite lack of production.

In an earlier blog post, we discussed the Texas fracing case that was headed to the Texas Supreme Court for further review. On April 24, 2015, the Texas Supreme Court issued its opinion in In Re Steven Lipsky, and determined that the Texas Citizens Participation Act does not require that courts apply a heightened standard of proof to claims requiring clear and specific evidence.

Background

The Lipskys claimed they could set their drinking water on fire due to the nearby fracing activities of Range Resources. The Lipskys filed suit against Range for contamination of their water well and Range filed a counter-suit against the Lipskys and another party, Alisa Rich, alleging defamation, business disparagement, and civil conspiracy. The Lipskys and Rich filed a special motion under the Texas Citizens Participation Act to dismiss Range’s counter-suit.