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The Fifth Circuit recently denied a landowner damages in their suit against a pipeline company. In Mary v. QEP Energy Co., No. 21-30195 (5th Cir. 2022) the Louisiana landowner had given the pipeline company an easement on their property. The easement had a right angle turn in it. Hard to imagine why the pipeline company agreed to this since pipelines really can’t be installed at right angles. At any rate, when the pipeline was laid, it “cut the corner” at the right angle and was laid partially outside the easement. 31 feet of one pipeline and 15 feet of the other were outside the easement.

The landowner sued for removal of the encroaching pipelines and disgorgement of all profits the pipeline company made from the gas that flowed through the pipeline. The Fifth Circuit held that the landowner could request removal of the pipelines or claim ownership of the portion of the pipelines outside the easement, subject to the pipeline company’s right to receive reimbursement for the current value of the materials and labor or the enhanced value of the land. However, regarding disgorgement of profits, the Court held that “Disgorgement in this circumstance is limited to the additional profits QEP earned, if any, as a direct result of installing the … (p)ipelines partly outside the servitude boundary, as compared to the profits QEP would have earned if it had installed the pipelines entirely within the servitude. ” The Court refused to hold that the landowner was entitled to all profits from gas flowing through the pipelines. Since the landowner did not offer any evidence of additional, incremental, profit due to the misplaced pipelines, the landowner’s claim for disgorgement was denied.

 

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The Texas Supreme Court has recently agreed to hear an appeal in a case involving the Texas Central Railroad. Oral argument is scheduled for January 11, 2022.

The case is Miles v. Tex. Central R.R. & Infrastructure, Inc., 2020 WL 2213962 (Tex. App.—Corpus Christi–Edinburg 2020), pet. granted, (Oct. 15, 2021) [20-0393]. As you may recall, Texas Central wants to build high speed passenger rail service between Dallas and Houston. To do that, while some land may be purchased voluntarily, it will probably need to use eminent domain to obtain most of the land needed for the railroad.

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The Plaintiff, Miles, claims that Texas Central has not shown a reasonable probability of project completion, as required by Texas Rice Land Partners, LTD. v. Denbury Green Pipeline-Texas, LLC, 363 S.W.3d 192, 198, 202 (Tex. 2012). Miles asserts that the Denbury decision requires entities show a reasonable probability that a project will be completed before obtaining eminent domain power.Miles contends that Texas Central has not met this standard, and so it does not have eminent domain authority. For example, Miles points out that Texas Central has not yet laid any track or done anything else that could be called operating a railroad. In fact, the Texas Central website admits they have not even bought any land yet, but instead “have control over” about 600 acres of land” (probably through options to purchase).

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The National Agricultural Statistics Service of the United States Department of Agriculture has recently published its Cash Rents survey. According to USDA, “NASS conducts the county-level Cash Rents survey every year in all states except Alaska. U.S. and state estimates are released in August every year. All qualifying counties in these states are represented in the sample. The target population is all farms and ranches that have historically rented land on a cash basis for any of the three land use categories. Land rented for a share of the crop, on a fee per head, per pound of gain, by animal unit month (AUM), rented free of charge, or land that includes buildings such as barns are excluded from the survey”.

You can access the survey for reported Texas counties here. The average asset value in Texas for an acre of pasture is $1800.00 according to NASS. The value of pasture and cropland as well as current rents can be important information in the event you are negotiating a surface use agreement with an oil company or negotiating a pipeline or utility easement.

 

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The U.S. District Court for the Southern District of Texas recently approved a settlement in the case of Regmund v. Talisman Energy U.S., Inc. You can review pleadings in the case here. Three royalty owners filed the class action lawsuit in 2016 alleging that Talisman Energy was under-reporting royalties and was improperly calculating royalties from 2013 to 2016. Talisman was acquired by Repsol S.A. in 2015. The suit claimed that the oil company paid royalties based on estimated sales of oil and gas rather than the actual volume of oil and gas produced and sold.

Talisman and later Repsol had become active in the last few years in the Eagle Ford Shale play area.

In the settlement documents, Repsol denies any wrongdoing. However, it certainly says a lot that they have agreed to repay all $24 million in royalties that the Plaintiffs claim are due.in addition, if Talisman or Repsol were under-reporting royalties to the Texas Railroad Commission, they certainly are going to be in hot water with that agency.

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In the recent case of Rodney Draughon v. Joycie Johnson, the Texas Supreme Court determined who would bear the burden of proof to negate the “unsound mind” tolling of the statute of limitations for a quiet title lawsuit. A “quiet title” suit is a lawsuit to establish legal title to real property.

The Court summarized the case as this: “In this quiet title action, a person who alleges a mental incapacity seeks to prevent his aunt from evicting him from property he inherited, contending that a deed to the aunt he had signed years earlier is void due to his lack of capacity. The aunt moved for traditional summary judgment based on the statute of limitations, and the nephew invoked the unsound-mind tolling statute. The question before us is whether the aunt had the burden to negate unsound-mind tolling in order to conclusively establish her affirmative defense and obtain summary judgment.”

In 2018, Ms. Johnson filed an eviction petition against Mr. Draughon to evict him from the house where he was living. The Justice of the Peace ordered him to vacate. Mr. Draughon filed a declaratory judgment seeking to quiet title to the property. He claimed he owned the property by inheritance. Ms. Johnson however introduced a 2006 warranty deed that he had signed that conveyed the property to Ms. Johnson. Mr. Draughon claimed he did not have the mental capacity at the time to sign the deed and that Ms. Johnson was aware of his incapacity, so the deed was invalid.

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The Texas Supreme Court, in the recent decision of BPX Operating Co. et al. v. Margaret Ann Stockhausen, denied an oil company’s claim that acceptance of royalty checks by the mineral/royalty owner ratified the oil company’s illegal pooling of her property.

Strickhausen owned property in LaSalle County, Texas. She negotiated a lease that strictly prohibited pooling under any circumstances without her express written consent. Notwithstanding this lease provision, BPX Operating Co. (formerly BP) pooled her property without her consent. As soon as she learned that BPX had pooled her interest, Ms. Strickhausen had her lawyer write BPX reminding them of the anti-pooling clause in the lease and asking for the authority by which they pooled her property. The oil company responded by acknowledging the anti-pooling provision and requesting a ratification of the pooled unit. The oil company also threatened to put her royalties in suspense if she did not sign the ratification.

Ms. Strickhausen did not sign the ratification. She continued to get royalty checks, which were based on the pooling unit allocations, which she cashed. The oil company then offered to settle her wrongful pooling claim. Ms. Strickhausen rejected that offer and countered with a different settlement offer. Ms. Strickhausen apparently believed the royalty checks were the royalty she was entitled to under the lease without pooling.

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Production sharing and allocation wells have been drilled in Texas for some time, and have been used almost exclusively for horizontal wells. (An allocation well is a horizontal well drilled across two or more lease lines without creating a pooled unit that includes the leases. A production sharing well is an allocation well for which production sharing agreements have been signed by mineral owners in all tracts that are crossed by the well.) However, the Texas Railroad Commission has never adopted a formal rule for issuing permits for these types of wells, by using the procedure in the Texas Administrative Code that all Texas agencies are supposed to follow when they want to adopt a new rule. The Administrative Code requires publication of proposed rules and opportunities for public comment before they are adopted. At first, the Commission approved a permit for these wells if the operator obtained signed production sharing agreements for at least 65% of the mineral owners. In recent years, the Commission began to approve permits for these wells even though no mineral owners had signed production sharing agreements.

In this case, two mineral owners in Karnes County, Texas, the Opielas, contested the granting of an allocation well permit by the Commission  to Magnolia Oil & Gas. On May 12, 2021, the 53rd District Court in Travis County reversed an order of the Texas Railroad Commission denying the mineral owners contest.  ( Elsie and Adrian Opiela v. Railroad Commission of Texas v. Magnolia Oil & Gas Operating Inc., Cause No. D-1-GN-20-000099). The Court held, in part, that “(t)he Commission erred in adopting rules for allocation and Production Sharing Agreement (“PSA”) well permits without complying with the requirements of the Administrative Procedure Act, Tex. Govt Code § 2001.001 et seq., and further erred in applying those rules by issuing well permits for the Audioslave A 102H Well (the “Audioslave Well”)”. The Court sent the case back to the Railroad Commission for “further proceedings consistent with this judgment.”

Texas oil and gas attorneys have been scratching their heads for some time at the Commission’s practice of granting permits for these types of wells without a formal rule. We don’t know whether the Railroad Commission will appeal this decision or not. If it does not, or if it does and the appellate court upholds the district court decision, what is the status of the many allocation and production sharing wells already drilled? Are they all void? Alternatively, are just the allocation wells permitted and drilled without mineral owner consent void? To be determined.

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In Texas, the Natural Resources Code, in Section 91.402  governs when royalties must be paid to royalty owners. Section 91.402(b) provides that royalty payments may be withheld without interest if there is a dispute concerning title that would affect distribution of payments or if there is a requirement in a title opinion that places in issue the title, identity or whereabouts of the payee and that is not been satisfied by the payee after a reasonable request for curative information.

Representative Reggie Smith, a Republican from Sherman, Texas, has introduced House Bill 3262, which would amend Section 91.402(b) to deprive royalty owners of the right to sue their oil company operator for a breach of contract to recover royalty payments that are withheld due to a title dispute unless the lease states otherwise. The specific language of the bill is that “a payee does not have a common-law cause of action against a payor for withholding payments under Subsection (b) unless, for a dispute concerning the title, the contract requiring payment specifies otherwise“. In other words, if an unscrupulous oil company is short of funds and holds back your royalties to use them as operating expenses under the guise of a trumped up title dispute, the royalty owner has no recourse!

This is a bad bill for a number of reasons, and it will hopefully not pass. Oil companies are already protected in the case of title disputes by Section 91.402 of the Natural Resources Code and there is no logical reason to add this language. Mineral owners with new leases can add language to their lease to counteract this bill, but that is no comfort to mineral owners whose leases are already signed.

 
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Given the stresses on the oil and gas industry over the last year, it’s not surprising that there have been many oil company bankruptcies, both in Texas and throughout the country. Royalty owners throughout Texas have been getting notices that the operator who is paying their royalties have filed for bankruptcy. In most cases, the oil company is filing a Chapter 11 proceeding, which is a reorganization, although a few have filed a Chapter 7 bankruptcy proceeding, which is a liquidation.

In the 1980s, the Texas Legislature added a provision to the Texas Business and Commerce Code to assist royalty owners. It is known as the “First Purchaser Statute” and is found in TEX. BUS. & COM. CODE § 9.343. The statute states, in part:

This section provides a security interest in favor of interest owners, as secured parties, to secure the obligations of the first purchaser of oil and gas production, as debtor, to pay the purchase price. An authenticated record giving the interest owner a right under real property law operates as a security agreement created under this chapter. The act of the first purchaser in signing an agreement to purchase oil or gas production, in issuing a division order, or in making any other voluntary communication to the interest owner or any governmental agency recognizing the interest owner’s right operates as an authentication of a security agreement in accordance with Section 9.203(b) for purposes of this chapter.

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As a Texas oil and gas attorney, I often find it necessary, when negotiating an oil and gas lease for a client, to add an addendum that modifies some of the terms in the printed lease. The printed lease form is often extremely operator oriented and does not give the mineral owner many rights. Very often, the printed lease will provide for deduction of post-production costs from royalties due to the mineral owner by providing that royalties shall be calculated “at the well”. In the addendum, we often add language that provides that royalty shall be calculated, not on the market value at the well, but instead on the gross proceeds received by the oil and gas operator. The result of that language in the addendum is that post-production costs cannot be deducted from the royalties.

In the recent Texas Supreme Court decision of BlueStone Natural Resources II LLC v. Walker Murray Randle et al, the printed oil and gas lease contained language that indicated that the royalties would be calculated on the market value at the mouth of the well. Prior decisions by the Texas Supreme Court determined that this language allows the well operator to deduct post-production costs. The operator and the mineral owner agreed to an addendum that stated that royalties would be based instead on the “gross value received” by the operator. The addendum also stated that if the addendum was in conflict with the printed lease provisions, then the addendum would control and prevail.

Once production was obtained on the well, the operator proceeded to deduct post-production costs. The mineral owner sued. The operator argued that the “at the well” language is the only lease language providing a valuation point, so nothing in the addendum can be considered contradictory to that portion of the printed lease’s royalty provision.

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