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You can’t watch a newscast these days without seeing a Senator or Congressman or some other talking head insist that the actions of the current Administration in curtailing domestic oil and gas production and pipelines were unwise and that oil and gas production must be restarted immediately.

The posture of the current President towards domestic oil and gas production has certainly been irrational, to say the least. In attempting to appease the far left of the Democratic Party, Biden has not only crippled energy production, he has created devastating inflation and a critically dangerous national security situation. Oil and gas is not just essential for transportation, it is a component of many of the products we use on a daily basis. In addition, people may not realize that natural gas is essential for creating fertilizer. American farmers have begun publicly warning of food shortages beginning this summer and fall because of the inability to obtain fertilizer. Since Biden is doing this while importing Russian oil and refusing to ban the import of Russian oil as a sanction for the Russian invasion of Ukraine, one might logically ask just who side he is on?

The problem is that even if Biden woke up tomorrow and removed all the impediments to domestic oil and gas production, there is no switch that gets thrown which results in sudden production. Instead, there is a substantial lead time to bring wells back online and into production. Drilling new wells, especially horizontal wells, takes time. More importantly, domestic oil and gas producers don’t trust the dementia-fueled irrationality of Biden and his advisors. They are not going to incur the considerable expense of drilling new wells, much less bringing existing wells back online, until there is someone with a logical and coherent and rational energy policy in the White House. Finally, even if and gas wells were to be allowed to be restarted and new wells could be drilled, we do not have sufficient pipeline capacity to get the oil and gas to refineries.

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In a recent case decided by the Eastland Court of Appeals in Texas, Foote v. Texcel Exploration, Inc., the Court held that the operator of an oil well was not liable for cows apparently killed by an oil and salt water spill.

The Plaintiff leased property for grazing 650 head of cattle. Texcel Exploration Inc. operated an oil and gas lease on the property. The lease did not require Texcel to fence off the well and associated equipment, however Texcel had installed an electric fence around the tank battery (where produced oil and gas and salt water produced along with the oil and gas were stored). There was evidence that the cattle were breaking the fence each day and getting inside the fenced area and ultimately broke a PVC pipe on one of the tanks. Salt water and oil was found on the cows and eventually 132 cows died. The Plaintiff requested reimbursement for the value of the 132 dead cows, veterinary bills, special feed costs, shipping cost to relocate cattle, and lost profits from the surviving cattle being sold under expected weight.

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The Court first sets out what is pretty well settled law in Texas for this situation: “[T]he owner/lessee of the surface estate in order to recover against the mineral lessee or operator for injury to his cattle must plead, prove and obtain a jury finding on one of the following:

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The Texas Supreme Court recently issued its decision in Nettye Engler Energy L.P. v. BluStone Natural Resources II, LLC, Cause No. 20-0639, which has added to the Texas jurisprudence on the frequently litigated subject of post-production costs that can be deducted from a royalty interest.

The deed that conveyed the mineral interest to the grantee reserved a nonparticipating royalty interest “in kind,” which as the Court notes, differs from the standard monetary royalty because the grantor retained ownership of a fractional share of all minerals in place. The deed required delivery

of the grantor’s fractional share “free of cost in the pipe line, if any, otherwise free of cost at the mouth of the well or mine”.  The question became which pipeline does the deed refer to: the gathering lines or the interstate transportation line?

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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.