Texas Oil and Gas Attorney Blog

The course of dealings between the parties over a period of time can lead to modifications and waivers of provisions within an oil and gas lease and related contracts. A recent Dallas Court of Appeals case, Tollett v. MPI Surface, LLC, Case No. 05-17-00435-CV (Tex.Civ.App.- Dallas, no writ), illustrates that point.

In 2012, Cecelia Tollett entered into a groundwater sales agreement that allowed MPI Surface, LLC (“MPI”) to extract groundwater from Tollett’s land to sell to others for various uses in the oil and gas industry. Among other provisions, the agreement provided that Tollett was to be paid a 25% royalty of the gross sale proceeds with said royalties to be “… due on the same day of each month in which sale proceeds are collected by MPI.” Furthermore, the agreement provided that failing to timely and fully pay the royalties “shall be considered a material breach” allowing Tollett to terminate the agreement. Further, the agreement required MPI to establish and maintain a point of sale meter to record sales. Under the agreement, Tollett could install her own meters if MPI failed to install meters. The agreement also provided that “… MPI’s failure to timely and fully meter the water sales and disposal water shall be considered a material breach” of the agreement allowing Tollett to terminate.

MPI drilled four wells and began making royalty payments. However, MPI never installed any sort of point-of-sale metering system. Tollett did not complain and did not install her own meters. Over the course of the next four years, royalties were paid monthly but not on the same day on which payments were collected from the third-party buyers. MPI intended to pay the royalties on the 20th of each month, but generally was either a couple of days early or a couple of days late. The agreement contained a 60-day grace period. Over the first four years of the agreement, Tollett never complained about the monthly royalty payments and never complained about whether the payments actually fell on the 20th or a few days later.

Normally, this blog discusses Texas court cases and decisions. However, occasionally, a court decision from one of our sister states is of interest. Such is the case with Briggs v. Southwestern Energy Production Co., 184 A.3d 153 (2018). In Briggs, the Pennsylvania Superior Court — equivalent to our Texas Courts of Appeal — held that a claim for subsurface trespass may be maintained as a result of hydraulic fracturing and that the “rule of capture” does not preclude the cause of action. This is, of course, directly at odds with the rule here in Texas established by Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex.2008). As a reminder, the Coastal Oil decision was a 6-3 split decision by the Texas Supreme Court. As one might expect, the Briggs opinion discussed Coastal Oil at length but concluded that the dissenters in Coastal Oil had the better arguments.

Briggs is another example that oil and gas law is changing — slowly — to reflect the fact that extracting petrochemicals from shale formations is different from extracting petrochemicals from older, more traditional oil fields. In this respect, Texas law is changing, too, as is evidenced by the recent Supreme Court case in Adams v. Murphy Exploration & Production Co.- USA, Case No. 16-0505 (Tex. 2018). In Adams/Murphy Exploration — involving offset wells — the Court highlighted the differences between vertical drilling into an underground reservoir and horizontal drilling into and using hydraulic pressure to extract oil/gas from a shale formation. With a reservoir, oil and gas will migrate across property lines towards any low pressure area created by a production well. However, there is no such migration in shale formations. Partly because of this difference, the Adams/Murphy Exploration court ruled that an offset well satisfied the requirements of the pertinent lease.

Briggs: Facts of Case and Court’s Reasoning

Last summer, we wrote about an interesting case involving offset wells and covenants (both implied and express) to prevent drainage in shale formations. As discussed in our earlier article, the San Antonio Court of Appeals reversed summary judgment for Murphy Exploration and remanded the case back to the trial court. However, the Texas Supreme Court recently reversed that decision on a close 5-4 decision. See Adams v. Murphy Exploration & Production Co.- USA, Case No. 16-0505 (Tex. 2018). You can read the dissenting opinion here.

At issue was whether Murphy Exploration violated its lease with the plaintiff landowners by drilling an offset will that was drilled 1,800 feet away from the pertinent lease line and 2,100 feet from the triggering well on the neighboring property.

The oil & gas lease between the parties required the drilling of an offset well if a producing well was drilled on a neighboring tract. A well was drilled on a neighboring tract and Murphy Exploration then drilled a new well on the leased tract, which it claimed was the required offset well. As noted, the new well was 2,100 feet from the neighbor’s wellhead and 1,800 feet from the property line. In many cases, a well so far from the neighboring well would not have prevented drainage to the neighboring well. The plaintiff did not believe it did, and brought suit claiming that the well drilled by Murphy Exploration did not constitute an “offset well” as that term is defined and understood in the gas and oil industry. The lease between the parties did not define the term “offset well.”

The recent Court of Appeals case of Lackey v. Templeton, 2018 WL 3384570 (Tex. Civ.App. — Beaumont, no pet.), provides another illustration of the legal principle that, in Texas, if you are challenging who owns certain real property, you MUST bring a trespass-to-try-title claim. No other cause of action — such as a declaratory judgment action — will suffice. This is in contrast to a recent Texas Supreme Court case — Lance v. Robinson, 543 S.W.3d 723 (Tex. 2018) — in which the Supreme Court held that a declaratory judgment action WAS allowable because the dispute in that case concerned easement rights — not ownership rights.

Texas Property Law: Challenging Ownership

In Texas, causes of action for challenging or asserting ownership of real property — including ownership of mineral estates — are governed by statute. In this regard, Section 22.001(a) of the Texas Property Code states that a “trespass to try title action is the method of determining title to lands, tenements, and other real property.” See Tex. Prop. Code § 22.001(a). Texas courts have interpreted this provision to mean that a trespass-to-try-title cause action is the exclusive remedy for resolving competing claims to ownership of real property.

A recent decision handed down by the U.S. Fifth Circuit of Appeals makes it clear that great care should be taken with how the consideration clause of Texas oil and gas leases are drafted. The case of In the Matter of: Goodrich Petroleum Corporation, 894 F3d 192 (5th Cir.) illustrates that you should NOT use the standard verbiage with respect to consideration paid if additional consideration for the lease is due. The additional consideration should be fully described, thereby providing notice of record to third parties of the additional consideration due.

Often, almost as a matter of rote, Texas oil and gas leases use language similar to this:

“NOW, THEREFORE, for the promises and covenants exchanged below, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree …”