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Last week the Texas Supreme Court handed down its opinion in Nettye Engler Energy, LP v. Bluestone Natural Resources II, LLC, No. 20-0639, affirming the lower court’s ruling that Engler’s royalty interest bears its share of gas gathering and processing costs.

Engler owns a royalty interest in a section of land in Tarrant County on which Bluestone owns a lease and operates gas wells. Engler’s royalty interest originated in a deed in which the grantor reserved a one-eighth non-participating royalty interest. The deed provides that the grantor reserves “a free one-eighth (1/8) of production … to be delivered to Grantor’s credit, free of cost in the pipe line, if any, otherwise free of cost at the mouth of the well or mine.”

Bluestone contracted with Crestwood Equity Partners to gather its gas through a gathering system owned by Crestwood and deliver it to various delivery points through a processing plant and into a pipeline owned by Energy Transfer, where the gas is sold. Bluestone deducted the gathering fees charged by Crestwood from Engler’s royalty, and the plant processing fees incurred before the gas was sold.

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The Texas Supreme Court agreed to decide Hlavinka v. HSC Pipeline, about which I have written before. The Court’s summary of the issues:

The primary issues in this case are whether (1) Texas law grants eminent domain authority to a pipeline owner shipping polymer grade propylene; (2) a pipeline shipping a product from the pipeline owner’s sole manager to an unaffiliated customer constitutes a public use; and (3) the landowner may properly testify that the highest-and-best use of the taken land is as a pipeline corridor, and value the land through comparisons to past, private pipeline easement sales.

Both parties have appealed. The Hlavinkas argue that HSC does not have eminent domain authority. HSC says Hlavinka’s testimony on value should not have been admissible.

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I wrote about this case before. Today the Texas Supreme Court agreed to hear the plaintiff’s appeal of a judgment of the El Paso Court of Appeals. The Supreme Court’s summary of issues in the case:

At issue in this case is whether courts are barred from considering deed records in a collateral attack on a default judgment. A second issue is whether a rule that bars such evidence shields a default judgment from an otherwise meritorious due process claim. Other issues raised are whether a property owner’s due process rights were violated in obtaining the default judgment and whether the doctrine of laches or provisions in the Tax Code bar a collateral attack on the judgment.

The default judgment was for foreclosure of a tax lien after service by publication. The case has significant due process issues. In a lengthy concurrence in the El Paso court’s judgment, Justice Alley voiced his dissatisfaction with the extrinsic evidence rule but concurred because the court was bound by the Texas Supreme Court precedent. He noted that Ms. Mitchell’s address was in eight warranty deeds that were recorded before the tax suit was filed and could have been easily found.

 

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Pending before the Texas Supreme Court is the petition for review of Ammonite Oil & Gas Corporation challenging the decision of the San Antonio Court of Appeals in Ammonite Oil and Gas Corp v. Railroad Comm’n of Texas, 2021 WL 4976324 (Oct. 27, 2021). The Court of Appeals upheld the RRC’s decision to deny Ammonite’s sixteen applications to force-pool portions of the Frio River into pooled units created by EOG for its horizontal wells in the Eagleville (Eagle Ford-1) Field in McMullen County. The application presents several interesting issues regarding the scope and interpretation of the MIPA.

The State of Texas owns the land within Texas riverbeds. Ammonite leased the oil and gas in the Frio River from the Texas General Land Office. Ammonite then made an offer to EOG to pool adjacent portions of the riverbed into sixteen existing EOG units along the river. (click on image to enlarge)EOG-AmmoniteAmmonite offered to sign an operating agreement with EOG providing for Ammonite to pay its share of costs related to wells in the pooled unit, based on its share of the acreage in the unit. It also offered a 10% “risk penalty.” Ammonite would agree that EOG could recover 110% of its already-incurred costs for wells on the unit before Ammonite would receive its share of revenues from the wells.

EOG rejected Ammonite’s offers and did not make any counteroffer.

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With the recent cold snap, we’re all remembering what we were doing last February when the lights went out.

Repercussions continue. As reported by Michell Ferman at Texas Tribune, Vistra corporation is in a dispute with Energy Transfer over its bill to Vistra for $21.6 million, for gas sold to Vistra during the freeze. Energy Transfer has threatened to cut off gas supplies to Vistra if it doesn’t pay, and Vistra has asked the Texas Railroad Commission to prevent that. Ferman writes:

During last year’s winter storm — which caused the near-total collapse of the state’s power grid, left millions without power for days and caused hundreds of deaths — Vistra spent approximately $1.5 billion for natural gas, ‘twice its planned natural gas cost to fuel its entire Texas fleet for a full year,’ the filing said. Vistra paid Energy Transfer more than $600 million during the storm, ‘which is more than 96% of all amounts invoiced by [Energy Transfer].’

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A friend alerted me to a new organization formed to promote geothermal energy, The Texas Geothermal Energy Alliance (TxGEA). TxGEA is an interdisciplinary group of entities engaged in geothermal resource exploration, drilling, construction and production, for producing electricity from geothermal resources. Membership includes: 

  • Baker Hughes
  • Blade Energy Partners
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Two recent decisions from two federal judges in the Southern District of Texas, Houston Division, dismissed suits alleging class actions against Apache and Hilcorp for failure to pay royalties on gas used in gas processing plants. Both construed identical lease provisions.

In Carl v. Hilcorp Energy, No. 4:21-CV-02133, Judge Keith Ellison construed a lease with the following provisions:

The royalties to be paid be Lessee are: … on gas, including casinghead gas or other gaseous substance, produced from said land and sold or used off the premises or in the manufacture of gasoline or other product therefrom, the market value at the well of one-eighth of the gas so sold or used ..

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In response to substantial criticism of its original proposed rule, the Texas Railroad Commission has issued a final rule, 16 TAC Sec. 3.65, relating to designation of critical natural gas infrastructure. Well owners can no longer exempt their wells’ designation as critical infrastructure simply by filing a form and paying a $150 fee. The RRC will now itself classify gas wells, pipelines, gas plants and other natural gas facilities as critical based on its own criteria, and those facilities will be required to winterize. Gas supply facilities that require electricity to operate will be “critical customers” and are required to provide information to their electric suppliers.

The RRC will initiate a rulemaking later to adopt rules on what weatherization is required.

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John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
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