Oil and Gas Lawyer Blog

Published on: September 3, 2020

Corpus Christi Court of Appeals Opines on Post-Production Costs

On June 25 the 13^th Court of Appeals in Corpus Christi issued is opinion in Devon Energy Production Co. v. Michael A. Sheppard, et al., No. 13-19-00036-CV making a deep dive into when post-production costs can be deducted from the plaintiffs’ royalty.

Plaintiffs’ leases provided for royalties on oil and gas to be based on gross proceeds of sale received by the lessee. The leases also contained the following provision:

Payments of royalty under the terms of this lease shall never bear or be charged with, either directly or indirectly, any part of the costs or expenses of production, gathering, dehydration, compression, transportation, manufacturing, processing, treating, post-production expenses, marketing or otherwise making the oil or gas ready for sale or use, nor any costs of construction, operation or depreciation of any plant or other facilities for processing or treating said oil or gas. Anything to the contrary herein notwithstanding, it is expressly provided that the terms of this paragraph shall be controlling over the provisions of Paragraph 3 of this lease to the contrary and this paragraph shall not be treated as surplusage despite the holding in the cases styled Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) and Judice v. Mewbourne Oil Co., 939 S.W.2d 135-36 (Tex 1996).

Finally, the lease had this “unique” paragraph 3(c):

If any disposition, contract or sale of oil or gas shall include any reduction or charge for the expenses or costs of production, treatment, transportation, manufacturing, process[ing] or marketing of the oil or gas, then such deduction, expense or cost shall be added to the market value or gross proceeds so that Lessor’s royalty shall never be chargeable directly or indirectly with any costs or expenses other than its pro rata share of severance or production taxes.

This last provision–the “add-back” clause–is the clause on which the case turned. Continue reading →

Published on: August 28, 2020

Supreme Court agrees to hear BPX v. Strickhausen

By John McFarland

The Texas Supreme Court has agreed to hear argument in BPX Operating v. Strickausen, Case No. 19-0567, an important case for royalty owners. I wrote about this case when it was decided last year by the Corpus Christi Court of Appeals (Strickhausen v. Petrohawk Operating, No. 04-18-00636-CV). That court ruled for Ms. Strickhausen, the royalty owner, on the issue of whether she had ratified a pooled unit by accepting royalties, despite protests by her and her lawyer that Petrohawk (now BPX) was not authorized by her lease to form the pooled unit. Briefs in the case can be found here.

Published on: August 18, 2020

The Global Energy Mix

By John McFarland

I read recently that, because of increased wind and solar generation capacity in Texas, no new gas-fired generating plants are being built, and some are being mothballed. Then I read this week of rolling blackouts in California, being blamed on the unreliability of wind and solar power and the need to build more gas-fired plants.

EIA has projected the consumption of global energy by source out to 2040. Its projections don’t bode well for reducing carbon emissions. A depiction of its projections is below. By 2040 world energy consumption will increase 22%. Energy from oil, gas and coal will increase 11%. Coal consumption will be essentially flat. Energy from all other sources will increase 70%. Energy from wind and solar will increase a whopping 333%. But total energy production from sources other than oil, gas and coal will increase only from 19% to 26% of total energy production. (click on image to enlarge)

Published on: August 14, 2020

Solar Energy in Texas and the Chadbourne Ranch

By John McFarland

The Texas Observer has a great article about Texas solar energy development, Texas Solar Hits a Turning Point, by Nancy Nusser. The article focuses on a new solar farm on the Chadbourne Ranch in Nolan County, owned by Garland Richards. The Holstein solar farm has 709,000 solar panels on 1,300 acres and can generate 200 megawatts of electricity, enough to power about 40,000 homes.

According to the article there are now 17 solar facilities in Texas, 13 of which can produce at least 100 megawatts. And more coming. Solar capacity in the ERCOT service area is expected to increase 150 percent this year to 5,777 megawatts, and next year to 13,449 megawatts. Still, solar provides only about 2 percent of Texas’ electricity generation. If 1,300 acres of solar farm generates 200 megawatts, and if Texas needs 300,000 megawatts of electricity, and if solar were to provide 20% of that, it would take 300 solar farms like the one above to provide that power, or almost 400,000 acres of solar farms – 600 square miles.

Chadbourne Ranch is the site of Fort Chadbourne, established by the army in 1852 in what is now Coke County, to protect the western frontier. The fort surrendered to confederates on February 28, 1861, before the confederate shelling of Fort Sumter on April 12 of the same year. It was reoccupied by federal troops from 1865 to 1867, and is on the National Register of Historic Places. Garland Richards helped form the Fort Chadbourne Foundation, which has preserved the fort, reconstructed some buildings, and built a museum housing artifacts discovered during restoration of the site. Restored barracks below.

Continue reading →

Published on: August 4, 2020

Texas Reconstruction and the Semicolon Court

By John McFarland

I have been reading Stephen Harrigan’s history of Texas, Big Wonderful Thing. Great read. I just finished Harrigan’s discussion of the period of Reconstruction in Texas after the Civil War. Two things struck me: first, in the Black Lives Matter era, how we are all being drawn into re-examining our country’s history of discrimination against African Americans; and second, how divided Texas was, both before and after the Civil War, on the issues of slavery and race relations.

After Lincoln’s assassination, his successor Andrew Johnson appointed Andrew Jackson Hamilton as provisional governor of Texas. Hamilton was a former Texas Congressman who opposed secession and escaped Texas during the war. A delegation was then elected in 1866 to write a new Texas constitution. The delegates refused to ratify the 13^th Amendment and wrote into the constitution that Blacks would not be allowed to vote, hold office, or serve on juries. Texas voters ratified the constitution in June 1866 and elected a new governor, James Throckmorton, who fought for the South in the war. The newly elected legislature then passed laws known as “black codes” further limiting rights of African Americans. For example, a law required that all Black household servants “shall at all hours of the day or night, and on all days of the week, promptly answer all calls … to be especially civil and polite to their employer, his family and guests.” Continue reading →

Published on: July 30, 2020

Post-Production Costs Podcast

By John McFarland

I was interviewed this week by Tiffany Dowell Lashmet, J.D., Agricultural Law Specialist with the Department of Agricultural Economics at Texas A&M University. Tiffany does lots of education programs for landowners at the Texas A&M AgriLife Research and Extension Center. She has a great blog for anyone involved in agriculture. Tiffany interviewed me about the law relating to deduction of post-production costs from oil and gas royalties. You can listen to Tiffany’s podcast of our interview here.

Published on: July 23, 2020

Another Chapter in Jimmy McAllen’s Fight with Forest Oil

By John McFarland

It seems that Jimmy McAllen’s troubles over damages and injuries he suffered when Forest Oil buried mercury-contaminated iron sponge wood chips on his ranch will never end. Arbitration of his claims resulted in a $20 million award which was affirmed by the Corpus Christi Court of Appeals, and the Supreme Court denied review.

But shortly thereafter, McAllen got in a dispute over attorneys’ fees related to the case with his lawyer and former son-in-law Chris Amberson. McAllen claimed his lawyer overcharged for fees and submitted bills for fraudulent expenses. That dispute also went to arbitration, and the arbitrator, Tom Collins, entered an award against Amberson for more than $15 million. Collins found that Amberson had billed McAllen almost $1.7 million in “reimbursable expenses” to retain 38 experts for the Forest Oil litigation. “These were made-up expenses,” Collins wrote, adding that “almost 100% percent of the expert retainers were not paid.” Collins found almost $2.6 million in fraudulent charges.

Amberson then asked the district court which appointed the arbitrator to set aside part of the award. But a company owned by Amberson, also a party to the case, has now sought bankruptcy protection, and the case was removed to bankruptcy court. The battle continues.

Published on: July 20, 2020

TexNet is adding an earthquake monitoring station in Odessa

By John McFarland

UT’s Bureau of Economic Geology has installed monitoring stations to record earthquakes across oil and gas fields in Texas, following the Legislature’s appropriation of funds for that purpose. It has been up and running since 1/1/17. Remember there was a big debate about whether oil and gas activities have resulted in earthquake activity. TexNet’s website has an interactive map that shows quakes of various magnitudes since that date. Snapshot below. You can see that quakes are centered in the active areas around the Permian, the Eagle Ford and the Barnett. Colors depict different magnitudes.

Published on: July 16, 2020

The Saga of the Dune Sagebrush Lizard Continues

By John McFarland

Read about most recent developments here. After failed efforts of the industry to self-police destruction of lizard habitat in the Permian, the US Fish and Wildlife Service has agreed to launch a full review of a proposal to classify the lizard as either endangered or threatened. The saga goes back to 2104, when development in the Permian accelerated. In the meantime, sand mines have invaded the Permian, further endangering the lizard.

Published on: July 16, 2020

Here’s An Interesting Graph on Shale Plays

By John McFarland

Click on graph to enlarge.