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May 14, 2011

Texas Supreme Court Again Reverses Jury Verdict Favoring Royalty Owners

The Texas Supreme Court has once again overturned a jury verdict in favor of royalty owners, finding "no evidence" to support the jury's finding. The court's opinion in the case, BP America Production Company, Atlantic Richfield Company and Vastar Resources, Inc. v. Stanley G. Marshall, Jr., et al., No. 09-0399, was issued last week. The case evidences the Court's continued hostility to royalty owners' claims of lease termination.

The important facts are as follows:

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January 28, 2011

The Importance of Audit Rights in Oil and Gas Leases: Shell v. Ross

I always counsel my clients to provide in their oil and gas leases that they have the right to inspect and copy all documents of the lessee necessary to determine whether royalties have been paid correctly, and to audit the records of the lessee to confirm accurate payment of royalties. Royalty owners generally assume that the royalty payments they received have been calculated and paid as required by their leases. This is not always the case, as illustrated by a recent case, Shell Oil Company SWEPI LP v. Ross, 2010 WL 670549 (Tex.App.-Houston [1st Dist.], decided February 25, 2010. The case illustrates typical schemes used by producers to underpay royalty owners, and their efforts to prevent royalty owners from knowing how royalties are calculated and, when the royalty owners discover the underpayment, to prevent royalty owners from recovering the underpayment. 

In Shell v. Ross, the trial court and Houston Court of Appeals held that Shell had underpaid royalties due to Ross.  Shell has appealed to the Texas Supreme Court.  The Texas Supreme Court refused to consider the case, but Shell has filed a motion for re hearing that is still pending. Other producers are very interested in the case:  friend-of-the-court briefs have been filed by Chesapeake, Texas Oil & Gas Association, and the American Petroleum Institute asking the Court to reverse the Court of Appeals.

The facts of the case require some explanation but illustrate well the importance of verifying the correct calculation of royalties.

 

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September 8, 2010

Texas Supreme Court Asked to Re-examine NGPL v. Pool

A case now before the Texas Supreme Court that addresses issues important to Texas mineral owners. The case, BP America Production Company, et al., v. Stanley G. Marshall, Jr., et al., No. 09-0399, asks the Texas Supreme Court to address the applicability of the laws of adverse possession to mineral interests for the first time since the Court's decision in the Pool case, Natural Gas Pipeline Co. of America v. Pool, decided in 2003. To understand the importance of BP v. Marshall, it is necessary to first review the Pool case.

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October 14, 2009

Accepting Drafts in Payment for Lease Bonus - A Ticking Time Bomb?

The recent volatility in prices for oil and gas leases has raised issues with the time-honored custom in the industry of paying lease bonuses with drafts. Problems have arisin because companies have refused to honor the drafts or because lessors have sought to cancel the transaction after signing and delivery the lease and lessor's deposit of the draft. When someone wants to back out of "the deal" after a lease has been exchanged for a draft, the lessor and lessee run to their lawyers to find out what legal rights and obligations have been created by the exchange. No one is happy.

As I have written previously, it is generally my advice to avoid using drafts for payment of lease bonuses. My practice is to hold my client's original signed lease until I receive a check for the bonus from the company, then send the check to my client and the lease to the company. I find that most companies are willing to close the deal in this manner.

But most lease transactions are consummated using a draft. So, herein is an additional discussion of problems arising from use of drafts..

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September 11, 2009

Delaware Bankruptcy Court Rules Against Texas Producers (and Royalty Owners)

A Delaware bankruptcy judge has ruled in the SemCrude bankruptcy that the claims of Texas producers for unpaid revenues from oil sales are subordinate to the claims of SemCrude's bankers. As a result, the Texas producers (and perhaps their royalty owners) may lose up to $57 million.

SemCrude filed for protection under Chapter 11 of the Bankruptcy Code in July 2008. SemCrude was a large purchaser of crude oil in Texas and seven other states. At the time of the filing, the SemCrude entities owed their banks $2.55 billion. It also owed more than one thousand oil and gas producers millions of dollars for oil purchased but not paid for in June and July 2008, including $57 million owed to oil and gas producers in Texas.

The court in the SemCrude bankruptcy recently ruled that the claims of Texas Producers for the $57 million in unpaid proceeds of oil and gas sales are subordinate to the claims of SemCrude's Banks, who hold liens on all os SemCrude's assets, despite a Texas statute that grants the Texas Producers a lien on their production and all proceeds of sale to secure the purchaser's obligation to pay.

The arguments made in the dispute between the Banks and the Texas Producers are complicated because they involve the interpretation of Article 9 of the Uniform Commercial Code, a code that has been the bane of many law students' studies. The judge's ruling will be appealed and so is not the final word on the matter, but if the ruling stands it will adversely affect the rights of royalty owners in bankruptcy proceedings of oil and gas purchasers and producers, and could greatly reduce their rights to recover payments for their royalties.

Here is a simplified summary of the judge's ruling:

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March 18, 2009

Oil and Gas Lease Termination Clauses

Last week I discussed Wagner & Brown v. Sheppard, a recent Texas Supreme Court case that involved a lease termination clause.  Sheppard's lease in that case provided that, if royalties were not paid to her within 120 days after first production, the lease would automatically terminate.  That is exactly what happened.

Landowners are usually surpriesed to learn that, under a "standard form" oil and gas lease, the lessee's failure to pay royalties does not give the lessor the right to terminate the lease.  The lease remains in effect, and the lessor's only remedy is to sue for the unpaid royalties.  Landowners often seek to negotiate a clause like Sheppard's that gives the lessor the right to terminate the lease for failure to pay royalties.  Exploration companies of course do not like such a provision.  It puts them at risk that, if royalties are not timely paid for some inadvertent reason, they can lose the lease even though they are willing and able to pay the royalties. 

First, I think it is not a good idea to include a provision that a lease terminates automatically if royalties are not paid within a specified time.  Depending on the circumstances, it may not be in the lessor's best interest to terminate the lease, even though royalties have been delayed.  A better provision is that, if royalties are not paid by a specified date, the lessor has the option to terminate the lease.

Second, I think that the lessee has a good point as well.  The lessor should not be able to terminate a lease because of inadvertence, or an innocent mistake, in paying royalties.  A well-drafted termination clause should provide that, if royalties are late, the lessor must give written notice to the lessee and an opportunity to cure the problem.  Only if the late payment is not rectified should the lessor have the right to terminate the lease.