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This year the Texas Supreme Court decided Van Dyke v. The Navigator Group, trying to give some structure to cases construing conveyances and reservations of royalty interests-whether fixed or floating. I wrote about the case last February. Since then two court of appeals cases have grappled with the issue: Royalty Asset Holdings II, LP v. Bayswater Fund III-A LLC, in the El Paso Court of Appeals, No. 08-22-00108-CV; and Thomson v. Hoffman, in the San Antonio Court of Appeals, No. 04-19-00771-CV.

In Royalty Asset, the court construed the following royalty reservation:

EXCEPT that Grantors, for themselves and their heirs and assigns, retain, reserve and except from this conveyance and [sic] undivided 1/4th of the land owner’s usual 1/8th royalty interest (being a full 1/32nd royalty interest) payable or accruing under the terms of any existing or future oil, gas or mineral lease pertaining to or covering the oil, gas and other minerals on, in or under the above described [sic] land. It is distinctly understood and agreed that the interest in royalties hereby retained and reserved by Grantors does not participate in any bonus or delay rentals payable for or accruing under the terms of any such oil, gas and mineral lease or leases, and it shall not be necessary for Grantors to join in, execute or ratify any oil, gas and mineral lease covering said above described tract, the right and privilege to execute any oil, gas and mineral lease or leases covering the full mineral interest in the above described tract being hereby granted and conveyed to Grantees herein, their heirs and assigns.

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Last year the Texas Supreme Court decided Mitchell v. MAP Resources, holding that a mineral owner whose interest was sold at a tax foreclosure could collaterally attack the judgment and introduce extrinsic evidence that he had not been properly served with notice of the suit and therefore was deprived of due process under the 14th Amendment of the US Constitution. Gill v. Hill is another such case. The El Paso Court of Appeals ruled against the plaintiff, with one judge dissenting. The Texas Supreme Court agreed to hear the case, where it is now pending.

The tax foreclosure in Gill v. Hill took place in 1999. Suit seeking to set aside the foreclosure was filed in 2019. The El Paso Court of Appeals distinguished the case from Mitchell v. MAP Resources. In both cases the taxpayer was served by posting on the courthouse door. In Mitchell, both sides moved for summary judgment, and the party seeking to set aside the foreclosure introduced extrinsic evidence that she could easily have been personally served because her name and address were in courthouse deed records and appraisal district records. In Gill v. Hill, the defendant moved for summary judgment on the ground that the suit was barred by limitations. The plaintiff alleged that he could have been personally served but did not move for summary judgment or introduce any extrinsic evidence.

The Court of Appeals held it was plaintiff’s burden to raise a fact issue on whether adequate notice of suit was given by introducing extrinsic evidence. The dissent would hold that the defendant had the burden on summary judgment to show that proper notice of the suit was given.

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In this case, decided last April, the Texas Supreme Court held that the force majeure clause in an oil and gas lease could not be relied on to extend the date by which a well had to be commenced to keep the lease in force.

The facts are these:

MRC owned a lease covering 4,000 acres in Loving County. The lease provided that, at the end of the primary term, the lease would terminate except as to designated production units around existing wells unless MRC engaged in “continuous drilling”—spudding a well within 180 days after the spud date of the previous well. Prior to the end of the primary term MRC had drilled five wells on the lease. Under continuous drilling clause, MRC had to spud a well by May 21, 2016 to avoid partial termination of the lease.

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This link shows a report from CBS Odessa affiliate about a huge leak of injected water. These events are occurring all over West Texas because the Railroad Commission grants permits to dispose of produced water into shallow formations. Thousands of old wellbores exist in West Texas, some never plugged, some plugged before regulation of wells, some plugged in violation of regulations. The over-pressurized formation breaks into the wellbore, or finds its way to the surface. Until the Commission addresses the problem by properly regulating produced water injection, these problems will only grow. (Click on image to enlarge)

Crane-Co-spill

 

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Twenty years ago I wrote an article, “Issues Concerning Royalty Valuations and Deductions,” published in the Petroleum Accounting and Financial Management Journal. One of those issues I discussed was the recurring problem of post-production cost deductions. In the article I contrasted the approaches to lease construction illustrated by two cases: Heritage Resources v. NationsBank, 939 S.W.2d 118 (Tex. 1996), and Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001). A recent decision from the Colorado Supreme Court, Board of County Commissioners of Boulder County, Colorado v. Crestone Peak Resources Operating, LLC, 2023 WL 8010221 (Nov. 20, 2023), further illustrates the contrasting approaches taken by Texas and Colorado courts in construing oil and gas leases.

First, Heritage v. NationsBank and Rogers v. Westerman. Both decided whether post-production costs could be charged to the royalty owner in two oil and gas leases. The NationsBank lease provided that “there shall be no deductions from the value of the Lessor’s royalty by reason of any required processing, cost of dehydration, compression, transportation or other matter to market such gas.” But because the lease provided for gas royalties based on “market value at the well,” the Texas Supreme Court held that transportation costs were deductible from NationsBank’s royalty. The Westerman lease provided that the royalty would be “one-eighth of the gross proceeds received from the sale of such produced substances where same is sold at the mouth of the well, or … if not sold at the mouth of the well, … one-eighth of the market value thereof at the mouth of the well, but in no event more than one-eighth of the actual amount received by the lessee for the sale thereof.” The Colorado Supreme Court held that the lessee must bear all post-production costs necessary to get the gas into “marketable condition.”

The Heritage court hung its opinion on the term “at the mouth of the well.” Since royalty is to be based on the market value at the well, there can be no deductions from that value, so the no-deductions clause was “surplusage.” The Westerman court instead said the term “at the mouth of the well … says nothing about the parties’ intent with respect to allocation of costs,” and concluded that the lease is “silent with respect to allocation of costs.”

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Ammonia production is essential to agriculture production, used as a fertilizer. Anhydrous ammonia, a gas, is injected into farmland to enhance the soil with nitrogen. As a boy I remember driving a tractor to fertilize with it.

Ammonia production also uses huge amounts of energy. It is created by transforming nitrogen (N2) into ammonia (NH3) by reaction with hydrogen. The source of that energy is typically natural gas. Burning natural gas, of course, creates carbon dioxide, a greenhouse gas. IEA estimates world CO2 emissions from ammonia production in 2022 were 450 million tons.

But natural gas emitted in the atmosphere is a much more potent greenhouse gas – 80 times more potent than CO2. So producers of ammonia are seeking ways to lower their “carbon footprint” – the emissions of CO2 and methane resulting from its manufacture. This leads us to “differentiated” natural gas.

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This case illustrates an increasing problem related to salt water disposal in the Permian Basin. Recent articles in Texas Monthly and other publications have documented leaks from old abandoned wells caused by injection of massive quantities of salt water into shallow formations.Iskandia Energy Operating, Inc. v. SWEPI LP, No. 08-22-00103-CV, El Paso Court of Appeals, October 31, 2023.

Iskandia acquired oil and gas leases covering some 5,000 acres in Loving County, along with more than 100 producing wells. Iskandia planned to re-stimulate the wells and increase production.  The wells produce from formations in the Delaware Mountain Group in the Delaware Basin lobe of the Permian Basin–the Cherry Canyon, Bell Canyon and Brushy Canyon formations. These formations are just above the Bone Springs and Wolfcamp formations, which are the principal formations being drilled by operators in the Delaware lobe. Iskandia’s wells produce oil and salt water; the salt water is re-injected into the producing formation. Iskandia produces and re-injects about 6,000 barrels per day on its leases, which maintains the formation pressure and facilitates continued oil production.

SWEPI owns and operates leases adjacent to the Iskandia leases and is drilling wells in the Bone Springs and Wolfcamp. These wells also produce large volumes of salt water, and SWEPI has drilled disposal wells on its leases that inject that water into the Delaware Mountain Group formations. Iskandia produced evidence that SWEPI is injecting more than 2 million barrels per month into the DMG, and has injected more than 75 million barrels in just three years.

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The US Supreme Court has agreed to hear Devillier v. State of Texas, Docket No. 22-913, a suit by the Devilliers and others to recover for damages to their land caused by the State.

The facts are described in the Devillier’s Petition for Writ of Certiorari:

This case arises out of a series of inverse-condemnation cases filed in Texas state courts, all alleging that a Texas highway project had caused widespread flooding. The flooding was no accident: In an effort to make sure that the eastbound lanes of Interstate Highway 10 (“IH-10”) would be available as an evacuation route in the event of a flood, the Texas Department of Transportation raised the highway’s elevation, added two additional lanes, and installed a nearly three-foot “impenetrable, solid concrete traffic barrier on the highway’s centerline.” The median barrier worked as intended, creating a weir that barricaded rainfall on the north side: water that would otherwise have flowed south into the Gulf of Mexico stopped deat at Highway 10. Texas’s plan worked, at least in that it ensured that part of the road remained navigable even in flood conditions. But it was not without cost. Keeping the south side of IH-10 dry meant keeping the north side of IH-10 wet and, in times of heavy rainfall, flooded entirely.

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