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Last week the Texas Supreme Court handed down its decision in Ammonite v. Railroad Commission, upholding the Commission’s denial of Ammonite’s MIPA application. Justice Young filed a dissenting opinion, joined by Justice Busby. The case has little implication for most mineral owners in Texas but is an important loss for the State of Texas and an important decision for future MIPA applications.

The State of Texas owns the lands within the beds of navigable rivers and waterways, some 80,000 miles of rivers and streams. Where oil and gas development occurs adjacent to rivers, operators often lease those riverbeds and include them in pooled units. Revenues from leasing of State lands goes to the State’s permanent school fund, which funds primary education. But EOG Resources, developing horizontal wells in the Eagle Ford Shale along both sides of the Frio River, decided not to lease the State’s riverbed, and left it out of the units.

Ammonite Oil & Gas, owned by William Osborn (my first cousin) leases riverbeds and stranded State tracts from the General Land Office and works to get them included in adjacent pooled units. If it is unable to reach agreement Ammonite files an action under the MIPA.

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Last December a federal court in Oklahoma issued an order in a long-continuing suit between the United States and the Osage Nation, as plaintiffs, and Enel Green Power North America. United States v. Osage Wind, LLC, et al., No. 4:14-cv-00704-JCG-JFJ (US Dist. Ct. N.D. Okla., Dec. 20, 2023)  Enel’s subsidiary operates a wind farm on 8,400 acres of land in Osage County, with 84 wind turbines. The Osage Nation and the US government are seeking to enjoin Enel from operating its wind farm. The court’s order holds that the plaintiffs are entitled to an injunction requiring Enel to remove its wind turbines.

The Osage have a fascinating history, most recently made famous by the book Killers of the Flower Moon by David Gran, and the 2023 release of the movie by the same name starring Leonardo DiCaprio.

In the early 19th century the Osage controlled a huge area between the Missouri and Red Rivers, the Ozarks to the east, and the foothills of the Wichita Mountains to the south.  The US government first required the tribe to move to a reservation in southeastern Kansas, containing some 325,000 acres of land. In 1870 Congress passed and the tribe ratified the Drum Creek Treaty, providing that the Osage Nation’s land in Kansas be sold and the proceeds paid to the Osage Nation. The Osage received $1.25 an acre for the land, which they used to purchase their present-day reservation in Oklahoma, now the county of Osage, some 1,470,000 acres. The surface estate of those lands was later “allotted” to individual tribe members, some 640 acres each, and most of those lands were later sold. But the mineral estate in the tribal lands remained with the Osage Nation, managed by the Bureau of Indian Affairs.

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In Hamilton v. ConocoPhillips, the Corpus Christi Court of Appeals construed a Production Sharing Agreement – to my knowledge the first appellate court to do so.

A Production Sharing Agreement is an agreement between mineral owners and an operator to allow the operator to drill a horizontal well whose lateral will be located partly on the leased premises and partly on other lands. Generally, such agreements provide that the allocation will be based on the number of productive lateral feet of the well on each tract crossed by the well. If a well crosses Tract A and Tract B, and 60% of the productive lateral is on Tract A, then the parties agree that the royalty owners in Tract A will be paid royalty on 60% of the production from the well. Such an agreement is a form of combining multiple tracts to produce from a single well–essentially a form of pooling with a different method of allocation.

In Hamilton, Lloyd Hamilton owned a mineral interest in the original Hamilton Ranch in DeWitt County, covering some 5,000 acres, which the Hamilton family leased to Burlington Resources Oil & Gas (now a subsidiary of ConocoPhillips). After the lease was signed the family partitioned the land and Lloyd received a separate surface tract, subject to the lease. The family then signed a Production Sharing Agreement allowing Burlington to drill wells located partly on the Ranch.

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Our firm represents the Opielas, who are involved in a dispute with the Railroad Commission and Magnolia Oil & Gas over a horizontal well located partly on the Opielas’ property. The case has made its way from the Commission to the trial court in Travis County, then to the Austin Court of Appeals, and the case is now pending on petition for review in the Texas Supreme Court.

Briefly, the facts are these:

Enervest applied for a permit for an allocation well to be located partly on the Opielas’ ranch of 640 acres in Karnes County. When the Opielas purchased the ranch it was under an old oil and gas lease held by some producing vertical wells. The Opielas acquired all of the mineral estate but previous owners had sold 3/4ths of the royalty. The lease contains a pooling clause, but a special provision says there can be no pooling for oil wells.

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In re Dallas County, Texas and Marian Brown, in her official capacity as Dallas County Sheriff, No. 24-0426, Texas Supreme Court, filed May 23, 2024.

In 2023 the Texas legislature passed Senate Bill 1045. The bill creates a new system of “business courts” having jurisdiction of high-stakes business cases. Notably, the judges of these new trial courts are not elected but are appointed by the Governor. The bill also creates a new 15th Court of Appeals to hear appeals of such cases, as well as any case against the State, state agencies and state officials.  This is the first case to challenge the constitutionality of SB 1045. Before the bill, suits against the State were filed in Austin and appeals went to the 3rd Court of Appeals in Austin.

Dallas County and others sued members of the Health and Human Services Commission in Travis County, alleging that HHSC has failed to timely transfer inmates from the Dallas County jail to state hospitals who have been held not competent to stand trial or not guilty by reason of insanity, as required by law. The trial court denied the defendants’ plea to the jurisdiction, and defendants appealed that ruling to the Austin Court of Appeals. The defendants filed a statement in that court indicating that, on September 1, 2024 (when the 15th Court of Appeals becomes effective), the appeal would be automatically transferred to the new 15th Court created by SB 1045, because the suit involves a case against state officials.

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Today the Texas Supreme Court decided Carl v. Hilcorp Energy Co, No. 24-0036. Its opinion addresses certified questions submitted to it by the US Fifth Circuit Court of Appeals concerning a class action suit pending in that court.

The Carls’ lease provided for payment of gas royalty based on its “market value at the well.” The lease also provided that royalty must be paid on gas “sold or used off the premises.” Hilcorp used some of the gas produced “off the premises” to transport or process the gas produced from the lease. Hilcorp did not pay royalty on the gas used. The Texas Supreme Court agreed with Hilcorp that it owes no royalty on the gas used off the premises.

This is another in a long line of cases in which the Court relies on its flawed reasoning in Heritage Resources v. Nationsbank. The Court’s reasoning: because the measure of gas royalty is “market value at the well,” the lessor must bear its share of post-production costs. Hilcorp’s use of gas for post-production costs must therefore be part of the cost borne by the lessor. One way to do that is to not pay royalty on the gas used. So, even though the lease provides for royalty on gas “used off the premises,” Hilcorp need not pay royalty on such gas as long as it is used to enhance the value of the gas after it leaves the lease. If Hilcorp were to use some of the gas for other purposes, royalty would be due.

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I am sometimes asked to evaluate whether a lease has terminated for failure to produce in paying quantities. It is not an easy question to answer. So here is a summary of how “paying quantities” are determined.

Basic Rules

When an oil and gas lease provides it will remain in effect after the primary term as long as oil or gas is produced from the leased premises, the law presumes that such production must be in “paying quantities.” The lease is entered into for the parties’ mutual benefit. If the lessee is no longer reaping a benefit because expenses exceed income, “the lessors should not be required to suffer a continuation of the lease after the expiration of the primary period merely for speculation purposes on the part of the lessees.” Garcia v. King, 164 S.W.2d 509 (Tex. 1942)

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Yesterday the US Supreme Court issued its opinion in DeVillier et al. v. Texas, No. 22-913, allowing 120 landowners to proceed with their takings claims against the State.

I wrote about this case when the Court agreed to hear it.

The Summary of facts in the Court’s Syllabus describes the issue:

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The US Department of Interior finalized a rule on Friday increasing royalty rates on oil and gas leases of federal land from 1/8th to 1/6th, and increasing minimum bonus rates from $2/acre to $10/acre. The regulations also increase bonding requirements to secure operators’ obligation to plug their wells.

I’ve always been puzzled why federal leases are not granted the same way the Texas General Land Office does, with competitive bidding. Almost all leases of lands owned by the State of Texas or University Lands reserve one-fourth royalty.

A lot of federal oil and gas leases cover offshore tracts, and thousands of wells have been drilled in federal offshore waters in the Gulf of Mexico. I recently heard a CLE presentation about companies’ plugging obligations in the Gulf. Unlike Texas, federal law provides that all operators in the chain of title to a federal well are jointly and severally liable for the plugging costs and for properly disposing of the platform once the wells are plugged. Many plugging obligations end up in bankruptcy courts, and prior operators are now receiving notices from the BLM notifying them of their plugging obligations. Louisiana also holds prior operators liable for plugging obligations. If prior operators in Texas retained liability for well plugging, the list of Texas “orphan wells” would shrink substantially.

Contact Information
John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
401 Congress Avenue, Suite 2700
Austin, Texas 78701
Phone: 512-480-5618
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