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Last week the Texas Supreme Court agreed to hear Texas Outfitters Limited v. Carolyn Grace Nicholson, No. 17-059, from the San Antonio Court of Appeals. I wrote about this case when the Court of Appeals decided it last year.  Interesting facts. The issue is whether the holder of executive rights can be liable for refusing to lease.  The courts below said yes and awarded the plaintiff $867,000 in lost bonus money.  Briefs on the merits have already been filed. No date yet for oral argument. The Court of Appeals’ opinion may be found here.

 

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Litigation of retained acreage clauses seems to be on the rise.  Apache Deepwater, LLC, v. Double Eagle Development, LLC, decided by the El Paso Court of Appeals last year, is now before the Supreme Court on petition for review, and the Court has asked the parties to file briefs on the merits. This after the Court recently issued two opinions on the same subject.

The lease in question in Apache v. Double Eagle covers a section of land in Reagan County. Four vertical wells were drilled and completed on the lease prior to the end of the primary term, and the lessee designated four proration units, 160 acres each, for those four wells. After the end of the primary term, three of those wells ceased producing. The lease has the following retained acreage clause:

Notwithstanding anything to the contrary in the foregoing, Lessee covenants to release this lease after the primary term except as to each producing well on said lease, operations for which were commenced prior to or at the end of the primary term and the proration units as may be allocated to said wells under the rules and regulations of the Railroad Commission of Texas or 160 acres, whichever is greater, insofar as said proration units cover from the surface to the base of the deepest formation penetrated by the deepest of said wells. The description of said tracts around said well shall be compiled and prepared by the Lessee for purpose of executing such release.

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Here’s another flow diagram, from Lawrence Livermore National Laboratory, showing sources and uses of energy in the US, sent to me by a client. Note how much of our energy comes from fossil fuels – natural gas, coal and petroleum. We are addicted to hydrocarbons, and will be for some time. Recent changes in weather patterns reflect what is becoming more obvious – increased CO2 in the atmosphere is warming our planet. But how are we going to stop driving our cars, running our air conditioners, powering our computers? The problem with fossil fuels is that they are too efficient a source of energy. (click to enlarge)

US-Energy-Consumption

And here’s a diagram given me by my niece, who is studying biology. I can’t tell you anything about it except that it reflects the inner workings of a human cell.  Things have certainly changed since I studied biology. Note the reference to “Energy” on the right side of the diagram, coming from glucose – sugar.

Cell

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NARO Texas‘ convention is being held July 18-20 at the Hyatt Regency Hotel on the Riverwalk in San Antonio.  Several good speakers will be presenting on topics including how to negotiate retained acreage and pooling clauses, how to handle mineral buyers, and developments in horizontal drilling.  I will be speaking about production sharing agreements and allocation wells.  NARO-convention

The link for online registration for this event: www.naro-us.org/events

Additional information can be found at: www.naro-us.org/texas

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In Devon v. Apache, No. 11-16-00105-CV, the Eleventh Court of Appeals sheds some light on a vexing problem that remarkably has never been addressed by a Texas court.  To understand the problem, consider the facts in Devon v. Apache:

Norma Jean Hester leased her one-third mineral interest in land in Glasscock County to Apache, reserving a one-fourth royalty. The remaining mineral owners leased to Devon, also reserving a one-fourth royalty. Apache and Devon were not able to reach agreement on joint development of the property, and Apache drilled seven wells on the property without Devon’s participation. Under Texas law, Devon and Apache were co-tenants, and Apache is obligated to account to Devon for 2/3rds of the net profits from the wells, which Apache did. But Apache refused to pay Devon’s royalty owners. Continue reading →

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On April 27 the Texas Supreme Court issued its opinion in Perryman v. Spartan Texas Six Capital Partners, Ltd., No. 16-0804. The dispute was over ownership of the royalty interest in 206 acres of land in Montague County and construction of a royalty reservation in a conveyance of the property.  The Supreme Court disagreed with the trial court’s and court of appeals’ construction of the deed reservation and with the construction argued by both sides in the dispute.  The case illustrates the need to be clear in drafting deed reservations and exceptions.TexasBarToday_TopTen_Badge_Small

In 1977, Ben Perryman conveyed the 207 acres to his son and daughter-in-law, Gary and Nancy Perryman. The deed contains the following:

LESS, SAVE AND EXCEPT an undivided one-half (1/2) of all royalties from the production of oil, gas and/or other minerals that may be produced from the above described premises which are now owned by Grantor.

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I love these energy flow diagrams from the Energy Information Administration. Below is the one for total energy sources and uses. EIA has others for crude oil, natural gas, coal and electricity. Click to enlarge.EIA-US-Energy-Flow-2017Here’s the flow chart for natural gas. Note how much US gas comes from shale gas wells and oil wells.

EIA-US-natural-gas-flow-2017

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Lona Hills Ranch, LLC v. Creative Oil & Gas Operating, LLC, et al., No. 03-17-00743-CV, Austin Court of Appeals.

Creative Oil & Gas held an oil and gas lease on Lona Hills Ranch’s property. Lona Hills concluded that the lease had expired, but Creative disagreed and filed for a permit to drill a new well on the lease. Lona Hills protested the permit on the ground that the lease had expired. But the Texas Railroad Commission ruled that Creative had a “good-faith claim” that its lease was still in effect and granted the permit. So Lona Hills sued Creative in Lee County for trespass and trespass to try title on the ground that the lease had expired.

TexasBarToday_TopTen_Badge_SmallIn response to Lona Hills’ suit Creative filed counterclaims for breach of the lease “by wrongfully claiming the Lease has terminated and wrongfully repudiating the Lease.” Lona Hills then filed a motion to dismiss Creative’s counterclaims under Texas’ Anti-SLAPP statute, the Texas Citizens Participation Act (TCPA), Tex.Civ.Prac. & Rem. Code Chapter 27. Continue reading →

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Last Friday the Texas Supreme Court issued opinions in XOG Operating, LLC v. Chesapeake Exploration Limited Partnership et al., No. 15-0935, and Endeavor Energy Resources, L.P. et al. v. Discovery Operating, Inc. et al., No. 16-0155.  In both cases, the Court affirmed the decisions of the trial courts and courts of appeals.  Both cases garnered substantial attention from the industry, as evidenced by amicus briefs from the Permian Basin Petroleum Association, the Texas Independent Producers and Royalty Owners’ Association, the Railroad Commission and the Texas Oil and Gas Association, among others.

Both cases construe retained acreage clauses. The opinion in Endeavor includes a good explanation of the purpose and effect of retained acreage clauses, the purpose and operation of field rules and proration units, and the interplay between the two. I summarized the facts and results in both of these cases when the Supreme Court granted the petitions for review. My prior post can be viewed here.   I have also previously written about the relationship between field rules and retained acreage clauses. I’ve said that it is a mistake to rely on field rules and proration units to determine how much acreage can be retained under a retained acreage clause; these cases illustrate why that is so.

One comment on Endeavor:  the field rules applicable in that case were for the Spraberry (Trend Area) Field. Those rules provide for “standard” proration units of 80 acres but allow the operator to assign up to 160 acres to a well, with a corresponding increase in its allowable rate of production. The allowable rate for a well on an 80-acre proration unit is 515 barrels per day.  The retained acreage clause provided that the lease would expire except for the “proration unit assigned to a well,” and that each proration unit would “contain the number of acres required to comply with” Railroad Commission rules “for obtaining the maximum allowable.” Endeavor assigned 80 acres to each of four wells, and Discovery said the lease expired except as to those four proration units “assigned” to the wells. Endeavor argued that it was entitled to 160 acres per well because that amount of acreage was necessary “for obtaining the maximum allowable.”  The Supreme Court agreed with Discovery.  In discussing Endeavor’s argument on the “maximum allowable” language, the Court quotes from two CLE papers: Continue reading →

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On April 2, the Superior Court of Pennsylvania issued its opinion in Briggs v. Southwestern Energy Production Co., 2018 PA Super 79, No. 1351 MDA 2017.  It held that “hydraulic fracturing may constitute an actionable trespass where subsurface fractures, fracturing fluid and proppant cross boundary lines and extend into the subsurface estate of an adjoining property for which the operator does not have a mineral lease, resulting in the extraction of natural gas from beneath the adjoining landowner’s property.” In doing so, the court rejected the reasoning of the Texas Supreme Court in Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008), which held that the rule of capture prevented any such cause of action.  The court agreed with the conclusion of a federal district court in West Virginia in Stone v. Chesapeake Appalachia, LLC, No. 5:12-CV-102, 2013 WL 2097397 (N.D.W.Va. Apr. 10, 2013), which held that hydraulic fracturing can give rise to a trespass claim. The court also agreed with Justice Johnson’s dissent in Coastal v. Garza, in which he said that he “would not apply the rule [of capture] to a situation  … in which a party effectively enters another’s lease without consent, drains minerals by means of an artificially created channel or device, and then ‘captures’ the minerals on the trespasser’s lease.”

The court concluded:

… we are persuaded by the analysis in the Coastal Oil dissent and Stone, and conclude that hydraulic fracturing is distinguishable from conventional methods of oil and gas extraction. Traditionally, the rule of capture assumes that oil and gas originate in subsurface reservoirs or pools, and can migrate freely within the reservoir and across property lines, according to changes in pressure. … Unlike oil and gas originating in a common reservoir, natural gs, when trapped in a shale formation, is non-migratory in nature. … Shale gas does not merely “escape” to adjoining land absent the application of an external force.  …

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