Oil and Gas Lawyer Blog

Published on: August 14, 2019

North Dakota Supreme Court Decides for Royalty Owner on Post-Production Costs

In a short opinion, the Supreme Court of North Dakota decided a case brought by Newfield Exploration against the North Dakota Board of University and School Lands to determine how royalties on gas should be calculated under the State’s leases to Newfield. The case illustrates how post-production costs can sometimes be hidden in “percentage-of-proceeds” or “POP” contracts for the sale of gas. Newfield Exploration Company v. State of North Dakota, No. 2019088, 2019 WL 3024639, decided 7/11/2019.

Newfield sold its gas to Oneok. The opinion describes this contract as follows:

Title to the gas passes to Oneok when it receives the gas from Newfield, but payment to Newfield is delayed until after Oneok processes the gas into a marketable form and sells the marketable gas. The price Oneok pays to Newfield for the gas is calculated based on 70-80% of the amount received by Oneok when Oneok sells the marketable gas. The 20-30% reduction of the price for which the marketable gas is sold accounts for Oneok’s cost to process the gas into a marketable form and profit.

The lease royalty clauses provided:

Lessee agrees to pay lessor the royalty on any gas, produced and marketed, based on gross production or the market value thereof, at the option of the lessor, such value to be based on gross proceeds of sale where such sale constitutes and arm’s length transaction.

All royalties on … gas … shall be payable on an amount equal to the full value of all consideration for such products in whatever form or forms, which directly or indirectly compensates, credits, or benefits lessee. Continue reading →

Published on: August 5, 2019

ConocoPhillips v. Ramirez – What is the effect of an oil and gas lease signed by the owner of a life estate?

By John McFarland

ConocoPhillips always seems to be getting into interesting scrapes.

In 1995, ConocoPhillips bought oil and gas leases from EOG covering 1,058 acres, the Las Piedras Ranch, in Zapata County. At the time there was one producing well on the leases. The minerals belonged to the Ramirez family. One member of that family was Leonor, who died in 1990, owning a 1/4 mineral interest in the Ranch. Her will devised to her son Leon Oscar Sr. “all of my right, title and interest in and to Ranch Las Piedras … during term of his natural life,” and on his death “to his children then living in equal shares.” Leon Oscar Sr. signed an oil and gas lease on the Ranch, which was acquired by ConocoPhillips.

Leon Oscar Sr. died in 2006, survived by three children – Leon, Jr., Minerva and Rosalinda. In 2010 they sued ConocoPhillips and EOG for an accounting and to establish their title to 1/4 mineral interest in the Ranch. They alleged that the oil and gas lease signed by Leon Oscar Sr. was not binding on them as remaindermen following Leon Oscar’s life estate, and that EOG and ConocoPhillips owed them an accounting and payment for 1/4 of the net profits from oil and gas production from the Ranch, from the date of first production. They also sued for prejudgment interest and attorneys’ fees. The plaintiffs settled with EOG, and in 2015 the trial court signed a final judgment against ConocoPhillips awarding plaintiffs title to the minerals and $11.1 million for their share of net profits on production from the Ranch, plus $950,000 in prejudgment interest and $1,125,000 in attorneys’ fees. In 2017, the San Antonio Court of Appeals affirmed. 534 S.W.3d 490. In June of this year the Texas Supreme Court granted ConocoPhillips’ appeal. Oral argument is set for September 17. ConocoPhillips Company, et al. v. Ramirez, No. 17,0822

Continue reading →

Published on: July 29, 2019

Flaring in the Permian

By John McFarland

Much has been written lately about flares of natural gas in the Permian Basin. A website called Skytruth provides a helpful interactive map allowing amazing satellite views of flares over time. Here’s a snapshot of flares in the Permian (click on image to enlarge):

One can zoom in on the map and locate each flare. This one is just east of US 285 southeast of Orla:

Since the beginning of the boom in the Permian, the Texas Railroad Commission has never denied an operator’s application for a permit to flare. With low gas prices and lack of pipeline capacity, operators have turned to flaring gas in order to produce oil.

Continue reading →

Published on: July 22, 2019

Solar Leases

By John McFarland

Excellent article by Shannon L. Ferrell, Professor at the Department of Agricultural Economics at Oklahoma State University, on negotiating solar leases. You can download it here.

Published on: July 15, 2019

Administrative Hearings in Texas: Three Recent Cases

By John McFarland

Three recent cases illustrate a little known aspect of Texas law – administrative law and how it works, and doesn’t work. Although the cases don’t directly affect mineral owners, they show how different the Texas Railroad Commission’s administrative process is from other agencies’.

Many disputes in Texas are resolved not in trial courts but by administrative hearings. In many cases, the law that governs those hearings is the Administrative Procedure Act, found at Chapter 2001 of Texas’ Government Code. The hearings are held before an administrative law judge (ALJ) who works for the State Office of Administrative Hearings (SOAH). If two parties get into a dispute in which the law requires adjudication by an administrative hearing, an evidentiary hearing is held before an ALJ who hears testimony, takes evidence, and prepares a Proposal for Decision (PFD). The PFD then goes before the board of the responsible agency, which either adopts the PFD or makes changes, and issues a final order. That order can then be appealed to a state district court in Travis County. The district court acts as an appellate body, and must uphold the decision if it is supported by “substantial evidence” in the record from the administrative hearing and otherwise complies with the governing law.

The APA limits the grounds on which an agency can change a PFD and requires the agency to explain its reasons for doing so. APA section 2001.058(e) provides:

A state agency may change a finding of fact or conclusion of law made by the administrative law judge, or may vacate or modify an order issued by the administrative judge, only if the agency determines:

(1) that the administrative law judge did not properly apply or interpret applicable law, agency rules, written policies provided under Subsection (c), or prior administrative decisions;

(2) that a prior administrative decision on which the administrative law judge relied is incorrect or should be changed; or

(3) that a technical error in a finding of fact should be changed.

The agency shall state in writing the specific reason and legal basis for a change made under this subsection.

Two cases, both from the Austin Court of Appeals, are appeals of orders by administrative agencies. Hyundai Motor America v. New World Car Imports San Antonio, Inc., No. 03-17-00761-CV, is an appeal of a decision by the Board of the Texas Department of Motor Vehicles. The case involves the obscure laws that govern the relationships between car manufacturers and their dealers. Continue reading →

Published on: July 8, 2019

Trial v. Dragon – The Duhig Doctrine and Estoppel by Deed

By John McFarland

Herein of a case that will probably be of interest only to law professors and title attorneys.

Leo Trial had six brothers and sisters. They inherited 237 acres in Karnes County. In 1983 Leo gave his wife Ruth one-half of his 1/7th interest in the property. In 1992, Leo and his siblings sold the land to the Dragons, reserving the minerals for a term of 15 years. But Leo’s wife Ruth did not join in the deed. The deed included a general warranty of title. The Dragons did not get a title policy and did not investigate the title.

Leo Trial died in 1996 and willed his estate to a trust for Ruth’s life and then to their two sons, Joseph and Michael. Ruth died in 2010, and Ruth’s 1/14th interest in the 237 acres passed to her sons.

The Trials’ 15-year term mineral interest expired in 2008. At the time there was production from the property, and the Dragons contacted the operator to transfer all royalties to them. The operator did so, not realizing that Ruth still had an interest in the property, a fact was not discovered until 2014. The operator then put Ruth’s interest in suspense, and the Dragons filed suit against the Trial sons, seeking to acquire their 1/14th interest in the property under the Duhig doctrine and the doctrine of estoppel by deed. Continue reading →

Published on: July 1, 2019

How to Identify and Resolve Your Oil and Gas Royalty Underpayments

By John McFarland

Last week MineralSoft published a webinar in which I was interviewed by Jay Snodgrass, VP of MineralSoft, about royalty underpayments. You can listen to it here.

I met Jay when MineralSoft was just getting started. It is a software company providing solutions for royalty owners to manage their interests. MineralSoft was recently acquired by Drillinginfo. MineralSoft also has a good blog addressing issues of interest to royalty owners.

In my experience it is getting more and more difficult for royalty owners to understand their check skirts. Multiple adjustments for previous months, different formats for reporting, and more complex marketing arrangements by producers make it harder for royalty owners to tell whether their lessees are properly making and reporting royalty payments in compliance with their lease. Companies like MineralSoft are addressing that problem.

Published on: June 19, 2019

Juneteenth

By John McFarland

Last Saturday our firm participated in the annual Austin parade celebrating Juneteenth, the day in 1864 it was announced in Texas that all slaves were free. The parade is the biggest in Austin, a celebration of freedom that has become a state holiday in Texas and 44 other states. June 19 also is my mother’s birthday.

Lincoln’s Emancipation Proclamation was issued on September 22, 1862, with an effective date of January 1, 1863. It declared that all slaves in the Confederate States would be free – excluding the five border states not in rebellion, and excluding the three zones then under Union occupation – Tennessee, lower Louisiana and Southeast Virginia.

Lee surrendered at Appomattox on April 9, 1864, but the Army of the Trans-Mississippi did not surrender until June 2. Union Army General Gordon Granger arrived on Galveston Island with 2,000 federal troops on June 18, to occupy Texas. The following day, from the balcony of Galveston’s Ashton Villa (see photo), Granger read aloud General Order No. 3:

Continue reading →

Published on: June 13, 2019

What Happens to Unclaimed Royalties?

By John McFarland

A reader alerted me to a Texas Supreme Court mandamus proceeding about unpaid royalties, In Re The Estate of Ebbie Edward Allen, Jr., No. 19-0027. Lawyers for the Relator asked the court to require the Texas Comptroller to audit Chesapeake and require it to deposit royalties not paid to Mr. Allen’s estate into the state’s unclaimed properties fund. The Supreme Court refused to take the case. The facts illustrate a little-known aspect of what can happen when royalties owed are not paid.

According to the petition, Ebbie Allen was an elderly man who lived alone on his 705-acre property in Brazos County and who signed an oil and gas lease in 1993, which was assigned to Chesapeake. In 1994, Chesapeake completed a horizontal well on the property and produced it until 2009, when it sold the lease to Envervest. Chesapeake produced 26,000 barrels and 2 Bcf of gas from the well. It sent a division order to Mr. Allen but he refused to sign it because he disagreed with the royalty decimal on the division order. Mr. Allen made attempts to resolve the royalty issue but never succeeded, and he subsequently passed away. Neither he nor his estate ever received any royalties on Chesapeake’s production. (After Enervest purchased the lease, the royalty issue was resolved and Mr. Allen’s estate received royalties from Enervest’s production, including some $15,000 in royalties that Enervest had deposited to the Comptroller’s unpaid properties fund.)

Chesapeake refused the Estate’s demands for payment, based on the four-year statute of limitations for royalty claims. Chesapeake also failed to deposit any of the royalties with the Comptroller. The Comptroller refused the Estate’s request that it audit Chesapeake’s records for unclaimed royalties that by law must be remitted to the Comptroller. In response to the Estate’s mandamus petition, the Comptroller responded that it had complete discretion whether and when to conduct audits and so could not be compelled to do so.

Continue reading →

Published on: June 5, 2019

Burlington v. Texas Crude – another Supreme Court Case on Post-Production Costs

By John McFarland

The Texas Supreme Court has denied motion for rehearing of its opinion in Burlington Resources Oil & Gas Company v. Texas Crude Energy, No. 17-0266. The case addresses deductibility of post-production costs in the context of an overriding royalty. The case may, however, have implications for post-production-cost deductions in oil and gas royalty clauses.

Texas Crude acquired oil and gas leases in Live Oak, Karnes and Bee Counties, and entered into an agreement with Burlington to develop those leases. The parties agreed that any oil and gas lease acquired by either party within the designated area would be part of the development agreement, and that Texas Crude would receive an overriding royalty interest in all leases within the development area. Texas Crude subsequently sued Burlington over various alleged breaches of the development agreement, including the deduction of post-production costs from Texas Crude’s overriding royalties. The parties filed summary judgment motions asking the trial court to construe the language in the assignments of overriding royalty, and the trial court ruled that post-production costs were not deductible. The parties agreed to seek an interlocutory appeal of this issue, which the court granted. The Corpus Christi Court of Appeals agreed to hear the case, and it affirmed the judgment of the trial court. 516 S.W.3d 638. Burlington then appealed to the Texas Supreme Court, which reversed and remanded, holding that the language of the overriding royalty assignments permits deduction of (some?) post-production costs.

The pertinent language of all of the overriding royalty assignments is identical:

The overriding royalty interest share of production shall be delivered to ASSIGNEE or to its credit into the pipeline, tank or other receptacle to which any well or wells on such lands may be connected, free and clear of all royalties and other burdens and all costs and expenses except the taxes thereon or attributable thereto, or ASSIGNOR, at ASSIGNEE’S election, shall pay to ASSIGNEE, for ASSIGNEE’S overriding royalty oil, gas or other minerals, the applicable percentage of the value of the oil, gas or other minerals, as applicable, produced and saved under the leases. “Value”, as used in this Assignment, shall refer to (i) in the event of an arm’s length sale on the leases, the amount realized from such sale of such production and any products thereof, (ii) in the event of an arm’s length sale off of the leases, the amount realized for the sale of such production and any products thereof, and (iii) in all other cases, the market value at the wells.

The unanimous decision, opinion by Justice Blacklock, held that the controlling language of the assignments is “delivered to ASSIGNEE or to its credit into the pipeline, tank or other receptacle to which any well or wells on such lands may be connected …” Texas Crude argued that the controlling language was in the definition of “Value”: “the amount realized from such sale of such production and any products thereof.” Texas Crude contended that under the court’s prior opinion in Chesapeake v. Hyder, 483 S.W.3d 870 (2016), a royalty based on the “amount realized,” without more, is free of post-production costs, and that the “into-the-pipeline” language would not be relevant unless Texas Crude elected to take its royalty share of production in kind. Continue reading →