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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.

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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.TexasBarToday_TopTen_Badge_Small

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 →

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Senate Bill 421, reforming how pipelines exercise the power of eminent domain to condemn right-of-way, died at the end of the Texas legislative session after Rep. Tom Craddick sought to make amendments opposed by its author, Sen. Lois Kolkhorst. Kolkhorst said Craddick “seized the legislation” from its house sponsor and severely weakened the bill. The bill would have prevented low first-time offers for easements, improved easement terms and set mandatory meetings with property owners to explain the eminent domain process.

“The language of the House version would have turned back the clock for landowners and greatly harmed them,” Kolkhorst said in a statement Sunday. “I cannot agree to the Craddick proposal, which would do the opposite of what we set to do: help level the playing field for landowners in the taking of their property.”

This is the third legislative session in which Kolkhorst’s efforts to reform eminent domain have failed. Kolkhorst said she isn’t giving up. “This issue will and must remain a top state legislative priority,” she said.

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TP-ticketA couple of years ago I wrote about the history of Texas Pacific Land Trust (TPLT), one of the largest landowners in Texas.  The trust was formed out of the bankruptcy of Texas Pacific Railroad, which received 3.5 million acres of land in West Texas in consideration for building the T&P Railway across the state. It went into bankruptcy in 1888, and its land was put in a trust to sell of to pay the railroad’s bondholders. Those certificates of trust were later listed on the New York Stock Exchange, where they trade under the ticker TPL. Its shares closed today at $786.44 per share, a market cap of $6.2 billion.

TPLT now owns some 888,000 acres of land. The minerals under its land were spun off into a separate company and acquired by Texaco, now Chevron – now one of the largest mineral owners in the Permian. TPLT has royalty interests under about 500,000 of those acres, in El Paso, Hudspeth, Culberson, Reeves, Pecos, Winkler, Ector, Midland and Glasscock Counties. In addition to collecting royalties the trust makes money granting easements and collecting damages from oil companies operating on its land, and has recently begun a business supplying water to the industry. Continue reading →

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Hays County and the City of Kyle, and private landowners, have sued Kinder Morgan, the Texas Railroad Commission and its commissioners over the route for Kinder Morgan’s Permian Highway Pipeline, a gas pipeline 42 inches in diameter, set to cross through the Texas hill country and Hays County.  KM-Permian-PL-routeKM-permian-PL-route-Hays-CoTexasBarToday_TopTen_Badge_SmallThe suit claims that the RRC has failed to establish regulations that implement the Legislature’s requirement, imposed by Section 121.052 of the Texas Utilities Code, to “establish fair and equitable rules for the full control and supervision of the pipelines … in all their relations to the public” and to “prescribe and enforce rules for the government and control of pipelines … in respect to transporting … facilities.”  The petition explains that, to obtain the right to condemn a pipeline easement, the pipeline company only needs to file a form T-4 with the RRC. The Commission “conducts no investigation, evaluates no alternative routes, entertains no adversarial inquiry, provides no notice, allows no hearing, and considers no evidence.” “The pipeline’s chosen route crosses some of the most sensitive environmental features in Central Texas and the Texas Hill Country, including the recharge zones of the Edwards and Edwards-Trinity Aquifers (which provide the drinking water supply for towns and cities such as Fredericksburg and Blanco) and endangered species habitat.”

The suit asks the court to find that the RRC has unconstitutionally delegated to Kinder Morgan the legislative and constitutional requirement that a government entity review and determine the necessity for the pipeline route, and enjoining Kinder Morgan from proceeding with condemnation until that has been accomplished.

Plaintiffs are represented by Richards Rodriguez & Skeith, LLP and Renea Hicks. The suit is No. D-1-GN-19-002161, in the 345, District Court of Travis County. A copy of the petition can be seen here:  01-OrigPet-Sansom

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Rystad Energy has released an analysis of gas flaring in the Permian Basin. Operators flared 533 million cubic feed per day during the fourth quarter of 2018 – more than some states use in a year.CaptureThe flared volumes represented an average of less than 5% of all gas produced. But results varied greatly by operator. (click to enlarge)

Capture-1According to a report by the Environmental Integrity Project, a result of the increased volumes of flared gas and emissions, excessive emissions of sulfure dioxide and hydrogen sulfide have increased pollution levels in Ector County above standards set by the EPA.

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Below is a Drillinginfo map of players in the Permian. Also see Forbes article here. Chevron’s position is derived from Texas Pacific Land Trust‘s spinoff of minerals under TPLT’s lands, subsequently acquired by Texas. It owns fee minerals in those lands. Click on image to enlarge. As Forbes says, ripe for consolidation.

https://www.oilandgaslawyerblog.com/files/2019/05/DrillingInfo-Permian-Full-Map-4.29.2019-800x450.jpg

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The San Antonio Court of Appeals handed down its opinion last week in Strickhausen v. Petrohawk Operating Company, No. 04-18-00636-CV.  The issue: Did Ms. Strickhausen ratify a pooled unit not authorized by her lease, or is she estopped from contesting the validity of the unit, because she accepted royalty checks calculated on her unit interest in production? The trial court held that she did; the Court of Appeals reversed and remanded, holding that there were issues of fact as to whether she intended to ratify or was estopped.

The issues relate to Petrohawk’s WK Unit 4 1H Well in La Salle County:

WK-Unit-4Ms. Strickhausen owns a 1/2 mineral interest in Tract 3 shown above. Her lease prohibits pooling without her consent. Without obtaining her consent, Petrohawk filed a pooled unit designation including her lease and drilled the well. It then asked Ms. Strickhausen to ratify the unit. Settlement negotiations were unsuccessful. Petrohawk sent Ms. Strickhusen checks for her share of unit production, which she cashed, but her attorney continued to tell Petrohawk that she objected to the pooled unit.

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Last week the Texas Supreme Court handed down its opinion in Texas Outfitters, Limited, LLC v. Nicholson, No. 17-0509, once again addressing the duty of the holder of executive rights to minerals owned by another. The Court affirmed a judgment of $867,654.32 plus interest and costs against Texas Outfitters for breaching that duty.

Dora Jo Carter owned the surface estate of 1,082 acres of land in Frio County. She and her two children owned 50% of the minerals; the other 50% were owned by the Hindes Family. In 2002 the Carters sold the land to Texas Outfitters, owned by Frank Fackovec, for $1 million, financing a part of the purchase price. Fackovec intended to live on the ranch and operate a hunting business. The Carters sold Texas Outfitters 1/24 of the minerals along with the land, and also conveyed to Texas Outfitters the exclusive right to lease the 11/24 mineral interest retained by the Carters. Fancovec wanted the right to lease the entire 50% mineral interest to be sure his surface estate was protected if and when oil and gas development took please. This right to lease the Carters’ minerals, the executive right, became the source of the later controversy.

In June 2010 the Hindes family leased their 50% mineral interest in the ranch to El Paso Exploration for $1,750 per acre and 25% royalty. El Paso made the same offer to Fackovec, but he declined the offer, despite the Carters’ request that he accept it. The Carters and Facovec then had settlement negotiations, resulting in a tentative settlement in which (1) Texas Outfitters would convey back to the Carters the executive rights to their 11/24 mineral interest, (2) the parties would agree to as-yet unspecified restrictive covenants burdening the mineral estate for the protection of the surface estate, (3) the Carters would forgive $263,000 of the note they held from Texas Outfitters, and the parties would sign a lease to El Paso. This settlement later fell apart over failure to reach agreement on the terms of the restrictive covenants. The Carters sued Texas Outfitters and Fackovec in June 2011, alleging that he had breached his duty as holder of their executive rights by refusing to lease to El Paso. Continue reading →

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Paul Yale and Brooke Sizer, lawyers at Gray Reed & McGraw in Houston, published an article in the most recent Section Report of the Oil, Gas & Energy Resources Law Section of the State Bar, “ A Brief Look at the Law of Hydraulic Fracturing in Texas and Beyond.” It will be published in a future issue of The South Texas Law Review. It is an excellent overview of the development of horizontal drilling and hydraulic fracturing and the law and controversies surrounding their use. The article is balanced and fully supported by citations to resources and authorities.

The authors cover the benefits and risks of hydraulic fracturing, including reduction of foreign imports, jobs, reduced prices for consumers, water quality and usage, air quality, earthquakes, and social impacts. It gives a balanced view of the ongoing debate over whether increased use of natural gas for generation of electricity reduces greenhouse gas emissions, whether there is a connection between hydraulic fracturing and earthquakes, and adverse impacts on roads and other infrastructure.

The article also contains information on the process of hydraulic fracturing itself:

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