Suppose Company A obtains an oil and gas lease on Blackacre from the owner of a 1/6 mineral interest in Blackacre, and Company B obtains and oil and gas lease from the owner of the other 5/6 mineral interest. That makes Company A and Company B co-tenants leasehold mineral estate. Usually in such a circumstance the two companies will sign an operating agreement naming one of them as operator and agreeing to share in the costs of drilling wells on Blackacre. But what if Company B refuses to enter into an operating agreement and drills and produces wells on Blackacre, paying all the costs?
Such was the case in Cromwell v. Anadarko, No. 23-0927. Anadarko refused to enter into an operating agreement with Cromwell. As a co-tenant, Cromwell was entitled to his share of net profits from wells on Blackacre after payout of the wells, and Anadarko did account to Cromwell for his share of net profits — until the primary terms of Cromwell’s leases expired. Then Anadarko took new leases from Cromwell’s lessors and told Cromwell that its leases had expired because Cromwell did not produce any oil and gas from the property. The El Paso Court of Appeals agreed with Anadarko, relying on its own prior opinion in Cimarex Energy Co. v. Anadarko Petroleum Corp., 574 S.W.3d 73 (Tex.App.–El Paso 2019, pet. denied). The Texas Supreme Court reversed, holding that the habendum clauses in Cromwell’s leases only required the oil or gas be produced to keep the lease in effect beyond the primary term, not that Cromwell had to produce it. The Court disapproved of Cimarex v. Anadarko.
A typical habendum clause in an oil and gas lease provides that the lease remains in effect after the primary term “for as long as oil or gas is produced from the leased premises.” Based on this language, the Supreme Court concluded that production by any co-tenant will maintain the leases of all co-tenants, whether or not they have signed an operating agreement.
Situations like these cases have become more common in my experience, especially since Cimarex v. Anadarko. The company holding the most leasehold estate in a tract could in effect freeze out the company holding only a small leasehold interest by refusing to enter into an operating agreement. Such is no longer the case.
The Supreme Court’s opinion contains the following language that I believe miss-states the law of co-tenancy:
Nor does our holding leave Anadarko without a remedy. Cromwell and Anadarko are co-tenants, both owning shares of the working interest on the same land. A non-producing co-tenant must accounting to the producing co-tenant for the reasonable and necessary costs of producing and marketing the minerals. See Cox v. Davison, 397 S.W.2d 200, 201 (Tex. 1965). If Cromwell were to refuse to pay his share of the operating expenses (which didn’t happen), Anadarko could sue Cromwell for an accounting. Tenancy law already provides Anadarko a remedy if Cromwell fails to fulfill his obligations as a co-tenant; it need not (and, here, cannot) seek termination of Cromwell’s leases.
The Court has it exactly backwards. Anadarko owes Cromwell, the non-consenting co-tenant, an accounting for the costs and revenues of Anadarko’s production. That is the holding in Cox v. Davison. Anadarko cannot force Cromwell to pay costs.
The Court does not address the issue of Cromwell’s duty to its lessors. Does Cromwell owe royalties even though it receives no revenue from the wells until after payout? Or does he owe royalties only on net profits he receives as a non-participating co-tenant? To my knowledge no court has addressed this issue. Devon Energy v. Apache, 550 S.W.3d 259 (Tex.App.-Eastland 2018, review denied) held that the producing co-tenant owes no royalty to the royalty owners of the non-participating co-tenant, but it did not say what royalty obligation the non-participating co-tenant owed to its royalty owners. Of course this problem can be addressed in the oil and gas lease, requiring the lessee to pay royalties on production whether or not the lessee participates in drilling and producing the wells on the leased premises.