Lease clauses

Published on: June 5, 2020

Texas Supreme Court Acts on Two Significant Oil and Gas Cases

Yesterday the Texas Supreme Court denied a petition in one case and granted a petition in the other, both dealing with provisions in oil and gas leases.

The Court denied Chesapeake’s petition in Chesapeake v. Bell, construing an express drainage offset clause in Bell’s lease. The San Antonio Court of Appeals’ decision in favor of Bell stands – for now. The case goes back to the trial court for trial on the merits. I wrote about the Court of Appeals’ decision here.

The Supreme Court granted Endeavor Energy’s petition for review in Endeavor Energy Resources v. Energen Resources, No. 18-1187, dealing with a continuous drilling provision in a lease retained acreage clause.

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Published on: September 18, 2019

Texas Supreme Court Opines on Consent-to-Assign Provision

By John McFarland

In 2017 I wrote about consent-to-assign provisions in oil and gas leases, and I commented on a case decided by the Tyler Court of Appeals that year addressing such provisions, Carrizo Oil & Gas v. Barrow-Shaver Resources, 2017 WL 412892. In December last year, the Texas Supreme Court wrote on that case, No. 17-0332, Barrow-Shaver Resources v. Carrizo Oil & Gas. The court split 5 to 4. Although the consent-to-assign provision in the case was in a farmout agreement, it sheds light on how such provisions in oil and gas leases would be treated by the courts.

The facts of the case are these: Carrizo owned an interest in an oil and gas lease covering 22,000 acres in north-central Texas. It entered into a farmout agreement with Barrow-Shaver under which Barrow-Shaver was granted the right to drill wells and earn assignments of the lease, with Carrizo retaining an overriding royalty. The farmout agreement contained the following provision:

The rights provided to [Barrow-Shaver] under this Letter Agreement may not be assigned, subleased or otherwise transferred in whole or in part, without the express written consent of Carrizo.

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Published on: June 14, 2018

Another Retained Acreage Clause Case Arrives in Supreme Court

By John McFarland

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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Published on: December 18, 2017

Checklist for Negotiating an Oil and Gas Lease

By John McFarland

I got the idea to start this blog after I made a presentation to a landowner group in which I distributed a checklist for negotiating an oil and gas lease. Soon thereafter, I began receiving calls from people who had found the checklist on the internet. The organization that sponsored my presentation had posted it on their website, and people searching for help on negotiating a lease found it. I decided that I should investigate this internet thing more closely, and that led to my decision to start this blog.

I have updated my checklist, and you can find the new and improved version here: Checklist for Negotiating an Oil and Gas Lease

And on a sadder note, I would like to mourn the passing of Tommy Nobis, the best linebacker ever to play for the University of Texas. He played for UT 1963-65, and was a member of its 1963 national championship team. He had a great professional career with the Atlanta Falcons, where he was the franchise’s first draft pick in 1966 and was known as “Mr. Falcon.” He still holds the record in the NFL for most tackles in a season, at 294. Nobis died December 13. He attended the football banquet at St. Stephen’s Episcopal School in 1965 where I was a sophomore and played defensive guard and center. My jersey, like Nobis’s, was number 60. He and I both sported a flat-top haircut, and for the rest of my high school football career my nickname was “Nobis.” Requiescat in pace, Tommy.

Published on: September 14, 2017

Supreme Court Considers Two Cases on Retained Acreage Clauses

By John McFarland

The Texas Supreme Court has reconsidered its decision not to hear two appeals involving retained acreage clauses: XOG Operating, LLC v. Chesapeake Exploration Limited Partnership, No. 15-0935, and Endeavor Energy Resources, L.P. v. Discovery Operating, Inc., No. 16-0155. The Court initially refused to consider the cases, after ordering briefs on the merits in both, but on September 1 the Court reversed itself. It reinstated XOG’s petition for review in XOG v. Chesapeake, and it granted the petition for review and set Endeavor v. Discovery for oral argument on January 9, 2018.

In XOG v. Chesapeake, the retained acreage clause is included not in an oil and gas lease, but in an assignment of lease from XOG. The assignment provided that, once the continuous development period in the assignment expires:

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Published on: April 26, 2017

What Constitutes “Reworking Operations” under an Oil and Gas Lease?

By John McFarland

Last December, the Eastland Court of Appeals issued its opinion in Crystal River Oil & Gas, LLC v. Patton, No. 11-15-00217-CV. Crystal River owned and operated wells on an oil and gas lease in Stonewall County. The oil wells on the lease produced twenty barrels of salt water for every barrel of oil, and Crystal River operated a disposal well on the lease to handle the salt water. The disposal well broke down, and while Crystal River was repairing the well it shut in its oil wells for more than sixty days. Robert Patton noticed the gap in production and obtained an oil and gas lease covering the same lands, based on his claim that Crystal River’s lease had terminated. Patton sued Crystal River to establish his title.

The oil and gas lease provided that, if after the primary term production should cease, “this lease shall not terminate if Lessee commences additional drilling or reworking operations within sixty days thereafter …” and thereafter re-establishes production. The case was submitted to the jury, which was asked:

Did the Defendants fail to commence drilling or reworking activities on the producing wells in question within 60 days after the wells ceased to produce oil and gas?

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Published on: March 23, 2017

Consent-to-Assign Provisions in Oil and Gas Leases

By John McFarland

Provisions in oil and gas leases requiring the lessor’s consent to assignment of the lessee’s interest are common. A lessor may have reasonable concerns about assignment of the lease, especially if the lessor is also the owner of the surface estate of the leased premises. The lessor may have agreed to lease in part because of the reputation and financial condition of the lessee, and he or she may justifiably wish to have control over whether the lease can be assigned to a third party.

Lessees, on the other hand, dislike consent-to-assign provisions in leases. Such provisions may substantially impair the lessee’s perceived value of the leasehold estate it has paid for. Leases are bought and sold like commodities. In the Permian Basin last year, more than $25 billion of transactions took place transferring mineral leasehold interests. Those transactions are made more difficult when lessors’ consents must be obtained to close the transaction.

Before closing a deal to purchase a package of oil and gas leases, the buyer will review the terms of the leases, and included in that review will be identifying leases that require consent to assign. Typically such review will uncover consent-to-assign provisions, in which event the buyer will have to determine whether obtaining such consent will be a condition to closing the deal. In my experience, companies acquiring leases will typically divide the leases containing consent-to-assign provisions into two categories, those with “soft-consent” provisions and those with “hard-consent” provisions. A “hard-consent” provision specifies the consequences of failure to obtain consent — for example, that such a breach is grounds for cancelling the lease, or that specified liquidated damages must be paid for the breach. A “soft consent” is one that prohibits assignment without consent but does not specify a remedy for the breach. Companies may elect to acquire leases with soft-consent provisions without requiring the seller to obtain consent, based on the reasoning that the lessor will have to prove damages for the breach, that damages would be difficult to prove, and that the lessor probably will not sue for the breach. Without a specified remedy for breach in the lease, in particular a right to terminate for the breach, the reasoning is that termination of the lease for breach of the consent-to-assign provision would not be a remedy available to the lessor. The buyer will, however, require the seller to obtain consent for leases containing a hard-consent lease provision, especially if it specifies that breach of the provision would allow the lessor to terminate the lease.

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Published on: October 19, 2015

More on Retained Acreage Clauses

By John McFarland

I recently wrote about two appellate opinions dealing with retained acreage clauses in oil and gas leases. A retained acreage clause requires the lessee to release acreage not assigned to a producing well at the end of the primary term, or at the end of a continuous drilling program conducted after the primary term. One commentator has said that the purpose of a retained acreage clause is to “replace the lessor’s need to utilize the implied covenant of reasonable development as the sole means to see that its acreage is fully developed.” Bruce M. Kramer, Oil and Gas Leases and Pooling: a Look Back and a Peek Ahead, 45 Tex. Tech L. Rev. 877, 881 (2013).

A retained acreage clause should be included in any oil and gas lease that covers a significant amount of acreage – more than 100-200 acres. Below is a retained acreage clause, from the TLMA lease form. TLMA is the Texas Land and Mineral Owners Association. I prepared the lease form, and TLMA provides it to all of its members:

Upon expiration of the Primary Term, or upon cessation of “Continuous Drilling Operations” (as hereinafter defined), whichever is later, this Lease shall terminate as to all the lands and depths then covered thereby except lands and depths then designated by Lessee, in accordance with the requirements of this Paragraph, to be within a “Production Unit” (as hereinafter defined) assigned to each well then producing in paying quantities on the Leased Premises or lands properly pooled therewith.

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Published on: April 10, 2012

Report Card on HB 2259 – Inactive Wells

By John McFarland

In its 2009 Legislative Session, the Texas Legislature passed House Bill 2259, whose stated purpose is to ensure that inactive oil and gas wells get plugged and that surface equipment associated with those wells gets removed. I provided a summary of the bill’s terms in a post on this site. A summary of the bill’s requirements from the Texas Railroad Commission may be found here. The Texas Land and Mineral Owners Association, which lobbied for the bill, has now issued its report card: the Railroad Commission is not doing its job.

HB 2259 does not actually require that inactive wells be plugged. It imposes requirements on operators of inactive wells, depending on how long the wells have been inactive, to: disconnect the wells from electricity; post additional bonds to assure that the wells will eventually be plugged; and remove surface equipment from the wells. These provisions are phased in over a 10-year period. HB 2259 provides that an operator who does not comply with the new requirements will lose its operating permit (known as a P-5) — meaning that it will not have the right to continue to operate any wells in the State.

Recently, TLMA asked the RRC how many P-5 permits have been denied because of failure to comply with HB 2259. The answer: none. Even though, according to TLMA, almost 1,500 operators failed to comply with the statute.

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Published on: February 22, 2011

Class Action to Force Companies to Reimburse Royalty Owners for Severance Tax Refunds – Coll v. Abaco

By John McFarland

Recently some of my clients have received notices of class action settlements in Coll v. Abaco Operating, LLC, et al., in the U.S. District Court for the Eastern District of Texas, Marshall Division, C.A. No. 2:08-CV-345 TJW. The case reveals a little-known aspect of royalty payments: many companies never reimburse their royalty owners for refunds of severance taxes.

Most royalty owners know little about severance taxes except that they are a deduction that regularly appears on their royalty check stubs. Texas imposes a tax on the value of all oil and gas produced in the state: 7.5% for gas and 4.6% for oil. Most producing states impose similar severance taxes. Pennsylvania has been debating whether to pass a severance tax in light of its budget problems and recent development of the Marcellus Shale in that state. Texas’ severance taxes are paid into its “rainy day fund” that has been much in the news of late.

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