Oil and Gas Lawyer Blog
A recent decision of the Texas Supreme Court, Wagner & Brown, Ltd. v. Sheppard, has caused quite a stir in oil and gas legal circles. The court was faced with a question never before answered by a Texas appellate court, what is known as a “case of first impression.” Such cases are always interesting to oil and gas lawyers, so I thought I would weigh in on the arguments.
The facts in the case are these: Jane Sheppard owns a 1/8th mineral interest in 62.72 acres in Upshur County. She leased her 1/8th interest, and her lease – along with leases of the other 7/8ths interest in the 62.72 acres and leases of other lands- was pooled to form the W.M. Landers Gas Unit, containing 122.16 acres. Two wells were drilled on Sheppard’s tract, both producing gas.
Sheppard’s lease contains a provision requiring payment of royalties within 120 days of first sales of gas, failing which the lease would terminate. She was not paid on time, and her lease terminated.
Texas law is clear that, if there had been no pooled unit, upon termination of her lease Sheppard would become what is known as a “non-consenting co-tenant” in the two wells on her tract. She would be entitled to receive her 1/8th share of proceeds of sale of gas from the wells, less 1/8th of the costs of production and marketing. But Wagner & Brown contended that Sheppard’s tract was still bound by the pooled unit, even though her lease had expired. Under the pooling clause in Sheppard’s lease, her royalty would be calculated based on the number of acres of her tract compared to the total number of acres in the unit – in this case, 62.72/122.16, or 51.34% of the wells’ production. Wagner & Brown contended that Sheppard should receive 1/8th of 51.34% of production from the wells, less that same fraction of the cost of production and marketing. The Supreme Court agreed with Wagner & Brown, holding that “the termination of Sheppard’s lease did not terminate her participation in the unit.”