Articles Posted in Recent Cases

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Last Friday the Texas Supreme Court issued opinions in XOG Operating, LLC v. Chesapeake Exploration Limited Partnership et al., No. 15-0935, and Endeavor Energy Resources, L.P. et al. v. Discovery Operating, Inc. et al., No. 16-0155.  In both cases, the Court affirmed the decisions of the trial courts and courts of appeals.  Both cases garnered substantial attention from the industry, as evidenced by amicus briefs from the Permian Basin Petroleum Association, the Texas Independent Producers and Royalty Owners’ Association, the Railroad Commission and the Texas Oil and Gas Association, among others.

Both cases construe retained acreage clauses. The opinion in Endeavor includes a good explanation of the purpose and effect of retained acreage clauses, the purpose and operation of field rules and proration units, and the interplay between the two. I summarized the facts and results in both of these cases when the Supreme Court granted the petitions for review. My prior post can be viewed here.   I have also previously written about the relationship between field rules and retained acreage clauses. I’ve said that it is a mistake to rely on field rules and proration units to determine how much acreage can be retained under a retained acreage clause; these cases illustrate why that is so.

One comment on Endeavor:  the field rules applicable in that case were for the Spraberry (Trend Area) Field. Those rules provide for “standard” proration units of 80 acres but allow the operator to assign up to 160 acres to a well, with a corresponding increase in its allowable rate of production. The allowable rate for a well on an 80-acre proration unit is 515 barrels per day.  The retained acreage clause provided that the lease would expire except for the “proration unit assigned to a well,” and that each proration unit would “contain the number of acres required to comply with” Railroad Commission rules “for obtaining the maximum allowable.” Endeavor assigned 80 acres to each of four wells, and Discovery said the lease expired except as to those four proration units “assigned” to the wells. Endeavor argued that it was entitled to 160 acres per well because that amount of acreage was necessary “for obtaining the maximum allowable.”  The Supreme Court agreed with Discovery.  In discussing Endeavor’s argument on the “maximum allowable” language, the Court quotes from two CLE papers: Continue reading →

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On April 2, the Superior Court of Pennsylvania issued its opinion in Briggs v. Southwestern Energy Production Co., 2018 PA Super 79, No. 1351 MDA 2017.  It held that “hydraulic fracturing may constitute an actionable trespass where subsurface fractures, fracturing fluid and proppant cross boundary lines and extend into the subsurface estate of an adjoining property for which the operator does not have a mineral lease, resulting in the extraction of natural gas from beneath the adjoining landowner’s property.” In doing so, the court rejected the reasoning of the Texas Supreme Court in Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008), which held that the rule of capture prevented any such cause of action.  The court agreed with the conclusion of a federal district court in West Virginia in Stone v. Chesapeake Appalachia, LLC, No. 5:12-CV-102, 2013 WL 2097397 (N.D.W.Va. Apr. 10, 2013), which held that hydraulic fracturing can give rise to a trespass claim. The court also agreed with Justice Johnson’s dissent in Coastal v. Garza, in which he said that he “would not apply the rule [of capture] to a situation  … in which a party effectively enters another’s lease without consent, drains minerals by means of an artificially created channel or device, and then ‘captures’ the minerals on the trespasser’s lease.”

The court concluded:

… we are persuaded by the analysis in the Coastal Oil dissent and Stone, and conclude that hydraulic fracturing is distinguishable from conventional methods of oil and gas extraction. Traditionally, the rule of capture assumes that oil and gas originate in subsurface reservoirs or pools, and can migrate freely within the reservoir and across property lines, according to changes in pressure. … Unlike oil and gas originating in a common reservoir, natural gs, when trapped in a shale formation, is non-migratory in nature. … Shale gas does not merely “escape” to adjoining land absent the application of an external force.  …

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The Texas Supreme Court recently decided JPMorgan Chase Bank v. Orca Assets GP, LLC, No. 15-0712, an interesting exposition on the value and risks of including no-warranty language in an oil and gas lease.

JPMorgan was trustee of the Red Crest Trust, which owns about 40,000 acres of minerals in the Eagle Ford Shale. In 2010, JPMorgan leased about 1,800 of those acres to GeoSouthern Energy. Later that year, JPMorgan was approached by another company, Orca Assets GP, to lease some of the same land.  JPMorgan’s trust offer erroneously concluded that the acreage Orca wanted had not been previously leased to GeoSouthern, and he negotiated a deal to lease to Orca.  But he put the following provision in the proposed leases to Orca:

Negation of Warranty.  This lease is made without warranties of any kind, either express or implied, and without recourse against Lessor in the event of a failure of title, not even for the return of the bonus consideration paid for the granting of the lease or for any rental, royalty, shut-in payment, or any other payment now or hereafter made by Lessee to Lessor under the terms of this lease.

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Last week the Texas Supreme Court issued its opinion in ConocoPhillips Co. v. Koopmann, No. 16-0662. Its opinion rejected Burlington’s argument based on the Rule Against Perpetuities.

Strieber sold 120 acres in Dewitt County to Koopmann, reserving one-half of the royalty for a term of 15 years and as long thereafter as there is production in paying quantities.  The 15-year term ended on December 27, 2011.  At that time the 120 acres was under lease to Burlington. Burlington included the 120 acres in a pooled unit and drilled a well in 2011, but the well was not producing on December 27. Prior to that time, Strieber conveyed to Burlington 60% of her reserved term royalty, “presumably as an incentive to motivate Burlington to begin drilling.”  The parties – Koopmann on one side, contending the term royalty had expired, and Strieber and Burlington, on the other, contending it had not — then joined suit.

Burlington and Strieber contended that the interest the Koopmanns claimed – the one-half-of-the-royalty that would be owned by her on expiration of the 15-year term – was void because it violates the Rule Against Perpetuities.  In effect, they argued that the royalty reserved by Strieber should remain in effect indefinitely because of the Rule.  The court disagreed, holding that the future interest conveyed to Koopmann was “vested” and therefore did not violate the Rule.  After a detailed discussion of the Rule and its application, the court followed more modern scholarship that construes the Rule based on its purpose and intent rather than by archaic application of terms and concluded that application of the Rule in this instance would not serve the Rule’s purposes.

Oil and gas attorneys will be greatly relieved at this result, since it is and for many years has been common for grantors to reserve term royalties in conveyances of their land. The rule advocated by Burlington would have made all such royalty reservations perpetual. Continue reading →

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Our firm filed suit last week to challenge Devon Energy Production Company’s permit for an “allocation well” in Ward County. Monroe Properties, Inc., et al. v. Railroad Commission of Texas, Cause No. D-1-GN-18-001111, 53rd District Court, Travis County. A copy of the petition may be viewed here. Monroe v. RRC

Devon’s proposed well is called the NI Helped 120 6H Well.  (The odd name comes from an old TV commercial in which the line “‘n I helped!” appears.) The permit and plats for the well can be viewed here.  N I Helped 120 6H Permit and Plat

Our firm filed a similar suit a few years ago on behalf of the Klotzman family challenging an allocation well permitted by EOG. EOG and the Klotzmans settled their dispute shortly after they appealed the RRC’s grant of EOG’s permit.  For my discussions of the Klotzman case, search for “Klotzman” in this site’s search engine.

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Lawyers for royalty owners have filed multiple suits against Chesapeake Energy in Dimmit County seeking damages for breach of Chesapeake’s leases. These cases were consolidated for discovery and case-management purposes into a single matter, In re: Chesapeake Eagle Ford Royalty Litigation, Cause No. 2016CI22098, in the 224th District Court in San Antonio.

TexasBarToday_TopTen_Badge_SmallIn addition to claims for underpayment of royalties, the plaintiffs in the Dimmit County cases allege that Chesapeake has breached clauses in the leases requiring the lessee to protect the lease against drainage from adjacent wells – sometimes called an express offset clause. Chesapeake has filed a motion for summary judgment arguing that these clauses are unenforceable because they impose a “penalty.”

One of the implied covenants in all oil and gas leases is the covenant to protect the lease against drainage from wells on adjacent tracts. The implied covenant requires the lessee to drill an “offset well” to the draining well if a reasonable and prudent operator would do so. Damages for breach of the implied covenant are the value of the royalty lost to the lessor, based on the amount of drainage that would have been prevented by the drilling of the offset well. Liability and damages for breach of the implied covenant are difficult to prove, so lessors have come up with an alternative – the express offset clause.

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I recently ran across an excellent article explaining the relationship between retained acreage clauses in oil and gas leases and density and proration rules promulgated by the Texas Railroad Commission:  “Fun New Ways for Density and Proration Rules to Bust Your Lease: Retained Acreage Clauses and ‘Governmental Authority’ Language in the Wake of Three Recent Texas Cases,” by Brandon Durrett, of Dykema Cox Smith.  You can view it here: 140_Durrett – Fun New Ways  Brandon summarizes the history of case law construing lease language that adopts RRC spacing rules as the basis for limiting pooled units and designation of acreage that can be held under an oil and gas lease.

At the time of Brandon’s article the Texas Supreme Court had denied petitions in two cases dealing with retained acreage clauses, Endeavor Energy Resources v. Discovery Operating and XOG Operating v. Chesapeake. Since then, the Supreme Court changed its mind and agreed to hear the cases and they were recently argued.

I have previously written that it is a mistake to adopt RRC field rules as the basis for retained acreage clauses. These two recent cases are Exhibit A for that argument.

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The Texas Supreme Court yesterday denied Samson Exploration’s petition for review, ending a long-fought fraud case against Samson that began in 2007. The case was before the Court for the second time; in its first opinion in 2015 the Supreme Court reversed a court of appeals’ judgment throwing out the Hooks’ $21 million judgment against Samson and remanded to the court of appeals for further proceedings. In 2016 the court of appeals affirmed all but $2.6 million of the judgment, leaving in place a judgment for $17.5 million plus interest.

The Hooks claimed damages resulting from Samson’s fraudulent misrepresentation of the location of a well it drilled adjacent to the Hooks’ property.  The Houston Court of Appeals’ first opinion in the case threw out the judgment because the Hooks’ claim was barred by limitations.  But one Justice on the court made clear that he was joining the majority only because he was bound to do so by the Supreme Court’s opinion in BP v. Marshall:

In that case, the Texas Supreme Court makes clear that no lies on the part of a lessee, however self-serving and egregious, are sufficient to toll limitations, as long as it is technically possible for the lessor to have discovered the lie by resort to the Railroad Commission records. This burden the Court imposes upon lessors is severe. It is now a lessor’s duty to presume that any statement made by its lessee is false and to ransack the esoteric and oft-changing records at the Railroad Commission to discover the truth or falsity of its lessee’s statements. If, as is often the case, these records are technical in nature and require expert review to ferret out the truth, it is the lessor’s job to hire experts out of its own pocket to perform such a review. If a lessor fails to take these steps, then it will have failed in exercising reasonable diligence to protect its mineral interests and, if the lessee’s fraud is successful for longer than the limitations period, the lessor’s claims will be barred by limitations.

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Last Tuesday the Texas Supreme Court heard arguments in three cases on oil-and-gas-related topics.TexasBarToday_TopTen_Badge_Small

Murphy Oil v. Adams, No. 16-0505:

Our firm represents the Herbsts in this case.  Murphy owns a lease on their lands in Atascosa County, shown in blue below. While the Herbst Lease was in its primary term, Comstock drilled the Lucas A Well on the adjacent tract, shown in green.

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Dragon v. Trial, from the San Antonio Court of Appeals, No. 04-16-00758-CV, decided November 8, is a case that may be of interest only to title attorneys and landmen and those of us who delight in the minutiae of land titles. It is also, like many title disputes, the story of a dispute over land whose minerals have become fantastically valuable. The case involves 237 acres in Karnes County, in the heart of the Eagle Ford play.

TexasBarToday_TopTen_Badge_SmallIn 1932, the 237 acres was conveyed in equal shares to eight siblings. One of the siblings died, and the property was thereafter owned by the remaining seven. One of the siblings was Leo Trial. In 1983, Leo conveyed one-half of his 1/7th share to his wife Anna Ruth.

In December 1992, Jerome and Patricia Dragon purchased the property from Leo Trial and his siblings. They financed a part of the purchase with a 15-year note. Also, the grantors reserved the mineral estate in the 237 acres for a term of 15 years, after which title to the minerals would go to the Dragons. But Anna Ruth Trial did not sign the deed – an oversight that was not discovered until years later. Continue reading →

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