Oil and Gas Lawyer BlogWade Caldwell, San Antonio attorney and President of NARO-Texas, published the article below in the recent NARO newsletter. He has kindly allowed me to republish it here.
And Happy New Year.
The Take Away
Articles Posted in Recent Cases
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Murphy v. Adams – What is an “offset well”?
The Texas Supreme Court denied the landowners’ motion for rehearing last Friday in Murphy v. Adams, rejecting their claim that Murphy Exploration had breached their oil and gas lease by failing to drill an offset well or pay liquidated damages. The Court was divided 5-4 on the issue when it issued its original opinion, and the court remained divided 5-4 on rehearing, but both the majority and the dissent issued corrected opinions.
Our firm represented the landowners in the case, so I must admit that it is difficult for me to be objective in reporting on this case. I wrote about the case when the Court of Appeals ruled in favor of the landowners, reversing a summary judgment in Murphy’s favor issued by the trial court.
The landowners’ lease contains the following provision:
It is hereby specifically agreed and stipulated that in the event a well is completed as a producer of oil and/or gas on land adjacent and contiguous to the leased premises, and within 467 feet of the premises covered by this lease, that Lessee herein is hereby obligated to, within 120 days after the completion date of the well or wells on the adjacent acreage, as follows:
(1) to commence drilling operations on the leased acreage and thereafter continue the drilling of such off-set well or wells with due diligence to a depth adequate to test the same formation from which the well or wells are producing from on the adjacent acreage; or
(2) pay the Lessor royalties as provided for in this lease as if an equivalent amount of production of oil and/or gas were being obtained from the off-set location on these leased premises as that which is being produced from the adjacent well or wells; or
(3) release an amount of acreage sufficient to constitute a spacing unit equivalent in size to the spacing unit that would be allocated under the lease to such well or wells on the adjacent lands, as to the zones or strata producing in such adjacent well.
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Seeligson v. Devon – Plaintiffs (Almost) Get Class Certification
The U.S. Court of Appeals for the Fifth Circuit recently handed down its opinion in Seeligson v. Devon Energy Production Co., Cause No. 17-10320. The case is an appeal from a decision in the District Court for the Northern District of Texas certifying a class of royalty owners to sue Devon for breach of the duty to market gas produced under the royalty owners’ leases. The Fifth Circuit affirmed all but one of the trial court’s findings on the appropriateness of allowing the class action to proceed.
The question of whether class actions are appropriate in federal courts are governed by federal rules and cases, but the class certification rules are very similar to those applied by Texas state courts. Although class actions are common in other contexts, such as suits by shareholders against their companies, they have not generally been successful in suits by royalty owners. The barriers created by the requirements to certify a class have usually been too great.
In Seeligson v. Devon, the plaintiffs claim that Devon breached its implied duty to market their gas. Devon’s wells in the Barnett Shale field are connected to a gathering system called the Bridgeport System, owned by an affiliate of Devon called Devon Gas Services. The gas is gathered and transported to the Bridgeport Gas Processing Plant, owned and operated by Devon Gas Services. Under a contract between Devon Energy and Devon Gas Services, Devon Gas Services takes delivery of the gas at the well and runs it through the plant, which separates the dry gas from the natural gas liquids and sells the dry gas and NGLs separately. Under the contract, Devon Gas Services pays Devon Energy 82.5% of a published industry index price for the dry gas and NGLs. Devon Gas Services thus retains 17.5% of the value of the dry gas and NGLs to compensate it for the gathering and processing of the gas. Plaintiffs claim that this arrangement breaches Devon Energy’s duty to market because the 17.5% is in effect a processing fee that is far greater than the market rate for processing. Continue reading →
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Devon v. Apache – Royalty and the Non-Consenting Co-Tenant
The Texas Supreme Court recently refused to consider the case of Devon Energy Production Company v. Apache Corporation, decided by the Eastland Court of Appeals – 550 S.W.3d 259. The case presents issues that, remarkably, have not previously been considered by a Texas appellate court.
Norma Jean Hester leased her one-third mineral interest in lands in Glasscock County to Apache, reserving a 1/4th royalty. The other mineral owners in the land (the Lessor Plaintiffs) leased their two-thirds mineral interest to Devon, reserving a 1/4th royalty. Apache and Devon were unable to agree on terms for a joint operating agreement to develop the property, and Apache drilled seven producing wells on the land without Devon’s participation. Devon became what is commonly called a “non-consenting co-tenant.” Devon became entitled to two-thirds of the net revenue from each well after Apache had recovered the costs of drilling and production (“payout”). But Devon did not pay its Lessor Plaintiffs their royalty on production, claiming that Apache owed the royalties to the Lessor Plaintiffs. The Lessor Plaintiffs sued Devon and Apache for their royalties.
The trial court ruled that Apache owed no royalty payments to the Lessor Plaintiffs, and that Devon owed the Lessor Plaintiffs royalties, but only on revenues received by Devon after the wells had paid out. The Lessor Plaintiffs then settled their claims against Devon, and Devon appealed. Continue reading →
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Three Supreme Court Cases to Watch
Two cases were argued in the Texas Supreme Court last week that bear watching, and a third interesting case is pending in the court on petition for review.
No. 17-0266, Burlington v. Texas Crude
Texas Crude and Burlington entered into a joint development agreement covering leases Texas Crude had acquired on lands in Live Oak County. As part of the deal, Texas Crude was entitled to an overriding royalty on all leases taken within the area of interest. Multiple assignments of overriding royalty were made, all containing this language:
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“Royalty Lease” – Lessor Beware
In Ridge Natural Resources v. Double Eagle Royalty, recently decided by the El Paso Court of Appeals, James and Jolinda McDaniel signed a “Royalty Lease” to Ridge, reading as follows:
Oil and Gas Royalty Lease
THIS LEASE AGREEMENT is made as of the 10th day of October, 2016 between
[the McDaniels]
as Lessor (whether one or more) … and Ridge Natural Resources … as Lessee. …
1. In consideration of ten dollars ($10.00) and other good and valuable consideration in hand paid and the covenants herein contained, Lessor hereby grants, leases and lets exclusively to Lessee, subject to the reservation contained herein, all of Lessor’s royalty interest in and to all of the oil, gas and other minerals produced and saved from the hereinafter described lands (the ‘Subject Interest’), such Subject Interest to include all proceeds thereof in and to the rights, rentals, royalties and other benefits accrued, accruing and/or to accrue and the right to demand, collect and receive same, hereinafter called leased premises:
[Legal description omitted]
2. This royalty lease, shall be in force for a primary term of 5 years from the date hereof, and for as long thereafter as oil or gas or other substances covered hereby are produced in paying quantities from the leased premises or from lands pooled therewith.
3. As Royalty on the Subject Interest leased to Lessee herein, Lessor reserves an equal one-fourth (25%) part of the Royalty and other proceeds from the sale of all oil, gas and condensate produced and saved from said Land and the Subject Interested lease to Lessee herein.
4. Lessor hereby expressly represents and warrants that no representation, promise or other statement that is not herein expressed has been made to Lessor in executing this Royalty Lease Document and Lessor did not rely on any representation, promise or other statement made by Lessee and/or Lessee’s agent and/or employees, relating to this Royalty Lease or the subject matter thereof, except as set forth herein, and it is the Lessor’s express intent to fully disclaim and disavow reliance on any such representation, promise or statement. Lessor expressly acknowledges that this Royalty Lease does not grant Lessee the right to explore for or produce oil, gas, or minerals from the leased premises. […]
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The EPA and the Rule of Law
The Senate hearings on Judge Brett Kavanaugh’s nomination to the Supreme Court have brought public attention to the role the Supreme Court, and courts in general, play in our trilateral system of government – a role that the public usually does not see in headlines other than when the Supreme Court considers hot-button social issues such as abortion and gun control. Most of the work done by courts flies under the radar and receives little public attention.
But a critical element in our system of government is its reliance on and belief in the “rule of law.” John Adams expressed this idea when he wrote that government should be a “government of laws and not of men.” It means that private citizens and government are accountable under the law; that laws be clear, just, publicized, and applied equally; that the process by which laws are enacted, administered and enforced are accessible, fair and efficient; and that justice is delivered timely by competent, ethical and independent representatives. Lawyers have an obligation to uphold the rule of law independent of and superseding their obligation to clients. Every person, including lawmakers, law enforcement officials and judges, is subject to the law. The authority of our courts is based on this principle.
The US Court of Appeals for the D.C. Circuit issued an opinion last month that illustrates the rule of law in the context of the political shift that took place after the election of President Trump. The case, Air Alliance Houston v. EPA, No. 17-155, was heard by a panel of three judges on that court, Judges Rogers, Wilkins, and Kavanaugh. Because of Judge Kavanaugh’s nomination to the Supreme Court, he did not participate in the opinion. The opinion was issued “Per Curiam,” meaning it was not signed by a particular judge but was issued “by the court” collectively. Continue reading →
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The Relation Between Lease Contracts and Forced Pooling Statutes
A recent case from the Ohio Court of Appeals, Fifth Appellate District, raises some interesting questions about forced pooling. The case, American Energy – Utica, LLC v. Fuller, Case No. 17 CA 000028, involves an oil and gas lease covering 40 acres in Guernsey County, Ohio, dated in 1981. The lease was held by production from a single vertical oil well. In 2009 Enervest acquired the lease; it subsequently assigned the deep rights to American Energy.
American Energy wanted to form pooled units to drill horizontal wells in the Utica formation. The lease contained a handwritten provision: “Unitization by written agreement only!” so American asked Fuller for consent to pool. The parties could not reach agreement on pooling Fuller’s lease, so in 2015 American Energy filed an application under Ohio law to force a portion of Fuller’s property into a pooled unit. Fuller then sued to prevent his tract from being force-pooled and for breach of the lease. The trial court granted American Energy’s motion for summary judgment, holding that American had the right to force-pool Fuller’s lease despite the lease language. Continue reading →
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Lindemann Properties v. Campbell – the Scope of Easements
This month the Texas Supreme Court refused to hear the case of Lindemann Properties, Ltd. v. Campbell, 524 S.W.3d 873 (Tex.App.-Ft. Worth 2017). Although the case involves an easement for a radio transmission tower, it provides some lessons for negotiating easements for pipelines.
In 1977 Smith granted to Campbell an easement to install a radio transmission tower on his land. The easement provided that it would be located on a tract 500 feet by 500 feet, the actual center of which would be determined by its location when installed. The easement did not specify the size or height of the tower. Campbell constructed the tower, 400 feet tall.
In 2012 Campbell decided to replace the tower, which had deteriorated in condition, with a new tower 420 feet tall. The original tower remained in place while the new tower was being constructed. The new tower was some 18 feet from the original tower. The old tower was later removed. Continue reading →
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Can Surface Owner force Lessee to Buy his Groundwater?
A recent opinion from the El Paso Court of Appeals, Harrison v. Rosetta Resources, illustrates how important groundwater has become in oil and gas development in the Permian Basin.
Harrison signed a lease on Relinquishment Act land, as agent for the State. The lease provided that the Lessee has the right to use groundwater in its operations, except for waterflood operations. Harrison sued the lessee for tearing up an irrigation ditch and other claims, and the lessee agreed as part of the settlement of those claims to purchase 120,000 barrels of water from Harrison’s water well at fifty cents a barrel. The lessee built a frac pit and bought the required amount of water from Harrison. But then the lessee sold the lease to Rosetta. Rosetta drilled additional wells but, instead of buying the water from Harrison, it piped the water onto the lease from another source. Harrison sued. He claimed that Rosetta had orally agreed to continue the same arrangement he had with the previous operator. He also alleged that there was a local custom, known as the “West Texas Rule,” that the lessee would purchase groundwater from the surface owner. He also alleged negligence and violation of the accommodation doctrine. The trial court granted Rosetta’s motions for summary judgment, and the court of appeals affirmed. Harrison has no right to require Rosetta to purchase his groundwater.
In Texas an oil and gas lease conveys the mineral estate to the lessee for the term of the lease. Because the mineral estate is the “dominant” estate, the mineral owner/lessee has the right to use so much of the surface estate as is reasonably necessary to exploit the mineral estate. The surface estate includes groundwater, so the lessee has the right, unless limited by the lease, to use groundwater in its operations — even to the point of depleting the groundwater aquifer. This is true as to fee lands as well as Relinquishment Act lands.