Articles Posted in Recent Cases

Published on:

Today the Texas Supreme Court agreed to hear Ammonite Oil & Gas Corp. v. Railroad Commission of Texas and EOG Resources, an appeal from the Commission’s denial of sixteen applications by Ammonite under the Mineral Interest Pooling Act.

I wrote about this case when it was decided against Ammonite by the Austin Court of Appeals. Ammonite has oil and gas leases from the State on the bed of the Frio River. Operators, including EOG, have drilled horizontal wells whose last take points extend to 100 feet from the edge of the river. Ammonite applied to the Commission to include portions of the riverbed in the units for the EOG wells. The Commission denied the applications.

EOG-Ammonite
Ammonite holds more than 50 state riverbed leases and has filed MIPA cases against EOG, Apache, Chesapeake and ConocoPhillips, all of which have resisted Ammonite’s efforts to include riverbed acreage in their units, leaving the minerals under the riverbed stranded. Royalties from riverbed leases are paid into the Texas Permanent School Fund for the benefit of Texas schools, managed by the Texas General Land Office.

Published on:

EP Energy E&P Co., L.P. v. Storey Minerals, Ltd., 2022 SL 223253 (Tex.App.-San Antonio 2022, pet. denied)

The Texas Supreme Court recently refused to review the opinion of the San Antonio Court of Appeals in this case, involving construction of a favored nations clause in an oil and gas lease. The court of appeals held that, under the favored nations clause, EP Energy owed the lessor an additional $41 million bonus. One judge dissented.

The case also recounts the “colorful history” of the Altito Ranch, covering about 23,000 acres in La Salle County. EP Energy’s brief describes that history:

Published on:

Today the Texas Supreme Court issued its opinion in Devon v. Sheppard, No. 20-0904, again addressing post-production cost deductions from royalties. The Court affirmed the court of appeals’ ruling in favor of the royalty owners.

Sheppard leased minerals in the Eagle Ford Shale in 2007, before the first successful well in the Eagle Ford. Sheppard is a lawyer in Cuero, Texas. His lease required payment of royalties on gross proceeds of sale, without deduction of post-production costs. The lease also contained this provision:

If any disposition, contract or sale of oil or gas shall include any reduction or charge for the expenses or costs of production, treatment, transportation, manufacturing, processing or marketing of the oil or gas, then such deduction, expense or costs shall be added to … gross proceeds so that Lessor’s royalty shall never be chargeable directly or indirectly with any costs or expenses other than its pro rata share of severance or production taxes.

Published on:

Recently the US Supreme Court heard argument in Biden v. Nebraska, in which several states challenge the President’s authority to forgive student loans. Lost in much of the coverage was the administration’s challenge to the states’ standing to bring the case. “Standing” is a difficult concept to get your arms around. Courts cannot issue advisory opinions. Under Article III of the US Constitution, courts can decide only a “case or controversy.” That means the plaintiff must have a stake in the outcome different from the general public. To have standing, a plaintiff must have sustained or be threatened with an injury different from or in addition to the general public. The Biden administration argued that the states who sued would not suffer any injury because of Biden’s forgiveness of student loans, and therefore do not have standing to sue.

The concept of standing is important to the separation of powers in our federal and state judicial systems. It is a check on the power of courts. Nebraska could not simply ask the court to declare Biden’s loan forgiveness an unconstitutional exercise of executive power without first showing how the state would be injured by Biden’s action. Such an opinion would be an “advisory opinion.”

What does this have to do with Railroad Commission v. Apache?

Published on:

Today the Texas Supreme Court handed down its opinion in Van Dyke v. The Navigator Group, resolving a ten-year dispute over the ownership of royalty interests and $44 million in royalties.

In 1924, the Mulkeys conveyed their ranch to White and Tom, with the following reservation:

It is understood and agreed that one-half of one-eighth of all minerals and mineral rights in said land are reserved in grantors … and are not conveyed herein.

Published on:

Last year the 14th Court of Appeals in Houston issue an opinion that should serve as a warning to mineral owners, Thistle Creek Ranch v. Ironroc Energy Partners, No. 14-20-00347-CV.

Thistle Creek sued IronRoc to terminate an oil and gas lease it claimed had expired for lack of production in paying quantities. The lease is on a form I have seen before. The habendum clause provides:

Unless sooner terminated or longer kept in force under other provisions hereof, this lease shall remain in force for a term of three (3) years from the date hereof, hereinafter called “primary term,” and as long thereafter as operations, as hereinafter defined, are conducted upon said land with no cessation for more than ninety (90) consecutive days.

Published on:

Last month the El Paso Court of Appeals issued its opinion in a long-running dispute over royalties on a section of land in Upton County. Davis et al. v. COG Operating, LLC, et al., No. 08-20-00205-CV. The court addressed several issues, one of which was the construction of a 1939 deed that reserved a royalty interest described as “one-fourth of the 1/8 royalty usually reserved by and to be paid to the land owner in event of execution of oil and gas leases, so that 1/4 of the 1/8 royalty to be paid to us, our heirs or assigns, if, as and when produced from the above described land ….” The court concluded that this was a “floating” royalty equal to 1/4th of the royalty reserved in the lease, not a fixed 1/4 of 1/8 royalty. This appears to be the correct result based on other recent cases construing similar language.

I have a bone to pick, however, with the language in the opinion describing the royalty reserved. To be fair, other courts have made the same error, and the same error was made by the appellants in their brief. The court concluded that the grantors reserved “a floating, 1/4 NPRI in Section 45.” A 1/4 NPRI is a 1/4th royalty interest, not 1/4th of the royalty reserved in the lease. A 1/4th royalty is equivalent to one out of every four barrels produced. One-fourth of the royalty under a lease reserving a 1/4th royalty is 1/4 of 1/4, or 1/16 royalty interest, not a 1/4th NPRI. Clearly, in using the term “floating, 1/4 NPRI” the court meant to conclude that the deed reserved 1/4th of the royalty reserved in any future lease. But referring to it as a 1/4 NPRI is confusing.

Published on:

Winter Storm Uri

The fallout from the Texas Freeze in February 2021 continues. A year later, UT’s Austin Energy Institute concluded that multiple failures of power plants, gas processing plants, gas storage and distribution facilities, and gas production all contributed to the system failures. ERCOT management was fired; natural gas prices spiked to more than $400/MMBtu; politicians blamed wind and solar generation; the legislature passed legislation requiring the Public Utility Commission and the Railroad Commission to strengthen weatherization requirements for production, processing and generation facilities and has since criticized those agencies for failing to fix the problem. ERCOT drastically raised electricity prices during the storm, resulting in multiple bankruptcies. The legislature provided for securitization of about $7 billion in private losses caused by the storm, so those losses are spread over the next twenty years in customer rate increases. Expect new legislation in the upcoming session.

Mitchell v. Map Resources, 649 S.W.3d 180 (Tex. 2022)

Published on:

Last week the Corpus Christi Court of Appeals issued a decision on a long-running dispute over reservation of a royalty interest in a deed. This is the court’s second opinion in the case.

In the court’s first opinion in 2018, the court construed the following royalty reservation:

SAVE AND EXCEPT and there is hereby reserved to [Hahn] herein, his heirs and assigns, an undivided one-half (1/2) non-participating interest in and to all of the royalty [Hahn] now owns, (same being an undivided one-half (1/2) of [Hahn’s] one-fourth (1/4) or an undivided one-eighth (1/8) royalty) in and to all of the oil royalty, gas royalty and royalty in other minerals in and under and that may be produced from the herein described property.

Published on:

Mayfield and Ingham leased several sections in Sutton County to EnerVest. EnerVest produces gas which goes to a gas plant for processing and pays royalty on the residue gas and natural gas liquids, after deducting post-production costs. The gas must be compressed and dehydrated before sale, and EnerVest does not pay royalty on the fuel used in compression and dehydration. Mayfield and Ingham sued EnerVest seeking royalties on the fuel gas.

The San Antonio Court of Appeals held that, under the lease royalty provisions, EnerVest does not owe royalties on fuel gas. EnerVest v. Mayfield, No. 04-21-00337-CV.

The lease provides for payment “on gas produced from said land and sold or used off the premises, … the market value at the mouth of the well of one-eighth of the gas so sold or used.” Another lease clause provides:

Contact Information