Recent Cases

Published on: April 6, 2009

Texas Supreme Court Record on Royalty Owner Cases

In a previous post I discussed a recent Texas Supreme Court case, Exxon v. Emerald, reversing a multimillion-dollar judgment against Exxon for intentionally sabatoging wells so that they could not be re-entered. This nudged me to look at other royalty-owner related cases handed down by the Texas Supreme Court over the last ten years. The court’s record is not a good one for royalty owners. Highlights of the Court’s work:

HECI v. Neel (1998). HECI sued an adjacent operator for illegal production on an adjoining lease that damaged the common reservoir underlying both leases, and recovered a judgment for more than $3.7 million. HECI did not inform its royalty owners of the suit and did not share any of the judgment proceeds with the royalty owners. When HECI’s royalty owners found out about the suit, they sued HECI to recover their share of the judgment. The Supreme Court held that the royalty owners had waited too long to bring their suit, even though they did not find out about the suit until five years after the trial. The Court held that the royalty owners should have known that the adjacent operator was damaging the common reservoir by its operations.

Yzaguirre v. KCS Resources (2001). Plaintiffs were royalty owners who received royalties under a lease operated by KCS. KCS sold its gas under a 20-year contract with Tennessee Gas Pipeline, and the price under the Tennessee contract greatly exceeded the spot market price of the gas. But KCS paid royalties based on the “market value” of the gas, using comparable spot sale prices, well below the price it received from Tennessee. The Court held that KCS did not owe royalties based on the Tennessee price — and, it held that the Tennessee contract was not even competent evidence of the market value of the gas.

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Published on: March 31, 2009

Exxon v. Emerald

By John McFarland

On March 27, the Texas Supreme Court issued its opinions in two related cases, both styled Exxon Corporation v. Emerald Oil & Gas Company. The cases were argued before the court more than two years ago, and the decisions were awaited with much anticipation. The Court reversed a judgment against Exxon for $8.6 million in actual damages and $10 million in punitive damages.

The facts in the case are remarkable. In the 1950’s Exxon’s predecessor Humble Oil & Refining Company obtained oil and gas leases covering several thousand acres in Refugio County owned by the O’Connor family. The leases were quite unusual; among other things, they provided for a 50% landowners’ royalty. Exxon drilled 121 wells and produced more than 15 million barrels of oil and 65 billion cubic feet of gas from the O’Connor lands. In the 1980’s Exxon asked the O’Connors to reduced their royalty, claiming that the leases were becoming uneconomical. Those negotiations failed, and in 1989 Exxon notified the O’Connors that it intended to start plugging wells and abandoning the leases. Negotiations for the O’Connors to take over operation of the wells were not successful, and Exxon began plugging wells and abandoning the leases.

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Published on: March 13, 2009

What happens to a pooled lease when the lease terminates?

By John McFarland

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.”

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