Recent Cases

Published on: October 2, 2023

City of Dallas v. Trinity East Energy – Texas Supreme Court Refuses City’s Petition on Appeal of $33 million judgment

In 2014 the City of Denton banned drilling of wells within its city limits. In response the Texas Legislature quickly passed HB 40, giving the Texas Railroad Commission exclusive jurisdiction to issue drilling permits within municipalities and allowing cities to regulate oil and gas activity only if their ordinances relate to “aboveground activity .. at or above the surface of the ground, including … fire and emergency response, traffic, lights, or noise, or imposing notice or reasonable setback requirements,” are “commercially reasonable,” and “do not effectively prohibit an oil and gas operation conducted by a reasonably prudent operator.”

The hubbub over drilling in municipalities arose after companies developed the technology to tap the Barnett Shale, which underlies the cities of Dallas and Fort Worth, as well as Denton. Dallas did not prohibit wells in its limits but required operators to obtain a city permit for a well. Dallas also owns substantial lands within its limits and in 2007 issued a request for proposals to lease municipal lands owned by the City. The City eventually leased more than 2,000 acres to Trinity East Energy in 2008, receiving a $19 million bonus; the lease designated potential drillsites from which multiple horizontal wells could be drilled.

By March 2010 Trinity was ready to start drilling and in 2011 it submitted applications for drill site locations on two sites identified in the City’s lease. The City Planning Commission considered those applications and denied them in December 2012. Trinity appealed to the City Council, but it failed to reverse the Planning Commission’s denial. Trinity then sued the City, alleging a “regulatory taking.” The trial court ruled that the City’s denial of the permits resulted in a regulatory taking; the amount of damages was submitted to a jury which found the City liable for $33,639,000 in damages. The City appealed, and last year the Dallas Court of Appeals affirmed that judgment. 2022 WL 3030995. This week the Texas Supreme Court denied the City’s petition for review.

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Published on: August 18, 2023

Federal District Court Addresses Post-Production Costs in Light of Devon v. Sheppard

By John McFarland

The federal district court in Pecos, Judge David Counts, issued a memorandum opinion in H.L. Hawkins, Jr., Inc. v. Capitan Energy, Inc., P:22-CV-DC[Hawkins] addressing Hawkins’ claim that Capitan had improperly deducted post-production costs from its royalty. The Court held that the reasoning in the recent Texas Supreme Court case of Devon v. Sheppard was of no help to Hawkins.

Hawkins’ lease reserved a royalty of “one-fourth of the gross proceeds received by Lessee,” and contained a free-royalty provision:

Lessor’s royalty shall not bear or be charged with, directly or indirectly, any cost or expense incurred by Lessee, including without limitation, for exploring, drilling, testing, completing, equipping, storing, separating, dehydrating, transporting, compressing, treating, gathering, or otherwise rendering marketable or marketing products, and no such deduction or reduction shall be made from the royalties payable to Lessor hereunder, provided, however, that Lessor’s interest shall bear its proportionate share of severance taxes and other taxes assessed against its interest or its share of production.

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Published on: August 3, 2023

Cactus Water Services v. COP Operating — Who Owns Produced Water?

By John McFarland

Production of oil and gas is often accompanied by production of water from the same formation. In recent years, water has been injected into wells in the process known as hydraulic fracturing, or “fracking.” Much of the frac water returns with oil and gas during the initial production of the fracked well. Fracking of horizontal wells requires huge quantities of water, and when this water—and water native to the formation—returns to the surface, something must be done with the water.

Historically produced water has been treated as waste—a substance that contains not only water but also salts, chlorides, sodium, carbon dioxide, and heavy metals. Produced water has typically been disposed of by injection into underground formations. Well operators may drill their own disposal wells or may contract with third parties to dispose of produced water for a fee.

Water used in fracking has typically been obtained from formations containing fresh groundwater. The huge quantities of fresh water used for fracking have taxed some aquifers, and the practice has been criticized as wasting a precious resource.

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Published on: July 18, 2023

PBEX v. Dorchester — Adverse Possession of a Non-Operating Working Interest

By John McFarland

The Amarillo Court of Appeals recently decided PBEX II, LLC, et al. v. Dorchester Minerals, L.P. et al., addressing an interesting issue on adverse possession of a non-operating working interest. One justice dissented.

The Court’s opinion relies on two Texas Supreme Court decisions that were controversial: Natural Gas Pipeline co. of America v. Pool, 124 S.W.3d 188 (Tex. 2003) and BP America Production Co. v. Marshall, 342 S.W.3d 59 (Tex. 2010) Pool held, to everyone’s surprise, that an operator could adversely possess or revive an oil and gas lease that had expired by continuing to operate and pay royalties on production. Marshall held that an operator’s continued payment of royalty on an expired lease “establish[ed] as a matter of law that [the mineral owner] was on notice that [the operator] claimed to own the leasehold ….”

In Dorchester, Torch was the owner of a 25% interest in an oil and gas lease covering a section of land in Midland County. Torch was party to an operating agreement under which it was a non-operating working interest owner. In 1990 Torch signed an assignment to Dorchester’s predecessors which Torch later claimed erroneously included its working interest in the lease. But from 1990 to 2016 Dorchester and its predecessors participated as working interest owners in the lease, paying their share of costs and receiving their share of revenues, in effect claiming to own Torch’s working interest.

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Published on: June 2, 2023

Texas Supreme Court Agrees to Hear Appeal of MIPA Case

By John McFarland

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.

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.

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Published on: May 9, 2023

EP Energy v. Storey Minerals – a $41 million most-favored-nations clause

By John McFarland

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:

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Published on: March 10, 2023

Devon v. Sheppard — A Win for Royalty Owners

By John McFarland

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.

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Published on: March 8, 2023

Railroad Commission v. Apache – The Issue of Standing

By John McFarland

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?

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Published on: February 17, 2023

Van Dyke v. The Navigator Group – Double Fractions and the Presumed Grant Doctrine

By John McFarland

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.

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Published on: February 13, 2023

“whether or not in paying quantities”

By John McFarland

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.

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