Articles Posted in The Oil and Gas Lease

Published on:

TexasBarToday_TopTen_Badge_SmallThe 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 →

Published on:

In Devon v. Apache, No. 11-16-00105-CV, the Eleventh Court of Appeals sheds some light on a vexing problem that remarkably has never been addressed by a Texas court.  To understand the problem, consider the facts in Devon v. Apache:

Norma Jean Hester leased her one-third mineral interest in land in Glasscock County to Apache, reserving a one-fourth royalty. The remaining mineral owners leased to Devon, also reserving a one-fourth royalty. Apache and Devon were not able to reach agreement on joint development of the property, and Apache drilled seven wells on the property without Devon’s participation. Under Texas law, Devon and Apache were co-tenants, and Apache is obligated to account to Devon for 2/3rds of the net profits from the wells, which Apache did. But Apache refused to pay Devon’s royalty owners. Continue reading →

Published on:

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.

Published on:

I got the idea to start this blog after I made a presentation to a landowner group in which I distributed a checklist for negotiating an oil and gas lease.  Soon thereafter, I began receiving calls from people who had found the checklist on the internet. The organization that sponsored my presentation had posted it on their website, and people searching for help on negotiating a lease found it.  I decided that I should investigate this internet thing more closely, and that led to my decision to start this blog.

I have updated my checklist, and you can find the new and improved version here:  Checklist for Negotiating an Oil and Gas Lease

And on a sadder note, I would like to mourn the passing of Tommy Nobis, the best linebacker ever to play for the University of Texas. He played for UT 1963-65, and was a member of its 1963 national championship team.  He had a great professional career with the Atlanta Falcons, where he was the franchise’s first draft pick in 1966 and was known as “Mr. Falcon.” He still holds the record in the NFL for most tackles in a season, at 294.  Nobis died December 13. He attended the football banquet at St. Stephen’s Episcopal School in 1965 where I was a sophomore and played defensive guard and center. My jersey, like Nobis’s, was number 60. He and I both sported a flat-top haircut, and for the rest of my high school football career my nickname was “Nobis.”  Requiescat in pace, Tommy.

Published on:

On September 22, the Texas Supreme Court refused to reconsider its opinion in BP America v. Red Deer Resources, No. 15.0569 – after some 16 amicus briefs and letters were filed urging the court to grant Red Deer’s motion for rehearing.

The Court addressed the construction of a shut-in royalty clause in an oil and gas lease:

Where gas from any well or wells capable of producing gas … is not sold or used during or after the primary term and this lease is not otherwise maintained in effect, lessee may pay or tender as shut-in royalty …, payable annually on or before the end of each twelve month period during which such gas is not sold or used and this lease is not otherwise maintained in force, and if such shut-in royalty is so paid or tendered and while lessee’s right to pay or tender same is accruing, it shall be considered that gas is being produced in paying quantities, and this lease shall remain in force during each twelve-month period for which shut-in royalty is so paid or tendered ….

Published on:

Last May, the San Antonio Court of Appeals issued an opinion in Texas Outfitters Limited v. Nicholson, No. 04-16-00392-CV, addressing the duty of holders of the mineral executive right to its non-executive mineral owner – a case now pending on application for writ of error in the Texas Supreme Court. It is the first significant appellate opinion on the duty of the executive since the Supreme Court’s decision in Lesley v. Veterans Land  Board on the same topic. The case tells the remarkable story of a landowner’s failure to carry out its duty of “utmost fair dealing” in exercising – or in this case failing to exercise – its executive right.

The executive right is the power to lease minerals for oil and gas exploration and development. It is one of the sticks in the bundle of rights that make up the mineral estate. The executive right can be conveyed or reserved separately from the other rights of the mineral owner – the right to bonus, delay rental and royalty. When the right to lease the mineral estate is owned by a different party than the owner of the mineral estate, conflicts can arise between the two on whether, when and on what terms the executive should exercise its right. Courts have struggled to define what duty the executive holds to the non-executive mineral owner.

The two previous cases from the Texas Supreme Court, In re Bass, 113 S.W.3d 735 (Tex. 2003) and Lesley v. Texas Veterans Land Board, 352 S.W.3d 479 (Tex. 2011), sent mixed signals on the scope of the executive-rights holder’s duty. In Bass, the court held that the holder of the executive right had no duty to enter into an oil and gas lease, but only to exercise utmost fair dealing if it elected to lease. In Lesley, the court backed off its previous holding, deciding that the holder of the executive right could breach its duty by failing to lease – or in Lesley’s, case, imposing restrictive covenants on the land that made it impossible to lease.

Published on:

With the drop in oil prices has come a wave of litigation over underpayment of royalties. Multiple suits have been filed against Repsol (formerly Talisman) over its royalty payments in the Eagle Ford. Multiple suits against Devon for royalty underpayment have been consolidated into a multi-district docket in San Antonio. A federal court in Fort Worth has certified a class action against Devon for underpayment of royalties in the Barnett Shale. Conoco is settling class actions brought in Oklahoma that also cover class members in Texas. These suits allege underpayments of royalty on oil and gas. The San Antonio multi-district suits also allege breach of lease provisions requiring the lessee to protect the lease against drainage from wells on adjacent properties.

These cases present opportunities for plaintiffs’ attorneys to earn large contingency fees. They also point out the problems faced by land and mineral owners in determining whether their lessee is complying with their oil and gas lease. What should landowners do to monitor lease compliance?

There are no easy answers to these questions. Below are some suggestions.

Continue reading →

Published on:

The Texas Land & Mineral Owners Association Newsletter recently published an article disclosing that the Zavala County Appraisal District has denied agricultural-use special appraisal value for land used for oil-pad sites and frac ponds. One owner who challenged the re-appraisal got the District to agree that, if a well pad is not fenced, it won’t deny the ag-use appraisal for pad sites. But fenced frac ponds, it said, don’t qualify.

When there is a “change of use” of land classified as ag-use or open-space use, the law provides that the change of use results in a “roll-back” of property taxes for five years. The owner is assessed tax based on market value for the five years, plus interest at 7% per annum. This can be a big hit for property owners. For one property owner in Zavala county, the assessed property value went from $73/acre to $2,000/acre. And, once a special use value is denied, it may take years after the oil company ceases its use of the property before the owner can re-gain the special use value.

Landowners should consider a lease provision shifting the risk of this re-appraisal to the lessee. Such a provision might read as follows:

Published on:

Modern oil and gas leases often contain provisions that have come to be known as “retained acreage” clauses. Such clauses require the lessee to release acreage not assigned to a producing well at the end of the primary term, or at the end of a continuous drilling program conducted after the primary term. One commentator has said that the purpose of a retained acreage clause is to “replace the lessor’s need to utilize the implied covenant of reasonable development as the sole means to see that its  acreage is fully developed.”  Bruce M. Kramer, Oil and Gas Leases and Pooling: a Look Back and a Peek Ahead, 45 Tex. Tech L. Rev. 877, 881 (2013).

There is no standard form of retained acreage clause. Lawyers representing lessors have developed their form of the clause, and the clause is often one of the most heavily negotiated provisions of an oil and gas lease.

Two court opinions have recently construed retained acreage clauses.

In ConocoPhillips Company v. Vaquillas Unproven Minerals, Ltd., 2015 WL 4638272 (Tex.Ct.App.-San Antonio Aug. 5, 2015), the lease provided that, at the end of the lessee’s continuous drilling program,

Lessee covenants and agrees to execute and deliver to Lessor a written release of any and all portions of this lease which have not been drilled to a density of at least 40 acres for each producing oil well and 640 acres for each producing or shut-in gas well, except that in case any rule adopted by the Railroad Commission of Texas or other regulating authority for any field on this lease provides for a spacing or proration establishing different units of acreage per well, then such established different units shall be held under this lease by such production, in lieu of the 40 and 640-acre units above mentioned.

Continue reading →

Published on:

Modern oil and gas leases often contain restrictions on the right of the lessee to assign the lease to third parties. The lease may require the consent of the lessor to any assignment, or it may impose conditions on the right to assign — for example, that the lessee retain an interest in the lease and/or remain operator.

Recently I received a draft of an article that will be published next year in the Buffalo Law Review addressing the validity of restrictions on assignments in oil and gas leases, and the authors asked that I make it available on this blog. It is titled “The Validity of Restraints on Alienation in an Oil and Gas Lease,” and it is authored by  Luke Myer and Rory Ryan, professors at Baylor Law School. There are actually two draft articles, one explaining the issue in layman’s terms and a second providing a more scholarly legal analysis with citations. The second article is titled “Aggregate Alienability.” The articles I think give a good analysis of the issue. There is actually little authority on whether restrictions on assignment, or “restraints on alienability,” in an oil and gas lease are valid. The authors make a good argument that such restrictions are valid. Good information for oil and gas lawyers, including tips on how to draft restrictions that are more likely to be upheld and enforced. The draft articles can be viewed here and here.

Contact Information