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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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The federal district court in Pecos, Judge David Counts, issued a memorandum opinion in H.L. Hawkins, Jr., Inc. v. Capitan EnergyInc., 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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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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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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Maybe you’ve heard of “green hydrogen.” There’s been a lot of press lately about projects to produce hydrogen to use as an alternative fuel, and the Inflation Adjustment Act provides tax credits for production of “green hydrogen.” But did you know that there are other hydrogen “colors”? An excellent article from MartenLaw.com provides a summary of the methods and tax credits and regulations being developed for green hydrogen programs. Here is its description of colors of hydrogen:

Types of Hydrogen

Hydrogen can be created through a variety of techniques. To distinguish between the different processes, the industry has developed an informal color-based categorization system:

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Since passage by Congress of the Inflation Reduction Act (IRA) in 2022, significant activities and developments have taken place in Texas regarding carbon capture and underground storage (CCUS) projects. The IRA provides tax credits for injection and underground storage of carbon dioxide. As a result, major companies have begun developing CCUS projects in Texas and other states. Landowners are signing agreements with these developers allowing use of their land for injection and storage.

Tax Credits for CCUS Projects

The economic benefits to developers of CCUS projects derive solely from the federal income tax credits granted for underground storage of CO2. The credits are granted based on tons of CO2 injected. The amount of the credit varies depending on the type of project.

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Governor Abbot has signed House Bill 456, passed by the Legislature, granting certain charities an exemption from ad valorem taxes on their oil and gas royalties, effective January 1, 2024. The bill amends Tax Code Section 11.18(a), which provides ad valorem tax exemptions for charitable organizations, including churches and educational institutions. The bill amends the statute to provide an ad valorem tax exemption for mineral and royalty interests, but only for some charitable organizations.

The exemption applies to the following types of charitable organizations who provide services without regard to ability to pay, but only if the mineral or royalty interest (i) is not severed from the surface estate (i.e., is under land owned by the charity), or (ii) was donated to the charity:

  • a charity providing medical care;
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