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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.

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Last week the Texas Supreme Court issued its opinion in ConocoPhillips Co. v. Koopmann, No. 16-0662. Its opinion rejected Burlington’s argument based on the Rule Against Perpetuities.

Strieber sold 120 acres in Dewitt County to Koopmann, reserving one-half of the royalty for a term of 15 years and as long thereafter as there is production in paying quantities.  The 15-year term ended on December 27, 2011.  At that time the 120 acres was under lease to Burlington. Burlington included the 120 acres in a pooled unit and drilled a well in 2011, but the well was not producing on December 27. Prior to that time, Strieber conveyed to Burlington 60% of her reserved term royalty, “presumably as an incentive to motivate Burlington to begin drilling.”  The parties – Koopmann on one side, contending the term royalty had expired, and Strieber and Burlington, on the other, contending it had not — then joined suit.

Burlington and Strieber contended that the interest the Koopmanns claimed – the one-half-of-the-royalty that would be owned by her on expiration of the 15-year term – was void because it violates the Rule Against Perpetuities.  In effect, they argued that the royalty reserved by Strieber should remain in effect indefinitely because of the Rule.  The court disagreed, holding that the future interest conveyed to Koopmann was “vested” and therefore did not violate the Rule.  After a detailed discussion of the Rule and its application, the court followed more modern scholarship that construes the Rule based on its purpose and intent rather than by archaic application of terms and concluded that application of the Rule in this instance would not serve the Rule’s purposes.

Oil and gas attorneys will be greatly relieved at this result, since it is and for many years has been common for grantors to reserve term royalties in conveyances of their land. The rule advocated by Burlington would have made all such royalty reservations perpetual. Continue reading →

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Although this has nothing to do with oil and gas, I’d like to share a great story about one of my partners, Doug Kilday. Doug is one of Graves Dougherty’s senior litigators. He and his family are also active members of Covenant Presbyterian Church in Austin. In 2017, the Kildays decided to combine their professional skills and their call to service and ministry by spending a year in Cambodia. Kilday-family-1

Doug and his wife Thais worked for International Justice Mission (IJM) (https://www.ijm.org/), the largest international anti-slavery organization in the world, working to end all forms of human trafficking, which currently victimizes more than 40 million people across the globe. IJM works to rescue victims, restrain and prosecute criminals, and restore survivors.  The Kildays worked in IJM’s Phnom Penh office with local IJM employees. Doug’s job was to assist in prosecuting cases against traffickers in slave labor. Thais created systems to help the office manage their many cases. During their year in Phnom Phen Doug and the team conducted IJM’s first labor trafficking trial in Cambodia. Over the course of the year Doug helped conduct eight trials resulting in eighteen convictions. Doug: “There are more people in slavery today than at any other time in history. It is a 150 billion-dollar per year industry.”

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Doug and Thais’ three children, Naeda (15), Lincoln (12) and David (9), attended Hope International School, which welcomed kids from thirty countries.

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Our firm filed suit last week to challenge Devon Energy Production Company’s permit for an “allocation well” in Ward County. Monroe Properties, Inc., et al. v. Railroad Commission of Texas, Cause No. D-1-GN-18-001111, 53rd District Court, Travis County. A copy of the petition may be viewed here. Monroe v. RRC

Devon’s proposed well is called the NI Helped 120 6H Well.  (The odd name comes from an old TV commercial in which the line “‘n I helped!” appears.) The permit and plats for the well can be viewed here.  N I Helped 120 6H Permit and Plat

Our firm filed a similar suit a few years ago on behalf of the Klotzman family challenging an allocation well permitted by EOG. EOG and the Klotzmans settled their dispute shortly after they appealed the RRC’s grant of EOG’s permit.  For my discussions of the Klotzman case, search for “Klotzman” in this site’s search engine.

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An article in the Harvard Business Review, Oil’s Boom-and-Bust Cycle May Be Over. Here’s Why, provides an excellent overview of how the global oil market has been changed fundamentally by development of shale oil resources.  Excerpts:

  • U.S. shale producers “now represent half of U.S. oil production, up from a mere 10% just seven years ago in 2011. In fact, 2018 may mark the first year shale producers will be able to fund future expansions of drilling programs through their own cash flow.”
  • ” Oil companies will need to develop both new conventional and unconventional crude oil resources to keep up with current demand for roughly one million more barrels of oil every year in addition to replacing the approximately four million barrels lost annually as reservoirs are naturally depleted. In total, we estimate that the oil and gas industry will have to replace about 40% of today’s oil production over the next seven to nine years.”
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Lawyers for royalty owners have filed multiple suits against Chesapeake Energy in Dimmit County seeking damages for breach of Chesapeake’s leases. These cases were consolidated for discovery and case-management purposes into a single matter, In re: Chesapeake Eagle Ford Royalty Litigation, Cause No. 2016CI22098, in the 224th District Court in San Antonio.

TexasBarToday_TopTen_Badge_SmallIn addition to claims for underpayment of royalties, the plaintiffs in the Dimmit County cases allege that Chesapeake has breached clauses in the leases requiring the lessee to protect the lease against drainage from adjacent wells – sometimes called an express offset clause. Chesapeake has filed a motion for summary judgment arguing that these clauses are unenforceable because they impose a “penalty.”

One of the implied covenants in all oil and gas leases is the covenant to protect the lease against drainage from wells on adjacent tracts. The implied covenant requires the lessee to drill an “offset well” to the draining well if a reasonable and prudent operator would do so. Damages for breach of the implied covenant are the value of the royalty lost to the lessor, based on the amount of drainage that would have been prevented by the drilling of the offset well. Liability and damages for breach of the implied covenant are difficult to prove, so lessors have come up with an alternative – the express offset clause.

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A client recently asked me whether he should sign a production sharing agreement. I replied that this is not an easy question to answer.TexasBarToday_TopTen_Badge_Small

First, the nomenclature.  These terms are not defined anywhere and their usage is not always consistent, but here’s what I mean when I use these terms:

Allocation Well. A horizontal well drilled across two or more lease lines without creating a pooled unit including the leases. Because no provision of the leases dictates how production will be shared among the leases, production must be “allocated” among the leases.

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I recently ran across an excellent article explaining the relationship between retained acreage clauses in oil and gas leases and density and proration rules promulgated by the Texas Railroad Commission:  “Fun New Ways for Density and Proration Rules to Bust Your Lease: Retained Acreage Clauses and ‘Governmental Authority’ Language in the Wake of Three Recent Texas Cases,” by Brandon Durrett, of Dykema Cox Smith.  You can view it here: 140_Durrett – Fun New Ways  Brandon summarizes the history of case law construing lease language that adopts RRC spacing rules as the basis for limiting pooled units and designation of acreage that can be held under an oil and gas lease.

At the time of Brandon’s article the Texas Supreme Court had denied petitions in two cases dealing with retained acreage clauses, Endeavor Energy Resources v. Discovery Operating and XOG Operating v. Chesapeake. Since then, the Supreme Court changed its mind and agreed to hear the cases and they were recently argued.

I have previously written that it is a mistake to adopt RRC field rules as the basis for retained acreage clauses. These two recent cases are Exhibit A for that argument.

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On February 2, 1848, the United States and Mexico signed the Treaty of Guadalupe Hidalgo, ending the Mexican-American War. I’ve been reading the biography of Stonewall Jackson; he and many of the generals in the Civil War first experienced combat in that war. As part of the treaty Mexico ceded the portion of Texas between the Nueces and Rio Grande Rivers, and Texas and the U.S. recognized the validity of titles to land granted by Mexico and Spain in this area, known as the Nueces Strip.

Of course the treaty didn’t settle matters in the Nueces Strip. In 1850 a movement arose to establish a Rio Grande territory separate from Texas. Its leaders called for a convention to form a provisional government and a petition to Congress to recognize the area as a separate territory. Part of the reason for the movement was fear that Texas wouldn’t recognize their land titles.

In response, on February 22, 1850, the Texas Legislature passed a law establishing a commission to investigate and recommend for confirmation title claims emanating from Spanish and Mexican land grants. Known as the Bourland Commission, it consisted of two commissioners, William Bourland and James Miller, and Robert Jones, a well-known lawyer and judge, to serve as the commission’s attorney. The commissioners gathered evidence, including documents, affidavits and testimony, and prepared an abstract on each claim and a recommendation as to whether the claim should be confirmed or rejected. The legislature then acted to confirm or deny applications for recognition of the land titles.

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The Texas Supreme Court yesterday denied Samson Exploration’s petition for review, ending a long-fought fraud case against Samson that began in 2007. The case was before the Court for the second time; in its first opinion in 2015 the Supreme Court reversed a court of appeals’ judgment throwing out the Hooks’ $21 million judgment against Samson and remanded to the court of appeals for further proceedings. In 2016 the court of appeals affirmed all but $2.6 million of the judgment, leaving in place a judgment for $17.5 million plus interest.

The Hooks claimed damages resulting from Samson’s fraudulent misrepresentation of the location of a well it drilled adjacent to the Hooks’ property.  The Houston Court of Appeals’ first opinion in the case threw out the judgment because the Hooks’ claim was barred by limitations.  But one Justice on the court made clear that he was joining the majority only because he was bound to do so by the Supreme Court’s opinion in BP v. Marshall:

In that case, the Texas Supreme Court makes clear that no lies on the part of a lessee, however self-serving and egregious, are sufficient to toll limitations, as long as it is technically possible for the lessor to have discovered the lie by resort to the Railroad Commission records. This burden the Court imposes upon lessors is severe. It is now a lessor’s duty to presume that any statement made by its lessee is false and to ransack the esoteric and oft-changing records at the Railroad Commission to discover the truth or falsity of its lessee’s statements. If, as is often the case, these records are technical in nature and require expert review to ferret out the truth, it is the lessor’s job to hire experts out of its own pocket to perform such a review. If a lessor fails to take these steps, then it will have failed in exercising reasonable diligence to protect its mineral interests and, if the lessee’s fraud is successful for longer than the limitations period, the lessor’s claims will be barred by limitations.

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John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
401 Congress Avenue, Suite 2700
Austin, Texas 78701
Phone: 512-480-5618
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