Oil and Gas Lawyer Blog

Published on: May 28, 2024

Update on Opiela v. RRC

Our firm represents the Opielas, who are involved in a dispute with the Railroad Commission and Magnolia Oil & Gas over a horizontal well located partly on the Opielas’ property. The case has made its way from the Commission to the trial court in Travis County, then to the Austin Court of Appeals, and the case is now pending on petition for review in the Texas Supreme Court.

Briefly, the facts are these:

Enervest applied for a permit for an allocation well to be located partly on the Opielas’ ranch of 640 acres in Karnes County. When the Opielas purchased the ranch it was under an old oil and gas lease held by some producing vertical wells. The Opielas acquired all of the mineral estate but previous owners had sold 3/4ths of the royalty. The lease contains a pooling clause, but a special provision says there can be no pooling for oil wells.

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Published on: May 23, 2024

First challenge to new “business courts” legislation filed in Supreme Court

By John McFarland

In re Dallas County, Texas and Marian Brown, in her official capacity as Dallas County Sheriff, No. 24-0426, Texas Supreme Court, filed May 23, 2024.

In 2023 the Texas legislature passed Senate Bill 1045. The bill creates a new system of “business courts” having jurisdiction of high-stakes business cases. Notably, the judges of these new trial courts are not elected but are appointed by the Governor. The bill also creates a new 15th Court of Appeals to hear appeals of such cases, as well as any case against the State, state agencies and state officials. This is the first case to challenge the constitutionality of SB 1045. Before the bill, suits against the State were filed in Austin and appeals went to the 3rd Court of Appeals in Austin.

Dallas County and others sued members of the Health and Human Services Commission in Travis County, alleging that HHSC has failed to timely transfer inmates from the Dallas County jail to state hospitals who have been held not competent to stand trial or not guilty by reason of insanity, as required by law. The trial court denied the defendants’ plea to the jurisdiction, and defendants appealed that ruling to the Austin Court of Appeals. The defendants filed a statement in that court indicating that, on September 1, 2024 (when the 15th Court of Appeals becomes effective), the appeal would be automatically transferred to the new 15th Court created by SB 1045, because the suit involves a case against state officials.

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Published on: May 17, 2024

Texas Supreme Court once again rules against royalty owners in post-production costs case

By John McFarland

Today the Texas Supreme Court decided Carl v. Hilcorp Energy Co, No. 24-0036. Its opinion addresses certified questions submitted to it by the US Fifth Circuit Court of Appeals concerning a class action suit pending in that court.

The Carls’ lease provided for payment of gas royalty based on its “market value at the well.” The lease also provided that royalty must be paid on gas “sold or used off the premises.” Hilcorp used some of the gas produced “off the premises” to transport or process the gas produced from the lease. Hilcorp did not pay royalty on the gas used. The Texas Supreme Court agreed with Hilcorp that it owes no royalty on the gas used off the premises.

This is another in a long line of cases in which the Court relies on its flawed reasoning in Heritage Resources v. Nationsbank. The Court’s reasoning: because the measure of gas royalty is “market value at the well,” the lessor must bear its share of post-production costs. Hilcorp’s use of gas for post-production costs must therefore be part of the cost borne by the lessor. One way to do that is to not pay royalty on the gas used. So, even though the lease provides for royalty on gas “used off the premises,” Hilcorp need not pay royalty on such gas as long as it is used to enhance the value of the gas after it leaves the lease. If Hilcorp were to use some of the gas for other purposes, royalty would be due.

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Published on: May 3, 2024

What Constitutes Production in “Paying Quantities”?

By John McFarland

I am sometimes asked to evaluate whether a lease has terminated for failure to produce in paying quantities. It is not an easy question to answer. So here is a summary of how “paying quantities” are determined.

Basic Rules

When an oil and gas lease provides it will remain in effect after the primary term as long as oil or gas is produced from the leased premises, the law presumes that such production must be in “paying quantities.” The lease is entered into for the parties’ mutual benefit. If the lessee is no longer reaping a benefit because expenses exceed income, “the lessors should not be required to suffer a continuation of the lease after the expiration of the primary period merely for speculation purposes on the part of the lessees.” Garcia v. King, 164 S.W.2d 509 (Tex. 1942)

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Published on: April 19, 2024

DeVilliers Prevail in US Supreme Court

By John McFarland

Yesterday the US Supreme Court issued its opinion in DeVillier et al. v. Texas, No. 22-913, allowing 120 landowners to proceed with their takings claims against the State.

I wrote about this case when the Court agreed to hear it.

The Summary of facts in the Court’s Syllabus describes the issue:

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Published on: April 17, 2024

There is still time to sign up for GDHM Landowner Seminar April 26

By John McFarland

Click here to see the agenda and speakers and to register.

Published on: April 15, 2024

Royalty on Federal Lands

By John McFarland

The US Department of Interior finalized a rule on Friday increasing royalty rates on oil and gas leases of federal land from 1/8th to 1/6th, and increasing minimum bonus rates from $2/acre to $10/acre. The regulations also increase bonding requirements to secure operators’ obligation to plug their wells.

I’ve always been puzzled why federal leases are not granted the same way the Texas General Land Office does, with competitive bidding. Almost all leases of lands owned by the State of Texas or University Lands reserve one-fourth royalty.

A lot of federal oil and gas leases cover offshore tracts, and thousands of wells have been drilled in federal offshore waters in the Gulf of Mexico. I recently heard a CLE presentation about companies’ plugging obligations in the Gulf. Unlike Texas, federal law provides that all operators in the chain of title to a federal well are jointly and severally liable for the plugging costs and for properly disposing of the platform once the wells are plugged. Many plugging obligations end up in bankruptcy courts, and prior operators are now receiving notices from the BLM notifying them of their plugging obligations. Louisiana also holds prior operators liable for plugging obligations. If prior operators in Texas retained liability for well plugging, the list of Texas “orphan wells” would shrink substantially.

Published on: April 5, 2024

Disposal of Produced Water in the Permian Basin

By John McFarland

In 2021 the Texas Legislature created the Texas Produced Water Consortium to study possible beneficial uses of fluid oil and gas wastes. The Consortium produced its report to the Legislature in 2022. I recently ran across a remarkable conclusion in that report: it estimates that in 2019 unconventional tight-oil formation wells in the Texas portion of the Permian Basin produced almost 4 billion barrels, or 506,800 acre-feet, of wastewater. (click on image to enlarge)

506,800 acre-feet is a column of water covering an acre of land and 96 miles high. Or 11.6 square miles covered one foot deep in water. Lake Buchanan, the largest Texas lake, has a capacity of 992,000 acre-feet. New York City consumes 1,236,000 acre-feet of water per year.

It is no wonder that the underground injection of such a huge volume of water is causing problems. Much of that water is being injected into shallow oil-producing formations, in particular the depths of the Delaware Mountain Group, damaging producing wells and causing waste. The increased pressures in injection zones have caused abandoned wells to erupt in gushers of injected water. And water injection is inducing seismic events, otherwise known as earthquakes. The Railroad Commission has even ordered some injection wells to be shut down in response to those quakes.

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Published on: March 15, 2024

White v. Hilcorp – Heritage v. Nationsbank Again Rears its Ugly Head

By John McFarland

In January the US 5th Circuit Court of Appeals submitted a “certified question” to the Texas Supreme Court. Federal courts have jurisdiction over cases involving only state-law issues if the parties are from different states – diversity jurisdiction. This is one such case. Carl v. Hilcorp Energy Company, No. 24-0036.

The trustees of the Carl/White Trust sued Hilcorp Energy on behalf of royalty owners with language in their leases providing that the lessee must pay royalties on gas “sold or used off the premises.” The suit seeks class-action status on behalf of these royalty owners. The Trust’s lease also provides that royalty on gas should be paid on the “market value at the well.” Hilcorp moved to dismiss the claim, arguing that under a “market-value-at-the-well” lease, Hilcorp was allowed to deduct all post-production costs and therefore had no obligation to pay for gas used in processing. The trial court agreed with Hilcorp and dismissed the case; the Trust appealed to the 5th Circuit.

When a case in federal court is governed by state law, a federal appeals court may ask the state’s top court to opine on a question of law critical to its case – to submit the question as a “certified question” to the state court. The 5th Circuit did so here, asking the Texas Supreme Court: “can a market-value-at-the-well lease containing an off-lease-use-of-gas clause and a free-on-lease-use clause be interpreted to allow for the deduction of gas used off lease in the post-production process?” The Texas Supreme Court agreed to consider the question, and the parties have submitted briefs. Two amicus briefs, one from Texas Oil & Gas Association supporting Hilcorp’s arguments, and one by Texas Land & Mineral Association and National Association of Royalty Owners-Texas, Inc., supporting the Trusts’ arguments.

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