Oil and Gas Lawyer Blog

This year the Texas Supreme Court decided Van Dyke v. The Navigator Group, trying to give some structure to cases construing conveyances and reservations of royalty interests-whether fixed or floating. I wrote about the case last February. Since then two court of appeals cases have grappled with the issue: Royalty Asset Holdings II, LP v. Bayswater Fund III-A LLC, in the El Paso Court of Appeals, No. 08-22-00108-CV; and Thomson v. Hoffman, in the San Antonio Court of Appeals, No. 04-19-00771-CV.

In Royalty Asset, the court construed the following royalty reservation:

EXCEPT that Grantors, for themselves and their heirs and assigns, retain, reserve and except from this conveyance and [sic] undivided 1/4th of the land owner’s usual 1/8th royalty interest (being a full 1/32nd royalty interest) payable or accruing under the terms of any existing or future oil, gas or mineral lease pertaining to or covering the oil, gas and other minerals on, in or under the above described [sic] land. It is distinctly understood and agreed that the interest in royalties hereby retained and reserved by Grantors does not participate in any bonus or delay rentals payable for or accruing under the terms of any such oil, gas and mineral lease or leases, and it shall not be necessary for Grantors to join in, execute or ratify any oil, gas and mineral lease covering said above described tract, the right and privilege to execute any oil, gas and mineral lease or leases covering the full mineral interest in the above described tract being hereby granted and conveyed to Grantees herein, their heirs and assigns.

Last year the Texas Supreme Court decided Mitchell v. MAP Resources, holding that a mineral owner whose interest was sold at a tax foreclosure could collaterally attack the judgment and introduce extrinsic evidence that he had not been properly served with notice of the suit and therefore was deprived of due process under the 14th Amendment of the US Constitution. Gill v. Hill is another such case. The El Paso Court of Appeals ruled against the plaintiff, with one judge dissenting. The Texas Supreme Court agreed to hear the case, where it is now pending.

The tax foreclosure in Gill v. Hill took place in 1999. Suit seeking to set aside the foreclosure was filed in 2019. The El Paso Court of Appeals distinguished the case from Mitchell v. MAP Resources. In both cases the taxpayer was served by posting on the courthouse door. In Mitchell, both sides moved for summary judgment, and the party seeking to set aside the foreclosure introduced extrinsic evidence that she could easily have been personally served because her name and address were in courthouse deed records and appraisal district records. In Gill v. Hill, the defendant moved for summary judgment on the ground that the suit was barred by limitations. The plaintiff alleged that he could have been personally served but did not move for summary judgment or introduce any extrinsic evidence.

The Court of Appeals held it was plaintiff’s burden to raise a fact issue on whether adequate notice of suit was given by introducing extrinsic evidence. The dissent would hold that the defendant had the burden on summary judgment to show that proper notice of the suit was given.

In this case, decided last April, the Texas Supreme Court held that the force majeure clause in an oil and gas lease could not be relied on to extend the date by which a well had to be commenced to keep the lease in force.

The facts are these:

MRC owned a lease covering 4,000 acres in Loving County. The lease provided that, at the end of the primary term, the lease would terminate except as to designated production units around existing wells unless MRC engaged in “continuous drilling”—spudding a well within 180 days after the spud date of the previous well. Prior to the end of the primary term MRC had drilled five wells on the lease. Under continuous drilling clause, MRC had to spud a well by May 21, 2016 to avoid partial termination of the lease.

Twenty years ago I wrote an article, “Issues Concerning Royalty Valuations and Deductions,” published in the Petroleum Accounting and Financial Management Journal. One of those issues I discussed was the recurring problem of post-production cost deductions. In the article I contrasted the approaches to lease construction illustrated by two cases: Heritage Resources v. NationsBank, 939 S.W.2d 118 (Tex. 1996), and Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001). A recent decision from the Colorado Supreme Court, Board of County Commissioners of Boulder County, Colorado v. Crestone Peak Resources Operating, LLC, 2023 WL 8010221 (Nov. 20, 2023), further illustrates the contrasting approaches taken by Texas and Colorado courts in construing oil and gas leases.

First, Heritage v. NationsBank and Rogers v. Westerman. Both decided whether post-production costs could be charged to the royalty owner in two oil and gas leases. The NationsBank lease provided that “there shall be no deductions from the value of the Lessor’s royalty by reason of any required processing, cost of dehydration, compression, transportation or other matter to market such gas.” But because the lease provided for gas royalties based on “market value at the well,” the Texas Supreme Court held that transportation costs were deductible from NationsBank’s royalty. The Westerman lease provided that the royalty would be “one-eighth of the gross proceeds received from the sale of such produced substances where same is sold at the mouth of the well, or … if not sold at the mouth of the well, … one-eighth of the market value thereof at the mouth of the well, but in no event more than one-eighth of the actual amount received by the lessee for the sale thereof.” The Colorado Supreme Court held that the lessee must bear all post-production costs necessary to get the gas into “marketable condition.”

The Heritage court hung its opinion on the term “at the mouth of the well.” Since royalty is to be based on the market value at the well, there can be no deductions from that value, so the no-deductions clause was “surplusage.” The Westerman court instead said the term “at the mouth of the well … says nothing about the parties’ intent with respect to allocation of costs,” and concluded that the lease is “silent with respect to allocation of costs.”