Oil and Gas Lawyer Blog

Published on: March 9, 2015

Texas Supreme Court Decides KCM Financial v. Bradshaw

Betty Lou Bradshaw’s parents owned 1773 acres in Hood County. In 1960, they sold the land and reserved 1/2 of the royalty on oil, gas and other minerals. Betty Lou inherited her parents’ royalty interest.

In 2005, Steadfast Financial (subsequently renamed KCM Financial) acquired the right to purchase the land. In 2006, KCM made a deal with Range Resources by which it simultaneously (1) exercised its right to purchase the land, (2) sold the land to Range, reserving all minerals, and (3) leased the mineral estate to Range. The lease provided for 1/8th royalty, and the bonus was $7,505 per acre.

Betty Lou sued KCM and Range. She alleged that they conspired to limit her royalty on production from the lease to 1/16 (1/2 of 1/8), whereas it should have been 1/8 (1/2 of 1/4), since the going rate for lease royalties in Hood County at the time was 1/4. She alleged that Steadfast had agreed to a lower royalty in order to receive an above-market bonus.

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Published on: March 3, 2015

Bills to Watch in Texas Legislature

By John McFarland

Here are bills filed in the current Texas Legislative session that may be of interest to mineral owners:

House Bill 539: This is the bill to prohibit municipalities from banning drilling within their jurisdictions.

Senate Bill 540: The Senate’s version of House Bill 539.

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Published on: February 23, 2015

Another Major Suit Challenges Chesapeake’s Royalty Practices

By John McFarland

A team of lawyers in Pennsylvania has filed an anti-trust suit against Chesapeake and Williams Partners (Formerly Access Midstream Partners) alleging that they conspired to restrain trade in the market for gas gathering services in and around Bradford County, Pennsylvania. The plaintiffs also sued Anadarko, Statoil, and Mitsui, all of whom own interests in Chesapeake’s leases. The suit alleges violation of the oil and gas leases granted by the plaintiffs, violations of ant-trust law, and violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). A copy of the complaint, filed in federal court in Pennsylvania, can be found here.

The team of lawyers who filed this suit have their own website, “Marcellus Royalty Action.” They say that their approach differs from other suits against Chesapeake in that they will not seek class action status, they intend to pursue discovery before negotiating settlements, and they will sue all working interest owners responsible for royalty payments.

Royalty owner suits against Chesapeake have become a growth industry for attorneys. Recently, Chesapeake requested that multiple royalty owner suits against it in the Barnett Shale region of Texas be assigned to a pretrial court for consolidated and coordinated pretrial proceedings. (Defendants Joint Motion for Transfer and Request for Stay) The request says that more than 3,200 landowners have filed 97 separate suits in Johnson, Tarrant and Dallas Counties alleging that Chesapeake and Total E&P, USA, Inc. (Chesapeake’s working interest partner in the Barnett Shale) have charged excessive post-production costs. This request results primarily from multiple suits filed by the McDonald Law Firm. See http://royaltyripoff.com/. McDonald has said he does not oppose Chesapeake’s request.

Published on: February 20, 2015

A Picture Says a Thousand Words

By John McFarland

Rigs stacked near Odessa, Texas.

Published on: February 16, 2015

NASA on Climate Change – This will get your attention

By John McFarland

Published on: February 16, 2015

Supreme Court Ducks Issue of Injection Well-Subsurface Trespass

By John McFarland

On February 6, 2015, The Supreme Court of Texas released its second opinion in FPL Farming Ltd. (“FPL”) v. Environmental Processing Systems, L.C. (“EPS”). The Beaumont court of appeals had held that injected fluids that migrate beyond the boundary of the land owned by the surface owner constitute a trespass on a neighbor’s property. The Supreme Court declined to address whether or not subsurface wastewater migration is actionable as a common law trespass in Texas, and instead focused on consent as a general element of a trespass cause of action.

Until recently, subsurface wastewater migration had never been addressed by a Texas appellate court, and the assumption in the disposal industry was that such incursion was not actionable. But the Beaumont Court of Appeals, in FPL v. EPS, concluded that the neighbor does have a trespass claim. The Beaumont Court issued two opinions in the case; the first was appealed to the Supreme Court which reversed and remanded to the Court of Appeals, and the second resulted in the opinion released February 6.

The facts in FPL are these: EPS operates an injection well for non-hazardous waste on land adjacent to the land owned by FPL. FPL had previously objected to an amendment of EPS’s permit that increased the rate and volumes allowed to be injected. The Austin Court of Appeals affirmed the permit amendment over FPL’s objections, ruling that “the amended permits do not impair FPL’s existing or intended use of the deep subsurface.” FPL Farming Ltd. v. Tex. Natural Res. Conservation Comm’n, 2003 WL 247183 (Austin 2003, pet. denied). FPL then sued EPS for trespass and negligence, alleging that injected substances had migrated under FPL’s tract causing damage. FPL lost a jury trial and appealed. The Beaumont Court affirmed, holding that because EPS held a valid permit for its well, “no trespass occurs when fluids that were injected at deep levels are then alleged to have later migrated at those deep levels into the deep subsurface of nearby tracts.” FPL Farming Ltd. v. Environmental Processing Systems, L.C., 305 S.W.3d 739, 744-745 (Tex.App.-Beaumont). The Supreme Court reversed, holding that Texas laws governing injection well permits “do not shield permit holders from civil tort liability that may result from actions governed by the permit.” FPL Farming Ltd. v. Environmental Processing Systems, L.C., 351 S.W.3d 306, 314 (Tex. 2011). But the court was careful to say it was not deciding that owners of injection wells could be guilty of trespass if their injected fluids migrated onto other lands. “We do not decide today whether subsurface wastewater migration can constitute a trespass, or whether it did so in this case.” The court remanded to the court of appeals for it to consider the other issues raised by the appeal. Continue reading →

Published on: February 16, 2015

Texas Supreme Court Rules for Mineral Owner in Hooks v. Samson

By John McFarland

On January 30, the Supreme Court issued its opinion in Hooks v. Samson Lone Star, Limited Partnership, No. 12-0920. In doing so, it kept alive a $21 million verdict against Samson and limited its prior holdings barring suits by mineral owners based on the statute of limitations.

The principal claim the Hooks made against Samson alleged breach of a lease provision intended to protect the Hooks’ lease against drainage from wells on adjacent lands. The lease provided that, if a gas well is drilled within 1,320 feet of the lease, Samson must either drill an offset well, release sufficient acreage for an offset well to be drilled, or pay “compensatory royalty” – the amount of royalty the Hooks would be entitled to if the well on adjacent lands had been drilled on their lease.

In 2000, Samson permitted a well on lands adjacent to the Hooks lease, and it approached the Hooks asking permission to pool portions of the Hooks land with that well. Mr. Hooks asked Samson how close the well would be to the Hooks lease boundary. Samson sent him a plat showing that the location of the well would be 1,400 feet from the lease. Based on this, the Hooks agreed to the pooling.

In 2007, in connection with related litigation, the Hooks discovered that the adjacent well in fact was located within 1,320 feet of the Hooks lease, and the Hooks sued Samson for misrepresenting the well’s location and inducing them to agree to the pooling. They sought damages under the lease compensatory royalty clause – the royalty they would have received had the offending well been located on the Hooks’ lease. They argued that the four-year statute of limitations applicable to their claim should not apply because Samson had fraudulently induced them to believe that the well was 1,400 feet from their lease. The jury found that the Hooks should not have discovered the true facts until less than four years before bringing suit. It awarded more than $20 million damages to the Hooks. Continue reading →

Published on: February 2, 2015

Texas Railroad Commission Adopts Rules Aimed at Earthquakes

By John McFarland

Earthquakes linked to oil and gas activity are in the news. A recent study in Ohio linked a rash of small earthquakes to fracing of wells in the area. Earthquakes in Oklahoma have increased tenfold since 2009. A swarm of small earthquakes hit the Dallas-Fort Worth area recently. The US Geological Survey is raising its evaluation of earthquake hazard risk in Texas as a result.

In Texas, the spate of small earthquakes is tentatively tied to injection wells rather than fracing of new wells. The theory is that the injected water lubricates lithologic layers, allowing them to slip and causing quakes.

The Environmental Protection Agency estimates that there are 144,000 Class II injection wells in the US. The RRC has permitted more than 50,000 Class II injection wells in Texas since the 1930’s. These injection wells are used to dispose of water and waste produced from wells, both that from the fracing process and water produced with oil and gas in the production phase. Many oil wells produce hundreds of barrels of water for each barrel of oil produced. Without injection wells, the Texas oil and gas industry would screech to a halt.

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Published on: January 27, 2015

The Economist – “Let There Be Light”

By John McFarland

In a special section of the January 17 edition of The Economist, Edward Lucas gives a broad overview of the world energy outlook and the future for renewable energy. His is an optimistic forecast for cleaner, cheaper and more plentiful energy. His article can be found online here.

First, the article provides this view of current world energy production and consumption:

This picture doesn’t present a very optimistic view. Almost 60% of energy production is “wasted energy.” Oil still provides 33% of all energy consumed, while wind supplies only 1.1%, and solar only 0.2%. And the EIA projects that global demand for energy will increase by 37% in the next 25 years.

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Published on: January 20, 2015

The Oil and Gas Lease – Part V: Implied Covenants

By John McFarland

Over the last 100 years courts have developed a body of case law in disputes between lessors and lessees of oil and gas leases. Courts have held that certain provisions are “implied” in the contracts, even though there is no language in the lease to support those provisions. The rationale behind these implied provisions goes back to cases interpreting hard mineral leases, and back to the cradle of the oil industry, Pennsylvania. The idea behind these implied provisions is that they are necessary for both parties to get the benefit of their bargain and to make the lease work as intended. Because the lessee has control over what operations are conducted under the lease, most of these implied provisions are intended to benefit the lessor, who generally has less bargaining power in negotiation of the lease and no say in whether and how the lease is developed.

An example: oil and gas leases generally provide that the lease will remain in effect for the primary term and for as long thereafter as oil or gas is produced from the leased premises. Courts have implied a requirement that, for the lease to remain in effect, the production must be in “paying quantities.” The production must be sufficient for the lessee to realize a profit over operating costs.

Another example: what if the well on the lease temporarily ceases production at some point after the end of the primary term. Does the lease terminate, even if the well can be repaired and restored to production? Courts developed the implied provision that a “temporary” cessation of production will not cause the lease to terminate, as long as the lessee acts with reasonable diligence to restore production.

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