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As I have written, Chesapeake has asked the Texas Supreme Court to reverse the San Antonio Court of Appeals’ decision in Chesapeake v. Hyder. The court of appeals ruled that Chesapeake could not deduct post-production costs from the Hyders’ royalty.

The Texas Land & Mineral Owners’ Association and the National Association of Royalty Owners – Texas have filed an amicus brief in Hyder supporting the Hyders’ case. The brief can be viewed here. Final Amicus_Brief_Chesapeake_v__Hyder.pdf It was authored by my firm and by Raul Gonzalez, who was a member of the Texas Supreme Court when the court decided Heritage v. NationsBank, the case relied on by Chesapeake as authority for its deduction of post-production costs.

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An essential element of any oil and gas lease is a description of the land to be covered by the lease. The test for a legal description is that it must contain, or make reference to recorded documents that contain, a description of the land of sufficient specificity that a surveyor could locate the property on the ground with reasonable certainty.

The lease itself can contain a metes and bounds description from a survey, or (more commonly) it can refer to an earlier recorded document that contains a metes and bounds description of the property. Sometimes descriptions have to be cobbled together from two or more other descriptions. For example: “All of that certain 100 acres of land described in deed from John Doe to Robert Smith recorded at Volume 99, page 99 of the deed records of Karnes County, Texas, save and except 10 acres of land described in deed from Robert Smith to Mary Jones recorded at Volume 100, page 100 of the deed records of Karnes County, Texas.”

There are other ways to adequately describe a tract. The test is whether the surveyor can use the description to locate the property.

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The Texas Railroad Commission has adopted amendments to its pipeline permits rule, 16 TAC Sec. 3.70. The amendments require pipeline companies to submit documentation to support their claim that they will operate the line as a common carrier or gas utility.

In Texas, pipelines have the right to condemn pipeline easements for lines that are common-carrier or gas-utility lines. Until the Supreme Court’s decision in Texas Rice Land Partners v. Denbury in 2011, pipelines assumed that all they had to do in order to exercise the right of eminent domain was file a form at the RRC – a Form T-4 – stating that the proposed line would act as a common carrier or gas utility. In Denbury, the court said that filing the form is not enough.

The court in Denbury first held that a pipeline does not acquire condemnation authority merely by obtaining a permit from the Railroad Commission and subjecting itself to that agency’s jurisdiction as a common carrier. The court then held that in order for a pipeline to have condemnation power it must serve a public purpose, and to serve a public purpose, “a reasonable probability must exist, at or before the time common-carrier status is challenged, that the pipeline will serve the public by transporting gas for customers who will either retain ownership of their gas or sell it to parties other than the carrier.” Once a landowner challenges its right to exercise eminent domain, “the burden falls upon the pipeline company to establish its common-carrier bona fides if it wishes to exercise the power of eminent domain.”  The court said that the question of whether the pipeline is dedicated to a “public use” is ultimately a judicial question.

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In Texas, an oil and gas lease grants to the lessee the fee mineral estate in the leased premises for the term of the lease. The lease provides for an initial term during which the lessee need do nothing in order to keep the lease in effect — called the “primary term.” Thereafter, the lease terminates unless the lessee is producing oil or gas or conducting operations in an effort to discover and produce oil or gas. If the lease remains in effect beyond the primary term, the remaining time the lease is in effect is called the “secondary term.” A typical lease will provide that

“This lease shall remain in effect for a term of three (3) years (the primary term) and as long thereafter as oil or gas is produced from the leased premises or operations, as provided herein, are being conducted on the leased premises.”

The primary term can be one month or ten years or more. Today, most leases provide for a three-year primary term. If no production or operations take place during the primary term, the lease terminates automatically and the mineral estate reverts to the lessor.

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I got the idea for starting this blog from a presentation I made at a meeting of the Texas Land & Mineral Owners’ Association, titled “Checklist for Negotiating an Oil and Gas Lease.” TLMA posted the outline of my presentation on its website. I soon began receiving calls from people who had found the article on the net. I had no idea that the article had found its way to the net, but the popularity of the checklist led me to believe that landowners might profit from other articles of interest to them on matters related to oil and gas exploration and development.

The oil and gas lease is the foundational document on which the oil and gas industry in the US is based. Its form and provisions have been modified and shaped over the years to respond to changing industry practices and developments in the law, but its essential form has remained unchanged since the latter half of the 19th century. It is one of the most commonly used and successful legal documents in US commerce.

So, I thought it would be a good idea to write a few posts focused on the oil and gas lease, of which this is the first.

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On August 30, 2013, the Texas Supreme Court decided two cases involving the Episcopal Church of the United States. Last week, the U.S. Supreme Court refused to hear the cases, making the results final. (In case you’re wondering, this has nothing to do with oil and gas. The cases are of interest to me as an Episcopalian.) The two cases were basically a fight over ownership of church property. The parties engaged some of the most powerful firms and lawyers in the state, and multiple amicus briefs were filed. And the cases grapple with the right to free exercise of religion guaranteed by the First Amendment of the U.S. Constitution.

There are about 4.5 million Episcopalians in the U.S. — fewer than the number of Baptists, Methodists, Mormons, Lutherans, or Presbyterians. Episcopalians, however, are often some of the elite and most powerful members of society in the U.S. The Episcopal Church in America was founded in 1789 and is a part of the Anglican Communion, which has about 80 million members worldwide. The Church is associated with and has its roots in the Church of England, founded by Henry VIII when Pope Clement VIII refused to approve the annulment of Henry’s marriage to Catherine of Aragon.

The two cases decided by the Texas Supreme Court last year, The Episcopal Diocese of Fort Worth v. The Episcopal Church, and Masterson v. The Diocese of Northwest Texas, have their genesis in the consecration of Gene Robinson by the Diocese of New Hampshire in 2004 — the first openly gay bishop in the Episcopal Church. In response, the Diocese of Fort Worth voted in 2007 and 2008 to withdraw from the Episcopal Church and enter into membership with the Anglican Province of the Southern Cone, a group of Anglican churches in South America. And the Diocese claimed to still own the properties of the churches within the Diocese of Fort Worth. (Three churches in the Diocese did not agree with the Diocese’s action and withdrew from the Diocese; the Diocese transferred property used by those churches to them.)

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The news is filled with stories predicting the effect of falling oil prices on US production.  Good news for the economy, bad news for the Texas oil and gas industry. Will the rig count fall? Will companies go into bankruptcy? Only time will tell.

The answer may depend on OPEC. OPEC countries produce about one-third of the world’s total oil each month. OPEC countries have about 80 percent of the world’s oil reserves. Predictions of OPEC’s demise are greatly exaggerated. But US production has increased to almost 9 million barrels a day, close to Saudi Arabia’s production. Texas is responsible for a big part of that increase:

Texas production chart.PNG

Clearly the increased US production, combined with the predictable decline in demand and the slowdown of China’s and Europe’s economies, is affecting the world oil price. OPEC convenes on November 27, and pundits are guessing what it will do. On October 29, OPEC’s Secretary-General Abdalla El-Badri, cautioned calm, after a conference in London: “We don’t see really fundamental changes in the supply side or the demand side.  Unfortunately everyone is panicking. The press is panicking, consumers are panicking. We really should think and see how this will develop.”

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Last week the San Antonio Court of Appeals decided Lightning Oil Company v. Anadarko, No. 04-14-001152-CV, a case involving “mineral trespass.”  What is interesting about the case is what the court did not decide.

Lightning Oil Company owns two oil and gas leases covering 3,250 acres within the Briscoe Ranch in Dimmit County. The Briscoe Ranch owns the surface but not the minerals in this 3,250 acres. To the south of Lightning’s leases is the Chaparral Wildlife Management Area, a wildlife sanctuary managed by Texas Parks and Wildlife Department. TPWD owns the surface and 1/6 mineral interest in the Chaparral WMA. The Light family (some of whom own Lightning Oil) own the other 5/6 mineral interest. Anadarko holds oil and gas leases on the Chaparral WMA.

The TPWD lease to Anadarko prevents use of the surface of the Chaparral WMA for oil and gas wells except with TPWD consent, and says that Anadarko must use off-site drilling locations “when prudent and feasible.” Anadarko made an agreement with Briscoe Ranch to use the surface of the Ranch to drill horizontal wells under the Chaparral WMA. The first location Anadarko chose is located on the land covered by the Lightning Oil Company leases. So Anadarko proposed to drill a horizontal well from a surface location on Lightning’s lease; the well would penetrate the Eagle Ford formation on Lightning’s lease, but no perforations, or “take points,” in the well would be located on Lightning’s lease.

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Chesapeake has asked the Texas Supreme Court to hear its appeal of Chesapeake v. Hyder, decided by the San Antonio Court of Appeals in March of this year. The Supreme Court has asked the parties to file briefs on the merits, and Chesapeake filed its brief last week. Although the Court has not yet agreed to hear the case, its request for briefs is an indication that the Court may do so.

I wrote about the Hyder case when it was decided last March. Since then, the U.S. Court of Appeals for the 5th Circuit has decided two other Chesapeake cases, Chesapeake v. Potts and Chesapeake v. Warren, ruling in Chesapeake’s favor in both cases. All three cases involve deduction of post-production costs from royalties. Multiple cases have been filed against Chesapeake challenging its post-production-costs deductions, because of its aggressive method of calculating those costs. In all three cases, Chesapeake relies heavily on a Texas Supreme Court case decided in 1996, Heritage Resources v. NationsBank. The Texas Supreme Court has not discussed its opinion in Heritage since it was decided. Hyder may be its opportunity to do so.

The oil and gas lease in Hyder provides that “the royalty reserved herein by Lessors shall be free and clear of all production and post-production costs and expenses.” It also states that “Lessors and Lessee agree that the holding in the case of Heritage Resources, Inc. v. Nationsbank, 939 S.W.2d 118 (Tex. 1996) shall have no application to the terms and provision of this Lease.” The Court of Appeals held that the lease prohibited Chesapeake from deducting transportation costs.

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