Oil and Gas Lawyer Blog
The Amarillo Court of Appeals recently decided PBEX II, LLC, et al. v. Dorchester Minerals, L.P. et al., addressing an interesting issue on adverse possession of a non-operating working interest. One justice dissented.
The Court’s opinion relies on two Texas Supreme Court decisions that were controversial: Natural Gas Pipeline co. of America v. Pool, 124 S.W.3d 188 (Tex. 2003) and BP America Production Co. v. Marshall, 342 S.W.3d 59 (Tex. 2010) Pool held, to everyone’s surprise, that an operator could adversely possess or revive an oil and gas lease that had expired by continuing to operate and pay royalties on production. Marshall held that an operator’s continued payment of royalty on an expired lease “establish[ed] as a matter of law that [the mineral owner] was on notice that [the operator] claimed to own the leasehold ….”
In Dorchester, Torch was the owner of a 25% interest in an oil and gas lease covering a section of land in Midland County. Torch was party to an operating agreement under which it was a non-operating working interest owner. In 1990 Torch signed an assignment to Dorchester’s predecessors which Torch later claimed erroneously included its working interest in the lease. But from 1990 to 2016 Dorchester and its predecessors participated as working interest owners in the lease, paying their share of costs and receiving their share of revenues, in effect claiming to own Torch’s working interest.
In 2016 Torch assigned its interest in the lease to PBEX II and notified Dorchester that it disputed its 1990 assignment. Torch and PBEX then sued Dorchester to recover the working interest. Dorchester claimed it had acquired title by adverse possession of the working interest. The trial court and Court of Appeals agreed.
Torch and PBEX claimed that Dorchester could not satisfy the requirements to obtain title by adverse possession because, as a non-operating working interest owner, it was not entitled to take possession of the working interest minerals; its interest was non-possessory and not subject to being acquired by adverse possession. The Court, relying on Pool and Marshall, disagreed.
PBEX and Torch insist, in order for there to be a hostile act to establish adverse possession, Dorchester and its predecessors had to literally perform the drilling and production activities themselves. However, the fact that Dorchester and its predecessors acted as the owners of the Working Interest for over twenty-six years is an act that is hostile sufficient to establish adverse possession.
Justice Doss dissented. He would hold that a non-operating working interest could not be acquired by adverse possession because the non-operator could not “actually drill and produce minerals,” and the operator could not adversely possess the interest on the non-operator’s behalf.
Suppose that the lessor of the lease in dispute in Dorchester had sued, claiming that his lease had terminated 26 years ago. Under the dissent’s view, only the operator could claim that the lease was revived by continuing to operate and pay royalties, and only as to its interest in the lease; the other non-operating interest owners could not claim title to their interest in the lease by adverse possession because their interest is non-possessory. That seems like an unlikely and unsatisfactory result.
The Supreme Court will undoubtedly be asked to consider the case.