Oil and Gas Lawyer Blog
Four interesting recent cases on oil and gas issues:
Energy Transfer Fuel v. 660 North Freeway, 2021 WL 1569702
Energy Transfer owns an easement across North Freeway’s property in Fort Worth. The easement provided that the owner “hereby reserves the right to use the land in any manner that will not prevent or interfere with the exercise by [the easement holder] of its rights, privileges and easements hereunder, provided, however, that OWNER shall not construct or permit to be constructed any house, building or structure of any kind whatsoever on the easement.”
North Freeway’s tenant, Tindall Properties, proposed to construct a self-storage complex on the property, including paving over the easement with a six-inch concrete slab. Energy Transfer sued to prevent Tindall from paving over its easement. The trial court held that the slab did not violate the easement, and Energy Transfer appealed.
The Fort Worth Court of Appeals affirmed. It held that the slab was not a prohibited “structure” under the terms of the easement.
The Texas Supreme Court declined to hear Energy Transfer’s petition for review.
EP Energy E&P Company v. Storey Minerals, Ltd., 2022 WL 223253
This case concerns the construction of a favored nations clause in three identical oil and gas leases. The clause provides:
If at any time during the existence of this lease, the lessee … acquires an Oil and Gas Lease on a portion of the leased premises with any … entity that owns a mineral interest in the leased premises on such terms that the … bonus … [is] greater than th[at] provided to be paid to lessor hereunder, lessee expressly stipulates, warrants, and agrees that it will execute an amendment to this lease, effective as of the date of the third party lease on the leased premises, to provide that the lessor hereunder shall receive thereafter the same percentage (per net mineral acre) … bonus … as any subsequent lessor of the leased premises to the extent that such … bonus … [is] greater than those provided to be paid herein. To the extent that the … bonus … in any subsequent lease [is] less than provided herein, lessor hereunder shall continue to receive the … bonus … as provided in this lease…. This Paragraph XXVI shall not apply to any lease or contract with a mineral owner that covers less than twenty (20) net mineral acres.
The leases provided for a bonus of $500 per acre. EP Energy subsequently acquired two leases covering interests in the same land, paying a bonus $5,200 per net mineral acre. When EP refused to pay Storey Minerals an additional $4,700/acre (some $41 million) bonus, Storey sued. The trial court held for Storey, entering judgment for the additional bonus due. EP appealed.
The San Antonio Court of Appeals affirmed, with one justice dissenting. The court summarized EP’s argument as follows: EP claimed it “was only obligated to make payments beginning on the acquired lease’s effective date if there were bonuses it decided were payable from that date forward on acreage subject to the … leases. To illustrate, the Donaldson Brown lease had a September 25, 2013 effective date—five days before the end of the [Storey] leases’ primary term on September 30, 2013. Under EP Energy’s construction, the MFN clause required it to pay $4,700 per net mineral acre—the difference between the $5,200 and the original $500 bonus … —only for acreage it decided to pay bonuses on during those five days.” The proper construction of the clause hinged on the meaning of the words “effective” and “thereafter” in the MFN clause. The dissenting opinion would accept EP’s construction.
EP Energy has petitioned the Texas Supreme Court for review.
Samson Exploration v. Bordages, 2022 WL 120004
This case is one of several appeals from a lengthy fight between royalty owners and Samson. See Hooks v. Samson Lone Star, Ltd. P’ship, 457 S.W.3d 52 (Tex. 2015), Samson Lone Star Ltd. P’ship v. Hooks, 497 S.W.3d 1 (Tex.App.-Houston [1st Dist] 2016, pet. denied); Samson Exploration, LLC v. T.S. Reed Prop., Inc., 511 S.W.3d 766 (Tex. 2017).
The issue here was how to calculate amounts due for late payment of royalties under the following lease clause:
All past due royalties … shall be subject to a Late Charge based on the amount due and calculated at the maximum rate allowed by law commencing on the day after the last day on which such monthly royalty payment could have been timely made and for every calendar month and/or fraction thereof from the due date until paid, plus attorney’s fees, court costs, and other costs in connection with the collection of the unpaid amounts. Any Late Charge that may become applicable shall be due and payable on the last day of each month when this provision becomes applicable.
Samson appealed the trial court’s award of interest and late charges on past-due royalties, complaining that it improperly imposed “late charges on late charges,” and improperly calculated amounts due “on a compound basis.” The court of appeals affirmed the trial court’s method of calculation on both issues. “We hold the parties’ intent as manifested by the plain meaning of the lease’s operative language authorized ‘late charges on late charges’ and did not limit a late charge to past due royalties.” “The contract’s language authorized compounding the late charges, rather than a simple interest calculation.”
Samson has filed a petition for review in the Texas Supreme Court.
Shirlaine West Properties Limited v. Jamestown Resources, 2021 WL 5367849
This is a post-production-cost case arising out of Chesapeake operations in the Barnett Shale.
Jameston (a Chesapeake affiliate) and Total jointly owned Shirlaine’s lease and each company separately marketed its gas through affiliates: Chesapeake Energy Marketing (CEM) and Total Gas & Power North America. Jamestown sold its gas to CEM at the well; CEM gathered and marketed the gas. The price paid by CEM to Jamestown was CEM’s weighted average resale price less post-production costs and a 3% marketing fee. Total’s contract with its affiliate Total Gas & Power was structured similarly.
Shirlaine’s lease provided:
As royalty, Lessee covenants and agrees: … (b)[1] to pay Lessor for gas including casinghead gas and other gaseous substances produced from said land and sold or used on or off the premises twenty-five percent (25%) of the market value at the point of sale, use or other disposition of all such gas. [2] The market value of all gas shall be determined at the specified location and by reference to the gross heating value (measured in British thermal units) and quality of the gas. [3] The market value used in the calculation of all royalty under this Lease shall never be less than the total proceeds received by Lessee in connection with the sale, use or other disposition of oil or gas produced or sold from the leased premises. [4] The royalty reserved to Lessor hereunder shall be free and clear of all costs and expenses whatsoever, except ad valorem and production taxes. [5] By way of explanation but not limitation, it is agreed between the Lessor and Lessee, that, notwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to the Lessor under this lease or by state law shall be without deduction for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to transform the product into marketable form; however, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor’s share of production so long as they are based on Lessee’s actual cost of such enhancements. [6] However, in no event shall Lessor receive a price that is less than, or mare [sic] than, the price received by Lessee. [7] If Lessee realizes proceeds of production after deduction for any expenses of production, gathering, dehydration, separation, compression, transportation, treatment, processing, storage or marketing, then the proportionate part of such deductions shall be added to the total proceeds received by Lessee for purposes of this paragraph. [8] Lessor and Lessee hereby agree that the holding in Heritage Resources, Inc. v Nations Bank, 939 S.W.2d 118 (Tex. 1996) shall have no application to the terms of this lease.
The Fort Worth Court of Appeals held that, under this clause, Jamestown and Total correctly paid royalties on the price received from their affiliates, and that post-production costs incurred by their affiliates did not have to be added back to the price for purposes of determining royalties. In so holding, the court essentially followed the Texas Supreme Court’s decision in Heritage Resources v. Nations Bank: clauses 1 and 2 of the royalty provision fix the point of sale as the point of valuation of market value of the gas. The gas is sold at the well. Therefore, clauses 4, 5 and 6 “are considered surplusage, or restatements of existing law, as a matter of law.”
As to clause 7, the “add-back” clause, the court said the lessor’s interpretation of this provision as requiring Jamestown and Total to add their affiliates’ post-production costs back to the proceeds for purposes of calculating royalty “would create an internal conflict between the market-value-at-the-well provisions in sentence 1 and 2 and the combination of sentences 3 and 7 to form a ‘total proceeds’ lease. This interpretation would effectively convert a market-value-at-the-well lease into a ‘total proceeds’ lease, which is not consistent with precedent.”
Shirlaine West has sought review by the Texas Supreme Court.