Oil and Gas Lawyer Blog
Recently the El Paso Court of Appeals affirmed a judgment denying Tom Craddick’s claim that Cimarex and BPX had conspired to wash out his overriding royalty interest in an oil and gas lease owned by BPX. Craddick v. Cimarex Energy, et al., No. 08-24-00010-CV.
An overriding royalty is created when the owner of an oil and gas lease assigns the lease but reserves a royalty interest in production. An overriding royalty can also be created by assignment from the lessee. Because the overriding royalty is carved out of the lessee’s working interest, it terminates when the lease terminates.
A “washout” of an overriding royalty occurs when the lessee releases the lease even though there is a well or wells on the lease that continues to produce in paying quantities. The overriding royalty is “washed out” by the release.
Tom Craddick claimed that Cimarex’s agreement with BPX – a complex “swap” in which Cimarex, the owner of the mineral interest underlying the lease, would convey other minerals to BPX in exchange for BPX’s release — violated a duty BPX owed to Craddick as owner of the overriding royalty. Based on prior precedent, the Court of Appeals held that BPX owed Craddick no duty to keep the lease in force.
Tom Craddick is a long-time member of Texas’ House of Representatives from Midland, first elected in 1968 at age 25. His daughter is a commissioner on the Texas Railroad Commission, which regulates the oil and gas industry in Texas. A family partnership, Craddick Partners, owns substantial royalties and overriding royalties. In a Texas Monthly article in 2023, How a Powerful Texas Lawmaker and his Family Made Half a Million for a Few Phone Calls, Russell Gold explained how Craddick Partners obtains its overriding royalties, by facilitating lease trades. (Gold wrote a follow-up article in 2023, The Craddicks’ Gushers of Cash: How a Powerful Texas Lawmaker and a Key Regulator Profit From the Industry They Oversee, about Craddick’s royalty dealings.)
Craddick’s suit against BPX and Cimarex was filed in 2022. In 2021, Craddick introduced a bill in the Legislature, House Bill 4218, which would have created a cause of action for washout of overriding royalties. The bill passed but was vetoed by Governor Abbott. In 2023 Craddick again introduced a bill which became Texas Property Code Sections 31.001-005, creating a cause of action for bad-faith washouts. Because the bill was prospective only in application, Craddick could not rely on it in his suit against BPX and Cimarex.