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Year in Review: Significant Cases and Events

Winter Storm Uri

The fallout from the Texas Freeze in February 2021 continues. A year later, UT’s Austin Energy Institute concluded that multiple failures of power plants, gas processing plants, gas storage and distribution facilities, and gas production all contributed to the system failures. ERCOT management was fired; natural gas prices spiked to more than $400/MMBtu; politicians blamed wind and solar generation; the legislature passed legislation requiring the Public Utility Commission and the Railroad Commission to strengthen weatherization requirements for production, processing and generation facilities and has since criticized those agencies for failing to fix the problem. ERCOT drastically raised electricity prices during the storm, resulting in multiple bankruptcies. The legislature provided for securitization of about $7 billion in private losses caused by the storm, so those losses are spread over the next twenty years in customer rate increases. Expect new legislation in the upcoming session.

Mitchell v. Map Resources, 649 S.W.3d 180 (Tex. 2022)

The Texas Supreme Court held that extrinsic evidence showing that the defendant in a tax foreclosure case can be admitted in a suit collaterally attacking the tax judgment on the ground that the plaintiff’s due-process right to notice was not followed.

When public property or tax records include contact information for a defendant that was served by publication, we hold that a court hearing a collateral attack on a judgment on due process grounds may consider those records. And because the deed records here featured Elizabeth’s mailing address, we hold that serving her by posting did not comply with procedural due process.

Hlavinka v. HSC Pipeline Partnership, LLC, 650 S.W.3d 483 (Tex. 2022)

The Texas Supreme Court issued an important decision on evidence admissible in pipeline condemnations, holding that the landowner can testify as to value based on comparable arms-length sales of other pipeline easements on his land.

Foote v. Texcel Exploration, 640 S.W.3d 574 (Ct. App.-Eastland 2022)

Oil spilled from Texcel’s tanks and poisoned Foote’s cattle. The court held that Texcel, as mineral lessee held the dominant estate, and “the only duty owed with respect to the cattle is to not intentionally, willfully, or wantonly injure them when they are injured on the area of the oil and gas operations.” “An operator has no duty to fence, or otherwise protect or prevent livestock from entering, the premises of the mineral lessee.”

Post-production costs:

Devon Energy Production Co. v. Sheppard, 643 S.W.3d 186 (Tex. App.-Corpus Christi 2020, pet. granted)

In this important case on post-production costs, the Texas Supreme Court heard oral argument last fall. The court of appeals held that, under a lease clause requiring the add-back of costs deducted by the purchaser for calculating royalties required royalty to be paid after adding back those costs.

Nettye Engler Energy v. Bluestone Natural Resources, 639 S.W.3d 682 (Tex. 2022)

The Texas Supreme Court held that a reservation of royalty “free of cost in the pipe line” allows the lessee to deduct gathering fees incurred after gas enters the gathering line. “The pipe line” is not the transmission line to which the gathering line is connected.

Shirlaine West Properties Limited v. Jamestown Resources, 2021 WL 5367849 (Tex. App.-Fort Worth November 18, 2021), petition for review pending

Shirlaine’s lease provided for royalties based on “the market value at the point of sale.” Lessee sold its gas to its marketing affiliate at the well and received the marketing affiliate’s resale price less gathering charges and a marketing fee. The lease required that, if the lessee “realizes proceeds of production after deduction for [post-production costs], then the proportionate part of such deductions shall be added to the total proceeds received by Lessee” for purposes of calculating royalties. The court held that royalties should be based on the price received from lessee’s affiliate, and that costs deducted from those proceeds by the affiliate need not be added back to the price for calculating royalties: under Heritage v. Nationsbank, the “at the well” royalty clause conflicts with the “add-back” language and so the “add-back” language is “surplusage”.

EnerVest Operating, LLC v. Mayfield, 2022 WL 4492785 (Tex. App.-San Antonio, Sept. 28, 2022)

The court held that EnerVest did not owe royalties on fuel gas, relying on Heritage v. NationsBank.

Carl v. Hilcorp Energy Company, 2021 WL 5588036 (S.D. Tex. Nov. 30, 2021) and Fitzgerald v. Apache Corp., Civil Action No. H-21-1306 (S.D. Texas, Dec. 20, 2021)

Two federal district courts held that the lessee did not have to pay royalty on gas used in “off-lease” operations.

Railroad Commission of Texas and Magnolia Oil & Gas Operating LLC v. Opiela, No. 03-21-00258-CV, Austin Court of Appeals

In an administrative appeal of Commission’s grant of an allocation well permit, the trial court ruled that the Commission had violated Administrative Procedure Act by informally adopting policies for issuance of allocation and production sharing well permits, and that the Commission erred in concluding that Magnolia had a good-faith claim of right to drill the well. The case has been argued in Austin Court of Appeals, decision expected early next year.

Carbon Capture and Storage

CCS has come alive in Texas, particularly since Congress passed the Inflation Reduction Act, increasing tax credits for carbon capture and storage projects. The Texas General Land Office leased 40,000 acres of state submerged land to Talos Energy for a CCS project. Oxy has been leasing thousands of acres in Southeast Texas for CCS projects, and has leased land in King Ranch for a direct-air-capture CCS project. The Texas Railroad Commission has applied to the Environmental Protection Agency for authority to issue permits for Class VI injection wells.

The Inflation Adjustment Act also addresses methane emissions. It charges companies a fee for methane that they leak or vent into the atmosphere, starting at $900 per ton in 2024 and increasing to $1500 per ton by 2026.





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