Due perhaps to geologic serendipity, Texas has a long and extensive history of oil and gas exploration and production. Consequently, much of Texas’ lands have experienced severance of mineral from surface estate and resulting complications of concurrent occupancy by parties whose interests are not always fully aligned. In Texas, the owner of a severed mineral interest (and its mineral lessee) generally enjoy an implied right to enter upon the surface and to use the surface estate for the purpose of exploring, drilling, producing, transporting, and marketing the minerals. The Texas Supreme Court has described this implied right as “a well established doctrine from the earliest days of the common law.” The underlying rational is that a grant, lease, or reservation of minerals would be worthless if the grantee, reserver, or lessee did not have access to and use of the surface estate.Read More »
This article features a portion of the Railroad Commission Update paper presented at the 45th Annual Ernest E. Smith Oil, Gas and Mineral Law Institute and provides an update to the Commission’s prohibition against double-assignment of acreage.Read More »
Texas Outfitters, Ltd., LLC v. Nicholson, 572 S.W.3d 647 (Tex. 2019)
The Texas Supreme Court recently issued its opinion in Texas Outfitters v. Nicholson, addressing the duties an executive mineral owner owes to non-executive owners. The case focused on when an executive owner has a duty to sign a lease and to what extent efforts to protect or benefit the surface estate can impact this duty. The Court affirmed the trial court’s judgment holding that the executive breached its duty and affirmed the trial court’s award of $867,654.32 plus interest and costs.Read More »
Post-Production Cost Fights Continue: Supreme Court Holds the Phrase “Into the Pipeline” Set a Valuation Point for “Amount Realized” Royalties
Burlington Resources Oil & Gas Co LP v. Texas Crude Energy, LLC, 2019 Tex. LEXIS 196 (Tex. March 1, 2019)
In Burlington Resources, the Texas Supreme Court held that an oil and gas royalty assignment that required the royalty to be delivered “into the pipeline” permits the payor to deduct post-production costs from the royalty owners’ payment, even if the agreement purports to prohibit such a deduction.
For years, Texas courts have found that when an oil and gas lease provides that royalty will be paid “at the well” or “at the mouth of the well,” the lessee generally can pay royalties net of all reasonable postproduction costs — even if the lease purports to prohibit such deduction. The reasoning has been that such language places the “valuation point,” (ie, where the production must be valued for royalty payment purposes) at a point before any post-production costs would have been incurred. In leases with a valuation point “at the well,” the Supreme Court has held that language prohibiting deductions for post-production costs as “surplusage” — or meaningless. In Burlington Resources, the Supreme Court held that the phrase “into the pipeline” mirrors the “at the well” designation and requires the same result.Read More »
Offset Obligations: Court Holds Offset Obligation Not Dependent on an Expectation of Profit or Actual Drainage
Bell v. Chesapeake Energy Corp, 2019 Tex. App. LEXIS 1978, 2019
WL 1139584 (Tex.Civ.App.—San Antonio, 2019, no pet)
In the last edition of Producer’s Edge, we surveyed several recent offset cases. Those cases illustrate that horizontal shale plays have brought several unique twists and complications, which can significantly alter the traditional notion of an “offset well.” In addition, Texas courts focus on a careful reading of the actual language within an offset provision when determining both when and how to drill an offset well.
A recent case out of the San Antonio Court of Appeals, Bell v. Chesapeake Energy Corp, continues this trend of offset lawsuits. The Bell case addresses whether two different offset provisions required the lessors to prove the reasonable prudent operator standard, and how to calculate compensatory royalties for an adjacent horizontal well.Read More »
Supreme Court Splits Over Use of Expert Testimony and Other Extrinsic Evidence When Construing Obligations in Oil and Gas Agreements
Barrow-Shaver Res. Co. v. Carrizo Oil & Gas, No. 17-0332, 2019 Tex. LEXIS 688 (June 28, 2019)
On June 28, 2019, a divided Texas Supreme Court issued its opinion in Barrow-Shaver Resources Company v. Carrizo Oil & Gas, LLC, a decision that will impact what evidence a court can consider in oil and gas contract disputes and possibly how oil and gas agreements are negotiated and drafted. The Court discussed the line between admissible evidence of “surrounding circumstances” and inadmissible parol evidence, when prior drafts and the use of expert testimony regarding industry custom and usage is offered to construe an unambiguous agreement. The Court also discussed the use and function of “consent-to-assign” provisions and the inability to rely on oral representations that conflict with the terms of a written agreement.Read More »
McGinnis Lochridge’s Oil & Gas Newsletter: Producer’s Edge keeps clients informed about Texas oil and gas case law, regulatory updates, and insightful articles relevant to the oil and gas community.
In this edition, we present several insightful articles, including an article covering the recent Barrow-Shaver opinion from the Texas Supreme Court involving the role of expert witness testimony in contract construction cases. You’ll also find an article surveying surface use disputes, an article discussing a recent drainage/offset case, and an article discussing acreage assignment issues at the Texas Railroad Commission. In addition, we have included a guest article from the International Trade and Transactions Practice Group, analyzing key legal factors when engaging in international oil and gas transactions. Finally, you’ll find a short summary of several recent Texas oil and gas cases, and a list of oil and gas cases pending before the Texas Supreme Court.
Download the second issue of Producer’s Edge here.
Carl M. Archer Tr. No. Three v. Tregellas, Nos. 17-0093, 17-0094, 2018 Tex. LEXIS 1153 (Tex. 2018)
Rights of first refusal (sometimes called preferential rights to purchase, or “pref rights”) are routinely found in oil and gas title, joint operating agreements, farmout agreements, and other instruments common to the industry. Even AAPL’s Model Form-610 Operating Agreement includes an optional pref right provision. Pref rights can destroy pending deals, or even unravel deals after they have already closed.
Oil and gas companies should exercise care in evaluating rights of first refusal burdening their interests or prospective interests, including analysis of the triggering conditions and notice provisions. Otherwise, as was recently illustrated in the Texas Supreme Court case, Carl M. Archer Tr. No. Three v. Tregellas, Nos. 17-0093 ~, 17-0094, 2018 Tex. LEXIS 1153 (Tex. 2018), limitations defense may not be available.Read More »
M & M Res., Inc. v. DSTJ, LLP, 2018 Tex. App. LEXIS 9331 (Tex.Civ.App.—Beaumont 2018, no pet.)
Plaintiffs in title disputes sometimes will allege a claim under the Declaratory Judgment Act in order to seek attorneys’ fees. In this case, the court held that the claim could only be asserted as a trespass to try title claim, where attorneys’ fees are not recoverable.
Here, an oil and gas company hired landmen to acquire oil and gas leases in Jefferson County. Landmen acquired 22 leases and assigned them to the oil and gas company using a form that included an overriding royalty reservation and a provision indicating the assignment would terminate upon any late royalty payments. The landmen allegedly recorded the assignment without giving the oil and company an opportunity to review or approve the form. Years later, the landmen claimed royalty payments were untimely and sought termination of the assignment. The landmen claimed that, even though the oil and gas company had not reviewed or accepted the assignment, it ratified the assignment by its conduct.Read More »
Yates Energy Corp. v. Broadway Nat’l Bank, No. 04-17-00310-CV, 2018 Tex. App. LEXIS 10517 (App.—San Antonio Dec. 19, 2018, no pet.)
The San Antonio Court of Appeals recently analyzed the Texas Correction-Instrument Statutes in Yates v. Broadway. The court held that, if a grantor or grantee have conveyed their interests to heirs, successors, or assigns, then those heirs, successors, or assigns must sign a correction instrument in order for it to effectively correct the original instrument. For many practitioners, this was the expected outcome; however, the case provides an interesting example of complexities that can be involved when attempting to correct an instrument years after it is executed.Read More »