Case Law Update

The in-house attorney and in-house landman’s home for commentary, insight, and analysis of case law affecting upstream oil and gas.

12Aug

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.

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6Aug

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.

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31May

SCOTX Applies Discovery Rule to Breach of Pref Right Despite Disclosure in Deed Records

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.

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30May

Ratification Issue Did Not Provide Path to Attorneys’ Fees

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.

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24May

Correction Mineral Deed Ruled Ineffective Under “Material Correction” Statute

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.

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22May

“Accumulation” Clause in Continuous Development Provision Only Extended the Next 150-Day Term

Endeavor Energy Res., L.P. v. Energen Res. Corp., No. 11-17-00028-CV, 2018; Tex. App. LEXIS 8705 (Tex.App.—Eastland Oct. 25, 2018, pet. filed)

The Eastland Court of Appeals recently issued its opinion in Endeavor v. Energen adopting a limited interpretation of an “accumulation” clause within a continuous development provision. The Court held that the clause only allowed the lessee to extend the “next” 150-day term, not to be accumulated and used on any well.

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17May

Texas Supreme Court Denies Review on Rolling/Snapshot Retained Acreage Case

Apache Deepwater, LLC v. Double Eagle Dev., LLC, 557 S.W.3d 650 (Tex. App.—El Paso 2017, pet. denied Dec. 14, 2018)

Retained acreage provisions continue to be a popular subject in Texas oil and gas law. The Texas Supreme Court recently denied a petition for review in the closely-watched case, Apache v. Double Eagle. In that case, the parties disagreed as to whether a retained acreage clause provided for a single partial termination at the end of the primary term (i.e., a “snapshot-in-time” termination), or a continuous partial release throughout the secondary term (i.e., “rolling termination”). This case bolsters the old adage: “say what you mean and mean what you say.” Texas courts will not fill in the blank otherwise.

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15May

Highway to Oil: Strip-And-Gore Leads to 30-Acres of Minerals Underlying a Highway

Green v. Chesapeake Expl., L.L.C., No. 02-17-00405-CV, 2018 Tex.; App. LEXIS 10307 (Tex. App.—Fort Worth Dec. 13, 2018, no pet.)

In urban oil and gas plays such as the Barnett Shale, horizontal drilling has “paved the way” for oil and gas operators to drill through and produce minerals underlying highways, streets, and roadways. Even in rural areas across Texas, numerous horizontal wells have been drilled underneath roads and highways. As a result, several reported cases in recent years have involved title to minerals underlying roadways. Landmen of the vertical era may have paid little attention to mineral title underlying roadway tracts. After all, one option may have been simply to drill the vertical well next to the road or to omit the roadway tract from the unit. However, horizontal drilling significantly altered this analysis, as geological implications and long horizontal laterals may dictate that the horizontal wellbore pass under the roadway, significantly increasing the odds that a roadway tract will be a “drillsite tract.” The result is that mineral title and pooling issues are more likely of critical concern.

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10May

Texas Court Addresses the Use of Contract Operators

OBO, Inc. v. Apache Corp., 2018 Tex. App. LEXIS 8392,
(Tex.Civ.App.—Houston [14th Dist.] 2018, no pet.)

Parties to a joint operating agreement sometimes elect to have a non-owner serve as the operator. For example, interest owners may determine that they are unwilling or unable to perform the operator duties under the operating agreement, and will instead elect hire an unaffiliated contract operator. However, placing a non-owner in the position of operator is problematic for a number of reasons. For example, most model form operating agreements either directly or indirectly indicate that ownership is a condition precedent to serving as operator. Moreover, numerous obligations, protections, and other provisions of model form operating agreements may become confusing, unworkable, or even meaningless when applied to a non-owning operator.

Some of those issues are illustrated by the recent case OBO, Inc. v. Apache, involving the American Petroleum Institute’s Model Form Unit Agreement and Model Form Unit Operating Agreement. In that case, the Houston 14th District Court of Appeals was faced with determining whether an elected Unit Operator is permitted to delegate operatorship duties to a contract operator, and whether that contract operator can be liable to nonoperators for breach of any duties imposed on the operator under that Unit Operating Agreement.

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3May

Four Recent Drainage and Offset Cases: A Texas Litigation Trend?

Three recent Texas cases have focused on the interpretation of express offset provisions in oil and gas leases.  Over the last year, the Texas oil and gas industry has experienced what some commentators have called “Shale Boom 2.0,” with increased drilling activity in South Texas and the Permian Basin, leading to some marketing bottlenecks and spikes in the number of drilled but uncompleted wells.

Whatever the cause, at least three reported appellate cases in the last 18 months have focused on the construction of express offset clauses in oil and gas leases.  Oil and gas landmen and lawyers alike should take note of these decisions, as they each underscore that Texas courts do not interpret oil and gas leases merely by reference to the industry’s general rules, but instead on a careful analysis of the actual language used by the parties in the lease.  And as one recent case illustrates, the “surrounding circumstances” of the shale boom might lead to results some would not expect.

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© Copyright 2012-2018, McGinnis Lochridge LLP. All Rights Reserved. DISCLAIMER: The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.
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