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.

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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8Aug

Appellate Court Holds that Landowner’s “Course of Dealing” Leads to Waiver

In June 2018, the Dallas Court of Appeals issued its memorandum opinion in Tollet v. Surface, holding that an ambiguous royalty provision in a groundwater lease, when read in light of the parties’ course of dealings, allowed the lessee to make royalty payments once per month with a 90-day grace period. The court also reviewed the landowner’s “course of conduct,” including a “continual failure” for four years to demand strict performance of royalty timing and metering provisions, and held that this resulted in a waiver of the lessee’s breach of those provisions.

Water companies and oil and gas operators alike may be interested in this case, as it underscores the importance of carefully drafting royalty and metering provisions, and illustrates the use of a “waiver” defense in a breach of lease case.

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5Jun

Tex. Supreme Court Splits Over Meaning of “Offset Well” in Shale Plays

The Texas Supreme Court issued a narrow 5-4 opinion in Murphy Exploration & Production Co. — USA v. Adams on June 1, 2018, interpreting a common “offset” clause contained in a 2009 oil and gas lease.  The majority held that the phrase “offset well” in that clause does not necessarily refer to a well that would protect the leasehold against drainage, but instead referred to a well drilled anywhere on the leased premises that was drilled to a depth required by the lease. The Court reached this conclusion based on interpreting that phrase in light of “surrounding circumstances” evidence of the discovery of the Eagle Ford and drainage patterns of horizontal shale wells.  Four justices dissented in an opinion that, among other things, criticized the majority opinion for disregarding the commonly understood meaning of the phrase “offset well,” which is a well designed to protect the leasehold from drainage.

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28Jun
The Texas Supreme Court Decides Whether “Subject To” Clause Alters Who Must Bear NPRI Burden

The Texas Supreme Court Decides Whether “Subject To” Clause Alters Who Must Bear NPRI Burden

In a decision that focuses on the parties’ intent as expressed within the four corners of the document, the Texas Supreme Court in Wenske v. Ealy [1]13-15-00012-CV, ___ S.W.3d ___ (Tex. 2017) decided whether the language of a deed puts the entire burden of an outstanding non-participating royalty interest (“NPRI”) on the grantees or whether the NPRI proportionately burdens both the grantor’s reserved interest and the interest conveyed to the grantees.  The grantors argued that their reserved interest is not burdened by the NPRI, while the grantees argued that the NPRI proportionately burdens both their interest and the grantors’ interest.  The Court ruled that, based on the language in the deed, the NPRI proportionately burdens both the conveyed and reserved interest.

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Footnotes   [ + ]

17Apr
Railroad Deed Controversy: 100+ Year Old Instrument Ruled an Easement, Not a Fee Simple Conveyance

Railroad Deed Controversy: 100+ Year Old Instrument Ruled an Easement, Not a Fee Simple Conveyance

 

BNSF Railway Co. v. Chevron Midcontinent, LP

This dispute arises from a deed executed in 1903 from W.H.C. Goode to BNSF’s predecessor covering land in Upton County, Texas.  When Chevron began producing from underneath BNSF’s railway tracks, BNSF sued for trespass of title, arguing that the 1903 deed conveyed fee simple title.  Chevron argues that BNSF acquired only an easement.  Thus, the issue before the Court was whether the parties to the 1903 deed intended to convey fee simple title or only an easement.  Although the deed contained the term “fee simple” in the habendum clause, the court ultimately decided the deed conveyed an easement because it contained terms throughout the deed that suggested the parties intended to convey only an easement.  Read More »

25Jan

Texas Court Holds that Permit of Injection Well May be Challenged Outside Railroad Commission and Travis County Via Injunctive Relief

Brief Overview: What You Need to Know

On January 18, 2017, in Ring Energy v. Trey Resources, Inc.,[1] Ring Energy v. Trey Resources, Inc., 2017 WL 192911(Tex. App.—El Paso January 18, 2017, no pet. h.).  the El Paso Court of Appeals, in a case of first impression, addressed whether a trial court outside of Travis County (where the Texas Railroad Commission (the “RRC”) is based) has jurisdiction to issue an injunction prohibiting a party with a valid RRC injection well permit from operating its injection well based on a complaining party’s claim that the injection would cause imminent and irreparable “waste,” even though the complaining party (1) had not yet sustained any actual injury, (2) did not oppose the permit prior to issuance, and (3) did not take advantage any other administrative remedy that might have been available. Read More »

Footnotes   [ + ]

18Jan

Denbury v. Texas Rice: Clarifying the Test for Common Carrier Status, Power of Eminent Domain

On Friday, January 6, 2017, the Texas Supreme Court issued its long-awaited opinion in Denbury Green Pipeline–Texas, LLC v. Texas Rice Land Partners, Ltd. (“Texas Rice II”), [1]15-0225, 2017 WL 65470 (Tex. Jan. 6, 2017). holding that:

  1. Denbury’s evidence of a post-construction transportation agreement with an unaffiliated customer was relevant to the “reasonable probability test,”
  2. rejecting a rule that the requisite intent must exist at the time the pipeline was contemplated,
  3. rejecting the appellate court’s “substantial public interest” test, and
  4. holding that Denbury had “conclusively” established its qualification as a common carrier with the power of eminent domain.

The opinion provides clarity as to the test previously set forth in Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline–Texas, LLC (“Texas Rice I”), [2]363 S.W.3d 192, 202 (Tex. 2012). and the types of evidence relevant to that determination.

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Footnotes   [ + ]

11Jan

10 Oil and Gas Cases to Watch in 2017

With the beginning of a new year, there are several oil cases pending in the Texas Supreme Court relevant to the oil and gas industry.  We’ll be following these cases throughout the year.  Sign up as a subscriber to oilandgaslawdigest.com to receive updates on these and other cases.

Here are ten cases that we will be watching:

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25Oct
The Texas Supreme Court Decides Whether “Subject To” Clause Alters Who Must Bear NPRI Burden

Graham and Hysaw Analyzed in New Deed Interpretation Dispute out of San Antonio CoA

Earlier this year, we reported the San Antonio Court of Appeals decision in Dragon v. Harrell, a fixed versus floating royalty case.  Here, the court is again confronted with the same issue.  Relying on its decision in Graham v. Prochaska, the court explains why the estate misconception theory does not apply and explains how the interest in dispute is a fixed nonparticipating royalty interest.

Read More »

© 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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