Regmund v. Talisman Energy USA, Inc., No. 4:16-CV-02960, 2019 U.S. Dist. LEXIS 110363 (S.D. Tex. 2019)

The Plaintiffs, a putative class of lessors under oil and gas leases, brought claims against Talisman Energy USA, Inc. (“Talisman”) relating to Talisman’s “volumetric” method of calculating royalties. Some of the gas produced is “wet gas,” which requires stabilization prior to sale, which results in a reduction or “shrinkage” of the volume sold. Talisman commingled the production from numerous leases for processing at the stabilization facility, and then allocated the sales volumes back to individual leases on the basis of wellhead metered volumes (a “volumetric” allocation), and applied an estimate of overall shrinkage.

HJSA No. 3, Ltd. P’ship v. Sundown Energy Ltd. P’ship, No. 08-18-00113-CV, 2019 Tex. App. LEXIS 7254 (Tex. App.—El Paso Aug. 16, 2019, no pet. h.)

This oil and gas lease termination dispute centered on a disagreement as to what type of “drilling operations” constituted “continuous drilling operations” under a continuous development clause. The court held that the lessee’s reworking of existing wells did not satisfy the continuous development clause, resulting in a partial termination of the lease. The court held that, while the lease contained a definition of “drilling operations” that expressly included “reworking,” that was a general definition that did not control over the more specific terms in the continuous development clause. In reaching its conclusion, the court analyzed the role of several lease provisions, including the continuous development clause, retained acreage provision, temporary cessation clause, and an agreed definition of “drilling operations.”

This summer, the Fifth Circuit Court of Appeals addressed an often used and hotly litigated compensation  practice adopted  by oil and gas companies—day rates. Commonly utilized in the energy sector, companies engage highly skilled workers (such as drilling or well consultants) through an independent contractor arrangement and pay a “day rate” for the services of those individuals—a predetermined amount paid based on each day worked, regardless of the number of hours actually worked. Recently,  this  day-rate  compensation  scheme has spawned legal challenges across the United States. Specifically, in these lawsuits, workers allege (i) they were incorrectly classified as independent contractors under the Fair Labor Standards Act (“FLSA”) and (ii) they are owed unpaid overtime compensation for hours worked over forty (40) per week.

In August 2019, the Fifth Circuit Court of Appeals (which covers Texas, Louisiana, and Mississippi) granted a “win” for employers adopting the day-rate compensation  structure. Specifically, the Fifth Circuit  in  Faludi v. U.S. Shale Solutions, L.L.C. held a worker paid a day rate was exempt as a Highly Compensated Employee (“HCE”) under the FLSA, and, therefore, was not entitled to overtime compensation. Although the court’s holding in Faludi was limited to whether workers paid pursuant to a day-rate scheme are paid on a “salary basis” as required for the HCE exemption, the Faludi decision marks an important shift in wage and hour litigation facing the energy sector.

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.

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.