Header graphic for print

Energy & the Law

Award for Nuisance From Gas Wells Squelched

Posted in operations, Pollution

bad dayIt was a bad day for the Parrs in Aruba Petroleum v. Parr. The trial court judgment was against the operator for intentional nuisance. The Parrs recovered $2.9 million for pain and suffering and mental anguish and for loss of market value of their home caused by Aruba’s gas wells in Wise County, Texas. (See our erudite discussions of this case at the trial court here, here and here.)

This, along with Cerny v Marathon Oil, makes one wonder what it might take for a Texas plaintiff with a nuisance claim arising out of oil and gas activities to recover personal injury damages, especially if there are operations in the area by non-defendants (there were no wells on the Parrs’ property and 87 other wells in the area).  As you will see, litigation by ambush is not likely to work.

The Parr’s claim was for “environmental contamination and polluting events” on their property by way of, among others, air contamination, light pollution and offensive noises and odors.

Recall Crosstex v. Gardiner, in which the Supreme Court described what is required to prove an intentional nuisance:

The actor desires to cause the consequences of his act or believes that the consequences are substantially certain to result from it. It is a subjective standard. It is not enough to conclude that the defendant intentionally engaged in the conduct that caused the injury.

The Parrs relied on three categories of evidence:

  • complaints by a neighbor to Aruba,
  • complaints to the Texas Commission on Environmental Quality,
  • complaints by the Parrs to Aruba.

Generalized, anonymous grievances fall short

For all their complaints, the Parrs never identified themselves or their specific problems to anyone in particular at Aruba. They failed to identify evidence that Aruba knew that the Parrs were complaining to the TCEQ or that complaints were about the Parr’s property.

The jury didn’t believe Aruba’s conduct was abnormal and out of place in its surroundings. Recall that after Crosstex that is an improper jury question anyway.

My guess is that the jury was persuaded by testimony of an Aruba witness that well sites are noisy, dusty, emitted odors, and result in underground vibrations and significant lights at night, that the Parrs “probably “ had complaints, that he considers smoke plumes a health hazard and a nuisance. That all might be true, but to the court that wasn’t the issue.

It’s all about the evidence

There was no evidence to support the jury’s finding that Aruba intentionally created or maintained a condition that substantially interfered with the Parrs’ use and enjoyment of their land. The Parrs couldn’t cite any evidence that Aruba knew who placed phone calls to Aruba and complained to the TCEQ, or that complaints were specific to the Parr’s property.

For our musical interlude, happy Valentine’s Day.

Oil and Gas Arbitration – Did the Parties Get What They Bargained For?

Posted in Contract Disputes, Litigation

judicial activistFirst, a promise: I won’t report on another arbitration case until there is more to say than “business as usual”. Second, an opinion: Arbitration is still the right forum in many situations. Third, remember: An award and a result, not litigation, was what Venoco says it bargained for.

That said, knowing only that Denbury Onshore v. Texcal Energy South Texas is an appeal of an arbitration award in Texas, you can predict the outcome. The award was confirmed.

How to vacate an award

The bases for vacating awards are similar under the federal and the Texas arbitration acts. Generally an award must have been procured by:

  • corruption, fraud or undue means,
  • evident partiality or corruption,
  • arbitrator misconduct (willful misbehavior),
  • refusing to postpone the hearing for sufficient cause,
  • refusing to hear material evidence,
  • other misbehavior that prejudices a party’s rights, or
  • the arbitrators exceeded their powers or so imperfectly executed them that a final and definite award was not made.

I’m conflating the two statutes.  They aren’t identical but the result is the same: vacating an award is difficult.

The dispute

Denbury had an option to purchase Venoco’s interests in the Hastings Field. After Denbury achieved payout, Venoco would receive a 25% back-in. Payout was dependent on Denbury’s “CO2 costs”, the direct costs of acquiring (commodity costs) and delivering (transportation costs) CO2.

A three arbitrator panel unanimously declared the meaning of the disputed language of the agreement and issued an award in Venoco’s favor.

Denbury sued to modify and vacate the award for:

  • insufficient evidence,
  • the arbitrators exceeded their authority by making an incorrect value judgment on the contract clause,
  • manifest disregard of the law (in essence, they construed the contract incorrectly), and
  • the parties had contracted for judicial review.

Denbury’s hurdles

All reasonable preferences are indulged in favor of the award, and review of an award is extraordinarily narrow.

Denbury argued that the parties contracted to expand judicial review for reversible error: “An appeal from an order or judgment of the panel shall be taken in the manner and to the same extent as some orders or judgment in civil cases under Texas law.” This was not a clear enough agreement to invoke the appellate process to correct reversible error by the panel.

Did Denbury get what it bargained for?

Under the TAA and FAA an arbitrator exceeds his authority only when he disregards the contract and dispenses his own idea of justice or when he strays from the delegated task of interpreting the contract, not that he performs that task poorly. The panel’s 13-page detailed award satisfied the contractual requirement that the award provide evidentiary references. The award was not so irrational or devoid of authority that the panel was merely dispensing its own idea of justice.

The court concluded that Denbury’s complaint was nothing more than a dispute as to the correctness of the panel’s construction of the provision and an effort to re-argue the merits of the case. Don’t be so sure. I could believe that Denbury believed it could appeal but failed to write the provision clearly enough.  Think about that the next time you write such a provision Better yet: why arbitrate if you can appeal?

A proposal

Let’s criminalize vacuous and inept cultural appropriation. If we were to do that, here is a victim and a misdemeanor. And here is a victim and a major felony. Write your Congressperson.

What Price For a Louisiana Servitude?

Posted in pipelines

cavalryAccording to Enterprise Te Products Pipeline Company v. Avila, it is the value of the expropriated property, even if it is as little as 33 cents each to the landowners. This seemingly small case must have had big potential for chaos. Otherwise, why appeal?

Enterprise sought expropriation of a 30-foot wide servitude over the Avilas’ property. The trial court granted a 99-year servitude and found the total value to be $1,060, but awarded each of the 12 landowners who appeared between $150 and $300, despite their collective ownership of slightly more than 1 percent. Each of the many absentee owners was awarded $150. Enterprise appealed, arguing that imposition of a term was erroneous and that the compensation award was contrary to the facts in the record.

Under Louisiana law, a legal servitude can be extinguished only by certain events, such as destruction of the dominant or servient estate, if things necessary for its use have undergone such a change that the servitude can no longer be used, or if it is not used for 10 years or longer. The trial court erred in fixing a term for a legal servitude.

What about those damages?

An award of damages caused by the expropriation should be based upon the value of the property before the contemplated improvement was proposed, without deducting benefits to the owner from the improvement. He must be compensated to the full extent of his loss. La. R. S. 19:9. Enterprise’s expert determined that, based on the highest and best use of this rural property, the value of the 160-acre tract was $1,200 per acre. The servitude covers less than one acre, making the total value of the expropriated property $1,060.

What motivated the trial court?

The trial court was “impressed by the impact that taking such as this would have upon the ancestors of an African-American landowner who acquired the property at a time when ownership by a person of color was rare .” The court of appeal believed that sentiment was “implicit” in the ruling.

The main argument of the landowners (who weren’t represented by counsel) was the fundamental unfairness of the expropriation process – a viewpoint no doubt shared by every expropriation defendant since the beginning of time. The court of appeal also appeared to sympathize. It its words, it was “forced to conclude that the award to the Appellees is manifestly erroneous” and amended the judgment.  The result was that each appellee-landowner received between 33 cents and $5.23.

Questions

  • When is a trial court’s duty to do what she believes is right, rather than rule in strict (or no) conformance with the rule of law?
  • What motivated the trial court? Sympathy, … a sense of justice and fairness, or … what?
  • What if there were no appellate court – no cavalry galloping over the hill to save the troops?
  • Why appeal? To communicate a message to future hold-outs?

A musical interlude for the long-suffering landowners.

Oil Industry Custom and the Model Form JOA: A Debate

Posted in Contract Disputes, Operating Agreements, operations

existential questionWe begin with an existential question:

“The philosophy behind all of the model form agreements is that aggressive drilling under the JOA should be promoted and rewarded.

Agree or disagree?

That was an issue in Talisman Energy v. Matrix Petroleum.  It was not resolved, but the decision is worth your attention because the court enjoined the operator from drilling and proposing wells pending trial on the merits.

The parties were drilling wells in LaSalle County, Texas, under a 1954 Model Form JOA. Section 15 (which the court refers to as Section ”16”; see V.D of the later forms) allows the operator to use its own equipment and tools only on a competitive basis, if it does not exceed prevailing rates, and after an agreement in writing with the non-operators. Evidence was presented that Talisman was exceeding the prevailing market rate and was not confirming the arrangement with Matrix prior to operations.

A procedural hurdle

Procedural wrangling prevented the court from answering our existential question. Talisman’s expert landman, and the source of the statement, was going to show certain customs and usages in the model form and how it is intended to work.

An expert can testify about, for example, the common understanding of “commencement of operations”. But the court viewed the testimony as being offered not to explain the meaning of an industry term, but rather to aid the trial court in construing sections 5 and 8 of the agreement.  A court doesn’t need an expert to help it construe an agreement. That’s what the judge is for. The testimony was not considered.

What about irreparable harm?

Lawyers: The decision discusses why there was irreparable injury and why it didn’t matter that Matrix wasn’t seeking a permanent injunction.

INTERMISSION

We’re usually done by now. Appropriate for an old-timey but still-breathing JOA are old-timey but timeless tunes. Today we have one with roots from 1860, and one originating in 1720 (you can look it up!).

If you elect to participate in a subsequent operation, you may now …

Consider the existential question

I conducted a random and unscientific survey of industry professionals (to-wit, people with whom I have lunch and drink whiskey, often not at the same time). The result: Some agreed with the statement, most did not.

These alternative “philosophies” behind the model form were presented:

  • The JOA is an “outline for honorable men to follow in the development of oil and gas properties.”
  • The purpose … or the “philosophy”, is to control the Operator to a certain extent and to ensure that WI owners understand and agree to costs and when and how payments are to be made.
  • The efficient utilization and maximization of leasehold opportunities, along with effective production management should be the goal. Profit maximization and reasonable adherence to the prudent operator’s implied covenant to develop should govern the drilling philosophy.
  • One of the reasons … [is] … to protect minority owners, to keep the major participants from expensing them out of the Agreement by not orderly and timely proposing drilling, completing and evaluating opportunities and risks … .
  • The goal is to have prudent operations in all respects – financial, engineering, geologic, etc.
  • The reason … is to provide those who elect to participate in the drilling of wells necessary to efficiently drain the reservoir with a proper return for assuming the risk and burden of those partners who elect not to participate.
  • If they choose to do so, the parties can negotiate terms that clearly provide for an active drilling program as their primary objective.
  • If you wanted “aggressive development” the non-consent penalty would be [more than] 300%.  Or there would be no non-consent … .  If the drafters truly wanted to reward “aggressive drilling”, the non-consent would have never been proposed.
  • In contrast to a JOA, it could be argued that “aggressive drilling be promoted and rewarded” is the intent of an Oklahoma Forced Pooling Order [and that] such an Order is designed to punish anyone who does not aggressively drill or expend capital … by taking away subsequent interests.

But I also heard from who agree (including the expert, who stands by his opinion):

  • The generation that came up in the 1950’s, ‘60’s and ‘70’s, plus committee members of the AAPL JOA task force who worked on the 1989 Model Form, asserted their “philosophy” that aggressive drilling is to be promoted and rewarded. That philosophy prevailed. Hence, the non-consent option.
  • Article VI (Drilling & Development) sets forth the conditions for which one party can take on the risk of drilling with or without the participation of all parties. Oklahoma’s forced pooling statute revolves around the JOA. (A contrary view of Oklahoma forced pooling?)
  • The pro-development bias is explained by the fact that any party, no matter how small its interest, can propose a well and force all other parties to either join or go non-consent, subject to the penalty.
  • The alternative is to either 1) carry the non- consenting party  under common law co-tenancy (in which case there is no “penalty”; only recovery of costs), or  2) vote on operations, as with international, offshore, and onshore field wide unitization/secondary recovery.
  • Unlike international or offshore arrangements, in the model forms there are no provisions for voting mechanisms, project teams, committees, and forced collaboration prior to a drilling proposal. Any party can move forward by AFE’ing the others and allowing them to invoke the non-consent penalty.  That reflects the aggressive drilling philosophy.
  • The form certainly doesn’t discourage aggressive drilling. That is reflected in the non-consent option.

Why the discord? 

It’s no surprise. The “disagreers” tend to be smaller operators and non-ops (my eating buddies). The “agreers” tend to be larger, with bigger budgets.  The “small guys” tend to want to rein in the “big guys” and make them go about development in an orderly fashion with maximum collaboration. The big guys tend to favor agreements that allow them drill away; said less charitably, to force operations on the others at-will.

Who says the oil business is monolithic?

It’s Now Easier To Be a Common Carrier Pipeline in Texas

Posted in Eminent Domain, pipelines

pipelineWe now know what it takes to establish common carrier pipeline status in Texas.  According to the Texas Supreme Court in Denbury Green Pipeline Texas LLC v. Texas Rice Land Partners Ltd., all that is required is a reasonable probability that the pipeline will, at some point after construction, serve the public by transporting a product for one or more customers who will either retain ownership or sell it to parties other than the carrier. A “reasonable probability” is “more likely than not”.

Summary judgment evidence established a reasonable probability that at some point after construction, Denbury Green’s CO2 pipeline known as the Green Line would serve the public, and thus Denbury Green is a common carrier as a matter of law. This means no jury trial in Jefferson County at which common-carrier status would be the issue.

A long history

In its original opinion first time up the appellate ladder, the court held that “checking the box” on Railroad Commission Form T-4 was insufficient to establish that a pipeline is a common carrier. The record showed only the possibility of future customers, which is not the same as a probability. Plus, there was objective evidence – from Denbury’s own web site – of its intent to use the pipeline solely for its own purposes. After that opinion, the court of appeals found that the facts at the trial court did not establish common carrier status.

This time around, though, Denbury presented evidence necessary to make its case. For example:

  • Testimony that the line was designed to be close to refineries, plants and other facilities that could use the line to transport and store CO2.
  • Transportation agreements with two unaffiliated entities and a sister company acting on behalf of itself and working interest owners unaffiliated with Denbury.

This was “reasonable proof of a future customer”, thereby demonstrating that the line will transport to or for the public for hire and is not limited in its use to the wells, stations, plants and refineries of the owner.

How else can we make it easier?

The Supreme Court removed two court of appeals-imposed hurdles to common-carrier status:

  • The court eliminated the requirement that agreements with third parties be sufficiently substantial to establish common-carrier status as a matter of law. The Supreme Court ruled that the public interest need not be “substantial”. Evidence of a “reasonable probability”, etc. is substantial enough to satisfy the public use requirement.
  • Evidence is no longer limited to pre-construction events or the proponent’s subjective intent or beliefs at the time of its plan to construct the line.  Post-construction contracts are relevant to the analysis.

Left for another day is whether a contract between affiliated entities that may benefit unaffiliated working interest owners is sufficient to establish common carrier status.

A musical interlude.

The Constructive Notice Doctrine in Action

Posted in Land Titles, Title Issues

speed limitToday’s “pay attention” edition begins with a quiz. What is the most important thing to read carefully:

a. Speed limit sign in small-town (insert name of Southern state).

b. Itinerary for that dream vacation, the one with multiple layovers of varying durations in airports and time zones far from your own.

c. Title documents to which you affix your John Hancock.

d. Prep instructions before the colonoscopy.

Scott v. Peters, et al. reminds us of the directive imposed by Oklahoma’s constructive notice doctrine:  Read and understand documents that you sign affecting your land. (Helpful hint: It’s no different in other states).

The events

  • 1997 – Warranty Deed filed with the county clerk, Scott conveys 120 acres to Peters; later says he only conveyed the surface.
  • 2000 – Warranty Deed filed, Scott conveys another 40 acres to Peters; retains no minerals
  • 2001 – Warranty Deed filed, Scott grants the same 120 acres to Russell; no reference to mineral reservation.
  • 2001 – Russell conveys the 120 acres to Wichert; no reference to mineral reservation.
  • 2002 – Peters discovers the Wichert deed; obtains a quitclaim from Wichert; leases the minerals under the entire 160 acres.
  • 2014 – Scott sues Peters to quiet title in the minerals under both tracts.

 The issue 

When did Oklahoma’s five-year statute of limitations for reformation of a deed begin to run? Resolved: When the document was filed of record, even if Scott didn’t understand what it said.

Scott argues: Limitations for reformation of the 1997 deed didn’t begin to accrue when the deed was filed. It did contain a mineral reservation, but the reservation was insufficient. A layman such as himself couldn’t be held to know the legal effect of such an insufficiency until the legal effect was questioned. He relied upon Oklahoma’s equitable 15-year limitation statute.

Peters responds: Constructive notice was imposed upon Scott by the filing of the deed in 1997; thus the suit was untimely.

Scott acknowledged that he was precluded from challenging the 2000 deed, but argued that the statute was tolled until he learned of an issue regarding the insufficiency of the reservation in the 1997 deed.

The court opines – Scott should have read his deed

Scott’s suit was untimely. He had an opportunity and obligation to read the 1997 deed and at least inquire as to what he was signing. He was required to be diligent in investigating the transaction. This, he did not do.

Even if the mineral reservation in the 1997 deed had been unartfully drafted and was insufficient, Scott attempted to convey the exact same property in 2001 with no reservation whatsoever. Thus, at least as of 2001 Scott was on notice as to what the deed expressed. Had he timely sought to reform the deed, his suit might have succeeded.

The statute began to accrue a least with Scott’s 2001 deed to Russell with no reservation. At that time Scott was on notice that he had no minerals.

Quiz answer

Its a trick question. All answers are correct sooner or later. In Mr. Scott’s case, it’s obvious.

A musical interlude for Mr. Scott.

2016 – A Bad Year For Bad Guys in Energy

Posted in Regulations, Statutes

white collar crimeLet’s look back at a cavalcade of crooks, criminals and miscreants who met up with justice in 2016.  We do it to be reminded of the others who will be lurking in the 2017 shadows.

Perp: David Kent, founder of Oilpro.com

Offense: Wire fraud by computer hacking.

How: Created a “backdoor entry” into the computer system of Rigzone  (the company he founded and sold for $51 million) and downloaded the “entire website” onto an external drive that disappeared after he left Rigzone. Then began soliciting Rigzone’s customers.

Sentence: Awaiting, if you’re talking jail time; the civil litigation will likely result in money damages against him and his co-conspirators.

__________

Perp: Sameer Sethi. This is an SEC civil action.

Offense: Fraudulent sale of securities. (SEC v Sethi Complaint)

How: All sorts of false and misleading statements and omissions to investors of Sethi Petroleum, LLC, to the tune of $4 million.

Result: Cease and desist order. (Memorandum Opinion and Order)

__________

Perps: Gregory P. Warren and Thi Houng Le.

Offense: Mail and wire fraud, conspiracy.

Sentences: After a four-week trial, Le, 84 months in federal prison; Warren, 204 months in federal prison; both, 3 years of supervised release, $25,000 fine.  5 others, including the lawyers who were given the lists, were acquitted.

__________

Perp: James VanBlaricum 

Offense: Mail fraud, Ponzi scheme.

How: Represented to 53 investors in Signal Oil & Gas an ‘assured’ rate of return of nine to 15 percent and full refund of their initial investment after a three to five-year investment period. $2 million of $2.6 million raised were commingled with other funds and more than half of investor funds went to payroll and day trading.

Sentence: Awaiting.

___________

Perps: Robert L. Baker and three others. This is an SEC enforcement proceeding.

Offense:  Sale of unregistered securities.

How: Worked for Chris Faulkner and Brietling Oil and Gas, which explains a lot. They collectively received nearly $9 million in undisclosed transaction-based commissions; none were registered with the Commission as a broker or associated with a registered broker-dealer.

Penalty: None as of this time.

_________

Perp: Jeffrey Wilson (See, it happens in renewables too!)

Offense: Tax and securities fraud.

How: Falsely portrayed a biofuels company as a legitimate manufacturer in order to receive federal tax incentives. All they were doing was moving the product from one state to another.

Sentence: Awaiting, after an eight day trial.

__________

Perp: Susan Gay Pruitt

Offense: State securities fraud.

How: Amateurish. Plugged numbers from producers’ websites into her projects, which she hadn’t invested in in the first place. Defrauded investors of $225,000.

Sentence: 22 years by a Collin County, Texas, state court. Seems overly harsh relative to others. If she knew she was risking 22 years, should she have swung for the fences …you know, steal more to make it worth her while?

__________

Perp: SandRidge Energy, Inc. This is an SEC enforcement proceeding.

Offense: Violated Securities Exchange Act of 1934

How: Fired whistleblower who raised concerns about the process for calculating publicly reported reserves; Then put language in the employee’s separation agreement that prohibited participating in any government investigation or disclosing information potentially harmful or embarrassing to the company.

Fine: $1.4 million and cease and desist order.

A musical interlude dedicated to our subjects.

And another one for those who prefer English.

Have You Reviewed Your Lease Maintenance Processes Lately?

Posted in Contract Disputes, Litigation

nightmareYou might conclude that the but-for-the-grace-of-God-that-could-be-me nightmare presented in In re: RPH Capital Partners is instructive only for lawyers. If so, you would be mistaken. The lesson: If you want to win the lawsuit, pay attention to pesky legalities such as notices of trial settings. Likewise, if you want to protect your hydrocarbons, reinforce your people and processes for maintaining leases and other significant obligations.

RPH sued Peridot and others for failing to make payments under a participation agreement and for selling interests in properties they didn’t own. The defendants didn’t appear for the trial.  A default judgment for $13 million was taken.

After RPH began garnishing bank accounts Peridot filed a petition for bill of review, contending it never received a copy of the judgment. Peridot had only 38 days’ notice of the trial (the law requires 45), so Peridot argued it was deprived of its due process rights.  The trial court ordered a new trial.

Everyone agreed that Peridot did not receive enough notice of the trial, but was the notice so insufficient that it was a violation of fundamental due process rights? No. Peridot waived that complaint when it took no action after it received less than 45 days’ notice.

The case then turned to whether Peridot’s failure to appear was not intentional or the result of conscious indifference, but was due to mistake or accident.  The court never got to whether there was a meritorious defense.

To prove that the failure to appear was not intentional or the result of conscious indifference there must be “some excuse, although not necessarily a good one.”  Forgetfulness alone is insufficient, but excuses that are acceptable are, for example, bad weather and misplacing the citation due to staff turnover.

Peridot’s counsel “did not see” the trial setting and no one in the office docketed the trial date. The deficiency in counsel’s affidavit was that it didn’t explain the failure to appear at trial and offered no description of circumstances that could explain why he took no notice of the trial date.  Finally, the affidavit failed to address other instances showing Peridot had notice of the trial date. Peridot did not establish that its failure to appear was not intentional or a result of conscious indifference.

What does this have to do with me?

The lesson for the lawyer is obvious. What if you run a land department?  You should be good to go if you have people and processes in place to assure that obligations such as delay rentals and royalty payments are made. And while you’re at it, who is paying attention to debilitating lease provisions (the ones the lessor would never even consider enforcing, until he does), such as lease termination for failure to timely pay royalties?

Musical interlude: For the trial judge who has been reversed.

TXO v. Vela Remembered in a Gas Royalty Case

Posted in Lease Disputes, Royalty Disputes

flea flickerWestport Oil & Gas Company, L.P. v. Mecom et al. presented this questionWas the lease royalty based on a gas purchase agreement formula or on the royalty clauses’s market value at the well provision?

Spoiler alert: Invoking the seminal Texas Supreme Court decision in Texas Oil and Gas Corporation v. Vela, the court went with market value at the well.

Dueling paragraphs

Under Paragraph 3, the royalty clause, gas royalty was 42 percent (not a typo!) of the “market value at the well … “.

Paragraph 17: “Notwithstanding any other provision of this lease to the contrary … a contract for the sale of gas … shall provide for the sale price computed on the average of the highest price paid by three separate Intrastate Purchasers of gas of like quality and quantity in [RRC] District 4 …”.

The court instructed the jury to compute the gas royalty’s market value based on Paragraph 17. The jury found that Kerr McGee failed to pay those royalties and awarded millions in damages and attorney fees.

The Court’s analysis

Mecom argued the significance of “Notwithstanding any other provision” language. Ignoring Paragraph 17, requiring that the three highest prices become the formula to calculate the market value, renders the paragraph meaningless.

Kerr McGee argued that the Paragraph 17 formula pertained only to future gas purchase agreements and did not alter the commonly accepted meaning of “market value at the well” as stated in Paragraph 3.

The court concluded that the royalty provision is not “contrary” to the gas purchase agreement provision and did not elevate Paragraph 17’s price mandate over Paragraph 3’s market value provision. Paragraph 3 defined the royalty owed and Paragraph 17 set a minimum contract price for future gas purchase agreements. Nothing more.

Remembering Vela

In that case the working interest owners sold gas at a price fixed by a gas sales contract. The market value of gas at the wellhead rose to be far in excess of the gas contract price.  The lease specified the royalty would be “1/8th of the market value … ”. The royalty owed was determined from the royalty provision, which was wholly independent of the gas contract. The court declined to conflate the gas contract price with the market value requirement. Victory for the royalty owner.

… and Yzaguirre

Bastard child of Vela (if you are a royalty owner). This time the market value measure worked for the lessee. The gas purchase price was far in excess of the market value.

What did we learn?

  • The lease dated to 1974. As with Godzilla, leaky shower pans, and a flea flicker in the fourth quarter, dangerous situations can lie dormant for a long time, bringing misery when the victim least expects it.
  • Despite the lessors’ best efforts to protect themselves, the case turned on one short phrase in a comprehensive, three-page royalty clause.
  • “Notwithstanding anything to the contrary … ” is a favored device for scriveners. Make sure it addresses that which you are trying to protect. What if Paragraph 17 had addressed the market value clause directly?

Merry Christmas.

Your Louisiana Override – Where Does it Come From?

Posted in Land Titles, Royalty Disputes

It’s a multiple choice question:

a.  The royalty interest reserved by the lessor.

b. The drillbit, courtesy of fearless, risk-taking entrepreneurs, the backbone of the great American free enterprise system and the sworn enemies of collectivism.

c.  A cache of DNC emails, discovered by Vladimir Putin himself.

d.  The working interest.

e. It doesn’t matter. Trump won. Get over it.

Can’t stand the suspense? It’s “d”. If the override doesn’t spring from the working interest, you don’t have it.

How did this happen?

EnCana Oil & Gas (USA) et al v. Brammer Engineering et al involved a Power of Attorney under which Brammer would manage minerals for the mineral owners. Terms in the POA regarding Brammer’s compensation:

  • “. . . mineral leases executed in the future by Agent . . . will provide for the reservation of an additional free overriding royalty interest on behalf of the lessors.”
  • Brammer’s compensation would be “on . . . leases under the terms of which not less than 1/16th override royalty is reserved, [Brammer] shall be entitled to 1/32nd free overriding royalty”.

WW&M represented other mineral owners. With Brammer’s permission WW&M negotiated a lease with EnCana with a 1/4th royalty. The lease did not include overriding royalty language Brammer believed it was entitled to, so Brammer executed the lease and an assignment of a 1/32nd override in favor of itself out of the lessor’s royalty.

Then, the litigation 

The mineral owners’ point: Brammer didn’t carve the override out of the working interest and thus was not entitled to it.

Brammer’s response: The additional override was a contractual obligation payable to Brammer from the total royalty reserved in the lease.

The court decides

If Brammer obtained any lessor’s royalty greater than 1/8th, was it entitled to an override, or was Brammer required to expressly reserve an additional free override for itself?

Brammer had to expressly reserve an additional royalty interest for the mineral owners in order to trigger its right to the override. To the court, Brammer redefined “royalty” to mean the standard royalty, whatever that standard might be at any given time. This would require the court to look beyond the words of the unambiguous contract. Further, to the court, “additional” means an override in addition to the lessor’s royalty.

Stated another way: Brammer argued it was entitled to a 1/32nd override anytime that it acquired, in favor of the mineral lessors, at least 1/16th more than the “typical” 1/8th. This, it did not do. Brammer did nothing to obtain the 1/4th royalty in WW&M’s bid package. Judgment for the mineral owners.

What is an overriding royalty anyway?

The Mineral Code does not expressly define an override. Citing plenty of authority, the court concluded that the term describes a royalty carved out of the working interest, different from and in addition to the lessor’s royalty.  This is acknowledged in Brammer’s assignment language:  “It is hereby reserved in favor of Brammer . . . from the Lessors’ royalty . . . a free overriding royalty 1/32nd of  . . .  .”

Have a happy holiday.