Co-author Carolina Cuppetilli*

Today we will skip our usual routine of explaining how court rulings on the question of the day might affect your interests. Instead we will discuss the fallout from abysmal document drafting. In Rosetta Resources Operating v. Martin, the Supreme Court of Texas cautioned that an express covenant to protect against drainage suffered from both lack of clarity and lack of accuracy. Although the Court attempted to harmonize the conflicting provisions in an effort to give effect to the intent of the parties as expressed in the contract, “Addendum 18” was so riddled with grammatical and typographical errors that its interpretation should not be relied upon as a useful guide for determining how covenants to protect against drainage typically function. (We’ve discussed Addendum 18 before.)

The clause

Addendum 18 of a mineral lease between the Martins as lessor and Rosetta Resources as lessee was an express covenant to protect the premises from drainage:

… [It] is further agreed that [(1)(a)] in the event a well is drilled on or in a unit containing part of this acreage or is drilled on acreage adjoining this Lease, [(b)] the Lessor [read “Lessee”], or its agent(s) shall protect the Lessee’s [read “Lessor’s”] undrilled acreage from drainage and [(2)] in the opinions of reasonable and prudent operations [read “operators”2], [(a)] drainage is occurring on the un-drilled acreage, even though the draining well is located over three hundred-thirty (330) feet from the un-drilled acreage, [(b)] the Lessee shall spud an offset well on said un-drilled acreage or on a unit containing said acreage within twelve (12) months from the date the drainage began or release the acreage which is un-drilled or is not a part of a unit which is held by production.

(Emphasis added by the Court to aid its analysis)

The facts

Rosetta, Newfield and others created the Martin Unit, pooling portions of the Martin Lease. Rosetta assigned an ORRI in the Martin pooled acreage to Newfield. Newfield drilled the Martin well on the Martin pooled acreage and then created the Simmons Unit that is not adjacent to the Martin Lease, and drilled the Simmons well.

The Martins sued Rosetta and Newfield for breach of Addendum 18, alleging an obligation to protect the undrilled Martin lease acreage from drainage caused by the Simmons well. Lessees countered that their obligation to protect had not been triggered because the Simmons well was not drilled on land adjacent to the Martin Lease.

The trial court granted summary judgment for Rosetta. The court of appeals reversed and remanded, instructing the trial court to grant partial summary judgment for the Martins. At the Supreme Court the parties argued over whether Addendum 18 allowed for separate triggering and draining wells.

The Court’s analysis

Could Addendum 18 be reasonably read to stand for the proposition that drainage that part (1)(b) obligates Rosetta to protect against is limited to drainage from a well listed in part (1)(a)? There were two reasonable interpretations regarding this question. If the meaning of the lease is uncertain and doubtful, or it is reasonably susceptible to more than one interpretation, then a fact issue arises regarding the parties’ intent.

Because both interpretations were reasonable there was an issue of material fact, rendering summary judgment improper. The Court punted the case back to the trial court for further consideration (likely a trial on the merits where a jury will sort it out).

Your musical interlude. 

* Carolina has recently survived her second year at SMU Law School and is a Gray Reed summer associate.

Co-author David Leonard

If perpetuation of a mineral lease beyond the primary term is contingent upon continuous operations, do traditional notions of “production in paying quantities” always matter? Spoiler: No.

In Thistle Creek Ranch, LLC v. Ironroc Energy Partners, LLC, an appellate court affirmed partial summary judgment in favor of lessee Ironroc Energy Partners under these odd clauses in the Kettler lease.

The habendum clause:

Unless sooner terminated …  this lease shall remain in force for a term of three (3) years from the date hereof, hereinafter called “primary term,” and as long thereafter as operations, hereinafter defined, are conducted upon said land with no cessation for more than ninety (90) consecutive days.

The lease defined “operations” as:

“ … any of the following: drilling, testing, completing, reworking, recompleting, deepening, plugging back or repairing of a well in search for or in any endeavor to obtain production of oil [or] gas, …  production of oil [or] gas, … whether or not in paying quantities.

The oddity, of course, is that the lease could be perpetuated by operations, whether or not there was production in paying quantities. Continue Reading Lease Perpetuated Beyond Primary Term Without Production in Paying Quantities

Co-author Brittany Blakey

The question in litigation is usually “WHAT”: what happened, what contract was breached, what did someone do or fail to do, and so on. In Hughes v. CJM Resources, LP, the question was, “WHO” had the right to file the suit in the first place? The Eastland Court of Appeals affirmed the trial court’s holding that the plaintiff no longer owned the causes of action he pursued after he conveyed his mineral and royalty interests to a third party.

The timeline and the suit

  • September 2017: Hughes, as lessor, enters into a paid-up oil and gas lease with CJM.
  • February 2018: Hughes assigns the minerals to Decatur Mineral Partners conveying all “claims and interests in and to the [“… well(s), land(s) and/or unit(s)”].
  • November 2018: Decatur executes a Mineral Deed to Universal Royalty & Mineral Fund purporting to convey all of Decatur’s interest that it received from Hughes.
  • September 2018: Hughes sues CJM; dismissed for lack of standing.
  • 2019 but effective 1/1/2018: Decatur reconveys the claims to Hughes (without success, it turns out).
  • August 2019: Hughes again sues CJM alleging false representations, fraud and negligent misrepresentation in the lease negotiations.

CJM responded with a plea to the jurisdiction asserting that Hughes did not have standing, specifically that he conveyed any causes of actions he had under the lease when he assigned the minerals to Decatur. Hughes countered by contending Decatur’s deed to Universal excepted (or reserved) the causes of action that Hughes now asserts.

The trial court granted CJM’s plea to the jurisdiction, concluding that Decatur’s Mineral Deed to Universal conveyed everything that Decatur received from Hughes in the original conveyance, including any causes of action.

On appeal, the court analyzed the Mineral Deed from Decatur to Universal to determine if Decatur retained the causes of action after the conveyance—because Decatur purportedly conveyed the claims back to Hughes after the conveyance to Universal.

The greatest estate doctrine

In Texas, deeds are generally construed to confer upon the grantee the greatest estate that the terms of the instrument will allow. In other words, a deed will pass whatever interest the grantor has in the land, unless it contains language showing a clear intention to grant a lesser estate.

Decatur’s deed to Universal stated that Decatur “does hereby grant, bargain, … to [Universal] all of [Decatur’s] interest in [the subject lands]… [.]” The conveyance also identified the interest Decatur conveyed to Universal as the interest Decatur received from Hughes. Therefore, the court concluded that the parties’ objective intent in the Decatur-to-Universal conveyance was for Decatur to convey all interests it obtained from Hughes. These interests included the causes of action that Hughes conveyed to Decatur.

The “subject to” clause

The Decatur-to-Universal deed was was “subject to” rights in valid oil and gas leases, and purported to grant to Universal “… benefits which may accrue after the date of this Mineral Deed”. The court construed that clause as purporting to except property from the conveyance, but the clause did not identify the causes of action with sufficient specificity and therefore did not except the causes of action from the deed.

Lessons learned?

Make your exceptions and reservations specific, especially if you know exactly what you are trying to carve out. Otherwise you might have regrets, like Lake Street Dive, or only left with Darius Rucker to console you.

Co-author Julia Edwards

This “most-favored-nations” clause in three oil and gas leases on land in LaSalle County, Texas, was at issue in EP Energy E&P Co., L.P. v. Storey Minerals, Ltd.:

If … the lessee … acquires an Oil and Gas Lease [on certain lands] on such terms that the … bonus … [is] greater than th[at] provided to be paid to lessor hereunder, lessee  …  agrees that it will execute an amendment to this lease, effective as of the date of the third party lease on the leased premises, to provide that the lessor hereunder shall receive thereafter the same percentage (per net mineral acre) … bonus … as any subsequent lessor of the leased premises to the extent that such … bonus … [is] greater than those provided to be paid herein. … “

In the end, as a result of lessee EP’s subsequent leases lessors (MSP) were entitled to increased bonuses on leases from the time prior to execution of the triggering lease. Once again, a court applied the plain, ordinary, and generally accepted meaning of the contract. Continue Reading Most-Favored-Nations Clause Costs Lessee

Co-author Justin Cowan

Does a former working-interest owner of a well bear continuing responsibility for a defective gas line despite having conveyed its ownership interest? The line was constructed by the former owner as operator of record, and it received a fee as operator. (One could assume there was a RRC Form P-4 on file and a Model Form JOA, but the court doesn’t say.)This was the question before the Texas Supreme Court in In re Eagleridge Operating, LLC.

 Facts

Aruba Petroleum owned a minority working interest in the Donnell 2-H well and was operator of record, for which it received a fee with the consent of the majority working-interest owner, USG Properties Barnett II.  As operator Aruba was responsible for drilling, operating, and servicing the well and securing proper equipment.  In 2013, while Aruba was a working interest owner and operator, a gas line was installed on the property. Aruba and USG paid their proportionate share of the construction expenses.

Four years later Aruba conveyed its working interest to USG and ceased serving as operator. Eagleridge subsequently entered into a written contract with USG to serve as operator and assumed control of the well in 2017. A few months later the gas line ruptured and injured Lovern, the plaintiff in the underlying negligence suit.

The suit

Eagleridge sought to designate Aruba as a responsible third party, asserting that Aruba, as a prior owner-operator, caused or contributed to Lovern’s injuries because Aruba was responsible for installing the gas line, selecting the materials, and determining its placement on the property.

Lovern moved to strike Arbua’s designation and sought a partial summary judgment. He argued that, under the Supreme Court’s opinion in Occidental Chemical Corp. v. Jenkins, a former premises owner owes no duty (and has no responsibility) related to the condition of the premises after conveying its ownership. Occidental  involved a sole owner-operator’s improvements.  On the other hand, Aruba was not just a property owner—it also received a fee as operator and made improvements in that capacity.  Accordingly, said Eagleridge, Aruba had a duty as an independent contractor, and that duty did not terminate when its control over the property ceased.

The trial court granted both of Lovern’s motions and the court of appeals denied Eagleridge’s request for mandamus relief. The Supreme Court’s review was confined to whether Occidental precluded Aruba’s responsibility for defects in the pipeline and whether the trial court erroneously struck Aruba’s designation as a responsible third party.

The result

The Supreme Court agreed with the lower courts and denied mandamus relief, reaffirming its position that Occidental precludes the “dual-role” analysis Eagleridge proposed.  A property owner, when making improvements on its own property, acts solely in its capacity as an owner and not as an independent contractor.  That analysis is not altered by the fact that USG paid Aruba to operate the well.  The core holding in Occidental is based on ownership, and the Court held that Aruba was a property owner exercising its possessory right to develop its property when it installed the gas line.

Aruba’s responsibility for premises defects did not survive conveyance of its ownership interest to USG.  Aruba and USG were tenants-in-common, and each could construct improvements on the property without the other’s consent.  Aruba’s right to construct the pipeline was independent of, did not arise from, and was not extinguished by its agreement to serve as operator of record.  Aruba’s receipt of compensation as operator neither transformed it from an owner into an independent contractor nor materially distinguished the case from Occidental.

Your musical interlude.

Co-author Max Brown

Commonwealth of Pennsylvania v. International Development Corporation resolved the question, In a 100 year old Pennsylvania deed is a “subject to” provision an exception to a grant or a warranty disclaimer?

The transactions:

  • 1894: 2,094 acres are sold by deed from Proctor and Hill to Union Trading Company; Proctor and Hill reserve all minerals.  This reservation is not reported to the taxing authority, and the property is assessed and taxed as a whole following the sale.
  • 1903: Union deeds the surface to CPLC.
  • 1908: Property is sold in a tax sale to McCauley. This effectively “washes” the title and reunifies the two estates; McCauley owns the surface and the minerals.
  • 1910: McCauley conveys the property back to CPLC.
  • 1920: CPLC sells the property and other land to the Commonwealth of Pennsylvania. The deed had two key clauses.

The clauses

The “First Clause”: The conveyance was “subject to” the mineral interests “as fully as said minerals and mineral rights were excepted and reserved in [the 1894 deed].”

The “Second Clause”: The conveyance was “also subject to all the reservations, exceptions, covenants, and stipulations contained in [the 1894 deed] … and in the [1903 deed].”

More transactions

CPLC quitclaims the mineral rights, the minerals were resold multiple times, in 2000 International Development Corporation (IDC) purchases the property.

Who owns the mineral rights, IDC or Commonwealth? Continue Reading The Meaning of “Subject To” in a Deed

Co-author Darien Harris

The Texas Civil Practices and Remedies Code, Chapter 95, limits a property owner’s liability when an independent contractor hired to construct, repair, renovate or modify an improvement to the owner’s property brings a negligence claim that arises “from the condition or use of the improvement.” The Texas Supreme Court has ruled that the property owner is free from liability when negligence elsewhere contributes to the plaintiff’s injuries. But the contributing negligence must involve the condition or use of the improvement on which the plaintiff was working.

If you’ve stayed with us this far you must be a lawyer.

The facts

In Energen Res. Corp. v. Wallace, Energen hired Nabors and New Prospect to drill an oil well in Pecos County. Energen contracted Dubose Drilling to complete a water well that would assist the oil well drilling operation.  Dubose subcontracted with Elite Drillers to complete the water well.  Elite’s president, Wallace, supervised the water well project. Because the wells were only 500 feet from each other, Energen and Elite more or less worked side-by-side. Continue Reading Operator Escapes Liability For a Gas Kick and Resulting Fire

Co-author Brittany Blakey

Zehentbauer Family Land, LP v. TotalEnergies E&P USA, Inc. is a story we’ve heard before: Royalty owners contend they are not getting a big enough slice of the hydrocarbon pie, which presents a question courts must answer: Where is the valuation point for royalty calculation?

Under the oil and gas leases at issue, royalties are to be paid:

“based upon the gross proceeds paid to Lessee for the gas marketed and used off the leased premises, including casinghead gas or other gaseous substance… computed at the wellhead from the sale of such gas substances so sold by Lessee.”

The midstream arrangements and the “netback method”

Chesapeake and Total sell their production at the wellhead to their respective midstream affiliates, CEMLLC and TGPNA, each of which sells the transported product to unaffiliated downstream companies. The affiliates account for the gas using the “netback” method, which “takes a weighted average of prices at which the midstream affiliates sell the oil and gas at various downstream locations and adjusts for the midstream company’s [various costs (including transportation)] to move the raw oil and gas from the wellhead to downstream resale locations.” The netback method accounts for these midstream (post-production) costs. The midstream affiliates pay this reduced amount to the producers, who use this netback price as the base for calculating the plaintiffs’ royalty payments. Continue Reading Ohio Royalty Owners Burdened with Post-Production Costs

The question with wide-ranging implications for Louisiana operators and mineral owners in Johnson et al. v. Chesapeake Louisiana LP et al is whether unleased mineral owners in a drilling unit established by the Commissioner of Conservation must bear their proportionate share of post-production costs.

The statutory scheme

Under Louisiana’s forced pooling statutes, the Commissioner may form drilling units and appoint an operator to drill and operate wells for all owners in the unit. Unleased mineral owners (the court called them UMO’s) are exempt from the statutory 200% risk charge for drilling costs applied to non-participating lessees. The operator is required by La. R.S 30:10(A)(3) to pay a UMO who has not elected to market his share of production the tract’s pro rata share of proceeds from the sale of hydrocarbons.

The claims and defenses Continue Reading Louisiana Unit Operators May Deduct Post-Production Costs from Unleased Mineral Owners

Author Ethan Wood

Louisiana’s compulsory pooling scheme seeks to balance the interests of individual landowners and oil and gas operators to promote responsible development of natural resources. Because of compulsory pooling, operators are not held hostage by individual landowners who refuse to lease, but landowners are afforded protections so as not to be taken for a ride by unscrupulous operators.

One such protection for landowners is the operator’s duty to report information to unleased landowners upon request (La. R.S. 30:103.1). Failure to provide the information means the operator forfeits the right to demand contribution from the unleased owner for the costs of drilling operations (La. R.S. 30:103.2).

These statutes are often litigated, but few disputes result in a reported decision. But last month, the U.S. 5th Circuit Court provided some guidance for how to interpret the notice provisions of 30:103.1-2 in B.A. Kelly Land Company, LLC v. Aethon Energy Operating, LLC.

What We Have Here is a Failure to Communicate

B.A. Kelly Land Company owned unleased interests in two compulsory units in Bossier Parish. Kelly sent a letter via certified mail to Aethon Energy Operating, LLC on December 15, 2017, requesting information regarding sixteen wells in the two units. The letter described the unleased lands, the units, names of wells, and asked for information regarding (1) the total amount of hydrocarbons produced, (2) the price received for the hydrocarbons, (3) operating costs and expenses, and (4) information regarding funds expended to enhance or restore production. This first letter did not contain an explicit reference to 30:103.1, nor did it request that reports be classified as “initial reports” or “quarterly reports.”

Kelly followed up with another letter sent via certified mail on April 17, 2018, that referenced the previous letter and called attention to the fact that Aethon failed to comply with the first letter. This letter also did not include a specific reference to 30:103.1 or 30:103.2, nor did it reference the possibility of a lawsuit, penalty or forfeiture under 30.103.2.

Aethon did not send the requested information to Kelly until February 12, 2019—after Kelly filed suit seeking a judgment that Aethon had failed to comply with its disclosure and reporting obligations. Kelly sought a declaration that Aethon had forfeited its rights to demand contribution for Kelly’s share of drilling costs.

The Pen is Mightier

At the district court, Aethon successfully argued that because Kelly failed to reference the statutes and failed to use certain key language, Kelly had failed to comply with the statutory requirements. The Court of Appeals reversed, finding that the district court had “erroneously engrafted conditions into [30:103.1 and 30:103.2] that are not present in the text of the statutes themselves.”

The first letter satisfied the requirements of the statute because it was (1) in writing, (2) sent by certified mail, (3) contained the name and address of the unleased owner, and (4) “was sufficiently clear to give Aethon, as operator of the Units, notice that Kelly, an unleased owner, was requesting reports pursuant to [30:103.1].” Further, the letter’s request for four types of information “matched almost verbatim the four categories of information” the statute requires operators to provide. The second letter similarly complied with 30.103.2 by referencing the earlier letter, reciting most of the crucial language of 30.103.2, and sufficiently calling attention to Aethon’s failure to comply with 30.103.1.

The court of appeals rejected the district court’s emphasis on referencing the statutes and omission of “reports” or the possibility of a lawsuit in the letters; these “requirements” are not in the text of the statutes and should not be read into them.

The Last Word

This week’s musical interlude …ouch.