Co-author Gunner West

In Byrne Oil Co. v. Walraven, a court of appeals held that a surface owner/lessor cannot bury his lessee’s pipelines and recover costs when adequate time exists to pursue judicial remedies, even after years of operator delay.

The oil and gas lease required the lessee to “bury pipeline[s] below plow depth” when requested. Walraven purchased the surface in 2016 and immediately requested burial of over 10,000 feet of above-ground flow lines. Lessee Byrne Oil (successor-in-interest of the original lessee) refused, claiming improper notice under the lease’s breach-notification provision. Byrne Oil sued for declaratory relief in 2019; Walraven counterclaimed for breach of the lease and sought an injunction.

Eighteen months into litigation, Byrne Oil buried most lines for a cost of $7,385. Apparently not a believer in comparison shopping, Walraven later hired a third party to bury the remaining 1,300 feet, which cost him $60,240. The trial court awarded Walraven $30,000 as partial reimbursement, finding the full amount he paid excessive. Byrne Oil appealed.

 Judicial remedy not exclusive

The appellate court rejected Byrne Oil’s first argument that the lease’s notice provision limited Walraven to judicial remedies. The court explained that the 60-day notice requirement protects lessees from forfeiture by allowing time to cure defaults—it does not establish an exclusive remedy structure. The lessee could propose such a provision, but it goes without saying that not many lessors would find that to be in their best interest. 

The suit was for nuisance, not trespass

The court then characterized Walraven’s claims as nuisance rather than trespass. Because the unburied pipelines interfered with Walraven’s use and enjoyment of the surface (not his exclusive possession given that the mineral estate is the dominant estate), the violation constituted a nuisance. The court recognized three remedies for private nuisances: damages, injunctive relief, and self-help abatement; however, not all are available in every case.

The court relied on Martin v. Martin, 246 S.W.2d 718 (Tex. App.—Fort Worth 1952), which held self-help abatement unavailable “where there is time and opportunity for the interposition of an adequate legal remedy.” The court emphasized that self-help exists only for injuries requiring immediate remedy that cannot wait for the ordinary forms of justice. If there is sufficient time to seek legal process, the privilege fails.

Here, the lawsuit had been pending for more than two years when Walraven hired the third-party contractor. Walraven had already pleaded for injunctive relief. The court found this timeframe provided adequate opportunity for judicial remedy, distinguishing cases where plaintiffs sought court orders rather than acting unilaterally.

Policy reasons for the limitation

The court reinforced this holding with oil-and-gas-specific policy: the lessee, as owner and operator of production equipment, “is better suited to either perform the work of relocating production equipment or retain a third party to perform such work.” Allowing surface owners to move equipment risks “disturbing mineral production as well as creating an environmental risk in the event of an accident.” While acknowledging Walraven’s frustration after five years of delay, the court held that “frustration [] cannot justify self-help when the legal remedies of damages and injunctive relief were available.”

The court reversed the $30,000 self-help award but affirmed $1,869.32 for Walraven’s costs to establish his enforcement right. The $125,000 attorneys’ fee award in Walraven’s favor was reversed and remanded for reconsideration.

Your musical interlude, as the appellants say to the trial court (straight out of Bakersfield?).

Lula Eades once owned minerals in Loving County, Texas. In 2000, in a single lawsuit the Wink-Loving ISD and Loving County foreclosed on the mineral and royalty interests of more than 80 owners, including Lula. In Ridgefield Permian Minerals et al v. DOH Oil Company, plaintiff Ridgefield alleged that it acquired Lula’s interests in 2022 by deeds from Lula’s successors. Defendant DOH claimed that in July 2001, after the foreclosure, DOH acquired minerals formerly owned by Lula by a Sheriff’s Tax Deed.

Ridgefield’s suit was to quiet title. One assertion was that the liens in the 2000 tax suit only extended to interests in production under a specific lease which had reverted and therefore could not be foreclosed. In response, DOH asserted res judicata (more about that later) and other defenses.

In 2010 Endeavor interpleaded funds in a Midland County suit to resolve rival claims for minerals that were originally owned by Abbott and were also foreclosed in the 2000 Loving County tax suit. A judgment in the Midland County suit, agreed by DOH and Abbott’s successors, declared that DOH acquired the interests of Abbott and his heirs in a corrected Sheriff’s Tax Deed.

DOH asserted that this case arises from “the same nucleus of operative facts” as the 2010 Midland suit and therefore the judgment declaring that DOH had valid title to Abbott’s interests bars Ridgefield’s challenge to other interests that were subject to the 2000 foreclosure (Lula’s interests, to be specific). Ridgefield’s response: (1) the interests at issue in this case were not derived from Abbott and his successors and (2) Ridgefield did not have notice of the Midland County judgment because it was not filed in Loving County; therefore Ridgefield was a bona fide purchaser.

The trial court agreed with DOH. The appellate court reversed, agreeing with Ridgefield. (We will ignore the question whether the trial court order met the requirements for a permissive appeal.)

“Res judicata”

Res judicata bars claims that have already been litigated or that “arise out of the same subject matter and that could have been litigated in the prior action”.  The doctrine bars a suit if there is proof of these elements:

  1. A prior final judgment on the merits by court of competent jurisdiction;
  2. The identity of parties or those in privity with them;
  3. The second action is based on the same claims as were raised or could have been raised in the first action.

The first element was satisfied. To resolve the third element – and the case – the court didn’t look at the claims in each suit, but whether both claims arose from the same subject matter. The claims in this suit did not involve the same subject matter as the 2010 Midland County suit. The claims in Midland were over mineral interests in Section 14 Block C-26; the claims in this case were over Section 3 Block C-27. Recall that real property is unique; the two properties are not the same subject matter. The interests in the property here were not litigated and determined in the Midland County suit. The court rejected DOH’s argument that, if one of Ridgefield’s predecessors challenged the foreclosure then Ridgefield cannot challenge the foreclosure any other of his predecessors.

The result

The mineral interests in this lawsuit were not adjudicated in the 2010 Midland County suit; thus res judicata did not bar Ridgefield’s suit. Reversed and remanded to the trial court to consider Ridgefield’s claims.

Your musical interlude

Co-author Gunner West

Once again, a Texas court has barred a lawsuit because the plaintiff waited too long to file. And once again, perhaps, the suit was a Hail Mary after alternatives failed.

In Hobson v. Commissioners Court of Palo Pinto County, a court of appeals affirmed a judgment against a landowner because his declaratory judgment and injunction claims against a county commissioners court* were time-barred.  Also, a commissioners court cannot adjudicate private rights by “declaring” a road public and lacks authority to create a neighborhood road where the route is partly in another county.

The facts

Hobson’s family acquired the “Hobson Tract” in 1978. The access road to the tract (the red line on the map) crosses the Ezell Tract to a highway; 60 to 70% of the road lies in Palo Pinto County, while the Hobson Tract is entirely in Parker County. The Ezells’ predecessor blocked Hobson’s use of the road. The road remained blocked after the Ezells purchase.

In 2017, Hobson sued the Ezells in Parker County for a prescriptive easement. The trial court granted summary judgment aginst Hobson.

In 2021, Hobson asked the Palo Pinto Commissioners Court to declare the route public or, alternatively, create a neighborhood road. The Commissioners denied the application.

In 2022, Hobson sued the Commissioners alleging they failed to maintain a public road and sued had abused their discretion in denying his neighborhood-road request, and the Ezells to stop their obstruction of access to his property. The trial court denied Hobson’s claims against the Ezells and the claims against the Commissioners.

Limitations

The court applied Texas’ four-year residual statute of limitations. Because Hobson knew of the blockage no later than his January 2017 Parker County suit, his 2022 claims against the Ezells were untimely.

Continuing tort did not save the claims.

The Texas Supreme Court has “neither endorsed nor addressed” the continuing-tort doctrine; once injury and cause are known, the time within which the plaintiff must sue begins to accrue. Further, the statute of limitations exemption for suits against state and political subdivisions did not apply to a private plaintiff.

Commissioners had no authority

A commissioners court has implied power to make an administrative determination of a road’s public status only as a foundation for authorized county action, such as maintenance. That authority does not include resolving private rights, which must be adjudicated in a court of law.

Applying those principles, the court held the Palo Pinto Commissioners Court lacked jurisdiction and authority to declare the road public in order to resolve Hobson’s dispute with the Ezells; the proper vehicle is a declaratory judgment suit in a court of law.

No cross-county neighborhood road power

Because a commissioners court’s control is over roads in its own county, Palo Pinto County could not create a neighborhood road on a route that crosses into Parker County and serves property located entirely in Parker County.

Hobson presented an alternative interlocal-agreement theory (Trans. Code § 251.059; Gov’t Code ch. 791) that did not change the result. His application did not establish the authority to order creation of such a road, and the district court could not compel the Commissioners to do so.

*In Texas, the governing body of a county is the commissioners court. It is not a ”court” and they are not judges even though the head of the government is the “county judge”, who is not really a “judge” but exercises a judge’s jurisdiction … sometimes. Go figure! Its like Shohei Ohtani isn’t the second coming of Babe Ruth, but he acts like it … sometimes.

Your musical interludes:

Pertinent to the content,

Lagniappe .. not pertinent but good.

Co-author Gunner West

Ambiguity is handy for office-seekers intending to walk back “promises” they later say they really didn’t make. It doesn’t work so well for the stability of land titles. In Thagard Mineral Partnership, LP v. Cass v. RIM, LLP, a Texas court of appeals resolved a dispute over whether vague exhibits in two assignments limited broad granting language.

The first assignment transferred all interests in oil and gas leases, including overriding royalty interests, even though no leases were listed. The second assignment conveyed the mineral fee to all depths even though depth limitations appeared in one section of the exhibit.

Thagard-to-Cass Assignment

Thagard executed an assignment to Cass conveying “all of [Thagard’s] right, title, and interest” in the lands and leases in and to the subject lands “listed and to the extent described on Exhibit A.” Exhibit A identified sections of land but listed no leases. Scriveners and title examiners, see the opinion for details. The rest of us can get by with this summary.

Did the assignment unambiguously transfer all right, title, and interest, including an override? Yes, Cass prevails.

Thagard argued that the assignment was “subject to” a missing document. A circular reference to a “subject to” clause was inartful drafting but was not evidence of a missing document.

Thagard also argued ambiguity: The assignment referenced “leases listed” in Exhibit A but no leases appeared. Said Thagard, where an exhibit is referenced to describe property being conveyed, the description of the interest in the exhibit controls over the scope of the grant, regardless of broad granting language. The court disagreed: “… an instrument of conveyance of real property passes whatever interest the grantor has … , unless it contains language expressing the intention to grant a lesser estate.” Exhibit A had no exceptions.

The court distinguished the requirement of Piranha Partners v. Neuhoff that override conveyances identify underlying leases. Piranha was of an override only, whereas Thagard granted “all” his interests. The property description sufficiently identified the land, allowing location of associated leases and production data.

Cass-to-Plains Assignment

Shortly after the Thagard assignment, Cass assigned interests now owned by RIM LLP. The exhibit had two parts: a table of “Proved Developed Producing Properties” labeled in bold, underlined, all-caps as “MICHAEL L. CASS’ PERSONAL INTEREST INCLUDING HIS O.R.R.I. & MINERAL INTEREST”, showing percentages but no depth limitations—and a “Leases Covering” section in the second part of Exhibit A listing specific leases “from the surface to 8700 feet … .”

Did the assignment unambiguously transfer Cass’s entire mineral fee interest to all depths? Yes. RIM prevails.

Cass argued depth limitations in the “Leases Covering” section applied to everything in Exhibit A. The counterargument: The structure of Exhibit A is relevant to its interpretation; depth limits applied only to leases, not mineral interests.

The court rejected Cass’s position, emphasizing Exhibit A’s deliberate segregation. The table explicitly addressed Cass’s “PERSONAL INTEREST INCLUDING . . . MINERAL INTEREST” with emphatic labeling but no depth language. The “Leases Covering” section listed specific leases with 8,700-foot limitations.

Section IV of the assignment shed further light on the meaning of Exhibit A by disclaiming decimal interests as limitations. They were “for informational purposes only” and stated the intent to convey “the entire right, title and interest” in the properties.

The assignment negated the one potential limitation in a “Producing Properties” table showing WI and NRI percentages and was silent about depth restrictions. If depth limits applied to mineral fee interests, they could have appeared in the table or been addressed in Section IV.

The depth limitations applied only to the leases, not Cass’s personal mineral fee. 

Your stress-free musical interlude.

You would think that a Master Service Contract concerning boats and oilfield operations in the Gulf of Mexico would be governed by federal maritime law. In some situations you would be mistaken, says Offshore Oil Services, Inc. v. Island Operating Company, Inc.  

The facts

Fieldwood and Island Operating entered into a MSC through which Island performed production services on Fieldwood’s Gulf of Mexico platforms. Most of the categories of “Work” identified in the MSC were those traditionally associated with production activities. Fieldwood contracted with OOSI for marine transport of equipment and Island’s workers on the platforms.

In the MSC Island agreed to indemnify third-party contractors such as OOSI against claims resulting from injuries to Island employees.

Fieldwood and Island agreed to a work order in which Island would fill “A Operator” positions. These operators would conduct BESE compliance testing and a host of other activities.

Island employee Felix sustained injuries while disembarking from a vessel. OOSI filed a Complaint for Exoneration From and/or Limitation of Liability and Felix filed a personal injury claim. OOSI demanded indemnification from Island.

The question for the court

Did federal Maritime law or Louisiana law govern the dispute? The question was whether transportation vessels would play a substantial role in the performance of the MSC and whether the parties expected as much.

There was no question that the indemnity provision required Island to indemnify OOSI for Felix’s personal injury claims; however Island argued that the Louisiana Oilfield Anti-Indemnity Act rendered the indemnity provision unenforceable. OOSI said federal maritime law controls. The trial court granted summary judgment for Island, concluding that the LOAIA governed the dispute based on a finding that the MSC did not provide that the vessels would play a substantial role in the completion of the contract and that the parties did not expect vessels to play such a role.

The Fifth Circuit affirmed the take-nothing judgment against OOSI. The court applied the choice of law analysis in the Outer Continental Shelf Lands Act. Whether federal maritime law applied of its own force to the MSC depended on the answer to two questions:

Was the contract to provide services to facilitate the drilling or production of oil and gas in navigable waters? The answer was “yes”. Then the court asked if the contract provided or did the parties expect that the vessel would play a substantial role in the completion of the contract? To this question the court said “no”. The result of that “no” was the MSC was a non-maritime contract. There was not a direct and substantial link between the contract and operation of the ship, it’s navigation or its management afloat.

The result was based on the testimony of the parties. A Fieldwood employee testified to the effect that they typically don’t use equipment associated with a vessel but it had been done. Island’s president testified that operators perform no work on vessels. The provision relating to marine transportation concerned transporting workers to the platform and was not a description of actual work the MSC contemplated.

The trial court, affirmed by the Fifth Circuit, ruled that OOSI take nothing. The MSC was not maritime in nature. Thus, the Louisiana Oilfield Anti-Indemnity Act controlled, nullifying Island’s indemnity obligations. (OOSI agreed that if the LOAIA applied, the indemnity obligation would be null, rendering discussion of that question unnecessary).

Your musical interlude.

Some things aren’t. In keeping with its familiar journalistic standards, the New York Times presents fact-free opinion in a place (page 1, top of the fold) usually reserved for news, this time in its July 26-27 International Edition.  Headline: “Ignoring the planet is now illegal.” First two sentences: “The science on climate change has long been settled. Now the law is, too”.  (It’s behind a paywall; I would publish the article if I could.)

If only it were true.

First, as Daniel Markind points out in Forbes, the “ruling”, from the International Court of Justice (a suggestion box in robes) is binding on absolutely no one, not even those countries who acknowledge its “jurisdiction” and in particular private citizens who were not involved.   

Second, is science ever “settled”? The American Council on Science and Health posits that “settled” does not mean “proved”, and use of the term is often based on ignorance (in both directions).

Website Ponderly ponders the question.  Consider the “yes” side of the debate and make you own conclusion about whether climate “science” meets the standard.

Now, opinions, facts and observations challenging climate alarmism. Don’t take my word for it, Read and decide for yourself.

David Blackmon reports in the Daily Caller on the politicalization of the allegedly neutral International Energy Agency, and Irina Slav reports on her Substack its “forecasts” that the world is moving toward renewable energy are being abandoned because they are based on ”nothing”.  

Anthony Watts challenges the Guardian’s attribution of heat waves to operations of 14 fossil fuel companies.

Judith Curry, respected climatologist, comments on the negative feedback on the DOE Climate Reassessment Report .

And here is more from Thomas Shepstone on the follly of the Endangerment Finding.

Stephen Heins in his substack corrects the record on alleged heat spikes in the UK (I wish the headlines wouldn’t scream “sensational”.)

Greenpeace founder Patrick Moore explains how the climate change movement is based on false narratives.  

More truth-telling about deception regarding coral reefs from Bjorn Lomborg, Danish economist and political scientist and author of a number of books and articles casting doubt on climate hysteria and the unwise policies resulting therefrom,

Doug Sheridan, commentator and frequent responder to false narratives, describes the uncertainty of measuring climate change. The post is 18 months old but is still relevant, especially in light of the NYT headline.

On our blog, search “climate change” for posts featuring scientists, economists and others who oppose climate alarmism.

Football fans: Five weeks into the season, is this your musical interlude? You’re smug because it’s not? Just wait. The season is long. Your dream is a bad game plan, bungled officiating, turnovers, or overall terrible play away from being crushed by the football gods.

Co-author Gunner West

Defendants – five oil and gas operators – challenged a venue selection clause requiring that suits be filed in Nueces County for disputes over La Salle County acreage. In In re INEOS USA Oil & Gas LLC, (disclosure and shout out: Gray Reed lawyers Justin Lipe, Bill Drabble and David Pruitt represented INEOS) a Texas Court of Appeals deemed the venue clause unenforceable as a “major transaction” when the agreements at issue on its face provided for less than $1 million in aggregate consideration.

The plaintiff, apparently having experience in Congress, engaged in creative math that added contingent drilling costs or potential penalties to the amount of consideration stated in the documents to push the value over that statutory threshold. This was rejected by the Court.

The facts: half-a-million + $10 is not a million

Texas Lone Star Petroleum assigned 14 Eagle Ford leases covering 633 acres through a Purchase and Sale Agreement stating $538,237 as the purchase price and an Assignment for consideration of “ten dollars ($10.00) and other good and valuable consideration.”

The Assignment included a reversionary “take-over” right keyed to production thresholds that allowed Lone Star to terminate and reclaim the acreage. Both agreements contain venue selection clauses designating Nueces County, Texas, as the exclusive venue for disputes.

Lone Star sued in Nueces County alleging breaches related to production levels that triggered Lone Star’s rights under the Assignment. Lone Star claimed equitable title in the leases. The defendants moved to transfer venue to La Salle County, contending that the venue selection clauses were unenforceable because the agreements did not evidence a “major transaction” under Texas Civil Practice and Remedies Code Section 15.020, and that venue was mandatory in La Salle County, the location of the real property at issue.

The trial court denied transfer; defendants sought mandamus relief.

The Court’s analysis

The Court first addressed whether the venue selection clause was enforceable as a “major transaction”. The statute requires that the written agreement evidence consideration with an aggregate stated value equal to or greater than $1 million. The Court explained that the aggregate stated value must be specifically stated on the face of the agreement, and contingent or prospective amounts cannot be considered.

Responding to defendants’ assertion that the agreements reflect payments totaling less than $1 million. Lone Star argued that the drilling obligation, which could cost over $1 million, combined with the purchase price and penalty provisions, should be aggregated to meet the threshold. In rejecting that argument, the Court held that the drilling obligation is a contingent and prospective cost, not a stated value in the agreement. Therefore, the agreements do not evidence a major transaction. The venue selection clause was unenforceable on that basis.

Next, the court considered whether venue was mandatory in La Salle County under Section 15.011, which governs actions related to ownership of real property. The court examined the “essence” or “substance” of Lone Star’s claims, which sought ownership and operation of wells and leases located in La Salle County, as well as constructive trusts on interests in those properties. The Court concluded that the lawsuit constituted an action for recovery of an interest in real property, making venue mandatory in La Salle County.

Because Section 15.020 did not apply, it did not preempt Section 15.011. Thus, venue must be transferred to La Salle County. The defendants carried their burden of proof to establish mandatory venue in La Salle County.

The result

The Court granted the petition for writ of mandamus and ordered the trial court to vacate its prior order denying the motions to transfer and to issue an order granting those motions and transferring the case to La Salle County.

Your musical interlude.

O’Connor v. O’Connor addresses tracing of property in a divorce proceeding and an evidentiary issue, but there are lessons for parties to mineral deeds as well. First, …

A few Texas marital property rules

  • Property acquired by either spouse during the marriage is community property unless it is separate property.
  • Property owned or claimed by a spouse during or on dissolution of the marriage is presumed to be community property.
  • The presumption can be defeated by “clear and convincing evidence” of the separate nature of the property’s ownership.
  • Separate property includes property acquired by the spouse during marriage by gift, devise or descent.
  • Texas law presumes that a parent-to-child transfer of property is a gift.

The lesson

Your mineral deed (or any written transaction for that matter) could be in jeopardy if the recitations in the document do not match the substance of the actual transaction and the intent of the parties. The deed in question used words of conveyance for consideration, not of a gift. Then husband Mike could not trace the funds for the purchase to his separate property. Did the scrivener pull out a document from the form file without thinking through the transaction? Did the parties give the scrivener accurate instructions? Did somebody grab a form off the internet? Mike could not produce sufficient records to support his claim that he used separate property. Maybe the marital relationship was suffused with such bliss at the time of the transaction that nobody (talking to you, married persons who stand to inherit valuable stuff) thought a paper trail mattered.

The facts

Mike and Shannon were married in 1995. Mike’s mother died in 2009 and Dad became trustee of a trust in her name that held mineral interests in McMullen County. By Mineral Deed effective in 2009 Dad transferred minerals to Mike and Mike’s five siblings. The deed recited that “for accurate consideration paid and received”, Dad granted, conveyed, etc.

Trial

The trial court concluded the deed was not a gift. It had no gift language; it recited that the minerals were sold for an unspecified amount of adequate consideration that was tendered at the time of the transaction.

If Mike could not trace the transaction to his separate property then the minerals and proceeds therefrom would be community property. Mike’s tracing failed. He could not establish by clear and convincing evidence that he used separate property to acquire the minerals. Clear and convincing evidence is a measure or degree of proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established. That burden is high.   

Mike alleged that the trial court failed to admit evidence showing his father intended to transfer the mineral interests as Mike’s separate property when he directed conveyance of the interests from the trust to Mike and gave Mike $12,000 with which to purchase the interests.

The rejected exhibit was fully redacted in the reporter’s record. It did not indicate the substance of its contents or what Dad’s intent was. The appellate court was unable to determine the harm resulting from the trial court’s refusal to admit the exhibit because there is no record of what the exhibit would have shown. The alleged error was not preserved.

Tracing methods

The court discussed the various tracing methods and explained why one applied and the others didn’t:

  • the community-out-method (applied by the trial court):
  • the clearinghouse method,
  • the identical-sum-inference method,
  • the minimum-sum-balance method.

Mixing up your musical interludes:

Diana Krall

Elaine Elias

Eric Clapton

If you are the type to be preoccupied with the nuances (drudgery if you prefer) of federal statutory and regulatory interpretation, or if you have a fetish for acronyms, I recommend that you read all 41 spellbinding pages of W&T Offshore v. U S Department of the Interior. The rest of us will dig into the U S District Court’s consideration of the so-called Auer deference (judicial deference being a hot topic these days) and the fair-notice doctrine under the Fifth Amendment and the Administrative Procedure Act. That is as deep into these weeds as we should dare to venture.

The facts

W&T deducted from royalty payments to the government a transportation allowance under federal law for costs incurred in remediation of the offshore Pluto Flowline. W&T had a Unit Operating Agreement with Mariner, the operator of the Pluto Project. Previous owners were parties to an Operations and Maintenance Agreement that was terminated after several transactions involving interests in the Pluto Project and the Pluto Flowline.

Judicial deference?

Interior (by Minerals Management Service and the Office of Natural Resources Revenue) denied the allowance and demanded an additional $4MM+ in royalties. W&T sued alleging that Interior’s disallowance ran afoul of a host of federal statutes and regulations and was therefore arbitrary, capricious, and an abuse of discretion, and that the rejection violated fair notice requirements.

The court considered Auer deference (an agency’s interpretation of its own regulation is controlling unless plainly erroneous or inconsistent with the regulation). The court performed this analysis:

  • First, determine that the regulation is genuinely ambiguous by “exhausting all the ‘traditional tools’ of construction.” (Applying Texas law, the law of the contracts).  
  • Second, determine that the interpretation is reasonable. 
  • Third, evaluate whether the character and context of the agency interpretation entitles it to controlling weight.  See pp. 9-11 of the opinion for the factors.

Under the UOA, W&T was obligated to reimburse operator Mariner for costs of unit operations, but the Pluto Flowline was not listed as joint property under the UOA.

The court found:

  • The regulation upon which the agency’s ruling was based was not ambiguous.
  • Interior’s interpretation was reasonable. Therefore, Skidmore deference did not apply (based on the interpretation’s persuasiveness, a weaker form of deference than Auer).
  • Interior’s interpretation did not invoke the agency’s substantive expertise (offshore oil and gas activities). The question whether W&T incurred the costs under an arms-length transportation contract was based on general common-law principles of contract interpretation.
  • Interior’s interpretation was not arbitrary and capricious.
  • Auer deference and Skidmore deference did not apply to the agency’s decision.

The flaw in W&T’s position was that the UOA was not a transportation contract, which was a requirement for the allowance.    

The fair-notice doctrine

So far, so good for Interior. But the agency is required to give fair notice to whomever it is regulating that certain conduct is forbidden. Interior violated the doctrine:

  • Interior had never before interpreted the regulation at issue to hold that W&T’s method of remediation was unreasonable.
  • Interior knew that terms such as ”reasonable”, “moderate” and “fair” made the regulation subject to ambiguity.
  • Mariner had obtained several layers of approval in which the procedure was described and was never put on notice that it was not reasonable.  
  • Interior did not cite any statute, regulation or prior adjudication finding the procedure was not reasonable.

There is much more to the opinion than this summary, but the result is the parties’ dueling motions for summary judgment were denied in part and granted in part, Interior’s Final Decision denying the allowance was reversed, and the case was remanded to the ONRR.

Your musical interlude

She does originals, too.

Co-author Gunner West

City of Crowley v. TotalEnergies E&P USA, is a post-production cost (PPC) case with a predictable result. The Fort Worth Court of Appeals confirmed its reasoning in Shirlaine W. Props. Ltd. v. Jamestown Res., L.L.C from 2021, that under a market-value oil and gas lease, gas sold at the wellhead means that other promises within the lease that royalties will never bear PPCs don’t matter. The lessee will bear its share of costs incurred to make the gas marketable.

Background and legal framework

The lessor’s share of production depends on two factors: the valuation metric (market value, proceeds, or price) and the point of valuation (at the well or other point of the). Together, these factors determine whether the royalty bears PPCs.

Gas sold at the wellhead is valued before PPCs are incurred and the royalty owner typically shares those costs through the workback method (which estimates wellhead value by subtracting PPCs from prices received downstream). In contrast, a gross-proceeds royalty is measured by the lessee’s actual receipts at the point of sale and is free of PPCs when the sales occur downstream.

The lease provisions

The court examined four key provisions of the royalty clause:

  • Payment will be the “Royalty Fraction of the market value at the point of sale, use, or other disposition”. The point of sale here was the wellhead;
  • The market value “will never be less than the total proceeds received by Lessee in connection with the sale  …” .
  • “[I]f Lessee realizes proceeds of production after deduction for any expense of [postproduction] . . . then the reimbursement or the deductions will be added to the total proceeds”; and
  • “Lessor’s royalty will never bear, either directly or indirectly,  . . . any part of [PPCs].”

Shirlaine controls

The court found the lease provisions to be nearly identical to those in Shirlaine. The valuation provision fixed market value at the wellhead – the point of sale. Moreover, adopting the lessor’s reading would improperly rewrite an at-the-well market-value lease into a “total proceeds” lease.

The court’s analysis

The Shirlaine reasoning was logically, legally, and linguistically sound, said the court.

The City’s argument that PPCs constitute “deductions” because gas buyers anticipate incurring them “twists commonsense economics into something it is not.”  Treating the gas buyer’s expectation of downstream costs as a “deduction” from the seller’s proceeds conflates price formation with expense recovery. While the commonly-used workback method anticipates PPCs to estimate wellhead market value, this doesn’t mean the seller actually “realizes proceeds . . . after deduction” of those costs. The workback method is merely a proxy for market value.

Market value at the well means the value before gas is prepared for market. There are no marketing costs to deduct from the value. Post-sale expenses are, by definition, post-sale. Therefore, with the wellhead as the valuation point the lessees do not “realize proceeds . . . after deduction for any [postproduction] expenses.”

The add-on and no-PPC clauses did not apply to these facts; perhaps those clauses could apply if the point of sale was a place other than the wellhead.

The court affirmed summary judgment for the lessees. The lessees did not breach the lease by calculating the lessor’s royalty without including PPCs.

Caveat

Don’t read too much into this or any other PPC case. Our Supreme Court reminds us frequently that the effect of any royalty clause depends on the language of the clause itself. Beware of general statements of the law.

Your musical interlude.

Lagniappe

Its bedtime and your stash of melotonin is depleted? We can help! Read these summaries of cases cited in the opinion to learn more about PPCs:

BlueStone Nat. Res. v. Randle

Burlington Res. Oil & Gas Co. v. Tex. Crude Energy

Devon Energy Production Co. v. Sheppard

Shirlaine