Co-author Brittany Blakey*

Louisiana practitioners and their clients tend to know this particular point of Louisiana law, but it could surprise out-of-staters (known in their native habitat as “Texans”), so it’s worth a reminder:

Under Louisiana Mineral Code art. 122 and art. 129, a lessee in a mineral lease is not relieved of its statutory duty to perform the lease as a reasonably prudent operator unless the lessor has expressly discharged the lessee in writing. The original lessee, along with all assignees and sublessees, are solidarily liable to the lessor for the whole performance of the obligations imposed by the lease. Continue Reading Original Louisiana Lessee Can’t Escape Liability

Co-author Ethan Wood

Coke or Pepsi? Elvis or the Beatles? Should there be a designated hitter? Fixed or floating royalty? Among the great debates of recent decades, few have proven quite as frustrating as the great “Fixed v. Floating” royalty debate in Texas jurisprudence.

A royalty can be conveyed or reserved in two ways: as a fixed fraction of total production (fractional royalty interest) or as a fraction of the total royalty interest (fraction of royalty interest). The fractional interest is “fixed” because it is untethered to the royalty in a particular oil and gas lease. A fraction of royalty is “floating” because it varies depending on the royalty in the lease. Continue Reading Texas Supreme Court Decides Another Fixed-or-Floating Royalty Case

Co-author Brittany Blakey*

The Louisiana Supreme Court’s reversal of lower courts in Gloria’s Ranch, L.L.C. v. Tauren Expl., Inc. eliminates a major source of anguish for Louisiana energy lenders and their borrowers. You might recall our report on the court of appeals opinion. Continue Reading Louisiana Lender Not Liable for Lease Violations

Co-author Trenton Patterson*

We’re not saying you should do it, but there is a recipe for ridding oil and gas leases of pesky burdens: Enter into a new lease covering the same interest as the earlier lease and omit any reference to an intent that the later be subordinate to the earlier. You don’t even have to release the earlier lease. So says TRO-X, L.P. v. Anadarko Petroleum Corp.

You might remember a report on this case at the court of appeal, where we marveled at the skillful (or fortuitous, we’ll never know) way the Anadarko landman won the day via email. Continue Reading Texas Supreme Court Affirms Washout of a Back–in Interest

Co-author Chance Decker

In Murphy Exploration & Production Co. — USA v. Adams the Texas Supreme Court held that an offset well clause in an oil and gas lease did not require the lessee to drill wells calculated to protect against drainage. Four dissenting justices believed the majority disregarded the well-established meaning of “offset well” used in the oilfield for decades.

The facts

Murphy’s two oil and gas leases with the Herbsts had identical offset well clauses:

… in the event a well is completed as a producer … on land adjacent to and contiguous to the leased premises, and within 467 feet of the premises covered by this lease, that Lessee … is obligated to . . . commence drilling operations on the leased acreage and thereafter continue the drilling of such off-set well or wells with due diligence to a depth adequate to test the same formation … . (emphasis ours)

When a well on a neighboring tract triggered the clause, Murphy drilled a well on the Herbsts’ tract 2,100 feet from the triggering well.  Everyone agreed this well would not prevent drainage. The Herbsts argued the well did not satisfy the clause because it was not designed to protect against drainage.

Murphy responded that the well satisfied the clause because all the clause required was that the well be drilled on the leased premises to the same depth as the triggering well. That an offset well must actually protect against drainage or even be calculated to do so has no place in horizontal drilling in tight shale formations where drainage is minimal.

The ruling

The clause did not require Murphy to drill a well to protect against drainage. Murphy’s well satisfied the clause.

The opinion was based on two premises. First, the leases provided their own definition of “offset well”: Murphy had to drill a well:

  • on the Herbsts’ tract,
  • with due diligence,
  • to the same depth as the triggering well, and
  • drilling “such offset well” would satisfy the Clause.

“Such offset well” did not require proximity or actual protection from drainage, and the Court would not impose those terms.

Second, as it was entitled to do, to inform its interpretation the Court considered the “surrounding circumstances” under which the leases were negotiated and executed. The Court concluded that the leases were drafted with horizontal drilling in mind.  Expert testimony was that drainage is almost non-existent from horizontal wells in tight-shale formations like the Eagle Ford.  Thus, it would be “illogical” for an offset well clause to require a well – even an “offset well” – to even attempt to protect against non-existent drainage.

The dissent

According to the dissenters the commonly understood definition of “offset well” required Murphy to drill its offset at a location where a reasonably prudent operator would drill to protect the leasehold from actual or potential drainage, regardless of whether drainage was actually occurring.  The majority opinion effectively read “offset” out of the leases.

The dissent also challenged the majority’s conclusion that the Herbsts negotiated the leases with horizontal drilling in mind. They just wanted production, and the majority ignored other, non-shale formations.

Where will the Court go from here?

The Court purported to limit its holding to these facts, but the opinion could have far-reaching consequences. Wells drilled in the most active plays in Texas today are by and large horizontal, tight-shale wells. The opinion indicates the historical understanding of an “offset well” is antiquated in this context. How can operators protect against drainage that doesn’t exist? Does the Supreme Court believe they can’t and don’t have to even try?

Stay tuned!

We will soon have more on this topic in a lengthier client advisory.

Lessors who can’t get a break from the court, listen to a therapeutic car song for today’s musical interlude.

Co-author Brittany Blakey*

A few things you should know about the acreage retention clause:

  1. Foremost and always, read the instrument – not all clauses are created equal. But you know that.
  2. Consider the clause before perfunctorily filing P-15’s, plats, and other RRC forms.
  3. Absentmindedly relying on field rules to determine how much acreage you can retain? Do so at your peril.  And while your’re reading, read the rules pertaining to your acreage!

Two Texas Supreme Court decisions published on the same day confirm that retained acreage clauses that vary in language from one instrument to another will likely vary in effect. Depending on the language, the lessee might not be able to maintain all the acreage it planned on holding.  Continue Reading Ask and You Shall (Not?) Receive: Retained Acreage Clauses and the Texas Supreme Court

The question posed in our recent discussion of Devon Energy v. Apache Corporation was the meaning of “payor” under the Texas Division Order Statute. The answer, as far as it went, was that in a well drilled without a joint operating agreement the statute does not require the operator to pay lease royalties to mineral interest owners who have leased to a different working interest owner.

The questions raised by the answer

When are mineral owners who have leased to a non-participating working interest owner entitled to royalties under their lease … before or after payout? Arguably, the lessor (to the non-participating WI owner) is not entitled to lease royalties from the lessee of its cotenant (the operator) until after payout of the well.

Well then, what’s keeping the lease alive if it is past the primary term? Absent pooling, the answer could be “nothing”.

As promised, here is more on these questions in “Show Me the Money: Who is a Payor under the Texas Natural Resources Code?” prepared by my very knowledgeable Gray Reed colleagues Paul Yale, Chance Decker and Ethan Wood.

And a musical interlude about venue.

Co-author Sonya Reddy

Defendants accused of stealing trade secrets often claim that publicly available information can’t constitute a trade secret. Sometimes yes, but mineral ownership that can be determined from the public record only after lengthy, expensive, and labor-intensive research in the county courthouse can have trade-secret protection, according to Eagle Oil & Gas Co. v. Shale Exploration, LLC.

 It began like a routine exploration venture … Continue Reading Big Damages in a Texas Trade Secret Case

Co-author Chance Decker

You’ve secured the right leases.  You’ve drilled nice wells in the right locations.  Now, who will pay the royalty owners?  Follow Devon Energy Production Company, L.P. v. Apache Corporation, to be sure.

The takeaways