Texas Crude v. Burlington Resources Oil and Gas considers the relationship between the operator and non-operators under Articles V and VI of the 1982 Model Form Joint Operating Agreement.

Burlington owed 87.5.% of a prospect and was the operator. Texas Crude owned 12.5. Warwick acquired a 10% working interest from Texas Crude. That interest was later acquired by Burlington.

The JOA provisions (summarized):

V.A:  Burlington as operator shall conduct all such operations in a “good and workmanlike manner” but would have no liability “ … for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct.”

V.B.1: Authorizes removal of the operator by the affirmative vote of 2 or more non-operators owning a majority interest if operator fails or refuses to carry out his duties.

VI.B.1: The operator shall commence a proposed operation within 90 days if all parties elect to participate. If the operation is not commenced by then, any party desiring to conduct the operation must resubmit the proposal.

What happened

Warwick proposed drilling a total of 39 wells and Burlington and Texas Crude elected to participate. Shortly before expiration of the 90 days, Burlington said it would not be drilling the wells because it would be imprudent to do so.

Warwick and Texas Crude sued for breach of contract and sought a declaration that:

  • Burlington’s refusal to drill was a breach of the JOA,
  • The JOA’s other provisions did not apply and did not excuse Burlington’s breach, and
  • Burlington’s failure to commence subjected Burlington to removal as operator.  

Burlington said it was not required to drill wells a reasonably prudent operator would not drill and any party still desiring to conduct the operation must resubmit the proposal under VI.B.1.

Texas Crude said the resubmittal requirement does not provide a remedy for Burlington’s failure, and the VI.A exculpatory clause does not apply to Burlington’s obligations under VI.B.1.

After several rounds of motions, the trial court ruled:

  • The JOA did not require Burlington to conduct operations in any way other than in a good and workmanlike manner,
  • The JOA required Burlington to commence the proposed operation within the deadline but the resubmittal process gives direction to any party wishing to proceed with a proposed operation that has not been properly commenced.
  • Burlington’s failure to timely commence the operation was not a breach of JOA .

On appeal

 Burlington breached the JOA. “May” is permissive, while the common meaning of “shall” is mandatory. The JOA uses “shall” in VI.B.1.

The exculpatory clause

“Good and workmanlike manner” means an operator owes a duty to perform as a reasonably prudent operator. Burlington contended that that standard applies to decisions whether, when and how to drill. Texas Crude maintained that the clause did not apply to Burlington’s refusal to conduct proposed drilling operations.

In Reeder v. Wood County Energy the Supreme Court held that the exculpatory clause in the 1989 form protects operators from “activities”, which is broader than “operations”. Lower courts have declined to extend Reeder so that the exculpatory clause in the 1982 form excused the operator who failed or refused to perform a mandatory contractual duty.   

The result

The court concluded:

  • The trial court erred in concluding that an operator cannot breach the JOA by failing to timely commence a proposed drilling operation.
  • The resubmittal requirement is not a remedy for an operator’s breach of the JOA; nor does it excuse an operator from fulfilling its contractual duty to commence a well. It does not eliminate a party’s ability to pursue legal remedies for an operator’s breach, such as monetary damages, instead of proceeding with the operation.
  • The case was remanded for the trial court to consider removal of Burlington as operator. (Good luck with that now that Burlington owns Warwick’s interest.)

Jesse Colin Young RIP

Co-author Gunner West

In Steelhead Midstream Partners, LLC v. CL III Funding Holding Company, LLC, the Texas Supreme Court authorized a pipeline owner’s breach-of-contract claim—alleging a co-owner used foreclosure to avoid cost-sharing obligations under a joint operating agreement. The claim was not an impermissible collateral attack against a judgment allowing a foreclosure because the foreclosure suit did not adjudicate the parties’ contractual cost-sharing obligations.

Cost-Sharing, Foreclosure, and Breach of Contract

Steelhead and CLIII each owned an interest in an oil and gas pipeline project, subject to a JOA with a 50/50 cost-sharing arrangement. CL III’s predecessor-in-interest defaulted on its share of construction costs, resulting in a mineral contractor’s lien. CL III purchased the lien, becoming both a 50% owner of the pipeline and the lienholder against it.

CL III sued to foreclose on the lien and to compel Steelhead to pay the outstanding construction debt. Steelhead counterclaimed, asserting CL III breached the JOA by failing to pay its share of the construction costs that gave rise to the lien. In Steelhead’s view, CL III owed the remaining construction debt inherited from its predecessor and could not collect that debt from Steelhead, whose predecessor had already paid its share of the construction costs.

CL III moved to dismiss Steelhead’s counterclaim for lack of jurisdiction due to related bankruptcy proceedings. The court granted the motion and ordered foreclosure of Steelhead’s interest. Steelhead paid the judgment and did not appeal.

Prior to final judgment in the foreclosure suit, Steelhead filed a separate breach of contract suit, alleging that CL III’s failure to pay its share of the construction debt resulted in the foreclosure of Steelhead’s interest in the pipeline.

The court of appeals concluded that the contract claim constituted an impermissible collateral attack on the foreclosure judgment, which had definitively determined the status of the debt and the parties’ rights under the JOA.  The Texas Supreme Court granted review to address the collateral attack issue.

The Supreme Court: No Impermissible Collateral Attack

The Court reversed. Steelhead’s breach of contract claim was not an impermissible collateral attack on the final judgment in the foreclosure suit.

The foreclosure proceedings focused exclusively on the construction debt and the lien’s enforceability. The Court reasoned that determining who owed the construction debt, to whom it was owed, and whether a lien securing the debt is enforceable, is conceptually and legally distinct from determining the parties’ contractual cost-sharing obligations under the JOA (the contractual debt). As such, Steelhead’s breach of contract claim could be litigated independently.

“Properly understood,” the Court explained, “Steelhead’s [breach-of-contract] lawsuit seeks to establish not that the result of the foreclosure litigation was incorrect, but that the result of the foreclosure litigation triggers contractual obligations CL III owes to Steelhead.”

The Court also noted that Steelhead attempted to raise its breach-of-contract claim as a counterclaim in the foreclosure suit, but CL III successfully argued the foreclosure court lacked jurisdiction. Thus, the Supreme Court concluded, it would be unfair to bar Steelhead from litigating its breach of contract claim in a separate action after CL III had prevented it from doing so in the foreclosure suit.

Your musical interludes: fiddles, pipes banjos … reels, jigs, and two steps … from all over.

Scotland

South Carolina (my guess)

Ireland (or Scotland?)

Ireland

Mamou

Co-author Gunner West

DALF Energy, LLC v. GS Oilfield Services addresses a fiduciary’s deceptive actions in oil and gas transactions. The Fifth Circuit held:

  • self-dealing may constitute a breach of fiduciary duty even when the principal is not a direct party to the transaction;
  • uncertainty in the amount of damages does not bar recovery when injury is evident; and
  • opinions about profitability can be actionable as fraud.

The relationship

DALF Energy hired Jeffrey Scribner to identify oil and gas investment opportunities in Texas. Scribner identified old wells that he claimed could be returned to production with “virtually no risk.” Relying on Scribner’s advice, DALF’s parent company, TitanUrbi21, LLC (“TU”), purchased several oil and gas leases.

However, Scribner had falsified production reports, misled DALF about the risks involved, and failed to disclose his personal interests in some of the acquired leases. Some leases were owned by his father’s company and in some, royalties were assigned to Scribner’s own company—all without DALF or TU’s knowledge.

When DALF and TU grew suspicious of Scribner’s production reports and requested information about a key subcontractor—GS Oilfield Services, LLC—Scribner claimed he could not contact its owners or managers. DALF later discovered Scribner was GSOS’s manager.

DALF and TU sued for, among other claims, breach of fiduciary duty and fraudulent inducement. After unsuccessful proceedings in bankruptcy and district courts, they appealed.

Fiduciary duty extends beyond direct transactions

A fiduciary’s duty to fully disclose matters affecting the principal’s interest and to refrain from self-dealing applies even when the principal is not a direct party to the transaction.

Scribner was DALF’s agent and owed a fiduciary duty to DALF but not to TU.

Under Texas law, a fiduciary must fully disclose matters affecting the principal’s interests and is prohibited from using the relationship to benefit his personal interest without full knowledge and consent of the principal. 

After TU purchased the leases DALF began operating the wells. Scribner breached his duty by not disclosing his personal interest in the leases and by using his relationship with DALF to influence TU to sign contracts that assigned royalties to Scribner’s company.

Scribner breached his fiduciary duty, even though DALF was not a party to the lease, by:

  • falsifying production volumes, violating his duty of full disclosure;
  • self-dealing, by not disclosing his or his father’s interest in entities involved in the transactions;
  • claiming “virtually no risk” despite knowing there was always some risk;
  • falsely claiming professional credentials by using “P.E.” after his name without certification; and
  • concealing his relationship with a subcontractor while financially benefiting from its work.

Uncertainty in damage amount is not fatal

The bankruptcy court’s dismissal was based on a lack of specific evidence regarding the extent of DALF’s losses. However, the Fifth Circuit emphasized that while “uncertainty as to the fact of legal damages is fatal to recovery, … uncertainty as to the amount will not defeat recovery.”

The fact of injury was evident. Payments made before Scribner’s confession, based on falsified reports, constituted a tangible loss. The bankruptcy court’s dismissal of the claims was error.

The Court remanded to the bankruptcy court to calculate damages for certain actions and to determine whether DALF suffered injury from others.

Actionable Fraud For Opinions

DALF argued that Scribner’s profitability opinions in prospectuses were fraudulent. While Texas law generally exempts “pure expressions of opinion” from fraud claims, it recognizes exceptions when the speaker knows the opinion is false, claims special knowledge of future events, or bases the opinion on past/present facts.

The bankruptcy court failed to consider these exceptions and erred in concluding that Scribner’s opinions about profitability were not actionable solely because they were “statement[s] of belief about the future earnings or profitability of a business.”

Your musical interlude.

Patch LLC et al v. Indio Minerals LLC et al  was a dispute over title to a 1/8th NPRI in land in Midland County. Viola Ash, an Illinois resident, executed a warranty deed in 1932 for land in Midland County, reserving a 1/8 NPRI. Viola died in 1974 leaving no children.

Due diligence

Patch’s due diligence concluded that Viola died without a will and Patch purchased mineral interests from most of her living heirs. Patch made offers to other heirs but Indio had already purchased those interests.

In its own due diligence, Indio found Viola’s will that had been filed in the probate records of Macon County, Illinois, three days after her death. Her interest was devised to ancestors of Ms. Shook and others who had conveyed to Indio.

in order to establish its title, Indio filed a small estate affidavit in Midland County in 2020 and initiated the probate of Viola’s will in Macon County. The will was filed in the Deed Records of Midland County in 2021 and admitted to ancillary probate in 2022.

When did title vest?   

In Texas if a person dies leaving a lawful will, all of the estate that is devised by the will vests immediately in the devisees. A a copy of a foreign will takes effect as a conveyance beginning at the time the instrument is delivered to the Clerk in Texas to be recorded.

So, which is it here?  It depends on whether the will is a foreign will.  Viola’s will that was probated in Illinois had the same effect as a domestic will and transferred title to her devisees on the date of her death.

Patch was not a bona fide purchaser

When Patch acquired its interest Viola’s will was on deposit in Illinois. The Estates Code regarding the deposit of a will only pertains to a deposit in Texas. The will of a testator not domiciled in Texas may be admitted to probate at any time in Texas if proof is presented that the will was probated in another state.

In Illinois, there is no limitations period following the testator’s death in which a will may be admitted to probate. Patch, contended it was a bona fide purchaser, which it could have been if it had purchased the property from the decedent’s heirs after the fourth anniversary of the decedent’s death.  But that rule does not apply to foreign wills.

Patch’s misery was compounded by the admission by a Patch witness that before Patch purchased the interests, the Clerk of Macon County informed him that Viola had a will on file.

The court relied on several sections of the Estates Code and the Property Code to arrive at these conclusions. It’s worth a read if this is an immediate issue for you. 

What does your mineral deed convey?

Patch acquired its interests by both a “Quitclaim Deed” and a “Mineral and Royalty Deed”. A party that acquires a real property interest in a quitclaim deed cannot be an innocent purchaser for value because the grantee receives only whatever right, title, interest or claim the grantor has, not the property itself. The grantee is on notice of legal or equitable claims in favor of a third person.

Patch’s Mineral and Royalty Deed granted “all right, title and interest that grantor may own”. The court agreed with Indio: that language indicated a quitclaim deed.

The result

Indio acquired its interest from Viola’s devisees under her duly probated Illinois will, and Patch was not a bona fide purchaser.

Your musical interlude. Muddy probably was not thinking about Lent.

Boren Descendants et al v. Fasken Oil and Ranch, LTD, offers something to talk about beyond interpretation of the fixed-or-floating NPRI question.  At issue was this reservation, expressed as a double fraction, in a 1933 deed:, “an undivided … 1/4th of the usual … 1/8th royalty” from a conveyance of real property”.

The court of appeals affirmed the trial court’s judgment that the deed conveyed a 1/4th floating NPRI in the grantor (Fasken). Grantees and their successors (Boren/Mabee) failed to rebut the presumption that the term “1/8th“ was a term of art to refer to the total mineral estate and not merely 1/8th .

Now, for the interesting part: The court of appeals affirmed the trial court’s rejection of several affirmative defenses asserted by Boren/Mabee that might have prevented Fasken from claiming that its interest is anything other than a fixed 1/32 NPRI.

Estoppel – Grantor wins.

Estoppel does not create a new contractual right, nor does it alter existing contractual rights. The court dispensed with a discussion of equitable estoppel. Quasi estoppel does not require a false representation or detrimental reliance. It precludes a party from asserting to another’s disadvantage a right inconsistent with the position previously taken. It applies when it would be unconscionable to allow a person to maintain a position inconsistent with one in which he acquiesced or from which he accepted a benefit.

Estoppel by deed or contract precludes parties to a valid instrument from denying its force and effect. Boren/Mabee referred to decades of conduct on the part of Fasken, such as execution of deeds, leases and division orders, that bound it to a fixed 1/32nd interest. However, Boren/Mabee were not parties to any of those documents and were not bound by them.

Boren/Mabee were not strictly required to establish justifiable reliance in order to recover on quasi estoppel; however, the court believed it needed to consider whether under the circumstances it would be unconscionable for Fasken to seek recovery of overpayments to Boren/Mabee. 

Fasken’s acknowledgment of its interest in documents that are otherwise unrelated to its relationship with Boren/Mabee did not render Fasken’s claims unconscionable.

The purpose of division order estoppel is to protect operators and payors from double liability. Fasken’s division orders were not binding between the distributees themselves.

Judicial estoppel – Grantor wins.

Judicial estoppel is not so much an estoppel as it is a rule of procedure based on justice and sound public policy and is intended to prevent a party from playing fast and loose with judicial system for their own benefit. In a suit by a taxing authority for a .03125 royalty interest (which is the fixed portion of the royalty at issue here), Fasken asserted that the interest belonged to it. Those statements were made at a time when the courts generally used a straightforward mathematical approach to multiplying double fractions to establish the fractional royalty interest (that is, before Hysaw v. Dawkins).

Waiver – Grantor wins.

Waiver permanently alters the parties’ contract rights. Fasken requested and accepted payments of a 1/32nd royalty during a period in which the law relating to the interpretation of double fractions was unsettled. Again, Fasken could not have formed a clear understanding of its rights in connection with a double fraction conveyance with the law was unsettled as it was at the time. 

Ratification – Grantor wins.

Ratification permanently alters the parties’ contract rights. Again, Fasken’s acceptance of a 1/32nd royalty was at a time when the law was unclear. The evidence was insufficient to demonstrate that Fasken formed an intention to be legally and permanently bound to the 1/32nd interest it was then receiving.

Presumed grant doctrine – the court passes

The court declined to rule on the presumed grant theory because the parties did not include that defense within the list of issues identified by the trial court in its order permitting an interlocutory appeal.

Limitations – Grantees win, mostly.

Boren/Mabee argued that Fasken’s recovery should be governed by the two-year statute of limitations for unjust enrichment (money had and received) and not the four-year statute for breach of contract.

The trial court erred when it denied Boren/Mabee’s motion for summary judgment on Fasken’s claim for breach of contract. There was no evidence that any of the defendants entered into a contract to ensure that royalty payments were correctly distributed or to turn over payments received from a payor or producer. Boren/Mabee win.

As for unjust enrichment, a payee’s execution of conveyances, division orders, and other documents that are not directly related to its relationship with other payees does not prevent the assertion of claims that such other payees have been overpaid pursuant to the relevant contracts between the parties.

The record wasn’t sufficient to support a defense that Fasken’s claim for money had and received is barred in its entirety. The trial court did not err when it denied Boren/Mabee‘s motion for partial summary judgment on the two-year statute of limitations. Its back to the trial court for more evidence, presumably to determine the amount of royalties paid before and after the two years before suit was filed.

Your musical interlude.

After four stops at the lower courts, Kenneth Hahn v. ConocoPhillips has been resolved by the Supreme Court of Texas. The Court opined on the effect of two instruments often used to clarify land titles in Texas:  ratifications of an oil and gas lease and stipulations of interests.  

See this post for background. And remember: These brief posts are not presented as fulsome discussions of the cases we report on. We promise not to “hallucinate”, as with AI and 1960’s rock-and-rollers, but we can’t discuss every nuance and detail of these often long and complicated decisions.   

The result

The Supreme Court reversed a court of appeals judgment favoring Hahn. Hahn’s NRPI was reduced to a floating interest as a result of a Stipulation between the parties but not as a result of a Ratification. It’s complicated. Read on.

The facts

Briefly stated: Hahn owned a 1/8 NPRI in “Tract A” and ratified a subsequently negotiated oil and gas lease from mineral owners the Gipses to ConocoPhillips which paid a ¼ royalty.  After the Gips lease was pooled title questions arose. At the request of ConocoPhillips, Hahn executed a “Ratification of Oil Gas and Mineral Lease” and he and the Gipses executed a “Stipulation of Interest’’.

The Ratification

An NPRI owner like Hahn has the option to ratify or repudiate a lease containing provisions which as to his interest the executive right owner has no authority to insert into the lease. But if an NPRI owner ratifies a pooling agreement (or a lease with such an agreement) his interest is bound by the entire agreement. He cannot accept provisions that benefit him and reject provisions that are detrimental to him.

The Gips lease’s royalty provision did not apply to Hahn’s nonpossessory interest in production because of the different nature of those property interests. An NPRI is neither ownership of the mineral fee nor a fractional title to the mineral fee. It is not leasable. The standard lease provision obligating the lessee to pay royalty to the mineral fee owner does not also apply to a pre-existing fixed NPRI and does not create an NPRI that floats with the lease royalty.

Because Hahn’s royalty interest was fixed it remained constant regardless of the royalty in the subsequently negotiated Gips lease.

The Stipulation

This instrument told a different story. The Stipulation included a cross-conveyance of interests between Hahn and the Gipses. Stipulations are favored in the law as a way to avoid litigation and clarify land titles. The parties agreed that if the Stipulation was effective, Hahn’s NPRI would float with the lease royalty. On its way to finding the Stipulation to be enforceable, the Court discussed in detail what is required for a written contract to satisfy the Statute of Frauds (See pp. 14 -16).

The Stipulation referred to the NPRI reserved to Hahn in the Gips deed as a 1/8 “of royalty”. Thus, the Stipulation changed Hahn’s NPRI from fixed to floating.

Clarifying Ellison

The Court clarified its ruling in Concho Resources v. Ellison regarding the effect of a stipulation of title:

  1. No proof of subjective uncertainty of the parties is required to make a stipulation enforceable, and
  • Stipulations are not limited to agreements establishing the physical location of a property boundary.

Roberta Flack RIP

Kouatli v. Endeavor Energy Resources L.P.  offers valuable (and obvious) lessons on how NOT to perform a Master Service Agreement in the oil patch (or, per Billly Bob and friends, “The Patch”), to wit:

  1. Don’t bother to comply with the most basic and unambiguous requirements of the contract.
  2. Take informality for granted.
  3. Assume that if your counterparty ignores those most basic and unambiguous requirements for 10 years the court will force him to keep on doing it.

The litigants were parties to an MSA which provided:

  1. When Operator (Endeavor) desired work to be performed by Contractor (Kouatli), Operator will request a Work Order, which could also be a purchase order, letter, memorandum or other document, or it may be oral.
  2. Upon acceptance of the Work Order, Contractor will commence performance of the work.
  3. A requested Work Order “shall be” confirmed in writing within three business days by Contractor.   
  4. Any Work Order not in conformity with the MSA “shall be null and void”.
  5. The MSA constituted the entire understanding between the parties and would supersede all negotiations, prior discussions, prior agreements and understandings relating to the subject matter.
  6. The MSA could not be modified or amended except by express written consent.

None of this is surprise to those who deal in MSAs.

Kouatli sued for breach of the MSA alleging that Endeavor failed to remit payment for 16 invoices. Endeavor’s motion for summary judgment stated that Kouatli had no evidence that:

  1. The work described in the invoices was requested by Endeavor either through a written Work Order or an oral request confirmed in writing,
  2.  Kouatli correctly performed the work described in each invoice in compliance with the MSA and a Work Order, and
  3. An authorized officer of both parties agreed to waive compliance with the requirements of the MSA with respect to the work described in the invoices.

Endeavor thus asserted that there was no evidence of:

  1. Fulfillment of a condition precedent (written Work Order or written confirmation of a verbal Work Order)
  2. Kouatli’s performance, or
  3. Breach by Endeavor.

Koualtli responded by affidavit testimony that:

  1. The work was verbally authorized,
  2. Kouatli submitted daily reports that described the work, and
  3. Endeavor’s representatives signed each report thereby accepting and confirming the work.

Endeavor objected for evidentiary reasons having nothing to do our purposes here (see p. 2 of the opinion).

The trial court dismissed Kouatli’s suit.

On appeal Kouatli argued that the manner of conduct by which the parties operated for 10 years precluded enforcement of requirements of the MSA. The court determined that there was no legal authority that Endeavor’s conduct precluded Kouatli from enforcing the MSA related to the work.

Kouatli did not expressly argue that he fulfilled or was excused from fulfilling the alleged condition precedent (submission of a Work Order or written confirmation) nor did he argue that confirmation was not a condition precedent. Koutali admitted that he never submitted written confirmation of any verbal Work Order.

The affidavit did not raise a genuine issue of fact on Kouatli’s own performance under the MSA. The affidavit was devoid of facts to support Endeavor’s waiver of the contract requirements.

The result: Kouatli (it appears) did a lot of work in return for nothing.

Your musical interludes, a carnival of covers:

Bob Dylan by Sam Bush and Jerry Douglas

Bob Dylan by Pete Townshend

Beatles by Michael Jackson

Eurythmics by Toni Lindgren

By Stephen A. Cooney

Who owns produced water in Texas?  And what is produced water anyway – oil and gas waste and part of the mineral estate, or groundwater and part of the surface estate?  We may be closer to an answer to these questions now that the Texas Supreme Court has agreed to hear a highly anticipated case out of Reeves County. 

Produced water, a byproduct of oil and gas activities, has historically been treated as waste and disposed.  However, recycling technologies have made produced water a potentially valuable commodity. 

In Cactus Water Services, LLC v. COG Operating, LLC, COG acquired oil and gas leasehold rights covering 37,000 acres in Reeves County.  Thereafter, Cactus Water entered “Produced Water Lease Agreements” with a surface owner covering the same property and included the produced water generated from COG’s oil and gas activities.  The agreements provide that Cactus has “the right to sell all water produced from oil and gas wells” under the property.  COG sued, seeking a declaratory judgment that it has the sole right to the produced water through its mineral leases and common law.  Cactus countersued, claiming its right to the produced water because it is groundwater, which belongs to the surface owner.  The district court agreed with COG; Cactus has “no rights in or to the product stream from COG’s wells.”  Cactus appealed and the El Paso Court of Appeals, in a 2 to 1 decision, affirmed the district court decision.   COG asserts that it owns all matter incidental to the product stream, including produced water, so it is part of the mineral estate.  Cactus Water asserts that groundwater is groundwater, no matter how dirty it is – and it is well-established that groundwater is part of the surface estate. 

With the evolution of treatment and recycling technologies, this conflict was inevitable.  This case could have extraordinary implications for the oil and gas industry, water transactions, water resources and of course to landowners with oil and gas operations on their property.  This continues a line of monumental water law cases the Texas Supreme Court has heard and ruled on in just the last 15 years.  See Gray Reed’s articles and blog posts on this topic here:

Who Owns Produced Water in Texas? – Energy & the Law Blog post, September 2023, in which we discuss the opinion and he dissent in the court of appeals decision.

Produced Water – Groundwater or Waste? – Gray Reed Legal Alert, August 2023

Produced Water in Texas – Waste or Groundwater? Who Owns It? – Gray Reed Insights, February 2020

Your musical interlude.

Alas, we might never know. Opiela v. Railroad Commission of Texas and Magnolia Oil & Gas Operating, was a challenge to the Commission’s authority to issue permits for allocation wells and wells drilled under Production Sharing Agreements. The parties have submitted a Joint Unopposed Motion For Reversal and Remand Pursuant to the Parties’ Settlement, which the Court granted.

The lawsuit, with potentially game-changing ramifications for PSA’s and allocation wells, attracted attention from the horizontal well drilling community (which includes just about everybody in the business in Texas) and we have reported it regularly: First on the trial court result, second on the Austin Court of Appeals result, and finally on the Supreme Court briefing. Those posts will tell you a lot about the dispute.

Because outsiders like you and me (or at least me) are not privy to the black box that is the parties’ settlement agreement, we don’t know what the parties truly believed about the strength of their respective cases.

What does it mean? It’s been business as usual at the Commission since the suit was filed. Time will tell if that changes. Parties in the future can be guided by the opinion of the Austin court: What they said and declined to say about, among others, the “65 percent rule”, the Commission’s authority to evaluate a permit applicant’s good faith claim to the right to drill a well, the Commission’s authority to resolve title issues, and the relationship between pooling and PSA’s.

Your musical interlude

The message in RSM Production Corporation v. Gaz du Cameroun SA: According to the federal Fifth Circuit, an arbitration tribunal’s construction of a contract and the arbitration rules governing the dispute “hold, however good, bad, or ugly.” Translation: Good for one party, bad or ugly for the other, just like the courthouse.

RSM was granted an oil concession with the Republic of Cameroon giving RSM the right to explore and develop hydrocarbons in the Logbaba Block. RSM and Guz du Cameroun (GdC) entered into farmin and joint operating agreements. GdC was the operator. The farmin granted RSM 100% participating interest in the concession in exchange for GdC’s agreement to operate. After GdC recovered 100% of drilling costs out of 100% of production revenues (“Payout”), the would share 60% to GdC, 40% to RSM.

A dispute arose over the payout calculation. The parties arbitrated, applying Texas Law and International Chamber of Commerce Rules. RSM had three claims. The tribunal ruled in favor of RSM on “Claim 1” and awarded $10 million+ in damages. The tribunal deemed RSM’s Claims 2 and 3 as moot, having ruled for RSM on Claim 1.

GdC contested the Partial Final Award.  An Addendum to Partial Final Award corrected Claim 1 and considered Claims 2 and 3. GdC prevailed on the merits of the contested claims, reducing RSM’s award by $4 million+.

Under ICC Rule 36, an arbitrator may correct a clerical, computational, or typographical error “or errors of similar nature”. Was GdC’s request a correction of law, which would exceed the tribunal’s authority, or a correction of a fact, which was within the bounds of Rule 36?

RSM sued in district court to vacate to the Addendum. That court vacated the part of the Addendum that reduced RSM’s recovery, concluding that the tribunal exceeded its powers by conducting a “merits re-do”.

GdC appealed, maintaining that the district court failed to apply the courts’ well-established, highly deferential approach to judicial review of arbitral awards. The court of appeal reversed, upholding the tribunal’s Addendum.

The court’s saw its task as determining the limits of an arbitrator’s power to reconsider a previously issued decision. (FYI, ICC Rule 36 is similar to the American Arbitration Association Rule 40.) So long as an arbitral award draws its essence from the contract, a court must uphold the award even if it was based on error. Convincing a court of even a grave error is not enough to justify vacatur.

Rule 36 prohibits redetermination of the merits of a dispute. The court concluded that the tribunal not only had the contractual authority to correct computational errors but also had the authority to determine what constituted a computational error in the first place.

The tribunal classified its error in the Partial Final Award as computational. The agreement established the tribunal’s authority to construe the meaning of the ICC rules themselves and whether an error truly is computational or not.

The tribunal had both the authority to correct computational errors and the more foundational authority to determine what counted as one in the first place. Rule 36 was broad enough to authorize the tribunal to analyze its ruling regarding RSM’s Claim 1 to determine whether a computational error occurred. The tribunal concluded that the authority to correct computational errors is within Rule 36’s purview and the tribunal had the authority to determine whether the error was computational or something else.

Musical interludes: artists you could have seen had you attended the 2025 30A Songwriters Festival:

Chuck Cannon (Chuck wrote it. It’s a “songwiters” festival)

Maddie Font

Lera Lynn

Austin Jenckes

Tia Sillers

Gina Venier