Co-author Derek Younkers *

And what a difference it was! In Apache Corp. v. Apollo Expl. LLC et al, Apache and others acquired an oil and gas lease on 100,000+ acres in the Texas Panhandle. The primary term was three years. The effective date was January 1, 2007, “from which date the anniversary dates of this Lease shall be computed”.  Extension beyond the primary term required a producing well and the creation of three blocks of equal acreage from which the lessees would drill wells to a combined depth of 20,000 feet per block per year.

The parties recorded a Memorandum of Lease in the public records. The Memorandum recited that it was “subject to other provisions of the Lease” and “the Primary Term thereof expires on the 31st day of December 2009.”

The other lessees sold 75% of their working interest to Apache by a series of substantially identical purchase-and-sale agreements. Section 2.5 granted each Seller a back-in working interest for up to one-third of the interests it conveyed to Apache once the wells reached “Two Hundred Percent … of Project Payout.”

Section 4.1 required Apache to offer “all of [its] interest in the affected Leases (or parts thereof) to Seller at no cost to Seller” should Apache’s drilling commitment for the year result in the loss or release of any of the leases.

In 2014, Apache bought lessee Gunn’s remaining interest of the leases and its PSA rights.

In 2015, Apache failed to drill 20,000 feet in the North Block of the lease.

The question for the Court: Did the North Block expire on December 31, 2015, or January 1, 2016?  The day the North Block expired determined whether Apache breached the contract by failing to offer the lease back to Sellers or had until the end of 2016 to drill the 20,000 feet.

The Sellers sued for breach of contract and declaratory relief. Apache filed four motions for summary judgment asking the Court to rule that:

(1) Apache complied with § 4.1;

(2) § 2.5’s 200% provision meant that Apache had to reach a 2:1 return on investment before Sellers could exercise their back-in option;

(3) the North Block expired on January 1, 2016; and

(4) § 4.1 required Apache to only offer back each Seller’s original interest, not all of the interests.

The Court applied the common-law default rule for describing time when parties use the words “from” or “after.” Under the rule, the date from or after a period is to be measured is excluded in calculating time periods. Thus, a period of years ends on the anniversary of the measuring date, not the day before. No language in the lease manifested a clear intent to displace the rule.

The Memorandum stipulated the lease would expire on December 31, 2009, but by its terms the Memorandum was subordinate to the lease. The lease was not ambiguous, so the Court ignored extrinsic evidence of the December date and found the primary term ended on January 1. Thus, the North Block expired on January 1, 2016.

The Court found that Section 4.1 only required Apache to offer back to each seller its original interest. A contrary interpretation would require Apache to offer each seller 100% of the same interests. (The court of appeal decision focused more on this issue.)

Finally, Section 2.5 meant a 2:1 ratio of profits to expenses. The Sellers’ argument that they could back in when profits equaled expenses would render the 200% language meaningless.

The Court remanded the case for further proceedings.

Your musical interlude.

* Derek is a rising 2-L at Baylor Law School and a Gray Reed summer associate.

You might recall our posts on litigation by states, counties, and cities blaming a host of calamities, real and imagined, past and future, on Big Oil. The producers tried their best to remove the cases to federal court. In a two-sentence ruling, the United States Supreme Court refused to consider defendants’ Hail-Mary to have the cases remain in federal court. This was the City of Baltimore case but it is expected to affect all climate litigation in which the plaintiffs assert only state law claims. The jurisdictional mud-wrestling is over and it’s back to the state courts for resolution.

In the future, you can follow climate litigation at this site: U. S. Climate Change Litigation sponsored by Columbia Law School and Arnold and Porter.

In the meantime, the breathless MSM celebrated the decision, likening these cases to the Big Tobacco litigation from years back.

Is the push to electrify the world at the expense of oil and gas achievable and if so, at what cost? Is government moving dangerously fast? Let’s hear from those who know more about the subject than I:

Daniel Markind in Forbes focuses the legal and financial challenges faced by New York State’s natural gas ban (60% of New York’s energy comes from fossil fuels). It’s probably pre-empted by federal law anyway.

The Wall Street Journal observes that the government doesn’t have to actually implement regulations that are destructive to the economy, the threat itself drains the life out of investment in whatever the government is targeting.

https://www.wsj.com/articles/power-plants-environmental-protection-agency-rule-epa-biden-administration-fossil-fuels-60f06bd0

According to E.J. Antoni in the Daily Signal, Biden’s Push for electric vehicles is expensive and unrealistic.

What the push will do to economy it will also do to the birds.

Finally, a two-fer: over-regulation and offshore wind turbines in the Northeast could endanger your Friday fishsticks say some Maine fishermen.

BUT WAIT!

Misguided ideology is a two-way superhighway. Here in Texas, the wind capital of the free world, our erstwhile laissez-faire Legislature loads the deck against alternative energy, says Texas Monthly.

RIP Chris Strachwitz, founder of Arhoolie Records. A musical interlude from one of his first discoveries.

Imagine these facts in a force majeure dispute (as presented in Point Energy Partners Permian LLC et al. v. MRC Permian Company).

Lessee (MRC) invokes the force majeure provision of an oil and gas lease, asserting that “wellbore instability” on a well on an unrelated lease requires the lessee to effectively redrill portions of the other well, setting back its rig schedule for the lease at issue. The event results in a 30-hour slowdown in the drilling of the other well. The lessee’s deadline to spud a new well on the lease to avoid lease termination is May 22, which it mistakenly records as June 19. Lessee schedules the spud date for June 2. Lessee discovers the error after the deadline has passed. Lessee could have spudded the well by the May 22 deadline but decides to drill the other well first. Before lessors receive a June 15 force majeure notice from MRC they sign new leases with Point Energy. 

MRC sues Point Energy and the lessors for trespass to try title, repudiation and civil conspiracy to tortiously interfere with the existing lease. Point Energy counterclaims for trespass to try title, accounting and constructive trust.

Who wins?

The force majeure discussion

The Court described a force majeure clause as a “contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or fact that the parties could not have anticipated or controlled”. The Court observed that force majeure clauses “come in many, shapes, sizes and forms” and may vary according to

  • The definition of force majeure,
  • the causal-nexus requirement,
  • the remedial-action requirement,
  • the notice requirement, and
  • the grace period excusing or delaying performance.

The Court focused on the “causal-nexus” requirement that is a necessary predicate to properly invoke the force majeure clause and decided that MRC did not satisfy the predicate.

As for remedial-action requirement, the lessee must use its “best efforts” to overcome the problem, which would not have been satisfied even if there had been no delay because the drilling of the new well as scheduled (i.e., after the lease termination deadline) would not have satisfied the continuous drilling requirement to perpetuate the lease.

The Court also determined that MRC would have had enough time to move the rig to the well on the lease at issue and to commence drilling by the termination date but chose to drill other wells first.

MRC’s proposed definition of the meaning of “delay” was not persuasive. The Court cautioned against taking literalism too literally and adopting of wooden construction of a word foreclosed by the context of the document at issue. That’s a mouthful, but the lesson is the Court will not allow a party to focus on the meaning of one wordd at the expense of the entire document.

The Court concluded that the ordinary person using the phrase “Lessee’s operations are delayed in by an event of force majeure”, given its textual context, would not understand those words to encompass a 30-hour slowdown of an essential operation that was already destined to be untimely due to a scheduling error.

The Court conclujded that the force majeure clause did not save the lease, and the Court rendered a take nothing judgment on MRC’s tortious interference claims to the extent those claims were predicated on application of the force majeure clause to save the lease.

Other issues preserved but not reached by the Supreme Court, such as the extent of acreage that would be held under a retained-acreage clause, were remanded to the Court of Appeals. 

Your post-Jazz Fest musical interlude

In TotalEnergies E&P USA, Inc. v. MP Gulf of Mexico LLC. the Supreme Court of Texas resolved the chaos created by conflicting dispute resolution regimes in three contracts for ownership and operation of an offshore unit and gathering system. The essential question: Did the parties agree that an arbitrator, rather than the courts, must determine the arbitrability of the disputes.

The Court held that the parties clearly and unmistakably allocated arbitrability issues to the arbitrator when they agreed to arbitrate their controversies in accordance with the AAA Commercial Rules, and their agreement to arbitrate some controversies but not others did not affect the delegation of the arbitrability decision to the arbitrator.

There were three contracts: the Chinook Unit Operating Agreement, a System Operating Agreement, and a Cost-Sharing Agreement for a common system to secure and transport production from the Chinook Unit and another unit. There were three procedings:

  • TotalEnergies sued in district court for a declaration construing the Cost-Sharing Agreement, which had no arbitration clause. That dispute required the court to look at the Chinook Operating Agreement but no one asked the court to determine the parties’ rights under the Chinook Operating Agreement,
  • TotalEnergies initiated an arbitration seeking determination of the parties’ rights under the Chinook Operating Agreement, which required arbitration of any controversy arising between the parties.
  • MP Gulf initiated an arbitration under the American Arbitration Association Commercial Rules, alleging that TotalEnergies breached the System Operating Agreement, which required arbitration of any controversy arising out of the agreement

The Court summarized the state of arbitration law in Texas:

  • Arbitration is a creature of contract, not coercion. Parties will not be forced to arbitrate unless they agreed to it.
  • When a party challenges the validity of a contract, but not of an arbitration agreement within the contact, the courts must enforce the arbitration agreement and require the arbitrator to decide the challenge to the broader contact. …
  • But when a party challenges the scope of the arbitration agreement, the courts must resolve that challenge ….
  • UNLESS the parties agree that the arbitrator will decide.
  • Courts will enforce an agreement to delegate arbitrability to the arbitrator if that agreement is “clear and unmistakable”.
  • The general rule is that an agreement to arbitrate under the AAA rules is a “clear and unmistakable” agreement that the arbitrator is the one to decide whether the disputes must be resolved through arbitration.

The Court referred to American Arbitration Association Rule 7(a). As it existed at the time the arbitrations were initiated the rule empowered arbitrators to “rule on his or her own jurisdiction.”  The rule changed in September 2022 to specifically designate the arbitrator as the arbiter of the scope of the arbitration.

What about a contractual carve-out of issues? It didn’t matter. Delegation to arbitrability to the arbitrator included the decision on the scope of the issues to be arbitrated and those that would not be.  … That is, unless the parties agreed more specifically than in this situation what would be arbitrated and what would not be.

Interested in the history of Texas, federal and other state court decisions on this subject? You are invited to read the opinion, all 50 pages of it. These meager 500+ words cannot do justice to all of that history.  And you don’t want a treatise anyway, so we are in accord.

Your mid-Jazz Fest musical interlude.

Golden Eagle Resources II LLC v. Rice Drilling D LLC. presents a small step in the development of subsurface trespass law in Ohio. The federal court considered a motion to dismiss, in which it evaluated the sufficiency of the complaint to state a cause of action. Such a motion is not a challenge to plaintiff Golden Eagle’s factual allegations. The causes of action were trespass and conversion.

Golden Eagle owns mineral rights in two tracts in Belmont County, 11.456 acres and 7.47 acres. Rice owns leasehold rights in the Marcellus Shale and Utica Shale. Minerals from the surface to the top of the Marcellus, between the bottom of the Marcellus and the top of the Utica, and below the base of the Utica were excluded from the lease. Rice drilled the “Big Tex” well, which is in the Big Tex 6 drilling unit. The unit overlaps with the entirety of the 7.47 acres and 9.05 of the 11.456 acres. Rice produces gas from the “Utica/Point Pleasant formations”. The Point Pleasant is below the Utica and not covered by the lease.

Trespass

Under Ohio law a trespass is an interference or invasion of a possessory interest in property. An entity is liable for trespass if it intentionally enters upon land in the possession of another or causes a thing or third person to do so. Landowners’ rights include the right to exclude invasions that actually interfere with their reasonable and foreseeable use of the subsurface.

The interest at issue was the Point Pleasant formation. How Rice invaded the property was the question. The Big Tex wellbore did not pass under Golden Eagle’s tracts, so there was no physical trespass with the drill bit.

Golden Eagle alleged trespass by Rice’s improper pooling. The court concluded that Ohio law does not hold that improper pooling into a drilling unit constitutes a trespass.

The central question was whether Ohio law recognizes a trespass by subsurface injection of frac fluids into the Point Pleasant formation. Rice relied on the so-called “negative rule of capture” allowing a landowner to inject into a formation substances which then migrate through the structure of the land to the land of others even if it results in displacement under such land. Ohio courts have not accepted that doctrine, said the court.  

Rice also argued that even if a claim for subsurface injectate is cognizable, it will fall short without allegations of physical damage or interference with use, assertions that were not in the complaint. Golden Eagle admitted that it did not specify the nature of the alleged physical invasion.  The trespass claim fell short of the federal pleading standard and Golden Eagle was given 14 days to amend its complaint.

Conversion

Golden Eagle alleged that Rice wrongfully converted oil and gas produced from the Point Pleasant formation that should belong to Golden Eagle. Ohio courts have held that the rule of capture does not apply to drainage or seepage of natural gas caused by the injection of frac fluids onto into another’s property. The court cited Briggs v. Southwestern Energy. The court concluded that the sparse Ohio case law on this topic recognizes a conversion claim predicated on natural resources that have been acquired by fracking that invades the plaintiff’s property. That is what Golden Eagle alleged and thus it adequately stated a claim for conversion.

Caveat

It might not matter. The case has been stayed pending a motion for summary judgment ruling on a related case.

Your Jazz Fest warmup musical interlude

As you negotiate your master service agreements are you confident that you know how insurance choices might affect indemnity obligations? Me neither. That’s why I turn to my Gray Reed partner Darin Brooks and his insurance coverage lawyers. I didn’t consult them about this post so all errors are on me, not them.

A basic principle of Texas insurance law is that a separate contract may be incorporated by reference into an insurance policy only if that reference is clearly manifested in the terms of the policy itself.  A court will consult the separate contract only to the extent that the policy requires it.

The question in Exxon Mobil v. National Union Fire Insurance Company was whether an insurance policy incorporated payout limits in an underlying service agreement. It did not.

The facts

Savage Refinery Services was an independent contractor at the Exxon refinery in Baytown. In the service agreement Savage promised to obtain at least a minimum stated amount of liability insurance for its employees and to name Exxon as an additional insured. Fulfilling its obligation, Savage procured five different insurance policies. Two Savage employees were severely burned in a workplace accident, sued Exxon for compensation for their injuries, and settled for $24 million. $5 million was paid from Savage’s primary insurance policies. National denied Exxon coverage under an umbrella policy. Exxon sued for breach of contract.

Summary judgments were heard on the question of Exxon’s status as an insured under the umbrella policy and whether the Exxon-Savage service agreement otherwise limited Exxon’s entitlement to further policy proceeds.

The Court’s reasoning

The policies defined “Insured” as “any person or organization, other than the Named Insured, included as an additional insured under Scheduled Underlying Insurance, but not for broader coverage than would be afforded by the Scheduled Underlying Insurance.”

The first question was easily resolved: National had recognized Exxon as an additional insured under its primary policy. The primary policy was incorporated for the limited purpose of identifying who was an insured.

The real inquiry was invited by the umbrella policy’s reference to the primary policy. The umbrella policy disclaimed “broader coverage” than what the primary policy offered. Exxon was not demanding broader coverage. It sought only the same coverage as the primary policy but at the umbrella policy’s higher limits because the primary policies had been exhausted.

National Union argued that the limit on “broader coverage” invoked payout limits of the service agreement, but the umbrella policy did not say anything about the service agreement’s payout limits.

To the extent it could read the umbrella policy to reference the service agreement, the Court found no limits that the umbrella policy could adopt. The primary policy had its own payout limits, which was the very reason that the parties needed an umbrella policy. Interpreting “broader coverage” to refer to payout limits would give the umbrella policy a self-defeating meaning.  An umbrella policy springs into action only when the primary policy is exhausted. To conclude that “broader coverage” referred to payout limits could be the result only if the language the parties use clearly required it. There was no such language here.

The Court considered conventional usage of the words “coverage” and “umbrella insurance”. The former contemplated the risks covered, the latter was triggered only by reason of the limits under other policies. Coverage does not include payout limits in this context. The umbrella policies provide greater limits for risks already covered by primary policies.

The Court of Appeals’ decision in National’s favor was reversed and the case remanded.

Your musical interludes, sponsored by GM … and Ford …

MIECO, LLC v. Pioneer Natural Resources presented a challenge to a force majeure defense in a dispute arising from Winter Storm Uri. The defense carried the day.

MIECO agreed to purchase 20,000 MMBtu/day of natural gas from Pioneer. Pioneer delivered residue gas from the tailgate of a Targa processing plant to two points near the border of Arizona and California. If Pioneer experienced a shortfall, it purchased gas on the spot market to cover.

From February 14 to 19, 2021, Pioneer failed to deliver the full amount of gas it contracted to deliver.  To fulfill its obligations to its own customers MIECO reallocated gas it had contracted to purchase for other purposes two days earlier. On February 16, Pioneer sent a notice of force majeure dated February 15. On February 16-19 Pioneer delivered no gas and MIECO purchased gas on the spot market. During this period Pioneer made no effort to purchase replacement gas. Pioneer resumed daily delivery on February 20 until March 1 when it was short again. Pioneer withdrew its force majeure declaration two days later.

The contracts (substantially redacted)

11.1. (as amended) … “Force Majeure” … means an event or circumstance which prevents one party from performing its obligations under one or more Transactions, which event or circumstance was not anticipated as of the date of the Transaction was agreed to, which is not within the reasonable control of, or the result of the negligence of, the claiming party, and which, by the exercise of due diligence, the claiming party is unable to overcome or avoid or cause to be avoided.

11.2. Force Majeure shall include … weather related events affecting an entire geographic region, such as low temperatures which cause freezing or failure of wells or lines of pipe …. Seller and Buyer shall make reasonable efforts to avoid the adverse impacts of a Force Majeure and to resolve the occurrence once it has occurred in order to resume performance.

11.3. Neither party shall be entitled to the benefit of … Force Majeure to the extent performance is affected by … loss or failure of Seller’s gas supply …

MIECO sued for $9MM+ in damages for the cost to cover gas not delivered by Pioneer.

In cross-motions for summary judgment Pioneer argued its nondelivery was excused by the force majeure provisions of the contract because it lost its gas supply due to low temperatures that affected the entire region.

Force majeure wins

MIECO argued three reasons why Pioneer’s facilities were not covered, none of which the Court found persuasive.

Caveat: For the most part, New York law applied in this Texas case.

First: the event must render performance literally impossible, citing a dictionary definition of “prevent”. But “prevent” also has other meanings (look it up). To require impossibility would render portions of the force majeure provisions superfluous, including the requirement that the claiming party was unable to overcome or avoid the event by exercise of due diligence.

Force majeure ordinarily excuses a party’s performance only if the clause specifically includes the event that actually prevents performance. Citing Ergon W. Va. v. Dynergy, a Texas case, the Court reasoned that to require a party to be unable to perform by force majeure if it could still purchase gas on the spot market would render the force majeure provision essentially meaningless because it would mean that a seller could never invoke force majeure so long as there was some gas available anywhere in the world at any price. That would lead to an absurd result.

Second: Pioneer lost only its preferred source and that is not force majeure because the contract provides only for price, amount, and delivery point. But the contract specifically mentioned Pioneer’s gas supply. The availability of other supplies did not bar a force majeure defense.

Third, the contract did not define the gas supply to be delivered. Under MIECO’s definition, if there were no available gas anywhere in the world at any price with which Pioneer could meet its contractual obligation it would still be liable for non-delivery unless 11.2 was met.  Pioneer’s “gas supply” is the gas it received from the Targa plant. This avoids the same absurd result. And use of the possessive “Seller’s” suggests the gas supply is owned or possessed by Pioneer, something which cannot be said of the spot market.

The court excused Pioneer’s failure to perform, granted Pioneer’s motion and denied Mieco’s breach of contract claim.

Your musical interlude

Co-author Caleb White

In a recurring theme, harmony and the four-corners rule were front and center in Citation 2002 Inv. LLC et al v. Occidental Permian, Ltd. et al, a case of competing claims over the granting language in an assignment of oil and gas leases.  Occidental (Oxy) claimed assignor Shell Western reserved mineral interests at certain depths from a conveyance to previous assignee, Citation, and that those reserved interests were later assigned by Shell Western to Oxy.  Citation, on the other hand, claimed there was no reservation of deep rights.

The instruments

  • 1987: Shell Western sells a large acreage position to Citation for $75 million. To effectuate the transaction the parties execute a purchase and sale agreement, incorporated into which are two other documents, a Shell-to-Citation Assignment, and an attached Exhibit A. The Assignment includes two key phrases. First: the conveyance is of all of Shell Western’s interests described in Exhibit A. Second: a subject-to clause stating the intent of Shell Western to convey all its rights and interests, regardless of whether the interest is accurately described in Exhibit A. Exhibit A describes the properties to be conveyed; some descriptions include references to depth, some do not.
  • 1997: Shell Western purports to transfer to Altura (n/k/a Oxy) the deep rights in some of the properties previously conveyed to Citation.
  • 2006 Citation assigns to Endeavor some of the properties acquired from Shell Western.
  • 2019: Oxy assigns some of the interests from the Shell-Altura assignment to Rodeo.

These conveyances led to competing trespass-to-try-title claims over the deep rights in two consolidated suits. The trial court agreed with Oxy and found that the original Shell-to-Citation Assignment was depth limited and as a result Oxy had acquired the deep rights.

Harmony and the four corners rule

The Court of Appeals’ task was to determine whether the Shell-to-Citation Assignment was depth-limited, conveying only certain shallow rights to Citation, or if the Assignment was an unlimited grant of all depths. The Court determined that the Assignment was unambiguous despite the competing interpretations, and limited the scope of its analysis to ascertaining the intent of the parties from the four corners of the instrument.

When analyzing multiple documents in one instrument, the Court will examine the entire instrument, seeking to harmonize and give effect to each provision. In harmonizing the Assignment and Exhibit A, the Court focused on the granting clause, the subject-to clause, and the lack of limiting language. Because Exhibit A contained only references to depths and had no limiting language, the Court determined that Exhibit A provided relevant information but was not intended to preclude Shell Western from transferring all its interests to Citation. Further, when Exhibit A was combined with the subject-to clause, the express intent of parties was for Shell Western to convey all its interests to Citation. In the words of the Court, “all means all.” 

The Court reversed the trial court’s summary judgment, vacated the declaration that the Assignment conveyed only certain shallow rights to Citation, and remanded the case for further proceedings.

Your musical interlude

Co-author Caleb White*

Davis v. COG Operating, LLC, in construing a Warranty Deed with a reservation of minerals, applied the estate-misconception doctrine and denied the presumed grant doctrine. At issue were three instruments:

  • A 1926 mineral lease from the Sesslers to Campbell.
  • A 1926 “Royalty Deed” from Sesslers to Haun.  
  • A 1939 Warranty Deed from the Sesslers to Roberts, in which the parties acknowledged that Haun had been conveyed 1/32 of the minerals.The conveyance did not include that interest. The Sesslers reserved “one fourth (1/4) of the 1/8 royalty usually reserved …” in an oil and gas lease.

Davis (Sesslers’ successor) sued the Neals and COG (Roberts’ successors) for trespass-to-try-title and a dog’s breakfast of other claims – 11 in total – asserting that she owned a portion of the Neals’ NPRI.  The trial court granted summary judgment for the Neals. Having denied Davis’s trespass-to-try-title claim, the court denied Davis’s remaining claims.

The appeal

The Court of Appeal concluded that the 1926 “Royalty Deed” actually conveyed a 1/32 mineral interest, as the deed did not strip away any traditional mineral rights from Haun.  The 1/32 in the deed was the conveyance of 1/4 of the remaining typical 1/8 reserved by the Sesslers as a result of their lease to Campbell.

Davis argued that the 1926 Deed put Roberts on notice of Haun’s preexisting interest in the mineral estate. The Neals responded that the Sesslers and Roberts intended a literal meaning of the 1/32 fraction and consequently, Roberts was not put on notice of the extent of Haun’s ownership. The Court did not accept the Neals’ argument.

The intention of the parties in using 1/32 in the 1939 Deed to identify what was reserved to Haun depended on whether they were operating under an estate-misconception. If they were not, then the Sesslers failed to provide adequate notice to Roberts of the interest previously conveyed to Haun. If they were, both parties would have understood that the 1/32 was simply a stand-in for the 1/4 mineral interest conveyed to Haun.

The Court concluded that the parties had been operating under estate-misconception, relying on three reasons:

  • 1939 was the height of the time estate-misconception was prevalent.
  • 1/32 is the product of multiplying 1/4 by 1/8, creating the expectation of a 1/8 lease (citing Hysaw v. Dawkins).
  • The double fraction found in the reservation links the reservation to estate-misconception.  

Considering those factors and harmonizing the Deed’s provisions, the Court determined the parties executed the 1939 Deed under an estate-misconception.

The deed effectively put Roberts on notice of the 1/4 interest in the mineral estate previously conveyed to Haun. The intent of the parties was to give Roberts notice of the previous transfer to Haun.

The Neals argued that even if the 1939 Warranty Deed reserved a 1/4 NPRI to the Sesslers, the reservation was ineffective. First, the 1/4 floating NPRI was an over-conveyance because they had already sold the same 1/4 interest to Haun. In such a case, the Duhig doctrine directs courts to make the grantee whole by awarding the missing title to the grantee out of the grantor’s remaining estate. The Court rejected this argument because the Sesslers did not convey more than they owned. The 1939 Deed did not purport to convey a 3/4 interest in future royalties to Roberts.

The Court denied Neals’ presumed-grant doctrine defense. It is an equitable doctrine that applies only in the case of a gap in title. And laches does not apply to a trespass-to-try-title claim.

The trial court erred in granting summary judgment for the Neals because the Sessler successors had clear title to a portion of the Neals’ NPRI. The Court reversed the summary judgment, rendered judgment on trespass-to-try-title in favor of Davis, and remanded the remaining claims to the trial court for further proceedings.

Your post-St. Patrick’s Day musical interlude.

*Caleb is a 3L at Baylor Law School and a Gray Reed intern.

In Devon Energy Production Company, LP et al v. Sheppard et al, the Supreme Court of Texas construed what it referred to as a “bespoke” and “highly unique” royalty clause in several oil and gas leases to prohibit the producers from deducting out of the lessor’s royalty post-production costs incurred downstream of the point of sale to unaffiliated third parties.

The provisions (redacted; read them yourself):

The royalty clause

Under 3.(a) and 3.(b), : Lessor’s royalty was 1/5th of the gross proceeds realized from sales.

3.(c): “If any … sale of oil or gas shall include any reduction or charge for the expenses or costs of … [specified PPC’s] … then such deduction, expense or cost shall be added to . . . gross proceeds so that Lessor’s royalty shall never be chargeable directly or indirectly with any costs or expenses… .”

Addendum L: Payments of royalty … shall never bear or be charged with, either directly or indirectly, any part of the costs or expenses of …  [specified PPC’s], post-production expenses, marketing or otherwise making the oil or gas ready for sale or use, …” 

The terms of L were controlling over 3.(c).

The general rules …

The court reiterated the rule that unless agreed to the contrary, the lessor shares in the burden of PPC’s, and proceeds leases ordinarily authorize the lessee to deduct from royalties PPC’s incurred after the point of sale to an unaffiliated third party.

However, the Court also reiterated the rule of contract construction that unambiguous contracts in Texas will be enforced according to the plain language of the instrument.  

… applied to this case

The court construed the royalty provisions as requiring an “add back”, and the key provisions in the lease plainly required that certain sums be “added to” the producers’ gross proceeds for royalty calculation purposes. The cost at issue was an $18 per barrel deduction for the buyer’s anticipated post-sale costs for “gathering and handling, including rail car transportation.” The producers did not add the $18 to the royalty base.

The question was not whether a buyer’s PPC’s were gross proceeds under the leases or the law. They weren’t. The question was whether the leases nonetheless required the producers to pay royalty on those costs. The broad language in paragraph 3.(c) was clear in requiring any reduction or charge for PPC’s that were included in the producers’ disposition of production to be added to gross proceeds so that the landowner’s royalty would never bear those costs, even indirectly. The leases contemplated royalties payable on amounts that may exceed the consideration received by the producers.

The Court denied the producers’ assertion that paragraph 3C was surplusage because the payment of royalty on non-proceeds is so at odds with the usual expectations that it could not be required unless such an intent was stated plainly and in a formal way, The court agreed that for continuity and predictability of oil and gas law the courts should construe commonly used terms in a uniform and predictable way; however, there was nothing usual or standard about the language in 3(c), which was clear in expressing the intent to deviate from the usual expectations.

The Court also denied the producer’s argument that leases’ references to Heritage Resources and Judice was surplusage.

There was some relief for the producers.  The lessors didn’t challenge the trial court’s summary judgment for the producers on:

  • adjustments for volumes of gas used for the producers’ operations and never sold;
  • adjustments for volumes of production deemed to be lost or unaccounted-for by third parties; and
  • value retained by the producers as a result of contractually fixed recovery factors. 

The dissent

Justice Blacklock dissented, reasoning primarily that the transaction between Devon and the purchaser did not involve a reduction or charge from PPCs that reduced the proceeds received by Devon or the royalty received by the royalty owners.  It is an accounting gimmick when Devon is required to pay an inflated royalty just because it left behind a paper trail indicating that it calculated its initial sales price with reference to a downstream market.

Your musical interlude