Co-author Chance Decker
The Texas Supreme Court recently heard oral argument in three intriguing oil and gas cases. Here’s what you need to know about two of them (We’ll address the third case soon).
Adams v. Murphy Exploration & Production Co. USA
Did lessee Murphy comply with an offset-well clause that doesn’t state where the offset-well must be drilled? When a well was drilled on an adjacent tract, Murphy drilled its offset-well more than 2,000 feet from the triggering well.
The lessors argued the offset-well clause requires Murphy to drill its offset close enough to the triggering well to actually prevent drainage, which Murphy’s well won’t accomplish. Murphy argued all it has to do is drill on the lessors’ property – anywhere. Whether it actually prevents drainage doesn’t matter.
The San Antonio court of appeals sided with the lessors. “Offset-well” is understood in the industry to be a well that protects against drainage. Thus, Murphy must drill a well close enough to the triggering well to actually prevent drainage from the lessors’ tract—and Murphy must prove it.
Predicting a “flood of litigation” if the lessors prevail, Murphy argues this interpretation is a “profound legal error”, noting it is next to impossible to prove an offset-well actually prevents drainage. In response, the lessors argue the court of appeals merely enforced the lease as written, and if oil and gas producers don’t like it they should draft leases with more flexibility.
ConocoPhillips Co. et al v. Koopmann, et al.
Does a term NPRI for 15 years “and so long thereafter… ” violate the Rule Against Perpetuities? Grantor the Strieber Estate and its lessees ConocoPhillips and Burlington say yes; this type of reservation creates a “springing executory interest” for the grantee when the production stops at some potentially distant time in the future, thus violating the Rule. The grantees – Koopmann – argue no; instead, a conveyance with this reservation conveys a future interest in the property subject to the NPRI in the grantees, which vests immediately even if they are not yet entitled to possession.
The two lower courts sided with the Koopmanns on the Rule of Perpetuities claim.
The Strieber parties argue the court of appeals “eviscerated” the Rule and invented a “legal fiction” to avoid enforcing the Rule, and Supreme Court’s acceptance of Strieber et al’s contention that term NPRI reservations like this one violate the Rule would be a watershed opinion “potentially opening the floodgates of litigation.” Predicting a lawsuit tsunami isn’t a bad pitch to this court, given its makeup ever since way back when, when Jimmy Johnson gave way to Barry Switzer.
Incidentally, when the Texas Oil and Gas Association filed an amicus brief against them the Koopmans alleged the Association is “controlled by, funded by, and biased” in favor of the industry! Wow! Now we understand Captain Renault!