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Co-author Cahill Maffei*

Can a non-operating working interest in a Texas oil and gas lease be adversely possessed? The Amarillo Court of Appeals said yes in PBEX II, LLC v. Dorchester Minerals, L.P.

In 1989, Torch Oil & Gas succeeded to a working interest in two producing gas wells. The next year, Torch conveyed that interest to Dorchester Minerals L.P.’s predecessor. Not long after, Torch signed a division order acknowledging that its interest was 0 percent.

At all times between 1990 to 2016, Dorchester and its predecessors performed all the functions of a non-operating working interest owner: paying their share of the costs of production, receiving revenues from the sale of the working interest’s share of the gas, paying royalties to the lessors under the lease, and making elections required under the joint operating agreement.

In 2016, Torch assigned its interest to PBEX. Dorchester informed Torch that it no longer had an interest in the lease. Torch filed suit. Dorchester counterclaimed and brought in PBEX. The trial court granted summary judgment in favor of Dorchester. Torch and PBEX appealed.

On appeal, Torch and PBEX asserted that Dorchester could not establish adverse possession as a matter of law. The court found that Dorchester adversely possessed the working interest by exercising the rights of the working interest owner for over 26 years, exceeding the 25-year statute of limitations.

Torch and PBEX asserted four arguments, each of which the court found unpersuasive.

First:  As a non-operator, Dorchester could not have a possessory interest sufficient for adverse possession. The court disagreed. There was no meaningful distinction between operating and non-operating working interests. On that basis, the court held that oil and gas leasehold interests are possessory interests because a working interest owner is granted the right to possess all the oil, gas, and other minerals underlying the lease.

Second: Dorchester could not meet the actual, visible appropriation requirement for adverse possession because only the operator engages in operations. But Dorchester need not be the one to literally remove the gas from the ground to establish adverse possession. By openly usurping all the benefits, liabilities, and obligations of the working interests, Dorchester held itself out to the world as the owner sufficient to establish adverse possession.

Third: Dorchester could not rely on the operator’s operations for adverse possession. The court responded that an operator can adversely possess the working interest on behalf of the owners. The court analogized this situation to a landlord-tenant relationship, in which the working interest owner is the landlord and the operator is the tenant, noting that in Texas it is well-settled that adverse possession can occur through a tenant and reasoned that the same applied here.

Fourth: Dorchester’s predecessors were “non-consent”, interrupting their adverse possession. A working interest owner goes non-consent when it elects not to participate in the costs of drilling a well. The election requires the working interest owner to relinquish its share of production. The court dismissed this argument because, in reality, Dorchester’s predecessors continued to deplete the wells, and the plaintiffs presented no evidence that a non-consent penalty was ever applied.

The court affirmed summary judgment in favor of Dorchester’s adverse possession of the working interest.

Your musical interlude

… a two-fer. Phil Lesh: The base that doesn’t lay behind the beat.

*Cahill is a rising 3-L at Texas A&M University School of Law and a Gray Reed summer associate.