Co-author Brittany Blakey

First, a word for you scriveners: Preserve your reputation and the honor of your law school writing instructor by preparing clear and understandable contracts. Then your handiwork won’t be disparaged as “opaquely worded” “cryptic language”, suffering from “lack of accuracy and lack of clarity”, and “containing grammatical and logical errors”, as in

Separator. Equipment for oil separation. Modular oil treatment unit. Bulite for separation

In resolving a dispute over post-production cost deductions from oil and gas royalties (PPC’s), the court in Shirlaine West Properties Ltd et al v. Jamestown Resources, LLC and Total E&P USA, Inc. opined that the case ” … is yet another episode in the endless struggle in the oil and gas context between lessors and lessees in the allocation of [PPC’s] in the calculation of royalty payments.”

Takeaway

Was the lessor’s gas royalty burdened by PPC’s? Yes. The market value royalty clause unambiguously fixed the wellhead as the valuation point for royalty calculation.

The royalty clause 

 The lessor did its best to be free of PPCs:

  • Royalty on gas was 25% of “ … market value at the point of sale, use or other disposition …
  • … to be determined “ … at the specified location and by reference to the gross heating value …”.
  • “The market value used in the calculation … shall never be less than the total proceeds received by Lessee in connection with a sale, use or other disposition … “.
  • Royalty “ … shall be free and clear of all costs and expenses whatsoever, except ad valorem and production taxes.”
  • … [N]otwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to Lessor … shall be without deduction for [PPC’s] …  and costs resulting in enhancing the value could be deducted ” … but in no event would Lessor receive a price lower than or more than the price received by Lessee.”
  • If Lessee realized proceeds after deduction for PPC’s “ … the proportionate part of such deductions shall be added to the total proceeds received by Lessee … . “.
  • Heritage Resources v. NationsBank would have no application.


Continue Reading Another Post-Production Cost Decision in Texas

Co-author Brittany Blakey

When the form contract says one thing and the addendum says another, which one would you expect to prevail?

The central issue in Tier 1 Resources Partners v. Delaware Basin Resources, LLC was whether one tract that was subject to several identical leases automatically terminated at the end of the primary term. The answer to the question turned on the aforementioned choice.

The leases

The Bush lessors leased Sections 6 and 2, in Reeves County, Texas, to DBR. The leases were made of two parts: a 10-paragraph “Producers 88” form and an 11-paragraph addendum. The interplay between the Producers 88 and the addendum caused disagreement among the parties.

Paragraph 1 defined the land covered by the lease as “said land,” which expressly included Section 6 and Section 2. The habendum clause established a three-year primary term. Upon lease expiration, DBR’s interest would automatically terminate as to all lands and depths except those designated to be within a production unit. DBR could save the lease from automatic termination by conducting a continuous drilling program per the lease specifications.

The lessee’s problem  
Continue Reading Addendum Prevails over Form … Again

Co-author Brittany Blakey

In Emerald Land Corp. v. Trimont Energy (BL) LLC, a Louisiana federal court considered whether a lessee was required to remove flowlines buried beneath the surface and canal bottoms of property subject to mineral leases.

What the leases said

Each of three leases granted to lessee Chevron the exclusive right to construct lines, tanks, storage facilities, and other structures necessary “to produce, save, take, care of treat and transport” oil and gas products.  All three had identical damages provisions: “Lessee shall pay all damages caused by its operations hereunder to the land, buildings and improvements presently existing… [.]”  Chevron contended that the granting language included the express right to install buried flowlines in connection with its activities. No provision expressly required restoration of the land by removing buried flowlines or paying the cost of removal.

Addressing lease terms and Castex

Relying on the lease terms and Terrebonne Parish School Board v. Castex Energy, Inc., Chevron differentiated between buried flowlines (buried below “plow depth”, which here was at least three feet) from surface flowlines, alleging that buried lines did not cause damage to the land. Chevron admitted it had to remove the surface lines.

Emerald distinguished Castex arguing that, unlike the canals dredged on the property in that case, these flowlines were foreign equipment attached and buried on the property. Therefore, Chevron was obligated to remove the lines as part of its obligation to restore the land to its original condition minus normal “wear and tear.” Emerald also pointed to evidence showing that buried flowlines were exposed at the surface of the property and, presumably, created a hazard.
Continue Reading Louisiana Court Considers Buried and Surface Flowlines

Lollygag: To fool around and waste time; dawdle.  As in, “I lollygagged for 15 years after filing my suit and obtained a less-than-optimal result.”

Gramwich Oil and Gas Corporation et al v. Meng addressed claims for lease termination, repudiation, laches, cessation of production, and failure to produce in paying quantities. The facts are dense and the savings clause at issue is sui generis, so I won’t go into lots of detail. The takeaway: If you have a claim, prosecute it.

The facts
Continue Reading Lessor Prevails in Texas Lease Termination Dispute

Co-author Rusty Tucker

Howard, et al. v. Matterhorn Energy, LLC, et al. [6th Dist.] May 4, 2021 considered the Texas Citizens Participation Act as amended, effective on September 1, 2019.

Background

The lessors leased their minerals in 1,100+ acres in Harrison County to Matterhorn. To induce the deal, Matterhorn several representations to the lessors and agreed to a continuous development program. The lease required lessors to give 60 days’ notice of a breach before filing suit. Before the primary term expired gas prices dropped and Matterhorn decided to sell the lease.

The lessors sued Matterhorn for damages and rescission based on several causes of action  and filed a notice of lis pendens. Matterhorn alleged it had contracted with EnergyNet to market its interest in the lease and that when lessors became aware they filed suit and a notice of lis pendens.

Testimony showed that the lessors made false misrepresentations about Matterhorn and Cherry to third parties (including prospective purchasers) prior to filing suit. Matterhorn claimed these discussions led to the termination of its sales agreement with EnergyNet. Matterhorn counterclaimed for tortious interference and business disparagement.

Lessors moved to dismiss Matterhorn’s claims under the TCPA because they were based on their petition and lis pendens and invoked their exercise of the right to petition the courts for relief. Lessors further argued they established an affirmative defense entitling them to judgment as matter of law because the counterclaims were barred by the judicial proceedings privilege.

Matterhorn responded that the communications forming the basis of their claims were among private parties, not the public, and occurred prior to the filing of the litigation. There was testimony about how lessors’ third party discussion and filing of the lawsuit and lis pendens caused Matterhorn to lose its ability to sell the lease. Plaintiff Howard admitted in a deposition that he filed the lawsuit before expiration of the primary term and before penalties under the lease were due to “put . . . a drain on” Matterhorn and affect its ability to “flip” the lease. The trial court denied lessors’ TCPA motion to dismiss.

The TCPA process

Resolving a TCPA claim occurs in three steps:
Continue Reading Texas Court Applies Amended Citizens Participation Act to a Lease Dispute

Co-author Rees LeMay*

“Ratification is not a game of ‘gotcha’”, said the Texas Supreme Court in BPX Operating Co. v. Strickhausen.  The Court, in a 5-4 opinion, addressed the standard for an oil and gas lessor’s implied ratification of an unauthorized pooling. Among other lessons, this decision warns royalty owners to be careful when cashing those royalty checks.
Continue Reading Supreme Court Introduces Totality of the Circumstances Test for Implied Ratification