Co-author Chance Decker

You’ve secured the right leases.  You’ve drilled nice wells in the right locations.  Now, who will pay the royalty owners?  Follow Devon Energy Production Company, L.P. v. Apache Corporation, to be sure.

The takeaways

Co-author Paul Yale

Issues surrounding the legality of allocation wells in Texas have been percolating for some time, and lately we’ve heard of potential litigation. So, what’s the fuss about? The results in Klotzman (a Texas Railroad Commission dispute) and Spartan et al v. EOG (a district court case) didn’t resolve the legal questions. Both settled before a ruling. Browning Oil Company v. Luecke provided theoretical underpinnings but didn’t go far enough.

Why does the controversy exist? Continue Reading Is the Allocation Well Debate About to Boil Over?


Co-author Trevor Lawhorn

*Kind of; this is a federal court predicting what the Ohio Supreme Court would do.

In Ohio, in calculating royalties in a market-value-at-the-well lease (as distinguished from a “proceeds” lease), post-production costs are to be shared proportionately by the working interest and royalty owners. The lessee’s duty to market does not extend to expenses incurred in sales not at the well-head. This is consistent with other producing states such as Texas and Pennsylvania.  Continue Reading Ohio Takes a Position on Market-Value-at-the-Well Royalty Clauses*

Co-author  Chance Decker

What does it take these days to get money from a Texas jury? Not much, it seems; in XTO v. Goodwin the trick was convincing a higher court that you should keep it.

Let’s start with the minefield that is the law of evidence:

  • Expert opinion testimony must be based on facts, and sound reasoning and methodology.
  • Conclusory or speculative opinion testimony is not relevant.
  • An opinion with no factual substantiation is speculative or conclusory.
  • Expert testimony based on unreliable data or flawed methodology is unreliable and does not satisfy the relevancy requirement.
  • Unreliable expert testimony is legally no evidence.

Continue Reading Trespass But no Damages in a Texas Case

Updated for a math infraction, thanks to several astute readers.

In Glassell Producing Company v. Naquin, the question was:

Did a conveyance among siblings create a real right in property, or was it an appendage of a lease that ceased to burden the property once that lease was terminated? Continue Reading An “Appendage” Determines a Louisiana Royalty Dispute

Co-author Chance Decker

How many times must an operator suffer for a mistake in a unit declaration? Samson Exploration LLC v. T. S. Reed Properties Inc. makes it twice. (See Hooks v. Samson Lone Star for the first round). The Texas Supreme Court ruled that a lessee could not avoid a contractual obligation to pay royalties from a zone shared by two pooled units. Continue Reading Unit Operator Pays For a Problem of its Own Making

Like Les, except with an offense, Coach O congratulates the Tigers for subscribing to Energy and the Law

Lenders to Louisiana operators are likely to be reconsidering their business practices in light of Gloria’s Ranch v. Tauren et al.

A rather ordinary lease termination suit resulted in the lender Wells Fargo being solidarily liable with the lessees for $22.8 million in lost leasing opportunities, $242,000 in unpaid royalties, $484,000 in statutory damages, and almost $1 million in attorneys’ fees.

Here’s why: Continue Reading A New Day for Louisiana Oil and Gas Lenders?

Co-author Chance Decker

“The only sensible way to live in this world is without rules”. The Joker to Batman, The Dark Knight

Subject-to, reservations-from, and exceptions-to problems have been lurking in the shadows of Texas jurisprudence for a while now, and the courts have been all over the map in recent holdings (Title nerd and proud of it? Compare this example with this one.)

In Wenske v. Ealy, the Supreme Court channeled our superhero’s painted friend, essentially jettisoning the old rules and confirming the new rule in deed construction cases: There are no “rules”.  Continue Reading Does Texas Have a New “Rule” in Conveyancing?

Co-author Brooke Sizer

Prevails over what, you ask? In Gladney v. Anglo-Dutch Energy, LLC, a conditional allowable from the Office of Conservation didn’t supersede lease royalty obligations.

How did we get here?

Anglo-Dutch completed a gas well on the Gladneys’ lease and then filed a pre-application notice for a compulsory drilling and production unit and applied for a conditional allowable. On May 17, 2012, the application was granted:

All monies generated from the date of first production, the disbursement of which is contingent upon the outcome of the current proceedings before the Office of Conservation for the Frio Zone will be disbursed based upon results of those proceedings.

The next day Anglo-Dutch began sales of production from the well and later submitted a formal unit application. Order No. 124-Y established the unit, effective on and after October 30, 2012.

Perhaps to the surprise of Anglo Dutch, but certainly to its chagrin, the Gladneys demanded payment of the full one-fifth royalty for production from the well prior to October 30th, rather than settle for their share of production on a unit basis.

Anglo-Dutch refused, relying on the conditional allowable which, it said, superseded its lease obligations.

The trial court ruled for Anglo-Dutch, holding that the “allowable covers the royalty payments” because the allowable dated back to first production. The court found no provision in the lease which would require that the Gladneys be paid more than that provided by the commissioner under the allowable and the unitization order.

Reversal from the court of appeal

The court of appeal reversed. “The Mineral Lease … clearly provided Plaintiffs were to get lease-basis royalties on all production from the well and that lease governed the parties’ relationship prior to the unitization order, which was not effective until October 30, 2012.”

Under the Order, the effective date of the unit was October 30, 2012, not the first date of production. The Gladneys were entitled to a full one-fifth royalty from first production until the effective date of the Commission’s Order.

The Gladneys argued, and the court agreed, that the Office of Conservation can’t impede private contract rights. According to an affidavit from a long-time Office of Conservation representative, the conditional allowable was not meant to abridge privately negotiated contract rights. That is consistent with settled Louisiana jurisprudence that meddling in private contracts is beyond the Office of Conservation’s authority.

The court helps those who help themselves

 The court was unpersuaded by Anglo-Dutch’s plea that it had no choice other than to pay royalty on a unit basis because otherwise it would have had to pay double royalties. Anglo-Dutch could have amended its lease obligations through a royalty escrow agreement. The Gladneys noted that they suggested this alternative and it was rejected, and that such an arrangement is a common practice in these situations. The court also rejected the argument that the Gladneys were improperly attacking the Commission’s actions.

Anglo-Dutch should have listened to Alabama Shakes.

flea flickerWestport Oil & Gas Company, L.P. v. Mecom et al. presented this questionWas the lease royalty based on a gas purchase agreement formula or on the royalty clauses’s market value at the well provision?

Spoiler alert: Invoking the seminal Texas Supreme Court decision in Texas Oil and Gas Corporation v. Vela, the court went with market value at the well.

Dueling paragraphs

Under Paragraph 3, the royalty clause, gas royalty was 42 percent (not a typo!) of the “market value at the well … “.

Paragraph 17: “Notwithstanding any other provision of this lease to the contrary … a contract for the sale of gas … shall provide for the sale price computed on the average of the highest price paid by three separate Intrastate Purchasers of gas of like quality and quantity in [RRC] District 4 …”.

The court instructed the jury to compute the gas royalty’s market value based on Paragraph 17. The jury found that Kerr McGee failed to pay those royalties and awarded millions in damages and attorney fees.

The Court’s analysis

Mecom argued the significance of “Notwithstanding any other provision” language. Ignoring Paragraph 17, requiring that the three highest prices become the formula to calculate the market value, renders the paragraph meaningless.

Kerr McGee argued that the Paragraph 17 formula pertained only to future gas purchase agreements and did not alter the commonly accepted meaning of “market value at the well” as stated in Paragraph 3.

The court concluded that the royalty provision is not “contrary” to the gas purchase agreement provision and did not elevate Paragraph 17’s price mandate over Paragraph 3’s market value provision. Paragraph 3 defined the royalty owed and Paragraph 17 set a minimum contract price for future gas purchase agreements. Nothing more.

Remembering Vela

In that case the working interest owners sold gas at a price fixed by a gas sales contract. The market value of gas at the wellhead rose to be far in excess of the gas contract price.  The lease specified the royalty would be “1/8th of the market value … ”. The royalty owed was determined from the royalty provision, which was wholly independent of the gas contract. The court declined to conflate the gas contract price with the market value requirement. Victory for the royalty owner.

… and Yzaguirre

Bastard child of Vela (if you are a royalty owner). This time the market value measure worked for the lessee. The gas purchase price was far in excess of the market value.

What did we learn?

  • The lease dated to 1974. As with Godzilla, leaky shower pans, and a flea flicker in the fourth quarter, dangerous situations can lie dormant for a long time, bringing misery when the victim least expects it.
  • Despite the lessors’ best efforts to protect themselves, the case turned on one short phrase in a comprehensive, three-page royalty clause.
  • “Notwithstanding anything to the contrary … ” is a favored device for scriveners. Make sure it addresses that which you are trying to protect. What if Paragraph 17 had addressed the market value clause directly?

Merry Christmas.