Gray Reed lawyer Ethan Wood explains what the oil industry’s classification as an essential business means during this crisis.

Read it here: COVID-19: Shelter-in-Place Orders and the Energy Industry

A musical interlude for the times.

And another. It’s about the coronavirus!

DONT CLICK ON THE VIDEO BELOW WITHOUT HEEDING THIS WARNING. By my count, this one could be offensive in no less than four  six ways. Even to identify those who might be offended could be deemed offensive. If you deem yourself likely to be offended, or a member of a group that might be offended, or this blog as offensive, you might want to go ahead and leave, but only after reading Ethan’s excellent work.

 

 

 

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The question for the Texas Supreme Court in Piranha Partners et al. v. Joe B. Neuhoff et al. was whether an assignment of an overriding royalty in minerals conveyed the override only in production from the identified well (the B #1-28), in production from any well drilled on the identified land (NW/4, Section 28), or in all production under the identified lease (the Puryear).

The takeaway

The Court shrugged off what it referred to as “rigid mechanical, arbitrary rules of construction” and examined the words of the deed itself, concluding that the assignment unambiguously conveyed to Piranha an override in production under the entire lease.

Scriveners of all sorts of agreements: This follows other recent rulings of the Court. ALWAYS consider carefully, especially when using a form you “know”, what it is you are trying to say. Think you’ve got it? Have someone else tell you what they think you are saying.

Today we will consider the Court’s treatment of rules of deed construction. Next week we will take a look at the effect of surrounding circumstances on the transaction.

The assignment

Neuhoff sold its interest in the lease, reserving a 3.75% override. The B #1-28 was located on the NW/4 of Section 28. The dispute arose after new wells were drilled on other portions of Section 28.

The granting clause was of “ … all of [Neuhoff Oil’s] right, title and interest in and to the properties described in Exhibit “A”.

The clause continued: “ … all oil and gas leases, mineral fee properties or other interests, INSORFAR AND ONLY INSOFAR as set out in Exhibit A, … .”

The Court looked at Exhibit A:

Lands and Associated Well(s):        Puryear #1-28, Wheeler County, Texas

NW/4, Secton 28, …

Oil and Gas Lease(s):

Lessor: [the Puryears]

Lessee: Marie Lister

Recorded: Volume 297, Page 818.

Which of the three provisions identified the “properties”?

Piranha cited what it asserted were well recognized rules of deed construction (see bullets below) and asserted that the court of appeal established a new rule that permits courts to imply a limitation on a grant even in the absence of language to that effect. The Court said that whenever it is necessary to harmonize apparently conflicting provisions, courts will do that.

Rejection of arbitrary rules of construction

The Court explained that it lately has been casting off rigid mechanical or arbitrary rules to conduct a careful and detailed examination of the deed in its entirety rather than applying some default rule that appears nowhere in the deed’s text. (We’ve talked about this before). The Court admitted that it has not clearly distinguished between those default rules it has recently rejected and well-settled contract construction principles. The Court rejected these rules as inapplicable:

  • The grant must be of the greatest estate permissible (not “possible” as Piranha argued). Even with a conveyance of all right, title and interest … , the Court still must ask whether Exhibit A conveyed all of Neuhoff’s interests under the entire lease.
  • Any alleged exception, reservation, or limitation not expressly and clearly stated should be rejected. Piranha ignored the difference between a deed conveying only a partial interest and a deed conveying an entire interest but reserving a portion.
  • Because the document was not ambiguous it didn’t need to be construed against one party or the other.

What does the deed say?

The Court harmonized all words in the assignment, refusing to give greater weight to the granting clause than other provisions. For example, the granting clause referred to overriding royalty interests and Neuhoff owned an override in the entire lease. Another section included all contracts that affected “the leases”. And another referred to production “from the leases”.

RIP both personas of Kenny Rogers: the psychedelic and the country.

 

If you have employees, or you are an employee, you should know that Congress has passed and the President has signed the Families First Coronavirus Response Act to address the impact COVID-19 is having on the American workforce. Here is a summary from Gray Reed’s team of employment lawyers, headed by Ruth Ann Daniels. Among others, the law addresses these issues:

  • FMLA expansion
  • Paid sick leave
  • Tax credits against the Social Security Tax

In the meantime, avoid doing those things that would encourage your employees to make an employment decision such as this one.

Co-authors Preston Kamin and Ryan Frankel

Schools are closing, major events have been cancelled, businesses are telling workers to stay home, and Texas oil and gas producers are preparing to see how the coronavirus will affect their operations.

Many oil and gas contracts – leases and JOAs for example – have force majeure clauses. The purpose is to allow contracting parties to suspend or terminate performance when certain circumstances arise that are beyond their control. These clauses, if applicable, could potentially save a contracting party millions of dollars in penalties and fees.

Recently, a Houston court interpreted a force majeure clause in a drilling contract.  TEC Olmos, LLC v. ConocoPhillips Company* examines just how specific contracting parties need to be in drafting force majeure clauses in order to avoid liability.

TEC Olmos was to test-drill on ConocoPhillips’ lease in search of oil and gas. The contract set a deadline to begin drilling and contained a liquidated damages clause requiring Olmos to pay $500,000 if it failed to begin drilling by the specified deadline. The contract’s force majeure clause identified several events that would suspend the drilling deadline, followed by a “catch-all” provision for events beyond the reasonable control of the party affected. The clause stated:

“Should either Party be prevented or hindered from complying with any obligation created under this Agreement, other than the obligation to pay money, by reason of [ … several enumerated causes … ] or any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected, then the performance of any such obligation is suspended during the period of, and only to the extent of, such prevention or hindrance, provided the affected Party exercises all reasonable diligence to remove the cause of force majeure. … .”  (Emphasis added).

After the contract was executed, the price of oil dropped significantly, causing TEC Olmos to miss the drilling deadline in the contract. TEC Olmos invoked the force majeure clause to extend the drilling deadline. The effort was unsuccessful. The court held that an event not specifically listed in the force majeure clause – but that could fall within a “catch-all” provision – had to be unforeseeable in order to allow a party to suspend or terminate performance.

What does this have to do with the Coronavirus?

It is unclear whether a Texas court would find that the coronavirus falls within the “catch-all” provision. However, based on TEC Olmos v. ConocoPhillips, contract writers should take note of the specificity required when interpreting force majeure clauses. With the rising fear of coronavirus and uncertainty as to how it will continue to affect Texas businesses, it is advisable to add, when practical, “disease” to the list of events constituting force majeure, rather than relying on “catch-all” provisions to cover the coronavirus or other specific endemics. That way, even if the coronavirus is “foreseeable”, it would likely not be a breach of the contract. Parties face significant and unnecessary risks by relying on a “catch-all” provision to cover the effects of a pandemic such as coronavirus when Texas law allows parties to protect themselves by simple, yet methodical, drafting.

*ConocoPhillips was represented by Darin Brooks, Meagan Glover, and John George of Gray Reed.

Mad about $30 oil, sub $2.00 gas, the disruptive coronavirus, the Green Nude Eel, ungrateful teenagers … ? Enjoy this angry musical interlude.

In Chalker Energy Partners III LLC v. LeNorman Operating LLC, the Texas Supreme Court reaffirmed its belief in the sanctity of the written contract and the freedom of parties to negotiate and agree to contracts as they desire.

Chalker and other sellers wanted to sell leases in several Panhandle counties. LeNorman signed a Confidentiality  Agreement, which had a provision entitled “No Obligation”,  … unless and until a definitive agreement has been executed and delivered, no contract … providing for a transaction … shall be deemed to exist and neither Party will be under any legal obligation of any kind whatsoever with respect to  such transaction … “

After a bidding war between LeNorman and Jones Energy, the Sellers declined to sell and LeNorman elected not to pursue the transaction. Then, after the bidding deadline the Sellers offered to sell 67 percent of the assets, LeNorman emailed what it termed a “counter-proposal”, setting a deadline and adding that it would not be modifying or accepting any changes. Sellers’ representative emailed an acceptance before the deadline, subject to a “mutual agreeable Purchase and Sale Agreement”, sent LeNorman a revised draft PSA, and took off for Thanksgiving. LeNorman sent a redlined PSA for consideration.  During that time Jones made another offer that was accepted and Jones acquired the assets.

LeNorman sued for breach of contract. The Sellers counterclaimed for breach of the Confidentiality Agreement and the bid documents. The trial court concluded that a PSA was a condition precedent and there was no meeting of the minds. The court of appeal reversed, finding fact issues.

Both sides agreed that unless there was a definitive agreement executed and delivered there was no contract. The No Obligation Clause did not define “definitive agreement” but said that term did not include “an executed letter of intent or any other preliminary written agreement or offer, unless specifically so designated in writing at and executed by both parties.”  The Court deemed the emails to be a preliminary agreement and a document such as a more formalized PSA would satisfy the definitive agreement requirement.

The Court concluded that Chalker’s Thanksgiving weekend acceptance of LeNorman’s offer subject to a mutual agreeable PSA did not create a fact issue. Instead, the definitive agreement referenced in the No Obligation Clause was a condition precedent to contract formation.

Takeaway – the practical effect on contract negotiations

The Court’s rationale was that if the exchange of agreed-to drafts were sufficient to raise a fact question as to the existence of a definitive agreement then the No Obligation Clause would be stripped of its meaning and utility. Even worse, such clauses would mislead parties operating under the assumption that they could freely engage in negotiations without binding themselves to proposals in an email exchange. By agreeing to the No Obligation Clause the parties provided themselves with the freedom to negotiate without fear of being bound to a contract.

Waiver?

To establish waiver by conduct, the conduct must be unequivocally inconsistent with claiming a known right.  The Court concluded that the negotiations were subject to the bidding procedures and the Confidentiality Agreement and the parties had not waived the right to a definitive agreement. Waiver was decided as a matter of law. The parties consistently agreed that a deal was subject to a mutual agreeable PSA. Chalker’s failure to object to the deviation between the contractually required bidding procedures and the emails was not evidence of an intentional relinquishment of the right to require a definitive agreement such as a PSA.

Have you ever seen the so-bad-its-good Plan 9 from Outer Space? This is gonna hurt, but here is your musical corollary.

 

 

Co-author Trenton Patterson

Copano Energy, LLC v. Stanley Bujnoch, Life Estate, et al. asked whether an enforceable easement had been established by email. The trial court and court of appeal said yes (here is our report), holding in favor of  landowner the Bujnochs. The Texas Supreme Court reversed.

How to almost create a contract by email

December

  • James for Copano approaches the Bujnochs for an easement to construct an additional 24-inch pipeline over an existing easement.
  • Schwartz, counsel for the Bujnochs, sends emails, typing his name below the message.
  • James creates a plat reflecting the second easement.

January

  • James emails Schwartz, agreeing to pay $70 per foot for the second line, typing his name below the message.
  • Schwartz accepts and requests advance notice of survey activities.
  • James emails Schwartz, agreeing to pay a Bujnoch party $88 per foot, again typing his name above a signature block that has his job title and contact info.
  • Schwartz, through his secretary, proposes a formal amendment to the original easement modifying the description consistent with the parties’ communications.
  • James replies “I’m fine with these charges”, typing his name.
  • Goolsby, another Copano rep, mails letters offering to pay no more than $25 per foot. No one accepts.
  • Eubank, also for Copano, offers Schwartz $20-$40 per foot for the second easement.
  • Schwartz replies, “This is not our deal.”
  • Eubank replies, “Sorry for the confusion.”

Copano fails to honor the agreement. Bujnochs sue. Copano asserts the Statute of Frauds.

How to satisfy the statute

  • There must be a written memorandum which is complete within itself in every material detail, and which contains all of the essential elements of the agreement, so that the contract can be ascertained from the writings without resorting to oral testimony.
  • The memorandum need not always be a single document, and courts may determine, as a matter of law, that multiple documents comprise a written contract.
  • Where multiple writings are proffered as a single contract, the “essential elements of the agreement” must still be evident from the writings themselves, without resorting to oral testimony.

Why there was no contract

The January emails contained an offer and an acceptance, but failed to specify what is being offered and accepted. Other than the price per foot and the pipeline’s size, the emails had none of the essential elements of the agreement. The text indicated that other terms of the deal may have been discussed in an earlier conversation, but none of the writings give insight into that conversation.

The other essential terms of the alleged agreement were not found in the December emails. This is for two reasons:

  • The emails themselves reflected no agreement to be bound by the terms they describe.
  • No later writing evidenced an agreement to be bound by the terms stated in the emails.

The chain of December emails was part of James’s request for a meeting between with Schwartz on a later date at which they would discuss a new easement. James merely described what he intended to offer at the meeting. The thread anticipated a future meeting where negotiations may or may not occur.

The future-tense phrasing of the December emails further confirmed the absence of an agreement to be bound by the terms stated therein. James used language such as “Copano will be asking for …”, Copano “will be buying …” . These were not present-tense offers of terms. Writings couched in futuristic language contemplating later negotiations do not satisfy the statute. There was no agreement to be bound in any of the December emails.

Nothing in the January emails reflected an agreement to the terms described in December. The only mention of earlier conversations was that they occurred. There was no evidence of what was discussed, or what terms the parties settled on. The December and January emails did not show with certainty and clarity that the January “acceptance” by Schwartz included the acceptance of terms described in the December emails.

The emails failed to create a written memorandum, complete within itself in every material detail. Copano’s future-tense language illustrated no intent to be bound. The January emails, although evidencing an “acceptance” of some terms, failed to establish what those terms were.

You deserve a musical interlude having nothing to do with email. Apologies to the White Stripes.

Co-author Kelley Clark Morris

Generally, if your will leaves your beloved “all … right, title and interest in and to”, said beloved would receive the entirety of your interest, whether a surface estate, mineral estate, or both. But in ConocoPhillips, et al. v. Ramirez, et al., the Texas Supreme Court looked beyond the four corners of the will in question and concluded that—based on family mineral leasing history—only the surface estate was devised.

If you don’t want to burn the 20 percent of your daily caloric intake that fuels your brain just to memorize the Ramirez family tree, leave with this takeaway: When a term in a will is open to more than one construction, a court can consider the circumstances existing when the will was executed.

The facts and a long history

In 1941, Ildefonso died and left 7,016 acres in Zapata County consisting of noncontiguous tracts to his two children Leon Juan and Felicidad. The brother and sister then partitioned the surface (each taking 3,508 acres) and severed the minerals (leaving each with an undivided 1/2 interest under the entire 7,016 acres). This family dispute is among Leon Juan’s descendants.

Leon Juan died and left his interests 1/2 to his wife Leonor and the remainder in equal shares to his three children, Leon Oscar Sr., Ileana, and Rodolfo. Thus, each child inherited a 1/6th interest in Leon Juan’s 3,508 surface acres and an undivided 1/12th interest in the minerals in both tracts. The three siblings and mother Leonor partitioned the surface estate and executed conveyances to swap some of the tracts. Each conveyance specified that it did “not … include oil, gas and other minerals which” were “to remain undivided.”

Following the partition, Leonor and the three children divided Leon Juan’s 3,508 acre surface estate into three tracts, one of which was “Las Piedras Ranch”, a tract not contiguous with the other property.

Leonor executed the will in question in 1987 and then died. At that time she shared ownership of the surface of Las Piedras Ranch with son Leon Oscar Sr., each owning an undivided 1/2 fee interest. Her will devised a life estate in “all of [her] right, title and interest in and to Ranch ‘Las Piedras’” to son Leon Oscar Sr. with the remainder to his living children in equal shares. The residuary was left equally to her three children, Leon Oscar Sr., Ileana, and Rodolfo.

In 1990, the siblings and their aunt Felicidad signed a lease extension with EOG (later transferred to ConocoPhillips) of the minerals under Las Piedras Ranch. The extension treated the siblings as equal fee owners of the minerals under the Ranch.

Leon Oscar Sr. died in 2006, terminating his life estate, which passed to his three children, Leon Oscar Jr., Rosalinda, and Minerva. In 2010, those three sued aunt and uncle Ileana and Rodolfo,  EOG, and ConocoPhillips, seeking a declaration that their father’s life estate under grandmother Leonor’s will included her interest in the minerals beneath Las Piedras Ranch.

The trial court agreed and awarded Leonor’s grandchildren a $12 million judgment against ConocoPhillips, which the court of appeals affirmed, holding that the will included her interest in the minerals under Las Piedras Ranch.

The result

A unanimous Supreme Court reversed and rendered judgment for ConocoPhillips. Leonor’s bequest conveyed a life estate in only the surface of Las Piedras Ranch; her undivided interest in the 7,016 mineral acres passed in the residuary of her estate equally to her three children.

The court looked beyond the four corners of Leonor’s will to resolve the dispute because the will’s use of the term “Ranch ‘Las Piedras’” to identify the interest devised opened the will to more than one construction. The bequest of the life estate capitalized “Ranch ‘Las Piedras’” and placed the name in quotation marks, indicating a specific meaning to Leonor and her family. The history of family conveyances shows that Las Piedras Ranch referred to only the surface estate and, moreover, that the family always intended the minerals to be jointly owned. This interpretation was supported by Leon Oscar Sr.’s participation in the lease extension.

Your musical interlude, a little late.

 

Is the world hurtling irreversibly toward incinerating, extinction-causing, fossil-fuel induced destruction while we’re doing nothing about it? Maybe not, if you consider overlooked and ignored sources of information.

We You will always have Paris

Despite bailing out of the Paris Climate Accord, the United States led the world in reducing CO2 emissions in 2019. If so, one might ask why we should be a part of it.

Said another way, the US approach works and the Paris way doesn’t.

And Bjorn Lomborg reports on the futility of the Paris promises. His contrarian view of the fires in Australia is behind a paywall.

Battle of the charts

Grist magazine published seven charts proclaiming that during the last decade ….

  • Atmospheric CO2 rose 25 ppm;
  • Climate change got expensive;
  • More and more people believe it’s getting hot and it’s our fault;
  • There is a widening partisan divide when it comes to the environment;
  • Coal continues its death spiral, solar skyrocketed, but fossil fuels still dominate;
  • Coal flatlined and the price of renewables dropped precipitously.

Anthony Watts responded with charts of his own that tell a different story …

  • Increased CO2 is greening the continents;
  • Normalized weather disaster costs paint a different picture;
  • It is not necessarily getting hotter;
  • Worldwide action on climate change ranks very low on the list of citizens’ concerns;
  • The decline of coal is market-driven rather than a nod to environmental concerns;
  • Solar doesn’t work without baseload generation by natural gas;
  • Renewables cost less because of generous government subsidies through tax credit programs.

See his link for eight reasons why the world has just had its best decade in human history.

Does the industry glow in the dark?

Rolling Stone scandalized oil production as producing untold tons of radioactive waste.

Energy In Depth pushed back.

Power to the people

In addition to an immediate fracking ban upon taking office, Comrade Bernie proposes a federal takeover of electricity production.

But blacklisting ended in the’50’s … ?

McCarthyite Skepitcal Science outs researchers, journalists and politicians whom it considers to be “science misinformers”. The purpose, of course, is to ostracize those voices into silence. One such victim is respected Georgia Tech Professor Judith Curry, whom they would like to make “unhireable”, as reported in Forbes magazine by Roger Pielke.

The worste case isn’t

The journal Nature reports that the “worst-case scenario” repeated ad nauseum with no investigation isn’t the accurate, much less the best, data on which to base policy.

Were you nice to your valentine … or not?

 

Co-author Stephen Cooney

Recent legislation in Texas to promote the recycling of water produced from oil and gas operations are steps in the right direction but may create as many problems as they fix. As technology improves, our population continues to grow at an unprecedented pace, and our water supplies remain limited, recycling of water is becoming vital.  At issue is the ownership of, and with it the right to profit from, produced water.

A measure passed by the 2013 Legislature (HB 2767, enacting new Section 122 of the Natural Resources Code) and then updated in 2019 (HB 3246, amending Section 122.002) provides that any party that takes possession of produced water to treat it for a subsequent beneficial use takes title to that water.

But wait!

Doesn’t produced water belong to the surface owner? Decisions by Texas courts strongly suggest that is the law, and if operators or re-cyclers are making money off that water, even though it has always been viewed as waste to be disposed as a bothersome component of oil and gas production, surface owners will want compensation.

It is well established in Texas that groundwater is part of the surface estate, owned by the surface owner as a vested property right. It is just as well established that mineral owners and their lessees have the implied right to use as much of the surface estate, including groundwater, as is reasonably necessary to extract and produce oil and gas. Along with that duty is the obligation to dispose of the waste that is the byproduct of production. If part of that waste, i.e., produced water, can be sold by the operator for independent economic gain, surface owners will likely have something to say about it.

It will be interesting to see how this tension plays out, either at the courthouse or reviewed again during the next legislative session that begins in January 2021.

For a more detailed discussion of this timely topic, see the Gray Reed Client Alert prepared by Stephen.

and …

a musical interlude  

and …

RIP Joseph Shabalala

It is no surprise to Texas Supreme Court watchers that in Energy Transfer Partners et al v. Enterprise Products Partners LP et al. the court rejected claims that the parties had created a partnership by actions that varied from the terms of written contracts. The court concluded that parties can conclusively agree that no partnership will exist unless certain conditions are satisfied.

The contracts

Cushing, Oklahoma is a major crude oil trading hub. Enterprise co-owned the Seaway pipeline that sent oil north to Cushing from the Texas Gulf Coast. Driven by a changing market, Enterprise approached ETP about converting the Ocean Pipeline (a gas pipeline) to move crude oil south from Cushing. ETP owns Ocean but Enterprise holds a long-term lease. To convert would require a massive investment and committed customers.

In three written agreements the parties reiterated in myriad ways that neither would be bound until each company’s board of directors approved the potential transaction and a written contract was negotiated, executed and delivered, and then only to the extent of the specific terms of such agreement. Otherwise, neither party would be under any legal obligation by virtue of any written or oral expression.

Enterprise and ETP ran a FERC-required “open season” during which shippers were asked to commit to daily barrel volumes and tariffs. The effort failed. Enterprise then exited the ETP relationship and made a deal with Enbridge for the Seaway, obtaining commitments and investing “billions” to reverse the direction of the Seaway.

ETP sued Enterprise on the theory that despite contractual disclaimers, the parties through their conduct had formed a partnership to market and pursue a pipeline and that Enterprise breached its statutory duty of loyalty by pursuing the project with Enbridge. ETP prevailed at trial and was awarded $535 million in damages.

Freedom of contract prevails

The court of appeal reversed. The Supreme Court affirmed the reversal. The court acknowledged that according to the Uniform Law Commission, under common law parties could inadvertently create a partnership despite their express subjective intention not to do so. That position has never been popular with the court.

The court focused on the public policy that contracts freely entered into are to be enforced. The question: Could freedom to contract for conditions precedent to partnership formation override the Texas Business Organizations Code’s statutory default test? TBOC non-exclusive factors for formation of a partnership are:

  • Receipt or right to receive a share of profits
  • Expression of an intent to be partners
  • Participation or right to participate in control of the business
  • Agreeing to share or sharing losses or liabilities for claims by third parties
  • Agreement to contribute or contributing money or property.

According to ETP, the TBOC’s totality-of-the-circumstances test controls partnership formation to the exclusion of the common law, and the parties’ intent is just one factor to be weighed with others. Enterprise responded with the primacy of freedom of contract and warned about the chaos and dire economic consequences that would result from litigation if ETP’s position were to prevail.

Wiggle room for future litigants

The court agreed that performance of a condition precedent could be waived or modified, by word or deed, by the party to whom the obligation was due. But that would require pleading and a jury finding or conclusive proof of waiver, neither of which happened.

The court further opined that where waiver of a condition precedent to partnership formation is at issue, only evidence directly tied to the condition precedent is relevant. Evidence that would be probative of expression of intent is not relevant. The court was essentially saying that there was no evidence that Enterprise specifically disavowed the requirements in the agreements or intentionally acted inconsistently with those requirements.

An inaccurate musical interlude? Everybody should know.