Can the Texas lessee perpetuate his oil and gas lease by “constructive participation” in wells drilled by another? Under the facts in Cromwell v. Anadarko E&P Onshore, LLC, the answer is no.

Cromwell and Anadarko’s wells

In 2009 Cromwell obtained the Ferrer and Tantalo leases covering small fractional interests in several sections. Anadarko owned working interests in the same sections. Before Cromwell obtained his leases Anadarko executed joint operating agreements with other working interest owners and was the operator. Cromwell asked for a JOA and to participate in Anadarko’s wells. Anadarko never responded.

Anadarko drilled the 75 – 26 –1 well, which paid out in August 2009. Anadarko sent Cromwell JIB’s for his share of the working interest and revenue checks. Cromwell paid the JIBs, including charges for a variety of operating costs. Anadarko netted Cromwell’s debts against his share of production proceeds in months when costs exceeded revenues. In letters Anadarko addressed Cromwell as a “working interest owner”. Anadarko claimed this was in error. 

The primary term of Cromwell’s leases passed in 2012 and 2014 respectively. Anadarko realized this but did not tell Cromwell, and continued sending JIBs and cutting revenue checks and communicating as if his leases were effective. Anadarko said this also was a mistake. Anadarko took leases from Ferrer and Tantalo in January 2017 and in March 2018 informed Cromwell that because it never received an executed well election the leases had expired and had been leased to “third parties”.

Cromwell sued for declaratory judgment, trespass to try title and damages alleging that his leases never expired because he constructively participated in drilling sufficient to perpetuate his leases and that he and Anadarko had formed a partnership. The trial court granted Anadarko’s motion for summary judgment.

Were Cromwell’s leases still valid?

Production had occurred in paying quantities and Cromwell participated in the costs and production. But Anadarko’s production could not be attributed to Cromwell. The court of appeals ruled that Cromwell was required to take some action of his own to cause production on the leased property to keep his leases alive despite the use of the passive voice in the habendam clauses that might indicate otherwise.

The costs Cromwell referred to as his “constructive participation” reflected his proportionate share of operating expenses ordinarily owed by a nonparticipating cotenant. Those costs were not indicative of the parties’ intent that Cromwell shouldered any risk or liabilities inherent in the operation of the well.  

Despite Anadarko’s reference to Cromwell as a working interest owner and to the existence of an operating agreement, the parties did not engage in conduct that would otherwise suggest they had a joint operating relationship. Cromwell’s course-of-conduct argument could not overcome the absence of an agreement to share in expenses of development and operation.

Anadarko treated Cromwell as if his leases had not expired after their primary terms lapsed, but the habendam clauses defined the terms under which the leases could be perpetuated. The leases terminated at the end of their primary term. The habendam clause was a special limitation, the failure which does not result in forfeiture.

Was there a partnership?

In a word, no. Of the five factors under the Business Organizations Code to determine whether there is a partnership the court accepted only Cromwell’s receipt of profits as proving a partnership. But this was equally consistent with Anadarko’s accounting to Cromwell as a cotenant.

Also, Cromwell’s evidence could not overcome the statute of frauds. Cromwell and Anadarko were cotenants, not partners.

Your musical interlude.

Co-author Katherine Sartain*

If you are scoring at home, count Permico Royalties LLC v. Barron Properties, Ltd., as a win for “floating” in the fixed-or-floating royalty battles. Permico, successor to grantors in a 1937 Deed for a tract in Ward County, argued that a mineral reservation was of a ½ floating royalty interest. Barron, successor to grantee and owner of the mineral estate subject to the reservation, claimed that the deed reserved a 1/16 fixed royalty. Grantors reserved:

“… a one-sixteenth (1/16) free royalty interest (being ½ of the usual 1/8th free royalty) … And the Grantors, …. shall be entitled to receive 1/16th of the oil and/or gas produced, saved and sold from said land, being ½ of the usual 1/8th royalty therein.”

In dueling motions for summary judgment the trial court denied Permico’s motion and granted Barron’s, ordering that Permico take nothing.

The double-fraction question and the usual doctrines

In reversing and rendering judgment that the deed reserved a ½ floating royalty, the court of appeals cited Hysaw v. Dawkins. Under the “legacy of the 1/8th royalty”, use of “1/8” has a special meaning. In deeds of that era the parties had an erroneous belief that a royalty in a lease would always be 1/8. The fraction was used as a placeholder for future royalties generally. It was “shorthand” for what the mineral owner believed was the entire royalty a lessor could retain under a mineral lease. It had no mathematical value.

Then you have the estate misconception doctrine recognizing that in that era mineral owners erroneously believed that they only retained a 1/8th interest in their mineral estate after leasing for a 1/8th royalty, citing Van Dyke v. Navigator Group.

Barron urged the court to reject the legacy doctrine, arguing that it is incorrect to presume that all mineral interest owners at the time believed that their royalty interest would always be 1/8. By the 1930s oil and gas leases existed providing for royalties other than 1/8. The court responded that Van Dyke shows continued reliance on the legacy doctrine.

Barron also argued there was no need for the legacy doctrine because there were no inconsistencies in the Deed that required harmonization of provisions. The Court responded: That is not true here, but even if so, Hysaw says the courts can use the doctrine even if there are no internal inconsistencies. Under the estate misconception doctrine the use of a double fraction created the rebuttable presumption that the parties intended to use the 1/8th as a placeholder for the grantor’s entire mineral estate.

Barron also contended that the court should ignore the double fractions as nonessential to the deed language, therefore to grantor’s intent, because the double fractions were in non-restrictive clauses.  The court rejected that assertion as taking the grammatical argument to an extreme.  Applying grammatical rules may be helpful in interpreting a deed, but the focus is still on harmonizing the entire deed.

The conclusion

If grantors had meant to reserve a fixed 1/16th royalty interest, there would have been no reason for them to use the double fractions in not one, but two clauses. The only way to give meaning to all of the Deed’s provisions was to apply the legacy doctrine and find that grantors’ use of the 1/8 fraction was a placeholder.

The Deed consistently demonstrated the parties’ intent to reserve a ½ floating royalty interest given its repeated use of the “usual 1/8 royalty” in the double fraction describing that interest.

Your musical interlude.

*Katherine is a rising 3L at Baylor School of Law and progeny of your author.

Co-author Katherine Sartain *

We begin with a document-drafting tip: When reserving an interest in minerals, before cutting and pasting from your old document that would be yellowed and dusty if it remained in its original papyrus format, lawyers and non-lawyers alike should consider Devon Energy Prod. Co. v. Enplat II, LLC. The Court was asked to determine whether a 1940 deed from Harris et al to Lopoo conveying a tract in Reeves County, Texas, reserved a cost-free royalty interest or a cost-bearing non-executive mineral interest.

The reservation was of an:

“… undivided one-sixteenth (1/16) of any and all oil, gas or other minerals produced on or from under the land above described. Lopoo …  shall have the right to lease said land for mineral development without the joinder of Grantors or their heirs and assigns, and to keep all bonus money, as well as all delay rentals, but when, if and as Oil, Gas or other mineral is produced from said land, one-sixteenth (1/16) of same, or the value thereof, shall be the property of Grantors,.”(emphasis ours)

Enplat, successor of Harris, sued Devon, successor of Lopoo, for a judgment declaring that Harris granted the entire mineral interest and reserved a 1/16 royalty interest. Devon counterclaimed saying that Harris conveyed a 15/16 mineral interest. On cross-motions for summary judgment the trial court granted judgment for Enplat; The deed reserved a fixed royalty interest. Devon appealed.

The result

The court of appeals reversed. The deed reserved a mineral estate shorn of all attributes but for the right to receive a royalty, if and when there was production.  

This deed did not use “in, on or under”, which indicates a mineral interest, not a royalty. However, a deed need not use the exact term to denote a mineral interest; it may instead use terms “of similar import.”

Emplat argued:

  • The language did not meet the “of similar import” standard because “produced on or from under” reflected the grantor’s specific intent to reserve a royalty interest after production.
  • Courts interpret “produced, saved and made available for market” as a royalty interest because they denote the grantor’s intent to reserve a post-production interest only.
  • “1/8th of all minerals that may hereafter be produced and saved on the land conveyed” was “akin” to a royalty interest.    

The Court acknowledged Enplat’s argument that  the last provision alone may denote a royalty interest, but that clause must be read with other portions of the document to determine the type of interest that was reserved.

The magic language historically associated with a post-production intent was not used. “Produced on or from under” is not the same as “produced, saved and made available,” and is not necessarily a royalty interest.

According to the Court, Harris specifically stated their intent not to strip themselves of the fourth attribute of their estate – the right to receive royalty payments (the first three being right to develop, right to lease, and right to receive the bonus) – because they specifically stated “but when, if and as Oil, Gas or other mineral is produced … ”  The deed as a whole indicated reservation of a mineral interest.

The Court distinguished a reservation with similar language in which “royalty” was used “no less than six times”. Here, the Harris grantors did not use the term once in describing the reservation.

Caveat: Don’t generalize from this post. Each case turns on the specific language of the reservation in light of previous decisions, and there are many.  

Your musical interlude. This is what the appellate court is for.

*Katherine is a rising 3L at Baylor School of Law and progeny of your author.

Unit Petroleum Company v. Koch Energy Services, LLC is another force majeure case arising out of winter storm Uri. Unlike a similar case, summary judgment was denied because, said the United States District Court,

The word “reasonable”, although not ambiguous, is a question of fact that must be answered by looking into the circumstances of the case at issue, including the nature of the proposed contract, the purposes of the parties, the course of dealing between them, and any relevant usages of trade.

The facts

Unit agreed to sell gas to Koch under a Base Agreement (the North American Energy Standards Board General Terms and Conditions Base Contract for Sale and Purchase of Natural Gas). Specific transactions were memorialized in Transaction Confirmations. The parties’ obligations were “firm”, meaning that either party may interrupt its performance without liability only to the extent that performance is prevented by events of force majeure.

The operative portion of the clause was, “Seller and Buyer shall make reasonable efforts to avoid the adverse impacts of force majeure and to resolve the event or occurrence once it has occurred in order to resume performance”.

In January 2021 Unit informed Koch that in February it would sell 25,000 MMBTU/day as a base load and up to 6,500 as a swing option. Then came Uri, which damaged Unit’s wells. Unit alerted Koch that it was declaring force majeure, explaining that Uri had reduced gas supply such that it could not fill Koch’s order. Koch rejected the declaration insisting that Unit perform by either buying back its contract obligation or buying gas on the spot market for Koch. Unit did neither. During this time Unit delivered gas to two other purchasers with whom it had interruptible contract obligations.

Koch bought spot gas for substantially greater sums for its spot gas and the next month withheld $1.3 million from Unit as cover damages and invoiced Unit $5.1 million for gas that it purchased on the spot market.

Arguments

Unit argued that because the storm was a qualifying force majeure event it had no obligation to buy gas on the spot market or buy back its obligation, arguing that to require Unit to either buy spot gas or buy back its obligation would effectively eliminate the force majeure clause.

Koch responded that there were fact questions precluding summary judgment, such as whether the storm caused Unit’s nonperformance and whether Unit undertook reasonable efforts to avoid the effects of the event. Koch also argued that industry practice requires the seller to either buy back its obligation or buy gas on the spot market during an event such as Uri and that Unit should have allocated to Koch gas that it sold under interruptible contracts.

Result

Summary judgment denied. Whether a particular gas allocation was fair and reasonable was a fact issue. The experts disagreed on what activities were reasonable in the context of “resonable efforts”. A jury could disagree both as to whether Unit’s gas allocation waa fair and reasonable and whether Unit exerted reasonable efforts to avoid the effects of the force majeure event.

Your musical interlude.

Davenport v. EOG Resources, Inc. is an appeal of a temporary injunction. The title tells you the result.

Davenport owned four tracts comprising 5,000 acres in Webb County that were originally part of a larger tract burdened by the 1967 Garner oil and gas lease. EOG has operated the lease since 1999 and its chief point of entry had been the Krueger Road gate on the east side of the ranch. In 2022 Davenport and EOG negotiated a water purchase agreement allowing a large frac pond and for EOG to purchase fresh water and have the right of ingress and egress on designated roads for the purpose of taking the water.  

EOG informed Davenport of its plans to drill new wells and to access the ranch from the west via a new gate using a new road. Davenport objected and sued, arguing that EOG already had access to the proposed sites via Krueger Road, and if a road was needed there was a better route.

EOG’s witnesses at the temporary injunction hearing testified:

  • The unpaved Krueger Road with its four wooden bridges and below-grade water crossings could not support the heavy equipment needed for its planned nine 12-well pads and associated production facilities.
  • EOG had been accessing the Garner lease from an adjacent ranch north and west of the Davenport Ranch.
  • EOG planned new roads would run primarily east-west across the northern portion of the ranch.
  • Irreparable injury would occur because of unrecoverable loss of hydrocarbons based the delay in offsetting production.

Davenport’s witnesses testified:

  • EOG did not express any concerns about Krueger Road
  • EOG had been running large trucks and other equipment over that road and the wooden bridges with no problem.
  • EOG’s planned route for the new road would damage a new asphalt road and waterlines running across his property.
  • The new entrance is visible from his home, and
  • He was concerned about the safety of his children from passing vehicles.

Davenport argued that in the water agreement EOG agreed to use the Krueger Road gate. EOG responded that the agreement pertained only to activities in getting water from the frack pond and relied on its pre-existing rights of access under the Garner lease.

The trial court found that Kreuger Road was not capable of sustaining EOG’s operations and enjoined Devonport from interfering with EOG’s access to the ranch. The status quo ante was EOG’s previously unhindered access to the ranch for its oil and gas operations.

The law

The purpose of a temporary injunction is to preserve the status quo of the litigation’s subject matter pending a trial on the merits. To prevail on an application three elements must be pled and proven:

  • a cause of action against the defendant
  • a probable right to the relief sought, and
  • probable imminent and irreparable injury in the interim.

The court of appeals cannot overrule a trial court’s decision unless the trial court acted unreasonably or in an arbitrary manner without reference to guiding rules or principles. That is a high hurdle for any appellant.

EOG proved all three elements: its cause of action under the oil and gas lease, a probable right to recover because the trial court gave greater weight to the credibility of EOG’s witnesses, and EOG needed to timely develop planned facilities and forcing it to access the ranch through the Krueger Road gate would delay or deny development which would harm future production, the reservoir damage could be permanent, and hydrocarbons could be irretrievably lost. Thus, damages would be difficult if not impossible to calculate.

Your musical interlude. Jimmy Buffet RIP.

Co-author Stephen A. Cooney

In Cactus Water Services LLC v. COG Operating, LLC., a divided Texas court of appeals answered the question this way: The oil and gas producer prevails over the purchaser of the surface owner’s right to own and sell produced water.

The majority discussed the composition of produced water. To be scientific, it’s got a bunch of nasty s$%^ in it that needs to be gotten rid of. But recent water treatment technologies have made what was once a cost for operators into a new industry in which treated wastewater can be sold back to operators.

The contracts

Along with its rights under oil and gas leases, COG has agreements with surface owners giving it the right to gather, store and transport oil and gas waste, lay lines on the surface for freshwater and produced water, and lay pipelines for transportation of oil and gas, produced water and other oilfield-related liquids or gases. Under the leases COG is not allowed to sell produced water to third parties for off-premises use.

The surface owners granted Cactus Water the right to own and sell all water produced from oil and gas wells on the property, defining water as all water produced from geologic formations.

COG sued for declaratory judgment that it has the sole right to the produced water by virtue of its leases and surface use agreements and common law. Cactus Water counterclaimed that it had ownership of produced water under its own agreements.

The court

The regulatory scheme governing handling and disposing of produced water includes these provisions:

  • Texas Natural Resources Code 91.1011: oil and gas waste includes salt water and other liquids.
  • TNRC 122.001(2): Fluid oil and gas waste is water containing salt or other mineralized substances from hydraulic fracturing, including flowback water, produce water, etc.
  • Water Code 27.002(6): Oil and gas waste includes saltwater, brine and other liquid or semiliquid waste material.
  • 16 Texas Administrative Code 3.8(a)(26): Oil and gas waste includes saltwater, other rmineralized water and other liquid waste material.
  • Water Code 27.002(8): Freshwater means water having properties that make it suitable for beneficial use.
  • Water Code 35.0029(5): Groundwater is water percolating below the surface.
  • 16 TAC 3.8(a)(29) Surface or subsurface water is groundwater, percolating or otherwise.

The majority concluded that in the regulatory lexicon, produced water cannot be groundwater. There is a clear distinction in the law between the two. And industry practice characterizes produced water as oil and gas waste rather than groundwater.

Given the legal framework, produced water is categorized within the former and places the burden of safe disposal on operators. For years operators have had the rights and duties associated with processing, transporting, and disposing of oil and gas waste, including produced water.

COG’s leases were executed before the parties saw produced water as having value. The majority concluded that parties’ knowledge of the value or even the existence of a substance at the time a conveyance ia executed is irrelevant to its inclusion or exclusion from a grant of minerals.

The dissent thought otherwise:

  1. Water recovered from operations was not conveyed by the leases’ granting language. It is well settled that groundwater is part of the surface estate that can be severed and conveyed similar to the mineral estate.
  • Characterizing produced water as waste does not automatically make it subject to the granting clause in the leases. Under case law, even deep, mineralized water produced from a well belongs to the surface estate and is only transferred by specific conveyance.  “Water by any name, even mixed with other substances, still remains water.”
  • The Texas Supreme Court “has not distinguished between different types of groundwater indicating that some water does not belong to the surface estate.”
  • The regulatory framework and industry practice should have nothing to do with ownership of produced water. Just because an operator has a duty dispose of this waste does not mean it has ownership.

Stay tuned. This debate is not over.

Your musical interlude.

Rhetorical Question: When will Texas be done with fixed/floating royalty cases such as Johnson et al v. Clifton et al?

Rhetorical Answer: When scriveners of deeds that are open to eight conceivably plausible meanings have completed their remedial scrivening courses.

How did it happen?

In 1951 Young and others conveyed to Clifton and others several thousand acres in Reeves County by a deed reserving a 1/128 interest in oil, gas and other minerals. It was stipulated that the land was under lease with a 1/8th royalty and grantees shall receive 1/16th of the royalty provided for in the lease, but grantees would not be entitled to receive any of the bonus for future leases, would not have executive rights, and would only receive in subsequent leases a “1/128th (1//16th of the usual 1/8th royalty)”. The title “Mineral Deed was crossed out and substituted with ”Royalty Deed”, handwritten. Current lease royalties are 25% or 22.5%.

 Grantees’ descendants sued, arguing that the deed conveyed a floating 1/16th NPRI. COG and other defendants argued limitations, waiver, estoppel, payment, laches, and trespass to try title.

The trial court ruled that plaintiffs take nothing, leaving them with the 1/128th royalty they had historically received.

Possible outcomes

According to the litigants, the deed conveyed:

  • A nonparticipating 1/16th mineral interest and a floating 1/16th royalty
  • A fixed 1/128th nonparticipating mineral interest and a floating 1/128th royalty in future leases
  • A 1/128th mineral interest and a fixed 1/128th in future leases
  • If there was a NPRI and not a mineral interest, then also a fixed 1/128th royalty in future leases
  • A floating 1/128th royalty interest
  • A floating 1/16th royalty interest
  • A fixed 1/128th royalty interest, or
  • Two separate estates, a 1/128th mineral interest and a fixed 1/128th royalty in future leases.

Title examiners can debate whether some of these constructions end up at the same place, but the court deemed them different enough to discuss each.

The result

The court of appeal reversed, granting judgment that the deed conveyed a nonparticipating 1/16th mineral interest and floating 1/16th royalty. The deed conveyed a mineral interest shorn of all attributes but for the right to receive royalty payments.

The court could reconcile the entire deed only by interpreting the granting clause as conveying a mineral estate and the remainder of the deed as clarifying that the grantors intend to strip all attributes of the mineral estate but for the royalty interest.

Each unsuccessful interpretation suffered more or less the same defect:  failing to consider, or ”harmonize”, all aspects of the deed.

Estate misconception in a different scenario

The court applied the Van Dyke v. Navigator estate misconception doctrine even though there was no double fraction in the granting clause. Discussing the “legacy of the 1/8 royalty”, the court concluded that 1/8th had acquired a special meaning in the standard royalty contract. Parties used 1/8th as a placeholder for future royalty without understanding that reference to set an arithmetical value. 1/128th is a multiple of 1/8th raised the presumption that the grantors believed they only owned 1/8th of the mineral estate. Rather than conveying a 1/128th interest, they intended to convey 1/16th of what they believed they owned. The result was a 1/16th mineral interest conveyance which has a corresponding 1/16th floating royalty interest. This interpretation reconciled the granting, existing-lease, and future-lease clauses. Use of the double fraction “1/16th of the usual 1/8th” is consistent with the description of a floating 1/16th royalty.

The court declined to address the presumed grant theory because it was not raised at trial or in appellate briefing. That affirmative defense must be pleaded at the trial court to preserve the issue for appeal.

Your musical interlude.

In Smart v. 3039 RNC Holdings LLC, the court reminds us that it will harmonize all parts of a contract, even one that “is not a model of clarity”, to reach the correct result.

RNC owned the surface and 50% of the mineral estate in a 45.6 acre tract in Karnes County. RNC agreed to convey and Smart agreed to purchase the surface and part of the mineral estate. Nancy, part owner of RNC and a real estate agent, used the then-in-effect TREC Farm and Ranch Contract and an Addendum for Reservation of Oil, Gas and Other Minerals to memorialize their agreement.

Paragraph 2F of the Contract said any reservation … “is made in accordance with the attached Addendum or Special Provisions”. The parties addressed the percentage of minerals in the Addendum. Paragraph 11 of the Contract, Special Provisions, said, “Seller to convey 10% mineral interest (of what the seller owns – 50%) to Buyer, see mineral reservation.”

The Mineral Reservation Addendum checked the box, “Seller reserves an undivided 40% interest in the mineral estate owned by Seller. NOTE: If Seller does not own all of the mineral estate, Seller reserves only this percentage or fraction of Seller’s interest.“

Nancy filled in the blanks and everyone signed. The title company prepared a Warranty Deed providing that “Sellers reserve an undivided 2/5ths of all oil, gas … “. The deed did not mention or account for the 50% of the mineral estate that was not RNC’s to convey.

The parties agreed that on its face the deed appeared to convey 3/5ths of the entire mineral estate and also agreed to reform due to a scrivener’s error. The parties disagreed on the division of the mineral estate.

Smart’s position: The Addendum unambiguously conveyed 30% of the total mineral estate and reserved 20% to RNC. RNC’s position: When read as a whole and properly harmonized, the contract unambiguously provided that RNC would reserve 40% of the total mineral estate and convey 10%.

30% to Smart and 20% to RNC.

Smart argued:

  1. The court should disregard Paragraph 11 and rely on the Addendum. That would render Paragraph 2F of the contract meaningless, so it failed.
  • Paragraph 11 should be subordinated to the Addendum because the Addendum attributes most essentially to the agreement. But the Addendum did not contain any essential terms that Paragraph 11 lacked.
  • The court may elevate one contractual provision over another without attempting to harmonize the two. No. That is contrary to principles of contract construction.
  • The parties intended for the Addendum to control because Paragraph 11 instructed the reader to “see the Addendum”.  No. The contract did not acknowledge the precedence of the Addendum.
  • Doubt as to the proper construction must be construed against RNC because Nancy drafted the agreement. No. Courts should not rely on that principle in determining whether the agreement is ambiguous or when construing an unambiguous agreement.

5% to Smart and 45% to RNC.

Paragraph 11 was subject to two potential meanings. 10% of RNC’s 50% or 5% of the total to Smart is a reasonable interpretation of Paragraph 11 in isolation, but that would require the court to ignore the Addendum. Thus 5% to Smart and 45% to RNC was not a reasonable conclusion.  

40% to RNC and 10% to Smart – Bingo!

Paragraph 11 and the Addendum could be harmonized to give effect to both. The result was the parties’ intention that 40% of the total mineral estate would be reserved to RNC and 10% conveyed to Smart. This was a reasonable construction of the contract as a whole.

The contract was not ambiguous. Summary judgment for RNC was proper.

Your musical interlude. Sinead O’Conner RIP.

The plain, ordinary, and generally accepted meaning of a word doesn’t mean “anything goes”. It depends on context, says the Supreme Court of Texas in Finley Resources Inc. v.  Headington Royalty Inc., a dispute over the meaning of “predecessors”. For the underlying facts see our post on the court of appeals decision.

The release

The release in an acreage-swap agreement between Petro Canyon Energy and Headington said that “Headington [ releases, etc.] Petro Canyon and its affiliates and their respective officers, directors, shareholders, employees, agents, predecessors and representatives… [for all claims, etc.]… related in any way to the Loving County Tract.”

The parties carved out Petro Canyon’s agreement to plug the wells and restore the property. Finley was not named anywhere in the agreement.

The discussion

Headington sued Finley for $54 million in damages related to Finley’s operation of wells on the Arrington lease on the Loving County Tract. The question: Did “predecessors” include Finley such that Headington’s claims against Finley arising from termination of the Arrington lease were released?

A release will discharge only those persons “named” or “identified” “with descriptive particularity” and that their identity or connection to the released claims “is not in doubt”. Stated another way, could a stranger readily identify the released party?

The court gave “predecessors” its plain, ordinary, and generally accepted meaning. But it wasn’t that simple. The word need not carry every meaning to which it is naturally susceptible. A primary determinant of meaning is context, said the court.

Finley/Petro Canyon’s broad view was that the release included all forms of predecessors given:

  • the ordinary meaning as one who precedes,
  • the absence of a modifier,
  • otherwise broad and encompassing language, and
  • surrounding circumstances. Thus, “predecessors” naturally referred to predecessors in title.

Headington’s narrow view:

  • the meaning was informed by its antonym;
  • “successors” of a business entity classically refers to legal succession such as merger or consolidation and;
  • by including “predecessors” in a categorical list of entity-related groups, that is how the release uses the term.
  • Also contextually, predecessors could not refer to preceding well operators because the release expressly excluded liability for plugging the Arrington wells.

The release described what was being released: claims related in any way to the Loving County Tract; and who was being discharged: by categorical language the parties intended to extend the benefits to classes of unnamed individuals and entities. The identity of constituent class members turned on the meaning of the categorical terms.  

The court acknowledged the “predecessor” often is shorthand for predecessor-in-title. So, the court asked, what is the grammatical use? “Predecessors” grammatically referred back to the entities released. The syntactic use of “predecessors” connoted a prior connection to corporate entities themselves and not the land.

The court concluded with respect to surrounding circumstances that even when an agreement is unambiguous, context that informs the meaning of the language includes objectively determinable facts and circumstances that contextualize the transaction.

Finley was not named in the agreement despite the looming threat of litigation and Headington’s proximal demand for information bearing on termination of the Arrington lease. Evidence of surrounding circumstances cannot contradict, change, enlarge or supplement the contract language and instead may only give the chosen words a meaning consistent with that to which they are reasonably susceptible.

The result

“Predecessors” bore the narrower meaning Headington ascribed to it. but that followed not from any rule requiring leases to be construed narrowly or for want of descriptive particularity, but rather from the plain meaning of the term as constrained by the linguistic and grammatical context in which it was used.

Your musical interlude.

California has passed Senate Bill 1137, which will prohibit drilling of new oil and gas wells and reworking of existing wells in certain areas.

Here is SB 1137 in legislativese (analysis comes first, then the text):

Here, in small part, is what the Bill does:

The Bill defines “sensitive receptors” as Hollywood A-listers and Stanford law students and their VP of DEI scolding who cannot tolerate voices they don’t agree with “residences, education facilities, day care centers, colleges and universities, community resource centers, healthcare facilities, live-in housing, prisons and detention centers, and any building housing any business open to the public.” The Bill is silent on porta-potties.

A “health protection zone” is any street in San Francisco not covered in syringes and human fecal matter a 3,200-foot radius around any sensitive receptor.  

The state’s oil and gas regulatory agency is prohibited from approving a permit to drill or rework a well within a health protection zone except for very limited circumstances.

An applicant for a permit to drill or rework a well within a health protection zone must include a sensitive receptor inventory map of the area and a myriad of other plans and information.

The Bill unleashes the full weight and authority of the Air Resource Board and State Water Board to adopt, implement and enforce a host of what one would expect to be burdensome and costly regulations.

Indemnity bonds, in addition to the current blanket bond, will be required.

Failure to comply to the new law will be a crime.

Reaction to the Bill

The Legislature passed it by a substantial margin; Governor Newsom heartily supports it; OPEC+ hasn’t said, but one would suspect they are in favor; the usual suspects support it: Natural Resources Defense Council, Central California Environmental Justice Network, EarthJustice, Sierra Club of California, and Voices in Solidarity Against Oil in Neighborhoods.

The industry has raised millions of dollars in support of a referendum to veto the Bill that will be voted on in the general election ballot in 2024. The referendum is supported by the California Independent Petroleum Association, the Construction Trades Council of California, and scores of small producers, service companies and royalty owners.

CIPA warns “If implemented SB 1137 we increase California’s already high gas prices by decreasing our energy supply and replacing it with expensive imported foreign oil that tankers must transport from countries that do not uphold the same environmental or labor standards.”

Having paid $3.25 for a gallon of regular in Dallas last month and $4.75 the next week in LA, I sympathize with the middle class whose energy bills will become even more unaffordable.

Greenpeace and the MSM blame the veto effort on their reliable villain, “Big Oil”.

And the MSM gets it wrong in several ways. Texas did not impose buffer zones and MSNBC omitted the ban on reworking permits.

What of the future?

According to the California Chamber of Commerce, good-paying oil and gas-related employment in the state will be lost; wealth for small operators, service companies and royalty owners will be destroyed; tax revenue will diminish.

According to the Wall Street Journal in 1982 California produced 61.4% of its oil consumption and imported 5.6%. Those numbers in 2019 were 29.7% and 58.4%.

California’s oil imports come mostly from the Middle East and South America, unregulated  producers of dirty oil such as human-rights abuser Saudi Arabia and Amazon forest destroyer Equador. These are places with policies Californians claim to disdain. California will be potentially greener and cleaner, and definitely poorer, and the exporters will be dirtier and richer.

Your musical interlude.