Co-author Julia Edwards

This “most-favored-nations” clause in three oil and gas leases on land in LaSalle County, Texas, was at issue in EP Energy E&P Co., L.P. v. Storey Minerals, Ltd.:

If … the lessee … acquires an Oil and Gas Lease [on certain lands] on such terms that the … bonus … [is] greater than th[at] provided to be paid to lessor hereunder, lessee  …  agrees that it will execute an amendment to this lease, effective as of the date of the third party lease on the leased premises, to provide that the lessor hereunder shall receive thereafter the same percentage (per net mineral acre) … bonus … as any subsequent lessor of the leased premises to the extent that such … bonus … [is] greater than those provided to be paid herein. … “

In the end, as a result of lessee EP’s subsequent leases lessors (MSP) were entitled to increased bonuses on leases from the time prior to execution of the triggering lease. Once again, a court applied the plain, ordinary, and generally accepted meaning of the contract. Continue Reading Most-Favored-Nations Clause Costs Lessee

Co-author Justin Cowan

Does a former working-interest owner of a well bear continuing responsibility for a defective gas line despite having conveyed its ownership interest? The line was constructed by the former owner as operator of record, and it received a fee as operator. (One could assume there was a RRC Form P-4 on file and a Model Form JOA, but the court doesn’t say.)This was the question before the Texas Supreme Court in In re Eagleridge Operating, LLC.

 Facts

Aruba Petroleum owned a minority working interest in the Donnell 2-H well and was operator of record, for which it received a fee with the consent of the majority working-interest owner, USG Properties Barnett II.  As operator Aruba was responsible for drilling, operating, and servicing the well and securing proper equipment.  In 2013, while Aruba was a working interest owner and operator, a gas line was installed on the property. Aruba and USG paid their proportionate share of the construction expenses.

Four years later Aruba conveyed its working interest to USG and ceased serving as operator. Eagleridge subsequently entered into a written contract with USG to serve as operator and assumed control of the well in 2017. A few months later the gas line ruptured and injured Lovern, the plaintiff in the underlying negligence suit.

The suit

Eagleridge sought to designate Aruba as a responsible third party, asserting that Aruba, as a prior owner-operator, caused or contributed to Lovern’s injuries because Aruba was responsible for installing the gas line, selecting the materials, and determining its placement on the property.

Lovern moved to strike Arbua’s designation and sought a partial summary judgment. He argued that, under the Supreme Court’s opinion in Occidental Chemical Corp. v. Jenkins, a former premises owner owes no duty (and has no responsibility) related to the condition of the premises after conveying its ownership. Occidental  involved a sole owner-operator’s improvements.  On the other hand, Aruba was not just a property owner—it also received a fee as operator and made improvements in that capacity.  Accordingly, said Eagleridge, Aruba had a duty as an independent contractor, and that duty did not terminate when its control over the property ceased.

The trial court granted both of Lovern’s motions and the court of appeals denied Eagleridge’s request for mandamus relief. The Supreme Court’s review was confined to whether Occidental precluded Aruba’s responsibility for defects in the pipeline and whether the trial court erroneously struck Aruba’s designation as a responsible third party.

The result

The Supreme Court agreed with the lower courts and denied mandamus relief, reaffirming its position that Occidental precludes the “dual-role” analysis Eagleridge proposed.  A property owner, when making improvements on its own property, acts solely in its capacity as an owner and not as an independent contractor.  That analysis is not altered by the fact that USG paid Aruba to operate the well.  The core holding in Occidental is based on ownership, and the Court held that Aruba was a property owner exercising its possessory right to develop its property when it installed the gas line.

Aruba’s responsibility for premises defects did not survive conveyance of its ownership interest to USG.  Aruba and USG were tenants-in-common, and each could construct improvements on the property without the other’s consent.  Aruba’s right to construct the pipeline was independent of, did not arise from, and was not extinguished by its agreement to serve as operator of record.  Aruba’s receipt of compensation as operator neither transformed it from an owner into an independent contractor nor materially distinguished the case from Occidental.

Your musical interlude.

Co-author Max Brown

Commonwealth of Pennsylvania v. International Development Corporation resolved the question, In a 100 year old Pennsylvania deed is a “subject to” provision an exception to a grant or a warranty disclaimer?

The transactions:

  • 1894: 2,094 acres are sold by deed from Proctor and Hill to Union Trading Company; Proctor and Hill reserve all minerals.  This reservation is not reported to the taxing authority, and the property is assessed and taxed as a whole following the sale.
  • 1903: Union deeds the surface to CPLC.
  • 1908: Property is sold in a tax sale to McCauley. This effectively “washes” the title and reunifies the two estates; McCauley owns the surface and the minerals.
  • 1910: McCauley conveys the property back to CPLC.
  • 1920: CPLC sells the property and other land to the Commonwealth of Pennsylvania. The deed had two key clauses.

The clauses

The “First Clause”: The conveyance was “subject to” the mineral interests “as fully as said minerals and mineral rights were excepted and reserved in [the 1894 deed].”

The “Second Clause”: The conveyance was “also subject to all the reservations, exceptions, covenants, and stipulations contained in [the 1894 deed] … and in the [1903 deed].”

More transactions

CPLC quitclaims the mineral rights, the minerals were resold multiple times, in 2000 International Development Corporation (IDC) purchases the property.

Who owns the mineral rights, IDC or Commonwealth? Continue Reading The Meaning of “Subject To” in a Deed

Co-author Darien Harris

The Texas Civil Practices and Remedies Code, Chapter 95, limits a property owner’s liability when an independent contractor hired to construct, repair, renovate or modify an improvement to the owner’s property brings a negligence claim that arises “from the condition or use of the improvement.” The Texas Supreme Court has ruled that the property owner is free from liability when negligence elsewhere contributes to the plaintiff’s injuries. But the contributing negligence must involve the condition or use of the improvement on which the plaintiff was working.

If you’ve stayed with us this far you must be a lawyer.

The facts

In Energen Res. Corp. v. Wallace, Energen hired Nabors and New Prospect to drill an oil well in Pecos County. Energen contracted Dubose Drilling to complete a water well that would assist the oil well drilling operation.  Dubose subcontracted with Elite Drillers to complete the water well.  Elite’s president, Wallace, supervised the water well project. Because the wells were only 500 feet from each other, Energen and Elite more or less worked side-by-side. Continue Reading Operator Escapes Liability For a Gas Kick and Resulting Fire

Co-author Brittany Blakey

Zehentbauer Family Land, LP v. TotalEnergies E&P USA, Inc. is a story we’ve heard before: Royalty owners contend they are not getting a big enough slice of the hydrocarbon pie, which presents a question courts must answer: Where is the valuation point for royalty calculation?

Under the oil and gas leases at issue, royalties are to be paid:

“based upon the gross proceeds paid to Lessee for the gas marketed and used off the leased premises, including casinghead gas or other gaseous substance… computed at the wellhead from the sale of such gas substances so sold by Lessee.”

The midstream arrangements and the “netback method”

Chesapeake and Total sell their production at the wellhead to their respective midstream affiliates, CEMLLC and TGPNA, each of which sells the transported product to unaffiliated downstream companies. The affiliates account for the gas using the “netback” method, which “takes a weighted average of prices at which the midstream affiliates sell the oil and gas at various downstream locations and adjusts for the midstream company’s [various costs (including transportation)] to move the raw oil and gas from the wellhead to downstream resale locations.” The netback method accounts for these midstream (post-production) costs. The midstream affiliates pay this reduced amount to the producers, who use this netback price as the base for calculating the plaintiffs’ royalty payments. Continue Reading Ohio Royalty Owners Burdened with Post-Production Costs

The question with wide-ranging implications for Louisiana operators and mineral owners in Johnson et al. v. Chesapeake Louisiana LP et al is whether unleased mineral owners in a drilling unit established by the Commissioner of Conservation must bear their proportionate share of post-production costs.

The statutory scheme

Under Louisiana’s forced pooling statutes, the Commissioner may form drilling units and appoint an operator to drill and operate wells for all owners in the unit. Unleased mineral owners (the court called them UMO’s) are exempt from the statutory 200% risk charge for drilling costs applied to non-participating lessees. The operator is required by La. R.S 30:10(A)(3) to pay a UMO who has not elected to market his share of production the tract’s pro rata share of proceeds from the sale of hydrocarbons.

The claims and defenses Continue Reading Louisiana Unit Operators May Deduct Post-Production Costs from Unleased Mineral Owners

Author Ethan Wood

Louisiana’s compulsory pooling scheme seeks to balance the interests of individual landowners and oil and gas operators to promote responsible development of natural resources. Because of compulsory pooling, operators are not held hostage by individual landowners who refuse to lease, but landowners are afforded protections so as not to be taken for a ride by unscrupulous operators.

One such protection for landowners is the operator’s duty to report information to unleased landowners upon request (La. R.S. 30:103.1). Failure to provide the information means the operator forfeits the right to demand contribution from the unleased owner for the costs of drilling operations (La. R.S. 30:103.2).

These statutes are often litigated, but few disputes result in a reported decision. But last month, the U.S. 5th Circuit Court provided some guidance for how to interpret the notice provisions of 30:103.1-2 in B.A. Kelly Land Company, LLC v. Aethon Energy Operating, LLC.

What We Have Here is a Failure to Communicate

B.A. Kelly Land Company owned unleased interests in two compulsory units in Bossier Parish. Kelly sent a letter via certified mail to Aethon Energy Operating, LLC on December 15, 2017, requesting information regarding sixteen wells in the two units. The letter described the unleased lands, the units, names of wells, and asked for information regarding (1) the total amount of hydrocarbons produced, (2) the price received for the hydrocarbons, (3) operating costs and expenses, and (4) information regarding funds expended to enhance or restore production. This first letter did not contain an explicit reference to 30:103.1, nor did it request that reports be classified as “initial reports” or “quarterly reports.”

Kelly followed up with another letter sent via certified mail on April 17, 2018, that referenced the previous letter and called attention to the fact that Aethon failed to comply with the first letter. This letter also did not include a specific reference to 30:103.1 or 30:103.2, nor did it reference the possibility of a lawsuit, penalty or forfeiture under 30.103.2.

Aethon did not send the requested information to Kelly until February 12, 2019—after Kelly filed suit seeking a judgment that Aethon had failed to comply with its disclosure and reporting obligations. Kelly sought a declaration that Aethon had forfeited its rights to demand contribution for Kelly’s share of drilling costs.

The Pen is Mightier

At the district court, Aethon successfully argued that because Kelly failed to reference the statutes and failed to use certain key language, Kelly had failed to comply with the statutory requirements. The Court of Appeals reversed, finding that the district court had “erroneously engrafted conditions into [30:103.1 and 30:103.2] that are not present in the text of the statutes themselves.”

The first letter satisfied the requirements of the statute because it was (1) in writing, (2) sent by certified mail, (3) contained the name and address of the unleased owner, and (4) “was sufficiently clear to give Aethon, as operator of the Units, notice that Kelly, an unleased owner, was requesting reports pursuant to [30:103.1].” Further, the letter’s request for four types of information “matched almost verbatim the four categories of information” the statute requires operators to provide. The second letter similarly complied with 30.103.2 by referencing the earlier letter, reciting most of the crucial language of 30.103.2, and sufficiently calling attention to Aethon’s failure to comply with 30.103.1.

The court of appeals rejected the district court’s emphasis on referencing the statutes and omission of “reports” or the possibility of a lawsuit in the letters; these “requirements” are not in the text of the statutes and should not be read into them.

The Last Word

This week’s musical interlude …ouch.

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Co-author Brittany Blakey

[Updated] The North Dakota Supreme Court will hear oral arguments on Thursday to consider who owns the right to profit from the value of the porous spaces within subsurface rock formations. The issue is over Senate Bill 2344, passed by the Legislature in 2019 and, no surprise here, supported by the oil and gas industry.

The Northwest Landowners Association sued North Dakota arguing that SB 2344 is unconstitutional, that it renders the surface owners’ “pore space estate” worthless, and amounts to a “taking” of property owners’ pore space without compensation. Incidentally, the court in Mosser v. Denbury Resources determined in 2017 that subterranean pore spaces are owned by the landowner.

The trial court in the Northeast District, Bottineau County concluded that landowners in North Dakota have a constitutionally protected property right to their subsurface pore space and said pore space has inherent value. SB 2344 prohibits landowners from obtaining compensation for an oil and gas operator’s use of their pore space estate and “[renders] the pore space worthless in every instance of its application[.]” It “acts to give North Dakota landowners’ value from pore space to the oil and gas industry, for free, under the guise of the North Dakota Industrial Commission.”  The opinion was seen as a huge victory for landowners.

Disputes involving pore space are likely to continue in North Dakota given increased oil and gas activity. North Dakota is a promising area for carbon dioxide injection. For example, there are projects in place and envisioned that would transport carbon dioxide from other areas of the country to North Dakota to be injected into pore space for carbon sequestration.

Compare Denbury with the Texas Supreme Court’s ruling in Lightning Oil Company v. Anadarko E&P Onshore:  The mineral owner has the right to explore for and produce the minerals and the surface owner owns the right to possess the specific place or space where the minerals are located. Looks pretty much the same.

Your musical interlude.

Co-author Stephanie Snyder-Zuasnabar*

A subcontractor’s mineral lien in Texas is invalid when, at the time the mineral owner receives notice of the lien affidavit, the mineral owner is not yet obligated to pay the contract price to its contractor.  So says Pearl Resources Operating Co., LLC v. Transcon Capital, LLC,

The real takeaway that drilling contractors already know: A turnkey drilling contract gone wrong is the gateway to a financial apocalypse.

The wild well

Pearl Resources and PDS Drilling agreed in a Turnkey Drilling Contract for PDS to drill a well in Pecos County. Pearl was to pay 30% of the contract price after PDS positioned a rig at the wellsite. The remaining 70% would be paid after delivery of a successful well. PDS was liable for the cost of regaining control of a wild well, along with associated remediation and restoration efforts.

The 30% was paid and as PDS drilled the well, a wild well incident caused an eruption of freshwater out of the well and an adjacent water well. PDS contracted with Cannon to haul away the accumulated water. PDS abandoned the well, notifying Pearl that it did not have the funds to repair the well or drill a replacement.

Cannon sent PDS two invoices requesting payment for services performed before PDS abandoned the well. PDS failed to pay, and Cannon transferred its rights to Transcon. Transcon requested payment of $57,000 based on the two unpaid invoices. When Pearl refused to pay, Transcon sent the statutory notice of its intent to file a Mineral Lien Affidavit. Pearl again refused to pay. Transcon filed a lien affidavit in the Pecos County records.

Pearl sued for a judgment that Transcon’s lien was invalid under Chapter 56 of the Property Code. Transcon counterclaimed for a judgment that its lien was valid and sought to foreclose. The trial court found that Transcon’s lien was valid and awarded an Order of Sale for foreclosure on the lien.

Pearl’s winning argument

Pearl argued that Transcon’s lien was invalid because Chapter 56 only allows a subcontractor’s lien on a mineral owner’s property in the amount the property owner owes to its contractor, if any, at the time it receives notice of the lien affidavit, and Pearl did not owe money to PDS when the lien notice was delivered.  The court of appeals agreed. The mineral lien is “dependent upon the state of the account between the owner and its contractor, and not upon the condition of the account between the contractor and subcontractor when the owner receives notice of the claim.”

Transcon contended the early termination provisions in the Turnkey Contract were invoked when PDS abandoned the well, requiring Pearl to pay PDS for its services. The court determined that the sections referencing early termination and compensation only applied to a Pearl-directed shutdown. Because PDS walked off the job, the contract did not obligate Pearl to pay PDS for Cannon’s services.

In denying Transcon’s argument that Pearl still owed 70% of the total contract price, the court focused on the plain language of the contract which did not obligate Pearl to pay the remaining balance until completion of a successful well, which never occurred. The Court was not willing to rewrite the parties’ contract which expressly obligated PDS, not Pearl, to pay the remediation costs. The trial court erred in finding a valid mineral lien.

Transcon’s claim for quantum meruit was not addressed because actual damages were not awarded by the trial court.

Norma Waterson, RIP. Category, you ask? “Celebrated English folk singers I’ll bet you’ve never heard of”.

*Stephanie is a Universlity of Houston law student and Gray Reed law clerk.

Foote and Cypert v. Texcel Exploration and Decker determined that cattle loitering uninvited around a well and tank battery and causing destruction are trespassers, not licensees.

How it happened

Foote arranged with Yates to graze 650 head of cattle on Yates’ pasture and paid Cypert to take care of them. Texcel operated the Hertel oil and gas lease on the property. Decker was Texcel’s pumper. The lease did not require Texcel to fence off the property or its equipment.  A one-wire electric fence surrounded the wellsite and tank battery to protect the premises from, you guessed it, wandering cattle. If the wire fell to the ground or otherwise hit brush or other material it would ground out and no longer be “hot”.

There was conflicting testimony about who did or did not do what to cause the bovine incursion. In short, 300 cattle, no-doubt drunk on hydrocarbon fumes, pushed over the fence and broke a PVC pipe, spilling saltwater and oil on the ground. 132 perished from drinking oil and others were under their expected weight at sale time.

Foote and Cypert sued Texcel and Decker for failure to construct and maintain an adequate fence around the well site and tank battery which created a dangerous condition that proximately caused the death and injury of cattle. The theories were premises liability and negligent undertaking.

Plaintiffs lost. Here’s why:

In order to recover against a mineral lessee/operator for injury to cattle, an owner or lessee of the surface must obtain a jury finding on one of the following:

  • The lessee/operator intentionally, willfully, or wantonly injured the cattle, or
  • The lessee/operator used more land than was reasonably necessary for carrying out the purposes of the lease and as a result of some negligent act or omission he proximately caused injury to the surface owner’s cattle.

Plaintiffs’ failure was in ignoring these requirements and seeking to expand the law to the same standards for protecting persons from a premises defect. Plaintiffs contended that because Foote was in business with Yates and the landowner (Yates leased the property), his status extended to his cattle on the entire premises, including the area where Texcel operated. The evidence established that the cattle did not have the status of invitees on the area of Texcel’s operations. The premises liability theory concerns the duty an owner or occupier of land owes to a person injured on the property.

By denying the cattle were licensees the jury essentially determined that the cattle were trespassers.  There was abundant evidence for this conclusion.

Texas has never categorized livestock as persons for premises liability purposes. The rule likens wandering cattle and other domestic animals to trespassers upon the legitimate area of oil and gas operations.

Other futile theories

Plaintiffs argued that the cattle were poisoned in an area where they were undisputedly invitees. An operator in Texas has no duty to fence or otherwise protect or prevent livestock from entering the premises of mineral lease. Tercel was not liable for the fluids deposited outside its legitimate area of operations because the cattle caused the fluids to escape.

The plaintiffs contended that the fence was inadequately maintained. Because there was no duty in the first place, the inquiry was whether the defendants acted in a way that required imposition of a duty where one would not otherwise exist. This, the plaintiffs failed to prove.

Your musical interlude: What Muddy Waters went without during Lent..