It was jurisprudential Groundhog Day as the Supreme Court of Texas handed down Nettye Engler Energy v. Bluestone Natural Resources, another in a series of postproduction cost disputes, only two days after Puxsutawney Phil peeked out of his cozy burrow to pronounce six more weeks of winter.

The takeaway

The Court clarified Burlington Resources v. Texas Crude Energy. Contrary to the reasoning of the court of appeals, Burlington did not establish a rule that “delivery into the pipeline” or similar phrasing creates a valuation or delivery point at the well or nearby.  Rather, Burlington reiterated that all contracts are construed as a whole to ascertain the parties’ intent from the language they used to express their agreement.

Recall the basic Texas PPC cost-sharing rule: A royalty interest bears its proportional share of PPC’s from the point of delivery to the purchaser or working interest owner unless the conveyance specifies otherwise. Likewise, a royalty interest is free of PPC’s incurred before delivery. The question in cases such as this, Where is the delivery point?

Facts

Engler’s predecessors conveyed 646 acres by special warranty deed reserving an undivided 1/8th NPRI in and to all the oil, gas, etc. The deed required the royalty “… to be delivered to grantor’s credit free of cost in the pipeline, if any, otherwise free of cost at the mouth of the well or mine …”

Gas produced at the wells is collected in a gas-gathering system on the lease for compression, processing and delivery to third-party transportation pipelines off the lease and then sold to third parties.

Former operator Quicksilver valued Engler’s NPRI at the point of sale to the gas purchaser’s pipeline, freeing Engler’s royalty from the burden of PPC’s. Under current operator Bluestone’s valuation, delivery of Engler’s share occurs at the point where unprocessed gas enters the on-site gathering system, thus bearing its proportional share of PPC’s from that point forward.

Engler argued that the delivery point was downstream of the wellsite at the transportation pipeline, if not farther, because a gas gathering pipeline is not a pipeline and use of the term “otherwise” to introduce the alternative delivery point “at the mouth of the well or mine” negated a construction of “the pipe line, if any” as including any pipeline at or near the wellhead.

 What is a “pipeline”?

The Court rejected Engler’s contention that a gathering system is not a pipeline. Resorting to contemporaneous dictionaries, treatises, decisions, and regulations, the Court concluded that a gas gathering pipeline is a pipeline in common industry and regulatory parlance.  The deed in question did not limit the delivery location to a specific pipeline nor prohibit delivery to a pipeline at or near the well if any.

The result

Bluestone discharged is royalty obligation by delivering Engler’s fractional share of production in the gathering pipelines on the premises. Therefore, Bluestone properly deducted PPC’s between that point and the point of sale. The Court of Appeals held that delivery occurs in the gathering pipeline, but misconstrued Burlington in reaching the correct result.

Lagniappe – no room for expert testimony

The Court rejected affidavits by attorneys purporting to clarify and explain what the original drafting parties could have meant by “in the pipe line.” Courts will consider only objectively determinable extrinsic facts and circumstances surrounding the contract’s execution that do not vary or contradict the contract’s plain language. The instrument was unambiguous and it was within the Court’s province to determine its meaning. The expert testimony Engler relied on to construe the phrase would impermissibly add words of limitation to modify the deed’s terms.

Your seasonal musical interlude 

This just in!

John Kerry has a plan to offset carbon emissions from the conflict in Ukraine.

Consider the power of a single word over the fortunes of the parties to a property deed. Such was the effect of the court’s ruling in Barrow Shaver Resources, LLC, et al v. NETX Acquisitions, LLC, et al.

In 1963, by the Stone Deed, Dawson and Hill conveyed a 181-acre tract in Cass County, Texas, to the Stones (John and Treba, not the Rollings). The granting clause described the land by metes and bounds, and continued, “There is likewise conveyed … 1/8th of the Oil, Gas and Other Minerals … .”  The conveyance was subject to an oil and gas lease then existing. At the time of the suit, Barrow Shaver had an oil and gas lease from Dawson/Hill and NETX had a lease from Merritt (successor to the Stones).

The question and spoiler alert

Did Dawson/Hill convey 1/8th of the minerals or did they convey 100% of the minerals and attempt to reserve 7/8ths in themselves?  Dawson and Hill conveyed 1/8th of the minerals (and the surface, of course).

The Court’s journey to the answer Continue Reading Texas Court Decides What “Likewise” Means in a Conveyance

If you dispose of produced water you are no-doubt aware of the intensive earthquakes being observed across the Midland and Delaware Basins. In West Texas Earthquake Observations, Implications for the Oil and Gas Industry, Scott Pinsonnault and John Shepherd of Ankura Consulting summarize the evolving situation and the Texas Railroad Commission’s response. They also present a series of initial questions that will need to be answered.

You should read the report itself, but in short the Commission has determined that saltwater disposal injections contribute to seismic activity in three particular areas and has taken action, including limiting injections and stopping deep water injections in the area identified as the Gardendale SRA, giving operators 120 days to propose next steps in the Northern Culberson-Reeves SRA, and giving operators in the Stanton SRA 90 days to come up with a response plan. The RRC says it will implement its own plan if it is not happy with the industry’s response.

Surely we’ve not seen the end of this.

Your musical interlude.

The baseball season might be in jeopardy, but litigants are swinging for the fences. In Mary v. QEP Energy, the parties entered into a Pipeline Servitude Agreement over Ms. Mary’s 160 acres. One of QEP’s pipelines extended beyond the servitude by 31 feet and another by 15 feet.

Ms. Mary sued claiming the pipeline was placed in bad faith and sought disgorgement of QEP’s profits or an order permitting removal of the pipeline.

The parties agreed that the case turned on Louisiana Civil Code art. 486:

A possessor in good faith acquires the ownership of fruits he has
gathered. If he is evicted by the owner, he is entitled to
reimbursement of expenses for fruits he was unable to gather.

A possessor in bad faith is bound to restore to the owner the fruits
he has gathered, or their value, subject to his claim for
reimbursement of expenses

The question was whether the standard for good faith was governed by La. CC art. 487 or La. CC art. 670. In granting summary judgment for QEP the district court ruled that art. 670 applied. But art. 670 applies only to construction of a building by a landowner. Under Louisiana law a servitude owner is not a landowner, and a pipeline is not a building.

The Fifth Circuit determined that art. 487 governs:

A possessor is in good faith when he possesses by virtue of an act translative of ownership and does not know of any defects in his ownership.  He ceases to be in good faith when these defects are made known to him or an action is instituted against him by the owner for the recovery of the thing.

What’s next?

Ms. Mary’s at-bat continues. Because the district court incorrectly relied on art. 670, the case was remanded for the district court to determine whether her cause of action for QEP’s intrusion is for trespass, accession, or some other provision of Louisiana law.  The Fifth Circuit instructed the district court to apply the relevant definition of bad faith (assuming the cause of action requires such a showing) to decide whether Ms. Mary is entitled to disgorgement of profits.

Your musical interlude. 

Of course it is. (Apologies for the clickbait.) If further reading would damage you, I recommend a subscription to the Guardian. Otherwise, consider these points of view when conversing with those in need of enlightenment. Counter-arguments abound, but they are not the purpose of this post.

The industry is subject to ad hominem attacks, as gratuitous and relentless as they are hollow and devoid of substance. Big Oil should be flattered to be in the same company as Big Poultry, Big Car, Big Pharma, Big Food and Big Semiconductor.  With the universal DH just around the corner, she should turn her hyper-regulatory energies to Big Sports.

Rebukes based on facts and economics, such as EQT president Toby Price’s response to Senator Warren, are more likely to sustain a meaningful exchange of ideas. His topics include affordability and reliability, China’s energy policies, and more. If you only have time for one of these links, read this one.

Daniel Markind in Forbes and David Frum writing in Defense One.com remind us of the industry’s contribution to national security.

The moral benefits to fracking are ignored by the anti’s, says Jude Clemente in Forbes.

Irina Slav at OilPrice.com says energy transition will be expensive: $15 trillion, then $14 trillion, then $1 trillion for key metals, then hidden costs, then environmental risks … .

Daniel Yergin in the Atlantic starts with the Colorado Oil and Gas Association’s Customer Appreciation Award to North Face and continues to the European energy crisis and other complex issues that must be resolved.

Lyn Arden Schwartzer in Seeking Alpha discuses the significance of oil and energy to the world’s economy.

Your musical interlude, for when you think you’re having a bad day.

Federal Insurance Company et al v. Select Energy Services LLC and Exco et al. is a reminder for negotiators of indemnity and defense obligations in oilfield contracts that choice of law is important. Ignore it when drafting and it will be too late when litigating.

The events

Three workers were injured on an Exco drilling rig in DeSoto Parish. Two sued in Texas, one sued in Louisiana. In the Texas suit Exco demanded that Select indemnify and defend Exco under the parties’ service agreement; Select did, and paid $31MM to settle. In the Louisiana suit the roles were reversed. Exco (through Federal) agreed to defend Select. Exco then withdrew its defense and alleged that the indemnity provision was unenforceable because it contravened La. R.S. 9:2780 the Louisiana Oilfield Anti-Indemnity Act.  Select filed a reconventional demand to recover the amount of the Texas settlement.

The choice of law provision called for Texas law to apply without regard to conflict of laws provisions. In case a court might choose to apply the Louisiana Act, there was a substitute indemnity provision: The indemnity and insurance obligations are separate and apart from each other. The insurance obligation would support, but not in any way limit, the defense and indemnity obligations set forth in the agreement.

The Louisiana and Texas Acts

The Louisiana Act was an attempt to avoid adhesionary contracts in which, due to unequal bargaining power, a contractor would have no choice but to agree to indemnify the oil company lest they risk losing the contract. The Act declares null and void any provision in any agreement which requires defense and/or indemnification where there is negligence or fault on the part of the indemnitee or an independent contractor who is directly responsible. If Louisiana law applied, the statute would invalidate Exco’s defense and indemnity obligations to Select.

On the other hand, the Texas Act generally invalidates oilfield indemnity agreements but allows enforcement of mutual indemnity obligations limited to the scope and amount of contractual indemnity insurance each party as indemnitor has agreed to provide to the other as indemnitee. Thus, a mutual obligation is enforceable but limited to the extent of coverage limits of contractual indemnity insurance.

The insurance provided by the parties in the contract brought the mutual indemnity agreement within the exception. Continue Reading Louisiana Court Considers Texas and Louisiana Oilfield Anti-Indemnity Acts

Like wild mushrooms after a warm summer rain, and undaunted by the COVIDs, the fraudsters, the grifters, and the “the spawn of the Devil’s own strumpet”* were prolific before meeting the wrath of the courts and the regulators in 2021. This year features several potential lifetime achievement awards for recidivism.

Corruption Goes Nuclear

Perps: Former Ohio Speaker of the House Larry Householder and utility First Energy, beneficiary of a $1.3 billion state bailout of the state’s nuclear energy industry.

Crime: Householder was indicted on racketeering and conspiracy charges for taking bribes from FirstEnergy. Others were charged for crimes.

How they did it: The utility paid $56.6 million to an outfit called Generation Now who allegedly siphoned it off to Householder and the others. The money came from customers of First Energy’s distribution and transmission units.

Sentences: Plenty but none yet to the calaboose. Householder’s trial date is coming up. Republicans and Democrats together expelled him from the House; First Energy CEO Charles Jones was fired; two others pled guilty; a lobbyist committed suicide; First Energy was fined $230MM and entered into a deferred prosecution agreement.

The big picture: Forbes’ Ken Silverstein predicts that it will jar an industry that is perpetually trying to regain its balance after much bad publicity. Plus, high capital costs for construction and cheap shale gas have curtailed nuclear development, presenting a problem for the environment. Example: When Southern California Edison closed its San Onofre nuclear station in 2013 CO2 emissions jumped by 35% (That’s green California for you). Factoid: 96 nuclear reactors in 29 states supply about 20% of the country’s electricity and 55% of the carbon free power.

Don’t you know his mother was disappointed

______________________________________________________________

Perp: Mark Plummer, host of the ironically-named Dallas radio show “Smart Oil and Gas”. Continue Reading 2021’s Bad Guys in Energy

Co-author Brittany Blakey

In Texas, what happens to an obligation to bury pipelines when, after creation of the obligation, the surface and minerals are severed?  Henry v. Smith explains.

Henry et al own the surface estate of the Camp Creek Ranch, a 15,000-acre tract in Archer County. Smith et al are lessees in three oil and gas leases. At the time the leases were executed the original lessors owned both surface and minerals. Each lease contains special surface covenants, including a requirement that the lessee to bury flowlines and pipelines to a certain depth at the lessor’s request.

Eventually, the mineral estates became severed from the surface. After purhasing the surface,  Henry et al requested that the lessees bury all flow lines pursuant to the covenants.

Lessees refused, taking the position that Henry et al could not enforce the covenants because the covenants had been detached from the surface estate through the mineral reservations (i.e, the covenants do not belong to the surface owners). Henry et al sued to enforce the covenants or, alternatively, recover damages for their breach.

The question

Were the surface covenants conveyed with the surface estates or reserved to the mineral estates (plural; at inception of the leases there were three different tracts).

The answer

Surface owners win. Because a pipeline burial covenant is “attached to the surface” it generally runs with the land and is conveyed through a deed. To deviate from the general rule, the deed must contain a reservation or exception that expressly reserves or detaches the burial covenant. The court will not infer a reservation by implication.

The court observed that the mineral reservations in the deeds from the previous owners to Henry et al did not mention the surface estates or surface covenants. And there were no express words revealing an intent by the grantors to detach the surface covenants from the surface estates. Therefore, because there was no reservation of the surface covenants, the deeds conveyed the covenants to Henry et al.  The trial court’s decision in favor of the lessees was reversed and the case remanded to the trial court.

The dead cow and injunctive relief

The surface owners alleged that the lessees’ actions constituted a nuisance, were negligent, and violated the Texas Natural Resources Code and the National Electric Code (who knew there was such a thing). The result was the electrocution of a cow, so innocent, not yet on its journey to the charnel house, and without doubt a prize cow and a credit to bovines everywhere.

The evidence was mixed. The standard for review of an injunction ruling is abuse of discretion. The appellate court declined to second-guess the trial court’s refusal to grant injunctive relief.

Sandra Jaffe, co-founder of Preservation Hall,  RIP.

Co-author Brittany Blakey

First, a word for you scriveners: Preserve your reputation and the honor of your law school writing instructor by preparing clear and understandable contracts. Then your handiwork won’t be disparaged as “opaquely worded” “cryptic language”, suffering from “lack of accuracy and lack of clarity”, and “containing grammatical and logical errors”, as in the case of an oil and gas lease considered in Martin v. Rosetta Resources Operating, LP. The Texas Supreme Court has granted petition to review the decision.

The issue

Did the offset well clause impose a general duty on the lessee to protect against all drainage, even when the draining well itself did not trigger a duty?

The leases

The Martins entered into a series of leases, all of which had this provision:

“ …  in the event a well is drilled on or in a unit containing part of this acreage or is drilled on acreage adjoining this Lease, the Lessor [sic], or its agent(s) shall protect the Lessee’s [sic] undrilled acreage from drainage and in the opinions of reasonable and prudent operations, drainage is occurring on the un-drilled acreage, even though the draining well is located over three hundred thirty (330) feet from the un-drilled acreage, the Lessee shall spud an offset well on said un-drilled acreage or on a unit containing said acreage within twelve (12) months from the date the drainage began or release the acreage which is un-drilled or is not a part of a unit which is held by production.”

Lessee Rosetta and other operators formed a pooled unit containing a portion of the Martin acreage and drilled the Martin Well. Those parties later drilled the Simmons well 1.5 miles away on a separate, nonadjacent unit. The Martins sued Rosetta and others alleging several theories, including breach of contract for failing to protect the undrilled leased acreage from drainage by the Simmons well.

The result

The theory argued by the Martins at the trial court was that by drilling the Martin well (not the Simmons, read the clause), Rosetta triggered a general duty to protect against drainage, including from the Simmons well. The trial court ruled for Rosetta, holding that the Simmons well did not trigger a contractual duty to protect against drainage because the Simmons well was not on acreage adjoining the Martin lease.

The court of appeals reversed and remanded. A general duty to protect the Martins’ undrilled acreage against all drainage was triggered when Rosetta drilled the Martin well. There was no dispute that there was drainage, prompting the court to require Rosetta to spud an offset well or else release the undrilled acreage.

In its petition to the Supreme Court, Rosetta argues that the general duty to protect against all drainage as found by the court of appeals defied the lease’s offset production clause and imposed an “onerous burden” on the lessee. The duty to protect was limited to drainage caused by the well triggering the duty.

It will be interesting to see how our Supreme Court addresses the odd and illogical lease language in light of its policy to interpret agreements according to the words the parties actually said, not on what the parties could have said.

Trial lawyers, read pp 4-5 discussing why the Martins’ new argument was not barred by res judicata.

Your musical interludes. RIP Michael Nesmith (Gotcha! You were thinking Monkees) … and some Christmas.

Co-author Brittany Blakey

The Texas Supreme Court has granted petition for review of a 2019 decision in Dyer et al v. Texas Commission on Environmental Quality . At issue is whether rescission of a Railroad Commission no-harm letter before the TCEQ granted an injection-well permit rendered the permit void.

The Injection Well Act (Chapter 27 of the Texas Water Code) governs the permitting process for underground injection wells in Texas. The Act aims to maintain the quality of fresh water for the public and existing industries while trying to prevent injections that may pollute fresh water. Under the Act, a company seeking to construct and operate an injection well must apply to the TCEQ for a permit. The applicant must also provide a “no-harm” letter from the RRC stating that the injection well will not damage an existing oil or gas reservoir.

I’m an oil and gas guy. Why does this order concern me?

This case is about injection wells for industrial and municipal waste, not for oil and gas waste. But the court’s treatment of the Administrative Procedures Act and the effect of (dueling?) orders of state agencies could inform future actions and orders of both agencies.

The long and complicated timeline Continue Reading Texas Supreme Court to Review Approval of Injection Well Permit