We begin with a tribute to global warming of a different sort.

For those not yet overexposed to reports on President Obama’s climate change policy announcement, I offer this reasonably objective factual summary of the highlights from the Washington Post (rather than the platitudes underlying many reports). A link to the text of the President’s plan is embedded in the Post article.

Also here is a reasonably objective and factual commentary from Bjorn Lomborg and criticism from the Heritage Foundation (rather than the hysteria from some on that side of the debate).

A provision in a contract, no matter how unequivocal, does not always trump the law. The oil and gas lease allowed assignments, but no change or division in ownership of  the land or royalties would be binding on the lessee until the acquiring party had furnished lessee with the instruments constituting his chain of title from the original lessor. Jones v. Clem says that the lessee could not rely on that clause if the lessor’s change of ownership occurred prior to the lessee’s acquisition, even if no notice was given to the previous lessee. (The case is not new, but is worth your attention.)

The Purchaser’s “Mistake”

When new lessee Jones acquired the lease from original lessee Western, he relied on a document he referred to as a “division order” – an unsigned piece of paper from Western’s lease records indicating that the original lessor Smith owned a .125 royalty interest. That document is not a division order under the Texas Natural Resources Code (See §91.401 (3)).

The lessor – Smith’s predecessor – quitclaimed to Clem, who recorded the deed but did not notify the lessee, Western. Nevertheless, Western paid Clem until 1999 before ceasing payment. Jones acquired the lease from Western in 2002 and received the so-called “division order” showing the .125 royalty interest is Smith, so Jones began paying Smith. Clem testified that he thought the well had ceased to produce after 1999, but later learned that the well had been producing. Clem sued Jones and Smith for improperly-paid royalties.

“Constructive Notice” – Again

As the courts often remind royalty owners, the doctrine of constructive notice creates a harsh but irrebutable presumption of actual notice of matters in the public records. Jones was charged with constructive notice of Clem’s right to be paid royalties, and his reliance on the purported “division order” was misplaced. Constructive notice trumped the change-in-ownership clause.

Jones reminded the court that ordinarily, change-in-ownership clauses override the constructive notice doctrine. But Clem’s ownership through the quitclaim deed was a matter of public record when Jones acquired the lease. Clem was already in the chain of title and his ownership would have been easily discoverable by searching the county clerk’s records or obtaining a title opinion. Jones could not rely on failure of notice because the change occurred prior to the time Jones took over the lease.

The Takeaway – They Call it Due “Diligence” For a Reason

The urge to reduce pesky land and legal costs when acquiring a property is strong and understandable, especially when the well has been producing and royalties have been paid with no complaints. But there are limits to what you should rely on without conducting your own investigation. As the court saw it, Jones could have ordered a title opinion, or at least a landman’s examination of the public records. It isn’t clear why Jones didn’t notice in 2002, when he acquired the lease, that Western had not been paying Smith since 1999, but that should have been a warning.

At Looper Reed we advise our clients that it is good business to accommodate your neighbor informally, if you can. Sometimes that leads to attempted world domination, as Chamberlain learned from Hitler in 1938. Closer to home it is my college-age son using his bedroom floor as a summertime closet. It can also lead to litigation. This is how it was at the Texas Supreme Court in Merriman v. XTO Energy.

What is the accommodation doctrine?

If the mineral owner has only one method for developing and producing the minerals, that method may be used regardless of whether it precludes or substantially impairs an existing use of the serving surface estate. On the other hand, if the mineral owner has reasonable alternative uses, one of which permits the surface owner to continue to use the surface in the manner intended and one of which would preclude that use by the surface owner, the mineral owner must use the alternative that allows continued use of the surface by the surface owner.

What must the surface owner prove?

The surface owner must prove that (1) the lessee’s use completely precludes or substantially impairs the existing use; and (2) there is no reasonable alternative method available to the surface owner by which the existing use can be continued. If he carries that burden, then he must further prove that given the particular circumstances there are alternative, reasonable and customarily industry accepted methods available to the lessee which would allow both uses.

How did he do in this case?

Merriman owns a 40 acre tract with a home and a barn, permanent fencing, and corrals used in cattle operation. He leases several other tracts and once a year brings his cattle to the 40 acres for a round-up.

XTO was lessee of the severed mineral estate. Merriman claimed the proposed location would interfere with his cattle operation and that XTO failed to accommodate his existing use of the surface, exceeded its rights in the mineral estate, and trespassed.

This decision turned on some inside-baseball summary judgment evidence rules. It is best to leave your trial lawyers in charge of such details. The point is that Mr. Merriman did not produce evidence that he had no reasonable alternatives for his cattle operation. The good news was that a surface owner need not prove that he has no reasonable alternative for general agricultural purposes.

The court concluded that the well was an inconvenience to Mr. Merriman and would result in some amount of additional expense and reduced profitability. That hindrance does not rise to the level of evidence that the surface owner has no reasonable alternative method to maintain the existing use.

Is there an unspoken issue?

XTO’s lease was of the severed minerals. You can count on a surface owner who will never benefit from a well in his backyard to be a tougher customer than the royalty owner who stands to receive a fat monthly check for his troubles.

We offer Mr. Merriman our condolences and this musical tribute to his cattle operation. Or you might prefer this one.

Politico and other sources report that President Obama promised a crowd of supporters in northern California recently that he would unveil his climate change strategy sometime soon. What it might look like is unknown.  It has been suggested that the policy will revolve around EPA pollution sources like power plants. 

It is reported that there is no relation between the Keystone and climate change initiatives. The State Department concluded that the Keystone XL pipeline which, as if you didn’t know it already, would import Canadian tar sands oil, would not meaningfully increase global pollution. This finding was attacked by environmental groups, and even another government agency, the EPA.

Before the election the President’s spokesperson said he had no plans for a carbon tax. It appears that he has changed his mind.  

Could this be the result they have in mind for oil and gas?

Speaking of climate change, as in any debate the same data can be used bydifferent sides for opposing purposes.  But there is always someone who seeks somthing closer to the rational center of the debate than do the radical elements.

Co-author Jason Emmitte

The Texas Railroad Commission has clarified and strengthened Rule 13, relating to requirements for drilling, putting pipe down, and cementing wells. The amendment will go into effect on January 1, 2014.

Generally, the revisions govern the casing and cementing of all wells, unlike previous versions.  Highlights are:

  • New and more precise definitions, for example, “hydraulic fracturing”.
  • Transfer from the Texas Commission of Environmental Quality (TCEQ) to the Groundwater Advisory Unit of the Oil and Gas Division of the RRC of responsibility for determining at what depth usable-quality water must be protected.
  • The authority to require a better quality of cement mixture to further protect groundwater that could be harmed by a poor casing job or the use of below-grade cement.
  • A cementing report must be filed with the RRC within 30 days of completion of a well or within 90 days of cessation of drilling, whichever is earlier.
  • Operators will be required to pressure-test well casings to the maximum pressure expected, monitor the annular space for pressure changes that could indicate a casing leak, verify the mechanical integrity of surface and intermediate casing when drilling time exceeds 360 hours, and seek prior approval before setting surface casing deeper than 3,500 ft.
  • Additional testing on wells less than 1,000 ft below usable groundwater
  • Use of air- and water-based drilling fluid until surface casing is cemented.
  • New requirements for well control measures and blowout preventers.
  • Additional cementing when an injection or disposal well is within a quarter mile.

The effect of the amendment is to more clearly outline the requirements for all wells, consolidate the requirements for well control and update the requirements for drilling, casing, cementing and fracture stimulation.

These revisions are timely, amid the debate over whether there should be  federal rules governing hydraulic fracturing.  Here is an article in Scientific American offering arguments for and against federal fracking rules. 

  

Co-author Travis Booher

The regular session of the 2013 Texas Legislature is over and now it’s time to assess the damage. Bills significant to the oil and gas industry, and their fate, are as follows:

HB 100 – Forced unitization: Failed. Regardless of your opinion of the merits, this was no surprise.

SB 108 – Allowing adverse possession of property by a cotenant heir after 15 years: Failed. That was a good thing. The bill would have created adverse possession of  lands from a cotenant who is also a family member (hence, a “cotenant heir”). The bill may have intended to clear title to land in which numerous heirs own an interest because of intestate succession, but it surely would have created conflict at family reunions. Texas already has a method to adversely possess lands, and having numerous affidavits claiming that lands have been successfully adversely possessed (as allowed by the bill) would create title uncertainty.

SB 873 – Permitting process for oil and gas wells and use of water: Failed (left pending in committee).

SB 1747 – Transportation reinvestment zones: Passed.

See our May 14 entry  for comments on these last two.

HB 2166 – Railroad Commission’s sunset bill: Failed. “Touchy” parts (as in strongly resisted by those with something to lose, to wit, some or all of the RRC commissioners) of the bill were new ethical requirements for the commissioners, including resigning before running for another statewide office, prohibitions on campaign contributions, and reporting of contributions from parties having business before the commission.

SB 219 – The Texas Ethics Commission’s sunset bill: Passed. The resign-to-run portion of failed HB 2166 found its way into this one. We understand that the rationale for opposition to the resign-to-run requirement was that the same rule would not apply to other statewide officeholders. This bill is awaiting the Governor’s signature.

HB 2590 – Effect of foreclosure sale of property subject to an oil and gas lease: Passed, awaiting the Governor’s signature. This bill, sponsored by a producer, attracted opposition by other producers after the session closed. They promise to ask the Governor to veto it. If you take a lease subject to a deed of trust and the property is later foreclosed, you lose your lease unless you have a subordination agreement. This bill changes that: You wouldn’t lose your lease (if recorded before the security interest or after the security interest but before the foreclosure sale).  You would lose use of the surface, however, and the bill imposes new indemnification obligations on the lessee.

CR 53 – Confirming the pecan pie as the official pie of Texas. Passed.

First, an admission and a regret:  My June 6 post missed the 69th anniversary of an episode as significant as any in our country’s history: D-Day.  I think I know why.  As time passes and the participants in that venture become fewer, there aren’t as many left to tell the story, the celebrations dwindle, and the meaning of D-Day becomes further removed from our collective memory.  (Note to middle schoolers and those who don’t read much: Abraham Lincoln was not the president during WW II).

The pics are of my uncle, Judge Lenton Sartain, then and now. Then he was a 23 year old lieutenant-soon-to-be-captain in the 82nd Airborne Division. On the night of  June 6 he and his troops and their artillery were packed into plywood gliders and cut loose several miles beyond the beaches. From there they helped to blast the advance out from the coast and pressed on to Holland, Belgium and Germany. I could go on but, as you’ve heard, the rest is history.  Now he is 92 years old, in well-deserved retirement, and feeling pretty good.

Now, on to business.

Our co-author today is Alexandra Crawley

Today’s post is about blocking and tackling – no lofty public policy considerations to get the electorate all fired up.  We see a recurring issue with the proportionate reduction clause in leasehold assignments that reserve an overriding royalty interest. The interpretation of these assignments – i.e. who gets the money – hinges on whether proportionate reduction covers the “mineral estate”, the “leasehold estate”, or both. Learn from the following examples:

The Deal

Tiger Drilling takes an Oil and Gas Lease with a lessor’s royalty of 15%. Tiger assigns 50% of its interest in the lease to 12th Man Operating, reserving an ORRI equal to the difference between existing lease burdens and 18%.

The First Scenario: The “Mineral” Estate

The assignment contains the following proportionate reduction clause:

If any lease assigned to Assignee covers less than a full mineral interest or if Assignor’s interest in such lease is less than the full mineral estate, then each overriding royalty interest reserved by Assignor in each such lease shall be reduced proportionately.  (all emphasis is ours)

It appears that 12th Man’s scrivener was not as slick and quick as their pesky quarterback.  Tiger would be credited with an ORRI equal to the difference between existing lease burdens and 18% applicable to 100% of the mineral interest assigned, not an ORRI equal to the difference between existing lease burdens and 18%, applicable to 50% of the mineral interest.

This is because there is no proportionate reduction clause reducing the reserved ORRI to the 50% leasehold interest being assigned. Therefore, Tiger would have the full 3% overriding royalty (18% minus the lessor’s royalty of 15%), all of which burdens 12th Man’s 50% leasehold interest in Subject Lease.

Second Scenario: The “Mineral” and the “Leasehold” Estates

The assignment contains the following proportionate reduction clause:

If any lease assigned to Assignee covers less than a full mineral interest or if Assignor’s interest in such lease is less than the full mineral estate, then each overriding royalty interest reserved by Assignor in each such lease shall be reduced proportionately. If the interest conveyed to Assignee herein is less than the entire leasehold estate, the overriding royalty shall be reduced proportionately to the interest conveyed.

Here, Tiger would be credited with an ORRI equal to the difference between existing lease burdens and 18%, applicable to 50% of the mineral interest assigned, rather than an ORRI equal to the difference between existing lease burdens and 18% and 100% as above. Pay attention to that second sentence. The clause now addresses both the mineral and leasehold estates.

The result is that Tiger would have a 1.5% overriding royalty (18% minus the lessor’s royalty of 15% multiplied by 50%), burdening 12th Man‘s 50% leasehold interest in the lease.

The Lesson

Double-check your proportionate reduction language. Does it reflect the parties’ intentions? If you intend to proportionately reduce the ORRI to the leasehold interest assigned, be sure to include “leasehold” language.

Co-author Chance Decker

Private property rights advocates scored a big victory in a Texas condemnation case in the ongoing battle between pipelines and landowners over the power of eminent domain. (See our last post for a decision with the opposite result). 

An appeals court in Crosstex NGL Pipeline, LP v. Reins Road Farms, Ltd. denied “common carrier” status for Crosstex, who wanted an injunction to prevent the landowner from interfering with Crosstex’s efforts to survey his property for a gas liquids pipeline.

The court found Crosstex was not a “common carrier” with eminent domain power under either the Texas Natural Resources Code or the Texas Business Organizations Code. Crosstex’s pipeline would transport “natural gas liquids” not “crude petroleum” as that term is defined by the Natural Resources Code, and there was evidence the pipeline “will not actually be used by the public,” a prerequisite to common carrier status under the Business Organizations Code.

The Natural Resources Code confers common carrier status on any person who “owns, operates, or manages a pipeline or any part of a pipeline in the State of Texas for the transportation of crude petroleum to or for the public for hire, or engages in the business of transporting crude petroleum by pipeline[.]” The court did not consider “natural gas liquids” to be “crude petroleum” under the statute.

The finding on the public use question is important to landowners opposing condemnation. Crosstex’s public use T-4 permit from the Railroad Commission did not automatically confer common carrier status. A landowner is still entitled to dispute a pipeline/condemnor’s common carrier status despite the issuance of a RRC T-4 permit. This is consistent with the Texas Supreme Court’s 2012 decision in Tex. Rice Land Partners, Ltd. v. Denbury Green Pipeline-Tex., LLC.

Prior to Denbury, about all the pipeline had to do for common carrier status was fill in a box in its RRC permit application. It’s not that easy anymore.

There are several ways the songsmith could view this case, in the unlikely event that condemnation law is his muse.  One is from this particular pipeline’s perspective. (Landowners who weren’t as lucky as here should like the reference to the six-gun). Another is through the eyes of the landowner.  That’s a stretch here. Nobody accuses the landowner in our case of being in such a tough spot.

Co-author Chance Decker

Two recent cases from the same Texas court reflect the ongoing uncertainty over the threat to private property rights posed by the Keystone XL and other pipelines. Is there a theme, a common thread, running through law on this subject? Not in Texas. Today we discuss one of these decisions, Next time we review the other.

In Re Texas Riceland Partners, Ltd., confirmed TransCanada Corp’s common carrier status and affirmed its right to immediate possession of landowners’ property in Jefferson County for the Keystone XL pipeline. A consortium of rice farmers alleged TransCanada could not use the power of eminent domain to take over private property because it was not a “common carrier” under the Texas Natural Resources Code. The Code grants common carriers the power of eminent domain, and defines a “common carrier” as someone who “owns, operates, or manages a pipeline or any part of a pipeline in the State of Texas for the transportation of crude petroleum to or for the public for hire, or engages in the business of transporting crude petroleum by pipeline.”

The trial court denied the farmers’ challenge to TransCanada’s common carrier status and upheld the condemnation. The court of appeal upheld TransCanada’s right to possession of the condemned property during the farmers’ appeal. The farmers relied upon the 2012 Texas Supreme Court decision Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC that a pipeline owner’s power to condemn must be fully resolved through the judicial process before the pipeline can take possession of private property. The flaw in that challenge was that in Denbury, the court denied common carrier status.

The court found ample evidence — including affidavits from TransCanada employees about the Keystone XL Pipeline’s ownership and planned operations—to find TransCanada a common carrier.

The takeaways: 

  • The pipeline/condemnor need not wait until the end of the seemingly interminable appeal process to take the land and construct its pipeline.
  • Some cases raising “big” policy issues are decided by a mundane examination of the statutes creating the rules, not flowery speeches by one side or the other.

I spent the better part of last week surrounded by foreigners … which is to be expected because I was in a foreign country, the Netherlands to be precise. Looper Reed has joined First Law International, a consortium of select, highly-rated law firms in over 45 countries, assembled to give businesses in one country, the United States for example, access to counsel in other countries who are a known quantity in terms of their talent and ability to address their legal needs.

The excursion was beneficial for several other reasons, one of which was to remind me of the multitude of benefits that result from the private ownership of minerals.  Mr. and Ms. Royalty Owner, next time you’re mad at your lessee, or the previous owner who reserved half the minerals and the executive rights, remember that if you were in many other producing countries you wouldn’t have standing to be dissatisfied. The government would own the minerals under your land.  And your suffering through the noise, truck traffic, dust and other detritus of a drilling operation wouldn’t be soothed by a fat royalty check.

If you are the operator, your ornery lessor would be your own federal govenment. Imagine control over our oil and gas reserves by those who believe that Uncle Sam knows best in all aspects of our economic life, and to whom fossil fuel production is to be discouraged.   

Second, the hydraulic fracturing debate rages in countries other than the United States. For example, it is banned in many places with the promise of bountiful gas reserves, and where it is allowed there is resistance:

France, where fracturing is legal for geothermal energy but not for gas.  

England, where it is legal but opposed by many.

The Netherlands, where the government supports it but others (according to the NewYork Times) don’t.

Where fracking is banned in those portions of Germany that are likely to be productive.

Today’s musical interlude has nothing to do with gas production, but maybe Irish-American relations is on your mind.