Occasionally, we venture beyond the comfortable red-state confines of Texas to visit swing states and discuss mineral activity other than oil and gas drilling; and we go back in time. This is one of those journeys, as we go to Ohio, where the court relied on a decision from the time when Chester A. Arthur was president.

In Snyder v. Ohio Department of Natural Resources, mineral reservation language in a deed to 651 acres included “reasonable surface right privileges”. Sixty years later, the court ruled that those privileges did not include the right to strip mine.

The mineral owners wanted to strip mine ten percent of the land, arguing that such a small amount was a reasonable portion of the property to use. The state refused, no doubt because surface estate was now part of the Brush Creek Wildlife Area in Jefferson County. 

The court considered whether the deed language was ambiguous. The court concluded that the right to strip mine must be clearly expressed in the reservation of mineral rights. In this case, it was not.

In Ohio, absent an agreement to the contrary the mineral estate owner has the right to use as much of the surface as is reasonably necessary to reach and remove the minerals. This is the law in all producing states I am aware of. But that right does not include the right to destroy the surface altogether.

The court referred to an 1884 case to show that Ohio courts have long held that the holder of mineral rights cannot destroy the surface unless a waiver of the right to an intact surface is expressed in the deed.  Deed language granting “reasonable surface right privileges” neither authorizes strip mining nor releases the right to surface support. According to the court, strip mining is not a reasonable use of the surface estate, even if it is the only way to obtain the minerals.

One suspects that the mineral owner knew the state of the law when he proposed to mine only ten percent of the land. But his proposal could not overcome the limitations of  his contract – strip mining was not expressly reserved in the deed. The total disruption of ten percent of the surface could not be considered “reasonable use” of the surface estate. The court found that the same test would apply to auger mining because strip mining is statutorily defined to include auger mining.  (No, I don’t know what auger mining is.  I guess it is a lot like strip mining).

 The musical interlude returns:

http://www.youtube.com/watch?v=bDCsc3CU5ww 

Special thanks to Lydia Webb for her contibution to this entry.

 

By Travis Booher – Aggie

For the sake of the game plan, let’s run with Charlie’s lame football analogies, and look at a few more objectives to keep in mind when preparing a runsheet. This time, attention will be on the good guys (the boys in maroon), rather than the gang in purple and gold. Here are five more thoughts:

1. The fields are the same, but the stadiums are unique: The field is 160’ wide and 360’ long, like all other fields, but on game day, Kyle Field is a unique experience. Likewise, each tract being examined is unique, and a roadmap to its history is useful. A deed-plotting program is a tool to confirm if the description closes. If a tract changes shape and size 10 times, 10 separate deed plots do not show the examining attorney how the property developed. Thus, it is always helpful to provide a “boundary history” of the tract on one plat, or to provide overlays to illustrate the boundaries during these ownership changes.

2. What color is his uniform? The 12th Man, wearing their maroon and white, stands during the game, ready to be called to the sidelines. The colors help identify your team. Many times, however, a runsheet shows a recent oil and gas lease acquired from a stranger to the title (an unknown uniform). The landman might tell the lawyer that as a result of running “telephone title”, he heard Old Man Johnson recently died and Bubba Johnson, the lessor in Lease 4, is his son. As a general rule, it is helpful to note in the runsheet who these new players are, as record title will not reflect their ownership (or even their existence). New uniforms create havoc, especially if they are as grotesque as these guys, or even these guys.  They should be adjudged guilty in the court of bad taste.

3. Date the Playbook: Coaches formulate a new playbook for each upcoming game. When preparing a runsheet, always confirm that it has a certification date, so that your examiner can identify the time frame in which the chain of title was run.

4. It’s the Xs and Os: When Kliff Kingsbury calls a play into Johnny Football (see him at right), the formation and routes are carefully detailed in the Xs and the Os. When a title examiner reviews only a Memorandum of Oil and Gas Lease, he understands only a small part of the pattern. If a tract is subject to a Memorandum of Oil and Gas Lease, provide the examining attorney a copy of the unrecorded, underlying lease for review.

5. A flag on the play: When the referee mistakenly throws a flag on the boys in maroon, the penalty is enforced and the yardage is marked off. A lawsuit in your chain of title is like a flag. In order for your title examiner to know and understand the penalty, he will need to review the Order or Final Judgment ending the lawsuit. Flags, like lawsuits, happen, but you have to know the penalty.

 Co-authored byMarty Averill

As promised in our September 9 post, here is a more detailed analysis of Reeder v. Wood County Energy, LLC, et al, the recent Texas Supreme Court decision holding that an operator is not liable for breach of the 1989 model form JOA absent willful misconduct or gross  negligence.

 

It is difficult to resist shameless promotion of natural gas, especially when to do so makes sense.  Here is an article by Bjorn Lomborg,   A Fracking Good Story . Mr Lomborg is is an adjunct professor at the Copenhagen Business School, and founder and director of the Copenhagen Consensus Center and is known as a global warming skeptic, not because he denies the phenomenon, but because he has alternative ideas about how to address it. And he isn’t from Texas or Louisiana!! 

Among other points in this article:

  • U. S. CO2 emissions have dropped 20 percent despite adding 57 million energy consumers.
  • Overall, U.S. emissions have been reduced by 400 to 500 megatonnes a year, which is twice the total effect of the Kyoto Protocol on the rest of the world.
  • Wind turbines in the United States reduce emissions by only one-tenth the amount natural gas does. The European Union, for example, has invested over $20 billion annually into solar and wind energy, but its per capita CO2 emission have fallen by less than half of what the United States has achieved.
  • Natural gas emits 45 percent less carbon per energy unit than coal.

http://www.youtube.com/watch?v=jBDF04fQKtQ

Written by Travis Booher

Disclaimer: Travis should not be blamed for the lame football analogies in this post. 

All too often landmen see the same old comments and the same old requirements in title opinions. I was recently asked for ways to decrease the number of comments and requirements and hence, the amount of curative work (and costs) relating to title opinions. Here are five thoughts to keep in mind when preparing a runsheet for your title attorney:

1. Be a Visionary: Like our friend Richard Murphy on the right, see the whole field; have an eye on the goal; tell your examiner in clear terms what you would like to see in your completed title opinion. For instance, if you are only concerned about the leasehold ownership for the Smackover Formation, then your cover letter should say that. Don’t be willing to pay for something you don’t need.

2. Close the Gap: You never want your linebacker to give up a running lane wide enough for your little sister to navigate. Likewise, it is unsettling to your title examiner when your runsheet reflects a significant gap in time, or a gap between record title owners. That uneasy feeling is further heightened when the landman does not acknowledge or recognize the gap. If a gap exists, acknowledge it in the runsheet.

3. Death is Complicated: Have a game plan.  Probates in Texas, for the most part, have the same sequence and similar, if not the same, types of documents. When an examiner is reviewing a probate, he will always want to review at least three documents: the Application to Probate Will, the Last Will and Testament, and the Order Admitting Will to Probate.  

4. Divorces Are Worse:  Divorcing spouses often specify in detail how to split up the Colt McCoy-autographed football and other sports memorabilia, but spend scant time describing the mineral interests, even if that’s where the money is.  Often they are not represented by oil and gas lawyers.  As a result, divorce documents occasionally fail to clearly outline or describe the ownership of  minerals acquired as community property. Try to include as many of the relevant divorce proceeding documents as possible, but always include the Divorce Decree and property settlement agreements.

5. Exhibits = Hours = Legal Fees: Talk about running out the clock!  Often the examiner may be required to review a conveyance with a very long exhibit (Example: assignment of 1,000 oil and gas leases). The runsheet should note which exhibit page lists the information the examiner needs for the opinion. Our educated guess is that you don’t want to pay for me to review a 400 page exhibit looking for one lease.

 We will have more on this subject in a later post.  Next time we might even feature an Aggie running back.

In a victory for local control of oil and gas activity, or for environmentalists hoping to ban gas drilling altogether, or both, a Pennsylvania court struck down two major provisions of that state’s new oil and gas statute as unconstitutional.

Act 13 of the Pennsylvania legislature, signed into law in February 2012, significantly amended the Pennsylvania Oil and Gas Act. The new act generally preempts local regulation of oil and gas operations, with certain limited exceptions. Among other features, the act limits the ability of local governments to regulate oil and gas operations, superceding local ordinances designed to regulate development of oil and gas operations.

Robinson Township v Commonwealth of Pennsylvania was brought by seven townships to challenge the constitutionality of Act 13.

Section 3304 of the act says: “[a local ordinance] may not impose conditions, requirements or limitations on the construction of oil and gas operations that are more stringent than conditions, requirements or limitations imposed on construction activities for other industrial uses.” In other words – if the ordinance does not apply to construction of a manufacturing plant, then it may not only apply to oil and gas operations.

The act goes on: “[a local ordinance] shall authorize oil and gas operations, other than activities at impoundment areas, compressor stations and processing plants, as a permitted use in all zoning districts.” (my emphasis).

Section 3304 also requires that oil and gas operations be allowed in all zoning districts in the state. The plaintiffs argued that to allow this would go against the very logic of zoning regulations, i.e. the weighing of protecting public interests over an individual’s property right.

The court ruled that as a matter of law, Section 3304 violates due process because it allows incompatible uses in zoning districts and does not protect the interests of neighboring property owners from harm, alters the character of the neighborhood, and makes irrational classifications.”

Sec. 3215(b) establishes the minimum setback requirements for any well drilled in proximity to a “solid blue lined stream, spring or body of water.” Sec. 3215(b)(4) provides: “The [DEP] shall waive the distance restrictions upon submission of a plan identifying additional measures, facilities or practices to be employed during well site construction, drilling and operations necessary to protect the waters of this Commonwealth.”

The court ruled that Section 3215 violates the non-delegation doctrine of the state’s constitution because it empowers the DEP to waive setback requirements without providing standards that will direct the DEP when such waivers may be granted.

According to the court, the statute unconstitutionally authorized the DEP to grant waivers without clear directions from the General Assembly as to when a waiver would be proper, and that this vaguely worded statute was a delegation of legislative authority to the state agency.

The Commonwealth is seeking an expedited review by the Pennsylvania Supreme Court.  In the meantime, they can heat their homes and schools and factories with coal and foreign oil and power their cars with algae.

Co-authored by Marty Averill

If you are a non-operator under the 1989 Model Form Operating Agreement, pay close attention to Reeder v. Wood County Energy, LLC, et al.  The Texas Supreme Court ruled that the operator is not liable to non-operators for breach of the agreement except in the cases of gross negligence or willful misconduct.

 This is a departure from Texas decisions which historically have held that the exculpatory language at the heart of the case extends only to claims that the operator failed to act as a reasonable prudent operator in connection with operations, but not for breaches of the JOA.

 The Decision

 The question before the court: What is the standard for resolution of a breach of contract claim against the operator? Article V.A.1. requires the operator to “ . . . conduct its activities under this agreement as a reasonable prudent operator, in a good workmanlike manner, with due diligence and in accordance with good oil field practice, …”. So far so good. But then comes the exculpatory clause: “. . . but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct.”

 The difference between the forms is, “its activities under this agreement …” (‘89 form) and “… all such operations …” (’77 and ’82 forms). The court concluded that there is a substantial difference between those terms.

 The Litigation

 The parties were not getting along on major operations decisions. Reeder, the operator, sued Wood County Energy (in which he was a 45% partner) and the other non-operators alleging that as operator he had the exclusive right of possession of certain well bores and for other claims. The defendants counterclaimed that he illegally produced oil, fraudulently reported oil from one formation as being produced from another, and failed to sustain production in the quantities required by the JOA. All parties alleged conversion, violations of the Texas Thief Liability Act, and a host of other misdeeds.

 The jury found that Reeder breached his duties as operator. The non-operators were awarded damages and a declaration that Reeder owned no interest in the two formations at issue. The Court of Appeals agreed, but the Supreme Court reversed.

 The Takeaway

 It will be more difficult for non-operators under te 1989 form to recover against the operator for any claim, including breach of the contract, unless the non-operator can prove that the operator is guilty of gross negligence or willfulness conduct. Those are difficult burdens to meet.

 The court also discussed the legal sufficiency of the evidence necessary to support a jury verdict for gross negligence or willful conduct.

Stay tuned for a more thorough analysis of the case, including how the court could have resolved it in favor of the non-operators, why that result might have been better for the industry, how the ruling can be addressed when negotiating future agreements, and the sufficiency of evidence in this kind of  case.

A Quiz:

I don’t always read blogs, but when I do, I prefer Energy and the Law.

“Sazerac”: (a) The bar in the Roosevelt Hotel in New Orleans, (b) A wholly-owned subsidiary of the oil field company with the blue trucks, (c) Cyrano, the French guy with the big nose, (d) A drink comprising rye whiskey, simple syrup, Absinthe or Herbsaint or Pernod, Angostura bitters, and Peychaud’s bitters, (e) a and d.

After attending a party in Baton Rouge, we decamped to a local restaurant, LeCreole, for a nightcap. Having been raised in those environs, I’m no stranger to the local culture. Why not a Sazerac? So I ordered one, and it was good, and at that moment my quest began: To find the perfect Sazerac. Invented before the Civil War in New Orleans, the Sazerac is one of the oldest cocktails in America – kind of like an Old Fashioned without the mulled fruit.

The basics: Rye, I would say, is less distinctive than bourbon or Tennessee whiskey, so it benefits from additional ingredients. Too much Absinthe/Herbsaint/Pernod – all made from the herb anise – and the drink tastes like cough syrup; too much simple syrup and it’s treacly, without the bite necessary for an honest drink.

Disclaimer: Cocktails are like art and music – appreciation is subjective, and everyone is entitled to his opinion. But bad taste has its limits. I refuse to imitate my college frat brother who tried in vain to convince me that Grand Funk Railroad was as talented as the Stones. What follows is an effort to enlighten those who might want to venture off the beaten path mixology–wise. Here are the first four candidates (in no particular order):

Galatoire’s (Second block of Bourbon Street, N.O. – stand just inside the front door in your slacks and jacket on a Saturday afternoon and watch the “revelers” stumble up and down Bourbon Street. Quite entertaining) Leans more toward the whiskey. Traditional, meaning the balance was just where it needed to be.

Hermes (At the entrance to Antoine’s Restaurant in the French Quarter): A lot like Galatoire’s, which means classic. Just what you would expect from a New Orleans bar.

Le Creole (way out Highland Road in Baton Rouge) Heavy on the simple syrup. Just right on the Herbsaint. The treat here was how much the waiter and bartender enjoyed their work, down to tossing the glass in the air to shake out the Pernod. True art.

Di Giulio Brothers (neighborhood restaurant on Perkins Road in B. R. – good food): A bit heavy on the whiskey. Not quite cold enough. Traditionally served neat, the barkeep has to get the glass very cold before pouring.

To be continued. A journey as important as this one is never complete.

http://www.youtube.com/watch?v=6EFPU221kPc

Answer to the quiz: e, of course.

“Who cares about the law. It’s time for some football in Tiger Town.” Les Miles

My, how times change!  In a suit that brings the chaos, frenzy, and all-embracing madness of 2008 Haynesville leasing activity into focus, Hall Ponderosa LLC vs. Petrohawk Properties L.P. held that reformation of an oil and gas lease because of mutual error was not available to a lessor who was negligent in executing the agreement.

In an environment the court described as a “land rush”, Petrohawk was eager to acquire leases, but only on tracts at least 100 acres in size. Hall Ponderosa, owner of Stella Plantation, was eager to receive a big check (Nothing wrong with that). Stella Plantation is located in Section 14 and Section 13 in Red River Parish. Hall Ponderosa believed that Section 14 was 170 acres and Section 13 was 30 acres. The lessor’s representatives, an experienced landman and a petroleum engineer, were not newbies. The negotiations were hurried (15 days passed between the first phone call and execution).

A little law is necessary at this point. Louisiana courts employ the “four corners doctrine” in construing oil and gas leases. When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent. The reason is obvious: It’s all about certainty and stability of titles and other instruments involving land. A stranger knows the “real deal” from the four corners of the document.

The trial court reformed the lease and awarded $1,971,030 in damages (131.42 acres at $15,000 per acre, the price for the original lease).

More law: Reformation in Louisiana requires clear and convincing evidence (demonstrating that the existence of a disputed fact is highly probable, that is, much more probable than its nonexistence). The court of appeals found that there was not clear and convincing evidence that Petrohawk intended to include the Section 13 property in the lease.

Here is how the court of appeals reported the events before the lease was signed:

• The lessor never mentioned to Petrohawk that they owned property in Section 13;

• The Petrohawk landman didn’t look at Section 13;

• Section 13 was never offered to Petrohawk to be leased.

• Old surveys of Section 13 were available to the lessor.

And after:

• Errors in the original lease were cleaned up and Section 13 was not mentioned;

• The lessors surveyed Section 13 and realized for the first time that it had 144 acres.

• Four months later one of the representatives advised Petrohawk that the lessor had acreage in Section 13 that was available to lease;

• Four months after that, the lessor told Petrohawk that the Section 13 acreage had was mistakenly left out of the property description.

One lessor representative said he didn’t read the lease before signing it. Good luck with that one. In Louisiana (as in every other state I am aware of) one who signs an instrument without reading it has no complaint.

There is another, oft-repeated lesson here: When the trial court action is on the home-town lessor’s dance floor, the celebration will be at the expense of the out-of-state lessee with the deep pockets.

Petro-Hunt L.L.C. vs. Wapiti Energy L.L.C. causes one to think about the effect of a gas imbalances on a producing property acquisition and the importance of so-called “boilerplate” in the purchase agreement. It is also the saga of a bad day at the plate for the seller.

Let’s say I sold you an interest in gas wells which, after closing, turn out to be over-produced. You bought another interest in the same field from mighty Exxon in a more-or-less simultaneous transaction. Those interests were under-produced.

I refuse to settle up as required by our purchase agreement. My response to your suit for damages is that the overproduced and under-produced interests that you acquired wash each other out. Whatever value you lost from me, you will get back from Exxon. By not considering your value received from the other guy, you failed to mitigate. I win – home run! Not so fast, said the court. The under-production you might recover from the Exxon interest has no bearing on your claim against me. My over-production diminished the value of the asset you purchased from me, the purchase price of which was based upon there being no over- or under-production. Strike one.

Next pitch: I say your damages are determined by the value of each over-produced MCF at the time it accrued, set off by the value of each under-produced MCF at the time it accrued. At least a single? Wrong again. The value of your loss was determined on the date of the sale of my interest to you. Strike two.

I’m in a hole at 0 and 2, but maybe I can dribble out an infield hit. Your attorney’s fees award was 75% of your damage recovery. The court should have reduced the fees, I say.  The Texas Supreme Court recognizes a number of factors that go into an award of attorney’s fees.  The amount of fees must bear some reasonable relationship to the amount in controversy, but that factor alone is not determinative. The mere fact that attorney’s fees meet or exceed the amount of damages does not automatically establish that the fees are unreasonable.  Strike three; the futility is complete. You’re feeling like JustinVerlander and I’m looking like Reggie Jackson.*

The ‘boilerplate” that was important in this decision was the survival of warranties and representations after closing and the further assurances clause. Hunt’s representation that there were no gas production imbalances survived closing. And the parties provided for a post-closing final settlement statement. The amount of the imbalances had not been determined at that time. Wapiti relied on the further assurances provision to require Hunt to honor its representation months later when the imbalance was determined.

*Why Reggie? Mr. October leads all batters in the history of major league baseball in strikeouts.  http://www.youtube.com/watch?v=70I4xRbsT4Q