Texas Attorney Blog

Assisting royalty owners in locating lost oil and gas royalties, and getting royalty owners paid their rightful royalty payments, is one of the parts of my practice as a Texas oil and gas attorney that I enjoy the most. However, many of my clients are suprised to learn that there is a pretty strict time limit to how far back they can claim unpaid or underpaid royalties. For that reason, if you think you are not getting royalties to which you are entitled, or if you think your royalty payments are not being correctly calculated and that you may be underpaid, it is important to take action to correct the situation sooner, rather than later.

A recent decision last week by the Texas Supreme Court underscores this point. Specifically, the Court issued a decision in Shell Oil Co., et al. v. Ralph Ross which could effect all future royalty disputes in Texas. In a nutshell, the Court solidified the four year limit under Texas law within which a lawsuit for underpaid or nonpaid royalties must be filed.

The case involved a dispute between the Ralph Ross, as the Plaintiff, and Shell Oil Company. Mr. Ross’s family had leased the mineral rights on their land to Shell since 1961. Mr. Ross is an oil and gas attorney and therefore understood the oil and gas industry and the relevant legal issues more than the usual lessor. Under the original lease, Shell was required to pay a certain percentage to the family for any gas produced from the land—a total roughly equaling one sixteenth of the profits. However, between 1994 and 1997, Shell used a different calculation, and underpaid Mr. Ross and his family for their royalties. Shell claimed this was due to a simple accounting mistake.

In 2002, Mr. Ross assumed all rights relating to his family’s oil and gas lease and first became aware of the underpayment. In 2002, Mr. Ross sued Shell Oil for breach of contract, unjust enrichment, and fraud. The family’s legal claims were brought five years after the final underpayment took place. Texas has a four year statute of limitations for filing this type of suit. However, the family argued that the statute of limitations period should be extended, or "tolled", under the “fraudulent concealment doctrine.” The doctrine essentially states that if a defendant conceals information from the plaintiff, and as a result the plaintiff could not have become aware of the problem, then the statute of limitations "clock" will not start to run until the plaintiff actually becomes aware (or should have become aware) of the problem.

Both the trial and appellate courts found for the family, holding that Shell had behaved fraudulently in underpaying for the gas produced from the family's land and that Shell engaged in fraudulent conduct which extended (or "tolled") the four year statute of limitations. Shell appealed the decision of the trial court and court of appeals to the Texas Supreme Court.

Last week the Supreme Court reversed the decision of the lower courts and found for Shell Oil. Justice Lehrmann, writing the opinion, held that contrary to the lower courts’ rulings, the fraudulent concealment doctrine did not toll the limitation period in this case. Justice Lehrmann noted that royalty owners are required to make themselves aware of relevant information which was publicly available to the royalty owners regarding the royalty payments they actually receive (or don't receive) and the payments they should have received. The Court held that if a royalty owner fails to utilize due diligence by finding that information within the 4 year limitations period, then that royalty owner's claim has expired. This opinion was a reiteration of the Court’s decision in BP Am. Prod. Co. v. Marshall.

The Court went on to say that there were significant discrepancies in royalties paid to the Ross family, and that these discepancies put them on notice that Shell was underpaying them. The Court also restated its decision in Wagner & Brown, Ltd. et al v. Horwood, in which they held that even if a reasonable explanation for the suspiciously low royalty payments exists, the royalty owner cannot avoid the due diligence requirement to investigate. The Court concluded that Shell’s alleged fraud could have been discovered by the Ross family if they had acted diligently during the limitations period. As a result, the family could not go forward with their suit.

This ruling is another reminder of how important it is to keep on top of your rights under an oil and gas lease. It is risky to sit on your rights, let suspicious payments slide, or let a land man or company agent explain away issues which may actually be a violation of the lease. Be aware that most disputes regarding royalties end up being settled, and do not end up in a lawsuit in court. However, the four year cutoff is going to apply in a negotiated settlement, as well as in a lawsuit.

With the four year statute of limitations period firmly set in Texas oil and gas law, if you are suspicious or concerned about low royalty payments, or about royalty payments that you should be getting but are not, it is imperative to talk to a Texas oil and gas attorney right away to protect your interests. Waiting too long could very well forfeit your rights to missing, underpaid or unpaid royalties.

See Our Related Blog Posts:

Mineral Deeds Can Be Complex!

Texas Supreme Court Sheds Light on Duty of Owner of Oil and Gas Leasing Rights

There are a number of misguided environmental "activists" who characterize efforts to reduce greenhouse gas emissions as some kind of a “David vs. Goliath” struggle between forward-thinking environmentalists who love the planet, on one hand, and greedy energy companies who want to plunder the planet, on the other. While this may be a convenient bias for news articles and political debates, it bears little resemblance to reality. As an oil and gas attorney in Texas, I work directly with the oil and gas industry. As a result, it's clear to me that the false dichotomy between those who care about the environment and those in the energy industry is exactly that: false. The truth is that many energy companies involved in obtaining, refining, and selling oil and gas are also environmentalists who work hard to preserve the planet.

For example, oil and gas companies are much better environmental stewards than they are given credit for. Consider a new report from the American Petroleum Institute analyzing investments in greenhouse gas technologies in North America over the last year. This report notes that there was roughly $225 billion spent in on greenhouse gas (GHG) mitigation in 2010. Of that total, U.S. based oil and natural gas companies contributed nearly half: $108 billion. That amount includes about $37 billion in shale gas development technologies and $71 billion in other investments. About $60.5 billion of the industry’s investment went toward oil and gas substitutions—including the shale gas investments. The shale gas advances are included in the data because its use can reduce the use of coal, which can significantly curb methane releases.

Compare these energy industry investments with about $74 billion in total federal government spending (most in projects funded by the “stimulus” package) for GHG mitigation. Private entities (other than energy companies) combined invested roughly $43 billion during that same time period. Most federal spending went toward energy efficient lighting, biofuels, solar power, and wind. The other private investments included efforts in advanced technology vehicles, electricity efficiency, biofuels, and wind power.

The API study was produced by T2 and Associates and is entitled "Key Investments in Greenhouse Gas Mitigation Technologies from 2000 Through 2010 by Energy Firms, Other Industry, and the Federal Government". It was created by analyzing 565 different public documents and databases on the topic, including corporate reports, federal budgets, and other sources.

These figures present a much different picture than that painted by some environmentalists, i.e., of an industry dragging its feet to prevent GHG mitigation efforts. Let us not forget that these large investments were made in the face of a significant and persistent recession. When businesses of every stripe were laying off workers, cutting services, and eliminating all non-essential efforts, the oil and gas industry continued to preserve jobs, produce jobs, and invest in GHG mitigation. In addition, these investments were made despite the significant questions about the psuedo-science that serves as the basis for claims of climate change due to alleged manmade greenhouse gas emissions.

Of course, all of these efforts received little to no attention in the national media. Instead, virtually all public or political mentions of the energy industry continue to be the usual attacks based on skewed or flat-out incorrect assertions about the work of these companies. One can only hope that more fair-minded Americans will become aware of the true story of the oil and gas industry’s efforts like these latest GHG mitigation investment figures. It is when we base our decisions on correct information, rather than psuedo-science, that we can properly balance energy production and environmental preservation.

Property transfers involving mineral rights can be complex. As a Texas oil and gas attorney, I help my clients navigate these difficult legal issues. Mineral rights and potential royalties from those minerals can have a significant impact on the value of a property. Therefore, whether you are buying or selling property, it is critical that the deed and other documents accurately address the mineral rights.

One especially tricky, but not uncommon, scenario, was the subject of a recent article in Tierra Grande, a publication from Texas A & M’s Real Estate Center. This situation involves a transfer in which the original sales agreement or earnest money contract reserves the mineral rights to the seller, but the reservation of mineral rights is not stated in the actual deed delivered to the buyer at closing.

Sometimes both parties admit the error and correct it in a non-contentious fashion by executing a correction deed. However, when a friendly solution does not materialize, there are several key legal issues of law that determine whether the deed can be reformed to match the sales contract and include the mineral reservation.

The first legal principle is the statute of frauds, which in Texas is contained in Section 26.01 of the Texas Business and Commerce Code and Section 5.021 of the Texas Property Code. The Texas statute of frauds provides that all terms of a real estate sale must be in writing and signed by both parties to be enforceable. The second legal principle is the merger doctrine, which provides that the deed is the final expression of the parties' agreement and supersedes all prior written or oral agreements, including the sales contract or the earnest money contract. The third legal principle that often applies is the statute of limitations, which, according to Texas Civil Practices and Remedies Code Section 16.051, is four years from the date of delivery of the deed to the buyer. Texas recognizes an exception to the statute of limitations, however, called the "discovery rule". In other words, the seller has four years from the time the seller discovered or reasonably should have discovered the mistake in the deed within which to file suit for reformation of the deed This date may be a later date than four years subsequent to the delivery of the deed.

If the statute of limitations has expired, even with the application of the discovery rule, then the seller's remedies have expired and that's the end of the story. If the statute of limitations has not expired, then we consider the merger doctrine. Generally, the merger rule dictates that the deed is the parties' final agreement. However, an exception to the merger doctrine can be based on a mistake, accident, or fraud in the deed. The concept of mistake is especially interesting in this context. In general, it has to have been a mutual mistake, that is, both parties must have intended to agree to something that did not end up in the deed. A Texas court in Gail v. Berry earlier this year ruled that, if the buyer notices the mistake in the deed at the time the buyer signed it, this will be considered to be a mutual mistake, even though this might appear to be a unilateral mistake by the seller. In the Gail case, the seller was allowed to reform the deed to reflect the mineral rights reservation.

The next question a Texas oil and gas attorney often encounters is what happens when the buyer has signed an oil and gas lease before the deed is reformed? In most cases, if the lessee/oil and gas company did not know about the mistake and could not have reasonably discovered the mistake, it is considered to be a bona fide purchaser, i.e., an innocent party. As a result, the oil and gas lease will be allowed to stand.

There is, of course, a lesson to all this. Have an experienced attorney handle mineral and real estate transactions. The small amount of money you may save by foregoing competent representation could cost you dearly in the long run.

I'll bet that most Texas oil and gas attorneys (and, I'm sure, everyone in the oil and gas business) often hear the myth repeated that someday there will be a peak in oil production, followed by a rapid decline which will cause the collapse of human civilization as we know it. This myth predicts that someday, possibly someday soon, (although that date keeps getting pushed back when it turns out to be wrong) the world will simply run out of oil. Please understand this myth for what it is—unnecessary fear mongering by those with either a political purpose or who are ignorant of the oil production process.

Daniel Yergin , an expert energy researcher and the Pulitzer Prize winning author of "The Prize", excerpts from his new book, "The Quest: Energy, Security and the Remaking of the Modern World", in a recent Wall Street Journal interview. He describes the ways in which the purveyors of this “oil peak” myth are systematically wrong. For example, the myth drastically oversimplifies the complex nature of oil production. It is based on the concept that the world has X amount of oil, and when we use X amount, there will be none left. While in an absolute sense that may be true, oil production is not nearly as simple as that. This country has a long history of feverish predictions that we are running out of oil, going back as far as the 1880s. The actual prospect of running out of oil remains as distant today as it did then.

From 2007 to 2009, for every barrel of oil produced in the world, 1.6 barrels of new reserves were found. In addition, energy technology, including green energy, has advanced to the point where we use oil in a much more efficient way than in the past. As a result, each barrel of oil goes further. But the “oil peak” myth still holds our collective national attention for some reason. Mr. Yergin attributes this in large part to a man by the name of Marion King Hubbert, who studied geology in the first half of the 20th century. The "oil peak" is often referred to as “Hubbert’s Peak.” In 1956, Hubbert theorized that oil production would peak between 1965 and 1970. When production did decline after 1970 and the oil embargo rocked America soon after, his theory seemed vindicated. He also claimed that the generation of children born in 1965 would see oil reserves wiped out in their lifetimes. But what Mr. Hubbert did not count on was the huge increase in newly discovered oil and gas reserves found and produced in the U.S. By 2010, US oil production was three and a half times higher than Mr. Hubbert predicted it would be.

Hubbert apparently did not have a good grasp of economics and technological change, and this hampered his ability to understand the future of oil. Both economics and technological change are critical to understanding how the oil industry works and changes over time. Economics drives production through the forces of supply and demand, but Mr. Hubbert, oddly enough, insisted that oil prices didn’t matter. He was mistaken, of course. High oil prices motivate oil companies to find new reserves and to develop new technology to produce known reserves. Technological innovation has increased dramatically in the oil industry in the last decades, resulting in discovery of new reserves and production of known reserves previously believed to be inaccessible.

Oil production in the US has increased 10% since 2008, assisted by discoveries like the Bakken oil fields in North Dakota (see our previous post). Mr. Yergin suggests that instead of thinking of a peak, it is more accurate to think of oil production as a plateau, which is leveling off because of increased energy efficiency and new technology.

Yergin brings substantial background and insight to both his first book, "The Prize" and now to this new work, "The Quest". The are both recommended reading for anyone interested in the history and the future of oil.