Articles Posted in Oil and Gas Law

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The United States Court of Appeals for the Fifth Circuit recently decided the case of Breton Energy, L.L.C., et al. v. Mariner Energy Resources, Inc., et al which concerned claims of waste and drainage against Defendants who were operators of a neighboring mineral lease. The issue was whether the Plaintiffs sufficiently plead a claim for relief against each Defendant. The Fifth Circuit concluded that the claims of drainage against all Defendants should be dismissed, and the claims of waste should be dismissed as to all but one Defendant, IP Petroleum Co. (“IP”).

The Facts
Conn Energy, Inc. (“Conn”) owned a mineral lease named West Cameron 171 (“WC 171″) in the Gulf of Mexico. In 2009, Conn had an agreement with Breton Energy, LLC (“Breton”), allowing Breton to explore WC 171 for hydrocarbons. Conn and Breton sued the owners and operators of a neighboring lease called West Cameron 172 (“WC 172″). It was significant in this case that the WC 171 and the WC 172 shared a hydrocarbon reservoir: the K-1 sands. The other Defendants were other lease owners and operators or predecessors or successors to the current operators.

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Previously I have discussed the revised Texas Railroad Commission (RRC) Rule 3.70 regarding permits for pipelines. You can access my previous blogs here and here. The RRC approved that new rule on December 3. 2014, and it went into effect on March 1, 2015. You can access the text of the new rule here.

There were many comments and suggestions made during the Public Comment period required by Texas law for any new administrative rule. The RRC included a few of these suggestions in the revised rule. However, there were a number of important comments and requests that were neither significantly addressed nor included in the revised rule. These include:

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An interesting case that involved easements was recently decided by the Texas Supreme Court. The case is David Hamrick, et al. v. Tom Ward and Betsy Ward and the issue presented to the Court was whether an implied easement of necessity by prior use continues after the necessity has ended. There are two basic types of easements. Express easements, that are created by an agreement (usually written) and implied easements, that arise by operation of the law due to certain specific facts. In Texas, implied easements are split further into a number of subcategories, including easements of necessity and easements by prior use.

grass-landscape-with-road-1440659-m.jpgThe Facts
In 1936 O.J. Bourgeois owned certain property in Harris County, Texas. Mr. Bourgeois gave two acres of the land to his grandson. While the grandson owned this land, a dirt road was built across Mr. Bourgeois’ remaining property to allow the grandson access to the public road. Subsequent owners of the grandson’s property also used the dirt road for access. Eighty years later, Tom and Betsy Ward were the owners of the grandson’s land and still used the dirt road. The Wards put gravel on the road so they could use it for construction of a new house on their property. The Hamricks owned the land that the dirt road crosses, formerly the property of Mr. Bourgeois. The Hamricks filed a lawsuit asking for a temporary injunction preventing the Wards from using this road. The temporary injunction was granted in April 2006. So as not to delay construction of their new house, the Wards built a new driveway to access the main road. In the suit, the Wards requested a declaratory judgment that they had an implied easement for the dirt road. The trial court granted the Wards motion for summary judgment and the Court of Appeals agreed and held that the Wards had a prior use easement across the Hamricks land.

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Steve Lipsky and his wife Shyla became famous as Texas landowners who claimed they could set their water on fire–and they alleged this was due to methane contamination from nearby hydraulic fracturing. The couple sued Range Resources who operated a well near their house in Weatherford, Texas. The Lipskys claimed they noticed problems with their water after Range drilled two natural gas wells near their house in 2009.


The Environmental Protection Agency, without any scientific basis whatsoever, concluded that Range had caused or contributed to the water contamination. The Railroad Commission of Texas did actual did scientific testing and determined that the methane came from a shallower rock formation than the one drilled, and allowed production at the wells to continue. Many people do not realize that methane occurs naturally in many water deposits, but is not drawn into the water pump until the water level falls below a certain level. With lots of fanfare, the EPA sued Range Resources in federal court for the alleged contamination. That suit was later quietly dismissed in its entirety.

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sunrise-series-1446056-1-m.jpgA federal appellate court decision demonstrates some lessons for Texas mineral owners. That decision was issued by the Fifth Circuit Court of Appeals in the case of Breton Energy, L.L.C., et al. v. Mariner Energy Resources, Inc., et al. The Plaintiffs in this case own and operate an off-shore lease in the Gulf of Mexico that includes an area known as the K-1 sands. The Defendants own and operate an adjacent off-shore lease that covers an area known as the K-2 sands. The Plaintiffs claimed that the Defendants engaged in “unlawful drainage” from the Plaintiffs’ lease in violation of federal and state law.

The Facts:

Breton Energy LLC
and Conn Energy Inc. sued International Paper Co. and its successors in interest, consisting of eleven oil companies including Apache Corporation, Chevron and I.P. Petroleum Co. The Plaintiffs claimed specifically that IP Petroleum perforated and drained an oil reservoir under the Plaintiffs’ lease on the Outer Continental Shelf in the K-1 sands. The Plaintiffs also claimed that IP co-mingled resources from this reservoir with hydrocarbons from a nearby reservoir, making it impossible for the Plaintiffs to produce oil and gas from its own wells.The evidence showed that I P Petroleum, even though it had been ordered by the federal Minerals Mining Service not to complete wells in both the K-1 and K-2 sands, did in fact complete wells in both areas. There was also evidence that I P Petroleum’s production exceeded their estimate by almost 30%, which would make sense if they were producing from someone else’s reservoir as well as their own.

The District Court dismissed the Plaintiffs’ claims, and they appealed to the Fifth Circuit.

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The Railroad Commission of Texas (the RRC) is planning to amend their permit rule for oil and gas pipelines. The section to be amended, section 3.70, involves the pipeline permit procedure. The RRC invited comments on the changes until August 25, 2014. The issue has become a hot topic, especially since Texas already has substantial case law on what constitutes a common carrier.

Current Texas Law
Texas law requires that to be considered a common carrier a pipeline must serve a “public purpose” in carrying products for third parties for compensation, as discussed in the Denbury Green opinion by the Supreme Court of Texas. (You can access my previous blog post about this case here). In the Denbury Green case, the Supreme Court said that when a landowner challenges a pipeline’s claim of common carrier status, the burden is on the pipeline company to prove it meets the definition of a common carrier.

Under the RRC rules in effect and discussed in Denbury, a pipeline company merely had to check a box on the permit form indicating that they are a common carrier. This has lead to litigation about whether a pipeline actually qualifies as a common carrier or not.

The proposed amendment intends to allow a private carrier to have common carrier status as long as certain documentation is supplied to the RRC. The documentation would include a sworn statement by the company detailing its common carrier claim. The RRC would then have 45 days to review the documentation. The RRC would have power to revoke the permit if the company violates the law and requires permits be renewed on an annual basis.

The issue of common carrier status is an important one because common carrier status confers the right of eminent domain (also known as condemnation) to obtain easements for the pipeline. If a pipeline that is not classified as a common carrier must negotiate an easement with landowners, much like any other private real estate transaction.

As a Texas lawyer who spend a considerable amount of time negotiating pipeline easements, I’m concerned that the rule change may not be good for landowners. There is a lot of definitive Texas law defining common carrier status, and now the Railroad Commission proposes replacing that law with an administrative determination. There should also be a way for a landowner to challenge the RRC determination that a pipeline crossing that owner’s land is common carrier, and that is not included in the proposed change although the RRC claims the ultimate authority to determine common carrier status will remain with the courts. Finally, the landowner has the best incentive to keep the pipeline companies honest by having the ability to challenge common carrier status. This is not to cast any aspersions on the RRC: they generally do a good job. However, there are 426,000 miles of pipeline in Texas, and one wonders where the staff and funds will come from to do a thorough review in this era of diminished budgets.

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The Texas Railroad Commission approved a substantial amendment to its oil and gas pipeline permit rule on December 2, 2014, and the amendment has major significance for Texas landowners and Texas mineral owners. The rule is Texas Railroad Commission Rule 3.70, and the amended rule goes into effect on March 1, 2015.

The Railroad Commission received a substantial amount of written comment from individuals, oil companies and trade organizations. Comment and testimony was also received at the public hearing on the proposed amendment held in Austin, Texas on September 22, 2014. The amended Rule 3.70 and the discussion of public comments by the Commission’s General Counsel can be accessed here.

The amended Rule 3.70 provides that each operator of a pipeline or gathering system (other than production lines or flow lines that are general confined to the leased premises) must obtain a permit from the Commission and renew the permit annually. The permit application must now include the following:

1. the contact information for the person who can respond any questions concerning the pipelines construction, operation or maintenance;

2. the requested classification and the purpose of the pipeline as a common carrier, a gas utility or a private pipeline;

3. a sworn statement from the permit applicant that provides the pipeline operator’s factual basis in support of its requested classification and purpose, including, if applicable, attestation to the applicant’s knowledge of the eminent domain provisions in the Texas property code and the Texas Landowners Bill of Rights published by the Texas Attorney General;

4. documentation to provide support for the classification and purpose being sought for the pipeline and any other information requested by the Commission.

The memorandum to the Railroad Commission from its General Counsel on November 25, 2014, (which you can read here), summarizes many of the written and verbal comments about the proposed amended rule. Many commentators wanted the Commission to take a more active role in the route of a pipeline and in the determination of whether a pipeline was a common carrier pipeline or not. In Texas, whether a pipeline is a common carrier pipeline is hugely important. A common carrier pipeline has the right of condemnation (or “eminent domain”) if they cannot reach a pipeline easement agreement with the landowner. Other types of oil and gas pipelines do not have this power.

The comments in the memorandum by the Railroad Commission General Counsel make clear that the Commission does not believe it has authority to adjudicate whether a pipeline is a common carrier or not. The memorandum also notes that the Railroad Commission has no authority over the routing of a pipeline nor do they have authority to become involved in private property rights, including pipeline easement negotiations.

On the other hand, the amended rule provides that the Railroad Commission will make a determination of the “sufficiency” of the information provided with the permit application. What will constitute “sufficient” documentation of common carrier status remains to be seen. In addition, the Commission’s press release about the amendment states that: “Texas Railroad Commissioners have unanimously adopted pipeline permit rule amendments designed to clarify how a pipeline operator may be classified by the Commission as a common carrier.” That statement makes it sound as if the Commission is making a “common carrier” determination!

Readers may recall that in 2012, the Texas Supreme Court, in the case of Texas Rice Partners Ltd. vs. Denbury Green Pipeline, 363 S.W.3d 192, held in part that the fact that a pipeline permit applicant checked a block on the permit application that indicated that it was a common carrier pipeline did not in fact make the pipeline a common carrier line. That case is still good law. The amendment to Rule 3.70, while not providing for a forum or process for determination of whether a pipeline is a legitimate common carrier or not, will still be helpful to landowners who are negotiating a pipeline easement. The information that the Railroad Commission requires a pipeline operator to supply with its permit application should be the first thing that a landowner or their oil and gas pipeline attorney looks up when negotiating a pipeline easement.

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Recently the Fifth U.S. Court of Appeals issued an interesting decision in the case of Warren et al. v. Chesapeake. This very important case for Texas mineral owners is based on a lawsuit against Chesapeake Exploration for what the Plaintiffs claimed was the wrongful deduction of post-production costs from the Plaintiffs’ gas royalty payments.

The Facts

The Warren case involves three oil and gas leases in Texas. Charles and Robert Warren entered into leases with FSOC Gas Co. Ltd. Those leases were then assigned to Chesapeake, who used an affiliate, Chesapeake Operating, to drill and operate the wells. Chesapeake deducted post-production costs from the royalty payments to the Warrens as well as from royalties to Abdul and Joan Javeed who joined the case as plaintiffs later. Chesapeake claimed that the leases authorized the deductions. The Plaintiffs asserted that Chesapeake breached the leases because the deductions did not comply with the lease provisions on calculating royalties. The complaint also included class action allegations on behalf of other royalty owners with similar leases with Chesapeake Exploration.

The U.S. District Court Proceedings

The Plaintiff based their claim in part on the previous decisions of the Texas Supreme Court in Heritage Resources, Inc. v. NationsBank and Judice v. Mewbourne Oil Co.. The District Court dismissed the claims of all four Plaintiffs with prejudice. That court held that since the leases contained “at the well” royalty provisions, Chesapeake was authorized to make post-production deductions in determining the income on which royalties would be based despite the provisions in the Warren leases that the royalty would be free of certain post-production costs.

The Fifth Circuit Decision

The Plaintiffs appealed their case to the Fifth Circuit Court of Appeals. The Warrens claimed that their leases contained two sets of obligations owed by Chesapeake. The first involved the costs of exploration, production and marketing of gas, including the costs of compression, dehydration, treatment, and transportation. The second are shared obligations such as costs incurred subsequent to production. The Warrens claimed the deducted expenses fell under the first set of obligations and so were the obligation of Chesapeake alone. The Fifth Court of Appeals did not agree with this argument and upheld the District Court’s dismissal with prejudice on this issue. The Fifth Circuit held that the language of the lease expressly provides that the lessor will bear a proportionate part of the expenses of delivering marketable gas to a sales point other than the mouth of the well.

The next issue the Court addressed concerned the leases of both the Warrens and the Javeeds. The Javeeds lease contained differently worded royalty provisions than the Warren leases, but the appellate briefs to the Court focused on the Warrens’ leases, not addressing the differing provisions. The District Court had treated the Javeeds leases as “functionally equivalent” to the Warrens. For the first time in the reply brief before the Fifth Circuit the Plaintiffs addressed the differences, but these arguments were waived because they were asserted too late. The Fifth Circuit determined that the Javeeds claim should be dismissed without prejudice anyway because it was apparent from the face of the complaint and its attachments that they could not conceivably state a cause of action.

This case illustrates that language in oil and gas leases concerning the calculation of royalty can be technical and complicated. It is essential for a mineral owner to fully understand the terms of an oil and gas lease and what may or may not be deducted from royalties before it is signed. Take the time to consult an attorney before signing. It will save money and stress later.

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As readers of this blog know, we have been following the case of Marcia Fuller French, et al. v. Occidental Permian Ltd., which is an important Texas case involving gas royalties. You can read our previous blog post here. The case was heard by the Supreme Court of Texas on February 5, 2014 and the The Texas Supreme Court has issued its decision.

As you may recall, Martha Fuller French and the other Plaintiffs were royalty owners and lessors on two oil and gas leases in Scurry County and Kent County, Texas. One lease is referred to in the decision as the “Fuller Lease”, which was executed in 1948, and the other lease is referred to as the “Cogdell Lease”, which was leased 1949.

In 2001, Occidental Permian began injecting wells on these leases with carbon dioxide to boost oil production. As a result, the natural gas produced from these leases contained about 85% carbon dioxide. Occidental then treated the gas to remove the carbon dioxide and sold the remaining gas, sending the carbon dioxide back to be reused at the well. Occidental paid Ms. French and the others royalties on the gas after it was treated and then deducted treatment costs from the royalties.


In Texas, the general rule, which can be modified by the language in a lease, is that royalties are not subjected to the costs of production, but are usually subjected to post-production costs, including taxes, treatment costs to render the hydrocarbons marketable, and transportation costs. Ms. French and the other Plaintiffs claimed that they should have received royalties on all gas produced, that Occidental should not have deducted post production costs, and since these costs were deducted from their royalties, they were underpaid by Occidental. The trial court agreed with them and awarded them $10.5 million in compensation. The case then went to the Texas Court of Appeals in Eastland, Texas, which overturned the judgment of the trial court and vacated the $10.5 million award.

In the Texas Supreme Court, the principal issues were: 1) whether the gas should be valued in its original state, before extraction from the well, or at the wellhead where it is commingled with carbon dioxide; 2) whether removing, compressing, and transporting carbon dioxide should be classified as a production operation; and 3) whether carbon dioxide removal off site for reuse is a production operation.

In a decision written by Chief Justice Nathan Hecht, the Texas Supreme Court affirmed the decision of the Court of Appeals. The decision held that carbon dioxide removal is a post-production expense that royalty owners share with the field operator. In the leases in this case, the Plaintiffs gave Occidental the right and discretion to decide whether to reinject or process the casinghead gas (which is gas produced with oil in oil wells, which is different from gas produced in a gas well) and since the Plaintiff royalty owners benefited from that decision, the royalty owners must share the cost of carbon-dioxide removal. The Court pointed out that the Fuller Lease specifies that the cost must be considered when determining the market value of the gas, and it is this figure that the royalty is based on. The Cogdell Lease provided that the cost of off-site manufacturing of the natural gas liquids and residue gas is deducted from royalties.

This decision contains two important lessons. First, an oil and gas lease may last for decades. Secondly, whether or not costs are deducted from your royalties can make a substantial difference in the amount of your royalty check. This case illustrates once again how critical it is to have an experienced oil and gas attorney review the fine print before you sign an oil and gas lease.

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An interesting case was in the news recently and oil and gas attorneys have been following it with interest. The case is Lisa Parr, et al. vs. Aruba Petroleum, Inc., et al.; County Court at Law No. 5, Dallas County, Texas; Cause Number: CC-11-01650.

The Background

The Parrs have a 40 acre ranch in Decatur, Texas which is about 60 miles northwest of Dallas, Texas. The ranch sits on the Barnett Shale. Robert and Lisa Parr and their 11 year old daughter Emma alleged that they started having health problems in 2008, including migraine headaches, dizziness and nausea. By 2009, Lisa Parr said: “(m)y central nervous system was messed up. I couldn’t hear, and my vision was messed up. My entire body would shake inside. I was vomiting white foam in the mornings.” She claimed that her husband and daughter had nosebleeds, vision problems, nausea, rashes and blood pressure issues.

The Lawsuit

The Parr family filed a lawsuit against Aruba Petroleum and a number of other well operators with wells in the area in 2011, requesting $66 million in damages. Aruba Petroleum had 22 natural gas wells within two miles of the Parr’s land, with three wells close to the Parr’s house: the closest well was 791 feet from their house. The lawsuit claimed that Aruba Petroleum poorly managed the wells and did not have proper emissions controls, leading to a “private nuisance” of air pollution and the family’s exposure to emissions, toxic air pollution and diesel exhaust. They claimed they got so sick that they could not work, and sometimes had to stay in Robert Parr’s office to escape the toxic environment.

Aruba claimed that: 1) the Parrs had no evidence that proved that diminished air quality at their home was due to the drilling of its wells; 2) Aruba had eliminated any environmental problems immediately and any contaminants were within air quality standards set by the Texas Commission on Environmental Quality; 3) all operations of Aruba’s wells complied with requirements of the Texas Railroad Commission; 4) the operation of the wells complied with all federal law and standards; and 5) any substances released into the air near the wells could not have made anyone sick.

The original lawsuit was not only against Aruba Petroleum, but also other oil and gas companies operating nearby. Halliburton won summary judgment against the Parrs last year. Other companies, including a subsidiary of ConocoPhillips Co., settled with the family.

The Judgment

In April 2014 the jury in the Dallas County Court of Law No. 5 awarded the Parr family $3 million dollars in a five to one jury verdict. The jury found that Aruba Petroleum took intentional steps to substantially interfere with the Parr family’s use of their home. The jury did not find that Aruba acted with malice however, and so the Court dismissed the Parr’s claims for exemplary damages. The award included $275,000 for loss of value to their property, $2 million for past physical pain and suffering of the three, $250,000 for future pain and suffering, and $400,000 for mental anguish. The judgement was signed by Judge Mark Greenberg on July 19, 2014. Judge Greenberg signed an order denying Aruba’s motion for new trial on September 10, 2014 and Aruba has posted a supersedeas bond, which prevents the Plaintiffs from collecting the judgement until all appeals are exhausted.

Aruba said that it plans to appeal the decision to the Fifth Circuit Court of Appeals. An Aruba representative said: “There were hundreds of wells drilled in the area. Trying to tie the diminution of property value and the health effects to Aruba alone makes no sense.”

I am all in favor of oil companies paying for whatever damage they may cause. I have to confess that I am a bit mystified as to how the Parrs could prove, by a preponderance of the evidence, that it was only the Aruba wells that caused their problems, when there were dozens of other wells in the area. It will be interesting to see what the Fifth Circuit Court of Appeals does with this case.

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