Articles Posted in Oil and Gas Law

In a case last year before the Texas Supreme Court, BPX Operating Co. v. Strickhausen, 629 S. W. 3d. 189 (Tex. 2021), the Court addressed whether the acceptance of royalty checks by a lessor constituted a ratification of the oil company’s pooling of the leased premises in violation of the anti-pooling clause in the lease.

Margaret Ann Strickhausen signed and oil and gas lease with BPX Operating that specifically prohibited pooling without the express written consent of the lessor. BPX sent her a ratification of pooling which she refused to sign. BPX pooled her property anyway. BPX continued to send her royalty checks, totaling over $700,000, which she deposited. BPX claimed that Ms. Strickhausen had therefore impliedly ratified the pooling of her property.

The Supreme Court stated: “Ratification is the adoption or confirmation by a person with knowledge of all material facts of a prior acts which then did not legally bind him and which he had the right to repudiate”.  In this case, there were a number of objective facts which indicated that Ms. Strickhausen did not agree with or consent to the pooling and that she accepted the royalty checks believing that these were the royalties she was entitled to without the pooling taking place. The Court further stated that “ratification is not a game of ‘gotcha’ ” and ruled that the lessor’s acceptance of royalty checks under these circumstances was not a ratification of the pooling by the BPX.

The Texas Supreme Court recently issued its long-awaited opinion in Terrance J. Hlavinka et al v. HSC Pipeline Partnership, LLC, —S.W.3d— (Tex. May 27, 2022). There were two important issues in this case: (1) whether a pipeline company transporting polymer-grade propylene can be a common carrier with condemnation authority under Texas Business Organizations Code Section 2.105 and (2) whether a property owner may testify during condemnation proceedings about recent arms’-length transactions with other pipeline companies as evidence of the current highest and best use of the property in determining the market value of the new easement.

The Court held that Section 2.105 does grant condemnation authority and that polymer-grade propylene is a qualifying product under that section. That makes sense since propylene is a petroleum by-product. The Court also held that one of the conditions for eminent domain, that the pipeline will be a common carrier for public use, is a legal question for a court to decide, and is not a fact question for the jury.

Finally, the Court held that “a property owner may testify to arms’-length sales of easements to other pipeline companies as evidence of the condemned property’s highest and best use”. (The trial court had excluded this evidence).

In a recent case decided by the Eastland Court of Appeals in Texas, Foote v. Texcel Exploration, Inc., the Court held that the operator of an oil well was not liable for cows apparently killed by an oil and salt water spill.

The Plaintiff leased property for grazing 650 head of cattle. Texcel Exploration Inc. operated an oil and gas lease on the property. The lease did not require Texcel to fence off the well and associated equipment, however Texcel had installed an electric fence around the tank battery (where produced oil and gas and salt water produced along with the oil and gas were stored). There was evidence that the cattle were breaking the fence each day and getting inside the fenced area and ultimately broke a PVC pipe on one of the tanks. Salt water and oil was found on the cows and eventually 132 cows died. The Plaintiff requested reimbursement for the value of the 132 dead cows, veterinary bills, special feed costs, shipping cost to relocate cattle, and lost profits from the surviving cattle being sold under expected weight.

The Court first sets out what is pretty well settled law in Texas for this situation: “[T]he owner/lessee of the surface estate in order to recover against the mineral lessee or operator for injury to his cattle must plead, prove and obtain a jury finding on one of the following:

The Texas Supreme Court recently issued its decision in Nettye Engler Energy L.P. v. BluStone Natural Resources II, LLC, Cause No. 20-0639, which has added to the Texas jurisprudence on the frequently litigated subject of post-production costs that can be deducted from a royalty interest.

The deed that conveyed the mineral interest to the grantee reserved a nonparticipating royalty interest “in kind,” which as the Court notes, differs from the standard monetary royalty because the grantor retained ownership of a fractional share of all minerals in place. The deed required delivery

of the grantor’s fractional share “free of cost in the pipe line, if any, otherwise free of cost at the mouth of the well or mine”.  The question became which pipeline does the deed refer to: the gathering lines or the interstate transportation line?

The Texas Supreme Court, in the recent decision of BPX Operating Co. et al. v. Margaret Ann Stockhausen, denied an oil company’s claim that acceptance of royalty checks by the mineral/royalty owner ratified the oil company’s illegal pooling of her property.

Strickhausen owned property in LaSalle County, Texas. She negotiated a lease that strictly prohibited pooling under any circumstances without her express written consent. Notwithstanding this lease provision, BPX Operating Co. (formerly BP) pooled her property without her consent. As soon as she learned that BPX had pooled her interest, Ms. Strickhausen had her lawyer write BPX reminding them of the anti-pooling clause in the lease and asking for the authority by which they pooled her property. The oil company responded by acknowledging the anti-pooling provision and requesting a ratification of the pooled unit. The oil company also threatened to put her royalties in suspense if she did not sign the ratification.

Ms. Strickhausen did not sign the ratification. She continued to get royalty checks, which were based on the pooling unit allocations, which she cashed. The oil company then offered to settle her wrongful pooling claim. Ms. Strickhausen rejected that offer and countered with a different settlement offer. Ms. Strickhausen apparently believed the royalty checks were the royalty she was entitled to under the lease without pooling.

Production sharing and allocation wells have been drilled in Texas for some time, and have been used almost exclusively for horizontal wells. (An allocation well is a horizontal well drilled across two or more lease lines without creating a pooled unit that includes the leases. A production sharing well is an allocation well for which production sharing agreements have been signed by mineral owners in all tracts that are crossed by the well.) However, the Texas Railroad Commission has never adopted a formal rule for issuing permits for these types of wells, by using the procedure in the Texas Administrative Code that all Texas agencies are supposed to follow when they want to adopt a new rule. The Administrative Code requires publication of proposed rules and opportunities for public comment before they are adopted. At first, the Commission approved a permit for these wells if the operator obtained signed production sharing agreements for at least 65% of the mineral owners. In recent years, the Commission began to approve permits for these wells even though no mineral owners had signed production sharing agreements.

In this case, two mineral owners in Karnes County, Texas, the Opielas, contested the granting of an allocation well permit by the Commission  to Magnolia Oil & Gas. On May 12, 2021, the 53rd District Court in Travis County reversed an order of the Texas Railroad Commission denying the mineral owners contest.  ( Elsie and Adrian Opiela v. Railroad Commission of Texas v. Magnolia Oil & Gas Operating Inc., Cause No. D-1-GN-20-000099). The Court held, in part, that “(t)he Commission erred in adopting rules for allocation and Production Sharing Agreement (“PSA”) well permits without complying with the requirements of the Administrative Procedure Act, Tex. Govt Code § 2001.001 et seq., and further erred in applying those rules by issuing well permits for the Audioslave A 102H Well (the “Audioslave Well”)”. The Court sent the case back to the Railroad Commission for “further proceedings consistent with this judgment.”

Texas oil and gas attorneys have been scratching their heads for some time at the Commission’s practice of granting permits for these types of wells without a formal rule. We don’t know whether the Railroad Commission will appeal this decision or not. If it does not, or if it does and the appellate court upholds the district court decision, what is the status of the many allocation and production sharing wells already drilled? Are they all void? Alternatively, are just the allocation wells permitted and drilled without mineral owner consent void? To be determined.

In Texas, the Natural Resources Code, in Section 91.402  governs when royalties must be paid to royalty owners. Section 91.402(b) provides that royalty payments may be withheld without interest if there is a dispute concerning title that would affect distribution of payments or if there is a requirement in a title opinion that places in issue the title, identity or whereabouts of the payee and that is not been satisfied by the payee after a reasonable request for curative information.

Representative Reggie Smith, a Republican from Sherman, Texas, has introduced House Bill 3262, which would amend Section 91.402(b) to deprive royalty owners of the right to sue their oil company operator for a breach of contract to recover royalty payments that are withheld due to a title dispute unless the lease states otherwise. The specific language of the bill is that “a payee does not have a common-law cause of action against a payor for withholding payments under Subsection (b) unless, for a dispute concerning the title, the contract requiring payment specifies otherwise“. In other words, if an unscrupulous oil company is short of funds and holds back your royalties to use them as operating expenses under the guise of a trumped up title dispute, the royalty owner has no recourse!

This is a bad bill for a number of reasons, and it will hopefully not pass. Oil companies are already protected in the case of title disputes by Section 91.402 of the Natural Resources Code and there is no logical reason to add this language. Mineral owners with new leases can add language to their lease to counteract this bill, but that is no comfort to mineral owners whose leases are already signed.

Given the stresses on the oil and gas industry over the last year, it’s not surprising that there have been many oil company bankruptcies, both in Texas and throughout the country. Royalty owners throughout Texas have been getting notices that the operator who is paying their royalties have filed for bankruptcy. In most cases, the oil company is filing a Chapter 11 proceeding, which is a reorganization, although a few have filed a Chapter 7 bankruptcy proceeding, which is a liquidation.

In the 1980s, the Texas Legislature added a provision to the Texas Business and Commerce Code to assist royalty owners. It is known as the “First Purchaser Statute” and is found in TEX. BUS. & COM. CODE § 9.343. The statute states, in part:

This section provides a security interest in favor of interest owners, as secured parties, to secure the obligations of the first purchaser of oil and gas production, as debtor, to pay the purchase price. An authenticated record giving the interest owner a right under real property law operates as a security agreement created under this chapter. The act of the first purchaser in signing an agreement to purchase oil or gas production, in issuing a division order, or in making any other voluntary communication to the interest owner or any governmental agency recognizing the interest owner’s right operates as an authentication of a security agreement in accordance with Section 9.203(b) for purposes of this chapter.

As a Texas oil and gas attorney, I often find it necessary, when negotiating an oil and gas lease for a client, to add an addendum that modifies some of the terms in the printed lease. The printed lease form is often extremely operator oriented and does not give the mineral owner many rights. Very often, the printed lease will provide for deduction of post-production costs from royalties due to the mineral owner by providing that royalties shall be calculated “at the well”. In the addendum, we often add language that provides that royalty shall be calculated, not on the market value at the well, but instead on the gross proceeds received by the oil and gas operator. The result of that language in the addendum is that post-production costs cannot be deducted from the royalties.

In the recent Texas Supreme Court decision of BlueStone Natural Resources II LLC v. Walker Murray Randle et al, the printed oil and gas lease contained language that indicated that the royalties would be calculated on the market value at the mouth of the well. Prior decisions by the Texas Supreme Court determined that this language allows the well operator to deduct post-production costs. The operator and the mineral owner agreed to an addendum that stated that royalties would be based instead on the “gross value received” by the operator. The addendum also stated that if the addendum was in conflict with the printed lease provisions, then the addendum would control and prevail.

Once production was obtained on the well, the operator proceeded to deduct post-production costs. The mineral owner sued. The operator argued that the “at the well” language is the only lease language providing a valuation point, so nothing in the addendum can be considered contradictory to that portion of the printed lease’s royalty provision.

The El Paso Court of Appeals recently decided a case that involved the use of the surface of land by a solar farm that was objected to by the Lyles, the  mineral owners of the property. That case is Lyle et al v. Midway Solar LLC et al. 

The Defendant Midway operated a large solar facility on the property in Pecos County, Texas under a 55 year lease with the surface owner. The solar leases designated drill sites for the benefit of future oil and gas production at either end of the property. The drill sites were about 30% of the surface area. The mineral owners claimed that the solar panels and transmission and electrical lines and cables serving the facility interfered with their ability to produce their mineral interests. At the time of the litigation, the mineral owners did not have an active oil and gas lease for the property and were not actively seeking a lease. In fact, the Court noted that “(i)t is undisputed that the Lyles have never leased out their interests to any oil and gas operators and have no current plans to lease their estate or to otherwise develop their mineral interests at this time. They have commissioned no geological studies, nor entered into any drilling contracts for the minerals. Since January 1, 2015, the Lyles had not received a single request to lease or purchase the mineral estate in Section 14. And the Lyles conceded they had no plans for drilling any wells.”

The mineral owners filed suit based on several claims, including a claim that the solar panels were a trespass, and requested that the Court order all solar panels and related lines be removed from the property. The Defendants claimed that the accommodation doctrine authorized their surface use.