MINERAL LAW

SPRING 2008

Bowden v. Phillips Petroleum Co., W.L. 400395; LEXIS 124 (Tex. 2008)

Royalty Clauses, Implied Covenants, Class Action: This case primarily involved efforts to certify claims of three subclasses of royalty owners for purpose of a class action suit, in light of the Supreme Court’s decision in Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368 (Tex. 2001), holding there was no implied covenant to market oil and gas for royalty owners paid under express market value royalty provisions. The Supreme Court had some good broad discussion of the differences and duties under oil and gas lease royalty provisions, including the following:

“Proceeds” or “amount realized” clauses require measurement of the royalty based on the amount the lessee in fact receives under its sales contract for the gas . . . By contrast, a “market value” or “market price” clause requires payment of royalties based on the prevailing market price for gas in the vicinity at the time of sale, irrespective of the actual sale price . . . The market price may or may not be reflective of the price the operator actually obtains for the gas.”

 “Every claim of improper operation by a lessor against a lessee should be tested against the general duty of the lessee to conduct operations as a reasonably prudent operator in order to carry out the purposes of the oil and gas lease . . . Supreme Court held that a duty to market can be implied in a proceeds lease and not in a market value lease, but that does not mean that there is an implied duty in all proceeds leases . . . there is no implied covenant when the oil and lease expressly addresses the subject matter of an asserted implied covenant . . . The implied duty to manage and administer the lease includes the duty to market the oil and gas reasonably . . . .” The opinion also contains a discussion about definitions and differences in “natural gas liquids,” “condensate,” “LGN” and between volumes of gas measured by “Mcf” and “Btu.”

Afe v. Armentrout, W.L. 823980; LEXIS 1725 (Tex. App.—Fort Worth 2008)(memo op.)

Oil and Gas Lease Termination, Shut-in Well, Capable of Producing Gas: The court reconfirmed that “produced” meant “produced in paying quantities.” The court affirmed the jury finding that the well was not capable of producing gas at the time it was shut in.

Valance Operating Co. v. Tex. Genco, LP, W.L. 533220; LEXIS 1561 (Tex. App.—Waco 2008)

Accommodation Doctrine: Texas Genco had a required ash-disposal landfill to dispose of the fly ash and bottom ash produced in its coal-burning electric generating plant. When the landfill operation began in 1985, there was one preexisting gas well within the affected area, which it was designed around. In later years, additional wells were drilled. Texas Genco was able to “notch around” the first several wells, but not the last proposed well, No. 9. The court restated the general law: “The dominant mineral estate has the right to reasonable use of the surface estate to produce minerals, but this right is to be exercised with due regard for the rights of the surface estate’s owner.”

. . . where there is an existing use by the surface owner which would otherwise be precluded or impaired, and where under the established practices in the industry there are alternatives available to the mineral owner whereby the minerals can be recovered, the rules of reasonable usage of the surface may require the adoption of an alternative by the mineral owner . . . if there is but one means of surface use by which to produce the minerals, then the mineral owner has the right to pursue that use, regardless of surface damage . . . On the other hand, if the mineral owner has reasonable alternative uses of the surface, one of which permits the surface owner to continue to use the surface in the manner intended (especially when there is only one reasonable manner in which the surface may be used) 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.”

Based on the evidence of ability to use directional drilling, etc., a jury found in favor of the surface owner.

City of Del Rio v. Clayton Sam Colt Hamilton Trust, W.L. 508682; LEXIS 1383 (Tex. App.—San Antonio 2008)

Reservation of “All Water Rights”: The trust sold 15 acres of a ranch to the City of Del Rio, specifically reserving “all water rights associated with said tract.” The city claimed that they had the right to drill a water well and pump groundwater to the surface, taking the position that the ground water cannot be “owned” until it was reduced to possession under the “rule of capture.” The Texas Supreme Court had previously held that percolating water was a “part of, and not different from, the soil” and the landowner was the “absolute” owner of it. “Water, unsevered expressly by conveyance or reservation, had been held to be part of the surface estate.” (Cases cited.) Held:  Under the rule of capture, a person owns all of the water or oil or gas produced by well bottomed on his land, even though the well may be draining the substances from beneath other property, and the landowner whose property was being drained can neither enjoin production from the draining well nor obtain an accounting, nor obtain other equitable relief. If the City of Del Rio owned the groundwater beneath the tract and began pumping water from beneath the surface, the trust would have no judicial remedy for any drainage. However, the City did not own the water beneath the tract as the grantor, in the deed, specifically reserved “all water rights.”

Veritas Energy, LLC v. Brayton Operating Corp., W.L. 384169; LEXIS 1107 (Tex. App.—Corpus Christi 2008)(memo op.)

Oil and Gas Lease Termination: Veritas acquired an oil and gas lease dated June 6, 2000, with a primary term that would expire on June 6, 2003. The lease provided that “if operations were not conducted on or before the first anniversary date,” the lease would terminate. “Operations” were defined as “any of the following: drilling, testing, completing, reworking, recompleting . . . .” On June 5, 2003, Veritas employed a backhoe which “back dragged” the grass from the curve of an existing road on the property to delineate the course of a road to be built for the purpose of drilling a well. A light rain interrupted that operation. The mineral owner entered a new lease with a third party on June 7, 2003. On June 9 or 10, 2003, the contractor resumed operations for construction of the road onto the property, which construction was completed by about June 11, 2003. On January 8, 2004, Veritas filed its suit against the landowner and the new lessee who had drilled a well on the land. The oil company cited cases where performing necessary road construction “beginning preliminary operations usually associated with actual drilling on the premises, undertaken in good faith . . .” satisfied the requirement of commencement of drilling and “commencement of drilling operations” clause on oil and gas leases. Held: The “mere back dragging of grass with a backhoe on the last day of the primary term, apparently to mark the location of a road” . . . did not constitute operations within the meaning of the lease provisions and did not serve to extend the . . . lease beyond its primary term. The summary judgment against the oil company was therefore upheld.

In re Rusk Energy, Ltd., W.L. 375972; LEXIS 654 (Tex. App.—Tyler 2008)(memo op.)

Accommodation Doctrine, Mandamus: Rusk Energy sought a Writ of Mandamus against an order requiring Rusk to put up $100,000 bond before continuing drilling operations on Smith’s land. Held: The surface of Smith’s tract and the underlying minerals were severed by the execution of an oil and gas lease. The lease was still in force and the lessee had the right to use as much of Smith’s tract as was reasonably necessary to produce and remove the minerals conveyed by the lease. The court held that the trial court abused its discretion in requiring the lessee to post a $100,000 bond as a condition of dissolving the TRO and permitting lessee to proceed with drilling.

Longoria v. Exxon Mobil Corp., W.L. 227970; LEXIS 614 (Tex. App.—San Antonio 2008)

Non-Possessory Mineral Interest Owners: Longoria and other appellants claimed their ancestor acquired an undivided one-half interest in 9200 acres of land by adverse possession before the mineral estate was severed. The Longorias sued eleven energy companies and two individuals who allegedly held or who have held record title to the minerals. The case was dismissed when the Longorias failed to join absent mineral interest owners. Held: The leases at issue granted the oil company defendants fee simple, determinable interest in the minerals, with the lessors retaining only royalty interest and the possibility of reverter, a non-possessory interest in the mineral estate that may be sold or assigned. The Longorias asserted that non-possessory owners did not need to be joined in the suit. The court held that it was in the trial court’s discretion to require joinder of absent lessors, royalty interest owners, and the owners of the unleased mineral estate.

State v. Hale, W.L. 191017; LEXIS 487 (Tex. App.—Amarillo 2008)(memo op.)

Surface Rights, Regulatory Law: A large ranch owner filed suit to question the Railroad Commission’s entry on his property for the purpose of conducting clean-up operations on adjoining land. The trial court overruled a plea to the jurisdiction and granted a temporary injunction. Held: This was a suit to test the validity of an oil or gas conservation law order and it was required to be filed in a court of competent jurisdiction in Travis County (not the county where the land was located).

Navasota Res., L.P. v. First Source Tex., Inc., W.L. 90444; LEXIS 153 (Tex. App.—Waco 2008)

Preferential Purchase Option of Oil and Gas Interests: This lengthy opinion discussed in detail notices and options and obligations of the parties under a complex preferential right to purchase certain mineral interest, which would need to be read if a person had similar issues.

Endeavor Natural Gas, L.P. v. Magnum Hunter Prod., W.L. 4340807; LEXIS 9685 (Tex. App.—Corpus Christi 2007)(memo op.)

Right to Recover Severance Tax Proceeds on Oil and Gas Properties Assigned: This was a contract (assignment and bill of sale) in which “all expenses and revenue attributable to the operations owned and production from the subject wells before or after December 2001, if any, will be the responsibility of and inure to the benefit of Endeavor.” The seller received over $700,000 in tax credits and refunds by reason of overpayment of severance taxes in prior years. The court, after discussing the contract issues, held that severance tax refund was neither expense nor revenue under the contract and therefore belonged to seller.

Silver Oil & Gas, Inc. v. EOG Res., Inc., W.L. 4180136; LEXIS 9234 (Tex. App.—San Antonio 2007)

Well Location: This case primarily dealt with surveying procedure and rules.

Trail Enters. v. City of Houston, W.L. 4157244; LEXIS 9199 (Tex. App.—Waco 2007)

Drilling Permit, City Limits: Trail Enterprise filed an inverse condemnation claim against the City of Houston for an ordinance prohibiting oil drilling on Trail’s property near Lake Houston. Inverse condemnation occurred when the property was taken for public use without process or without proper condemnation procedures and the property owner attempted to recover compensation therefor. The City contended that Trail had not exhausted its administrative remedies, i.e., seeking drilling permits, prior to initiating the lawsuit. Held: Trail’s claims were ripe upon enactment of the ordinance and the court rendered judgment in favor of the plaintiff for over $16million and conveyed all of the plaintiff’s rights in the oil, gas and other minerals under the 1025 acres of land to the City.

McGuire Oil Co. v. City of Houston, W.L. 2274848; LEXIS 8174 (Tex. App.—Houston [14th Dist.] 2007)(memo op.)

Drilling Permit, City Limits: The City acquired surface rights on land which was eventually inundated with water to form Lake Houston. In 1967, the City amended the ordinance to eliminate drilling in and around Lake Houston, and again amended that “control area” to cover land in its extraterritorial jurisdiction in 1967. In the 1980s, the mineral owner began to investigate prospects for a gas well in the control area. A vertical well was first attempted, followed by a directional drill which also failed. The mineral owner then decided it was necessary to drill a vertical well inside the city limits within approximately 300 feet of the lake. The City, after granting a permit, revoked the permit. Held: After discussing the City’s numerous challenges based on lack of ripeness, lack of appeal to the city council, not exhausting its administrative remedies, etc., the appellate court held that the case was ripe for adjudication, and the case was remanded to the trial court for further action.