MINERAL LAW

FALL 2011

Tawes v. Barnes, 340 S.W.3d 419 (Tex. 2011)

Royalties, Joint Operating Agreement, Working Interest Unit Agreement, Third Party Beneficiaries, Privity of Estate: To understand the precise relationship of the parties, this opinion needs to be read. Basically Moose and Tawes, owners of a lease from Baker entered into a working interest unit agreement (WIUA) and a joint operating agreement (JOA) with Dominion, owner of an adjoining lease from Barnes. After the first well was drilled, Dominion elected to go non-consent on the next two wells. The JOA provided that the Consenting Parties would be responsible for paying royalties owed to the lessors of leases contributed by Non-Consenting Parties until a specified amount of production had been recovered. Barnes did not get all the royalties owed on production from the two non-consent wells. Although Barnes was not a member, Barnes sued the parties thereto claiming she qualified as a third party beneficiary or privity of estates under the WIUA or JOA. Barnes settled with Dominion and Moose, but not Tawes. Held: As to Barnes’ third party beneficiary status, the Texas Supreme Court found that Barnes was not a signatory to these agreements and that there was an absence of any sufficiently clear and unequivocal language demonstrating an intent to directly benefit the royalty owner. Likewise, privity of estates between Barnes and Tawes was held not to exist because the grant of temporary ownership of the non-consenting parties’ share of production to consenting parties was temporary, i.e. the consenting parties received no permanent interest in the Barnes lease and Tawes never specifically assumed dominion’s duty of to pay directly to Barnes the royalties accruing from production on the non-consent wells.

Exxon Corporation and Exxon Texas v. Emerald Oil & Gas, W.L. 1226100; LEXIS 250 (Tex. 2011)

Duty to Plug Well, Statute of Limitations, Fraudulent Concealment, Waste, Negligence, Tortious Interference, Fraud in Filing Plugging Reports: This case was previously reported in the GPD, Mineral Law, Spring 2011 Edition. The 12/17/2010 opinion was withdrawn, but the Court’s judgment remained unchanged. The basic allegations were that the lessee failed to fully develop an oil and gas tract and sabotaged the wells before abandoning the lease. This opinion needs to be read in detail to review and understand the Supreme Court’s discussion of the lessee’s duties and potential causes of action related thereto.

Railroad Commission of Texas and Pioneer Exploration v. Texas Citizens for a Safe Future and Clean Water, 336 S.W.3d 619 (Tex. 2011)

Salt Water Injection Well Permits: The issue was whether the Texas Railroad Commission was entitled to or should take into account the impact of a salt water injection well operation on traffic safety in the area and whether it would not serve the “public interest” which the Railroad Commission was obligated to consider. Held: The Court held that it was obligated to defer to an agency’s interpretation and construction of an ambiguous statute that it was charged with administering if its construction was reasonable. Note: Three of the Supreme Court justices joined in a concurring opinion because they felt the statute at issue unambiguously precluded the Railroad Commission from considering traffic safety factors as a part of its public interest inquiry in the permitting of oil and gas waste injection wells.

Basic Energy Services v. D-S-B Properties, Inc., W.L. 2649989; LEXIS 4971 (Tex. App.—Tyler 2011)

Operator, Royalty Owner, Rights under DTPA: D-S-B hired Basic to repair a well, which was irreparably damaged in connection with the repair work. D-S-B brought suit as operator and on behalf of the royalty interest owners. Held: The Court held that D-S-B had standing to sue as a representative of all working interest owners. The measure of damage for destruction of an oil well that can be reproduced was the lower of: (1) cash market value of the old well or (2) the cost of reproduction of the well with a new well equipped like the old one, less selling value of the old well. While a royalty owner must prove with “reasonable certainty” the damages suffered, under the facts in this case, the Court held sufficient evidence was admitted to support the damages awarded to the royalty owner. The well repair company also argued that the royalty owner had no right to sue under the DTPA because it was not involved in the transaction between the repair company and the operator for the work on the well. The DTPA required proof of “consumer status” i.e. “a person or entity that sought or acquired goods or services by purchase or lease.” Here the repair company was employed by the working interest owners, and the Court held that the royalty owner as an incidental beneficiary of the transaction was not sufficiently connected with the transaction to be a consumer under the DTPA, and therefore it was not entitled to attorneys fees in its claim against the repair company.

Faith Oil & Gas v. King, W.L. 2204476; LEXIS 4215 (Tex. App.—Eastland 2011)(memo op.)

Habendum Clause, Gas Lease: Faith Oil & Gas(Faith) and King entered into a gas lease dated February 19, 2007, and acknowledged April 5, 2007, providing for a term of one year and so long thereafter as oil, gas, or minerals were produced from said land …. A well was drilled but no oil, gas or minerals were ever produced. Instead Faith used the well as a salt water injection well. The lease did have a provision “if the well being drilled on King land does not prove to be a producing gas well, then and only then will this well be used as a salt water injection well.” Held: Since there was no production of oil, gas or other minerals at the end of the primary term, the lease terminated.

Pharaoh Oil & Gas, Inc. v. Ranchero Esperanza, Ltd., W.L. 2162755; LEXIS 4179 (Tex. App.—El Paso 2011)

Surface Use, Trespass, Unreasonable Use of Surface, Negligence, Temporary Injunction: Ranchero Esperanza, Ltd. was the owner of the surface estate and one-half of the mineral estate. Pharaoh began operating oil and gas wells on many sections in the ranks. Suit was brought by the surface owner against Pharaoh for a temporary injunction and trespass, negligence, and for various causes of action on the ground that the equipment and materials and actions on the surface were not for any current or were not used for any current operation. The trial court found that the storage of equipment constituted an unreasonable, unnecessary excessive burden on the leased land and granted a temporary injunction. Held: After discussing the elements required for a mandatory temporary injunction the Court held the trial court abused its discretion in granting a mandatory temporary injunction in this case.

Merriman v. XTO Energy, Inc., W.L. 1901987; LEXIS 3601 (Tex. App.—Waco 2011) (memo op.)

Surface Use, Mineral Estate: The landowner, owning the surface rights in a 40 acre tract, told the oil company, XTO that the proposed well site would interfere with his cattle operation. XTO started building a well site and the surface owner sought a temporary and permanent injunction. Held: The dominant mineral estate had the right to reasonable use of the surface estate to produce minerals, but this right was to be exercised with due regard to the rights of the surface estate’s owner. Where there was an existing use by the surface owner which would otherwise be precluded or impaired, and where under the established practices in the industry, there were alternatives available to the mineral owner whereby minerals could be recovered, the rules of reasonable usage of the surface may require the adoption of an alternative method by the mineral owner. In this case the Court held that the surface owner had other reasonable means of developing his land for agricultural purposes under the evidence and affirmed the trial courts’ order granting XTO’s motion for summary judgment.

Coleman v. Coleman, W.L. 1796234; LEXIS 3497 (Tex. App.—San Antonio 2011)

Construction of Mineral Conveyance: The husband bequeathed to the wife a life estate in his mineral estate under the terms “I give all of my interest in the Crockett County, Texas, mineral interest that Occidental Permian Ltd. is presently making payments to me on under owner number …. to my wife, Betty … Coleman for the term of her life ….” After the Husband’s death, additional wells were drilled on the land and the issue arose as to whether or not the wife was entitled to royalties from the additional wells. Held: The husband unambiguously bequeathed to the wife his entire mineral estate in Crockett County. The phrase regarding payments was held not to limit the interest but to describe it in additional detail.

City of Houston v. Maguire Oil Company, W.L. 1643587; LEXIS 3306 (Tex. App.—Houston 2011, pet. filed)

Regulatory Taking of Private Property: The city’s interference with the oil company’s right to drill constituted a regulatory taking for which compensation was due under the Texas

Constitution. This case would need to be read, if a lawyer has a similar situation.

Hernandez v. El Paso Production Company, W.L. 1442991; LEXIS 2841 (Tex. App. — Corpus Christi 2011) (memo op.)

Mineral Interest Conveyance: The original deed granted a “one-sixteenth interest in and to all of the oil, gas and other minerals in and under and may be produced from the following described land . . . . .” The land was under an oil and gas lease described in the deed which stated “. . . .this sale is made subject to said lease, but covers and includes one-half (1/2) of all the oil royalty and gas rental or royalty due and to be paid under the term of the lease.” The deed further provided that in the event the “lease becomes cancelled or forfeited . . . the lease interests and all future rentals on said land, for oil, gas and mineral privileges” would be owned jointly by grantee and grantors . . . . “each owning one-half ½ of Royalty same being 1/2 of 1/8 or 1/16 interest in all oil, gas and other minerals in and upon said land under the present lease or any future lease on said land together with 1/2 one-half interest in all future rents.” Note: The opinion and cases cited need to be reviewed as the opinion discusses the duty of the court interpreting the deeds, and prior Supreme Court cases interpreting “three grant” clauses and,

“two grant clauses in Texas.” Held: While the granting clause may have granted a one-sixteenth interest in the minerals, the “subject to” clause included a one-half interest in the oil royalty, and the gas royalty, and the subject to clause showed an intent to convey a full one-half of all royalties and gas rental due under the lease, indicating that the grantors understood that a one-eighth royalty was what they owned and they were giving one-half of that to the grantee, and that the future lease provision expressed the parties intent that they jointly own the minerals one-half each, with the future lease provision further confirming the grantors thought that the 1/8 royalty interest was all that they owned and that by granting a 1/16^th interest, the grantors were conveying a ½ of what they owned on the existing as well as any potential future leases.

Gail v. Berry, W.L. 1434642; LEXIS 2812 (Tex. App.—Eastland 2011)

Contract to Sale, No Deed Reservation, Mutual Mistake, Reformation of Deed: An attorney in fact for appellees entered a contract to sell land to the purchaser, under a sales contract reserving to the seller all minerals. The mineral reservation was omitted from the warranty deed. Held: A scrivener’s failure to embody the true agreement of the parties in a written instrument was a ground for reformation on the basis of mutual mistake. Here, the Court held that grantors established there were no genuine issues in material facts and as a matter of law they were entitled to reformation of the deed on the basis of mutual mistake.

Smith v. Basa Resources, Inc., W.L. 1435273; LEXIS 2813 (Tex. App.—Eastland 2011) (memo op.)

Damages to Surface. Leaking Pipeline: An oil leak from a production pipeline on a ranch caused damages to the surface. The damage was caused by a rusted bolt breaking on a buried pipeline; but the probative evidence showed the defendant acted as a reasonably prudent operator would have acted under the circumstances in and had used reasonable care in maintaining and taking care of the pipeline and in cleaning up and remediating the leak. Note: The case can be read for its discussion of the evidence required to prove the operators’ negligence, trespass and it’s reasonably prudent operator defense.

Long v. RIM Operating, Inc., W.L. 1431476; LEXIS 2808 (Tex. App.—Eastland 2011)

Joint Operating Agreement, Non-consent: The operator acting under a joint operating agreement (JOA) filed suit against one of the working interest owners who had signed the (JOA) to determine that he had forfeited his interest in the lease. The (JOA) provided that if working interest owner went non-consent over a proposed operation it relinquished rights to any production until its share of the cost, plus and additional 200% to 500%, had been recouped by the consenting working interest owners. However a “required well” provision provided that if the well drilling or other proposed operation was necessary to perpetuate expiring leases, and a party elected not to participate, then the nonparticipating party shall release and relinquish forever its interest in and to the leases which would be perpetuated by drilling the “required well” well under the circumstances. Held: The Court after discussing a number of technical points raised by the non-consenting owner confirmed the judgment of the trial court, except for attorney fees.