law of shale plays conference - the center for american
TRANSCRIPT
6th Law of Shale Plays Conference Institute for Energy Law (IEL)
of The Center for American and International Law
September 10 - 11, 2015 Omni Hotel
530 William Penn Place Pittsburgh, Pennsylvania 15219
Litigation Update -Texas, Louisiana, and Oklahoma Oil and Gas Cases
Donald D. Jackson Haynes and Boone, LLP
1221 McKinney Street, Suite 2100 Houston, Texas 77010
The author would like to thank Mr. Miles Indest of Tulane Law School for his work locating and summarizing many of the cases discussed herein.
TABLE OF CONTENTS
TABLE OF CONTENTS ................................................................................................................. i
I. Texas Case Law Update ....................................................................................................... 1
A. Purchase and Sale, Joint Operating, and Other Contract Disputes ......................... .1
I. Plains Exploration & Prod. Co. v. Torch Energy Advisors Inc., 2015 Tex. LEXIS 558, 58 Tex. Sup. J. 1115 (Tex. June 12, 2015) ............................................................................................................ 1
2. Kachina Pipeline Co. v. Lillis, 2015 Tex. LEXIS 549, 58 Tex. Sup. J. 1105 (Tex. June 12, 2015) ................................................................ 2
3. Matador Prod. Co. v. Weatherford Artificial Lift Sys., Inc., 450 S.W.3d 580 (Tex. App.-· Texarkana 2014, pet. denied) ............................. 2
4. XH, LLC v. Cabot Oil & Gas Corp., No. 12-12-00338-CV, 2014 WL 2505541 (Tex. App.-Tyler May 30, 2014, no pet.) ................... 3
5. Albert v. Dunlap Exploration, Inc., 457 S.W.3d 554 (Tex. App.-Eastland 2015, pet. denied) ............................................................. .4
6. Petrohawk Properties, L.P. v. Jones, 455 S.W.3d 753 (Tex. App.-Texarkana 2015, pet. filed) .............................................................. 5
B. Royalty Disputes ...................................................................................................... 8
I. French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014) .................. 8
2. Chesapeake Exploration, L.L.C. v. Warren, 759 F.3d 413 (5th Cir. 2014) ................................................................................................... 10
3. Potts v. Chesapeake Exploration, L.L.C., 760 F.3d 470 (5th Cir. 2014) ................................................................................................... 12
4. Chesapeake Exploration, L.L.C. v. Hyder, 2015 Tex. LEXIS 554, 58 Tex. Sup. J. 1182 (Tex. June 12, 2015) ........................................ 13
C. Lease Termination ................................................................................................. 14
I. PNP Petroleum I, LP v. Taylor, 438 S.W.3d 723 (Tex. App.-San Antonio 2014, pet. denied) .................................................................. 14
- 1 -
2. Rippy Interests, LLC v. Nash, No. 10-12-00233-CV, 2014 WL 4114328 (Tex. App.-Waco Aug. 21, 2014, pet. denied) ......................... 16
3. Landover Production Company, LLC v. Endeavor Energy Resources, LP, No. 11-13-00132-CV, 2014 WL 5563454 (Tex. App.-Eastland Oct. 31, 2014, pet. denied) ............................................. .18
4. Chesapeake Exploration, LLC v. Energen Resources Corp., 445 S.W.3d 878 (Tex. App.-El Paso 2014, no pet.) ............................... .19
5. BP America Production Co. v. Laddex, Ltd., No. 07-13-00392-CV, 2015 WL 691212, (Tex. App.-Amarillo, Feb. 17, 2015, pet. filed) .................................................................................................... 21
D. Limitations ............................................................................................................. 22
I. Hooks v. Samson Lone Star, L.P., 457 S.W.3d 52 (Tex. 2015) ................. 22
2. Cosgrove v. Cade, No. 14-0346, 2015 Tex. LEXIS 625 (Tex. June 26, 2015) ............................................................................................ 23
E. Subsurface Trespass and Surface Accommodation .............................................. .24
I. Envtl. Processing Sys., L.C. v. FPL Farming Ltd., 457 S.W.3d 414, 416 (Tex. 2015) .................................................................................. 24
2. Key Operating & Equip., Inc. v. Hegar, 435 S.W.3d 794 (Tex. 2014) .......................................................................................................... 25
3. Lightning Oil Co. v. Anadarko E&P Onshore, LLC, No. 04-14-00152-CV, 2014 WL 5463956 (Tex. App.-San Antonio, October 29, 2014, pet. filed) ..................................................................... .27
4. Lightning Oil Co. v. Anadarko E&P Onshore, LLC, No. 04-14-00903-CV, 2015 WL 4933439 (Tex. App.-San Antonio, Aug. 19, 2015, no pet. h.) ................................................................................... 29
5. City of Lubbock v. Coyote Lake Ranch, LLC, 440 S.W.3d 267 (Tex. App.-Amarillo 2014, pet. filed) ..................................................... 29
F. Nuisance and Surface Trespass .............................................................................. 31
I. Sciscoe et al. v. Enbridge Gathering (North Texas) LP et al., No. 07-13-00391-CV, 2015 WL 3463490 (Tex. App.-Amarillo June 1, 2015, no pet. h.) .............................................................. 31
- 11 -
2. Crosstex North Tex. Pipeline, L.P. v. Gardiner, 451 S.W.3d 150 (Tex. App.-Fort Worth 2014, pet. filed) ........................................... 32
G. Executive Rights .................................................................................................... 33
1. KCM Financial LLC v. Bradshaw, 457 S.W.3d 70 (Tex. 2015) ............... 33
II. Louisiana Case Law Update ...................................................................................................... 34
A. Project and Operating Agreements ........................................................................ 34
1. Olympia Minerals, LLC v. HS Res., Inc., 2014 La. LEXIS 2258, 2013-2637 (La. 1/15/14) .................................................................. 34
2. Mack Energy Co. v. Expert Oil & Gas, L.L.C., 2014-C-1127, (La. 1/28/15), 159 So. 3d 437 .................................................................... 35
B. Fair Market Value and Sale of Mineral Properties ................................................ 36
1. Harruff v. King, 2013-940 (La. App. 3 Cir. 5/14/14), 139 So. 3d 1062, 1069-70, reh'g denied (July 9, 2014), writ denied, 2014-1685 (La. 11/7/14), 152 So. 3d 176 .................................................. 36
2. Quality Environmental Processes, Inc. v. St. Martin, 2013-1582 (La. 5/7/14), 144 So. 3d 1011, reh'g denied (July 1, 2014) .......................................................................................................... 36
3. Norwood v. Mobley Valve Servs., Inc., 49,064 (La. App. 2 Cir. 6/25/14), 144 So. 3d 1143, 1149-50, reh'g denied (Aug. 7, 2014), writ granted in part, 2014-1882 (La. 1/16/15) reh'g denied, 2014-1882 (La. 3/6/15), 161 So. 3d 5 ........................................... 37
C. Imprudent Operations ............................................................................................ 38
1. Hayes Fund for the First United Methodist Church of Welsh, LLC v. Kerr McGee Rocky Mountain, LLC, 2013-1374, (La. App. 3 Cir. 10/1/2014), 149 So. 3d 280, writ granted, 2014-2592, (La. 4/17/15) .................................................................................... 38
III. Oklahoma Case Law Update ............................................................................................. 41
A. Exploration Agreements and Oil Purchase Contracts ........................................... .41
1. Cyanostar Energy, Inc. v. Chesapeake Exploration, L.L. C., 2014 OK CIV APP 7, 317 P.3d 217 (Okla. Ct. App. 2013) ..................... .41
- 111 -
2. Gaskins v. Texan, LP, 2014 OK CIV APP 22, 321 P.3d 985 (Okla. Ct. App. 2014) ................................................................................ 42
B. Deed Interpretation ................................................................................................ 43
1. Chaparral Energy, L.L.C. v. Samson Res. Co., 2015 OK CIV APP 44, 348 P.3d 1104 (Okla. Ct. App. 2015) ......................................... .43
C. Surface Damages ................................................................................................... 44
1. Calyx Energy, LLC v. Hall, 2015 OK CIV APP 1, 342 P.3d 1007 (Okla. Ct. App. 2015) ...................................................................... .44
2. Chesapeake Operating Inc. v. Kast Trust Farms, 2015 OK CIV APP 5, reh'g denied (Sept. 25, 2014), cert. denied (Jan. 6, 2015) .......................................................................................................... 45
D. Tort Claims Based on Neighboring Oil and Gas Operations ................................ .46
1. Reece v. AES Corporation, et al., No. 6:12-cv-00457, 2014 WL 61242 (E.D. Okla., Jan. 8, 2014) ............................................................... 46
2. Ladra v. New Dominion LLC, No. 113,396, 2015 WL 3982748, (Okla. June 20, 2015) ................................................................................. 47
3. Jennifer Lin Cooper v. New Dominion LLC, No. CJ-2015-0024 (District Ct., Lincoln Cty., Okla., Feb. 10, 2015) ...................................... 48
- lV -
I. Texas Case Law Update
A. Purchase and Sale, Joint Operating, and Other Contract Disputes
1. Plains Exploration & Prod. Co. v. Torch Energy Advisors Inc., 2015 Tex. LEXIS 558, 58 Tex. Sup. J. 1115 (Tex. June 12, 2015).
Between 1968 and 1984, Dr. Burdette A. Ogle obtained leases on the Pacific outer
continental shelf. In 1994, Torch acquired Ogle's leases. In a 1996 purchase and sale
agreement, Torch assigned its leasehold interests in undeveloped oil and gas fields to Nuevo
Energy Company. Certain tangible and intangible interests, however, were excluded from the
conveyance. Plains later merged with Nuevo, thereby succeeding to the interests under the 1996
agreement.
A few years later, a federal court determined that the federal government had repudiated
the mineral leases because a statute enacted before the conveyance had been applied in a manner
that precluded development of the leasehold. Consequently, Plains was awarded a share of the
restitution for the lease-bonus payments that Torch's predecessor had paid to secure the leases,
which amounted to more than $83 million. Torch claimed an ownership interest in
approximately half of Plain' s refund based on the excluded-assets provision in the 1996
agreement.
Plains declined to pay, and Torch sued alleging contract and equitable theories of
recovery. The trial court entered a take-nothing judgment in Plains' s favor. The court of appeals
reversed in part and remanded the equity claim for a trial on the merits, concluding that Torch's
equitable claim hinged on the proper construction of the 1996 agreement's terms.
The Texas Supreme Court reversed, holding that the relevant excluded-assets provisions
in the 1996 agreement were unambiguous and, as a matter oflaw, Torch did not retain ownership
of the claimed asset.
- 1 -
2. Kachina Pipeline Co. v. Lillis, 2015 Tex. LEXIS 549, 58 Tex. Sup. J. 1105 (Tex. June 12, 2015).
Kachina Pipeline Co. and Michael Lillis, a natural-gas producer, entered into a Gas
Purchase Agreement (the "Agreement"). Kachina bought, transported, and resold Lillis's gas
under the Agreement and resold it to Davis Gas Purchasing. Lillis later entered into a separate
purchase agreement directly with Davis and constructed his own pipeline to one of Davis' gas
processing plant. Thereafter, Lillis sued Kachina, asserting that Kachina had breached the
Agreement by deducting the compression costs incurred after Lillis delivered the gas to Kachina.
Lillis also brought a fraud claim, asserting that Kachina represented it would release him from
the Agreement and had built his new pipeline in reliance on the alleged representation. Kachina
counterclaimed for breach of the Agreement and sought declarations that it had the right to
deduct compression charges under the Agreement.
The trial court granted summary judgment for Kachina, declaring that the Agreement
entitled Kachina to deduct the costs of compression from its payments to Lillis and that the
Agreement gave Kachina the option to extend the arrangement for an additional five-year term.
The court of appeals reversed. After a detailed analysis of the Agreement's terms, the Supreme
Court affirmed, holding that the Agreement unambiguously allowed neither the disputed
deductions nor a five-year extension.
3. Matador Prod. Co. v. Weatherford Artificial Lift Sys., Inc., 450 S.W.3d 580 (Tex. App.-Texarkana 2014, pet. denied).
Matador drilled a well in the Cotton Valley formation and designed a hydraulic fracture
stimulation treatment for the well. Matador hired Weatherford to carry out the operation. The
planned treatment provided for multiple stages of fracturing and specific sequences and amounts
of various materials, including the proppant and fluids. Weatherford attempted to carry out the
planned operation, but encountered various problems that resulted in some of the proppant and
- 2 -
fluids not being pumped and not being displaced as planned. Weatherford invoiced for the work,
but Matador refused to pay.
Weatherford subsequently sued Matador, asserting a verified claim for a sworn account
(a Texas cause of action for collection of a debt) and for breach of contract, claiming damages of
$314,034. Matador alleged that Weatherford was negligent, had failed to complete the job,
breached the contract and a warranty, and asserted its own claim for $2,374,900 for damages to
the well.
On appeal, Matador challenged the lower court's summary judgment in favor of
Weatherford and the court's evidentiary rulings. Reciting detailed evidence about problems with
the fracturing operation, the court of appeals stated there was a fact issue regarding the amount
of materials Weatherford actually provided versus what it claimed to have provided. The
appellate court also analyzed evidence regarding Weatherford's claim that Matador had waived
consequential damages in a terms and conditions document and the trial court's admission into
evidence of a Master Service Agreement entered by the parties after the operations at issue. In
both cases, the court of appeals ruled against Weatherford and found that the trial court had
committed error. The case was remanded for further proceedings consistent with the opinion.
4. XH, LLC v. Cabot Oil & Gas Corp., No. 12-12-00338-CV, 2014 WL 2505541 (Tex. App.-Tyler May 30, 2014, no pet.).
Under a Purchase Agreement ("PA"), a seller sold its leases and reserved an overriding
royalty interest ("ORI") in the assigned leases. The PA contained an area of mutual interest
("AMI") provision and had an attached joint operating agreement ("JOA"), which the parties
signed. The JOA contained its own AMI provision, which identified five separate areas of
mutual interest. XH and Cabot were the successors to the original PA and JOA parties. XH
- 3 -
claimed that Cabot's acquisition of ORis was subject to the AMI provision in the JOA and that
XH was entitled to a proportionate share of the ORI Cabot had acquired.
The PA's AMI provision addressed lease acquisitions only and specified that "[a]ll leases
subsequently acquired by either party to this [PA] that are located within one of five ( 5) separate
designated Areas of Mutual Interest : .. will be subject to the Area of Mutual Interest provision
provided in the [JOA]." On the other hand, the JOA's AMI provision was broader in scope and
stated that "[i]n the event that any party or parties acquire any oil and/or gas interest (which shall
be deemed to include royalties, mineral interests, and other payments out of production) or oil
and gas leases or other contract rights ... the non-acquiring party or parties shall have a right to
acquire their proportionate interest therein .... "
The court concluded that the JOA and PA must be read together because they were
executed at the same time, for the same purpose, and in the course of the same transaction. The
JOA specified that in the event of a conflict between the JOA and the PA, the PA would control.
The AMI provisions in the PA and JOA, however, could not be harmonized, leaving the PA to
control. Consequently, the ORI were not subject to the JOA's AMI provisions, which only
addressed subsequently-acquired leases, and summary judgment for Cabot was affirmed.
Finally, because the parties did not contend that the PA or JOA was ambiguous, the Court would
not consider extraneous evidence, including an internal Cabot memo that was adverse to its
arguments.
5. Albert v. Dunlap Exploration, Inc., 457 S.W.3d 554 (Tex. App.-Eastland 2015, pet. denied).
Dunlap Exploration sued Albert, a leaseholder from whom it had obtained deep well
drilling rights pursuant to a farmout agreement. Dunlap sought to enforce an agreed judgment
and settlement agreement entered in the parties' prior lawsuit, after another dispute arose
- 4 -
concerning the duration and the depths at which Dunlap could drill on the leased property. The
lower court entered summary judgment in Dunlap's favor, awarding it damages of $146,101.38,
a proportionate share of future production from two disputed wells, and attorney fees.
The court of appeals held: (1) oil and gas lease pooling agreement negated or superseded
a horizontal Pugh clause in the parties' 251.5-acre lease that had provided that the lease would
expire "as to all depths below the deepest depth drilled" during the primary term of the lease;
(2) a ratification agreement negated or superseded the horizontal Pugh clause; and (3)
leaseholder was precluded by operation of the estoppel doctrine from repudiating its authority to
drill wells under terms of pooling agreement and ratification agreement.
6. Petrohawk Properties, L.P. v. Jones, 455 S.W.3d 753 (Tex. App.-Texarkana 2015, pet. filed).
This case arose out of Petrohawk's agreement with the plaintiff landowners to schedule
multiple closings to sign oil and gas leases, and Petrohawk's refusal to lease additional properties
after the first closing. The court of appeals upheld a $12.4 million breach of contract judgment
against Petrohawk.
The dispute had its roots in a legendary natural gas boom that took place in the
Haynesville Shale formation in 2008. Exploration companies competed aggressively for
available leases, offering bonuses as high as $30,000 per acre. But requisite title investigation
constrained the leasing activity. In East Texas's Harrison County, where this case arose,
landmen overwhelmed the clerk's office and had to take turns using the office's computer
terminals.
It was during this leasing frenzy that Petrohawk entered into an Agreement to Lease Oil
and Gas Mineral Interests (the "Agreement") with a family group of mineral interest owners
("Plaintiffs"). The Agreement specified conditions under which Petrohawk would lease mineral
- 5 -
interests from Plaintiffs covering the Haynesville and Bossier Shale formations, if Plaintiffs
could deliver their interests "free and clear of Title Defects." The Agreement called for an
August 15, 2008 closing of "not more than 8,500 net mineral acres," at a lease bonus of $23,500
per acre. The total lease bonus that Petrohawk would have to pay Plaintiffs at closing was
potentially almost $200 million. Petrohawk expected to close on at least 4,800 acres.
The Agreement required Petrohawk to place $10 million in escrow for the closing. The
Agreement would terminate and Petrohawk would recover the escrowed funds if, at closing,
Plaintiffs were unable to deliver free and clear title to mineral acreage that exceeded $10 million
in lease value (i.e., 426 acres). Petrohawk would forfeit the $10 million as liquidated damages if
Plaintiffs delivered at least 426 acres and other conditions were satisfied, but Petrohawk
nevertheless refused to close the transaction. Petrohawk was to notify Plaintiffs of any title
defects not later than five days before closing. If Plaintiffs were unable to cure the defects by
closing, they would enjoy a 30-day grace period during which Petrohawk would still honor the
$23,500 per acre bonus.
The title work progressed more slowly than hoped and the parties agreed to delay the
closing to August 27. The parties also agreed to a second "clean-up" closing on September 17.
On August 27, the parties closed on 2,200 mineral acres and Petrohawk paid Plaintiffs more than
$51 million, including the $10 million escrow deposit.
Additional title difficulties caused the parties to postpone the September closing to
October 9, and to agree to a third and final closing on November 6, 2008. However, in the fall of
2008, the United States was in the midst of a financial crisis. On October 7, Petrohawk notified
Plaintiffs that, in light of "uncertainty in the capital markets," it would not lease additional
acreage. Petrohawk eventually took the position that Plaintiffs had 30 days to clear title on
- 6 -
additional acreage after the August 29 closing and, having not done so, Petrohawk had no further
obligations under the Agreement. Plaintiffs sued for breach of contract and a jury awarded them
$12.4 million in damages, plus $4.2 million in attorneys' fees and post-judgment interest.
On appeal, Petrohawk argued, among other issues, that the statute of frauds barred
recovery under the changed Agreement. As the court noted, "[t]he statute of frauds applies to oil
and gas leases and contracts to acquire the same." Generally, modifications to an agreement
subject to the statute of frauds must be in writing, but an oral modification may be enforceable.
In particular, the court held that an oral modification to extend time of performance 1s
enforceable if it is made before the written contract expires and if it is not material.
Petrohawk argued that the parties' agreement to hold the second closing materially
changed the Agreement and was, therefore, unenforceable under the statute of frauds. Under
Petrohawk's reasoning, the Agreement contemplated only one closing where Petrohawk could
accept the leases or forfeit its $10 million escrow deposit. Having released the escrow deposit in
the first closing, Petrohawk argued that it lost its "walk away" option. Multiple closings,
Petrohawk argued, deprived Petrohawk of its ability to weigh its "walk away" option against
"all" Plaintiffs' leases. Petrohawk argued this would have required it to "accept whatever leases
Plaintiffs presented and subjected Petrohawk to 'unlimited and indeterminate liability."'
As a threshold matter, the court of appeals held that Petrohawk's lease obligations were
"neither unlimited, nor indeterminate, nor unseen" because Petrohawk performed all the title
work for Plaintiffs' mineral interests and was in a position to choose what it would lease based
on the state of the title. Moreover, the court pointed out that Petrohawk's obligation to lease did
not exceed 8,500 acres.
- 7 -
As to the $1 O million escrow deposit, the court held that Petrohawk did not lose its walk
away option because of the Agreement's modification, but instead because Petrohawk partially
performed its contractual obligations. The court reasoned that Plaintiffs fulfilled their obligation
to present mineral acres worth at least $10 million in lease value at the first closing, and
Petrohawk chose to proceed with the transaction and apply the $10 million escrow deposit to the
purchase price. Under these conditions, the court held that the parties' decision to proceed with
multiple closings did not change their rights and obligations and did not substantially alter the
Agreement itself. In conch1sion, the court held that the modification was not material, did not
need to be in writing, and its enforcement was not barred by the statute of frauds.
B. Royalty Disputes
1. French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014).
The Plaintiffs are owners of royalty interests under two oil and gas leases in west Texas.
The 1948 and 1949 vintage leases were pooled in 1954 to form the Cogdell Canyon Reef Unit
(CCRU). Since the CCRU was formed, a method of enhanced oil recovery was developed that
involves injecting carbon dioxide into the reservoir to sweep more oil to the production wells.
With this method, the carbon dioxide returns to the surface along with casinghead gas and oil.
At issue in this case was whether the royalty due on the casinghead gas under the parties'
agreements must be determined as if the injected carbon dioxide was not present and whether the
royalty owners were required to share the expense of removing the carbon dioxide from the gas.
In an issue of first impression, the Texas Supreme Court (1) rejected the royalty owners'
claim that the royalties on casinghead gas should be determined as if the injected carbon dioxide
was not present, and (2) held that, under the applicable contracts, the costs of removing carbon
dioxide from the gas were post-production expenses that the royalty owners must share.
- 8 -
Occidental Permian, Ltd. (Oxy) held the working interest in two CCRU leases, one of
which was a "market value" lease and the other was a "proceeds" lease. After production had
substantially declined, Oxy began injecting large amounts of carbon dioxide into the field in
2001, which significantly enhanced production but resulted in production of carbon dioxide
laden casinghead gas. Some of the casinghead gas was simply transported from the production
wells to the injection wells and pumped back into the reservoir. But to increase the
concentration of carbon dioxide in the reinjected stream and to realize the value of natural gas
liquids (NGLs) entrained in the casinghead gas, Oxy processed some of the gas to: (1) remove
the carbon dioxide and other contaminants for reinjection into the reservoir; and (2) extract the
NGLs for sale.
Oxy contracted with Kinder Morgan to build the multi-million dollar Cynara plant to
process the gas to remove most of the carbon dioxide, certain contaminants, and some of the
NGLs. Kinder Morgan in tum contracted with Torch Energy Marketing to further process the
gas at a separate Snyder plant, where the rest of the carbon dioxide was removed and the
remaining NGLs were extracted. Oxy paid Kinder Morgan a monthly fee based on the volume
of gas that was processed, plus an in-kind payment of 30 percent of the total NGLs extracted.
Oxy paid the plaintiffs a royalty on 70 percent of the NG Ls, but not on the 30 percent that was
paid in-kind to Kinder Morgan.
French argued that, except for the removal of contaminants and the extraction of NG Ls at
the Snyder plant, the costs of processing the casinghead gas were production costs that should be
borne solely by Oxy. These costs included the transportation of the casinghead gas from the
wellhead to the Cynara plant, the processing at the Cynara plant, the transportation of the
partially-processed streams of NG Ls and gas to the Snyder plant, removal of carbon dioxide at
- 9 -
the Snyder plant, and the transportation of the carbon dioxide streams from both plants back to
the injection wells. French also argued that the royalty should be based on the value of the
native casinghead gas, without the presence of carbon dioxide Oxy had introduced. French
prevailed on these arguments at trial, obtaining a judgment in excess of $10 million. However,
the court of appeals reversed the judgment. The Texas Supreme Court affirmed, albeit for
different reasons than the court of appeals.
The Supreme Court first rejected French's argument that the cost of removing the carbon
dioxide was analogous to the cost of separating water from the oil, which Oxy had always treated
as a cost of production. The Court reasoned that separating water was much simpler than
separating carbon dioxide, and was essential - not merely beneficial - to the continued production
of oil. The Court also noted that Oxy was free, under the parties' agreements, to simply re-inject
all of the casinghead gas, but instead further processed it for the benefit of all parties. Thus,
"French, having given Oxy the right and discretion to decide whether to re-inject or process the
casinghead gas, and having benefitted from that decision, must share in the cost of carbon
dioxide removal."
The costs of the gas processing activities aimed at returning the carbon dioxide to the
reservoir were production costs borne by Oxy, which the Court found were covered by Oxy's
monetary payment to Kinder Morgan. But the Texas Supreme Court held that all of the other
processing costs were post-production costs in which the royalty owners must share under both
the "market value" and "proceeds" leases.
2. Chesapeake Exploration, L.L.C. v. Warren, 759 F.3d 413 (5th Cir. 2014).
Royalty owners sued claiming that post-production costs were improperly deducted by
Chesapeake. The trial court granted a 12(b )(6) motion to dismiss after concluding Chesapeake
- 10 -
had not breached the leases by deducting post-production costs. The Fifth Circuit affirmed, but
dismissal of some claims should have been without prejudice.
The dispute involved the "Warren Leases" and the "Javeed Lease," all of which
contained similar royalty provisions. The Warren Leases provided that the 22.5% royalty was to
be based on the "amount realized" computed at the "mouth of the well," but also provided that
the lessors would "bear a proportionate part of all those expenses imposed upon Lessee by its gas
sale contract to the extent incurred subsequent to those that are obligations of Lessee."
The Fifth Circuit compared the Warrens' lease language to the royalty provisions in
Heritage Resources, Inc. v. Nationsbank, 939 S.W.2d 118 (Tex. 1996) and Judice v. Mewbourne
Oil Co., 939 S.W2d 133 (Tex. 1996), which addressed deductions in royalty calculations. The
Fifth Circuit concluded the Warrens had not provided in their leases that no post-production
costs could be deducted. The court focused on the Warrens' lease specification that royalty was
computed at the mouth of the well, regardless of where the gas is sold. The court concluded this
meant the royalty was "based on net proceeds" and allowed Chesapeake to deduct post
production costs from the mouth of the well to the sales point.
The Fifth Circuit rejected the lessors' arguments that were based on the provision
limiting costs chargeable to the royalty owner. The court concluded that the provision requiring
the lessor to bear proportionate costs under the lessee's gas sales contracts mandated that any
costs the lessee incurred in delivering marketable gas to a sales point beyond the mouth of the
well meant that these costs would be borne proportionately by the lessor. Moreover, the Fifth
Circuit rejected the Warrens' reliance on Chesapeake Exploration v. Hyder, 427 S.W.2d 472
(Tex. App.-San Antonio 2014), a.ff"d, 2015 Tex. LEXIS 554 (Tex. 2015), concluding that the
royalty provisions in the Hyder Lease and the Warren Leases "differ markedly."
- 11 -
The Fifth Circuit, however, reversed the trial court's decision to dismiss the Javeeds'
claims with prejudice. The Javeed Lease provided that the lessor's royalty would be calculated
at the point of sale, not the well mouth of the well, as provided in the Warren Lease. Based on
this distinction, the Fifth Circuit concluded it was not apparent the Javeeds could never state a
claim and that dismissal of their complaint should have been without prejudice.
3. Potts v. Chesapeake Exploration, L.L.C., 760 F.3d 470 (5th Cir. 2014).
Lessors sued Chesapeake claiming their royalties were improperly burdened with post-
production costs. The leases provided that royalties would be based on the "market value at the
point of sale" and all royalty was to be "free of all costs and expenses related to exploration,
production and marketing . . . including compression, dehydration, treatment, and
transportation." Chesapeake sold the lessors' gas at the wellhead to an affiliate, which in turn
transported the gas and resold it downstream at distant locations in Louisiana and Alabama.
Chesapeake paid the lessors a royalty based on the wellhead price, which the affiliate calculated
after deducting post-production costs from the sales prices it received far downstream.
The parties agreed the leases were unambiguous, which prompted the trial court to grant
summary judgment to Chesapeake. On appeal, the Fifth Circuit reasoned that if gas sales had
occurred downstream of the wellhead, the lessors should have received the market value of the
gas at the downstream point of sale, without deducting post-production costs between the point
of sale and the wellhead. But in the instant case, gas sales were at the wellhead, which generally
does not include post-production costs.
The Fifth Circuit concluded that Chesapeake's royalty calculations were consistent with
the market value calculations approach in Heritage Resources v. NationsBank, which also
involved a "market value at the well" royalty provision. Further, the Fifth Circuit rejected the
lessors' attempt to distinguish their lease language from that in Heritage Resources, which
- 12 -
involved a lease that provided royalties should not be subject to deductions for dehydration,
compression, or transportation, similar to the royalty provision in Potts.
The Fifth Circuit summarized Heritage Resources by stating that the Texas Supreme
Court held in that case there were two methods of calculating market value at the well. The first
and most desirable method is to use comparable sales at the well. When such comparable sales
data are not available, the second method for determining market value can be used to compute
royalties using the market value of the gas at a downstream point where sufficient sales
information is available, and by deducting reasonable post-production and marketing costs. The
Fifth Circuit concluded that such a "net back" calculation method does not burden the royalty or
reduce its value, and deduction of post-production costs between the wellhead and a downstream
point where market value could be ascertained was nothing more than a method of determining
market value at the well in the absence of comparable sales data.
4. Chesapeake Exploration, L.L.C. v. Hyder, 2015 Tex. LEXIS 554, 58 Tex. Sup. J. 1182 (Tex. June 12, 2015).
In this case, the Hyder family leased 948 mineral acres. Chesapeake acquired the lessee's
interest. At issue were costs deducted from the Hyders' overriding royalty.
As a general matter, an overriding royalty on oil and gas production is free of production
costs but must bear its share of post-production costs, unless the parties agree otherwise. The
Hyders and Chesapeake agreed that the overriding royalty was free of production costs under the
lease but disputed whether it was also free of post-production costs. The lease included a
provision that called for "a perpetual, cost-free (except only its portion of production taxes)
overriding royalty of five percent (5.0%) of gross production." The meaning of this clause was
the focus of the dispute.
- 13 -
The trial court rendered judgment for the Hyders, awarding them $575,359 in post-
production costs that Chesapeake had deducted from their overriding royalty. The court of
appeals affirmed.
The Texas Supreme Court analyzed the lease language including an express "disclaimer"
of the Texas Supreme Court's holding in Heritage Resources, a case involving a lease provision
stating there would be no deductions from the lessor's royalty by reason of any post-production
costs, but in which the Texas Supreme Court had concluded this provision was "ineffective to
free the royalties from postproduction costs." In Hyder, the Texas Supreme Court concluded that
the lease's disclaimer of the Heritage Resources holding did not influence the court's analysis
and that such a disclaimer could not free a royalty of post-production costs when the remaining
text of the lease does not do so. Nevertheless, in a 5-4 decision the Texas Supreme Court
affirmed, holding that the lease in Hyder freed the gas royalty of post-production costs and did
the same for the overriding royalty.
C. Lease Termination
1. PNP Petroleum I, LP v. Taylor, 438 S.W.3d 723 (Tex. App.-San Antonio 2014, pet. denied).
The parties disputed whether PNP, the lessee, had extended an oil and gas lease's term by
tendering a shut-in royalty payment. PNP entered the one-year primary term oil and gas lease on
June 1, 2009. The lease provided that PNP could tender a "shut-in well royalty payment" to
extend the term of the lease "[i]f, at the expiration of the primary term there is located on the
leased premises a well or wells not producing oil/gas in paying quantities." (emphasis added).
When the parties executed the lease, the property contained thirteen non-producing wells,
which were apparently still not producing one year later. Shortly before the end of the primary
term, PNP sent the lessors a letter exercising PNP's right to tender a shut-in royalty payment.
- 14 -
The lessors rejected the enclosed payment and informed PNP that the lease would expire at the
end of the primary term "absent proper extension." PNP quickly filed suit for declaratory relief.
Both sides filed competing motions for summary judgment. The lessors argued that
PNP's payment of a shut-in royalty was ineffective because there was no shut-in well on the
property "capable of' producing in paying quantities, a requirement that has been implied in
Texas to shut-in royalty provisions. The trial granted summary judgment to the lessors.
Seven months after the summary judgment ruling, PNP filed a motion to reconsider and
an affidavit describing the lease negotiations surrounding the shut-in royalty provision and
explaining that the terms "capable of producing" had been struck from a draft of the lease. The
trial court denied PNP's reconsideration motion, sustained objections to the affidavit, and struck
the lease negotiation evidence.
The court of appeals concluded that a 2011 Texas Supreme Court opinion and a San
Antonio appellate opinion both supported PNP's argument that contract negotiations can be
considered as "surrounding circumstances" when construing the language of the lease. The trial
court's sustaining of parol evidence and other objections was therefore error.
In addition, PNP's evidence that a draft of the lease showed that the terms "capable of'
had been deleted and this demonstrated that the parties intended to allow shut-in royalty
payments, even if there was no well capable of producing in paying quantities. According to the
opinion, this established that the parties did not intend to apply the oil and gas industry's
generally-accepted meaning of the lease term "shut-in royalty." PNP therefore properly tendered
the shut-in payment thereby extending the term of the lease, and judgment was rendered
declaring that the lease was extended by one year.
- 15 -
2. Rippy Interests, LLC v. Nash, No. 10-12-00233-CV, 2014 WL 4114328 (Tex. App.-Waco Aug. 21, 2014, pet. denied).
On January 18, 2006, the Nash lessors granted an oil and gas lease to Rippy's
predecessor, Range Production I, L.P. ("Range"). The primary term was due to expire on
January 18, 2011. Range assigned the lease to Rippy in September 2009. In September 2010,
Rippy received a drilling permit for a well on the lease. That same month, the Nashes granted a
top lease to KingKing.
On January 1, 2011, with little more than two weeks before the end of the primary term,
Charles Nash called KingKing with news that Rippy was starting to work on the property. Rippy
paid Nash $28,650 for surface damages to construct a well site and road. On January 7, 2011,
Nash signed a damage release and acknowledged payment for well pad construction and access
road use. On January lih or 13th Rippy installed a conductor pipe for the well and on January
1 i 11 he started constrnction of the well pad.
On January 18th, when the lease's primary term expired, Nash locked the gate to the well
site. Nash claimed he locked the gate because "he wanted Rippy and KingKing to communicate
because he did not know which lease was valid." Rippy's workers cut the lock and entered the
property, prompting Nash to call the police the next day. Rippy claimed he called the police to
document that Rippy had entered the property when he "might" not have a valid lease. There
were no arrests and the police concluded it was a civil matter.
Rippy received a bid to drill the well on January 18th and signed a drilling contract on
February 1ih. The opinion does not make clear what happened between January 18th and
February 12th, but Rippy proceeded to drill a pilot hole to 7900 feet. Thereafter, Rippy did not
complete the planned horizontal portion of the well and stopped work in March 2011 because,
according to Rippy, title was in dispute.
- 16 -
After analyzing several similar Texas lease termination opinions, the appellate court
concluded that Rippy's activities satisfied the lease's "operations for drilling" requirement
during the primary term. The undisputed facts showed that by the end of the primary term Rippy
had obtained a drilling pe1mit and a surface damages release, hired a drilling contractor, solicited
and received a bid for a drilling rig, hired contractors to prepare the well site, began well site and
road construction, and set a conductor pipe. The court also noted that Rippy continued these
efforts and actually drilled a pilot hole. The court concluded that these activities qualified under
the lease as operations for drilling as a matter of law.
Concluding that Rippy's conduct perpetuated the lease beyond the primary term, the next
issue the court analyzed was whether the lease terminated when Rippy decided to stop operations
after drilling a pilot hole. The lease specified that it would terminate upon cessation of activities
for more than 90 days. Rippy, however, relied on Nash's alleged repudiation of the lease to
avoid termination.
Under Texas law, a lessor who wrongfully repudiates the lessee by an "unqualified
notice" that the lease is forfeited or terminated cannot complain if the lessee suspends operations
pending a detennination of the controversy. Reversing the trial comi's summary judgment
against Rippy, the court of appeals held that there was a genuine issue of material fact as to
whether Nash gave "unqualified notice" the lease was terminated. Evidence of the repudiation
included Nash placing a lock on the gate, calling the police allegedly to arrest Rippy's workers,
and allegedly indicating to Rippy that Nash "felt like" the lease was tenninated.
Finally, the court found that Rippy had not waived the affirmative defense of repudiation
by failing to halt operations when Nash allegedly repudiated the lease. The appellate court held
- 17 -
that continuing operations after an alleged repudiation of the lease was not a waiver of the
repudiation defense.
3. Landover Production Company, LLC v. Endeavor Energy Resources, LP, No. 11-13-00132-CV, 2014 WL 5563454 (Tex. App.-Eastland Oct. 31, 2014, pet. denied).
Landover owned a top lease that was burdened by a prior lease to Endeavor. Landover
sued Endeavor claiming that Endeavor's lease automatically terminated when there was no
production from the property's only well during the period May 2001 through August 2001.
A jury found that the absence of production was excused in accordance with the
temporary cessation of production doctrine. The jury also found in favor on Endeavor on
adverse possession issues.
The parties' dispute focused on a savings clause in the Endeavor lease, which provided
that the lease could be perpetuated "[i]f at the expiration of the primary term oil and gas is not
being produced on said land but Lessee is then engaged in drilling or reworking operations
thereon, the lease shall remain in force .... " The court of appeals concluded, however, that this
clause did not apply because it was undisputed that there was production at the end of the
primary term.
Because the lease did not contain a savings clause applicable to the secondary term, the
appellate court held that Texas law would necessarily imply a temporary cessation of production
provision. Under the temporary cessation of production doctrine, the "'automatic termination
rule is relaxed if the lessee can prove that the cessation of production is temporary and is due to
sudden stoppage of the well, some mechanical breakdown of the equipment used therewith, or
the like."' (quoting Krabbe v. Anadarko Petroleum Corp., 46 S.W.3d 308, 315 (Tex. App.-
Amarillo 2001, pet. denied). A lessee must also prove that it "acted with diligence and remedied
the cause of the temporary cessation and resumed production within a reasonable time."
- 18 -
Endeavor's evidence showed that the cessation of production was caused by a hole that
developed in a "heater-treater," which separates produced oil from comingled water. The
evidence also showed that the hole in the heater-treater prevented the oil from being made
marketable and also caused oil and water to spill onto the property. Endeavor adduced evidence
that several attempts were made to repair the treating equipment; production had to be shut-in for
the repairs; initial repair attempts were unsuccessful; wet weather hampered additional repair
efforts; and, after several attempts, production was restored in August 2001. Although Endeavor
was required to prove it acted with diligence and within a reasonable time, Landover did not
allege Endeavor failed to meet these requirements with the evidence. Instead, Landover
complained that Endeavor could have used "reasonable alternative production methods." The
court held that this was not Endeavor's burden to prove under the facts of the case.
Finally, the court noted that it would affirm judgment for Endeavor even if the evidence
did not support application of the temporary cessation of production doctrine because Landover
had not appealed the adverse possession finding.
4. Chesapeake Exploration, LLC v. Energen Resources Corp., 445 S.W.3d 878 (Tex. App.-El Paso 2014, no pet.).
Chesapeake and Energen were operators who asse1ied competing interests in the same
propetiy known as Section 25. Two leases executed in 197 6 covered Section 25 (the "197 6
Leases"). As authorized by the 1976 Leases, Section 25 had been pooled with an adjacent
section of land, Section 18, to form two 640-acre pooled gas units, apparently at different depths.
One of the pooled units included 80 acres from Section 25 and 560 acres from Section 18. The
second unit contained 540 acres from Section 25 and 80 acres from Section 18 and was known as
the Cadenhead No. 2 Pooled Gas Unit. The Cadenhead No. 2 unit contained only one well,
which was located on Section 25 and had produced gas, but that well had been plugged in 1988.
- 19 -
The other pooled unit also contained only one well, but that well was still producing at the time
of trial.
The 1976 Leases contained a retained acreage clause providing that failure to
continuously develop the lease would terminate it as to all unproductive acreage except for:
"[E]ach proration unit established under ... [the] rules and regulations [of the RRC ... ] upon which there exists (either on the above described land or on lands pooled or unitized therewith) a well capable of producing oil and/or gas in commercial quantities
"
Both parties agreed the leases were unambiguous and that the retained acreage clause
applied, but they disagreed about the scope and application of that clause. The issue was
whether the 1976 Leases remained in effect as to all of Section 25 (which was included in the
proration unit of the well that was plugged) or only as to an 80-acre portion of Section 25 that
was still included in the other proration unit, which contained a producing well. Energen
claimed the 1976 Leases were still in effect for all of Section 25. Chesapeake claimed the 1976
Leases terminated as to Section 25, except for the 80-acres within the producing gas unit.
To support its position, Chesapeake argued that the 1976 Leases provided for a "rolling"
termination so that lands would be released at various times after the end of the primary term and
acreage would automatically be released as a proration unit ceased to produce. Energen argued
the 1976 Leases provided for a one-time termination at the point when continuous development
beyond the primary term had ceased, meaning that partial termination would occur "once and
only once."
The court held that Chesapeake's arguments were not supported by the retained acreage
clause. According to the court of appeals, the leases made clear the proration units were
maintained not by the existence on the unit of a producing well, but by the presence of a well
- 20 -
capable of producing in paying quantities. Because the parties chose to maintain the lease as to
each proration unit when continuous development stopped and based on the production capacity
of that unit's well, rather than actual production, this indicated that the parties did not intend for
the retained acreage clause to be applied each time production stopped. The comi reasoned that
if the parties to the 1976 Leases had wished to provide for continual relinquishment of non-
producing proration units, so that acreage would no longer be subject to the lease once
production ceased from a particular unit, they could have done so by including such language.
Absent such language, the court concluded it could not rewrite the paiiies' bargain.
The court concluded that the plain, grammatical language showed that the parties
intended for the leases to continue as to each designated proration unit if the unit had a well
capable of producing in commercial quantities when continuous development ceased.
Accordingly, summary judgment for Energen was affirmed.
5. BP America Production Co. v. Laddex, Ltd., No. 07-13-00392-CV, 2015 WL 691212, (Tex. App.-Amarillo, Feb. 17, 2015, pet. filed).
BP acquired the "Arrington Lease," which had one producing well. The 1971 Arrington
Lease had been maintained by its only well, which produced steadily until August 2005 when
production slowed significantly. 15 months later, in November 2006, production inexplicably
increased to rates comparable to those prior to the August 2005 slow down.
In 2007, the landowners entered into a top lease with Laddex. The Laddex Lease
provided that it would not begin until the Arrington Lease terminated, either by BP's written
release, or by a judgment holding that Arrington Lease had terminated.
One month after executing the Laddex Lease, Laddex sued BP seeking termination of the
Arrington Lease and possession of the mineral estate based on BP's alleged failure to produce in
- 21 -
paying quantities during the 15-months from August 2005 to November 2006. A jury found that
the Arrington Lease had terminated during those 15 months when production slowed.
BP appealed, arguing that the Laddex lease violated the Rule Against Perpetuities. This
argument was unavailing, but BP also appealed on the grounds that the trial court's charge
improperly restricted the jury's review to the 15-month period of slow production, which
excluded higher levels of production in the months prior to and after the production downturn.
The Laddex opinion concluded that termination of a mineral lease is assessed through a
two-step test for determining profitability: "(1) viewed over a reasonable period of time, did the
lease cease to pay a profit after deducting operating and marketing expenses, in other words, did
the lease cease to produce in paying quantities; and (2) would a reasonably prudent operator
continue to operate under the lease for profit and not merely for speculation."
By the time the Laddex Lease was executed, "evidence established that the Arrington
Lease had resumed production in paying quantities." The court of appeals stated "evidence that
a lease had returned to profitable production is material to the determination of whether a jury
question inquires about a period that is reasonable under the circumstances." The court of
appeals further stated that the trial court's limiting of the relevant time, "which isolated a fifteen
month period that was not reflective of the true profitability of the lease," was not reasonable in
assessing whether the lease ceased to produce in paying quantities. Based on this reasoning, the
appellate court reversed and remanded for a new trial.
D. Limitations
1. Hooks v. Samson Lone Star, L.P., 457 S.W.3d 52 (Tex. 2015).
Hooks, a mineral owner, sued Samson, the lessee, alleging breach of contract, failure to
pay royalties, and fraud. The claims centered on three oil and gas leases that Hooks executed
- 22 -
with Samson in 1999. Hooks prevailed on the majority of his claims in the trial court and was
awarded a judgment for more than $21 million.
The jury determined that Hooks, in the exercise of reasonable diligence, discovered the
fraud less than four years before filing suit. The trial court therefore concluded that the claims
were not time barred. The court of appeals reversed, concluding that the fraud should have been
discovered, as a matter of law, more than four years before Hooks filed suit because Hooks
should have discovered the relevant information in the Texas Railroad Commission's public
records. The critical information involved plats showing a well location relative to lease
boundaries and a directional survey filed with the Texas Railroad Commission that contradicted
a plat signed by one of Samson's landmen.
The Supreme Court reviewed evidence regarding the plat information and Texas Railroad
Commission records and stated that it could not say as a matter of law that Hooks should have
discovered the accurate information when the more recent filing conveyed inaccurate well
information. The court stated that "[a]lthough [a party exercising] reasonable diligence should
examine readily ascertainable information in the public record, it may stop at more recent filings
with the Railroad Commission, without the need to double-check more recent filings against
earlier filings." The Supreme Court reversed and remanded for a determination of the factual
sufficiency of the evidence regarding Hooks' reasonable diligence in discovering the underlying
fraud, as well as for determination of other various issues.
2. Cosgrove v. Cade, No. 14-0346, 2015 Tex. LEXIS 625 (Tex. June 26, 2015).
In 2011, the Cades sued Cosgrove over two acres of land that Cosgrove purchased from
the Cades in 2006 through a trust. The deed mistakenly - but unambiguously - failed to reserve
mineral rights. The deed was notarized and the Cades initialed or signed each page.
- 23 -
When the Cades discovered the error years later, they demanded that Cosgrove issue a
correction deed. Cosgrove refused and the Cades filed suit in 2011, more than four years after
the deed was signed. The Cades urged the trial court to declare as a matter of law that the deed
did not convey mineral rights and argued that Cosgrove breached the sales contract by refusing
to execute a correction deed. Cosgrove claimed that the applicable two and four year statutes of
limitations barred each of the Cades' claims regarding the deed.
On summary judgment, the trial court ruled that the Cades' claims were time-barred. The
court of appeals reversed, concluding that the discovery rule delayed the accrual of limitations
for a deed-reformation claim.
The Texas Supreme Court reversed and held that (1) a plainly evident omission in an
unambiguous deed is not a type of injury for which the discovery rule is available because it
charges parties with irrefutable notice for limitations purposes; (2) Tex. Prop. Code Ann. 13.002
provides all persons, including the grantor, with notice of the deed's contents as well; and (3) a
grantor who signs an unambiguous deed is presumed as a matter of law to have immediate
knowledge of material terms. Accordingly, the suit was untimely.
E. Subsurface Trespass and Surface Accommodation
1. Envtl. Processing Sys., L.C. v. FPL Farming Ltd., 457 S.W.3d 414, 416 (Tex. 2015).
FPL sued Environmental Processing Systems ("EPS") seeking injunctive relief and
asserted claims for trespass, unjust enrichment, and negligence. The dispute involved FPL's
claim that EPS committed a subsurface trespass when its injected wastewater migrated on to
FPL's property approximately 8,000 feet below ground. The case was tried before a jury, which
found against FPL on all causes of action. The court of appeals affirmed, holding that an
- 24 -
actionable trespass did not occur because the Texas Commission on Environmental Quality
(TCEQ) has issued a permit for EPS' injection activities.
FPL appealed to the Texas Supreme Court, which reversed on the basis that the TCEQ
permit did not shield EPS from civil tort liability that may stem from the permitted activities, and
remanded to the court of appeals for consideration of issues related to the trespass claim. On
remand, the court of appeals reversed the judgment on the ground that the charge improperly
placed the burden of proving EPS' s affirmative defense of consent on FPL.
Both parties promptly petitioned the Texas Supreme Court, which again reversed the
court of appeals' ruling. Instead of definitively answering whether a claim for subsurface
trespass was cognizable, the Texas Supreme Court decided the case on the ground that there was
no charge error because the burden of proving lack of consent belonged to the plaintiff. The
Court expressly declined to address whether wastewater that migrates under adjoining land could
be considered a trespass and stated that because the jury found no liability for deep subsurface
trespass, there was no need to address in this case whether it is a viable cause of action in Texas.
2. Key Operating & Equip., Inc. v. Hegar, 435 S.W.3d 794 (Tex. 2014).
The Texas Supreme Court determined in Hegar that a mineral lessee enjoys surface
rights over a pooled tract even if no physical production is coming from the pooled tract. Key, a
mineral lessee, pooled part of a 191-acre tract (the Curbo tract) with an adjoining tract (the
Richardson tract) to form a single unit. Key used a road across the Curbo tract to reach oil and
gas operations on the Richardson tract. The trial court relied on expert testimony to find that no
oil produced from the Richardson tract came from the Curbo tract. Although Regar, the Curbo
tract surface owner, acquired his acreage after the road was built and being used for mineral
operations, Regar nonetheless sued Key for trespass and sought to enjoin Key's traffic across his
property claiming that "Key had no legal right to 'access or use [his surface] in order to produce
- 25 -
minerals from the Richardson Tract.'" The trial court granted Regar declaratory and injunctive
relief and the court of appeals affirmed.
On appeal, Regar argued that a mineral estate's implied surface easement is contingent
on production coming from the mineral estate. Regar reasoned that Key could not use Regar' s
surface because the pooled unit's production came only from the Richardson tract. The Texas
Supreme Court rejected Regar's argument.
The Texas Supreme Court began its analysis by noting that in Texas lessees may pool
multiple tracts, provided the mineral leases allow it. Texas public policy disfavors waste,
pooling generally prevents waste, and both the Richardson and Curbo leases permitted pooling.
The Court then reiterated that the "primary legal consequence of pooling is that 'production and
operations anywhere on the pooled unit are treated as if they have taken place on each tract
within the unit."' In this case, production from the Richardson tract was, therefore, also
considered production from the Curbo tract underlying Regar' s surface acreage. The pooled
tracts having lost their separate identities, the mineral estate owner could use the Regar tract to
reach the Richardson tract. The Court of Appeals' erroneous conclusion that Key's right to use
the Regar surface existed only to serve mineral operations under the Regar tract itself conflicted
with the pooled tracts' merged identities.
The Texas Supreme Court also rejected Regar's argument that Robinson v. Robbins
Petroleum Corp., 510 S.W.2d 865 (Tex. 1973), supported his position. In Robinson, the mineral
owner took salt water from a well on Robinson's surface estate to waterflood adjacent units.
Robinson's surface estate was subject to the Wagoner mineral lease, but the units formed did not
include the Wagoner lease. The Supreme Court held in Robinson that nothing in the lease
authorized the lessee to "increase the burden of the surface estate for the benefit of additional
- 26 -
lands." In Key, the Texas Supreme Court noted that the minerals under Robinson's surface were
not pooled with tracts where the water was used. The Key court held that Robinson was
therefore distinguishable and not controlling.
3. Lightning Oil Co. v. Anadarko E&P Onshore, LLC, No. 04-14-00152-CV, 2014 WL 5463956 (Tex. App.-San Antonio, October 29, 2014, pet. filed).
Lightning owns Eagle Ford Shale leases, and Briscoe Ranch, Inc. owns the surface above
Lightning's leases. Occupying the surface adjacent to Lightning's lease is the Chaparral Wildlife
Management Area ("Chaparral WMA"), a wildlife and public hunting area managed by the
Texas Parks and Wildlife Department ("TPWD").
Anadarko obtained leases beneath the Chaparral WMA. Anadarko' s lease requires it to
use offsite drilling locations "when prudent and feasible." To reach the Eagle Ford Shale,
Anadarko first unsuccessfully sought a surface use agreement from TPWD. After its
unsuccessful bid to TPWD, Anadarko obtained a Surface Use and Subsurface Easement
Agreement from Briscoe Ranch. Anadarko planned to establish drill sites on Briscoe Ranch's
land to reach the Eagle Ford Shale on its lease and under the Chaparral WMA. Anadarko's wells
would pass through-but not produce directly from-Lightning's leasehold. Anadarko informed
Lightning of its plans to drill five wells. Below is a schematic of the leases, surface ownership,
and Anadarko's planned well path:
Briscoe Ranches '' ' ' Chaparral WMA
Lightning's lease Anadarko's Chaparral lease
5 wells planned. not drilled at time ofTI hearing
- 27 -
After discussions between Lightning and Anadarko broke down, Lightning sued
Anadarko, asserting claims for trespass and tortious interference with contract. At a temporary
injunction hearing, Lightning claimed that Anadarko' s drilling operations could harm Lightning
because:
• If Anadarko failed to properly case its wells, drilling or frac fluid could damage Lightning's mineral interests;
• Lightning would have to drill additional offset wells to prevent drainage from Anadarko' s wells; and
• Anadarko's wellbore would interfere with Lightning's drilling plans.
The trial court denied the temporary injunction, and Lightning immediately filed an
interlocutory appeal. The appellate court, however, agreed with the trial court, noting that
Lightning's own witnesses undercut its argument that it would suffer immediate and irreparable
harm if Anadarko were permitted to drill. In particular, Lightning's witnesses testified that:
• A casing failure or blowout was highly unlikely, but even if one occurred, "that loss could be quantified and compensated based on reserve estimates;"
• Lightning would have to drill the same additional offset wells if Anadarko were able to reach its lease from a different surface location; and
• Lightning's proposed wellbore would "never encounter" Anadarko's wellbore because of Texas' field spacing rules.
On appeal, both sides also argued the issue of whether Anadarko' s drilling plans would
constitute a trespass, and whether Briscoe Ranch, the surface owner, had the right to consent to
drilling activities through Lightning's lease. The court, however, stated that those arguments
were outside "the scope of this interlocutory appeal" and would have to be "determined at the
trial on the merits." The court did state, however, that even assuming the planned activities
would constitute a legal trespass, Lightning had failed to show that it would suffer imminent and
irreparable harm if Anadarko was permitted to proceed with its drilling plans.
- 28 -
4. Lightning Oil Co. v. Anadarko E&P Onshore, LLC, No. 04-14-00903-CV, 2015 WL 4933439 (Tex. App.-SanAntonio, Aug. 19, 2015, no pet. h.).
After the denial of injunctive relief, the trial court in this case granted summary judgment
to Anadarko, prompting Lightning to file a second and separate appeal from the interlocutory
appeal discussed above. In this second opinion, the court of appeals analyzed several Texas
cases involving mineral estate rights and concluded that the surface estate owner controls the
earth beneath the surface estate.
Based on its analysis of Lightning's lease and the case authorities, the court concluded
that Lightning had "no right to exclude others from the earth surrounding the oil and gas
hydrocarbons in [Lightning's lease]." The court also determined that a plaintiff alleging trespass
must show it owned or otherwise had the legal right to exclude others from the property. In the
court of appeals' view, Lightning did not "own or control the earth surrounding any hydrocarbon
molecules" within its lease and instead had a "fair chance to recover the oil and gas in or under"
its lease. There was no evidence that Anadarko had bottomed or opened perforations within
Lightning's lease.
Based on these conclusions, the appellate court affirmed summary judgment on the
trespass claim. The summary judgment evidence also showed that the surface owner had granted
Anadarko permission to drill where it did, which the court found established a defense of
justification as a matter of law, defeating Lightning's tortious interference claim regarding its
lease.
5. City of Lubbock v. Coyote Lake Ranch, LLC, 440 S.W.3d 267 (Tex. App.Amarillo 2014, pet. filed).
In 1953, the City of Lubbock acquired the groundwater rights to the land at issue. The
groundwater rights were severed from the surface estate, and the deed granting the rights
provided the City with various rights to use the land to take, transport, and use groundwater. In
- 29 -
2012 and 2013, the City proposed a plan for testing and development of its groundwater rights.
Coyote Lake Ranch, LLC ("CLR") sued the City and obtained a temporary injunction. The trial
court's order recited that the City's plan failed to use reasonable means to ameliorate potential
damage to the surface estate. The City filed an accelerated interlocutory appeal of the injunction
order.
On appeal, the court of appeals noted that the injunction order focused exclusively on
concepts associated with the Texas accommodation doctrine from oil and gas law and that the
trial court must have first concluded, without expressly stating so, that the City owed CLR a duty
to exercise its dominant groundwater rights with due regard for current uses by the servient
surface estate owner, CLR. Apparently agreeing with this conclusion, CLR framed the issue as
"whether this well-established doctrine applies to the relationship between a surface owner and
the owner of a severed groundwater estate." The City argued that the accommodation doctrine
had no application to groundwater rights and that its relationship with CLR was governed by the
terms of the 1953 deed.
CLR pointed out that the Texas Supreme Court's recent decision in Edwards Aquifer
Authority v. Day, 369 S.W.3d 814 (Tex. 2012), had drawn an analogy between the rule of
capture in oil and gas law and how the rule applies to and impacts groundwater ownership. The
court also explained that in Day the Texas Supreme Court had held that landowners have a
constitutionally-protected interest in groundwater and there was an analogy between ownership
of groundwater in place and ownership of oil and gas in place.
The court of appeals was unpersuaded by CLR' s invitation to extend the accommodation
doctrine to the instant case and distinguished Day, declaring that the Day opinion did not address
implied rights of a severed groundwater estate or surface uses for groundwater production. The
- 30 -
court of appeals reversed the temporary injunction grant and remanded the case to the trial court,
but noted that it would respectfully defer to the Texas Supreme Court if it chose to extend the
accommodation doctrine. The appellate court stated that such an extension of the law should be
left to the Texas Supreme Court or the Texas Legislature, "especially in light of the dramatic
implications it could have in the area of water law in Texas." CLR has filed a petition for review
by the Texas Supreme Court.
F. Nuisance and Surface Trespass
1. Sciscoe et al. v. Enbridge Gathering (North Texas) LP et al., No. 07-13-00391-CV, 2015 WL 3463490 (Tex. App.-Amarillo June 1, 2015, no pet. h.).
In this appeal from the grant of summary judgment, a Texas appeals court revived the
claims of several Dish, Texas homeowners who claimed airborne emissions from nearby natural
gas operations constituted a trespass that diminished the values of their homes. Relying on
Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008), the defendants
argued that the trial judge had correctly ruled as a matter of law that airborne particles could not
trespass on others' properties simply by passing over the property.
The Court of Appeals disagreed, reasoning that in Coastal Oil the Texas Supreme Court
defined trespass by a substance as a deposit on the surface of the ground, but also recognized that
an invisible pollutant could constitute an actionable trespass if it caused actual injury. The
Sciscoe court held that the plaintiffs had not proven that a trespass occurred, but the trial court
erred when it ruled as a matter of law that airborne particles could never constitute a trespass.
The court of appeals remanded the case stating that migration of airborne particulates can
constitute an actionable trespass, but plaintiffs must prove causation and injury.
- 31 -
2. Crosstex North Tex. Pipeline, L.P. v. Gardiner, 451 S.W.3d 150 (Tex. App.Fort Worth 2014, pet. filed).
The Gardiners had bought 95 acres in north Texas to use for riding horses, raising cattle,
recreation, and investment. Crosstex obtained an easement from the Gardiners and also built a
compressor station on land nearby. The compressor station emitted noise, the Gardiners
complained, and Crosstex made changes to its station in an attempt to reduce the noise, but this
was unsatisfactory to the Gardiners. The Gardiners ultimately sued Crosstex for nuisance,
negligence, and gross negligence, and a jury awarded the Gardiners $2,042,500 in damages.
The court of appeals reviewed the evidence and concluded that the company showed that
on an objectively-measured basis the post-mitigation noise levels and most of the pre-mitigation
noise levels were not incompatible with the landowners' actual use of the property. Further,
once the company received complaints about the station's noise it held a meeting with local
landowners, consulted a sound expert, and began implementing mitigation efforts based on the
expert's recommendations. There was no testimony that the station or the mitigation devices had
been negligently installed.
The court of appeals held that the evidence was factually insufficient to support the jury's
finding that the natural gas company negligently created a nuisance by building a compressor
station adjacent to the land. The court of appeals also held that the trial court abused its
discretion by denying the landowners' request for a trial amendment so they could add the
"abnormal and out of place" basis for nuisance to the jury charge and remanded the case for a
new trial to allow the Gardiners to add this to their nuisance claim.
- 32 -
G. Executive Rights
1. KCM FinancialLLCv. Bradshaw, 457 S.W.3d 70 (Tex. 2015).
At issue in this oil and gas dispute was the validity of a mineral lease on nearly two
thousand acres of land in north Texas. The non-participating royalty interest holder (non
executive) claimed the executive-right holder (executive) procured the mineral lease in breach of
a duty of good faith owed to her. The non-executive claimed the executive breached the duty by
executing a lease that provided an allegedly below-market, 118 royalty rate, and a bonus that was
allegedly above the market. The non-executive further alleged that the lessee acted in concert
with the executive in facilitating the breach of duty and that the executive's ill-gotten gains were
fraudulently transferred to third parties.
The trial court granted a take-nothing summary judgment on all claims. The court of
appeals reversed, concluding that issues of material fact existed that precluded summary
judgment.
The Texas Supreme Court affirmed in part and reversed in part, holding (1) fact questions
precluded summary judgment as to the non-executive's breach-of-duty claim against the
executive; but (2) summary judgment was proper as to the claims against the remaining
defendants. The court stated that evidence a higher royalty of 1/4 was at least attainable, if not
ubiquitous, meant the executive was not entitled to summary judgment. In addition, the court
stated that "if the executive has the discretion to negotiate the royalty, the duty of utmost good
faith and fair dealing applies."
- 33 -
II. Louisiana Case Law Update
A. Project and Operating Agreements
1. Olympia Minerals, LLC v. HS Res., Inc., 2014 La. LEXIS 2258, 2013-2637 (La. 1/15/14).
The Louisiana Supreme Court analyzed the lower courts' interpretation of portions of a
North Starks Project Agreement (the "Agreement"). The Agreement was prepared by a mineral
leaseholder and ostensibly conveyed to an exploration company an "exclusive option to
sublease" at least 15 percent of the leaseholder's mineral rights. The lower courts interpreted the
Agreement as imposing an obligation on the exploration company to execute the sublease rather
than simply providing the exploration company the right to execute the sublease. Because the
exploration company did not execute such a sublease, the lower courts awarded damages to the
leaseholder for breach of contract. When the Court granted review, the lower courts had
awarded to the leaseholder other damages related to the exploration company's obligation to
execute a mineral sublease.
The Louisiana Supreme Court determined that the lower courts erred in ruling that the
exploration company was obligated by the Agreement to sublease mineral rights. Instead, the
Court found the Agreement afforded the exploration company a non-binding option to sublease
(for which the exploration company paid $1.4 million), but that if the exploration company
exercised the non-binding option, it was then obligated to sublease at least 15 percent of the
leaseholder's rights described in the Agreement. Accordingly, the damage award on the breach
of contract claim was reversed.
However, the Court also found the exploration company breached its obligation to
complete a seismic survey, and the Court affirmed the corresponding award of damages.
Because the record did not support a finding that the exploration company acted in bad faith, the
- 34 -
Court examined the effects of a contractual prohibition against consequential damages and found
them enforceable. The prohibition, however, was not a shield against all damages, and the Court
found that an award of $4,125,000 was proper based on the failure to complete the seismic
survey. The Court also addressed other issues and remanded to the court of appeals the question
of the propriety of its dismissal and, the question of whether the record supports the exploration
company's request for relief, or whether remanding to the district court for the taking of
additional evidence is required.
2. Mack Energy Co. v. Expert Oil & Gas, L.L.C., 2014-C-1127, (La. 1/28/15), 159 So. 3d 437.
The issue in this case is whether an accountant, serving as an arbitrator, exceeded his
arbitral authority. Based on an operating agreement, an oilfield operator was authorized to
charge certain costs against revenues prior to paying the oilfield owners. After a dispute arose,
an auditor examined the oilfield operator's costs charged to the other owners and found
approximately $1 million in charges were unsubstantiated and, therefore, impermissibly charged
to the owners.
The arbitrator reached a different conclusion regarding what charges were permissible
and awarded the owners approximately $1.6 million. Satisfied with the arbitrator's decision, the
owners brought an action in the district court to confirm the award. The operator, however,
moved to vacate the award. The operator argued that the arbitrator improperly considered
certain employment documents and that the arbitration was limited in scope by the auditor's
findings of the unsubstantiated charges.
The district court confirmed the award and denied the operator's motion. The court of
appeal affim1ed and the Louisiana Supreme Court affirmed, holding held that the arbitrator acted
pursuant to the authority lawfully and contractually vested in him by the parties.
- 35 -
B. Fair Market Value and Sale of Mineral Properties
1. Harruffv. King, 2013-940 (La. App. 3 Cir. 5/14/14), 139 So. 3d 1062, 1069-70, reh'g denied (July 9, 2014), writ denied, 2014-1685 (La. 11/7/14), 152 So. 3d 176.
Two sisters sold their interest in two tracts located in the Haynesville Shale area. The
sisters later sought to rescind the sale based on lesion beyond moiety as provided La. Civ. Code
Ann. art. 2589:
The sale of an immovable may be rescinded for lesion when the price is less than one half of the fair market value of the immovable.
This issue was whether Louisiana law allows for the inclusion of the speculative value of mineral
interests or rights in and to immovable property in determining the fair market value of such
property for the purpose of rescinding the sale of the property on the basis of lesion beyond
moiety. The Louisiana Court of Appeal held: sellers of real property were not entitled to
rescission on the basis of lesion beyond moiety because their expert's testimony valuing
undeveloped mineral interests did not provide the required clear and exceedingly strong evidence
of value, in light of the "speculative nature of mineral exploration."
2. Quality Environmental Processes, Inc. v. St. Martin, 2013-1582 (La. 5/7/14), 144 So. 3d 1011, reh'g denied (July 1, 2014).
This dispute involved claims for mineral rights and royalties associated with a production
well located on land owned by the plaintiffs in Terrebonne Parish. Two conveyances were at
issue: a 1966 mineral deed and a 1992 cash sale. The plaintiffs asserted the 1966 mineral deed
did not create a valid mineral servitude and, consequently, sought to be declared owners of 100%
of the mineral rights since 1992 and demanded to be awarded royalties due from June 29, 1997,
until the well stopped producing sometime in 2001 or 2002. Plaintiffs further asserted a
- 36 -
violation of the Louisiana Unfair Trade Practices Act based on the allegation that defendants
tortiously conspired to deprive plaintiffs of their royalties.
The trial court ruled in the plaintiffs' favor, finding the 1966 deed did not create a valid
servitude over the subject property, plaintiffs were the owners of the mineral rights as of the
1992 purchase, and the defendants' conduct amounted to unfair trade practices. The appellate
court reversed and vacated the judgment, finding that the 1966 mineral deed had created a valid
mineral servitude and that the 1992 cash sale had placed the plaintiffs on notice that the mineral
rights to the property had been previously conveyed. The appellate court then remanded the case
for consideration of the remaining issues associated with any rights the plaintiffs may have
acquired from settlements with predecessor mineral interest owners in 2001 and 2005.
After its review of the case, the Louisiana Supreme Court affirmed the court of appeal:
the 1966 mineral deed was sufficiently specific to identify the property to be conveyed and, thus,
to create a valid mineral servitude and to place third parties on notice of the existence of that
servitude. Plaintiffs did not acquire the mineral rights to the subject property via the 1992
warranty deed. Furthermore, the actions of the defendants did not rise to the level of an unfair
trade practice within the meaning of the act.
3. Norwood v. Mobley Valve Servs., Inc., 49,064 (La. App. 2 Cir. 6/25/14), 144 So. 3d 1143, 1149-50, reh'g denied (Aug. 7, 2014), writ granted in part, 2014-1882 (La. 1/16/15) reh'g denied, 2014-1882 (La. 3/6/15), 161 So. 3d 5.
Mineral lease investors won damages against a mineral lessee, the lessee's sole
shareholder, and the lessee's corporate officer who had sold option rights and received lease
bonus payments in breach of their fiduciary duty to disclose a pending sale. Defendants had an
agreement with plaintiffs by which the plaintiffs were to receive 10% of the money defendants
obtained in managing plaintiffs' lease interest. The trial court found the defendants had breached
- 37 -
their fiduciary duty by not disclosing a pending transfer of Haynesville Shale interest under a
lease to Chesapeake prior to the sale of the investors' share of well participation rights.
The Louisiana Court of Appeal held that: (1) selling mineral lease option rights without
disclosure of the pending sale was a breach of the fiduciary duty of diligence under La. Civ.
Code Ann. art. 3001; (2) the proper measure of damages was the proceeds derived from the
breach; and (3) failing to document some drilling costs breached the duty to provide accurate
information under La. Civ. Code Ann. art. 3003, requiring a refund.
C. Imprudent Operations
1. Hayes Fund for the First United Methodist Church of Welsh, LLC v. Kerr McGee Rocky Mountain, LLC, 2013-1374, (La. App. 3 Cir. 10/1/2014), 149 So. 3d 280, writ granted, 2014-2592, (La. 4/17/15).
The court of appeals stated this was a "complex dispute" apparently because of the
volume of technical evidence. Hayes Fund sued Kerr McGee for allegedly failing to follow
customary and accepted protocols for drilling and operating two oil and gas wells and for alleged
imprudent operations in violation of La. Rev. Stat.§ 31.122. Hayes Fund claimed Kerr McGee's
actions caused valuable hydrocarbons to be left unrecoverable, resulting in damages from the
alleged loss of oil and gas royalties.
Trial was conducted over ten months during 2012 and included 25 days of testimony
spread over various weeks and involved numerous experts who provided evidence that was
"highly technical." Ultimately, the trial court dismissed all claims and ruled for Kerr McGee.
The court of appeals reviewed several factual findings by the trial judge and reversed
each of them. For example, the trial court concluded that "industry-wide requirements for a
good cement job to accomplish zonal isolation did not apply to cementing drill pipe in the
wellbore." After reviewing detailed expert testimony, the court of appeals determined this was
manifest error. The trial court had also concluded that Hayes Fund's expert did not dispute Kerr
- 38 -
McGee's position that the pipe in one of the wells was centralized in the hole at certain points
and that there was sufficient cement in the well to form a vertical barrier to fluid migration.
After citing various instances of expert testimony, the court of appeals also found manifest error
in this finding.
Other conclusions by the court were similarly technical and involved the following:
chloride levels in water produced from one of the wells and what that indicated as to its source;
the use of three permanent packers that were set simultaneously above each productive zone in a
well; whether Kerr McGee should have known one of the wells would sand up; and where casing
leaks were located. The court of appeals found manifest error in the court's conclusion on each
of these issues.
Hayes Fund also complained that the trial court erred in requiring it to prove Kerr
McGee's actions were imprudent as to one of the wells, claiming that the lease in question only
required proof of causation and damages. The court of appeals agreed, noting that limiting terms
had been struck from the lease: "The Lessee shall be responsible for all damages to timbeF---a:Bd
growing crops of Lessor caused by Lessee's operations." The court of appeals held that the
surviving lease language meant Kerr McGee was "absolutely liable" for any damages it caused
and the trial court erred in ruling that Hayes Fund had to prove Kerr McGee's operations were
imprudent regarding the well in question.
In addition, one of the wells at issue was the subject of a Louisiana Commissioner of
Conservation order that had established the boundaries of a hydrocarbon reservoir. Kerr McGee
had argued the reservoir boundaries at issue were not actually rectangular and that the true
boundaries differed from those in the Commission's order. The court of appeals held that the
trial court erred by allowing this collateral attack on the commission order and stated that the
- 39 -
collateral attack doctrine "requires us to fix damages based on the reservoir sizes in the unit
orders." Hayes Fund's expert opined that damages to the effected reservoirs in the two wells
equated to $13,437,895 in lost royalties. The court of appeals found that these damages were
proven to a reasonable certainty, awarded this amount to Hayes Fund, and rendered judgment.
The Louisiana Supreme Court granted writ for this case on April 17, 2015.
- 40 -
III. Oklahoma Case Law Update
A. Exploration Agreements and Oil Purchase Contracts
1. Cyanostar Energy, Inc. v. Chesapeake Exploration, L.L.C., 2014 OK CIV APP 7, 317 P.3d 217 (Okla. Ct. App. 2013).
Cyanostar, Penn Virginia, and Chesapeake were parties to an Exploration Agreement that
provided for an area of mutual interest ("AMI"):
[A ]ny acreage acquired within the AMI and outside the Drillsite Sections after the closing date will be offered to the other Parties and those Parties shall have the option to take their proportionate share of the interest based on the percentages in Article I by paying their proportionate share of actual acquisition costs within fifteen (15) days of receipt of offering.
Chesapeake acquired acreage within the AMI and offered it to the other parties to the
agreement. Cyanostar agreed to accept a proportionate share of the acreage, but Penn Virginia
declined Chesapeake's offer. Chesapeake did not offer Cyanostar the opportunity to acquire a
proportionate share of Penn Virginia's declined acreage, prompting Cyanostar to sue for breach
of contract and a declaratory judgment. The trial court granted summary judgment to
Chesapeake.
The court of appeals affirmed summary judgment and noted that while the AMI provision
expressly required the parties to offer each other acreage they acquire within the AMI, the parties
were not required to accept any acreage offer. The court explained that the AMI provision was
silent on the consequences of a party's rejection of an acreage offer, even though such a scenario
was a "very real possibility." The court concluded that the parties "could have easily provided"
for an obligation to "re-offer" rejected acreage, but they did not. Given the silence of the AMI
provision about such a scenario, the appellate court concluded it could not read into an
agreement a requirement to re-offer acreage or to "add an option that did not exist."
- 41 -
2. Gaskins v. Texon, LP, 2014 OK CIV APP 22, 321 P.3d 985 (Okla. Ct. App. 2014).
Gaskins sold 642 barrels of oil to SemCrude. The oil was transported through
SemCrude's pipeline system and sold to downstream purchasers, including Texon in Cushing,
Oklahoma. SemCrude filed for bankruptcy and failed to pay Gaskins $62,000 for his oil.
Gaskins claimed that Texon owed him for the sale of the oil by SemCrude to Texon, relying on
the Oklahoma Production Revenue Standards Act, 52 O.S. 2011, § 570.lO(A). Gaskins claimed
that Section 570.lO(A) created a statutory duty for Texon to hold the proceeds from the sale of
the oil in trust and sought a declaratory judgment against Texon. The trial court ruled that
Gaskins failed to state a claim for which relief could be granted. On appeal, the court of appeals
reviewed the statutory history of Section 570.1 O(A) and the language of the statute itself, which
provided:
All proceeds from the sale of production shall be regarded as separate and distinct from all other funds of any person receiving or holding the same until such time as such proceeds are paid to the owners legally entitled thereto. Any person holding revenue or proceeds from the sale of production shall hold such revenue or proceeds for the benefit of the owners legally entitled thereto. Nothing in this subsection shall create an express trust.
The appellate court found that statutory language was clear and unambiguous and
contained nothing that "creates or suggests a duty on the downstream purchaser or applies to
downstream purchasers of oil and gas after it reaches the stream of interstate commerce."
In its analysis, the court of appeals found persuasive a bankruptcy court opinion, In re
SemCrude, LP (Samson Res. Co. v. SemCrude, LP, et al.), 407 B.R. 140 (D.Del 2009), which
analyzed the claims against SemCrude by other producers who had argued Section 570.1 O(A)
created an implied trust over oil and gas revenue. The bankruptcy court observed that the statute
did not identify a trustee, require segregation of trust proceeds, or otherwise impose rights or
- 42 -
duties typical of a trust. The bankruptcy court concluded that Section 570.1 O(A) is part of a
regulatory scheme for how operators and owners will interact with regard to a well and does not
impose a trust in favor of the producers.
The appellate court agreed with the Delaware bankruptcy court opinion and concluded
that Section 570.l O(A) applies only to revenue and proceeds from the sale of production,
typically at the wellhead, and that Section 570.1 O(A) does not specifically apply to downstream
purchasers. Finally, the court noted that other Oklahoma statutes give producers and royalty
owners first liens to secure payment for their interests.
B. Deed Interpretation
1. Chaparral Energy, L.L.C. v. Samson Res. Co., 2015 OK CIV APP 44, 348 P.3d 1104 (Okla. Ct. App. 2015).
Chaparral, an oil and gas operator, brought an interpleader action to settle conflicting
claims to the production proceeds of three wells. Circle F owned an undivided 320 mineral acres
in a Section 24 ( 640 acres) in Latimer County and had executed a deed that conveyed "an
undivided one-half (Vi) interest in and to all of the oil and gas interests and royalties, and any and
all other mineral interests which may be owned by Circle F Ranch, Inc." The dispute was
whether the deed conveyed all of the 320 acres or one half of Circle F's mineral interest, which
equates to 160 acres.
The District Court entered judgment in favor of Samson and Circle F Ranch, the grantor
under the deed, finding that Circle F was entitled to a share of the interpleaded funds and future
production proceeds. The trial court found that the limiting words in the granting clause: "which
may be owned by Circle F Ranch, Inc.," unambiguously expressed its intent to reserve to itself
an undivided one-fourth (1/4) mineral interest in Section 24. The deed's grantees and the
competing claimants appealed.
- 43 -
The Court of Civil Appeals held that the trial court's determination was not against the
weight of the evidence, the deed conveyed one-half (Yz) of Circle F's one-half (Yz) mineral
interest (or a one-fourth (1/i) mineral interest) to Grantee, and the trial court properly determined
Circle F was entitled to have its title quieted in and to a one-fourth (1/i) mineral interest.
C. Surface Damages
1. Calyx Energy, LLC v. Hall, 2015 OK CIV APP 1, 342 P.3d 1007 (Okla. Ct. App. 2015).
This case involved a claim for treble damages and attorneys' fees under the Oklahoma
Surface Damages Act, 52 O.S.2011 § 318.9. Calyx sued for a determination of the amount it
owed the Halls for drilling on the Halls' property. Following a jury's award of damages to the
Halls, the District Court entered a judgment on a jury verdict. The District Court granted the
Halls' motion for attorneys' fees, but only awarded a portion of the fees sought, and denied their
motion for treble damages due to Calyx's alleged failure to post a location damage bond. The
Halls appealed and the Court of Civil Appeals dismissed the appeal for lack of appellate
jurisdiction. Calyx Energy, LLC v. Hall, 2013 OK CIV APP 4, 295 P.3d 30 (Calyx I).
Thereafter, the District Court denied the Halls' motion for treble damages and also denied their
motion for attorneys' fees incurred pursuing their treble damages claim, which resulted in this
second appeal.
The purpose of the Surface Damages Act is to promote the prompt payment of
compensation of a surface owner whose land is taken for oil and gas exploration. The Act
requires such a case to be tried in the same manner as railroad condemnation cases. The Halls
were entitled to attorneys' fees because they obtained a judgment for more than the amount the
appraisers had found. The Halls contended that the amount of the fees should be based on the
contract with their attorneys, which was an hourly fee arrangement. They also contended that
- 44 -
they were the prevailing parties on the Surface Damages Act claim and their claim for treble
damages was a part of that claim.
The operator of an oil and gas well in Oklahoma is required to post a plugging bond and a
location damage bond. Calyx did not post the required location damage bond before beginning
drilling operations, but the evidence showed this was a good faith mistake. The Halls admitted
that Calyx notified them before entering their property. The Halls did not establish that Calyx's
failure to post the location damage bond was with wrongful intent or the kind of willful and
wanton conduct that was required for an award of treble damages.
The Court of Civil Appeals held: (1) as a matter of first impression, claimants in a
Surface Damages Act case are not entitled to an attorneys' fee award based solely on the contract
with their attorney; (2) the trial court acted within its discretion in awarding surface owners
approximately 50% of fees paid to their attorney; (3) attorneys' fees are not included in the Act
section regarding treble damages and the Halls would not be entitled to attorneys' fees with
respect to their request for treble damages, even if they had prevailed on that issue; ( 4) the Halls
failed to meet their burden of proving that Calyx's failure to post the required location damage
bond was willful and knowing; and (5) the Halls were not entitled to treble damages for a willful
and knowing entry on premises without notice or agreement.
2. Chesapeake Operating Inc. v. Kast Trust Farms, 2015 OK CIV APP 5, reh'g denied (Sept. 25, 2014), cert. denied (Jan. 6, 2015).
This case involved an Oklahoma Surface Damage Act claim. The act allows damages
that a surface owner will incur by drilling or maintenance of oil or gas production. Chesapeake
notified the Kast Trust of its intent to drill, attempted to negotiate damages, and when
negotiations failed, filed a petition to appoint appraisers pursuant to the Surface Damages Act.
The appraisers found diminution in value of $28,000, but a jury returned a verdict for $86,750.
- 45 -
The jury's damage award was more than the Trust's own expert's appraisal of damages. The
District Court entered judgment on the jury verdict for the diminished value. Chesapeake
appealed, and the Kast Trust filed a counter-appeal.
The Court of Civil Appeals held: (1) testimony about various elements of personal
inconvenience was admissible; (2) a redacted report and testimony of the Kast Trust's expert
appraiser were admissible; (3) evidence of previous voluntary transactions between the Kast
Trust and Chesapeake could be excluded; (4) instructions on temporary or permanent injury and
factors for determining fair market value were permissible; (5) the stigma caused by having oil
and gas well on the property could not be considered; ( 6) trial court improperly required
Chesapeake to present its evidence first, where the Trust had the burden of proof; and (7) the
Kast Trust was not entitled to treble damages. The case was remanded for a new trial.
D. Tort Claims Based on Neighboring Oil and Gas Operations
1. Reece v. AES Corporation, et al., No. 6:12-cv-00457, 2014 WL 61242 (E.D. Okla., Jan. 8, 2014).
Plaintiffs contend companies involved in generation, transportation and disposal of coal
combustion waste and oil and gas drilling waste fluids polluted the environment in Leflore
County, Oklahoma. Defendants include oil and gas companies that generated fluid wastes, and
companies that transported fluid wastes to a commercial disposal pit. The Plaintiffs claimed that
the Oklahoma Corporation Commission had issued a permit to allow disposal of produced water
from wells completed in coal seams, but the fluid waste was allegedly not produced water and
instead included oil and synthetic drilling fluid and hydraulic stimulation flowback solids and
fluids. Plaintiffs claim the fluids contaminated the air, land, surface waters and groundwater at
the disposal pit and adjacent area. Plaintiffs asserted several claims, including strict liability,
medical monitoring, nuisance, trespass, negligence, negligence per se and unjust enrichment.
- 46 -
On January 8, 2014, the district court dismissed many of the claims. With regard to the
strict liability claim, the claims against the "oil producers" and "fluid waste" transporters were
dismissed because such liability may not be imposed. With respect to other claims against the
"fluid waste truckers," the court held that there are no facts pleaded which they could be held
liable for any other claim. As for the medical monitoring claim, the court noted there are no
allegations of physical injury stemming from the oil and gas drilling fluids, and held that - if
physical injuries are established ~ plaintiffs will be allowed to seek necessary future medical
expenses, which may include monitoring on an individual basis. With respect to the "oil
producers," the plaintiffs alleged no facts showing what harms they suffered" or how the alleged
contamination affected specific properties. Plaintiffs did not plead facts showing any plaintiff
had come into contact with any contaminated fluids that caused specific injury, and plaintiffs did
not allege any loss in property values or other property damage resulting from the fluid waste.
Plaintiffs were granted leave to amend their complaint to sufficiently plead that they
personally sustained injuries as the result of the oil producers' alleged conduct. The trespass and
nuisance claims were not dismissed. However, all remaining claims were dismissed without
prejudice on January 28, 2014. On February 27, 2014, an appeal was filed with the Tenth Circuit
Court of Appeals (docket No. 14-7010). Oral argument was held on November 20, 2014.
2. Ladra v. New Dominion LLC, No. 113,396, 2015 WL 3982748, (Okla. June 20, 2015).
"Since approximately 2009, Oklahoma has experienced a dramatic increase in the
frequency and severity of earthquakes." Sandra Ladra of Lincoln County claimed she was
injured in November 2011 during an earthquake. Ladra was at home in Prague, Oklahoma
watching television in her living room when a 5.0 magnitude earthquake struck nearby, causing
rock facing on her two-story fireplace and chimney to fall into the living room area, injuring her
- 47 -
legs. She claims the earthquake was caused by the injection of oil and gas wastewater, and sued
New Dominion, Spess Oil Company, and 25 John Does.
The defendants moved to dismiss, arguing that the Oklahoma Corporation Commission
had exclusive jurisdiction over the claims. The Lincoln County District Court granted the
motions and dismissed the action, holding that the case should be heard by the Oklahoma
Corporation Commission. The Oklahoma Supreme Court subsequently retained jurisdiction and
issued an opinion in March 2015 reversing the district court.
The Oklahoma Supreme Court explained that the Commission "although possessing
many of the powers of a court of record, is without the authority to entertain a suit for damages."
Based on this, the Oklahoma Supreme Court stated that "[p ]rivate tort actions ... are exclusively
within the jurisdiction of district courts." The Court further found that its decision "conforms to
the long-held rule that district courts have exclusive jurisdiction over private tort actions when
regulated oil and gas operations are at issue." The Oklahoma Supreme Court also instructed
"[w]hether Appellees are negligent or absolutely liable is a matter to be determined by a district
court." The case was remanded to the district court for further proceedings.
3. Jennifer Lin Cooper v. New Dominion LLC, No. CJ-2015-0024 (District Ct., Lincoln Cty., Okla., Feb. 10, 2015).
Jennifer Cooper of Lincoln County alleges New Dominion and Spess Oil Company are
responsible for property damage from earthquakes in November 2011. Cooper is seeking class-
action status for Lincoln County residents and eight surrounding counties whose homes were
damaged by earthquakes that she blamed on water disposal wells. The petition cites papers
published in the periodicals Geology and Science, which purport to correlate earthquakes in
central Oklahoma with wastewater injections. The petition also cites a study by the United
- 48 -
States Geological survey that statistically analyzed Oklahoma's earthquake activity. Cooper
alleges claims for nuisance, trespass, and negligence.
15308650 2
- 49 -