Oil and Gas Law: 2017 Year in Review
At the end of the year, I like to take stock—in summary form—of the leading decisions impacting the energy industry. Historically, this has been for my own personal reference, or something I share inside our firm with my partners. Since this crib sheet of sorts has been well received by my colleagues, I figured there might be broader interest in this annual “quick reference” guide. So, without further ado (and in no particular order), here is my short list of cases from 2017 that should be on your radar screen if you work in the oil and gas sector.
- Denbury v. Texas Rice Land Partners (available here: https://tinyurl.com/denburytexasrice). The Texas Supreme Court concluded that a pipeline can qualify as a common carrier for purposes of exercising eminent domain powers if it shows that it would serve the public interest by transporting gas “for one or more customers who will either retain ownership of their own gas or sell it parties other than the carrier.” Notably, the Court emphasized that a pipeline company can make this evidentiary showing after condemning private land and after constructing a gas pipeline. In other words, the required showing of a public interest need not occur prior to the exercise of eminent domain powers. This was a big win for the industry
- Lightning Oil Co. v. Anadarko E&P Onshore, LLC (available here: https://tinyurl.com/lightningoil). According to this watershed decision from the highest Court in Texas, drilling through a mineral estate—which is not under lease by the driller—to access a reservoir beneath a bordering tract does not constitute a form of trespass. This settled a long-running debate about how traditional rules of trespass (originally formulated in the context of vertical wells) would apply to newer, directional drilling technologies.
- Davis v. Mueller (available here: https://tinyurl.com/davismueller). In this closely watched case that threatened to invalidate mineral leaseholds across the state, the Texas Supreme Court addressed a challenge to a mineral conveyance, as ambiguous, because it had been made—lock, stock, and barrel—on a county-wide basis (in other words, the mineral deed provided for the transfer of all the seller’s oil-and-gas interests in a specific county). Mercifully, the Texas Supreme Court reached the correct decision, and came to the common-sense conclusion that county-wide mineral deeds are valid and enforceable. Leaving no room for doubt, Chief Justice Hecht wrote that, on its face, a county-wide conveyance “could not be clearer.” He then added, simply enough, that “all means all.”
- Wenske v. Ealy (available here: https://tinyurl.com/wenskeealy). According to the dissent in this case that deeply divided the Texas Supreme Court, the five-justice majority ignored both “[o]ur decisions that imbue words with ‘magic,’” and the fact that “drafters rely on that talismanic power to create certainty in their instruments.” In a nutshell, the majority concluded that the intent of the parties to mineral conveyances must be ascertained on a case-by-case basis, by parsing the instrument as a whole—without assigning undue importance to words and phrases of art. As a practical matter, wrote Justice Boyd on behalf of the dissent, the majority in Wenske jettisoned “long-standing rules in the oil and gas field,” thus potentially “alter[ing] the ownership of minerals conveyed in deeds which rely on the law established by this court and followed by lower courts, commentators, and especially lawyers advising their clients.”
- Samson Exploration LLC v. T.S. Reed Properties Inc. (available here: https://tinyurl.com/samsonreed). The Texas Supreme Court told a cautionary tale for operators with this unanimous opinion, which addressed the circumstance in which a well is situated within not just one pooled unit, but instead within two overlapping units. The operator, Samson Exploration, paid royalties from the well to interest owners from one of the units, to the exclusion of the other. The royalty owners from the second unit who had gone unpaid balked, arguing that—although Samson may have struck a poor bargain by including a single well in multiple units—a deal is a deal, and so a sophisticated actor like Samson must sleep in the bed it made. The Supreme Court of Texas agreed, invoking the language from a 1968 Fifth Circuit decision, Howell v. Union Producing Company: “To argue that we must enforce only reasonable contracts or contracts which reasonable men enter into, mistakes our function. We can and do enforce unreasonable contracts if they be clear. Unreasonable men make reasonable contracts and reasonable men may make unreasonable contracts.”
- Hardin-Simmons University v. Hunt Cimarron LP (available here: https://tinyurl.com/hardinhunt). In this decision out of the Seventh Court of Appeals in Amarillo, several mineral lessors maintained that Hunt Cimarron had failed to execute a release setting forth the acreage and depths that were no longer held by an expired lease. The Seventh Court of Appeals sided with the mineral owners. While some operators casually treat acreage releases as housekeeping matters, this lackadaisical attitude can have serious consequences if the release obligation is not approached soberly. Indeed, mineral lessors may take the position that an operator’s failure to timely release acreage deprives it of the ability to enter into new, lucrative leases with other oil and gas companies. To inoculate against this kind of exposure, operators would be wise to give their full attention to lease provisions that require them to put acreage releases in place by a specific deadline.
- Texas Outfitters Limited v. Nicholson (available here: https://tinyurl.com/texasoutfitters). Here, the Court of Appeals in San Antonio decided one of the first cases in some time to address the duties of the party with the executive right to lease minerals to non-executive mineral-interest owners. Texas Outfitters, the surface owner and also the owner of the executive right, operated a hunting business on the subject property. To keep the surface estate pristine, Texas Outfitters refused to exercise the executive right to lease, and, in response, the mineral owners sued for breach of fiduciary duty. The San Antonio Court of Appeals held that this claim was meritorious because, by declining to lease, Texas Outfitters was angling to get for itself “unfettered use of the surface for its hunting operation,” and “the ability to sell its land at a large profit free of any oil and gas lease.”
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