Presentation on theme: "Case Law Update— 2014 Christopher S. Kulander Visiting Professor of Law, South Texas College of Law Of Counsel, Haynes and Boone, LLP"— Presentation transcript:
Case Law Update— 2014 Christopher S. Kulander Visiting Professor of Law, South Texas College of Law Of Counsel, Haynes and Boone, LLP
Key Operating & Equipment, Inc. v. Will Hegar and Loree Hegar 435 S.W.3d 794 (Tex. 2014) Question considered: – Can a lessee reasonably use the surface above any properly pooled tract to produce from that tract & tracts pooled with it? Background: a tale of two tracts – Key operated well on Richardson Tract since 1987 – 1994: Key gets lease on Curbo Tract. Reworks well. – Key builds road across both tracts to access both wells – 2000: Curbo Tract ogl expires. Key purchases an undivided 12.5% m.i. in Curbo Tract that it then leases to itself. Key then pooled minerals under 10 acres of the Curbo Tract with leased minerals under 30 acres from the Richardson Tract. – 2002: Hegars buy 85 surface acres portion of Curbo Tract— including a portion of the road used to access Richardson No. 1.
Key Operating v. Hegar 435 S.W.3d 794 (Tex. 2014) Complaints! – Hegars did not object to road usage until Key drilled the Richardson No. 4 Well and traffic increased. Litigation! – Hegars claimed Key has no right to use their surface to produce minerals from the Richardson Tract. – Trial court: enjoined Key from using the part of the road that was on the Hegar tract. – …and use of the surface of the Curbo tract was not reasonably necessary to extract minerals from beneath the Curbo Tract, as no minerals were being extracted from beneath Hegars’ tract by wells on the Richardson Tract. (!) C R
Key Operating v. Hegar 435 S.W.3d 794 (Tex. 2014) Houston (1 st Dist.) Court of Appeals: – Initial reverses…but then… – Determined that evidence supported finding that Key was only producing oil from Richardson tract – Opined that Key's lease and pooling agreements, which were not part of the Hegars’ chain of title, could not expand Key’s right to use Hegars’ surface Key appeals: – Robinson v. Robbins Petroleum Corp. 1 inapplicable (unpooled tract used for water for pooled tract)
Key Operating v. Hegar 435 S.W.3d 794 (Tex. 2014) Supreme Court: – Hegars bought the surface of the Hegar tract subject to a lease that authorized pooling and Key owned a portion of the fee mineral estate of the Hegar Tract, Key had a right to use the road. – Claim that ogls were not in the title chain irrelevant due to the implied surface rights enjoyed by mineral owners and lessees. – Ingress and egress rights cover the surface of any pooled acreage w/r/t producing minerals from any part of that pooled acreage.
French v. Occidental Permian Ltd , 2014 WL (Tex. 2014) Question considered: – Are fees charged by PoPs, which are calculated on the amount received by enhanced recovery projects, a shorting of the volume upon which royalty is calculated? Background: – Parties: French (lessor) Occidental (lessee) K-M (PoP) – Processing Agreement between Occidental and K-M Monetary charge: not deducted from royalty In-Kind fee comprised of: 30% of value of NGLs 100% of value of casinghead gas
French v. Occidental Permian Ltd , 2014 WL (Tex. 2014) Cynara Processing Facility Snyder Gas Plant oil casinghead gas + CO 2 NGLs gas oil 85% of CO 2 15% of CO 2
French v. Occidental Permian Ltd , 2014 WL (Tex. 2014) French brought suit to recovery royalty claiming: – CO 2 ops were a “production activity” and not a “post- production activity” – Unlawful shorting of value upon which royalty was based violated marketing covenant Two leases: “market value” & “net proceeds” Trial Court: for lessor; Eastland Court reverses: – CO 2 processing was not “production activity” – Used traditional TX analysis for “market value” (comparable sales, then net back) & “net proceeds” (must act as “reasonable operator”)
French v. Occidental Permian Ltd , 2014 WL (Tex. 2014) Supreme Court of Texas: – Water: separation of produced water during injection operations essential to continued production of oil— thus a production expense. Oxy agreed—no deduction – CO 2 : separation from the casinghead gas stream prior to reinjection not strictly necessary for operations. Oxy heightened value of production stream to both Oxy and French by processing the casinghead gas and separating the CO 2 because this both allowed: – the sale of the NGLs (70%) and… – …the reinjection of a more concentrated CO 2 stream.
French v. Occidental Permian Ltd , 2014 WL (Tex. 2014) Texas Supreme Court: – Separating gases led to more efficient production of oil and gas and the prevention of waste. – Noted benefit received by lessor when lauding the fairness of sharing separation costs among the royalty and w.i. owners. Unitization Agreement: – Occidental was under no obligation to separate the gas prior to reinjection. – Royalty on NGLs (70%) results from post-production extraction of gases, not merely from the reinjection of CO 2. – French acquiesced to the discretion of Oxy w/r/t casinghead gas in recovery operations in the unitization agreement and having received royalty on the NGLs, the Court held French must share in the cost of CO 2 extraction
Lamont v. Vaquillas Energy Lopeno Ltd. 421 S.W.3d 198 (Tex. App. – San Antonio 2014, pet. filed). Question Considered: – What actions constitute a violation of a trade secret? Background: – Lamont created Ricochet Energy in – In , Ricochet entered into PGAs with Vaquillas Energy and JOB Energy Partners. Vaquillas and JOB cover Ricochet’s overhead. – PGAs: Ricochet to identify and present prospects with seismic maps to Vaquillas and JOB for their first right of refusal. Also vested Vaquillas and JOB with proprietary interests in all acquired or generated data and interpretations. Prospect Generation Agreements
Lamont v. Vaquillas Energy Lopeno Ltd. 421 S.W.3d 198 (Tex. App. – San Antonio 2014, pet. filed). Ricochet successfully identified the Lopeno Prospect in Zapata County. Presents “Treasure Map” Lopeno Prospect 2 parts: (i) Worley property and (ii) El Milagro property. Lamont leaves Ricochet in 2006, but still allowed to continue to participate in Ricochet PGA prospects – Elects to participate in Lopeno Prospect as 29% w.i. owner 2007: Lamont meets with Carranco – Offers 10% of Lamont’s share in Lopeno Prospect – Provides seismic maps of four different prospects, including the Treasure Map. Carranco buys in. Ricochet and Montecristo both try to lease El Milagro tract
Lamont v. Vaquillas Energy Lopeno Ltd. 421 S.W.3d 198 (Tex. App. – San Antonio 2014, pet. filed). Trouble! – Montecristo and L.O.G. Energy Development, Ltd. develop Lopeno Prospect. Vaquillas sues claiming trade secret misappropriation, among other claims. – A jury awarded the plaintiffs $4.9 million in damages. Both sides agree Treasure Map was a trade secret, but… – Lamont: because Ricochet did not require confidentiality agreements before viewing the map and allowed Lamont to view the map after leaving Ricochet, the map’s trade secret status was destroyed. – Vaquillas: Ricochet only showed the Treasure Map to Lamont for the limited purpose of negotiating his agreement and electing his percentage of working-interest in the Lopeno Prospect. Also: the Treasure Map was only shown to potential Lopeno Prospect working-interest investors.
Lamont v. Vaquillas Energy Lopeno Ltd. 421 S.W.3d 198 (Tex. App. – San Antonio 2014, pet. filed). The court sides with Vaquillas: – CL! Employees forbidden “from using trade secret information acquired during employment relationship in a manner adverse to [their] employer… [an] obligation [which] survives the termination of employment.” 1 – Ricochet’s actions did not destroy the trade secrecy status of the Treasure Map. – Acquisition of a trade secret can be improper even if means of acquisition are not independently wrongful – Reaffirms that the common law can protect trade secret owners under certain conditions, even in the absence of a confidentiality agreement. 1 Reliant Hosp. Partners, LLC v. Cornerstone Healthcare Grp. Holdings, Inc., 374 S.W.3d 488, 499 (Tex. App.—Dallas 2012, pet. filed)
Warren v. Chesapeake Exploration 759 F.3d 413 (5 th Cir. 2014) Questions Considered: – If an ogl seems to prohibit deduction of post- production costs from the lessor’s royalty, but the royalty clause provides that the “amount realized” is to be computed at the wellhead, can a lessee deduct post-production costs incurred in getting marketable gas from the wellhead to market? Background—deduction fight – Leases provided lessors entitled to 22.5% “of the amount realized by Lessee, computed at the mouth of the well.” In Texas: = net proceeds
Warren v. Chesapeake Exploration 759 F.3d 413 (5 th Cir. 2014) Lease addendum: Notwithstanding anything to the contrary, herein contained, all royalty paid to Lessor shall be free of all costs and expenses related to the exploration, production and marketing of oil and gas production from the lease including, but not limited to, costs of compression, dehydration, treatment and transportation. Lessor will, however, 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.
Warren v. Chesapeake Exploration 759 F.3d 413 (5 th Cir. 2014) Lease addendum: “It is expressly agreed that the provisions of this Exhibit shall super[s]ede any portion of the printed form of this Lease which is inconsistent herewith, and all other printed provisions of this Lease, to which this is attached, are in all other things subrogated to the express and implied terms and conditions of this Addendum.”
Warren v. Chesapeake Exploration 759 F.3d 413 (5 th Cir. 2014) Federal District Court: – Granted the Chesapeake motion to dismiss— plaintiffs’ claims were precluded as a matter of law, applying Texas law found in Heritage…
Warren v. Chesapeake Exploration 759 F.3d 413 (5 th Cir. 2014) Heritage Resources, Inc. v. NationsBank 1 – TxSC: lessee could deduct transportation costs for gas as the lease in question provided that royalties would be: “the market value at the well of 1/5 of the gas so sold or used,... provided, however, that there shall be no deductions from the value of the Lessor’s royalty by reason of any required processing, cost of dehydration, compression, transportation or other matter to market such gas.” – The Court ruled the lessee could still deduct transportation costs despite the language S.W.2d 118 (Tex. 1996).
Warren v. Chesapeake Exploration 759 F.3d 413 (5 th Cir. 2014) Fifth Circuit: – Heritage recognized that parties may contract to make royalty free of post-production costs… – …but Warrens’ leases failed to accomplish this because of the phrase “amount realized by Lessee, computed at the mouth of the well” – Also: “the phrase ‘net proceeds’ contemplates deductions.” 1 1 Judice v. Mewbourne Oil Co., 939 S.W.2d 133, 136 (Tex. 1996).
Warren v. Chesapeake Exploration 759 F.3d 413 (5 th Cir. 2014) Fifth Circuit: – Addendum did not change the point at which royalty was to be calculated, which was the mouth of the well. – If the parties had intended lessor to receive 22.5% of the actual proceeds of sale regardless of the location, they could have and should have said as much in the oil and gas lease or the addendum thereto.
Cade v. Cosgrove 430 S.W.3d 488 (Tex. App.-Fort Worth 2014, pet. filed) Questions Considered: – Does the doctrine of merger bar an equitable claim for reformation? – When does the SoL period begin to run against a claimant seeking deed reformation based on mutual mistake? Background: – 2006: Cades and Cosgrove sign K of sale and then deed – : Indicators of Cades’ ownership of minerals – 2010: Chesapeake sends royalty forms to Cosgrove – Cosgroves refuses to sign correction deed. Past SoL!
Cade v. Cosgrove 430 S.W.3d 488 (Tex. App.-Fort Worth 2014, pet. filed) 2010—Trial Court: granted SJ for Cosgrove. Generally: – the terms of a sales K merged into associated deed Why? Deed considered final expression of agreement! – Application of the merger doctrine can be avoided, however, by proving a mutual mistake in the execution of the deed. – But, parties are on notice of what’s in a deed when signed—therefore, that’s when the SoL period runs
Cade v. Cosgrove 430 S.W.3d 488 (Tex. App.-Fort Worth 2014, pet. filed) Court of Appeals on the Merger Doctrine: – Deed can be reformed if evidence of mutual mistake exists – Noting that the K expressly provided that the Cades would retain the property’s mineral rights… – …and noting the other indices of ownership… – …the Court declares fact question trumps prior SJ
Cade v. Cosgrove 430 S.W.3d 488 (Tex. App.-Fort Worth 2014, pet. filed) Court of Appeals on the SoL: – Because doctrine of merger does not bar reformation claim, the SoL period does not begin to run against a claimant… – …on a claim for deed reformation based on mutual mistake until the claimant knows or with reasonable diligence should have known of the mistake… – …and that there is a question of fact regarding when the Cades knew or should have known of the mistake in the deed, so reverse the SJ.
State vs. Local Control of Fracing What level of government should control fracing? – Federal Pre-existing federal acts on air & water; federal lands Push for nationwide ingredient disclosure before drilling – Local Zoning & setbacks; road use; hours of ops; noise – State Regular E&P controls—permitting, reporting, bonding, etc. Zoning & setbacks; state environmental law; road use Statewide ingredient disclosure Taxes—severance, road use, permitting fees NY: municipalities given the right to outlaw or permit fracing as they see fit; Lift of statewide ban meaningless?
Norse Energy Corp. USA v. Dryden Cooperstown Holstein Corp. v. Middlefield State Supreme Court—NY Question considered: preemption quandary Background: Dryden & Middlefield, New York enacted fracing bans. Ps sued claiming the local municipal code was preempted by the State Oil, Gas, and Solution Mining Law (“OGSML”) – NY municipalities operate with authority from the state through the Municipal Home Rule Law (the “MHRL”) – grants some discretion to towns to enact laws protecting aesthetic and environmental aspects
Norse Energy Corp. USA v. Dryden Cooperstown Holstein Corp. v. Middlefield Court: rule doesn’t regulate operations, but rather controls land use generally—controls: – proximity to nonindustrial districts – compatibility with neighboring land uses – noise and air pollution Local governments have broad authority to ban fracing and other oil & gas exploration activity in NY.
Alliance Pipeline v. 4,360 Acres of Land, More or Less in S/2 of Section 29, Twp. 163 N., Range 85 W., Renville Cnty., N.D. 746 F.3d 362 (8th Cir. 2014) Questions/Issues Considered: – Notice—what’s enough? – Does the NGA require state or federal procedure? – Does the NGA require “good faith” negotiations? – What are “good faith” negotiations, if required? Background: – Alliance sought eminent domain right concurrently with offer to landowners. – Landowners flatly turn down offer, no counteroffer – Alliance gets FERC Certificate – Alliance tries to survey land; Smiths bring suit, claiming:
Alliance Pipeline v. 4,360 Acres of Land, More or Less in S/2 of Section 29, Twp. 163 N., Range 85 W., Renville Cnty., N.D. 746 F.3d 362 (8th Cir. 2014) Claims of the Smiths: – Not provided with adequate notice – FERC ruling inappropriately preempted ND law As to siting and condemnation issues – Alliance did not negotiate in good faith 8th Circuit Court of Appeals: – Ripeness: Smiths did not exhaust FERC remedies – Notice must be “reasonably calculated…apprise” Alliance had contacted the Smiths twice Case not ripe for court to consider validity of notice claim – Cite FRCP 71.1: FRCPs covering condemnation & eminent domain trump any conflicting state rules
Alliance Pipeline v. 4,360 Acres of Land, More or Less in S/2 of Section 29, Twp. 163 N., Range 85 W., Renville Cnty., N.D. 746 F.3d 362 (8th Cir. 2014) Good faith negotiations: – Not mentioned in NGA – Discussed but did not answer whether there existed an implied covenant for good faith negotiations in the NGA – Alliance met the standard for good faith negotiation when it made an offer and it was rejected with no counteroffer. Clear that further negotiations would be futile
Hess Corp. v. ENI Petroleum US, LLC 86 A.3d 723, 435 N.J.Super. 39 (2014). Question considered: – Absent provision stipulating use of a particular pipeline, can force majeure be claimed as a defense for failing to meet the K obligations if other pipelines were available? Background: – NAESB gas purchase contract with Hess (purchaser) and ENI (producer/transporter) – Leak in intermediate pipeline leading to “Tennessee 500” trunk line. – ENI claims force majeure
Hess Corp. v. ENI Petroleum US, LLC 86 A.3d 723, 435 N.J.Super. 39 (2014). NJ Superior Court: – Since ENI did not provide for using a specific pipeline to deliver to the Tennessee 500, it could not claim force majeure as a defense for failing to meet its K obligations as other pipelines were available. – Under the K, there existed an obligation to make delivery to the destination pipeline. So… – Expressly mention specific sources, pipelines, and delivery nodes
Other Cases in the Proceedings Chesapeake Exploration v. Hyder 427 S.W.3d 472 (Tex. App. – San Antonio 2014, pet. filed) Court, examining the four corners of an instrument, found that the parties had expressly excluded ORI from deductions for post production costs High Country Conservation Advocates, et al. v. United States Forest Service, et al. (D. Colorado, June ) – Challenge to coaling permits requires more information, including global warming data
Other Cases in the Proceedings Lightning Oil Co. v. Anadarko E&P Onshore, LLC (Tex. App. – San Antonio 2014, no pet. h.) – Can P stop D from drilling horizontal wells through its mineral estate to access and produce D’s adjacent minerals even if it failed to prove an imminent & irreparable injury would occur pending trial? Forest Oil Corp. v. El Rucio Land & Cattle Co. 446 S.W.3d 58 (Tex. App. – Houston 1 st Dist.) – Does the RRC have exclusive and primary jurisdiction over a dispute arising from a K claim pursuant to a Surface Use Agreement?
Other Cases in the Proceedings Breton Energy, L.L.C. v. Mariner Energy Res., Inc. 764 F.3d 394 (5th Cir. 2014) – Did lessees of offshore ogl, as required by FRCP Rule 12(b)(6), adequately allege that one of the prior operators of a neighboring lease had committed waste? In re Johnson 513 B.R. 333 (Bankr. S.D. Ill. 2014) – held that a debtor’s working interest in oil and gas properties, including the profits earned from the sale of the extracted oil, was property of the bankruptcy estate.
Thank you! Christopher S. Kulander Visiting Associate Professor of Law, South Texas College of Law Of Counsel, Haynes and Boone, LLP