1. POOLING IN TEXAS: Production Sharing Agreements and Allocation Wells
Deana Allen, Of Counsel

2. Overview History of Pooling in Texas Mineral Interest Pooling Act
Voluntary Pooling
Production Sharing Agreements
Allocation Wells

3. History of Pooling in Texas
Rule of Capture
Rule developed in Pennsylvania involving a case in which a mineral owner complained that an adjacent mineral owner was draining his minerals through the drilling of a well
“Water and oil, and still more strongly gas, may be classed by themselves, if the analogy be not too fanciful, as minerals ferae naturae. In common with animals, and unlike other minerals, they have the power and the tendency to escape without the volition of the owner. Their ‘fugitive and wandering existence within the limits of a particular tract was uncertain,’ as said by Chief Justice Agnew in Brown v. Vandergrift, 80 Pa. St. 147, They belong to the owner of the land and are part of it, so long as they are on or in it, and are subject to his control; but when they escape, and go into other lands, or come under another’s control, the title of the former owner is gone. Possession of the land, therefore, is not necessarily possession of the gas. If an adjoining, or even a distant, owner, drills his own land, and taps your gas, so that it comes into his well and under his control, it is no longer yours, but his.” Westmoreland & Cambria Natural Gas Co. v. Dewitt, 18 A. 724, 725 (1889)

4. History of Pooling in Texas
Effects of The Rule of Capture
Drilling of excessive wells
Excessive rates of production
Premature loss of reservoir energy
Inefficient reservoir development
Extreme price fluctuations
The Spindletop Oil Field, Texas. circa 1901.

5. History of Pooling: Regulation
Well Spacing (Rule 37)
Wells must be at least 1,200’ apart and at least 467’ from a property line, lease line, or subdivision line (SWR) or operator must obtain a Rule 37 exception (note: Lessee as only working interest owner may waive its notice and obtain permit administratively because lessor or royalty owner is not an “affected person” under Rule 37 and therefore not entitled to notice of exception application)
No well drilled in violation of this section without special permit obtained, issued, or granted in the manner prescribed in said section, and no well drilled under such special permit or on the commission's own order which does not conform in all respects to the terms of such permit shall be permitted to produce either oil, gas, or geothermal resources and any such well so drilled in violation of said section or on the commission's own order shall be plugged
Density Requirements (Rule 38)
SWR requires a minimum of 40 acres in a drilling unit
Generally, cannot double assign acreage. However, SFR may apply allowing acreage to be double assigned simultaneously to vertical and horizontal wells
Production Allowables (Rule 40)
Maximum amount of hydrocarbons well may recover
Usually determined by amount of productive surface acres. Operator designates the proration unit and acreage assigned to it, certifies acreage is productive and then receives the well’s production allowable

6. History of Pooling: Regulation
SWR 86, first rule from RRC to specifically address horizontal drilling
Effective June 1, 1990
Applies to all horizontal wells except wells in fields with horizontal well rules
Applies leaseline and between-well spacing requirements to all points along the “horizontal drainhole”, that portion of wellbore drilled in the correlative interval, between the penetration point and the terminus [unless 2016 amendments adopting “take point” rules apply]
Allows operators to assign additional acreage to a horizontal well, based on the length of the horizontal drainhole displacement and to receive additional allowable for that added acreage
2016 SWR amended to adopt “UFT” rules (Unconventional Fracture Treated fields) - UFT rules incorporate many of the SFR related to horizontal wells

7. Basic Definitions Horizontal Well
“[a]ny well that is developed with one or more horizontal drainholes having a horizontal drainhole displacement of at least 100 feet.” 16 Tex. Admin. Code §3.86(a)(4) (2013)
Like vertical wells, horizontal wells are initially drilled vertically down to a formation suspected of holding hydrocarbons. At a pre-determined point, the drill stem proceeds horizontally into the formation. Horizontal wellbores can extend across several leased tracts each having different owners and contain multiple production points along the drainhole. Browning Oil Co., Inc. v. Luecke, 38 S.W.3d 625 (Tex. App. — Austin 2000, pet. denied)

8. Basic Definitions
Voluntary Pooled Unit – results from lessee’s exercise of authority granted in a lease pooling clause or other agreement
Drilling Unit –Consists of unassigned acreage credited to well by lessee on W-1 APD form to satisfy the statewide or special field rules for density
Regulatory Concept Only - No effect on title; Does not affect ownership, royalty allocation, or lease maintenance
Proration Unit – Acreage assigned to a well for purposes of assigning well’s production allowable

9. Usual Methods of Combining Tracts
Forced Pooling – Mineral Interest Pooling Act
II. Voluntary Pooling
III. The “Texas Method”

10. Force Pooled Unit Mineral Interest Pooling Act (“MIPA”) Rarely used
Must have extended a fair and reasonable voluntary pooling offer
Limited to fields discovered after March 8, 1961
Limited in size to 160 acres for oil well and 640 acres for gas well

11. Voluntary Pooling Why Pool?
Negates nonapportionment rule and sets forth a basis on which production from a pooled unit is allocated
Maintain leases for future drilling and additional development
Comply with RRC spacing and density regulations and obtain increased production allowable rates

12. Voluntary Pooling Why Pool?
Locate wells in the pooled unit without respect to the individual property or lease line
Lessee relieved of the implied covenant of reasonable development of each tract
Commencement of a well on any leased tract in a pooled unit will excuse the payment of delay rentals

13. Voluntary Pooling Limitations
Lease doesn’t contain express pooling authority
Lease permits pooling for one substance and not another
Pooling power exhausted when pooled into a pre-existing unit
Pooling provisions don’t allow for pooled units of sufficient size to accommodate lateral length of horizontal well
Leases contain anti-dilution provisions (may require that pooled unit consist of a minimum percentage of interest pooled under lease or require that all of pooled interest must be included in the pooled unit)

14. Voluntary Pooling Authority
Pooling authority derived from lease
Pooling authority must be exercised in good faith
Whether pooling considers geological information
Whether pooling exercised to prevent waste and not solely to maintain leases
Whether pooling includes unproductive acreage
Timing of pooling
Production proceeds usually allocated among mineral interest owners on basis of their mineral acres relative to total mineral acres in the unit

15. Voluntary Pooling Authority
Parties to an oil and gas lease must strictly comply with its terms.
Lease that required recordation of unit declaration was not extended beyond its primary term by unit designation executed before but filed after expiration of primary term. Sauder v. Frye, 613 S.W.2d 63, 64 (Tex. Civ. App. 1981, no writ)
Lease that provided lessee could execute and file a unit designation was not extended beyond its primary term by a unit designation filed by anyone other than lessee, even its agent. Pampell Interest, Inc. v. Wolle, 797 S.W. 2d 392, 394 (Tex. App. – Austin, 1990, no writ)
“Absent express authority, a lessee has no power to pool interests in the estate retained by the lessor with those of other lessors.” Jones v. Killingsworth, 403 S.W.2d 325 (Tex. 1965)

16. Voluntary Pooling Authority
Nonparticipating royalty interest created before lease cannot be pooled without consent. Brown v. Smith, 174 S.W.2d 43 (Tex. 1943)
Ratification
Pooling Agreement – typically used by NPRI owner to grant pooling authority on a limited basis
Overriding royalty interest can be pooled unless assignment limits pooling authority. Union Pacific Resources Company v. Hutchinson, 990 S.W.2d 368 (Tex. Civ. App. — Austin 1999)

17. Voluntary Pooling Authority
Scenario:
RRC has adopted 80-acre proration units and a tolerance rule permitting assignment of an additional 80-acres for purposes of assigning allowable
Lessee seeks to pool lease into an oil unit containing 160 acres
Lease contains pooling clause that includes following language:
Units pooled for oil hereunder shall not substantially exceed 40 acres each in area, and units pooled for gas hereunder shall not substantially exceed in area 640 acres each plus a tolerance of 10% thereof, provided that should governmental authority having jurisdiction prescribe or permit the creation of units larger than those specified, units thereafter created may conform substantially in size with those prescribed by governmental regulations.
Does lessee have authority to pool lease into proposed unit?

18. Voluntary Pooling Authority
Answer: No.
Units pooled for oil hereunder shall not substantially exceed 40 acres each in area, and units pooled for gas hereunder shall not substantially exceed in area 640 acres each plus a tolerance of 10% thereof, provided that should governmental authority having jurisdiction prescribe or permit the creation of units larger than those specified, units thereafter created may conform substantially in size with those prescribed by governmental regulations. Jones v. Killingsworth, 403 S.W.2d 325  (Tex. 1965)

19. Voluntary Pooling Authority
Scenario:
Lease contains pooling clause that includes following language:
If larger units than any of those herein permitted, either at the time established, or after enlargement, are required under any governmental rule or order, for the drilling or operation of a well at a regular location, or for obtaining maximum allowable from any well to be drilled, drilling, or already drilled, any such unit may be established or enlarged to conform to the size required by such governmental order or rule
In order to pool lease, increasing size must increase allowable
In fields operating under an allocation formula not based on acreage, pooling clause would not allow larger unit

20. Voluntary Pooling: Unpooled/Unleased InterestsB
100% leased C
Operator wants to pool Tracts A-C pursuant to pooling provisions in respective leases
50% of Tract A does not have express pooling authority - is unleased or leased without pooling provision
Question: Can Lessee include Tract A in pooled unit?
Question: Is unleased mineral interest owner entitled to production?
Issues: How to allocate production to unleased 50% mineral interest owner.
Note: Scenario creates a property line. Requires a Rule 37 exception unless Take Point Rule applies.

21. Voluntary Pooling: Unpooled/Unleased Interests
Lessee pools tracts A-D pursuant to pooling clauses in Tracts A, C, D and pooling provision in X’s lease in Tract B
Y is unleased or lease does not contain pooling provision
Is Y entitled to a share of production? A
100% leased B
X=95%
Y=5% C D

22. The Texas Method
Drilling a Horizontal Well Across Lease Lines without Pooling Authority
PSA Well
Horizontal well permitted by the Texas Railroad Commission
Drilled across lease lines
No pooling authority or consent of Lessors
Requires representation by applicant that 65% of both mineral and working interest owners in tracts covered by PSA have signed an agreement as to how production proceeds will be divided
Allocation Well
Wells Horizontal well permitted by the Texas Railroad Commission
Less than 65% of working interest and mineral interest owners have agreed to a PSA

23. Who is Drilling PSA Wells
Who is Drilling PSA Wells? (Thanks to Brian Sullivan of McElroy, Sullivan, Miller, Weber & Olmstead, L.L.P.)

24. Who is Drilling Allocation Wells
Who is Drilling Allocation Wells? (Thanks to Brian Sullivan of McElroy, Sullivan, Miller, Weber & Olmstead, L.L.P.)

25. PSA Wells Permitting
In 2006, RRC approved drilling permit on PSA basis when 100% of owners signed PSA
Since 2008, RRC will permit a PSA well upon representation by applicant that 65% of both mineral and working interest owners in each tract covered by PSA have signed an agreement as to how production proceeds will be divided
Requires a SWR 37 lease line exception, but if operator owns 100% of working interest, it can waive notice and hearing under Rule 37 (“own-offset” waiver)

26. Production Sharing Agreements
An agreement between royalty, working interest and other mineral interest owners whereby parties contractually agree to a method for allocating production from horizontal wells
Single Well PSA
Signed by owners within two or more existing pooled units or leases
Agreement limited to the identified well
Designated Area PSA
Agreement applies to one or more wells
Sharing Well PSA
Signed by lessors of a lease that may or may not be within an existing pooled unit authorizing the lessees/operator to allocate production from a “Sharing Well”, one or more horizontal wells that traverse lease or pooled unit and other lands
Lessee may include the lease/pooled unit in more than one shared well
No specific acreage is designated in the agreement

27. Production Sharing Agreements Provisions
Describe method by which owners will share in production
Modify habendum clause - production, whether or not on a specific lease, will be deemed production from each lease
May negate offset obligations
If parties to PSA include owner of surface estate, provision granting lessee authority to use surface estate for production from all tracts covered by PSA

28. Allocation Well Permitting
In 2010, Devon submitted an application for a permit to drill a horizontal well in which they did NOT have either pooling authority or a PSA, calling it an Allocation Well
The RRC originally denied the application. However, on appeal approved Devon’s application stating “ It appears that a 100 percent interest in each of the leases is a sufficient colorable claim to the right to drill a horizontal well as proposed to authorize the removal of the regulatory bar and the issuance of a drilling permit by the Commission, assuming the proposed well is in compliance with all other relevant requirements.”

29. RRC Disclaimer on Allocation Permits
Commission Staff expresses no opinion as to whether a 100% ownership interest in each of the leases alone or in combination with a "production sharing agreement" confers the right to drill across lease/unit lines or whether a pooling agreement is also required. However, until that issue is directly addressed and ruled upon by a Texas court of competent jurisdiction it appears that a 100% interest in each of the leases and a production sharing agreement constitute a sufficient colorable claim to the right to drill a horizontal well as proposed to authorize the removal of the regulatory bar and the issuance of a drilling permit by the Commission, assuming the proposed well is in compliance with all other relevant Commission requirements. Issuance of the permit is not an endorsement or approval of the applicant's stated method of allocating production proceeds among component leases or units. All production must be reported to the Commission as production from the lease or pooled unit on which the wellhead is located and reported production volume must be determined by actual measurement of hydrocarbon volumes prior to leaving that tract and may not be based on allocation or estimation. Payment of royalties is a contractual matter between the lessor and lessee. Interpreting the leases and determining whether the proposed proceeds allocation comports with the relevant leases is not a matter within Commission jurisdiction but a matter for the parties to the lease and, if necessary, a Texas court of competent jurisdiction. The foregoing statements are not, and should not be construed as, a final opinion or decision of the Railroad Commission.

30. Allocating Production
Production paid in compliance with lease clauses
The interest of party owning an interest in the leases, minerals, royalties and/or executive rights would receive share in well based on ownership
Production attributed with “reasonable probability” to each unit traversed by well’s productive drainhole

31. Allocating Production
Browning Oil Co., Inc. v. Luecke
In 1979, Luecke executed 3 oil and gas leases covering three tracts of land owned by lessors, totaling approximately 420 acres
Leases allowed pooling, but pooling was limited to 80-acre proration units, and contained anti-dilution language that required that each pooled unit contain at least 60% of the Luecke’s acreage
Browning attempted to form pooled unit that violated anti-dilution clause and drilled two horizontal wells that crossed Luecke’s tracts and several other tracts

32. Allocating Production
Browning Oil Co., Inc. v. Luecke
Luecke sued, claiming wells violated leases’ pooling authority and claimed royalty on 100% of production (only about 25% of the horizontal wellbore was located on acreage in which Luecke owned an interest)
Austin Court of Appeals held lessee is required to pay the lessors’ royalties based upon “a determination of what production can be attributed to their tracts with reasonable probability”

33. Allocation Production Formulas
No current guidance on how to satisfy this standard
Productive lateral length? How much does well drain beyond first and last take points?
Proportion of take points between first to last take point?
Penetration point to terminus?
Acreage?

34. Allocating Production
Voluntary Pooled Unit
[640 acres]
A 1/8 [80/640]
B 1/8 [80/640]
C 1/4 [160/640]
D 1/4 [160/640]
E 1/4 [160/640]
Allocation Well
Formula: Productive Length of Wellbore
A 1/4 [1320/5280]
B --
C 1/4 [1320/5280]
D --
E 1/2 [2640/5280] B A C D E
1320ˈ
1320ˈ
2640ˈ

35. Which Leases are HBP? A , C, E A, B, C, D, E Voluntary Pooled Unit
[640 acres]
Allocation Well
A , C, E
A, B, C, D, E

36. Production Allocation
Allocation Well
Formula: Productive Length of Wellbore
A 1/7 [660/4620]
B --
C 2/7 [1320/4620]
D --
E 4/7 [2640/4620]
Allocation Well
Formula: Ratio of Take Points
A 1/8
B --
C 1/4
D --
E 5/8 B
80 acs. A C
160 acs. D E *
660ˈ * *
1320ˈ * * *
2640ˈ * *

37. Arguments in Support of Allocation Wells
Given production allocation, this is not “pooling” in traditional sense
Traditional pooling pursuant to pooling authority granted in leases typically involves the cross-conveyancing of royalty interests insofar as production is allocated based on the surface acreage of the tract with the total surface acreage of the pooled tracts

38. Arguments in Support of Allocation Wells
Traditional pooling treats production from any tract in pool as production from every tract in pool and then apportions production to each of the tracts based on the acreage that each tract contributes to the pool
So long as Lessee pays royalties based on the production allocable to the lessors’ tracts so that each lessor remains entitled to royalty based on the production obtained from his or her tract, terms of typical mineral lease provides all authority necessary to produce from a lease drilled by a horizontal wellbore that crosses lease line (lease grants authority to drill for and produce minerals from a described tract – no restrictions on the manner in which that is done)

39. Arguments against Allocation Wells
Excessive use of Surface “the use of the surface by a mineral owner or lessee in connection with operations on other premises constitutes an excessive use of his surface easements.” Robinson v. Robbins Petroleum Co., 501 S.W.2d 865 (Tex. 1973)
Typical lease provisions require that royalties be paid on oil and gas produced and saved from the leased premises or lands pooled therewith
Impossible to comply with royalty provisions in lease in allocation well - in allocation wells you don’t know where production is coming from, you are making assumptions

40. Allocation Wells: Legal Status
EOG v. Klotzman
EOG proposed to drill a horizontal well across 80 acres, consisting of two adjacent 40-acre tracts under separate leases that did not provide pooling authority
Klotzmans, lessors on one of the tracts, protested EOG’s application for drilling permit arguing that RRC did not have right to issue permit for multi-tract unit when lessee did not possess pooling authority
Permitting Standard: Must “reasonably appear that applicant has a good-faith claim in the property” so as to drill a well

41. Allocation Wells Legal Status
RRC examiners agreed with the Klotzmans, finding that EOG did not have a good faith claim to drill well and stated:
“The examiners find no Texas statute, Commission Statewide Rule or Commission Final Order authorizing ‘allocation’ wells. There is no Commission form on which to apply for ‘allocation’ wells. All permits for ‘allocation’ wells have been filed on a Form PSA‐12, a form adopted by the Commission effective September, 2011, which is used to file for Production Sharing Agreement well permits. Apparently, prior applications for ‘allocation’ wells have been routinely administratively granted. There has been no notice to potentially affected parties and there has been no investigation by the Commission as to the facts of the applications.”

42. Allocation Wells Legal Status
Commissioners declined to follow examiner’s proposal for decision and issued permit stating permit was appropriate - EOG owned the entire working interest for the two tracts and there was no unleased interest within the minimum required spacing and density rules that applied to proposed wellbore
Klotzmans appealed to Travis County District Court
Outcome: Settled.

43. Allocation Wells Legal Status
No case law affirming whether Allocation wells permissible under typical oil and gas lease
What must an operator show to support its production allocation scheme to avoid liability to owners who believe they are being underpaid?
RRC’s approval of permit only removes regulatory bar to drilling, does not endorse method of allocation
Function of RRC “is to administer the conservation laws. It does not undertake to adjudicate questions of title or rights of possession. These questions must be settled in the courts.” Magnolia Petroleum Co. v. Railroad Commission, 170 S.W.2d 189, 191 (Tex. 1943)

44. Allocation Wells Legal Status
Pending Allocation Case
Casey v. MD Am. Energy, LLC, No (278th Dist. Ct., Madison Cty., Tex. June 16, 2015)
Challenging allocation and legality of RRC authorization of drilling permits for allocation wells

45. Allocation Well: Response
Lessors executing leases prohibiting wells from crossing lease lines without an agreement from Lessor specifying allocation
GLO Relinquishment Act Lease
10. POOLING; ALLOCATION: (a) Lessee is hereby expressly prohibited from pooling or unitizing the Leased Premises or any interests therein with any other leasehold or mineral interest for the exploration, development and production of Oil or Gas or either of them without the express consent of the Lessor. A well, whether or not classified as an allocation well, that traverses multiple leases or units including the Leased Premises hereunder, one or more of which leases or units contains Oil and Gas owned by Lessor, and which well is not associated with an agreement approved by the Lessor specifying the allocation of the production of Oil and Gas, is hereby expressly not permitted and may not operate on or under this lease or a unit containing Lessor-owned Oil and Gas without the prior written consent of the Lessor, which consent may be granted or withheld in the Lessor's sole discretion.

46. Allocation Well: Response
SMU Lease Form
Lessee is prohibited from seeking or consenting to the forced pooling of any part of the Leased Premises with other lands under the Texas Mineral Interest Pooling Act or other pooling statutes of Texas without Lessor’s consent. Lessee shall have no right to drill a horizontal well crossing the boundary of the Leased Premises or lands pooled therewith without creating a pooled unit encompassing the productive lateral length of such well that complies with the pooling provisions of this lease. Violation of the provisions of this paragraph shall be grounds for termination of this lease.

47. Legislative Update
HB1552 designed to amend the Texas Natural Resources Code, Section by adding Subsection (d) to read as follows:
In order to prevent waste, promote conservation, or protect correlative rights, the commission may issue a permit to an operator or lessee to drill an oil or gas well that traverses multiple tracts. If there is not an agreement with one or more owners of royalty or mineral interests in the tracts traversed by the well regarding the manner in which production from the well shall be allocated among the tracts, the operator or lessee shall allocate to each of those tracts its share of the aggregated production from the well as determined by the operator or lessee with reasonable probability.
Died in Committee after Texas General Land Office and The University of Texas Lands issued a negative fiscal impact of $490 million
Rumored that there would be attempts to introduce an allocation well bill in the 85th legislative session, which convened January 10, However session ends May 29th and won’t reconvene until 2019.

48. Texas Case Law Update Trespass and Nuisance: Lightning Oil Co. v
Texas Case Law Update Trespass and Nuisance: Lightning Oil Co. v. Anadarko E&P Onshore, LLC
Lightning Oil owned leasehold under Briscoe Ranch
Anadarko owned leasehold underlying Chaparral Wildlife Management Area
Chaparral required Anadarko to utilize off-site drilling when feasible
Anadarko entered into surface agreement with Briscoe Ranch
Anadarko’s wellbore would pass through, but not produce from, Lightning’s leasehold

49. Would Anadarko’s plans constitute a trespass?
Texas Case Law Update Trespass and Nuisance: Lightning Oil Co. v. Anadarko E&P Onshore, LLC
Would Anadarko’s plans constitute a trespass?
Under Texas law ownership of mineral estate does not include ownership of the subterranean structures
Court cited Coastal v. Garza stating mineral estate owner entitled to a fair chance to recover the oil and gas under the surface estate
Surface owner controls the subterranean structures
Appellate Court ruled Briscoe Ranch could grant permission for Anadarko to drill through subsurface and such operations did not constitute a trespass
Case is on appeal to Texas Supreme Court. Oral arguments were heard in March.

50. Texas Case Law Update Royalty/Mineral Distinction: Reed v
Texas Case Law Update Royalty/Mineral Distinction: Reed v. Maltsberger/Storey Ranch, LLC
1942 deed conveyed to grantees “an undivided ¼ interest in and to all of the oil, gas and other minerals in and under and that may be produced from certain lands
Deed included “in and under” language reflective of mineral interest but then reserved the executive right, and right to bonus and delay rentals
Royalty interest is a non possessory interest in production

51. Texas Case Law Update Royalty/Mineral Distinction: Reed v
Texas Case Law Update Royalty/Mineral Distinction: Reed v. Maltsberger/Storey Ranch, LLC
Incidents of mineral interest: (1) right to develop, (2) right to lease (the executive right), (3) the right to receive bonus payments, (4) right to receive delay rentals, and (5) right to receive royalty payments
Court noted that separation of all possessory rights from a mineral fee interest will not automatically convert interest to a mineral interest
Court held that deed conveyed a mineral interest and noted that if the grantor intended to convey royalty interest, reservation of certain rights would be redundant because royalty owner has no such rights

52. Texas Case Law Update Railroad Deed – Fee or Easement: BNSF Ry. Co. v
Texas Case Law Update Railroad Deed – Fee or Easement: BNSF Ry. Co. v. Chevron Midcontinent, L.P.
Deed purported to convey “for a right of way, that certain strip of land located over, through or across the following tracts ” [Emphasis Added]
Also included the words “fee simple” in the habendum clause
Court stated general rule that a deed with a granting clause conveying “a ‘right of way’ in or over a tract of land conveys only an easement [but] a deed which grants tract or strip of land conveys the title in fee, even though in a subsequent clause or paragraph of the deed the land conveyed is referred to as a right of way” [Emphasis Added]

53. Texas Case Law Update Railroad Deed – Fee or Easement: BNSF Ry. Co. v
Texas Case Law Update Railroad Deed – Fee or Easement: BNSF Ry. Co. v. Chevron Midcontinent, L.P.
Seek to harmonize all parts of deed but primary purpose in construing deed is to give effect to parties’ intent
Court looked to other portions of deed noting that recitals referenced RR passing “over” the land, the location of term “right of way” in front of “strip of land” limited nature of conveyance, deed contained a reference of surveyor line that went “[o]ver, through and across” and that certain rights expressly included in conveyance would have automatically passed with a fee estate
Held: Deed conveyed an easement

54. Texas Case Law Update Paying Quantities and Top Lease/RAP: BP Am. Prod
Texas Case Law Update Paying Quantities and Top Lease/RAP: BP Am. Prod. Co. v. Laddex, Ltd.
BP owned lease granted in 1971 that was purportedly HBP
Laddex took top lease and sued BP asserting that BP’s lease expired for failure to produce in paying quantities in 2005 and 2006
Jury found for Laddex. Court of appeals agreed that Laddex lease was not a violation of RAP but reversed and remanded on grounds that jury instructions improperly limited analysis of paying quantities to 15-month period in which production had slowed
Both parties filed petitions for review with Texas Supreme Court. Laddex asserted that jury was properly instructed and judgment should be affirmed. BP asserted that no evidence to support jury’s findings and that Laddex lease was void as a violation of RAP

55. Texas Case Law Update Paying Quantities and Top Lease/RAP: BP Am. Prod
Texas Case Law Update Paying Quantities and Top Lease/RAP: BP Am. Prod. Co. v. Laddex, Ltd.
The Court noted earlier decisions holding that when assessing whether production has occurred in paying quantities “there can be no limit as to the time to be taken into consideration”
Texas Supreme Court upheld court of appeals agreeing that the trial court had erred by instructing the jury to limit its analysis to the 15-month slowdown period
Because top lease was to vest in Laddex “any and all remainder and reversionary interest and after-acquired title of Lessor” upon expiration of prior lease, Court ruled that Laddex owned a presently vested interest and did not violate RAP

56. Texas Case Law Update Post-Production Costs: Burlington Res
Texas Case Law Update Post-Production Costs: Burlington Res. Oil & Gas Co. LP v. Tex Crude Energy, LLC
First case addressing deductibility of post-production costs from royalty payments since Chesapeake v. Hyder
In Chesapeake, Texas Supreme Court held that lease provision granting “a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent (5%) of gross production obtained” did not permit the deduction of post-production costs
In Burlington, the Court of Appeals in Corpus Christi considered language stating the subject ORI would be paid on the “amount realized” by the lessee, and would be paid “free and clear of all development, operating, production and other costs”
Court of Appeals held that Burlington had to pay ORI without deducting post-production costs

57. Texas Case Law Update Taxation of Mineral Interest: Chambers v
Texas Case Law Update Taxation of Mineral Interest: Chambers v. San Augustine Cnty. Appraisal Dist.
Plaintiff owned land in Shelley County that was pooled with land in San Augustine County
San Augustine County attempted to assess taxes on plaintiff’s land in Shelley County
San Augustine County argued that because land was pooled, there was cross conveyance of interests and mineral owners appropriately taxed based on proportion of pooled unit in San Augustine County

58. Texas Case Law Update Taxation of Mineral Interest: Chambers v
Texas Case Law Update Taxation of Mineral Interest: Chambers v. San Augustine Cnty. Appraisal Dist.
Plaintiff’s lease contained following provision:
The formation of any unit hereunder which includes land not covered by this lease shall not have the effect of exchanging or transferring any interest under this lease Between parties owning interests in land covered by this lease and parties owning interests in land not covered by this lease
Held: San Augustine County failed to establish that plaintiff owned an interest in pooled minerals because although lease authorized pooling, clearly prohibited cross-conveyancing of interests

59. Texas Case Law Update Nuisance: Aruba Petro., Inc. v. Parr
At trial, plaintiffs alleged health problems related to air pollution from drilling activity consisting of flaring, construction activity, trucking traffic and emission of gas and chemicals
In 2014, Dallas jury found drilling activities constituted a private nuisance and awarded a Texas family almost $3MM
Fifth Court of Appeals in Dallas reversed judgment finding there was no legally sufficient evidence that Aruba intentionally created a private nuisance

60. Texas Case Law Update Strip and Gores Doctrine: Crawford v
Texas Case Law Update Strip and Gores Doctrine: Crawford v. XTO Energy, Inc.
Plaintiff’s predecessor, Mary Ruth Crawford, owned approximately 146 acres in Tarrant County
In 1964, Mary Ruth conveyed surface estate of an strip of land (“Crawford Strip”) to Texas Electric Service Company for the construction of an electric transmission line. Reserved minerals under conveyed strip of land.
In 1984, Mary Ruth conveyed the 142 acres north and south of the Crawford Strip without reservation. Property was subsequently subdivided into residential lots.
In 2007, Mary Ruth executed an oil and gas lease (“Crawford Lease”)covering the Crawford Strip

61. Texas Case Law Update Strip and Gores Doctrine: Crawford v
Texas Case Law Update Strip and Gores Doctrine: Crawford v. XTO Energy, Inc.
Lessee paid royalties due on Crawford Strip to owners of adjacent tracts pursuant to a title opinion applying the strip-and-gore doctrine which generally provides:
Where it appears that a grantor has conveyed all land owned by him adjoining a narrow strip of land that has ceased to be of any benefit or importance to him, the presumption is that the grantor intended to include such strip in such conveyance; unless it clearly appears in the deed, by plan and specific language, that the grantor intended to reserve the strip
Plaintiff filed suit for breach of contract and failure to pay royalties
XTO responded with a motion to compel joinder of the 44 adjacent landowners as parties claiming an interest in the subject tract

62. Texas Case Law Update Strip and Gore Doctrine: Crawford v
Texas Case Law Update Strip and Gore Doctrine: Crawford v. XTO Energy, Inc.
Appeals court held that adjacent landowners were necessary parties under Rule 39 and dismissed plaintiff’s claim for failing to join them
Texas Supreme Court: Reversed and Remanded. Agreed that landowners could claim an interest pursuant to strip-and-gore doctrine
Nevertheless, held that acceptance of royalties and application of strip and gores doctrine insufficient to establish that landowners had affirmatively claimed an interest
“The ultimate issue of the strip-and-gore doctrine’s effect on the [Crawford Strip] is an interesting one, but it is not before us ”

63. Disclaimer
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