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Originally published in the Texas Bar Journal,
Vol 82, No. 1, January 2019.

2018 saw continued litigation in familiar areas, including the characterization of royalty interests and the interpretation of retained acreage clauses. Additionally, developments in the use of surface resources (such as groundwater usage and sand mining) have increasingly become more prominent topics of litigation.

The ongoing “fixed vs. floating” royalty debate continues to be fertile ground for Texas litigators. Recent seminal cases continue to reject mechanical rules of interpretation and reinforce the “four corners” approach, which seeks to harmonize all provisions of an instrument.[1] In Laborde Properties, LP v. U.S. Shale Energy II, LLC[2], the Texas Supreme Court determined that the reservation of a “…1/2 interest in and to the oil royalty, gas royalty…the same being a one-sixteenth interest…” created a floating interest. The majority reasoned that a reservation of 1/2 of the royalty estate equaled reservation of 1/2 of 1/8th , as 1/8th was widely understood to be 100% of the royalty estate at the time (c.1951). Practitioners should expect more of these cases as the fixed 1/2 x 1/8 = 1/16th interpretation is falling out of favor, shifting to a more nuanced approach underpinned by the Estate Misconception Theory.

The dramatic acceleration of leasehold acreage prices has put retained acreage clauses in the crosshairs. In XOG,[3] the Texas Supreme Court determined that the size of the Railroad Commission’s prescribed proration unit in its Special Field Rules determined the amount of acreage retained, regardless of the acreage assigned by the operator to the proration unit. The Court emphasized the plain meaning of the parties’ definition of proration unit, limiting it to “the area within the surface boundaries of the proration unit then established or prescribed by field rules…” XOG’s sister case, Endeavor Energy,[4] similarly turned on the plain meaning of its clause, which provided for retention of acreage “…located within a government proration unit assigned to a well.” The two cases reinforce the Supreme Court’s reliance on the plain meaning of words within their regulatory context, to be reviewed on a case-by-case basis. Ultimately, as a preeminent Austin attorney recently quipped, “You gotta read the lease!”[5]

The use of surface resources is quickly becoming a hot issue of contention due to their demand in the age of horizontal production. In Texas, groundwater rights are attendant to the surface and, following the English rule, a surface owner may use so much of the water as he can capture, subject to the police power of the State to regulate via local conservation districts. The 2016 decision in Coyote Lake Ranch[6] applied the accommodation doctrine to ground water development and confirmed the severability of water rights. In this context, the El Paso Court of Appeals recently ruled in Harrison[7] that the accommodation doctrine could not be used to force an oil and gas company to purchase groundwater from a lessor for use in operations on the leased premises. The scarcity of groundwater in the Permian should lead to numerous accommodation doctrine cases in the coming years.

Previously worthless, West Texas sand is now a billion-dollar industry. The sand estate may be severed from the surface estate, is subject to previous conveyance and reservation in a chain of title, and is claimed by the State on all mineral classified and Relinquishment Act Lands. Although there were no Texas cases on sand use in 2018, practitioners should anticipate accommodation doctrine cases to become more prevalent as feverish development in the Permian Basin conflicts with expansive sand mining operations. Since there is no Texas governmental agency that currently regulates sand mining activities, a glimpse towards the future might see the Texas Commission on Environmental Quality, or a newly created administrative entity, filling this void.

Finally, the hot topic of the last few years, allocation wells, has garnered little, if any attention in 2018. Ernest Smith’s recent article[8] appears to have “ended” the debate by determining a horizontal wellbore may cross lease lines absent express pooling permission. However, while the academic debate may be “settled”, the real world has yet to give up the fight as seen in recently filed litigation.[9]

 

[1] Wenske v. Ealy, 60 Tex. Sup. Ct. J. 1433, 51 S.W.3d 791 (Tex. 2018);

[2] U.S. Shale Energy II, LLC v. LaBorde Properties, L.P., 61 Tex. Sup. Ct. J. 1727, 551 S.W.3d 148 (Tex. 2018);

[3] XOG Operating, LLC v. Chesapeake Exploration Limited Partnership, 61 Tex. S. Ct. J. 802, 554 S.W.3d 607 (Tex. 2018);

[4] Endeavor Energy Resources LP, et al v. Discovery Operating, Inc., 61 Tex. Sup. Ct. J. 787, 554 S.W.3d 586 (Tex. 2018);

[5] Retained Acreage After XOG and Endeavor: Read the Lease, Watson, Skip, State Bar of Texas 36th Annual Advanced Oil, Gas, and energy Resources Law CLE, Chapter 8, 9/2018.

[6] Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53 (Tex.2016);

[7] Harrison v. Rosetta Resources Operating, LP, 2018 Tex. App. WL 3751740 (8/8/2018);

[8] Applying Familiar Concepts to New Technology: Under the Traditional Oil and Gas Lease, A Lessee Does not Need Pooling Authority to Drill a Horizontal Well that Crosses Lease Lines, Smith, Ernest; http://texasbar.informz.net/texasbar/data/images/OGE%20Applying%20Familiar%20Concepts%20to%20New%20Technology.pdf (last visited 11/6/18);

[9] Monroe Properties, Inc., et al. v. Railroad Commission of Texas, Cause No. D-1-GN-18-001111, 53rd District Court, Travis County, Texas; for a discussion of the case, see https://www.oilandgaslawyerblog.com/challenge-devon-allocation-well/ (last visited 11/6/18);

 

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