Case Law Update— 2014
Christopher S. Kulander
Visiting Professor of Law, South Texas College of Law
Of Counsel, Haynes and Boone, LLP
ckulander@stcl.edu
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!
C
R
– 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. (!)
Key Operating v. Hegar
435 S.W.3d 794 (Tex. 2014)
• Houston (1st 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.
12-1002, 2014 WL 2895999 (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.
12-1002, 2014 WL 2895999 (Tex. 2014)
15% of CO2
oil
oil
casinghead
gas + CO2
85% of CO2
NGLs
Cynara Processing
Facility
gas
Snyder Gas Plant
French v. Occidental Permian Ltd.
12-1002, 2014 WL 2895999 (Tex. 2014)
• French brought suit to recovery royalty claiming:
– CO2 ops were a “production activity” and not a “postproduction 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:
– CO2 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.
12-1002, 2014 WL 2895999 (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
– CO2: 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
CO2 because this both allowed:
– the sale of the NGLs (70%) and…
– …the reinjection of a more concentrated CO2 stream.
French v. Occidental Permian Ltd.
12-1002, 2014 WL 2895999 (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 CO2.
– 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 CO2 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 1996.
– In 2003-4, 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 (5th Cir. 2014)
• Questions Considered:
– If an ogl seems to prohibit deduction of postproduction 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 (5th 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 (5th 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 (5th 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 (5th Cir. 2014)
• Heritage Resources, Inc. v. NationsBank1
– 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.
1
939 S.W.2d 118 (Tex. 1996).
Warren v. Chesapeake Exploration
759 F.3d 413 (5th 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 (5th 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
2008-2009: 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 27 2014)
– 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 1st 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
ckulander@stcl.edu