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Recent Trends in Oil & Gas Litigation

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Recent Trends in Oil & Gas Litigation

  1. 1. © Jackson Walker L.L.P. 2015 EMERGING TRENDS IN OIL AND GAS LITIGATION Reagan Marble & Amanda Crouch February 25, 2019
  2. 2. Memorandum Opinions TRAP 47, Comment to 2008 change: “All opinions and memorandum opinions in civil cases issued after the 2003 amendment have precedential value.”
  3. 3. Traditional Phases of Oil & Gas Litigation Title Litigation Contract Litigation Lease Termination
  4. 4. Emerging Trends 1. Lease Termination Claims 2. Proration Unit Litigation 3. Joinder of Parties 4. Class Actions 5. Arguing “Context” 6. Arbitration
  5. 5. Lease Termination Claims • BP America Production Co. v. Laddex • BP America Production Co. v. Red Deer Resources, LLC
  6. 6. BP Am. Prod. Co. v. Red Deer Res., LLC Issue: • Is the point in time to evaluate whether a well is “capable of producing in paying quantities” in the context of triggering a shut-in royalty clause the day the well last produced or the day shut-in royalty is tendered? Background: • BP had a 1962 OGML covering 2113 acres of land in Lipscomb and Hemphill Counties. • BP had one gas well producing 10 mcf per day on the entire lease.
  7. 7. Red Deer, cont. • Red Deer top leased the tract in early 2011. • The well last produced gas on June 4, 2011. BP turned off the valve on the well on June 12, 2011 and tendered shut-in royalty to the lessors the following day. • Red Deer sued arguing that lease terminated for failure to PPQ prior to shut-in. • Jury was asked whether well was “incapable of producing in paying quantities when it was shut-in on June 13, 2012?” • BP argued that proper question was whether the well was “incapable of producing in paying quantities on the last day gas was sold or used—June 4, 2012.”
  8. 8. Red Deer, cont. Holding: • The day the well last produced. “The determination regarding capability of production in paying quantities [is] made on the date that gas was last sold or used.” Practical Application: • Evaluate “capable of production” as of the last date gas was sold or used unless shut-in language dictates otherwise.
  9. 9. BP Prod. Co. v. Laddex, Ltd. Issue: • (1) Did top lease violate the rule against perpetuities? • (2) Can production in paying quantities analysis be limited a period of slowed production? Background: • BP had a 1971 OGML covering a ranch in Roberts County. • One successful well was drilled during the primary term which produced steadily until significant decline in August 2005. Well resumed steady production in November 2006.
  10. 10. Laddex, Cont. • In March 2007 Laddex top leased the tract. • Top lease commenced either when (a) written releases were filed of record or (b) BP lease terminated by non- appealable judgment of the court. • Laddex sued BP in April 2007 arguing that lease terminated for failure to PPQ. • BP argued top lease violated rule against perpetuities. • Case went to trial and Laddex asked the jury whether the well failed to PPQ for the 15 month period. • BP argued that jury question cannot be limited in time.
  11. 11. Laddex, Cont. Holding: • No. The top lease was a present conveyance of a vested interest (i.e., the possibility of reverter) that did not violate RAP. • No. “[T]here can be no limit as to the time…to be taken into consideration” in making a determination of whether a well was producing in paying quantities. While the trial court had correctly allowed evidence regarding profitability before, during, and after the slowdown, it had erred by instructing the jury to limit its analysis to the 15-month slowdown period. Practical Application: • Top lease must contain conveyance of possibility of reverter. • File suit as soon as possible after period of limited production or non-production.
  12. 12. Proration Unit Litigation • Endeavor Energy Resources, L.P. v. Discovery Operating, Inc. • XOG Operating, LLC v. Chesapeake Exploration, Ltd.
  13. 13. Endeavor Energy Resources LP v. Discovery Operating, Inc • Issue: – Does a lessee only retain the acreage it “assigned” to its proration unit on its P- 15 filed at the railroad commission? • Background: – Endeavor obtained leases which identified the acreage that could be obtained by referencing Railroad Commission regulatory concepts of proration units and allowables: “[The] lease shall automatically terminate . . . save and except those lands and depths located within a governmental proration unit assigned to a well . . . [containing] the number of acres required to comply with the applicable rules and regulations of the Railroad Commission of Texas for obtaining the maximum producing allowable for the particular well.” – The field rules allotted 80 acres to a proration unit with an additional 80 “tolerance acres” at the operator’s election; essentially allowing 160 acres to be assigned. – Endeavor drilled four wells and filed P-15s assigning 80 acres to each well.
  14. 14. Endeavor Energy Resources LP, cont. –Discovery took leases by assignment from a third- party covering the 80 acres not designated on the P- 15. –Discovery drilled two wells. –Endeavor sued discovery and filed new P-15s designating 160 acres. –Discovery argued that the clause allowed Endeavor to retain only what it actually assigned the wells on its P-15s filed at the RRC. –Endeavor argued that it was entitled to what it actually assigned plus the tolerance acreage.
  15. 15. Endeavor Energy Resources LP, cont. • Holding: – Yes. The phrase “assigned to” is unambiguous, is a term of art in the oil and gas industry, and can only be reasonably understood as the filing of a proration unit with the RRC. • Practical Application: – If your retained acreage clause allows the retention of “assigned” proration acreage at the RRC, actually check to see if the maximum acreage (proration unit plus tolerance) under the field rules was designated.
  16. 16. XOG Operating, LLC v. Chesapeake Expl. Ltd. P’Ship • Issue: – Does a lessee only retain the acreage it assigned to its proration unit on its P-15 filed at the railroad commission or what is allowed by the field rules? • Background: – The retained acreage clause read that the entire lease would terminate: “save and except that portion … included within the proration unit or pooled unit of each well drilled … and producing or capable of producing oil and/or gas in paying quantities.” – The term “proration unit” was then defined as “the area established or prescribed by field rules … for the reservoir in which each well is completed.” – No field rules = “each proration unit shall be deemed 320 acres.” – Chesapeake drilled six wells on the lease and filed proration units for four of the wells assigning a total of 800 acres to those wells.
  17. 17. XOG Operating, LLC, cont. – XOG argued that all acreage not included in a proration unit filed at the railroad commission had terminated. – Chesapeake argued that because the field rules allowed for a 320 acre unit, six wells earned all 1600 acres regardless of what was filed at the railroad commission. – XOG argued that Chesapeake did not actually assign that acreage and the acreage was thus lost.
  18. 18. XOG Operating, LLC, cont. • Holding: – Field rules. Chesapeake was allowed to retain the maximum allowable acreage allowed by the field rules by reference to the field rules; not what was actually assigned. • Practical Application: – If your retained acreage provision does not reference acreage “assigned,” and instead incorporates the field rules by reference, it might not matter what is filed at the railroad commission.
  19. 19. Joinder of Parties • Crawford v. XTO Energy, Inc.
  20. 20. Crawford v. XTO Energy, Inc. Issue: • Whether a trial court abused its discretion by dismissing a lessor’s suit against XTO because he failed to join nearby landowners under Texas Rule of Civil Procedure 39? Background: • Mary Crawford owned 146 acres of land in Tarrant County. • Conveyed 8.235 acres to Texas Electric Service Company but reserved the minerals. • Sold the surrounding property in 1984 which was later developed into residential lots. • XTO’s predecessor-in-interest leased 8.235 acre tract from Crawford in 2007.
  21. 21. Crawford, cont. • She died shortly thereafter and son inherited her estate. • XTO pooled Crawford lease with hundreds of other leases; forty- four were adjacent to Crawford 8.235 acre tract. • XTO title opinion held that under strip-and-gore doctrine Crawford’s later conveyance of surrounding property carried with it a conveyance of the minerals underlying the 8.235-acre tract to the adjacent landowners. • XTO never paid Crawford any royalties and began crediting her share to adjacent landowners. • Crawford sued for breach of contract and declaratory judgment. • XTO filed a motion to abate and compel joinder of the adjacent landowners arguing that under TRCP 39 adjacent landowners would be affected by the judgment and true relief could not be granted without their inclusion. Trial court granted abatement. Crawford never joined. Suit was dismissed.
  22. 22. Crawford, cont. Holdings: • Yes. Landowners did not actually claim an interest in the dispute, and thus were not required to be joined under Rule 39. “Rule 39 does not require joinder of persons who potentially could claim an interest in the subject of the action; it requires joinder, in certain circumstances, of persons who actually claim such an interest.” Practical Application: • Either join allegedly interested parties under Rule 37 to preclude “inconsistent judgments” or prior to paying royalties on disputed interest interplead the funds.
  23. 23. Class Actions • Seeligson v. Devon Energy Prod. Co., L.P.
  24. 24. Seeligson v. Devon Energy Prod. Co., L.P. • Issue: – Are royalty owners suing for breach of the duty to market gas produced pursuant to various oil and gas leases entitled to class certification? • Background: – Plaintiffs claimed Devon breached its implied duty to market their gas. – Devon Energy Production sold gas to Devon Gas Services at 82.5% of a published industry index price; Devon Gas Services then processes the gas at the Bridgeport Gas Processing Plant and sells to a third-party. – Plaintiffs argued the 17.5% fee is far greater than the market rate for processing, and thus, Devon breached its implied duty to market. – Plaintiffs asked court to certify class of royalty owners who are paid royalties by Devon on gas processed at Bridgeport.
  25. 25. Seeligson, cont. – Plaintiffs argued (1) class is adequately defined and clearly ascertainable; (2) numerosity (many members); (3) commonality (common questions of law); (4) typicality (claims typical of all class members); (5) adequacy of representation (named plaintiffs represent all); and (6) predominance (questions of law or fact predominate over individual member issues). – Devon argued predominance was not present because the statute of limitations applied to each member of the class differently. – Trial court initially denied the motion for class certification, but upon a motion for rehearing and an evidentiary hearing, it certified a class that included 4,143 oil and gas leases.
  26. 26. Seeligson, cont. Holdings: • Reversed and remanded for insufficient evidence to support predominance. Practical Application: • Include an arbitration clause with a class action waiver.
  27. 27. Arguing Context • Murphy Expl. & Prod. Co. v. Adams
  28. 28. Murphy Expl. & Prod. Co. v. Adams • Issue: – What is the meaning of “offset well” in the context of an oil and gas lease? • Background: – The plaintiffs granted an oil and gas lease to Murphy with the following provision: “It is hereby specifically agreed and stipulated that in the event a well is completed as a producer of oil and/or gas on land adjacent and contiguous to the leased premises, and within 467 feet of the premises covered by this lease, that Lessee herein is hereby obligated to, within 120 days after the completion date of the well or wells on the adjacent acreage, as follows: (1) to commence drilling operations on the leased acreage and thereafter continue the drilling of such off-set well or wells with due diligence to a depth adequate to test the same formation from which the well or wells are producing from on the adjacent acreage; or (2) pay the Lessor royalties as provided for in this lease as if an equivalent amount of production of oil and/or gas were being obtained from the off-set location on these leased premises as that which is being produced from the adjacent well or wells; or (3) release an amount of acreage sufficient to constitute a spacing unit equivalent in size to the spacing unit that would be allocated under the lease to such well or wells on the adjacent lands, as to the zones or strata producing in such adjacent well.”
  29. 29. Adams, cont. – The term “offset well” was undefined in the lease. – The Lucas A#H Well was drilled on a tract adjacent to and within 467 feet of the lease line. – Murphy drilled the Herbst Unit B #1h on the plaintiffs’ lease, within the same formation, but over 2100 feet away and contended that this was the “offset well” under the lease. – Murphy’s only evidence was an affidavit from a petroleum engineer that the term “offset well” “is commonly understood within the industry as describing any well drilled on an adjacent lease or property. – The trial court held that the well was on offset well and Murphy won on summary judgment.
  30. 30. Adams, cont. • Holding: – COA: Reversed and remanded. A offset well is a “well drilled on one tract of land to prevent drainage of oil or gas to an adjoining tract of land, on which a well is being drilled or is already in production.” – SCOTX: Phrase “offset well” (in that clause) does not necessarily refer to a well that would protect the leasehold against drainage, but instead referred to a well drilled anywhere on the leased premises that was drilled to a depth required by the lease.
  31. 31. Adams, cont. • Practical Application: – Define the term “offset well.”
  32. 32. Arbitration • Ridge Natural Res., LLC v. Double Eagle Royalty
  33. 33. Ridge Natural Res., LLC v. Double Eagle Royalty • Issue: –Is an arbitration clause in a lease agreement binding when attempted to be enforced by a successor-in- interest to an original party? • Background: – McDaniels signed lease with an arbitration provision. – Double Eagle Royalty became successor in interest to McDaniels and filed suit to quiet title to a disputed royalty interest. – Ridge Natural Resources moved to compel arbitration. – Double Eagle argued the clause was procedurally and substantively unconscionable.
  34. 34. Ridge, cont. – The clause was lengthy and extensive – Texas oil and gas expert called it “highly unusual.” – Double Eagle argued it was substantively unconscionable because arbitration is “not viable” for oil, gas and mineral leases. – Double Eagle also argued it was procedurally unconscionable because the parties had not really agreed to arbitrator – “had not read the lease in depth” and no one “spoke to counsel.” – The clause was also not in bold or otherwise highlighted – McDaniels did not understand what they were signing.
  35. 35. Ridge, cont. • Holding: – Trial Court: Agreed with Double Eagle and refused to compel arbitration. – COA: Reversed – BUT contractual prohibition on punitive damages is void as against public policy.
  36. 36. Ridge, cont. • Practical Application: – New trend to add arbitration clauses to oil and gas leases. – The Court provides a blueprint for avoiding an arbitration clause.
  37. 37. Additional Emerging Trends 1. Offset Well Disputes - Martin v. Newfield 2. Fixed v. Floating - U.S. Shale v. Laborde 3. Electronic Signature Act Transactions - Bujnoch v. Copano Energy 4. Trade Secret Battles - Eagle Oil and Gas v. Shale Exploration 5. Anti-SLAPP - Lona Hills Ranch v. Creative Oil & Gas

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