Overview of current trends in oil and gas royalty litigation. Covers post-production cost deductions, royalty calculation, lease royalty clauses, and some applicable statutory provisions.
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Presentation by Austin Brister entitled "Production in Paying Quantities; Is my lease still alive?" Presented at the Dallas Bar Association's 31st Annual Review of Oil & Gas Law on August 10, 2017.
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Sometimes a dispute cannot be settled completely in mediation. In that case, this presentation shows how you can use partial settlements in multi-party and single party disputes to narrow the dispute through partial settlements.
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In intellectual property cases, there are two types of monetary remedy: damages and an accounting of profits. Damages represent the patentee’s loss and are the default remedy in the sense that a court is obliged to award damages on proof of infringement and consequent loss. This publication focuses on damages in patent cases, although the reasoning generally applies in trade-mark and copyright cases.
An ebook published by the law firm Porter Wright Morris & Arthur LLP. Contains several blog posts they've published on the topic of oil and gas lease issues for landowners. Our favorite article: My Sister is a Fractivist and Won’t Sign an Oil and Gas Lease. What Can We Do?
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WEST SHELL, JR.; and ANDREW C. HAUCK, III, Plaintiffs-Appellants.docxphilipnelson29183
WEST SHELL, JR.; and ANDREW C. HAUCK, III, Plaintiffs-Appellants, HERBERT A. MIDDENDORFF, Plaintiff, v. R.W. STURGE, LTD.; THE COUNCIL OF LLOYD'S; THE SOCIETY OF LLOYD'S; and THE CORPORATION OF LLOYD'S, Defendants-Appellees.
No. 94-3119
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
55 F.3d 1227; 1995 U.S. App. LEXIS 13911; 1995 FED App. 0176P;
63 USLW 2804; Blue Sky L. Rep. P 74,044 (6th Cir.)
May 1, 1995, Argued
June 8, 1995, Decided
June 8, 1995, Filed
PRIOR HISTORY: [**1] ON APPEAL from the United States District Court for the Southern District of Ohio. District No. 93-00802. Herman J. Weber, District Judge.
COUNSEL: For WEST SHELL, JR., ANDREW C. HAUCK, III, Plaintiffs - Appellants: John L. Campbell, ARGUED, BRIEFED, Kohnen, Patton & Hunt, Cincinnati, OH. Virginia C. Whitman, White, Getgey & Meyer, Cincinnati, OH. For R.W. STURGE, LTD., formerly A.L. Sturge (Management) LTD dba R.W. Sturge & Company, THE CORPORATION OF LLOYD'S, THE SOCIETY OF LLOYD’s THE COUNCIL OF LLOYD'S, Defendants - Appellees: Charles J. Faruki, ARGUED, BRIEFED, Faruki, Gilliam & Ireland, Dayton, OH.
JUDGES: Before: KENNEDY and SUHRHEINRICH, Circuit Judges; HILLMAN, District Judge. * * The Honorable Douglas W. Hillman, United States District Judge for the Western District of Michigan, sitting by designation.
OPINIONBY: KENNEDY
OPINION: [***2]
[*1228] KENNEDY, Circuit Judge. Plaintiffs, investors in the Society of Lloyd's, brought this diversity action against defendants R. W. Sturge, Ltd., the Society of Lloyd’s, the Council of Lloyd’s and the Corporation of Lloyd’s seeking to rescind their investment contracts under Ohio securities law. Defendants filed a motion to dismiss for improper venue under Rule 12(b)(3) of the Federal Rules of Civil Procedure on the grounds that forum selection clauses in the investment contracts gave exclusive jurisdiction to the English courts. The District Court granted the motion to dismiss and plaintiffs now appeal, arguing that the forum selection clauses deprive them of their substantive rights under the Ohio securities laws and that Ohio public policy outweighs the policies served by enforcing the forum selection clauses. For the following reasons, we affirm.
I.
The Society [**2] of Lloyd's, or Lloyd’s of London, (“Lloyd's”) is not an insurance company, but rather is an insurance marketplace in which individual Underwriting Members, or Names, join together in syndicates to underwrite a particular type of business. The Corporation of Lloyd’s (“Corporation”), which was created by an Act of Parliament, regulates the Lloyd’s insurance market. The Corporation itself does not underwrite any insurance, but provides facilities and services to assist underwriters. The Corporation is managed by the Council of Lloyd’s (“Council”) which controls the admission and discipline of Names, sets the Names’ reserve requirements and establishes standards for Lloyd’s policies.
To become a Name, one must apply and be sponsore.
Vendome Real Estate Media is proud to present the top five stories from 2016 from the Commercial Tenant's Lease Insider.
Stories include:
- Make Sublet Deal Work for You
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Balancing the right of a cotenant to develop his oil and gas rights and the rights of an unwilling or unlocatable cotenant has become an increasing challenge for industry and landowners alike. This PowerPoint was presented at the PBI Sixth Annual Oil and Gas Law Colloquium in a program examining current Pennsylvania law relating to unleased, undivided fractional interests.
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WEST SHELL, JR.; and ANDREW C. HAUCK, III, Plaintiffs-Appellants.docxphilipnelson29183
WEST SHELL, JR.; and ANDREW C. HAUCK, III, Plaintiffs-Appellants, HERBERT A. MIDDENDORFF, Plaintiff, v. R.W. STURGE, LTD.; THE COUNCIL OF LLOYD'S; THE SOCIETY OF LLOYD'S; and THE CORPORATION OF LLOYD'S, Defendants-Appellees.
No. 94-3119
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
55 F.3d 1227; 1995 U.S. App. LEXIS 13911; 1995 FED App. 0176P;
63 USLW 2804; Blue Sky L. Rep. P 74,044 (6th Cir.)
May 1, 1995, Argued
June 8, 1995, Decided
June 8, 1995, Filed
PRIOR HISTORY: [**1] ON APPEAL from the United States District Court for the Southern District of Ohio. District No. 93-00802. Herman J. Weber, District Judge.
COUNSEL: For WEST SHELL, JR., ANDREW C. HAUCK, III, Plaintiffs - Appellants: John L. Campbell, ARGUED, BRIEFED, Kohnen, Patton & Hunt, Cincinnati, OH. Virginia C. Whitman, White, Getgey & Meyer, Cincinnati, OH. For R.W. STURGE, LTD., formerly A.L. Sturge (Management) LTD dba R.W. Sturge & Company, THE CORPORATION OF LLOYD'S, THE SOCIETY OF LLOYD’s THE COUNCIL OF LLOYD'S, Defendants - Appellees: Charles J. Faruki, ARGUED, BRIEFED, Faruki, Gilliam & Ireland, Dayton, OH.
JUDGES: Before: KENNEDY and SUHRHEINRICH, Circuit Judges; HILLMAN, District Judge. * * The Honorable Douglas W. Hillman, United States District Judge for the Western District of Michigan, sitting by designation.
OPINIONBY: KENNEDY
OPINION: [***2]
[*1228] KENNEDY, Circuit Judge. Plaintiffs, investors in the Society of Lloyd's, brought this diversity action against defendants R. W. Sturge, Ltd., the Society of Lloyd’s, the Council of Lloyd’s and the Corporation of Lloyd’s seeking to rescind their investment contracts under Ohio securities law. Defendants filed a motion to dismiss for improper venue under Rule 12(b)(3) of the Federal Rules of Civil Procedure on the grounds that forum selection clauses in the investment contracts gave exclusive jurisdiction to the English courts. The District Court granted the motion to dismiss and plaintiffs now appeal, arguing that the forum selection clauses deprive them of their substantive rights under the Ohio securities laws and that Ohio public policy outweighs the policies served by enforcing the forum selection clauses. For the following reasons, we affirm.
I.
The Society [**2] of Lloyd's, or Lloyd’s of London, (“Lloyd's”) is not an insurance company, but rather is an insurance marketplace in which individual Underwriting Members, or Names, join together in syndicates to underwrite a particular type of business. The Corporation of Lloyd’s (“Corporation”), which was created by an Act of Parliament, regulates the Lloyd’s insurance market. The Corporation itself does not underwrite any insurance, but provides facilities and services to assist underwriters. The Corporation is managed by the Council of Lloyd’s (“Council”) which controls the admission and discipline of Names, sets the Names’ reserve requirements and establishes standards for Lloyd’s policies.
To become a Name, one must apply and be sponsore.
Vendome Real Estate Media is proud to present the top five stories from 2016 from the Commercial Tenant's Lease Insider.
Stories include:
- Make Sublet Deal Work for You
- Get Nine Protections When Leasing Property for Your Cannabis Business
- And more!
Balancing the right of a cotenant to develop his oil and gas rights and the rights of an unwilling or unlocatable cotenant has become an increasing challenge for industry and landowners alike. This PowerPoint was presented at the PBI Sixth Annual Oil and Gas Law Colloquium in a program examining current Pennsylvania law relating to unleased, undivided fractional interests.
Distressed asset sales both in bankruptcy and out-of-court alter Feb 2015 Polsinelli PC
Given the economic downturn of recent years, professionals' fees and costs have been a driving factor in conducting the acquisition of distressed assets. A majority of these transactions take place pursuant to section 363 of the Bankruptcy Code. However, out-of-court alternatives such as Receiverships, Assignments for the Benefit of Creditors, and Article 9 of the Uniform Commercial Code have gained momentum to bankruptcy as expeditious and cost-efficient alternatives.
This webinar focuses on the sale of distressed assets under each of these alternatives, including bankruptcy and a special emphasis on the sale or acquisition of distressed health care assets.
Car Accident Injury Do I Have a Case....Knowyourright
Every year, thousands of Minnesotans are injured in car accidents. These injuries can be severe – even life-changing. Under Minnesota law, you can pursue compensation through a personal injury lawsuit.
A "File Trademark" is a legal term referring to the registration of a unique symbol, logo, or name used to identify and distinguish products or services. This process provides legal protection, granting exclusive rights to the trademark owner, and helps prevent unauthorized use by competitors.
Visit Now: https://www.tumblr.com/trademark-quick/751620857551634432/ensure-legal-protection-file-your-trademark-with?source=share
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The committee’s focus was on ensuring the safety and security of individuals, communities, and the nation as a whole. Throughout its deliberations, the committee aimed to uphold constitutional values such as justice, dignity, and the intrinsic value of each individual. Their goal was to recommend amendments to the criminal laws that align with these values and priorities.
Subsequently, in February, the committee successfully submitted its recommendations regarding amendments to the criminal law. These recommendations are intended to serve as a foundation for enhancing the current legal framework, promoting safety and security, and upholding the constitutional principles of justice, dignity, and the inherent worth of every individual.
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Victims of crime have a range of rights designed to ensure their protection, support, and participation in the justice system. These rights include the right to be treated with dignity and respect, the right to be informed about the progress of their case, and the right to be heard during legal proceedings. Victims are entitled to protection from intimidation and harm, access to support services such as counseling and medical care, and the right to restitution from the offender. Additionally, many jurisdictions provide victims with the right to participate in parole hearings and the right to privacy to protect their personal information from public disclosure. These rights aim to acknowledge the impact of crime on victims and to provide them with the necessary resources and involvement in the judicial process.
5. Ok, there are also
“in kind” Royalty Clauses,
but let’s move on …
5
6. “Sales Based” Royalty Clauses
The royalty owner’s payment is based on a “sale,”
but not always a sale by the lessee.
The “sale” may be one by a non-affiliate.
The “sale” may occur at a location, regardless of
the parties to the transaction.
Examples include, but are not limited to:
Gross proceeds received
Sometimes, just “proceeds”
Net proceeds received
Amount realized
6
7. “Market Based” Royalty Clauses
The royalty owner’s payment is based on market conditions, not an
actual transaction.
In theory, the price received by the lessee is not determinative.
Examples include, but are not limited to:
Market value
Highest posted price
Average price received in the field
Best price received in the field
7
8. “Hybrid” Royalty Clauses
The royalty owner’s payment can be based on the “higher
of” a market valuation and sales valuation.
Examples include, but are not limited to:
The higher of market value and the net proceeds received by
the lessee.
8
9. The Valuation Point Can Vary
Common valuation points include, but are not limited to:
Valued “at the well” or the “mouth of the well”
Valued at the “point of sale” or the “first sale to an
unaffiliated third-party”
Valued at the “delivery point”
9
10. Remember to Look For Defined Terms
Leases are “contracts” and courts will construe them as
such.
“Industry custom” will only take you so far …
It is not uncommon for leases to have defined terms
which dictate what will constitute things such as a “sale”
or “market value.”
10
12. Typical Types of Royalty Disputes
Failure to pay royalties
Underpayment of royalties
Overpayment of royalties
12
13. Complete Failure to Pay Royalty
Royalty owners can assert a claim as a “breach of contract” (ie, the
lease) and/or under the Texas Natural Resources Code.
The Texas Natural Resources Code provides for certain safe harbors, if:
The royalty owner has refused to sign a division order that complies
with the statute;
Royalty is being withheld because of a bona fide title dispute;
But, make sure that the lease does not override a safe harbor.
13
15. Underpayment of Royalty
These cases are usually determined after an audit.
Common reasons for underpayment of royalty cases
include, but are not limited to:
Disputes over “no-deduct” clauses.
Disputes over lease interpretation of “how” production is
valued and/or “where” it is valued.
Disputes over the impact of pooling and/or PSA wells.
15
16. Heritage Resources v. Nationsbank
939 S.W.2d 118 (Tex. 1996)
Royalty on gas was to be calculated by the “market
value at the well.”
The lease contained a “no-deducts” clause (ie, royalty
not chargeable with post-production costs).
16
17. Heritage Resources v. Nationsbank
939 S.W.2d 118 (Tex. 1996)
A split court (5-2-2) held that the “no deducts” clause
was mere surplusage (it was meaningless) because
royalty calculated “at the well” prior to any post-
production costs being incurred.
Decision permits a lessee to use the “netback method”
or the “comparable sales method” of determining
royalty.
17
18. Hyder v. Chesapeake
The overriding royalty provision provided for a “perpetual, cost-free
(except only its portion of production taxes) overriding royalty of five
percent (5.0%) of gross production obtained.”
A clause provided that “each Lessor has the continuing right and
option to take its royalty share in kind.”
A so-called anti-Heritage clause which provided that “Lessors and
Lessee agree that the holding in the case of Heritage Resources,
Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) shall have no
application to the terms and provisions of this lease.”
18
19. Unusual Issues with Hyder
The royalty was paid as a surface use payment, but was incorrectly
referred to as an “override.”
There was no valuation point. There was a reference to receiving a
portion of the “gross production,” but this is a metric of volume, not
valuation.
The opinion reveals no contention (from any party) that the
provision described an “in-kind” royalty, which it arguably is.
19
20. Overpayment of Royalty
Generally arise when the lessee is confronted with a
demand for royalty which reveals an error in the way the
lessee has been paying royalty.
Suit is brought by the lessee against the royalty owner to
recover overpayments.
These cases can turn on the reason for the overpayment.
20
21. Amoco Production v. Smith
Amoco owed royalty to H.W. Smith, but paid the wrong H.W. Smith.
Once the issue was raised by the correct H.W. Smith, Amoco sued the
party that was paid in order to recoup the improperly paid royalties.
This was a mistake of fact because Amoco intended to pay the
correct person, but erroneously paid the wrong person with the same
name. The result could be different if Amoco made a mistake of law.
21
23. Common Remedies Sought
by Royalty Owners
Money (unpaid royalties)
Interest
Can be recovered by contract and/or by statute
Rates can vary
Watch for issues of compounding vs. simple interest
Attorneys’ Fess
Can be recovered by contract and/or by statute
23
24. Some Leases Provide For Lease
Termination
Be aware of the remedies provided in a lease.
Some leases provide that the lease will terminate if the
royalties are not timely and properly paid.
Courts consider these types of clauses “forfeiture” clauses,
which are disfavored.
But be cautious anyway!
24
28. Post-Production Cost Litigation
Numerous cases over the past five years.
Typically involve a variation of the dispute in the Heritage
case.
Can be complicated:
Midstream agreements
Affiliate sales
Evolving technologies: production costs or post-production?
28
29. Heritage Resources v. Nationsbank
One of the most cited cases on this topic.
Describe the “netback method” and “comparable sales”
method to determining market value.
“Anti-Heritage” clauses have arisen in oil and gas leases.
Their effect, if any, is debatable.
29
30. French v. Oxy
Although having different royalty provisions, the French court found that both leases
provided that the royalty owner would not bear any production expenses but
would bear at least some post-production costs.
One lease valued production “at the well” and the other lease valued
production prior to the first sale.
Oxy performed a CO2 flood in a field with 106 wells. Producing casinghead gas
contained 85% CO2.
Oxy paid royalty based on 70% of the NGLs produced, but not on the other 30%
which was paid to Kinder Morgan in kind as part of Kinder Morgan’s compensation
for constructing a plant to remove most of the CO2 and H2S. Oxy did not pay any
royalty on any residual gas, 100% of which was given in kind to Kinder Morgan. Oxy
considered a monetary fee paid to Kinder Morgan to be a production expense..
30
31. French v. Oxy 31
KM plant
removes Most
of the CO2 and
H2S
Torch Energy
removes the
remaining CO2
and H2S
Field
Oil and Gas
produced from
the field with
CO2
32. Chesapeake v. Hyder
French v. Oxy was not cited in the Court’s opinion.
Seems that the Court could have held that the royalty
provision was an “in kind” royalty and the Hyders must bear
post production costs if they permit their gas to be sold with
Chesapeake’s gas.
The Supreme Court noted that no party argued that the
royalty should be construed to be an in kind royalty.
32
33. PSA Well Litigation
Disputes of “PSA Wells” generally come in two forms:
Contractual authority for the lessee to drill a PSA well
Some believe this to be a form of “pooling”
The Texas Railroad Commission does not consider this to be
pooling
Issues on allocation of royalty
This is a topic which will likely be addressed by the courts
and/or the Legislature
33
34. Authority for Lessee to Drill
The Texas Railroad Commission seems to have concluded
that lessees do not need pooling authority to drill a
production sharing well.
The issue was disputed in the “Klotzman” well protest
The subject of debate
Rival articles have been published within the past few months
34
35. Allocation of Royalty
Royalty payment issues can arise when a PSA well is drilled
without agreement on apportionment of production to
various tracts.
Litigation on this issue is risky for both parties.
The industry and others are working to obtain action from
the Legislature.
35
36. Browning Oil Company v. Luecke
Lessee create a unit which did not comply with pooling
restrictions.
Lessors sought to nullify the unit and claimed entitlement to
royalty based on 100% of production, regardless of whether
the production came for the Lessors’ property.
Court held that the Lessors were only entitled to royalty from
their specific property.
36
37. Bad Faith Pooling
This is an area that is seeing a slight resurgence, but we
could see more.
New issues are implicated when pooling horizontal wells.
The downturn in the industry could result in a spike in
pooling litigation.
37