Annual Oil & Gas Case Law Update 2016

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1 Annual Oil & Gas Case Law Update 2016 Christopher S. Kulander Director & Professor, Harry L. Reed Oil & Gas Law Institute, South Texas College of Law Houston Of Counsel, Haynes and Boone, LLP

2 Need Energy-Related Ethics Hours? -We have them!

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4 30 th Annual Energy Law Institute for Attorneys and Landmen -The Institute s Institute! August 30-31, 2017 (Wednesday & Thursday the week before Labor Day weekend)

5 Topics for Discussion Evidentiary requirements for nuisance/ negligence Fixed vs. Floating Royalty the TxSC weighs in Preemption of local ordinances by state regs Are multi-tract NPRIs appurtenances to individual tracts? Groundwater & the Accommodation Doctrine Clarifying pipeline eminent domain authority And more!

6 Crosstex North Texas Pipeline, L.P. v. Gardiner Texas Supreme Court, 2016 (No ) Question presented: Was noise from a compressor station an actionable nuisance? What is nuisance in Texas? Background: Crosstex owned and operated a natural-gas pipeline that ran approximately 130 miles from Tarrant to Lamar County. Purchased a 20-acre tract along pipeline path in rural Denton County to use as a storage yard and a compressor station. Gardiners owned an undeveloped 95-acre ranch SW corner of lay directly across a public road from Crosstex s 20-acre tract. Sold Crosstex easement to run the pipeline across the southwest corner of the ranch.

7 Crosstex North Texas Pipeline, L.P. v. Gardiner Texas Supreme Court, 2016 (No ) Background (cont.) Compressor station led to multiple noise complaints Crosstex held public meeting, then constructed: a partially enclosed pavilion around the engines, installed sound blankets inside the building s walls, installed sound walls on three sides of the building, and planted vegetation around the building and walls. May 2008, Gardiners file suit, initially claiming private nuisance, ordinary negligence, and gross negligence. Amended petition to allege that Crosstex had both intentionally and negligently created a nuisance.

8 Crosstex North Texas Pipeline, L.P. v. Gardiner Texas Supreme Court, 2016 (No ) Trial court: directed a verdict for Crosstex on the ordinary negligence claim but allowed the jury to consider the nuisance claim The jury failed to find that Crosstex intentionally and unreasonably created a nuisance as to the Gardiners ranch but did find that Crosstex had negligently created a permanent nuisance resulting in a diminution of ranch s fair market value by $2 million. Crosstex appealed

9 Crosstex North Texas Pipeline, L.P. v. Gardiner Texas Supreme Court, 2016 (No ) Fort Worth Court of Appeals: while the evidence was legally sufficient, it was not factually sufficient to support the jury s finding of a negligently created nuisance. trial court erred by denying Gardiners request for a jury question asking whether Crosstex created a nuisance through behavior that was abnormal and out-of-place. The court reversed and remanded the case for a second trial where the Gardiners could add the abnormal and out-of-place variation of their nuisance claim. Both parties appealed.

10 Crosstex North Texas Pipeline, L.P. v. Gardiner Texas Supreme Court, 2016 (No ) TX Supreme Court law analysis Nuisance: a legal injury that may support a cause of action, but it is not itself the cause of action or conduct that is necessary to support cause of action. Plaintiff must prove: interference is substantial, and the resulting discomfort, annoyance is unreasonable: Focus on interference s effect on the plaintiff Objective standard Case specific and fact-intensive but need not establish that defendant s conduct or land use was unreasonable.

11 Crosstex North Texas Pipeline, L.P. v. Gardiner Texas Supreme Court, 2016 (No ) TX Supreme Court law analysis (cont.) Injury is not enough: must be caused by an identifiable legal wrong violation of a legal right caused a breach of a legal duty by respondent Not a showing by claimant that respondent acted or used respondent s real property unlawfully or illegally. Here, the Court lengthily described 3 liability categories: intentional nuisance negligent nuisance (at issue in the case) strict-liability nuisance Three general remedies are available to claimants: damages injunctive relief, and self-help abatement

12 Crosstex North Texas Pipeline, L.P. v. Gardiner Texas Supreme Court, 2016 (No ) TX Supreme Court case analysis Issues raised by parties on appeal to TxSC: Crosstex: evidence legally insufficient for jury finding Gardiners: wrong standard of review used in finding that the evidence was factually insufficient Evidence of Nuisance: Did Crosstex negligently create a nuisance as to the [Gardiner s property]? ( Nuisance then defined legal injury.) Jury: Yes ; TxSC: Both sides presented evidence and jury found for Gardiners. Evidence legally sufficient! Also: Crosstex s efforts to mitigate suggestive of nuisance? Page 44 of opinion

13 Crosstex North Texas Pipeline, L.P. v. Gardiner Texas Supreme Court, 2016 (No ) TX Supreme Court case analysis (cont.) Factual evidence of Negligence: TxSC found that the court of appeals had sufficiently considered and weighed the evidence and its conclusions that (1) the decision of the jury was contrary to the overwhelming weight of the evidence presented by Crosstex and (2) that a new trial should be conducted were therefore necessarily sound. Remanded affirmed call for a new trial

14 Hysaw v. Dawkins Texas Supreme Court, 2016 (No ) Question presented: fixed vs. floating non-participating royalty interest ( NPRI ) battle in will from 1947 Background: Ethel Hysaw owned three tracts in Karnes County, Texas a 1,065-acre tract, a 200-acre tract, and a 150-acre tract. Her will divided a fee-simple interest in the 1,415 acres of property among her three children as follows: to Inez Hysaw Foote, 600 acres; to Dorothy Francis Hysaw Burris, 465 acres; and to Howard Caldwell Hysaw, Jr., 350 acres. Regarding the related mineral estates, the testatrix changed her allocation methodology, encumbering each tract thusly:

15 Hysaw v. Dawkins Texas Supreme Court, 2016 (No ) I will and bequeath to each of the above named children fee simple title to the lands designated to go to them, subject, however, to the following: That each of my children shall have and hold an undivided one-third (1/3) of an undivided one-eighth (1/8) of all oil, gas or other minerals in or under or that may be produced from any of said lands, the same being a nonparticipating royalty interest... [emphasis by Court]

16 Hysaw v. Dawkins Texas Supreme Court, 2016 (No ) Next, three identical royalty clauses: [T]hat is to say, that... [the named child] shall not participate in any of the bonus or rentals to keep any lease or leases in force; that it shall not be necessary for the said [named child] to execute any oil, gas or mineral lease over the lands of [the siblings], and that it shall not be necessary for [the named child] to obtain the consent either orally or written of the said [siblings], to lease any portion of said land so willed to [the named child] for oil, gas or other minerals, but that the said [named child] shall receive one-third of one-eighth royalty, provided there is no royalty sold or conveyed by me covering the lands so willed to [the child]... [emphases by Court]

17 Hysaw v. Dawkins Texas Supreme Court, 2016 (No ) In 1946, Ethel granted equal royalty interests to each child in the two tracts comprising the 350 acres received by Howard Hysaw, Jr. Two years later, she granted the surface estate in 200 acres to Howard Hysaw, Jr. After Ethel died in 1949, the rest of her real property passed under her will. The three Hysaw children later died, and their property interests in the captioned land passed to other successors.

18 Hysaw v. Dawkins Texas Supreme Court, 2016 (No ) Much later, a lease with a 1/5 lessor s royalty was executed over the 600-acre tract of Inez Foote, and a conflict ensued concerning the measurement of the NPRIs that burdened the lands. Inez Foote s successors claimed that the 600-acre tract of Inez Foote and the 465-acre tract of Dorothy Burris were each burdened with three NPRIs fixed at 1/24 (each being one-third of a fixed 1/8), and that any royalties in excess of the NPRIs were reserved by the fee owner. The successors of Dorothy Burris and Howard Hysaw, Jr., asserted that tracts were burdened with a floating NPRI of 1/3 of any lessor s royalty obtained (1/3 of 1/5, or 1/15, for each successor under the current lease) and that this interpretation was supported by language in the will providing intent for each sibling to receive an equal share of royalties.

19 Hysaw v. Dawkins Texas Supreme Court, 2016 (No ) Trial court finds floating NPRIs, CoA reverses CoA: Each clause individually was found to comport with prior fixed NPRI language. Tx SC reversed on January 29, 2016 Yes, without other indicators of intent, reasonable to interpret the double fraction as a devise of a fixed 1/3 of 18 to each of Ethyl Hysaw s children, but interpreter must consider entire instrument

20 Hysaw v. Dawkins Texas Supreme Court, 2016 (No ) Reasons TxSC found floating NPRIs: (1) the deliberate recitation of identical language to effect each child s royalty inheritance; (2) the use of double fractions in lieu of single fixed fractions, with one fraction connoting equality among the three children (1/3) and the other raising the specter of estate misconception or use of the then-standard 1/8 royalty as a synonym for the landowner's royalty; (3) the first royalty provision s global application to all the children and the second provision s language restating the royalty devise of each child individually; and (4) the equal-sharing language in the third and final royalty clause

21 BCCA Appeal Group, Inc. v. City of Houston No (Tex., Apr. 29, 2016) Questions presented: Are enforcement & registration provisions in a Houston air quality ordinance preempted by the Texas Clean Air Act? Does incorporation into the ordinance of TCEQ rules violate the nondelegation doctrine of the Texas constitution? Background: In 2007/08, Houston amended its existing air quality ordinance to establish its own regulatory-compliance program and adopted a fee schedule to fund the program. The amendments also incorporated TCEQ regulations by reference and made it unlawful to operate an unregistered regulated facility inside Houston s limits

22 BCCA Appeal Group, Inc. v. City of Houston No (Tex., Apr. 29, 2016) The BCCA Appeal Group ( BCAA operators of integrated chemical manufacturing plants and refineries in the Houston area) sued. Trial Court: preempted; Court of Appeals: reverse Rules are not preempted and do not violate the nondelegation doctrine of Texas Constitution. TxSC: Ground rule: ordinance is unenforceable to the extent that it is inconsistent with state statutes Finds unmistakable intention to preempt by legislature any inconsistent local acts

23 BCCA Appeal Group, Inc. v. City of Houston No (Tex., Apr. 29, 2016) TxSC analysis (cont.) the rules converted a primarily administrative and civil enforcement regime under state law into a primarily criminal enforcement regime moved primary enforcement authority from the agency that can ensure consistent enforcement across the state into the hands of the local officials disrupts sought-after uniformity State law recognized that a city had a right to enact ordinances to control air pollution with two limitations: (1) the ordinance must not be inconsistent with the Act or rules or orders of the TCEQ; and (2) the ordinance must not make unlawful a condition or act approved or authorized under [the Act] or the [TCEQ s] rules or orders.

24 BCCA Appeal Group, Inc. v. City of Houston No (Tex., Apr. 29, 2016) Problem with registration ordinance: Facility allowed by state law could violate ordinance contrary to state law s language Nondelegation: can a city delegate its lawmaking authority to a state agency? Generally, no but narrowly applied in Texas Here, because the state law recognized a city s authority to enact ordinances consistent with it, an ordinance incorporating the agency s rules as they exist and as they may be amended did not violate the nondelegation doctrine of the Texas constitution.

25 Coyote Lake Ranch, LLC v. City of Lubbock No , 2016 Tex. LEXIS 415 (Tex. May 27, 2016) Question presented: Is development of groundwater subject to the accommodation doctrine? Background: In 1953, Lubbock purchased the Coyote Ranch s groundwater to supply the city and vicinity. In the deed, the ranch reserved water for domestic, ranching, oil and gas, and agricultural use. City was provided surface use rights, including the rights necessary or incidental to the taking, production, treating, transmission, and delivery of water. In 2012, city ramped up development. Ranch complains

26 Coyote Lake Ranch, LLC v. City of Lubbock No , 2016 Tex. LEXIS 415 (Tex. May 27, 2016) Trial Court: grants temporary injunction City: no accommodation doctrine applies Court of Appeals: removes injunction TxSC: Instrument silent on implied right to use surface reiterated the key principle of the doctrine: conflicting estates should consider and accommodate one another s rights. Notes similarities of groundwater to minerals

27 Coyote Lake Ranch, LLC v. City of Lubbock No , 2016 Tex. LEXIS 415 (Tex., May 27, 2016) Accommodation Doctrine (1) the groundwater owner s use of the surface prohibits or substantially precludes the surface s existing use; (2) the surface owner does not have a reasonable alternative; and (3) the groundwater has other available, industryaccepted, alternatives, so that the surface owner can continue his existing use.

28 Denbury Green Pipeline-Texas v. Texas Rice Land Partners, Ltd. No (Tex., Jan. 6, 2017) Concept presented: Clarifying pipeline eminent domain authority Background: Denbury wanted pipeline and claimed common carrier status as required by RRC for eminent domain. Texas Rice sues, arguing that RRC box checking doesn t automatically get one common carrier status TxSC in 2012: Mere assertions of possibility of future public use insufficient for common carrier status

29 Denbury Green Pipeline-Texas v. Texas Rice Land Partners, Ltd. No (Tex., Jan. 6, 2017) Beaumont Court of Appeals: Denbury required to show a (1) reasonably probable future use that (2) would serve a substantial public interest. TxSC: Denbury qualified as common carrier as a matter of law showed a reasonable probability that, after construction, it would serve the public. serve the public means pipeline must transport gas for one or more customers who will either retain ownership of their gas or sell it to parties other than the carrier

30 Aery v. Hoskins, Inc. No CV (Tex. App. San Antonio, Mar. 30, 2016 pet. granted) Question presented: Is a royalty interest covering three pooled tracts appurtenant only to one tract of conveyed land? Background: In 1957, Rose Quinn conveyed the mineral estate of her Quinn Ranch to her three children: Hazel Hoskins, Sam Quinn, and Frances Ray. Rose partitioned and conveyed the surface estate to the children in Subsequently, the three children executed a Sibling Agreement containing various provisions, including: a pooling agreement with regards to royalties, and a cross-conveyance provision. One of the siblings, Sam Quinn, eventually conveyed the majority of his interests through two separate deeds: The first deed involved a conveyance to his sister, Hazel Hoskins. The second deed involved a conveyance to James House.

31 Aery v. Hoskins, Inc. No CV (Tex. App. San Antonio, Mar. 30, 2016 pet. granted) Deed 1: On February 8, 1966, Sam Quinn conveyed his tract of acres to James House, together with all and singular rights and appurtenances thereto in anywise belonging. Did not mention any reservation of rights or any pooled, shared, or undivided royalty interest in other tracts of the Quinn Ranch. Deed 2: On February 11, 1966, Sam Quinn executed a deed to his sister, Hazel Hoskins, and brother in law, L.R. Hoskins. The deed conveyed all of Sam s right, title, and interest in and to the tracts belonging to Hazel Hoskins and Frances Ray. Trouble with the deeds question: Did the Sibling Agreement create an undivided royalty interest in each of the three individual tracts of land 3x separate NPRIs? or Did it create an undivided royalty interest in the entirety of the (mighty) Quinn Ranch

32 Aery v. Hoskins, Inc. No CV (Tex. App. San Antonio, Mar. 30, 2016 pet. granted) Essentially, two possible title chains! Court a question of law: Nature of the royalty interest from production on Hazel Hoskins and Frances Ray s tracts of land Question: Were these interests appurtenant or personal to Sam Quinn s, and now House s, tract of land? Noting that Sam s royalty interests from the Hoskins and Ray tracts were not necessary to the use and enjoyment of Sam s tract of land, court concluded that Sam s undivided royalty interest in his tract was separable from his undivided royalty interest held in Frances and Hazel s tracts.

33 Haider v. Jefferson Cty. Appraisal Dist. No CV, 2016 WL (Tex.App. Beaumont Apr. 14, 2016) (memorandum opinion) Question presented: If a leased tract located outside of a taxing unit is brought into a pool that is partially inside the limits of the taxing unit, can the owner be taxed? Background: The owners of a acre tract that lay outside the tax boundary of Beaumont apparently leased all or a portion of the tract to Cimarex Energy Co. Subsequently, acres of the acre tract was pooled into a 425-acre gas unit. The pool lay mostly, but not entirely, within Beaumont s tax boundary. Cimarex brings in production in the gas unit. Appraisal district wants to levy ad valorem taxes.

34 Haider v. Jefferson Cty. Appraisal Dist. No CV, 2016 WL (Tex.App. Beaumont Apr. 14, 2016) (memorandum opinion) Trial court held: royalties were taxable based on the % of the minerals associated with the acre tract represented in the total pooled acreage two of the plaintiffs had forfeited their rights to challenge the ad valorem assessment in 2012 because they had failed to timely pay that year s assessment before the assessment became delinquent.

35 Haider v. Jefferson Cty. Appraisal Dist. No CV, 2016 WL (Tex.App. Beaumont Apr. 14, 2016) (memorandum opinion) Court of Appeals: Found the taxing power to be limited to real property located inside the boundaries of the city. 1 Taxing unit must show that the assessed property lies inside the unit s boundaries. 2 If parcel does not lie in city, it cannot be taxed. 3 While a taxing unit can tax minerals in place, code and case law do not address ability of pooling to bring into the taxing unit a part of the pool that lies outside the taxing unit. 1 TEX. TAX CODE ANN (West 2015). 2 Oake v. Collin Cty., 692 S.W.2d 454, 455 (Tex. 1985). 3 Devon Energy Prod., L.P. v. Hockley Cty. Appraisal Dist., 178 S.W.3d 879, 883 (Tex. App. Amarillo 2005, pet. denied).

36 Haider v. Jefferson Cty. Appraisal Dist. No CV, 2016 WL (Tex.App. Beaumont Apr. 14, 2016) (memorandum opinion) Court of Appeals: Was there a cross-conveyance? Need the leases! Must examine the pooling clauses. 1 But somehow the trial court had issued SJ without looking at the leases, only memorandum of same Reversed. Get the leases. Also: 2 parties could challenge Quasi-estoppel did not apply. Pooling Acquiescence Consider city limits when pooling! Consider pooling clause language! 1 Veal v. Thomason, 159 S.W.2d 472, 476 (Tex. 1942).

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38 Some other cases in the associated paper not mentioned Apache Deepwater, LLC v. McDaniel Partners, Ltd. 1 Do production payments survive termination of the oil and gas leases from which they were derived? Adams v. Murphy Exploration & Production Co.-USA 2 What comprises an adequate offset well? Samson Lone Star Ltd. P ship v. Hooks 3 Can an imprecise calculation of a well s location can be actionable as a fraudulent misrepresentation? And ten more cases! 1 : Tex., Feb. 26, : Tex App. San Antonio, Jun. 15, : Tex. App. Houston [1st Dist.], Mar. 15, 2016

39 Finally A Couple of Sources Journal: Oil & Gas, Natural Resources, and Energy Journal ( ONE-J ), University of Oklahoma Primer: Texas Law of Oil & Gas Joseph Shade Casebook/Hornbook: LOWE, ANDERSON, SMITH, PIERCE & KULANDER, CASES AND MATERIALS ON OIL & GAS LAW (6 th ed. Thomson/West 2012). AND 2015 Forms Manual! Energy News Aggregator: Real Clear Energy:

40 Thank you! Christopher S. Kulander Director & Professor, Harry L. Reed Oil & Gas Law Institute, South Texas College of Law Houston Of Counsel, Haynes and Boone, LLP