2013 Oil & Gas Case Law Update. January 28, 2014

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1 HOUSTON BAR ASSOCIATION OIL, GAS & MINERAL LAW SECTION 2013 Oil & Gas Case Law Update January 28, 2014 Christopher Kulander, Assistant Professor of Law, Texas Tech School of Law Of Counsel, Haynes and Boone, LLP Anh Tran, Texas Tech School of Law JD Candidate, 2014 Monica Hart, Texas Tech School of Law JD Candidate, 2015 TABLE OF CONTENTS Texas and Vicinity... 1 Total E & P USA, Inc. v. Kerr-McGee Oil & Gas Corp Phillips Petroleum Co. v. Yarbrough... 2 Key Operating & Equip., Inc. v. Hegar... 3 Springer Ranch, Ltd. v. Jones... 4 Richmond v. Wells... 7 Merriman v. XTO Energy, Inc Wynne/Jackson Dev., L.P. v. PAC Capital Holdings, Ltd... 9 Graham v. Prochaska Crosstex NGL Pipeline, L.P. v. Reins Road Farms 1, LTD Crawford Family Farm Partnership v. TransCanada Keystone Pipeline, L.P Colt Unconventional Resources, LLC v. Resolute Energy Corporation Other States Robinson Township v. Commonwealth of Pennsylvania Stone v. Chesapeake Appalachia, LLC Bilbaran Farm, Inc. v. Bakerwell, Inc State ex rel. Morrison v. Beck Energy Corp Elm Ridge Exploration Co., LLC v. Engle Clovelly Oil Co., LLC v. Midstates Petroleum Co., LLC... 28

2 Texas and Vicinity Total E & P USA, Inc. v. Kerr-McGee Oil & Gas Corp. Opinion No , 711 F.3d 478 (5th Cir. 2013), 2013 WL , 2013 U.S. App. LEXIS 4963; vacated & superseded by Total E & P USA, Inc. v. Kerr-McGee Oil & Gas Corp., 719 F.3d 424 (5th Cir. 2013), 2013 WL , 2013 U.S. App. LEXIS On June 20, 2013, the United States Court of Appeals for the Fifth Circuit vacated and superseded its prior opinion involving whether, pursuant to a contract, lessees had to pay overriding royalties on the initial oil and gas production on a property located on the Outer Continental Shelf ( OCS ) adjacent to Louisiana. In 1998, the United States gave oil companies ( Lessees ) a mineral lease to a property located on the OCS. In 1999 and 2001, overriding royalty interests were assigned to seven individuals (collectively, the Belcher Group ) and Kerr-McGee Oil and Gas Corporation ( Kerr-McGee ) from the lessees working interest. In 2009, when production was achieved, the working interest in the lease belonged to three oil companies: Chevron USA, Inc. ( Chevron ); Total E & P USA, Inc. ( Total ); and Statoil Gulf of Mexico, L.L.C. ( Statoil ). While Chevron soon thereafter paid the overriding royalties to the Belcher Group and Kerr-McGee, Total and Statoil did not pay based on their interpretation of the calculate and pay clauses within the mineral lease. These calculate and pay clauses provided that [t]he overriding royalty interest assigned herein shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner s royalty under the Lease. Total and Statoil asserted that the calculate and pay clauses were meant to suspend the requirement of payment of the overriding royalty to the Belcher Group and Kerr-McGee as long as the 12.5% payments of the lessor s royalty were (possibly) suspended under the terms of the mineral lease due to the Outer Continental Shelf Deep Water Royalty Relief Act (the DWRRA ). The DWRRA, enacted in 1995, authorized the U.S. Department of Interior to suspend the collection of royalties by the U.S. from certain oil and gas leases until a certain production had been achieved in an effort to promote offshore development in the OCS. The Belcher Group and Kerr-McGee, however, asserted that the calculate and pay clauses were meant only to denote how their overriding royalties were to be calculated and paid, not to tie payment of the overriding royalties to the lessor royalties owed the federal government. When Total and Statoil moved the district court for summary judgment, the Belcher Group and Kerr-McGee responded with affidavits and evidence that the court deemed to be extrinsic and, ultimately, did not consider. The district court granted summary judgment in favor of Total and Statoil, and the Belcher Group and Kerr-McGee appealed. The appellate court reversed and remanded, concluding that the calculate and pay clauses were ambiguous and required further interpretation based on the parties intent. Citing the Louisiana Civil Code and the cases CLK Co., LLC v. CXY Energy, Inc. 1 and Henry v. Ballard & Cordell Corp., 2 the court determined that it must know the parties intent in order to interpret So.2d 1280, 1286 (La.Ct.App. 2007). 418 So.2d 1334, 1339 n.2 (La. 1982). 1

3 the overriding royalty contracts because the contracts did not include any explicit words that allowed the lessees to suspend overriding royalty payments in the event relief from paying lessor s royalty to the federal government was provided by the DWRRA. The court also cited Meeker v. Ambassador Oil Co. 3 for the proposition that overriding royalty interests are wellrecognized as being distinct from a lessor s royalty. As the calculate and pay clauses could be reasonably be interpreted two ways, either that the lessees shall calculate and pay overriding royalties using the same calculations that applied to the lessor s royalty or that the lessees could suspend payment of overriding royalties altogether during activation of royalty relief as provided by the DWRRA, the intent of the parties must be determined. Because neither the Belcher Group nor Kerr-McGee filed a cross motion for summary judgment or sought any other relief from the appellate court beyond a reversal of the district court s judgment, the appellate court did not consider the extrinsic evidence either of the two parties submitted to the district court. Rather, the court instructed the district court to consider relevant evidence when it interpreted the calculate and pay clauses on remand. Phillips Petroleum Co. v. Yarbrough Opinion Nos , , 405 S.W.3d 70 (Tex. 2013), 56 Tex. Sup. Ct. J. 725, 2013 WL , 2013 Tex. LEXIS 494. In a decision handed down on June 21, 2013, the Texas Supreme Court found that a trial court must recertify a class when the class adds a new claim for breach of the implied duty to market to its petition. Furthermore, a party can pursue an interlocutory appeal of the trial court s decision to allow the opposing party to proceed with the new claim without first recertifying the class. In Yarbrough, royalty owners brought a class action against Phillips Petroleum Company ( Phillips ), alleging that Phillips had underpaid oil and gas royalties. Royce Yarbrough ( Yarbrough ) was among the royalty owners who brought the suit and became the representative of the class at issue in this case. In 2008, the Texas Supreme Court affirmed decertification of two subclasses, reversed decertification of another, and remanded the issue of that certification back to the trial court with instructions for the trial court to conduct a res judicata analysis regarding that class s potential for certification. 4 On remand, Yarbrough amended her petition to include a new claim. Specifically, she additionally alleged that Phillips had breached the implied covenant to market contained in the gas royalty agreements, which subsequently led Phillips to underpay the royalty owners. Over Phillips s objections, the trial court allowed Yarbrough to add her implied covenant claim without a new certification motion or hearing. Phillips then filed a notice of interlocutory appeal and a petition for writ of mandamus to the court of appeals. Relying on De Los Santos v. Occidental Chemical Corp., 5 the court of appeals dismissed the appeal for want of jurisdiction F.2d 875, 882 (10th Cir. 1962), rev d on other grounds, 375 U.S. 160, 84 S.Ct. 273, 11 L.Ed.2d 261 (1963). See Bowden v. Phillips Petrol. Co., 247 S.W.3d 690 (Tex. 2008). 933 S.W.2d 493 (Tex. 1996) (per curiam). 2

4 and denied the petition as well. Phillips then filed both a petition for review and writ of mandamus in the Texas Supreme Court. The Texas Supreme Court rejected the court of appeal s application of De Los Santos. Specifically, it noted that De Los Santos stood for the proposition that a party may appeal an order when the order changes the class in such a way as to raise significant concerns regarding whether the class should remain certified and, as such, alters the fundamental nature of the class. In this case, when the trial court denied Phillips s motions to dismiss, sever, or not include Yarbrough s implied covenant claim (collectively, Alternative Motions ), the trial court s order altered the class s fundamental nature because of two reasons. Citing Yzaguirre v. KCS Res., Inc., 6 the Texas Supreme Court noted that an entity could still breach an implied covenant to market whether or not it complied with the express terms of an agreement. Furthermore, before Yarbrough amended her petition on remand, her suit was based solely on her allegation that Phillips had violated the express terms of the agreement between it and the royalty owners. Thus, when Yarbrough amended her petition on remand, she altered the fundamental nature of the class rather than merely altering the class s attributes. While the trial court s order denying Phillips s Alternative Motions did not specifically certify or refuse to certify the class at issue, the Texas Supreme Court noted that the order had the effect of a class certification order. Because a party may file an interlocutory appeal on a class certification order, the Texas Supreme Court reversed the court of appeals and held that Phillips could appeal the trial court s denial of its Alternative Motions. The Texas Supreme Court went on to stress that the trial court should have carried out a rigorous analysis to determine whether it should certify the class. Specifically, because Yarbrough s new claim raised issues of typicality and predominance, the trial court had not adequately considered all the factors regarding whether the class should be certified. Citing Citizens Insurance Co. v. Daccach, 7 the Texas Supreme Court further emphasized that the trial court should have conducted a res judicata analysis regarding the class s potential for certification. The Texas Supreme Court thus remanded the case back to the trial court to determine whether the class should be certified. Key Operating & Equip., Inc. v. Hegar Opinion No CV, 403 S.W.3d 318 (Tex.App. Houston [1st Dist.] 2013), review granted (Dec. 13, 2013), 2013 WL , 2013 Tex. App. LEXIS 140. On January 7, 2013, the Houston Court of Appeals released the opinion of an appeal from the 21 st District Court in Washington County that considered a trespass action against mineral estate owner Key Operating & Equipment, Inc. ( Key ) to permanently enjoin Key s continued use of a road located on the property of surface estate owners Will and Loree Hegar (collectively, Hegar ). The road was used to facilitate production of oil from a neighboring property. In 1994, Key obtained an oil and gas lease covering a tract of land (that included the S.W.3d 368 (Tex. 2001). 217 S.W.3d 430 (Tex. 2007). 3

5 Curbo Tract ) that abutted a second tract of land (the Richardson Tract ) on which Key had been operating wells since As the Curbo Tract and the Richardson Tract were themselves contiguous, Key built a road across the Curbo Tract to access its wells on both tracts from 1994 on. In 2000, when the wells on the Curbo Tract stopped producing, Key pooled its mineral interests from both tracts. In 2002, Hegar became the surface estate owner to the Curbo Tract. When Hegar acquired the surface interest, Hegar had actual notice not only that the tract was subject to oil and gas leases but also that Key accessed its wells on the adjacent Richardson Tract via the road on the Curbo Tract. In December 2007, after Key drilled a new well on the Richardson Tract that led to a significant increase in the use of the road by Key, Hegar brought a lawsuit against Key for trespass and sought to enjoin Key from continued use of the road. After a bench trial, the trial court permanently enjoined Key from using the road on the Curbo Tract to produce oil on the Richardson tract. Key appealed. The court of appeals affirmed the trial court s judgment. The court first addressed whether Hegar was bound by Key s lease or pooling agreements. Because both agreements were outside of Hegar s chain of title and could not contractually expand Key s right to use Hegar s surface estate, the court held that Hegar was not bound by either of the agreements. After considering the accommodation doctrine and relying on Robinson v. Robbins Petroleum Corp., 8 the court then held that Key had the right to use Hegar s road so long as the oil that was produced from the pooled Richardson-Curbo tract included oil produced from the Curbo tract individually. Thus, Key could not use the road from one mineral estate to produce oil only from another mineral estate. Relying on Dyer v. Cotton, 9 the court of appeals remanded to the trial court the issue of whether Key was producing oil from the Curbo Tract. As the trial court found that Key was not currently producing oil from the Curbo Tract, the court of appeals affirmed. Springer Ranch, Ltd. v. Jones Opinion No CV, 2013 WL (Tex. App. San Antonio Dec 20, 2013, no pet. h.). On December 20, 2013, the San Antonio Court of Appeals released a decision interpreting and applying a 1993 contract (the Allocation Agreement ) between surface estate owners that allocated royalties to the owner of the surface estate on which such well or wells are situated, without reference to any production unit on which such well or wells are located to subsequently drilled horizontal wells. 10 The opinion supported calculating and allocating production from horizontal wells crossing multiple tracts based on the length of production casing in each tract in relation the entire productive length S.W.2d 685 (Tex. 1973). 333 S.W.3d 793 (Tex.App. Houston [1st Dist.] 2010, no pet.) Springer Ranch, Ltd. V. Jones, No CV, 2013 WL , at *1 (Tex. App. San Antonio Dec. 20, 2013, no pet. h.) 4

6 The original tract owner executed an oil and gas lease covering the entire tract in The original tract, at the time of litigation over fifty years later, had been subsequently divided into three separate tracts per the terms of a 1990 partition, each with different owners and multiple oil and gas operators. At the time of the Allocation Agreement, the tracts contained six vertical wells with two wells on each tract. To make royalty payment matters simple, the tract owners signed the Allocation Agreement, which allowed the owners to exclusively collect royalty payments from the two vertical wells on their respective tracts. The Allocation Agreement remained for twenty years until an operator drilled a horizontal well on one of the three tracts. The well started on the tract that belonged to Springer Ranch and continued under the contiguous Sullivan tract, another of the three original tracts. Productive intervals in the borehole were completed under both tracts. Sullivan attempted to negotiate with the operator in order to obtain a portion of the royalties from the horizontal well, but the negotiations fell through and the operator suspended further royalty payments. Springer Ranch subsequently sued Sullivan and other parties seeking a declaration stating that Springer Ranch was entitled to all royalties from the horizontal well drilled spudded on its property. Much of the disagreement centered on the meaning of the word situated in the Allocation Agreement. Plaintiff Springer Ranch argued that the Allocation Agreement stated that 100% of the royalties were to be paid to the owner of the surface estate where the wellhead is situation without regard to the likely location of actual hydrocarbon production. The defendants argued that situated meant all the tracts that the wellbore crossed and that it is therefore necessary for the operator to pay royalties to the owners of the surface estates of multiple tracts under which the productive portions of the well are located. The defendants also sought a declaration that all future horizontal well royalty payments be based on the location of the productive portions of the well. The trial court ultimately ruled for the defendants and found that horizontal well royalty payments are to be paid to the owner of the surface under which the productive portions of the well are located. The San Antonio court of appeals first considered the Allocation Agreement through the prism two long-established Texas canons of contract interpretation. When Texas courts deem contracts unambiguous, as was the Allocation Agreement in the present case, the court must construe the four corners of the contract to ascertain the intent of the parties based on the express contract language. The court looked to the parties objective intent, as opposed to subjective intent, in the contract by examining the contract as a whole and attempting to give meaning to every word. Courts also construe contracts from a utilitarian standpoint, considering the particular business activity provided for in the contract and then attempting to avoid an unreasonable, inequitable, or oppressive construction. The court of appeals used these interpretive tools when considering the terms well, on, and surface estate in the Allocation Agreement in order to determine the parties objective intent. First, the plaintiff s argued meaning of well included the top portion of the surface or hole where hydrocarbons exit only. The defendants argued that well should be construed to mean the entire underground structure where oil and gas is produced. The court noted both legal and lay authorities that have defined a well as a hole sunk in the earth where the presence of minerals are detected and produced. Technical, legal, and dictionary definitions that supported the defendants argument regarding the definition of well were noted. Because of the above definitions and the plaintiff s lack of support to establish that the term well equates 5

7 to wellhead, the court found that the well consisted of the entire underground portion where oil and gas is able to be detected and produced. Second, Springer Ranch also attempted to argue that the term on also indicated that the well on a surface estate meant the visible portion of the wellhead where production was separated. Because on is a universally vestal word, the court did not construe on to possess one meaning and therefore the term on did not affect the construction of the contract. Third, the court construed the term surface estate and analyzed the implications of the stated construction. The legal definition of surface estate is a legal unit of ownership in the physical land. However, in order to give one of the party s constructions meaning, the court construed surface estate to mean the portions of the earth, over which the surface estate owner holds dominion after a severance of the mineral estate. 11 The surrounding earth legally belongs to the surface estate owner as a real property right. 12 The mineral estate owner, on the other hand, possesses a real property interest in the hydrocarbons located in under the surface. The mineral owner does not have a real property right to the actual molecules residing underground, but rather an exclusive right to recover the hydrocarbons in a given area. 13 Here, the court equated the surface estate with the physical or corporeal structures of the earth over which the surface estate owner has dominion or owns because such a construction would be necessary if the Allocation Agreement was to be given meaning under either party s construction as separate surface and mineral estates do not come into existence until there is a grant of the minerals in a deed or lease, or a reservation in a conveyance. 14 Therefore, the court construed the term surface estate to mean the tracts over which the surface estate owner held dominion after a severance of the mineral estate and not only the surface estate where the wellhead was located. The defendants next argued that regardless of the construction of the above terms, the provision stating without reference to any production unit on which such well or wells are located prevented division of royalty payments between adjacent land owners. The court examined the facts and circumstances that led to the Allocation Agreement to find that the provision did not prevent the splitting of royalty payment between separate surface owners. The Allocation Agreement s intent was to remove a well s location in a production unit that included acreage from adjoining parties as a basis for one party demanding a portion of the royalties from the well. 15 The contract served to allocate royalty payments based on the physical location of a vertical well on a surface owner s estate as opposed to the location within a production unit consisting of multiple tracts. Because the purpose of the contract was meant to split royalties based on well location, not production unit location, the provision cannot be construed to prevent splitting of royalty payments between different surface owners. The final issue before the court involved the division and allocation formula for royalty payments. The defendant argued the allocation should be calculated by the distance between the well s first and last perforation points one discrete interval with each owner entitled to a percentage of royalty calculated upon the proportion of the length of the discrete interval Id. at *6. Id. at *7 (citing Emeny v. United States, 412 F.2d 1319, 1323 (ct. Cl. 1969)). Id. (citing Coastal Oil & Gas Corp v. Garza Energy Trust, 268 S.W.3d 1, 15 (Tex. 2008)). See Moser v. U.S. Steel Corp., 676 S.W.2d 99, 101 (Tex. 1984) Id. at *8. 6

8 traversing under a particular owner s tract compares to the total length of the interval. The plaintiff believed that the allocation should be based on the entire length of the well under each tract and not just the productive portions. The theory of each party would have yielded its proponent a higher royalty share than the theory of the opposing party. The court ruled for the defendant, theorizing that because a well produces hydrocarbons only over the interval of the well traversing the reservoir, the court ruled that the discrete interval of production is a more accurate method of apportioning royalties. The court s holding considered each foot of the production interval to be equally productive. The opinion also did not address a scenario where multiple productive intervals were interspersed with non-productive intervals. Richmond v. Wells Opinion No CV, 395 S.W.3d 262 (Tex.App. Eastland, 2012), 2012 WL , 2012 Tex. App. LEXIS 9929, reh g overruled, (Jan. 4, 2013). On November 30, 2012, the Eastland Court of Appeals issued an opinion considering a suit brought by T.N. Wells and Vicki Wells (collectively, Wells ) who sued Neil Edward Richmond, Mary Richmond Clark, and James B. Richmond (collectively, Richmond ) for declaratory relief arising from two successive deeds that appeared to pass the mineral estate to Wells from Richmond through an intermediary party. Richmond owned the surface and minerals of a property on which an operator, Endeavor Energy Resources, L.P., ( Endeavor ) completed an oil well. Richmond then conveyed the property to John D. Zugg III and Stacy M. Zugg (collectively, Zugg ) by warranty deed. Zugg subsequently conveyed that property to Wells by warranty deed. A dispute then arose as to whether Richmond or Wells owned the mineral interest in the property. Wells brought suit claiming ownership of the minerals along with the surface. Richmond filed both a general denial and a third-party lawsuit against Zugg in which Richmond attempted to reform the deed to Zugg to reflect Richmond had retained the mineral interest. Zugg answered the third-party lawsuit and agreed that the deed from Richmond was for the surface only. After hearing the competing motions of both Richmond and Wells for summary judgment, the trial court denied Richmond s motion but granted the Wells motion. The trial court declared that both deeds had conveyed the property s mineral estate as well as the surface estate and Richmond had not reserved any interest in the mineral estate of the property. In addition, Richmond was not entitled to any proceeds from the mineral estate and Richmond was not entitled to reform his deed to Zugg. On appeal, Richmond contended that Wells s claim should have been a trespass to try title action and, under that cause of action, Wells failed to meet the burden for summary judgment. Richmond relied on Martin v. Amerman 16 in which the Texas Supreme Court held that a party should bring a trespass to try title cause of action to determine title to real property. The court of appeals, however, distinguished Martin, opining that Martin involved a possessory S.W.3d 262 (Tex. 2004). 7

9 interest. Here, the case dealt with only non-possessory interests a royalty interest and a possibility of reverter. Therefore, Wells was not required to bring its claim as a trespass to try title action. Furthermore, although construing two competing deeds could coincidently affect the parties possessory interests, the court of appeals held that did not mean that Wells had to bring its claim as a trespass to try title action. Richmond also asserted that, because the deed to Zugg had been reformed, the Wells deed was reformed as well. The court of appeals countered that, when an intermediate party has conveyed a subsequent deed to a third party, the original party that is seeking reformation of the subsequent deed must prove that the third party was not a bona fide purchaser. Thus, Richmond could only reform the Wells deed if it could prove that Wells either did not purchase the property in good faith or with valuable consideration, or had notice of the Richmond mineral interest in the property. Of these elements, Richmond only attacked Wells s status as a bona fide purchaser in regard to having notice. Richmond asserted that Wells had constructive notice of Richmond s claim because of the pump jack and batteries that were on the property. The court of appeals rejected Richmond s assertion, and instead found that the presence of the pump jack and batteries could only provide Wells notice of Endeavor s right to occupy the property. The court further found genuine issues of material fact existed as to whether Wells had actual knowledge of Richmond s interest. Specifically, Richmond had submitted an affidavit by Mrs. Zugg stating that she told Mr. Wells that his purchase of the property would not include any mineral interests. Wells also submitted a statement signed by Mrs. Zugg in which she claimed that Zugg and Wells never discussed the property s mineral estate. Because these two statements by Mrs. Zugg were inconsistent, the court held a genuine issue of material fact existed regarding whether Wells had notice of Richmond s claims to the mineral estate, which would cause Wells not to be bona fide purchasers and allow Richmond to reform Wells s deed. Therefore, the court of appeals reversed and remanded the trial court s summary judgment in favor of Wells. First, this case suggests that a trespass to try title cause of action is unnecessary to determine the ownership of non-possessory interests such as royalty and a possibility of reverter and those interests may be determined with just a declaratory judgment. Second, exploration and production activities may be insufficient to qualify as constructive notice as a possessory right except for the operator/lessee conducting the operations. Merriman v. XTO Energy, Inc. Opinion No , S.W.3d (Tex. 2013), 56 Tex. Sup. Ct. J. 719, 2013 WL , 2013 Tex. App. LEXIS 492. On June 21, 2013, the Texas Supreme Court released its opinion in Merriman v. XTO Energy, Inc. The opinion substantively addressed the accommodation doctrine for the first time in twenty years, holding that a surface owner was not required to show (1) that it was impossible to use other lands (that were covered by short term leases) for the disrupted use on the lease land; or (2) that it had no reasonable alternatives for any sort of agricultural use on the leased land. 8

10 Homer Merriman ( Merriman ) owned the surface estate on a tract upon which he raised cattle. The tract s severed mineral estate had been leased to XTO Energy, Inc. ( XTO ). When XTO drilled near Merriman s barn, Merriman filed a motion for a permanent injunction, claiming that XTO had failed to accommodate his existing use of the tract s surface, namely an annual cattle roundup. The trial court granted summary judgment in favor of XTO. After holding that Merriman had not proven that he did not have any available alternatives as to managing his cattle, the court of appeals upheld the trial court s decision. First, the Supreme Court outlined the accommodation doctrine. The surface owner must prove that (1) the lessee s use entirely or substantially precludes the existing use of the surface; (2) no reasonable alternative method exists that would allow the surface owner to continue its use; and (3) the lessee has a reasonable alternative to the use or practice about which the surface owner is complaining. The Supreme Court affirmed the trial courts summary judgment in favor of XTO, but rejected the court of appeals methodology. First, the court of appeals had held that if evidence existed that Merriman was able to use the tract in any alternative means, he could not claim that XTO s use completely precluded or substantially impaired Merriman s use of the surface. Relying on its prior decisions in Getty Oil Co. v. Jones 17 and Tarrant Cnty. Water Control & Improvement Dist. No. One v. Haupt, Inc., 18 the Supreme Court disagreed and narrowly defined Merriman s use as to how he was specifically using the tract. It was, therefore, Merriman s more specific use that the court must consider in carrying out its analysis under the accommodation doctrine. Merriman only had to provide sufficient evidence that he had no reasonable alternative as to his cattle operation no other type of use need be considered. Second, the court of appeals had determined that Merriman s short-term lease on adjoining tracts was a reasonable alternative method by which he could continue his existing use of the tract. The Supreme Court stated that the court of appeals determination would slant the balance between the competing rights too greatly toward the mineral owner or its lessee. Therefore, only the present use of the surface owner and the specific leased tract should be considered. In the end, however, because Merriman did not raise a fact issue as to the alleged failure of XTO to accommodate the surface use, the Supreme Court affirmed summary judgment in favor of XTO. The Supreme Court s decision therefore lessened the burden that the court of appeals would have placed on the surface owner. Wynne/Jackson Dev., L.P. v. PAC Capital Holdings, Ltd. Opinion No CV, 2013 WL , 2013 Tex. App. LEXIS 6865 (Tex.App. Corpus Christi June 6, 2013, pet. filed) (mem. op.) (op. on reh g). On June 6, 2013, the Corpus Christi Court of Appeals withdrew and substituted its opinion upon rehearing in which it considered a suit brought by PAC Capital Holdings, Ltd., S.W.2d 618, 621 (Tex. 1971). 854 S.W.2d 909, 911 (Tex. 1993). 9

11 ( PAC ), who sought a declaratory judgment that its non-participating royalty interest ( NPRI ) under three deeds (collectively, the Porter Deeds ) was a fraction of royalty. The deed described the contested NPRI and other interests as: a non-participating royalty of one-half (1/2) of the usual one-eighth (1/8) royalty in and to all oil, gas, and other materials produced, saved and sold from the above-described property, provided, however, that although said reserved royalty is non-participating and Grantee shall own and possess all leasing rights in and to all oil, gas and other minerals, Grantor shall, nevertheless, have the right to receive one-half (1/2) of any bonus, overriding royalty interest, or other payments, similar or dissimilar, payable under the terms of any oil, gas and mineral lease covering the above-described property. PAC contended that this reservation reserved a fraction of royalty and thus it was entitled to receive an indefinite NPRI equal to one-half of the royalties in all of the mineral leases, whatever those lessor s royalty amount were, that had been executed since 1968, when the Porter Deeds were first executed. Wynne/Jackson Development, L.P., and W/J Lakes, L.P., ( Wynne Jackson ), the owner of the mineral property encumbered by PAC s NPRI, contended that the NPRI under the Porter Deeds reserved only a definite fractional royalty. Thus, PAC was entitled only to a fixed royalty that was equal to one-half of one-eighth (or one-sixteenth) of production regardless of the language contained in any mineral leases that had been executed after the Porter Deeds. After both PAC and Wynne Jackson filed cross motions for partial summary judgment regarding the proper calculation of PAC s NPRI, the trial court granted partial summary judgment in favor of PAC. On appeal, PAC cited Sundance Minerals, L.P. v. Moore. 19 in support of its contention that its NPRI under the Porter Deeds was an indefinite fraction of royalty. The deed in question in Sundance conveyed 515 acres of real mineral property, reserving an undivided and nonparticipating one-half interest in the oil, gas, and other mineral rights. The deed further contained a second statement that Moore shall be entitled to one-half of the usual one eighth royalty received forsuch [sic] oil, gas, and other minerals produced from said land. The Court of Appeals agreed that the parties intended to reserve one-half of the royalty in any future lease and that the second provision stating one half of the usual one eighth limited the reservation to royalty (and thus did not include bonus and delay rentals), and was merely to serve as an illustration of how the royalty reservation would be calculated. Thus the reserved royalty in Sundance was not a fixed fractional royalty but rather an indefinite or floating one-half royalty interest that entitled the NPRI owner to one-half of any future lessor s royalty. The court of appeals, however, was not persuaded as, in Sundance, the court did not quote the entire operative language of the deed the court had construed. Instead, the Sundance court had summarized the language of the deed, thus making it impossible for the present court to compare and contrast the language of the Sundance deed to the Porter Deeds. The court also rejected PAC s proposal that the reservation of bonus payments and delay rentals should be construed as a single reservation. The court determined that, by doing so, the distinction between the different components of the mineral estate would be blurred when the S.W.3d 507, 510 (Tex.App. Fort Worth 2011, pet. denied). 10

12 Porter Deeds clearly sought to maintain such distinction. Thus, by relying on the precedent of Harriss v. Ritter 20 and Pickens v. Hope, 21 the court of appeals concluded that the Porter Deeds in this case reserved a fractional royalty, not a fraction of royalty. As one commentator noted, unlike Sundance, the Wynne/Jackson decision purposely sets aside judicial recognition of the usual 1/8 landowner s royalty, despite the express reference to that royalty in the deed. 22 Graham v. Prochaska Opinion No CV In an opinion delivered and filed on Dec. 31, 2013, the Fourth Court of Appeals in San Antonio analyzed a 1950 warranty deed to determine whether a reserved royalty was a fixed or a floating royalty i.e. whether a reservation of royalty was fixed at the time of the reservation or whether the reserved royalty was dependent on the amount of lessor s royalty provided for in future leases. In 1950, George and Elsie Ann Prochaska (collectively, Prochaska ) conveyed a tract of land in Karnes County, Texas, to John and Frances Regmund (collectively, Regmund later including Roger Graham, the first named appellant). The granting clause conveyed all that certain tract or parcel of land. Prochaska, however, reserved a royalty interest as follows: SAVE AND EXCEPT, however, there is reserved unto George Prochaska, his heirs and assigns, one-half (1/2) of the one-eighth (1/8) royalty to be provided in any and all leases for oil, gas and other minerals now upon or hereafter given on said land, or any part thereof, same being equal to one-sixteenth (1/16th) of all oil, gas and other minerals of any nature, free and clear of all costs of production, except taxes; *** AND PROVIDED this reservation is burdened with paying the two outstanding mineral royalty reservations, each of One-Fourth (1/4) of one-eighth (1/8) royalty, one of which reservations is described in the deed from John Hancock Mutual Life Insurance Company to E.S. Joslin, now of record in Vol. 141, page 161, Deed Records of Karnes County, Texas, and the other reservation is described in the deed from E.S. Joslin, et ux to A.W. Powell, Jr., et al now of record in Vol. 165, page 80 of the Deed Records of Karnes County, Texas; And this reservation shall only be effective to the extent that one or both of said outstanding reservations become terminated. It being the intent of the parties hereto that John W. Regmund and wife, Frances E. Regmund, as of the effective date hereof, shall be vested with and entitled to one-half (1/2) of the usual one-eighth (1/8) royalty in and to all oil, gas and other minerals in on and/or under the property herein conveyed, and the reservation herein above recited in favor of the grantor herein, shall relate to and cover only the one-half (1/2) of one-eighth S.W. 2d 845, 847 (Tex. 1955). 764 S.W.2d 256, (Tex.App. San Antonio 1988). Laura Burney, Oil, Gas, and Mineral Titles: Resolving Perennial Problems in the Shale Era, KANSAS LAW REVIEW, 2013, Vol. 62, No. 1, Pg

13 (1/8) royalty interest previously reserved in favor of John Hancock Mutual Life Insurance Company and Ennis Joslin, if, as and when said interest in favor of said parties terminate. The original mineral leases provided for the (then) typical one-eighth lessor s royalty in effect at the time of the 1950 conveyance. After these expired, Regmund executed new leases that provided for a one-fifth lessor s royalty. Then, as a preventative measure, Regmund filed a lawsuit seeking a declaratory judgment that Prochaska had only reserved a fixed one-sixteenth royalty interest from the 1950 deed. Under the Regmund interpretation, Prochaska would receive one-sixteenth of production and Regmund would keep the remaining eleven-eightieths of production from the lessor s royalty (1/5-1/16 = 11/80). Prochaska counterclaimed for declaratory relief, contending they were entitled to a floating one-half royalty interest. Under the interpretation promoted by Prochaska, they should receive one-half of whatever lessor s royalty Regmund secured on the conveyed lands, now and in the future. Accordingly, Prochaska contended they should currently receive one-tenth of production, which is one-half of the lessor s royalty, and Regmund would take the remaining one-tenth of production (1/5 1/2 = 1/10). Despite the differences in interpretation, both parties contended the deed was unambiguous. The trial court held a hearing on the parties competing motions for summary judgment before rendering judgment for Prochaska by construing the deed as reserving a floating one-half lessor s royalty interest in the current and any future mineral leases. Regmund appealed. Charged with interpreting the Prochaska-Regmund deed de novo, the court of appeals first summarized the effect of the three clauses as followed: the save and except clause excluded a royalty interest from passing under the deed while the and provided clause identifies previously reserved mineral royalty interests that encumbered ( burdened ) the royalty interest of Prochaska. The intent clause clarified the relationship between the reserved interest of Prochaska, the received interest of Regmund, and the previously reserved interests identified in the provided clause. The court of appeals agreed with Prochaska that the one-eighth royalty must be read in light of the surrounding language. The court refused to construe the one-eighth in the description of the lessor s royalty as a limitation fixing the royalty owned by Prochaska, instead ruling that its presence reflected the common misconception of that period that the landowner s royalty would always be one-eighth of production obtained under a lease. 23 Accordingly, the court then construed the one-eighth within the context of the surrounding language ( the... royalty to be provided in any and all leases for oil, gas and other minerals now upon or hereafter given on said land, or any part thereof ) as an objective expression of the parties intent to measure the reserved royalty of Prochaska on the basis of any lessor s royalty on any future lease 23 Graham v. Prochaska at *13 (citing Concord Oil Co. v. Pennzoil Exploration & Prod. Co., 966 S.W.2d 451, 460 (Tex. 1998), Garrett v. Dils Co., 299 S.W.2d 904, 907, and 1 SMITH & WEAVER, TEXAS LAW OF OIL & GAS 3.7[A], at 3-47; citing Heritage Res., v. NationsBank, 939 S.W.2d 118, 121 ( We give terms their plain, ordinary, and generally accepted meaning unless the instrument shows that the parties used them in a technical or different sense. ) 12

14 along with the mistaken assumption that that landowner s royalty would always be one-eighth of production. The court then attempted to harmonize first portion of the save and except clause with the second clause, describing the reserved interest as same being equal to one-sixteenth (1/16th) of all oil, gas and other minerals of any nature, free and clear of all costs of production, except taxes, noting that this language, standing alone, would normally reserve a fixed royalty interest. But the court then held that the first clause showed the parties true intention that the royalty float and then harmonized the second phrase with the first, opining that the parties had again mistakenly believed that one-half of the lessor s royalty under future leases would always equal one-sixteenth of production but that their true intention was that the overall save and except clause unambiguously showed the intent to reserve one-half of the lessor s royalty in any and all leases for oil, gas and other minerals now upon or hereafter given on said land. The court of appeals then turned to the third and final paragraph (the intent clause) and found that it both confirmed that the parties mistakenly assumed that the lessor s royalty in future leases would always be one-eighth of production ( as of the effective date hereof, shall be vested with and entitled to one-half (1/2) of the usual one-eighth (1/8) royalty in and to all oil, gas and other minerals in on and/or under the property herein conveyed ) and that the interest of Prochaska would bear the two existing outstanding terminable mineral royalty reservations until they expired. Thus, the Prochaska interest was a future interest, not a present or immediately effective one. The as provided clause describes the two outstanding mineral royalty reservations as terminable interests that preempted immediate activation of the Prochaska royalty as each of One-fourth of one-eighth (1/8) royalty. The intent clause later repeats this seemingly fixed formula. The court acknowledged that if outstanding mineral royalty reservations meant royalty interests than the terminable interests would be fixed and that it would be challenging to interpret the Prochaska reservation of those interests as floating interests. However, since the Prochaska-Regmund deed specifically referred to and identified the two instruments creating the interests that burdened the reservation of Prochaska, those two instruments were incorporated into the Prochaska-Regmund deed and the descriptions of the interests in the prior deeds were therefore also incorporated into the Prochaska-Regmund deed. Since the royalty interests in the two prior instruments were floating, the court determined that no conflict existed in concluding that the Prochaska reservations also floated. Crosstex NGL Pipeline, L.P. v. Reins Road Farms 1, LTD. Opinion No CV, 404 S.W.3d 754 (Tex. App. Beaumont 2013, no pet. h.) On May 23, 2013, the Beaumont Court of Appeals decided, in an interlocutory appeal, that the trial court did not abuse its discretion when it denied the request of Crosstex NGL Pipeline ( Crosstex ) for a temporary injunction that would prevent Rein Road Farms ( RRF ) from interfering with Crosstex s attempt to survey RRF s land for an NGL pipeline. 24 In 2011, 24 Natural gas-liquids 13

15 the Texas Railroad Commission granted Crosstex permission to build a pipeline that would transport NGL from Daisetta, Texas, to processing plants in Louisiana. RRF owned a tract of land in Jefferson County, Texas, that was located in Crosstex s proposed pipeline route. Crosstex requested permission to survey RRF s land, but RRF denied Crosstex permission to enter. Crosstex filed an action for a declaratory judgment and temporary injunction claiming it had a right as a common carrier to enter on to and survey RRF s land. The trial court conducted a hearing but ultimately denied the request for temporary injunction. Crosstex based its common carrier status on two foundations: (1) common carriers transport crude petroleum and the proposed pipeline would transport natural gas, which is considered a type of crude petroleum, and (2) Crosstex is a common carrier because the pipeline would be under the authority of the Texas Railroad Commission and available for public use. 25 The court found that trial court did not abuse its discretion in denying injunctive relief based on common carrier status because both Crosstex and RRF presented conflicting evidence in support of their opposing arguments. First, Crosstex noted that (1) of the Texas Natural Resources Code gives common carrier status to pipelines that transport crude petroleum, and argued that natural gas is a form of crude petroleum covered under the code. The court ruled that the trial court did not abuse its discretion by determining that the term crude petroleum, as used in the eminent domain provisions of the Natural Resources Code, does not include by-products like NGLs. To make this decision, the court first cited Webster s Dictionary s definition of crude petroleum which defined it as petroleum as it occurs naturally as it comes from an oil well, or after extraneous substances... have been removed. 26 Additionally, the court also looked at the entire Texas Natural Resource Code to determine if natural gas is ever included as a form of crude petroleum. The court found that the Texas Legislature had recognized a distinction in the code between hydrocarbons in crude form and materials that are by-products derived from the crude form. In addition, testimony from a Crosstex vice-president described how NGLs are derived from a stream that once began as a crude gas. Because the legislature distinguishes crude oil from byproduct materials and due to the evidence provided by the vice-president s testimony, the court held that the ultimate NGL stream was a by-product of the crude oil captured at the wellhead. As a result, Crosstex s argument for common carrier status based on crude petroleum transportation failed. One implication of this point is that if NGLs are not included in the term crude petroleum then NGL pipelines will need addition authority for eminent domain. Crosstex s second argument proposed that it had common carrier status under Section of the Texas Business Organizations Code because, as required therein, the pipeline would be available for public use and under the authority of the Texas Railroad Commission. Under the code, in order to achieve common carrier status, the pipeline s builder may not be the exclusive pipeline user. Citing a Crosstex press statement describing the pipeline s 70,000 barrel per day capacity and noting that at the time of the lawsuit Crosstex already had agreements requiring it to provide 70,000 barrels of NGL per day to Crosstex affiliates, RRF argued that while the pipeline could be a common carrier in the future, it was currently likely to be used See Crosstex NGL Pipeline, L.P. v. Reins Road Farms 1 Ltd., 404 S.W.3d 754, 757, 756 (Tex. App. Beaumont 2013, no pet. h.). Id. at 758 (quoting Webster s Third New International Dictionary 546 (2002)). 14

16 exclusively by Crosstex and its affiliates. Conflicting trial testimony stated that the pipeline s design allowed for a capacity of 77,000 barrels per day, leaving 7,000 barrels per day available for new customers. Evidence was also provided at trial showing that Crosstex entered into four contracts with unaffiliated customers, but these required Crosstex to purchase the NGL before it entered the proposed pipeline. A fifth contract would allow an unaffiliated customer to transport products on the pipeline, but the current and proposed Crosstex pipelines did not and would not terminate at the unaffiliated customer s desired location. Therefore, the trial court held that, despite Crosstex s efforts to enter into contracts with unaffiliated customers, the pipeline was still likely to be used exclusively by Crosstex. The court of appeals found that the trial court did not abuse its discretion or act in an arbitrary manner when, after considering the evidence, the trial court ruled in favor of RRF, holding that Crosstex could not exercise the power of eminent domain, given the result Denbury (even though that case was a CO 2 pipeline and not an NGL pipeline), concluding,... we are not persuaded the [Supreme] Court's reasoning concerning the process of obtaining a T-4 permit applies only to carbon dioxide lines. Therefore, despite Crosstex possessing a T-4 permit from the Texas Railroad Commission, the permit was not enough by itself to presume common carrier status. Questions of common carrier status are receiving heightened scrutiny. Pipelines looking to exercise eminent domain should ensure that, before they seek the necessary permits, adequate evidence exists that at least some portion of the current or near-future pipeline capacity can be shown to be allocated to a non-affiliated party and seek written findings of fact at every stage of the process. Second, as three commentators suggest, prospective NGL pipelines should not rely only on the NRC for eminent domain authority, but should also invoke and comply with of the Texas Business Organizations Code as a separate source of eminent domain authority. 27 Crawford Family Farm Partnership v. TransCanada Keystone Pipeline, L.P. Opinion No CV, 2013 WL (Tex. App. Texarkana Aug. 27, 2013, no pet. h.). The Texas Legislature has delegated eminent domain power to nongovernmental entities such as pipelines that are considered to be common carriers under Texas law. TransCanada Keystone Pipeline ( TransCanada ) attempted to exercise this eminent domain power in order to obtain an easement on the land of the Crawford Family Farm Partnership ( Crawford ). The proposed easement would help allow TransCanada to build a crude petroleum pipeline running from Canada to Port Arthur, Texas. Three special commissioners were assigned to estimate Crawford s condemnation damages from the proposed pipeline. The commissioners awarded TransCanada the easements and estimated Crawford s damages at $10,395. Crawford challenged the decision in the Country Court at Law in Lamar County. TransCanada filed a motion for summary judgment claiming a right to exercise eminent domain power through its common carrier status. Crawford responded, claiming that 27 James Barkley, et al. Denbury Construed by Two Texas Appeals Court Decisions, May 28, 2013, available at 15