National Association of Division Order Analysts July / August / September 2023
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Volume MMXXIII • No 3
Contents Feature
Articles
NADOA 2023 Officers President Norma Dooley 1st Vice President Vicki Danielson, CDOA 2nd Vice Presiden t Kimberly Bowman Treasurer Valerie Wible, CDOA Corresponding Secretary Kelly Sandoval, CDOA
Unclaimed Property Delaware VDA, OUP VR and CR Notices..........................8 Ohio Reporting Funds Webinar........................................10 Ancient Document Rule...........................................................12 Legislative Watch TX HB 2056..............................................13 Legal Updates Cromwell v. Onshore..............................................................13 Post-Production Deductions (Devon v. Sheppard)........16 PBEX II v. Dorchester (Adverse Possession)..................21 Is Supplemental Title Opinion Necessary-Part Two.........23 National Niche............................................................................31 Institute Highlights...................................................................39
Recording Secretary Sonya Turner, CDOA
The NADOA News Magazine is a quarterly publication of the National Association of Division Order Analysts P O Box 1656 Palm Harbor, FL 34682 Subscription: By membership to NADOA, at $75.00 per year. News Magazine Editor
In This
Issue
President’s Corner.............................................................1 2024 Election Results........................................................3 2023 Membership Recognition......................................4 Decimal Points....................................................................6 2024 Institute.......................................................................7 Cob Webs...............................................................................7 Certification......................................................................... 8 New Members....................................................................32 NARO News........................................................................33 OERB Outlook....................................................................33 Counterpart Connection................................................34 NADOA Board & Committee Chairs...........................51 Calendar of Events..........................................................52
Rona L. Erickson, CDOA Kaiser-Francis Oil Company Ronae@KFOC.net 918.491.4319
Graphic Design, Paul Beach
On the Cover: Waterfront Park and Big Four Bridge Courtesy of Louisville Visitors Center
All rights reserved. No part of this publication may be reproduced/copied without written permission. Editorial disclaimer: The contents of this newsletter are intended for member use only and any other use without permission from the NADOA Board of Directors is strictly prohibited. Articles published herein represent the view of the authors; publication neither implies approval of the opinions expressed nor accuracy of the facts stated and NADOA accepts no liability for misprints.
President’s
Corner
Norma Dooley 2023 NADOA President
WE DID IT ; NADOA’s 50th Annual Institute was FANTASTIC ! We had a great turnout of 323 and I couldn’t have been more excited. A BIG thank you to Liz Fajen and Michelle Harris-Fairclough and the Institute Committee for all their hard work and dedication to putting on an amazing Institute. Of course nothing happens without a few hiccups but it all worked out perfectly. These people have worked hard volunteering their time to plan a conference that would hopefully satisfy all who attended. Comments from attendees with whom I spoke were that everyone enjoyed the classes, speakers, food and wonderful door prizes. I can’t tell you how much I loved seeing all the beautiful hats, fascinators, socks, ties and even a sequin jacket at the Derby Party Thursday night. So many participated in a fun evening, prancing around the stage for best hat, socks & tie and overall outfit and all looked FABULOUS. I wish I had prizes for everyone as you all looked MARVELOUS . With this being such a special anniversary, “50 years”, we were all blessed to have so many Past Presidents join us. There was a lot of history in the General Session, as these men and women helped mold NADOA into a great organization. Thank you all for being there to join on this special occasion. I also want to thank all the companies and corporations that allowed employees to join us in Louisville to celebrate this momentous occasion, while also receiving an outstanding education in the various areas of our work and industry. Don’t forget, the education, networking and friendships you make at Institute will be invaluable to you now and in the future.
Not only was this year’s Institute a meaningful part of my life; by the time this magazine comes out I will be a grandmother for the 2nd time. My son and his wife are expecting a little boy to join his big sister Leighton any day. I just knew they were going to call while I was in Louisville but so glad he stayed put while I was gone. I am thrilled to have another sweet baby in my life and hear him call me “Cabbie”.
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NADOA Board Elections for 2024 A huge thank you to Norma Dooley for helping find candidates for the 2024 elections and Chris Tucker, our NADOA Administrator, for all he does to get the ballots out and pull everything together! President 1st Vice President
Vicki Danielson, CDOA (Automatic advancement from 1st VP) Kimberly Bowman (Automatic advancement from 2nd VP)
2nd Vice President Jean Hinton Treasurer
Thank you to every candidate who chose to run this year and congratulations to the winners! Please think about running for a position next year as we always need new candidates to keep fresh ideas going for our changing membership. Come be a part and make a difference! The election results for the 2024 NADOA Board were certified by the Teller’s Committee. Volunteering for Teller’s Committee this year were Michele Lawton, Chairman, Cheryl Hampton, Lewis Box, and Lisa Buffaloe. Thank you for helping certify the 2024 elections.
Valerie Wible, CDOA (last year of 2-year term)
Recording Secretary Melanie White Corresponding Secretary Lola Strickland Board Advisor Norma Dooley
(Automatic advancement from President)
Local Association Directors
- Chosen by the local associations
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2023 NADOA Membership Recognition Awards
2023 NADOA Membership Recognition Corporate Award This company has been a vital part of NADOA for several years. They are willing to come to our Annual Institutes and Local Seminars to educate our organization as to Escheat. This organization keeps us updated as to escheat, new regulations passed within the United States and how to negotiate with State Auditing companies. Without their help, guidance, and education several of us would be drowning in a sea of unfamiliar territory. Please help me in congratulating KPMG as the 2023 recipient of the NADOA Membership Recognition Corporate Award. 2023 NADOA Membership Recognition Award for Education This individual is a great teacher. They possess a wealth of knowledge and is gracious enough to share. For CDOA Reviews, Calculation Classes, and any other topic you might need addressed and presented, they will go the extra mile to research the topic and make the presentation
They step up to absolutely anything - Need a speaker – call them. Need a volunteer – call them. Need donations – call them.
Need support – call them. Need a referral – call them. Need a job – call them.
I can promise you most of us sitting in this room have not only heard of this individual but have personally reached out to them at least one time if not many times. Their interaction with our industry has been above and beyond. Please help me in
congratulating Betty Davidson as the 2023 recipient of the NADOA Member Recognition Award for Interaction
2023 Russell Schetroma Memorial Speaker’s Award This individual has been busy this year presenting webinars, in-person association meetings and this year’s Institute. The hot topic: Fixed and Floating Royalties, NPRI’s and the most recent Texas Supreme Court ruling in Van Dyke vs The Navigator Group. They strive to make sure each of us understands the ruling, the potential consequences for the Division Order Analyst and what the future may hold as to interest owner push back regarding royalty interest calculations. Please help me in
interesting. They are always willing to help NADOA or any local associations when asked. Please help me in congratulating Eli Murray as the 2023 recipient of the NADOA Membership Recognition Education Award
congratulating Demetri Economou as the 2023 recipient of the Russell Schetroma Memorial Speaker’s Award
2023 NADOA Membership Recognition Award for Interaction There are not enough words in the English vocabulary to describe how much this individual has done for NADOA, our industry and our local associations (and I do not just mean their local association; I mean all local associations).
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2023 Ellis Rudy Memorial Lifetime Achievement Award
hours to make sure we have available hotel rooms, moderating temperatures when possible, and ensuring all NADOA’s needs are met. I am sure this individual could tell us a few horror stories as well as remarkable success stories from the many institutes with which they have been involved. This individual’s greatest accomplishment was that of being our NADOA President in a very unprecedented year. They spent a long year as 2nd Vice President finding that perfect place to host their Presidential year. Then something we have never dealt with hit. COVID. They and the board had to make the hard decision to cancel NADOA’s Institute. This individual did not get to see all their hard work to fruition. Nevertheless, this individual always has what is best for NADOA at the forefront of what they do and made the
This year’s recipient has worked tirelessly in the background for NADOA their entire career. They have in fact worked on several of our Institute Committees, such as Hospitality and Hotel. Their work on Hospitality has enabled us to have magnificent events all while being fed well and staying within budget. And let us not forget those Thursday Night events; can you imagine the responsibility of planning such a large evening event? • Picking the event • Theme • Entertainment • Food • Will attendees enjoy themselves? • Cost • Logistics I could go on. But what I can imagine is the organizational and delegation skills needed to pull this type of event off and this year’s recipient excels in these gifts. This individual has headed up the Hotel committee on several occasions, working long
hard decision of canceling their presidential year 2020 NADOA Institute for the safety of our members. Please help me in congratulating Luanne Johnson as the 2023 recipient of the NADOA Membership Recognition
Lifetime Achievement Award
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NADOA
Decimal Points
Remember to keep your NADOA directory information updated. Due to all the changes taking place in our industry and the world, it is more important than ever to maintain professional contacts and receive the educational benefits of membership in NADOA. NADOA online Job Bank has new postings. Visit http://www.nadoa.wildapricot.org/page-662233
Regional Reporters
ABADOA
Steptoe & Johnson PLLC Ryan.daniels@steptoe-johnson.com
CAPDOA DADOA
OPEN
Kelly Sandoval, CDOA Kelly.sandoval@sitio.com
DALWORTH Lewis Box, CDOA lewis.box@gmail.com HADOA Emily Sheffield
esheffield@oglawyers.com Rosanne Kidder Rosanne.kidder@pxd.com
PBADOA
SADOA
Dena Blevins Drblevins2014@gmail.com Jackie Clotfelter, CDOA jclotfelter@hannaoilandgas.com Amy Flaming Amy.flaming@chsinc.com Kimberly A. Backman kbackman@crowleyfleck.com
2023 NADOA Article Deadlines
Arkansas
November 10............................ Fourth Quarter
Kansas
North Dakota
If you have a suggestion for someone to act as a Regional Reporter to help NADOA keep abreast of current legislation and legal issues for your region, please submit the name or the name of the firm.
New Mexico
Zachary P. Oliva zoliva@oglawyers.com Margaret Patton mpatton@pattonfirm.com
Louisiana
2023 News Magazine Team Rona Erickson , CDOA Editor Kim Bowman Associate Editor, Photography Cheryl Hampton Associate Editor
Michelle Davila Associate Editor
Joseph Carpini Associate Editor Armando Lopez Associate Editor
Susan Bradley, CDOA Associate Editor
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Cob Webs
Educational webinars can be approved for 1 (one) CDOA certification point. NADOA webinars, Steptoe & Johnson PLLC webcasts and Oliva Gibbs
ybazan@extex.net . Details for upcoming NADOA Webinars can be found at: https://nadoa.org/news-events/ The webinar committee is looking for volunteers. Opportunities include: creating webinar flyers, contacting speakers before a webinar event to obtain biographies and presentations, help modernize NADOA’s GoToWebinar site. Please email Yoli Bazan at webinars@nadoa.org if you are interested. Steptoe & Johnson PLLC – Visit: https://www.steptoe-johnson.com and click on News for details. The Steptoe webcasts are recorded. To access previously recorded webcasts, go to www.Steptoe-Johnson.com and enter Webcasts in the search feature. Oliva Gibbs LLP – Energy Education Series: Visit www.oglawyers.com/ events for further information. If you are aware of other educational webinars, please advise NADOA News Magazine editor, Rona Erickson, CDOA (ronae@kfoc.net ) or Associate editor, Susan Bradley, CDOA ( sbradley@faulenergy.com ).
LLP webinars are pre-approved. Please check the certification page to determine if other webinars are pre-approved or need to be submitted for approval to the NADOA Certification Committee. Contact Sherry Werth for approvals ( srw6886@gmail.com ). Certification points should only be applied for after completing the event. If you are unable to attend an event due to unforeseen circumstances, it is an ethics violation to apply for the credit. NADOA – Webinar information and registration links will be posted on the website ( www.nadoa.org ). Webinars are free for NADOA members and $15.00 for non- members. NADOA members may use the following link to log in and register for upcoming webinars as well as listen to previously recorded webinars: https://nadoa.wildapricot.org/ page-1709226 or by using the Webinar link in the Members Only section on the homepage. Please send suggestions for NADOA webinar topics/ speakers to Webinar Chair, Yoli Bazan, CDOA,
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CANDIDATES FOR CERTIFICATION Publication of the following “Certified Division Order Analyst” applicant(s) fulfills the requirement as stated in the Voluntary Certification Policy, III C.2 which states: “…applicant’s name will be published in the NADOA Newsletter or other official publication of NADOA.” This allows the NADOA membership an opportunity to present objections to the certification of the applicant. Any objection to the certification of the applicant must be in writing and signed by a NADOA member or non-member who qualifies his knowledge and objection of the applicant. All such letters will be considered confidential and must be received by the NADOA Certification Committee at the following address within thirty (30) days following the last day of the month in which the Newsletter or other official publication of NADOA was published: NADOA Certification Committee P O Box 1656 Palm Harbor, FL 34682 If the objection warrants denial of the certification or temporary withholding of certification, the applicant will be notified by Certified Mail. CANDIDATES FOR CERTIFICATION
Jason Alexander – Houston, TX Michelle Davila – Houston, TX Brook Granger – Fort Worth, TX Kelly Hunt – Tomball, TX Rebekah Jones – Houston, TX
Laura Juarez – Dallas, TX Lori Land – Plano, TX
Kyndall Leone – Midland, TX Armando Lopez – Houston, TX Jennifer Smith – Plano, TX
CANDIDATES FOR RECERTIFICATION
Kelsi Flores – Fort Worth, TX
Diane Walters – Kingwood, TX
Unclaimed
Property
ABANDONED & UNCLAIMED Delaware Enforcement 1170: Verified Report & Compliance Review
Delaware
the holder’s most recent annual filing of unclaimed property. Both initiatives offer a means for the State to confirm that the holder’s unclaimed property controls are adequate, and furthermore that the holder is currently in compliance; in a manner that is less strenuous than a traditional involuntary audit, or formal voluntary disclosure program.
Written by: Gary Joseph, MBA, CIA Discovery Audit Services, LLC
The Delaware Department of Finance’s Office of Unclaimed Property (“OUP” or “State”) has expanded its compliance and enforcement initiatives by way of enacting 12 Del. C. § 1170 in 2017; followed by amendments in 2021 and 2022. This provision currently authorizes the State Escheator to 1.) request the filing of a Verified Report; or, effective June 30, 2022, 2.) conduct a Compliance Review of
Verified Report
A Verified Report Notice is a letter that is sent to a
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company to request that the company certify that a report previously submitted to the state is complete, or if no report was submitted, that there is truly no property to report. The OUP Verified Report (“VR”) process is not an examination, but rather a means to evaluate the existence, comprehensiveness, and adequacy of a holder’s unclaimed property policies and procedures. VR notices are mailed by the State, or its agent, directly to the holder (or an agent in possession of its records) via certified mail. The timeline for completion of the VR is 270 days upon receipt of notice. Holders are required to complete the following tasks: 1. Provide a copy of the company’s unclaimed property policies and procedures for review. 2. Complete the Verified Report form for the report year referenced in the mailing. In doing so, the holder certifies on behalf of the parent and all subsidiaries populated on the form. 3. Notarize the form and return it per OUP’s instructions. The analysis of a holder’s unclaimed property policies and procedures may uncover inefficiencies or other inadequacies which the reviewer may request be addressed. Examples of requests made by OUP may include, however are not limited to: 1. Incorporation of definitions, dormancy periods, priority rules, and other useful information. 2. Exhibit of parent and subsidiaries that includes the state of incorporation. 3. Reference to property types of which the holder is susceptible to generating.
response to the notices. By statute, a Compliance Review may also be initiated by the OUP without first requesting the holder submit a verified report. The purpose of the State’s Compliance Review is to allow the state to request and review certain documentation to confirm that the report submitted by the holder was complete and accurate. The OUP Compliance Review (“CR”) is a limited scope evaluation of compliance. The scope of the review focuses on the most recent filing period to ensure a holder included all properties that were reportable. The timeline for completion of the CR is 360 days from receipt of notice. Holders can expect to receive data requests consistent with their most recent annual unclaimed property reports such as, by way of example, but without limitation:
1. Lists and corporate formation information for the holder, subsidiaries, and related entities;
2. Accounting and related records;
3. Details of unclaimed property reported to Delaware within the most recent cycle; 4. Disbursements, accounts payable, and payroll records;
5. Accounts receivables aging reports; and
6. Records of other accounts of interest (i.e. rebates, securities, royalties, depository accounts, etc.). CR notices are mailed by the State, or its agent, directly to the holder (or an agent in possession of its records) via certified mail. Holders are provided 30 days to respond to the First Notice. If no response is received, a Second Notice is forwarded. Holders that do not respond to the Second Notice, within 30 days, or fail to complete the CR within the 360-day period, may then be considered for involuntary audit, or participation in the Department of State’s Voluntary Disclosure program.
4. Procedures on reporting properties to the States.
Holders are provided 30 days to respond to the First VR Notice. If no response is received, a Second Notice is forwarded. Holders that do not respond to the Second Notice, within 30 days, or fail to complete the VR within the 270-day period, may then be referred for Compliance Review or other statutorily available alternative means to evaluate its unclaimed property compliance.
Conclusion
Just as with the Delaware Department of State’s Voluntary Disclosure Program notices (“DE VDA”), holders should be on the lookout for OUP VR or CR notices. Timely response to any notice from the State of Delaware is critical, as non-response may result in a DE VDA invitation or DE audit eligibility. Holders should review their policies and procedures, as well as filing history, to ensure the company is positioned to respond to the notices timely and sufficiently.
Compliance Review
The Compliance Review Notice is the next step after a verified report if a holder either fails to respond after the Second VR Notice or submits an insufficient
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Reporting Funds Webinar Replay All Other Businesses Due Date Nov. 1, 2023
Reporting Funds Webinar
Got Questions? Watch Replay
Download the Slide Deck
View Q&A Document
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Haven't reported your unclaimed funds? Sign our Voluntary Compliance Agreement to be Compliant The Ohio Department of Commerce, Division of Unclaimed Funds offers a Voluntary Compliance Agreement (VCA) for companies or holders of unclaimed property that was not reported in past reporting cycles and would like to become compliant with the Ohio Unclaimed Funds law. In exchange for voluntary compliance through an executed VCA, the Division will agree to forgo the right to assess penalties and interest outlined in the law. Filing your Report Whether you want to pay funds via your debit card or a check, there are options to filing your report. Get the complete details on our website. Filing a None (Negative) Report If a diligent search has shown that the company is not holding any unclaimed funds, or if all owners respond to the OUF-8 Notice of Unclaimed Funds mailing, you may file a None (Zero) Report through the Ohio Business Gateway at www.business.ohio.gov. Once on Ohio Business Gateway, you must first add a negative report to your dashboard. Then, you can file your none report. Watch our step by step instructional videos on How to Add a Report and How to File a Negative Report. If you need help filing, call the Ohio Business Gateway Help Desk at 866-644-6468. Update your Contact Information It is important to update your company’s contact information with the Ohio Division of Unclaimed Funds annually. This allows us to contact you with crucial information regarding your unclaimed fund reporting or with questions regarding a claim.
Refer friends for news & updates
Connect with us!
Ohio Department of Commerce, Division of Unclaimed Funds https://com.ohio.gov/unfd | 614-466-4433
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Ancient document
Wikipedia An ancient document , in the law of evidence, refers to both a means of authentication for a piece of documentary evidence, and an exception to the hearsay rule . Authentication With respect to authentication, an “ancient document” is one that may be deemed authentic without a witness to attest to the circumstances of its creation because its age suggests that it is unlikely to have been falsified in anticipation of the litigation in which it is introduced. Under the American Federal Rules of Evidence (“FRE”), a document is deemed authentic if it is: 1. at least twenty years old; 2. in a condition that makes it free from suspicion concerning its authenticity; and 3. found in a place where such a writing was likely to be kept. Many states have similar rules, but may limit the application of the doctrine to specific kinds of documents such as dispositive instruments (primarily conveyances, deeds, and wills), and may require the documents to be even older. By admitting an ancient document into evidence, it is presumed only that the document is what it purports to be, but there are no presumptions about the truth of the document’s contents . A jury can still decide that the author of the document was lying or mistaken when the author wrote it. Hearsay Ancient documents also present an exception to the hearsay rule. FRE 803(16) applies this exception to all documents over twenty years old. Because of their age, they may be presented as evidence of the truth of any statements contained therein. Many states follow this rule as well, but again most limit it to documents that dispose of property.
GOOGLE What are the rules for ancient documents?
Under the rule, if a document is (1) more than 20 years old; (2) is regular on its face with no signs of obvious alterations; and (3) found in a place of natural custody, or in a place where it would be expected to be found, then the document is found to be prima facie authenticated and therefore admissible.
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Legislative
Watch
Texas HB 2056
Texas
Texas HB 2056, which was left pending in committee on April 10, 2023, relates to a severance tax exemption for oil and gas produced from certain restimulation wells. This legislation provides a temporary severance tax exemption for up to 75% of
restimulation costs, or for 60 months, whichever comes first, when the restimulation treatment was performed using hydraulic fracturing pumps powered exclusively by electricity or natural gas. The exemption is based on the difference between the previous production rate of the well and any added production that results from the restimulation. The Commissioner of the Railroad Commission of Texas, Jim Wright, came out in favor of the novel approach taken by HB 2056. Legal Updates Articles are not intended to be and should not be relied upon as legal advice or to establish any kind of an attorney-client relationship with the author.
Every Lessee for Himself! – In Cromwell v. Onshore, the El Paso Court of Appeals doubles down on its support of the “Anadarko Washout”
Texas
In 2019, the Texas Eighth District Court of Appeals reached its decision in Cimarex Energy Co. v. Anadarko Petro. Corp. , 1 raising eyebrows across the oil and gas industry. The Cimarex decision sent “non-op” lessees scrambling to double-check their lease language and straining to recall whether they ever signed that operating agreement. Cimarex warned lessees that production on their lease may not extend it past its primary term if the lessee did not “directly cause” the production. In other words, if your lease does not provide otherwise and you are not party to an operating agreement, your lease may not be extended by the on-lease activities of your designated operator. Once the primary term of the lease expires, the 1 574 S.W.3d 73 (Tex. App.—El Paso 2019, pet. denied). 2 See Durrett, Brandon, Turn Around, Don’t Drown: A New Generation of Oil and Gas Lease “Washouts: in Texas and How to
leased interest would instead revert back to the lessor as an unleased cotenant. Of further concern is the possibility that another lessee may have taken a top lease that is now in effect. In the wake of Cimarex , many practitioners expected the Supreme Court to weigh in on the decision and provide further clarity. 2 However, on August 28, 2020, the Supreme Court of Texas denied a petition for review, and on March 5, 2021, it denied a motion for rehearing on petition for review, tacitly endorsing the Cimarex decision. Now, in Cromwell v. Onshore , 3 the El Paso Court of Appeals has upheld and arguably expanded Cimarex. Cromwell potentially opens the floodgate for what will be referred to in this article as an
Avoid Them, 53 Tex. L. Rev. 473, 495 (2021). 3 2023 Tex. App. LEXIS 5848 (El Paso 2023).
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“Anadarko Washout.” Conversely, the Texas Legislature has recently rebuked the washout of certain oil and gas interests. Effective September 1, 2023, T ex . P rop . C ode § 31.001, et seq . creates a cause of action for the bad faith washout of overriding royalty interests. 4 However, no such protection currently exists for the washout of a working interest, whether or not in “bad faith.” Note that in both Cimarex and Cromwell , the habendum clauses of the leases in issue were similar and generic. Each lease provided that it would be held for a fixed primary term and “so long thereafter as oil and gas is produced from said land or from land with which said land is pooled.” As demonstrated below, this “passive” habendum language creates a very much active obligation on lessees. I. Cimarex Energy Co. v. Anadarko Petro. Corp. (2019) Cimarex Energy Co. (“Cimarex”) and Anadarko Petroleum Corp. (“Anadarko”) were cotenants who held separate oil and gas leases on the same property. 5 Anadarko drilled two producing wells on the property, which each paid out during Cimarex’s primary term. 6 Cimarex sued Anadarko for failure to account for its share of production, which resulted in a settlement agreement. 7 Importantly, no operating agreement existed between the parties either prior to or post-settlement. Once Cimarex’s lease expired, Anadarko stopped paying Cimarex under the settlement agreement and took a “top” lease on Cimarex’s mineral interest. 8 As part of its argument that it now had the effective lease, Anadarko asserted that Cimarex’s “bottom” lease required Cimarex to actually drill or operate a well. Cimarex, it argued, was unable to passively rely on Anadarko’s development activities in the absence of an operating agreement. Cimarex argued that it did not have to directly cause production on the property to perpetuate the lease, and it could rely on Anadarko’s production to extend the lease into its secondary term. After all,
it claimed, production was occurring on the lease. Cimarex also contended that the prior settlement agreement served as an operating agreement proxy. 9 The court held that despite the “passive” voice of the habendum clause, Cimarex was required to “take some action to cause production,” and it could not rely on a cotenant’s production to keep its lease alive. 10 The court was not persuaded by evidence that Cimarex had made repeated unsuccessful attempts to enter into an operating agreement with Anadarko. The court noted that an operating agreement would fulfill the lessee’s requirement to cause production, but without such an agreement Cimarex and Anadarko were merely cotenants who owed no duties to each other and were entitled to act independently. 11 Cimarex knowingly took the risk that other tenants on the land might refuse to agree to a joint operating agreement, forcing it to commence production on its own. 12 The Cimarex court also rejected various additional arguments related to the settlement agreement and the parties’ course of conduct in finding for an implicit agreement to operate. This included correspondence referencing an “Operating Agreement” and referring to Cimarex as a “Working Interest Owner.” It remained to be seen whether Cimarex was the new reality, or an oddity relegated to its facts. 4 Under T EX . P ROP . C ODE § 31.001, “bad faith” is defined as “the conscious taking of action for the purpose of washing out all or party of an overriding royalty interest.” “Washout” means the “[intentional] elimination or reduction of an overriding royalty interest in an oil and gas lease by the forfeiture or surrender of the oil and gas lease . . . and the subsequent reacquisition of a lease . . .” 5 574 S.W.3d 73, 80. 6 Id. at 83. 7 Id. at 83-84. 8 Id. at 84. 9 Id.
10 Id . at 93. 11 Id . at 95. 12 Id .
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II.
The court of appeals held that Cimarex squarely applied to the facts of Cromwell , and that Cromwell’s actions were insufficient to “cause production” under his leases. The court rejected the idea of “constructive participation,” finding instead that Cromwell’s payments were ordinary operating expenses owed by a nonparticipating cotenant. Further, correspondence from Anadarko referring to Cromwell as a working interest owner and other “course of conduct” activities did not rise to the level of a constructive agreement between the parties. 20 Cromwell’s bottom leases thus expired at the end of their primary terms, and Anadarko’s top leases took effect.
Cromwell v. Onshore (2023)
David Cromwell (“Cromwell”) was the owner of a small working interest under two oil and gas leases in Loving County. Each lease contained a habendum clause similar to that set forth above ( i.e. , “. . . and so long thereafter as oil and gas is produced from said land”). Anadarko E&P Onshore LLC (“Anadarko”) owned a much larger working interest in the same land. 13 Cromwell submitted his leases to Anadarko and asked multiple times for an operating agreement, but Anadarko never responded. 14 After several successful wells were drilled, Cromwell was presented with – and paid – various joint interest billings (“JIBs”). In some months, Cromwell paid Anadarko and in other months his operational costs were netted out and he received a revenue check. 15 Cromwell also received authorizations for expenditures (“AFEs”) that referred to him as a “Working Interest Owner” and contained elections to participate in various expenditures. 16 Anadarko later claimed that these and other activities were conducted in error. After the primary term of Cromwell’s leases expired, Anadarko top leased Cromwell’s lessors and asserted that Cromwell had never executed an operating agreement. Cromwell sued alleging that a “constructive” operating agreement had been formed based on the activities above. The trial court held for Anadarko on summary judgement and Cromwell appealed. On appeal, both Cromwell and Anadarko agreed that oil and gas was produced in paying quantities on Cromwell’s leases, and that the court must decide whether that production may be attributed to Cromwell. 17 Cromwell attempted to distinguish Cimarex by arguing that he did exactly what Cimarex had not done: he participated in production by sharing in its costs, risks, and liabilities. 18 Cimarex’s chief defense had been that it could rely on Anadarko’s production to perpetuate its lease. Cromwell, on the other hand, argued that his actions amounted to constructive participation and implied an operating agreement. 19
III.
Takeaway from Cimarex and Cromwell
Cimarex was a wakeup call for non- operators in Texas that is further emphasized by Cromwell . It seems that in the absence of a signed operating agreement, the standard “passive” habendum clause in a lease creates an obligation to actually cause the production. This does not, the El Paso Court maintains, run afoul of judicial safeguards preventing surprise forfeitures, because a habendum clause is a special limitation, which is not a forfeiture. Cromwell further expands Cimarex by rejecting arguments in favor of constructive participation, or an implied operating agreement based on the parties’ course of conduct. Thus, stealthy operators appear to have a powerful weapon in the form of the Anadarko Washout.
IV.
Avoiding an Anadarko Washout
Following Cimarex and Cromwell , non- operating lessees should ensure that they enter
13 2023 Tex. App. LEXIS 5848 at 3. 14 Id .
15 Id . at 4. 16 Id . at 5. 17 Id . at 11. 18 Id . at 19. 19 Id. at 26. 20 Id. at 29.
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into a valid operating agreement prior to the expiration of the primary term of their leases. It remains unclear whether different facts may lead to a “constructive” operating agreement, but such an argument appears to be tenuous at best. For added protection and to avoid an intentional washout, lessees should ensure that their leases provide that any operations on the leased premises, (i) whether or not caused by the lessee or its successors or assigns, (ii) whether or not conducted in accordance with an executed operating agreement, and/or (iii) whether or not the lessee conducted, participated in, or consented to the drilling, reworking, completion, or other operations resulting in production, will maintain a lease past its primary term and will fulfill the lessee’s obligation to cause production on the lease. Otherwise, a well-capitalized party may attempt to wield Cimarex offensively by refusing to enter into an operating agreement. As of the date of this article, it remains to be seen whether Cromwell will file an appeal and the Supreme Court will weigh on the possibility of creating an “operating agreement by estoppel.” Otherwise, the Anadarko Washout may be here to stay. CONTACT If you have any questions regarding this case law update or suggestions for topics to be covered in future issues, please call our office at 713-229-0360 or contact:
Brad Gibbs Partner, Houston bgibbs@oglawyers.com
www.oglawyers.com
The content of this publication and any attachments are not intended to be and should not be relied upon as legal advice or to create a lawyer-client relationship. © 2023 Oliva Gibbs LLP. All rights reserved. This publication may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Houston (principal office): 815 Walker St., Suite 1140, Houston, Texas 77002 | Columbus: 580 North Fourth Street, Suite 260, Columbus Ohio 43215 | Lafayette: 4906 Ambassador Caffery Parkway, Building K, Lafayette, LA 70508 | Oklahoma City: 301 Lilac Drive, Suite 250, Edmond, OK 73034| Attorneys licensed in Arkansas, Colorado, Louisiana, Montana, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia and Wyoming
Landowners and oil and gas companies in Texas are facing a significant legal battle over the interpretation of new royalty clauses. The recent ruling by the Texas Supreme Court has restricted post-production cost deductions, causing turmoil in the industry. This groundbreaking decision has sparked a $100 million lawsuit against Devon Energy and BPX Properties, with landowners alleging underpaid royalties. In this article, we will delve into the details of this case and explore the implications of the court’s ruling on the oil and gas sector.
Texas
Texas Supreme Court Ruling Restricting Post-Production Deductions in New Royalty Clauses Now Being Tested in $100M Lawsuit
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Pay attention – there are some new royalty clauses in town and the Texas Supreme Court is interpreting them against oil and gas companies who attempt to deduct post-production costs from their lessor’s royalty payment. What’s unique about these provisions is that they prohibit deductions AFTER the point of sale to third-party affiliates. Devon v. Sheppard Lawsuit Landowners and oil and gas companies in Texas are facing a significant legal battle over the interpretation of new royalty clauses. The recent ruling by the Texas Supreme Court has restricted post-production cost deductions, causing turmoil in the industry. This groundbreaking decision has sparked a $100 million lawsuit against Devon Energy and BPX Properties, with landowners alleging underpaid royalties. In this article, we will delve into the details of this case and explore the implications of the court’s ruling on the oil and gas sector. In the case of *Devon et al. v. Sheppard (No. 20- 0904, March, 2023), the Texas Supreme Court affirmed the lower court’s ruling that the clear language of the lease provision unambiguously prevented deductions of post-production costs from a third-party affiliate who deducts costs from published index prices downstream from the point of sale. *Devon Energy Production Co., L.P., f/k/a GeoSouthern DeWitt Properties, LLC; BPX Properties (NA) LP; GeoSouthern Energy Corp.; and BPX Production Co. are all being sued under these leases. The recent test case highlights the impact of this new ruling. Specifically, Devon Energy and BPX are facing lawsuits from numerous landowners in DeWitt County, southeast of San Antonio. These landowners in the Eagle Ford Shale allege that they have been underpaid royalties and interest amounting to $100 million, citing the Texas Supreme Court opinion as supporting evidence. (See Houston Chronicle article by Amanda Drane of July 3, 2023)
So, what are these new provisions? First, it’s important to understand that the plaintiff in the Supreme Court case and the newly filed case is Michael Sheppard, an attorney and mineral owner who created the provisions not only for his lease but for other lessors in the area. Second, the parties all agree that per the “gross proceeds” language of the traditional royalty clause in the lease, no post-production costs are deductible to the point of sale. At issue are these new, bespoke provisions affecting whether oil companies can take the posted price of the product and deduct costs for “gathering and handling, including rail car transportation, of $18” as discussed in the case, from the per barrel posted price and use this figure to calculate royalties.
Here are the two provisions:
3(c) If any disposition, contract or sale of oil or gas shall include any reduction or charge for the expenses or costs of production, treatment, transportation, manufacturing, process[ing] or marketing of the oil or gas, then such deduction, expense or cost shall be added to…gross proceeds so that Lessor’s royalty shall never be chargeable directly or indirectly with any costs or expenses other than its pro rata share of severance or production taxes.
AND
Payments of royalty under the terms of this lease shall never bear or be charged with, either directly or indirectly, any part of the costs or expenses of production, gathering, dehydration, compression, transportation, manufacturing, processing, treating, post-production expenses, marketing or otherwise making the oil or gas ready for sale or use, nor any costs of construction, operation or deprecation of any plant or other facilities for processing or treating said oil or gas. Anything to the contrary herein notwithstanding, it is expressly provided that the terms of this paragraph shall be controlling over the provisions of Paragraph
New Royalty Provisions
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3 of this lease to the contrary and this paragraph shall not be treated as surplusage despite the holding in the cases styled “Heritage Resources, Inc. v. NationsBank,” 939 S.W. 2d 118 (Tex. 1996) and “Judice v. Mewbourne Oil Co.”, 939 S.W. 2d [133,] 135- 36 (Tex. 1996). Royalty Payment Based on Index Price Typically, a royalty owner is paid on the posted index price less any costs incurred by the oil and gas company to move the product to a refinery. For oil, this can be done by rail and so the railroad charges a fee to the oil and gas company and this fee is deducted from the per barrel price. The royalty owner’s decimal interest is multiplied by the number of barrels produced at the reduced (after deducting transportation costs to get it to the refinery) per barrel index price. In the olden days, during my time at Exxon, it was a requirement to include the index price and any deductions, such as transportation costs, on the division order. This allowed royalty owners to understand how their payments were calculated and replicate the calculation if needed. For instance, if the posted index price for oil was based on WTI (West Texas Intermediate), but “gathering and handling, including rail car transportation” amounted to a total deduct of $18 fee, we would display the posted price as WTI minus the $18 gathering and handling, including rail car transportation fee on the division order. As a result, the royalty payment would be based on $52 per barrel, if the WTI posting was $70 per barrel that particular month. Deducting transportation costs from the posted price and paying the royalty owner based on the actual price is still a standard practice in the industry today; however, today most companies use the NADOA Model Form Division Order with no added provisions.
Formula for Royalty Owner: Decimal Interest * number of barrels produced x $52/barrel
*Royalty Payment Typically Based on this
Impact of New Interpretation According to the Houston Chronicle article, there are about 5 leases in the new lawsuit with this key language, but it could affect up to 200 leases with the same provisions in the area. And, of course, any new leases negotiated with these added provisions will be affected. Let’s do a current example of one month for a large landowner to see how this issue might affect one individual lessor who owns 100% of the minerals in an Eagleford well with a ¼ RI: See the chart below for a new well’s production in the Eagleford shale. The well will also produce gas, but we will examine just the oil in this example. (a) 1500 bbls per day x 30 days = 45,000 bbls x posted price of $70 per bbl = 45,000 * $70 = $3,150,000 * ¼ RI = $787,500 , with an additional deduction for severance tax (b) 1500 bbls per day x 30 days = 45,000 bbls x posted price of $70 per bbl less the $18 gathering and handling, including rail car transportation fee cited in the case = 45,000 * ($70-$18= $52) = $2,340,000 * ¼ RI = $585,000 , with an additional deduction for severance tax
This is a difference of roughly $200,000 more per month owed to this particular royalty owner.
Posted price Its long been held that landowners and producers have the opportunity to reach an agreement regarding the rightful amount of royalty, the criteria for its calculation, and the allocation of expenses. It is important to note that a landowner’s royalty
Example:
Posted Index Price: West Texas Intermediate....................$70/barrel Railroad Fee: ....................................- $18/barrel Royalty Payment based on: ........$52/barrel oil*
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that excludes postproduction costs, holds greater value for the royalty holder but is more costly for the producer. This is because the landowner will benefit from the increased value of production without having to bear the expenses incurred in getting the product to market. Consequently, disputes over the terms of mineral leases and the distribution of postproduction costs are quite common. However, the specific application of the royalty clause in this lease are unique and, according to the Texas Supreme Court, “unprecedented.” Analysis So why is the Texas Supreme Court who is historically “pro-industry” ruling against an oil and gas company? In my opinion, the Texas Supreme Court has gone to such extremes to rule in favor of oil and gas companies that it is to the point of bordering on the ridiculous. Take the 1995 Texas Supreme Court case quoted in the lease provision, Heritage v. Nations Bank . In that case, the royalty clause had typical market value language but also included this language: …provided, however, that there shall be no deductions from the value of the Lessor’s royalty by reason of any required processing, cost of dehydration, compression, transportation or other matter to market such gas. That’s pretty unambiguous language in my opinion. Yet in Heritage, the court ruled that this language was “surplusage” and that the lease language really meant that oil and gas royalty were to be paid on net proceeds and deductions were allowed. One could argue that if one part of the royalty clause called for a market valuation and another part said “no deductions,” this creates an ambiguity. Under contract law, an ambiguity in a lease is construed against the lessee. Despite this, the court ruled in the oil and gas company’s favor. This paved the way for a skilled attorney and mineral owner to skillfully construct language designed to counter the ruling in the Heritage case, ultimately leading to the present outcome. I would
contend that the financial burden on the oil and gas company is significantly higher when they are obliged to pay post-deduction costs to a third-party affiliate, as opposed to if the court had permitted post-production deductions prior to sale. Typical post-production cost deductions range from a few cents (19 - 21 cents per barrel), rather than nearly $20 per barrel as in this example. Nevertheless, this is the current situation we find ourselves in. Impact on Land Professionals This affects all land professionals. For the landman, be aware of this provision and its impact on your company’s bottom line when negotiating a new lease. For lease analysts, make sure you note these provisions well when analyzing the oil and gas lease. For division order analysts, this may require manual handling of checks for lessors with this lease language. Typically, when the revenue accountant gets a posted index price, that price is applied to all the owners in a deck. That won’t work for lessors with this language creating a whole new administrative burden (not to mention financial) to the oil and gas company. Conclusion In conclusion, the recent Texas Supreme Court ruling restricting post-production cost deductions in new royalty clauses has sent shockwaves through the oil and gas industry. With landowners now armed with a powerful legal precedent, oil and gas companies will need to carefully review their lease agreements and navigate the complexities of calculating royalties. This landmark ruling serves as a reminder that the balance between landowners and producers is constantly evolving, and the interpretation of lease provisions can have significant financial implications. It remains to be seen how this ruling will shape future lease agreements and the relationship between landowners and oil and gas companies. This is why it is crucial for all stakeholders to stay informed and seek expert guidance to ensure fair and equitable agreements moving forward .
Alyce B. Hoge Land Training ahoge@landtraining.net
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