When Non-Operating Working Interest Rights Are Subject to Adverse Possession
Texas
Can non-operating (“non-op”) working interest rights in an oil and gas lease be adversely possessed? That is the primary question asked and (ostensibly) answered by the Seventh District Court of Appeals in PBEX II, LLC v. Dorchester Minerals, L.P. 1 The undisputed facts in Dorchester are as follows. Prior to 1983, Felmont Oil Corporation (“Felmont”) had acquired a 25% working interest in a tract of land in Midland County, Texas (the “Subject Land”). In 1983, Felmont entered into a Joint Operating Agreement (“JOA”) on the Subject Land with other working interest owners, resulting in two producing wells. In 1989, Torch Oil & Gas Company (“Torch”) succeeded to Felmont’s interest. Torch then apparently assigned its interest in the Subject Land to SASI Minerals Company and Baytech, Inc., who later conveyed it to Dorchester Minerals, L.P. (“Dorchester”). Consequently, Santa Fe Minerals, Inc. (“Santa Fe”), the Operator under the JOA, issued a new division order to Torch confirming that its interest under the JOA was now “0%.” Torch signed the new division order. 2 From May 1990 to September 2016, Dorchester acted as a non-op under the JOA, paying its share of the costs of production, receiving revenue from the sale of gas, paying landowner royalties, and making elections under the JOA. However, in June 2016, Torch purported to assign its interest in the Subject Land to PBEX II, LLC (“PBEX”). Torch then notified Dorchester that back in 1990 it had mistakenly notified Santa Fe that it had assigned out its interest. Dorchester, after 26 years of paying joint interest billings (“JIBs”), obviously refused to execute a “correction” instrument confirming that Torch owned its interest. 3 Torch, in response, filed this suit. Of primary concern in this case is whether, regardless of the existence of a valid conveyance in 1990, Dorchester adversely possessed the non-op working interest of Torch in the Subject Land. In finding that Dorchester had in fact divested Torch’s interest, the court looked to the so-called “25-Year” Adverse Possession Statute. 4 The court’s analysis was divided into three primary inquiries.
1. Can non-operating working interests be adversely possessed in Texas?
Although Torch argued that the working interests at issue aren’t possessory, and thus are not subject to adverse possession because they are non-operated rights, the court disagreed. The court notes that there is no distinction in Texas between operated or non-operated working interests in terms of possession, and that “all working interests are possessory.” 5
2. What constitutes actual, visible appropriation of a working interest?
Adverse possession requires “actual, visible appropriation” of leasehold working interests. Actual, visible appropriation is generally satisfied by oil and gas drilling and production. Although Torch argued that Dorchester itself never set foot on the property, the court notes the surface estate is not at play here. Under the lease at issue, the minerals were drilled and produced by the operator, which satisfies the appropriation component of the rule. 6
3. Does non-consent status interrupt the continuous possession requirement?
Although Dorchester was at times considered “non- consent” in the operations under the subject lease, this status does not constitute an interruption in continuous possession. The uninterrupted possession requirement is intended to incentivize those with a competing claim to initiate an adverse suit. Further, the court notes the non-consent argument fails because non- consent does 1 2023 Tex. App. Lexis 2847 (Tex. App.—Amarillo 2023, writ pending). 2 Id. at 4-5. 3 Id. at 5-6. 4 Tex. Civ. Prac. & Rem. Code §§ 16.027 and 16.021. 5 2023 Tex. App. Lexis 2847, at 9. 6 Id. at 11.
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G rowth T hrough E ducat i on - J uly / A ugus t / S ept ember 2023
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