National Association of Division Order Analysts October / November / December 2018
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NADOA N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s G R O W T H T H R O U G H E D U C T I O N
Volume MMXVIII • No 4
www.NADOA.org
Contents Feature
NADOA 2018 Officers President Cheryl Hampton 1st Vice President Jason Lucas 2nd Vice Presiden t Luanne Johnson, CDOA Treasurer Stephanie Moore, CDOA Corresponding Secretary
Articles
In This 2018 Membership Recognition Awards.......................... 8 Legal Watch – Four Texas Cases................................... 10 Colorado Proposition 112 defeated.............................. 15 Legal Updates Louisiana Small Succession Affidavits........................ 16 Texas Continuous Development Clause...................... 17 Texas Payor under the Division Order Statute........... 18 Institute Highlights....................................................... 20 President’s Corner. .................................................1 Decimal Points.......................................................3 Division Order $al.................................................3 Certification...........................................................4 NADOA Election Results. .......................................6 Volunteers needed for 2019 Institute......................7 Interaction............................................................36 New Members.......................................................37 Counterpart Connection.......................................38 2018 Institute Committee.....................................41 2018 Board/Committee Chairs.............................42 Calendar of Events. ..............................................44 Issue
Donna King, CDOA Recording Secretary Jennifer Lujano
The NADOA News Magazine is a quarterly publication of the National Association of Division
Order Analysts PO Box 44009 Denver CO 80201
Subscription: By membership to NADOA, at $75.00 per year. News Magazine Editor Rona L. Erickson, CDOA Kaiser-Francis Oil Company Ronae@KFOC.net 918.491.4319 Associate Editor April Luedecke, CDOA April.Luedecke@anadarko.com
Graphic Design Paul Beach
On the Cover: Gaylord Opryland Delta Atrium Photo Courtesy of Gaylord Opryland Resort
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
Cheryl Hampton 2018 NADOA President
It seems like this year has flown by! It’s hard to believe that the holidays are just around the corner and my year as NADOA President will be ending. We’ve had a very successful year topped off by a great Institute in Nashville. This was our largest attendance at Institute since we were in Chicago in 2014. I would like to thank all who attended, and thank the Institute Committee, headed up by Co-Chairs Luanne Johnson and Lucretia Jones, for all the hard work they did to make Institute amazing! You all ROCK! Your NADOA Board worked hard this year and some of the association’s 2018 accomplishments are: • NADOA gave away three full scholarships to NADOA members to attend Institute. • We currently have 1204 Active members and we added 192 NEW members this year. • We continued to add to our social media accounts: Twitter, Instagram, LinkedIn and Facebook. If you haven’t joined any of those, please do so as we also include local association information. • NADOA will make a profit this year. • We held 4 Webinars in 2018 and the attendance for them has increased. • A regional seminar was held in New Braunfels, TX and was very successful. The turnout from the San Antonio and Austin areas was great. I would like to encourage each of you to not only join NADOA next year, but to reach out to your co-workers who are not members and let them know the benefits of being a member of NADOA. So many new people are entering our industry and many of them know nothing about our organization. We want to keep NADOA growing and our members are our best publicists! I would also like to thank you all for allowing me to be your 2018 President. I have met so many wonderful people and have made so many good friends through this organization. I also thank the 2018 Board for their hard work and for working with me this year to make it successful. It was my pleasure to work with all of you.
I want to leave you with two things: In the words of George Strait, “Does Fort Worth Ever Cross Your Mind” – start planning now for the 2019 NADOA Institute!!! And in the words
of Bob Hope, thanks for the memories!
G r o w t h T h r o u g h E d u c a t i o n - O c t o b e r / N o v e m b e r / D e c e m b e r 2 0 1 8 1
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NADOA
Decimal Points
April Luedecke, CDOA Associate Editor
Rona Erickson, CDOA Editor
2019 NADOA Article Deadlines
First Quarter.............................February 15 Second Quarter...............................April 26 Special Institute Edition.....................June 7 Third Quarter........................ September 13 Fourth Quarter........................ November 8
MAADOA
Angie Coady, CDOA
acoady@vessoil.com
PBADOA
Nicki Scoggins
nicole.scoggins@pxd.com
SADOA
Rebecca Helt, CDOA rebecca.helt@wpxenergy.com Jackie Clotfelter, CDOA jclotfelter@hannaoilandgas.com
Regional Reporters
Arkansas
ABADOA
Steptoe & Johnson PLLC dan.swiger@steptoe-johnson.com Donna King, CDOA donna.king@forwardlandllc.com Sharon Siemer, CDOA sharon.siemer@anadarko.com
North Dakota Kimberly A. Backman
kbackman@crowleyfleck.com
CAPDOA
New Mexico
Zachary P. Oliva
zoliva@kolawllp.com
DADOA
Louisiana
DALWORTH Lewis Box, CDOA
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.
lbox@comstockresources.com
HADOA
Dale Bender, CDOA dalebender1433@yahoo.com
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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 44009 Denver CO 80201 If the objection warrants denial of the certification or temporary withholding of certification, the applicant will be notified by Certified Mail.
CANDIDATES FOR CERTIFICATION Lindsay Anderson – Oklahoma City, Oklahoma Krista Barrientes – Fort Worth, Texas Charlene Bilski – Houston, TX Angela Dempsey – Oklahoma City, Oklahoma Mary Ann Maimo – Oklahoma City, Oklahoma Crystal Pack – Houston, TX Jennifer Sims – Oklahoma City, Oklahoma Keith Voytoski – Houston, TX
CANDIDATES FOR RECERTIFICATION Christopher Anderson – Oklahoma City, OK Janet Cavanah – Tulsa, OK Lori M. Graham – Oklahoma City, OK Kim M. Stephens – Oklahoma City, OK Sonya Turner – Tulsa, OK
CERTIFICATION Brenda Dickey, CDOA In accordance with my usual modus operandi, here is my “Hail and Farewell” for 2018. Intermingled is other news of which you should be aware. The Committee says farewell to Heidi Davis. Heidi has done a fabulous job overseeing our Policy and Procedures. During her tenure, Heidi did a detailed review and update of our Policy and Procedures document to add clarity in some areas, and “modernize” in others to acknowledge the use of electronic communication. In addition to those changes mentioned above that were effective 1/1/2018, two more changes will be effective 1/1/2019. The first is in Application for Certification. Because our industry is so dynamic, oftentimes applicants do not know three CDOAs, or the CDOAs they do know, they do not know well. The Committee voted to remove the requirement that the sponsors be CDOAs. Applicants still must have three sponsors, one of which must be the applicant’s supervisor or manager. The second change is in the Examination Process. The Policy and Procedures document was silent as to the number of times an applicant can retest with reapplying. The Committee voted to clarify the Policy and Procedures to limit retake opportunities to twice within 12 months of the notification of first failure of the exam. This change puts us more in line with NALTA and AAPL. Chris Tucker will notify everyone by email once the updated Policy and Procedures document is posted on the NADOA website.
If you are a CDOA whose certification expires January 1, 2019, you should receive your Re-Certification Application electronically by the end of January. If you do not receive your Application, please contact Darryn McGee, CDOA at dmcgee@protege-energy.com. TIME TO RECERTIFY? Back to “farewells”... The Committee also says farewell to me. It’s kind of weird to say farewell to myself, and I’ll admit I’m a little sad. Serving on the Certification Committee has afforded me the opportunity to meet many talented professionals from many different companies. I’ve forged friendships with many of you--friendships I believe will last a lifetime. I feel honored and privileged to have served as Certification Committee Chair. Thank you for the opportunity. The Committee “hails” Elizabeth (Eli) Murray as its Certification Committee Chair for 2019. Although Eli is not new to the Committee, she is new to the Chair position. Eli is very passionate about certification. She believes certification is something to be proud of--something for which we should strive to preserve the respect she feels it deserves. Don’t we all feel that way? That’s why I know I’m leaving you in good hands.
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2018 CDOAs Jennifer L Cramer Noemi T Peralta Diane Dolan Walters
Kelsi Lynn Flores Becky J Kennedy Jobeth Hines-Lorraine Debra Henson Congratulations!
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NADOA Election Sandi Rupprecht, Board Advisor
Directors: CAPDOA.......................................Valerie Wible, CDOA DADOA..................................................Lauren Roswold DALWORTH. ....................................... Kimberly Ginter HADOA...................................... April Luedecke, CDOA PBADOA................................................ Kaprice Pearson SADOA........................................Rona Erickson, CDOA
Many thanks to the nominating committee, which consisted of the following NADOA members: Sandi Rupprecht, Chair; Betty Davidson, CDOA; Brenda Pirozzolo, CDOA; Kimberly Ginter; Jason Alexander; Danielle Bedingfield; Valerie Wible, CDOA. The Teller’s Committee met at Institute to certify the balloting results for the 2019 NADOA Board. Thanks to Sandi Rupprecht; Rosemary Cruthirds, CDOA; Dorena Garza, CDOA; Quint Withers, CDOA, and Jennifer Kegans for serving on the Teller’s Committee. 2019 NADOA Board: President......................................................... Jason Lucas 1st Vice President. ..................... Luanne Johnson, CDOA 2nd Vice President...............................Lewis Box, CDOA Corresponding Secretary............. Michelle Harris, CDOA Recording Secretary..................................Jennifer Lujano Treasurer............................................Jeff Kliewer, CDOA Board Advisor ....................................... Cheryl Hampton
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2019 NADOA Institute September 5-7, 2019 Fort Worth, Texas
Photographers Needed If you have a camera and love to take candid photos, NADOA has a volunteer position for you in 2019. We need a team of people who love to take pictures and have high resolution cameras. Your main job will be taking pictures at NADOA’s 2019 Institute in Fort Worth. If you are interested, ask your supervisors and managers now for permission to attend and get on their list of people to send to NADOA Institute. Email Chris Tucker at administrator@nadoa.org if you are interested.
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2018 MEMBERSHIP RECOGNITION AWARDS
Each year during Institute NADOA recognizes a few outstanding members for their contributions to the Association throughout the year. This year NADOA had five very deserving recipients.
Interaction Award
Tricia Davis Our winner has been an advocate for NADOA and the oil and gas industry in general. Her hard work in the capital city of Austin, Texas, for more than 10 years has resulted in many cost savings to the industry and our companies. She has testified at numerous federal and state hearings. She worked closely with NADOA on several Texas bills that would have been expensive and cumbersome for companies with Texas production. She educated us on the legislative process and how NADOA can have a voice in stopping passage of bills that would be detrimental to the industry. Senate Bill 402 & House Bill 3068, known as the division order bills, were two such bills. After meeting several times with the authors of the bills and testimony by many who would be affected, the bills were dropped. This is just one example of her bringing pending legislation to our attention. She continues to keep us apprised of what the lawmakers are up to. We are proud to present the Interaction Award to Tricia Davis of the American Royalty Council. Jeff Kliewer CDOA The winner of this award has been active with NADOA Education as well as education at the local chapter level. He promoted the idea of a regional seminar in the San Antonio/ Austin area. The idea was to offer education to land professionals in a region where there was not a local Division Order association and where there may not be an opportunity to attend other seminars. He spent countless hours reaching out to companies and was successful in planning and executing a regional seminar held this summer. Because of the seminar and the interest NADOA showed to the region, Division Order professionals in the region hope to start a local association. The 2018 NADOA Education Award goes to our current Education chair, Jeff Kliewer, CDOA Andy Graham The winner of this award is well known to many of us. He has been active in NADOA for many years and has often been a speaker at past Institutes as well as at many of the local associations. He is heavily involved with the Petroleum Land Management degree pro- gram at Western State University in Gunnison, Colorado. He is also an Adjunct professor at WVU and if his classes are as interesting as the classes he teaches at Institute, we are sure they are very popular. In winning this award, he exemplifies the high standard set by Russ Schetroma. We are proud to present the 2018 Russell Schetroma Memorial Speaker’s award to Andy Graham of Steptoe & Johnson.
Education Award
Russell Schetroma Memorial Speaker’s Award
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Lifetime Achievement Award
Mary Sons The 2018 NADOA Lifetime Achievement Award was presented to Mary Sons at the 45th Annual NADOA Institute in Nashville, TN. Mary has been an active member of NADOA and SADOA for many, many years. She has served on both the national and local association boards in many capacities, including President. She served on nu- merous NADOA Institute Committees in all capacities, including Institute Coordina- tor. She also served on the committee to voice industry opinion on new escheat laws prior to implementation. Mary continues to mentor analysts and volunteer whenever she is needed. She almost single-handedly scanned NADOA archives to USB drives to preserve association history. Lastly, she has an up close and personal relationship with NADOA’s tiny storage unit…a job no one else would undertake. NADOA proudly hon- ored Mary with the 2018 Lifetime Achievement Award.
Corporate Award
Concho Resources, LLC. The winner of the 2018 NADOA Corporate Award has generously supported NADOA for many years. Most recently, they supported the Summer Regional Seminar in the San Antonio and Austin region by providing personnel to run the seminar as well as speakers. They donate not only employee time but resources and giveaways. This company has supported employees who were serving as Board Members and Directors to NADOA as well as Committee Chairs. They will be represented by three board member/director positions in 2019. It is with great pleasure we award the 2018 Corporate Award to Concho Resources, LLC.
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Legal
Watch
1. Four Texas Cases to Watch These materials reflect only the personal views of the authors and are not individualized legal advice. It is understood that each case is fact-specific, and that the appropriate solution in any case will vary. Therefore, these materials may or may not be relevant to any particular situation. Thus, the authors and their law firm cannot be bound either philosophically or as representatives of their various present and future clients to the comments expressed in these materials. The presen- tation of these materials does not establish any form of attorney-client relationship with the authors or their law firm. While every attempt was made to insure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed. TEC Olmos, LLC v. ConocoPhillips Co. Are falling oil prices a force majeure event? 1. Background TEC Olmos, LLC (“Olmos”) entered into a farmout agreement (“agreement”) with ConocoPhillips Company (“ConocoPhillips”) to test-drill land that was leased by ConocoPhillips. The agreement set out a specific date by which drilling had to be completed. Also included in the agreement was a $500,000 force majeure event and that it was entitled to the liquidated damages penalty. The trial court granted ConocoPhillips’ motion for summary judgment, finding that ConocoPhillips had established each element of its breach of contract claim and had disproved Olmos’s claims and affirmative defenses. As a result, Olmos appealed the trial court’s order. Id. at 180.
liquidated damages provision in the event the drilling deadline was not met. The agreement also contained a force majeure clause that outlined specific events which, if they occurred, would suspend the drilling deadline. The events included “fire, flood, storm, act of God, governmental authority, labor disputes, war or any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected. . . .” Olmos’s parent company, Terrace Energy Company (“Terrace”), guaranteed the contract. TEC Olmos, LLC v. ConocoPhillips Co. , 555 S.W.3d 176, 179 (Tex. App.—Houston [1 st Dist.] 2018, pet. filed). After the contract’s effective date, the price of oil dropped significantly causing Olmos’s financier for the project to revoke its financing. Olmos was unable to secure other financing for the project and, thus, was unable to meet the drilling deadline. Olmos invoked the force majeure provision to avoid paying the $500,000 liquidated damages penalty. ConocoPhillips challenged the provision’s applicability and sued Olmos, seeking a declaration that the drop in oil prices was not a covered
2. The Court of Appeals
On appeal, Olmos argued that: (1) fact issues precluded summary judgment on their invocation of the force majeure clause; and (2) fact issues precluded summary judgment regarding whether the maximum liquidated damages claimed by ConocoPhillips constituted an unenforceable penalty. Id. A. Force Majeure Olmos contended that the downturn in oil prices was a covered force majeure event because of the catch-all provision that covers “any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected.” Id. at 182. The court disagreed and reasoned that because the provision did not specifically include a downturn in the oil and gas market, the real issue is whether the catch-all provision includes events that are foreseeable.
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Id. at 182. The court faced a similar situation in Valero Transmission Co. v. Mitchell Energy Co. , 743 S.W.2d 658, 660 (Tex. App.—Houston [1st Dist.] 1987, no writ). In Valero , the court held that because the change in market price was not listed, and a market downturn is a foreseeable event, the downturn was not a covered event under the force majeure provision. Following the court’s reasoning in Valero , the court held that the economic downturn is not a covered event and the performance of contractual duties is not excused solely because the duties became more economically burdensome. Id. at 183. In addition to the foreseeability factor, the court also concluded that the market downturn was not a covered event because of the principle of ejusdem generis . Ejusdem generis states that “the latter must be limited to things like the former.” The court found that the former, “fire, flood, storm, act of God, governmental authority, labor disputes, [and] war,” were not like the latter, an economic downturn. The court stated that because the former involve natural or man-made disasters which, although foreseeable, occur so infrequently that planning for them and allocating risks based on them is impracticable absent a force majeure provision. On the other hand, downturns in commodities markets occur fairly regularly and can easily be dealt with in a contract provision outside of a force majeure provision. Id. at 186. Because this was not a covered event under the force majeure provision, the court of appeals affirmed the lower court’s decision. Id. at 186. B. Liquidated damages
Olmos next claimed that the trial court erred in awarding liquidated damages because liquidated damages constitute an unenforceable penalty. Id. at 187. Applying the principal from Phillips v. Phillips , 820 S.W.2d 785, 788 (Tex. 1991), the court stated that contractual damages provisions are enforceable only if two elements are met: (1) it is impossible or very difficult to estimate the amount of damages, and (2) the amount of damages is reasonable under the circumstances. Olmos did not challenge the first element, but claimed that the second element was not satisfied because the amount estimated at the time of the agreement was not necessarily the estimated amount agreed to at the time of the breach. However, the court stated that this is not the test. The test looks to whether or not the provision is a reasonable estimate of the damages at the time of the agreement, not at the time of the breach. Id. at 187. Therefore, because all of Olmos’s evidence focused on the time of the breach, they did not raise a fact issue and the trial court properly granted summary judgment in favor of ConocoPhillips. Id. at 188. On August 15, 2018, Olmos petitioned the Texas Supreme Court for review, arguing that the appellate court incorrectly read a foreseeability requirement into the force majeure provision. Olmos argues that no foreseeability requirement was written into the contract, challenging the appellate court’s ruling that foreseeability is “rooted in the common law” of the force majeure provision. brush and predator control, game surveys, and, most importantly, deer captures. Deer captures involve the use of helicopters to locate the deer. The pilot then chases the deer approximately 4-5 feet above the ground, weaving in and out of brush, trees, and other obstacles. Finally, a passenger will use a net gun to trap the deer so that they can be bred or relocated. This is regarded as the most cost efficient method and least stressful process for the deer. VirTex Operating Co. v. Bauerle , No. 04–16–00549–CV, 2017 WL 5162546, at *1 (Tex. App.—San Antonio Nov. 8, 2017, pet. filed) (mem. op.). 3. The Texas Supreme Court
2. VirTex Operating Co. v. Bauerle Does the accommodation doctrine prevent a lessee from installing power lines when the surface owner uses helicopters for commercial hunting purposes on its ranch? 1. Background Robert Leon Bauerle and Cynthia Bauerle (“the Bauerles”) own an 8,500 acre ranch that is primarily used for commercial hunting. The Bauerles lease the ranch to numerous hunters on a yearly basis. These hunters utilize helicopters throughout the year to conduct
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VirTex Operating Co., Inc. and VirTex Producing Company, L.P. (“VirTex”) currently operate nine wells on the property, all equipped with a diesel generator run pumpjack. In 2012, VirTex approached the Bauerles with a plan and an easement agreement to install overhead powerlines. The proposed layout of these powerlines was likened to that of a spider’s web with many different powerlines going in all different directions. The Bauerles refused to sign the agreement. The Bauerles asked VirTex to halt construction of the powerlines, which VirTex obliged. Id. at *1. action stating that the proposed plan violated the accommodation doctrine because it would significantly impair their use of helicopters on the “lateral surface and super-adjacent airspace.” Id. at *2. A jury found in favor of the Bauerles, and the trial court rendered a verdict in their favor, which also awarded attorney’s fees. Virtex appealed. Id. at *1. 2. The Court of Appeals VirTex argued to the appellate court that the Bauerles failed to prove the elements of the accommodation doctrine. More specifically, they failed to prove that: (1) the proposed powerlines would completely or substantially impair existing hunting operations on the land; (2) there was no reasonable alternative to these existing operations; and (3) there was a reasonable, customary and industry-accepted alternative available to VirTex. Id. at *4. The court found that the first element was met because there was enough evidence presented for a jury to properly conclude that the powerlines would substantially impair the Bauerles’s use of the surface for their commercial hunting operation. The evidence presented showed that the powerlines would make flying helicopters on the property “a very dangerous situation.” Some of the pilots even stated that it would be so dangerous that they would no longer perform the task. Id. at *5. The court also found that the second element, no reasonable alternatives to the existing operations, was met. VirTex argued that the Bauerles could use four wheelers on the acreage where the proposed powerlines would be located and could continue to use helicopters on the other The Bauerles then filed a declaratory judgment
5,500 acres of unleased property. However, the Bauerles argued that due to the size of the property and the unpredictability of the deer, the only reasonable means of capture was by helicopter. The Bauerles also argued that hunters lease the property specifically so that they can use helicopters to cover large amounts of terrain and quickly capture the deer. Two of the hunters who lease the land confirmed (1) that four wheelers would not work because the amount of land they have to cover; (2) that they may have to fly into VirTex’s leased area because of the unpredictability of the animals; and (3) that they would no longer lease the land from the Bauerles if they were not able to use helicopters. Id. at *7. Lastly, the court found that the Bauerles satisfied the third element by proposing a number of alternatives to overhead powerlines such as: underground powerlines, fueling the pumpjacks by diesel or natural gas, or continue renting the generators currently powering the pumpjacks. Evidence presented showed that powering the pumpjacks by natural gas was a potential option, but would cost an extra $200-$300 per month. Testimony presented also showed that underground lines were a reasonable alternative, albeit at an additional cost. Finally, Dale Phipps, an owner and officer of VirTex testified that the temporary generators currently powering the pumpjacks were a feasible option as they had been, and were currently, being used to power wells in other counties, although it was more expensive. Id. at *10. As a result, the appellate court concluded that the evidence was factually sufficient to support the jury’s finding and the trial court’s ruling in favor of the Bauerles. Id. at *10. 3. The Texas Supreme Court On February 26, 2018, VirTex petitioned the Texas Supreme Court for review, claiming that the Bauerles have not met the elements of the accommodation doctrine on two grounds. First, the hunters use the helicopters for only part of the year. Second, the wells cover a small portion of the land. VirTex also continues to claim that the Bauerles have not provided sufficient evidence of other reasonable, industry-accepted methods for powering the wells.
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3. Devon Energy Production Co., L.P. v. Apache Corp. Does an operator have a statutory obligation to pay royalties to the lessors of its non-consenting cotenants? 1. Background The lessor of a one-third mineral interest in non-consenting cotenants is well-settled, whether the drilling party is liable for payment to the non-consenting cotenant’s lessors had not previously been addressed by case law. Caleb A. Fielder, Blood and Oil: Exploring Possible Remedies to Mineral Cotenancy Disputes in Texas , 50 Tex. Tech L. Rev. 173, 199-202 (2017).
Glasscock County leased her interest in the subject land to Apache Corporation (“Apache”), reserving a 25% royalty interest. The remaining mineral owners (“Lessor Plaintiffs”) leased their two-thirds mineral interest to Devon Energy Production Company, L.P. (“Devon”), also reserving a 25% royalty interest. Apache and Devon were unable to agree on terms for a joint operating agreement. Apache drilled seven oil and gas wells, recovered its costs and, after payout, paid Devon the two-thirds share of the net revenue to which it was entitled as Apache’s cotenant. Neither party paid royalties to the Lessor Plaintiffs. The Lessor Plaintiffs filed suit against both Devon and Apache alleging that (a) Devon failed to pay all royalties due under their respective leases and (b) Apache failed to pay royalties pursuant to Section 91.402 of the Texas Natural Resources Code (“the Statute”). Devon Energy Prod. Co., L.P. v. Apache Corp. , 550 S.W.3d 259, 260 (Tex. App.— Eastland 2018, pet. denied). Devon filed a cross-claim against Apache asserting that Apache had the obligation to pay royalties directly to the Lessor Plaintiffs under the Statute. All parties moved for summary judgment on the issue of which party was required to pay royalty payments. The trial court granted the Lessor Plaintiffs’ motion against Devon, but denied their motion against Apache. The trial court also denied Devon’s motion against Apache and granted Apache’s motion against Devon. The Lessor Plaintiffs settled their claims against Devon, and Devon’s cross-claim against Apache was severed into a separate lawsuit. The trial court then entered a take-nothing judgment in favor of Apache finding that “Apache is not obligated under the Texas Natural Resources Code to pay royalties to [the Lessor Plaintiffs].” Id. at 261. 2. The Court of Appeals On appeal, Devon argued that the trial court erred because Section 91.402 of the Statute mandates that Apache directly pay the Lessor Plaintiffs royalty payments due under the leases between Devon and Lessor Plaintiffs. While the common law duty to account to
Tex. Nat. Res. Code § 91.402(a) requires that “proceeds derived from the sale of oil and gas production from an oil or gas well located in this state must be paid to each payee by payor on or before 120 days after the end of the month of first sale of production from the well. After that time, payments must be made on a timely basis according to the frequency of payment specified in the lease or other written agreement between the payee and payor.” The question for consideration was whether Apache and the Lessor Plaintiffs have a “payor-payee” relationship. Devon argued that Apache was a “payor” because Apache was the operator of the well and that Lessor Plaintiffs were payees because they were legally entitled to payment from the proceeds from the sale of oil or gas. Devon Energy Prod. Co., L.P. at 262-63. The appellate court affirmed the trial court’s decision concluding that Apache and the Lessor Plaintiffs did not have a payor-payee relationship. Under the Statute, to qualify as a “payor,” Apache must have “undertaken” to distribute proceeds to payee, and to qualify as “payees,” the Lessor Plaintiffs must have been “legally entitled” to payment. The appellate court determined that while Apache was the operator, it did not undertake to distribute proceeds to the Lessor Plaintiffs, and did not meet the statutory definition of “payor,” but stopped short of determining whether Lessor Plaintiffs were payees under the Statute. Id . at 263. 3. The Texas Supreme Court On October 19, 2018, the Supreme Court of Texas denied Devon’s petition for review.
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Texas Outfitters Limited, LLC v. Nicholson When does the refusal to lease violate the executive rights holder’s duty to the non-executive mineral owner?
1. Background In 2002, Texas Outfitters offered to buy the
On appeal, Texas Outfitters argued that its discretion in executing was subject only to the rule that it not engage in self-dealing that unfairly diminishes the value of the non-executive’s interest. The appellate court rejected this argument, stating that this standard applies in the context of the execution of a lease, not the refusal to execute a lease. The appellate court agreed with the trial court’s application of the Lesley standard in a refusal- to-lease context: whether the executive rights holder’s refusal to lease was arbitrary or motivated by self-interest to the non-executive’s detriment. Id . at 73. Texas Outfitters also argued that the trial court’s specific findings were insufficient to support its judgment and that there was insufficient evidence to support that Texas Outfitters’ refusal to lease breached its executive duty. The appellate court held that the trial court’s specific fact-findings did not contradict its judgment. In determining whether sufficient evidence supports the finding of a breach of duty, the appellate court considered whether there was evidence that Texas Outfitters (1) refused to lease and (2) its refusal to lease was arbitrary or motivated by self-interest, (3) to the non-executive’s detriment. The appellate court pointed out that Texas Outfitters never sought surface protections from any potential lessee and never made a settlement offer without seeking a reduction in amounts owed to the non- executive. Texas Outfitters’ testimony that it was holding out for a higher bonus was disputed by testimony of the non-executives as well as evidence that even after a year of not receiving a better bonus offer, Texas Outfitters refused to accept a pending lease offer. Accordingly, the appellate court held that the evidence established Texas Outfitters’ refusal to lease was arbitrary or motivated by self-interest to the non-executive’s detriment. Id . at 74-78. The appellate court was careful to make clear that it did not address whether the executive’s failure to execute any lease the non-executive desired is a breach of the executive duty. Id . at 80. 3. The Texas Supreme Court On June 15, 2018, the Supreme Court of Texas granted Texas Outfitters’ petition for review. Oral argument was heard October 10, 2018.
surface estate of the 1,082-acre Derby Ranch (the “Ranch”) in Frio County. The Carters owned 50% of the mineral interest and the Hindeses owned the other 50%. Dora Jo Carter sold the surface, which she owned individually, the executive rights associated with the Carters 50% mineral interest, which she acquired from her children, and a 4.16% royalty interest to Texas Outfitters. Texas Outfitters received two offers to lease: (1) in March 2010, it rejected a lease offer for 22% royalty and a $450 per acre bonus and (2) in June 2010, it received an offer for 25% royalty and a $1,750 per acre bonus. The Hindeses received and accepted the second offer to lease their 50% mineral interest. The owner of Texas Outfitters met with the Carters and told them that in the interest of protecting his hunting business on the Ranch, he would not lease their mineral interest. After a year of back and forth attempting to negotiate a settlement of the issue, the Carters sued Texas Outfitters alleging it breached its duty of utmost good faith and fair dealing by refusing to lease the Ranch. Texas Outfitters received two additional offers to lease before selling the surface and executive rights to a third party. The trial court awarded $867,654.32 in damages to the Carters and found that Texas Outfitters breached its duty to the Carters. Texas Outfitters Limited, LLC v. Nicholson , 534 S.W.3d 65, 66-69 (Tex. App.—San Antonio 2017, pet. granted). 2. The Court of Appeals The appellate court identified two recent cases addressing the executive duty and refusal to lease: In re Bass and Lesley v. Veterans Land Board of the State of Texas . In Bass , the supreme court held the executive did not breach its duty to lease because the executive had not executed a lease and thus had not exercised its right to lease. In Lesley , the supreme court held that an executive rights holder breached its duty when it filed restrictive covenants limiting development of the mineral estate. The supreme court, in Lesley , distinguished the case from Bass stating that an executive may not be liable to the non-executive for failing to lease when it had not been requested to lease, but an executive’s refusal to lease must be examined. Id . at 70-72.
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About the Authors:
Melissa Munson Melissa Munson practices in the areas of business and energy and natural resources law. Her practice focuses on energy transactions, including those involving oil and gas exploration and production and upstream and midstream asset acquisitions and dispositions. Melissa’s transactional experience includes advising clients in connection with the formation of joint ventures and joint development projects, general corporate matters including entity formation and corporate formalities, and other commercial transactions. She also has experience conducting due diligence on energy assets and corporate entities. Melissa.munson@steptoe-johnson.com Garrett Korbitz Garrett Korbitz is an Associate with Steptoe & Johnson, PLLC, who focuses his practice in the area of energy transactional law. Garrett.korbitz@steptoe-johnson.com
COLORADO PROPOSITION 112
Proposition 112 would have expanded existing oil and gas drilling setbacks from 500 feet from homes and 1,000 feet from “high occupancy” buildings to a mandatory 2,500 feet around “vulnerable areas” and “occupied structures”. On November 6, 2018, with 100 percent of counties reporting, the measure failed by a 57% to 43% margin. The final tally indicated an even narrower margin of 55.11% to 44.89%. Amendment 74 was also defeated, trailing 54% to 46%. This amendment would have modified Colorado’s constitution to allow property owners to seek compensation from government any time a government action or regulation devalues a person’s property. Colorado voters followed a national trend as voters in Arizona and Washington also turned down measures that would have curbed fossil fuel development. In its post-election analysis, The Washington Post wrote these defeats “underscore the difficulty of tackling a global problem like climate change at the state and local level, where huge sums of money poured in”.
Pro-renewable energy, anti-fracking forces are not giving up in Colorado and according to Russell Mendell, a spokesperson for Colorado Rising, which backed Prop. 112, activists are “going to keep fighting”. “We are going to hold our elected leaders accountable, and do all we can to protect Colorado communities from the dangers of fracking,” said Mendell, who pointed out that although the measure failed, at least 825,000 voters across the state supported it. The anti-112 oil-and-gas-backed issue committee, Protect Colorado, campaigned against the measure saying it would ban oil and gas development and cause the state to lose hundreds of thousands of jobs. Dan Haley, president and CEO of the Colorado Oil and Gas Association, called Tuesday’s vote a “good night for Colorado’s economy and working families.” Protect Colorado did support Amendment 74, one of the few industry-backed measures nationwide that failed Tuesday.
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Legal
Updates
See legal disclaimer on Page 10
Resolving Ownership Issues with Small Succession Affidavits By Katherine Guidry Douthitt Blanchard, Walker, O’Quin & Roberts, a PLC
Documenting changes in ownership which occur upon the death of a property owner is a universal problem faced by operators in all states. Frequently, the value of the estate is too small to economically justify instituting a probate proceeding, but there is sufficient value or complexity to cause a lessee or operator concern over transferring an interest to the deceased person’s heirs without some legal protection. Louisiana legislators recently made some adjustments to our laws dealing with small successions, which allow, in certain cases, for the recognition of an heir’s ownership in inherited property without judicially opening a succession. See La. C.C.P. arts. 3421 – 3443. Successions meeting the statutory definition of “small succession” are allowed to utilize a simplified process – essentially recording an affidavit of heirship – to dispose of the Louisiana property of deceased persons who died without a will and deceased persons domiciled out of state whose will was probated by court order of another state. The recent changes expand the definition of a small succession, which has made the small succession affidavit procedure more widely available to formally transfer the Louisiana property of qualifying estates. Now, a small succession of a deceased person is defined as either 1) the succession of a person who died with assets located in Louisiana having a total value of not more than $125,000; or 2) the succession of a person who died more than 20 years ago, leaving assets in Louisiana of any value. Previously, a succession could qualify as “small” if the Louisiana estate had a gross value of $75,000 or if more than 25 years had passed since the death of the person for whom the succession would be filed. The increased availability of the small succession affidavit should be useful to reconcile more title matters relating to a deceased person’s property at a lower cost. As an alternative to instituting a probate proceeding for a qualifying estate, a small succession affidavit must be signed by at least two persons, including the surviving spouse and an heir who is at least 18 years old. The affidavit must provide standard information, including
date of death, domicile, address and marital status of the deceased person; confirmation that the deceased person died intestate (separate rules if a will was probated out of state); information regarding the heirs; property descriptions, values and percentages inherited by each heir; and affirmations of acceptance and truth by each affiant. This properly completed and executed affidavit must be recorded in the records of any parish in which immovable property belonging to the succession is situated at least 90 days after the deceased person’s death. Once recorded, this affidavit has the same effect as a Judgment of Possession as to any property described in it. Affidavits of heirship are widely used to informally recognize ownership in property in a deceased person’s heirs. However, an affidavit of heirship alone provides no protection if it is not correct; on the other hand, a small succession affidavit following the law has the same effect as a Judgment of Possession, providing evidence presumed to be correct of the relationship and of the right of the heirs named in that affidavit to possession of the estate. At least in Louisiana, it might be worth considering conforming any form affidavit of heirship to the statutory standard, so that you might be in a position to take advantage of the protections provided by a properly completed, executed and recorded small succession affidavit. We believe that this broadened definition of small succession and expanded availability of the small succession affidavit will be beneficial in quickly resolving ownership issues in more situations at a lower cost, which is a win for all involved.
About the Author:
Katherine Guidry Douthitt Katherine is a partner at Blanchard, Walker, O’Quin and Roberts in Shreveport, Louisiana. Her practice centers on oil and gas transactions and title examination as well as corporate and business matters.
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The Continuous Development Clause
Endeavor Energy Resources, L.P. v. Energen Resources Corporation and John Thomas Quinn 11th Court of Appeals (Eastland) October 25, 2018. No. 11-17-00028-CV.
early spudding of the preceding well could be counted.
Quinn leased 11,302.98 acres in Howard County to OGX who assigned to Endeavor. The lease had a primary term of 3 years with the usual habendum clause but subject to a continuous development clause which allowed Endeavor to retain the entire lease after the primary term if Endeavor continued to drill wells. The lease would terminate as to everything outside of any proration units unless a subsequent well were completed within 150 days after the completion of the preceding well. As with many leases, the lease granted the right to accumulate days not used. If you started a well 145 days from the preceding well, you accumulated 5 days. The accumulation provision reads as follows:
Both the trial court and the Eastland Court of Appeals agreed with Energen. The court focused on the second half of the provision quoted above: “By limiting the use of unused days to the ‘next allowed’ 150-day term, the language of the accumulation provision limits the use of unused days arising from the ‘early’ drilling of one well to be used only to extend the 150-days term for the drilling of the next well” and relied on the dictionary to say that “next” meant the immediately succeeding well, not any subsequent well. The court rejected Endeavor’s construction, which permitted more than a year’s delay in drilling, as conflicting with “the purpose of a continuous- development clause.” This case seems to have turned on the use of the word “next” in the second line of the above quote. Could the scrivener have changed the result by deleting “the next” and substituting “any”?
Lessee shall have the right to accumulate unused days in any 150-day term during the continuous development program in order to extend the next allowed 150-day term between the completion of one well and the drilling of a subsequent well.
About the Author:
The use of the accumulated days is what was at issue in this case.
Endeavor drilled its first well 145 days after the expiration of the primary term and proceeded to drill eleven additional wells over the next five years. After completing the 12 th well on December 27, 2014, Endeavor did not spud the next well until November 12, 2015 (320 days). Believing the lease to have expired as to all acreage outside the proration units, Quinn leased to Energen which brought this cause of action. Endeavor calculated that it had accumulated 227 days from the first twelve wells that extended the deadline for the thirteenth well to 377 days (150 + 227). Energen calculated that Endeavor had only earned an additional 36 days from the twelfth well because it was completed 114 days after the eleventh well. Endeavor added up each day it spudded any of the 12 wells early to calculate its extension. Energen said that only the
Martin Gibson P.O. Box 864 Cedar Creek, Texas 78612 512-614-7785 mgibson@GibsonOilGas.com
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