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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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
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