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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 MMXX • No 3

www.NADOA.org

Contents Feature

NADOA 2020 Officers President Luanne Johnson, CDOA

Articles

1st Vice President Lewis Box, CDOA 2nd Vice Presiden t Michele Lawton Treasurer Jennifer Kegans

Cob Webs – Webinar Events........................................... 3 Chalker v LeNorman – Varying a Written Contract...... 7 Texas Law of Commingling............................................. 9 Colorado Oil and Gas Conservation Commission........ 19 Legislative Updates: Louisiana.................................................................... 20 Oklahoma................................................................... 21 Legislative Watch – Oklahoma..................................... 21 BLM Guidance for Suspension of Operations/Royalty Rate Reductions during COVID-19 Emergency. ........ 21 Fossil Fuels.................................................................... 28 Fossils Ruled a Surface Right........................................ 29 Nebraska Unclaimed Update........................................ 29

Corresponding Secretary Michelle Harris, CDOA Recording Secretary Vicki Danielson, CDOA

The NADOA News Magazine is a quarterly publication of the National Association of Division

Order Analysts PO Box 1656 Palm Harbor, FL 34682

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 Editors April Luedecke, CDOA aprilluedecke@yahoo.com Cheryl Hampton champton@limerockresources.com

In This

Issue

President’s Corner. .................................................1 Decimal Points.......................................................3 Certification...........................................................4 2020 Thank You (Institute Sponsors). ....................5 Counterpart Connection.......................................22 New Members.......................................................28 2020 NADOA Board/Committee Chairs...............32 Calendar of Events. ..............................................33

Graphic Design Paul Beach

On the Cover: Oakland Cemetery Courtesy of Shreveport Visitor’s Bureau

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

Luanne M Johnson, CDOA, CPLTA 2020 NADOA President

Well we are 3/4ths of the way through 2020. Can you believe it? The virus has not gotten any better and, in some states, has just gotten worse. Our industry is still in hard times. Schools are starting to go back into session and that is different--some of us now will add teacher to our resume. It is a year that when we look back on it in history, we will all have stories of what we went through. But I hope that when we talk about all the bad and crazy things we dealt with, that we also include the good things that we had during this year. One of the positives I have is being with my son, while working from home. He turned sixteen in August and is starting his Junior year so I am grateful to have these few months with him. We made wonderful memories while mom was working from home and he was finishing his Sophomore year, having summer and then starting his Junior year. These are months that I have cherished being with him as I know there isn’t a lot more time before he goes off to college. I hope that you too have some good memories during this year. I also hope you are enjoying the webinars NADOA has been doing as well as the local association webinars we have hosted. We will make sure to let you know about all the webinars we hear about so tune in to follow us on all of our media accounts!

All active NADOA members should have received the voting link for the 2021 Ballot on August 21, 2020. If you didn’t receive the email, please contact administrator@nadoa.org .

NADOA will be holding a webinar on September 24, 2020 at 9:00 am central time as our annual meeting. We will go over the state of the organization, have election results for the 2021 board and will also announce the 2021 Institute location. We hope you will be able to attend! Stay safe. -

September 24, 2020 9:00 AM Central Annual Meeting via webinar

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NADOA

Decimal Points

Regional Reporters

April Luedecke, CDOA Associate Editor Rona Erickson, CDOA Editor 2020 NADOA Article Deadlines Cheryl Hampton Associate Editor

ABADOA

Steptoe & Johnson PLLC dan.swiger@steptoe-johnson.com Donna King, CDOA donna.king@flywheelenergy.com

CAPDOA

DADOA

OPEN

Fourth Quarter................. November 13

DALWORTH Lewis Box, CDOA

Details are still being put in place regarding the 2021 Ellis Rudy Memorial Scholarships – more information to come. Remember to keep your NADOA directory information updated. Due to all of 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.

lbox@comstockresources.com

HADOA

OPEN

MAADOA

Angie Coady, CDOA

acoady@vessoil.com

PBADOA

OPEN

SADOA

OPEN

Arkansas

Jackie Clotfelter, CDOA jclotfelter@hannaoilandgas.com

North Dakota Kimberly A. Backman

kbackman@crowleyfleck.com

New Mexico

Zachary P. Oliva

zoliva@kolawllp.com

Louisiana

OPEN

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.

( 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). Links to recorded webinars are available to NADOA members by using the Webinar link in the Members Only section on the homepage. Steptoe & Johnson PLLC – A Rockies webcast series is being planned for September 8, 15, 22 and 29. These webcasts will be held at 11:00 AM Mountain Time. Visit: https://www. steptoe-johnson.com and click on News for details. The Steptoe webcasts are recorded. To access

Cob Webs

Educational webinars can be approved for 1 (one) CDOA certification point. NADOA webinars, Steptoe & Johnson PLLC webcasts and Kiefaber & Oliva 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

G r o w t h T h r o u g h E d u c a t i o n - J u l y / A u g u s t / S e p t e m b e r 2 0 2 0

Visit www.kolawllp.com/events for further information.

previously recorded webcasts, go to www.Steptoe-Johnson.com and enter Webcasts in the search feature. Kiefaber & Oliva LLP LANDMAN EDUCATION SERIES – UPCOMING WEBINARS (click link to register) • September 9 – Application of the Ohio Marketable Title Act to Severed Oil and Gas Interests • October 28 – Haunted Leasehold Tales • November 18 – Co-tenancy • December 9 – Ethics and Negotiations

If you are aware of other educational webinars, please advise NADOA News Magazine editor, Rona Erickson (ronae@kfoc.net), Associate editor, April Luedecke (aprilluedecke@yahoo.com), Associate editor, Cheryl Hampton (champton@ limerockresources.com), or 2020 NADOA Education Chair, Yoli Bazan (ybazan@hilcorp.com).

CERTIFICATION

social distancing issues. Also, we are working diligently to approve webinars in order for CDOA’s to attain the credits necessary to recertify in a safe environment. As a reiteration, please contact us should you have any questions or concerns. Respectfully Submitted, Eli Murray, CDOA 2020 Certification Chairman emurray@dmlp.net

The Certification Committee wants all CDOA’s and CDOA Candidates to know that we are here to help during this crazy time!! We understand that family and life should be your first priority. As such, we are empathetic to those who are dealing with hardships in either recertifying or testing. If you happen to fall into that category, please do not hesitate to reach out to the Committee for assistance. Please note we are granting extensions to those who cannot test due to

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 RECERTIFICATION

Sally Holt – Lone Tree, CO Carol Johns – Houston, TX Zachary Murchison – Houston, TX Kelly Sandoval – Denver, CO Monica Wamsley – Houston, TX Coren Zeigler – Oklahoma City, OK

Sarah Bolen – The Woodlands, TX Brittany Brown – Oklahoma City, OK Chasta Butler – Oklahoma City, OK Lazara Coronado – Houston, TX John Cameron – Houston, TX Michelle Carter – Oklahoma City, OK Kimberly Greenland – Denver, CO

Congratulations to our new CDOA’s:

Tara Miller

Annette Boyd

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

NADOA

Institute

2020 Institute Although the 2020 NADOA Institute was cancelled, NADOA would like to extend a heartfelt thank you to the sponsor companies that donated to NADOA and allowed the donation to be credited to the 2021 Institute. NADOA

also wants to thank all of the speakers who were already lined up to give presentations at Institute prior to the cancellation. Hats off to all of you for your support of NADOA!

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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

Legal

Update

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 presentation 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.

Texas

Chalker Energy Partners III, LLC et al. v Le Norman Operating LLC Cause No. 18-0352 Texas Supreme Court Varying a Written Contract By Email

The Texas Supreme Court released the above opinion on December 4, 2019. The lessons learned from the case are very important in today’s world of on-line auctions and contract negotiations by email/phone. More importantly, the court addresses when and under what conditions a written contract can be altered by other contemporaneous writings, including emails. Factually, the Sellers owned oil and Assets worth hundreds of million of dollars and had decided to sell same utilizing an on-line auction procedure. Bidding procedures were put in place by the Sellers and a virtual data room was created to provide information about the Assets. Key to this decision was the creation of what was denominated as a “No Obligation” clause, which clause was found in a Confidentiality Agreement. This Confidentiality Agreement had to be signed by both parties as a prerequisite to entry into the virtual data room by potential buyers. The No Obligation Clause provided in part the following: “The Parties hereto understand that unless and until a definitive agreement has been executed and delivered, no contract or agreement providing for a transaction between the Parties shall be deemed to exist and neither Party will be under any legal obligation of any kind whatsoever with respect to such transaction by virtue of this or any written or oral expression thereof… For purposes of this Agreement, the term “definitive agreement” does not include an executed letter of intent or any other preliminary written agreement or offer, unless specifically so designated in writing and executed by both Parties.” (emphasis added) The following timeline activities, confirmed by email, took place: 1. Company 1 emailed Sellers a counterproposal to

Sellers’ offer of sale. 2. Sellers voted to sell 67% of the assets and

confirmed such vote to Company 1 via email. A separate and distinct definitive agreement (such as a PSA) by and between the parties was not entered into by said parties. 3. Company 2 thereafter presented Sellers with a new offer of purchase. 4. Sellers elected to sell to Company 2 and executed, along with Company 2, a PSA to that effect. 5. Company 1 demanded that Sellers honor their alleged contract entered into via the email exchange. 6. A lawsuit by Company 1 was brought alleging breach of contract by Sellers. The trial court held, in part, that the entry into a PSA (per the No Obligation Clause) was a condition precedent to the formation of a valid contract. Therefore, there was no meeting of the minds and thus no binding contract by and between Company 1 and Sellers. The appeals court reversed the trial court’s decision. It held that whether the alleged contract between Company 1 and Sellers was subject to the Confidentiality Agreement, and thus the No Obligation Clause, was an issue of fact precluding summary judgment and remanded the case back to the trial court. The Supreme Court held that, by including the No Obligation Clause in the Confidentiality Agreement, an agreement signed by both parties, that Company 1 and Sellers had agreed that a definitive agreement (PSA) was a condition precedent to the formation of a valid contract. In the absence of the execution of a definitive agreement, such as a PSA, by both parties, THERE WAS NO BINDING CONTRACT BY SELLERS TO SELL

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THE ASSETS TO COMPANY 1.

Why choose LIS O.R. ? 80%+ Close out Call Rates 1 Our state-of-the-art Owner Relations CRM tool, LandVan- tage, allows full transparency between the LIS Owner Team Why choose LIS O.R. ? 80%+ Close out Call Rates Support for operators of all sizes. Increase Owner Satisfac- tion and strengthen company reputation. LIS Owner Relations The professional voice of the oil and g s industry. In-House Operators Strengthen Owner Loyalty Reduce Internal OR Support In that event, a new agreement should be prepared and executed by all parties, paying special attention to negating the earlier agreement as written and substituting the new agreement in its place. Amending or replacing a valid contract should never be left to an exchange of emails ONLY. agreement (for example, a PSA) had to be entered into and attached a form of that agreement to be utilized by the parties. Utilizing such specificity in the No Obligation Clause, only upon execution of the PSA could a binding and valid contract be deemed entered into by both buyer and seller. Proper drafting of contracts matters! More importantly, no party to a written agreement (such as a Confidentiality Agreement, PSA etc.) should ever attempt to vary an underlying agreement via email, especially where there is a condition precedent requiring the formation and execution of a specific agreement BEFORE a valid contract will be found to have been established. Both parties to a potential deal (purchase and sale, farmout, etc.) should never use emails to vary or contradict the prior written agreement unless a distinctly new and different agreement is intended by both parties. 1 2 © Terry E. Hogwood 2020

The Supreme Court correctly pointed out that the No Obligation Clause did NOT define what a definitive agreement was. This was a drafting error on the part of the Sellers. However, what was clear from the emails was that no specific agreement was executed and delivered as required by the No Obligation Clause. It is instructive that Company 1 and Sellers attempted to negotiate and execute a PSA but failed in that endeavor. The Court also addressed whether the Sellers waived their right to require the execution of a definitive agreement as a condition precedent to the formation of a valid contract. Not only was there no waiver on the part of the Sellers, Company 1 and Sellers continued to negotiate a PSA but failed to reach a mutually acceptable agreement. CONCLUSIONS: It cannot be emphasized enough that the Confidentiality Agreement, containing the No Obligation Clause, could have been better written. Specifically, the No Obligation Clause should have defined what

In-House Operators Strengthen Owner Loyalty Reduce Internal OR Support In-House Operators Strengthen Owner Loyalty Reduce Internal OR Support

LAND INFORMATION SERVICES

In-House Operators Strengthen Owner Loyalty Reduce Internal OR Support Support for operators of all sizes. Increase Owner Satisfac- tion and stre gthen company reputation. LIS Owner Relations Our state-of-the-art Owner Relations CRM tool, LandVan- tage, allows full transparency between the LIS Owner Team Our state-of-the-art Owner R lations CRM tool, LandVan- tage, allows full transparency between the LIS Owner Team LIS Owner Relations The professional voice of the oil and g s industry. The professional voice of the oil and gas industry.

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tions Why choose LIS O.R. ? 80%+ Close out Call Rates 1 Support for operators of all sizes. Increase Owner Satisfac- tion and strengthen company reputation.

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Live, reportable metrics coupled with monthly analytics detailing call st tistics, trends and outly- ing issues 4

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Reprinted by permission from the March 2020 Energy Update Newsletter authored by Terry E. Hogwood, terrye.hogwood@gmail.com, 713/823-4949. This newsletter was prepared by Terry E. Hogwood for use by his

clients and prospective clients as a reference tool only. Any comments and/or legal conclusions contained in this newsletter are solely those of the author and reliance thereon by any reader of this newsletter is at their sole risk.

Texas Law of Commingling – An Evidentiary Rule By Terry E. Hogwood Attorney-At-Law

Preliminary Statement Two terms used throughout this article need to be

by the Commingler of like or similar personal property owned by both the Commingler and Aggrieved Party into a uniform mass where each component of the mass cannot be distinguished one from the other. Legally, commingling is a rule of evidence that, upon the establishment of the fact of the occurrence of commingling by the Commingler, shifts the burden of proof to the Commingler to prove, with reasonable certainty, how much of the Aggrieved Party’s personal property it has commingled. Failing to meet that burden of proof can result in the forfeiture and vesting of all of the Commingler’s interest in the value of the commingled mass in the Aggrieved Party. For example, if a rustler took A’s cattle and mixed them with his own, and it could not be determined which cattle were A’s and which were the

identified and defined:

1. “Commingler” – This term refers to the party actively mixing (and confusing) its oil and gas with the Aggrieved Party’s oil and gas.

1. “Aggrieved Party” – This term refers to the party whose oil and gas has been commingled.

Commingling of personal property in Texas, or as it was originally called, ‘confusion of goods’, is not, in the author’s opinion, a separate and distinct cause of action. Physically , commingling is simply the gathering

Why choose LIS D.O. ? Set up and maintain ownership records Determine working interest and establish burden groups Resolve revenue and JIB discrepancies

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Why choose LIS D.O. ? Set up and maintain ownership records Determine working interest and establish burden groups Resolve revenue and JIB discrepancies Prepares preliminary Division of Interest, which includes reviewing leases with early pay provisions to ensure owners are included in the preliminary DOI to comply with the lease obligations. Prepares final and payout Division of Interest and performs calculations of interests for all owners reflecting accurate ownership in wells. Determines and calculates leasehold and unit interests. Analyzes title requirements, cures title defects, and determines owner pay status. Researches and resolves owner decimal discrepancies. Review and analyze title documents (deeds, assignments, probates, title opinions, affidavits, etc.) and process ownership changes for both Revenue and JIB. Responds o owner qui ies (email, written, phone) within a timely manner; investigates revenue suspense; interface r gularly with Clients, Revenue & JIB Accounting and Owner Relations. Liaise with landmen, owners, clients, and attorneys in obtaining or providing data and/or explanations with ownership breakdown. Sending Division Orders, Sending Well Exhibits, Preparing Mail-outs, Receiving Documents, Scanning images, and Logging Cases. Why choose LIS D.O. ? Set up a d maintain ownership records Determine working interest and establish burden groups Resolve revenue and JIB discrepancies

Land Admin professionals focused on providing your team with the highest level LIS Division Orders Prepares preliminary Division of Interest, which includes reviewing leases with arly pay provi ions to e sure owners are included in the preliminary DOI to comply with the lease obligations. Prepares final and payout Division of Interest and performs calculations of interests for all owners reflecting accurate ownership in wells. Determines and calculates leasehold and unit interests. Analyzes title requirem nts, cures title defects, and determines owner pay status. Researches and resolves owner decimal discrepancies. Review and analyze title documents (deeds, assignments, probates, title opinions, Responds to owner inquiries (email, written, phone) within a timely manner; investigates revenue suspense; interface regularly with Clients, Revenue & JIB Accounting, and Owner Relations. Liaise with landmen, owners, clients, and attorneys in obtaining or providing data and/or explanations with ownership breakdown. Sending Division Orders, Sending Well Exhibits, Preparing Mail-outs, Receiving Documents, Scanning images, and Logging Cases.

Prepares preliminary Division of Interest, which includes reviewing leases with early pay provisions to ensure owners are included in the preliminary DOI to comply with the lease obligations. Prepares final and payout Division of Interest and performs calculations of interests for all owners reflecting accurate ownership in wells. Determines and calculates leasehold and unit interests. Analyzes title requirements, cures title defects, and determines owner pay status. Researches and resolves owner decimal discrepancies. Review and analyze title documents (deeds, assignments, probates, title opinions, aidavits, etc.) and process ownership changes for both Revenue and JIB. Responds to owner inquiries (email, written, phone) within a timely manner; investigates revenue suspense; interface regularly with Clients, Revenue & JIB Accounting, and Owner Relations. Liaise with landmen, owners, clients, and attorneys in obtaining or providing data and/or explanations with ownership breakdown.

9 Land Admin professionals focused on providing your team with the highest level of back office Division Order support in the industry. Let the LIS Division Order team help organize and assist with projects large and small. Professionalismmeets expertise with full commitment to a job well done. www.lislv.com team help organize and assist with projects large and small. Professionalism meets expertise with full commitment to a job well done.

G r o w t h T h r o u g h E d u c a t i o n - J u l y / A u g u s t / S e p t e m b e r 2 0 2 0 Sending Division Orders, Sending Well Exhibits, Preparing Mail-outs, Receiving Documents, Scanning images, and Logging Cases.

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rustler’s, the entire herd would be sold and all monies from such sale would be awarded to A as damages.

of oil and gas which has been commingled by the Commingler; and the Aggrieved Party, after hearing and believing the false statement(s), either acts or fails to act based on the assumptions made after hearing the information to his detriment.) 5. Trespass (entry by the Commingler onto the property of the Aggrieved Party without permission of the Aggrieved Party and unlawful/ illegal production of oil and gas without the Aggrieved Party’s consent or authorization.) 6. Suit under the Texas Division Order Statute (Article 91.401 et seq, Title 3, Texas Natural Resources Code) 7. Suit under the Texas Theft Liability Act (Texas Civil Practice and Remedies Code, Title 6, Chapter 134) 8. Breach of contract (A breach of contract {can be an underlying oil and gas lease, operating agreement, etc.} only requires that there be an existing contract, which the Aggrieved Party acknowledges and performs under and which the Commingler breaches, thereby damaging the Aggrieved Party.) 9. Suit under TEX.NAT.RES.CODE ANN. § 85.321 (When a mineral, royalty or working interest owner is damaged by a violation of the conservation laws of this state or a Railroad Commission rule or order, section 85.321 of the Texas Natural Resources Code expressly provides for a damage suit against the offending operator) Suit for an accounting (failure to properly meter, measure or account to the mineral, royalty or working interest owner for oil and gas produced under an oil and gas lease or joint operating agreement) Examples of Commingling - Commingling of oil and gas owned by different parties can occur under several general factual situations. In the author’s opinion, all of the following examples, except Example A, could involve the bringing of a lawsuit sounding in one or more the above 10.

The same logic applies to cases which involve oil and gas commingling. Each molecule of oil and/or gas is exactly identical to all of the other molecules of oil and/or gas that a Commingler may wrongfully produce and fail to account to other mineral, royalty or working interest owners. As a rule of evidence, once commingling has been established, the Commingler has the burden of proof to demonstrate, with reasonable certainty, what share of the commingled mass of the oil and/or gas is his and what share belongs to the Aggrieved Party. The failure of the Commingler to meet that burden of proof results in the forfeiture of all of the Commingler’s interest in the value of the uniform mass to the Aggrieved Party.

Examples of Modern Oil and Gas Commingling

Potential Causes of Action Which May Be Brought by the Aggrieved Party (NOTE: the bringing of one of the herein identified causes of action does not necessarily preclude the bringing of additional causes of action under the same identical facts in the same case. This paper will not address any potential conflicts between any of the below identified causes of action.) 1. Conversion of oil and gas by the Commingler (Exercise of dominion and control over the Aggrieved Party’s oil and/or gas by the Commingler in an unlawful and unauthorized manner) 2. Unlawful drainage by the Commingler (Typically, drilling by the Commingler too close to Aggrieved Party’s lease line in violation of Texas Railroad Commission rules and regulations and illegally draining oil and/or gas from the Aggrieved Party’s lease OR the illegal drilling of a deviated wellbore across lease lines) 3. Negligence (including gross negligence) in metering/production practices by the Commingler to the detriment of the Aggrieved Party 4. Fraud (Fraud can occur when the Commingler makes purposeful, false, damaging statements to the Aggrieved Party concerning ownership

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

identified causes of action to recover the oil and/or gas wrongfully commingled by the Commingler. 1. Example A: Production of oil and/or gas is from one or more lease wells on a single lease where the working interest is owned in undivided interests and all production is produced into a common tank battery or sold to a common purchaser. Metering of each well is not usually required in this situation since each working interest owner will be able to determine its undivided lease working interest based on accurate title examination and thus define it aliquot share of production from all lease wells going into the common facility. There is no issue of commingling under this fact scenario.

production is attributable to each separate lease/well.

Once commingling of the oil and gas has been established, the common working interest owner has the burden of showing how much of the production is attributable to each well/lease.

3. Example C: Example B is to be distinguished from the situation where a validly pooled unit has been formed but not all mineral/royalty owners have been effectively pooled. a. Where vertical wells are involved, if the well is not on the un-pooled/un-leased mineral or royalty owner’s tract of land, such mineral or royalty owner does not share in any of the unit production; and b. Where the vertical well is on the un-pooled/ un-leased mineral or royalty owner’s tract of land, and that production has been commingled with production from other wells located on the unit area, the working interest owner has the burden of proving how much production is attributable to the well located on the un-pooled/un-leased mineral or royalty owner’s tract of land. If demonstrable with reasonable certainty, thereafter the un-pooled/ un-leased mineral or royalty owner thereafter takes its share of that tract’s production on an un-pooled/un-leased basis. If the working interest owner cannot demonstrate what share of production is attributable to the well under which a mineral/royalty owner’s interest is not validly pooled, such mineral/royalty owner may be entitled to its share of all unit production from all unit wells. 4. Example D – The operator of an adjoining lease/ unit a. Unlawfully trespasses on another lease/unit and drills one or more unauthorized wells; and b. Produces that well(s) through its metering facilities/tank facilities; and

2. Example B: Oil and/or gas production:

a. From two or more vertical wells on two separate and distinct oil and gas leases; and b. Ownership of the mineral/royalty interest is different under each lease; and c. The working interest in each lease is vested in the same oil company; and d. The production from both wells is produced into a common tank battery or sold to a common gas purchaser utilizing only one common metering device. e. This factual situation does not involve the pooling of the separate leases. The ownership question is what portion of the oil and/or gas stream is attributable to each well/lease where only one common metering device has been utilized. This factual situation often arises where the same operator produces all of the wells from all of its separate leases and does not meter each well separately coupled with different mineral/royalty ownership under one or more separate leases. The question of ownership centers on what amount of

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recognized in Texas since it adopted the common law of England as it existed in 1840 ( Perry v. Smith , 231 S.W. 340 (Tex.Com.App. - 1921). The following early cases yield rules of law governing the doctrine in addition to those set out in the West Trilogy cases below. Rule No. 1 – Before the rules governing commingling may be applied, the Aggrieved Party seeking such application must prove and secure a fact finding that commingling by the Commingler did in fact occur. Mooers v. Richardson Petroleum Co., 204 S.W.2d 606, 608 (Tex. - 1947) Rule No. 2 – The commingling of goods/assets of like kind and nature of two or more persons, whether done intentionally, negligently or inadvertently, which makes the goods/assets of the parties become indistinguishable, places the burden of proof of determining the ownership share of each party on the Commingler . Sheldon Petroleum Co. v. Peirce , 546 S.W.2d 954 (Tex.Civ.App. — 1977); Mooers v. Richardson Petroleum Co., 204 S.W.2d 606 (Tex. - 1947) Rule No. 3 - Damages -The failure of the Commingler to carry its burden of proof and show the respective ownership shares of the commingled goods/assets results in the forfeiture of the value of the whole commingled mass claimed by the Commingler to the Aggrieved Party. Holloway Seed Co. v. City Nat. Bank , 47 S.W. 95 (Tex. - 1898); Farrow v. Farrow , 238 S.W.2d 255 (Tex.Civ.App. - 1951) Rule No. 4 – If the respective shares of the commingled parties in the confused mass of like goods/assets can be determined, no change of ownership in the goods/assets takes place. Farrow v. Farrow , 238 S.W.2d 255 (Tex.Civ.App. — 1951) Rule No. 5 – If the division of goods is impossible, but the parties’ aliquot shares of the commingled mass can be determined by valuing the commingled mass, then each party may claim its prorata share of the total value thereof. Belcher v. Cassidy Bros. Live-Stock Commission Co ., 62 S.W. 924 (Tex.Civ. App. - 1901)

c. Does not separately meter/measure the oil and gas production from the unauthorized well(s). d. The Commingler has the burden of proving the aliquot share of production attributable to the unauthorized well(s) or suffer the loss of the value of the entire amount of oil and/or gas as metered/ measured at its facilities. 5. Example E - Oil and/or gas production from a horizontal well involving two or more tracts, where: a. The producing zone from a horizontal well is physically located on a tract where one or more mineral/royalty owners under that tracts is either un-leased and/or not subject to an existing pooling designation; and b. All of the production from the horizontal well is produced into a common tank battery or sold to a common purchaser utilizing only one common metering device. c. The issue is how much of the production from the horizontal well is to be allocated to the tract under which the mineral/ royalty interest is un-leased/un-pooled. The operator of the well, after the preliminary

demonstration of the commingling of all production from the well, including production attributable to the Aggrieved Party, then bears the burden of proving the allocation of production to the tract at issue. This situation will not be addressed in this paper but has been addressed in a prior article by the author – Horizontal Wells and Commingling.

Early Law of Commingling:

The doctrine of confusion of goods (commingling) originated early in Texas jurisprudence. In fact, the doctrine of confusion of goods has been

Rule No. 6 – The evidence presented by the

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commingling party/adversely affected party to prove damages need only be sufficient to allow a jury to calculate the amount of damages with reasonable certainty . Ortiz Oil Co. v. Luttes , 141 S.W.2d 1050 (Tex.Civ.App. – 1940) - See discussion of reasonable certainty below.

was interesting to say the least.

“Moreover the record reflects that plaintiffs’ damages may not be fixed with any accuracy. Defendant’s geologist, witness Warnock, who testified as to the size and contents of the field based on available data candidly informed the court he could not state the margin of error in his testimony. Insofar as his testimony is concerned the error could be 100%, 200% or any other figure. Defendant’s engineer witness Whitson’s testimony was no more certain than that of Warnock. And plaintiffs’ remedy at law is inadequate if damages may not be determined with some precision. ...” West v. Humble Oil & Refining Co , 496 S.W.2d 212, 215 (Tex.Civ. App. - 1973) Since the proof of damages tendered by Humble was, in the opinion of the court, suspect as to its accuracy, the court held that, lacking a clear, adequate remedy at law, the Wests were entitled to relief by injunction and remanded the case back to the trial court with instructions to enter a permanent injunction prohibiting Humble from injecting gas until all native gas in the reservoir had been produced.

The West Trilogy Cases

Although Texas law on the matter of oil and gas commingling did not originate with the West Trilogy Cases, today the rules of law coming out of said cases are the basis for all Texas cases dealing with the commingling of oil and gas. To completely understand the ruling in the Supreme Court case, it is helpful to review the holdings of the appeals court prior to the Supreme Court opinion and the appeals court ruling after the Supreme Court opinion.

West v. Humble Oil & Refining Co , 496 S.W.2d 212

(Tex.Civ.App. - 1973)

The initial court of civil appeals case involved the entry by Humble onto the West oil and gas lease in which it was the lessee as well as owner of the gas storage rights. Gas storage rights are an incident of surface ownership and not mineral ownership. Springer Ranch, Ltd. v. Jones , 421 S.W.3d 273 (Tex.App. - 2013). Humble began injecting gas into the yet to be depleted gas reservoir for storage purposes. The Wests sued for an injunction prohibiting Humble from using the reservoir for gas storage until all native gas located in the reservoir had been produced. Alternatively, the Wests asked the court, if an injunction was not to be granted, to order Humble to pay royalties in accordance with the lease whether the gas produced was native gas or stored gas. Humble argued that 89% of the native gas had already been produced. It further stated that if all native gas was produced prior to storage activities, that the reservoir would be damaged for gas storage purposes and thus not usable. Humble offered to pay to the Wests royalties on gas until the volume of gas it paid royalties on equaled the volume of gas still remaining in place. The trial court denied the Wests’ request for a permanent injunction but did order Humble to account to the Wests for their royalty share of all gas produced from tracts in which they owned royalty interests, whether native or stored gas. The testimony on reserve calculations

Humble Oil & Refining Co. v. West , 508 S.W.2d 812

(Tex. – 1974)

The case reached the Texas Supreme Court for review. In light of the appeals court holding on the issue of damages and the apparent lack of specificity and accuracy on native gas reserve calculations, the Supreme Count looked at the law of confusion of goods in Texas (commingling). It set forth the following general rules regarding commingling: 1. The confusion of goods theory only applies where the commingled goods of two or more parties are joined (confused) such that the property of each of the parties cannot be determined. 2. If the commingled goods are similar in value and nature then each party takes its share of the commingled mass. In this case, the in-place native gas and stored gas were clearly commingled in the reservoir. The problem was determining what percentage of the thereafter produced gas was native gas and what percentage was stored gas.

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3. The burden of proof for determining the ownership of a commingled mass is on the Commingler once it has been factually determined that a commingling of like personal property has taken place. 4. If the commingled mass is so confused that a proper and accurate division of same cannot be made, the loss falls on the Commingler. “Stated differently, since Humble is responsible for, and is possessed with peculiar knowledge of the gas injection, it is under the burden of establishing the aliquot shares with reasonable certainty …” Humble Oil & Refining Co. v. West , 508 S.W.2d 812, 818 (Tex. – 1974) emphasis added Thus, the burden of proof fell on Humble to show, with reasonable certainty¸ the volume of native gas upon which the Wests were entitled to receive their royalty share absent the injection of the storage gas. This shift in the burden of proof occurred upon proof by the Wests:

Exxon Corp. v. West , 543 S.W.2d 667 (Tex.Civ.App.

- 1976)

This portion of the case arose after remand where the appeals court addressed the evidence introduced by Humble (now Exxon) in an attempt to satisfy its burden of proof as outlined by the Supreme Court. This court is attempting to determine if the gas reserves (native and stored) were computed with reasonable certainty , thus discharging Exxon’s burden of proof. This appeal takes place after a second trial on the merits.

The court set out the Supreme Court rule of the case which it believed the trial court should have followed:

“. . . (I)t is our view that the act of commingling native and extraneous gas did not impose upon Humble the obligation of paying royalties on all gas thereafter produced from the reservoir, if the evidence establishes with reasonable certainty the volume of gas reserves upon which the Wests would have been entitled to royalties, absent injection of extraneous gas. The burden of this showing devolves upon Humble after proof by the Wests of their royalty interest, together with proof of Humble’s commingling of extraneous and native gas. The threshold question for determination is whether the requisite computation of reserves is capable of establishment with reasonable certainty ; and, if so, the further question to be resolved is whether the burden defined above is discharged by Humble under the evidence . . .” Exxon Corp. v. West , 543 S.W.2d 667,669 (Tex.Civ.App. - 1976) emphasis added Exxon again relied on the testimony of two witnesses: a geologist and a petroleum engineer. The two Exxon witnesses testified as experts on the maximum amount of gas that was in place as of the date gas storage operations commenced. The Wests did not present any witnesses to rebut Exxon’s expert testimony. After Exxon’s expert testimony was concluded, both sides rested. The trial court found for the Wests, requiring Exxon to pay royalties on all gas produced from the West lease, be it native or stored gas. It further found, as the trier of fact, that Exxon had not established, with reasonable certainty, the maximum volume of recoverable gas in the reservoir nor the total amount of gas in the reservoir as of the date

1.That Humble had commingled native gas and storage gas and

2. Proof of the Wests’ royalty percentage in the native gas.

The issue thus became whether Humble could accurately prove the percentage of native/stored gas reserves with reasonable certainty. If so, the burden of proof would have been discharged by Humble by such evidence and the burden of proof transferred back to the Wests to prove otherwise. “The threshold question for determination is whether the requisite computation of reserves is capable of establishment with reasonable certainty ; and, if so, the further question to be resolved is whether the burden defined above is discharged by Humble under the evidence. We have concluded that the cause should be generally remanded to the trial court for determination of these issues at the trial level, as well as for consideration of any other issues the parties may raise in the light of our rulings.” Humble Oil & Refining Co. v. West , 508 S.W.2d 812, 819 (Tex. – 1974) emphasis added

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of commencement of gas storage operations.

proof and, in the absence of controverting evidence to the contrary, may bind the Aggrieved Party (as in the last of the three West cases). This rule of evidence will be key in determining if commingling was committed and what the measure of damages will be. It is also instructive for any Aggrieved Party – the Aggrieved Party must present expert testimony (evidence) that controverts that of the Commingler. Otherwise, the uncontroverted evidence presented by the Commingler may be found to be binding on the Aggrieved Party.

Significant to this case, the appellate court looked at the evidence presented by Exxon on the calculation of recoverable gas reserves and total possible in place gas reserves. Key in its analysis was the fact that the Wests elected not to present any expert witnesses of their own. “ However, where the nature of the subject matter of the experts’ testimony is such that the trier of facts must be guided solely by the opinion of experts in that scientific field, the opinions given by the expert witnesses may be regarded as conclusive, if otherwise credible and free from contradiction and inconsistency”. Exxon Corp. v. West , 543 S.W.2d 667, 672 (Tex.Civ.App. - 1976) emphasis added The appellate court then went on to analyze the evidence presented by Exxon. It acknowledged that the trial court, as the trier of fact, did not accept Exxon’s maximum recoverable gas calculations since they could not be made, in the trial court’s opinion, with reasonable certainty. The case then turned on a stipulation by Exxon that it would pay royalties on the maximum amount of gas in the reservoir as of the commencement date of injection of storage gas. Exxon argued that even if had not met its burden of proof regarding the establishment of the total amount of recoverable gas in the reservoir as of the commencement date of gas storage, it did meet its burden of proof by proving with reasonable certainty the maximum amount of gas which could have been in the reservoir as of the gas storage commencement date. The court found that absolute accuracy in determining the amount of producible gas/native gas in place was not required. Rather, the evidentiary rule adopted by the court was reasonable certainty even if the exact volume of reserves could not be determined. Additionally, since none of the Exxon scientific evidence was controverted, the court found that the Exxon total in-place reserve calculations (prior to gas injection operations) offered by its experts was binding on the trial court. The West Trilogy Cases added a new element to shifting the burden of proof from the Commingler to the Aggrieved Party. If the Commingler can show, with reasonable certainty, the aliquot share of production that the Aggrieved Party is entitled to, it has met its burden of

Underlying Causes of Action

It appears that the West Trilogy Cases were premised on Exxon’s breach of the oil and gas lease covering the lands under which the gas storage formation was located. Specifically, the formation into which the gas was being injected still held gas that was being produced as primary production by Exxon. The Wests alleged a breach of contract by Exxon for improperly paying royalty under their oil and gas lease by combining native and injected gas and refusing to tender royalty on all production since it was alleged that the percentage of native and stored gas could not be determined.

The examples set forth above, and indeed most modern day commingling cases, can be premised upon:

1. an antecedent underlying tort cause of action (conversion, trespass, negligence or, fraud); or

2. three statutory causes of action: Texas Division Order Statute (Article 91.401 et seq, Title 3, Texas Natural Resources Code); Texas Theft Liability Act (Texas Civil Practice and Remedies Code, Title 6, Chapter 134); or suit under TEX. NAT.RES.CODE ANN. § 85.321 or

3. breach of contract; or

4. unlawful drainage by the Commingler due to one or more violations of the spacing rules of the Texas Railroad Commission or the drilling of an illegal, deviated wellbore or 5. improper accounting by the operator under an oil and gas lease or joint operating agreement.

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