2018 Q1

National Association of Division Order Analysts January / February / March 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 1

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 UPDATES Dragon v. Trial: Revisiting Duhig................................................. 9 Colorado – COGCC Ruling on Overrides.....................................10 Davis v. Mueller – Validity of General Granting Clause...............12 Ohio – Post-Production Deductions..............................................13 Pennsylvania – Non Resident Withholding Tax............................14 North Dakota Hallin v. Inland Oil & Gas Corp................................................15 Wilkinson v. Board of University and School Lands...................16 Senate Bill 2134..........................................................................18 NDIC Rule Changes under review. .............................................19 Data: You Can Do It!...................................................................21 Institute Preview............................................................................27 President’s Corner. ................................................................1 Certification..........................................................................3 Decimal Points......................................................................5 2019 Nominations.................................................................6 Division Order $al................................................................6 2018 Member Recognition Nominations................................7 NADOA Social Media...........................................................7 Interaction – NAPE.............................................................20 New Members......................................................................22 Counterpart Connection......................................................23 2018 NADOA Board/Committee Chairs..............................39 Calendar of Events. .............................................................41 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: Nashville Night Skyline from the River Photo courtesy of Nashville Convention and Visitors 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

Cheryl Hampton 2018 NADOA President

Let me start out by saying what a privilege and honor it is to serve as your 2018 President. I’m looking forward to serving you this year and working hard to continue making NADOA the successful and professional organization that it is. We have seen many ups and downs in our industry over the years and I’m encouraged by the current positive signs we are seeing. There seem to be more jobs on the horizon compared to last year. Some areas, such as Denver, have more jobs than analysts. This year’s NAPE held in Houston was well attended. All of this points to an upward trend in the oil and gas industry. While some companies are still experiencing layoffs, there are still jobs available. Do you know someone who has been laid off? Encourage them to join NADOA. Perhaps you can offer to pay their dues to help them out. There is no better way to network and keep in tune with what is happening in our profession. This year we celebrate the 45th anniversary of NADOA. What better place to celebrate than in Nashville, Tennessee! The 45th Annual Institute will be held September 5-7 at the beautiful Gaylord Opryland Hotel. The Board and the Institute Committee are already hard at work planning for a successful Institute. Room rates are $159 and reasonable flights to Nashville can be found at all airlines. I hope you are as excited about attending this year’s Institute as I am. Not only will you be getting an exceptional education experience, but there is so much to explore in Nashville! Rated the #1 convention destination, the city really goes all out to make sure you have a great time. Live music, exhibits, food, history and so much more await you in Nashville! Plan to come early and stay on to make sure you experience it all! The Board met in January to start tackling business for 2018. Your Board members are dedicated to keeping NADOA on track this year with educational opportunities, innovative new ideas and fiscal responsibility. From time to time we send out surveys to the membership. Please take a few moments to complete these surveys so we know your thoughts. Remember, this is YOUR organization. I’d also like to thank Newfield Exploration for hosting the first Institute Committee meeting this year. Institute Co-Chairs Luanne Johnson and Lucretia Jones have assembled an enthusiastic group to plan this year’s Institute. I have no doubt that you will be amazed at the program they put together. Thank you also to all the companies who sponsor and allow their employees to serve on the Board and on the committees. We couldn’t do it without them. In closing, I would like to encourage each and every member to make an effort to invite a fellow co-worker or friend in the industry to join NADOA. Let’s make 2018 a great year for our organization as we celebrate 45 years of excellence!

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NADOA

Certification

2018 Certification Committee Chair.....................................................................Brenda Dickey, CDOA Application and Publications.................................Yoli Bazan, CDOA Recertification Credits...........................................Eli Murray, CDOA Policies...................................................................Heidi Davis, CDOA Recertification Applications...................................Darryn McGee, CDOA Review Manuals/Forms..........................................Lewis Box, CDOA Testing...................................................................Sherry Werth, CDOA NADOA Board Liaison.........................................Melanie Finnegan, CDOA

CERTIFICATION Hail and Farewell— The Committee says farewell to Stephanie Franklin after her three years of dedicated service handling applications for certification. We are thankful for her organizational skills and thoughtful input in our meetings. We will miss you, Stephanie! Hail to Yolanda “Yoli” Bazan and Melanie Finnegan! Yoli, from HADOA, is taking over from Stephanie. Many of you are familiar with Yoli and all that she does to help further the education of our members. Melanie, from DALWORTH, will serve as NADOA Board Liaison. We look forward to hearing Melanie’s ideas and her participation on the Committee. Welcome, Yoli and Melanie! Reminder— CDOAs with a January certification date have until March 31 to enter employment credit for the calendar year 2017. The Certification System is operational for entering employment credit. Having said that, there are still some individuals experiencing issues. Our system service provider has determined the problem is due to security on certain networks. If you are continuing to have problems, please send me an email and I will get your credits entered for you. The Committee will be discussing alternative ways to handle employment credit in its next meeting. We are frequently asked why a pre-approved credit cannot be found in the drop-down menu. Many times the answer is that the event was over 60 days ago. CDOAs are required to report their recertification credits

in the system within 60 days of the educational event. The pre-approved events are entered in the system with an expiration date. Make it a practice to enter your credits as soon as you complete the event. Policy and Procedure— Recent updates have been made to the Voluntary Certification Program Policy and Procedures document. There were no changes to the policy, per se, but rather the revisions were made to add clarity and address changes in how the policy is administered, such as electronic communications versus postal mail. Even so, I ask that you take a few moments to familiarize yourself with the document on the website. Many of the questions the Committee receives are addressed in this document. Don’t misunderstand me—the Committee is more than happy to address your questions. The committee members are actively employed analysts and as such, you may experience a delay in receiving the information you need. You may be able to find what you need quickly on the website. The document is located at www.nadoa.org , under the “CDOA” tab; “Program Governance”.

As always, thank you for the opportunity to serve as Certification Committee Chair.

Brenda Dickey, CDOA Brenda.Dickey@bp.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 RECERTIFICATION

Rose Nguyen – Houston, TX Elizabeth Nolan – Dallas, TX Honey Overby – Houston, TX Deachi Lee Payne – Houston, TX Terra Peterson – Houston, TX Katie Petross – Denver, CO Hedy Salazar – Birmingham, AL

Vivian Atchinson – Enid, OK Dale Bender – Houston, TX Tonya Bieda – Plano, TX Monica Bradley – Tulsa, OK Brad Brown – Oklahoma City, OK Linda Chance – Houston, TX Heidi Davis – Kansas City, MO

Bonita Hill – Houston, TX Lisa L Johnson – Tulsa, OK Cathy Jones – Houston, TX Lynne McCord – The Woodlands, TX Maryum Mims – Houston, TX Judy Moreland – Midland, TX Jill Nelson – Oklahoma City, OK

CANDIDATES FOR CERTIFICATION

Christine Cordier Burton - Houston, TX Somchay Fairbanks - Dallas, TX

Jennifer Crystal Lujano – Midland, TX Karen Sue Townson – Midland, TX

TIME TO RECERTIFY? If you are a CDOA whose certification expired January 1, 2018, you should have received your Re- Certification Application electronically by the end of January. If you did not receive your Application, please contact Darryn McGee, CDOA at dmcgee@protege-energy.com.

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NADOA

Decimal Points

April Luedecke, CDOA Associate Editor

Rona Erickson, CDOA Editor

NADOA Education Memorial Fund In 1985, an Educational Memorial Fund was established to provide funding for NADOA educational programs. In memory of each deceased member of the association, $100.00 from the general treasury of the Association is placed in the Fund. Donations are also accepted from individuals, local Division Order associations, and corporations. A list of members who have passed on is found in the directory on the NADOA website ( http:// www.nadoa.wildapricot.org/page-249739 ). If you are aware of the death of an NADOA member, past or present, please be sure to notify the administrator ( administrator@nadoa.org ) and/or the News Magazine editor ( ronae@kfoc.net ) for recognition in NADOA’s records and a donation to the Educational Memorial Fund made in their name.

2018 NADOA Article Deadlines

DO Smiles Division Order $al was introduced in the Fourth Quarter 2017 NADOA News Magazine (see Page 22). $al is the brainchild of Phyllis Raynor, who is a member of the Division Order team at Laredo Petroleum in Tulsa, OK. $al looks at the sometimes humorous side of a Division Order Analyst’s world. Second Quarter...............................April 27 Special Institute Edition.....................June 1 Third Quarter..............................August 17 Fourth Quarter........................ November 9

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.

Regional Reporters ABADOA

Steptoe & Johnson PLLC

dan.swiger@steptoe-johnson.com donna.king@forwardlandllc.com

CAPDOA

Donna King, CDOA

DADOA

Sharon Siemer, CDOA

sharon.siemer@anadarko.com

DALWORTH

Lewis Box, CDOA

lbox@finleyresources.com

HADOA

Dale Bender, CDOA Angie Coady, CDOA

dalebender1433@yahoo.com

MAADOA

acoady@vessoil.com

PBADOA

Shawn Thompson

shawn.thompson@pxd.com

SADOA

Rebecca Helt, CDOA

rebecca.helt@wpxenergy.com

Arkansas

Jackie Clotfelter, CDOA

jclotfelter@hannaoilandgas.com

North Dakota

Kimberly A. Backman

kbackman@crowleyfleck.com

New Mexico

Zachary P. Oliva

zoliva@kolawllp.com

Louisiana

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Officer Nominations for the 2019 Board of Directors It seems like we just elected the officers for 2018 but it is never too soon to consider running for a position on the 2019 NADOA Board. Our President in 2019 will be Jason Lucas and our First Vice President will be Luanne Johnson. We need members to run for 2nd Vice President, Treasurer, Recording Secretary and Corresponding Secretary. Know of a member who would make a great candidate? Perhaps you are interested in running for office for 2019? Please contact me at srupprecht@enerplus.com to discuss the possibility of running for office or if you would like to nominate someone. I will be forming a nomination committee and welcome hearing from people who would like to recruit candidates. I hope to hear from many of you interested in serving NADOA in 2019.

Submitted by Sandi Rupprecht 2018 Board Advisor

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It’s never too early to think about the accomplishments of our members and the companies that support them, but it can be too late. So, start thinking now about that special person and/or company who should be nominated to receive one of NADOA’s Special Recognition awards. Awards will be presented at the 2018 Institute in Nashville, TN. 2018 Member Recognition Awards

Russell Schetroma Memorial Speaker’s Award: Presented to the individual who has contributed to NADOA’s growth and development by speaking, educating and sharing knowledge on numerous occasions to the NADOA membership, the Division Order profession and/or the industry during the past year. contributed the most to NADOA’s growth and development, the Division Order profession, and/ or the industry during the past year. Nomination form follows and may also be found on the homepage of the website www.NADOA. org . Please forward nominations to Stan Pinney at sbpinney@sbcglobal.net . Corporate Award: Presented to the group/company that has

Interaction Award: Presented to the NADOA member or affiliated organization who has demonstrated leadership in the promotion of the profession to the industry and the community. Education Award: Presented to the NADOA member who has achieved a level of unusual distinction in NADOA’s education activities, as demonstrated by their contribution of time and service to the betterment of Division Order professionals. Lifetime Achievement Award: Presented to the NADOA member who has exemplified the Division Order profession through demonstrated leadership contributions to the industry and the profession during their career.

Deadline for nominations is May 31, 2018.

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2018 Nomination Form for NADOA Membership Recognition Awards

I would like to nominate ___________________________________________ for the award(s) marked below:

_____ Interaction Award: Presented to the NADOA member or affiliated organization who has demonstrated leadership in the promotion of the profession to the industry and the community. _____ Education Award: Presented to the NADOA member who has achieved a level of unusual distinction in NADOA’s education activities, as demonstrated by their contribution of time and service to the betterment of Division Order professionals. _____ Lifetime Achievement Award: Presented to the NADOA member who has exemplified the Division Order profession through demonstrated leadership contributions to the industry and the profession during his/her career. _____ Russell Schetroma Memorial Speaker’s Award: Presented to an individual who has contributed to NADOA’s growth and development by speaking, educating and sharing knowledge on numerous occasions to the NADOA Membership, the Division Order profession and/or the industry during the past year. _____ Corporate Award: Presented to the group/company that has contributed the most to NADOA’s growth and development, the Division Order profession, and/or the industry during the past year. Please detail the nominee’s involvement in NADOA, the services they have performed and/or contributions they have made (You may attach a separate sheet if necessary). ________________________ ________________________________________________________________________________________ ________________________________________________________________________________________ ________________________________________________________________________________________ ________________________________________________________________________________________ ________________________________________________________________________________________ ________________________________________________________________________________________ ________________________________________________________________________________________

Nominator: ____________________________________________________ (Please Print)

____________________________________________________ (Signature) ____________________________________________________ (Daytime Phone)

Send nominations to: Member Recognition Awards Committee, c/o Stan Pinney ( sbpinney@sbcglobal.net ) Nominations will be accepted through May 31, 2018

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Updates

These materials reflect only the personal views of the author 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 author 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 author 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.

Case Study: Dragon v. Trial: Revisiting the Duhig Rule

Background: The case involves 237 acres in the Eagle Ford play in Karnes County, Texas, which was conveyed in equal shares to eight siblings in 1932, one of whom died. One of the remaining seven siblings was Leo Trial. In 1983, Leo conveyed one-half of his 1/7th share to his wife Anna Ruth. Jerome and Patricia Dragon purchased the property from Leo Trial and his siblings in 1992. They financed a part of the purchase with a 15-year note to the Trials. The Trials reserved the mineral estate in the 237 acres for a term of 15 years, after which title to the minerals would go to the Dragons. (Anna Ruth Trial did not sign the deed, an oversight that was not discovered until years later.) Leo Trial died in 1996, and devised his estate to a trust with his wife Anna Ruth as life beneficiary, and on her death to his two sons. After Leo’s death, Anna Ruth continued to accept Leo’s share of payments on the Dragons’ note, and when the debt was paid, she signed a release of lien, along with Leo’s other six siblings. Facts: The minerals in the land were leased and produced. In 2008, the Dragons informed the operator that the 15- year mineral reservation had expired so all royalties should be paid to them. The operator’s title opinion concluded that, because of the 1983 deed to Anna Ruth, the Dragons did not acquire her interest in the property (as she had not signed the conveyance). Since Anna Ruth had died, the operator credited Anna Ruth’s 1/2 of 1/7 interest in the property to her two sons. The Dragons sued the two sons over title to the 1/2 of 1/7 interest.

Trial Court: In Dragon v. Trial, the 81st Judicial District Court, Karnes County, Texas, denied the Dragon’s motion for summary judgment and found for the two Trial sons. Dragon appealed. Issue on Appeal: Does the Duhig rule apply in this case? The Duhig Rule was established in Duhig v. Peavy-Moore Lumber Co., 144 S.W.2d 878 (1940). In Duhig, Gilmer sold land to Duhig, reserving a one-half mineral interest. Duhig then conveyed the land to Miller-Link Lumber Company, also reserving a one-half mineral interest. But Duhig’s deed to Miller-Link failed to mention the prior mineral reservation by Gilmer. The Supreme Court held that, because Duhig had warranted title in his deed, his deed reserved no mineral interest, and the minerals were held 1/2 by Gilmer and 1/2 by Miller-Link. The San Antonio Court of Appeals held that the Duhig Rule applied to the deed to Dragon. It held that, because Leo Trial’s sons derived their title claim from their father Leo, and because Leo had conveyed his interest in the 237 acres to Dragon by a general warranty deed, Leo’s sons were estopped from claiming ownership of an interest in the land through their mother. From the opinion: The Trials are remainder beneficiaries of Leo’s estate and trust, and, therefore, they are his privies in blood, privies in estate, and privies in law. They are bound by the recitals in the 1992 deed. The Trials are Court of Appeals: Reversed, concluding that Duhig applies to the facts in Dragon v. Trial.

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About the Author:

therefore estopped from asserting title to any interests in contradiction to Leo’s duty to defend the Dragons against all claims to “all that certain parcel or tract of land.” (Note that Leo Trial conveyed to the Dragons in 1992 and died in 1996, when his wife and sons inherited.) Rationale: The Duhig Rule is at its core a rule of fairness. Under the circumstances, it would not have been fair for the Trial sons to claim an interest in the land that their father sold, the Dragons paid for, and their mother accepted note payments on.

Manning Wolfe

Manning Wolfe, an author and attorney residing in Austin, Texas, writes cine- matic-style, smart, fast-paced thrillers. Her series featuring Austin lawyer Merit Bridges includes “Dollar Signs: Texas Lady Lawyer vs Boots King” and “Music

Notes: Texas Lady Lawyer vs L.A. Baron”. A graduate of Rice University and the University of Texas School of Law, Ms. Wolfe’s practice is focused on the oil and gas industry and her novels include landman, oil and gas and legal themes. Man- ning Wolfe, PLLC www.manningwolfe.com

Judgment: Reversed.

Commission Orders No Payment Due to ORRIs During Cost Recovery Period

By: James Parrot and Jill Fulcher

At its September 11, 2017 hearing in Durango, Colorado, the Colorado Oil and Gas Conservation Commission (“COGCC”) considered, for the first time, an issue of great concern to any party who owns or pays an overriding royalty interest (“ORRI”). Specifically, the Commission determined that under Colorado’s compulsory pooling statute (C.R.S. § 34-60-116(7)) (“Pooling Statute”), consenting owners do not have to pay ORRI owners whose interests derive from a working interest (“WI”) that is nonconsenting until the consenting owners have recovered well costs. Background In this case, a party who owned leases (“Nonop”) assigned various ORRIs in its leases to several individuals (“ORRI Owners”), which in aggregate were equal to 30.0%. The ORRI assignments were recorded. A second party who owned other leases in the same area (“Operator”) established a drilling and spacing unit and planned to drill a well. Operator mailed packets to Nonop that contained an election to participate and authorization for expenditure. Nonop did not elect to participate in the well. Operator subsequently obtained a pooling order from the COGCC, which authorized cost recovery under

C.R.S. § 34-60-116(7) for the well. C.R.S. § 34-60- 116(7)(a) provides: As to each nonconsenting owner… the order shall provide for reimbursement to the consenting owners… of the nonconsenting owner’s share of the costs and risks of such drilling and operating out of, and only out of, production from the unit representing his interest, excluding royalty or other interest not obligated to pay any part of the cost thereof. (emphasis added). C.R.S. § 34-60-116(7) (b) further provides that the recoverable costs are equal to 200% of downhole and equipment costs and 100% of surface costs. 1 1 This is a rough paraphrase of the various costs that are recoverable at either 200% or 100%—the statute is considerably more specific about such costs. For full details about what costs are recoverable at what percent, please consult C.R.S. § 34-60-116(7)(b) or contact us for further information. Operator subsequently drilled the well and obtained production. Operator notified Nonop and ORRI Owners that it did not intend to pay the ORRIs during the pendency of the cost recovery period. In other words, Operator would pay no ORRIs until it had recovered

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200% of downhole and equipment costs and 100% of surface costs. ORRI Owners objected and eventually filed an application to the COGCC to determine whether such costs could be withheld during the cost-recovery period. The COGCC bifurcated the hearing into two issues. The first was whether consenting owners must pay ORRIs during the cost recovery period, which issue hinged on whether an ORRI is included in “royalty or other interest not obligated to pay any part of the cost thereof…” The second issue was whether the aggregate 30% ORRI was so egregious as to justify equitable relief under the Pooling Statute’s requirement that every pooling order “shall be upon terms and conditions that are just and reasonable …” The COGCC stayed the equitable arguments and at the September hearing in Durango, considered only the first issue. Arguments and Deliberations ORRI Owners took the position that the plain language of the statute, “royalty or other interest not obligated to pay any part of the cost thereof…” includes ORRIs. Hence, Operator must pay ORRI Owners during the cost-recovery period. ORRI Owners argued that the language was unambiguous, ergo no further statutory interpretation would be necessary. ORRI Owners also argued that operators are free to drill or not drill and should make the choice partially on the basis of lease burdens. Finally, ORRI Owners argued that numerous individuals and families rely on ORRIs for income and it would be unfair to them to rule for Operator. Operator argued that the language was ambiguous and therefore the Commission must consider other canons of statutory interpretation. Operator argued that the phrase “overriding royalty interest” is specifically used elsewhere in the Colorado Oil and Gas Conservation Act, C.R.S. §§ 34-60-101, et seq. (the “Act”) and that its exclusion from the Pooling Statute was intentional. Operator also argued that a non-operator could get around the cost-recovery provision of the Pooling Statute by conveying a 100% ORRI. Operator further argued that since an ORRI derives from and arises out of a WI, it is subject to the WI owner’s decision to participate or accept a risk penalty. Finally, Operator argued that parties are free to negotiate ORRI assignments that allow an ORRI to have a say in whether the WI participates or not. In deliberations, Commissioners found the use of “overriding royalty interest” elsewhere in the Act persuasive. They also agreed that it would frustrate the risk and reward mechanism of the Act if parties

could avoid penalties by carving out ORRIs. The Commissioners voted to deny ORRI Owners’ Application because the Pooling Statute does not require consenting owners to pay an ORRI that arises from a nonconsenting WI until the consenting owners have recovered their costs. Implications The COGCC’s ruling may be appealed to district court and eventually the Colorado Supreme Court. If it is upheld on appeal, the obvious result will be that operators will move ORRIs that arise from nonconsenting WIs from the “before payout” column to the “after payout” column of their DOI decks. While the issue is being appealed, however, operators should consider suspending such ORRIs. The COGCC’s ruling will also have other repercussions. Assignments and reservations of ORRIs will become more complicated in Colorado, with the issue of well participation likely to become a key negotiating point. Existing ORRI owners may choose to bring actions to force participation or recover proceeds when WI owners do not participate. Operators may decide to bring actions to recover erroneously paid ORRIs, especially for wells that are not going to pay out 200%. Alternatively, an operator may decide to net out such an ORRI against other wells. Conclusions Outside of rulemakings, there have been few hearings in recent history that could have the impact of this ORRI decision. There will inevitably be additional consequences of the Commission’s decision that will emerge over time. In the immediate future, operators, non-operators, and ORRI owners should begin planning for its effects. Operators may want to begin revising DOI decks. Nonconsenting WI owners may consider communications with ORRI owners about the possibility of diminishing, or even vanishing revenue streams. For any specific concerns about this decision, please contact either James Parrot or Jill Fulcher.

Copyright © 2017 Beatty & Wozniak, P.C. All Rights Reserved. Reprinted by permission.

The views expressed in this article are the views of the authors and not necessarily the views of the firm. Please consult with legal counsel for specific advice and or information.

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Davis v. Mueller – Validity of Deeds Upheld IN THE SUPREME COURT OF TEXAS NO. 16-0155

JAMES H. DAVIS, INDIVIDUALLY AND D/B/A JD MINERALS, AND JDMI, LLC, PETITIONERS, v. MARK MUELLER, RESPONDENT

ON PETITION FOR REVIEW FROM THE COURT OF APPEALS FOR THE SIXTH DISTRICT OF TEXAS JUDGMENT

THE SUPREME COURT OF TEXAS, having heard this cause on petition for review from the Court of Appeals for the Sixth District, and having considered the appellate record, briefs, and counsel’s argument, concludes that the court of appeals’ judgment should be reversed.

IT IS THEREFORE ORDERED, in accordance with the Court’s opinion, that: 1) The court of appeals’ judgment is reversed;

2) Judgment is rendered that respondent Mark Mueller take nothing; and

3) Petitioners James H. Davis, Individually and d/b/a JD Minerals, and JDMI, LLC, shall recover, and respondent Mark Mueller shall pay, the costs incurred in this Court and in the court of appeals.

Copies of this judgment and the Court’s opinion are certified to the Court of Appeals for the Sixth District and to the District Court of Harrison County, Texas, for observance.

Opinion of the Court delivered by Chief Justice Hecht

Justice Boyd did not participate in the decision

May 26, 2017 **********

Davis v. Mueller On May 26, 2017, the Texas Supreme Court delivered its opinion in this case, reversing the court of appeals and rendering judgment in favor of Davis. The court upheld the validity of deeds conveying all of the grantors’ mineral rights in an entire county. The original deeds were executed in 1991 and in 2011 the same grantors purported to deed mineral interests to Mueller. Mueller sued Davis, alleging among other claims that the property descriptions and granting clause in the 1991 deeds were insufficient. Davis was granted summary judgment by the trial court. Concluding that the general granting clause was ambiguous and holding

that the question required a jury, the court of appeals reversed. The Supreme Court of Texas reversed, held that the general granting clause in the 1991 deeds was sufficient to convey the mineral interests in question and that Davis had superior title to the property since the 1991 conveyances preceded the Mueller conveyances. This is an interesting case that reviewed several other issues prior to the Supreme Court rendering its opinion. View “Davis v. Mueller” on Justia Law

Submitted by Rona Erickson, CDOA

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Ohio Clarifies Its Position on the Deduction of Post-Production Costs

In Lutz v. Chesapeake Appalachia, LLC, No. 4:09-cv- 2256, 2017 U.S. Dist. LEXIS 176898 (N.D. Ohio Oct. 25, 2017), the Northern District certified a question to the Ohio Supreme Court regarding the deduction of post-production costs. Specifically, the Court certified the following question: “Does Ohio follow the ‘at the well’ rule (which permits the deduction of post-production costs) or does it follow some version of the ‘marketable product’ rule (which limits the deduction of post-production costs under certain circumstances?” The Court stayed proceedings until the Ohio Supreme Court decided whether to accept the certified question. On November 2, 2016, the Ohio Supreme Court ruled: “Under Ohio law, an oil and gas lease is a contract that is subject to the traditional rules of contract construction. Because the rights and remedies of the parties are controlled by the specific language of their lease agreement, we decline to answer the certified question and dismiss this cause.” Lutz v. Chesapeake Appalachia, LLC, 148 Ohio St. 3d 524, 2016 Ohio 7549, 71 N.E.3d 1010, 1013 (Ohio 2016). Two justices dissented. One dissenting justice argued that Ohio would follow the “marketable product” rule and the other dissenting justice argued that Ohio would follow the “at the well” rule. Following the Ohio Supreme Court’s decision not to accept the certified question, Chesapeake sought summary judgment in the District Court.

Lutz, 2017 U.S. Dist. 176898, at *11. Here, Chesapeake paid the lessors a “pro rata share of the downstream sales price of the gas, and may - depending on the circumstances of each well and each lease - allocate a pro rata share of the post-production costs against the royalty payment.” Id., at *13. This method assumes that Ohio would follow the general “at the well” approach followed by Texas and permit the net back method for calculating the royalty payment. The other approach followed by courts in calculating royalties is the “first marketable product” approach, which is followed in Oklahoma. Under the first marketable product approach, courts interpret oil and gas leases as containing an implied covenant that the lessee bears the burden of bringing the produced gas to market. The District Court, seeking to choose the approach that the Ohio Supreme Court would choose, discussed principles of interpretation of oil and gas leases. The Court explained that oil and gas leases are contracts and that “’[c]ontracts are to be interpreted so as to carry out the intent of the parties, as that intent is evidenced by the contractual language.’” Id., at *16 (quoting Lutz, 71 N.E.3d at 1012). “’When the language of a written contract is clear, a court may look no further than the writing itself to find the intent of the parties.’” Eastham v. Chesapeake Appalachia, L.L.C., 754 F.3d 356, 361 (6th Cir. 2014) (quoting Sunoco Inc. (R&M) v. Toledo Edison, 129 Ohio St. 3d 397, 2011 Ohio 2720, 953 N.E.2d 285, 292 (Ohio 2011). Based on Ohio caselaw, the District Court concluded that the Ohio Supreme Court would adopt the “at the well” approach. The District Court noted that the language “market value at the well” would be meaningless if the “at the well” approach was not followed. Lutz, 2017 U.S. Dist. 176898, at *18. The District Court’s decision is significant because it brings Ohio in line with the majority of other oil and gas jurisdictions that follow the “at the well” approach. It remains to be seen whether Ohio will further adopt Texas jurisprudence regarding the “at the well” approach and how courts will reconcile “at the wellhead” language in the

The District Court sought to interpret the following royalty provision and how royalties should be paid:

“3. The royalties to be paid by Lessee are: . . . (b) on gas, . . . produced from said land and sold or used off the premises . . . the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale . . . .”

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royalty clause with other provisions in leases (or addenda attached to the lease) that prohibits the deduction of post-production costs. Additionally, it is unclear how Ohio courts will handle oil and gas leases where the point of valuation of the royalty payment is shifted from the wellhead to a point further downstream. It is important to pay careful attention to the specific language in the royalty provision in determining whether the deduction of post- production costs is permissible.

Colorado and Ohio, is a regular speaker on issues relating to the development of unconventional shale plays and has given a variety of presentations regarding legal issues relating to oil and gas development. Eli earned his B.A from Kenyon College and his J.D., with honors, from Marquette University Law School.

Zachary Oliva is a partner with Kiefaber & Oliva LLP. Zack focuses his practice on energy and corporate law. He regularly assists clients in the drafting of oil and gas title opinions, purchase and sale agreements and contract interpretation. Additionally,

About the Authors:

Eli Kiefaber is a partner with Kiefaber & Oliva LLP. Eli focuses his practice on oil and gas matters, including acquisition and divestiture of oil and gas assets, title opinions, joint operating agreements, federal leases, pooling and unitization issues.

he assists clients with the negotiation, drafting and review of business formations, contracts and service agreements. Zack earned his B.A. from The Ohio State University and his J.D. from Capital University Law School. He is licensed to practice in New Mexico, Ohio and Texas.

Eli is licensed to practice law in Texas, Oklahoma,

PA Requires Oil and Gas Lessees to Withhold State Income Taxes from Nonresident Lessors

By Glenn A.W. Thompson, Steptoe & Johnson PLLC

Under Act 43 of 2017 beginning January 1, 2018, anyone that pays Pennsylvania-source non-employee compensation or business income to a non-resident individual or disregarded entity that has a non-resident member, and is required to file a Federal Form 1099-Misc must withhold an amount computed at the specified tax rate (currently 3.07%). The new withholding obligations clearly apply to most payments to non-resident independent contractors for services in the course of a trade or business. The obligation extends beyond non-resident individuals to payments to a disregarded entity (like an LLC) that has a non-resident member. However, the definition of “payments” does not include a partner or shareholder’s distributive share of income from a partnership or Pennsylvania S corporation. Any lessee of Pennsylvania real estate who makes a lease payment to a non-resident lessor, defined to include an

individual, estate or trust, must withhold Pennsylvania personal income tax on rental payments. Obviously contemplating oil and gas leases, “lease payments” include but are not limited to rents, royalties, bonus payments, damage payments, delay rents and other payments made pursuant to a lease. There is an exception for

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About the Author:

residential property, but that is property used as the tenant’s residence; not for oil and gas leases on the lessor’s residence. Withholding is optional for payments of less than $5,000 a year, but the risk is on the payor. The payor is liable for the tax on all payments from which withholding should be made. For additional information including the timing of payment obligations see the Pennsylvania Department of Revenue’s Informal Notice Personal Income Tax 2017-01 Issued December 2017-01.

Glenn A.W. Thompson focuses his practice in the area of energy and oil and gas law, assisting clients in Pennsylvania and North Dakota with oil, gas and mineral title issues by overseeing the delivery of oil and gas [mineral] title opinions in most major

shale plays. Email: glenn.thompson@steptoe-johnson.com

North Dakota Legal Update

By: Kimberly A. Backman

North Dakota Supreme Court Determines Oil and Gas Leases Cover All of Lessors’ Mineral Interests

In Hallin v. Inland Oil & Gas Corp., 2017 ND 254, 903 N.W.2d 61, the North Dakota Supreme Court interpreted the provisions contained in certain oil gas leases and held that the leases covered all of the lessors’ interest in the oil and gas in the leased lands, regardless of the fact that they were only paid bonus consideration for a portion of their oil and gas interests in those lands. Joan Hallin, John Hallin and Susan Bradford (collectively, “Hallin”) executed oil and gas leases to Inland Oil & Gas Corporation (“Inland”) covering “all that certain tract of land situated in Mountrail County” which consisted of a 160 acre tract. At the time the leases were executed, Hallin only owned a portion of the minerals in the 160 acre tract, however, there was a question as to whether Hallin owned 60 net mineral acres or 80 net mineral acres. Upon execution of the leases, Hallin received payment drafts for a rental bonus showing that the parties owned 60 net mineral acres. Hallin subsequently sued to confirm ownership of their interest in the tract. In Hallin v. Lyngstad, 2013 ND 168, ¶19, 837 N.W.2d 888, the North Dakota Supreme

Court determined Hallin owned 80 net mineral acres in the tract. As a result of the suit, a dispute arose between Hallin and Inland regarding how many acres the leases covered. Hallin argued that the leases and the payment drafts should be read together to show they leased 60 net mineral acres, while Inland argued the leases were unambiguous and covered all of Hallin’s oil and gas interest. The district court agreed with Inland and determined the leases were unambiguous and Hallin leased whatever interest they owned in the property. Upon appeal to the North Dakota Supreme Court, the decision was affirmed. The Court reasoned that the leases specifically provided that “they include ‘all that certain tract of land’ within the entire 160-acre parcel. Nothing within the four corners of the leases suggests [Hallin] leased something other than all of the net mineral acres they owned.” The Court further noted that “the term ‘all’ is not ambiguous and it is unnecessary to go beyond the leases to discern the parties’ intent,” including the review of extrinsic evidence such as the payment drafts.

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Hallin also argued that this case was factually similar to Borth v. Gulf Oil Exploration & Production Co., 313 N.W.2d 706 (N.D. 1981), a North Dakota Supreme Court case wherein a lease was executed that contained an “unless” clause which provided the lease would terminate unless the lessee paid a delayed rental, absent production to hold the lease. This provision required that the lease terminate automatically should the rental payments not be paid on time or in the correct amount. The operator made payments based on the assumption that the lessor owned 60 net mineral acres. After a determination was made that the lessor actually owned 80 net mineral acres, the lessor sued to cancel the entire lease. The district court determined that the lease terminated as to twenty net mineral acres, but was valid as to the remaining 60 net

mineral acres. The Court affirmed the decision stating that both parties failed to accurately check record title to resolve the inconsistency. In addition, the lessor failed to object to the payment for numerous years. The Court distinguished Borth from the facts in this case reasoning that in Borth, there were no title inconsistencies as there were in this case and that it was the parties’ responsibility to determine the correct acreage covered by a lease containing an “unless” clause. In this case, the title inconsistencies existed when the leases were executed and notwithstanding those inconsistencies, Hallin executed unambiguous leases covering all of their mineral interest to Inland. Author’s Note: The author’s law firm represented Inland Oil & Gas Corp. in this case.

Case Involving Ownership Dispute for Minerals Underlying the Missouri River Reversed and Remanded

On September 28, 2017, the North Dakota Supreme Court reversed and remanded the district court’s decision in Wilkinson v. Board of University and School Lands, 2017 ND 231, 903 N.W.2d 51, a case which involves the determination of ownership of minerals underlying portions of the Missouri River that the United States acquired for operation of the Garrison Dam and Reservoir. Prior to the following, J.T. Wilkinson and Evelyn M. Wilkinson (“Wilkinsons”) acquired certain property located in Williams County. In 1958, the Wilkinsons conveyed the surface to the United States for the construction and operation of the Garrison Dam and Reservoir, reserving the oil and gas rights in and under the property. Subsequently, the Missouri River was flooded to form Lake Sakakawea, altering the channel of the Missouri River. In 2012, Plaintiffs, the successors in interest to the Wilkinsons, sued the Board of University and School Lands of the State of North Dakota (“Land Board”), and others, seeking to determine ownership of the minerals underlying the property. Thereafter, the Land Board and State Engineer moved for summary judgement, requesting the court determine that the State holds title to the bed of the Missouri River up to the current ordinary high

watermark and that the disputed property is located below the current ordinary high watermark. In response, Plaintiffs argued that the property is not part of the State’s sovereign lands, there was no navigable body of water on the property at the time of statehood, the surface property was purchased by the United States as part of the Garrison Project, the property was flooded by Lake Sakakawea and lastly, the property is located above the historical ordinary high watermark. The district court granted the State’s motion, ruling that the State owns all of the minerals and the surface of the disputed property and dismissed Plaintiff ’s claims. The district court further explained that the State owns those lands that are within the ordinary high watermark of navigable lakes and streams, noting that the Missouri River is not distinguishable from Lake Sakakawea, and that the Missouri River was navigable at the time of statehood. The district court therefore concluded that the property in dispute was below the ordinary high watermark and that both the surface and minerals are sovereign lands and belong to the State. Plaintiffs appealed the decision to the North Dakota Supreme Court. Subsequent to the district court’s decision and while the appeal to the Supreme Court was pending, the North Dakota legislature passed Senate Bill 2134 which was enacted as N.D.C.C. ch. 61-33.1. N.D.C.C. ch. 61-

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