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Annals of Oil and Gas: Posner on Leases

Do you think of Chicago as an oil and gas town? Dallas, yes; Houston, for sure; New Orleans, uh-huh; maybe Bismarck, North Dakota (for the shale gas); and perhaps even New York (because of trading oil futures on the NYMEX).

Chicago? Meh.

But wait up. Today Judge Richard Posner wrote about oil and gas leases. Forget that the leases covered acreage in Texas. And never mind that he mainly lays out some basics on "lessor", "lessee", "primary term", "secondary term", and "operator". Judge Posner represents Chicago the way J. R. Ewing does Dallas. And the fact that a Chicagoan wrote about oil and gas sort of tickled Blawgletter.

The case involved a not-so-mundane fight over contempt of an Indiana district court's order. The edict in question called on SonCo Holdings to pay a $250,000 bond to the Texas Railroad Commission, which deals with oil and gas matters in the Lone Star State, and to replace ALCO Oil & Gas as the leases' "operator", which handles drilling wells and so forth. Except the order didn't say the part about getting a new operator in So Many Words. Yet the judge held SonCo in "contempt" for not doing what the order required and as a "sanction" forced SonCo to sign the leases over to ALCO. SonCo appealed.

Judge Posner didn't buy SonCo's point that it didn't violate the order because the order didn't say in So Many Words "get a new operator to replace ALCO". "We said the order was poorly drafted, and meant it wasn't clear." Securities and Exchange Comm'n v. First Choice Mgmt. Svcs., Inc., No. 11-1702, slip op. 10 (7th Cir. May 1, 2012). That differs from calling the order "ambiguous". He noted that "context . . . can disambiguate . . . [and] does so in this case." Id.

The panel vacated the sanction, though, finding that the district court didn't explain how forcing SonCo to give the leases over to ALCO counted as compensation rather than punishment and therefore made the order one for civil contempt rather than the criminal kind.

Settlement Privilege? Ha!

In the last 30 days, two U.S. courts of appeals have held (sort of) that no "settlement privilege" -- a right to deny others access to the terms of your settlements with third-parties -- exists.

In the first case, the Federal Circuit ruled, "in light of reason and experience, . . . that settlement negotiations related to reasonable royalties and damages calculations [in patent infringement cases] are not protected by a settlement negotiation privilege." In re MSTG, Inc., Misc. No. 996, slip op. 19 (Fed. Cir. Apr. 9, 2012) (denying mandamus petition seeking to halt order that required claimant to turn over documents showing settlement negotiations with infringement defendants).

The other case dealt with a barge that the Government of Ghana hired Balkan to render able to produce 150 megawatts of electricity. Balkan settled a case in Missouri federal court against its subcontractor, ProEnergy. Ghana wanted to know on what terms -- not least because Balkan had accused ProEnergy in the Show Me state case of messing up the barge at the same time it said, in its dispute with Ghana, that everything on the barge worked just fine. The Eighth Circuit said "[w]e have no reason to assume that the district court intended to acknowledge a novel claim to privilege." Government of Ghana v. ProEnergy Services, LLC, No. 11-2714, slip op. 6 n.3 (8th Cir. May 1, 2012). But it (a) went on to hold that the district court acted within its discretion when it refused to order ProEnergy to turn over its settlement agreement with Balkan but (b) seemed pretty clear it thought the settlement privilege idea a dim one.

Blawgletter notes that the later case didn't cite the one from three weeks earlier. Clerks, wake up!

AMI in JOA Ended in 1974, Fifth Circuit Rules

If you've tried an oil and gas case, you've likely seen a form contract that the American Association of Professional Landmen wrote to "help landmen effectively do their jobs." And if your case dealt with a falling out over efforts to explore for, find, and produce oil and gas, the AAPL form you saw more often than not will have laid out the terms in one of the AAPL's Model Form Operating Agreements.

But a form can do only so much. Many times you'll see big parts of an MFOA with slashes across them, meaning those sections don't apply, or smaller changes by way of write-ins or type-ins. And, at the end, you'll probably find a section that says "OTHER CONDITIONS, IF ANY, ARE:" with either a blank space or the parties' other terms.

A case the Fifth Circuit decided this week concerned that last part of a joint operating agreement, this one on the AAPL's first model form for JOAs -- the 1956 version.

The JOA in question involved the pooling in 1971 of oil and gas leases that covered lands within 10 townships in Montana. The two parties to the JOA -- predecessors in interest to A. L. Ballard and Devon Energy Production Company -- agreed to work together under the JOA towards finding oil and gas within the 10 townships (almost 250,000 acres), which they deemed their "Area of Mutual Interest" in subparagraph F of paragraph 31, the "OTHER CONDITIONS" part of the JOA.

Ballard claimed that Devon breached the JOA by not giving him the chance to buy into leases that Devon acquired within the AMI decades after the predecessors of Ballard and Devon had entered into the JOA. His lawsuit turned on whether parts of the AMI provision in paragraph 31 lasted for only three years or whether they instead endured until the End of Time.

Can you see where this will come out?

The pieces that Ballard relied on in subparagraph 31F did oblige Devon to share any leases it got within the AMI. Another sentence, later in the subparagraph, dealt with losing rights to share if, for example, a party failed to maintain a lease. And just below that sentence, which the court called "a 'surrender' provision", appeared this:

The above subparagraph of 31F shall be effective from the date of the Farmout Agreement to which this Operating Agreement is attached and shall terminate and be of no further force and effect after three years from the date of this operating agreement.

Did the three-year term apply to all the parts of 31F or just the "surrender" sentence?

The Fifth Circuit panel held Ballard's view, while "plausible", would produce the "absurd" result that the AMI would bind the parties until Kingdom Come. And it therefore upheld summary judgment in favor of Devon. Ballard v. Devon Energy Production Co., L.P., No. 10-20497 (5th Cir. Apr. 19, 2012) (applying Montana law).

Annals of Oil and Gas: Mineral Owner Wins Fight with Seismic Supplier

Blawgletter adores trials. Let us tell you about our last one:

The other side thought the case related to theft of their 3D seismic data. They felt so strongly about it that at trial they asked for more than $70 million -- for what they deemed misuse of their trade secrets.

But the court saw things differently. On March 5, 2012, the 36th District Court of Beauregard Parish, Louisiana, issued its Reasons for Judgment. And, in those Reasons for Judgment, by The Honorable H. Ward Fontenot, Susman Godfrey's client won a near-total victory.

Olympia Minerals held mineral leases and servitudes that covered 445 square miles in western Louisiana. In 2000, Olympia, which then belonged to El Paso Production Company, entered into a contract with Aspect Resources and a predecessor of Kerr-McGee Oil & Gas for a project over 135 square miles in Beauregard and Calcasieu Parishes. Aspect and Kerr-McGee agreed to conduct a 3D seismic survey, to sublease at least 15 percent of the acreage, and to provide Olympia with a copy of the seismic data, including in the form of raw data or field tapes. But Aspect and Kerr-McGee shot only about half of the 135 square miles, did not sublease any acreage, and provided only processed seismic data to Olympia.

Aspect and Kerr-McGee nonetheless claimed that Olympia had misused the seismic data by letting other parties, which had subleased some of the Louisiana lands from Olympia, "work" the data in a secure data room. They also alleged that one of the sublessees removed the data from the data room and put it on the company's computer system. They asked for disgorgement of all profits Olympia and the sublessees had made on productive wells plus a five percent royalty on future discoveries and other relief.

In the Reasons for Judgment, the trial court found the evidence "strongly suggests that it was never the intention of the defendants to honor the terms of the" contract with Olympia and that Aspect breached the contract intentionally and therefore in "bad faith". The court cited testimony of "Alex Cranberg, the chairman and founder of Aspect", on the question of why Aspect chose not to shoot more than half of the 3D survey, in support of the court's finding that Aspect made "conscious and calculated business decisions" to commit "major breaches" of the contract with Olympia. The court also found that "the 'shell game' played by Aspect . . . when Olympia sought the [field] tapes is inexcusable." The court therefore struck the contractual limitation on consequential damages, awarded damages (including for loss of royalties) that Olympia estimates at $40 million or more, dissolved the contract between Olympia and Aspect, and directed Aspect to provide Olympia with the field tapes for the 3D data. The court also dismissed all of Aspect's claims against Olympia and its sublessees for misappropriation of trade secrets, breach of contract, and other theories with prejudice.

"I knew the only way ultimately to prevail was to be genuinely prepared to try the case represented by a firm with a track record of success", said Olympia's President, Michael Lewis. "That said", he added, "the Susman Godfrey attorneys presented a rare combination of strong legal intellect, common sense about right and wrong, and credibility in the courtroom".

"Judge Fontenot's scholarly and compelling analysis demonstrates the importance of keeping promises, in the oil patch and in everyday life", said Barry Barnett, Olympia's lead trial counsel and a partner in Susman Godfrey L.L.P. "It also shows that mineral owners in Louisiana can count on the law to protect the rights they bargain for."

The Olympia trial team consisted of Mr. Barnett and partner Daniel Charest, both of Dallas, and Brian Gillett, an associate in Susman Godfrey's Houston office. Pat Long, a Patton Boggs partner in Dallas, and Carver Darden partner John Dunlap and associate Harry Barton, both of New Orleans, represented different groups of the working interest owners. Barry Wertz and Jonathan Baughman of McGinnis Lochridge & Kilgore in Houston represented Aspect.

Olympia and the working interest owners settled with Kerr-McGee following summary judgment rulings favoring the plaintiffs.

 

 

If You Own Land in the Lone Star State, You Also Own the Water Down Below, Texas Supreme Court Rules

The rule of "capture" has meant for a long time in Texas that the oil and gas lying beneath your land belong to you. Now it also means you own the subterranean water. The Edwards Aquifer Authority v. Day, No. 08-0964 (Tex. Feb. 24, 2012).

The Court ruled, 9-0, that limiting landowners' right to use ground-water amounted to a "taking", for which the state owed compensation.

Justice Nathan Hecht wrote the opinion for the unanimous Court.

Second Circuit Explains Why It Lifted Order Barring Efforts to Enforce Ecuadoran Judgment in New York

Last September, a panel of the Second Circuit tossed a preliminary injunction that barred any action, anywhere, to collect on an Ecuardoran court's $17.2 billion judgment against Chevron for polluting part of the Amazon. Last week, the court got around to saying why.

[Blawgletter describes some of the dispute's facts, claims, and decades-long history here.]

The court grounded its ruling on the fact that the basis for the injunction -- New York’s Uniform Foreign Country Money-Judgments Recognition Act, N.Y. C.P.L.R. §§ 5301-5309 -- "does not authorize affirmative relief of this kind, but only recognizes a defense available when a would-be judgment-creditor first attempts enforcement in New York." Chevron Corp. v. Naranjo, No. 11-1150-cv(L), slip op. at 2 (2d Cir. Jan. 26, 2012). The panel went on:

Judgment-debtors can challenge a foreign judgment’s validity under the Recognition Act only defensively, in response to an attempted enforcement – an effort that the defendants-appellees have not yet undertaken anywhere, and might never undertake in New York.

Id. at 4. Got that? The Recognition Act recognizes foreign judgments except when it doesn't, in which case you have to invoke the exception by way of defense and not through an action for a pre-emptive injunction.

We suspect that the outcome in Naranjo won't mean a huge change in your law practice, but we all must marvel at the great lengths to which people who seek or want to keep large amounts of money will go to get or retain them.

 

Annals of Oil and Gas: Royalty Owners May Have to Check Public Records, Texas Supreme Court Rules

Big Oil v. Royalty Owners

Who said Big Oil can't beat Texas royalty owners?

Not Blawgletter. And definitely not the Supreme Court of the Lone Star State.

Royalty owners typically become that by granting your ExxonMobils, your Conocos, your BPs, and the like the right to drill for oil and gas. The lease contract calls for the lessor (mineral owner) to get royalties on any production from good wells (plus per-acre "bonus" payments on the front-end no matter what). And the royalties usually equal a fraction (e.g., one-eighth) of what the lessees sell any oil and gas for.

Victory for Exploration and Production Companies

A couple weeks ago, the Court handed Shell Oil Company, and its Big Oil brethren, a huge win against Texas royalty owners. Although Shell admitted that it underpaid mineral owners in the Permian Basin, the Rosses, around $73,000 from 1988 through early 1994, the Court ruled for Shell -- unanimously.

Shell asserted as its main defense that the Rosses had waited too long to sue. A Houston jury disagreed, finding that Shell defrauded the family by sending them royalty checks that understated the prices at which Shell sold the Rosses' gas. The trial court entered judgment on the verdict.

The court of appeals affirmed. But the Supreme Court held that the evidence proved, as a matter of law, that the Rosses hadn't used "due diligence" to figure out that Shell had short-paid them on the royalties.

Texas Two-Step

The Court used a two-step analysis. It first ruled that the Rosses should have noticed that royalty check stubs that Shell sent them showed different prices for gas from the same reservoir. One set of check stubs -- for the Rosses' "Lease Wells" -- reflected prices far less than those on other check stubs -- for the "Unit Wells", which Shell had drilled on land near the Rosses'. "The large difference in the prices paid to the Rosses on the Unit Wells and on the Lease Wells", the Court said, "triggered the Rosses' duty to investigate the royalty payments." Shell Oil Co. v. Ross, No. 10-0429, slip op. at 7 (Tex. Dec. 16, 2011).

Step two dealt with what the Ross family should have done once the "duty to investigate" arose. The Court noted that the Rosses could've looked at "readily accessibly and publicly available information" to see that prices on the Shell check stub prices fell below market prices. The info consisted of records at the Texas General Land Office -- a state agency that received (higher) royalty payments for its share of the gas under a "pooling and unitization agreement" with the Rosses -- and an index of gas sales prices in the Permian Basin. The combination of a duty to investigate and the fact that an investigation "could have led to discovery of Shell's underpayments" established Shell's limitations defense as a matter of law, the Court held. Id. at 9 (emphasis ours).

Check Those Check Stubs

What does the outcome mean for royalty owners? Mainly it suggests that they can't rely on oil companies to report accurately and must instead look for signs of perfidy. Also that, once red flags "trigger[] the . . . duty to investigate the royalty payments", royalty owners must consult public data to see if it supports the view that the lessee has short-paid royalties. Even if you have to go to Austin to examine the General Land Office's records.

Note that the Court requires royalty owners to assume the worst. The fact that the prices for the Unit Wells far exceeded the prices for the Lease Wells didn't trigger a duty to look only into the Lease Wells prices but also into the (much higher) prices for the Unit Wells. (Really? Why?) And the Court didn't require that a review of public records "would" lead to discovery of underpayments. It instead called for a "could" test. (Huh? Surely the public info needs to show a clear case of underpayment for a court to take the issue from a jury. "Could" strikes us as far too lenient for the short-payers.)

Landowners of Texas, get out your royalty check stubs and start looking for discrepancies. And do it now. The clock may have started ticking.

LOI Goes DOA

Blawgletter adores cases that involve energy -- oil, gas, wind, sun, nuclear, electric, tidal, you name it. We tried one last May in Texas and another last month in Louisiana -- and look forward to trying a Great Many others, within Texas and without.

Which made us smile today at Judge Posner's opinion yesterday in a case involving coal and coal bed methane (natural gas). The parties to the lawsuit had signed a letter of intent. The LOI provided -- in a non-binding way -- (a) that the Party of the First Part, a coal mining company, hoped some day to grant the right to produce coal bed gas to the Party of the Second Part, an owner of options to mine coal, and (b) that the Party of the Second Part would assign to the Party of the First Part the options to mine the coal.

Because of the non-binding nature of the LOI, the Party of the Second Part couldn't enforce it. So the POSP sued the POFP for fraud.

The district court would have none of it. Neither would the Seventh Circuit. Reasons included the fact that the POFP's failure to do what the POSP said it promised by itself provided no evidence of fraudulent intent. BPI Energy Holdings, Inc. v. IEC (Montgomery), LLC, No. 10-3871 (7th Cir. Dec. 8, 2011) (applying Illinois law).

Frac, Frack, or Hydrofrack?

You know that word choice matters. Twain's lightning versus lightning bug comes to mind.

What about spelling? Well, the tumult over a key part of a way to complete a sideways oil and gas well shows that spelling matters too.

The Supreme Court of Texas explains the process thus:

As in other shale formations, wells in the Barnett Shale [area of northern Texas] require fracture stimulation in order to produce. Fracing a well entails pumping large volumes of water and sand into reservoir rock, which then mixes with saline formation water and must be flowed back out of the well before production can begin. A company fracing a well must dispose of the resulting waste.

Railroad Com'n of Texas v. Citizens for a Safe Future, 336 S.W.3d 619 (Tex. 2011).*

Note the "fracing". Sounds like fray sing? Nay. Frack-ing. Fracking.

Why does the Court use "fracing" instead of "fracking"? Most other writers about the technique go with the "frack" method. See, e.g., www.frackinginsider.com; Wikipedia; Gasland; WSJ.

People who question or oppose hydraulic fracturing tend to include the "k". NYT items do. Indeed, they often add "hydro" as well -- as in "hydrofrack" or "hydrofracking".

Without the "k", the word seems almost benign. With it, it sounds less so. And with the "hydro" prefix? Pretty darn bad.

Bonus:    Arrrrgh, me hearties -- Happy Talk Like a Pirate Day!

____________________
* The Court in an older case noted that someone "[f]irst used" "[f]racing" "commercially in 1949". Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1, 7 (Tex. 2008) (holding that rule of capture barred claim for trespass). 

 

Nonsuit as Loss on Merits in 19-Opinion Day for Texas Supreme Court

Talk about cutting a backlog.

The Supreme Court of Texas issued rulings in 19 cases this week, setting a record for the year if not for all time. The oldest case, City of Dallas v. Albert, No. 07-0824 (Tex. Aug. 26, 2011), started its Supreme Court journey in April 2007 -- four years and four months ago.

The one that most caught Blawgletter's eye dealt with a quirk of Texas procedure -- the nonsuit. The right to nonsuit means a party can dismiss his/her/its claims whether the other side or the judge wants him/her/it to or not.

The case involved a contract that entitled the "prevailing party" in a lawsuit to "reasonable attorney's fees". Plaintiffs nonsuited, without prejudice, on the same day they filed a response to the defendants' motion for summary judgment. The trial court awarded defendants almost $30,000 in attorneys' fees.

The Court held that "a defendant may be a prevailing party when a plaintiff nonsuits without prejudice if the trial court determines, on the defendant’s motion, that the nonsuit was taken to avoid an unfavorable ruling on the merits." Epps v. Fowler, No. 10-0283, slip op. at 11-12 (Tex. Aug. 26, 2011).

The theory? That barring a fee award in all instances of nonsuits without prejudice "would enhance the possibility that plaintiffs who pursue frivolous claims suffer no consequences and fail to reward defendants whose efforts cause their opponents to yield the playing field." Id. at 12.

The dissent urges that the rule reflects the majority's policy judgment instead of the parties' intent.

Blawgletter concurs. Failing to get a good ruling on the merits because the other side nonsuits at the last minute doesn't feel like "prevailing" to us. And even if it did we think the Court should change the nonsuit rule by, well, changing it instead of saying it reads "prevailing" to mean something that few Texas lawyers would have thought it means in light of the long-standing tradition of viewing the right to nonsuit as just about absolute.