OIL & GAS ROYALTY ISSUES

Similar documents
COMPRESSION OF NATURAL GAS WHO PAYS? TEXAS V. OKLAHOMA I. INTRODUCTION

How To Get A Well To Pay Royalties

THE COMPRESSION OF NATURAL GAS IS IT PRODUCTION OR POST-PRODUCTION? IS IT DEDUCTIBLE FROM ROYALTIES? IF SO, HOW MUCH?

AVOIDING THE UNINTENDED CONSEQUENCE WHEN DRAFTING MINERAL RESERVATIONS

July 2013 Tax Alert. Gifts of Mineral Rights: What do charities and donors need to know about gifts of mineral rights? What are mineral rights?

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

Jesse R. Pierce. Representative Experience

Gifts of Black Gold:

THE MISSING LINK IN ROYALTY ANALYSIS: AN ESSAY ON RESOLVING VALUE-BASED ROYALTY DISPUTES

A QUICK PRIMER ON MINERAL RIGHTS

Mike Hannah, Senate Finance Counsel Heather Fennell, Staff Attorney, Research Division NCGA Energy Policy Commission March 4,

Texas Common Carriers May Soon Be Running In Circles

PRESENTATION OF PROPERTY DAMAGE CLAIMS

TEXAS HOMESTEAD AND PROBATE LAW

COMMISSION Director INTRODUCTION ARKANSAS OIL AND GAS COMMISSION

ACC Houston Chapter Meeting

4/25/ :12 AM ARTICLE

IN THE SUPREME COURT OF TEXAS

In The Court of Appeals Seventh District of Texas at Amarillo

TEXAS RICE LAND PARTNERS, LTD. V. DENBURY GREEN PIPELINE-TEXAS, LLC: TEXAS EMINENT DOMAIN LAW AND THE NOT-SO-COMMON COMMON CARRIER STATUS

Case 4:14-cv BRW Document 51 Filed 02/02/16 Page 1 of 6

Court of Appeals. First District of Texas

Evaluating Oil & Gas Lease Proposals

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

FOR IMMEDIATE NEWS RELEASE NEWS RELEASE # 15 FROM: CLERK OF SUPREME COURT OF LOUISIANA

In The Court of Appeals Fifth District of Texas at Dallas. No CV

Overview of U.S. Lands. Presented by Lynette Y. Johnson, CPLTA PNG Tenure Information Exchange April 13, 2011 Calgary, Alberta

Overview of Legal Issues and Litigation Arising from Shale Gas Development and Fracking

Rights and Responsibilities of Mineral Cotenants

James J. Ormiston. Shareholder

Royalty and Surface Owner Information Brochure

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

KEN PAXTON ATTORNEY GENERAL OF TEXAS. March 31, Opinion No. KP-0011

Buying and Selling Oil & Gas Assets In Bankruptcy Cases. June 16, 2015

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION. vs. CIVIL ACTION NO. 4:12-cv-2922 COMPLAINT

MINING, OIL & GAS LAW

IN THE TENTH COURT OF APPEALS. No CV. From the 170th District Court McLennan County, Texas Trial Court No MEMORANDUM OPINION

ATTORNEY GENERAL OF TEXAS

ADJUSTING OTHER INSURANCE CLAUSE CLAIMS

Will Deepwater Horizon Change a Long Standing Rule of Law?

Black Gold: Gifts of Oil and Gas Interests Made Simple

Fourth Court of Appeals San Antonio, Texas

IN THE COURT OF APPEALS OF TENNESSEE AT KNOXVILLE February 13, 2008 Session

Mineral Issues Impact on Solar Energy Development in Texas and Other States (2013 Update)

TEXAS AND LOUISIANA: TWO STATES SEPARATED BY A COMMON LAW

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

OKLAHOMA SENATE BILL 168 & JUDICIAL DEVELOPMENTS

The Shifting & Allocation of Risks

There is a Proposed Settlement in a class action brought against Chesapeake Appalachia, L.L.C. on behalf of certain royalty owners.

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT. No Mary Pena, Plaintiff/Appellant, versus

Like-Kind Exchanges Involving Oil, Gas and Mineral Interests Tax Gold.

What s News in Tax Analysis That Matters from Washington National Tax

Oil & Gas: Valuation, Surface Rights and Mineral Interests. Rita Beth Whatley Barbara D. Nunneley

CHECKLIST FOR NEGOTIATING AN OIL AND GAS LEASE

Oil & Gas Lease Judon Fambrough Senior Lecturer and Attorney at Law

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

No Filed: IN THE APPELLATE COURT OF ILLINOIS SECOND DISTRICT

F I L E D November 29, 2012

In the Court of Appeals of Georgia

2015 IL App (5th) U NO IN THE APPELLATE COURT OF ILLINOIS FIFTH DISTRICT

In the Missouri Court of Appeals Eastern District

Reverse and Render in part; Affirm in part; Opinion Filed December 29, In The Court of Appeals Fifth District of Texas at Dallas

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

NO. PLAINTIFFS ORIGINAL PETITION. Level 3 of Texas Rule of Civil Procedure and urge the Court to act on entering a

IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT. No Non-Argument Calendar. Docket No. 1:13-cv WSD.

Real Estate Leases And Margin Taxes: Who Pays?

STATE OF MICHIGAN COURT OF APPEALS

THE TEXAS SUPREME COURT S APPROACH TO ENFORCING ARBITRATION CLAUSES IN 2010 THE 6TH ANNUAL CONSTRUCTION SYMPOSIUM

The Court Has Spoken: Case Law Update

THE GENERAL ASSEMBLY OF PENNSYLVANIA SENATE BILL

Recent Developments Regarding Attorney s Fees PHILIP DURST DEATS DURST & OWEN, P.L.L.C SAN ANTONIO, SUITE 203 AUSTIN, TEXAS 78701

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION File Name: 05a0308n.06 Filed: April 21, No

Vince Ryan Harris County Attorney

UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF MICHIGAN. NEWSTAR ENERGY, U.S.A., INC., Case No. SL

Case 3:09-cv B Document 23 Filed 09/23/09 Page 1 of 8 PageID 649 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF TEXAS DALLAS DIVISION

IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT. No D.C. Docket No. 4:08-cv HL. versus

Black Stone Minerals, L.P.

'Additional Insured' At Stake In Texas High Court BP Case

In The Court of Appeals Fifth District of Texas at Dallas. No CV

IN THE SUPREME COURT OF TEXAS

F I L E D September 13, 2011

Case 4:10-cv Document 103 Filed in TXSD on 10/09/13 Page 1 of 7 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

COURT OF APPEALS THIRTEENTH DISTRICT OF TEXAS CORPUS CHRISTI EDINBURG

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS GALVESTON DIVISION CIVIL ACTION NO. 3:12-CV-341 MEMORANDUM AND ORDER

Fourth Court of Appeals San Antonio, Texas

TEXAS POOLING OVERVIEW

FREQUENTLY ASKED QUESTIONS

Unearthing Mineral Rights:

Courtroom: 19 FINAL JUDGMENT AND ORDER OF DISMISSAL WITH PREJUDICE

Importance of Mineral Rights and Royalty Interests for Rural Residents and Landowners

Putting the Pieces Together: The Texas Whistleblower Act s Jurisdictional Puzzle

Case 3:05-cv M Document 24 Filed 02/21/07 Page 1 of 8 PageID 623

In The Court of Appeals Fifth District of Texas at Dallas. No CV

THE ASSIGNMENT OF OIL & GAS LEASES: CONDITIONS, CONSTRAINTS, AND CONSEQUENCES

REVERSE, RENDER, REMAND, and AFFIRM; and Opinion Filed August 22, In The Court of Appeals Fifth District of Texas at Dallas. No.

VALUATION - THE IMPACT OF BUY SELL AGREEMENTS

INFORMATIONAL NOTICE REALTY TRANSFER TAX AND PERSONAL INCOME TAX

THE JOINT OPERATING AGREEMENT THE BASICS (REVISED OCTOBER 2012)

Transcription:

OIL & GAS ROYALTY ISSUES Robert (Eli) Kiefaber The Esperson Building 808 Travis Street, Suite 1030 Houston, Texas 77002 Telephone: 713.229.0360 Email: rkiefaber@kolawllp.com

2 Firm Overview Oil and Gas A/D Contracts Regulatory Title Opinions Transactions Licensed In: Colorado Kansas Louisiana New Mexico North Dakota Ohio Oklahoma Pennsylvania Texas

3 Oil & Gas Royalty Issues Recent Developments Regarding the Interpretation of Nonparticipating Royalty Interests Heritage Resources and the Deduction of Post- Production Costs from Royalty

4 Types of Non-Executive Interests Non-Executive Mineral Interest (NEMI) An interest in the mineral estate but without the power to execute leases Typically shares in bonus, rentals and royalties Created by reservation or by grant Non-Participating Royalty Interest (NPRI) An expense-free interest in oil or gas, if and when produced Created by reservation or by grant

5 Basic Elements of NPRIs Non-possessory No right to enter on the land Vested incorporeal interest in land No right to demand partition Mineral fee owners cannot compel partition

6 Types of NPRIs Two Types of NPRIs (Fixed or Floating) Fixed Royalty (Fractional Royalty) The stand-alone right to a particular share of the proceeds from production The NPRI is not proportionately reduced based on the lease royalty rate Example: A 1/16 fixed royalty is entitled to the same 1/16 of the royalties from production irrespective of the lease royalty rate

7 Examples of Language Creating a Fixed Royalty 1. A one-fourth royalty in oil, gas and other minerals in and under and hereafter produced 2. A fee royalty of 1/32 of the oil and gas 3. An undivided one-sixteenth royalty interest of any oil, gas or minerals that may hereafter be produced 4. One-half of the one-eighth royalty interest 5. An undivided 1/24 of all the oil, gas and other minerals produced, saved and made available for market 6. 1% royalty of all the oil and gas produced and saved

8 Floating Royalty Floating Royalty (Fraction of Royalty) The interest shares in a portion of the royalty and varies (or floats) with the lease royalty rate The mineral owner s royalty is proportionately reduced according to the lease royalty rate Example: A 1/2 NPRI (or NEMI) that is subject to a lease with a 1/4 royalty rate will be entitled to 1/2 x 1/4 =1/8 of the royalties from production Generally, addition of the word of before royalty creates a floating royalty

9 Examples of Language Creating a Floating Royalty 1. 1/16 of all oil royalty 2. The undivided 2/3 of all royalties 3. One-half interest in all royalties received from any leases 4. An undivided one-half interest in and to all royalty 5. One-half of one-eighth of all oil, gas and other mineral royalty that may be produced 6. One-half of the usual one-eighth royalty

10 Fixed vs. Floating: Interpretation of NPRIs Historically, the granting clause was considered superior to any conflicting language in other parts of the instrument Recent caselaw has shifted the focus away from the granting clause to an attempt to discern the intent of the parties

11 Interpretation of NPRIs The Four Corners Rule Luckel v. White, 819 S.W.2d 459, 461 (Tex. 1991) ( The primary duty of a court when construing such a deed is to ascertain the intent of the parties from all of the language in the deed by a fundamental rule of construction known as the four corners rule ). Estate Misconception Theory Graham v. Proschaska, 429 S.W.3d 650, 657 (Tex. App. San Antonio 2013, pet. denied) (explaining that the estate misconception theory is the theory that the parties from that period mistakenly assumed and conceptualized the landowner's royalty as set at one-eighth of production ).

12 Traditional Interpretation The traditional approach treated the usual 1/8 according to its plain meaning and multiplied the double fraction to find a fixed royalty. Example: A reservation of one-half (1/2) of the usual one-eighth (1/8) reserved a fixed 1/16 royalty. Wynne/Jackson Dev. L.P. v. PAC Capital Holdings, Ltd., 2013 Tex. App. LEXIS 6865, at *11-15 (Tex. App. Corpus Christi 2013, pet. denied). There are a significant number of Texas decisions that have followed this approach.

13 The Estate Misconception Theory Takes Hold Sundance Minerals, L.P. v. Moore, 354 S.W.3d 507, 512 (Tex. App. Fort Worth 2011, pet. denied) The court determined that 1/2 floating royalty was reserved when the grantor reserved one half of the usual one-eighth royalty. The court explained the reference to the usual 1/8 royalty was merely an example showing the type of interest they intended to reserve, not a further limitation. Other courts follow Sundance Minerals and conclude that a floating royalty is reserved when there is a reference to the usual 1/8 royalty

14 Courts Stretch the Estate Misconception Theory Further Graham v. Prochasaka, 429 S.w.3d 650, 658-59 (Tex. App. San Antonio 2013, pet. denied) Reservation provided: One half (1/2) of the one-eighth (1/8) royalty to be provided in any and all leases for oil, gas and other minerals now upon or hereafter given. The court did not look to caselaw to interpret the reservation; rather, the court focused on the ordinary meaning of the as the modifier of one-eighth The court examined all of the language in the deed and reviewed the instruments referenced in the deed and concluded that the parties intended that the royalty interest be a floating interest and be 1/2 of royalty provided by any current or future lease and that the parties incorrectly assumed that the royalty provided in an oil and gas lease would always be 1/8. Medina Interest, Ltd. v. Trial, 2015 Tex App. LEXIS 6382, at *15 (Tex. App. San Antonio 2015, no pet. h.) (interpreting a reservation of our undivided interest in and to the 1/8 royalties paid the land owner to reserve a floating royalty interest).

15 The Texas Supreme Court Weighs In Hysaw v. Dawkins, 2016 Tex. LEXIS 100 (Tex. Jan. 29, 2016) The testatrix devised to each child an NPRI of an undivided one-third (1/3) of an undivided (1/8) of oil, gas or other minerals The will also provided that each child shall receive onethird of one-eighth royalty The Court concluded that they cannot embrace a mechanical approach requiring rote multiplication of double fractions whenever they exist. Rather, considering the testatrix s will in its entirety, we hold that she intended her children to share future royalties equally, bequeathing to each child a 1/3 floating royalty, not a 1/24 fixed royalty.

16 Oil and Gas Royalties Most disputes focus on how royalties are calculated on gas production The general rule is that royalty clauses based on proceeds or amount realized or market value at the well permit deduction of postproduction costs from gas sales before paying royalties.

17 Deduction of Costs By definition royalty is paid free of the costs of exploration, drilling and production of oil and gas (the production costs ) Post-Production costs: Dehydration and separation Compression Removal of substances to make the production marketable Gathering costs Marketing

18 Heritage Resources, Inc. v. NationsBank The Texas Supreme Court construed the phrase market value at the well in a lease that also contained language prohibited the deduction of post-production costs. The operator was selling the gas and deducting the transportation costs and paying royalty on the net amount as market value The Texas Supreme Court affirmed the operator s practice and held that when royalty is based on market value any subsequent language prohibiting deduction of post-production costs is surplusage and cannot be enforced.

19 Anti-Heritage Clauses Following the Heritage decision, many lessors sought to avoid the application of Heritage and the deduction of post-production costs and included anti-heritage clauses The inclusion of anti-heritage clauses and the industry practice of deducting transportation and other post-production costs has led to a wave of royalty litigation

20 Post-Production Deduction Caselaw Warren v. Chesapeake Exploration, L.L.C., 759 F.3d 413 (5th Cir. 2014) The lease provided for royalties based upon the amount realized by Lessee, computed at the mouth of the well. Lessors included a no deductions clause and an anti- Heritage provision The Fifth Circuit concluded the lease permitted postproduction deductions and that Heritage still permitted the operator to net-back to a wellhead price.

21 Post-Production Deduction Caselaw Potts v. Chesapeake Exploration, L.L.C., 760 F.3d 470 (5th Cir. 2014) The lease provided for royalties based on the market value at the point of sale and that all royalty shall be free of all costs and expenses related to marketing. Chesapeake sold the gas to a Chesapeake affiliate at the wellhead and was paid a weighted average of sales proceeds minus the post-production costs incurred to bring the gas downstream. The Court explained that market value at the point of sale was unambiguous and required the operator to value production wherever the gas was sold.

22 Post-Production Deduction Caselaw French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014) Oxy injected CO2 purchased from Kinder Morgan to attempt to increase the amount oil production. Oxy contracted with Kinder Morgan to build a processing facility to remove CO2 and H2S so the gases could be reinjected. Plaintiffs asserted that the removal of the CO2 was a production activity and should not be deducted from royalty The Court focused on a Unitization Agreement that authorized reinjection of gas and expressly provided that no royalties would be due on unitized substances. The Court concluded that Oxy s decision to have the gas processed and NGLs extracted benefitted both parties and under the Unitization Agreement Plaintiffs were required to share in the cost of the CO2 removal.

23 Texas Supreme Court s View of Post-Production Deductions Chesapeake Exploration, L.L.C. v. Hyder, 2016 Tex. LEXIS 94 (Tex. Jan. 29, 2016) The provision in dispute provided for a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent (5.0%) of gross production obtained from directional wells drilled from the surface of the lease but bottomed on other land The lease also contained an anti-heritage clause. The meaning of cost free The Court concluded that an anti-heritage clause did not free the royalty of post-production costs

24 Questions? Robert (Eli) W. Kiefaber The Esperson Building 808 Travis Street, Suite 1030 Houston, Texas 77002 Telephone: 713.229.0360 rkiefaber@kolawllp.com www.kolawllp.com