Replies to This Discussion

Permalink Reply by Spring Branch,mineral owner on August 13, 2012 at 7:59

I would think that the Lease in question would be a public record.  Any way you can put a link to the Lease Agreement so we can better tell what not todo?

Permalink Reply by Andrew on August 13, 2012 at 8:25

I have attached a copy of the lease, Spring Branch.

Attachments:

• Magnolia Point Lease.pdf, 827 KB

Permalink Reply by Skip Peel - Mineral Consultant on August 10, 2012 at 1:10

Correct,  Pardon any confusion.  My interest is in making elected judges accountable.  And feel the state appellate courts are the place to start.  As a witness in an O&G related trial that was decided for plaintiff at the district level and overturned by the Second Circuit, I sat through both trials.  The defense didn't offer any testimony in district court.  None.  The plaintiff attorneys had put on such a compelling case that the defense knew they would only dig themselves a deeper hole and make things worse.  They wanted to avoid putting any of their expert witnesses on the stand at all costs.  IMO they felt that the best strategy was to avoid any further testimony and rely on the appellate court to bail them out.  And that is what happened.  IMO if the mineral owners of NW LA had sat through those trials they would be sorely disappointed.  Not just at the outcome but at the process.

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Permalink Reply by Henry on August 10, 2012 at 5:51

Who were the attorneys for Magnolia Point Minerals in this case?  Does anyone know?

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Permalink Reply by Martin on August 10, 2012 at 13:10

What are the odds for appeal? Any word yet?

 Of course, the appellate court in New Orleans may not be considered neutral.  See Skip Peel's post about the trials he  attended.

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Permalink Reply by Skip Peel - Mineral Consultant on August 10, 2012 at 13:41

Martin, I need to take this opportunity to back up a little and be more specific.  I hope you don't mind.  The Magnolia Minerals vs. CHK suit was heard in federal court.  I am totally unfamiliar with the federal court that would hear any appeal and, even given the specific knowledge, wouldn't imagine the odds for reversal are good.  I'll leave comment on the federal court process to any of our attorney members who would care to do so. 

When a dispute over a matter of a mineral lease, production or payment to lessors results in a suit the first question, and legal battle, is in what court will the action be heard.  Attorneys for mineral owners prefer the state district courts while the energy industry prefers a federal court.  That battle can take a year or more to play out.  We as mineral owners are up against a federal court system that is in large part pro-business and prone to lean toward the interests of the O&G industry that has curried their favor for decades.  When a mineral owner wins the battle of venue they have the initial trial at the district court level with appeal to a LA court of appeals.  An appeal from the appellate court would be to the State Supreme Court if that court would choose to hear the case. 

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Permalink Reply by HBP on August 11, 2012 at 3:22

Appeals in our Federal Court will end up in the 5th district, New Orleans.  We will just have to watch to see if a notice of appeal gets filed in the next few weeks. 

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Permalink Reply by Jack W McIntyre on August 16, 2012 at 7:50

The Heritage case was decided on ambiguous Division Order language according to the ruling, and should not be considered universal on all lease agreements. I wonder how many companies started charging post cost after the case was held that were not charging before that had these clauses. That should set a president.

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Permalink Reply by adubu on August 17, 2012 at 1:32

OK -- question for Ben , Andrew, others professional --- for future leases what's the perfect language for a true royalty free clause ? Also what is mineral owner entitled to receive. If gas is valued at X at well before gas goes into pipeline and at final point of delivery to market it is valued as X+ cost to prepare it to go into pipeline +to get it there . Which should mineral owner be entitled to receive? I assume mineral owner should receive Net that operator receives for gas which should be X because at delivery point operator receives gross - cost= net . With Royalty free mineral owner should not receive X+ all other cost to get gas to point of sell should he because that would be wind fall extra profit. The mineral owner for sure should not receive X- all cost since operator for sure get X because he will pass all cost to party who purchased gas at delivery point

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Permalink Reply by Ben Elmore on August 17, 2012 at 3:40

As a caveat, this is just a suggestion and should not be taken as legal advice.  This case and discussion shows why it's important to get your own attorney to help in the drafting of oil and gas leases.  Having said that, one suggestion is to not tie the royalty to market value, but rather to gross proceeds at the point of sale, and specifically disclaim that the rulings in these cases will apply.  For instance:

 

Lessor shall receive, and Lessee agrees to pay to Lessor as royalty, one-fourth (1/4^th) of the gross proceeds realized by Lessee from the sale of oil and/or gas and casinghead gas, and any associated hydrocarbons or by-products thereof, including any reimbursements or other forms of compensation paid by a third party purchaser of such oil and/ or gas and casinghead gas to Lessee, produced from the leased premises. In no event shall Lessor receive a price for its royalty share of oil and/or gas and casinghead gas produced from the leased premises that is less than the price Lessee receives for such payment. In the event Lessee sells oil and/or gas and casinghead gas to an affiliate, the price received shall be equal to the price paid at the point of sale in arms length contracts and non-affiliate sales.

Further, Lessor's royalty shall not be charged directly or indirectly with any of the following charges:  expenses of production, gathering, dehydration, transportation, fractionation compression, manufacturing, processing, treating or marketing of gas, oil, or any liquefiable hydrocarbons extracted therefrom. If any contract by which Lessee sells oil or gas produced hereunder makes deductions or adjustments to the price to account for costs of production, gathering, dehydration, transportation, fractionation, compression, manufacturing, processing, treating or marketing of oil or gas produced from the Leased Premises, or any liquefiable hydrocarbons extracted therefrom, then such deductions shall be added back to the price received for purposes of computing the gross proceeds upon which royalties are to be paid hereunder.  In this regard, the holdings in Heritage Resources v. Nationsbank, 939 S.W.2d 118 (Tex. 1996) relating to similar “cost-free” lease language as contained in this paragraph, or any subsequent court decisions with like holdings, are inapplicable.

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Permalink Reply by adubu on August 17, 2012 at 5:07

Ben--- Thanks---Excellent --- this defines to me what Royalty Free means. The Lessor should receive the Gross price at point of delivery to market.  If the following clause as you included above is not in lease--In the event Lessee sells oil and/or gas and casinghead gas to an affiliate, the price received shall be equal to the price paid at the point of sale in arms length contracts and non-affiliate sales---- and if your Lessee sells gas to a pipeline operator near well therefore this is " operators gross and Net  price after gas come out  at well head" operator receives ( Of course it is discount since pipeline add transportation charges since it became owner of gas when it flowed into their pipe at that point ) therefore operator ran around Royalty Free Clause. As you say the lease language is very important that legal view by oil & gas attorney more than pays for itself.

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Permalink Reply by tc on August 17, 2012 at 5:25

Ben, what are the chances that a landowner actually gets the above lease?  Processing NGL from is NG is expensive and I don't see an E&P operator giving 25% royality and paying $.50/mcfe in processing cost.  EOG ships oil from the Eagle Ford to S. LA to get LLS pricing and its not cheap to move oil hundreds of miles and they are talking about doing the same for the Bakken's oil and now we are talking thousands of miles.  E&P companies now know that shale is everywhere and there is no reason to REALLY compete on leases.  Look at the prices being paid for leases in the TMS a very promising oil shale.

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