Ben Elmore's Posts - GoHaynesvilleShale.com2024-03-29T15:13:12ZBen Elmorehttps://gohaynesvilleshale.com/profile/BenElmorehttps://storage.ning.com/topology/rest/1.0/file/get/2192561929?profile=RESIZE_48X48&width=48&height=48&crop=1%3A1https://gohaynesvilleshale.com/profiles/blog/feed?user=176s4aud16e9c&xn_auth=noTexas Statewide Rule 37 Exceptions and the Mineral Interest Pooling Acttag:gohaynesvilleshale.com,2011-02-02:2117179:BlogPost:17508052011-02-02T00:00:00.000ZBen Elmorehttps://gohaynesvilleshale.com/profile/BenElmore
<p><strong><span style="text-decoration: underline;"> </span></strong></p>
<p><strong>This discussion is intended to provide a general overview of Statewide Rule 37 Exceptions and the Mineral Interest Pooling Act in Texas, and is not a comment or opinion on any one particular set of facts. If you have questions or have received a notice of a Rule 37 Exception application or MIPA application affecting your land, you are encouraged to contact an attorney to receive advice specific to your…</strong></p>
<p><strong><span style="text-decoration: underline;"> </span></strong></p>
<p><strong>This discussion is intended to provide a general overview of Statewide Rule 37 Exceptions and the Mineral Interest Pooling Act in Texas, and is not a comment or opinion on any one particular set of facts. If you have questions or have received a notice of a Rule 37 Exception application or MIPA application affecting your land, you are encouraged to contact an attorney to receive advice specific to your situation.</strong></p>
<p><strong><span style="text-decoration: underline;"> </span></strong></p>
<p><strong><span style="text-decoration: underline;">Rule 37 Exceptions</span></strong></p>
<p><strong><span style="text-decoration: underline;"> </span></strong></p>
<p>In Texas, an operator is not required to include a non-drillsite tract unleased mineral owner (UMO) in a unit. If you are a UMO and are not the drillsite tract owner, you will not share in production from the unit even if you are in the middle of the unit. If you are the drillsite tract owner and are a UMO, you are entitled to your proportionate share of the well production as a "co-tenant" after the well has paid out (although the Texas Supreme Court has thrown a wrench into this rule in<em> Wagner & Brown v. Sheppard (2008</em>), but that is a topic for another day). If you are a UMO and are holding out for better lease terms, or are thinking that the operator will be forced to include you in a unit, be careful. The operator may apply for a Rule 37 exception and effectively cut you out of a well that may likely drain you. </p>
<p>Statewide Rule 37 governs how close a well can be to any property line, lease line, or other well. No well can be drilled closer than 1200 feet from another well completed in the same horizon on the same tract, and no well shall be drilled closer than 467 feet from a property line, unit line, or lease line. Field rules can be issued for each specific field that prescribe longer or shorter distances. For horizontal wells, the entire length of the horizontal drainhole (penetration to terminus point) must comply with the spacing requirements, unless the field rules prescribe otherwise. The Railroad Commission can grant exceptions to the spacing rule permitting wells to be drilled closer than prescribed. </p>
<p>With respect to horizontal wells, if there is a UMO that is holding up the spud date, and the UMO is a nondrillsite tract, an operator may decide to seek a Rule 37 exception. For example, under Rule 37, no portion of the horizontal drainhole can come within 467 feet of the UMO's property line. This presents a problem if the proposed wellsite or path of the horizontal drainhole is closer than 467 feet (or field rule spacing) of the UMO's property line. A Rule 37 exception will allow the operator to drill the well as close as possible to the UMO's tract and effectively drain the UMO's acreage without having to account to the UMO for his share. How can this be you ask? Under Rule 37, if the operator can prove there is a necessity for such an exception to prevent waste or confiscation, the RRC will likely grant the application, especially if the application is not contested (more on this below). To establish that the exception would prevent waste, the operator must show that its proposed well will recover oil or gas that wells in the field that would not otherwise be recoverable (i.e., the oil or gas under the unreasonable UMO's land), or that unusual geological conditions specific to the unit exist that require closer spacing to the UMO's tract. To establish an exception would prevent confiscation, the operator must show that absent the exception, it will be denied a reasonable opportunity to recover its fair share of hydrocarbons currently in place. </p>
<p>The operator is required to send notice to all affected UMOs of their application for an exception, and notify them of the date the RRC will hear the application. It is up to the UMO to appear and contest the application. The UMO will need to hire an attorney familiar with the RRC rules and administrative process. Typically, the UMO lacks the resources to contest the applications. If uncontested, the applications are usually granted. </p>
<p> </p>
<p><strong><span style="text-decoration: underline;">Mineral Interest Pooling Act</span></strong></p>
<p>There is no automatic right for a UMO to be included in a unit in Texas. A UMO or operator must apply to the RRC to include a UMO interest in a unit. Under the Mineral Interest Pooling Act, an operator can apply to the RRC to force pool a UMO into an existing unit if certain criteria are met. First, their must be an existing RRC designated common reservoir for the field in which the unit is located, and existing or temporary field rules. Second, the operator must show that it made a fair and reasonable offer to the UMO to voluntarily pool. What is considered fair and reasonable depends on the circumstances, however, typically an offer for the UMO to share on the same "yardstick" as others in the unit is usually considered fair and reasonable. Third, the MIPA unit is to be limited to 160 acres for an oil well and 640 acres for a gas well plus 10 percent tolerance, and must contain the "approximate acreage" of the proration units under the field rules. The operator must also show that the UMO's acreage reasonably appears to be within the productive limits of the reservoir. Fourth, the operator must propose the economic terms on which the UMO is to be paid if force pooled. In past cases, the RRC has determined that the UMO is to be paid (1) on the royalty share of their interest, the fair market royalty rate at the time of the order with no bonus, and (2) on the working interest share of their interest, the difference of 100% and the royalty interest being pooled. In other words, if the market royalty is 1/4, then the UMO would receive a 1/4th royalty and a 3/4ths carried working interest. The MIPA unit typically dissolves one year after its effective date if no production or drilling operations has taken place, six months after a dry hole is completed, or six months after cessation of production. As with the Rule 37 exception, the operator must file an application and give the UMO notice. The UMO can appear at the hearing to contest the application, and will likely need attorney representation. </p>
<p>Vice-versa, the UMO can apply to the RRC to "muscle into" an existing unit. The UMO is required to meet the same elements, and must provide notice to all interest owners (working, royalty, overriding royalty, etc..) in the unit. </p>
<p> </p>Educate Yourself About Your Rights! The Draconian Application of Statute of Limitations in Texastag:gohaynesvilleshale.com,2011-01-14:2117179:BlogPost:17423232011-01-14T15:29:55.000ZBen Elmorehttps://gohaynesvilleshale.com/profile/BenElmore
<p>I wanted to let Texas royalty owners know the importance of educating yourself about what your rights are as mineral owners. Your rights can be taken away if you are not proactive to protect them. I've attached an article I co-authored almost two years ago discussing how the Texas Court system has eroded royalty owner rights over the past 12 years via a draconian application of applicable statutes of limitations. (Limitations are known as "prescription periods" in Louisiana, and the need…</p>
<p>I wanted to let Texas royalty owners know the importance of educating yourself about what your rights are as mineral owners. Your rights can be taken away if you are not proactive to protect them. I've attached an article I co-authored almost two years ago discussing how the Texas Court system has eroded royalty owner rights over the past 12 years via a draconian application of applicable statutes of limitations. (Limitations are known as "prescription periods" in Louisiana, and the need to educate yourself in LA is equally important, though this article only addresses Texas law). </p>
<p> </p>
<p>Not many people enjoy getting involved in a lawsuit. That is understandable. But oftentimes, you are faced with a situation that you cannot resolve without the legal system. In Texas, depending on the claim you have, you must file a lawsuit to bring such claim within the applicable statute of limitations period. The "discovery rule" can be applied to toll the running of limitations until such time as your injury should have been discovered in the exercise of reasonable diligence, if the injury is inherently undiscoverable and objectively verifiable. The Railroad Commission and your lessee has most of the information you need to educate yourself. As you will see in the article, Texas courts place a heavy burden on you to go and get it. </p>
<p> </p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/309169569?profile=original">Discovery%20Rule%20Article%20%2800078659%29.PDF</a></p>
<p> </p>
<p> </p>Primer on Texas Oil & Gas Lawtag:gohaynesvilleshale.com,2010-12-16:2117179:BlogPost:17003382010-12-16T17:00:00.000ZBen Elmorehttps://gohaynesvilleshale.com/profile/BenElmore
<p>I am an oil and gas lawyer in Houston with roots in East Texas. I was born and raised in Jasper, Texas and have family ties still in the area. I have been an oil and gas lawyer for ten years. I started out representing operators, but have since devoted myself to representing landowners and doing my part to educate the masses on their legal rights. I've started with educating my own family. We own acreage in East Texas and South Texas, but I was surprised to learn that nobody had a clue…</p>
<p>I am an oil and gas lawyer in Houston with roots in East Texas. I was born and raised in Jasper, Texas and have family ties still in the area. I have been an oil and gas lawyer for ten years. I started out representing operators, but have since devoted myself to representing landowners and doing my part to educate the masses on their legal rights. I've started with educating my own family. We own acreage in East Texas and South Texas, but I was surprised to learn that nobody had a clue how much acreage we owned, who the acreage was leased to, or what was going on with our property. My parents, aunts and uncles were just collecting royalty checks treating it as "mailbox money." Through my representation of oil companies, I came to learn that my family was not much different than most royalty owners. The average royalty owner in Texas is a 65 year old widow. When compared to the resources, knowledge and expertise that an oil company has, royalty owners are typically at a huge disadvantage when it comes to protecting their interests. Our Texas Supreme Court ignores this reality, and over the past 15 years has continually sided with oil companies in litigation, which has increased the burdens on royalty owners to protect themselves. So I am posting this Primer on Texas Oil & Gas Law to provide an overview of some of the basic rights every royalty owner should know they have. This is not intended to be legal advice. This is simply a recitation of existing law in Texas. If you have questions, please do not hesitate to contact me or a lawyer you trust. Here is a link to my website <a target="_self" href="http://www.wattbeckworth.com/elmore.htm">http://www.wattbeckworth.com/elmore.htm</a>.</p>
<p> </p>
<p><b>I. Basic Principles</b></p>
<p><b> </b></p>
<p><b>A. Mineral Estate is often severed from surface estate</b></p>
<p> </p>
<p>Five attributes of mineral estate</p>
<p></p>
<ol>
<li>Right to develop</li>
<li>Right to lease</li>
<li>Right to receive bonus payments</li>
<li>Right to receive delay rentals</li>
<li>Right to receive royalty payments</li>
</ol>
<p></p>
<p><i>Altman v. Blake,</i> 712 S.W.2d 117, 118 (Tex. 1986); <i>Day & Co. v. Texland Petroleum,</i> 786 S.W.2d 667, 669 n. 1 (Tex. 1990); <i>French v. Chevron U.S.A. Inc.,</i> 896 S.W.2d 795, 797 (Tex. 1995)</p>
<p> </p>
<p>Oil and gas lease is a fee simple determinable, with possibility of reverter in the lessor/mineral owner. <i>Cherokee Water Co. v. Forderhouse,</i> 641 S.W.2d 522, 525 (Tex. 1982). Oil and gas lease vests title to minerals in the lessee for so long as the lease is kept in force. <i>W. T. Waggoner Estate v. Sigler Oil Co.,</i> 19 S.W.2d 27 (1929).</p>
<p> </p>
<p><b>B. Rule of Capture</b></p>
<p> </p>
<p>Mineral owner acquires title to minerals he produces from his land, even if such minerals migrated from adjacent lands. Imagine an oil reservoir as an underground pool that extends from your land across the lease line to your neighbor’s land. If you drill a well into that reservoir, you have the right to produce all of the oil, even that which is located under your neighbor’s land.</p>
<p><b> </b></p>
<p><strong>C.</strong> <strong>Essential Terms of Oil and Gas Lease</strong></p>
<p> </p>
<p style="padding-left: 30px;"><strong>1. Habendum clause</strong> – description of “primary term” and “secondary term”- primary term is the stated months or years in the lease - secondary term comes into effect after the expiration of the primary term, but only if drilling, production or other operations are taking place as more specifically described in the lease (every lease is different in this regard). Example:</p>
<p>Unless sooner terminated or longer kept in force under other provisions hereof, this lease shall remain in force for a term of three (3) years from the date hereof, hereinafter called “primary term”, and as long thereafter as operations, as hereinafter defined, are conducted upon said land or with no cessation for more than ninety (90) consecutive days, or as long thereafter as oil or gas is produced from said land by lessee.</p>
<p><b> </b></p>
<p style="padding-left: 30px;"><b>2. Royalty clause</b></p>
<p> </p>
<p>The lessor’s royalty is equal to his share of production, free of production costs. <i>See Heritage Resources, Inc. v. Nationsbank</i>, 939 S.W.2d 118 (Tex. 1996), <i>reh’g denied,</i> 960 S.W.2d 619. Production costs may include the costs of 3D seismic, drilling costs, testing or reworking a well, or secondary recovery operations. Reasonable post-production costs are typically deducted from royalty, such as severance taxes, costs of compression, treating or transportation. <i>See id.</i></p>
<p><i> </i></p>
<p>Royalty clause may be based on a fraction of the “posted price” for oil, or “market value at the well” or “amount realized by lessee.” Market value is the price negotiated between a willing seller and willing buyer. <i>See Exxon Corp. v. Middleton,</i> 613 S.W.2d 240, 246 (Tex. 1981). Market value is determined either by analyzing comparable sales or taking the amount realized by the lessee and netting out post production costs (<i>i.e.,</i> “net-back”) to get to a value at the mouth of the well. <i>Heritage Resources, Inc. v. Nationsbank</i>, 939 S.W.2d at 122-23.</p>
<p> </p>
<p style="padding-left: 30px;">3. <strong>Pooling provision</strong></p>
<p> </p>
<p>Oil and gas leases contain a clause that grants lessees the right to pool leases together to form a unit. The pooling power must be exercised in good faith. <i>See Elliott v. Davis,</i> 553 S.W.2d 223, 226 (Tex. Civ. App. - Amarillo 1977, writ ref’d n.r.e.); <i>Amoco Prod. Co. v. Underwood,</i> 558 S.W.2d 509, 512 (Tex.Civ.App. - Eastland 1977, writ ref’d n.r.e.). Lessors can negotiate maximum unit sizes so as to protect against dilution of their royalty. If lessors are included in a unit, their royalty is recalculated to their proportionate share of the entire unit production. If the lessor’s royalty in his lease is 1/8<sup>th</sup>, and 50 acres under his lease is included in a 640 acre unit, his royalty is equal to 1/8<sup>th</sup> of 50/640ths of production.</p>
<p> </p>
<p>Every lease should contain a vertical and horizontal <i>Pugh</i> clause to protect the interests of the lessor. Such a clause results in a severance of the pooled and non-pooled portions of the leasehold such that the lease acreage and depths outside the pooled unit are not maintained by drilling or operations on the pooled unit. <i>SMK Energy Corp. v.Westchester Gas Co.</i>, 705 S.W.2d 174, 176 (Tex.App.—Texarkana 1985, writ ref’d n.r.e.). </p>
<p> </p>
<p>The Texas Supreme Court recently held that if a lease contained within a unit terminates, the lease nevertheless remains part of that unit. If the terminated lease is a drillsite tract, the lessor is treated as a cotenant and owes his proportionate share of production and post-production costs. <i>See Wagner & Brown v. Sheppard,</i> 282 S.W.3d 419 (Tex. 2008).</p>
<p> </p>
<p><b>II.</b> <b>Implied Covenants of Oil and Gas Lessee</b> – <i>Amoco Production Co. v. Alexander,</i> 622 S.W.2d 563, 567 (Tex. 1981). - these are implied oblgiations the courts have placed on lessees. Express provisions of a lease will control, and many lessees attempt to include express provisions that disclaim or nullify these implied covenants. One needs to read a lease carefully before signing.</p>
<p><b> </b></p>
<p><b>A.</b> <b>Applicable Standard is Reasonably Prudent Operator</b></p>
<p><b> </b></p>
<p><b>B. Covenant to Develop</b></p>
<p> </p>
<p>There is no requirement outside the express terms of the lease that the lessee drill an initial well. A lessee may obtain a lease to hold and prevent its competitor from leasing acreage nearby. The lessee either executes a paid-up lease or pays annual delay rentals to maintain the lease. However, once the first well is drilled, the lessee must drill such additional wells to develop the property as a reasonably prudent operator would under the same or similar circumstances, taking into consideration the interests of both the lessor and the lessee. <i>Clifton v. Koontz</i>, 160 Tex. 82, 325 S.W.2d 684, 693-94 (Tex. 1959); <i>Lenape Resources Corporation v. Tennessee Gas Pipeline</i> <i>Company</i>, 925 S.W.2d 565, 572 (Tex. 1996). The lessee has no duty to develop without a reasonable expectation of profit to it. <i>Pickens v. Hope</i>, 764 S.W.2d 256, 270 (Tex. App.—San Antonio 1988 writ denied). </p>
<p> </p>
<p><b>C. Covenant to Protect Against Drainage</b></p>
<p> </p>
<p>The obligation to protect the lease has been described as “the duty of the lessee to drill an offset or additional well, if, considering the cost of same and the probable profit therefrom, he would have been doing what an ordinarily prudent person would have done under the same circumstances.” <i>Texas Pacific Coal and Oil Co. v. Barker</i>, 117 Tex. 418, 6 S.W.2d 1031, 1036 (Tex. 1928); <i>Amoco Production Company v. Alexander</i>, 622 S.W.2d 563 (Tex. 1981). Further, the reasonably prudent operator standard includes an independent requirement that the drainage be substantial before lessor can maintain a cause of action. <i>Good v. TXO Production Corp.</i>, 763 S.W.2d 59, 61 (Tex. App.—Amarillo 1988, writ denied); <i>Clifton v. Koontz</i>, 160 Tex 82, 96-97, 325 S.W.2d 684, 695-96 (1959). </p>
<p> </p>
<p>D. <strong>Covenant to Market</strong></p>
<p> </p>
<p>This covenant includes the duty to produce and market, to operate with reasonable care, to use modern methods of production and development and to seek favorable administrative action. <i>Amoco Production Company v. Alexander</i>, 622 S.W.2d 563, 567 (Tex. 1981). The most common dispute arising under this covenant is the implied duty to market. The lessee has the duty to “exercise good faith in the marketing of gas”. <i>Amoco</i> <i>Production Company v. First Baptist Church of Peyote</i>, 579 S.W.2d 280, 287 (Tex. Civ. App.—El Paso 1979, writ ref’d. n.r.e.) <i>per curiam</i> 611 S.W.2d 610 (Tex. 1980). A lessee’s primary goal is to maximize profits. Some lessees attempt to pass on unreasonable post-production costs by virtue of net-back method of accounting, which can result in less than market price.</p>
<p> </p>
<p><b>III. Royalty Reporting Statute</b></p>
<p><b> </b></p>
<p>Lessees are required to provide certain information to royalty owners on every royalty check stub. Texas Natural Resources Code §91.502. If the royalty owner wants additional information, he can make written request to the lessee, who has 60 days to respond. <i>Id.</i> at §91.504. If the lessee fails to provide the requested information, the royalty owner may file suit and recover court costs and attorney’s fees. <i>Id.</i> at §91.507.</p>
<p><b> </b></p>
<p><b>IV. Surface Use and Damages</b></p>
<p><b> </b></p>
<p>The mineral estate is dominant over the surface estate. <i>See Harris v. Currie,</i> 176 S.W.2d 302 (Tex. 1944). As such, Texas courts have long defined the mineral owner’s right to use the surface as follows:</p>
<p> </p>
<p>(1) The mineral owner may only use the surface as reasonably necessary to develop the underlying minerals;</p>
<p>(2) In using the surface, the mineral owner must act with due regard for the rights of the surface owner; and</p>
<p>(3) The mineral owner must act non-negligently in the way and manner of use.</p>
<p><i> </i></p>
<p><i>Brown v. Lundell,</i> 344 S.W.2d 863,866-67 (Tex. 1961); <i>General Crude Oil Co. v. Aiken,</i> 344 S.W.2d 668, 671 (Tex. 1961); <i>Sun</i> <i>Oil Co. v. Whitaker,</i> 483 SW.2d 808 (Tex. 1972).</p>
<p> </p>
<p>Under the accommodation doctrine, surface owners must demonstrate that: 1) their use preexisted the mineral owner's conflicting use; 2) the preexisting use is their only reasonable means of developing the surface; and 3) the mineral owner has other options that a) would not interfere with the surface owner's preexisting use, b) are reasonable (including economic reasonableness), c) are practiced in the industry on similar lands put to similar uses, and d) are available on the premises. <i>Getty Oil Co. v. Jones,</i> 470 S.W.2d 618 (Tex. 1971); <i>Sun Oil Co. v. Whitaker,</i> 483 S.W.2d 808 (Tex. 1972<i>); Tarrant County Water Control</i> & <i>Improvement District No. One v. Haupt, Inc.,</i> 854 S.W.2d 909 (Tex. 1993).</p>
<p><b> </b></p>
<p><b>V. Investigation into Lessee’s Compliance with Covenants</b></p>
<p> </p>
<p>Most of the claims brought by royalty owners are for breach of the express or implied covenants of the oil and gas lease governed by the four year statute of limitations. Typically lessees do not provide their royalty owners with technical information supporting the lessee’s decisions concerning drilling activities, or lack thereof. Over the past fifteen years, the Texas Supreme Court has eroded the protections afforded royalty owners by the "discovery rule" which acts to delay the running of statute of limitations on claims until such time that the claimant discovered or should have discovered the claim through the exercise of reasonable diligence. This places an ever increasing burden on royalty owners to educate themselves about the lessee’s operations and compliance with the oil and gas lease express and implied provisions. </p>
<p>In order to investigate into a lessee’s operations and compliance with the lease, royalty owners typically will need assistance from experts, such as a geologist or petroleum engineer. There is information publicly available on the website of the Texas Railroad Commission relating to individual wells and operators. </p>
<p><a href="http://www.rrc.state.tx.us/">http://www.rrc.state.tx.us/</a> </p>
<p></p>
<ul>
<li>Available Maps – Public GIS Map Viewer for O&G Data</li>
</ul>
<p></p>
<p><a href="http://www.rrc.state.tx.us/forms/maps/index.php">http://www.rrc.state.tx.us/forms/maps/index.php</a></p>
<ul>
<li> Drilling Permits and Production Data</li>
</ul>
<p><a href="http://www.rrc.state.tx.us/data/online/index.php">http://www.rrc.state.tx.us/data/online/index.php</a></p>
<p> </p>
<p>The Texas Supreme Court has held on more than one occasion that one source of information is the lessee, and therefore, royalty owners should make written requests to their lessee for information concerning their operations. </p>