» Oil and Gas Law

Texas Supreme Court rejects plaintiff’s breach-of-contract claim in unambiguous oil and gas farmout agreement

In Barrow-Shaver Resources Co. v. Carrizo Oil & Gas, Inc., on June 28, 2019, the state’s high court issued an opinion in a Texas breach-of-contract case involving a farmout agreement. Generally, a farmout agreement is one in which a party that owns rights to drill for oil on a property agrees to allow another entity to drill on the property in exchange for defined rights. While the underlying claim arose in the context of a dispute involving Texas oil and gas law, the court ultimately resolved the case by applying fundamental contract law.

According to the court’s opinion, the plaintiff was a company that engaged in oil and gas drilling, and the defendant was a current leaseholder of a tract of land. The parties entered into an agreement whereby the plaintiff would drill on the leasehold property. Among other terms included in the contract was a consent-to-assign term, which is the focus of this appeal.

Initially, the contract provided that, “The rights provided to [the plaintiff] under this Letter Agreement may not be assigned, subleased or otherwise transferred in whole or in part, without the express written consent of [the defendant] which consent shall not be unreasonably withheld.” However, the agent for the defendant later submitted a revised draft of the contract, eliminating the phrase “which consent shall not be unreasonably withheld.”

The plaintiff took issue with the removal of this phrase, and was verbally reassured by the defendant that, even without the term in the contract, consent would not be withheld. Ultimately, the final version of the contract provided that, “The rights provided to [the plaintiff] under this Letter Agreement may not be assigned, subleased or otherwise transferred in whole or in part, without the express written consent of [the defendant].”

The plaintiff spent $22 million drilling wells, but was unsuccessful in establishing production. At that time, another company approached the plaintiff interested in purchasing the plaintiff’s drilling rights. The plaintiff negotiated an agreement with the company, and submitted the agreement to stakeholders, all of which approved the assignment of the plaintiff’s rights except for the defendant. As a result of the defendant’s refusal to consent to the assignment, the deal fell through. The plaintiff then sued the defendant for breach-of-contract, fraud and tortious interference.

The Court’s Decision

Ultimately, the court rejected each of the plaintiff’s claims against the defendant, first discussing the breach-of-contract claim. The court explained that when a contract is unambiguous, interpretation of the agreement is a matter of law which is to be resolved by a judge. Despite the plaintiff’s arguments to the contrary, the court concluded that the contract was unambiguous because it provided an unqualified right for the defendant to refuse to consent to the assignment of the plaintiff’s drilling rights. In so holding, the court rejected the plaintiff’s request to read in an implied requirement of good faith, noting that Texas contract law imposes no such duty.

The court then discussed the plaintiff’s fraud claim, holding that the plaintiff could not rely on the defendant’s oral assurances that consent would not be withheld and therefore, the defendant was not liable for fraud. The court noted that it is a basic principle of contract law that “a written contract vitiates any oral promises.” Here, the court explained that regardless of what the defendant may have told the plaintiff during contract negotiations, the only relevant agreement between the parties was the written document. The court went on to hold that because there was no limitation included in the contract regarding the defendant’s ability to withhold consent, the plaintiff’s fraud claim must fail.

Are You Involved in a Texas Oil and Gas Dispute?

Texas oil and gas law can be exceedingly complex. The Law Offices of Gregory D. Jordan helps individuals and businesses effectively navigate the legal system to resolve their claims efficiently and practically. Through his Austin oil and gas practice, Attorney Jordan confidently serves clients throughout the State of Texas, including those involved in the Eagle Ford Shale and in the Permian Basin, and he has been doing so since 1989.

The Duties of the Holder of the Executive Right to Minerals

In the case of Texas Outfitters, LLC vs. Nicholson, the Texas Supreme Court examined the holder of the executive right’s duty of utmost good faith and fair dealing to non-participating mineral interest owners. In Texas Outfitters, the holder of the executive right to lease minerals refused to sign a lease which the owner of a non-participating mineral interest alleged it should have signed.

A company called Texas Outfitters, LLC purchased over a thousand acres, including 1/24th of the mineral rights, as well as the exclusive right to lease 11/24th of the mineral rights retained by the sellers of the property. At the time, the land was not leased and had no oil and gas production. Approximately a decade after the sale of the land, the owners of the remaining 50 percent of the minerals leased to El Paso Oil Exploration and Production Company. El Paso made the same offer to Texas Outfitters; however, Texas Outfitters refused to lease even though the sellers made it clear to Texas Outfitters that they wanted Texas Outfitters to lease. Ultimately, the sellers filed suit against Texas Outfitters for breaching its duty of good faith and fair dealing as the executive holder of the right to lease the mineral rights. The sellers sought damages in the amount that they lost due to Texas Outfitters refusing to lease the mineral rights.

At a bench trial, the trial court found in favor of the sellers, holding that Texas Outfitters did not act in good faith and breached its duty as the holder of the executive right. The case was eventually appealed to the Texas Supreme Court. The Court looked at the history of the executive right and ultimately held that, in this case, Texas Outfitters breached its duty of good faith and fair dealing where it engaged in acts of self-dealing to the benefit of its interest in the surface estate and to the detriment of the owners of the mineral estate. The Court stated that Texas Outfitters, in refusing to lease the mineral rights, did so “in acts of self-dealing that unfairly diminished the value of the non-executive interest.” This action “crossed the line” bringing Texas Outfitters, LLC into the realm of breaching its duty to the non-executive rights holder.

Attorney Gregory D. Jordan is an oil and gas attorney with offices in the Austin area. To learn more, visit http://www.theaustintriallawyer.com/

Law Offices of Gregory D. Jordan
5608 Parkcrest Drive, Suite 310
Austin, Texas 78731
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Texas jury awards $60 million in oil and gas royalty fraud case

A jury in Roby, Texas has awarded a group of oil and gas investors $60 million, making it the largest verdict ever in Fisher County. The case stemmed from a fraudulent scheme concocted by two men to cut other partners out of profits from the sale of oil and gas leases, thus keeping the profits for themselves. The fraud was allegedly planned and performed by attorney Kerwin Stephens and oilman Chester Carroll.

The issue began when Richard Roughton and Lowry Hunt, along with other investors, acquired mineral and property rights to 25,000 acres in the Three Finger/Black Shale region of the Cline Shale in West Texas. Roughton then brought in as additional investors his attorney, Stephens, and Roughton’s best friend, Carroll. They created a partnership called the Alpine Group. The leases were then transferred from Roughton and Hunt to the Alpine Group. It was then that Stephens and Carroll allegedly conspired to cut the other partners out of any profits obtained from subsequently selling the leases.

Stephens and Carroll were accused of fraudulently convincing Roughton and Hunt to lower their percentages of ownership in the leases, indicating to the two that Stephens and Carroll were also lowering their interests, but they actually did not. This was done by allegedly convincing Roughton and Hunt that there was no buyer for any of the leases, but actually there was a buyer lined up by Stephens and Carroll. Instead of lowering their ownership interest, Stephens and Carroll purportedly increased their ownership interest in the leases. Then, unbeknownst to Roughton and Hunt, Stephens and Carroll allegedly sold an additional 17,000 acres of leases to a buyer, splitting the money for themselves.

The verdict on behalf of Hunt and Raughton includes $3 million in actual damages plus more than $7 million in returned profits and $18 million in punitive damages. Two additional plaintiffs in the trial, Tiburon Land and Cattle and Trek Resources, both of Dallas, were awarded $33.1 million, including $24 million in actual damages and $9 million in exemplary damages.

Attorney Gregory D. Jordan is an oil and gas litigation attorney with offices in the Austin area. To learn more, visit http://www.theaustintriallawyer.com/

Disclosure requirements reach mailed, but not emailed, offers to purchase oil interests

A Texas statute requiring that offers to purchase oil rights contain a conspicuous, large-print disclaimer does not apply to emailed offers, according to a recent ruling from the Texas Court of Appeals in El Paso.

The court turned back several arguments why an arbitration clause in an agreement to purchase mineral interests was unconscionable, among them the lack of the statutorily mandated large-print disclaimer.

Texas Property Code, § 5.151, provides in relevant part:

A person who mails to the owner of a mineral or royalty interest an offer to purchase only the mineral or royalty interest . . . and encloses an instrument of conveyance of only the mineral or royalty interest and a draft or other instrument, as defined in Section 3.104, Business & Commerce Code, providing for payment for that interest shall include in the offer a conspicuous statement printed in a type style that is approximately the same size as 14-point type style or larger and is in substantially the following form:

By executing and delivering this instrument you are selling all or a portion of your mineral or royalty interest in (description of property being conveyed).

By its terms, Section 5.151(a) applies only to “mailed offers, not emailed offers,” Justice Yvonne T. Rodriguez wrote for a unanimous court. The court gave this limiting interpretation to the statute without analysis, though it appears to be the first time a Texas court has considered the question.

State law regulating real estate transactions marched into the twenty-first century with the 2005 Uniform Electronic Real Property Recording Act (Real Property Code § 15.001 et seq.) and 2007 Uniform Electronic Transactions Act (Business and Commerce Code § 322.001 et seq.), the latter declaring that if a law requires a record to be in writing, an electronic record satisfies the law.

The court’s ruling, if widely adopted, means that consumer protections found in Section 5.151 will not be traveling along. By restricting the statute’s reach to mailed offers, the court appears to have confined the state legislature’s command that offers to purchase mineral interests include a conspicuous disclaimer to the rapidly receding era of mailed, ink-on-paper transactions.

Even if the statute did apply to emailed offers, the court continued, the remedy is not rescission or a finding of unconscionability.

“Nothing about the text of this statute indicates that the Legislature intended for transactions like this one to be voidable, and nothing in the text of the statute excuses a party from his general duty under Texas contractual common law to read whatever instrument it is he is signing,” the court said.

Justice Rodriguez said that the remedy for a violation of Section § 5.151 is an award of $100 statutory damages or the difference in value between the amount paid for the mineral interest and its fair market value.

Along the way, the court invalidated language in the arbitration agreement eliminating punitive damages, finding that this restriction on available remedies violates Texas public policy. The court’s ruling is consistent with other rulings in this area, cf., Amateur Athletic Union of the U.S., Inc. v. Bray, 499 S.W.3d 96, 108-09 (Texas Ct. App., 4th Dist.—San Antonio, 2016).

The case is Ridge Natural Resources LLC v. Double Eagle Royalty L.P., No. 08-17-00227, (Texas Ct. App., 8th Dist.—El Paso, Aug. 24, 2018).

Court applies foreseeability limitation to catch-all force majeure clause

A Texas appellate court ruled that a significant downturn in the price of oil is not a force majeure event that excuses non-performance with a promise to drill for oil by a certain date. Reviewing a contract that excused non-performance for several reasons plus a catch-all clause which stated, “any other cause not enumerated herein,” the court said that this broad language must be interpreted to reach only force majeure events that were not reasonably foreseeable at the time the parties entered into their contract.

The case arose from a contract dispute between two oil companies, TEC Olmos and ConocoPhillips. TEC Olmos contracted with ConocoPhillips to drill for oil and gas on land leased by ConocoPhillips. The contract contained a deadline for drilling to begin, and a $500,000 liquidated damages clause in the event TEC Olmos failed to meet the deadline. The contract contained a force majeure clause listing several specific events, adding to the list a catch-all provision that excused non-performance due to “any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected.”

After the contract was executed, global oil prices dropped significantly, causing TEC Olmos’ financing partners to drop out of the project. TEC Olmos informed ConocoPhillips that it would be unable to meet the drilling deadline, citing the force majeure clause as a reason to extend the deadline. ConocoPhillips successfully sued for the $500,000 liquidated damages amount, with the trial court finding that the force majeure clause did not excuse TEC Olmos’ non-performance.

First District Court of Appeals Chief Justice Sherry Radack, writing for a 2-1 majority, explained that, at common law, the term “force majeure” included the notion of foreseeability. In cases such as this one, where an event is alleged to fall within the terms of a catch-all force majeure provision, it is unclear whether the contracting parties had contemplated and voluntarily assumed that risk of that event.

In a such a circumstance, it is appropriate to apply common-law notions of force majeure, including unforeseeability, to “fill the gaps” in the force majeure clause, Chief Justice Radack wrote. “Because fluctuations in the oil and gas market are foreseeable as a matter of law, it cannot be considered a force majeure event unless specifically listed as such in the contract.”

The case is TEC Olmos LLC v. ConocoPhillips Co., No. 01-16-00579.

Texans seek class action certification in suit against Talisman Energy USA

If four South Texas landowners get their way, a federal judge will certify the individual lawsuits they filed against Talisman Energy USA in 2016 as a class action. The plaintiffs allege that Talisman shorted them on royalty payments for oil leases on their land.

The four recently filed a motion to have their lawsuits against Talisman joined as a class, arguing that as many as 4,000 other royalty owners from Eagle Ford Shale of South Texas and Marcellus Shale in Pennsylvania could join the ongoing litigation.

Bryan Blevins, a partner with Houston-based Provost Umphrey Law Firm LLP, said, “It’s clear that Talisman knew what they were doing when the company voluntarily commingled production from different wells and then allocated net sales in violation of best oil field practices and Texas law. We intend to prove that the amounts paid to the royalty owners were based on manipulated production volumes.” The plaintiffs are seeking to have Blevins and another member of his firm named as their lead counsel.

According to court filings, Talisman denies any wrongdoing.

The pending lawsuits claim Talisman manipulated production volumes for oil wells operated in the two shale basins named in the suit.

Talisman Energy USA is an indirect subsidiary of Calgary, Alberta–based Talisman Energy Inc., which was acquired by Repsol S.A. in 2015.

The case is Rayanne Regmund Chesser, Gloria Janssen, Michael Newberry and Carol Newberry v. Talisman EnergyUSA, Inc. No. 4:16-cv-02960 in the U.S. District Court for the Southern District of Texas, Houston Division.

Texas jury awards $100 million in lawsuit between oil companies over underpayments under joint operating agreement

A Texas jury issued an award of $100 million in a lawsuit between two oil companies.

Jurors found that Talisman Energy USA, a Canadian firm, underpaid Matrix Petroleum of Houston and breached a joint operating agreement for gas and oil production in the Eagle Ford Shale. Talisman was acquired by Repsol in 2015 and is now called Repsol Oil & Gas USA.

The joint operating agreement dates back to 1954 and governs drilling and production on 12,600 acres of the Cooke Ranch. Talisman acquired its interest in 2010, along with its joint venture partner Statoil. Matrix was a non-operating partner, but the lawsuit alleges that Matrix was treated as a passive investor instead, with Talisman assuming unilateral control and breaching governing documents related to Cooke Ranch operations.

According to the complaint, an early dispute arose when Talisman drilled wells on a nearby property within 100 feet of the Cooke Ranch, without drilling an offset well on Cooke Ranch as required by the lease. The lawsuit also claimed that Talisman used improperly sized meters which failed to accurately measure the gas and oil produced from the Cooke Ranch field, resulting in Matrix not being paid for all of the gas and oil that Talisman produced from the well. The complaint alleged that Talisman sold the gas and oil to a third party, profiting from the difference. Repsol is expected to appeal the verdict.

Texas appeals court rules on consent provision in oil lease case

A Texas appeals court eliminated a $27.7 million judgment against an oil and gas company in a dispute over a drilling farmout agreement, ruling that the contract permitted the company to withhold consent to an assignment of the agreement.

Carrizo Oil & Gas Inc. had appealed a jury verdict finding it liable for fraud, breach of contract and tortious interference with contract. The jury awarded Barrow-Shaver Resource Co. (BSR) $27.7 million on the breach of contract claim. Carrizo had signed a drilling farmout agreement with BSR, but when BSR signed a deal assigning the agreement to Raptor Petroleum II LLC, Carrizo refused to honor it.

The Twelfth District Court of Appeals reversed the lower court’s decision, holding that BSR should receive nothing. Chief Justice James T. Worthen wrote that a provision in the farmout agreement permits Carrizo to withhold consent to assignment of the agreement to another party, and the trial court should not have submitted that issue to the jury.

Judge Worthen wrote that because the contract was unambiguous, the jury should not have had the opportunity to decide the breach of contract issue. The appeals court also noted that the evidence of previous drafts and negotiations indicated that Carrizo intended to preserve its right to withhold consent. The evidence was that a preliminary draft of the agreement said that Carrizo could not “unreasonably” withhold consent, but that clause was deleted. The appeals court said that this evidence was not barred from admissibility by the parol evidence rule, and the trial court should not have excluded it.

Pipeline owners file $300 million breach of contract lawsuit against midstream operator

An amended breach of contract lawsuit was filed by Magellan Midstream Partners and Plains All American Pipeline against Stampede Energy, seeking over $300 million in damages over an oil transport deal.

The lawsuit claims that Stampede did not meet minimum volume obligations on the BridgeTex pipeline from March 2015 through 2016, breaching its contract. The BridgeTex pipeline carries around 300,000 barrels per day from Colorado City, Texas to the Gulf Coast. Stampede is a privately held midstream operator.

From mid-2014 to early 2016, oil prices dropped by more than 70 percent, prompting production cuts and leading several energy firms to declare bankruptcy. Pipelines function like toll roads, so they are generally considered to be better protected from commodity price fluctuations, but with fewer barrels to ship, pipelines have been affected by output declines.

An amended petition filed March 22 claimed that Stampede owed the plaintiffs over $311.8 million, including interest and late fees, for breaching its shipping obligations. The BridgeTex firms also filed a claim against Ballengee Interests, which guaranteed payments owed by Stampede.

According to court documents, Stampede agreed in August 2014 to ship 30,000 barrels per day of crude and condensate on BridgeTex, which is about 10 percent of the pipeline’s capacity. Court filings state that Stampede executed a Transportation Service Agreement calling for the company to ship on the pipeline for 29 quarters.

Texas property owners file class-action suit against Devon Energy over royalties

A class-action lawsuit has been filed by Texas property owners alleging that Devon Energy used sham transactions to underpay natural gas royalties.

On January 6, class-action status was granted by U.S. District Judge Ed Kinkeade in Dallas, allowing the four individuals who brought the lawsuit to represent the interests of thousands of landowners. The judge found that there were common legal issues, that Devon Energy owed a common duty to the members of the class, and that a formula can determine the damages owed to each class member, if any.

The landowners claim that the production arm of Devon Energy sold the natural gas to an affiliate, Devon Gas Services, at a low well head price. Devon Gas Services then used its Bridgeport plant to process the gas and deduct a 17.5 percent processing fee from royalty checks, the lawsuit alleges.

The plaintiffs called the processing fee “unreasonable and lucrative” and stated that Devon calculates royalties based on the “artificial” price it received from its own affiliate rather than what it was paid by unaffiliated third parties. The lawsuit also claims that after the gas left the processing plant, Devon and its affiliates made a profit selling the residue gas to third parties, but did not pay royalty owners a share of those profits.

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