Drainage of Oil and Gas in Texas

A federal appellate court decision demonstrates some lessons for Texas mineral owners. That decision was issued by the Fifth Circuit Court of Appeals in the case of Breton Energy, L.L.C., et al. v. Mariner Energy Resources, Inc., et al. The Plaintiffs in this case own and operate an off-shore lease in the Gulf of Mexico that includes an area known as the K-1 sands. The Defendants own and operate an adjacent off-shore lease that covers an area known as the K-2 sands. The Plaintiffs claimed that the Defendants engaged in “unlawful drainage” from the Plaintiffs’ lease in violation of federal and state law.

The Facts:
Breton Energy LLC and Conn Energy Inc. sued International Paper Co. and its successors in interest, consisting of eleven oil companies including Apache Corporation, Chevron and I.P. Petroleum Co. The Plaintiffs claimed specifically that IP Petroleum perforated and drained an oil reservoir under the Plaintiffs’ lease on the Outer Continental Shelf in the K-1 sands. The Plaintiffs also claimed that IP co-mingled resources from this reservoir with hydrocarbons from a nearby reservoir, making it impossible for the Plaintiffs to produce oil and gas from its own wells.The evidence showed that I P Petroleum, even though it had been ordered by the federal Minerals Mining Service not to complete wells in both the K-1 and K-2 sands, did in fact complete wells in both areas. There was also evidence that I P Petroleum’s production exceeded their estimate by almost 30%, which would make sense if they were producing from someone else’s reservoir as well as their own.

The District Court dismissed the Plaintiffs’ claims, and they appealed to the Fifth Circuit.

The Opinion
The Fifth Circuit partially vacated the District Court’s order, in part affirmed the order , and remanded part of the case back to the District Court in a decision written by Judge Stephen Higginson. The Fifth Circuit held that the Plaintiffs had pled sufficient facts to state a claim of waste against IP, but not against the other Defendants. The Court also determined that the Plaintiffs had made a plausible allegation that IP contributed to waste from the reservoir, which was enough to pass the pleadings test in the U.S. Supreme Court’s decision of Bell Atlantic Corp. v. Twombly. The Court found that the neighboring reservoir had been overproduced and this supported the Plaintiffs’ claim that minerals were commingled and that recoverable hydrocarbons had been lost. In upholding the District Court’s dismissal of claims for unlawful drainage against other Defendants, the Fifth Circuit relied on Louisiana law that prohibits landowners from filing claims against neighbors who drain liquids or gases from under their property.(Louisiana law allows production of oil and gas that migrates from other people’s properties. Texas has pooling regulations to prohibit one person from benefiting from their neighbors minerals).

Breton Energy called the decision of the Fifth Circuit a “great ruling for us” and said that “(t)he focus from the beginning and the target was IP, because they actually performed the perforation. The other parties were sued on the grounds that they should have been aware of the perforation and done something about it.” Breton Energy and Conn are currently preparing for a new trial in the District Court.

One of the lessons of this case is that it is difficult to successfully prosecute an oil and gas drainage and waste claim. Both parties in this lawsuit retained a lot of expensive petroleum engineering and geology talent to try to prove their side of the case. While the Plaintiffs in this particular case survived a dismissal based on their pleadings, it is not at all clear that they will prevail on the merits. It will be very interesting to see how this case turns out.

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