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The oil and gas production industry operates in a tough position. On the one hand, oil and gas production are critical economic drivers in the United States. Oil and gas generates hundreds of thousands of jobs and contributes 8% of the U.S. Gross Domestic Product, according to the American Petroleum Institute.

On the other hand, the Texas oil and gas  industry is constantly grappling with environmental concerns and the threat of even more regulation of their activities by the Texas Railroad Commission and the federal Environmental Protection Agency. The oil and gas industry is already highly regulated, and yet state and federal government agencies consistently add more regulations on top of those that already exist. One of the recent set of regulations that the industry is facing are rules issued by the EPA concerning reducing methane emissions.

The reasons behind state and federal regulations are often good ones, for instance, concerns about air quality. On the other hand, some regulations are too far-reaching and overly aggressive. For example, where regulations require the adaptation of new technology designed to be cleaner and more environmentally conscious, the high cost of implementing those regulations can force smaller oil and gas producers out of business. That means fewer jobs and a decrease in taxes on oil and gas production that are paid to local governments. Another problem, with federal regulations in particular, is that they are often based on faulty (and sometimes nonexistent) science and take a one-size fits all approach that does not take into account local conditions, technologies and regulations. We end up with a mess!

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Environmental groups in a number of states are pushing for ballot initiatives to ban or limit drilling for oil and gas. Most reasonable people, and I believe many oil and gas companies, agree that regulations are appropriate, especially for drilling in environmentally sensitive areas or near residential developments. But few people proposing outright bans or overly restrictive regulation discuss or even acknowledge the unintended consequences of such a course of action.

For one thing, many people do not realize that the vast majority of mineral owners are just regular individuals, some of whom depend on royalty income for retirement. A drilling ban or overly restrictive regulation can deprive some people of much needed income. Are the proponents of drilling bans prepared to replace that income or to pay additional taxes to support welfare payments to those people who need their royalties so they can pay their rent and eat?

Secondly, according to the U S and state constitutions and the legal principle of inverse condemnation,  if government regulation deprives someone of their property, then the government is required to pay the owner the market value of that property. Individuals in this country own billions of dollars worth of mineral interests. A recent study in Colorado estimated the value of unproduced oil and royalties to mineral owners in that state to be $26 billion. Are taxpayers ready for higher taxes when their local or state government has to start paying these claims?

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In two recent cases, the Texas Supreme Court reviewed what are called “retained acreage” clauses in gas and oil leases. Consistent with recent precedent, the Court instructs that these clauses are to be interpreted based on the language used and that the intent of the parties is to be the guiding principle.

In Endeavor Energy Resources, L.P. v. Discovery Operating Inc., the conflict involved the interpretation of so-called “retained acreage” clauses where the parties intended the retained-acreage definition to be based on the plats filed with the Texas Railroad Commission (“RRC”). The Court also decided a companion case,  XOG Operating LLC v. Chesapeake Exploration LP, that came to a different conclusion. The difference between the cases hinges on the language in the leases. We will discuss XOG separately.

Regulatory Background

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In the case of ConocoPhillips Co. v. Koopmann the Texas Supreme Court held that the Rule Against Perpetuities (“the Rule”) did not void a 15-year non-participating royalty interest that was reserved in a deed. In doing so, the Court changed the way the Rule applies to oil and gas deeds.

The Rule is a complicated legal subject and this case makes significant changes in how the Rule applies in Texas. Note that the Supreme Court explicitly limited the holding of this case to “future interests in the oil and gas context.” The case is significant for these reasons:

  • The Supreme Court rejected the long-held distinction of a future interest created via reservation versus one created via grant in the oil and gas context.
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In the recent opinion of Knopf v Gray, the Texas Supreme Court instructs as to the essence of a life estate under Texas law. Whatever specific words are used to create a life estate, a testator must express three ideas:

  • Any land granted is subject to the limitations that it not be sold;
  • That the grantee take care of the land; and
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A January 2018 case from the Texas Supreme Court, JP Morgan Chase Bank, N.A. v. Orca Assets GP, LLC, the Court dealt with justifiable reliance which is an element of a common law fraud and negligent misrepresentation claim. In this case, there were too many “red flags” for the plaintiff to show justifiable reliance with respect to certain oil and gas leases.

Background

This case involved mineral interests in various tracts throughout the Eagle Ford Shale adding up to about 40,000 acres owned by The Red Crest Trust. JP Morgan Chase Bank was the trustee. A  JP Morgan employee, Phillip Mettham, was responsible for leasing the trust’s Eagle Ford interests.

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The recent case of Hardaway v. Nixon, decided by the San Antonio Court of Appeals, provides an example of the doctrine of adverse possession as it relates to co-tenants. The trial court granted summary judgment in favor of the landowners claiming adverse possession. The Court of Appeals reversed and held that a presumption of ouster could not be affirmed on summary judgment merely on proof of long-continued possession — 75 years — even in the absence of a claim of ownership by the non-possessory co-tenants. According to the Court, no evidence was presented in the summary judgment record that the owners undertook “unequivocal, unmistakable, and hostile acts” and mere possession and lack of a claim of ownership by non-possessory co-tenants was not sufficient to “disseize” the non-possessory co-tenants.

Texas Property Law: Adverse Possession Against a Cotenant

Under Texas law, adverse possession with respect to a co-tenant requires proof of “ouster” or “repudiation” of the co-tenant’s claim to ownership. Ouster/repudiation is generally shown by various “unequivocal, unmistakable, and hostile acts” taken by the tenant in possession to oust or disseize the non-possessory co-tenant, but can also be shown by long continued possession. Aside from actually fencing, locking, and taking other “hostile” acts to repudiate a co-tenant, there are two other circumstances in which Texas courts have recognized ouster/repudiation and notice:

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Under Texas law, the Statute of Frauds requires that contracts regarding the sale of lands be in writing. There are some exceptions to this “in writing” requirement, particularly if the buyer has partially performed under the contract. The case of Zaragoza v. Jessen  provides a good reminder of the principles underlying the Statute of Frauds and the partial performance exception.

Statute of Frauds

The Statute of Frauds is codified at Tex. Bus. & Comm. Code § 26.01(a) & (b) which states, in pertinent part:

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A recent case from the Houston Court of Appeals reminds us that, at least in Texas, if you are renting a house and you walk over broken concrete for months, you cannot sue your landlord if you fall on the broken concrete. See Phillips v. Abraham, 517 S.W.3d 355 (Tex.Civ.App. – Houston [14th Dist.] 2017, no pet.). The broken concrete is going to be deemed “open and obvious” at that point and, if no exceptions apply, you will not recover a judgment against your landlord. The case is a victory for common sense.

Facts of Case

During 2012 and 2013, the plaintiff leased a house in Friendswood from the owners and signed a written residential lease. In January 2013, the plaintiff lost his footing and fell while attempting to walk up the driveway which, according to the plaintiff, “was in disrepair with many loose and broken rocks.” As a result of the fall, the plaintiff claims that he broke his back. He sued for negligence and sought exemplary damages based on alleged gross negligence of the landlord.

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In 1924, Cora McCrabb (along with two co-owners) owned 1,448.50 acres of farm and pasture land. In that same year, Cora executed her Last Will and Testament, bequeathing all of her “farm lands and pasture lands” equally to her three grandchildren, Jessie, J.F., and Mary Lee McCrabb. Cora gave the residue of her estate to only one of the grandchildren, Jessie.

In 1927, Cora and her co-owners sold the 1,448.50 acres of “farm lands and pasture lands” in fee simple to J. L. Dubose. Dubose simultaneously conveyed to Cora and her co-owners an undivided one-half interest in the oil, gas, and minerals in and under the 1,448.50 acres of farm lands and pasture lands. Cora did not change her Last Will and Testament. Cora died in 1929.

Many years later, in 2013, the heirs of J.F. and Mary McCrabb filed a petition for a declaration that Cora’s share of the undivided mineral interest under the “farm lands and pasture lands” passed equally to all three grandchildren. The heirs of Jessie McCrabb filed a counterclaim asking for a declaration that Cora’s entire mineral interest passed to Jessie McCrabb alone pursuant to the residuary clause in the 1924 Last Will and Testament. The trial court sided with the heirs of Jesse McCrabb.

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