Texas Oil and Gas Attorney Blog

A recent Texas case decided by the San Antonio Court of Appeals, Texas Outfitters Limited, LLC v. Nicholson, offers some lessons on an executive rights owner’s fiduciary duties to the non-executive mineral owner in the context of oil and gas leases. At trial, the executive interest owner, Texas Outfitters, was found to have breached its fiduciary duty and a judgment of $867,654.32 was awarded to the non-executive.

What is “The Executive Right”?

Under Texas law and under the laws of most states, real property can have two co-existing estates – the surface estate and the mineral estate (covering minerals, oil, and gas below the surface). As the Texas Supreme Court has held, the property rights granted by the mineral estate are a “bundle” of rights and one of the “sticks” in the bundle is called the “executive right.” In general, the executive right is the right to make decisions affecting the exploration and development of the mineral estate and, more specifically, is the right to decide whether to execute a mineral lease and to determine the terms of the lease. These concepts were discussed by the Texas Supreme Court in Lesley v. Veterans Land Board of Texas, 352 S.W.3d 479 (Tex. 2011). As discussed in this article, holders of the executive rights sometimes owe fiduciary duties to any non-executive co-tenants.

Mineral owners in Texas often sign oil and gas leases that include language that requires that oil or gas be produced in commercially paying quantities in order to keep the lease alive. When production falls below that level, the lease may terminate or lapse, and the mineral interest reverts to the landowner, or to other leases with subsequent rights to the property (i.e., top lease holders). In addition, many leases contain what is called a “shut in royalty” clause, which often goes something like this: “where gas from any well or wells capable of producing gas . . . is not sold or used during or after the primary term and this lease is not otherwise maintained in effect, the lessee may pay or tender … shut-in royalty . . . , and if such shut-in royalty is so paid or tendered

and while lessee’s right to pay or tender same is accruing, it shall be considered that gas is being produced in paying quantities, and this lease shall remain in force during each twelve-month period for which shut-in royalty is so paid or tendered . . .” . It is important to notice that the shut in royalty clause can only be invoked if the well in question is capable of producing in paying quantities.

BP America Production Co. v. Red Deer Resources LLC is a case involving a marginal well operated by BP that was producing at very low levels. BP invoked the shut-in royalty clause of their lease  with the mineral owners. However, questions arose as to whether BP’s use of the shut in royalty clause was valid and whether the lease had actually terminated.

When an oil and gas well is no longer producing (or if it needs major repairs but the production is not sufficient to justify the cost of repairs), Texas Railroad Commission rules require that the well must be plugged. The plugging procedure (which you can read about here) involves cementing the wellbore and is designed to be permanent. The plugging is designed specifically to protect against leaks into aquifers. Unfortunately, occasionally a production or waste water well gets plugged improperly or negligently, and salt water from these wells leaks out over time and on to the adjacent property, resulting in very unhappy property owners. Salt water leakage can cause damage to the surface of the property, such as contaminating the land so that crops can no longer be grown, or can seep through the ground to contaminate aquifers beneath the surface. Of course, plugged wells should not leak, and if they do, the property owner may have an actionable claim against the company that plugged the well.

The case of Ranchero Esperanza, Ltd. v. Marathon Oil Co. addressed a number of issues that arise in this kind of case. Some of these issues, such as standing (i.e., the right to sue), the statute of limitations, the applicability of the discovery rule and when a cause of action accrues, were addressed by the Texas Eighth Court of Appeals in El Paso in the Ranchero Esperanza case.

In connection with standing, the Court repeated the well-known legal precept that a cause of action for injury to land is a personal right belonging to the person owning the property at the time of the injury. A subsequent owner can’t recover for an injury committed before their ownership unless they received an express assignment of the cause of action from the former owner. In this case, the injury did not occur until saltwater was released from the plugged well onto the surface of the property in July 2008. Since Ranchero Esperanza was the owner of the property at that time, it had standing.

When parties enter into agreements concerning the conveyance of mineral royalty interests in Texas, it is extremely important that the language of the conveyance is clear and that the parties know exactly what they are agreeing to in terms of how the royalty interest is structured. The San Antonio Court of Appeals addressed the issue of fixed versus floating royalties in the case of Leal v. Cuanto Antes Mejor LLC.

The case involved forty acres of land in Karnes County, Texas. Phillips sold the land to the Leals, but reserved for himself all minerals and royalties, except for conveying a one fourth “non-participating royalty interest in and to all of the royalty paid on production,” which was conveyed to the Leals. Later, Phillips signed an oil and gas lease with Cuanto Antes Mejor LLC. The Leals and Cuanto Antes Mejor LLC got into a dispute over how the Leals’ royalties should be calculated. The Leals claimed that their royalty interest was a fixed royalty entitling them to royalties for one fourth of production. Cuanto Antes Mejor LLC contended that the Leals were only entitled to a floating royalty.

A Royalty Interest Can Be Conveyed in Two Ways