Texas Oil and Gas Attorney Blog
A recent opinion by the Fifth Circuit Court of Appeals addressed a claim by royalty owners that Devon Energy Production Company LP violated its implied duty to market arising from their oil and gas leases with Devon in the Barnett Shale area. That case is Seeligson et al v. Devon Energy Production Company LP (Case 17-10320 October 16, 2018 Unpublished).
The royalty owners/lessors were attempting to obtain class-action certification. As part of their evidence, they showed that Devon sold the gas produced from their wells to a Devon affiliate for a price of 82.5% of the published industry index value of the residue gas and natural gas liquids. The evidence also showed that payment was never made by Devon to its affiliate. In addition, the affiliate “charged” Devon 17.5% of the value of the gas as a processing fee which was claimed to be substantially higher than the current market rate for processing gas. Again, no money actually changed hands between Devon and its affiliate. The royalty owners claimed that this was a sham transaction that resulted in their receiving lower royalty payments than they would have had Devon paid the market price for the gas produced from their wells.
The District Court certified the Plaintiffs’ claims as a class action and Devon appealed. The Fifth Circuit held that the class certification was not an abuse of discretion by the District Court, but that the District Court had failed to consider the effect of potential statute of limitation defenses by Devon on the class certification. As a result, the case was sent back to the District Court to examine the effect of these to defenses on class certification.
I have not read the individual leases involved in this case (there are over 4000), but I suspect that one way the whole issue could have been avoided would have been to: 1) make the implied duty to market explicit in the lease; and 2) use a carefully worded royalty paragraph that provides that the royalty owner is paid on the proceeds of the well and that transactions with affiliate corporations of the well operator are not counted. The use of affiliate corporations who add unnecessary fees is a common ploy by oil and gas companies but can be avoided with a properly worded lease.
A recent opinion by the Fifth Circuit Court of Appeals addressed a claim by royalty owners that Devon Energy Production Company LP violated its implied duty to market arising from their oil and gas leases with Devon in the Barnett Shale area. That case is Seeligson et al v. Devon Energy Production Company LP (Case 17-10320 October 16, 2018 Unpublished).
The royalty owners/lessors were attempting to obtain class-action certification. As part of their evidence, they showed that Devon sold the gas produced from their wells to a Devon affiliate for a price of 82.5% of the published industry index value of the residue gas and natural gas liquids. The evidence also showed that payment was never made by Devon to its affiliate. In addition, the affiliate “charged” Devon 17.5% of the value of the gas as a processing fee which was claimed to be substantially higher than the current market rate for processing gas. Again, no money actually changed hands between Devon and its affiliate. The royalty owners claimed that this was a sham transaction that resulted in their receiving lower royalty payments than they would have had Devon paid the market price for the gas produced from their wells.
The District Court certified the Plaintiffs’ claims as a class action and Devon appealed. The Fifth Circuit held that the class certification was not an abuse of discretion by the District Court, but that the District Court had failed to consider the effect of potential statute of limitation defenses by Devon on the class certification. As a result, the case was sent back to the District Court to examine the effect of these to defenses on class certification.
I have not read the individual leases involved in this case (there are over 4000), but I suspect that one way the whole issue could have been avoided would have been to: 1) make the implied duty to market explicit in the lease; and 2) use a carefully worded royalty paragraph that provides that the royalty owner is paid on the proceeds of the well and that transactions with affiliate corporations of the well operator are not counted. The use of affiliate corporations who add unnecessary fees is a common ploy by oil and gas companies but can be avoided with a properly worded lease.