TBJ January 2022

2021: The Year in Review

Oil and Gas Law

Written by Carroll Martin

A steady stream of reported oil, gas, and energy law cases continued to flow through the pandemic period, the oil and gas price “collapse” of 2020, and into 2021. This summary will touch on a few 2021 Texas Supreme Court decisions. For comprehensive updates of recent caselaw, go to the State Bar of Texas Oil, Gas & Energy Resources Law Section’s website at oilgas.org.

A gift that keeps on giving is the issue of whether post-production costs are deductible in determining the royalty due under oil and gas leases. In BlueStone Nat. Res. II, LLC v. Randle,¹ the court visited this issue again. The lease consists of a printed form and addendum. The printed form requires royalty on the production’s “market value at the well”—a valuation standard that allows deduction of costs. The addendum requires royalty on the “gross value received” for production. Both sides agreed that the addendum controls in case of conflict but disagreed as to whether there is conflict. Lessee BlueStone contended: (1) the addendum includes a yardstick (“gross value received”), but no valuation point, and (2) so, the valuation point must be “at the well” per the printed form, which allows deduction of costs. The court disagreed, holding the “gross value received” addendum standard supersedes the printed form standard as to both valuation point and yardstick, and “gross” means no deduction of costs. BlueStone surprised practitioners who expected the court to harmonize the provisions as in Burlington Resources Oil & Gas Co. LP v. Texas Crude Energy, LLC,² and hold “at the well” valuation point allows deduction of costs. In Burlington, the court reasoned that the “amount realized” yardstick in the addendum combined with “into the pipeline” valuation point in the printed form means costs could be deducted. The difference in BlueStone seems to be the additional word “gross” in the standard.

Who can correct a material mistake in a conveyance after a third party has acquired an interest in the property conveyed? The court addressed this significant question in Broadway Nat’l Bank v. Yates Energy Corp.,³ parsing Section 5.029 of the Texas Property Code (the Texas correction statute). In a 5-4 opinion, the court held that the original parties to a recorded conveyance could correct a material mistake in the original conveyance, by making a correction instrument, without joinder of the current owners of the property, provided the current owners were not innocent purchasers for value. Justice Brett Busby’s dissent would require the third party join in any correction conveyance.

Does a royalty owner’s acceptance of royalties paid on a pooled unit basis ratify the pooling? Past Texas cases have held that it does, provided the royalties paid exceed the royalties due absent pooling. In BPX Operating Co. v. Strickhausen,⁴ the court, in another 5-4 opinion, found an exception. This lease disallows pooling without the lessor’s written consent. When asked for consent, the lessor, through counsel, does not deny consent, but asks for additional information, and then seeks to negotiate an additional payment for her consent. Meanwhile, the lessee refuses to make the additional payment, and instead pays the lessor royalty on a pooled unit basis, and she cashes the checks. The majority considers the lease requirement of consent, combined with her correspondence asserting her right to deny consent, trumped her acceptance of royalties. Justice Jeffrey S. Boyd, in dissent, contended precedent requires this court to hold that acceptance of royalty, alone, is an act of ratification.

CARROLL MARTIN is a partner in Scott, Douglass & McConnico, in Austin, where she has practiced since 1980. Her practice areas include energy advice, transactional, regulatory and litigation matters for exploration and production companies, and energy leasing advice for landowners. Martin is the chair of the State Bar of Texas Oil, Gas & Energy Resources Law Section. She can be contacted at cmartin@scottdoug.com.