“Fixed vs. Floating” Mineral and Royalty Questions in Texas
Is the End Any Nearer
By: Christopher Kulander1 Professor of Law South Texas College of Law Houston
during the duration of the lease and is determined through a negotiation between the mineral owner and the lessee, typically an oil and gas company or abroker.Itisgenerallyafixedfractionofthegross production, perhaps varying depending on the volume of production.
Introduction and Background
Altman v. Blake, cited by some sources2 as the definitive Texas case for the proposition that the mineral estate consists of five distinct “sticks” – the right to develop, the right to lease, and the rights to collect royalty, bonus, and delay rentals –helped usher in the modern view of the fivefaceted separable mineral estate. In Altman, the Texas Supreme Court held the owner of an entire fee mineral estate retained a fee mineral interest despite having conveyed away the right to collect delay rentals and the executive right.3 The court noted that it had “before recognized that a mineral interest shorn of the executive right and the right to receive delay rentals remains an interest in the mineral fee.”4
Royalty is perhaps the most litigated stick within the bundle. Royalty in the oil and gas context in Texas is commonly defined as a nonpossessory interest in real property.5 Owners of royalty receive a fraction of the produced hydrocarbons without having to pay any of the exploration, drilling, and production costs. 6 Because of problems such as shoddy drafting and inconsistent judicial determinations, there has arisen over the decades an enormous amount of litigation, academic analysis, and general handwringing centered on whether a conveyed or reserved interest is a royalty or a (generally fractional) interest in the actual minerals.
Royalty interests are often categorized into three distinct groups: One is the lessor’s (or landowner’s) royalty, a royalty interest that is retained when a mineral owner (the “landowner”) executes a mineral lease. This interest is effective
Historically, the lessor’s royalty began during the early 1900s as a widely varying fraction; by the 1920s it had gradually settled across the industry at 1/8 for both oil and gas produced.Thisequilibriumlasteduntilroughlythe mid-1970s, longer than the professional memory of lessors and lessees alike, when market forces driven by the suddenly rising prices finally overcame tradition and lessor’s royalties finally rose. During this stretch of almost fifty years, the idea took hold that lessor’s royalties would always be 1/8 for produced oil and gas, even though other produced minerals (such as sulfur) required payment ofotherfractions, such as 1/10 or1/16, as described in the very same royalty clauses in the very same leases.7
After the 1970s, and through the present, the lessor’s royalty for produced oil and gas has most often been 1/6 or greater. Now, with the advent of unconventional onshore plays, lease royalty has increased dramatically, commonly reaching 1/5 or 1/4.8 Leases issued by the Texas General Land Office are now typically set at 1/4.9 Lease bonuses topped $26,000 per mineral acre in the most prospective portions of the Barnett Shale during the latter half of the 2000s.
In contrast to a lessor’s royalty, a nonparticipatory royalty interest (“NPRI”) is an expense-free real-property mineral interest that does not participate (hence the name) in collecting bonus or delay rentals, leasing, or exploring and developing.10 This interest is “non-possessory in that it does not entitle its owner to produce the minerals himself,” as one Texas court described it.11 “It merely entitles its owner to a share of the production proceeds, free of the expenses of exploration and production.” 12 The size of an NPRI can be expressed in one of two ways: the NPRI can be reserved or conveyed as a fixed fraction of gross production, commonly 1/16, or it can be dependent upon the lessor’s royalty of the
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existing lease and every lease covering the captioned land thereafter.13 In the second instance, the NPRI fraction is typically multiplied by whatever lessor’s royalty is found in the existing oil and gas lease covering the captioned land.14
The size of a mineral interest or NPRI may be “fixed” or “floating.” For example, compare an NPRI that is specified as 1/16 of production and a NPRI that is specified as 1/2 of the lease royalty. The first is “fixed” at 1/16 because the royalty fractionis independent oftheleaseroyalty.Butthe latter is “floating” because the NPRI fraction of production cannot be determined until one knows the lease royalty fraction.15 For the latter, if the lease royalty is 1/8, then the NPRI fraction will be 1/16, but if the lease royalty is 1/4, the NPRI fraction will be 1/8. Disputes over whether a royalty is fixed or floating are frequent because deeds executed in the early through middle decades of the Twentieth Century were drafted on the assumption that the 1/8 royalty would remain as the standard lease royalty, which it was until the 1970s when lease royalties began to commonly exceed 1/8 especially in Texas. Thus, some NPRIs were fixed with a single fraction, such as 1/16, but many other NPRIs specified a double fraction, e.g., 1/2 of 1/8. While both formulations yieldeda1/16royalty,draftersoftenusedthelatter double fraction to avoid having the interest misconstrued as a mineral interest. Some other formulations had a single fractional floating royalty such as 1/2 of the lease royalty. Confusion arose when the NPRI was described in both fixed and floating language, e.g., 1/2 of lease royalty together with other language that specified a 1/2 of 1/8 royalty, thus mixing apparent references to floating and fixed royalties. The following cases explore this confusion.
The Repugnant-to-the-Grant Theory vs. and the “Two-Grant” Doctrine
The “four corners” rule did not initially carry over to fixed vs. floating royalty or mineral questions. Before the early 1990s, most courts resolved contradictory reservation/conveyance descriptions by utilizing the “repugnant-to-thegrant” theory, made popular in Texas by the case of Alford v. Krum.16 In that case, the Supreme
Court of Texas held that a granting clause conveyed a 1/16 mineral interest despite the fact that the actual language of the instrument later described the interest as a multiple of a fraction 1/2 of 1/8. 17 Specifically, in Alford, a mineral conveyance from 1929 granted a “one-half of the one-eighth interest in and to all of the oil, gas and other minerals.” 18 This was followed by a provision noting that the conveyance “covers and includes 1/16 of all the oil royalty and gas rental or royalty due and to be paid under the terms of said lease.”19 Both clauses then recognized that future leases might follow and, in such cases, the grantor and grantee would each own “a one-half interest in all oil, gas and other minerals in and upon said land, together with one-half interest in all future rents.”20
Litigation ensued, with courts asked to consider whether the grantee received a 1/2 mineral interest or only a 1/16 mineral interest –1/2 of 1/8. The Texas Supreme Court majority, its eye seemingly fixed on a policy of title clarity, noted the “clear and unambiguous language of the granting clause,” and held that the deed conveyed only a perpetual 1/16 mineral interest to the grantee.21 The Court formulated a bright-line rule:
In cases involving the construction of mineral deeds, the “controlling language” and the “key expression of intent” is to be found in the granting clause, as it defines the nature of the permanent mineral estate conveyed. It logically follows that when there is an irreconcilable conflict between clauses of a deed, the granting clause prevails over all other provisions.22
As one commentator opined, the majority ignoredtheleaseclausescoveringthepresentlease and any future leases as they muddied “the clear and unambiguous language of the granting clause.”23 Such a rule empowered Texas courts to declare such “present” and “future” lease clauses as found in Alford unambiguously “repugnant” to the granting clause and thus allowed them to ignore such clauses as a matter of law.24 Alford,
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therefore, essentially ignored language subsequent to the granting clause that may conflict with the express result of the granting clause. While Alford would seemingly tarnish the intent of drafters in some instances, presumably Texas title examiners could more easily interpret mineral deeds by simply ignoring language that challenged the granting clause.
The three dissenting justices in Alford read the future lease clause as a separate grant, turning away from a perceived failure by the majority to examine the four corners of the instrument in an effortto giveeffect to alltheprovisions inthedeed and the intent of the drafters.
The minority’s time would soon come. Seven years later, the Texas Supreme Court changed course with the Alford majority in Luckel v. White, wherein the Court held that conveyances should generally be interpreted by harmonizing all of the provisions rather than allowing the first granting provision primacy over subsequent grants.25
Under the “two-grant” doctrine, a deed with multiple clauses is construed as making separate grants of different types of interests in a particular tract of property or varying sizes of one interest at different times. 26 Deeds where the fractions used in the granting clause and in the subsequent “covers and includes” clause, or its equivalent, are not consistent with each other have provided themost controversial applications ofthe two-grant doctrine. If, for example, the land is subject to an oil and gas lease providing for a 1/8 lessor’s royalty, the granting clause may purport to convey 1/32 of the oil and gas beneath the tract, while the “subject to” clause states that the deed covers and includes 1/4 of all rents and royalties under the outstanding lease and under all future leases.
Luckel illustrates the problems involved in construing this type of deed, as it deals with a royalty deed containing terms that, so long as the royalty payable under any future lease over the captionedlandwas1/8,itremainedconsistentwith the other deed provisions. The granting and warranty clauses of the royalty deed provided for
a 1/32 NPRI.27 In contrast, a subsequent provision describing an existing lease and another provision addressing the possibility of subsequent leases stated, respectively, that the grantee would “receive one-fourth” and “be entitled to onefourth” of all royalties.28 This would, of course, equal a 1/32 royalty under a 1/8 royalty lease the prevailingoiland gas royaltyatthetime.Problems in construing the deed arose, however, with subsequent leases that provided for a 1/6 royalty29 1/4 of 1/6 does not equal 1/32. The Court ruled that a 1/4 of royalty a “floating” royalty based upon the product of 1/4 and whatever the future lease’s royalty fraction might be resulted rather than a “fixed” 1/32 royalty.30
Interestingly, the Court went on to provide that the “floating” royalty could never be below 1/32 the contrasting language was held to provide a “floor” value for the grantee’s royalty.31 In the unlikely circumstance that a future lease contained, say, a 1/10 royalty, that would still provide the grantee with a 1/32 royalty and not a 1/40 royalty (1/4 of 1/10), as the 1/4 of royalty otherwise payable under any given lease could not result in less than a 1/32 royalty.
The Texas Supreme Court held that the majority in Alford had failed to harmonize the provisions as required by the “four corners rule.”32 Contemporaneously with Luckel, the Texas Supreme Court decided Jupiter Oil Co. v. Snow,33 a case involving a granting clause in a mineral deed that first provided for a conveyance of a 1/16 mineral interest: “all that certain undivided 1/16th interest in and to all theoil, gas, and otherminerals of whatsoever kind and character in and under the following described lot.”34
Despite some still finding wisdom in Alford and the repugnant-to-the-grant rule, 35 Luckel and Jupiter Oil eliminated the repugnantto-the-grant rule of construction that had been adopted in Alford with a definitive knell, opting instead for the “four corners” approach currently applied to instruments deemed unambiguous in Texas: the intent of the parties is to be determined (orsurmised)atlawbyattemptingtoharmonizeall theprovisions oftheinstrument in question.36 This task was later summarized in J.M. Davidson, Inc.
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v. Webster: “[W]e must examine and consider the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless.”37 Later, the Court in Seagull Energy E & P, Inc. v. Eland Energy, Inc. cinched the issue: “No single provision taken alone will be given controlling effect; rather, all the [deed] provisions must be considered with reference to the whole instrument.”38
In Luckel and Jupiter Oil, the granting clause expressed a smaller fixed fractional interest conveyance (a 1/32 royalty in Luckel and a 1/16 mineral interest in Jupiter) than the floating royalty conveyance or mineral interest in subsequent parts of the conveyance (a 1/4 of royalty in Luckel and a 1/2 interest in production under any current lease, followed later in the conveyance by a 1/2 interest in all minerals, in Jupiter). In both instruments, the conveyance appeared to contain clear and unambiguous provisions that provided for what interest the grantee was to receive under various subsequent circumstances. In both cases, the subsequent fractions wereharmonious in allclauses except the initial granting clause. More importantly, in both cases, whenallthereceivedinterestsofthegrantee under the provisions subsequent to the granting clause were compiled, the grantee had (dependent on the measure of lessor’s royalty in Luckel) received a larger estate than granted by the opening granting clause.
Hysaw v. Dawkins
Inthewakeof Luckel and JupiterOil,fixed vs. floating royalty cases accelerated. The overall trend of these seemed to suggest to observers that courtsweremovingtoward“floating”over“fixed” interpretations. 39 Finally, the Texas Supreme Court waded into the fray again with its decision in Hysaw v. Dawkins.40
Like all these wrangles, Hysaw’s facts begin in the hoary days of yore. When Ethel Nichols Hysaw executed her will in 1947, she owned three tracts in Karnes County, Texas a
1,065-acre tract, a 200-acre tract, and a 150-acre tract. At her death, her will divided a fee-simple interest in the 1,415 acres of property among her three children as follows: to Inez Hysaw Foote, 600 acres; to Dorothy Francis Hysaw Burris, 465 acres; and to Howard Caldwell Hysaw Jr. 350 acres. Regarding the related mineral estates, the testatrix changed her allocation methodology, encumbering each tract thusly:
I will and bequeath to each of the above-named children fee simple title to the lands designated to go to them, subject, however, to the following:
That each of my children shall have and hold an undivided one-third (1/3) of an undivided one-eighth (1/8) of all oil, gas, or other minerals in or under or that may be produced from any of said lands, the same being a non-participating royalty interest . . ..
Ethel Hysaw went on to designate the royalty interest devised to each of her kids in three very similar paragraphs:
[T]hat is to say, that . . . [the named child] shall not participate in any of the bonus or rentals to keep any lease or leases in force; that it shall not be necessary for the said [named child] to execute any oil, gas or mineral lease over the lands of[thesiblings],andthatitshallnot be necessary for [the named child] to obtain the consent either orally or written of the said [siblings], to lease any portion of said land so willed to [the named child] for oil, gas or other minerals, but that the said [named child] shall receive one-third of one-eighth royalty, provided there is no royalty sold or conveyed by me covering the lands so willed to [the child] 41
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The court noted that before and after executingthewill,Ethel Hysawmadeseveral inter vivos conveyances to her children. In 1946, she granted equal royalty interests to each child in the two tracts comprising the 350 acres received by Howard Hysaw Jr. Two years later, she then granted the surface estate of 200 acres to Howard Hysaw Jr. After she died in 1949, the rest of her real property passed via her will. The three Hysaw children later died, and their property interests in the captioned land passed to other successors.
Much later, a lease commanding a 1/5 lessor’s royalty was executed over the 600-acre tract of Inez Foote, and a predictable conflict ensued concerning the measurement of the NPRIs that burdened the land. Inez Foote’s successors claimed that the tracts of Howard Hysaw Jr. were burdened with floating NPRIs of equal measure based on the inter vivos gift, that the 600-acre tract of Inez Foote and the 465-acre tract of Dorothy Burris were each burdened with three NPRIs fixed at 1/24 (each being one-third of a fixed 1/8), and that any royalties in excess of the NPRIs were reserved by the fee owner.42 The successors of Dorothy Burris and Howard Hysaw Jr. asserted thatthelanguageinstead meantthateachchildwas due a floating NPRI of 1/3 of any lessor’s royalty obtained (1/3 of 1/5, or 1/15, for each successor under the current lease) and that this interpretation was supported by language in the will providing intent for each sibling to receive an equal share of royalties.
The trial court sided with the successors of Inez Foote and Dorothy Burris and found that the will created three equal floating NPRIs. The court of appeals reversed, ruling that the will unambiguously resulted in the fee mineral interest comprisingthe600-acretractofInezFooteandthe 465-acre tract of Dorothy Burris being burdened bytwofixed1/24NPRIs, andthe350-acremineral fee of Howard Hysaw Jr. being burdened by three floating NPRIs measuring 1/3 of any future lessor’s royalty from any lease covering that tract. Therefore, the later inter vivos royalty gifts resulted in the will’s devising equal NPRI royalty shares on the tracts of Howard Hysaw Jr. and, under the 1/5 lessor’s royalty lease, greater royalties to the successor mineral fee owners on
the Inez Foote and Dorothy Burris tracts a fixed 1/24 NPRI plus any lessor’s royalty remaining after subtracting the two other fixed 1/24 NPRIs bequeathed to the non-surface-owning children.
In finding fixed NPRIs on the leased tract, the court of appeals highlighted, in two extensive sections, examples of both fixed and floating NPRIs taken from the Williams & Meyers treatise.43 After that, the court focused on each individual clause in the disputed instrument, examining three different clauses and comparing each to an example pulled from the case law compiled in the Williams & Meyers treatise. Each clause individually was found to comport with prior fixed NPRI language. Then, attempting to read the clauses together, the court found that the second provision was “an individualized restatement that affirms both the first royalty provision and the fee simple title devise.”44 More globally, the court of appeals rejected the argument that Ethyl Hysaw had intended that all three children would get equal royalty, holding simply that the language in each of the portions it examined expressly provided otherwise.
The Texas Supreme Court reversed on January 29, 2016, with an opinion penned by Justice Eva Guzman, South Texas Houston alum. Holding that the court of appeals had “departed from the appropriate analytical approach by construing each royalty provision in isolation” and had merely cited past examples from the Williams & Meyers treatise and compared each disputed phrase with its closest syntactical match, the Court found that the NPRIs on the leased tract were floating.45 Specifically, the Court found that the will devised to each of Ethel Hysaw’s three children “an undivided one-third (1/3) of an undivided one-eighth (1/8) of all [minerals],” described each fee mineral’s right to receive royalty payments as “one-third of one-eighth royalty,” and made clear that should any further NPRI be later conveyed by Ethel Hysaw from the captioned land, the children “shall each receive one-thirdoftheremainderoftheunsoldroyalty.”46
The Court noted that, without other indicators of the intent of the testatrix, it would be reasonable to interpret the double fraction as a
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devise of a fixed 1/3 of 1/8 to each of Ethyl Hysaw’s children. The Court cautioned, however, thatbeforeanalyzingthemeaningofanyparticular use of double-fraction language, it was necessary to examine the entire instrument to deduce how each disputed phrase interacted with the rest in order to divine the overall intent.47 In the present case, the Court found clear intent by Ethel Hysaw to divide the royalty equally among the three children, citing four indicators:
(1) the deliberate recitation of identical language to effect each child’s royalty inheritance;
(2) the use of double fractions in lieu of single fixed fractions, with one fraction connoting equality among the three children (1/3) and the other raising the specter of estate misconception or use of the then-standard 1/8 royalty as a synonym for the landowner's royalty;
(3) the first royalty provision’s global application to all the children and the second provision’s language restating the royalty devise of each child individually; and
(4) the equal-sharing language in the third and final royalty clause.48
TheCourtbelieved that themost indicative datum of testamentary intent was the equalroyalty-sharing language of the will’s third royalty clause that in the event of an inter vivos royalty sale, each child would receive “one-third of the remainder of the unsold royalty.” The court of appeals had also found this to convey floating NPRIs, but the Supreme Court looked past the meaning of the isolated phrase and took it as indicative of intent by the testatrix to re-equalize the floating NPRIs of all the children if any particular sibling received an inter vivos gift, and more globally, intent to convey equal floating
NPRIs to all children over all the captioned acreage. This, the Court opined, was the holistic approach made necessary by the various shards of intent scattered throughout the contested instrument.
Hysaw was where the Texas Supreme Courtchartedatentative courseforfuturefixedvs. floating mineral or NPRI case analysis, particularly for instruments that involve double fractions, multiple clauses, and family members conveying and reserving mineral and royalty interests to one another.
First, after the preliminaries, the Court addressed the double-fraction dilemma. It noted that “the possibility that the parties were operating under the assumption that future royalties would remain 1/8 will not alter clear and unambiguous languagethatcanotherwisebeharmonized.”Here, the Court avoid trying to determine whether the drafters were operating under the eternal 1/8 lessor’s royalty misconception, saying that interpreters must focus instead on the language.
Then the Court stated a truism: “[T]he reality is that use of 1/8 (or a multiple of 1/8) in some instruments undoubtedly embodies the parties’ [mistaken] expectation that a future lease will provide the typical 1/8th [lessor’s] royalty with no intent to convey a fixed fraction of gross production.”49 This is undoubtedly true in some instances. But which particular instances these are, however, remains unknown, hence all the lawsuits. The Court noted authorities that believe that use of 1/8 in a double fraction makes clear (to it, anyway) that the drafters were operating under the eternal 1/8 lessor’s royalty misconception. Further on, the Court recognizes that no unifying premise has emerged on the fixed vs. floating NPRI royalty.
While the Hysaw Court acknowledged the benefit of a “mechanically applied, mathematical approach,” it claimed that such an approach failed to recognize the “significance to the use of double fractions in lieu of a single fraction and, in doing so, may interpolate words not actually expressed in an instrument (i.e. a fixed single fraction).”
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Further, the Court claimed that prior opinions that used double-fraction language “adhered to an analytical approach that emphasizes the fourcorners rule and harmonization principles,” and that the more recent floating NPRI cases typically involved more complicated, multi-part conveyances/reservations than the fixed NPRI cases, and therefore required more creative interpretations that scrutinized every word.
One oil and gas legal commentator, William Burford, has noted that after Hysaw, “one can be certain of the construction of a royalty expressed as a fraction if one-eighth only if absolutely identical language has been definitively construed in an earlier case, if then.”50 Such cases cannot put title examiners at ease, as these cases steer clear of a more mechanical reading that would allow a more definitive interpretation of NPRIs. After Hysaw, whilemention ofthefraction “of 1/8” maynot haveautomatically been assumed to mean “of any future lessor’s royalty” without other indicia of intent for a floating NPRI to be conveyed or reserved, a case-by-case analysis was still necessary to divine the drafter’s intent.
U.S. Shale Energy II, LLC v. Laborde Props., L.P.
Thebattlesraged on. On June28, 2018, the Supreme Court of Texas, in U.S. Shale Energy II, LLC v. Laborde Props., L.P., reversed the holding of the San Antonio Court of Appeals (Fourth District) and held that the trial court correctly granted summary judgment for the successors to the original grantors because the disputed deed unambiguously reserved a floating 1/2 interest in the royalty in all oil, gas, or other minerals produced from the conveyed property.51
In 1951, four years after Ethel Hysaw’s will was complete, J.E. and Minnie Bryan sold their mineral interest in a tract of land in Karnes County, Texas. As part of the conveyance, the Bryans reserved an NPRI in the minerals. The reservation as described in the deed provided:
There is reserved and excepted from this conveyance unto the grantors herein, their heirs and assigns, an undivided one-half (1/2) interest in and to the Oil Royalty, Gas Royalty, and Royalty in other Minerals in and under or that may be produced or mined from the above described premises, the same being equal to onesixteenth (1/16) of the production. This reservation is what is genaerally [sic] termed a nonparticipating Royalty Reservation….52
LabordeProperties, L.P. bought thetract in 2010. At that time, EOG Resources held an oil and gas lease paying a lessor’s royalty of 1/5. EOG Resources’ division order reflected that the Bryan successors werebeing paid 1/2 ofa1/5 royalty, for a total of 1/10th of production. Laborde disputed the accuracy of the payments, arguing that the Bryansuccessorswereonlyentitledto1/16oftotal production based on the reservation language in the original 1951 deed reserving a fixed 1/16 royalty. The trial court held in favor of the Bryan successors, but in 2016, the Fourth Court of Appeals in San Antonio reversed, ruling the second clause in the deed reservation “qualifies, modifies, or clarifies the preceding undivided onehalf language, showing an intent to reserve a fixed one-sixteenth (1/16) interest.”53
The Texas Supreme Court reversed in a 63 decision, holding that the deed unambiguously reserved a floating royalty interest. The majority limited itself to “the language and structure of the reservation at issue” as its “sole guide in ascertaining the intent of the parties.”54 Thecoreof the Court’s analysis centered on reconciling the two clauses in the reservation.
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First, the clause “an undivided one-half (1/2) interest in and to the Oil Royalty,” when construed independently unambiguously was found to reserve a floating royalty.55 However, the second clause, “the same being equal to onesixteenth (1/16) of the production” had the effect of fixing an interest to 1/16 of the production despite the first clause tying the interest to a royalty.56 As discussed above, in 1951 at the time of the deed, 1/8 was the typical landowner’s royalty rate in oil and gas leases. The Court contended that the first phrase indicated the parties’ “intent to tie the reservation to the royalty rate that was in effect at any given time,” or to reserve a floating royalty.57 Given that an oil and gas lease was not in effect when the deed was executed, “the parties could not have intended to tiethereservation to something that simply did not exist,” therefore, the Court surmised that the reservation must have referred “to a royalty that could come into being at some point in the future.”58
As evidence of this intent, in a riveting digression, the Court looked at the grammatical structure of the sentence and, citing Garner’s The Red Book, noted that the second clause was a nonrestrictive dependent clause a clause that simply “‘gives additional description or information that is incidental to the central meaning of the sentence.’” If at the time the deed was negotiated, there was an oil and gas lease with a 1/8 royalty rate, there would not have been a dispute between the parties regarding interpretation of the two clauses as 1/2 of 1/8 royalty is equivalent to 1/16 of production. In analyzingtheeffectofthesecondclause,theCourt adhered to the rule of construction requiring that no language be rendered meaningless by the overall interpretation.59
Withthatinmind,theCourtconcludedthat the second clause could not reasonably have
modified the plain meaning of the first clause without rendering it meaningless. Specifically, if a lease agreement paid a royalty rate other than 1/8 (such as the 1/5 royalty EOG Resources was paying), in order for the reserved royalty interest to match 1/16 of production, that interest would ultimately be precluded from being 1/2, in essence rendering the first part of the clause meaningless.60 Whereas, interpreting the reservation as a floating royalty allowed both clauses to remain relevant even as leases have moved away from standard 1/8 royalties. Thus the 1/16 of production reference “clarify as an incidental factual matter whata1/2interestintheroyaltyamountedtowhen the deed was executed.” 61 By contrast, if the royalty were fixed to production, the Bryan successors would be entitled only to 1/16 of the production, which is not half of the royalty when the royalty is above 1/8, thereby making the first clause meaningless and a violation the rule of construction. Furthermore, the reservation’s grammatical structure was believed to bolster the Court’s interpretation. According to the Court, “the same being able to 1/16th” was offset by a comma, indicating a non-restrictive dependent clause which “’gives additional description or information that is incidental to the central meaning of the sentence’” and “’that could be taken out of the sentence without changing its essential meaning.’” 62 Accordingly, the majority reversed the court of appeals and reinstated the judgment of the trial court.63
The dissent would have held that the royalty was fixed, not floating, reasoning that because the terms “Oil Royalty, Gas Royalty and Royalty in other Minerals,” were capitalized, but not defined, the lease presented “the question of what specific ‘Oil Royalty’ the parties had in mind.” The dissent then cited a mix of cases where similarlanguageaboutoilroyaltieswassometimes held to be fixed and other timesheld to be floating, with the difference in construction coming from
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other language in the deeds that clarified the intended meaning of royalty. The dissent then asserted that the Court’s construction incorrectly looked at the first clause in isolation, thereby ignoring the intended effect that the second clause was meant to have on the first clause’s meaning. The dissent further asserted that when reading the clauses together, the second clause made it clear that “Oil Royalty” in the first clause referred to the then ubiquitous 1/8th royalty, not to royalty generally. Thus, the first clause was not rendered meaningless but instead helped clarify the second clause.
In summary, the majority supported its conclusions by discussing a comma. The dissent supported its conclusion by discussing undefined capitalized terms. Ultimately, both opinions seem result oriented: the majority preferred resolving doubt in favor of floating and the dissent preferred fixed.
Van Dyke v. The Navigator Group
While the primary focus of this paper has thus far been on royalty interests, mineral interest conveyances can also be affected by fixed vs. floating interpretation disputes. The results of thesedisputescanimpact interpretationsofroyalty instruments, as Alcorn has shown. In February 2023, the Texas Supreme Court issued an opinion for Van Dyke v. The Navigator Group 64 that settled a ten-year dispute over the ownership of mineral interests and $44 million in royalties. In 1924, the Mulkeys conveyed their ranch to White and Tom, using a deed (the “1924 Mulkey Deed”) with the following reservation:
“It is understood and agreed that one-half of one-eighth of all minerals and mineral rights in said landarereservedingrantors...and are not conveyed herein.”
As the property records show, the captioned land experienced multiple episodes of leasing, slipping in and out of a leased state for
over a century. In the 1920s, both mineral owners leased the mineral interest, with both owners receiving an equal share of the royalties, the first acknowledgement that each owned an undivided 1/2 interest in the mineral estate by virtue of the 1924 Mulkey Deed. In the 1940s, in letters and agreements culminating in a recorded stipulation, the relevant parties again acknowledged the 50/50 split of minerals in the captioned tract. In the 1950s, in royalty deeds and division orders, the predecessors in title to the parties today claiming a full 15/16ths executed instruments with the obvious belief and understanding that they collectively owned 1/2 of the minerals. In the 1970s, the record shows another swarm of instruments from another generation of owners definitively illustrating the belief and understanding that each side to this case owned a 1/2 undivided interest in the minerals. In 2007, as the mineral estate fractionated, one owner, in a recorded deed, again confirmed the belief and understanding that the 1924 Mulkey Deed split the mineral estate equally. During all this time, the interests resulting from the 1924 Mulkey Deed were always observed to be a 50/50 split.
Suddenly, with the bringing of this case, the successors of White and Tom argued that this reservation in the 1924 Mulkey Deed was, in fact, of a 1/16 mineral interest. Unsurprisingly, the successors of the Mulkeys argued that the reservation reserved 1/2 mineral interest. The trial court and the court of appeals agreed with the successors of White and Tom. The Texas Supreme Court reversed, unanimously ruling for the Mulkeys based on a combination of two legal premises working together: (i) the estate misconception theory and (ii) the presumed grant doctrine.
Astotheestatemisconceptiontheory,65 the 1924 Mulkey Deed comes from the earlier portion of the period during which parties conveying and reserving mineral interests believed themselves owners of interests derived from a one-eighth royalty. In Shepard, Executrix v. John Hancock Mutual Life Ins. Co., 66 one finds an excellent discussion of this early misconception and misuse of the fraction “1/16th” when “1/2” was really intended: “As the most common leasing
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arrangement provides for a one-eighth royalty reserved to the lessor, the confusion of fractional interests stems primarily from the mistaken premise that all the lessor-landowner owns is a one-eighth royalty.”
Citing Hysaw and Concord Oil Co. v. Pennzoil Expl. & Prod. Co., the Court first took notice that, at the time of the 1924 Mulkey Deed, “1/8 was widely used as a legal term of art to refer to the total mineral estate” and that,
the estate-misconception theory reflects the prevalent (but, as it turns out, mistaken) belief that, in entering into an oil-and-gas lease, a lessor retained only a 1/8 interest in the minerals rather than the entire mineral estate in fee simple determinable with the possibility of reverter of the entire estate. Therefore, for many years, lessors would refer to what they thought reflected their entire interest in the “mineral estate” with a simple term theyunderstoodtoconveythesame message: “1/8.” This widespread and mistaken belief ran rampant in instruments of this time involving the reservation or conveyance of a mineral interest so much so that courts have taken judicial notice of this widespread phenomenon . . . Therefore, the very use of 1/8 in a double fraction “should be considered patent evidence that the parties were functioning under the estate misconception.”67
The Court disregarded the fact no oil and gas lease was in effect at the time of the 1924 Mulkey Deed, a fact that facilitated the court of appeals’ conclusion that the estate misconception theory was inapplicable. Then, in a thunderbolt, Court conjures perhaps its most important point of law in the case, a rebuttable presumption:
When courts confront a double fraction involving 1/8 in an instrument,thelogicofouranalysis
in Hysaw [v. Dawkins, 483 S.W.3d 1 (Tex. 2016)] requires that we begin with a presumption that the mere use of such a double fraction was purposeful and that 1/8 reflects the entire mineral estate, not just 1/8 of it. Our analysis in Hysaw thuswarrantstheuseofarebuttable presumption that the term 1/8 in a double fraction in mineral instruments of this era refers to the entire mineral estate. Because there is “little explanation” for using a double fraction for any other purpose, this presumption reflects historical usage and common sense.68
The Court made clear that a rebuttal of this presumption could be made by other language within the four corners of the instrument suggesting a different meaning. One commentator suggested that such rebuttal evidence could be “express language, such as the presence of distinct provisions that could not be harmonized if 1/8 is given the term-of-art usage or the repeated use of fractions other than 1/8 in ways that reflect than arithmetical expression should be given to all fractions within the instrument.69 Whereas Hysaw required language in the deputed conveyance to invoke this position, Van Dyke placed the onus on the other side to rebut the presumption.70
Deep into theopinion, theCourtturns from the double fractions and estate misconception theory to the “presumed-grant doctrine,” holding that, even if the deed did not clearly reserve 1/2 of the minerals, the 80-plus year record of instruments, title opinions, and ratifications conclusivelyestablishedthattheMulkeysacquired half the mineral interest via doctrine. The Court said the presumed grant doctrine has three elements:
A long-asserted and open claim, adverse to that of the apparent owner; (2) nonclaim by the apparent owner; and (3) acquiescence by the apparent ownerintheadverseclaim....The
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presumed grant doctrine, “also referred to as title by circumstantial evidence, has been described as a common law form of adverse possession.”71
Where the court of appeals required a gap in the chain of title to invoke the presumed grant doctrine, the Texas Supreme Court held that no such fourth element existed. In addition, the Van Dyke court did not examine the disputed instrumentinavacuum,insteadmakingnoteofthe extensive paper trail that demonstrated the longheld belief by both parties that they each owned half of the interest before concluding that this evidence “conclusively satisfies the presumedgrant doctrine’s requirements” and that “[t]he filing of this lawsuit in 2013 cannot negate nearly acenturyofoverwhelmingevidencethattheWhite parties never previously made such a claim in all those years.” This recognition of the long-held belief and resultant paper trail by the parties to the 1924 Mulkey Deed and their successors sets Van Dyke apart from other cases before it, many of which focused entirely on the disputed instrument’s language.
Bridges v. UHL
On December 29, 2022, while Van Dyke percolated with the Supreme Court of Texas, the Court of Appeals of Texas, Eighth District, El Paso, was wrestling with yet another fixed vs. floating royalty case known as Bridges v. UHL.72 Appellant Mary Ann Bridges (“Bridges”) was successor-in-interest to grantors who executed a deed in 1940 (the “1940 Deed”), that expressly reserved an NPRI. The reservation read:
Grantors, their heirs and assigns, reserve unto themselves, their heirs and assigns, an undivided one-half (1/2) of the usual one-eighth (1/8) royalty in, to and under the above[-]described land, covering the oil, gas and other minerals, said royalty reservation, however being
wholly nonparticipating, ... if, as and when production is obtained, grantors, their heirs and assigns, shall receive one-half (1/2) of the usual one-eighth (1/8) royalty, or one-sixteenth (1/16) of the total production, it being the intention that this royalty reservation is wholly non-participating in bonuses, delay rentals, etc.73
Bridges received the NPRI in 1975 via a deed that provided “these presents do grant, sell, convey, assign, and deliver, unto the said [Appellant] an undivided 1/2 of the usual 1/8 royalty interest, and being all of [1940] royalty interest, and to all of the oil royalty, gas royalty, and royalty in casinghead gas, gasoline, and royaltyinothermineralsinandunderandthatmay be produced and mined from [the tract][.]”
In 2010, the other successors to the 1940 deed executed a lease providing for a 1/4 lessor’s royaltyonproduction.Bridgescontactedthelessor Concho Operating in 2013, upon noticing increased oil and gas production on a particular tract tied to her interest without receiving any royalties.Conchoacknowledgedherentitlementto royalties in 2014, and calculated her royalties at a 1/16 “fixed” NPRI. Bridges contested this calculation, contending that Concho owed her 1/2 of the 1/4 lessor’s royalty, based on binding lease terms and brought suit against individuals and entities with interests in the leased minerals, contending that these parties owed her royalties underthepertinentleasemeasuredas1/2ofthe1/4 lessor’s royalty. The trial court entered summary judgment for appellees.
The court of appeals reversed, holding that the trialcourterredininterpretingthereservationdeed language to reserve a “fixed” 1/16 NPRI an NPRI that remains constant irrespective of the lessor’s royalty amount in the lease. Rather, the
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court held the 1940 Deed was unambiguous, and reserved a “floating” 1/2 NPRI an NPRI that varies depending on the lessor’s royalty in the lease. Applying deed construction principles, the court of appeals found the phrase “if, as and when production is obtained,” reflected that the grantors had contemplated the royalty reservation would take effect prospectively regardless of when a new lease was negotiated with whatever lessor’s royalty. The court believed that, considered in the larger historical context, the 1940 Deed contained many of the recognized features of a floating royalty, including multiple references to the “usual” 1/8 royalty as the proxy for the landowner’s royalty.
Summary
Recent decisions of the Texas Supreme Court seem to prefer finding that NPRIs and mineral interests are floating. Yet, several older cases did find similar royalty instruments to be fixed. This creates a problem for certainty and also an opportunity for mischief. An enterprising owner, landman or lawyer might look for these sorts of interests for producing properties and trigger a legal dispute that might otherwise have remained dormant.
These cases cite and discuss many of the earlier fixed v. floating cases illustrating the challenges courts face when confronting deed language that slightly differs from deed language in prior cases. “‘Harmonization’ is a deceptively simple solution to the problem of whether a nonparticipating royalty interest is fixed or floating.” 74 Although the 4-0 record for “team floating” over “team fixed” in the above-described cases suggest the development of consensus, all four cases involved an appellate court reversing a lower court. Hysaw and Van Dyke were unanimous, but Laborde saw a well-reasoned three-justice dissent. These facts indicate an overall diversity of thought when approaching such cases.
The appearance in Van Dyke of the rebuttable presumption that the mere use of a double fraction was purposeful and, absent other indications within the disputed instrument, either results in a 1/2 mineral interest or a royalty that floats with successive lessor’s royalties in leases changes the landscape. One might argue that such an approach comes within sight of a mechanically applied rule. 75 While the Hysaw Court acknowledged the benefit of a “mechanically applied, mathematical approach,” it claimed that such an approach failed to recognize the intent of the drafter. Also in Hysaw, the Court claimed that prior opinions that used double-fraction language cases like Luckel “adhere[d] to an analytical approach that emphasizes the fourcorners rule and harmonization principles” and that the floating NPRI cases typically involved more complicated, multi-part conveyances/reservations than the fixed NPRI cases, requiring more creative interpretations that scrutinize every word.
Title examiners are heavily impacted by the fixed vs. floating issue, and because the oil and gas industry relies on title examiners to advise about ownership, the industry is impacted as well. First, title examiners must be alert to new court decisions.Second,inthisauthor’sexperience,they often, out of caution, construe instruments against their client – or at least raise concerns. Where the interest owner is affected, then the owner must make a judgment call regarding title. If the examiner has doubts about the judgment call, then the examiner will suggest how to resolve the doubt, such as by obtaining a stipulation at interest or, failing that, an action to quiet title. Mechanical rules can assist title examiners by providing a clearer path towards describing the state of title.
Perhaps best highlighted by Laborde, cases like those highlighted herein can feature application of recondite rules of grammar. Those who support construing deeds using strict rules of grammar are faced with the conundrum that if intent is indeed the crux, is it realistic for courts to
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assume that grantors, many of whom were not lawyers, adhere to strict rules of grammar? Consider the lengths that the majority in Laborde went to in its grammar analysis – it is reasonable to assume every grantor does the same?
Sometimes, courts seize upon a phrase and seem to build a narrative from it. The court in Bridges seemed to glom onto one – “if, as and when production is obtained” – and believed it showed the drafter had thought about the possibility of rising (and possibly falling) royalty rates. I have doubts, and using Hysaw’s “holistic” approach to NPRIs expressed as double fractions to craft a “royalty interpretation to suit their own, possibly ill-informed, suspicions of the parties’ intent”76 could be hazardous.
Some of these disputed interests are created by wills and not deeds, raising the specter of whether they could be construed somewhat differently as some courts seem to construe wills more cavalierly than deeds. The basis for doing so may be that certainty is somewhat less important when construing a will, which is not generally
1 Director and Professor, Harry L. Reed Oil & Gas Law Institute, Houston College of Law; B.S. (Geology) and M.S. (Geophysics), Wright State University; Ph.D., Texas A&M University (Petroleum Seismology); J.D., University of Oklahoma. Licensed in Texas and New Mexico. This article first appeared in the proceedings of the Permian Basin Special Institute, May 25-26, 2023, Santa Fe, NM, Foundation for Natural Resources and Energy Law. This article is dedicated to the memory of Norwegian traveler, historian, and teacher Hans Petter Cammermeyer Næss (Jan. 20, 1946 Jan. 23, 2023), Asker, Norway. © 2023 Christopher Sigmund Kulander. All rights reserved.
2 See, e.g., Christopher S. Kulander, The Executive Right to Lease Mineral Real Property in Texas Before and After Lesley v. Veterans Land Board, 44ST MARY’S L.J. 529, 531 (2013).
3 712 S.W.2d 117, 119–20 (Tex. 1986).
4 Id. at 118–19.
5 See 1 ERNEST E. SMITH & JACQUELINE LANG WEAVER, TEXAS LAW OF OIL AND GAS § 2.4A, at 2-80 (2d ed. 2015).
6 Id.
7 See Wynne/Jackson Dev., L.P. v. PAC Capital Holdings, Ltd., No. 13-12-00449-CV, 2013 WL 2470898, at *4 (Tex. App. Corpus Christi June 6, 2013, pet. denied) (reserving
recorded in real estate records. Thus, determining the testator’s intent may be of even greater importance to the court.
Finally, what are the “four corners,” exactly? Demonstrable misconceptions and intent can live outside the boundaries of an instrument. “Misconceptions” of what the drafting parties thought the future royalty could be (or not be) necessarily lie outside the four corners. Subsequent recognition by parties of what a prior instrument conveyed and retained, as seen in Van Dyke by the paper trail that spun out after the 1924 Mulkey Deed like a tail follows a comet, are outsidethe “fourcorners” but, as theCourtshowed through its invocation of the presumed grant doctrine through the estate misconception theory, are important in establishing intent and divining thetruemeaningofadeed. Van Dyke’s recognition that the estate misconception theory, paired with the presumed grant doctrine, can solidify established title might serve to pave over potholes gouged by those challenging established title in a surer way than its ballyhooed rebuttable presumption ever could.
an NPRI measuring it as “a non-participating royalty of one-half (1/2) of the usual one-eighth (1/8) royalty in and to all oil, gas, and other materials produced, saved and sold from the above-described property” (emphasis added)). This Author has seen lessor’s royalty due on produced minerals other than oil and gas measured as fractions other than 1/8 in many instruments executed from the 1930s to the 1970s.
8 1 SMITH & WEAVER, supra note 5, § 2.4B1, at 2-64.
9 Id.
10 See JOSEPH SHADE & RONNIE BLACKWELL,PRIMER ON THE TEXAS LAW OF OIL AND GAS app. A (5th ed. 2013) (defining “nonparticipating royalty”). The third kind of royalty, not discussed in this Article, is the overriding royalty interest. This is described as “[a]n interest in oil and gas produced at the surface, free of the expense of production. In modern times overriding royalty interests usually refers to a non-cost bearing interest carved out of the lessee’s working interest under an oil and gas lease.” Id A “freestanding royalty” is synonymous with an NPRI, and is a name preferred by the author.
11 Range Res. Corp. v. Bradshaw, 266 S.W.3d 490, 491 n.1 (Tex. App. Fort Worth 2008, pet. denied.).
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12 Id.; see also Plainsman Trading Co. v. Crews, 898 S.W.2d 786, 789 (Tex. 1995); Hamilton v. Morris Res., Ltd., 225 S.W.3d 336, 344 (Tex. App. San Antonio 2007, pet. denied).
13 1 SMITH & WEAVER, supra note 5, §2.4B2, at 2-64.
14 Id. For example, the owner of an NPRI that gave him the right to “one-eighth of royalty” would be entitled to receive 1/64 of the gross production from a lease containing a 1/8 lessor’s royalty (1/8 × 1/8), but would receive 1/48 of the gross production from a lease containing a 1/6 lessor’s royalty (1/8 × 1/6). This amount is deducted from the lessor’s royalty owed to the lessor himself. Unless uncommon terms are at play, the lessee continues to pay only the amount of the lessor’s royalty; he does not typically pay the sum of the lessor’s royalty and the NPRI.
15 More descriptive terms might be “definite” and “indefinite” royalty, but fixed and floating royalty are the commonly used terms of art.
16 Alford v. Krum, 671 S.W.2d 870 (Tex. 1984).
17 See id. at 873–74; Krum v. Alford, 653 S.W.2d 464, 467 (Tex. App. Corpus Christi 1982, no writ).
18 Alford, 671 S.W.2d at 871.
19 Id at 872.
20 Id.
21 Id. at 874.
22 Id. at 872 (citation omitted).
23 David E. Pierce, Interpreting Oil and Gas Instruments, 1 TEX J. OIL, GAS, & ENERGY L. 1, 9 (2006) (citing Alford, 671 S.W.2d at 874).
24 Id.
25 819 S.W.2d 459, 464 (Tex. 1991).
26 See generally Laura H. Burney, The Regrettable Rebirth of the Two-Grant Doctrine in Texas Deed Construction, 34 S. TEX. L. REV.74 (1993).
27 Luckel, 819 S.W.2d at 460.
28 Id
29 Id. at 461.
30 Id. at 465.
31 Id. at 464–65.
32 Id. at 464.
33 Jupiter Oil Co. v. Snow, 819 S.W.2d 466 (Tex. 1991).
34 Id. at 468.
35 Terry I. Cross, Mineral Titles in Texas After 1984 – Our Brave New World, 6 Energy Newsletter 3 (2023).
36 Id. at 461.
37 128 S.W.3d 223, 229 (Tex. 2003).
38 207 S.W.3d 342, 345 (Tex. 2006) (quoting Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983)).
39 See Christopher Kulander, Fixed vs. Floating NonParticipating Oil & Gas Royalty in Texas: And the Battles Rage On... 4 TEX A&M L.REV. 41 (2016).
40 483 S.W.3d 1 (Tex. 2016).
41 Id.
42 Id. at 6.
43 Id. at 6–7 (citing Dawkins v. Hysaw, 450 S.W.3d 147, 153 (Tex. App. San Antonio 2014), rev’d, 483 S.W.3d 1 (Tex. 2016)).
44 Dawkins, 450 S.W.3d at 156.
45 Hysaw, 483 S.W.3d at 13–14.
46 Id. at 14–15.
47 Id. at 14 (citing Garrett v. Dils Co., 299 S.W.2d 904, 906–07 (Tex. 1957, pet. denied)) (suggesting Garrett supports the proposition that “use of a double [royalty] fraction juxtaposed with a single fraction in another provision clarified that the grantor intended to reserve [a] floating [NPRI] under future leases.”).
48 Hysaw, 483 S.W.3d at 15. The four points cited are exact quotes that have been parsed out.
49 Id.
50 William B. Burford, Permian Basin Oil and Gas Case Law Update 2016, Proceedings of the 18th Annual Permian Basin Oil & Gas Law Seminar, Chapter A-2, Feb. 26, 2016.
51 551 S.W. 3d 148 (Tex. 2018).
52 Id.
53 Id. at 151.
54 Id. at 150.
55 Id. at 152.
56 Id.
57 Id. at 153.
58 Id.
59 Id.
60 Id.
61 Id. at 153-54.
62 Id. at 154 (citing BRYAN A. GARNER,THE REDBOOK: A MANUAL ON LEGAL STYLE § 1.6(a), 6 (3d ed. 2013).
63 Id. at 156.
64 No. 21-0146, 2023 Tex. LEXIS 144 (Tex. Feb. 17, 2023).
65 See Laura H. Burney, Interpreting Mineral and Royalty Deeds: The Legacy of the One–Eighth Royalty and Other Stories, 33 ST. MARY’S L.J. 1 (2001) (discussing at length both the “double fraction” or “restated fraction” problem as well as “estate misconception” the confusion created by further-explanation clauses such as the reservation of “an undivided [1/2 NPRI]” followed by the parenthetical, “([b]eing equal to, not less than an undivided 1/16th) of all the oil, gas and minerals . . . .”).
66 368 P.2d 19, 26 (Kan. 1962).
67 Van Dyke v. Navigator Group, No. 21-0146, 2023 WL 2053175, at *5–6 (Tex. Feb. 17, 2023) (citation omitted)
68 Burney, supra note 26 at 90.
69 William Burford, Case Law Update, Proceedings of the 25th Annual Permian Basin Oil & Gas Law Seminar, (Mar. 3, 2023).
70 2023 WL 2053175, at *8 (“The use of a double fraction in this deed, combined with the lack of anything that could rebut the presumption, is precisely why we can conclude as a matter of law that this deed did not use 1/8 in its arithmetical sense but instead reserved to the Mulkey grantors a 1/2 interest in the mineral estate.”).
71 Id.
72 No. 08-21-00130-CV, 2022 LEXIS 9552 (Tex.App. El Paso Dec. 29, 2022).
73 Id.
74 ANDERSON, OWEN ET AL.,OIL AND GAS LAW AND
TAXATION § 2.4 (G)(1) (1st ed. 2017).
75 And at least one commentator believes the presumption will “yield future dispute in application.” Alex Kuiper, Caselaw Update: Van Dyke v. The Navigator Group, (Mar. 10, 2023), https://www.kuiperlawfirm.com/caselaw-updatevan-dyke-v-the-navigator-group/
76 Burford, supra note 50.
15
The “Free Rider” in Louisiana –the “Louisiana Risk Fee Act”
By: Patrick S. Ottinger Ottinger Hebert L.L.C. Lafayette, Louisiana
The “free rider” has been the proverbial thorn in an operator’s side for as long as the oil and gas industry has been around. By the moniker of “free rider,” one refers to a person or entity who, having the right to conduct drilling activities to exploit mineral resources, prefers to have another person or entity do so at its sole cost, risk and expense. Then, if the exploration venture is unsuccessful (a “dryhole”),the “free rider” simply walks away, but, if successful (the completion of a well capableofproducing oil orgas in commercial quantities), seeks to receive its share of the production, in both cases, with no responsibility for costs or expenses. Put another way, absent (express) consent, a “free rider” whether an unleased mineral owner or a non-consenting lessee, has no personal liability for costs, but the operator is relegated to withholding/recouping out ofproduction. Thereis,however,ajurisprudential exception to this if/when the third party initiates the unitization proceeding.1
The practice of “free riding” was explained by commentators as pertaining to the situation in which “the developing cotenant bears the risk of development, with the non-developing cotenant free riding on the coattails of a successful well and disclaiming any responsibility for any unsuccessful well.”2
In Louisiana, the practice of “free riding” was essentially unrestrained or unfettered prior to January 1, 1985. Before adoption of the Risk Fee Act, Act No. 345 of 1984, it was the established law that an “owner” in a compulsory unit had no personal, “out of pocket,” responsibility for costs of drilling a unit well in the absence of expressly consenting to have such personal responsibility. At the time of adoption of this legislation, “owner,” for purposes of Louisiana’s Conservation Act, was defined as “the person,
including operators and producers acting on behalf of the person, who has the right to drill into and to produce from a pool and to appropriate the production either for himself or for others.”3
At the same time, a landowner (or mineral servitude owner) had no duty to grant a mineral lease, and could elect to “hold out,” and not facilitate the drilling by another.4 The operator could nonetheless drill the well and assume all cost, risk and expense of such venture.
If the well was successful, the operator had the right to withhold all revenue attributable to the share of unit production allocable to the “free rider” until the operator recouped the “free rider’s” share of the cost of drilling, testing, completing, equipping and operating the unit well.5 However, upon achievement of “payout,” the “free rider” was due its share of production (called “8/8ths”), subject to bearing is proportionate share of current operating expenses. While there is no statutory definition of “payout” for purposes of the Conservation Act, industry custom and usage would deem “payout” to have been achieved when the operator has been reimbursed the costs of drilling, testing, completing, equipping, and operating the unit well, out of production.
The courts have recognized that the potential that the operator will eventually be reimbursed out of production can be a hollow remedy, noting: “It is obvious that, if [the “free rider’s”] contention is maintained, it will have obtained a substantial advantage over [the operator], in that the well satisfies its obligation to its lessor to develop and that it will ultimately receive its share of the proceeds thereof, all without the outlay of one penny. The suggestion that payment will ultimately be made from proceeds of production is not an answer to this situation, as [the operator] will then be required to finance [the “free rider”] during the entire time required to obtain reimbursement from proceeds of production. In short, [the operator] alone will have been required to make the entire investment, whereas the return will accrue only partly to it, and partly to [the “free rider”].”6
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After several unsuccessful attempts to enact a legislative solution to the problem of “free riding,” the Legislature finally enacted what is now called the “Risk Fee Act” in 1984. (Notably, the legislation, which reposes in La. R.S. 30:10(A)(2)(a)-(h), does not utilize the term “risk fee,” but characterizes the recoupment factor that an operator might impose as a “risk charge.”).
In many respects, the structure of the legislation mimics the contractual regime for the conduct of “subsequent operations” under a Model Form Operating Agreement.7
In summary, the Risk Fee Act establishes a mechanism whereby an operator desiring to drill a unit well may call upon all other “owners” in the unit by certified mail to make an election to participate or not in the cost, risk and expense of thewell. Thenotifiedpartyhas30days torespond to the operator’s notice. Should a notified party fail to affirmatively elect to share in these costs, theoperatoris entitled to withhold in thenormal, historic fashion all proceeds allocable to the interest of the non-participating party until payout, probably on a tract basis, is achieved. Additionally, the operator may assess a “risk charge” of 100% of such party’s share of the costs of drilling, testing and completing the unit well; the “risk charge” does not apply to costs of equipping and operating the well. This “risk charge” was increased in 2008 to 200% of such costs.
Otheramendments have been madeto the Risk Fee Act, including an amendment in 2012 to expandtheprovisionsoftheActtoasubstituteunit well, an alternate unit well or a cross-unit well. However, the “risk charge” is 100% with respect to an alternate unit well or cross-unit well that will serve as an alternate unit well. Also, the mode of transmittal was changed from “certified” mail to “registered” mail.
any unleased interest not subject to an oil, gas, and mineral lease.”
After the enactment of the Risk Fee Act, but prior to 2012, the “free rider” was obligated to pay royalties to its own lessor even though it was receiving no revenue out of the well prior to payout.8 This precept, of course, constituted a disincentive to a party to decline to participate in the drilling of the unit well as it would be required to pay its lessor royalty “out of pocket.”
In 2012, controversial amendments were made to the Risk Fee Act that removed that disincentive by requiring the operator to pay over to the “free rider” the necessary amount of proceeds in order that the lessor royalty would be paid. This overturned a century of jurisprudence as outlined above.9
This newly imposed requirement had the result of diminishing the revenue stream to which an operator was entitled, thus delaying payout. This reversal of the former entitlement was not well received by the industry.
Subsequent to 2012, the Legislature adopted Senate Resolution No. 31 to study the Risk Fee Act, particularly as it pertains to the new requirement that an operator must pay over to a “free rider” the proceeds for payment of the lessor’s royalty. The Resolution tasked the Louisiana State Law Institute (“LSLI”) to undertake this study, and the Risk Fee Act Committee was formed by the LSLI for the purpose. In the interest of full disclosure, this author served as Reporter of this Committee. It was composed of practitioners and academicians throughout the State of Louisiana.
Importantly, under no circumstance may the operator assess a “risk charge” to an unleased mineral owner. La. R.S. 30:10(A)(2)(e)(i) now states expressly that the provisions of the Act “with respect to the risk charge shall not apply to
After delays caused by the Covid-19 pandemic, the Committee submitted a report that was adopted by the Council of the LSLI in December 2020, and sent to the Legislature. Introduced as Senate Bill No. 59, it was converted during the 2021 session to a study resolution and a Risk Charge Commission was formed. Again, this author served as Vice-Chair of this Commission.
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The Commission rendered a report after conducting extensive studies and debates over several months. The recommendations of the Commission were introduced as Senate Bill No. 38, which was unanimously adopted, resulting in Act No. 5 of the 2022 legislative session, effective August 1, 2022.
The new legislation amended the Louisiana Risk Fee Act in the following respects, to-wit:
• Redefining “Risk Charge Notice” and “Lessor Royalty”;
• Authorizing the Risk Charge Notice to Include a Cash Call;
• Clarifying the Amount of Royalties to be Paid Over to the NPO;
1 Superior Oil Co. v. Humble Oil & Ref. Co., 165 So. 2d 905, 908 (La. Ct. App. 4th 1964), writ ref’d, 167 So. 2d 668 (La. 1964).
2 Timothy C. Dowd, Wade C. Mann and Anthony J. Ford, Statutory Pooling and the Unleased Mineral Owner, 65 Rocky Mt. Min. L. Inst. 13, 13-15 (2019).
3 LA REV STAT ANN § 30:3(8).
4 See Arkansas Fuel Oil Corp. v. Weber, 149 So. 2d 101, 108 (La. Ct. App. 2d 1963) (recognizing that the “right of an owner to refrain from exercising his right of ownership is absolute.”).
5 LA. REV. STAT. ANN. § 30:10A(2)(b)(i).
• Payment of NPO’s Overriding Royalty Interest;
• Procedures for Payment of Royalties, and Rights of Lessor Royalty Owner;
• Extending the RFA to Subsequent Unit Operations;
• Clarifications as to Risk Charge Notices; and
• Amendment to R.S. 30:10A(3).
While it is possible that further refinement of the Risk Fee Act will be pursued, it is sufficient to say that great progress has been made to address the situation of the “free rider.”
6 Superior Oil Co. v. Humble Oil & Ref. Co., 165 So. 2d at 908.
7 See Patrick S. Ottinger, Be Careful What You Ask For: Subsequent Operations Under the Model Form Operating Agreement, 63 The Institute for Energy Law of The Center for American and International Law’s Annual Institute on Energy Law 281, (LexisNexis 2012).
8 Gulf Explorer, LLC v. Clayton Williams Energy, Inc., 964 So. 2d 1042 (La. Ct. App. 1st 2007).
9 See Patrick S. Ottinger, It’s a Risky Business, but There’s an Act for That: The Louisiana Risk Fee Act, 63 Ann. Inst. on Min. Law 61 (2016).
18
Mineral Titles in Texas After 1984 –Our Brave New World
By: Terry I. Cross McClure & Cross LLP
Bright Lines in 1984
In June 1984, the Supreme Court of Texas handed down two decisions, Moser v. U.S. Steel Corp.1 and Alford v. Krum,2 that brought more certainty and title stability to two contentious arenas of mineral conveyancing and ownership. This article will evaluate the legacies of these landmark decisions.
The Moser Decision
One of those contentious arenas sorted by the court in June 1984 was the constituency of the substances included in the historically ubiquitous grant (or reservation) of “oil, gas and other minerals.”
The first generation of “substance” cases had settled the status of various substances under the “ordinary and natural meaning” test, and under these cases stone, limestone, sand, and gravel remained with the surface estate when a mineral severance was accomplished.3 Later, the prospect of destruction of the surface by strip mining of mineral substances not specifically named in the effective vesting instruments caused the Supreme Courttoshelvethe“ordinaryandnaturalmeaning” test in Acker v. Guinn, 4 where the court adopted the “surface destruction test.” The Acker holding waslimitedtoironore,butthestatementofthetest left every substance not previously sorted as being an attribute of either the surface or mineral estate subject to future fact determinations regarding the methods of extraction and their effect on the surface.
The Moser decision supplied a legal standard, the “ordinary and natural meaning” test, as a replacement for fact-specific geological or engineering tests on a tract-by-tract basis for the determination of what are minerals. The energy
crisis of the 1970’s elevated the value of lignite coal and uranium and raised the stakes regarding their status under the “other minerals” grouping, leading up to Moser. The Moser decision circled back to the “ordinary and natural meaning” test and calmed the water.
The Alford Decision
The Alford case was the other important mineral title decision in June 1984, and it brought order to the chaos created by “multi-grant” deeds. The so-called “three grant” deed was a form that emanated from the early 20th century, and it represented a meticulous response to uncertainty that attended mineral conveyancing in that era by providing separate blanks for the insertion of a fraction for the mineral conveyance, a fraction for thebenefitsunderanyexistinglease,andafraction for the benefits under future leases. Today, we can say the last two blanks are superfluous unless the parties desire to convey different interests under these three contingencies. However, without regard to what the parties to three-grant deeds intended, many of these deeds had differing fractions in the blanks and these discrepancies led to title disputes. The Alford opinion applied the “repugnant to the grant” rule of construction to make the “second” and any additional grants of a multi-grant deed superfluous as a matter of law.
The absence of contemporaneous judicial constructionofthesemulti-grantdeedscontributed to their proliferation before the consequences of them were apparent. The case of Hoffman v. Magnolia Petroleum Co., 5 decided in 1925, did not involve the three-grant deed but deployed a “two-grant theory”to giveliteral effect to grants of a one-half mineral interest in a 90-acre tract and one-half of all royalty payable under an oil and gas lease covering those 90 acres and additional land.6 The Hoffman “two-grant theory” presumably became binding authority for the resolution of these “differing grant” disputes. However, in Garrett v. Dils, 7 decided in 1957, the Supreme Court construed a three-grant deed with fractions of 1/64 (mineral interest), 1/8 (of royalty under existing lease) and 1/8 (of royalty under future leases) but did so without mentioning Hoffman. In Garrett, production was obtained under an oil and
19
gas lease executed after the three-grant deed, and thelitigationresulted when, despitethethirdgrant, division orders were prepared showing the grantee as owning 1/64 of1/8 royalty. The Garrett holding disregarded the “first grant” and credited the grantee with a 1/8 mineral interest and 1/8 of royalty. After Garrett, it was unclear whether, and ifso,when,theseparategrantapproachhadaplace at the table.8
The Alford opinion applied the “repugnant to the grant” rule of construction to give superiority to the granting clause and negate any effect for the “second”andany additionalgrantsofamulti-grant deed. The court did not use the “repugnant to the grant” label, but the handle is still appropriate:
In cases involving the construction of mineral deeds, the “controlling language” and the “key expression of intent” is to be found in the granting clause, as it defines the nature of the permanent mineral estate conveyed. Kokernot v. Caldwell, 231 S.W.2d 528, 531–32 (Tex.Civ.App. Dallas 1950, writ ref’d). It logically follows that when there is an irreconcilable conflict between clauses of a deed, the granting clause prevails over all other provisions. Lott v. Lott, 370 S.W.2d 463, 465 (Tex.1963); Waters v. Ellis, 158 Tex. 342, 312 S.W.2d 231, 234 (1958) 9
The Alford opinion did not mention Garrett10 or Hoffman yet the analysis is abjectly contrary to that of either of those opinions.
The Best of Times?
With the decisions in Alford and Moser the clouds parted in Austin in June 1984, yielding greater mineral title certainty. The “repugnant to the grant” rule of Alford and the “ordinary and natural meaning” test of Moser could be applied with confidence by the marketplace and title examiners. However, almost 40 years later, the legacies of these two decisions are markedly
different. The Moser decision yielded winners and losers in the ownership of certain substances, but since 1984, the ownership of “substances” has not generated material litigation. This is due in large part to the cataloguing by Moser of prior decisions covering specific substances, 11 which were not disturbed, and the prompt clarifications supplied by Friedman v. Texaco, Inc.12 On the other hand, Alford and the proper resolution of the issues addressed by it have generated a sustained torrent of litigation that, year after year, names new winners and losers on a case by case basis and that shows no sign of ebbing.
Alford Vilified- Misconceptions Diagnosed
Despite the clarity achieved by giving the supremacy to the granting clause, the Alford decision was not universally applauded. Alford was ultimately the winner of a poll for “the most regrettable oil & gas decision,” as John Scott and RobertBledsoeannounced at the1990 Texas State Bar Advanced Oil, Gas & Mineral Law Course during their presentation.13 The primary criticism from that poll was directed at the failure of Alford to expressly overrule Garrett, 14 but the louder drumbeat against Alford was based on the proposition that it defeated the intent of the original parties. The premise for this criticism is that if a mineral deed contained serial grants with different fractions, and the grant of the mineral estate, the “first grant,” was a multiple of 1/815 , then the granted quantity reflected a misconception16 regardingwhatthegrantorowned and therefore, what was meant to be conveyed.
When the “Ten Most Regrettable Cases” poll was taken, two other cases dealing with multiple grant deeds, Luckel v. White 17 and Jupiter v. Snow, 18 were in the appellate pipeline. The Supreme Court handed down its opinions in both these cases on the same day, October 23, 1991. Luckel overruled the “repugnant to the grant” rule of Alford and reverted to amultiplegrant approach. In Luckel, the court construed a three-grant royalty deed from 1935, when Hoffman was still standing, that granted (i) 1/32 royalty interest in the land (ii) 1/4 of royalties payable under the existing lease and (iii) 1/4 of royalties payable under any future lease. Using “harmonization” analysis (and
20
withoutexpressly calling outanymisconceptions), the Luckel court held that the third grant conveyed 1/4ofthepossibilityofreverter,andsincethelease in place when the deed was executed had expired, the rights granted with this third grant were what Mr. Luckel owned in 1991.19
The Jupiter decisionacknowledgedthat Luckel was overruling Alford, but found Alford to be inapplicable.20 In Jupiter, the court construed a three-grant deed from 1918 that granted (i) 1/16 mineral interest in the land, (ii) 1/2 of royalties payable under the existing lease, and (iii) 1/2 of royalties payable under any future lease. The Jupiter court determined that all provisions could be reconciled, and this reconciliation accomplishedthesameendas Luckel,i.e.,thethird grant was effective to vest in the grantee one-half of the grantor’s possibility of reverter.21
Projecting Misconceptions
After Luckel and Jupiter, the next significant decision addressing multiple grants was Concord v. Pennzoil Exploration and Production Co., 22 in 1998, where the court construed a deed from 1937 thatgranted(i)1/96mineralinterestinthelandand (ii) 1/12 of royalties payable under any existing or future lease. In Concord, the court embraced the “misconception” diagnosis and discussed it extensively, 23 but ultimately did not use any misconception as a dispositive decoder device:
[W]e do not base our decision in this case on the theory of an “estate misconception.'' An understanding of the misconceptions under which some operated is helpful and instructive, but not dispositive. We cannot say categorically that no conveyancewithdifferingfractions effectuated agrant of one fractional interest in the mineral estate and a different fractional interest in royalties under either existing or future leases.24
Thus “instructed” by estate misconception, the Concord court held the deed conveyed a 1/12
mineralinterest,25 i.e.,eighttimesthe1/96fraction set forth in the first granting clause.
Since Concord, advocates have argued the misconception analysis vigorously, and the discourse has identified both the “estate misconception” and the “Forever 1/8” or “Legacy of the 1/8” misconception. The estate misconception is the lack of understanding regardingwhat amineral ownerownsimmediately after signing an oil and gas lease. The Forever 1/8 misconception is the assumption of mineral owners that all oil and gas leases to be signed in the future will provide for a 1/8 royalty.
The estate misconception led parties to insert 1/8 of the actual mineral interest intended in that first grant of multi-grant deeds and explains the fractions in the first grants of the deeds examined in Alford, Jupiter, and Concord. The estate misconception prism, if applicable, will “true up” the understated grant of a mineral interest as the decision in Concord did. The Forever 1/8 misconception, if projected, led to use of fractions that are multiples of 1/8 when the parties really intended to state a fraction “of royalty” no matter what the royalty fraction in a future lease may turn out to be. The Forever 1/8 misconception may present in conveyances that do not contain multiple granting formats and may be evidenced by use of double fractions, one being 1/8, or arguably, merely by a fraction that is a multiple of 1/8 as in Concord. The Forever 1/8 misconception argues for a royalty grant to float with the royalty fraction in the current oil and gas lease and against a fixed royalty set by reference to the 1/8 fraction.26
Where Are We?
The flood of cases citing Luckel and Concord and their progeny is reallocating mineral ownership, at least with reference to both (i) the law as of the execution of the vesting conveyances and(ii)theunderstanding ofthesuccessiveowners through the decades following those conveyances. The opportunity for a reinterpretation of the chain of title and reallocation of ownership entices prospectors (affectionately, “title trolls”) who buy
21
into the chain for the purpose of asserting the misconception reset of fixed to floating royalty.
The court recently made it clear in Wenske v. Ealy27 that there are no mechanical rules, or even canons of construction, to answer any deed construction issue:
Over the past several decades, we have incrementally cast off rigid, mechanical rules of deed construction. We have warned against quick resort to these default or arbitrary rules. And we do so again today by reaffirming the paramount importance of ascertaining and effectuating the parties' intent. We determine that intent by conducting a careful and detailed examination of a deed in its entirety, rather than applying some default rule that appears nowhere in the deed's text.28
It is fair play to refer to canons, but no canon itself is determinative. The proper construction of each instrument requires consideration of all four corners of it, and thus, there is likely no authority that is binding precedent for the precise four corners of any given instrument. Even if the granting language mirrors that of reported cases, any variation within the four corners may, at least until an appellate court reviews the case, bear on the parties’ intent and arguably distinguish precedent.29
The dates of the deeds of Luckel (1935), Jupiter (1918), Concord (1935) and all others are irrelevant, and the deeds are construed without reference to the law as it existed when the deeds were drafted or as it existed upon any subsequent transfer. Instead, each lawsuit is decided based on our current position on the continuum of what the Wenske opinion characterized as Texas’ “evolving mineral deed-construction jurisprudence.” 30 Presumably, there is a place for estoppel by deed, quasi-estoppel, presumed lost deed, or novation defenses when old deeds have been construed subsequently in the chain. However, these defenses, when the facts support them, must be evaluated by an appellate court, on a case-by-case
basis, before they can play a role in the construction of any given chain of title.
Want a Mulligan?
Presumably, the foregoing discussion has not incited enthusiasm for the “repugnant to the grant” ruleof Alford. Nevertheless, consider the “what if” consequences of the Supreme Court not having used Luckel to overrule Alford, but instead embracing the Houston court of appeals’ decision in Luckel v. White.31 The grant in the royalty deed under scrutiny was “undivided one thirty-second (1/32nd) royalty interest in and to the [land],” the habendum clause called it “1/32 royalty,” and the “subject to” provision explained that the grantee would receive 1/4 of the royalty paid under the existing lease and 1/4 of all royalties reserved in future leases. The Houston appeals court harmonized all of this, without resorting to any “repugnance” analysis, by acknowledging the Forever 1/8 misconception:
For many years the customary landowner’s royalty was a 1/8th reservation. This practice was so commonthatthecourtshadjudicial knowledge that “the usual royalty provided in mineral leases is oneeighth.”[citations omitted] We find it a reasonable inference that the parties to the Mayes-Luckel deed intended for all future leases to have a reservation of the usual and customary 1/8th landowner's royalty.
Such an interpretation allows the futureleaseclauseto becompletely harmonized with the granting clause. The granting clause conveys a 1/32nd royalty interest and the future lease clause unnecessarily reconfirms that 1/32nd as a 1/4th [of the usual and customary 1/8th] royalty interest.
22
The Luckel court also acknowledged the Forever 1/8 presumption but decided, in the motherofall“fixedvs. floating”royaltycases,that it (pause for the coin toss) is “just as logical” to resolve the issue in favor of the floating royalty:
We do not quarrel with the assumption that the parties probably contemplated nothing other than the usual one-eighth royalty. But that assumption does not lead to the conclusion that the parties intended only a fixed 1/32nd interest. It is just as logical to conclude that the parties intendedtoconveyone-fourthofall reserved royalty, and that the referenceto1/32ndinthefirstthree clauses is “harmonized” because one-fourth of the usual one-eighth royalty is 1/32nd [emphasis in original]32
1 676 S.W.2d 99 (Tex. 1984).
2 671 S.W.2d 870 (Tex. 1984).
3 See Heinatz v. Allen, 217 S.W.2d 994 (Tex. 1949); Atwood v. Rodman, 355 S.W.2d 206 (Tex. App. El Paso 1962, writ ref’d n.r.e.); Psensik v. Wessels, 205 S.W.2d 658 (Tex.App. Austin 1947, writ ref’d).
4 464 S.W.2d 348 (Tex. 1971).
5 273 S.W. 828 (Tex. Comm. App 1925, holding approved).
6 See Richardson v. Hart, 185 S.W.2d 563, 565 (Tex. 1945) (citing Hoffman, 273 S.W. 828) (relying on Hoffman, the Texas Supreme Court applied the separate grant theory to a three-grant deed).-
7 299 S.W.2d 904 (Tex. 1957).
8 Gibson v. Watson, 315 S.W.2d 48 (Tex. App. Texarkana 1958, no writ); Pan Am. Petroleum Corp v. Texas Pac. C. & O. Co., 340 S.W.2d 548 (Tex. App. El Paso 1960, no writ); Etter v. Texaco, 371 S.W.2d 702 (Tex. App. Waco 1963, no writ). After Garrett, three subsequent “no writ” cases recognized separate grants of differing fractions.
9 Alford 671 S.W.2d at 873.
10 See Id. at 876. The Alford dissent would have decided the case differently by following Garrett
11 Moser 676 S.W.2d at 101.
12 691 S.W.2d 586, 589 (Tex. 1985). Acker and Reed v. Wylie, 597 S.W.2d 743 (Tex. 1980) apply to severances affecting uranium occurring prior to June8,1983. Moser governsseverancesaffecting uranium after June 8, 1983. If mineral and surface estates severed prior to June 8, 1983, have merged, and are subsequently reserved after June 8, 1983, the rules announced in Moser will apply thereafter.
13 Robert Bledsoe & John Scott, The Ten Most Regrettable Oil and Gas Decisions Ever Issued by the Texas Supreme Court - and the "Winner"- Based on a Survey, STATE BAR OF TEXAS PROF. DEV. PROGRAM, 8 ADVANCED OIL, GAS AND MINERAL LAW COURSE H (1990).
“Just as logical” does not claim “preponderance of logic,” much less judicial notice, regarding the expectations of either of the parties to the 1937 deed or the parties to other royalty deeds at any given point in time. We will never know how either Mary Etta Mayes or Eb Luckel would have responded to the question: “What if there is a future lease with a 1/6 royalty fraction?” Perhaps they each may have given a different answer after pondering their respective self-interest.
If the Houston court’s Luckel opinion was left standing in 1991, the Texas Supreme Court could have still dispatched the “repugnant to the grant” rule of Alford in Concord, which involved conflicting grants and estate misconception, or in a similar case. We would have been spared the pivotal “coin toss” referenced above and perhaps at least some of the barrage of fixed vs. floating litigation. Even good golfers need a mulligan every now and then.
14 Id., at H27-28 (“Faced with a three-grant deed, do we follow this case or Garrett v. Dils [not expressly overruled] or require litigation?”).
15 One-eighth was the typical royalty fraction in oil and gas leases in the early 20th century.
16 Theterm“estatemisconception”wascoinedbyProfessorBurney in “Laura H. Burney, The Regrettable Rebirth of the Two-Grant Doctrine in Texas Deed Construction, 34 S. TE L.J. 73, 87-8 (1993).This label was later embraced by the Texas Supreme Court in Concord Oil Co. v. Pennzoil Expl. & Prod. Co., 966 S.W.2d 451, 460 (Tex. 1998).
17 819 S.W.2d 459 (Tex. 1991).
18 819 S.W.2d 466 (Tex. 1991).
19 Luckel, 819 S.W.2d at 464 (“The so-called ‘future lease’ provision in the Mayes–Luckel deed presently conveyed the possibility of reverter to one-fourth fractional interest of the royalty interest as part of the mineral estate. 3A W. SUMMERS, THE LAW OF OIL AND GAS, § 601 (2d ed. 1958).”).
20 Moser, supra note 1.
21 Jupiter Oil Co., supra note 18 at 469 (“he third paragraph conveys one half of the Hendersons’ possibility of reverter. The effect of this grant is that when the States lease ended, Jupiter’s interest in the mineral estate simultaneously expanded into a full one-half by operation of law.”).
22 966 S.W.2d 451 (Tex. 1998).
23 Id. at 460.
24 Id.
25 Id. at 459.
26 The use of 1/8 or a multiple thereof in any vesting instrument does not necessarily communicate that one or both parties was not aware that the royalty fraction in oil and gas leases was negotiable. It is “just as logical,” and maybe more logical, that a reference to 1/8 wasmerely an acknowledgment that 1/8 wasthe“usual”royalty fraction or, if executive rights were being severed in the instrument,
23
the minimum commercially reasonable royalty fraction for an oil and gas lease.
27 521 S.W.3d 791 (Tex. 2017).
28 Id. at 792.
29 Hysaw v. Dawkins, 483 S.W.3d 1, 13 (Tex. 2016) (“The permutations of deed language reflected in [fractional royalty] cases underscores the case specific nature of the inquiry.”).
30 Wenske, 521 S.W.3d at 795.
31 792 S.W.2d 485 (Tex. App. Houston [14th Dist.] 1990),
rev’dd 819 S.W.2d 459 (Tex.1991)
32 Luckel 819 S.W.2d at 463.
24
WINTER STORM URI: FEDERAL COURT EXCUSES NONDELIVERY PURSUANT TO FORCE MAJEURE PROVISION OF AN NAESB AGREEMENT
By: Boston C. Mallory
3L Student, South Texas College of Law Houston
be excused in circumstances similar to Uri, at least to the extent amending the provisions is a possibility. Otherwise, purchasers may be faced with the potential of their contract rights being diminished by force majeure and left without a remedy.
B. NAESB Base Contract
I. Introduction
This Article discusses a recent decision out of the Northern District of Texas that allowed for a party’s contractual obligations to be excused pursuant to a literal interpretation of the force majeure provisions in the parties’ agreement .1 Moreover,thisArticlehighlightstheimportanceof amending force majeure provisions and how courts may interpret the merits of a force majeure claim in situations similar to Winter Storm Uri.
II. Background
A. Winter Storm Uri
In February of 2021, Winter Storm Uri a major winter storm made its presence known in Texas. In fact, based on a survey conducted by the University of Houston, roughly 69% of Texans lost power at some point between February 14 and February 20, and many also lost running water. The storm contributed to more than 210 deaths, and it is estimated that the storm-related financial losses would range from $80 to $130 billion.
Unsurprisingly, many energy companies were faced with issues related to maintaining their contractual obligations as a result of theimpacts of WinterStormUri.Andbasedononerecentfederal court case in Texas interpreting an NAESB agreement, sellers of gas could be excused from their delivery obligations based on force majeure, even without showing impossibility of performance.2 This case serves as a reminder of the importance of carefully amending force majeure provisions such that non-delivery will not
The NAESB, or North American Energy Standards Board, published the most recent version of the NASEB Base Contract in 2006 a standardized contract form commonly used in the industry for the purchase and sale of natural gas. The case discussed in this Article generally involves a Texas federal court interpreting the NAESB Base Contract for Sale and Purchase of Natural Gas. Specifically, the force majeure provisionsthatwillbediscussedinthisArticlewill address Section 11 of the NAESB Base Contract.
C. Force Majeure Overview
A “force majeure” is an event, outside the reasonable control of the parties, that intervenes to create a contractual impossibility and thus excuses contract performance. 3 Sometimes these events are referred to as “acts of God.”4 Generally, the types of events that will be deemed force majeure depends heavily on the language included in the clause itself the language in the force majeure provision of the agreement.
Force majeure clauses will typically only excuse a party’s nonperformance if the event that causes the party’s nonperformance is specifically identified in the agreement. Oftentimes, parties assume force majeure is only proper when performanceis madeimpossible,but thefollowing case demonstrates that the language in the contract is pivotal and sometimes, impracticability is sufficient.
A. Factual Background
25
III. MIECO LLC v. Pioneer Natural Resources USA, Inc.
MIECO is an energytrading firm that buys and sells natural gas the buyer in this case.5 Pioneer is an exploration and production company that produces and sells natural gas the seller in this case.6
In September of 2020, MIECO and Pioneer entered into an NAESB contract for Pioneer to supply MIECO with 20,000 MMBtu of natural gas each day from November 1, 2020, to March 31, 2020.7 Over the course of the contract, Pioneer used its own production operations to fulfill its contractual obligations to MIECO.8 Pioneer’s gas came from its operations in the Permian Basin in Texas.9 Pioneer’s operations in the Permian Basin produced casinghead gas, which Pioneer sent to processing plants, typically Targa. 10 Once processed, Pioneer used that gas supply for sale to its customers.11 Importantly, Pioneer considers the processed gas “its gas supply.”12
Between February 14 and February 19, 2021, because of Winter Strom Uri, Pioneer failed to deliver the natural gas it had contracted to deliver MIECOpursuanttotheiragreement.13 Tofulfillits obligation to its own customers, MIECO took necessary actions, by way of reallocation, to cover the shortfall from Pioneer’s nonperformance.14
On February 16, 2021, Pioneer sent MIECO a noticeofforcemajeure.15 Pioneermadenoattempt to purchase replacement gas from the “spot market” to cover the shortfall, which Pioneer could have done. 16 In other words, performance was not impossible, it just was not possible for Pioneer to use “its gas supply” to fulfill its contractual obligations to MIECO.
Finally, on July 30, 2021, MIECO sued Pioneer, alleging Pioneer had breached the parties’ agreement by failing to deliver the 20,000 MMBtu of gas between February 14 and February 19.17 Subsequently, the parties filed cross-motions for summary judgment, each seeking summary judgment on both MIECO’s claim and Pioneer’s counterclaim.18
B. Discussion
The pertinent issue presented in this case was whether Winter Storm Uri constituted a force
majeure event under the parties’ agreement, even if Pioneer could have purchased replacement gas on the spot market.19 Ultimately, the Court held that Pioneer’s non-delivery of gas was excused by force majeure. The Court focused its reasoning on a plain reading of the unambiguous force majeure provisions in the NAESB agreement.
Applying New York law, the Court held Pioneer properly invoked force majeure because the circumstances created by Winter Storm Uri were squarely within those circumstances contained in the force majeure provisions of the parties’ agreement. The pertinent parts of the relevant NAESB Force Majeure provision read as follows:
SECTION 11. FORCE MAJEURE
11.1.Exceptwithregardtoaparty's obligation to make payment(s) due under Section 7, Section 10.4, and Imbalance Charges under Section 4, neither party shall be liable to the other for failure to perform a Firm obligation, to the extent such failure was caused by Force Majeure. The term “Force Majeure” as employed herein means any cause not reasonably within the control of the party claiming suspension, as further defined in Section 11.2.
11.2. Force Majeure shall include, but not be limited to, the following: ... (ii) weather related events affecting an entire geographic region, such as low temperatures which cause freezing orfailureofwells orlines ofpipe.... Seller and Buyer shall make reasonable efforts to avoid the adverseimpacts ofa ForceMajeure and to resolve the event or occurrence once it has occurred in order to resume performance.
11.3. Neither party shall be entitled to the benefit of the provisions of Force Majeure to the extent
26
performance is affected by any or all of the following circumstances: ... (ii) the party claiming excuse failed to remedy the condition and to resume the performance of such covenants or obligations with reasonable dispatch; ... or (v) the loss or failure of Seller's gas supply or depletion of reserves, except, in either case, as provided in Section 11.2.20
Pioneer successfully argued that the force majeureprovisionsofthecontractexcusedPioneer from making deliveries if Pioneers experienced a “loss of failure of [its/Pioneer’s] gas supply” causedbyfreezingtemperaturesaffectinganentire geographic region. 21 The Court agreed with Pioneer. In making its determination, the Court found that the plain meaning of “Seller’s gas supply” in Section 11 meant the gas Pioneer normally sold, not any gas available to the seller.22 Specifically, theCourt wrote,“‘Seller’sgas supply’ in Section 11.3 unambiguously means the gas Pioneer [normally] receives from [its processor] TargainthePermianBasin.”23 TheCourt’s narrow interpretation of the force majeure language excused Pioneer’s performance even though performance was not impossible. So, even though Pioneer could have bought replacement gas on the spot market, it was excused from doing so based on the language in the parties’ agreement.
1 See MIECO LLC v. Pioneer Natural Resources USA, Inc., 2023 WL 2064723.
2 Id.
3 See Virginia Energy Power Marketing, Inc. v. Apache Corp., 297 S.W.3d 397 (Tex. App. Houston [14th Dist.] 2009).
4 See Zurich American Ins. Co. v. Hunt Petroleum (AEC), Inc., 157 S.W.3d 462 (Tex. App. Houston [14th Dist.] 2004).
5 MIECO at *1.
6 Id.
7 Id. at *2 (The agreement consisted of three parts: (1) NAESB Base Contract for Sale and Purchase of Natural Gas, (2) Special Provisions to the Base Contract, and (3) a transaction confirmation).
8 Id. at 1.
9 Id.
Ultimately, the Court found that the force majeure provisions in the parties’ agreement was unambiguous and Pioneer’s non-delivery from February14to February19,2021constitutedforce majeure. Therefore, Pioneer’s non-delivery was excused.
IV. Conclusion
MIECO serves as a reminder to purchasers of natural gas to pay close attention to the language contained within the force majeure provisions of their contracts. The MIECO case also showed that courts may not require impossibility for a party to successfully claim force majeure; especially if the contract does not require impossibility. Likewise, this case indicates courts may not require sellers to purchase replacement gas to fulfill their contract obligations, even when delivery only becomes impracticable, not impossible.
In sum, the MIECO case emphasizes how important it is for parties to undertake the utmost level of diligence and detail when drafting and amending their force majeure provisions and exclusions. Otherwise, a seller may be excused from its contractual obligations for non-delivery, even when delivery was not made impossible.24
10 Id.
11 MIECO at *1.
12 Id.
13 Id.
14 Id.
15 Id.
16 Id. (“A ‘spot market’ is a market in which natural gas is bought and sold for immediate or very-near term delivery, usually for a period of 30 days or less.”).
17 MIECO at *1.
18 Id. at *3.
19 Id. at *1.
20 Id. at *5.
21 Id. at *8.
22 Id.
23 MIECO at *8.
24 Id. at 21-22
27
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