As we head into the new year, several oil and gas cases are pending at the Supreme Court. Here are some of the key cases we are watching (status as of Jan. 1, 2020):
Unleased Mineral Co-Tenants
ConocoPhillips Company, et al v. Leon Oscar Martinez, Jr., et al. Cause No. 17-0822 (argued 9/17/19).
The trial court’s judgment, affirmed by the San Antonio Court of Appeals, held that the plaintiffs were contingent remaindermen of certain mineral interests. Because the plaintiffs did not ratify ConocoPhillip’s leases, the lower courts held that those leases were not binding on the plaintiffs. As such, the plaintiffs became unleased mineral co-tenants, entitled to a co-tenancy accounting. Petitioners challenge, among other things (1) the nature of the plaintiffs’ interest and whether they were properly held to be contingent remaindermen of a life estate and (2) the proper methodology for a co-tenancy accounting. ConocoPhillips raises several costs which it contends should have been considered when performing the accountings, such as, acquisition costs, royalty payments, and cost of capital.
Offset Obligations
Chesapeake Exploration, LLC, et al. v. Stanton Bell, et al. Cause 19-0538 (merits briefing requested 10/18/19).
This appeal arises from Chesapeake’s Multi-District Litigation and concerns the proper method for computing compensatory royalties. The pertinent leases contain offset obligations, requiring Chesapeake to drill an offset well when a neighboring well is “deemed draining” the leased premises. If Chesapeake elects not to drill an offset well, then the lease requires Chesapeake to pay compensatory royalties valued by the production from the neighboring well. Among other things, Chesapeake argues that the lower court erroneously held that compensatory royalties should be computed based on all production from the neighboring well, even if the neighboring well is a horizontal well with portions outside the buffer zone set by the lease. Chesapeake also challenges the lower court’s decision not to apply the prudent operator standard despite Chesapeake’s allegation that the prudent operator standard is engrafted based on the express terms of the lease.
Retained Acreage Provisions
Endeavor Energy Resources, LP v. Energen Resources Corporation, et al. (merits briefing requested 10/18/19).
The parties dispute the interpretation of a retained-acreage clause that provided for a partial termination if more than 150-days lapsed between the completion of one well and the commencement of operations for drilling on a new well. However, the lease also provided that the lessee could “accumulate unused days” to extend the “next” 150-day period. Endeavor contends that this provision was improperly applied by the lower court, resulting in the termination of its leases.
Pooling
Petrohawk Operating Company, et al. v. Margaret Ann Strickhausen, Cause No. 19-0567 (merits briefing requested 12/13/19).
The Petitioners/Lessees purported to pool the Respondent/Lessor lease into a pooled unit in order to drill a horizontal well. After accepting over $700,000 in royalties, the Lessor alleged that her lease was not properly pooled. The lower court rejected the Lessee’s arguments that, among other things, the Lessor ratified the unit by accepting royalties. The San Antonio Court of Appeals, relying on recent Supreme Court precedent in Hooks and T.S. Reed, held that accepting royalties was not, by itself, sufficient to result in a ratification of the unit. The appellate court found that the Lessor’s initial objection to the unit was sufficient to defeat the Lessee’s implied ratification theory, despite the Lessor’s acceptance of royalties after her initial objection.
