Friday, April 13, 2012 Texas Supreme Court Ruling
Are You As a Texas Royalty/Mineral owner Receiving Your Fair share or Are You Being Cheated By The Oil Company
The Texas Supreme Court has ruled that mineral rights owners often bear the burden to make sure oil and gas operators don't underpay them — whether it's a mistake or outright fraud. On December 16, 2011, the high court issued an opinion reversing lower court findings that Shell Oil Co. must reimburse $72,532.09 to a Texas royalty owner named Ralph Ross. In Shell Oil Co. v. Ross, No. 01-08-00713-CV (Tex. App.-Houston [1st Dist.] February 25, 2010, no pet. h.), Ross, a mineral interest owner, brought a breach of contract, unjust enrichment, and fraud action against natural gas lessee, Shell. Ross alleged that Shell failed to pay royalties in accordance with the lease agreement and that it fraudulently deprived him of royalties by making payments "based on an arbitrary amount even below the internal transfer price." He further alleged that Shell sent him royalty statements containing false representations that the royalties were based on actual sales prices. A Houston area jury had found that Shell fraudulently reported lower prices for its natural gas to Ross and then underpaid him, violating the terms of their lease contract. A lower appellate court had upheld the finding for Ross. However, the Supreme Court found that Ross had an obligation to investigate further and conduct research of public records that could have alerted him to the underpayments by Shell. The high court did not seem moved by the fraud arguments and any bearing those findings may have had on a final decision on royalty payments. "We hold that the fraudulent concealment doctrine does not apply to extend (the statute of) limitations as a matter of law when the royalty underpayments could have been discovered from readily accessible and publicly available information before the limitations period expired," wrote Justice Debra Lehrmann for the court. The court added: "[I]n this case, the Rosses could have timely discovered the underpayments through the exercise of due diligence." This decision could trigger a number of lawsuits so that royalty owners can ensure through legal discovery that they are given accurate information from oil and gas operators. In addition, the Texas Supreme Court solidified the four-year limit within which a lawsuit for underpaid or non-paid royalties must be filed in Texas. Click here for the orignial link to author: Jeremy J. Sanders http://www.boyarmiller.com
Thanks, Clint, for posting this informative article. I was once in a situation whereby the Lessee chose to disregard the terms of our signed lease in a multitude of ways. Refused me all sorts of information that the terms of the lease granted to me. I began digging and found all sorts of violations, some minor, some not so minor. When I confronted said Lessee with these issues, the response was total denial. I turned to an oil and gas attorney who agreed with me on all issues after reading our lease and hearing my complaints. A letter was written to the company on the attorney's letterhead pointing out that Lessee was in violation of the terms of our lease, including underpayment of royalties. The company wrote back and denied all charges. So, the only available route to me at the time was to go to court, but since the well was a shallow gas well with a short term projected life span and limited production, it simply was not worth it from a monetary point of view. I know people involved in lawsuits with oil and gas companies, and they have won, but the whole process can really take a toll, so I decided it was best to just let it go. I did learn, however, that sometimes, no matter how tight and strict a lease you may have, there are companies out there that will blatantly violate the terms of your lease and cheat you in every way they can, especially if they believe they can get away with it. Vigilance is tantamount to keeping the integrity of the lease intact, but sometimes even that is not quite enough. Start with a good lease, and try to make sure you are dealing with a company that will not violate the terms of your lease nor the laws set in place to govern these matters. I'm not sure it's possible in all situations to guarantee complete and ethical compliance.
This is an article I did a few years back on the TSC's erosion of royalty owner rights through application of the 4 year statute of limitaitons. The TSC has been doing this methodically since 1998, and Shell v. Ross is just the latest chapter. B.P. v. Marshall was handed down just before Shell v. Ross. Make no mistake, if you are a royalty owner and you want to make any sort of claim against your lessee for any type of breach of your oil and gas lease, you will be barred from attempting to seek underpayment beyond four years from the date of filing suit. And I do mean ANY TYPE OF CLAIM.
Ron and Ben,
Thanks for your input.
Clint
I asked my lawyer one time if justice was bought by the big boys. He said sure, they will hire the best talent and have the biggest war chests. The little guys typically cannot hire the best legal talent so they are swimming upstream before they even get to court.
I would not go so far to say that the Texas Supreme Court Takes Care of Big Oil Companies and Not The Texas Mineral/Royalty Owners.
I would say that the quality of representation for the party that has the ability to withstand years of litigation, preparation and paying top dollar for legal representation and expert witnesses has the better chance, even if they do not have the better case.
Look at it like football. The best team -- the one with the best talent, the best game plan, the home field advantage, etc., will win the game more times than not. To not think so, well, is silly.
I have interest in oil production on about 340 surface acres that is combined with production from 5,420 acres that I have no interest in. The same company operates the entire 5,760 acres which are all on one lease name.
I cannot verify production on my acres because the RRC requires oil production to be reported on a lease basis. So, how does the TSC expect me to verify my royalty payment when there are no public records for me to research?
This is a good question and ultimately I think the answer may be hard to come by, especially if there is pooling and you want to know exactly how much is being extracted from under the land you own to verify you if you being paid your fair share. If you go to the RRC website, and look at production by company, each lease name may have one or more wells listed (up to dozens and even more: 1, 1A, 2, 49A, etc.). Your monthly statement should name the specific well(s) you are receiving royalty payment(s) on. You can then go to the RRC again and look up the drilling permits (W1) for those specific wells, then look at the plats submitted for each well drilled. This may help you better determine which wells are on your property, which ones are not, and which ones you may be pooled in. Good luck, keep us posted. Of course none of this applies if the wells were drilled long before the RRC records went online. I'm sure others on this board can offer additional/better advice on this matter. Good luck.
Wilson, so are you a non-participating royalty owner in 340 of the 5,760 acres? If you own the executive right, then did you sign a community lease?
In general, the TSC expects you to contact your lessee and obtain the requested information, and if they are not responsive, you are expected to protect your rights by retaining a lawyer to pursue it further.
Ben,
I was guessing Field Wide Unitization as a possible explanation.
You may be right Buddy. Need more info from Wilson.
The issue of mineral owner rights is a state issue, so the federal courts (5th Cir. and USSC) do not address it. If they ever did have a case in font of them, they would apply existing Texas state law to the matter.
Sorry to take so long to respond. Been unusually busy with the holday. Happy independence day to evereyone!
There is no pooling that I am aware of. In 1937 my great grandparents made a lease on the south 340 acres of a 640 acre section for "one-half interest in minerals...and claim royalty and rentals in that proration." The lease has been held by production since then. I do not know what a community lease is but I see no indication of such on the 1937 lease.
Checking the 'Operator/Wellbore' on the RRC website for any well in the nine sections brings up the identical 'COMPLETION INFORMATION' - same lease name and number. The 'FIELD' is 'FARGO (CONSOLIDATED)'. The wells are so old that checking the 'Well Logs' and 'Drilling Permits' brings up no results except for a rare recompletion. Checking 'Production Data Query' for any well brings up the identical 'Specific Lease Query Results' page which is the combined production from all nine sections.
When I just now for the first time checked the 'Oil/Gas Imaged Records...' I found a Fargo Unit Plat that shows 54 tracts in the 4,959.4 acres of the unit which spans the nine sections. The three tracts reported on my royalty check statement match the location where my interest is on the plat. And there is production data per tract on the statement. The first tract has two producing wells. The second tract has three producing wells but one is reported individually. The third tract has four producing wells but two of the four are reported individually on the statement. I am thinking the individually reported wells have all been recompletions. Anyway, there is no individual well production data at the Railroad Commission to verify my royalty payment.
So, how does the TSC expect me to verify my royalty payment when there are no public records for me to research?
Seth, there really is no next step I can see, unless you want to vote more democrats to the Texas benches and legislature. For now, royalty owners are going to have to keep themselves informed about what their lessees are doing to develop their minerals and how the lessees are calculating royalty payments. If you cannot find information publicly available, you are obligated to demand information from your lessee.
Seth said:
Ben,
Thanks, for judicial clarity. So, this issue is dead? And, if so, then what could possibly be done henceforth? What is a possible next step?
Ben Elmore said:
The issue of mineral owner rights is a state issue, so the federal courts (5th Cir. and USSC) do not address it. If they ever did have a case in font of them, they would apply existing Texas state law to the matter.
Wilson, in that situation, the TSC expects you to contact your lessee and get verification from them directly.
Wilson Inc said:
Sorry to take so long to respond. Been unusually busy with the holday. Happy independence day to evereyone!
There is no pooling that I am aware of. In 1937 my great grandparents made a lease on the south 340 acres of a 640 acre section for "one-half interest in minerals...and claim royalty and rentals in that proration." The lease has been held by production since then. I do not know what a community lease is but I see no indication of such on the 1937 lease.
Checking the 'Operator/Wellbore' on the RRC website for any well in the nine sections brings up the identical 'COMPLETION INFORMATION' - same lease name and number. The 'FIELD' is 'FARGO (CONSOLIDATED)'. The wells are so old that checking the 'Well Logs' and 'Drilling Permits' brings up no results except for a rare recompletion. Checking 'Production Data Query' for any well brings up the identical 'Specific Lease Query Results' page which is the combined production from all nine sections.
When I just now for the first time checked the 'Oil/Gas Imaged Records...' I found a Fargo Unit Plat that shows 54 tracts in the 4,959.4 acres of the unit which spans the nine sections. The three tracts reported on my royalty check statement match the location where my interest is on the plat. And there is production data per tract on the statement. The first tract has two producing wells. The second tract has three producing wells but one is reported individually. The third tract has four producing wells but two of the four are reported individually on the statement. I am thinking the individually reported wells have all been recompletions. Anyway, there is no individual well production data at the Railroad Commission to verify my royalty payment.
So, how does the TSC expect me to verify my royalty payment when there are no public records for me to research?
Dear Ben, et al
I tried to expand on the HECI case a bit over a year ago with this article:
http://www.mineralrightsforum.com/profiles/blogs/heci-exploration-co-v-neel-982
I understand that there is nothing much to hope for under the fraud issues, but I did come up with a few ideas on the HECI issues.
Incidentally, do you agree (like other attorneys that I have talked to) that this is one of the worst Supreme Courts in the history of Texas jurisprudence?
I am going to withhold commenting on our TSC other than to say that they have certainly come down on the side of big oil more often than royalty owners in the past 10 years.
TEXAS SUPREME COURT TAKES CARE OF BIG OIL COMPANIES
AND NOT THE TEXAS MINERAL/ROYALTY OWNERS
Thank you Ben for your contribution to this subject. Maybe the mineral/royalty owners need to be changing 'Supremes' at the ballot box. We certainly don't need this group of traitors in there. We elect them and then they stab us in the back.
Clint Liles
Dear Ben Elmore,
Thank you for responding.
If I get individual well production data for my three tracts from the lease operator where do I go to verify it? Contacting the other 51 tract owners to see if our combined production total matches what is reported to the RRC does not seem very practical.
Thank you,
Wilson
Ben Elmore said:
Wilson, in that situation, the TSC expects you to contact your lessee and get verification from them directly.
Wilson Inc said:
Sorry to take so long to respond. Been unusually busy with the holday. Happy independence day to evereyone!
There is no pooling that I am aware of. In 1937 my great grandparents made a lease on the south 340 acres of a 640 acre section for "one-half interest in minerals...and claim royalty and rentals in that proration." The lease has been held by production since then. I do not know what a community lease is but I see no indication of such on the 1937 lease.
Checking the 'Operator/Wellbore' on the RRC website for any well in the nine sections brings up the identical 'COMPLETION INFORMATION' - same lease name and number. The 'FIELD' is 'FARGO (CONSOLIDATED)'. The wells are so old that checking the 'Well Logs' and 'Drilling Permits' brings up no results except for a rare recompletion. Checking 'Production Data Query' for any well brings up the identical 'Specific Lease Query Results' page which is the combined production from all nine sections.
When I just now for the first time checked the 'Oil/Gas Imaged Records...' I found a Fargo Unit Plat that shows 54 tracts in the 4,959.4 acres of the unit which spans the nine sections. The three tracts reported on my royalty check statement match the location where my interest is on the plat. And there is production data per tract on the statement. The first tract has two producing wells. The second tract has three producing wells but one is reported individually. The third tract has four producing wells but two of the four are reported individually on the statement. I am thinking the individually reported wells have all been recompletions. Anyway, there is no individual well production data at the Railroad Commission to verify my royalty payment.
So, how does the TSC expect me to verify my royalty payment when there are no public records for me to research?