On behalf of the Editorial Board and the Members of the ENERGY NEWSLETTER, we are pleased to present you Edition 1, Volume 8. The ENERGY NEWSLETTER is a student-run scholarly newsletter committed to bringing to the global energy community timely and unique perspectives in the industry. South Texas College of Law Houston has an extensive student, Energy Alumni association,and generalfootprintacrossthe worldinoil, gas,and allthingsenergy. The ENERGY NEWSLETTER seeks to bring all their perspectives in one place at the center of the global energy community in Houston.
This is the eighth volume of our ENERGY NEWSLETTER publication through South Texas College of Law Houston. Having such a center stage in downtown Houston, the newsletter team looks forward to bringing exciting articles coauthored by students and alumni. We look forward to growing the intellectual prowess of the ENERGY NEWSLETTER and South Texas College of Law Houston.
This publication begins with an informational guide to the new Texas Business Courts and how they will impact the oil, gas and energy industry. Next, is the assessment of the future of hydrogen energy and its possible uses. We then turn to a discussion into which mineral ownership is most efficient for production. Finally, our newsletter ends with a summary on acquisitions, due diligence, and title.
On behalf of the Editorial Board and the Institute of Oil & Gas, we thank the authors who have added their support to this enterprise through their submissions. We would also like to thank South Texas College of Law Houston and all organizations in and surrounding the College for making the ENERGY NEWSLETTER possible.
Sincerely,
Cameron Echevarria Editor-In-Chief
Disclaimer: The opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of South Texas College of Law Houston or the Harry L. Reed Oil & Gas Law Institute, their students, staff, faculty, or associates.
Tomorrow: Unveiling the Potential of
Private vs. Nationalized vs. International: What type of Mineral Ownership is Most
Editor-in-Chief CAMERON ECHEVARRIA
Managing Editors
ABIGAIL GALVAN
ANACELIA RAMIREZ
Articles/Note Editors
YASMIN FARID
BRITTANY KELLER
THOMAS MCKELLAR
JOSEPH NGUYEN
ELIZABETH PECK
KALLIE RAMIREZ
ALEXANDRA RATHER
Authors
AUSTIN W. BRISTER
ROBERT C. CLANTON
ALEX KUIPER
RANDALL K. SADLER
ASHLEY N. VEGA
Oil and Gas Counsel’s Guide to Texas’ New Business Court
By: Austin W. Brister and Ashley N. Vega McGinnis Lochridge
Introduction
On September 1, 2024, Texas unveiled a significant change to its legal landscape: the opening of the new Texas Business Court system. This new specialized court system, designed to handle complex commercial disputes, represents a major shift in how high-stakes business litigation may be conducted in the Lone Star State. We have been closely monitoring the new Business Court over the last six months. Among other things, we have gained new insights from the Business Court’s own written opinions.
For in-house counsel in the oil and gas industry, these developments warrant close attention and carefulconsideration. The Texas Business Courtis impacting a wide range of cases, from high-value contract disputes to intricate corporate governance issues, many of which are lawsuits involving energy and oil and gas entities. As with any substantial change to the legal system, this new court structure brings with it a host of potential questions, challenges, strategies, and other considerations as uncertainty remains. For example:
- How will the limited jurisdiction of these new courts fit within the types of disputes common in the oil and gas sector?
- What strategic implications might arise fromtheBusiness Courts’ mandateto issue written opinions, unlike their district court counterparts?
- What potential pros and cons may arise fromsubmitting a case to thenew Business Courts?
- How might existing agreements and future contracts be affected by this new forum?
This article aims to provide oil and gas in-house counselwith apracticaloverviewofthenew Texas Business Court, as well as some potential impacts and strategic considerations. We'll examine the structure, jurisdiction, and procedural aspects of the new system, explore potential strategic considerations, discuss the possible implications for the energy industry, and analyze the opinions and orders issued by the Business Court thus far.
Purpose and Intent
The Texas Business Court aims to address what legislators identified as a growing need for specialized courts to handle complex business litigation. Over twenty–five states have already created specialized business courts, and Texas legislatures saw the need to do the same to ensure that Texas remains an attractive state for companies to do business and resolve disputes.
The primary goals of this new system include:
- Creating more predictable outcomes for business disputes;
- Making Texas a more attractive venue for resolving commercial conflicts; and
- Improving efficiency in handling complex business cases.
Proponents of the Business Court argue that this system will allow for the development of a specialized systemfor complex business litigation, not only allowing judges to develop specialized expertise but will also resulting in streamlined rules and concentrated dockets for certain major business disputes. Additionally, proponents argue that it will increase efficiency, as litigants in Business Court will not have to compete for hearings and trial scheduling alongside the already busy, overburdened criminal and family law dockets.
Initial Business Courts
The Business Court is principally governed by three texts: (1) House Bill 19 (“HB 19”), the
original legislation that created the Business Court; (2) Texas Government Code Chapter 25A (“Chapter 25A”) and (3) Texas Rules of Civil Procedure 352-360.
The new law created 11 multi-county Business Court divisions.1 However, initially, Texas only opened five divisions, representing the majority of the state's population and business base. The five initial divisions include:
- First Business Court Division, located in Dallas
- Third Business Court Division, located in Austin
- Fourth Business Court Division, located in San Antonio
- Eighth Business Court Division, located in Fort Worth
- Eleventh Business Court Division, located in Houston
Each Business Court division has been appointed two judges, each of whom will serve a two-year term.2 The Texas Governor is expected to appoint judges to the remaining districts by September 1, 2026, contingentupon reauthorization and funding bytheTexasLegislature.If thelegislaturedoesnot reauthorize and/or fund the courts, the Second, Fifth, Sixth, Seventh, Ninth, and Tenth Business Court Divisions will be abolished.3
These five divisions opened thus far became fully operational on September 1, 2024. Within five months of opening, over 70 cases have been filed across the divisions, with over 30 filings in the Eleventh Business Court Division in Houston alone.
In addition, a newly created Fifteenth Court of Appeals, based in Austin, opened September 1, 2024. The Fifteenth Court of Appeals has exclusive jurisdiction over appeals from the Business Court.4
Jurisdiction
and Case Eligibility
The Texas Business Courts are courts of limited jurisdiction, as opposed to the general jurisdiction granted to state district courts under the Texas Constitution. Their limited jurisdiction, setforth in Chapter 25A, is described by a detailed list of claims, with a variety of limitations, exceptions, and exclusions. The following is an overgeneralization of those categories for illustration.
1.Major Corporate Governance Claims
One category covers what might be generally summarized as major corporategovernance claims, including cases involving: (1) Derivative actions; (2) Corporate governance and internal corporate affairs issues; (3) Securities and trade regulation litigation cases against certain parties; (4) Actions by a business or its owner against another owner orofficer;(5)Actionstoholdownersor executives responsible for breaches of duty; (6) Actions to hold owners or governing persons liable for obligations of the business;and (7) Actions arising out of the Texas Business Organizations Code.
Key Threshold Requirement, Only for Non-
Public
Companies:
For claims involving publicly traded companies there is no minimum amount in controversy to establish Business Court jurisdiction. However, for other entities, in order to establish Business Court jurisdiction, the claim must involve a minimum of $5 million in controversy
2. Major Contract/Transaction Disputes
Another category covers what might be generally summarized as certain major contract or transactional disputes, including claims that:
(1) involve an amount in controversy exceeding $10 million; AND
(2) one of the following apply:
(a) the claim arises out of a “Qualified Transaction” (generally defined as one where a party pays or receives, or is required to pay or is entitled to receive, consideration with a value of more than $10 million, or lends or borrows more than $10 million, excluding those involving a bank, credit union, or savings and loan association);
(b) the parties agreed to Business Court jurisdiction in the underlying contract or in a subsequent contract (excluding insurance contracts); OR
(c) the claim arises out of a violation of the Texas Finance Code or the Business & Commerce Code, by an organization (or officer or governing person on its behalf) other than a bank, credit union, or savings and loan association.
3. Related Equitable Jurisdiction
The statute also provides Business Courts with jurisdiction covering actions seeking injunctive relief or declaratory judgment involving disputes based on a claim otherwise within the Business Court’s jurisdiction.
4. Supplemental Jurisdiction
The Business Court may have supplemental jurisdiction over any other claims related to a case withinthecourt's jurisdiction,butonly if allparties to the claim and the judge agree. If the parties do not agree to the court’s supplemental jurisdiction, then the claims may proceed in a separate court, such as a state district court, concurrently with the claims pending in Business Court. The Court's supplemental jurisdiction does not apply to any claims filed before September 1, 2024, as the Business Court has ruled it does not have authority to hear those cases.
5. Exclusions from Jurisdiction
Certain types of cases are expressly excluded from the jurisdictional reach of the Business Courts, except on a "supplemental" jurisdiction basis, including:
- Cases related to a consumer transaction;
- Deceptive Trade Practices Act claims;
- Free Enterprise and Antitrust Claims;
- Cases brought by or against a government entity;
- Cases to foreclose on a lien on real or personal property;
- Cases brought under the Family Code, Estates Code, InsuranceCode, and Chapter 53 and Title 9 of the Property Code;
- Cases involving the production or sale of farm products, under 9.102 of the Texas Business & Commerce Code; and
- Cases related to insurance coverage.
Additionally, the following three types of cases cannot go to Business Court regardless of any supplemental jurisdiction:
- Cases involving medical malpractice;
- Personal injury; and
- Cases involving legal malpractice.
Key Considerations for Oil and Gas In-House Counsel:
- Many oil and gas contract disputes may meet the $10 million amount in controversy threshold, but the underlying contracts might not have involved $10 million in initial consideration or lending. For example, jointoperating agreements or midstream contracts like gas purchase agreements often involve no initial monetary consideration but can lead to significant disputes in excess of $10 million. Disputes may arise as to whether the definition of “qualified transaction” is broad enough to encompass transactions with little or even no monetary consideration, but significant value over the life of the contract.
- In fact, the Business Court has provided guidance on the amount in controversy threshold. Satisfying the $5 million and/or $10 million amount in controversy thresholds may turn on the value of what is being sued upon. Where a party sought only equitable relief, and not monetary damages, the Court found that amount in controversy may be satisfied by either the
sum of money sought “or the value of the thing originally sued for.”5
- If acontractor transaction does notinvolve qualify as a “qualified transaction,” Business Court jurisdiction can still be established so long as the amount in controversy exceeds $10 million and the parties expressly agree to Business Court jurisdiction. Some commentators argue that a general “choice of business courts” provisions will establish this element, while others suggest the clause should expresslyincorporatesupplementalclaims.
Jury Trial Rights and Appellate Process
Importantly, the right to a jury trial is preserved in the Business Court system. For cases originally filed in a district court, jury trials may be held in the same county where the plaintiff filed the lawsuit. For cases originally filed in the Business Court, theplaintiff may choose aproper county for ajury trial, or theparties may agreeto hold thejury trial in any other county.
Appeals from the Business Courts will be handled by the new Fifteenth Court of Appeals, with further discretionary review available from the Texas Supreme Court.
While the Fifteenth Court of Appeals was created with the primary purpose of possessing exclusive jurisdiction over appeals from the Business Court, controversyregardingthescopeofitsauthorityhas been quietly brewing. The issue has emerged through letters filed within a pending docket, in which the Fifteenth Court of Appeals has requested the Texas Supreme Court to weigh in on whether it can hear an appeal regarding a residential construction defectdispute. This comes in response to the Fourteenth Court of Appeals position that the appeal was inappropriately filed in the Fifteenth Court of Appeals and should therefore be transferred out of the Fifteenth Court of Appeals. The Fifteenth Court of Appeals disagrees and now has requested the Texas Supreme Court’s guidance.6 A response has not yet been provided, but any response from the Texas SupremeCourtmay significantly impactthe types of cases the Fifteenth Court of Appeals is
authorized to hear, possibly broadening or narrowing its jurisdiction and influence in future matters.
Strategic Considerations for Oil and Gas Counsel
Assess pros and cons of new venue
For cases filed on or after September 1, 2024, litigants have the option to file qualifying cases directly in Business Court or transfer qualifying cases to Business Court. This creates new strategic considerations for where to file suits and whether to seek removal. Among those considerations:
- Assess the potential impact of having business court judges, who are appointed rather than elected, presiding over your cases, and how this might affect jury selection and trial strategy.
- Assess whether expedited resolution aligns with your litigation strategy for each case. While faster outcomes can be beneficial, they may not always serve your company's interests, particularly in complex, highstakes disputes.
- Consider the potential impact on discovery timelines and motion practice. The specialized nature of the court may lead to more streamlined processes.
- Be prepared for a potentially different pace of litigation, which may require adjustments to your internal case management processes.
Choice of Forum/Venue Provisions
One significant potential issue is the application of the existing body of Texas case law regarding choice of forum and venue to the new Business Courtcases. Although there is a considerable body of Texas case law on the subject in general, it remains to be seen how those principles will be applied in the context of the new Business Courts.
Food for Thought: Consider amending existing agreements to include choice of forum and venue provisions that expressly agree to Business Court jurisdiction. It is important to note that while the
parties may agreetothepersonaljurisdictionofthe Business Court, the Court must still possess subjectmatter jurisdiction. Within thefirsthandful of opinions issued, the Business Court reiterated this by remanding a lawsuit to district court when the Business Court did not possess jurisdiction, even though all parties agreed to proceed in Business Court.7
Evaluate Potential Written Opinions
Consider the long-term implications of seeking written opinions in your cases. While they may provide clarity, they could also set unfavorable precedents.
Unlikestatedistrictcourts, theBusiness Courts are required to issue written opinions for dispositive rulings when requested by theparties or when they are on issues important to state jurisprudence. Before diving head-first into Business Court, inhousecounselshould consider thepotential impact of written opinions on your company's business and legal strategies outside of the immediate dispute. Consider the following:
Potential Benefits: Proponents of the Business Courtargue thatrequiring written opinions at the lower court level will benefit Texas by speeding up the development of Texas law to guide Texas businesses, contract drafting and governance, and lead to a more welldeveloped body of law to provide more predictable outcomes in major disputes.
Potential Drawbacks: On the other hand, it is not always desirable to have written opinions at the lower court level. For instance, written opinions can significantly increase public awareness of the dispute and lower court outcome. Similarly, some may perceive a risk that an adverse written opinion could have far-reaching implications beyond the immediate case.
Opinions
and Orders
Issued:
Since opening, and through February 11, 2025, the Business Court issued 15 opinions and orders.8 All five districts have issued at least one opinion:
- First Business Court Division: 5 opinions
- Third Business Court Division: 3 opinions
- Fourth Business Court Division: 2 opinions
- Eighth Business Court Division: 1 opinion
- Eleventh Business Court Division: 4 opinions
While it is not entirely clear the precedential weight such written opinions will carry on other Business Court Divisions or on state district courts, they are likely to at least carry some persuasive authority. As a result, for better or for worse, lawyers will often benefit in the near future by expanding their legal research to cover potential Business Court opinions.
Anticipate Strategies to Avoid Business Court
While Business Court is intended to be ideal for certain complex business disputes, in reality, a core strategy of some litigants will likely be to avoid Business Court. A variety of motives could underly an attempt to avoid Business Court. For example, some may attempt to avoid Business Court to avoid a particular judge or to guide the case to a district court they prefer. Others may desire to avoid the written opinions that will flow outof Business Court. Of course, in thewild world of complex commercial litigation, one should also anticipate opponents who may challenge jurisdiction for the primary purpose of delaying and complicating litigation.
There will likely be a variety of creative methods and strategies for avoiding Business Court. Counsel should be prepared to spot and counter such strategies. The most obvious substance of such disputes will center on whether a case qualifies under the various statutory criteria, limitations, or exceptions, and whether other claims can fall within the court’s supplemental jurisdiction. Of course, others may attempt to add claims against third parties primarily for the purpose of avoiding a contractual choice of Business Court provisions.
Removal and Remand
It is key to develop a decision-making framework for determining when to file in or seek removal to the Business Court. Factors might include the complexityofthecase,desiredspeedofresolution, and the potential impact of a written opinion on your company's broader legal interests. Likewise, develop a decision-making framework for determining when to avoid Business Court. Unless all parties agree to the transfer, be aware of the 30day deadline for removal after discovering facts establishing business court jurisdiction.
As anticipated, the Court’s subject matter jurisdiction, specifically whether removal applied to cases filed prior to September 1, 2024, was a forefront issue for the Business Court.
Nothing within Chapter 25A speaks directly to the ability to remove cases filed before September 1, 2024, and/or whether the ability to remove would be applied retroactively. In fact, the new Texas Rule of Civil Procedure 355, which governs the procedure of removal to Business Court, is also arguably silent on the issue.
Issuing two opinions back-to-back (the first two opinions from Business Court), Judge Bill Whitehill of the First Division provided the legal framework for this exact issue. In both cases, the plaintiffs attempted to remove state court actions filed prior to September 1, 2024. However, the Courtremanded both, holding that HouseBill19 –the Court’s enabling legislative bill – limits Chapter 25A’s “removal provisions to cases filed on or after September 1, 2024.”9 In other words, the Court held that removal is not permitted for cases filed before this date.
The Business Court’s analysis behind its holdings may be boiled down to 3 findings: (1) relying on House Bill 19, Section 8, “changes in law made by this Act apply to civil actions commenced on or after September 1, 2024”; (2) Chapter 25A is a change of law, meaning the removal provisions within Chapter 25A are changes in law; and (3) “a statute is presumed to be prospective in its operations unless expressly made retrospective.”10
Providing similar analyses, the remaining divisions ruled in a similar fashion:
- Tema Oil & Gas Co. v. ETC Field Servs., LLC, No. 24-BC08B-0001, 2024 Tex. Bus. 3 (Tex. Bus. Ct. Nov. 6, 2024) (Remanding lawsuit originally filed in 2017);
- Jorrie v. Charles, et al., No. 24-BC04B0001, Tex. Bus. 4 (Tex. Bus. Ct. Nov. 7, 2024)(The Court sua sponte remanded a case originally filed in 2018);
- Winans v. Berry, No. 24-BC04A-0002 Tex. Bus. 5 (Tex. Bus. Ct. Nov. 7, 2024) (Remanding a lawsuit originally filed 22 months prior to September 1, 2024); and
- XTO Energy, Inc. v. Hous. Pipe Line Co., LP, No. 24-BC11B-0008, 2024 Tex. Bus. 6 (Tex. Bus. Ct. Nov. 26, 2024) (Remanding lawsuit originally filed in 2021).
With the Business Court providing its clear stance on this specific subject-matter jurisdiction issue, we do not anticipate many more removal actions challenging the Court’s ability to act on cases filed prior to September 1, 2024.
Sanctions: Sanctions for frivolous notices of removal may be available.11 This is important to keep in mind, not only when encountering an overly litigious opposing party, but also when determiningwhetheryouwishtoremoveyour case to Business Court. A party seeking sanctions must show:“(1) thatthepleading or motion was brought for an improper purpose, (2) that there were no grounds for the legal arguments advanced, or (3) that the factual allegations or denials lacked evidentiary support” 12 It is presumed that a pleading is filed in good faith, and the party seeking sanctions can only overcome the presumption with competent evidence that is proffered, and admitted, at an evidentiary hearing. 13 Where a party did not request an evidentiary hearing and provided only arguments in its motion (“motions, and the arguments in them, are not evidence”), the Eighth Division denied the sanctions request.14
Conclusion
The Texas Business Court represents a significant shiftinthestate'sapproachtocomplex commercial litigation. For in-house counsel in the oil and gas industry, these courts offer both opportunities and challenges. Moreover, it is clear that participants in the oil and gas industry, and the broader energy industry, are currently analyzing and attempting to assess the impact of the Business Court. Lawsuits surrounding natural gas agreements and transportation of same, gas purchase agreements, and gas gathering and purchase agreements have been at the center of lawsuits filed in Business Court and those where parties have attempted to remove the case to Business Court.
In weighing your option of filing or transferring a case to Business Courts, it is crucial to:
- Consideryourcompany’s/client’sgoalsfor seeking or avoiding Business Court jurisdiction, and weigh the perceived pros and cons. As this is a developing area, this will likely require some monitoring for developments, and the goals and strategies may evolve over time
- If your company/client prefers to seek Business Court jurisdiction, then consider
6 See Kelley v. Homminga, No. 15-24-00123-CV (Tex. App. Austin [15th Div.] filed Nov. 6, 2024).
7 Jorrie v. Charles, et al., No. 24-BC04B-0001, Tex. Bus. 4 (Tex. Bus. Ct. Nov. 7, 2024).
8 See About Texas Courts, Tex. Jud. Branch, https://www.txcourts.gov/businesscourt/opinions/ [https://perma.cc/2N6X-9N5L].
amending existing contracts to address permissive or exclusive Business Court jurisdiction, especially for high-value transactions.
- Develop strategies to evaluate whether certain cases are, or are not, ideal for Business Court.
- Prepare your legal team for the nuances of this new specialized court system, including the impact of written opinions.
- Stay informed about developments, including the early rulings which provide insight into the Court’s analyses and holdings related to specific issues.
By continuing to adapt to this new system and carefully considering each case's unique circumstances, you can position your company/client with purpose, whether that means seeking to leverage the potential benefits of the Texas Business Court while mitigating potential risks or avoiding the Texas Business Court and its perceived risks and challenges.
9 Energy Transfer LP v. Culberson Midstream LLC, No. 24BC01B-0005, 2024 Tex. Bus. 1 at 7 (Tex. Bus. Ct. Oct. 30, 2024); Synergy Glob. Outsourcing, LLC v. Hinduja Glob. Sols., Inc., No. 24-BC01B-0007, 2024 Tex. Bus. 2 at 9 (Tex. Bus. Ct. Oct. 31, 2024).
the Potential of Hydrogen for a Sustainable Future
By: Alex Kuiper Kuiper Law Firm
ABSTRACT
Embarking on an era of revolutionary energy solutions, hydrogen emerges as a key player, offering a pathway to unparalleled energy efficiency, environmental resilience, and economic competitiveness. Employing the use of hydrogen as a power source is not a new concept, but recent advances in technology have finally allowed the oil and gas industry to make progress in this field. As the dawn of hydrogen energy across diverse sectors surfaces from production and storage to transportation and industrial applications one must delve into advanced technological options, exploring the unexpected prospect of harvesting this versatile and abundant element.
The Production Methods of Hydrogen
Hydrogen energy utilizes hydrogen, or hydrogencontaining compounds, to produce energy for various practical applications. 1 Although hydrogen is the most abundant element in the universe, it is commonly found bound to other molecules and thus needs to be separated. 2 Production is generally classified as black, brown, pink, grey, blue or green, based on the source and method applied 3 Grey hydrogen is the most conventional form, representing nearly 95% of hydrogen production in the U.S., and is generally sourced from natural gas. 4 In 2022, hydrogen production via steam methane reform from natural gas, without carbon capture and storage (“CCS”), accounted for 62% of global production according to the International Energy Agency. 5 This form of hydrogen is produced through a process called steam methane reform but results in direct CO2 emissions. 6
Similarly, blue hydrogen is produced through steam methane reforming and produces
CO2, but unlike grey hydrogen, this production method employs CCS technology which captures and stores CO2 underground.7 This process is a carbon neutral alternative that does not disperse CO2 directly into the atmosphere.8 According to the Center for Climate and Energy Solutions, CCS captures more than 90% of emissions generated from power plants and industrial facilities. 9
Green hydrogen is produced through electrolysis, which splits water into hydrogen and oxygen through the use of such renewable sources as solar or wind power. 10 This method is cleaner as it “emits only water vapor during production.” 11 However, less than 0.1% of hydrogen production currently comes from electrolysis due to the grid being unable to support it.12 Green hydrogen also provides for “versatility as an energy source.”13 Due to the nature of the production of green hydrogen, the byproducts result in little to no carbon dioxide.14
Hydrogen Energy
Hydrogen can be used both as a direct fuel source for certain modes of transportation and as an energy carrier that can generate electricity.15 After separating hydrogen atoms through one of the various production methods, it can also be used to store and transport energy. Hydrogen fuel cells are seen as a way to combat the large draws on the renewable grids. 16 During times of peak production from these energy sources, hydrogen could be produced and stored for times of greater need or emergency. Currently, hydrogen stands as the leading option to reduce emissions in the manufacturing, power, and transportations sectors.
Today, hydrogen is used primarily in the refinery process, treating of metals, production of petrochemicals, and the production of chemicals such as ammonia (fertilizer) and methanol. 17 It is also added to fossil fuels through the hydrogenation process which results in cleaner, more efficient fuels. 18 It is predicted by researchers and experts in the industry that in the future, hydrogen will have the following uses19:
- Fuel for producing electricity in fuel cells;
- Supplement natural gas;
- Feedstock in the production of synthetic fuels;
- Fuel for motor vehicles, locomotives and aircraft; and
- Fuel for space heating.
Current Hydrogen Projects in the United States of America:
Unlocking the development of hydrogen energy will be vital in reducing emissions in the most energy intensive and polluting sectors. Various oil and gas companies have emerged as leaders in developing projects that implement hydrogen production and utilization. Current examples are shown in the following:
- In March of 2024, JERA, Japan’s top power generator, came to an agreement with Exxon Mobil to explore the development of lowcarbon hydrogen and production of ammonia in the United States. 20
Exxon Mobile is developing a world-scale blue hydrogen plant at its petrochemical complex in Baytown, Texas. 21 The plant is expected to generate up to 1 billion cubic feet of hydrogen a day and over 1 million tons of ammonia.22 The project is expected to begin production in 2028. 23
- The United States Department of Energy issued a loan to developers toconstructtwocavernsin Utahhat will be used to store hydrogen gas. 24 Their plan is to produce hydrogen with excess solar and wind power in the spring and fall when electricity demand is low and store itin theprospective caverns.25 Then, in the summer months when electricity is in higher demand, the hydrogen would be burned using a blend of the stored hydrogen and
natural gas.26 The construction of this power plant site is expected to be completed by 2025 with a projected cost of $2 billion. 27
- TotalEnergies acquired Talos Low Carbon Solutions on March 18, 2024, for $148 million.28 As a part of the acquisition, TotalEnergies acquired Talos’ 25% stake in Bayou Bend CCS, which is a carbon transportation and storage solution located in the Houston Ship Channel and Beaumont. 29 Among the stakeholders in the Bayou Bend CCS are Chevron at 50% and Equinor at 25%.30 This project, the company states, “will be instrumental for the reduction of direct emissions from [its] US operations.”31
Many of these projects have come after the announcement of new federal tax incentives, which create a 10-year incentive for clean hydrogen production with up to $3.00/kilogram, or up to $85 per metric ton of stored carbon dioxide that is captured after extracting hydrogen from natural gas.
32
Furthermore, oil and gas companies are among some of the best suited entities to carry out these goals. Ashydrogenproduction isstillaverycostly means of fuel production, large amounts of capital combined with knowledge, work force, and current infrastructure allow for oil and gas companies to combine this new energy source into their portfolio. Although the efforts and incentives are present within the new age of hydrogen, this also leads to thesenew systems being more strictly watched. Various complaints involving hydrogen energy have been filed, including against Toyota for issues on hydrogen block stations 33 and against the Port of Stockton in California for approving a project in which hydrogen would be produced in a manner that increased air and climate pollution.34
In conclusion, this new and emerging approach offers significant environmental, social, and
economic advantages. Currently, the world is exploring the emergence of hydrogen energy across sectors such as energy production, storage, distribution, electricity, heating, cooling for buildings, industrial processes, transportation, and feedstock fabrication. The transition from a fossil fuel-based economy to an economy driven by
1 Natalie Marchant, Grey, blue, green – why are there so many colours of hydrogen?, WORLD ECONOMIC FORUM, https://www.weforum.org/stories/2021/07/clean-energygreen-hydrogen/ (last updated July 21, 2021).
2 Id.
3 Id.
4 Global Hydrogen Review 2023, INT’L ENERGY AGENCY 64 (2023), https://www.iea.org/reports/globalhydrogen-review-2023 [https://perma.cc/Y3RC-G3C9] (last updated December 2023).
5 Id.
6 Joseph C. Conklin & Thomas Beresnyak, Unraveling the Hydrogen Rainbow: Green, Blue, and Gray Hydrogen Production, PENNSTATE EXTENSION, https://extension.psu.edu/unraveling-the-hydrogen-rainbowgreen-blue-and-gray-hydrogen-production [https://perma.cc/6XXY-YD4Y] (last updated January 25, 2024).
7 Id.
8 Id.
9 Carbon Capture, CENTER FOR CLIMATE AND ENERGY SOLUTIONS, https://www.c2es.org/content/carbon-capture/ [https://perma.cc/9S6F-D75S] (last visited April 2024).
10 Conklin and Beresnyak, supra note 6.
11 Id.
12 Supra note 1, see also Hydrogen Production: Electrolysis, U.S. DEPARTMENT OF ENERGY (stating the grid electricity is not ideal for electrolysis because “most of the electricity is generated using technologies that result in greenhouse gas emissions and are energy intensive.”).
13 Kayna Lantz and Luke Sower, Fueling A Hydrogen Boom: Federal and State Policies for Promoting Green Hydrogen, 48 Wm. & Mary ENVTL. L. &POL'Y REV. 95, 97–98 (2023).
14 Id.
15 Id. at 130.
16 Fuel Cells, U.S. DEP’T OF ENERGY: Hydrogen & Fuel Cell Techn. Off., https://www.energy.gov/eere/fuelcells/fuel-cells [https://perma.cc/ZXW7-P6DP].
17 Marc A. Rosen & Seama Koohi-Fayegh, The prospects for hydrogen as an energy carrier: an overview of hydrogen energy and hydrogen energy systems. ENERG. ECOL. ENVIRON 1, 10–29 (2016).
18 See Hydrogen Production, U.SDEP’T OF ENERGY, https://www.energy.gov/eere/fuelcells/hydrogen-production [https://perma.cc/7CDR-QLFC].
energy efficiency and sustainability has been a crucial aspect of 21st century engineering and energy technological choices, and hydrogen energy offers a new and possibly endless fuel source. This transition is still in its early stages, and will at best still takes decades to perfect, but it currently presents a viable option for the future
19 Rosen and Koohi-Fayegh, supra note 17.
20 Yuka Obayashi, JERA, Exxon to explore development of hydrogen and ammonia production project in US, REUTERS (March 25, 2024), https://www.reuters.com/business/energy/jera-exxonexplore-development-hydrogen-ammonia-productionproject-us-2024-03-25/[perma.cc/3E9W-TB3A].
21 Id.
22 Id.
23 Id.
24 Advanced Clean Energy Storage, U.S. DEPARTMENT OF ENERGY, https://www.energy.gov/lpo/advanced-cleanenergy-storage.
25 Id.
26 Id.
27 Id.
28 TotalEnergies acquires Talos Low Carbon Solution, a pioneer in the growing American Carbon Storage industry, TOTALENERGIES PRESS RELEASE (last updated March 18, 2024), https://corporate.totalenergies.us/news/totalenergiesacquires-talos-low-carbon-solutions-pioneer-growingamerican-carbon-storage [https://perma.cc/ZD4F-ZMW9].
29 Id.
30 Id.
31 Id.
32 Financial Incentives for Hydrogen and Fuel Cell Projects Clean Hydrogen Production Tax Credit , U.S. DEP’T OF ENERGY, HTTPS://WWW.ENERGY.GOV/EERE/FUELCELLS/FINANCIALINCENTIVES-HYDROGEN-AND-FUEL-CELL-PROJECTS (last updated January 16, 2025) [https://perma.cc/S4MJ-9DHS].
33 Corrado Rizzi, Toyota Mirai Lawsuit Alleges Automaker, First Element Behind Anticompetitive Pricing Scheme for Hydrogen Fuel, CLASSACTION.ORG, HTTPS://WWW.CLASSACTION.ORG/NEWS/TOYOTA-MIRAILAWSUIT-ALLEGES-AUTOMAKER-FIRST-ELEMENT-BEHINDANTICOMPETITIVE-PRICING-SCHEME-FOR-HYDROGENFUEL#EMBEDDED-DOCUMENT (last updated August 9, 2024) [https://perma.cc/5XGN-3NE5].
34 Lawsuit Challenges California Dirty Hydrogen Project, CENTER FOR BIOLOGICAL DIVERSITY PRESS RELEASE, https://biologicaldiversity.org/w/news/pressreleases/lawsuit-challenges-california-dirty-hydrogenproject-2024-09-18/, [https://perma.cc/KU5Y-ERAK] (last updated September 18, 2024).
International: What type of Mineral Ownership is Most Efficient for Oil and
Gas Production.
By: Robert C. Clanton. Student, Class of 2025
South Texas College of Law Houston
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“ordinary andnaturalmeaning” test in Acker v. Guinn, 4 where the court adopted the “surface destruction test.” The Acker holding was limited to iron ore, butthestatementof thetest 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 thebenefits under anyexisting lease, and afraction 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 constructionof thesemulti-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-granttheory”to giveliteraleffectto grants of a one-half mineral interest in a 90-acre tract and one-half of allroyalty payable under an oiland 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 gas lease executed after the three-grant deed, and thelitigation resulted when, despitethethird grant, division orders were prepared showing the grantee as owning 1/64 of 1/8 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,theseparategrantapproach hadaplace 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”and anyadditionalgrantsofamulti-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 atthe 1990 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 regarding whatthegrantor owned 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 a multiplegrantapproach. In Luckel, the courtconstrued 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 withoutexpressly calling outany misconceptions), 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 accomplished thesameend as 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)1/96 mineralinterestintheland and (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 conveyance with differing fractions effectuated a grant 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., eighttimes the1/96 fraction 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 regarding what amineralowner owns immediately 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) theunderstandingof thesuccessiveowners 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 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 againstquick resortto thesedefault 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 common that the courts had judicial knowledge that “the usual royalty provided in mineral leases is one-eighth.”[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 future lease clause to be completely 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.”
The Luckel court also acknowledged the Forever 1/8 presumption but decided, in the motherof all“fixedvs.floating”royalty cases,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 logicalto concludethattheparties intended toconvey one-fourthof allreservedroyalty, and that the reference to 1/32nd in the first three clauses is “harmonized” becauseonefourth of the usual one-eighth royalty is 1/32nd.” [emphasis in original]32
“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
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).
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 June 8, 1983. Moser governs severances affecting 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 OFTEXASPROF. DEV. PROGRAM,8 ADVANCED OIL, GAS AND MINERAL LAW COURSE H (1990).
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 The term “estate misconception” was coined by Professor Burney 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 was merely an acknowledgment that1/8 was the “usual” royalty fraction or, if executive rights were being severed in the instrument, the minimumcommercially reasonable royalty fraction foran 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.”).
The purpose of this article is to discuss the title examination process as it relates to the due diligenceaspects of an acquisition of producing oil and gas properties by abuying company (“Buyer”) from a selling company (“Seller”) through the mechanism of a traditional purchase and sale agreementoronecommonlyused intheoilandgas industry. Due diligence, in the broadest use of the term, is an integral part of the acquisition transaction, from the offering of the properties for sale through the closing of the transaction. It provides the Buyer, and often as importantly- the lender/investor, with verification that the oil and gas properties are as represented in the purchase and sale agreement. The due diligence process involves all the different professional disciplines within an exploration and production company. This article will focus on very practical legal services that an attorney may be required to perform once he or she receives the telephone call from an excited client who is the successful bidder on an oil and gas property.
Understanding the Transaction
Based on my experience, an attorney cannotbe too familiar with the various aspects of the acquisition process. Each transaction is different and a familiarity with the unique aspects of the elements of the transaction prepare the attorney to better identify what title due diligence encompasses in a specific transaction. Facts are the foundation of any legal matter, and it is imperative for any attorney involved in an acquisition to understand as many facts about the transaction as possible.
A. Seller Who is the Seller and what do you know about the Seller? The selling party may be a major international oil and gas corporation who is seeking to dispose of assets it considers less profitable than its management desires, or a small, limited liability company or partnership backed by aprivateequity investor who seeks to sellits assets to either reduce a loss, maximize a gain, or to acquire cash for another opportunity. In between these two types of Sellers are a variety of enterprises that have different goals in the disposition of the properties each seeks to sell. Relevant in today’s market is the financial situation of the Seller and whether the Seller may be suffering economically due to market conditions or legal complications?
B. Buyer The Buyer will likely be your client. A knowledge and understanding of your client’s goals related to the transaction will affect the due diligence process and your obligations and responsibilities during the due diligence process. Some factors to consider are whether the Buyer is purchasing the properties for cash or through existing credit agreements, the Buyer’s experience in the acquisition of oil and gas properties, and whether or not the Buyer seeking to acquire the oil and gas properties for long term investment and development, or to drill a few wells and sell the properties after 3-5 years. In addition, the attorney should obtain a clear understanding of the risk tolerance of its client and its financiers, and a thorough understanding of your client’s goals.
ASK ENOUGH QUESTIONS. The attorney cannot ask too many questions relative to the transaction, the client’s goals, the client’s level of risk tolerance, and the time constraints placed on the transaction by the purchase and sale agreement.
C. Properties of the Transaction Over the last few years with the expansion of the unconventional development of oil and gas
properties, the transaction could be for the purchase of oil and gas properties located in any number of different states with different laws and regulatory rules and procedures. Legal considerations are vital to an effective representation and analysis. For example, a 10,000 acres lease in Midland County, Texas, will result in a different legal analysis, then a 10,000 acres lease in Washington County, Pennsylvania. Other transaction considerations include factors such as thenumberofwellsintheassetpackage, thenature of the wells- such as whether they are vertical or horizontal, and whether they are Proved Developed Producing (PDP), Proved Behind Pipe (PBP), or Proved Undeveloped (PUD) and the actual quantum of wells. In addition to the well count, the location of the properties might be important, such as whether they are in a concentrated area or are scattered throughout different counties and fields in the state. The due diligenceprocess willbeaffected by thenumber of the oil and gas leases involved, voluntary pooling and forced pooled units, including secondary recovery units. The ageof the properties is another factor which should be a consideration; for example, are the oil and gas assets located on oil and gas leases within their primary term, or are the oil and gas leases in their secondary term, considered held by production (HBP). The oil and gas leases may likely be beyond the primary term but could be subject to a continuous drilling obligation requiring thedrilling of additionalwells at specific periods of time to maintain the entire lease prior to a partial termination. Certainly, such facts will add to future anticipated costs for maintaining a leasehold and anticipated revenue generated by the oil and gas properties. Regardless of the age of the properties, the various properties may be subject to any number of horizontal severances with different working interest ownership at different subsurface intervals. The attorney should also be aware whether the oil and gas leases contain any unusual terms or conditions
which could haveadramaticimpacton their actual or anticipated value to the Buyer. The same consideration should be given to the ancillary agreements which facilitate the future operation of the properties without interruption.
Overview of Purchase and Sale Process
The due diligence process normally begins after initial terms of the sale have been agreed to by the parties. Just like the Seller and Buyer of a house negotiate a deal before obtaining a title report, the Seller and Buyer of oil and gas interests usually “make their deal” before bringing in the due diligence team. Eventually, the terms of the sale are set forth in detail in the form of a purchase and saleagreement, which generally occurs prior to the commencement of most due diligence activities. People have been horse trading since, well-since God created Men and Horses. Practically every majorUniversity offersan entirecurriculumonthe motivations of why people buy and why people sell(anything). Likewise, thehows and whys ofoil and gas asset trades continues to be the subject of a large number of excellent papers which discuss in detail the preparation of properties for sale, the process of offering the properties for sale, confidentiality agreements related to reviewing oil and gas properties, and the various types of offerings to purchase oil and gas properties. The bibliography of this article references a number of fine papers, which this author recommends, for an in depth discussion of the types of agreements that are required during the process of the acquisition of producing properties. However, the mention of some of such agreements and their terms and provisions are relevant to the discussion of the due diligence process.
A. Letter of Intent Once a Seller and Buyer have agreed on the general terms to the sale of oil and gas properties; their agreement is memorialized in a letter of intent (“LOI”). An LOI is like a
handshake agreement that everyone agrees to make a best effort to consummate the transaction. The LOI identifies the parties, a general description of the sale assets, the purchase price, general guidelines on how due diligence is to be conducted, an agreement that the LOI is conditioned on and subject to the execution of a definitive purchase and sale agreement. The LOI may contain several other conditions which must be met before either party is required to conclude thetransaction. Theplanning and organizing of the due diligence process begins in full earnest following the execution of the LOI.
B.
Purchase and Sale Agreement The purchase andsaleagreementoutlines,in veryspecificterms, the essential rights and obligations of the Seller and the Buyer in the transaction. This agreement contains elements such as purchaseprice, purchase price adjustments, representations and warranties of the parties, various covenants regarding the operations of the properties, allowed expenditures of the Seller on the properties pending closing, the nature of the title of the properties being sold, and obligations of all parties after closing. Importantly for thepurposes of titleduediligence, thepurchase and sale agreement specifies various dates regarding when certain actions and obligations should beperformed, from execution to closing. In addition, a purchase and sale agreement will contain detailed terms and provisions as to what constitutes a title defect, parameters of when notice of title defects must be delivered to Seller, the economic effects of the failure to deliver notices of title defects, how title defects are remedied, how the parties will value the title defects, and the economic value of title defects relative to adjustments on the purchase price. 1. Marketable Title Obviously, Buyers invest in an asset with the expectation to make a reasonable return on their investment. If the investment is in oil and gas properties, the Buyer must confirm to its satisfaction that the Seller actually owns the
interests the Seller is purporting to sell, and the Buyer is actually receiving titled ownership to the properties, free of any unanticipated significant economic diminution in value, free and clear of liens and without serious legal claims. The marketability of title to an interest in and to oil, gas and other minerals, is generally speaking from the Buyer’s perspective, one which is free from reasonable doubt and will not expose the party who holds it to the hazards of litigation. Marketable Title is defined in Standard 2.10 of the TexasTitleExaminationStandardsas “... arecord title that is free from reasonable doubt such that a prudent person, with knowledge of all salient facts and circumstances and their legal significance, would be willing to accept it. To be marketable, a title need not be absolutely free from every possiblesuspicion. Themerepossibility ofadefect that has no probable basis does not show an unmarketable title.” The Comment to Standard 2.10 provides, subject to certain exceptions, that if a title examination reveals the need to rely on facts outside of the record, the title is unmarketable. This Comment lists seven matters that may make a title unmarketable, including, (1) land acquired by limitation title, (2) land acquired by accretion, (3) title that is subject to an outstanding oiland gas lease, (4) title that is subject to an outstanding royalty interest, (5) title that is subject to an outstanding covenant, (6) title that is subject to an outstanding easement, and (7) title that is subject to a mortgage, judgment lien or tax lien.
Purchase and Sale Agreement Title
Most purchase and sale agreements will define three terms that are definitive of whether a “Title Defect” (defined by example below) exists with respect to the interest of Seller in and to the oil and gas properties subject to the purchase and sale agreement. The terms which define the standard of title to be met are (1) Defensible Title or similar term, (2) Permitted Encumbrances, and (3) Title
Defect. The interpretation and interrelation of Defensible Title, Permitted Encumbrances and Title Defect are clearly not Marketable Title as defined by the Texas Title Examination Standards. Examples of these defined terms are as follows:
a. “Defensible Title” means such right, title or interest held by Seller that (i) will entitle Buyer, as Seller's successor, to receive not less than the net revenue interests described in Exhibit A of all oil, gas, condensate, related hydrocarbons and other minerals produced under the terms of the Leases (or other property denominated in Exhibit A); (ii) will obligate Buyer, as Seller's successor, to bear a percentage of costs and expenses related to the maintenance, operation and development of the Leases (or other property denominated in Exhibit A) not greater than the working interest shown in Exhibit A, unless the circumstances causing the working interest to be greater will cause the corresponding net revenue interest to increase in the same proportion; and (iii) is free of all liens, security interests, encumbrances and defects, except for Permitted Encumbrances.
b. “Permitted Encumbrances” are: (a) lessor's royalties, overriding royalties, production payments, net profits interests, reversionary interests and similar burdens on production that does not, and will not, reduce Buyer's net revenue interest, as Seller's successor in title, below the net revenue interest shown in Exhibit A or increase Buyer's working interest, as Seller's successor in title, above the working interest shown in Exhibit A (unless the circumstance causing the working interest to increase will cause the corresponding net revenue interest to increase in the same proportion); (b) preferential rights to purchase and third party consents with respect to which, prior to Closing, (i) waivers or consents are obtained from the appropriate parties or (ii) the time for asserting such rights has expired without exercise; (c) mechanics’, materialmen’s, operators', tax and similar liens or charges arising in the ordinary course of business related to an interest if such
liens secure payments not yet due; (d) all consents from, notices to, approvals by or other actions by governmental authority in connection with sale or transfer of properties as to the Interests if such matters are customarily and appropriately obtained after thesaleortransfer;(e) liens,security interests or other encumbrances to be released at or prior to Closing; (f) rights of a governmental entity to control or regulate the Interests, together with all applicable laws, rules and regulations; (g) easements, rights-of-way, surface leases and other surface use restrictions if such restrictions will not materially adversely affect the use, value or operation of the Interests; and (h) title matters waived or deemed to be waived by Buyer hereunder.
c. “Title Defect” means any encumbrance, irregularity or defect in Seller's title to an Interest which, alone or in combination with other defects, causes Seller's titleto beless than DefensibleTitle. Understanding the definition of these or similar terms as agreed to by the parties in a purchase and sale agreement is imperative for the attorney in relation to conducting due diligence for the Buyer on the subject oil and gas properties. In addition, depending on whether it is a “Buyer’s Market” or a“Seller’s Market”, theelements of thedefinitions of Defensible Title, Permitted Encumbrances, and Title Defect will be modified to benefit the party having thestronger bargaining position. Oneof the most important provisions related to Title Defects is the notice of title defects provisions which normally provide that the Buyer’s failure to give noticeof aTitleDefectwithin thetimeand manner specified in purchase and sale agreement shall be a waiver by Buyer of the Title Defect and the Title Defect shall be treated as a Permitted Encumbrance. The legal axiom “Time is of the Essence” never had greater meaning than as related to timely giving notice to the Seller of Title Defects. Under the terms of the purchase and sale agreement, a Title Defect is given a monetary value, which if not cured, will cause a reduction in
the purchase price. The value of Title Defects that are notcured could causeasubstantialreduction of the purchase price, or in the extreme, a condition to not close the transaction. The attorney should strive to identify all anticipated or determinable Title Defects relating to the oil and gas properties, which will impact the economic considerations of the transaction for the Buyer.
Conditions to Closing
Let it suffice for the purpose of this article that the ultimate goal of the Seller and Buyer is that the transaction will close as agreed to by both parties in the purchase and sale agreement, and with both parties leaving the closing room confident that each reached all of their anticipated economic goals. Some of the papers referenced in the bibliography contain examples of closing checklists which offers in a general way the complexityoftheclosingportionof thetransaction. All purchase and sale agreements will contain conditions, which if not met, will relieve one party or the other of the obligation to close the transaction. In many instances, the Buyer’s condition to close may be information or changes in the representations of the sale assets that will be discovered by the attorney during the title due diligence phase of the transaction.
Time Restrictions
Generally speaking, the time between the execution of the purchase and sale agreement and closingis between 30 to45 days.In aperfectworld this time period would be more than an adequate time for the Buyer to satisfy itself that the Seller’s represented interests in the oil and gas assets, which it seeks to purchase, are as represented and free and clear of liens and encumbrances, but this isnotaperfectworld. Thenumberofunanticipated delays due to the collection, availability and review of information in the due diligence process and its assimilation into a title defect or a title
opinion are limitless. Since the deadline for submitting title defects is not negotiable once the purchase and sale agreement is executed, the coordination of the efforts of the Buyer, the attorney and all other professionals involved is essential to a positive outcome for the client.
If a Buyer utilizes an existing credit facility or enters into one to finance the purchase of the sale assets, the credit agreement will contain covenants, and more probably, representations and warranties regarding the title of the Buyer (as Borrower) to the oil and gas properties pledged or to be pledged as collateral under the terms of the credit agreement. The representations and warranties of title in the credit agreement should be reviewed in relation to the standard of title to be delivered under the terms of thepurchaseand saleagreement. The standard of title delivered to Buyer under the purchase and sale agreement should align with the representations and warranties given by the Buyer (as Borrower) under the credit agreement. A general statement of warranty to the oil and gas properties in a credit agreement could be that Buyer (as Borrower) “has good and indefeasible title to all of the oil and gas properties, free and clear of allliens exceptpermitted liens, and thatno person other than the Borrower has any ownership interest, whether legal or beneficial, in any oil and gas property of the Borrower, except to the extent of permitted liens.” Of course, terms such as oil and gas property, liens, and permitted liens would be specifically defined terms in the credit agreement and are of utmost importance to understand. There exists the possibility of a conflict in the title delivered or to be delivered to Buyer under the terms of the purchase and sale agreement and the title to the oil and gas assets as collateral which Buyer (as Borrower) is representing to the lender under the credit agreement.
Unrelated to title due diligence, the due diligence process will include due diligence of the Seller’s
records, files and data related to its engineering operations, legal obligations, accounting (both revenue and costs related to the oil and gas asset), environmental, and marketing relating to the sale by Seller of its oil and gas products. All of the different aspects of due diligence, including title due diligence, will be occurring simultaneously and require a high degree of coordination, cooperation and communication between all parties participating in the due diligence process. The level of due diligence depends on the shortterm or long-term strategy of the Buyer with respect to the oil and gas properties.
Coordination of Due Diligence and Planning
Each Buyer will plan and coordinate its due diligence efforts in order to meet its goals with respectto the purchaseof the oil and gas assets. As has been previously mentioned and stressed above, planning, coordination, cooperation and communication with the client is essential at all times during the due diligence process. Generally the Buyer will organize its due diligence activities by teams of professionals who will be given responsibility for conducting different aspects of the due diligence process. Most Buyers will divide the due diligence process into three parts, record title review, environmental due diligence and the in-house review, which will include accounting, engineering, and land and contract due diligence reviews. In deciding which oil and gas properties should be subjected to the due diligence process, many of today’s Buyers use an economic evaluation of the oil and gas properties commonly referredto asthe20/80rule,which meansthat20% of the oil and gas properties to be purchased in the aggregate constitute 80% of the value of the properties being acquired. This valuation is based on reserve reports and other information obtained by the Buyer or provided by the Seller and confirmed by the Buyer to its satisfaction. Based on the 20/80 rule the Buyer will identify those properties which fall within this designation and
concentrate its due diligence efforts on those properties. The identified properties will generally be the only properties on which the Buyer will concentrate its due diligence efforts to verify the title representations of the Seller. Again, depending on thesizeof thetransaction in terms of monetary value and volume of properties, the period of due diligence can become extremely compressed for the attorney and other members of the due diligence teams.
Allocation of Responsibility
1. Seller’s Records The current trend in title due diligence of the Seller’s property records is delegated to a team of landmen who will review the lease files, the division order files, the contract files and other miscellaneous records of the Seller, as each set of files relate to the oil and gas assets being sold. Based on the definition of Defensible Title, Permitted Encumbrances and Title Defect and the size of the transaction, the level of review and therecords reviewed may changedramatically from one transaction to another.
2. Public Records As has become the generally acceptedpractice,landmenwillbeprovidedcopies of the most recent title opinion covering the Seller’s interest in the oil and gas property, and landmen will be dispatched to the various counties where the properties are located to review the official records of real property related to the interest of the Seller. A runsheet or index of the documents filed of record since the closing date of the prior opinion and recorded copies of such instruments will be provided to the attorney for examination and the rendering of a title opinion. The title opinion should be prepared and delivered to the Buyer in sufficient time for the Buyer to review, analyzeand assess alltitledefects and then to deliver timely title defect notices to the Seller.
Purchase and Sale Agreement definitions determine what constitutes a Title Defect The attorney should be provided with a copy of the
Title Defects section of the purchase and sale agreement and any title covenants or representations in existing creditfacilities or credit facilities being negotiated in conjunction with the purchase of the oil and gas properties. Depending on the client and the individual attorney’s involvement with the entire due diligence process, the examining attorney may be provided with the valuation schedule of the oil and gas assets in the sales package, which sets forth the represented Gross Working Interest and the Net Revenue Interest of the Seller, as such schedule of values is set forth in the purchase and sale agreement. The definitionof DefensibleTitleand TitleDefectboth involve some increase or decrease in the represented Gross Working Interest and Net Revenue Interest of the Seller in the oil and gas properties scheduled as part of the purchase and sale agreement. The determination and identification of an increase or decrease in the Gross Working Interest and Net Revenue Interest of the Seller in the oil and gas properties, and the satisfaction of the conditions to closing, which results in part from information generated outside of the record title, is the major difference in title due diligence and in title opinions generated only based on record title. As a matter of course, the existence of liens and encumbrances affecting Seller’s interests will be identified in both title due diligence and title opinions based on record title.
Title Examination based on Record Title
The type of title examination to be conducted and the type and substance of the title opinion should be coordinated with the client. The title examination should be limited to the interest of Seller, and identify any liens, encumbrances or the other matters that the attorney would normally address in a title opinion for other oil and gas purposes regardless of the limitations on the definition of Title Defect set out in the purchase and sale agreement. The client may request other limitations on the title examination, such as
limiting the attorney’s access to unrecorded agreements, or by identifying the specific depths or lands to be covered by the title opinion.
Risk Tolerance of the Client. The attorney’s understanding of the risk tolerance of the client cannot be understated. The risk tolerance of the client will vary from transaction to transaction based on the size of the transaction and the shortterm or long-term strategy of the client. A transaction in which the client is risking a few million dollars verses a transaction in which the client is risking several hundred million dollars willdefinitely affectthedegree to which any given title defect has on the particular transaction.
Deadlines in Process. As discussed above, once the purchase and sale agreement is executed, the period of time in which the title due diligence may be completed in order for the Buyer to timely deliver title defect notices or confirm to its satisfaction that all of its conditions to closing are met, are not negotiable. The attorney should know the dates which are required for completion of his legal services under the terms of the purchase and sale agreement of any transaction and use best efforts to meet the prescribe deadlines.
In-house Due Diligence. The landman team examining the Seller’s records will be reviewing the lease files, division order files, contract files, and the revenue and joint interest billing (“JIB”) decks. Depending on the available time, the complexity of the transaction, and the title due diligenceprocess, theattorney may berequested to participate as a part of the in-house Due Diligence team.
1. Lease Files These files are reviewed to determine if the leases on which the wells are located are still in force and effect. Other critical issues are discussed and listed below. (a.) Thefiles will be reviewed for payment of delay rentals, shut- in royalties, lease amendments, ratifications, or any other information in the file that may reveal
a defect or discrepancy with the oil and gas lease or affect an increase in the royalty provided in the oil and gas lease. If the oil and gas lease has been voluntarily pooled, a determination should be made if the oil and gas lease was properly pooled with other leases according to the terms and provisions of the leases. (b.) A determination should be made whether the oil and gas lease contains a retained acreage provision or horizontal severance provision that may have terminated the lease as to acreage or depths originally covered by the lease. (c.) A determination should be made whether the oil and gas lease contains any special surface damage or restriction provisions that may impair the long-term benefit and operation of specific property. (d.) A determination should be made whether the files reveal any specific lessor complaints. (e.) The files reviewed should verify that all of the oil and gas leases are on the proper schedule and properly described on the schedules to the purchase and sale agreement. (f.) A review of the division order files should be conducted to determine that the division orders reflect the represented Gross Working Interest and Net Revenue Interest of the Seller in the oil and gas assets. (g.) The suspense files should be reviewed to determine if any interest is in suspense, the amount of the suspense funds and the reason for the interest to be in suspense. (h.) The files should be reviewed for any threatened lawsuits, disputes, demand letters or other information which would put the validity of the oil and gas lease in question. (i ) Lease files should be reviewed for the required notifications, waivers, consents and third-party approvals affecting the oil and gas leases and interests therein. (j.) Lease files should be reviewed for depth limitations or “pugh type” clauses in the oil and gas leases that are not disclosed on theschedules to the purchase and sale agreement.
2. Contract Files (a.) Joint Operating Agreements should be reviewed to determine any of the following provisions: (1) the form of the
agreement; (2) any conflicts between multiplejointoperating agreements on thesameproperty or related unitization agreements; (3) change of operator provisions;(4) any area of mutual interest (“AMI”) provisions; (5) gas balancing agreements (over-produced; under- produced); (6) calls on production; (7) uniform maintenance of interest provisions; (8) preferential rights to purchase; and (9) area of mutual interests provisions. (b.) Participation Agreements, Farmout Agreements, Unitization Agreements, and Assignments should be reviewed for any of the following issues in addition to the ones stated above: (1) reversionary interests, (2) before and after payout status, (3) drillingobligations,and(4)rightsofre-assignment. The schedules to the purchase and sale agreement should be reviewed to verify that all of the above referenced agreements have been properly included and described on the appropriate schedules. (c.) Contract Files should be reviewed forreversionary interestsyettobeexercised orthat have not yet occurred or reassignment obligations which will cause a reduction in the represented Gross Working Interest and the Net Revenue Interest of the Seller. (d.) Revenue and JIB decks should be reviewed to confirm that the represented Gross Working Interests and Net Revenue Interests on the schedules to the purchase and sale agreementarethesameinterests asreflectedonthe records of the Seller. (e.) Contract Files should be reviewed for required notifications, waivers, consents and third-party approvals within the above-mentioned agreements. (f.) Contract Files shouldbereviewed fordepth limitationswithinthe abovereferenced agreements thatare notdisclosed on the schedules to the purchase and sale agreement.
Title Examination
The following listed items and issues should be identified and setforth in thetitleopinion rendered as a result of the title examination of the oil and gas properties which are the subject to the
purchase and sale agreement (“Limited Title Opinion”). The list is by no means exhaustive but only identifies some of the title issues commonly encountered in the title examination process. The list will include some issues identified in the title due diligence process outside of the record, where such documents are provided for examination. The following discussion includes somecomments and suggestions as to the type of information and form of the title opinion to be rendered. The Limited Title Opinion may encompass all or any of the following constituent parts. 1. 2. Be addressed to your client; however, there may be circumstances inwhich thetitleopinion may needto beaddressed to the lender of the credit agreement of the Buyer in order to satisfy various covenants in the credit agreement. In such a case, counsel for the lender should be consulted as to any particular formatting and content requirements as set forth in the credit agreement. A division of interest similar to that found in the traditional oil and gas title opinion format, or the division of interest may be modified to opine as to the record title Gross Working Interests and Net Revenue Interests of Seller, and an additional section that sets forth 3. 4. 5. 6. 7. 8. 9. represented the Gross Working Interest and Net Revenue Interests of Seller as set forth on the schedules to the purchase and sale agreement and containinglanguagewhichduplicatesthelanguage of the purchase and sale agreement as to the manner in which the Gross Working Interest and Net Revenue Interest are defined therein and identify anydifferences thatarereflectedbyrecord title. A list of all prior title opinions provided in conjunction with the title examination and reviewed asapartof theinstrumentsexamined and upon which the Limited Title Opinion is based. A discussion of the requirements of the prior title opinions as to whether such requirements are satisfied, unsatisfied, previously waived by a successor in interest or waived by the Seller, advisory only, or are inapplicable to the title of the Seller, and includeprior noted defects which could
change the represented Gross Working Interest and Net Revenue Interest of Seller. Set forth limitations and disclaimers with respect to any excluded and unrecorded instruments notprovided for examination, the location of wells, either surface or bottomhole, and whether such wells located on the oil and gas leases are at a legal location under the rules of the Railroad Commission of Texas, and the depths from which the wells are producing. A discussion of theoiland gas lease or leases as to whether each is within its primary termor secondary term and maintained by production as provided by the terms of the leases, and whether the attorney was provided with information to evidence the production history of the wells. Set forth the status of ad valorem taxes assessed against the surface and mineral estates, whether paid or delinquent. Set forth a list of all pending litigation disclosed of record; A list of all surface use agreements and easements of record, and if relevant, any terms and provisions thereof related to duration of the agreement, restrictions contained therein or Chapter 5 provisions which could cause a termination of the agreement or easement, or create a limitation on the use of the property by the Buyer. 10. A legal description of the lands covered by the oil and gas lease or leases on which the opinion is based. 11. The identification of allwells located on theoil and gas leases or units, as the case may be, to the extent disclosed of record or by documents outside the record which were provided as a part of the examination. 12. A detailed list of all liens, encumbrances, UCC financing statements, lis pendens, abstracts of judgments, pooling or unitization agreements affecting the lands which are the subject of the examination, regardless of whether same are to be released at closing. 13. A description of allinstruments,documentsandprior title opinions which are outside of the record provided for a basis of theexamination. Additional title issues which are commonly encountered that should be included and discussed in the Limited
Title Opinion are as follows: a. b. merger documentsnotofrecord;allnecessaryratifications of the oil and gas leases or units; c. the proper pooling of oil and gas leases as required by the terms and provisions of the leases; d. conveyances and assignments by strangers in title; e. with regard to the State of Texas leases, have the conveyance instruments and other documents required by statute been filed in the leasefilein the General Land Office; f. preferential rights of purchase or calls on production contained within assignments of record; g. any consents to assign contained in the oil and gas leases or other restrictions on transfer of the lease rights; and h. Gaps in the mineral or leasehold title.
Title Defect Notices and Remedies
Depending on the experience of the client in purchasing producing oil and gas properties and therelationship between the attorney and theclient throughout the entire purchase and sale process, the attorney may be asked to prepare title defect notices. Typically thepurchaseand saleagreement will contain provisions as to the content and information thatis to beincluded in anoticeof title defect, such as (a) a description of the oil and gas property affected by the title defect; (b) an adequate explanation of the basis for the title defect; and (c) the amount by which the Buyer believes the value of the affected oil and gas property has been reduced by the title defect. The purchase and sale agreement will set forth the terms for remedies of the title defects. The Seller is normally given an opportunity to cure the title defect or the election not to cure the title defect. If a title defect is not cured, normally the purchase price will be reduced based on some valuation standard set forth in the purchase and sale agreement. The value of a title defect may have a threshold dollar amount of the claimed title defect which must be met in order for title defect to be claimed under the agreement. The methods of remedy of a claimed title defect are varied based
on thebargaining positions of the Seller and Buyer. The value of a claimed title defect may be based on the costs to cure or the reduction in value to an individual property based on the amount of the decrease in the Gross Working Interest and the accompanying decrease in the Net Revenue Interest. The monetary value of the decrease in the purchase price would be based on the decrease in the amount of the Gross Working Interest and accompanying decrease in the Net Revenue Interest multiplied by the monetary value given to the oil and gas property on the value (dollar amount) allocation schedule for each property that isattached to thepurchaseand saleagreement.The purchase and sale agreement may provide that once an aggregate dollar amount of title defects is reached, then either party may terminate the purchase and sale agreement. Generally, the remedy provisions will require the parties to meet and negotiate in good faith to reach an agreement as to the value of any title defect before any termination provisions would be utilized. Often times, the parties will have a disagreement as to a title defect, perhaps one that is still contingent or cannotbecured before closing buttheBuyer elects to purchase the oil and gas property subject to the parties entering into a title indemnity agreement. The above discussion is just an example of the types of remedies available, but each transaction is uniqueandwilllikely haveauniquesetofmethods for curing title defects and the manner of their remedy.
Conclusion
Despite the harried pace at which the title due process takes place, the seemingly endless number of surprises found in some old dusty file, the process can be well managed. The title due diligence process requires a very coordinated effort organized and managed through a team effort that requires cooperation, coordination and communication. While every transaction is different in magnitude and complexity, certain
patterns and processes can be applied to each transaction, and adapted to the particular transaction, such that at the end of the day the Seller and Buyer are generally satisfied that each received the benefits it contemplated by entering the transaction in the first place. For the attorney and the rest of the due diligence team, it’s time for a vacation; although that seldom happens
BIBLIOGRAPHY
1. Fabeńe W. Talbot, The Due Diligence Checklist for Acquisitions and Divestitures, SOUTH TEXAS COLLEGE OF LAW ENERGY LAW INSTITUTE: OIL AND GAS, (2000)
2. Aaron G. Carlson, Merger and Acquisition Due Diligence, STATE BAR OF TEXAS 24TH ANNUAL ADVANCED OIL, GAS AND ENERGY RESOURCES LAW COURSE, (October 2006)
3. Cheryl S. Phillips, Allocating Risk in Asset Purchase and Sale Agreements, STATE BAR OF TEXAS 31TH ANNUAL ADVANCED OIL, GAS AND ENERGY RESOURCES LAW COURSE, (October 2013)
4. Michael S. Browning, Title Research and Selected Problematic Areas inOil, Gas andMineralTitle, HOUSTON BAR ASSOCIATION OIL, GAS AND MINERAL LAW SECTION, (November 2011)
5. Arnold J. Johnson, Land Mines in the Purchase and Sale Transaction Process, ADVANCED OIL, GAS AND MINERAL LAW COURSE STATE BAR OF TEXAS, (September 2000)
6. Hunter H. White, Preferential Purchase Rights; Area of Mutual Interest Provisions; and Maintenance of Uniform Interest Provisions, ADVANCED OIL, GAS & MINERAL LAW COURSE1996 STATEBAR OFTEXAS, (September 1996)
7. Phyllis Pollard, Environmental Due Diligence Procedures and Checklist, 11TH ANNUAL ADVANCED OIL, GAS & MINERAL LAW COURSE, (October 1993) Tevis Herd, Title Examination Issues – A Practical Presentation for the Title Examiner Focusing on Current Issues, (September 1991)
8. Allen D. Cummings, SelectedTitle Problems intheTitle Examination, THE UNIVERSITY OF TEXAS SCHOOL OF LAW 17TH ANNUAL OIL, GAS & MINERAL LAW CONFERENCE, (March 1991)
9. Michael L. Grove, Acquisition and Sale of Producing Properties: Environmental Issues, (September 1988) R. Charles Gentry, Acquisition and Sale of Producing Properties: Regulatory Issues, (August 1988)
10. William D. Watson, Acquisition and Sale of Producing Properties: General Contract Issues, (September 1988)
11. Donald G. Sinex and Signey F. Jones, Jr., Landman’s Overview of Producing Property Acquisitions, THELANDMAN, (January 1985)
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