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Re-Emerging Trends in Oil & Gas Litigation

Eastern District of TexasBench Bar Conference

Plano, TexasFriday, October 26, 2012

DICK WATTWATT BECKWORTH THOMPSON HENNEMAN & SULLIVAN LLP

711 Louisiana Street, Ste. 1800Houston, Texas 77002

(713) 650-8100www.wattbeckworth.com

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1. JURY QUESTIONS AND INSTRUCTIONS IN OIL & GAS CASES

A. Oil & Gas Pattern Jury Charge – website of Oil, Gas & Energy Resources Law Section, State Bar of Texas: www.oilgas.org

• Searchable database of O&G articles

• Currently not an official “State Bar of Texas” PJC, but that may change

• References herein to “PJC” are to the current version

B. Words are critical: Oil & Gas leases and standard form Joint Operating Agreements (including COPAS) in the age of word processors – read everything and assume nothing!

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2. STATUTES OF LIMITATION IN OIL & GAS CASES

A. Most oil & gas lease cases are based on express or implied covenants, i.e. breach of contract (4 year S/L); fraud and fraudulent concealment (4 year S/L); torts, including negligent misrepresentation (2 year S/L). If title issues are involved, then the various statutes of limitation concerning adverse possession come into play.1

B. The Discovery Rule, Fraudulent Concealment and facts found in the public record2

Discovery Rule applies to cases where claim is limited by statute for a specific number of years after “accrual” of cause of action. It defers the accrual of the cause of action to “categories” of cases where the injury is (1) inherently undiscoverable and (2) objectively verifiable. Discovery Rule is a “plea in confession and avoidance,” and whether it is applicable is a question of law. If applicable, then the fact question becomes when did the Plaintiff know or when should the Plaintiff have known of the injury through exercise of reasonable diligence, and the accrual of the cause of action is deferred until that date.

Despite occasional contradictory statements found in the case law, it is not clear whether or not the Discovery Rule applies to ordinary fraud, but it effectively applies to fraudulent concealment. When alleging fraudulent concealment, as to limitations, a Plaintiff has the burden of proof to show that he/she did not (1) know of the fraudulent concealment; and (2) could not in the exercise of reasonable diligence have discovered the fraud within 4 years of its occurrence. If successful, in a fraudulent concealment case the statute of limitations is “tolled” until that time, as opposed to the Discovery Rule, where “accrual is deferred.” Also, fraudulent concealment does not require a plea in confession and avoidance.

Of critical importance, in either case if information revealing either injury or fraud is available in the public record, then (1) the COA as a matter of law is not "inherently undiscoverable;" therefore, the Discovery Rule does not apply, and (2) also as a matter of law, the COA could be discovered by reasonable diligence, therefore limitations on a Fraud COA is not "tolled."

1 See Tex. Civ. Prac. Code 16.021 – 16.037; see also Natural Gas Pipeline Co. v. Pool, 124 S.W.3d 188 (Tex. 2003).2 See generally, Dick Watt, Ben Elmore and Robert C. Campbell, The Texas Supreme Court and the Evolution of the Discovery Rule and Fraudulent Concealment Doctrines in Oil and Gas Cases, 7 Tex. J. Oil Gas & Energy L 383, 389 (2012)

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2. STATUTES OF LIMITATION IN OIL & GAS CASES

C. Cases on both the Discovery Rule and statutes limitations on fraudulent concealment• Gaddis v. Smith, 417 S.W.2d 581 (Tex 1967) (first Texas case to use the term “Discovery Rule”)

• HECI Exploration v. Neel, 982 S.W.2d 881 (Tex. 1998) (Discovery Rule: AMOL, not “inherently undiscoverable” if available in public record)

• Kerlin v. Sauceda, 263 S.W.3d 920 (Tex. 2008) (AMOL: analogizes to Discovery rule in HECI v. Neel fraud should be discovered in exercise of reasonable diligence when information available in public record)

• BP America Prod. Co. v. Marshall, 342 S.W.3d 59 (Tex. 2011) (fraudulent concealment differs from Discovery Rule because it’s “fact specific,” however, it is analogous to the Discovery Rule, and the complexity of what is found in public record does not matter)

• Shell Oil Co. v. Ross, 356 S.W.3d 924 (Tex. 2011) (fraudulent concealment—Plaintiff must prove that the Defendant must actually know a fraud occurred, had a fixed purpose to conceal it, and did conceal it – but same rules apply regarding information in public record)

• Samson v. Hooks, __ S.W.3d __, 2012 WL 1951113 (Tex. App.—Houston [1st] 2012)

• See generally, Dick Watt, Ben Elmore and Robert C. Campbell, The Texas Supreme Court and the Evolution of the Discovery Rule and Fraudulent Concealment Doctrines in Oil and Gas Cases, 7 Tex. J. Oil Gas & Energy L 383, 389 (2012); for a discussion of Texas law before HECI v. Neel, see generally, Dick Watt, Application of Discovery Rule In Oil and Gas Litigation: 1995 Update — The Plaintiffs’ Perspective for the State Bar of Texas, Advanced Oil, Gas and Mineral Law Course, September 21, 1995

• Emphasis: These cases are not based on “constructive notice” or “inquiry notice”

D. Arguably, the only remaining difference between Discovery Rule and Fraud cases as to limitations is procedural

• Woods v. William M. Mercer, Inc., 769 S.W.2d 515 (Tex. 1988) (must plead confession and avoidance)

E. Perhaps one exception: reformation of deeds, leases, etc. based on mutual mistake• Lesley v. Veterans Land Board, 352 S.W.3d 479 (Tex. 2011)

• Friddle v. Fisher, 2012 WL 3536796 (Tex. App.—Texarkana, August 17, 2012) (also, when alleging breach of fiduciary duty, what’s in the public record is apparently not a factor)

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3. DETERMINING TITLE: TRESPASS TO TRY TITLE vs. SUIT TO QUIET TITLE; DECLARATORY JUDGMENT, ETC.

A. Title Disputes in Texas

Disputes over ownership often are at the heart of oil and gas litigation. These cases can take many forms, such as determining the amount of a non-participating royalty, determining whether an interest is a non-participating royalty interest or a mineral interest, competing claims between lessees owning under two separate chains of mineral title, etc. A critical decision at the outset is what type of action should be employed to resolve these title disputes. Heretofore, many lawyers automatically thought of a trespass to try title action, which often seems unnecessary, but may be more necessary than previously thought. Trespass to try title suits are governed by the Property Code and Texas Rules of Civil Procedure and are very technical in their requirements.3 Of particular concern, the end result in a trespass to try title suit is a judgment which vests title in one party and divests it from another. Often, the real issue in a dispute is the effect of a legal instrument in the chain of title. For example, did a reservation reserve a mineral interest or a non-participating royalty interest? Because of this, the parties can often use equitable remedies such as an action to quiet title, or the declaratory judgment act, to resolve their differences. Generally, these may be much more satisfactory than a trespass to try title action.4

3 See Humble Oil & Refining v. Sun Oil, 191 F.2d 705 (5th Cir. 1951); see also TEX. PROP. CODE § 22.001, et seq, and TEX. R. CIV. P. 783-809.4 For an excellent discussion on this topic, see Andy Carson, Selected Land Title Litigation Issues, 24TH ANNUAL OIL, GAS & MINERAL LAW INSTITUTE, Houston (1998); However, for a later update, see Michael Jones, Trespass to Try Title – the only recognized manner to clear, determine and vest disputed title in Texas; the interplay with declaratory judgments; and the procedural requirements of a TTT case, 36 Section Report of the Oil, Gas & Energy Resources Law Section of the State Bar of Texas 1, 4 (2011).

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3. DETERMINING TITLE: TRESPASS TO TRY TITLE vs. SUIT TO QUIET TITLE; DECLARATORY JUDGMENT, ETC.

A. Title Disputes in Federal and State Courts – Can a Federal Court decide title to property located in another state?

• Hayes v. Gulf Oil Corp., 821 F.2d 285 (5th Cir. 1987) (the “local action” doctrine: federal court cannot decide state questions of real property law)

The seminal case is Fall v. Eastin, 215 U.S. 1, 11-12 (1909), which stands for the proposition that “where the relief when granted is such that it must act directly upon the subject-matter, jurisdiction must be exercised in the state where the land is located,” but further held that while a Court may lack “in rem” jurisdiction to issue its own deed relating to state property (as was the case in Fall), it is perfectly appropriate for any court in any state where there is personal jurisdiction to order the defendant to take action with respect to out of state property – by executing or rescinding a deed, for example. Id. at 11:

In accord, see Miller v. Miller, 715 S.W.2d 786, 788 (Tex. App. – Austin 1986, writ ref’d n.r.e.). In short, only questions of “naked title” are subject to the local action doctrine. Where the parties’ obligations are governed by contract, and are not simply a real property question of ownership, the action is not a question of “naked title” and is not subject to the local action doctrine. Id.

the well-recognized principle that when the subject-matter of a court of equity is within another State or country, but the parties are within the jurisdiction of the court, the suit may be maintained and remedies granted which may directly affect and operate upon the person of the defendant and not upon the subject-matter, although the subject-matter is referred to in the decree, and the defendant is ordered to do or refrain from certain acts toward it, and is thus ultimately but indirectly affected by the relief granted. (emphasis added)

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A. Lesley v. Veterans Land Board, 2011 WL 379658 (Tex. 2011)• A duty for an executive to lease or negotiate a lease• Is this dicta? If not, practical implications: must executive negotiate every offer? Under what

standard?

B. Fiduciary duty vs. duty of good faith—a big difference often confused• Manges v. Guerra, 673 S.W.2d 180 (Tex. 1984) (uses fiduciary duty and duty of good faith

interchangeably)• In re Bass, 113 S.W.3d 735 (Tex. 2003) (continues to confuse both doctrines)• Lesley, supra (discusses fiduciary duty without mention of prior confusion)

C. Non-participating royalties (NPRIs)• The difference between NPRIs and non-executive mineral interests• Should this make a difference? Yes!• Does it make a difference? Apparently not!

4. EXECUTIVE RIGHTS ISSUES

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A. Pooling and Unitization – horizontal drilling, shale plays and tight sands: a whole new worldVertical wells – traditional view• Jones vs. Killingsworth, 403 S.W.2d 325 (Tex. 1965) (strict compliance required; Units “prescribed” by RRC versus Units

“prescribed” or “permitted” by RRC)

Horizontal wells• The Texas Railroad Commission: Statewide Rule 86 and Field Rules

• The Production Sharing Agreement (PSA)—multiple types; allocates production from existing Units

• Effect on continuous drilling and retained acreage provisions in oil & gas leases

• For a complete discussion, see H. Philip Whitworth and D. Davin McGinnis, Square Pegs, Round Holes: The Application and Evolution of Traditional Legal and Regulatory Concepts for Horizontal Wells, Texas Journal of Oil, Gas, and Energy Law, Vol. 7, No. 2, 2011-2012

Miscellaneous• Wagner & Brown v. Sheppard, 282 S.W.3d 419 (Tex. 2009)

o minerals remain pooled after lease terminateso laws of mineral co-tenancy turned upside down

For a more complete discussion, see Laura H. Burney, The Texas Supreme Court and Oil and Gas Jurisprudence: What Hath Wagner & Brown v. Sheppard Wrought? 27th Annual Advanced Oil, Gas and Energy Resources Law Course, October 8-9, 2009, Houston, Texas

5. ISSUES INVOLVING LESSOR/ROYALTY OWNER VS. LESSEE/OIL CO.

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5. ISSUES INVOLVING LESSOR/ROYALTY OWNER VS. LESSEE/OIL CO.

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B. Royalty Claims and Post Production Costs – Proceeds Royalty vs. Market Value Royalty As litigation involving these issues has progressed, so has the complexity of the gas business, caused by the beginning of the deregulation of gas prices in 1978, and enhanced by market factors, and radical technological advances through even date. As a result, gas now is marketed in a dizzying myriad of methods, and post production costs – the cost of treating, processing, compressing and transporting gas after it is produced at the well-head – have become increasingly important factors in calculating on what revenue stream gas royalty is calculated, and what may be deducted from that revenue stream. Most royalty provisions involve some version of “proceeds” or “market value’ or both – which perhaps we understand in the abstract, but often are very difficult concepts to apply in practice. Moreover, because both are calculated at the well-head, under a proceeds royalty provision the deductibility of costs incurred after production occurs at the well-head is often the issue. Under a market value royalty clause, these post well-head costs may not be the issue, unless they are used to establish market value at the well-head by deducting them from sales downstream, a common practice which may result in the same price under either standard.5

Thus, cases like Vela6 and Yzaguirre,7 as well as Union Pacific Resources Group, Inc. v. Hankins,8 starkly demonstrate that “proceeds” and “market value” concepts, originally assumed to be about equal, may in fact be dramatically different. For just one example, Hankins states that when gas is sold, the proceeds of that sale may well exceed the “market value” of that gas, if the sale resulted from “extraordinary negotiation and sales efforts that exceeded the results reasonably obtainable by an ordinary lessee.”9 Obviously, the questions raised by these cases and issues are complicated. Please note that Texas law on these topics can be very different from that in other oil and gas jurisdictions, so precedents from those jurisdictions should be used in Texas with great caution, and visa versa.10

Two final notes on royalty litigation: First, do not overlook the effect of two Texas statutes affecting payment of royalty,11 as well as the effect of division orders.12

5 See Dick Watt, et al., Royalty Litigation in 2004: An Update and a Look Ahead, THE UNIVERSITY OF TEXAS SCHOOL OF LAW CIVIL LITIGATION CONFERENCE, October 28-29, 2004, condensed in Dick Watt, et al., Royalty Litigation – Key Issues, 19 TEX. OIL & GAS L.J. 1 (2005); see also, Pearson, Gas Royalty Calculation 2005 – An Update, Oil, Gas & Energy Res. L. Section Report No. 3 at 4 (St. Bar of Texas 2006).6 Texas Oil & Gas Corporation v. Vela, 429 S.W.2d 866 (Tex. 1968).7 Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368 (Tex. 2001)8 111 S.W.3d 69 (Tex. 2003). 9 Id. at 75. 10 See for example, Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001). 11 TEX. NAT. RES. CODE § 91.401-406; § 91.501-506; 34 Tex. Admin. Code § 3.15(a) (Vernon 1999).12 See Smith & Weaver, Texas Law of Oil and Gas, n. 3 at § 6.5; see also Stuart C. Hollimon, Division Orders – A Primer, 34th Oil & Gas Inst. 313 (1983).

5. ISSUES INVOLVING LESSOR/ROYALTY OWNER VS. LESSEE/OIL CO.

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TRADITIONAL LESSOR/LESSEE CLAIMS AFFECTED BY SHALE PLAYS, HORIZONTAL DRILLING AND RRC RULES

C. Drainage Claims• Standard measure of damages: if “substantial drainage” occurs, and a “reasonable and prudent operator with a

reasonable expectation of profit” would drill a protection well, then damages are based on what amount of royalty a protection well if it would yield to the royalty owner; see Texas Pacific Coal & Oil Co. v. Barker, 6 S.W.2d 1031 (Tex. 1928); see generally, Watt et al., Drainage A to Z for State Bar of Texas, 12th Annual Advanced Oil, Gas and Mineral Law Institute, October 6‑7, 1994.

• Coastal Oil & Gas v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2002)—frac is not a trespass; also, as to damages for drainage compare statement at 268 S.W. 3d 18 (“one measure of damages “. . . is “the amount of royalties that the lessor would have received from the offset well on its lease. But this would overcompensate the lessee . . . The correct measure of damages is the amount that will fully compensate, but not overcompensate the lessor for the breach . . .”, attributed to Williams & Meyers, Oil & Gas Law §825.2 at 167 (2007); however, that section involves a discussion of the equities of various rules governing drainage damage standards in Texas and other states; in contrast Barker, supra, held that its measure of damages is not a basis for “equitable interference.” Query: did the Supreme Court overrule Barker case law on drainage damages sub silento?

• expert witnesses

D. Development Claims• Exploratory wells, development wells, and “wildcat” wells; see AAPG definitions• Essentially same as a drainage claim except no need to prove “substantial drainage”• See generally, Watt et al., Sun v. Jackson: An Analysis of a Lessee’s Obligations In Texas Under the Implied

Covenant of Reasonable Development in 1990 for Houston Bar Association, Oil, Gas and Mineral Law Section, April 24, 1990

E. Bad Faith Pooling Claims• how will multiple laterals affect?• how will RRC “allocation” and PSAs affect?

5. ISSUES INVOLVING LESSOR/ROYALTY OWNER VS. LESSEE/OIL CO.

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A. Joint Operating Agreements (JOAs)

When oil and gas companies choose jointly to explore and develop for oil and gas, they often enter into joint operating agreements which govern their activities. Frequently, they may also enter into other contractual arrangements, such as exploration and development agreements, which have joint operating agreements attached as exhibits to govern activities in particular areas.

Joint operating agreements appoint one party as the operator, and the rest as non-operating parties. These agreements are contractual in nature, and generally disclaim any agency, partnership or joint venture arrangement. In onshore operations, the American Association of Petroleum Landmen began publishing standard form joint operating agreements in 1956 and to-date there are four of them, designated by the date of their publication: 1956, 1977, 1982, and 1989. Some variation of these 4 types of JOAs is used in almost all on-shore wells, usually with some customized additions.

6. ISSUES BETWEEN WORKING INTEREST OWNERS; JOINTOPERATING AGREEMENTS AND THE EXCULPATORY

CLAUSE

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B. Exculpatory Clauses

All of the standard form joint operating agreements, and most other joint operating agreements, contain a so-called “exculpatory” clause. This clause requires the operator to perform its responsibilities in a good and workmanlike manner, but shields the operator from liability to non-operators absent proof that the operator acted with gross negligence or willful misconduct. 13 While these are terms commonly associated with tort law, they do not give rise to tort liability, but instead are adopted as a contractual standard.

As a result, the non-operator must prove that the operator acted with gross negligence or willful misconduct in order to recover for breach of the operating agreement.

The standard form JOAs: 1956, 1977, 1982 (“all operations”):

o Stine v. Marathon, (976 F.2d 254 (5th Cir. 1992)—literally, applies to everything

• OTHER CASES HELD THAT EXCULPATORY CLAUSE APPLIES ONLY TO PHYSICAL OPERATIONS:o Castle Tex. Prod. Ltd. P’ship v. Long Trusts, 134 S.W.3d 267, 283 n. 4 (Tex. App.—Tyler 2003, pet. denied)o IP Petroleum Co. v. Wevanco Energy, LLC, 116 S.W.3d 188 (Tex. App.—Houston [1st Dist.] 2003, no pet.)o Cone v. Fagadau Energy Corp., 68 S.W.3d 147 (Tex. App.—Eastland 2001, pet. denied)o Abraxas Petroleum Corp. v. Hornburg, 20 S.W. 3d 741 (Tex. App.—El Paso 2000, no pet.)

13 See generally, Watt, et al., A Litigation Perspective: Selected Thoughts on the Express Negligence Doctrine, Exculpatory Clauses, and Indemnity in Joint Operating Agreements, 26th Oil, Gas and Energy Resources Section 1 (2001).

[Operator] . . . shall conduct and direct and have full contract of all operations on the Contract Area as permitted and required by, and within the limits of, this agreement. It shall conduct all such operations in a good and workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct. (emphasis added)

6. ISSUES BETWEEN WORKING INTEREST OWNERS; JOINTOPERATING AGREEMENTS AND THE EXCULPATORY

CLAUSE

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Operator shall conduct its activities under this agreement as a reasonable prudent operator, in a good and workmanlike manner, with due diligence and in accordance with good oilfield practice, but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct. (emphasis added).

6. ISSUES BETWEEN WORKING INTEREST OWNERS; JOINT OPERATING AGREEMENTS AND THE EXCULPATORY

CLAUSEReeder v. Wood County Energy, LLC, et al., __ S.W.3d __, 2012 WL 3800231 (Tex. 2012)

• Reeder: “activities” means “all activities”

• The 1989 JOA (“all activities” )

C. “Gross Negligence or Willful Misconduct” – Sufficiency of Evidence• Gross negligence – a tough standard of proof for a Plaintiff

• Willful misconduct – an easier standard of proof for a Plaintiff

• A party is free to breach a contract (and suffer consequences, of course)

D. Privity of Contract and Assignments of Leases and JOAs • Seagull Energy E&P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (Tex. 2006)

• See generally, Watt et al., The Legal Principles Affecting Contractual Liabilities When Oil & Gas Properties Are Assigned, 20th Annual Energy Law Institute, South Texas College of Law, November 8, 2007

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CPRC § 15.011: Mandatory Venue in county where land located in “suits affecting land; ownership and damages”

CPRC § 65.023: Mandatory Venue – injunctions mandatory in “district or county court in the county in which the party is domiciled” (referring to the “party” against whom the injunction is sought)

CPRC § 15.020: Major Transactions; specification of venue

In re Hardwick, __ S.W.3d __, 2012 WL 3132670 (Tex. App.—Houston [1st Dist.] 2012)

• Plaintiff filed suit in Houston and sought assignment of properties in West Texas from Defendant as a remedy in addition to monetary damages. Defendant’s Motion to Transfer Venue denied in trial court; on Defendant’s application for writ of mandamus, the 1st Court of Appeals held that § 15.011 applies—venue mandatory in West Texas; § 65.023 CPRC on injunctions not applicable

• “one bite of the apple” – venue determined on basis of pleadings live at time of motion to transfer venue; after venue established, pleadings can be amended, but subsequent amendments can’t change venue

7. VENUE IN OIL & GAS CASES

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A. Technology: broad strokes with a marks-a-lots on a Tobin ownership map versus layered digital maps

B. Examples of existing Texas cases – outline on a plat may not satisfy statute of frauds; see for example

• Guenther v. Amer-Tex Const. Co.,534 S.W.2d 396 (Tex. App.—Austin 1976, no writ)

• U.S. Enterprises v. Dauley , 535 S.W.2d 623 (Tex. 1976)

C. For an interesting contrast, see Coe v. Chesapeake Exploration, LLC, No. 11-41003 (5th Cir. Sept 12, 2012) – “layered,” digital maps

8. OUTLINES DRAWN N MAPS AND THE STATUTE OF FRAUDS AS A BAR TO ENFORCING OIL & GAS AGREEMENTS

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These two issues are often hotly contested and can be hyper-technical.

A preferential right, also known as a preemptive right, is also commonly described as a “right of first refusal.” If a contract area is burdened by a preferential right, before a lease within it can be sold, the owner must offer the lease to the holder of the preferential right on the same terms and conditions as those offered by the third party. In other words, once the party receives an offer to buy an asset that it would like to accept, the holder of the preferential right acquires an option to purchase the assets on the same terms and conditions as the offer from the third party.

In contrast, a typical area of mutual interest (AMI) provision requires a party, upon acquisition of an oil and gas interest in a specified area, to offer a portion of that interest to the other parties to the AMI. In other words, preferential rights are triggered by a party’s proposed sale of an interest while AMI provisions are triggered by a party’s purchase of an interest. For an excellent discussion of these types of agreements, as well as their fete during bankruptcy, see Rhett G. Campbell, Prior Consents to Assignment, Preferential Rights of Purchase, and Rights of First (Last) Refusal in Oil & Gas Transactions (cite Section Report Vol. 36, Number 1, September 2011)

A. “Contract Area of JOA”• Acts essentially as an AMI

• Often expanded by special language

B. AMI problems• Package sales of oil & gas properties where not all leases that are “packaged” are subject to preferential

right or AMI: for example, see Navasota Resources v. First Source Texas, 249 S.W.3d 526 (Tex. App.—Waco 2008)

• Overlapping AMIs in different JOAs or other agreements

9. AREAS OF MUTUAL INTEREST (AMIs) AND RIGHTS OF FIRST REFUSAL

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A. Mineral Estate is Dominant Estate

Many surface disputes arise because in Texas the mineral estate is “dominant” to the surface estate, which means that the mineral owner has a right to develop the minerals that prevails over the surface owner’s rights to use and develop that surface. This “dominant estate” doctrine was developed by Texas courts in the early days of the oil business, based on the notion that if the surface owner and the mineral owner could not agree, the mineral owner’s rights to develop the minerals would be worthless unless they “trumped” the surface owners’ rights. Of course, any use of the surface for mineral development is limited as to what is “reasonably necessary” to accomplish development.

B. Accommodation Doctrine

Under limited circumstances, the “accommodation doctrine” may provide an exception to the dominant estate doctrine, but the benefits of its application are generally narrow and difficult to obtain, and are still unclear because of a lack of judicial decisions.14 Additionally, municipal drilling ordinances, where available, may be effective in barring oil and gas development in certain areas and their usefulness is fact dependent.

Surface disputes, including those relating to pollution, deserve analysis with a critical eye. If there is an oil and gas lease, then the lessee has the benefit of the dominant estate doctrine, and the landowner is entitled to no damages unless the use was unreasonable (this assumes that the lease contains no damage clause). However, if the use is found to be unreasonable, then that use is not covered by the oil and gas lease, and is considered to be a trespass. 15 Of course, if there is no lease, or the viability of the lease is at issue, then the case becomes a trespass case. In either event, damages are determined depending on whether the damages are permanent or temporary.16

• For a mundane but interesting example, see Pharoah Oil & Gas, Inc. v. Ranchero Esperanza, Ltd., 343 S.W.3d 875 (Tex. App.—El Paso, 2011) (can lessee store equipment on lease – is that a reasonable use?)

14 See Smith & Weaver, supra at 2.1.B.2.b. 15 Brown v. Lundell, 344 S.W.2d 863 (Tex. 1961). 16 PJP 3.a., “Comment on Damages to Real Property.”

10.SURFACE OWNER ISSUES; PIPELINES, EMINENT DOMAIN AND WATER

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C. Pipelines and Eminent Domain

• § 21.001 et seq. Texas Property Code (eminent domain procedure)

• § 111.001 et seq.,Texas Natural Resources Code (eminent domain authority)

• Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC , WL 3796574 (Tex. 2011)

• Calculation of damages; see Exxon Pipeline Co. v. Zwahr, 88 S.W.3d 623 (Tex. 2010); Enbridge Pipelines (East Texas) L.P. v. Avinger Timber, LLC, __ S.W.3d __, 2012 WL 3800234 (Tex.

2012)

• One often overlooked factor: pipeline’s access to condemned easement

D. Salt Water, Fresh Water and Fracs

• Groundwater – see definitions in Texas Real Estate Forms Manual (2d ed.), Vol. 2, 31.2:1

• Texas Supreme Court in 2012: water, like oil, is owned in place (“we held long ago that oil and gas are owned in place;” Edwards Aquifer Authority v. Day, 309 S.W.3d 814, 829 (Tex. 2012); compare with statement in Coastal Oil & Gas v. Garza, 268 S.W.3d 1 (Tex. 2008) at 15 (“While a mineral rights owner has a real interest in oil and gas in place, this right does not extend to specific oil and gas beneath the property; ownership must be considered in connection with the law of capture, which is recognized as a property right as well” (internal quotations omitted)).

• Fracs require massive amounts of fresh water

• Water measurement

10.SURFACE OWNER ISSUES; PIPELINES, EMINENT DOMAIN AND WATER