Brian C. Boyle 2016-12-20 17:59:46
The energy industry continues to face challenges in a market burdened by low oil prices and global oversupply of oil and gas. In these market conditions, bankruptcies and distressed litigation have shaped legal issues, while the Texas Supreme Court has addressed matters that will affect the industry as companies move forward following mergers and reorganizations. One of the most controversial rulings in the energy space came in the bankruptcy of Sabine Oil & Gas Corporation. The bankruptcy court ruled that gas-gathering contracts between Sabine and two midstream companies did not contain covenants that run with the land under Texas law, which allowed Sabine to reject the contracts in the Chapter 11 bankruptcy.1 Midstream companies have viewed this decision as contrary to Texas precedent treating certain midstream agreements as conveying real property interests. The Sabine ruling could have significant financial implications for the midstream industry and has prompted challenges by creditors in other bankruptcies.2 Putting to rest a 2015 decision that was nearly as controversial as Sabine, the Texas Supreme Court issued a substitute opinion in Chesapeake Exploration, LLC v. Hyder et. al., confirming that an overriding royalty was free of all post-production costs under the lease at issue.3 Ultimately, Hyder may simply stand for the proposition that the specific lease language controls the overriding royalty valuation and deductibility of post-production costs. Certain post-production costs should still be deductible where a lease provides for valuation “at the well” and does not otherwise provide for a “cost-free” royalty similar to the lease in Hyder. Another important ruling handed down by the state’s highest civil court came in Apache Deepwater, LLC v. McDaniel Partners, Ltd., in which the court looked to precedent governing overriding royalties in holding that a production payment created through assignment of a lease ordinarily terminates upon expiration of that lease. Absent specific language to the contrary, a production payment survives only so long as the associated lease remains in existence.4 When multiple leases are at issue, a production payment must be reduced proportionately if one or more of those leases terminates. In Coyote Lake Ranch LLC v. The City of Lubbock, the Supreme Court also looked to oil and gas principles in holding that the accommodation doctrine applies to severed groundwater estates, such that the owner of groundwater rights must reasonably accommodate existing uses of the property by the surface owner.5 This is significant considering the importance of scarce water resources in many oil and gas-producing regions, as well as the likelihood that the court’s plain-language approach in construing the water rights deed will be extended to future cases involving oil and gas leases. Other cases pending before the Texas Supreme Court could have significant implications for the industry, such as the appeal of Lightning Oil Co. v. Anadarko E&P Onshore LLC, in which the lower court held that a surface estate owner has the right to drill through the earth beneath the surface even if the mineral estate has been severed.6 This would allow a landowner to enter into a mineral lease with one company while entering into a surface-use agreement with a second company permitting it to drill horizontal wells on the land to reach its adjacent mineral estate. Finally, challenges to energy regulations and agency enforcement powers—including the Federal Energy Regulatory Commission’s market manipulation authority and the Environmental Protection Agency’s Clean Power Plan—are likely to continue next year. Notes 1) See In re Sabine Oil & Gas Corp., 550 B.R. 59, 65-71 (Bankr. S.D.N.Y. 2016). 2) See Official Committee of Unsecured Creditor of Tristr v. Tristream East Texas, LLC et al., No. 16-03234 (Bankr. S.D. Tex.). 3) 483 S.W.3d 870, 873-876 (Tex. 2016). 4) 485 S.W.3d 900, 906-907 (Tex. 2016). 5) No. 14-0572, 2016 Tex. LEXIS 415, at *24-30 (Tex. May 27, 2016). 6) 480 S.W.3d 628, 635-638 (Tex. App.—San Antonio 2015, pet. filed). BRIAN C. BOYLE is a partner in the Houston office of Norton Rose Fulbright. His practice focuses on commercial litigation and arbitration, with an emphasis on energy industry matters.
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