Texas Agriculture Law Year in Review (Part II): Oil

Yesterday, we looked at some of the major events in Texas agricultural law for 2015 related to water.  Today, we will look at the major agricultural law events having to do with oil and gas.

* Texas Legislature prohibits local oil and gas production bans in most circumstances.  After Denton residents passed a bill prohibiting fracking in city limits, the Texas Legislature responded with House Bill 40.  The Bill, which was passed and signed by Governor Abbott, intends to pre-empt any local efforts to regulate oil and gas production, leaving that control with the state Railroad Commission.  Specifically, the bill prohibits any local regulations banning, limiting, or otherwise regulating oil and gas activities subject to a narrow exception for above ground activities (i.e. traffic, noise) if the regulation is commercially reasonable and does not effectively prohibit production.  [Read prior blog post here.  To a review summary of Texas Legislature bills related to agriculture, click here.]

* Court clarifies that control of subsurface rests with surface owner, not mineral lessee.  Lightning Oil Co. v. Anadarko E&P Onshore LLC raised a very interesting issue of who has control over a property’s subsurface.  Here, one oil and gas company sought to drill through the subsurface owned by a ranch whose minerals were leased to a second oil and gas company.  The first company obtained consent from the ranch to drill through the subsurface in order to reach their own mineral lease on neighboring land.  The second oil and gas company filed suit claiming that they, as the mineral owner, should have the right to determine whether someone could drill through the mineral estate.  The San Antonio Court of Appeals found that it was the surface owner, here the ranch, that controlled the subsurface of the property.  It remains to be seen whether the mineral owners will appeal this decision.  [Read prior blog post here.]

*  Texas Supreme Court addresses cost-free royalty issues in Chesapeake Exploration, L.L.C v. Hyder.  Texas courts have long sought to define the circumstances in which royalty language could successfully prohibit oil and gas companies in requiring royalty owners from sharing in post-production costs.  This case involved an oil and gas lease between Chesapeake and Hyder, in which Hyder sought to do just that.  Out of three different provisions, one was found by the Texas Supreme Court to allow Mr. Hyder’s interest to be free from post production costs.  Currently, a motion to reconsider is pending at the Texas Supreme Court.  [Read prior blog post here.]

Executive right holder owed duty to non-participating royalty owner.  In April, the Texas Supreme Court clarified the level of duty owed by an executive rights holder to a non-participating royalty owner in KCM Financial LLC v, Bradshaw.  An executive rights holder has the power to negotiate and enter into oil and gas leases on behalf of other royalty owners, who are deemed non-participating royalty owners (“NPRO”) because they hold no executive rights.  Questions arise when an executive rights holder negotiates a deal that may benefit himself or herself at the NPRO’s expense.  The Court found there is no bright line rule and that it will require a factual analysis in each case.  Although an executive does not owe a true fiduciary duty to put the  NPRO’s interests above his own, he may not deal in self dealing that unfairly diminishes the value of the NPRO’s interest.  [Read prior blog post here.]

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