The Supreme Court refused certiorari in Devon Energy Prod. Co. v. Apache Corp., 550 S.W.3d 59 (Tex. Civ. App.-Eastland, 2018) in a case that is, remarkably, a case of first impression in Texas.
The factual scenario in this case is simple: Norma Jean Hester leased her 1/3 mineral interest to Devon. The other mineral owners leased their minerals to Apache. With two separate parties having a right to drill for hydrocarbons, Devon and Apache were co-tenants with each other. As a co-tenant, one party may drill for oil or gas without the consent of the other co-tenant. However, the co-tenant must account for any profits from the production of oil and gas.
Apache and Devon attempted to negotiate a joint operating agreement, but they failed to enter into any agreement. Apache drilled seven wells on the lease tract with Devon as a non-consenting co-tenant. When the wells reached payout and Devon had recovered its costs, Apache began to pay Devon its share of the revenues from the seven wells. Apache and Devon did not, however, pay royalties to Devon’s royalty owners before the wells reached payout.
Not surprisingly Devon’s lessors sued both Apache and Devon for unpaid royalties. The Court held that Apache, the operator, was responsible only for paying its lessors, not Devon’s, because Apache was not a Payor under Section 91.402 of the Texas Natural Resources Code. Devon, of course, was found responsible for its royalties but the question of whether any obligation to its lessors arose prior to “payout” was left open. [It is suggested that Devon separately settled with its royalty owners].
For landowners, it would be advisable to add a clause that, if there is production, their lessee is responsible to pay royalties even if the lessee is not receiving payment. For non-consenting lessees, it is advisable to attempt to negotiate with the operator that its royalties would be paid and added to the “payout” account or anticipate claims for royalties even when not receiving revenues.
Edward Wilhelm and Jack Wilhelm provide assistance to royalty owners, working interest owners, and operators with oil and gas properties. Call us today at 512-236-8400.