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«AN ANALYSIS OF WAGNER & BROWN, LTD., v. SHEPPARD Lalenur Irdem* Abstract Oil and gas leases are one of the main granting instruments used in the oil ...»

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Ankara Law Review Vol. 7 No. 2 (Winter 2010), pp.127-146

AN ANALYSIS OF

WAGNER & BROWN, LTD., v. SHEPPARD

Lalenur Irdem*

Abstract

Oil and gas leases are one of the main granting instruments used in the oil

industry. The “contract and conveyance” nature of these leases can make

certain clauses challenging to interpret. In Wagner & Brown, Ltd. v. Sheppard,

the main discussion focuses on a pooling clause, specifically the legal nature of that clause and the rights conveyed from lessor to lessee through such pooling.

After providing a detailed analysis of Wagner and Brown with regard to the jurisdiction in which it was decided, this article applies that lens to the examination and comparison of the Turkish legislature’s treatment of pooling.

This leads to the Texas Supreme Court’s decision being called into question based on its arbitrary interpretation of fundamental property law principals.

Öz Petrol sözleşmeleri ve bunun Türk hukukundaki görünümü olan ruhsatlar, petrolün araştırılması, aranması, petrollü arazinin işletilmesi ve geliştirilmesi gibi hakların devrinde kullanılan başlıca araçlardır. Klasik anlamda petrol sözleşmeleri (oil and gas leases), sözleşme niteliğinin yanı sıra mülkiyetin devrini de sağlayan bir işlev görür. Tam da bu özelliği nedeniyle bu sözleşmelerin yorumlanması sıkıntılı olabilir. Bu yazıda, Teksas Yüksek Mahkemesi’ne ait Wagner & Brown, LTD. v. Sheppard, isimli davada, bu sözleşmelerin temelde bahsedilen söz konusu nitelikleri sonucunda, içerdikleri ameliyelerin birleştirilmesine (pooling) ilişkin hükümlerin uygulanması bakımından çıkan problemler irdelenmektedir. Teksas düzenleme ve uygulamaları uyarınca bu dava incelendikten sonra, ameliyelerin birleştirilmesine ilişkin düzenlemeler bakımından Türk Hukuku ve uygulamaları karşılatırmalı olarak işlenmektedir. Sonuç olarak ise, Teksas Yüksek Mahkemesince verilen karar, common law’a ait eşya hukuku ilkelerinin keyfiyete varan bir yorumla ele alınıyor olması bakımından sorgulanmaktadır.

* LL.M., Turkish Petroleum Corporation (TPAO).

Ankara Law Review Vol. 7 No. 2 Keywords: Oil and gas lease, pooling, unitization, fee simple, fee simple determinable, possibility of reverter, agency, power coupled with an interest.

Anahtar Kelimeler: Petrol sözleşmeleri, ameliyelerin birleştirilmesi, mülkiyet hakkı, mutlak ayni hak, sınırlı ayni hak, şarta bağlı sözleşme, acente sözleşmeleri.

INTRODUCTION

In Wagner & Brown v. Sheppard,1 the Supreme Court of Texas decided that the termination of an oil and gas lease did not terminate the related pooling unit.

Furthermore, the Court ruled that the operator was not necessarily precluded from recovering in equity from plaintiff for reimbursement for plaintiff’s share of costs incurred by the operator to drill a gas well on plaintiff’s land before the lease expired. In reaching this result, the Court arguably misinterpreted some basic property law principles such as ‘fee simple determinable’ and ‘possibility of reverter’ with respect to oil and gas leases.2 Several amici offered a variety of arguments with respect to this apparent contradiction.3 The decision is also inconsistent as to the reasoning the Court applied concerning the effect of a pooling clause to the unit and the decision regarding the costs are to be accounted to the lessor and the royalty amount is to be granted.4 This article is mainly divided into three parts. Part I discusses the Wagner & Brown; Part II discussed the possible consequences while Part III is the analysis of the pooling issues under the Turkish Law.

I. ANALYSIS OF THE DECISION

In connection with the misinterpretation of the long-established property law

principles, the Court stated that:5

But her lease allowed pooling of “all or any part of the leased premises or interest therein,” and Sheppard’s reverter was certainly an interest in the leased Wagner & Brown, Ltd. v. Sheppard, 282 S.W.3d 419 (Tex. 2008).

Stephans County v. Mid Kansas Oil & Gas Co., 254 S.W. 290 (Tex. 1923); Rogers v. Ricane Enterprises, Inc., 772 S.W.2d 76, 79 (Tex. 1999).

See Briefs for Dick Watt, George A. Snell, Herbert W. Henry, Amicus Curiae Brief of Texas Civil Justice League, Inc., Chesapeake Energy Corporation, Forest Oil Corporation, and XTO Energy Inc., all as Amicus Curiae, Wagner & Brown, Ltd. v. Sheppard, 282 S.W.3d 419 (Tex.

2008).

John McFarland, “What Happens to a Polled lease When the Lease Terminates?,” Oil and Gas Lawyers Blog, 13 March 2009, at http://www.oilandgaslawyerblog.com/2009/03/what-happensto-a-pooled-lease.html#more (last visited 24 July 2011).

Wagner & Brown, Ltd., 282 S.W.3d at 423-24 (quoting Mengden v. Peninsula Prod. Co., 544 S.W.2d 643, 648 (Tex. 1976) (emphasis added); Southland Royalty Co. v. Humble Oil & Ref.

Co., 151 Tex. 324, 326, 249 S.W.2d 914, 916 (1952); Brown v. Smith, 141 Tex. 425, 428, 174 S.W.2d 43, 46 (1943).

2010 An Analysis of Wagner & Brown, Ltd., v. Shepard 129 premises. “When a unit is properly pooled, the owners of the minerals or reversionary interests in a separate tract within the unit surrender their right to receive their interest in all production from wells located on their own tract….” Just as pooling impinges on a mineral owner’s royalty interest, it also may impinge on an owner’s possibility of reverter.





Case law in Texas6 contradicts the Court’s decision and sees the possibility of reverter as a property interest in the lessor-grantor. From that perspective, pooling is not capable of impinging the grantor’s possibility of reverter.

The Court’s decision creates an inconsistency – although the parties accepted the termination of the lease, the court held that the lessor is bound by the pooling after the termination of her lease. On the other hand, regarding the drilling and completion costs, the lessor bears them as if the lease was not in existence at the time the well was drilled.7 From these standpoints, the decision rendered by the Supreme Court caused a great confusion among oil and gas lawyers. This article will explain the legal nature of the rights created and conveyed by oil and gas leases, the nature of the pooling clause and its effects on these rights. I am also going to cover the Court’s reasoning with respect to Wagner & Brown and try to explain the inconsistency of the decision. Last I am going to mention some possible problems caused by any application of the Supreme Court’s decision.

Lessor conveys a fee simple determinable interest in the mineral estate with an oil and gas lease and keeps the possibility of reverter.8 Property rights are pre-determined and tend to be specific and concrete. The Court, here, did not need to determine the content of the conveyed fee simple determinable, since it was already clear. Instead, contractual relations between the parties should have been analyzed. The other reasonable way of handling this case could be to base it upon only equitable grounds. This kind of approach would also help us to distinguish it on the basis of its distinctive features. However, what we see in the Supreme Court’s approach is trying to find reasons for the result that they had already reached rather than considering the facts in the first hand, then concluding the case.

Caruthers v. Leonard, 254 S.W. 779, 782 (Tex. Comm’n 1923); York v. Kenilworth Oil Co., 614 S.W.2d 468, 471 (Tex. Civ. App.-Waco 1981, writ ref’d n.r.e.); Jensen v. Wilkinson, 133 S.W.2d 982, 984 (Tex. Civ. App.-Galveston 1939, writ dism’, judg. Corr. ); Jupiter Oil Co. v.

Snow, 819 S.W.2d 466, 468 (Tex. 1991).

John McFarland, “What Happens to a Polled lease When the Lease Terminates?,” Oil and Gas Lawyers Blog, 13 March 2009, at http://www.oilandgaslawyerblog.com/2009/03/what-happensto-a-pooled-lease.html#more (last visited 24 July 2011).

Wagner & Brown, Ltd., 282 S.W.3d at 420.

Ankara Law Review Vol. 7 No. 2 This case raises three main issues regarding the nature of oil and gas leases from the aspect of property law, the nature of ‘pooling,’ and the nature of the agency relationship. Each will be discussed in part.

A. Nature of Oil and Gas Leases from the property law aspect The first thing that we have to understand about the oil and gas leases is their legal nature. Despite the fact that the term ‘lease’ is used to define oil and gas instruments, it is not a lease in the traditional sense.9 An oil and gas lease is treated as both conveyance and contract.10 A lease is a conveyance because it is the instrument by which the mineral owner conveys a property right to an oil company to explore for and produce oil and gas, reserving a royalty interest in production. A lease is a contract because the oil company accepts the right to explore and produce, burdened by certain express and implied promises.

In states like Texas where the ownership-in-place theory is applied, the leasehold interest is considered to be a fee interest,11 because the lease continues “as long as there is production;” it is determinable, because it can always terminate by the special limitations12 in the lease such as a lack of production by the end of the primary term or the cessation of production during the secondary term.13 After conveying the determinable fee to the lessee, the only interest that BP America Production Co. v. Marshall, 288 S.W.3d 430 (Tex. App. San.Antonio, 2008). (“An oil and gas lease is not a “lease” in the traditional sense of a lease of the surface of a real property;

rather, in a typical oil and gas lease, the lessor is a grantor and grants a fee simple determinable interest to the lessee, who is actually a grantee.”).

John S. Lowe, Owen L. Anderson, Ernest E. Smith, and David E. Pierce, CASES AND MATERIALS ON OIL AND GAS LAW 307 (Thompson West 2008). See also Natural Gas Pipeline Co.

of Am. v. Pool, 124 S.W.3d 188, 192 (Tex. 2003) (“In Texas it has been long recognized that an oil and gas lease is not a ‘lease’ in the traditional sense of a lease of the surface of real property.”).

Bowers v. Taylor, 263 S.W.3d 260 (Tex. App. Houston.1.Dist. 2007).

See Wagner & Brown Ltd., 282 S.W.3d at 421 (Sheppard’s lease had a special addendum providing that if royalties were not paid within 120 days after first gas sales, her lease would terminate the following month, quoting the provision stated “[w]ithin 120 days following the first sale of oil or gas produced from the lease premises, or lands pooled therewith, settlement shall be made by the Lessee, or by Lessee’s agent, for royalties due hereunder with respect to such oil or gas, and such royalties shall be paid monthly thereafter without the necessity of Lessor executing a division or transfer order. If said initial royalty payment is not so made under the terms hereof, this lease shall terminate as of 7:00 A.M. the first day of the month following the expiration of said 120 day period”).

Lowe, et al, supra note 10, at 310; Joseph Shade, PRIMER ON THE TEXAS LAW OF OIL AND GAS 31, (Michie, 4th ed., 2008)(“The primary term (p/t) lasts for a fixed number of years…During the p/t the Lessee has the option but not the obligation to drill.” “…the secondary term (S/T) which lasts as long as oil and gas is produced from the lease. This period could last a short time or it could last for generations.”).

2010 An Analysis of Wagner & Brown, Ltd., v. Shepard 131 remains with the lessor is the possibility of reverter.14 “The lessee/grantee acquires ownership of all the minerals in place that the lessor/grantor owned and purported to lease, subject to the possibility of reverter in the lessor/grantor.”15 Energy companies, by virtue of leases granting them fee simple determinable interests in the minerals of the mineral estate with the lessors retaining only royalty interests, acquire title to all the minerals in place that the lessors own and purport to lease, subject to the possibility of reverter in the lessors; thus, the energy companies' interests are determinable because they may terminate on the occurrence of events specified in the leases, and, if the lease terminates, fee title to the minerals reverts entirely to the lessor.16 In Wagner & Brown, as stated above, the Supreme Court of Texas decided that once the pooling comes into an effect, it may also impinge on an owner’s possibility of reverter.17 First of all, this conclusion is not logical and cannot have been the parties’ intention.18 By signing an oil and gas lease, the lessor aims to convey a determinable interest to the lessee, which means that the lessor has an expectation to get her fee interest back in case the special limitations stipulated under the lease occurs. Why would the lessor ever want to convey her possibility of reverter to the same person that she conveyed the fee determinable? If she does so, she possibly has no available way to get her fee interest back. Second, this kind of conclusion is also legally impossible; the nature of property law tends to be certain.19 The characteristics of fee simple determinable and possibility of reverter as explained above has been the law in Texas.20 There is also another point which was argued in the amicus brief by George A. Snell: the possibility of reverter cannot be an interest in the leased premises, because the lease defined what is conveyed instead of what is reserved in the lessor.21 Although some may claim that the lease may contain both the conveyed and the reserved interests, in case of ambiguity what is conveyed and what is reserved still needs interpretation. The possibility of A. W. Walker, The Nature of the Property Interest Created by an Oil and Gas Lease in Texas, 7 TEX. L. REV. 539, 547 (1929); BLACK’S LAW DICTIONARY 548 (3d pocket. ed. 2006) (possibility of reverter is “[a] reversionary interest that is subject to a condition precedent; specif., a future interest retained by a grantor after conveying a fee simple determinable”).

Natural Gas Pipeline Co. of Am., 124 S.W.3d at 192.

Longoria v. Exxon Mobil Corp., 255 S.W.3d 174 (Tex. App. San.Antonio, 2008).

Wagner & Brown, Ltd., 282 S.W.3d at 423-24.

Brief for Dick Watt, as Amicus Curiae, Wagner & Brown, Ltd. v. Sheppard, 282 S.W.3d 419 (Tex. 2008) at 5.

Shade, supra note 13, at 3.

Natural Gas Pipeline Co. of Am., 124 S.W.3d at 192.



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