Occidental Permian Ltd. v. Helen Jones Foundation
333 S.W.3d 392
Tex. App.2011Background
- Six leases in the Slaughter Field are at issue; four are amount-realized (proceeds) leases, paying 1/8 of the amount realized at the well; two are market-value leases, paying 3/8 of market value in the field.
- Casinghead gas is processed at the Slaughter and Mallet Plants; carbon dioxide is injected into the field and CO2 cycles back through processing and reinjection, increasing CO2 in the gas stream.
- OPL, as of 2000, acquired the leases and the plants, becoming both seller and buyer under life-of-plant gas sales contracts that transfer processed products to OEMI.
- The royalty owners sued BP and OPL claiming underpayments on both the amount-realized and market-value leases and on CO2 royalties; partial summary judgment favored OPL on CO2 royalties, and a jury trial awarded damages to the royalty owners on other theories.
- The trial court entered a judgment awarding damages against OPL and take-nothing against BP; the court denied attorney’s fees to the royalty owners, and BP’s limitations defense was upheld by JNOV.
- The Texas Court of Appeals ultimately held that royalties on the amount-realized leases were paid as required, rejected the implied duty to market as a breach, rejected the market-value lease underpayment theory, denied attorney’s fees, and reversed the damage award against OPL, remanding for entry of a new judgment with these rulings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Proceeds leases: breach of royalty on amount realized | Graham shows true amount realized includes downstream proceeds | Contracts pay royalties on amount realized at well; records show compliance | Royalties paid in accordance with leases |
| Implied duty to market gas under proceeds leases | Self-dealing and control of plant breached duty to reasonably market | No evidence contracts were unreasonable; no proof of required action by a prudent operator | No breach; duty not proven; evidence insufficient |
| Underpayment of royalties on market-value leases | Alguire's market-value study shows underpayment based on field market value | Alguire's methodology unreliable and gas quality not properly accounted; no true market-value calculation | No evidence royalties were based on market value; market-value claim rejected |
| Attorney's fees on cross-appeal | Should recover attorney's fees under Chapter 38 | No prevailing cause of action for which fees could be recovered | Denied; royalty owners not entitled to attorney's fees |
Key Cases Cited
- Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996) (market value determined by comparables; objective basis for royalties)
- Yzaguirre v. KCS Resources, Inc., 53 S.W.3d 368 (Tex. 2001) (implied covenant not in market-value leases)
- Bowden v. Phillips Petroleum Co., 247 S.W.3d 690 (Tex. 2008) (distinguishes market-value vs. proceeds leases; effects of arm's-length marketing)
- Hankins v. Union Pac. Res. Grp., Inc., 111 S.W.3d 69 (Tex. 2003) (implied covenant to reasonably market; common-issues analysis re class actions)
- Tana Oil & Gas Corp. v. Cernosek, 188 S.W.3d 354 (Tex.App.-Austin 2006) (amount-realized royalty; 'at the well' interpretation)
- Middleton v. Tex. Oil & Gas Corp., 613 S.W.2d 246 (Tex. 1981) (market value determined by comparables and quality adjustments)
- Humble Oil & Refining Co. v. West, 508 S.W.2d 812 (Tex. 1974) (store/recapture of extraneous gas; ownership under storage doctrine)
- Murchison v. Lone Star Gas Co., 353 S.W.2d 870 (Tex.Civ.App.-Dallas 1962) (ownership of extraneous gas in subsurface injection context)