At recent conferences, dialogue on trends and notable cases in litigation were an integral part of several presentations and discussions. Although not typically a preferable option for litigants, these cases can bring light and insight to a number of areas. Our experiences as expert witnesses can attest that these cases can have a broad-reaching impact for the litigants involved as well as for interested observers and even the community at large.
Over the last five years, or so, there has been an overall uptick in cases. New royalty disputes, while rising steadily overall since 2012 took a big jump in 2015 and then came back down somewhat in 2016 and this year. Cases having to do with land and lease rights have also risen overall in the past several years. A recent notable case in this area has been Escondido Resources II, LLC v. Justapor Ranch Company, LLC (Webb County Trial Court 2013-CV7-0011396-D1).
Lastly, as we have written about in the past, bankruptcy cases also rose in 2015 and 2016, as the price of oil fell and many operators were unable to pay off large sums of debt. While the number of oil and gas bankruptcies has since dropped, there are a number of companies that could still be described as distressed that have been unable to solve their balance sheet issues.
Three Main Royalty Dispute Issues
In regards to royalty disputes, there are generally three kinds of issues: (i) failure to pay, (ii) underpayment, and (iii) overpayment.
The trend in recent years has been centered mainly on underpayment issues. Underpayment issues have often times revolved around disputes with post production costs in various lease clauses. Historically, some notable cases here include Heritage Resources v. Nations Bank (939 S.W. 2nd), Hyder v. Chesapeake (04-12-0769-CV), and French v. Oxy (11-10-00282-CV).
In addition, there have been lost opportunity cases that are of note.
One such case is Spring Creek et al. v. Hess Bakken IV (14-CV-00134-PAB-KMT). Both underpayment and lost opportunity issues are present in that case. In that case Hess Bakken (and later Statoil) was required to pay ORRI’s to Spring Creek, but there were several disputes as to the Defendants’ requirements to pursue new leases and drill additional wells in the area (known as the “Tomahawk Prospect”) which would be subject to payments made to the Plaintiff. Plaintiffs claimed damages in two areas: (i) the discounted present value of overriding royalty interest on areas of mutual interest (damages ranging between $24.2 million and $59.3 million), and (ii) the potential working interest in the same area ($182-403 million). The court granted a partial summary judgment for the defense denying working interest damages.
Royalty underpayment cases are anticipated to remain steady in the current pricing environment. There is an understandable tension between mineral owners’ concern over shrinking payments and operators’ concern over profitability and favorable drilling economics.
Mercer Capital’s professionals have consulted and testified in a wide variety of energy litigation matters. We have extensive experience in damages and valuation-related litigation support and assist our clients through the entire dispute process by providing initial consultation and analysis, as well as testimony and trial support. To discuss a matter in confidence, please call one of our team members.