September 7, 2018

With the new term underway in the Texas Supreme Court, Law360’s Senior Energy Reporter Keith Goldberg took a look at a number of cases before the Court. He noted that the justices will hear cases that address oil and gas issues including how to define post-production costs in calculating royalties, how to enforce so-called force majeure provisions that allow companies to suspend contractual obligations, and how much freedom companies have to assign drilling farmout agreements.

Partner Jonathan Baughman, who chairs the firm’s oil and gas practice group, spoke with Law360 about two cases in particular: TEC Olmos LL et al. v. ConocoPhillips Co, and Devon Energy Production Co. LP v. Apache Corp.

In the first case, TEC Olmos and Terrace Energy Corp. want the Texas Supreme Court to review a split decision from the First Court of Appeals that came down in May. In the decision, the Court sided with ConocoPhillips in its view that a drop in oil prices doesn’t constitute an act of God that would excuse a breach of contract for a drilling project.

Jonathan said the case comes down to how far parties can stretch force majeure provisions in their contracts given that the Texas Supreme Court has consistently held that contracts should be enforced as written.

“You have a generalized force majeure provision, but you have this wording where it said, to the extent their performance is prevented or hindered, force majeure applies. I think the court is forced with reconciling that with general language in Texas law of force majeure that a change in economics is always foreseeable.”

In June, Devon Energy Production urged the Texas Supreme Court to overturn an April decision from the Eleventh Court of Appeals finding that driller Apache had no statutory responsibility to pay oil and gas production royalties to a different groups of property owners. The appellate court found Apache did not have a “payor-payee” relationship under the Texas Natural Resources Code and therefore wasn’t obligated to make royalty payments with landowners with whom they did not have a lease.

Jonathan comments that if the Texas Supreme Court were to take this case and reverse the appellate court, it could have far-reaching impacts affecting many other co-tenants of mineral estates.

“They would be obligated to find out who all the royalty owners are and pay them,” Baughman said. “Right now, that's not the law.”

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