Cimarex Energy Co. v. Anadarko Petroleum Corp.
A few months ago, I wrote about an issue that occurs when there are co-tenants of mineral estates. Specifically, what happens when two operators both own oil and gas leases under the same tract of land and one drills without a Joint Operating Agreement in place. The issue in the case I wrote about previously (Devon Energy Production Company, L.P. v. Apache Corporation) was who had the responsibility to pay the non-operating party’s Lessors royalty payments. The Eleventh Court of Appeals of Texas held that it was the non-operating party’s responsibility, even if it was not yet receiving any payments from the operator. A petition for review has been filed with the Texas Supreme Court.
A new case involving another mineral co-tenancy issue is now in front of the Texas Supreme Court: Cimarex Energy Co. v. Anadarko Petroleum Corp. Here, Anadarko, the majority owner of a leasehold tract, drilled a well without executing a Joint Operating Agreement with Cimarex, the minority leasehold owner. Although Cimarex asked to join the well, Anadarko declined. There was no argument as to who was required to pay Cimarex’s royalty owners, and Cimarex requested information from Anadarko that would enable Cimarex to make the required payments. After a few skirmishes, Anadarko provided the information and also began paying Cimarex its proportionate proceeds after Anadarko recouped its costs. Cimarex timely paid all of the required royalties to its Lessors.
However, in December of 2014, Anadarko stopped paying Cimarex. When Cimarex complained, Anadarko argued that Cimarex’s lease had expired and Cimarex was no longer entitled to receive any of the net revenue. Cimarex maintained that the lease was held past the primary term by Anadarko’s production. Anadarko disagreed, and Cimarex filed suit.
Cimarex’s lease was for a five-year term and for “as long thereafter as oil or gas is produced from said land or from land with which said land is pooled.” Cimarex argued that there was production on the lands, and although it was Anadarko’s production, under the terms of the lease it was sufficient to keep the lease alive beyond the primary term. Anadarko claimed that in order for Cimarex to maintain the lease after the primary term by production, the production relied upon must be Cimarex’s. Cimarex pointed out that the lease only called for production and did not specify that Cimarex had to be the actual producer.
Despite Cimarex’s arguments, the court of appeals agreed with Anadarko. It noted that “various Texas courts, including this Court, have interpreted similar mineral leases—which contain habendum clauses requiring production to keep a lease alive without specifying who was required to cause the production—to impose an obligation on the lessee to actually cause the production.” While Cimarex argued that this was ignoring the plain language of the lease and rewriting it to add a requirement that did not exist before.
The court of appeals explained its reasoning by pointing out that “the Cimarex lease contained various other provisions imposing requirements on Cimarex to take action in other contexts to keep the lease alive.” The court listed the provisions that specifically required Cimarex to be the actor, as follows: pay royalties; commence additional drilling if production ceases after the primary term; the right and power to pool; the right to assign the lease; the use of oil, gas and water for operations; and, the right to remove property at the expiration of the term. The court of appeals reasoned that these provisions implied “that the lessors intended for Cimarex to be the one to cause production on the property in order to extend the lease into the secondary term.” Thus, the court of appeals held that because Cimarex was not the party that actually caused the production, Cimarex’s lease had terminated at the expiration of the primary term.
Cimarex’s attorneys filed an extremely well written and argued petition for review with the Texas Supreme Court, and Anadarko’s reply is currently due by September 16, 2019. We will be waiting some time to see if the Texas Supreme Court will accept the petition for review. If accepted, we’ll wait even longer still to get a ruling. But the importance of this issue merits watching, as the ultimate outcome could dramatically affect both existing minority leasehold owners as well as a mineral owners’ chance to competitively market their minerals for leasing.