Natural Gas Royalties Prompting a Spate of Litigation

Between 2008 and 2011, natural gas exploration and production companies paid out more than $1.2 billion in mineral leases and royalty payments to Arkansas residents.

In 2011 alone, $346 million in payments were made.

But not everyone’s satisfied, and it shows in the spate of lawsuits that follow leasing activity in the Fayetteville Shale.

The companies seem to expect this. Southwestern Energy Co. of Houston, for example, in its 2011 annual report, said it is “subject to various litigation, claims and proceedings that have risen in the ordinary course of business. Management believes, individually or in aggregate, such litigation … will not have a material adverse impact on our financial position … but these matters are subject to inherent uncertainties and management’s view may change in the future.”

“Oil and gas law is just a different breed of animal,” said Richard Mays, a Heber Springs lawyer who often represents landowners with gas equipment on their property. “It’s a very strange area of law in some ways.”

It’s strange enough that it causes constant confusion among landowners. The problem is a disconnect between the two parties: Gas exploration companies are in a hurry to drill, mineral rights owners are in a hurry to be paid, and the timetables for the two priorities aren’t always in sync.

Keith Grayson, another lawyer in Heber Springs, said he’s involved in a large number of suits against gas companies. Almost always, they’re stories of landowners with unfulfilled expectations.

“There are a lot of cases where the gas companies go out, and they lease minerals, and they pay bonus money, and the mineral owners are led to believe that after the wells are drilled, they will start receiving royalties,” Grayson said. “But what happens is, the gas companies are in a rush to gain control over the drilling units, so their land men find out the identities of anyone that might have an interest in the minerals, and they rush out and lease them.”

There’s not the same urgency, Grayson said, to pay royalties for the sale of the gas.

Thomas Daily, an attorney in Fort Smith, typically represents the gas companies in suits like this.

“The truth of the matter is, most of these disputes arise out of a poor title that we had nothing to do with,” Daily said. “We are unable to figure out … who’s entitled to the royalties.”

Then the burden falls on the owners, according to Grayson.

“So what happens is, many times, if there’s not a perfect title to the minerals, the gas companies put the royalties in suspense, then leave it up to the mineral owners to satisfy the gas companies,” Grayson said. “Then they have to go out and hire lawyers and spend money to satisfy the gas companies.”

Grayson gets calls every week from mineral owners with royalties in suspense and a list of items they have to “cure” before the royalties are unfrozen.

“That’s what the gas company would refer to as a title defect, or an uncertainty in the chain of title,” Grayson said. “So they have to go out and get a lawyer and set about curing the alleged title defects.”

Why the owners aren’t initially told about the uncertainties, Grayson said, is the “ultimate question,” and one that usually needs to be answered through months of court proceedings.

“One could argue that the intent of the gas company is to gain control of the drilling unit, and in order to do that, they have to have 51 percent of the mineral owners leased in the mineral unit,” he said. “So their objective is to get 51 percent or more leased, and they’re not particularly concerned at that point with whether or not there are any defects in the title or not. It’s only later, when they do a drilling title opinion, that they are more concerned about paying the proper party for ownership of the royalties.

“And the mineral owners don’t understand that, and they aren’t told up front.”

Many times, Grayson said, the companies will list the parties with interest in titles and let the court decide who gets the royalties.

“We have a name for that,” Daily said. “It’s called an interpleader. Very frequently, we’ll be sued by Joe, who says, accurately, that the gas companies have been paying Sam instead of me, and they should have been paying me. We’ll go back, and we’ll review the title, and in all likelihood, they won’t agree with that — so we don’t violently disagree and risk the company’s money. We interplead.”

“It’s just the party that has the superior title,” Grayson said. “But it’s up to the party to litigate among themselves and get an order from the court that they are in fact the true owner.

“So the bottom line is this: Many mineral owners that executed leases to gas companies didn’t realize at the time that they were really signing up to be a party to the lawsuit before they can get royalty money.”

Sadly, Grayson said, many of the owners who call him have to walk away.

“Some of these people may have only one or two acres,” he said. “When I tell them it could cost thousands of dollars to fix the problem, it’s just not worth it to them.”

Despite the decreased exploration and production activity in the shale play, the lawsuits aren’t showing any signs of going away.

“The leases are pretty complicated,” Mays said. “They’re written in arcane language, people don’t really understand them, and unfortunately they don’t always go to a lawyer before signing them.”  W

 

Environmental Questions also Prompt Lawsuits Against Gas Companies

 

Royalty payments and lease wording aren’t the only types of suits filed against gas companies.

“I’ve had two cases that involved five-year leases where the gas company had to produce gas before the expiration of the five-year term,” said Keith Grayson, an attorney in Heber Springs. “They took the position that if they started drilling a well before the five-year term expired, it was enough to perpetuate the lease, and it wouldn’t expire at the end of the five years.”

The biggest alternate source of suits, however, is the environment. Richard Mays, another attorney in Heber Springs, said he does a lot of environmental work.

One of his recent high-profile cases involves well drilling in the Ozark National Forest and underneath Greers Ferry Lake. The suit, filed in 2011, isn’t actually against a gas company; it’s against the government. Mays said the U.S. Forest Service, the Bureau of Land Management and the Army Corps of Engineers have been lax in letting gas companies explore in protected areas.

“I’ve filed a couple of other suits against gas companies,” Mays said. “Things like pipelines and condemnation of pipelines.”

Another highly publicized issue was the question of the cause of earthquakes around Greenbrier in Faulkner County. Emerson Poynter LLP of Little Rock filed a class-action lawsuit in 2011 against several gas companies, claiming the hydraulic fracturing technique used by the companies had caused several hundred earthquakes in the Faulkner County area. The suit is ongoing.

Mays said overt environmental damage to private land has been difficult to prove.

“I didn’t hear of anybody that had significant damage from those earthquakes,” Mays said. “You can take anecdotal instances where people claim to have had water contaminated. The problem was finding the causal connection. I had one client who had a well whose flow was affected, but not the quality of the water. When you look at the number of wells that are drilled, there are probably relatively few instances of any contamination that anybody knows about, or that you can attribute with any degree of certainty to the production company.”