4. Eleventh District Court of Appeals—Eastland
This case dealt with determining which party owed royalty payments to Lessor-Plaintiffs after Apache Corporation (“Apache”) paid Devon Energy Production Company, L.P. (“Devon Energy”) a share of its net revenue from wells drilled on the leased premises. The primary issue decided in this case was whether a producing oil and gas operator/lessee was liable under Texas Natural Resources Code § 91.402(a) for failing to directly furnish royalty payments to lessors with whom the operator/lessee did not have a lease. The appellate court affirmed the trial court’s ruling that no duty arises in the absence of contractual privity between a lessor and lessee; thus, Apache was not liable to Lessor-Plaintiffs for royalty payments furnished to Devon Energy.157
The initial suit arose out of a conveyance whereby the grantor, Norma Jean Hester, leased her undivided one-third mineral interest in the subject land to Apache, reserving a 25% royalty interest. The remaining mineral interest owners (the “Lessor-Plaintiffs”) subsequently leased their combined two-thirds mineral interest to Devon Energy, also reserving a 25% royalty interest. After failed attempts to negotiate terms of a joint operating agreement for the shared development of the mineral estate, Apache drilled seven producing oil and gas wells on the premises. Apache subsequently paid Devon Energy’s two-thirds share of the net revenue to which Devon Energy was entitled as Apache’s cotenant, less production and drilling costs; however, Apache did not pay Devon Energy’s royalty owners—the Lessor-Plaintiffs.158
Seeking the royalties thought to be owed to them based on the nature of their relationship with the oil and gas companies, the Lessor-Plaintiffs filed suit against both Devon Energy and Apache. In response, Apache argued it was under no obligation to pay these royalties since the company did not lease their minerals to the Lessor-Plaintiffs, and Devon Energy argued that it was not required to pay royalties until it received payments from Apache.159 Devon Energy further cross-claimed against Apache, asserting Apache owed royalties to the Lessor-Plaintiffs under Section 91.402 of the Texas Natural Resources Code, which states the following language:
The proceeds derived from the sale of oil or gas production from an oil or gas well located in this state must be paid to each payee by payor on or before 120 days after the end of the month of first sale of production from the well. After that time, payments must be made to each payee on a timely basis according to the frequency of payment specified in a lease or other written agreement between payee and payor.160
All parties moved for partial summary judgment on the issue of which party owed the Lessor- Plaintiffs royalty payments. The trial court granted the Lessor-Plaintiffs’ motion against Devon Energy but denied their motion for the same against Apache. The trial court also denied Devon Energy’s motion against Apache but granted Apache’s motion against Devon Energy. The Lessor- Plaintiffs subsequently settled their claims against Devon Energy, and the court granted the parties’ motion to sever Devon Energy’s cross-claim against Apache. Ultimately, the trial court entered a final judgment against Devon Energy, ruling that Apache did not owe royalties to Devon Energy because Section 91.402 did not require Apache to pay royalties to the Lessor-Plaintiffs on oil and gas proceeds from the wells Apache drilled.161
The critical question considered on appeal—whether Apache had statutory liability for paying royalties directly to the Lessor-Plaintiffs pursuant to their leases with Devon Energy—had not been addressed up until this time.162 In beginning their analysis, the appellate court noted the decisive inquiry boiled down to determining the presence of a “payor-payee” relationship between Apache and the Lessor-Plaintiffs, as defined under the Texas Natural Resources Code.163 Section 91.401(1) of the Code defines a “payee” as “any person or persons legally entitled to payment from the proceeds from the sale of oil or gas from an oil or gas well located in this state.”164 In contrast, Section 91.401(2) of the Code defines a “payor” as the party undertaking to distribute oil and gas proceeds to the payee, whether as the purchaser of the production of oil or gas generating such proceeds or as operator of the well from which such production was obtained or as lessee under the lease on which royalty is due.165 In other words, a “payor” is essentially the first purchaser of produced oil or gas from an oil or gas well.
While Devon Energy argued that a payor-payee relationship existed between Apache and the Lessor-Plaintiffs, the court disagreed. Devon Energy argued that Apache was a “payor” under the statute because it was the operator of the well from which the oil and gas production was obtained, and the Lessor-Plaintiffs were “payees” because they were legally entitled to payment from the proceeds from the sale of the oil and gas. Contrary to Devon Energy’s argument, the court reasoned that in construing a statute, its primary objective is to glean the legislature’s intent for its writing. The court posited that analyzing statutes for such a purpose requires the bench to read the statute “as a whole” and based on the plain meaning of the textual language.166 Thus, in studying Section 91.401(1) of the Texas Natural Resources Code, the court understood the legislature’s intent for a “payor-payee” relation to exist—to qualify as a “payor” who owes a “payee”—a payor must have undertaken, or set out to obligate itself, in some way to the payee.167
Citing Prize Energy Res., LP v. Cliff Hoskins, Inc., Devon Energy contended that the lack of a lease with the Lessor-Plaintiffs did not affect Apache’s status as a “payor” under the circumstances, as Texas courts have interpreted the definition of a “payor” to include well operators, even if the operator does not have a lease with the royalty owner.168 However, the court rejected Devon Energy’s argument because the facts of the Prize Energy case are distinguished from the case at hand in that the royalty interest in Prize Energy was an NPRI and not a royalty interest reserved by a lease.
Applying this interpretation of the statute and common law to the facts of the case, the court held that the Lessor-Plaintiffs were not “payees” of Apache because Apache never “undertook” to enter into a relationship with the Lessor-Plaintiffs.169 Moreover, although Apache was the operator of the well from which the oil and gas production was obtained, it could not be considered a “payor” to the Lessor-Plaintiffs because it did not undertake to distribute oil and gas proceeds to them.170 Instead, Apache set out to legally bind itself to Hester by undertaking to distribute a portion of the proceeds of its wells to her.
The court concluded by noting how this holding is consistent with Section 91.402(a), as the statute specifically calls for payments to be made by a payor to its payee(s) according to the frequency of payments specifically enumerated in a lease or other written agreement between the payee and payor. Thus, as Apache and the Lessor-Plaintiffs were not in contractual privity with one another, they were not entitled to royalty payments from Apache. Accordingly, the court overruled Devon Energy’s appeal.
156 Devon Energy Prod. Co., L.P. v. Apache Corp., No. 11-16-00105-CV, 2018 WL 2022699 (Tex. App.—Eastland Apr. 30, 2018).
157 Id. at *1.
160 TEX. NAT. RES. CODE ANN. §91.402(a) (West Supp. 2017).
161 Devon Energy Production Company, L.P. v. Apache Corporation at *1.
162 Id. at *2.
163 Id. at *3.
164 TEX. NAT. RES. CODE ANN. §91.401(1) (West Supp. 2017).
165 TEX. NAT. RES. CODE ANN. §91.401(2) (West Supp. 2017).
166 Devon Energy Production Company, L.P. v. Apache Corporation at *4.
167 Id. at *4.
168 Prize Energy Res., LP v. Cliff Hoskins, Inc. , 345 S.W.3d 537 (Tex. App.—San Antonio 2011, no pet.).
169 Id. at *5.
170 Id. at *4.