Energy companies are paying billions of dollars in oil and gas royalties to Texas landowners. But some owners say they’ve been short-changed. The biggest among them: The State of Texas.
“If they don’t pay the royalty, that’s stealing,” Former Texas Land Commissioner Jerry Patterson told us.
Patterson said the Texas Railroad Commission is constantly negotiating with big oil companies (which he declined to name) for underpayments. Patterson said that when he was in office the unpaid royalties one year totaled upwards of $100 million. Private property owners are often owed more. Let that sink in a moment.
In the past several years, the Texas Railroad Commission has collected royalties totaling hundreds of million dollars annually. Some of the money goes into a fund for public education. How much have private owners collected?
“There’s nobody out there who wants to intentionally shortchange the state of Texas. Not many anyway. But it does happen,” Patterson said.
But here’s the problem: Patterson said determining that a company has underpaid is far more likely if the landowner is the State of Texas rather than a private owner.
“Private parties are at a little bit of a disadvantage. They get a royalty check and they may not have the resources to verify that, to do all the things that we do to make sure we’re getting paid correctly,” Patterson said. His office has attorneys, petroleum engineers, and field inspectors who review royalty payments.
What’s more, there is no statute of limitations on the state if it wants to pursue a lawsuit alleging underpayment. But private landowners must bring legal action within four years. If they don’t, they could end up like Dallas resident Ralph Ross.
PRIVATE LANDOWNER SUES SHELL
Ralph Ross’s family had owned property in south central Texas for several generations. In the 1960’s, they leased some of it to Shell Oil which drilled on the property, struck natural gas, and started paying the family royalties on the money it earned from selling the gas.
But years later, Ross said he got a tip from the Texas General Land Office, which also had an interest in the same gas field, that the royalties Shell was paying the state were more than what the company was paying the Rosses. Had he not gotten that tip, Ross said he would never have known.
“Without actually seeing their internal records, which they obviously have no obligation to show me without a lawsuit over it, I would have never reasonably discovered what was going on.”
So in 2002, Ross went to court in Austin and sued Shell for “breach of contract, unjust enrichment, and fraud” according to court documents.
“But of course, (Shell) immediately moved to transfer venue down to Houston which is obviously a big oil town, thought that they had a much better shot down there,” said Ross.
Shell would contend that the royalty discrepancy was not fraud but rather was an accounting error or computer glitch, according to court documents.
But the jury in Houston that Ralph Ross thought might be sympathetic to a big oil company instead found in favor of Ross, saying Shell owed him $72,532.09 in damages plus interest and legal fees. The judgement would later be affirmed by a Texas Court of Appeals.
But then, Shell took the case to the Texas Supreme Court. And it was there Ralph Ross…lost.
TEXAS SUPREME COURT TELLS ROSS IT WAS HIS FAULT
One Friday on a cold December day, as strong gusts of wind and rain swept the Texas Supreme Court building in Austin, the court delivered its opinion on Shell’s appeal.
“We hold that evidence conclusively established that Shell’s alleged fraud could have been discovered by the Rosses through the exercise of reasonable diligence. Accordingly, we reverse the court of appeals’ judgement and render judgement for Shell,” wrote Justice Debra Lehrmann.
In other words, it was the Rosses own fault for not having found the underpayments sooner. That was a critical point because the statute of limitations of four years had expired when Ralph Ross sued. The lower courts had said the statute didn’t apply. But the state Supreme Court said it did and thus, Ross was owed nothing.
“Their reasoning essentially was that they thought it was more important for these oil company executives to rest easy knowing they’ve gotten away with whatever they’ve done to the royalty owners,” said Mark Perlmutter, the Austin attorney who represented the Rosses.
Perlmutter said the court’s opinion puts an unreasonable burden on royalty owners, requiring them to do their own exhaustive audits of the payments they receive.
“If the Supreme Court is saying, you guys should be more diligent, then they’re setting a standard that nobody can possibly meet,” said Perlmutter.
AN EAST TEXAS CASE
Charles Hooks, a Texas property owner in Jefferson County had a lawsuit over just how much “due diligence” a mineral owner must show in auditing his or her payments. The case concerns whether a mineral owner should get extra time to sue for fraud after discovering that an operator provided false information about drilling plans. The legal team for Hooks, the plaintiff, calls the matter “perhaps the single most important policy issue in Texas oil and gas today.”
A Jefferson County jury returned a verdict in Hooks’ favor, saying Samson Lone Star, an oil and gas partnership, owed him more than $21 million for withholding royalties. The First Court of Appeals in Houston reversed the ruling, saying Hooks waited too long to file the suit, and could have discovered payment discrepancies years earlier by poring over public records.
Samson, backed by Texas’ biggest energy groups, argues that the four-year statute of limitations on fraud cases is appropriate, and that mineral owners should take more initiative in auditing their royalty payments. Looser limits would create uncertainty for oil and gas operators, the company argues, making it difficult for them to balance their books.
The Texas Supreme Court has set a high bar for mineral owners in past disputes. John McFarland, an oil and gas attorney who filed a brief in support of Hooks, said he knows of no similar case in which the mineral owner prevailed. The court last addressed the issue in a 2011 royalty dispute, when it overturned a jury verdict favoring a mineral-owning family to rule in favor of British Petroleum (BP)
GAS & OIL INDUSTRY: NO BENEFIT FROM SHORTCHANGING OWNERS
The Texas Oil and Gas Association (TxOGA), which had filed a brief in support of Shell in the Ross case, maintains that the industry does not intentionally take advantage of those who are owed the royalties.
“There’s no benefit to shortchanging the royalty owners.The cost of litigation far exceeds any value you could get from shortchanging the royalty owners,” said Keith Strama, an attorney for TxOGA (but who did not work on the Shell brief).
Strama said the Texas legislature has mandated increased transparency in how companies report royalties and what rights landowners have to request information to explain how the payments are figured.
What’s more, Strama said that in the big picture, with gas and oil production booming, the disputed amounts—while sometimes in the millions—are but a fraction of the billions being paid to landowners, both private and public.
“I would say there is actually remarkably little litigation regarding what’s a fairly complicated accounting procedure to pay those royalties,” Strama said
We find that a bit incredulous since, no one enforces the Oil and Gas Companies from short changing royalty owners. In addition, there is a shortage of oil and gas attorneys in the state of Texas who will represent royalty owners.
Why you may ask? The majority of oil and gas attorneys often have done work for the oil and gas companies. These large companies often own numerous subsidiaries that do not keep an attorney in house. Therefor it is frequently a conflict of interest to represent a client against them. Besides who do you think pays more. An oil and gas company or your average Texas property owner?
In addition, we would also point out the Judicial System as a whole. They often lean towards the oil and gas companies because they make the better campaign contributions.
Where can I find statutes outlining the rights of royalty owners?
The statutes outlining the rights of royalty owners can be found in the Texas Natural Resources Code, TEX. NAT. RES. CODE ANN. . Sections 91.401 to 91.406 of the Natural Resources Code concern the timely payment of royalties. Note that ‘91.406 provides for minimum damages and recovery of attorney’s fees in a successful action to recover past due payments. Section 91.501 to 91.506 of the Natural Resources Code outline the information to which royalty owners are entitled from their payor. The Railroad Commission cannot intervene in royalty matters. If you would like the names of experienced oil and gas attorneys in your area, the State Bar of Texas has a lawyer referral service and can provide a list of lawyers board certified in oil and gas law. Their address is:
State Bar of Texas
P.O. Box 12487
Austin, Texas 78711
The Railroad Commission cannot advise you whether you should enter into a lease or any other agreement, or whether an operator is in compliance with the terms of a lease. Since these are private contractual matters, you may want to consider contacting an experienced oil and gas attorney