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The Clock is Ticking for Mineral Estate Owners to Ask for Audits

Everyone trying to get their fair share

By Jennifer Hiller

Mineral owners have four years to make sure contracts are followed.

More than a billion barrels of crude oil have flowed from the Eagle Ford Shale, and now many mineral owners want to know whether they’ve gotten their fair share.

More South Texas mineral owners are asking for audits to check their royalty payments, making sure that oil companies are paying correctly and following the requirements of their leases, attorneys say.

Why now?

Oil prices are slumping — causing everyone to scrutinize their statements — and there’s a four-year statute of limitations for making a legal claim for breach of contract.

The Eagle Ford discovery well was drilled in late 2008, but it was a few years before oil production started to surge in the South Texas field. The Eagle Ford now makes around 1.7 million barrels of crude oil and other liquids daily, according to the U.S. Energy Information Administration.

“The clock is ticking,” said Robert Park, an attorney with Uhl, Fitzsimons, Jewett & Burton in San Antonio. “Your statute of limitations for this is four years.”

A basic royalty audit can use an owner’s statements, check stubs and data about the lease that’s publicly available from the Texas Railroad Commission. That could show if there’s a payment problem worth further investigation, Park said, though families that have received more than $500,000 in royalties may want to do a more in-depth audit.

Lease audits look at the terms of the lease — things such as offset obligations or continuous drilling provisions, which require an operator to keep drilling wells to hold a lease. Producing wells usually hold a certain amount of acreage, giving the company the right to drill more wells in the future. But Park said there’s sometimes a difference between the amount of acreage an operator and a mineral owner thinks is being held.

There are also disputes about the surface obligations that may be included in leases where the mineral owner also owns the surface of the property — whether topsoil was replaced correctly after putting in a pipeline, for instance, or whether retention berms were built to keep spills from contaminating the rest of the property.

Some problems pop up again and again: Workers speeding on a ranch, hunting on a property without permission or leaving gates open.

“It’s over and over with people not closing the gates,” said attorney Ezra Johnson, also with Uhl, Fitzsimons, Jewett & Burton.

In one instance, someone was hitting golf balls into a pasture, where grazing cattle ate them.

While oil companies will have the lease on file, as well as a lease summary to refer to for key requirements, Johnson said it’s easy for an operator to lose track of the details of a lease, especially if the original operator sold the lease to another company. This can lead to companies not following the finer details of a lease agreement.

“They get lost in the shuffle of a lot of leases,” Johnson said.

Site visits done as part of an audit have found metering errors, including bypasses that route hydrocarbons around the meter entirely, making it impossible for a mineral owner to know how much oil or gas was produced, Park said. More common problems might be a broken needle on the meter.

The General Land Office does audits of oil and gas production on state lands to make sure the state is being paid properly. State law also gives the GLO the authority to inspect and examine an operator’s books, accounts, reports or other records relating to the payment of royalties.

Ideally, a good mineral lease will allow individual mineral owners similar access to a company’s accounting records.

Mineral owners often assume their royalty payments are correct, but the Texas courts have made clear that the mineral owners have the burden of discovering any problems and taking legal action.

The key case is Shell Oil Co. v. Ross. In that situation, Ralph Lee Ross sued Shell Oil Co. and Shell Western E&P, arguing that the company had for several years underpaid royalty on natural gas under a mineral lease to Ross’ grandmother.

Shell said the error was an accounting mistake. A jury found that the company had fraudulently concealed its underpayments, and the appellate court in Houston upheld the decision in favor of the Ross family.

But the Texas Supreme Court sided with Shell, ruling that Ross had waited too long to discover that the family had been underpaid. The statute of limitations — four years — had long passed by the time Ross sued.

“Readily accessible and publicly available information could have led the Rosses to discover that Shell was underpaying royalty before the limitations period expired,” the Texas Supreme Court ruled. “We hold that evidence conclusively established that Shell’s alleged fraud could have been discovered by the Rosses through the exercise of reasonable diligence.”

But it isn’t all disputes these days. There’s at least one area of the mineral lease where companies and mineral owners are seeing eye to eye right now: No one wants to rush to drill cheap oil.

“The companies asking for more time to drill wells,” Johnson said.

“The operators and the mineral owners feel the same about that one,” Park said.

Twitter: @Jennifer_Hiller

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