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Repsol Settles Class Action Lawsuit with Eagle Ford Royalty Owners

Regmund, et al v. Talisman Energy, USA, Inc.

Synopsis

Repsol S.A. has agreed to settle a proposed class action lawsuit filed on behalf of more than 2,700 royalty owners in the Eagle Ford Shale concerning the alleged underpayment of royalties under leases operated by Talisman Energy UA, Inc. (which was acquired by Respsol in 2015).

Summary of the Complaint and Settlement

The royalty owners filed a lawsuit in 2016 against Talisman alleging that Talisman fraudulently underreported royalties beginning in 2013. The oil and gas leases under which Talisman operated contained royalty clauses that required Talisman to pay royalty on oil and gas production “actually sold.” Rather than pay royalties on actual volumes sold, the complaint alleged that Talisman improperly estimated sales volumes because its production operations involved the commingling of production from multiple wells with differing ownership interests. The complaint alleged that Talisman was unable to identify sales volumes for each individual well as a result of having commingled production from multiple wells. As a result, Talisman resorted to applying a “shrinkage” factor on production volumes to calculate sales volumes.

“Shrinkage” is a term used in the industry to describe the difference between production volumes and volumes of oil and gas entering the pipeline for sales. According to the complaint, Talisman’s shrinkage factor was determined arbitrarily, and although there is no set industry standard, Talisman’s own representatives had previously concluded that even 20% was excessive.

The complaint further alleged that Talisman conceded that “it did not have the capability to manage the complexities of the leases it purchased . . . and its production accounting system was incapable of proper allocation of commingled oil and gas production and sales.” Commingling oil and gas production from wells of differing ownership interests made it difficult, if not impossible, to allocate the sales volumes back to the individual wells.

Following years of litigation, the parties ultimately reached a Settlement Agreement which Judge Keith Ellison of the United States District Court for the Southern District of Texas in Houston approved. Under the agreement, Repsol has agreed to pay 100% of the underpaid royalties, totaling $24 Million and an additional $9 Million in attorneys’ fees, while admitting no wrongdoing.

Key Concept: Production and Sales Volume Reporting Requirement

Under Texas law, operators are required to report volumes for well production and sales to the Texas Comptroller of Public Accounts. Laws have also been enacted to assist royalty owners in verifying that its royalty payments are correct. Entities paying oil and gas royalties must provide detailed information accompanying all royalty payments, including the identification of each individual well, volumes produced from each well, sales price, the royalty owner’s decimal interest, and deductions for expenses and taxes.

Key Concept: Confusion of Goods

Texas law also requires that an operator commingling production be able to identify each royalty owner’s proportionate share of production commingled and sold with reasonable certainty. If, as alleged in the complaint, Talisman’s accounting system was incapable of allocating commingled oil and gas back to the individual well, it would be seemingly impossible to identify each royalty owner’s share of production. The confusion of goods theory essentially gives exclusive ownership of the commingled goods to the non-commingling party without any compensation to the commingling party.

Takeaway

It is of utmost importance that an operator in Texas configure its production accounting systems in a manner that will allow it to properly track production and sales volumes, especially if the operator is commingling production from different wells of varying ownership. As evidenced by this case, if an operator is alleged to be incapable of accurately calculating production and sales volumes, and resorts to relying on excessive or arbitrary adjustment factors, it is unlikely to go unnoticed by royalty owners and their attorneys and can lead to significant litigation costs.

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