Why Texans Are Chasing Millions in Oil and Gas Royalties

Dave Fehling/StateImpact Texas

Oil and Gas royalties paid to the State of Texas average $865 million a year

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,” Texas Land Commissioner Jerry Patterson told StateImpact Texas.

Patterson said his office is currently negotiating with two big oil companies (which he declined to name) for years of underpayments. Patterson said the the unpaid royalties could total upwards of $100 million.

In the past several years, his office has collected  royalties totaling an average of $865 million dollars annually. The money goes into a fund for public education. 

“There’s nobody out there who wants to intentionally shortchange us. 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 have to 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 told StateImpact 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 in December of last year, 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 told StateImpact 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.

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).

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 pubic.

“I would say there is actually remarkably little litigation regarding what’s a fairly complicated accounting procedure to pay those royalties,” Strama told StateImpact.