In Myers-Woodward, LLC v. Underground Servs. Markham, the Texas Supreme Court has granted a petition for review, with oral arguments scheduled for October 29, 2024. The primary questions raised in this case are who owns the right to use underground salt caverns created by a salt-extraction process and how a salt royalty interest is calculated. The 13th Court of Appeals previously overturned the trial court’s decision on several key issues. The two primary matters under review are: (1) the appropriate legal standard governing royalty payments, and (2) the ownership rights of underground salt caverns, specifically whether they belong to the surface owner or the holder of the mineral estate.
Background
Myers-Woodward, LLC v. Underground Services Markham, raises important questions regarding royalty payments and the ownership of underground salt caverns. The case involves a 160-acre property in Matagorda County where Underground Services Markham, LLC (“USM”) owns the mineral estate, while Myers-Woodward, LLC (“Myers”) holds the surface estate along with a 1/8 non-participating royalty in the minerals.
Between 2015 and 2019, USM drilled and stored hydrocarbons in the underground salt caverns without paying royalties to Myers. USM then sought a declaratory judgment to clarify its right to use the salt caverns for hydrocarbon storage and determine the appropriate royalty payments. In response, Myers countersued, arguing USM had no right to use the caverns and that they were also entitled to royalty payments in-kind. Both parties filed motions for summary judgment.
The trial court partially granted USM’s motion, ruling that the company owned the underground salt caverns. However, the court limited USM’s use of the caverns to the purposes outlined in the original 1947 deed, which did not include hydrocarbon storage. As for Myers’ motion for summary judgment, the court held that the 1/8 royalty should be calculated based on the market value of salt at the point of production. The court further ordered USM to pay Myers $258,850.41 in back royalties for the four-year period. Subsequently, both parties filed an appeal with the 13th District Court of Appeals.
Appellate Opinion & Subsequent Steps leading to Texas Supreme Court Review
The 13th Court of Appeals affirmed the trial court’s calculation of royalties owed to Myers, rejecting their claim to receive royalties in-kind. The court of appeals applied the general rule that royalties are measured at the wellhead, and further explained that if Myers had intended to receive royalty payments in-kind, they should have negotiated for it and included a stipulation in the lease. Since no such language was present, the default rule of calculating royalties at the wellhead applies.
The appeals court also reversed the trial court’s ruling on ownership, holding that Myers, not USM, owns the underground salt caverns. In its analysis, the appeals court noted that although USM owns the mineral estate, its rights extend only to the minerals extracted from the caverns, not the caverns themselves. The appeals court clarified that although a mineral interest owner has the right to enter and reasonably use the surface, this does not equate to ownership of subsurface structures. By concluding that the surface owner’s rights include the subsurface caverns, the appeals court reaffirmed the principle that the surface estate extends to all fixtures of the land, including those subsurface features. Both parties petitioned the Texas Supreme Court for review, and both petitions were granted.
This pending case is significant, as it reinforces the rule that the general royalty payment standard applies unless explicitly altered in an oil and gas lease. Further, it also acknowledges that the surface estate’s interest covers subsurface areas by default, a right granted through ownership, not through lease provisions. With oral arguments set for the end of October, the Texas Supreme Court’s decision will provide important clarification on royalty distribution and ownership rights.
Kuiper Law Firm, PLLC specializes in all aspects of oil and gas operations including oil, gas, and mineral leases. We will continue to monitor any updates as they pertain to this caselaw. If you have any questions about the information in this article or how it may affect your operations, please do not hesitate to contact us.