Gas Disputes

What is the value of CO2 in the oil sector?

There are vast numbers of mineral rights owners in the state of Texas and elsewhere in the Southwest, some of whom have been bringing lawsuits against energy producers for not paying the proper royalty compensation. Recently, a Denver resident, Jack Grynberg, was awarded $1.5 million by a Texas jury which found that ExxonMobil failed to act in good faith in connection with royalty payments for CO2 rights. Mr. Grynberg owns royalty rights on federal lands in southwest Colorado that has large reserves of the gas.

What is tertiary recovery?

CO2 is injected into wells in previously developed fields to enhance production. In west Texas, injections in such fields produce 200,000 barrels a day of so-called tertiary recovery. This technique is used to extract oil from reservoirs in which the oil is difficult to extract or requires more processing. Because this makes tapping the oil more expensive, and therefore less profitable, tertiary recovery is only worthwhile when the market price for oil is high. In order to tap wells through tertiary recovery, oil companies need to procure adequate supplies of CO2.

In 1983, Mr. Grynberg sold drilling leases to energy companies, including ExxonMobil and Kinder Morgan, and retained overriding royalties. Several years ago, he noticed that the royalties from Kinder Morgan were much higher than the compensation from ExxonMobil and he filed a breach of contract lawsuit against the oil company.

Calculating Royalty Payments

The overarching issue in many of these disputes is the method used to calculate royalty payments and how processing costs are assessed and allocated. In some states, such as Colorado, these costs cannot be deducted from the royalties. In Texas, however, production costs are subtracted from the sales price before the royalties are paid. Disputes often arise when royalty owners believe processing costs are too high. In this case, the jury found ExxonMobil failed to act in good faith because the royalties it paid were less than the value of the CO2.

Some energy sector observers believe the verdict may trigger similar lawsuits and prompt energy companies to be more cautious when calculating mineral rights royalties. Meanwhile a spokesman for the oil company said it does not agree with the verdict. In the end, these disputes typically involve unique legal issues that can best be handled by an attorney with expertise in oil and gas disputes.