The Texas Prompt Payment Act in Oil and Gas Construction
In December 2024, the Texas First Court of Appeals in Houston addressed a novel question: the mineral exemption under the Texas Construction Prompt Payment Act (Chapter 28 of the Texas Property Code, “PPA”) in the case Arrow Field Services, LLC v. Linde Engineering North America, Inc. 710 S.W.3d 856 (Tex. App. – Houston [1st Dist.] 2024). In its appellate decision, the Court of Appeals set the precedence that construction of an NGL facility fell within the mineral exemption of the PPA, foreclosing the appellee’s ability to recover 1.5% monthly compounding interest on overdue sums.
Chapter 28 of the PPA contains an exemption for what can generally be classified as “energy construction efforts.” The exemption of Section 28.010 was not included in the introduced bill, CSHB 1522, and was only added to address concerns that the PPA “could unintentionally affect oilfield contracts. . . [which] almost always involve a contingency, providing for payment only when oil is found. The language of the bill could force drillers to bill for services monthly even for dry holes.” See CSHB 1522 bill analysis report.
As a result, the following mineral exemption was added when the PPA was enacted in 1999:
Sec. 28.010. EXEMPTION FOR MINERAL DEVELOPMENT AND OILFIELD SERVICES.
(a) This chapter does not apply to any agreement:
(1) to explore, produce, or develop oil, natural gas, natural gas liquids, synthetic gas, sulphur, ore, or other mineral substances, including any lease or royalty agreement, joint interest agreement, production or production-related agreement, operating agreement, farmout agreement, area of mutual interest agreement, or other related agreement;
(2) for any well or mine services; or
(3) to purchase, sell, gather, store, or transport oil, natural gas, natural gas liquids, synthetic gas, or other hydrocarbon substances by pipeline or by a fixed, associated facility.
(b) In this section:
(1) “Agreement” includes a written or oral agreement or understanding:
(A) to provide work or services, including any construction, operating, repair, or maintenance services; or
(B) to perform a part of the services covered by Paragraph (A) or an act collateral to those services, including furnishing or renting equipment, incidental transportation, or other goods and services furnished in connection with those services.
(2) “Well or mine services” includes:
(A) drilling, deepening, reworking, repairing, improving, testing, treating, perforating, acidizing, logging, conditioning, purchasing, gathering, storing, or transporting oil or natural gas, brine water, fresh water, produced water, condensate, petroleum products, or other liquid commodities, or otherwise rendering services in connection with a well drilled to produce or dispose of oil, gas, or other minerals or water; and
(B) designing, excavating, constructing, improving, or otherwise rendering services in connection with an oil, gas, or other mineral production platform or facility, mine shaft, drift, or other structure intended directly for use in exploring for or producing a mineral.
Arrow Field v. Linde
In late 2022, a prompt payment dispute arose between Arrow Field Services, LLC (“Arrow Field”) and Linde Engineering North America, Inc. (“Linde”). The construction project was an NGL facility, with Linde seeking payment for design services. Following trial, the jury found in favor of Linde, after which the parties submitted extensive briefing on whether the PPA’s mineral exemption applied to the hefty interest award. The trial court declined to apply the exemption, and Arrow Field appealed, asserting that Sections (a)(1) and (a)(3) prohibited awarding Linde interest under the Property Code on the past due amount awarded.
In the first case of its kind, the First District Court of Appeals addressed the interpretation and application of Sections 28.010(a)(1) and (a)(3). After applying common understandings of the statute’s undefined terms, the appellate court concluded that the mineral exemption to the PPA applied and foreclosed Linde’s ability to recover interest under the Property Code. Linde then appealed to the Texas State Supreme Court who granted certiorari. While pending review, the parties reached a confidential settlement, asking the Supreme Court to vacate the trial court’s award and the appellate court’s decision, which was granted. Thus, though the reported case may stand as persuasive authority, it no longer has precedential value.
Under prevailing principles of statutory construction, the appellate court was left with little-to-no alternative than to hold that (a)(1) and (a)(3) applied. However, this case highlights that in constructing and enacting Section 28.010, the 76th Texas Legislature overreached the articulated concern raised during CSHB 1522 review: forced payment for non-producing oil and gas exploration. While the current PPA exemption certainly favors oil and gas developers and producers, it ignores the interests of industrial contractors who provide material and labor to design and construct large storage and processing facilities.
Impact on Energy Development
The current domestic energy policy, under the Trump Administration (as of the time of this note), focuses on maximizing fossil fuel production, eliminating regulations, and promoting energy independence through initiatives like “Unleashing American Energy,” pausing IRA climate spending, and accelerating permits for oil, gas, and nuclear projects. With this, multiple domestic and foreign companies are seeking to expand their U.S. production and output, thus creating a need for new and revamped industrial facilities.
With such projects costing billions of dollars each and being backed by mega energy providers such as NRG, Exxon, and Qatar, the risk of nonpayment to contractors arguably far outweighs the financial risk to the energy developers, and Galloway’s construction attorneys are monitoring whether this was the intent of the 76th Texas Legislature when it added Section 28.010 to proposed PPA. However, until revamped, Section 28.010 will likely continue to hinder industrial contractors’ ability recover interest at the rate allowed for certain construction projects under the Texas Property Code. . . for now.
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