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In Texas, the Natural Resources Code, in Section 91.402  governs when royalties must be paid to royalty owners. Section 91.402(b) provides that royalty payments may be withheld without interest if there is a dispute concerning title that would affect distribution of payments or if there is a requirement in a title opinion that places in issue the title, identity or whereabouts of the payee and that is not been satisfied by the payee after a reasonable request for curative information.

Representative Reggie Smith, a Republican from Sherman, Texas, has introduced House Bill 3262, which would amend Section 91.402(b) to deprive royalty owners of the right to sue their oil company operator for a breach of contract to recover royalty payments that are withheld due to a title dispute unless the lease states otherwise. The specific language of the bill is that “a payee does not have a common-law cause of action against a payor for withholding payments under Subsection (b) unless, for a dispute concerning the title, the contract requiring payment specifies otherwise“. In other words, if an unscrupulous oil company is short of funds and holds back your royalties to use them as operating expenses under the guise of a trumped up title dispute, the royalty owner has no recourse!

This is a bad bill for a number of reasons, and it will hopefully not pass. Oil companies are already protected in the case of title disputes by Section 91.402 of the Natural Resources Code and there is no logical reason to add this language. Mineral owners with new leases can add language to their lease to counteract this bill, but that is no comfort to mineral owners whose leases are already signed.

 

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Given the stresses on the oil and gas industry over the last year, it’s not surprising that there have been many oil company bankruptcies, both in Texas and throughout the country. Royalty owners throughout Texas have been getting notices that the operator who is paying their royalties have filed for bankruptcy. In most cases, the oil company is filing a Chapter 11 proceeding, which is a reorganization, although a few have filed a Chapter 7 bankruptcy proceeding, which is a liquidation.

In the 1980s, the Texas Legislature added a provision to the Texas Business and Commerce Code to assist royalty owners. It is known as the “First Purchaser Statute” and is found in TEX. BUS. & COM. CODE § 9.343. The statute states, in part:

This section provides a security interest in favor of interest owners, as secured parties, to secure the obligations of the first purchaser of oil and gas production, as debtor, to pay the purchase price. An authenticated record giving the interest owner a right under real property law operates as a security agreement created under this chapter. The act of the first purchaser in signing an agreement to purchase oil or gas production, in issuing a division order, or in making any other voluntary communication to the interest owner or any governmental agency recognizing the interest owner’s right operates as an authentication of a security agreement in accordance with Section 9.203(b) for purposes of this chapter.

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As a Texas oil and gas attorney, I often find it necessary, when negotiating an oil and gas lease for a client, to add an addendum that modifies some of the terms in the printed lease. The printed lease form is often extremely operator oriented and does not give the mineral owner many rights. Very often, the printed lease will provide for deduction of post-production costs from royalties due to the mineral owner by providing that royalties shall be calculated “at the well”. In the addendum, we often add language that provides that royalty shall be calculated, not on the market value at the well, but instead on the gross proceeds received by the oil and gas operator. The result of that language in the addendum is that post-production costs cannot be deducted from the royalties.

In the recent Texas Supreme Court decision of BlueStone Natural Resources II LLC v. Walker Murray Randle et al, the printed oil and gas lease contained language that indicated that the royalties would be calculated on the market value at the mouth of the well. Prior decisions by the Texas Supreme Court determined that this language allows the well operator to deduct post-production costs. The operator and the mineral owner agreed to an addendum that stated that royalties would be based instead on the “gross value received” by the operator. The addendum also stated that if the addendum was in conflict with the printed lease provisions, then the addendum would control and prevail.

Once production was obtained on the well, the operator proceeded to deduct post-production costs. The mineral owner sued. The operator argued that the “at the well” language is the only lease language providing a valuation point, so nothing in the addendum can be considered contradictory to that portion of the printed lease’s royalty provision.

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From what I read, it appears that there are many people, including politicians in our federal government, who believe that  electricity produced by solar panels should be a substitute for oil and gas production. However, there are a number of aspects of energy produced from solar panels that don’t appear to be considered:

utility-scale-solar-panels

  • studies have indicated that solar panels may actually increase global warming. The reason is that solar panels only convert around 15% of the sunlight that hits them into electricity. The rest is given off into the environment as heat. For small installations of solar panels, that may not be a big deal. But large-scale installations, the kind that would be needed to produce large amounts of electricity, would emit a large quantity of heat, thus potentially raising global temperature. You can read about one study published in 2018 in the journal Science here. Another study that reaches the same conclusion was published in 2016 in the journal Nature and can be reviewed here.
  • many of the parts used to build solar panels and the batteries in which the electricity produced by solar panels is stored come from China exclusively. To the extent energy production in the future relies on solar energy, we are going to be at the mercy of China unless we can come up with domestically produced alternatives.
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As anyone who reads my blog is aware, I am a Texas oil and gas attorney who only represents mineral, royalty and surface owners and I never represent oil companies. My passion has always been helping land and mineral owners make the best use of their land and mineral assets and get the best compensation and terms for leases, pipeline and utility easements and surface use agreements. However, the current political discussions regarding the oil and gas industry seem to disregard some important facts that we may all want to keep in mind.

The oil and gas industry has been the subject of many public discussions, and that is a good thing. Regardless of your political view, the suggestions that we eliminate fracking, limit oil and gas production offshore and on federal lands, transition away from oil and gas and remove what have been called “subsidies” to the oil and gas industry, involve a number of potential unintended consequences that we all should be aware of. These include:

  • All the plastics and a number of medicines in our life are derived from oil and gas. Without petroleum, there will be no cell phones, computers, appliances, cars and many other items that we use in our daily life. (Maybe that’s a good thing!). If the supply of oil and gas becomes limited, all these things will become more expensive.
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As most people are aware, President Biden has canceled the permit for the Keystone pipeline with one of his first executive orders. While environmental interests certainly applaud this move, there will be consequences that politicians may not be taking into account.

First, without the pipeline, oil will need to be moved by railroad cars and trucks. Both of these methods involve a greater rate of accidents and spills than the pipeline.

Secondly, using rail and trucks to move oil will result in an increase in carbon emissions compared with the pipeline.

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The El Paso Court of Appeals recently decided a case that involved the use of the surface of land by a solar farm that was objected to by the Lyles, the  mineral owners of the property. That case is Lyle et al v. Midway Solar LLC et al. 

The Defendant Midway operated a large solar facility on the property in Pecos County, Texas under a 55 year lease with the surface owner. The solar leases designated drill sites for the benefit of future oil and gas production at either end of the property. The drill sites were about 30% of the surface area. The mineral owners claimed that the solar panels and transmission and electrical lines and cables serving the facility interfered with their ability to produce their mineral interests. At the time of the litigation, the mineral owners did not have an active oil and gas lease for the property and were not actively seeking a lease. In fact, the Court noted that “(i)t is undisputed that the Lyles have never leased out their interests to any oil and gas operators and have no current plans to lease their estate or to otherwise develop their mineral interests at this time. They have commissioned no geological studies, nor entered into any drilling contracts for the minerals. Since January 1, 2015, the Lyles had not received a single request to lease or purchase the mineral estate in Section 14. And the Lyles conceded they had no plans for drilling any wells.”

The mineral owners filed suit based on several claims, including a claim that the solar panels were a trespass, and requested that the Court order all solar panels and related lines be removed from the property. The Defendants claimed that the accommodation doctrine authorized their surface use.

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In a bit of welcome news for Texas mineral owners, according to the metrics calculated by Baker Hughes, the oil and gas drilling rig count for Texas and the United States is going up. Specifically, the rig count has gone up by 13 rigs since October 9, 2020. This represents the fifth week in a row that there has been an increase in the rig count. This past week has represented the largest increase since January 2020. Of course, there has been a decrease of 569 rigs since October 2019, so there is a ways to go.

Over half of the rigs have been added in Texas and especially in the Eagle Ford Shale.

The downward pressure on oil and gas prices due to the OPEC/Russian price war and the erosion of demand due to the covid virus has decimated oil prices, although they currently seen to be holding steady at about $40 per barrel for oil, according to the Energy Information Administration. In September, the Henry Hub natural gas spot price averaged $1.92 per million British thermal units (MMBtu), down from an average of $2.30/MMBtu in August, 2020.

 

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In August 2020, the Energy Information Administration (EIA) issued the second part of its report on the Wolfcamp shale play of the Midland sub-basin section of the Permian Basin, which you can read here. The report is an interesting analysis of the geology of this area. The accumulations in the Permian Basin that became hydrocarbons were deposited during the Pennsylvanian through the late Wolfecampian geologic era while an inland sea covered this area.

Hydrocarbon_Plays_within_the_Permian_Basin
As many of you know, the Permian Basin has been producing for about 100 years. So far, it has produced more than 35.6 billion barrels of oil and about 125 trillion cubic feet of natural gas. Last year, this area accounted for more than 35% of total U.S. crude oil production. The EIA estimates that its reserves of oil and gas make the Permian one of the largest hydrocarbon producing basins in the world.

The Permian Basin contains three sub-basins: the Delaware, Central and Midland. The Wolfcamp play extends in the subsurface of all three of these sub-basins. It has been called the most prolific oil and gas bearing formation within the Permian Basin. The Wolfcamp formation is, in turn, divided into four sections, or benches, designated by A, B, C and D. Each bench differs in a number of ways, including its porosity and organic content. Since many areas of this play have very low permeability, production often requires multistage hydraulic fracturing.

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There is a new book out in September 2020 by Daniel Yergin. As some of you know, he is the author of The Prize (which won a Pulitzer Prize) and The Quest, both of which are essential reading for anyone seeking an understanding of the history and nature of the oil and gas industry. The new book is entitled: The New Map: Energy, Climate, and the Clash of Nations, and will no doubt be just as interesting as his previous books.

Some of the points he addresses in the new book are:

  • the future of the shale boom