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The San Antonio Court of Appeals recently issued an interesting opinion regarding a well operator’s claim that H2S/CO2 from a nearby injection well damaged its leased minerals. The case has been appealed to the Texas Supreme Court and oral argument has been scheduled for December 2020.

The case is Swift Energy Operating, LLC v. Regency Field Services LLC. In 2009, Swift, the Plaintiff, leased approximately 4200 acres of a ranch in McMullen County, Texas and operated a number of producing wells on the ranch. In 2006, Regency obtained a permit from the Texas Railroad Commission to operate an injection well in which they would dispose of a gas mixture of concentrated hydrogen sulfide (H2S) and carbon dioxide (CO2) by pumping it into the Wilcox formation. In its application for the permit, Regency submitted a plume model to the Railroad Commission that predicted that the injected material would spread horizontally by approximately 2200 feet after 40 years of injection. The review by the Railroad Commission staff indicated that they believed that shale formations above and below the disposal zone would prevent vertical migration of the injected gas.Deep_injection_well

In 2012, another operator in the area discovered H2S in one of the its wells and testing indicated it came from the Regency injection well. As result, that operator had to plug and abandon that well. An employee of that operator emailed Swift about these developments.

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Many Texas mineral interest and royalty owners have seen their royalty checks shrink or disappear altogether in the second quarter of 2020. The covid crisis caused prices to slip to nearly zero in some cases and in response, in April, May and June 2020, many operators shut in wells that they could no longer afford to operate. There was concern among some in the oil and gas industry that shutting in these wells could cause permanent damage to the wells and/or the reservoirs.images5

It now appears that those fears were probably unfounded. A recent press release by Rystad Energy, based on an analysis of second quarter earnings reports from 25 large, publicly traded oil companies, reports that most US onshore operators will restore nearly all shut-in oil wells by the end of the third quarter of 2020. This has no doubt been driven by the partial rebound in oil  prices. The operators sampled said they did not face any issues in bringing wells back online. Rystad Energy’s Vice President for North American Shale and Upstream, Veronika Akulinitseva, said “No loss of production has been reported by any operator following the shut-ins and moderation of output, with most companies flagging a smooth return of operations, and in some cases posting a positive production impact from those reactivations”. One operator, EOG Resources, indicated that nearly all their reactivated wells have exhibited some degree of “flush production”. Flush production is an increase in production after a well is reactivated because the bottom hole pressure has been building up while the well was shut in.

Many Texas mineral and royalty owners are individuals who depend on their monthly royalty check to pay the bills. The reactivation of these wells, and the larger royalty checks for a month or so, will be good news to these owners. In addition, as production comes back, oil companies will begin to add back laid off employees, which is important to those families and also to the Texas economy as a whole.

 

 

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The Texas Supreme Court recently heard a petition for mandamus requesting relief from some of Governor Abbott‘s executive orders that suspended the right of “nonessential” business owners to make a living. The petition was denied for lack of jurisdiction. However, the concurring opinion by Justice John Phillip Devine (that you can read here) sets out a remarkable and eloquent defense of constitutional principals in the context of crises. In his opinion, Justice Devine writes that, while he concurs with the dismissal for lack of jurisdiction, he felt compelled to address the constitutional issues presented by executive orders. To quote Justice Devine:

“…Texans have experienced a suspension of their rights. Suspension of law is serious business. It involves a decision that, at the very least, itself needs a constitutional blessing. In fact, the Texas Constitution speaks to this very issue. In the first article, it states: “No power of suspending laws in this State shall be exercised except by the Legislature.” This provision means what it says. The judiciary may not suspend laws. Nor may the executive. Only the Legislature. … As Relators point out, in Brown Cracker & Candy Co. v. City of Dallas, this Court long ago held that article I, section 28 (of the Texas Constitution) does not permit the Legislature to “delegate to a municipal corporation or to anyone else, authority to suspend a statute law of the State.

Despite this clear constitutional exhortation, we review orders from the Governor that purport to be made under the Texas Disaster Act of 1975, which says that the “governor may suspend provisions of any regulatory statute prescribing the procedures for conduct of state business . . . .” I find it difficult to square this statute, and the orders made under it, with the Texas Constitution.

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There seem to be more and more frequent commercials advertising services to protect homeowners from “home title fraud”. These commercials are not talking about fraudulent applications for mortgages, although that probably happens frequently. Instead, they are talking about someone who forges a deed to themselves and then tries to borrow money against the property or resell the property to a third party. Despite the frantic tone of the commercials, one has to wonder just how common home title theft is.

The FBI reported that in 2017, 9600 people lost a total of $56 million through wire fraud involving real estate. However, that is an extremely broad category and the FBI has not published statistics so far that delineate how much of this is “home title fraud”. In my experience, in Texas it is not very common. I looked for statistics regarding this kind of fraud nationally but numbers just aren’t available.

There are a number of things to know about this kind of fraud. First, in Texas, keep in mind that this kind of fraud is enabled if an unsuspecting buyer purchases property from someone without going through a title company. The title company closing process includes protections designed to prevent this kind of fraud.

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The Texas Eleventh Court of Appeals decided yet another “continuous development” case in which the lessee tries to wiggle out of its obligations under the oil and gas lease with a strained interpretation of the lease terms (although in this case, both the lessor and the lessee were oil companies).

In Endeavor Energy Resources, L.P. v. Energen Resources Corporation, the oil and gas lease contained a continuous development clause that said:

If this lease is extended as to non-dedicated acreage beyond the expiration of the primary term hereof, this lease shall terminate as to non-dedicated acreage one hundred fifty (150) days after the expiration of the primary term unless during such one hundred fifty (150) day period Lessee has commenced operations for the drilling of a well in which case this lease shall be extended as to the dedicated and non-dedicated acreage so long as operations for the drilling of a subsequent well are commenced within one hundred fifty (150) days after the completion of the preceding well. This lease shall terminate as to all non-dedicated acreage any time a subsequent well is not commenced within one hundred fifty (150) days from the completion of a preceding well.

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The Texas Court of Appeals in El Paso, in HJSA No. 3, Ltd. P’ship v. Sundown Energy LP,  issued a decision siding with the landowner on the interpretation of an oil and gas lease regarding the meaning of “continuous development“.

The oil and gas lease contained two paragraphs related to drilling:

7(b). The first such continuous development well shall be spudded-in on or before the sixth anniversary of the Effective Date, with no more than 120 days to elapse between completion or abandonment of operations on one well and commencement of drilling operations on the next ensuing well.

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In Piranha Partners et al v. Joe B. Neuhoff et al,  the Texas Supreme Court examined a written assignment of an overriding royalty interest in minerals produced from land subject to an oil and gas lease in Wheeler County, Texas. The Neuhoffs claimed the assignment conveyed an interest only in production from the well specifically identified in the assignment. Piranha Partners claimed that the assignment conveyed an interest in production from any well drilled on the identified land, or alternatively, in all production under the identified lease.

The assignment stated:

[Neuhoff Oil] does hereby assign, sell and convey unto [Piranha] . . . without warranty or covenant of title, express or implied, subject to the limitations, conditions, reservations and exceptions hereinafter set forth . . . all of [Neuhoff Oil’s] right, title and interest in and to the properties described in Exhibit “A” (the “Properties”)

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As oil prices have declined to unprecedented lows, consumers may feel glad for lower gasoline prices at the pump. However, the piper always has to be paid, and nowhere more so than in Texas.

As I discussed in a previous post, oil companies have been hit by a number of negative factors, some of their own making.  First, our country was experiencing a substantial oversupply of oil going into the current situation. Many oil companies continued to produce, despite the oversupply, because increased production resulted in higher stock prices which in turn resulted in higher bonus for officers of the oil company. To this extent, some oil companies have brought this situation upon themselves. Secondly, the production war between Russia and Saudi Arabia exacerbated the oversupply and helped drive the price of oil down. Third, as the price of oil declined, the value of individual oil company’s reservoirs declined. In the cases where reserves were used as collateral for loans, the bank would then require either repayment of at least a portion of the loan or new collateral for the loan. Oil companies that cannot comply default and/or file bankruptcy. Fourth, the covid 19 virus creates staffing issues for oil companies, both in their offices and in the field. Fifth, shelter in place orders have resulted in drastically reduced demand for oil and gas. Finally, all of these factors make lenders and investors very nervous and so new money for exploration, production and pipelines is becoming more scarce.

Not surprisingly, all of this has resulted in oil company bankruptcies. So far, since January 2020, several oil companies have filed for bankruptcy protection: Bridgemark Corporation, Southland Royalty Company LLC, Dalf Energy LLC, Sheridan Holding Company I LLC (who are actually an investment fund), Echo Energy Partners I LLC, Whiting Petroleum Company, Victerra Energy LLC, Gavilan Resources LLC, Ultra Petroleum and Sklar Exploration Company LLC. Other companies, including Chesapeake Energy Corporation and Denbury Resources, are reportedly preparing bankruptcy filings. There been some predictions that hundreds of oil companies will file bankruptcy by the end of 2021.

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The Texas rule against perpetuities (the “Rule”) was something all lawyers learned about in law school, but it seemed at the time like a concept we would not run into very often in real life law practice. Unfortunately, it comes up regularly in connection with Texas oil and gas leases and related interests.

In Texas, the Rule states that a property interest must vest within 21 years after the death of some life or lives in being at the time of the conveyance of that property interest. If it does not, then the interest is a perpetuity. Perpetuities are prohibited by Texas Constitution Article 1, section 26 as restraints on free alienation of property. A conveyance that violates the Rule is void.

In Tommy Yowell v. Granite Operating Company et al, the Texas Supreme Court had occasion to review a claim that an overriding royalty interest (ORRI) violated the Rule. As many of you know, an ORRI is a share of either oil and gas production or revenue from that production that is carved out of a lessee’s interest under an oil and gas lease. In most cases, when the oil and gas lease to which the ORRI is attached terminates, the ORRI terminates as well. In this case, the ORRI contained a provision that purported to cover any extension or renewal of the existing lease as well as any new leases. When the operator of a new lease stopped paying royalties to Yowells, they sued.

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The Texas 14th Court of Appeals recently interpreted a pipeline easement and that interpretation may have application for many other pipeline easements in existence in Texas. The case is Texas Land & Cattle II, Ltd. v ExxonMobil Pipeline Company.

Texas Land & Cattle (TLC) owned real property in Harris County, Texas. ExxonMobil owned a pipeline easement across this property. ExxonMobil was the successor in interest to Humble Oil Company who originally obtained the easement. The easement granted the right to operate a pipeline for the “transportation of oil or gas”. The easement did not define oil or gas.

ExxonMobil had transported gasoline and diesel through this pipeline since 1995. TLC sued ExxonMobil on the grounds that transporting gasoline and diesel was not allowed by the easement. TLC believed the terms “oil and gas” included only crude oil or crude oil petroleum, but not any refined products. ExxonMobil claimed that the plain and ordinary meaning of the terms “oil and gas” as used in an easement have always included refined products like gasoline and diesel. The trial court denied the motion for summary judgment filed by TLC and granted the relief sought by ExxonMobil.