Articles Posted in Oil and Gas Law

Recently both the U S House of Representatives and the Senate passed by unanimous vote new federal pipeline legislation. The legislation would both reauthorize and strengthen existing pipelines safety programs through 2015, improve enforcement of existing laws, address National Transportation Safety Board recommendations, and fill in any gaps in the law if necessary.This was the most recent of the pipeline safety acts passed by Congress. The very first statute that regulated pipeline safety, the Natural Gas Pipeline Safety Act, was passed in 1968 and amended in 1976. Congress added language about liquid pipelines to the statute in the Pipeline Safety Act of 1979. The Acts that followed were the Pipeline Safety Reauthorization Act of 1988, the Pipeline Safety Act of 1992, the Accountable Pipeline Safety and Partnership Act of 1996, and the Pipeline Safety Improvement Act of 2002. Congress also created the Office of Pipeline Safety (part of the Department of Transportation) in 1968 for the purpose of overseeing and implementing pipeline safety regulations. However, the Office of Pipeline Safety has been accused of weak enforcement and ineffective rules.

The latest pipeline safety legislation was passed partly in response to disasters such as the 2010 PG&E pipeline explosion in San Bruno, California, that killed eight people, and an accident in July when an Exxon Mobil pipeline dumped an estimated 1,000 barrels into the Yellowstone River. Some of the specific features of the legislation include doubling the maximum fine for safety violations to $2 million, increasing the number of pipeline inspectors, and requiring automatic shutoff valves on new or replaced pipelines wherever “economically, technically and operationally feasible.” Oil and gas companies would be required to meet maximum pressure standards when testing all pipelines, including old ones.

Members of the oil and gas industry endorsed the legislation. Donald F. Santa, president of the Interstate Natural Gas Association of America, stated that improvements in integrity management, incident notification, public education, and pipeline safety research and development would result in “a safer, more reliable pipeline system nationwide.” Likewise, Dave McCurdy, the president of the American Gas Association, said that he looked forward to the bill finally reaching President Obama’s desk, where it would inevitably be signed.

Despite having many obvious benefits, the legislation contained some compromises that left some people wanting. Some critics complained that the legislation did not provide for enough safety inspectors (it authorizes the hiring of 10 federal inspectors). Others, like Congresswoman Jackie Speier, who represents San Bruno, felt that the language on automatic and remote shutoff valves was still too weak.
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Hydraulic fracturing has often been criticized for its possible effect on groundwater, but the early results of a study by the Energy Institute at The University of Texas at Austin indicates that the concern is largely unfounded. Early results of the study, entitled “Separating Fact from Fiction in Shale Gas Development” shows that the process alone does not contaminate drinking water. Instead, what the study pointed out was that fracturing sites might have a higher rate of surface problems that could occur with any type of drilling.The purpose of hydraulic fracturing is to wrest natural gas and oil from shale and sand formations, which tend to be dense and difficult to penetrate. The hydraulic fracturing approach uses a combination of sand and chemicals, mixed with millions of gallons of water, to break up and keep open the shale formations, resulting in hydrocarbons being released. Although most of the fracturing fluid is water, a tiny percentage is made up of chemicals, several of which could potentially be dangerous. There have been reports of surface spills killing livestock and polluting drinking water. The EPA has blown that tiny percentage out of proportion, claiming that fracking fluid in general is harmful and should be phased out by the oil and gas industry.

Yet the University of Texas results show that hydraulic fracturing has been getting an undeserved bad reputation. According to Chip Groat, the University of Texas geologist leading the study, what actually happens is that shale drilling causes more problems on the surface than drilling without fracking. These problems include spills of drilling and fracking fluids and leaks from wastewater pits. There have also been problems with surface casing (a steel pipe at the top of a well meant to isolate the flow of hydrocarbons from aquifers) as well as the cement jobs that hold the casing in place, but these are problems common to any type of drilling project, not just fracking. Chip Groat’s position is that no evidence links these problems to incidents of groundwater contamination.

In Texas, hydraulic fracturing is a common practice of the oil and gas industry. Prior to the study, the Railroad Commission of Texas, the state’s oil and gas regulator, reported at least 311 complaints about the possibility of contaminated drinking water from the beginning of 2006 to the end of September this year. However, one of the commissioners stressed that no complaint had ever been linked to an improper well cement casing.

Last fall, the Texas Railroad Commission held a hearing to consider a new rule for disclosure of hydraulic fracturing chemicals. At the hearing, Chemistry Professor Andrew Barron from Rice University claimed that the rule would serve to demystify the chemicals used and help assure the public that the chemicals were not overly dangerous.The new rule will be codified as 16 Texas Administrative Code section 3.29 and would implement House Bill 3328. House Bill 3328 has already been passed by the Texas state legislature and signed by Governor Perry. Section 3.29(c) lists disclosure requirements for suppliers, service companies, and operators who are involved with hydraulic fracturing. Under the Rule, not later than 30 days after the completion of a hydraulic fracturing treatment, suppliers and service companies must provide the well operator with the names of each chemical substance that was purposely added to the hydraulic fracturing fluid. In particular, any chemical ingredient that requires a Material Safety Data Sheet must be listed.

The rule defines “chemical ingredient” as “a discrete chemical constituent with its own specific name or identity.” An additive is “any chemical substance or combination of substances” contained in a hydraulic fracturing fluid that is purposely added to the base fluid for a specific reason whether or not that reason is to create fractures in a formation.

Under the rule, operators of wells have the responsibility of submitting information to a hydraulic fracturing chemical disclosure online registry. The data that must be given includes the operator’s name, the date of the treatment, the well’s location, the well’s API number, the amount of water used in the treatment, each chemical treatment used, and several other important pieces of information. Operators must also submit a well completion report for each well that received a hydraulic fracturing treatment to the Railroad Commission. Certain chemical ingredients are exempt from being listed under Section 3.29(d), such as ingredients not disclosed by their manufacturer, or ingredients not intentionally added to the hydraulic fracturing treatment. Ingredients that are trade secrets would also be protected from disclosure.

Contrary to the Obama administration’s expectations, it sounds as though states are doing a fine job regulating the oil and gas industry, according to members of a shale gas subcommittee in the U.S. Senate. In the Shale Gas Subcommittee 90-day Report subcommittee members reported to the Senate Committee on Energy and Natural Resources during a hearing last fall. The subcommittee was formed to make recommendations about the safety and environmental performance of shale gas production.The Report made 20 recommendations, including:

1. Improve public information about shale gas operations.

2. Improve communication between state and federal regulators. The subcommittee recommended continued yearly support to STRONGER (the State Review of Oil and Natural Gas Environmental Regulation) and to the Ground Water Protection Council for expansion of a data management system that determines risk, along with similar programs.

3. Improve air quality. The subcommittee had recommendations for reducing general pollutants, ozone precursors, and methane quickly.

4. Protect water quality. The subcommittee recommended a water management system based on “consistent measurement and public disclosure of the flow and composition of water at every stage of the shale gas production process.”

5. Disclose fracturing fluid composition. The subcommittee believed that although the risk was remote that fluid from deep shale reservoirs fractures could leak into drinking water, any chemicals in fracturing fluids should be made available to the public.

6. Manage short-term and cumulative impacts on communities, land use, wildlife, and ecologies.
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Any good Texas oil and gas attorney must be fully versed in the Texas Statute of Frauds. The Statute of Frauds is an old concept, requiring that certain contracts have to be in writing and signed to be valid. The Statute of Frauds dates back to at least seventeenth century England, and was exported to the United States as part of common law. It now exists in the Texas Uniform Commercial Code and in the Texas Business and Commerce Code. The Texas Statute of Frauds requires that all conveyances of real property and transfers of mineral interests (including oil and gas leases) be in a writing, signed by both parties.For an agreement to comply with the Statute of Frauds, it has to include all of the essential elements of the agreement. Basic elements include the time of performance and a description of the property. This may sound fairly straight forward, but time and again, disputes have arisen over oil and gas agreements and conveyances that failed to accurately describe the interest being conveyed — or in which the conveyance was not in writing at all.

For example, in Quigley v. Bennett (2007), geologist Robert Bennett charged Michael Quigley, an oil and gas operator, with fraudulently inducing him to perform services related to an oil and gas lease. Bennett claimed that he was entitled to an overriding royalty interest that Quigley had conveyed to him orally in return for certain services that Bennett performed. The Texas Supreme Court disagreed. Because Bennett and Quigley never put the conveyance in writing, Bennett had no interest. He therefore was not entitled to the $1 million award that the jury had given him.

More recently, in Preston Exploration Co. v. Chesapeake Energy Co. (2010), the Court reviewed a disagreement over the legal descriptions in Purchase and Sale Agreements for oil leases. Preston argued that the Purchase and Sale Agreements and exhibits complied with the Statute of Frauds because the description identified the property being conveyed with “reasonable certainty.” However, the District Court of the Southern District of Texas found that since neither the Agreements nor the exhibits included specific information about the location of the leases, they failed to comply with the Statute of Frauds.

The oil and gas industry is under attack not only in Texas, but nationally. Several months ago, a new study by Louisiana State University Professor Joseph Manson, An Economic Analysis of Dual Capacity and Section 199 Proposals for the U.S. Oil and Gas Industry, was released. Professor Manson’s study found that tax changes proposed by the Obama administration would actually increase the deficit.One of Obama’s proposals would prohibit oil and gas companies from using the manufacturer’s deduction created by Section 199 of the American Job Creation Act of 2004. The other proposal would create limits on foreign tax credits used by U.S. dual-capacity taxpayers. The Obama administration claims that these changes would lower the deficit and has included them in every annual budget proposal. Instead, Professor Manson demonstrates that these proposals would result in a loss of $53.5 billion a year in tax revenue.

Section 199 allows taxpayers who produce or manufacture in the United States to deduct a certain percentage of domestic production activity from their taxable income each year. The dual-capacity taxpayer rules prevent U.S. firms operating in foreign countries from being doubly taxed. Professor Manson’s study, sponsored by the American Energy Alliance, took a detailed look at the effect that the loss of these credits would have on the oil and gas industry. Professor Manson concluded that there would be a loss of 155,000 lost jobs, a loss of $68 billion in wages, and a loss of $83.5 billion in reduced tax revenues. Not only that, beware the unintended consequences: as more people are laid off, more people will request unemployment benefits, food stamps and other forms of assistance.

Professor Manson made his calculations using the Modern Regional Input-Output Modeling System II, developed by Nobel Economic Laureate Wassily Leontief, which supposes that when a company has to pay $1 more in taxes, it must take it out of other sources, such as workers’ pay. As a result, Professor Manson notes: “[A] tax on just a small number of firms can be felt throughout the economy.” He found that job losses go beyond those strictly related to oil and gas production: construction, retail, food services, and even arts and entertainment would feel the pain. Not only would there be significant job losses, but also the U.S. could suffer $341 million in lost output. The region hardest hit would be the Gulf of Mexico, where the local community has already suffered extensively following the Deepwater Horizon tragedy.

Readers may recall that last year the Supreme Court of Texas issued an opinion with profound implications for the rights of Texas landowners when they are faced with a request for a pipeline or utility easement. In Texas Rice Land Partners Ltd. and Mike Latta v. Denbury Green Pipeline-Texas LLC, issued on August 26, 2011, the Court addressed the issue of the requirements a pipeline company must meet in order to be deemed a common carrier and thus be entitled to use the power of eminent domain. My discussion of the original opinion can be found here.

In its original decision, the Court limited the eminent domain powers of pipeline companies, stating that they must show more than that the pipeline could be used by others, aside from the company building the pipeline, at some indefinite point in the future. In addition, the Court held that a permit issued by the Texas Railroad Commission, which was previously assumed to confer common carrier status (and thus eminent domain power), no longer has this effect. This decision, therefore, shifts the burden onto the pipeline company to prove that it meets the requirements to be classified as a common carrier. The Court’s decision gives vastly more power to landowners, and the case is likely to impact the attitude of all pipeline and utility companies negotiating with landowners for easements and rights of way.

In an opinion last Friday, the Supreme Court not only denied Denbury Green Pipeline’s motion for rehearing, but Court also clarified its previous judgment in significant ways. In stating that a company cannot wield the power of eminent domain for a private oil or gas pipeline, the Court added that “private” means a pipeline that is limited in its use to wells, stations, plants, and refineries of the owner. The Court went on to say that a “common carrier” means that the company is transporting gas for hire and therefore implies more customers for the gas than the owner of the pipeline. In other words, the pipeline cannot be built for the owner’s exclusive use and still be a common carrier.

Environmentalists like to argue that oil and gas are harmful to the planet, that their sources are drying up, and that “clean” green energy is the way of the future. However, more studies are finding that green energy is far from harmless to the environment. In fact, it may actually be more harmful than traditional energy sources.

This is because the batteries that run “clean” energy hybrids, electric cars, and other related products are made up of rare earth elements (REEs). REEs consist of 15 periodic elements of the lanthanide group, along with scandium and yttrium. These metals are in nearly all batteries due to their unique properties.According to an EPA report, because REEs are generally concentrated evenly throughout the Earth’s crust, there are few locations where they can be economically mined. That doesn’t mean, however, that a determined government would be unable to gain a monopoly over REEs. Or that REEs would not require extensive mining and refining.

While the United States controlled the REE industry up until 1985, in recent years, China has taken over. By some accounts, it now produces 95% of all REEs. China managed to gain control by flooding the market with cheap REEs, due to large high-quality reserves and low labor costs. Since then, China has sent the cost of REE products — such as fluorescent light bulbs — soaring. The United States is trying to regain its dominance, and American producers have received permission to conduct exploratory drilling for heavy metals. Currently Mountain Pass mine in California is the only mine that has been used for heavy metal mining. Government and industry have set their sights on the Bokan Mountains in Alaska, Diamond Creek in Idaho, and the Bear Lodge Mountains in Wyoming as other potential mining locations.

The conventional wisdom is that when oil prices are high, gasoline prices follow. Yet is that really true? Just recently, oil prices were up more than 9%, yet gas prices at the pump actually dropped 15 cents, to 3.30 a gallon. Why is this? Well, it turns out the conventional wisdom is mostly true, but gasoline prices do not follow oil prices perfectly, and each has its own reasons for prices rising and falling.First, why do gas prices tend to follow oil prices on an upward climb? According to one source, it is simply because when oil prices rise, gas dealers raise their prices in order to avoid losing money. At the same time, when oil prices go down, it can take anywhere from two days to three weeks for gas prices to fall. Another reason may have to do with the type of crude oil on the market. When crude oil is plentiful, but gas prices are still high, the reason may be because the crude is heavy and sour, which requires greater processing — as opposed to light, sweet crude oil, which is easier to refine.

If this is the case, then why do oil and gas prices sometimes vary? There are several reasons, most very specific to the way oil and gas are produced and to their intended purpose. While nearly half of crude oil — 42% — is used for producing gas, the other 58% is used for diesel fuel, jet fuel, and is even used to make everyday products such as tires. Therefore, the more demand for these items, the more the price of oil will be affected.

As for why gas prices rise and fall, the reasons range from the methods of production to the state of the economy. First, gas prices are affected by demand — when people travel in the summer, prices tend to go up. During the winter, with less travel, prices tend to drop. Second, there is not just demand for oil in the United States, but all across the world. China, India, and Brazil, all enjoying economic expansion, require more energy to keep their economies moving. Less oil means that it is more valuable, which increases the price of any product associated with it, including gas.

In what is hopefully a sign of a healthy Texas oil and gas industry, as well as good news for Texas mineral owners, Apache Corporation (the subject of a recent post) has not only renewed its lease of 365,000 square feet at its Post Oak Central office building, but has also leased another 132,000 square feet of space. This represents a 36 percent office space increase, bringing Apache’s total square footage to 467,000. The company also extended its current lease term to 2018, a five year add-on to their agreement, which was set to expire at the end of this year. The Houston office complex is owned by JP Morgan and is distinct for its three 24 story glass and steel towers.Apache’s move to expand its operations was likely prompted by the company’s healthy profit margins. The Wall Street Journal recently reported that Apache’s fourth quarter earnings were up 73 percent as the company benefited from high oil prices and increased production. Apache’s fourth quarter profit was $1.9 billion, or $2.98 a share. That is a substantial increase over their $689 million profit and $1.77 share price from 2011. Chief Executive G. Steven Farris said the company expected to spend $9.5 billion on drilling capital this year, up from $8 billion in 2011. Revenue also increased for the company by about 25 percent to $4.3 billion. Apache’s global production was up by 4.2 percent from a year earlier and average prices went up 24 percent for oil and nearly 3 percent for natural gas. These reports on Apache’s success are good news for the Texas energy industry and a benefit to Houston, the company’s headquarters.

This comes on the heels of other big real estate transactions in Houston, a city fortunate to be at the center of the oil and gas industry’s resurgence. In January, Noble Energy signed a lease for 467,000 ft2 of office space at the former headquarters of Hewlett Packard, taking over the northwest Houston building in its entirety. The 10 story building opened in 1998 as the headquarters for Compaq Computer Corporation. The building was one of Houston’s largest vacant office buildings and Noble’s lease is helping bring the city’s vacancy numbers down significantly-showing once again how a robust and profitable energy industry can help the economy as a whole.

In December, Shell Oil renewed its 1.2 million ft2 office lease at One Shell Plaza and Two Shell Plaza in downtown Houston. Shell’s Houston lease was the biggest lease signed in the United States in 2011. Last year, 1.8 million square feet of office space was occupied in Houston and that number is expected to be the same or greater this year, spurring new construction for the first time in years.