Articles Posted in Oil and Gas Law

The battle in Texas and in the country in the oil and gas field over hydraulic fracturing, or “fracing”, rages on, of course. There are several recent developments in the effort to uncover the facts about fracing, as opposed to unsubstantiated claims and political posturing. These research efforts are important resources for better understanding of this technology and how it affects the environment and the natural gas industry. With so much discussion and debate on the issue of fracing, a technology used for years but subject to intense criticism only recently, it is especially important to publicize the scientific evidence related to the process, rather than buying into the political hype (see a previous post on my opinions here).

The University of Texas at Austin released its preliminary findings, entitled “Boom or Bane: A Report on Hydraulic Fracturing of Shale”, excerpted from an intensive ongoing research and study project on this issue, on November 9, 2011. The University’s Energy Institute examined the use of hydraulic fracturing in shale gas drilling. The preliminary findings indicate that there is no direct link between fracing and groundwater contamination. The researchers suggest that, at worst, any contamination is probably from above ground spills, mishandling of drilling waste products, or faulty cement casings-not the the hydraulic fracturing itself. Dr. Charles “Chip” Groat, a UT geology professor and Energy Institute associate director who is leading this research project, stated at the release of the preliminary findings: “Our goal is to inject science into what has become an emotional debate and provide policymakers a foundation to develop sound rules and regulations.” The final report is expected to be released soon, in the early part of this year. The Energy Institute has two other projects on hydraulic fracturing in shale gas development in the works which may also shed light on the issue in the near future.

In November of last year, the Environmental Protection Agency released its Plan to Study the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources. This study intends to look into the potential effects on drinking water from various natural gas drilling techniques associated with hydraulic fracturing. The EPA plans to use existing data as well as developing case studies at the Haynesville, Marcellus, Bakken, and Barnett fields. They will study drinking water at sites where fracing has already been used and collect data both before and after fracing at new sites where the process has not been used before. This report will be released in two parts, the first of which is expected by the end of 2012. That first report will contain the analysis of existing data. The longer-term results of this EPA project will be released in a supplemental report in 2014, which will include information and conclusions from the case studies of new sites.

Texas mineral owners who have signed oil and gas leases with Chesapeake Energy may be faced with some unanswered questions.

The American natural gas industry faces the paradox of having been too successful in recent years. A glut of natural gas on the market due to technological advances have allowed access to previously inaccessible gas, especially through horizontal drilling and hydraulic fracturing. The glut of gas has pushed prices down 45 percent in the past year. In fact, natural gas prices are at a ten year low right now. As a consequence, the second largest natural gas producer in the nation, Chesapeake Energy Corporation, recently announced that it will cut gas production by half. The company will only operate 24 of its dry gas drilling rigs, down from the 50 rigs it operated in 2011.

Chesapeake’s measures will only reduce America’s supply of gas by 1.4 percent. The indications from other natural gas companies regarding cutting gas production has been mixed. EQT Corporation stated that it would suspend natural gas drilling in Kentucky indefinitely because of low prices. Exxon declined to comment. Cabot Oil & Gas has no plans to cut production.

New technology has breathed new life into older Texas oil fields in the Panhandle and in nearby Oklahoma. Apache Corp, one of the nation’s largest energy explorers, recently purchased Cordillera Energy Partners III LLC for $2.85 billion. Apache is paying $600 million in common stock and the rest in cash. The deal brings Apache control of 254,000 acres of the Granite Wash Field, an area of older oil wells in the Texas panhandle and across the Texas-Oklahoma border. It consists of a series of thick, multilayer, liquids-rich sandstone and conglomerates, and the area possesses superior reserve properties compared to other shale.

The remaining oil and natural gas in Granite Wash is between 11,000 and 13,000 feet deep, and there is natural gas at a depth of up to 17,000 feet. At these depths the oil and natural gas was technologically impossible to access in the past. Recent extraction advances broke through that technological hurdle, but the area was still economically nonviable because of the high costs involved. Apparently no longer. This area has estimated reserves of 71.5 million barrels of oil equivalent and a current net production of 18,000 BOE per day.

A recent decision by a Texas Court of Appeals may be helpful to Texas property owners who are negotiating an oil and gas pipeline right of way or easement on their property. In its opinion rendered in LaSalle Pipeline LP v. Donnell Lands LP, the Texas Fourth Court of Appeals in San Antonio upheld a jury award to a Texas landowner of $604,950.00 for dimunition in value to approximately half of the landowner’s 8034 acre ranch in McMullen County, Texas.LaSalle, the pipeline company, enjoyed the right of eminent domain, or condemnation, of the right of way for its pipeline, because the pipeline it was laying was intended to be a common carrier. However, LaSalle offered the landowner nothing for for the decrease in value to the Donnell’s land due to the 16″ gas pipeline stretching across almost five miles of their property.

At trial, the Donnell’s expert witness, (an M.A.I. appraiser who specialized in farm and ranch land appraisals), testified that he believed the first tract involved would suffer a 10% decrease in value due to the pipeline, and that the second, smaller, tract, would experience a 25% decrease in value. He arrived at his figures by comparing sales of similiar land, with and without pipelines, both in McMullen County and nearby Webb County. The Donnell’s expert testified that the landowner was due $902,255.00 in damages, consisting of dimunition in value damages, payments for the right of way itself and the temporary workspace damages. The landowner also testified about why he believed the pipeline would decrease the value of his property. These reasons included: 1) the pipeline would be there forever, and would always be a “black mark” on his land; 2) the pipeline cut right through the middle of his property; 3) the pipeline owner and operator would have permanent access to come and go whenever they wanted; and 4) the pipeline easement could be freely assigned to any other company.

This last reason is especially important. No one can guarantee that the right of way will not be assigned in the future to a company who is less than diligent in doing maintenance, or who is less than careful with the adjoining land, than the current pipeline company.

It is important for all of us to keep informed about proposed legislation related to energy issues. Even if you aren’t an oil and gas attorney or involved directly in the energy industry in some way, all of us are affected by energy independence (or lack thereof) and prices. Local, state, and federal legislation often has profound effects on how much energy costs us and whether or not America’s own energy potential is maximized.Consider the New Alternative Transportation to Give Americans Solutions Act, otherwise known as the NAT GAS Act. Originally, this bill seemed like a good idea. It was introduced in the House by Oklahoma Republican John Sullivan and shepherded through the Senate by Democrats Harry Reid of Nevada and Robert Menendez of New Jersey and Republicans Richard Burr of North Carolina and Saxby Chambliss of Georgia.

The NAT GAS Act would allow consumers or investors who either purchased natural gas vehicles or who built natural gas stations to claim between $5 billion and $9 billion in federal tax credits over the next five years. It had bipartisan support. Many Republicans were happy to sign on initially because of their tendency to support legislation helping the natural gas industry and to give this important sector of our economy a reprieve from some of the currently oppressive taxes. A bevy of prominent business leaders signed on as well, such as T. Boone Pickens .

This support is understandable because America needs more natural gas-an efficient, abundant, and clean energy source. However, it apparently remains a challenge to enact common sense legislation involving natural gas use. Certain segments of the liberal left have been waging a war against natural gas for years. Also, some state legislatures are shortsightedly fighting energy tax savings by actually raising taxes to preserve their own government spending. This ultimately hamstrings industry growth and job creation. Expectedly, President Obama continues his knee-jerk reaction in opposition to any type of sensible fossil fuel policy. The politically-motivated outcry over hydraulic fracturing, and efforts to curtail a demonstrable safe 60 year old practice, (click here for related blog) interferes with rational discussion on the subject.

Assisting royalty owners in locating lost oil and gas royalties, and getting royalty owners paid their rightful royalty payments, is one of the parts of my practice as a Texas oil and gas attorney that I enjoy the most. However, many of my clients are suprised to learn that there is a pretty strict time limit to how far back they can claim unpaid or underpaid royalties. For that reason, if you think you are not getting royalties to which you are entitled, or if you think your royalty payments are not being correctly calculated and that you may be underpaid, it is important to take action to correct the situation sooner, rather than later.

A recent decision last week by the Texas Supreme Court underscores this point. Specifically, the Court issued a decision in Shell Oil Co., et al. v. Ralph Ross which could effect all future royalty disputes in Texas. In a nutshell, the Court solidified the four year limit under Texas law within which a lawsuit for underpaid or nonpaid royalties must be filed.

The case involved a dispute between the Ralph Ross, as the Plaintiff, and Shell Oil Company. Mr. Ross’s family had leased the mineral rights on their land to Shell since 1961. Mr. Ross is an oil and gas attorney and therefore understood the oil and gas industry and the relevant legal issues more than the usual lessor. Under the original lease, Shell was required to pay a certain percentage to the family for any gas produced from the land-a total roughly equaling one sixteenth of the profits. However, between 1994 and 1997, Shell used a different calculation, and underpaid Mr. Ross and his family for their royalties. Shell claimed this was due to a simple accounting mistake.

There are a number of misguided environmental “activists” who characterize efforts to reduce greenhouse gas emissions as some kind of a “David vs. Goliath” struggle between forward-thinking environmentalists who love the planet, on one hand, and greedy energy companies who want to plunder the planet, on the other. While this may be a convenient bias for news articles and political debates, it bears little resemblance to reality. As an oil and gas attorney in Texas, I work directly with the oil and gas industry. As a result, it’s clear to me that the false dichotomy between those who care about the environment and those in the energy industry is exactly that: false. The truth is that many energy companies involved in obtaining, refining, and selling oil and gas are also environmentalists who work hard to preserve the planet.

For example, oil and gas companies are much better environmental stewards than they are given credit for. Consider a new report from the American Petroleum Institute analyzing investments in greenhouse gas technologies in North America over the last year. This report notes that there was roughly $225 billion spent in on greenhouse gas (GHG) mitigation in 2010. Of that total, U.S. based oil and natural gas companies contributed nearly half: $108 billion. That amount includes about $37 billion in shale gas development technologies and $71 billion in other investments. About $60.5 billion of the industry’s investment went toward oil and gas substitutions-including the shale gas investments. The shale gas advances are included in the data because its use can reduce the use of coal, which can significantly curb methane releases.

Compare these energy industry investments with about $74 billion in total federal government spending (most in projects funded by the “stimulus” package) for GHG mitigation. Private entities (other than energy companies) combined invested roughly $43 billion during that same time period. Most federal spending went toward energy efficient lighting, biofuels, solar power, and wind. The other private investments included efforts in advanced technology vehicles, electricity efficiency, biofuels, and wind power.

Property transfers involving mineral rights can be complex. As a Texas oil and gas attorney, I help my clients navigate these difficult legal issues. Mineral rights and potential royalties from those minerals can have a significant impact on the value of a property. Therefore, whether you are buying or selling property, it is critical that the deed and other documents accurately address the mineral rights.

One especially tricky, but not uncommon, scenario, was the subject of a recent article in Tierra Grande, a publication from Texas A & M’s Real Estate Center. This situation involves a transfer in which the original sales agreement or earnest money contract reserves the mineral rights to the seller, but the reservation of mineral rights is not stated in the actual deed delivered to the buyer at closing.

Sometimes both parties admit the error and correct it in a non-contentious fashion by executing a correction deed. However, when a friendly solution does not materialize, there are several key legal issues of law that determine whether the deed can be reformed to match the sales contract and include the mineral reservation.

I’ll bet that most Texas oil and gas attorneys (and, I’m sure, everyone in the oil and gas business) often hear the myth repeated that someday there will be a peak in oil production, followed by a rapid decline which will cause the collapse of human civilization as we know it. This myth predicts that someday, possibly someday soon, (although that date keeps getting pushed back when it turns out to be wrong) the world will simply run out of oil. Please understand this myth for what it is-unnecessary fear mongering by those with either a political purpose or who are ignorant of the oil production process.

Daniel Yergin , an expert energy researcher and the Pulitzer Prize winning author of “The Prize”, excerpts from his new book, “The Quest: Energy, Security and the Remaking of the Modern World”, in a recent Wall Street Journal interview. He describes the ways in which the purveyors of this “oil peak” myth are systematically wrong. For example, the myth drastically oversimplifies the complex nature of oil production. It is based on the concept that the world has X amount of oil, and when we use X amount, there will be none left. While in an absolute sense that may be true, oil production is not nearly as simple as that. This country has a long history of feverish predictions that we are running out of oil, going back as far as the 1880s. The actual prospect of running out of oil remains as distant today as it did then.

From 2007 to 2009, for every barrel of oil produced in the world, 1.6 barrels of new reserves were found. In addition, energy technology, including green energy, has advanced to the point where we use oil in a much more efficient way than in the past. As a result, each barrel of oil goes further. But the “oil peak” myth still holds our collective national attention for some reason. Mr. Yergin attributes this in large part to a man by the name of Marion King Hubbert, who studied geology in the first half of the 20th century. The “oil peak” is often referred to as “Hubbert’s Peak.” In 1956, Hubbert theorized that oil production would peak between 1965 and 1970. When production did decline after 1970 and the oil embargo rocked America soon after, his theory seemed vindicated. He also claimed that the generation of children born in 1965 would see oil reserves wiped out in their lifetimes. But what Mr. Hubbert did not count on was the huge increase in newly discovered oil and gas reserves found and produced in the U.S. By 2010, US oil production was three and a half times higher than Mr. Hubbert predicted it would be.