Articles Posted in Oil and Gas News

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Earlier this week, the Securities and Exchange Commission (SEC) sued Chris Faulkner, his company, Breitling Energy Corporation and several other parties for defrauding investors. The complaint filed by the SEC can be reviewed here. The SEC Complaint alleges that the Defendants intentionally and repeatedly misled purchasers of working interests regarding Faulkner’s  experience in the oil and gas industry, the nature of the investment, and the estimated cost to drill and complete the intended wells.

A working interest, unlike a royalty interest, is a type of mineral interest that bears a proportionate share of all exploration, drilling and completion expenses. Thus, an accurate estimate of the potential costs is critical information for an investor considering the purchase of a working interest. If costs are inflated over actual costs and the operator pockets the difference, obviously that’s a problem.

Whether Faulkner and the other Defendants are adjudged guilty of these allegation remains to be seen, of course. However, these kinds of claims emphasize the need to have an experienced oil and gas attorney examine and evaluate any potential oil and gas investment before you invest. An experienced oil and gas attorney will review your goals for the investment, discuss the suitability of the investment with you, review and analyze all offering circulars, contracts and other documents, and possibly most important, conduct due diligence background research on the company with whom you are investing.

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Fracing, or hydrofracturing, is a natural gas extraction technique by which a liquid solution (primarily made up of water) is pumped into the ground at high pressures to fracture rock formations. Fracturing the rock releases gas that is trapped inside the rock formation. The geological areas where natural gas is found, and thus where a majority of fracing occurs, is in shale.

By the way, folks in the oil and gas industry call it “fracing”. The mainstream media somehow started adding a “k”, but the correct term is still “fracing” (i.e., there is no “k” in hydraulic fracturing)

Fracing is actually an old technique and has been used for many decades. Once fracing was combined with horizontal drilling, however, oil and gas companies found they could extract far more natural gas, more efficiently, than before.

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Over the years I have negotiated many leases for mineral owners in the Texas Permian basin and the Eagle Ford Shale. Historically, production in these two areas has set records. These two shale plays, together with the Bakken, the Haynesville, the Marcellus, the Niobrara and the Utica represent 95% of all United States well and gas production increases from 2011 through 2013. The adjacent map shows the location of these areas.

dpmapv4l-wtitleHowever, the United States Energy Information Administration (the “EIA”), in its most recent Drilling Productivity Report, projects a substantial decline in production for the Permian basin and the Eagle Ford Shale. Specifically, the EIA predicts a 58,000 barrel per day decline in April 2016 for the Eagle Ford and a 4000 barrel per day decline in the Permian basin wells.Apr 2015 EIA DPR Permian
Aor 2015 EIA DPR Eagle FordThis decrease in production, together with the substantial decline in oil and gas prices over the last year, hits mineral and royalty owners hard. Many mineral and royalty owners are retired and their royalty income supplements Social Security payments. In many cases, they won’t have any source of substitute income.

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Brent crude oil closed below $30 on Friday, January 15, 2016. This is the first time Brent crude has traded below $30 in over twelve years. Oil prices have plunged recently despite reports of Mideast instability, that terrorist groups have attacked storage facilities in two major Libyan ports and the threat of spreading hostilities in Iraq, Iran, Bahrain and other countries in the Persian Gulf.

The price decrease is primarily the result of supply and demand. Typically oil prices go up when the global economy is strong and world demand for oil and gas is rising. In response, response suppliers increase production and deplete stored reserves to take advantage of the increased price. When the global economy is stagnant or struggling, energy demand decreases and producers typically decrease production in line with the falling demand and also increase reserves or stockpiles. Not so this go round. In order to maintain cash flow, many oil companies are currently producing all they can.

Falling Demand

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Earthquakes are caused by a sudden release of energy in the earth’s crust when two sections of the crust slip past each other.The size of an earthquake is determined by the Richter magnitude scale, which ranges from 0-10. Earthquakes are sometimes classified as:

● Micro Earthquakes. Earthquakes that register less than 2.0 on the Richter scale are called micro earthquakes and are typically not felt at the surface. Micro earthquakes are so frequent that it is estimated that they may be continually occurring or that there are several million that occur each year.

● Minor Earthquakes: Earthquakes that register 2.1 to 2.9 on the Richter scale are called minor earthquakes and occur over one million times per year. Minor earthquakes can be felt slightly by some people, but cause no damage to buildings.

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Last year was a tough year for oil and gas companies. Houston based Schlumberger announced that it was laying off 9,000 workers. Range Resources cut its 2015 capital budget to $870 million. Other oil producers have cut rig production in response to the price declines. Concho Resources, a major producer in the Permian basin, recently cut its 2015 production by a third. Pioneer Natural Resources converted its derivative contracts to a fixed-price swap, to shield itself from the declining market. “Demand for rigs is falling off the cliff” said Joseph Triepke, a financial analyst and managing director of Oilpro. Finally, we have seen a number of oil and gas companies filing bankruptcy, as they find themselves unable to meet their lender’s demands for additional collateral in response to the shrinking value of the borrower’s reserves.

Its a frightening time for employees too. While the oil industry has added about 150,000 jobs over the last three years, the current pace of layoffs may outstrip the hiring. Each drilling rig represents about 100 jobs, from field hands to maintenance workers. The current rig count is down substantially. Oil companies are cutting exploration at exponential rates. Mr. Triepke surmised that this may mean that the three biggest  land rig companies- Helmerich & Payne, Nabors Industries and Patterson-UTI Energy – are “likely to cut approximately 15,000 jobs out of the 50,000 people they currently employ.”

Local economies may be devastated. Take the extreme example of Sweetwater, Texas. Two years ago Sweetwater was to herald a new age of industry due to the nearby Cline Shale.

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Currently, there is  a coordinated effort underway by a number of organizations to study and identify a possible connection between hydraulic fracturing (fracing) and a recent increase in seismic activity.

Some scientists have observed an increase in seismic activity in the central and eastern regions of the United States, as shown in the graphic below. Scientists with the U.S. Geological Survey have been documenting the number of earthquakes of Richter Scale 3.0 or larger and have noted an increase in the number of earthquakes. There have been more than 100 earthquakes a year on average in the last four years, up from 20 a year between 1970 to 2000. California in particular has experienced an increase in seismic activity. After a relatively quiet period of seismic activity in the Los Angeles area, the last five months have been marked by five earthquakes measured larger than 4.0. That hasn’t occurred since 1994, the year of the destructive Northridge earthquake that produced 53 such temblors. In the two decades subsequent to the Northridge earthquake, there were some years that passed without a single quake of 4.0 or greater.

One of these organizations exploring a potential link between fracing and seismic activity is the U.S. Energy Association. Their main focus is on determining the quality and availability of information. With so much misinformation in the media, it is easy for mistaken assumptions to be published just to score a political point.

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Kinder Morgan, based in Houston, Texas, is in the process of obtaining commitments from oil and gas companies who want to use its Utica Marcellus Texas Pipeline (“UMTP”) project. This pipeline will transport natural gas and mixed natural gas liquids produced from the Utica and Marcellus shale areas to delivery points along the Texas Gulf Coast. In February 2015, Kinder Morgan filed for abandonment of a Tennessee Gas Pipeline pipelineKinderMorgan ProjectMap with the Federal Energy Regulation Commission (“FERC”).

As part of this pipeline project,  964 miles of natural gas pipeline in the  Tennessee Gas Pipeline will be abandoned and converted and approximately 200 miles of new pipeline from Louisiana to Texas will be constructed. The new pipeline is expected to be completed by the 4th quarter of 2018. The new pipeline will have a maximum design capacity of 430,000 barrels per day.

It appears from the Kinder Morgan maps that this new pipeline will travel through Newton, Polk, Liberty and possibly Chambers Counties in Texas. Landowners in these counties should be aware that the may be getting an easement request from landmen for Kinder Morgan, and when they do, they should contact my office. To make sure you get the best easement terms and compensation, you really need an experienced Texas oil and gas pipeline attorney representing you.

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Texas royalty owners have sure taken a licking this year. Unfortunately, it’s probably going to get worse before it gets better.

Moody’s Investor’s Service recently lowered its estimates for future average 2015 prices of Brent crude to $55 per barrel, and of West Texas Intermediate (WTI) crude to $50 per barrel. The new 2016 estimates are $57 per barrel for Brent and $52 per barrel for WTI. Meanwhile, the futures markets for September 2015 delivery settled at $43.87/bbl on the New York Market this week.

There are many factors that affect the price of oil. Some of the factors that are in play right now probably include weak global economic growth resulting in weak demand, the increase in the size of oil inventories, the prospect of Iranian oil coming to market in the near future and the increased production by oil companies. In fact, it’s ironic that oil companies are producing more and more oil in large part because the price is so low. They produce and sell more oil at a lower price in order to realize the same income that they received when oil prices were higher.

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The ownership of oil and natural gas companies may not be what people commonly think it is or expect it to be. The fact is that over 80% of the ownership of oil and gas companies in America is held by private individuals, either in their individual names or through their IRA, mutual fund or pension fund.

Broad Ownership of Public Oil Companies

A report of an investigation by Robert J. Shapiro and Nam D. Pham notes thate oil and gas company officers and managers, the corporate management, own a mere 2.9%. Asset management companies, including mutual funds, own 24.7%. Pension funds control 28.9%. Individual investors, which come in as the third highest portion at 18.7%, control a significant portion of the wealth. Next in line are IRAs, which control 17.9%. Other institutional investors own 6.9% percent.