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Environmental groups in a number of states are pushing for ballot initiatives to ban or limit drilling for oil and gas. Most reasonable people, and I believe many oil and gas companies, agree that regulations are appropriate, especially for drilling in environmentally sensitive areas or near residential developments. But few people proposing outright bans or overly restrictive regulation discuss or even acknowledge the unintended consequences of such a course of action.

For one thing, many people do not realize that the vast majority of mineral owners are just regular individuals, some of whom depend on royalty income for retirement. A drilling ban or overly restrictive regulation can deprive some people of much needed income. Are the proponents of drilling bans prepared to replace that income or to pay additional taxes to support welfare payments to those people who need their royalties so they can pay their rent and eat?

Secondly, according to the U S and state constitutions and the legal principle of inverse condemnation,  if government regulation deprives someone of their property, then the government is required to pay the owner the market value of that property. Individuals in this country own billions of dollars worth of mineral interests. A recent study in Colorado estimated the value of unproduced oil and royalties to mineral owners in that state to be $26 billion. Are taxpayers ready for higher taxes when their local or state government has to start paying these claims?

In two recent cases, the Texas Supreme Court reviewed what are called “retained acreage” clauses in gas and oil leases. Consistent with recent precedent, the Court instructs that these clauses are to be interpreted based on the language used and that the intent of the parties is to be the guiding principle.

In Endeavor Energy Resources, L.P. v. Discovery Operating Inc., the conflict involved the interpretation of so-called “retained acreage” clauses where the parties intended the retained-acreage definition to be based on the plats filed with the Texas Railroad Commission (“RRC”). The Court also decided a companion case,  XOG Operating LLC v. Chesapeake Exploration LP, that came to a different conclusion. The difference between the cases hinges on the language in the leases. We will discuss XOG separately.

Regulatory Background

In the case of ConocoPhillips Co. v. Koopmann the Texas Supreme Court held that the Rule Against Perpetuities (“the Rule”) did not void a 15-year non-participating royalty interest that was reserved in a deed. In doing so, the Court changed the way the Rule applies to oil and gas deeds.

The Rule is a complicated legal subject and this case makes significant changes in how the Rule applies in Texas. Note that the Supreme Court explicitly limited the holding of this case to “future interests in the oil and gas context.” The case is significant for these reasons:

• The Supreme Court rejected the long-held distinction of a future interest created via reservation versus one created via grant in the oil and gas context.

In the recent opinion of Knopf v Gray, the Texas Supreme Court instructs as to the essence of a life estate under Texas law. Whatever specific words are used to create a life estate, a testator must express three ideas:

• Any land granted is subject to the limitations that it not be sold;
• That the grantee take care of the land; and

A January 2018 case from the Texas Supreme Court, JP Morgan Chase Bank, N.A. v. Orca Assets GP, LLC, the Court dealt with justifiable reliance which is an element of a common law fraud and negligent misrepresentation claim. In this case, there were too many “red flags” for the plaintiff to show justifiable reliance with respect to certain oil and gas leases.

Background

This case involved mineral interests in various tracts throughout the Eagle Ford Shale adding up to about 40,000 acres owned by The Red Crest Trust. JP Morgan Chase Bank was the trustee. A  JP Morgan employee, Phillip Mettham, was responsible for leasing the trust’s Eagle Ford interests.

Texas residents are required by law to call 811 before digging any deeper than 16 inches. Once that call is made, all companies with any pipelines, water lines or utility lines in that area come out and mark their respective lines so that the excavation can avoid those lines. This is an obvious and common sense safety measure to protect the public as well as whoever is doing the digging.

House Bill 1818 recently extended the authority of the Texas Railroad Commission regarding pipelines. Previously, the RRC had jurisdiction only over intrastate pipelines (lines that begin and end within Texas). Now, the RRC has authority over interstate pipelines as well (lines that cross state boundaries).

Under the new RRC Rules (that you can review here), excavators must report any damage not later than one hour after the damage occurs. Next, a written report must be filed with the RRC within 30 days.

Interesting to realize that United States has overtaken Saudi Arabia and Russia to become the world’s largest oil and gas producer and continues to lead in production. On April 7, 2016, the U.S. Energy Information Administration released a report showing the United States remained the world’s largest producer in 2014 despite the decline in oil prices that occurred during the second half of 2014. In that year, the United States produced almost double the amount of oil and gas that was produced by Saudi Arabia. Saudi Arabia produces mostly oil and a small amount of gas while the production in the United States and Russia is balanced, with about half of the production coming from gas, and the other half from oil.

Why The Increase In The US?

The report credits the increase in production of both oil and gas directly to the United States’ ability to exploit tight oil and shale gas formations. Last year the United States produced over 3.1 billion barrels of crude oil, an 18% increase from the 2.7 billion barrels produced in 2013. The increase in hydrocarbon production over the last several years is credited to the increase in horizontal drilling and hydraulic fracturing which allows production from unconventional reserves which were previously uneconomical to produce.

No question about it: Hurricane Harvey and its aftermath have been horrible. It will be a very long time before things return to anything like “normal” for a lot of people. One of the few things that bring a smile these days is the amount of volunteer effort going on in response to the hurricane. Boaters across Texas hauled out their boats, headed to Houston and have been rescuing people. Churches, businesses and public institutions open their doors to serve as shelters. Nonprofit rural water and electric co-ops all over Texas are sending their crews and equipment to help the local crews in Southeast Texas restore water and power service.

One of the things I was intrigued to learn is that Anheuser-Busch has a history of producing water for disaster situations and Hurricane Harvey is no exception. When disaster strikes the company halts their production at its Cartersville, Georgia brewery and begins canning drinking water instead. So far, they’ve delivered over 410,000 cans of safe drinking water to the Gulf Coast. According to their website, they’ve been doing this since 1988. In 2016, Anheuser-Busch produced and shipped emergency drinking water to the California wildfire area, as well as areas impacted by the Louisiana floods and Hurricane Matthew.

Yes, I realize it’s good PR. But it’s also a really nice thing to do. Texans are tough and we will recover from this. However, it sure is nice to have the help!