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The Texas School Land Board announced new policies in response to the covid pandemic. These policies apply to Texas Permanent School Fund (PSF) lands that are subject to the Texas Relinquishment Act, Texas Natural Resources Code 52.171 through 52.190. According to the General Land Office (GLO) website: “The policies delegates the Land Commissioner the authority to grant up to a six-month extension on all drilling commitments, when it’s deemed to be in the state’s best interest, made by lessees of permanent school fund property during 2020, and a 90-day tolling on calculations for enforcing lease terminations for halting of production or failure to produce in paying quantitiesAdditional actions include adopting a policy addressing a waiver of penalties and interest on late royalty payments submitted from April 1, 2020 through June 30, 2020 in light of the current oil and gas crisis facing the nation.”

Owners of school lands who observe operators on their property who are not drilling or who have producing wells on their property that have ceased production, need to be aware that the cessation of drilling or production may not be a default under the lease, at least until the grace period imposed by the GLO has expired. Keep in mind that, given the other pressures the oil industry is suffering from at the moment, it would not be surprising to see these waivers extended.

 

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The oil and gas industry has always been cyclical. Always has been and no doubt always will be. $20 per barrel oil is not new. Just during my career, there have been three substantial downturns in oil prices prior to the one we are experiencing today. These happened in approximately 1970, the mid-1980s, in the late 1990s. Each downturn was followed by a tremendous uptick in prices.

Keep in mind that the current issues facing the oil industry are not from a single cause. In a sense, the industry is facing a multiple whammy. 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.

There has been a lot of discussion in the industry about the appropriate response to these factors. Some have suggested the imposition of tariffs on imported oil. Others have suggested direct federal assistance to oil companies. Unfortunately, there is no consensus in the industry on what solution might help, or even as to whether any solution is called for. The smaller independent companies appear to prefer some kind of federal assistance. On the other hand, it appears that many of the large oil companies, who are better equipped to weather the storm, would prefer to let the downturn play out and then gobble up the smaller independent oil companies who can no longer stay in business. There are others who fear that government assistance now means government overregulation in the future. Anyone who remembers the draconian and impossibly complex oil allocation and pricing regulations of the Carter Administration knows just how uneconomic and illogical government regulation can be.

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It  certainly contains some food for thought.  I do not, and have never, represented an oil company. However, it is important to look at these issues in an unbiased way, free of an ideological lens.  Therefore, please remember: oil company profits pay salaries for hundreds of thousands of workers, not just the top officers,  as well as royalties to millions of royalty owners and dividends to millions of shareholders, the majority of whom are just individuals.

“The recent actions by Saudi Arabia to flood the world oil markets at extremely low prices is bringing the American oil and gas industry to a screeching halt. Ironically, some 1,000,000, that’s right, one million barrels per day of oil is being imported into the United States right now from Saudi Arabia. The largest refinery in Texas, and 5th largest in the world, located in Port Arthur, Texas is now owned by Saudi Arabia. Shell sold control of the refinery to the Saudi’s in 2017. Today, 650,000 plus barrels of the 1,000,000 barrels per day imported from Saudi Arabia goes into their 100% Saudi owned Motiva refinery in Port Arthur Texas. https://en.wikipedia.org/wiki/Motiva_Enterprises None of the gasoline produced from this refinery is made from American oil – it is 100% Saudi derived. Saudi Arabia sells this gasoline mainly through its Shell and some through its “76” branded Motiva supplied service stations in South Texas and all across the Gulf and East coasts.

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The Texas Supreme Court decided a case recently involving an assignment of an overriding royalty interest (ORRI) in minerals located in Wheeler County, Texas. That case is Piranha Partners et al v. Joe Neuhoff et al.

In 1975, Neuhoff Oil & Gas purchased an undivided two-thirds interest in a mineral lease known as the Puryear Lease. The lease was between the Puryears (and others) as lessors and Marie Lister as the lessee. The lease covered all of the minerals under a tract of land referred to as Section 28. A few years later, Neuhoff Oil sold and assigned its two-thirds interest, but reserved for itself a 3.75% ORRI on all production under the Puryear Lease. An ORRI is an interest that is created out of the working interest (the oil company’s or operator’s interest) in the lease. It is a fractional, undivided interest with the right to participate or receive proceeds from the sale of oil and/or gas. It is not an interest in the minerals, but an interest in the proceeds or revenue from the oil & gas minerals sold. The interest is limited to a specific tract of land and is bound by the term of the existing lease. If the underlying lease expires, the ORRI expires.

Only one well was completed on the property, the Puryear B #1-28. At some point, Neuhoff Oil & Gas sold its ORRI to Piranha Partners. A bit later, Neuhoff Oil & Gas went out of business and assigned its assets to individual members of the Neuhoff family.

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Many Texas landowners have old electric line easements on their property with companies that are no longer in business, such as the old Texas Electric Co. AEP Texas, Inc. and/or Southwestern Electric Power Company (“SWEPCO”) now own many of these easements. These easements are often incredibly vague, especially regarding what can be done with the easement in the future and as to how wide the easement is.

A recent Texas Supreme Court case dealt with one of these easements. In Southwestern Electric Power Company v. Lynch, the Court considered a 1949 easement over lands in northeast Texas that did not contain a fixed width for the easement. The initial easement contained a wooden pole transmission line.

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The original easements authorize SWEPCO “to erect towers, poles and anchors along” a set course on a right-of-way that crossed several privately owned properties. In addition, these easements granted SWEPCO the right to ingress and egress over the encumbered properties “for the purpose of constructing, reconstructing, inspecting, patrolling, hanging new wires on, maintaining and removing said line and appurtenances.” The width of the easement was not specified, however, SWEPCO historically utilized 30 feet as its easement.

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The Commissioners of the Texas Railroad Commission recently voted unanimously to amend Rule 3.40, which has to do with the assignment of acreage to pooling and proration units. The current rule provides that “… acreage assigned to a well for drilling and development, or for allocation of allowable, shall not be assigned to any other well or wells completed or projected to be completed in the same field; such duplicate assignment of acreage is not acceptable”.  According to the Commission’s press release:

The rule restricted exploration in unconventional fracture treated (UFT) fields when oil and gas mineral ownership is divided at different depths below the surface. A UFT field is a field in which horizontal drilling and hydraulic fracturing must be used to recover oil and gas. To take advantage of technological advances that can tap into once inaccessible hydrocarbon resources in UFT fields, Commissioners voted to allow assignment of acreage to multiple wells in these fields. This rule revision will further protect mineral owner interest and allow access to additional resources.

The amendment to Rule 3.40 will probably result in increased drilling and production in fields where there is multiple ownership at different depths below the surface of the property. That means there will be increased royalties for mineral interest owners.The amended rule goes into effect on March 3, 2020

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A well operated by Chesapeake Energy Corporation experienced a fiery blowout on Thursday, January 30, 2020.  The well, the Daniel H 1 H, is located in Burleson County, Texas near Deanville. The well is in an area where Chesapeake is drilling long lateral well bores to develop Eagle Ford shale deposits. Two of Chesapeake’s subcontractors, C.C. Forbes and Eagle Pressure Control, were operating a service rig to install new hardware on the well at the time of the accident. Unfortunately, three employees of these subcontractors were killed by the fire. News reports indicated that Boots & Coots, a well control company now owned by Halliburton, was hired to get the well under control and put the fire out.

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KBTX Photo

The U.S. Chemical Safety Board  (CSB) is sending a team to the well to investigate the accident. The CSB is an independent federal agency charged with investigating industrial chemical accidents. Headquartered in Washington, DC, the agency’s board members are appointed by the President and confirmed by the Senate. According to the CSB website: “The CSB conducts root cause investigations of chemical accidents at fixed industrial facilities. Root causes are usually deficiencies in safety management systems, but can be any factor that would have prevented the accident if that factor had not occurred. Other accident causes often involve equipment failures, human errors, unforeseen chemical reactions or other hazards. The agency does not issue fines or citations, but does make recommendations to plants, regulatory agencies such as the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA), industry organizations, and labor groups. Congress designed the CSB to be non-regulatory and independent of other agencies so that its investigations might, where appropriate, review the effectiveness of regulations and regulatory enforcement.”
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The Texas Supreme Court decided an interesting case last week regarding easements. The case was Copano Energy LLC et al. v. Stanley D. Bujnoch, Life Estate, et al. One of the interesting aspects of this case was the part that emails played in the transaction.

The plaintiffs, who were the landowners, owned land in Lavaca and DeWitt counties. The landowners had previously agreed to a 30 foot wide easement to Copano for a 24 inch oil and gas pipeline. That pipeline was installed. In 2012, Copano asked the landowners for second easement to construct a 24 inch pipeline on the landowners’ property. The landman for Copano and an attorney representing the landowners exchanged a number of emails in the course of negotiating the terms of the proposed easement. In one email, the landman agreed to pay the landowners a specific price and agreed to remedy damage to the landowners’ property caused during the construction of the original pipeline. The attorney replied “In reliance on this representation we accept your offer and will tell our client you are authorized to proceed with the survey on their property.” Later emails from Copano transmitted amendments to the original easement and an amended plat. Some of these later emails offered a lower price per foot for the easement. A still later email from the secretary of the landowners’ attorney transmitted revisions to the original easement agreement pertaining to some, but not all, of the landowners’ property to the landman. A still later email from the landman stated that: “I am fine with these changes”. Finally, the project manager for Copano then sent a “compensation proposal letter” to the landowners’ attorney with completely different compensation terms. There was no written acceptance of these terms.

The second pipeline was never built. The plaintiffs claimed that the series of emails, taken as a whole, created an enforceable written contract that satisfied the Texas Statute of Frauds and sued Copano for breach of contract.

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I recently had occasion to review the Texas Supreme Court’s decision on a long-running dispute between BP America and Laddex, Ltd. The case is centered around a disagreement of the terms in a decades old lease and its result has been significant for the energy industry. The case, known as  BP America Production Co. v. Laddex, Ltd., began in 2007. British Petroleum America (BP) had been producing out of a single well on property in Roberts County, Texas since 1971, however Laddex believed BP’s lease expired and signed a top lease with the mineral owners.  BP believed they still had rights to the land and so Laddex filed suit.

Arguments

This case reached the Texas Supreme Court after both the initial jury and the Court of Appeals in Amarillo, Texas ruled in favor of Laddex. However, BP argued that the jury’s findings were incorrect as there was not sufficient evidence to support the jury’s verdict. BP also contended that Laddex’s lease is void under the Texas rule against perpetuities. Laddex argued that BP’s well had not been producing “payable quantities of oil” for 15 months and therefore any “prudent operator” would have halted all operations. Thus, according to Laddex, the terms of the BP lease stated that should BP’s production stop, the lease would be terminated and the rights given back to the lessor, allowing Laddex the right to sign a new lease and assume operations on the property.

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Recently the Texas Supreme Court decided an interesting case in which it examined whether a will had given a surface estate or a mineral estate to the beneficiaries of the will. In ConocoPhillips et al v. Leon Oscar Ramirez Jr. et al,  the testatrix, Leonor Juan, executed a will in 1987 and died the next year. The will devised a life estate in “all of [her] right, title and interest in and to

Ranch ‘Las Piedras’”to her son Leon Oscar Sr. with the remainder to his living children in equal shares and devised the residual of her estate equally to her three children, Leon Oscar Sr.,

Ileana, and Rodolfo. In this case, Leon Oscar Sr.’s children claim that Leonor’s residual estate did not include the mineral interest in Las Piedras Ranch but that it passed to Leon Oscar Sr. as part of his life estate.