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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.

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There is no denying the importance of the Texas oil and gas industry to the Texas economy. A less obvious impact is the effect of oil and gas prices on Texas land values.

Texas A&M University’s Real Estate Center released an econometric model positing a powerful correlation and interdependence between rural land prices and Texas oil prices. For most landowners, their land is arguably their most valuable possession. Land is also a vital ingredient for the oil industry. In addition, the oil industry is highly competitive in terms of offers to lease mineral rights and make use of the surface. The price of one’s land can be calculated from the value of projected future revenue the landowner receives from an oil company.

Land prices are determined by two factors: expected net revenue and the discount rate applied to future cash flows. The higher the price of oil, the greater the revenue from bonus and royalty income will be for oil and gas producing land. The increase in oil prices also effects oil company workers, shareholders, and executives in the form of increased salaries, bonuses and share prices. With more to spend, the workers and shareholders can pay more for land and so this helps bid up land prices as well.

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There is a new technology developed by Texas Tech University called “zipper frac.” It is a hydraulic fracturing process, which serves to fracture the subterranean rock formations by using pressurized liquid. Texas Tech University modified the original technique. As the zipper frac process commences, it creates the fractures, or splintering, in a staggered order. Tests have proved the new zipper frac ameliorates the fracturing process; the contact area is able to expand and the fluid production is augmented. The technique calls for two simultaneous parallel horizontal wellbores that are in close proximity of each other.  The Texas Tech researchers report that the modified fracing process will not only cost the same, but more importantly, guarantee a greater return and thus make wells more efficient.

The Zipper Fracing Advantage

The modified zipper fracing process combines the benefits of alternating fracturing and zipper frac. By doing so, modified zipper frac is able to create greater intricacy in the reservoir. The modified process is much simpler and does not require the use of specialized tools. This particular process eliminates some of the risks associated with stress reversal, which typically occurs near the wellbore. There is also the promise of superior long-term fluid production. The objective with the zipper frac technique is to alter the stress field and thereby create a more substantial fracture network, which is important for shale reservoir development.

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The Texas legislature sent a new bill, HB 1436,  to Texas Governor Greg Abbott on May 28, 2015. The new bill aims to provide those dog owners who have been notified by animal control that their dog has been determined to be dangerous the opportunity and ability to appeal the animal control authority’s determination of the “dangerous dog” characterization. Once signed and made law by the Governor, the bill would go into effect on September 1, 2015.

What Is A Dangerous Dog?

Dangerous dog law is a characterization governed by both state and local law, so for each city or county dangerous dog laws might be slightly different. For example, one city might require dog owners to register online if they have certain breeds of dog that are generally considered dangerous, while other cities do not have this requirement. Under Texas Health and Safety Code Section 822.041, a dangerous dog is defined as one that:

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There are some relatively new operators in the Texas oil and gas industry. One of these is Parsley Energy, Inc. which was founded in 2008. Run by a relatively young management team, Parsley Energy appears to be establishing a good reputation in an industry which is typically dominated by more seasoned players.

Parsley Energy is an independent natural gas and oil company operating primarily in the Permian Basin and the Midland Basin. Parsley has experienced significant growth since its inception and now operates hundreds of wells and produces over twelve thousand barrels of oil each day.

The Permian Basin

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On May 18, 2015, the Texas Governor Greg Abbott signed HB 40 into law. The law is effective September 1, 2015. This new law effectively prohibits local city and county governments and subdivisions from regulating surface oil and gas activity in their jurisdictions. The law provides that all such regulation is now preempted by the state of Texas. The new law does have an exception, but it is so narrow as to be effectively useless.

This is not a good day for Texas property owners.  I foresee the law of unintended consequences coming into play here. Specifically, as oil and gas activities encroach on residential areas, the market value of those properties will decline, and may decline substantially. That means appraisal districts will have to reappraise these properties at a lower level. That in turn results in lower tax revenues. Texas counties are already pinched financially. Will Texas counties simply increase the tax rate to make up for the lost revenues? Texas property owners already bear huge tax burdens from county and school taxes. Many counties spent like drunken sailors when taxes were buoyed by taxation of oil and gas production during times of high oil and gas prices. Now they have huge overhead and new programs that they cannot pay for. What happens next will depend on how much oil and gas activity occurs in residential areas where it was previously prohibited and what impact that has on local taxes. To be announced.

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As of November 4, 2014 Denton, Texas was the first Texas city to ban fracing inside city limits with a ballot initiative that passed with almost 59 percent of the vote. The next day, the state’s energy lobby, Texas Oil and Gas Association, filed an injunction in response. The Texas General Land Office also separately filed suit to prevent Denton from enacting the ordinance. Arguments in both suits were based on the fact that well completion techniques, which include fracing and disposal, are preempted by the state regulation and that the ban cannot be enforced by a city. Opponents of the ban have also argued that the ban constitutes an unlawful taking of mineral rights. It is unclear if the courts would find the fracing ban to be an unconstitutional taking of property in violation of the Texas Constitution because it is not a ban on gas well drilling, only a ban on one type of gas recovery technique used during production.  More recently, the Texas legislature has prepared legislation that would actually ban all local regulation of oil and gas drilling, and not just fracing.

Implied Preemption in Texas

In Texas there is no doctrine of implied preemption under state law. This means that in order for a city or municipal regulation to be preempted by state law the Texas State Legislature must “with unmistakable clarity” dictate that state law controls. In January 2014, the state of Texas adopted new rules in the Texas Administrative Code relating to hydraulic fracturing in Texas. The new rules do not specifically preempt municipalities from adopting additional regulations.

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The United States Court of Appeals for the Fifth Circuit recently decided the case of Breton Energy, L.L.C., et al. v. Mariner Energy Resources, Inc., et al which concerned claims of waste and drainage against Defendants who were operators of a neighboring mineral lease. The issue was whether the Plaintiffs sufficiently plead a claim for relief against each Defendant. The Fifth Circuit concluded that the claims of drainage against all Defendants should be dismissed, and the claims of waste should be dismissed as to all but one Defendant, IP Petroleum Co. (“IP”).

The Facts
Conn Energy, Inc. (“Conn”) owned a mineral lease named West Cameron 171 (“WC 171”) in the Gulf of Mexico. In 2009, Conn had an agreement with Breton Energy, LLC (“Breton”), allowing Breton to explore WC 171 for hydrocarbons. Conn and Breton sued the owners and operators of a neighboring lease called West Cameron 172 (“WC 172”). It was significant in this case that the WC 171 and the WC 172 shared a hydrocarbon reservoir: the K-1 sands. The other Defendants were other lease owners and operators or predecessors or successors to the current operators.

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Another piece of scientific evidence has been published that suggests that the negative press over hydraulic fracturing may be unwarranted. As most of you are aware, there have been many accusations reported in the media that fracing allowed methane to enter and contaminate water wells. While methane is not particularly toxic, it is smelly, explosive and thus potentially dangerous. A new study that you can read here was published last fall in the Proceedings of the National Academy of Sciences. That study concluded that contaminated groundwater in Texas and Pennsylvania is not due to fracing but is primarily the result of problems with pipes and seals at natural gas wells, and particularly with annulus cement, production casing, and failure of the water wells themselves.

The study authors chose research areas in the Marcellus Shale and the Barnett Shale where the most complaints of water contamination were reported. The study addressed two questions: (i) are elevated levels of hydrocarbon gases in drinking-water aquifers near gas wells natural or anthropogenic (i.e., resulting from the influence of human beings); and (ii) if fugitive gas contamination exists, what mechanisms cause it? The study was conducted by analyzing chemicals, like methane, in groundwater using noble gas and hydrocarbon tracers. This process allowed the researchers to determine if gas wells were contaminating the water, if so, which wells and also to determine which part of the drilling process or equipment was to blame. The proportions of elements such as methane, helium, neon, and argon in the groundwater demonstrated that these elements originated from leaky pipes and bad seals. If the contamination had come from fracing, the water would have exhibited different proportions of these elements.

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Previously I have discussed the revised Texas Railroad Commission (RRC) Rule 3.70 regarding permits for pipelines. You can access my previous blogs here and here. The RRC approved that new rule on December 3. 2014, and it went into effect on March 1, 2015. You can access the text of the new rule here.

There were many comments and suggestions made during the Public Comment period required by Texas law for any new administrative rule. The RRC included a few of these suggestions in the revised rule. However, there were a number of important comments and requests that were neither significantly addressed nor included in the revised rule. These include:

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