The Real Estate Center at Texas A & M University has recently made available an educational video entitled “Inside Fracking” that explains the process of fracing oil and gas wells. (I still believe the correct spelling is “fracing”). You can access the video here. If you are wondering just what fracing is and why it is used, this video offers some clear explanations.
It’s good news for Texas mineral and royalty owners that oil and gas production in Texas is increasing, due in large part to the spike in natural gas production from shale reservoirs. It’s also good news that plants that use that gas are being built.
For example, ExxonMobil Corporation is expanding its capacities on the Gulf of Mexico coast after EPA’s finalization of their permit on May 14, 2014. In Baytown, Texas, Exxon has begun work on a multibillion dollar expansion of their refining and petrochemical infrastructure to process shale-derived natural gas into plastics and other products. They plan to construct something called an ethane cracker, which is a facility in which complex organic molecules such as kerogens or heavy hydrocarbons are broken down into simpler molecules such as light hydrocarbons. The cracker will be able to process 1.5 million tons of gas per year and make ethylene stocks available for downstream chemical processing. The downstream facilities include an Exxon plastic plant in Mont Belvieu, Texas which processes 650,000 tons per year in two high performance polyethylene facilities. Ethylene is processed into polyethylene, which is a basic plastic that is used to make bags, bottles and other products.
In Mont Belvieu, Mitsubishi Heavy Industries is going to build the two polyethylene facilities. The Baytown olefins plant has also awarded contracts to Linde Engineering North America Inc. and Bechtel Oil, Gas & Chemicals Inc. to build olefin recovery units. Mitsui Engineering & Shipbuilding Co. Ltd. and Huertey Petrochem SA are building the olefin furnaces.
An interesting case was in the news recently and oil and gas attorneys have been following it with interest. The case is Lisa Parr, et al. vs. Aruba Petroleum, Inc., et al.; County Court at Law No. 5, Dallas County, Texas; Cause Number: CC-11-01650.
The Background
The Parrs have a 40 acre ranch in Decatur, Texas which is about 60 miles northwest of Dallas, Texas. The ranch sits on the Barnett Shale. Robert and Lisa Parr and their 11 year old daughter Emma alleged that they started having health problems in 2008, including migraine headaches, dizziness and nausea. By 2009, Lisa Parr said: “(m)y central nervous system was messed up. I couldn’t hear, and my vision was messed up. My entire body would shake inside. I was vomiting white foam in the mornings.” She claimed that her husband and daughter had nosebleeds, vision problems, nausea, rashes and blood pressure issues.
Another oil and gas company is expanding its operations in Texas. Paradigm Oil and Gas Inc. is adding 50 new wells to its Texas operations through new leases from Magnum Oilfield Services, Bitter Creek Petroleum and Blackjack Services. The deal includes cash and stock, with Paradigm keeping between 70% to 95&% interest in the wells. Paradigm will be the operator of the wells. Some of the new leases are the Miller, Adobe, Somerset, WH Summers, Hall, Don & Ruby Roberts, Cole, Colley and Brinkmayer A. A full list and details of the transaction will be released later. These leases are in Tyler County, Liberty County, Bexar County, Atascosa County, Kaufman County and Callahan County, Texas.
Paradigm is an expanding oil and gas producer, and currently has 30 leases with nearly 300 wells. Recently, Paradigm announced that its April 2014 oil shipments produced record returns. The CEO of Paradigm, Vince Vellardita, told reporters that “(w)e shipped two loads in April from leases in Texas and Louisiana totaling nearly 309 barrels. Those wells have since produced another 466 barrels which are ready for pick up. This oil production and (these)shipments send a clear message to shareholders that we are delivering on our promise to generate revenue and achieve sustained profitability.” Many of the new Paradigm leases are between Dallas, Texas and Houston, Texas and others cover almost 4,000 acres in the Permian Basin and the Eagle Ford shale. Of the 50 new wells, 20 are producing revenue oil and gas already. A Paradigm operations division worker said it was another example of Paradigm’s “due diligence” in going after low-risk, high return properties that are very lucrative for the company.
Let’s hope that Paradigm’s efforts will result in increased royalties for Texas mineral owners whose leases will now be operated by Paradigm.
The rapid pace of construction of new oil and gas pipelines to transport current energy production in Texas and North America continues. In fact, there has been an explosion of pipeline development in Texas. According to a recent study the industry needs to invest $200 billion nationally in capital for pipelines, storage and other facilities to meet demands from shale oil and gas by 2035. One example is River Rock Energy LLC, based in San Antonio, Texas, that has committed $125 million to fund logistics and infrastructure for the oil and gas industry, including the development of pipelines, railways and storage. The money comes from the private equity firm EnCap Flatrock Midstream. Wood Mackenzie, an energy research firm, expects about $23 billion in investment in the Eagle Ford shale alone, which is less than the $28 billion last year. The difference according to Wood Mackenzie is due to increased efficiency.
Recently, Koch Industries Inc., headed by the well-known conservative political donors Charles Koch and David Koch, announced that its subsidiary Koch Pipeline Co. LP plans to build a 24 mile, 16 inch pipeline in San Patricio County, Texas that is expected to be in service by the second quarter of 2014. Koch Pipeline has not released information on the cost of this new project.
Koch Pipeline is based in Wichita, Kansas and already has about 4,000 miles of pipelines in six states including Texas, Wisconsin, Minnesota, Missouri, Iowa and Illinois. Koch’s pipelines transport a number of products, such as crude oil, refined products, ethanol, natural gas, and chemicals. The new pipeline will have a capacity of 200,000 barrels per day of crude oil and will expand Koch’s South Texas crude oil pipeline system. Their South Texas infrastructure already has 540 miles of pipeline to move crude oil to Corpus Christi’s Flint Hills Resources refinery, which is also affiliated with Koch Industries. The refinery processes locally produced crude oil from the Eagle Ford shale and has a capacity of approximately 300,000 barrels of crude oil per day, producing a variety of petroleum products. From the refinery, Koch has pipelines that move crude oil to San Antonio, Dallas, and other markets in Texas.
The oil and gas industry both nationwide and in Texas has provided a steady stream of good economic news. Wells are being drilled and pipelines are being built and investment in infrastructure (particularly in areas with shale gas) and in technological improvements is increasing. For quite a while it seemed that an older workforce dominated the industry. That has been changing.
Businessweek recently discussed how a growing number of young people, the so-called “Millennials“, are getting involved in the oil industry. Today about 71% of the oil industry’s workforce is over 50 years old, but the industry is now undergoing what the Independent Petroleum Association of America is calling the “great crew change”.
This change has resulted in part from the excitement of the new drilling technology in the U.S. A new generation of wildcatters, landmen, engineers, investors, entrepreneurs and aspiring oil barons are coming of age and creating even more opportunities. One such new entrepreneur is 27 year old Mark Hiduke, who calls himself a Texas oilman. His company, PetroCore LLC is based in Dallas and is just a few months old. As of May, 2013 he obtained $100 million from a local private-equity firm this month. The company plans to purchase underdeveloped land and drill shale wells. He told Businessweek that the opportunities were arising from new energy technology and that the shale boom had created many opportunities to “jump in and be given enormous responsibility”.
Another new oil pipeline is being laid in the Delaware Basin in Texas, which is part of the greater Permian Basin in west Texas. According to Benjamin Shattuck, an analyst with energy research firm Wood Mackenzie, “(t)he Permian is one of the most exciting areas in the lower 48 states right now.”
Western Refining Inc. has announced plans to build 40 miles of pipeline for light crude oil and condensate from the region. Western Refining is a refining and marketing company with headquarters in El Paso, Texas. Western has refineries in El Paso and in Gallup, New Mexico with a combined capacity of 153,000 barrels per day. These refineries primarily process sweet crude oil and are in a good position to buy crude at a discount from Delaware Basin producers.
The new 40 mile pipeline in the Delaware Basin will connect with the Mason Station crude oil facility in Reeves County, Texas owned by a sister company, Western Refining Logistics LP with a new facility at Wink Station in Winkler County, Texas. From Wink Station, the crude oil and condensate will be sent through other currently existing pipelines for delivery to the market. Mason Station was built last year as part of Western Refining’s expansion plans and was the first phase of its Delaware Basin Crude Oil Gathering System.
As a Texas oil and gas attorney, I often explain to clients how important it is to be smart and review oil and gas leases, contracts and other legal documents before signing anything. So many people sign documents without reading or understanding them first and come to me after the fact, when it is much harder and often impossible to do anything about it–money and peace of mind have already been lost. I recently read a case, Ayala and Chesapeake Exploration LLC v. Soto, that exemplifies exactly this situation.
Natividad Soto is a 75 year old man and land and mineral owner in LaSalle County, Texas. He cannot read or write in English. He was approached by Henry Gilbert Ayala, a prison guard and mayor pro tem of Cotulla, Texas who was an acquaintance of Soto’s niece. Mr. Ayala allegedly pressured Mr. Soto into signing what Mr. Soto thought was an oil and gas lease. Mr. Soto actually signed a durable power of attorney to Ayala, giving Ayala authority to sign oil and gas leases and certain other documents for Mr. Soto.. Mr. Soto claims no one explained what the document was and he did not seek assistance from anyone before he signed. Mr. Ayala filed the power of attorney in the county deed records and then signed two mineral leases with Chesapeake Exploration.
A few days later, Mr. Soto consulted an attorney. The attorney prepared and filed revocations of the power of attorney with the county clerk’s office. A few weeks later, Chesapeake sent a check of almost $239,000 as lease bonus to Ayala. Ayala kept the money and claimed that Soto agreed that Ayala could keep the bonus funds as his fee.
The Supreme Court of Texas will be considering an interesting case about oil and gas royalties for a Texas mineral owner. The case is Charles G. Hooks III et al. v. Samson Lone Star L.P.
The case arises from a dispute over oil and gas leases in Jefferson County and Hardin County, Texas. The mineral and land owner is Charles G. Hooks, III, who is also an oil and gas attorney. The Jefferson County lease provided that the lessee, Samson Lone Star LLC pay compensation to Mr. Hooks if drilling occurred within 1,320 feet of his property line. Samson drilled a directional well that bottomed out within that distance, but Samson never compensated Mr. Hooks as the lease required. With the two Hardin County leases, Mr. Hooks gave Samson permission to pool his mineral interests, but Mr. Hooks contended that Samson did not pay him for all production within the pool. Mr. Hooks also claimed that Samson was required to pay both royalties on the sale of oil and gas and on the same oil and gas as it existed in the reservoir, so called “formation production”.
In the trial court, Mr. Hooks was awarded more than $21 million on these claims. The case was appealed to the Houston Court of Appeals, which reversed the judgment of the trial court in a majority decision written by Justice Evelyn V. Keyes in 2012. The Houston Court of Appeals determined that, as to the Jefferson County lease, Mr. Hooks’ claim was barred by the statute of limitations and was based on an incorrect interpretation of his oil and gas lease. The Court noted that surveys on file for this well at the Texas Railroad Commission in 2000 and publicly accessible put Hooks on notice of the location of the bottom of Samson’s directional well, and as an oil and gas lawyer, Hooks should have been aware of his claim if he reviewed both those surveys. Unfortunately, Hooks did not file the lawsuit against Samson until after the four year statute of limitations that applied to his claim had expired.
A recent case decided by the U.S. Sixth Circuit Court of Appeals holds a cautionary tale for Texas investors or any one who may want to invest in oil and gas. The case is United States v. Smith decided on April 15, 2014.
This case involved the Smith brothers, Michael and Christopher, who operated a company called Target Oil. Target conducted speculative oil drilling in several states, including Texas, but also in Kentucky, West Virginia, and Tennessee. The Smiths told potential investors that certain wells were sure-fire investments, but these wells often produced no oil at all. In fact, some of the wells had not even been drilled. Investigators discovered that from 2003 to 2008, Target Oil received approximately $15.8 million from investors, but only distributed royalties amounting to $460,000. Their operation was a classic Ponzi scheme. That means that the Smith brothers paid new investors from the investment funds of previous investors, rather than from the production proceeds from the wells they were supposed to be drilling. As in all Ponzis, for the first few months the investor thinks they’ve made a good investment. At some point, as in all Ponzis, the fraudsters run out of new investors to scam and the returns to investors stop. The newer investors get nothing at all. These kinds of schemes seem to come out of the woodwork when the price of oil approaches $100 per barrel.
Michael and Christopher Smith were arrested and charged with conspiring with others to defraud investors of millions of dollars. In the trial court, Michael Smith was convicted of conspiracy to commit mail fraud and of 11 substantive counts of mail fraud. He was sentenced to 120 months in prison and ordered to pay $5,506,917 in restitution. Christopher Smith was convicted by the same jury on seven counts of mail fraud. He was sentenced to 60 months in prison and ordered to pay $1,652,075 in restitution. The Sixth Circuit Court of Appeals affirmed the convictions in an opinion written by Justice Ronald Lee Gilman. The Court rejected the Smith brothers’ complaints of insufficient evidence, that the government introduced evidence that effectively amended the indictment, that a defense witness was erroneously excluded, that their sentences were procedurally and substantively unreasonable and that their forfeiture judgment was excessive.
