Texas Oil and Gas Attorney Blog

There is new reason to be energized (excuse the pun!) about Texas’ oil and gas industry in 2013. The last several years have been exciting in this field, and Texas has benefited from its substantial natural resources. Now recent reports indicate that oil and gas companies will spend $28 billion in the Eagle Ford shale play alone in the coming year. That money will infuse the Texas economy, create many new jobs and send billions of dollars in tax revenues to local and state government.

The Eagle Ford is the second largest tight oil play in the United States. It is fifth in the country for shale gas production and is projected to account for 15% of US onshore oil production. North Dakota’s Bakken field is still the largest unconventional oil producer. Wood Mackenzie, an energy industry research and consulting firm commonly called “WoodMac”, studied and analyzed the trends to calculate these numbers for the Eagle Ford. Callan McMahon, an upstream analyst, asserted that the Eagle Ford continues to exceed analyst expectations.

The Eagle Ford has already shown impressive growth, going from 100,000 barrels per day of liquids such as natural gas in early 2011, to 700,000 barrels per day by December 2012. This dramatic increase is, according to WoodMac, due to technology and expertise. A lot of the money spent in the Eagle Ford this year will come from three major operators: EOG Resources, BHP Billiton, and ConocoPhilips. All three were early to focus on Eagle Ford’s liquids-rich areas, and have been rewarded. The Eagle Ford represents 38% of EOG’s upstream value, and 20% of BHP Billiton’s upstream value. According to WoodMac, in resource plays the key is core acreage. This certainly seems to hold true in the Eagle Ford. Most operators are realizing the quality of their acreage just recently. The leading companies, like the three above, not only hold core acreage positions but also own large numbers of acres in the key areas. Smaller companies are also getting in on the action by using joint venture and cost carry agreements to maximize their value per acre.

A few months ago, the nonprofit organization Resources for the Future sponsored a seminar entitled “The Future of Fuel: Toward the Next Decade of US Energy Policy.” The seminar highlighted the future of five key fuels over the next decade–oil, coal, natural gas, renewables, and nuclear–as well as the future of energy efficiency. The opening remarks were presented by Phil Sharp, president of Resources for the Future. Kristin Hayes, a Center Manager for Resources for the Future, moderated the event and Michael Schaal of the federal Energy Information Administration gave a presentation on energy projections.

One of the speakers was Alan Krupnick, a senior fellow and director of the Center for Energy Economics and Policy at Resources for the Future, who asserted that restricting carbon emissions could significantly slow growth in US shale gas production.

He said, “Fugitive emissions are the biggest issue, and if they are considered too high, it could reverse the potential gains.” He noted that most regulation of shale gas comes at the state level, so it can vary widely across the country. Even states with a long history of oil and gas production, like Texas, are still working out the kinks with some local governments.

The rights of Texas mineral owners can be complicated, which is why having a Texas oil and gas attorney review your options is important before you sell or lease your mineral rights or before you buy property in which you will own only the surface.

In many cases, a property owner owns both the surface and the minerals below the surface. However, it is possible to split the ownership, so two different persons or entities own the surface of the land on one hand and the minerals beneath it on the other. In Texas, the owner of the mineral rights has a right to the reasonable use of the surface to produce or extract the minerals, without the permission of the surface owner.

This is where the Texas accommodation doctrine comes in, which is an area of law that is still evolving in Texas. The Texas accommodation doctrine cases hold that, in some cases, the owner of the mineral rights must accommodate the surface owner’s pre-existing surface uses, so long as other means of production or extraction of the minerals are available. It is important to note that this doctrine applies only to the existing surface uses, not possible future uses by the surface owner.

Congress is considering whether to eliminate or limit a federal tax deduction for intangible drilling costs. Intangible drilling costs are those costs incurred to develop an oil or gas well other than the costs of the actual well. It includes costs such as surveying, clearing the land for a well pad or storage tanks, drainage modifications, fuel, and workers’ wages. Current US tax law allows oil and gas companies to deduct these operating expenses from their taxes, exactly like other businesses deduct the intangible business expenses incurred in operating their business.

Understandably, the oil and gas industry is quite concerned about the potential elimination of this deduction. Elimination of this deduction would effectively make exploration, drilling and production of oil and gas more expensive. That means that there will be less exploration, drilling and production in Texas, as well as in other states. In turn, that means that some number of Texas mineral owners who hope to lease their minerals, and who may really need the royalty income, may lose that opportunity.

A coalition of 33 national, regional and state oil and gas associations sent a letter to the leaders of two key congressional committees, the House Ways and Means Committee and the Senate Finance Committee, who are dealing with this issue. Groups who signed the letter included the American Exploration and Production Council, or AXPC, the American Petroleum Institute, the Independent Petroleum Association of America and the Western Energy Alliance, as well as ten other national and two other regional associations and 17 state organizations, including some from Texas.

During all of the budget talks in Washington, DC, I was interested to read a recent report entitled “CO2 Enhanced Oil Recovery” by the U.S. Chamber of Commerce regarding how enhanced oil recovery (“EOR”) techniques could add significant revenue to the Texas and federal budget, as well as enhance our energy security and benefit the environment!

Enhanced oil recovery is a general term that refers to techniques for increasing the oil that can be extracted from a given oil field. The type of enhanced oil recovery technique discussed in this report is carbon dioxide recovery. It works by pumping carbon dioxide into the reservoir, and the gas improves the flow of the remaining oil. Once the oil-carbon dioxide mixture reaches the surface, the two are separated and the carbon dioxide is recycled back into the reservoir. The U.S. is already leading the world in this technique and it is providing nearly 6% of our onshore oil production.

The new report was written by the Chamber’s Institute for 21st Century Energy. The report notes that the U. S. Department of Energy estimates that enhanced oil recovery could produce 67 billion barrels of oil, which is three times the size of the U.S. current proven oil reserves. If the price is $85/bbl, $1.4 trillion in new government revenue would result directly from these procedures, in addition to billions in private investment.

Recently, NuStar Energy LP announced that they are proposing a new system of oil pipelines to bring oil from the Niobrara Shale in Colorado to Texas’s oil refineries. The Niobrara Shale is a promising play and there is a need to get the oil produced there to refineries that can process the increasing amount of oil. Colorado is set to produce between 42 and 44 million barrels of oil this year, in a growing industry for the state. NuStar is calling this new pipeline project the “Niobrara Falls Project.”

The new pipeline would extend from Niobrara, which is near Platteville and Watkins, to an already existing pipeline in Denver. From there the oil would be transported via Denver to a McKee, Texas pipeline, which has a capacity of about 70,000 to 75,000 barrels per day. From McKee, the project would utilize other existing pipelines to get the oil to refineries in Wichita Falls, Texas. NuStar states that once the oil gets to Wichita Falls, it can be sent to the Nederland-Beaumont, Texas market and the Cushing hub via other third-party pipeline connections in Wichita Falls. This pipeline could also supply refineries such as Suncor Energy’s Denver refinery, Valero Energy’s McKee, Texas refinery, Ardmore, Oklahoma refineries, and WRB’s Bolger, Texas refinery. The new pipeline system could also transport oil from Granite Wash and Permian basin to Dixon, Texas, where NuStar has a tank farm.

To find out what kind of interest exists for this new pipeline project, NuStar held a binding open season the end of last year. A binding open season allows companies to make a long-term commitment to use the pipeline. Commitment terms of five, seven, or ten years are available for this project.

The United States, including Texas, will be self-sufficient in natural gas within the next ten years, according to a recent survey of oil and gas professionals. The survey, entitled Energy Independence and Security: A Reality Check was published by the Deloitte University Press. There is less optimism about self sufficiency in oil, however. Deloitte released the results of this survey at their recent Oil and Gas Conference in Houston, and the full report will be available shortly.

The survey questioned 250 oil and gas professionals. The participants averaged about 20 years of experience in the oil and gas industry. Also, all the participants had college or graduate degrees and were primarily executives.

Of those surveyed, 75% think the US is already self sufficient in natural gas or will be within ten years. John England, the vice chairman of Deloitte, said: “It’s not surprising that oil and gas decision-makers are enthusiastic about the role of natural gas in our national energy future, given burgeoning supplies, America’s comparatively low cost of extraction, and its relative cleanliness.” He noted that the most surprising thing about natural gas is that just a few years ago the country was prepared to import it. How quickly things changed. In relation to gas prices, 86% responded that in 2013 the price should remain at less than $4/MMbtu. 40% predict prices lower than $3/MMbtu.

Ever since Gasland came out and hydraulic fracturing became a hot topic that everyone, even people with no knowledge of the field, had an opinion about, the federal government has sought to use the issue for political gain. When people in Pavillion, Wyoming, complained about their drinking water and claimed that hydraulic fracturing, or fracing, had contaminated their wells, the Environmental Protection Agency (EPA) went rushing out to do tests.

The EPA constructed two monitoring wells and tested water samples from these wells. It issued a draft report in December 2011, concluding that it was “likely” that fracing contributed to water contamination, and claimed that they found elements of methane, ethane, diesel components, and phenol in their samples. Oil and gas industry experts at the American Petroleum Institute (API) criticized the study at the time for its unscientific data and flawed research methodology. One of API’s directors, Erik Milito, noted that the lack of properly conducted research also casts doubt on the EPA’s upcoming national study.

Another federal government agency, the US Geological Survey (USGS), also tested in the area and came to different results, described in two public releases, the “Sampling and Analysis Plan for the Characterization of Groundwater Quality in Two Monitoring Wells near Pavillion, Wyoming” and the other entitled “Groundwater-Quality and Quality-Control Data for Two Monitoring Wells near Pavillion, Wyoming, April and May 2012”.