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When a Texas mineral owner asks me to review or negotiate an oil and gas lease offer they have received, one of the first things I do is to determine who the proposed operator, or lessee, will be. Many people do not realize how important it is to know just who you are leasing to. If you do not investigate the proposed lessee before you sign, you may be throwing away the royalties you could have received had you leased to a competent oil and gas company.

First, I determine whether the potential lessee is a licensed oil and gas operator. I strongly urge my clients not to sign a lease with a middleman. Instead, I insist that the actual oil company who will be operating the lease be disclosed so we can do a background check on them. There can be many potential problems if you sign a lease with a middleman. These include, (but are certainly not limited to), the following problems:1) The company who contacted you may be a broker or a “lease hound”, that is, a person or company who tries to sign up leases cheaply and then sell them to a real oil company for a huge markup. I prefer to see my client be paid that markup, rather than the middleman.

2) They may be an agent for a “boiler-room” operation, who make their money by selling interests in a lease or “drilling program” as an investment. They make their money on the sale of these interests, and could care less about drilling a good well, or treating your minerals or the surface of the property competently. In some cases, they don’t care if a well is drilled or not, because they have already made their money.

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I spend a significant amount of time as a Texas oil and gas attorney assisting landowners with negotiation of easements and rights-of-way for oil or gas pipelines. As my client and I work through the negotiation process, it is vital to understand the various options available to the pipeline company if we are unable to reach an agreement. While we always try to reach a fair agreement, knowing what the other party can do if a deal is not reached is a key part of crafting an appropriate strategy so that you, as a landowner, can get the most value out of the agreement. Earlier this year, the Texas Supreme Court handed down a landmark decision which may affect the options available to pipeline companies when they negotiate with landowners. The case, Texas Rice Land Partners, Ltd. and Mike Latta v. Denbury Green Pipeline-Texas, addressed issues regarding when a pipeline company is a common carrier and therefore, when the eminent domain power is available to pipeline companies.The Texas Natural Resources Code allows “common carrier” pipelines to wield the eminent domain power only if they are going to transport gas “to or for the public for hire.” Of course, this statute reflects the constitutional requirement that property cannot be taken from an owner if it will be used merely for private purposes. In Denbury, the Texas Supreme Court provided further clarification on what a pipeline must do to qualify as a common carrier so that they can utilize the eminent domain power. In the past, it was assumed by most involved parties, including Texas oil and gas attorneys, that the issuance of a common carrier permit by the Texas Railroad Commission was sufficient to satisfy the requirement. In other words, if a pipeline company received the permit, then they could utilize the eminent domain power if they could not negotiate a right of way with the landowner. The Denbury case changes that.

In this case, Denbury Green received a T-4 permit from the Texas Railroad Commission to construct and operate a CO2 pipeline at the Texas-Louisiana boarder and extending to the Hastings Field in Brazoria and Galveston counties. As part of the permit application, the company checked a box which indicated that the pipeline would be used as a common carrier, instead of as a private line. After receiving the permit, Denbury Green visited part of the proposed location where the pipeline would be put. However, the owners of the land in question, Texas Rice Land Partners, refused to give the company access. Denbury Green and the Texas Rice Land Partners had previously negotiated on the company’s use of the land, but they had not reached agreement. Denbury Green sued to have access to the site to survey in preparation for condemning the pipeline easement.

The case eventually made its way up to the Texas Supreme Court. Denbury Green argued that it should be deemed a common carrier with the power of eminent domain because the permit issued by the Railroad Commissions deemed it as such. However, the Supreme Court rejected that argument. They noted that “the T-4 permit alone did not conclusively establish Denbury Green’s status as a common carrier and confer the power of eminent domain.” Instead, the Court stated that whether or not a pipeline company is deemed a common-carrier is a judicial question. The Railroad Commission’s granting of a permit is an administrative tool based upon the self-reporting of the company involved. Such a process is not subject to the adversarial testing present in the judiciary to determine if the company will actually use the pipeline for public purposes.

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When the federal government began giving billions of dollars to the banking industry through the Troubled Asset Relief Program (TARP), we discovered that many financial institutions had gotten themselves into their dire situations by making or investing in high-risk home loans. Subsequent to that discovery, there was a push to reform residential lending practices.One piece of legislation aimed at curbing such high-risk lending for homes is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In part, this law gives federal bank regulators the authority to set mortgage lending standards to attempt to prevent the lending mistakes of the past. Using this authority, the newly empowered regulators have created a new Qualified Residential Mortgage (QRM) standard and proposed guidelines to govern it. This standard is meant to increase the number of loans that are of high credit quality and have a low likelihood of default.

According to the Community Associations Institute, as proposed, these QRM loans require that a person be able to provide a 20 percent down payment (or more), pay full closing costs out-of-pocket, provide full income documentation, and be current on all existing debt payments. Additionally, applicants are subject to strict debt-to-income ratio limitations, must not have been more than 60 days delinquent on a debt obligation for two years, have had neither property repossessed nor been party to a bankruptcy proceeding, foreclosure, short-sale, or deed in lieu of foreclosure within the last three years, and have never been subject to a Federal or state judgment for collection of any unpaid debt. QRM loans are also only available as first-lien mortgages for a purchaser’s primary residence or second-liens for refinancing existing loans. Finally, adjustable rate mortgages are only to be adjusted only twice per year, and those adjustments cannot exceed six percent during the life of the loan.

The new guidelines impose much stricter standards than previous lending practices. For example, previously closing costs (which can be several thousands of dollars) could be financed. The 20 percent down payment requirement is perhaps the greatest change, as it doubles the 10 percent down payments that were routinely made by first time home buyers in previous years. What is so onerous about saving up the amount needed for closing costs and down payment, like we all used to? In addition, if buyers have more invested in their home purchase, they are less likely to just walk the loan, as so many have done.

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It is incumbent upon a Texas oil and gas lawyer to keep abreast of all relevant decisions from appellate courts and the state’s highest court. Proper advocacy demands that attorneys understand changes in the law and be able to incorporate those changes in their legal representation. Lawyers must have an awareness of all the legal tools at their disposal so they can provide zealous advocacy and competent representation for a client, whether in a dispute, guiding a landowner through the negotiation process for a lease, preparing a mineral deed or a number of other tasks.

There remain many areas of Texas oil and gas law with questions that are unanswered, and our courts are frequently providing guidance on those issues. For example, the Texas Supreme Court recently handed down a decision in Lesley v. Texas Veterans Land Board that provided further clarification on the rights and responsibilities that executive rights holders owe to mineral owners.

A mineral estate is basically a bundle of various property rights. One of those rights is known as the “executive right”, which is the ability to enter into an oil and gas lease. This is distinct from other rights of mineral ownership, such as the right to collect royalties, bonus or delay rentals pursuant to an oil and gas lease. More often than not a single owner will possess all of these rights, meaning they can choose to lease and will receive payment for royalties due under that lease. However, these rights can be split between one or more persons or entities. When those rights are split, the holder of the executive right owes a duty of “utmost fair dealing” to other owners of a mineral interest.

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Practicing oil and gas law in Texas competently also requires being aware of the “bigger picture” in which I work. One component of that bigger picture these days is the issue of energy independence.

Energy independence has become a major political issue in recent years, and has resulted in increased efforts to find ways to reduce the United States’ dependence on importing foreign oil to meet our nation’s energy needs. Renewable energy sources and nuclear solutions have been discussed as alternatives to importing oil, but our country’s natural gas reserves are also an important part of our national energy policy moving forward. Ancillary to this national discussion, the production of natural gas, and in particular, the practice of hydraulic fracturing, or fracing, has come under attack.Natural gas is often contained within dense shale formations underground, and fracing is a process used to extract those reserves of natural gas. The process itself involves the use of water combined with sand and chemicals and pumped into the shale formations to fracture them and allow the release of the gas held in the rock.

To my knowledge (and I research this issue), there has never been a documented case of the fracing process injuring a water well. Those who suggest otherwise (such as the producers of “Gasland”) are not being honest with the public or themselves. I wrote a previous article on this blog outlining the reasons for my statement.

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As a Texas oil and gas lawyer, I work frequently with Texas ranch owners to negotiate oil and gas leases or pipeline easements that effect their ranches. A recent development threatens to add yet another layer of regulation for the operation of these ranches. Specifically, the United States Environmental Protection Agency (EPA) has recently proposed new guidance rules regarding what bodies of water are protected by the federal Clean Water Act (CWA). Bodies of water protected by the CWA are regulated by the EPA, and the draft guidance that the agency has submitted seeks to expand the types of waterways that are within the gamut of the CWA. These rules purport to increase the EPA’s jurisdiction under the auspice of both the statutory language of the Act and federal case law, such as the Rapanos v. United States decision handed down by the United States Supreme Court several years ago.

Generally, the Clean Water Act covers navigable waterways that are “relatively permanent, standing or continuously flowing bodies of water” under Rapanos. The new guidance rules, however, are based upon Justice Kennedy’s concurrence opinion in Rapanos, in which he stated that the CWA covers waters that “significantly affect the chemical, physical, and biological integrity” of navigable waterways. According to the EPA website, using this broader standard allows the EPA to evaluate “groups of waters holistically” instead of using the waterway-by-waterway piecemeal evaluations that are currently performed by the agency. The new rules mean that a surface connection to a navigable waterway is not necessarily needed for that waterway to be protected under the CWA. Additionally, the guidance states that waters which flow between two or more states are protected under the Act as well.

The draft guidance will be open for public comment for 60 days once it is published in the Federal Register, and cattle ranchers, in particular, have voiced opinions that are strongly opposed to the EPA’s proposal. According to the Texas and Southwestern Cattle Raisers Association (TSCRA), the guidance, if approved as is, may give the Environmental Protection Agency regulatory authority over stock tanks, drainage ditches, and other intermittently flowing bodies of water that are currently not within its jurisdiction. As a result of the agency’s additional authority, ranchers would have to submit to an additional permitting process — and incur the cost of hiring both engineers to evaluate the bodies of water and lawyers to explain the regulations and help the ranchers successfully navigate that process — and allow federal inspections of their private property. This increased regulation would prove a significant financial hardship to those who raise cattle.

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An experienced oil and gas lawyer understands how politics influences the rules and regulations placed upon those working in the energy industry. Unfortunately, that political influence means that decisions about how the industry is regulated are often not guided by common sense, logic, and fair-minded decision-making. Instead, oil and gas regulations are frequently spurred by knee-jerk, reactionary administrators who are more concerned with appeasing loud public voices than making choices that are necessary and reasonable in light of all the information.

One is hard pressed to turn on a television news channel or flip open a newspaper without hearing or reading some story vilifying oil and gas companies and calling for new measures to control their activities. A cruel caricature is often painted of those who work in the energy industry which ignores the fact that these individuals are regular citizens working each day in a business that remains vital to national productivity. The unflattering and inaccurate public portrayal of the industry often causes appointed bureaucrats to impose new regulation after new regulation on these businesses. To make matter worse, those making these regulatory decisions are rarely knowledgeable about the day-to-day activities of those working in this field, and they usually ignore the effect that their arbitrary rules have on the business.For example, the US Department of Interior (DOI) and Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE) announced a spate of new workplace regulations recently for all offshore oil and gas producers. As reported last week in the Oil and Gas Journal, these new regulations will require certain actions be performed on these rigs in an apparent effort to improve workplace safety. These include guidelines for reporting unsafe work conditions, stop-work action procedures, safety audit requirements, and a variety of other mandates. While everyone can agree that safety should always be prioritized, heaping new requirements on the industry is rarely the best way to achieve that goal.

If history is any indication, these new rules from federal regulators will likely do little to address the actual safety goals and instead only stifle each company’s ability to respond on its own to the unique safety challenges that it faces on the ground. As those working in the field of oil and gas law know, when push comes to shove it almost always makes more sense for those actually working in these environments to decide the ideal safety protocols instead of regulations being handed down on high from those walking the halls in Washington D.C.

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Texas oil and gas attorneys are watching with trepidation as Obama seeks to cripple domestic mineral production with his ill-conceived policies. In our previous post, we discussed the Obama administration’s push to eliminate some of the tax subsidies that oil and gas producers in the United States currently enjoy. One of the subsidies that will be cut — if the President’s Fiscal Year 2012 Budget is approved — is percentage depletion for oil and gas wells, or the “oil depletion allowance” as Speaker Boehner recently called it. According to an article on Texas Insider, the Office of Management and Budget (OMB) estimates that repealing percentage depletion would generate 607 million dollars in 2012, and 11.2 billion dollars over the next decade, in additional tax revenue. While that extra income would surely help the federal government’s bottom line, it is not a smart policy due to the adverse affects it will have on oil and gas exploration and ultimately, retail gas prices. Before we can address these potential effects, however, it is helpful to have an understanding of what the “oil depletion allowance” is.

Depletion allowances let the owner of an asset account for the portion of that product as it is used up. Depletion allowances are similar to depreciation in that they provide cost recovery for capital investments — it is a tax structure to ensure that the financial burden of using resources is not borne by businesses in a lump sum. There are two types of depletion allowances available to oil and gas producers: cost depletion and percentage depletion. Cost depletion allows a taxpayer to recover the actual capital investment through the period of income production of the oil and/or gas reserves, and the cumulative amount recovered through cost depletion cannot exceed the taxpayer’s original capital investment. The other form of depletion is percentage depletion, which allows oil and gas producers and mineral rights owners to recover a portion of the mineral that is used up, or depleted, at a rate of fifteen percent of the average daily gross income from their operation each year. Unlike cost depletion, cumulative depletion deductions under the percentage model can be greater than the original capital investment made to exploit those resources.

The White House’s 2012 budget seeks to eliminate percentage depletion for oil and gas wells, leaving only cost depletion as a means for recovering such capital investment costs for the domestic independent oil and gas industry. The effects of such a change would be substantial. According to the Independent Petroleum Association of America (IPAA), removing percentage depletion as an option for small oil producers would force these companies to reduce their drilling budgets anywhere from twenty to thirty-five percent. The IPAA goes on to say that the independent oil industry accounts for almost four million jobs in the United States, and that the elimination of percentage depletion will increase taxes and result in fewer employment opportunities for Americans. Furthermore, the IPAA asserts that the elimination of percentage depletion will increase our nation’s dependence on foreign oil and result in less governmental revenue going forward.

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Texas oil and gas attorneys are watching the recent series of drilling moratoriums by the federal government with great interest. In a recent blog post, I discussed the legal background behind the first deepwater drilling moratorium and the litigation that followed.Because a federal judge ruled that the first deepwater drilling moratorium should be set aside as “arbitrary and capricious” under the Administrative Procedure Act (“APA”), the U S Department of the Interior (“DOI”) was left with a choice: either lift the deepwater drilling moratorium completely, or try to instate a new moratorium that might pass APA muster.

In an unsurprising move, the DOI issued a second deepwater drilling moratorium. The second moratorium banned exactly the same activities as the first moratorium, although it used slightly different grounds to do so. While the first moratorium banned activities occurring at depths greater than 500 feet, the second moratorium restrained all rigs that use subsea blowout preventers or surface blowout preventers on a floating facility. In reality, the second moratorium restrained precisely the same rigs as the first moratorium. The DOI defended their second attempt by explaining that, although the second moratorium was similar in effect to the first moratorium, the second moratorium did address the technical concerns highlighted in the District Court’s first order.

In November 2010, the DOI lifted the second moratorium. However, despite the fact that the moratorium was lifted, the DOI was slow to issue new permits for activities covered by the two moratoriums.

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As a Texas oil and gas attorney, I have followed with great interest the actions of the US Department of Interior (DOI) to finally lift the post-BP Oil Spill moratorium on deepwater drilling. It has been a long and legally complex road, but finally the DOI has taken the initial steps necessary to end the moratorium and re-start deepwater drilling in the Gulf of Mexico. So far, three deepwater drilling projects have been approved. A project sponsored by a Texas corporation, ATP Oil & Gas, was one of the lucky three.

In my next two blog posts, I’ll discuss the legal background behind the two deepwater drilling moratoriums issued by the Obama administration, the litigation challenging those moratoriums, and the current state of deepwater drilling operations.

Immediately after the BP oil spill disaster, the DOI issued a “Moratorium Notice to Lessees and Operators,” which: 1) directed oil and gas lessees and operators to cease drilling new deepwater wells; 2) prohibited the

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