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As a Texas oil and gas attorney, I often find it necessary, when negotiating an oil and gas lease for a client, to add an addendum that modifies some of the terms in the printed lease. The printed lease form is often extremely operator oriented and does not give the mineral owner many rights. Very often, the printed lease will provide for deduction of post-production costs from royalties due to the mineral owner by providing that royalties shall be calculated “at the well”. In the addendum, we often add language that provides that royalty shall be calculated, not on the market value at the well, but instead on the gross proceeds received by the oil and gas operator. The result of that language in the addendum is that post-production costs cannot be deducted from the royalties.

In the recent Texas Supreme Court decision of BlueStone Natural Resources II LLC v. Walker Murray Randle et al, the printed oil and gas lease contained language that indicated that the royalties would be calculated on the market value at the mouth of the well. Prior decisions by the Texas Supreme Court determined that this language allows the well operator to deduct post-production costs. The operator and the mineral owner agreed to an addendum that stated that royalties would be based instead on the “gross value received” by the operator. The addendum also stated that if the addendum was in conflict with the printed lease provisions, then the addendum would control and prevail.

Once production was obtained on the well, the operator proceeded to deduct post-production costs. The mineral owner sued. The operator argued that the “at the well” language is the only lease language providing a valuation point, so nothing in the addendum can be considered contradictory to that portion of the printed lease’s royalty provision.

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From what I read, it appears that there are many people, including politicians in our federal government, who believe that  electricity produced by solar panels should be a substitute for oil and gas production. However, there are a number of aspects of energy produced from solar panels that don’t appear to be considered:

utility-scale-solar-panels

  • studies have indicated that solar panels may actually increase global warming. The reason is that solar panels only convert around 15% of the sunlight that hits them into electricity. The rest is given off into the environment as heat. For small installations of solar panels, that may not be a big deal. But large-scale installations, the kind that would be needed to produce large amounts of electricity, would emit a large quantity of heat, thus potentially raising global temperature. You can read about one study published in 2018 in the journal Science here. Another study that reaches the same conclusion was published in 2016 in the journal Nature and can be reviewed here.
  • many of the parts used to build solar panels and the batteries in which the electricity produced by solar panels is stored come from China exclusively. To the extent energy production in the future relies on solar energy, we are going to be at the mercy of China unless we can come up with domestically produced alternatives.
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As anyone who reads my blog is aware, I am a Texas oil and gas attorney who only represents mineral, royalty and surface owners and I never represent oil companies. My passion has always been helping land and mineral owners make the best use of their land and mineral assets and get the best compensation and terms for leases, pipeline and utility easements and surface use agreements. However, the current political discussions regarding the oil and gas industry seem to disregard some important facts that we may all want to keep in mind.

The oil and gas industry has been the subject of many public discussions, and that is a good thing. Regardless of your political view, the suggestions that we eliminate fracking, limit oil and gas production offshore and on federal lands, transition away from oil and gas and remove what have been called “subsidies” to the oil and gas industry, involve a number of potential unintended consequences that we all should be aware of. These include:

  • All the plastics and a number of medicines in our life are derived from oil and gas. Without petroleum, there will be no cell phones, computers, appliances, cars and many other items that we use in our daily life. (Maybe that’s a good thing!). If the supply of oil and gas becomes limited, all these things will become more expensive.
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As most people are aware, President Biden has canceled the permit for the Keystone pipeline with one of his first executive orders. While environmental interests certainly applaud this move, there will be consequences that politicians may not be taking into account.

First, without the pipeline, oil will need to be moved by railroad cars and trucks. Both of these methods involve a greater rate of accidents and spills than the pipeline.

Secondly, using rail and trucks to move oil will result in an increase in carbon emissions compared with the pipeline.

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The El Paso Court of Appeals recently decided a case that involved the use of the surface of land by a solar farm that was objected to by the Lyles, the  mineral owners of the property. That case is Lyle et al v. Midway Solar LLC et al. 

The Defendant Midway operated a large solar facility on the property in Pecos County, Texas under a 55 year lease with the surface owner. The solar leases designated drill sites for the benefit of future oil and gas production at either end of the property. The drill sites were about 30% of the surface area. The mineral owners claimed that the solar panels and transmission and electrical lines and cables serving the facility interfered with their ability to produce their mineral interests. At the time of the litigation, the mineral owners did not have an active oil and gas lease for the property and were not actively seeking a lease. In fact, the Court noted that “(i)t is undisputed that the Lyles have never leased out their interests to any oil and gas operators and have no current plans to lease their estate or to otherwise develop their mineral interests at this time. They have commissioned no geological studies, nor entered into any drilling contracts for the minerals. Since January 1, 2015, the Lyles had not received a single request to lease or purchase the mineral estate in Section 14. And the Lyles conceded they had no plans for drilling any wells.”

The mineral owners filed suit based on several claims, including a claim that the solar panels were a trespass, and requested that the Court order all solar panels and related lines be removed from the property. The Defendants claimed that the accommodation doctrine authorized their surface use.

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In a bit of welcome news for Texas mineral owners, according to the metrics calculated by Baker Hughes, the oil and gas drilling rig count for Texas and the United States is going up. Specifically, the rig count has gone up by 13 rigs since October 9, 2020. This represents the fifth week in a row that there has been an increase in the rig count. This past week has represented the largest increase since January 2020. Of course, there has been a decrease of 569 rigs since October 2019, so there is a ways to go.

Over half of the rigs have been added in Texas and especially in the Eagle Ford Shale.

The downward pressure on oil and gas prices due to the OPEC/Russian price war and the erosion of demand due to the covid virus has decimated oil prices, although they currently seen to be holding steady at about $40 per barrel for oil, according to the Energy Information Administration. In September, the Henry Hub natural gas spot price averaged $1.92 per million British thermal units (MMBtu), down from an average of $2.30/MMBtu in August, 2020.

 

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In August 2020, the Energy Information Administration (EIA) issued the second part of its report on the Wolfcamp shale play of the Midland sub-basin section of the Permian Basin, which you can read here. The report is an interesting analysis of the geology of this area. The accumulations in the Permian Basin that became hydrocarbons were deposited during the Pennsylvanian through the late Wolfecampian geologic era while an inland sea covered this area.

Hydrocarbon_Plays_within_the_Permian_Basin
As many of you know, the Permian Basin has been producing for about 100 years. So far, it has produced more than 35.6 billion barrels of oil and about 125 trillion cubic feet of natural gas. Last year, this area accounted for more than 35% of total U.S. crude oil production. The EIA estimates that its reserves of oil and gas make the Permian one of the largest hydrocarbon producing basins in the world.

The Permian Basin contains three sub-basins: the Delaware, Central and Midland. The Wolfcamp play extends in the subsurface of all three of these sub-basins. It has been called the most prolific oil and gas bearing formation within the Permian Basin. The Wolfcamp formation is, in turn, divided into four sections, or benches, designated by A, B, C and D. Each bench differs in a number of ways, including its porosity and organic content. Since many areas of this play have very low permeability, production often requires multistage hydraulic fracturing.

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There is a new book out in September 2020 by Daniel Yergin. As some of you know, he is the author of The Prize (which won a Pulitzer Prize) and The Quest, both of which are essential reading for anyone seeking an understanding of the history and nature of the oil and gas industry. The new book is entitled: The New Map: Energy, Climate, and the Clash of Nations, and will no doubt be just as interesting as his previous books.

Some of the points he addresses in the new book are:

  • the future of the shale boom
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The San Antonio Court of Appeals recently issued an interesting opinion regarding a well operator’s claim that H2S/CO2 from a nearby injection well damaged its leased minerals. The case has been appealed to the Texas Supreme Court and oral argument has been scheduled for December 2020.

The case is Swift Energy Operating, LLC v. Regency Field Services LLC. In 2009, Swift, the Plaintiff, leased approximately 4200 acres of a ranch in McMullen County, Texas and operated a number of producing wells on the ranch. In 2006, Regency obtained a permit from the Texas Railroad Commission to operate an injection well in which they would dispose of a gas mixture of concentrated hydrogen sulfide (H2S) and carbon dioxide (CO2) by pumping it into the Wilcox formation. In its application for the permit, Regency submitted a plume model to the Railroad Commission that predicted that the injected material would spread horizontally by approximately 2200 feet after 40 years of injection. The review by the Railroad Commission staff indicated that they believed that shale formations above and below the disposal zone would prevent vertical migration of the injected gas.Deep_injection_well

In 2012, another operator in the area discovered H2S in one of the its wells and testing indicated it came from the Regency injection well. As result, that operator had to plug and abandon that well. An employee of that operator emailed Swift about these developments.

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Many Texas mineral interest and royalty owners have seen their royalty checks shrink or disappear altogether in the second quarter of 2020. The covid crisis caused prices to slip to nearly zero in some cases and in response, in April, May and June 2020, many operators shut in wells that they could no longer afford to operate. There was concern among some in the oil and gas industry that shutting in these wells could cause permanent damage to the wells and/or the reservoirs.images5

It now appears that those fears were probably unfounded. A recent press release by Rystad Energy, based on an analysis of second quarter earnings reports from 25 large, publicly traded oil companies, reports that most US onshore operators will restore nearly all shut-in oil wells by the end of the third quarter of 2020. This has no doubt been driven by the partial rebound in oil  prices. The operators sampled said they did not face any issues in bringing wells back online. Rystad Energy’s Vice President for North American Shale and Upstream, Veronika Akulinitseva, said “No loss of production has been reported by any operator following the shut-ins and moderation of output, with most companies flagging a smooth return of operations, and in some cases posting a positive production impact from those reactivations”. One operator, EOG Resources, indicated that nearly all their reactivated wells have exhibited some degree of “flush production”. Flush production is an increase in production after a well is reactivated because the bottom hole pressure has been building up while the well was shut in.

Many Texas mineral and royalty owners are individuals who depend on their monthly royalty check to pay the bills. The reactivation of these wells, and the larger royalty checks for a month or so, will be good news to these owners. In addition, as production comes back, oil companies will begin to add back laid off employees, which is important to those families and also to the Texas economy as a whole.