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Energy & the Law

Consider The Retained Acreage Clause

Posted in Lease Disputes, Pooling

Exclusive: Referees gather after Cowboys – Packers

Have you ever wondered about the original purpose of the retained acreage clause? According to Professor Kramer, it was “to prevent the lessee from losing those portions of a lease that had productive wells thereon if the rest of the lease terminated”. The term has been expanded “to include clauses that require the release of all acreage that, at the end of the primary term, is not within a drilling, spacing, or proration unit.”*

To the Point – The Lessons

  1. Lease clauses evolve over time. Before you march off to the courthouse armed with righteousness, mean lawyers, and a full head of legal steam, read the lease carefully to determine what it says about your problem. An old case addressing, for example a retained acreage clause, might not yield the same result if yours is written in a different way.
  2. A position based on an interpretation of a lease that is not consistent with the plain language will fail. If the parties intended a certain purpose they would have said so, but if they didn’t, it’s not up to the court to rewrite the lease.
  3. Inequitable or not, the language of the lease controls.

Chesapeake Exploration L.L.C. v. Energen Resources Corporation involved the retained acreage clauses of two oil and gas leases.  According to the leases, when continuous development ends, the lease terminates, except as to acreage for “each proration unit established under … [the] rules and regulations [of the RRC … ] or upon which there exists (either on the above-described land or on lands pooled or unitized therewith) well capable of producing oil and/or gas … “.

Under the pooling clauses, drilling and production anywhere on pooled acreage is treated as if it were on the land described in the lease, regardless of where the well is located.

The two leases covered Section 25, 80 acres of which was pooled with 560 acres in adjacent Section 18 to form the Cadenhead No. 1 Pooled Gas Unit. The well was drilled and completed on Section 18 and has continually produced. The Cadenhead No. 2 Pooled Gas Unit consisted of 560 acres in Section 25 and 80 acres in Section 18. That well was also on Section 18. The operator designated all of Section 25 as the proration unit for No. 2. Two months later continuous development ended on the leased premises. The No. 1 continues to produce, the No. 2 was P&A’ed. Energen drilled a well on the 560 -acre portion of Section 25 that had been pooled with the 80 acres of Section 18.

The Issue and the Result

Did the leases remain in effect as to all of Section 25 or only as to an 80 acre portion? The court concluded that the leases remained in effect for all of Section 25. Because the Cadenhead No. 2 was capable of producing, the lease was preserved as to its designated proration unit, all of Section 25, a portion of which had previously been pooled with Section 18.

The plain grammatical language of the retained acreage clauses do not provide for rolling termination of non-producing proration units, as argued by Chesapeake. Instead, production anywhere on Section 25 or land pooled was sufficient to maintain the leases as to the entirety of Section 25 as long as a well capable of producing was on the land or land pooled therewith. Under the __ clause, the leases continued as to all the leased land beyond the primary term as long as oil or gas was being produced from anywhere on the property.

Chesapeake argued that the parties could not have intended for production on a single unit to maintain the entire lease indefinitely after continuous development ceased. The court acknowledged the equitable appeal of this argument, but it was refuted by the language of the lease. Operations anywhere in the unit are treated as if they have taken place on each tract within the unit.

Is This Ruling Correct?

I’m not so sure it is, but this post is already too long. I might revisit it in the future.

I admire lawyers who make it look easy. Stevie Ray Vaughn had a way of doing that with a guitar.

*Bruce M. Kramer, Oil and Gas Leases and Pooling: A Look Back and A Peek Ahead, 45 Tex. Tech L. Rev. 877, 881 n.28 (2013)

5th Circuit Blocks Punitive Damages in Maritime Case

Posted in Litigation

Co-author Shannon Thorne

In McBride v. Estis Well Service, LLC, the federal 5th Circuit Court of Appeals determined that punitive damages are not available to seamen under the Jones Act or under general maritime law. In those cases, recovery is limited to pecuniary losses.

The Drill Barge Accident

Estis Well Service owned and operated Estis Rig 23, a barge that supported a truck-mounted drilling rig operation in Bayou Sorrell, Louisiana. The truck and rig toppled and capsized, killing Estis crew member Skye Sonnier and injuring three others.

Sonnier’s personal representative and the injured crew members sued Estis, alleging negligence under the Jones Act and unseaworthiness under general maritime law. They sought compensatory and punitive damages under both.

Trial and Appeal

The trial court granted Estis’ motion to dismiss the punitive damages claim and certified it for immediate appeal.

A three-member panel of the Fifth Circuit concluded that the Supreme Court’s holding in Atlantic Sounding Co. Inc. v. Townsend should be read broadly, meaning that punitive damages would be available to the injured seamen and their survivors.

The Rehearing

The Fifth Circuit granted an en banc (“by the full court”) rehearing, reversed the three-member panel’s decision, and reinstated the district court’s dismissal of the punitive damages claims.  Dismissal was not unanimous.

Judge Davis based the majority opinion on the Jones Act and the Supreme Court’s decision in Miles v. Apex Marine Corp., 498 U.S. 19 (1990). In Miles, the court denied recovery for damages of loss of society because the Jones Act and the general maritime law of unseaworthiness limited recovery to pecuniary loss.

Judge Davis distinguished Townsend by noting that it involved maintenance and cure, not unseaworthiness. Finally, Justice Davis applied Miles to the personal injury claims of the surviving seamen, rationalizing that “no one has suggested why [Miles] would not apply to an injury case.”

Several judges questioned whether Miles should preclude punitive damages for surviving seamen’s injury claims.  In a dissent, Judge Higginson focused on Townsend’s principle that if a maritime cause of action and remedy were established before the Jones Act, and the Jones Act did not specifically address that cause of action or remedy, then that remedy would remain available. Judge Higginson broadly argued that “maintenance and cure” could be replaced with “unseaworthiness,” thus allowing the court to award punitive damages.

Our Takeaway

This case provides an historical discussion of the availability of punitive damages in Jones Act and unseaworthiness causes of action. Should other circuit courts conclude differently, this issue will need to be clarified by the Supreme Court.

Joe Cocker RIP

Frackers v. Anti’s – Scoring update

Posted in Energy Policy, Environmental Policy, Hydraulic Fracturing

The box scores after election day showed frackers 4, anti’s 4. Courtesy of a gubernatorial grand-slam by Gov. Andrew Cuomo, hydraulic fracturing is now banned throughout the entire state of New York.

In this ballgame within a ballgame, it’s

Yoko and Shawn, the likes of Moveon.org , and wealthy Manhattanites: 1

Mineral owners, asthmatics, underemployed up-staters, and cash-starved municipalities: 0

Producers are safe at home. They will take their bonus money, royalty payments, and jobs elsewhere, such as to other producing states, or just over the border to Pennsylvania.

Why did he do it?

A cynic would say it’s a political decision: He needs the environmentalists for his next election more than the citizens who actually live where production would occur. The professed rationale is that health concerns outweighed economic benefits.

The New York Times reported:

  • The governor said, “I have never heard anyone say to me “I believe fracking is great” . . . “What I get is ‘I have an alternative but fracking’”.
  • The move seems “likely to help repair [Gov. Cuomo’s] ties to his party’s left wing.” (Did we say “cynic”?)
  • In announcing the report, Health Commissioner Dr. Howard Zucker said there was “insufficient scientific evidence to affirm the safety of fracking.”
  • “We can’t afford to make a mistake”, he said. “The potential risks are too great, in fact they are not even fully known”.

Decide for yourself what those explanations really mean, or if they are plausible, but the long and short of it is that unless and until fracking is proven beyond any doubt to be safe in all circumstances, at least under the current thinking there will be no fracking - and thus minimal oil and gas production – in New York. Given the propensity of certain groups to make up what they want out of the available scientific evidence, that is not likely to happen.

Here is the 184-page report if you want to read it. Jillian Kay Melchior of National Review Online summarizes:

  • At his news conference Cuomo said that the commissioners made the decision and “I think I don’t even have a role here”.
  • The first draft of the report, under then-Governor David Patterson, concluded that New York should allow fracking to proceed. Patterson asked for do-over that was followed by years of intensive environmental lobbying.
  • There was a suggestion that prosperity itself poses a public health risk (see p. 6).
  • The report focused on what it referred to as “significant uncertainties about the kinds of adverse health outcomes that may be associated with fracking”.
  • Absolute scientific uncertainty of fracking is unlikely to ever be attained.

What could he have done?

Here is what comes immediately to mind:

  • For communities that might want the economic benefits of oil and gas production, let the  voters decide for themselves.
  • Impose reasonable regulations, as producing states have done.
  • Pay attention to the long and safe history of hydraulic fracturing.

Natural Gas is Evil Because …

It’s cleaner?

The protestors in the Times photo gathered in Manhattan, where air pollution is the lowest it’s been in 50 years thanks to, among other efforts, more natural gas for home heating.

It’s the preferred fuel?

New York City’s Pollution Control Code revisions announced in April by Mayor deBlasio will require certain targets, such as mobile food trucks and char broilers, to be run on natural gas and renewables in order to clean up the atmosphere.

You can count on this

Citizens where the process is legal thank the governor for helping keep the production at home, and for affirming New York’s hostile business environment.

Today’s musical interlude – a big Christmas thank you from the Far Left to the Guv for his Kris Kringle moment.

 

A Little-Used Doctrine Saves a Lease

Posted in Lease Disputes

Would this scenario keep you up at night? Your lease does not produce from May through August because a leak in a heater-treater makes it impossible or impractical to produce the well. Problems such as access to the site during rainy weather make repairs difficult. You are beyond the primary term. The top- lessee lurks.

The Lease

“If at the expiration of the primary term oil and gas is not being produced on said land but Lessee is then engaged in drilling or re-working operations thereon, the lease shall remain in force so long as operations are prosecuted with no cessation of more than thirty (30) consecutive days, and if they result in the production of oil and gas so long thereafter … .”

The Question

Did the lease automatically terminate due to cessation of production from the only well on the property?

The Answer

Go ahead and admit it.  You either don’t know or have forgotten the “necessarily implied” temporary cessation of production clause for a Texas oil and gas lease. The “ … automatic termination rule is relaxed if the lessee can prove that the cessation of production was temporary and due to sudden stoppage of the well, some mechanical breakdown of the equipment used in connection therewith, or the like.”

In Landover Production Company, LLC v. Endeavor Energy Resources, L. P.Endeavor had the lease in Borden and Dawson Counties. Landover held the top lease.  The jury, trial court, and court of appeal all agreed with Endeavor that cessation of production was excused in accordance with the implied doctrine.

The lease clause is a savings clause. The lease would remain in effect if the lessee is then engaged in operations and there was no cessation of more than 30 consecutive days. If production was obtained thereafter the lease would continue. But this clause never came to fruition because there was production at the end of the primary term. The court reasoned that the savings clause applied only if, at that time, oil and gas was not being produced. In order to avoid the harsh result of automatic termination, the court impressed the temporary cessation of production clause upon the lease.

Endeavor had to prove that the cessation of production after the primary term was temporary and due to sudden stoppage of the well, and that it acted with diligence and remedied the cause of a temporary cessation and resumed production within a reasonable time.

The court determined that there was evidence in the record to support the jury finding. The court recited examples of the temporary nature of the cessation and Endeavor’s attempts to make repairs and turn the well back on. This procedure ultimately resulted in resumption of production. Thus, there was no termination.

If you’ve dealt with cessation of production you are no doubt wondering about the myriad cases addressing continuous drilling and reworking operations. Those cases address typical explicit savings clauses in modern leases. but those provisions apply to the secondary term. Typical examples are shut-in royalties, continuous operations, and drilling operations. There was no such clause in this case.

Just to be sure Landover got the message, the court also declared that even if Landover had won, Endeavor held title to the leasehold estate by adverse possession.

Merry Christmas

Listen to the Words In the Injunction Battle

Posted in Litigation, operations

If it’s an injunction you want, some words are your friend and others aren’t. For example:

“Imminent” = friend

“Might” = not friend

“Likely” = friend

“Could” = not friend

“Irreparable” = friend

“Money damages” = not friend

In Lightning Oil Company v. Anadarko E&P Offshore, LLC, the surface and 1/6 of the minerals of the Chaparral Wildlife Management Area is owned by the Texas Parks and Wildlife Department. 5/6th of the minerals is owned by the Light family. Adjacent is the Cutlass Lease, owned by their company, Lightning.

Anadarko planned to drill into its CWMA lease from locations on the surface of the adjacent Briscoe Cochina East Ranch and negotiated a surface use and subsurface easement agreement, which allowed Anadarko to drill five horizontal wells on each of 13 to 14 drillpads. The wellbores would cross through Lightning’s mineral estate to reach Anadarko’s lease. Lightning objected and staked its own location at the same surface location as Anadarko.

Lightning sued Anadarko for trespass and tortious interference with contract. The trial court denied a temporary injunction and Lightning appealed.

According to Lightning, the question was (1) would Anadarko’s plan to drill through Lightning’s mineral estate constitute a trespass, (2) does a third party surface owner with no interest in the mineral estate have the right to consent to such drilling activity and (3) was Lightning entitled to enjoin Anadarko’s drilling plan.  Issues 1 and 2 were not on the table in this injunction appeal.

The Standards

The main disputed issue: Did Lightning prove that it would suffer an imminent and irreparable injury if Anadarko were permitted to proceed with its plan to drill through the Lightning mineral estate. Here are the rules:

  • The injury must be probable and imminent. This is not satisfied by evidence indicating that the harm or injury is merely possible or feared.
  • The commission of the act must be more than speculative and the injury that flows from the act must be more than conjectural. If the injury can be compensated in money damages, injunctions are typically not authorized.
  • On the other hand, money damages are generally inadequate to compensate for the loss of property deemed to be legally unique or irreplaceable.

Lightning’s Testimony

  • Leaky casing from an Anadarko well could harm the value of the Lightning mineral estate. But a loss could be quantified and compensated based on reserve estimates for Lightning’s other wells in the area.
  • Anadarko’s drilling plans would place a “tremendous burden” on Lightning to drill offset wells to prevent drainage of its minerals, costing “millions of dollars”. But even if Anadarko would have drilled from a different location and not enter the mineral estate, Lightning would have the same offset obligations.
  • Anadarko’s activity would “probably disrupt our drilling program” because the pipes would be in the way of Lightning’s wells. But the wellbore for the Cutlass No. 3 would never encounter any portion of Anadarko’s wellbores because of the 330-foot field rules.
  • An Anadarko casing leak or blowout is probably not going to happen, and the Cutlass No. 3 could be drilled without any problem from Anadarko’s proposed wells. The difficulty in avoiding a collision with one of Anadarko’s wellbores would increase Lightning’s cost to drill offset wells.

The Predictable Result

There was a potential for injury and increased costs, but Lightning could not show that those injuries were not susceptible to quantification and compensation.  Lightning failed to prove that any injury to its mineral estate was probably imminent and irreparable pending trial on the merits. Denial of temporary injunction affirmed.

Today’s musical interlude has nothing to do with the topic.

Lagniappe

Why the Pearl Harbor pic? To remember, but also to remind that the injunction is the surprise attack, rather than the war of attrition that characterizes much litigation. As the Japanese learned four years and millions of dead people later, the risk of this approach is if you don’t prevail early, you are likely not to prevail at all.

Avoid the Oral Agreement

Posted in operations

Cresson SWD Services, L.P. vs. Basic Energy Services, L.P. is a warning about the perils of an oral agreement for a risky downhole procedure. Cresson hired Basic to make improvements on a saltwater disposal well by deepening the injection zone, inserting a liner, and cleaning out the hole to 8,600 feet.

The Claims

Cresson’s claim: Basic did not complete the well to 8,600 feet as promised and did not offer to complete the work.

Basic’s response: The agreement did not include a guarantee of success and Basic worked on the well until Cresson decided not to spend any more money on the project.

Let the Swearing Match Begin

The testimony came down to the word of Lack, Cresson’s “company man”, and Thomas and Wild, Basic’s rig manager and “head fishing rental tool guy”.  Lack understood that the well was a straight hole, with no deviation from vertical. In communicating with Basic, Lack did not share any of the specifics with the workover other than they were going to clean the bottom of the well and attempt to run a liner. Obstructions were encountered downhole.  Several unsuccessful fishing operations were conducted. It turned out that one surprise obstruction was a whipstock - the tool that kicks off the wellbore and changes the angle from vertical to deviated or directional.

Lack testified about a  meeting at which he told Cresson their options were to continue to spend money fishing without knowing whether it would be successful, or set another whipstock and go in another direction. He testified that it was Cresson’s financial decision to decide what to do.

Basic’s witnesses testified that no decision was made at the meeting.  Basic then rigged down the equipment, moved off the location, and demanded payment. Litigation ensued when Crossen would not pay Basic’s invoice.

The jury decided that the decision not to continue with the operation was Cresson’s and not Basic’s.  Basic recovered a judgment for its invoices.  The appellate court found that this finding by the jury was supported by the evidence.

The Takeaways

  • If essential terms of the transaction had been reduced to writing, perhaps this dispute could have been avoided.
  • With more effort up front, even more detail could be incorporated into the agreement, further reducing the chances of misunderstandings leading to conflict.
  • The trial revolved around a bunch of oral communications. Reducing communications, alternatives, options, and questions to writing brings clarity.
  • The more clarity, the more likely litigation can be avoided altogether.
  • Clarity adds certainty to the litigation calculation, which enhances early resolution, … which eliminates  trial and appeal, … which saves you time, money, and the agony of tedious, seemingly endless, cross-examination under oath.
  • Diogenes would have liked Lack. He was the company man, yet his testimony seems to have helped Basic. either Lack was an honest man or the court  cherry-picked his testimony to find support for the jury finding. That is likely. The appellate court’s job was to look for evidence supporting the jury verdict.

Bobby Keys RIP (his greatness begins at about 3:10)

The Fat Lady Who Hasn’t Sung, Oil Field Technology, and a Lizard

Posted in Contract Disputes, Regulations

Today is a grab-bag of topics, a pastiche if your college tuition was higher than mine.

When Will the Fat Lady Sing?

El Paso Marketing, LP v. Wolf Hollow I, L.P., involving a gas plant Supply Agreement, continues its tortured journey through the Texas civil justice system. Chance Decker and I reported on this case in July 2012.

El Paso provides natural gas for a power plant owned by Wolf Hollow. El Paso has a Transportation Agreement with Enterprise. Interruptions in gas delivery required purchase of replacement power. Wolf Hollow claims Enterprise delivered gas contaminated with liquids that damaged the plant, requiring plant upgrades and the purchase of replacement power.

I won’t delve into the complicated procedural history, except to say that the Supreme Court refers to Wolf Hollow I, III and II (no doubt this will be IV). The court of appeals misunderstood it to say it held on the merits that Wolf Hollow was entitled to recover on its claim for replacement power damages resulting from poor quality gas.  The Supreme Court says it didn’t rule on that and remanded the case for proceedings “consistent with this opinion.”

The opinions case (but not necessarily this one) are worth following in that they address a number of legal issues:  The force majeure provision of the Supply Agreement; waiver of consequential damages; default and remedy provisions, including how a contract treats gas quality and gas quantity (to interpret:  use your words carefully); and cover damages.

Technology Marches On

According to Leon Rosen, with the Futurest (a publication of the World Future Society), NET Power is constructing the first natural gas power plant that will completely sequester carbon. The rationale (read it for yourself) is that rather than burning natural gas in ambient air, which produces nitrous oxide, the energy driver is compressed CO2.  It’s way more complicated than that but is good news for the gas industry and the environment.

Whither the Dunes Sagebrush Lizard? (or as his mother would say, ”sceloporus arenicolus”)

Last month a federal district judge dismissed a suit by environmental groups over an agreement between the state of Texas and oil and gas producers in which the industry would promise to protect vast expanses of the lizard’s shinnery-oak habitat. The agreement was to avoid what was referred to as the “regulatory rigidity of the Endangered Species Act”. The suit had claimed that the U.S. Fish and Wildlife Service erred by allowing voluntary conservation agreements to eliminate threats to the dunes sagebrush lizard. Environmental groups said the pacts were not enforceable or verifiable. The original agreement was either a welcome respite from unnecessary regulation, smart policy,  or the end of the little fella’s time on this earth.

References to “the industry” are misleading; the players do not take their orders from Dick Cheney. But it seems to me this is “the industry’s” opportunity to prove that it can be a responsible steward of the environment.

Today’s musical interlude – having nothing to do with the topics – features dead white-boy blues guitar players who died too young – one from the ’60′s and one from the ’80′s.

More Seismic Rumbling in Louisiana

Posted in Contract Disputes

Co-author Brooke Sizer

In Olympia Minerals et al v. HS Resources, et althe Louisiana Supreme Court addressed a decision we discussed in a February entry by affirming in part, reversing in part, amending in part and remanding (because why do one thing when you can do four). The case involved the “North Starks Project Agreement” covering 42,000 acres in Beauregard and Calcasieu Parishes.

Affirmed

HS/Aspect breached its obligation to complete a seismic survey over all of the lands covered by the agreement.  The Supreme Court agreed with the lower courts that HS/Aspect was required to survey all the lands. HS/Aspect focused on limiting language, “shall not be obligated …”  The court considered this as a customary phrase recognizing that there may be obstacles that preclude undertaking seismic surveying in certain areas, eg., towns and cemeteries. the court ruled that a complete survey of both the northern half and the southern half was a benefit of the bargain and that El Paso was entitled to foreseeable damages.

Reversed

HS/Aspect was not obligated to sublease a minimum of 15% of El Paso’s mineral rights; instead, HS/Aspect had a non-binding option to sublease. Only after the company exercised the opinion was it obligated to sublease at least 15% of the leaseholder’s rights. Aspect never exercised that option, thus the damage award for breach of contract for failing to sublease at least 15% was reversed.

Reversal was based on Civil Code Art. 1933. The Court must interpret the word “option” according to civil law tradition, by beginning with legislative direction. Civil Code Art. 2047 requires that the words of a contract be given their generally prevailing meaning. According to Art. 1933: “[a]n option is a contract whereby the parties agree that the offeror is bound by his offer for a specified period of time and that the offeree may accept within that time.”

Amended

The damage award for HS/Aspect’s failure to conduct a complete survey was proper. The judgment had typos and was amended to reflect the correct amount: $4,125,00.00.

Remanded

The question was whether HS/Aspect’s use and sharing of its seismic data was proper. The lower courts reasoned that because HS/Aspect failed to fulfill the terms of the agreement, the agreement was dissolved and there was no restriction as to the use of seismic data by El Paso/Olympia. Because the Supreme Court found that the agreement did not require the sublease, the agreement was still active. Findings on the merits as to the use of the data must now be determined by the court of appeal.

There was a question about the kind or type of data HS/Aspect was required to deliver to El Paso/Olympia. The Supreme Court agreed that HS/Aspect should have turned over the raw data to El Paso/Olympia upon request, but because it was evident that El Paso/Olympia did not fulfill its agreement to keep the data confidential, there could be no malice by HS/Aspect.

This being a Louisiana case, and our purpose being to educate about meaningful topics, we bring to your attention two classic (and deceased, unfortunately) New Orleans musicians you might not be familiar with: a guitar player and a singer.

 

Election Scoreboard: Frackers 4, Anti’s 4

Posted in Hydraulic Fracturing

Hydraulic fracturing bans had eight at-bats last Tuesday. Here are the results.

Denton, Texas

See the Ballot Question in a recent entry.

YES 58.64%

NO 41.36%

Athens, Ohio

“To establish a community bill of rights for residents and natural communities of Athens and to protect those rights by prohibiting shale gas and oil extraction and related activities; and by elevating the rights and governance of the people of Athens over those privileges bestowed on certain extraction corporations.”

YES 78.28%

NO 21.72%

Gates Mills, Ohio

“Shall Article II of the Charter of the Village of Gates Mills be amended to add Section 4, Gates Mills Community Bill of Rights?”

The amendment itself  was described as a “poorly drafted populist-like approach to changing all manner of laws in our village charter”. The proposition included additional rights such as the “right to pure water”, “right to be free from toxic trespass.”

30.7% Yes

69.3% No

Kent, Ohio

“Shall the proposed amendment to the Charter of the City of Kent adding Section 4 et seq. to Article I, Incorporation; Form of Government; Powers, under the heading titled Community Bill of Rights be adopted?”

YES 46.31%

NO 53.69%

Youngstown, Ohio

The effect of the “Community Bill of Rights Fracking” would be to:

  • Prohibit “unconventional natural gas extraction using horizontal hydraulic fracturing”
  •  Ban “the establishment of infrastructures supporting gas production”
  • Ban “the storage, transportation or depositing of gas drilling waste products” in Youngstown.

YES 42%

NO 58%

Santa Barbara County, California

“Initiative to Ban ‘High-Intensity Petroleum Operations’ including but not limited to Well Stimulation Treatments and Secondary and Enhanced Recovery Operations such as Hydraulic Fracturing, Steam Injection and Acid Well Stimulation Treatment on all Lands within Santa Barbara County’s Unincorporated Area.”

YES 37.35%

NO 62.65%

San Benito County, California

“Shall San Benito County’s General Plan be amended to ban High-Intensity Petroleum Operations (such as hydraulic fracturing, also known as fracking, acid well stimulation, and cyclic steam injection, but not Low-Intensity Petroleum Operations) throughout all unincorporated areas, and all Petroleum Operations in residential general plan designations of Rural, Rural Transitional, Rural Residential, Rural/Urban, and Sphere of Influence Rural/Urban, with related zoning changes to implement the new General Plan policies?”

YES 57.3%

NO 42.64%

Mendocino County, California

“An Initiative to Assert the Rights of Residents of Mendocino County in Order to Secure Clean Water, Air and Soil and Freedom From Chemical Trespass. Which Would Ban Hydraulic Fracturing, Directional and Horizontal Drilling, and Waste Injection Wells in the County of Mendocino and Invalidates Any and All Laws Contrary to this Purpose to the Extent They Effect the County of Mendocino.”

YES 67.18%

NO: 37.82%

What does it mean?

  • We are in the middle innings of the debate. More of these votes are sure to come as reserves are discovered in places where people live.
  • There is a home field advantage.  Drivers of the Denton vote were lackadaisical local regulation leading to wells in places where voters thought they shouldn’t be, and vocal and organized proponents.
  • As nasty as a Randy Johnson fastball on the inside edge of the plate, citizens without mineral rights and the royalty checks that come with them, get cranky when noisy, ugly industrial activities jam and ruin their roads and otherwise interfere with their lifestyle. They vote in large numbers.
  • The industry whiffs on the hanging curveball.  The perceived risks - groundwater contamination, air pollution, earthquake damage - are fears, not well grounded in science.  The industry can’t convince some voters otherwise.
  • As with the Yankees, it’s not about the money. Industry outspent the opposition by substantial amounts, sometimes with success, sometimes not.
  • Like a spring-training game, there are times when the outcome doesn’t matter.  There is no fracking (and for all I know, no oil and gas activity) in San Benito County.
  • Sometimes the player off the bench makes the winning play. Results appear not to be based on predictable factors. Denton is heavily Republican and banned fracking. Athens votes Democratic and refused a ban. (The labor unions were against it).
  • Don’t underestimate the stolen base. They say it’s only about “fracking”. But without fracking it’s really about drilling.

New players in different places will be called on to participate.

The Well Operator Should Have Listened To My Mother

Posted in Royalty Disputes, Title Issues

My mother used to give us good advice.  For example:  Don’t lie … do your homework.  Sabella v. Appalachian Development Corporation agrees with my mother.

Sabella bought minerals in 1997 under 66 acres in Warren County, Pennsylvania, on which the Haners had two producing wells (under a 144-acre lease from the Harveys). They weren’t paying royalties to Sabella. When given the chance in a 2008 meeting, Mr. Haner did not tell Sabella that his wells produced Sabella’s minerals. Haner then went “all in”, elected not to conduct a title search, drilled more wells, and never paid Sabella.

Limitations and the Discovery Rule

Sabella sued in 2010 for ejectment, conversion and trespass. The Haners asserted that the suit was barred by a two-year limitations statute. Sabella pled the discovery rule: The statute of limitations may be delayed by the plaintiff’s ignorance of his injury and its cause until such time as he could or should have discovered it by the exercise of reasonable diligence.

The court determined that Sabella had used reasonable diligence by taking reasonable efforts to examine the property for oil and gas production. A witness who resided on the secluded, wooded property testified that it was virtually impossible to see wells from the road. For his part, Sabella believed that he did not have the right to trespass on the property to investigate, so he did little else other than investigate from the road.

Does the Objective Test Allow For a Subjective Factor?

Reasonable diligence is determined by an objective standard. Sabella became legally blind between his acquisition of the property and his suit. The Haners argued that such a party-specific consideration could never play into the inquiry. The court disagreed, citing the flexibility of the rule. His impairment was a factor in whether or not he exercised reasonable diligence.

Trespass - Good Faith or Bad Faith? 

As in most states, a Pennsylvania good-faith trespasser owes to the injured party, in effect, the trespasser’s net profits. The bad-faith trespasser is liable for all monies derived from the trespass without offset for the cost of generating those monies here, drilling costs and operating expenses.

The court of appeal determined that when Sabella recorded his mineral deed in official public records the Haners were put on constructive notice of his ownership. Pennsylvania’s constructive notice statute imputes knowledge of a fact to a person if he knows the fact or has reason to know it.  This includes notice by recording in the public record. The Haners were bad-faith trespassers.  The court determined that oil and gas lessees, such as the Haners, are purchasers for purposes of the recordation statute because, upon discovery and production of oil, the lease conveys a potential and definite fee simple determinable.  It appears from the discussion that this issue is a new one for Pennsylvania courts.

About That Homework …

The Haners were required to exercise due diligence in their acquisition of their lease from the Harveys. If they had done so, they would have learned of Sabella’s ownership of the minerals under the 66 acres. Because constructive notice of Sabella’s ownership was imputed to the Haners by statute, they lost their claim to bona fide purchaser status.

Mr. Haner should have listened to my mother.