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Energy & the Law

Can Reworking a Saltwater Disposal Well Maintain a Lease?

Posted in Lease Disputes, operations

work on wellShould the sufficiency of reworking operations under the cessation-of-production clause of an oil and gas lease be limited to the producing well?  Crystal River Oil and Gas, LLC et al v. Patton was a suit to terminate an oil and gas lease due to cessation of production. The case addressed this question, which you would think had been considered in all the years of lease termination disputes in Texas.

The clause at issue was pretty “standard”:

If, … after discovery of oil, or gas the production thereof should cease from any cause, this lease shall not terminate if Lessee commences additional drilling or re-working operations within sixty (60) days thereafter … .”

The well produced 2,000 barrels of saltwater for each barrel of oil. The saltwater disposal well servicing the producing well became inoperable in September 2011 and was repaired in late October. The jury was asked whether the defendants failed to commence drilling or reworking operations on the producing well. The lessee complained that the question should have allowed the jury to consider work performed on the disposal well. The court agreed.

Lawyers: Pay attention to the Texas Pattern Jury Charge at PJC 303.16. Others: You need not go to that trouble.

The lease didn’t define “reworking operations”.  Lessor Patton contended that reading was required by the habendum clause.

Courts in Texas have used this definition for the term:

“… any and all actual acts, work or operations in which an ordinarily competent operator under the same or similar circumstances, when engaged in a good faith effort to cause a well or wells to produce oil or gas in paying quantities.”

Williams and Meyers (see §618.1) cites the difficulty in defining the term “because of the many ancillary activities that are required in order to operate an oil and gas well” and concludes that whether any particular operation falls under the definition of “reworking operations” depends upon the facts peculiar to that operation.

Prohibiting the jury from considering operations on the salt water disposal well was reversible error. The result will be a do-over at the trial court with a more expansive jury question.

I know you know this, but to appreciate Chuck Berry you have to listen to his songs as if it is 1956: Something you never heard before. RIP.

The Parol Evidence Rule at Work in a Mineral Transaction

Posted in Contract Disputes, Land Titles, Title Issues
Coach Maineiri wondering why the Tigers aren't reading Energy and the Law

Coach Mainieri searching for a Tiger who will read Energy and the Law

A phrase currently in common usage begins with “‘cluster” and ends with a vulgarity that has been around for centuries. Saheid v. Kennedy presents facts that pretty much exemplify the meaning of the phrase:

  • While living in England, start out to buy a hotel in New Orleans,
  • have no experience in Louisiana mineral transactions,
  • when the hotel falls through, buy 1096 acres with 500 wells in northernmost Caddo Parish,
  • do zero title due-diligence,
  • memorialize the $4 million transaction with a one-page handwritten document,
  • close the deal three weeks later with an Act of Credit Sale,
  • pay royalties for four years and then dispute the obligation,
  • when disagreement ensues sign another “contract” that doesn’t really help,
  • sum it all up by testifying as to your “confusion” about the transaction.

The one-pager for the 1096 acres provided: “Seller [Gish] to give a best effort to deliver to Buyer [Saheid] the remaining 12 ½% Gish family oil and gas lease holding.” Saheid’s purchase price would be reduced by $400,000 if Gish couldn’t deliver the minerals within five years. Saheid paid royalty to the Gish relatives for almost four years. Saheid and Gish later entered into a “contract” in which they agreed that the Saheid payment would be reduced and Gish would continue to withhold the 12.5% royalty.

What legal points are at play?

Not much about titles, a lot about parol evidence, which is admissible when:

  • the terms of a contract are susceptible to more than one meaning,
  • there is ambiguity as to its provisions, or
  • the intent of the parties cannot be ascertained from the language used.

Four witnesses sorted out the mess. And as one might expect, the testimony was confusing and contradictory. Saheid had never purchased mineral interests before and said he was unaware of the 12.5% being claimed by the family. His title-examiner expert testified that the public records showed there was no written contract for the 12.5% mineral interest. But he agreed that it was Gish’s right to sell 87.5% and keep the rest if the agreement so specified.

The court concluded that Gish did not intend to sell and Saheid did not intend to buy the entire mineral interest. Gish was selling 100% of the tract and 87.5% of the minerals, which is a reasonable concession for accepting a partial payment and owner financing. The court referred to Saheid’s “imperfect understanding” of the transaction.

Takeaways

  • Due diligence = good business, sloppiness and haste = bad business.
  • Lame, one-page agreements are seldom sufficient for anything, much less a $4 million land and mineral trade.
  • Paying royalties for four years and then saying you thought you owned the minerals = not persuasive.
  • Entering into a contract before you understand it = bad business.

If Saheid had stopped in Opelousas instead of turning north to Shreveport, maybe he could have avoided this mess.

Does it Matter if a Deed Correction is Material?

Posted in Land Titles, Title Issues
Good - Better - Best. On the black bacground

Good – Better – Best. On the black bacground

Co-author Katie English

McCabe Trust v. Ranger Energy LLC, is the consequence of failing to comply with the Texas Property Code when correcting real property conveyances.

The simplified facts

  • In 2008, Mark III executes a mortgage granting a bank a security interest in property described in an attached exhibit which included certain oil and gas leases.
  • In 2011, Mark III assigns overrides in the leases covered by the mortgage, plus two additional leases, the McShane Fee and Brice, to the McCabe Trust and the Rochford Trust.
  • In January 2013, a revised mortgage is recorded, replacing the original exhibit with one including the McShane Fee and Brice leases. It is not executed by the bank or Mark III.
  • The bank transfers the mortgage to Ranger Energy.
  • Ranger forecloses.

Ranger asserted that the Trusts’ overrides in the McShane Fee and Brice leases were extinguished by the foreclosure sale. The trial court granted judgment for Ranger.  The appellate court reversed and remanded.

Why the reversal? Blame the Texas Property Code

A correction instrument that complies with the Property Code is effective as of the date of the original conveyance. The statutory requirements for correction instruments differ based on whether the correction is a material change or nonmaterial correction.

A nonmaterial change

Section 5.028 allows a person with personal knowledge to execute a correction instrument making a nonmaterial change of an inadvertent error, including the addition of an inadverantly omitted legal description.

A material correction

Section 5.029 allows the original parties to the transaction or their successors to execute a correction instrument making a material correction, including “the addition of land to a conveyance that correctly conveys other land.”

The decision

The 2013 revisions added two additional leases to a mortgage which correctly conveyed interests in other leases.  The addition was a material correction. The corrective instruments were not retrospectively valid because they were not signed by the parties who originally executed the instruments. Thus, they were not notice to subsequent buyers of the facts stated therein. Foreclosure of the revised mortgage did not extinguish the Trusts’ overrides in the two leases.

The dissent

The dissent agreed with Ranger that adding the two leases was a nonmaterial change but argued that the Trusts were not bona fide purchasers.  The dissent would say the Trusts’ interests were extinguished.

Takeaways

There are several:

  • Statutory requirements for correcting a real property conveyance differ depending on the circumstances.
  • These provisions date from 2011. If you haven’t dusted off the Code since the Longhorns were successful on the gridiron, be warned.
  • The general rule is that first in time is first in right. There will be times when you will need the correction to relate back.
  • If there is a question whether a change is material or nonmaterial, have all original parties to the original transaction (or their successors) execute the correction.

Recall my desire to criminalize lame cover songs. Immunity should be granted for good ones. For example, we have the very outstanding Curtis Mayfield original, and the almost-as-good Huey Lewis cover.

Lessons in Administering a Master Service Agreement

Posted in Litigation, operations

fireIs condensate a contaminant? When it spills and burns a worker, yes. In Hiland Partners v. National Union Fire Insurance Company the operator, an additional insured under a contractor’s commercial general liability insurance policy, was deprived of coverage – and a duty of the insurer to defend. We’ll get to the lessons.  But first, …

The accident

Hiland owns a gas processing facility in North Dakota and had an MSA with Missouri Basin under which MB would provide services. MB procured the insurance policy and included Hiland as an additional insured. As always, the insurer had a duty to defend. There was an exclusion in the policy for bodily injury arising out of the discharge, release, etc. of pollutants, which were defined as any “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acid, alkali, chemicals and waste”.

Am MB employee was removing water from a condensate tank when the tank overflowed, causing a fire that seriously injured the worker. Because of the exclusion, there was no coverage for Hiland under the policy. And now, …

The lessons

Should Hiland have adjusted language in its MSA to protect itself? I don’t see how it could have. They made themselves an additional insured. The problem was with the policy exclusion. Everybody (whether contractor or operator) must be diligent in confirming that liability insurance coverage tracks – and covers – the liabilities and obligations in the MSA. But here’s the problem: It was MB’s policy. How may additional insureds study the other guy’s policy? I venture to say not many.

Then there was an administration problem: The insuror’s duty to defend was nullified by Hiland’s failure to give the court evidence that it reported the pollution claim to the insurer within 21 days of discovering it – the deadline required in the policy. Timely reporting would, perhaps, have established an exception to the exclusion. Was notice not given, or did Hiland just didn’t show it to the court? The opinion doesn’t say.

Why the exclusion applied

The definition of pollutant is not subject to strict technical usage so the court – as it should – went to the dictionary. A pollutant is something that irritates, or causes irritation, … or contaminates. The injured worker’s suit described condensate as flammable, volatile and explosive.  Cases discuss petroleum products being toxic by nature. The fact that condensate caused harm other than by contamination and is a product that causes harm in a manner other than by irritating or contaminating, didn’t matter to the court.

The court rejected Hiland’s argument that the condensate caused harm in a manner other than by contamination and thus the exclusion did not apply, and rejected the argument that condensate is not a “pollutant” under the exclusion because Hiland is in the business of selling condensate, which makes it a product.

For today’s musical interlude, more girl singers you need to know about: A black, guitar-playing, gospel singer who was around so long she’s no longer around, and a more recent underappreciated country singer.   

 

 

Mineral Lease Prevails in Louisiana Royalty Dispute

Posted in Lease Disputes, Regulations, Royalty Disputes

Co-author Brooke Sizer

Prevails over what, you ask? In Gladney v. Anglo-Dutch Energy, LLC, a conditional allowable from the Office of Conservation didn’t supersede lease royalty obligations.

How did we get here?

Anglo-Dutch completed a gas well on the Gladneys’ lease and then filed a pre-application notice for a compulsory drilling and production unit and applied for a conditional allowable. On May 17, 2012, the application was granted:

All monies generated from the date of first production, the disbursement of which is contingent upon the outcome of the current proceedings before the Office of Conservation for the Frio Zone will be disbursed based upon results of those proceedings.

The next day Anglo-Dutch began sales of production from the well and later submitted a formal unit application. Order No. 124-Y established the unit, effective on and after October 30, 2012.

Perhaps to the surprise of Anglo Dutch, but certainly to its chagrin, the Gladneys demanded payment of the full one-fifth royalty for production from the well prior to October 30th, rather than settle for their share of production on a unit basis.

Anglo-Dutch refused, relying on the conditional allowable which, it said, superseded its lease obligations.

The trial court ruled for Anglo-Dutch, holding that the “allowable covers the royalty payments” because the allowable dated back to first production. The court found no provision in the lease which would require that the Gladneys be paid more than that provided by the commissioner under the allowable and the unitization order.

Reversal from the court of appeal

The court of appeal reversed. “The Mineral Lease … clearly provided Plaintiffs were to get lease-basis royalties on all production from the well and that lease governed the parties’ relationship prior to the unitization order, which was not effective until October 30, 2012.”

Under the Order, the effective date of the unit was October 30, 2012, not the first date of production. The Gladneys were entitled to a full one-fifth royalty from first production until the effective date of the Commission’s Order.

The Gladneys argued, and the court agreed, that the Office of Conservation can’t impede private contract rights. According to an affidavit from a long-time Office of Conservation representative, the conditional allowable was not meant to abridge privately negotiated contract rights. That is consistent with settled Louisiana jurisprudence that meddling in private contracts is beyond the Office of Conservation’s authority.

The court helps those who help themselves

 The court was unpersuaded by Anglo-Dutch’s plea that it had no choice other than to pay royalty on a unit basis because otherwise it would have had to pay double royalties. Anglo-Dutch could have amended its lease obligations through a royalty escrow agreement. The Gladneys noted that they suggested this alternative and it was rejected, and that such an arrangement is a common practice in these situations. The court also rejected the argument that the Gladneys were improperly attacking the Commission’s actions.

Anglo-Dutch should have listened to Alabama Shakes.

Award for Nuisance From Gas Wells Squelched

Posted in operations, Pollution

bad dayIt was a bad day for the Parrs in Aruba Petroleum v. Parr. The trial court judgment was against the operator for intentional nuisance. The Parrs recovered $2.9 million for pain and suffering and mental anguish and for loss of market value of their home caused by Aruba’s gas wells in Wise County, Texas. (See our erudite discussions of this case at the trial court here, here and here.)

This, along with Cerny v Marathon Oil, makes one wonder what it might take for a Texas plaintiff with a nuisance claim arising out of oil and gas activities to recover personal injury damages, especially if there are operations in the area by non-defendants (there were no wells on the Parrs’ property and 87 other wells in the area).  As you will see, litigation by ambush is not likely to work.

The Parr’s claim was for “environmental contamination and polluting events” on their property by way of, among others, air contamination, light pollution and offensive noises and odors.

Recall Crosstex v. Gardiner, in which the Supreme Court described what is required to prove an intentional nuisance:

The actor desires to cause the consequences of his act or believes that the consequences are substantially certain to result from it. It is a subjective standard. It is not enough to conclude that the defendant intentionally engaged in the conduct that caused the injury.

The Parrs relied on three categories of evidence:

  • complaints by a neighbor to Aruba,
  • complaints to the Texas Commission on Environmental Quality,
  • complaints by the Parrs to Aruba.

Generalized, anonymous grievances fall short

For all their complaints, the Parrs never identified themselves or their specific problems to anyone in particular at Aruba. They failed to identify evidence that Aruba knew that the Parrs were complaining to the TCEQ or that complaints were about the Parr’s property.

The jury didn’t believe Aruba’s conduct was abnormal and out of place in its surroundings. Recall that after Crosstex that is an improper jury question anyway.

My guess is that the jury was persuaded by testimony of an Aruba witness that well sites are noisy, dusty, emitted odors, and result in underground vibrations and significant lights at night, that the Parrs “probably “ had complaints, that he considers smoke plumes a health hazard and a nuisance. That all might be true, but to the court that wasn’t the issue.

It’s all about the evidence

There was no evidence to support the jury’s finding that Aruba intentionally created or maintained a condition that substantially interfered with the Parrs’ use and enjoyment of their land. The Parrs couldn’t cite any evidence that Aruba knew who placed phone calls to Aruba and complained to the TCEQ, or that complaints were specific to the Parr’s property.

For our musical interlude, happy Valentine’s Day.

Oil and Gas Arbitration – Did the Parties Get What They Bargained For?

Posted in Contract Disputes, Litigation

judicial activistFirst, a promise: I won’t report on another arbitration case until there is more to say than “business as usual”. Second, an opinion: Arbitration is still the right forum in many situations. Third, remember: An award and a result, not litigation, was what Venoco says it bargained for.

That said, knowing only that Denbury Onshore v. Texcal Energy South Texas is an appeal of an arbitration award in Texas, you can predict the outcome. The award was confirmed.

How to vacate an award

The bases for vacating awards are similar under the federal and the Texas arbitration acts. Generally an award must have been procured by:

  • corruption, fraud or undue means,
  • evident partiality or corruption,
  • arbitrator misconduct (willful misbehavior),
  • refusing to postpone the hearing for sufficient cause,
  • refusing to hear material evidence,
  • other misbehavior that prejudices a party’s rights, or
  • the arbitrators exceeded their powers or so imperfectly executed them that a final and definite award was not made.

I’m conflating the two statutes.  They aren’t identical but the result is the same: vacating an award is difficult.

The dispute

Denbury had an option to purchase Venoco’s interests in the Hastings Field. After Denbury achieved payout, Venoco would receive a 25% back-in. Payout was dependent on Denbury’s “CO2 costs”, the direct costs of acquiring (commodity costs) and delivering (transportation costs) CO2.

A three arbitrator panel unanimously declared the meaning of the disputed language of the agreement and issued an award in Venoco’s favor.

Denbury sued to modify and vacate the award for:

  • insufficient evidence,
  • the arbitrators exceeded their authority by making an incorrect value judgment on the contract clause,
  • manifest disregard of the law (in essence, they construed the contract incorrectly), and
  • the parties had contracted for judicial review.

Denbury’s hurdles

All reasonable preferences are indulged in favor of the award, and review of an award is extraordinarily narrow.

Denbury argued that the parties contracted to expand judicial review for reversible error: “An appeal from an order or judgment of the panel shall be taken in the manner and to the same extent as some orders or judgment in civil cases under Texas law.” This was not a clear enough agreement to invoke the appellate process to correct reversible error by the panel.

Did Denbury get what it bargained for?

Under the TAA and FAA an arbitrator exceeds his authority only when he disregards the contract and dispenses his own idea of justice or when he strays from the delegated task of interpreting the contract, not that he performs that task poorly. The panel’s 13-page detailed award satisfied the contractual requirement that the award provide evidentiary references. The award was not so irrational or devoid of authority that the panel was merely dispensing its own idea of justice.

The court concluded that Denbury’s complaint was nothing more than a dispute as to the correctness of the panel’s construction of the provision and an effort to re-argue the merits of the case. Don’t be so sure. I could believe that Denbury believed it could appeal but failed to write the provision clearly enough.  Think about that the next time you write such a provision Better yet: why arbitrate if you can appeal?

A proposal

Let’s criminalize vacuous and inept cultural appropriation. If we were to do that, here is a victim and a misdemeanor. And here is a victim and a major felony. Write your Congressperson.

What Price For a Louisiana Servitude?

Posted in pipelines

cavalryAccording to Enterprise Te Products Pipeline Company v. Avila, it is the value of the expropriated property, even if it is as little as 33 cents each to the landowners. This seemingly small case must have had big potential for chaos. Otherwise, why appeal?

Enterprise sought expropriation of a 30-foot wide servitude over the Avilas’ property. The trial court granted a 99-year servitude and found the total value to be $1,060, but awarded each of the 12 landowners who appeared between $150 and $300, despite their collective ownership of slightly more than 1 percent. Each of the many absentee owners was awarded $150. Enterprise appealed, arguing that imposition of a term was erroneous and that the compensation award was contrary to the facts in the record.

Under Louisiana law, a legal servitude can be extinguished only by certain events, such as destruction of the dominant or servient estate, if things necessary for its use have undergone such a change that the servitude can no longer be used, or if it is not used for 10 years or longer. The trial court erred in fixing a term for a legal servitude.

What about those damages?

An award of damages caused by the expropriation should be based upon the value of the property before the contemplated improvement was proposed, without deducting benefits to the owner from the improvement. He must be compensated to the full extent of his loss. La. R. S. 19:9. Enterprise’s expert determined that, based on the highest and best use of this rural property, the value of the 160-acre tract was $1,200 per acre. The servitude covers less than one acre, making the total value of the expropriated property $1,060.

What motivated the trial court?

The trial court was “impressed by the impact that taking such as this would have upon the ancestors of an African-American landowner who acquired the property at a time when ownership by a person of color was rare .” The court of appeal believed that sentiment was “implicit” in the ruling.

The main argument of the landowners (who weren’t represented by counsel) was the fundamental unfairness of the expropriation process – a viewpoint no doubt shared by every expropriation defendant since the beginning of time. The court of appeal also appeared to sympathize. It its words, it was “forced to conclude that the award to the Appellees is manifestly erroneous” and amended the judgment.  The result was that each appellee-landowner received between 33 cents and $5.23.

Questions

  • When is a trial court’s duty to do what she believes is right, rather than rule in strict (or no) conformance with the rule of law?
  • What motivated the trial court? Sympathy, … a sense of justice and fairness, or … what?
  • What if there were no appellate court – no cavalry galloping over the hill to save the troops?
  • Why appeal? To communicate a message to future hold-outs?

A musical interlude for the long-suffering landowners.

Oil Industry Custom and the Model Form JOA: A Debate

Posted in Contract Disputes, Operating Agreements, operations

existential questionWe begin with an existential question:

“The philosophy behind all of the model form agreements is that aggressive drilling under the JOA should be promoted and rewarded.

Agree or disagree?

That was an issue in Talisman Energy v. Matrix Petroleum.  It was not resolved, but the decision is worth your attention because the court enjoined the operator from drilling and proposing wells pending trial on the merits.

The parties were drilling wells in LaSalle County, Texas, under a 1954 Model Form JOA. Section 15 (which the court refers to as Section ”16”; see V.D of the later forms) allows the operator to use its own equipment and tools only on a competitive basis, if it does not exceed prevailing rates, and after an agreement in writing with the non-operators. Evidence was presented that Talisman was exceeding the prevailing market rate and was not confirming the arrangement with Matrix prior to operations.

A procedural hurdle

Procedural wrangling prevented the court from answering our existential question. Talisman’s expert landman, and the source of the statement, was going to show certain customs and usages in the model form and how it is intended to work.

An expert can testify about, for example, the common understanding of “commencement of operations”. But the court viewed the testimony as being offered not to explain the meaning of an industry term, but rather to aid the trial court in construing sections 5 and 8 of the agreement.  A court doesn’t need an expert to help it construe an agreement. That’s what the judge is for. The testimony was not considered.

What about irreparable harm?

Lawyers: The decision discusses why there was irreparable injury and why it didn’t matter that Matrix wasn’t seeking a permanent injunction.

INTERMISSION

We’re usually done by now. Appropriate for an old-timey but still-breathing JOA are old-timey but timeless tunes. Today we have one with roots from 1860, and one originating in 1720 (you can look it up!).

If you elect to participate in a subsequent operation, you may now …

Consider the existential question

I conducted a random and unscientific survey of industry professionals (to-wit, people with whom I have lunch and drink whiskey, often not at the same time). The result: Some agreed with the statement, most did not.

These alternative “philosophies” behind the model form were presented:

  • The JOA is an “outline for honorable men to follow in the development of oil and gas properties.”
  • The purpose … or the “philosophy”, is to control the Operator to a certain extent and to ensure that WI owners understand and agree to costs and when and how payments are to be made.
  • The efficient utilization and maximization of leasehold opportunities, along with effective production management should be the goal. Profit maximization and reasonable adherence to the prudent operator’s implied covenant to develop should govern the drilling philosophy.
  • One of the reasons … [is] … to protect minority owners, to keep the major participants from expensing them out of the Agreement by not orderly and timely proposing drilling, completing and evaluating opportunities and risks … .
  • The goal is to have prudent operations in all respects – financial, engineering, geologic, etc.
  • The reason … is to provide those who elect to participate in the drilling of wells necessary to efficiently drain the reservoir with a proper return for assuming the risk and burden of those partners who elect not to participate.
  • If they choose to do so, the parties can negotiate terms that clearly provide for an active drilling program as their primary objective.
  • If you wanted “aggressive development” the non-consent penalty would be [more than] 300%.  Or there would be no non-consent … .  If the drafters truly wanted to reward “aggressive drilling”, the non-consent would have never been proposed.
  • In contrast to a JOA, it could be argued that “aggressive drilling be promoted and rewarded” is the intent of an Oklahoma Forced Pooling Order [and that] such an Order is designed to punish anyone who does not aggressively drill or expend capital … by taking away subsequent interests.

But I also heard from who agree (including the expert, who stands by his opinion):

  • The generation that came up in the 1950’s, ‘60’s and ‘70’s, plus committee members of the AAPL JOA task force who worked on the 1989 Model Form, asserted their “philosophy” that aggressive drilling is to be promoted and rewarded. That philosophy prevailed. Hence, the non-consent option.
  • Article VI (Drilling & Development) sets forth the conditions for which one party can take on the risk of drilling with or without the participation of all parties. Oklahoma’s forced pooling statute revolves around the JOA. (A contrary view of Oklahoma forced pooling?)
  • The pro-development bias is explained by the fact that any party, no matter how small its interest, can propose a well and force all other parties to either join or go non-consent, subject to the penalty.
  • The alternative is to either 1) carry the non- consenting party  under common law co-tenancy (in which case there is no “penalty”; only recovery of costs), or  2) vote on operations, as with international, offshore, and onshore field wide unitization/secondary recovery.
  • Unlike international or offshore arrangements, in the model forms there are no provisions for voting mechanisms, project teams, committees, and forced collaboration prior to a drilling proposal. Any party can move forward by AFE’ing the others and allowing them to invoke the non-consent penalty.  That reflects the aggressive drilling philosophy.
  • The form certainly doesn’t discourage aggressive drilling. That is reflected in the non-consent option.

Why the discord? 

It’s no surprise. The “disagreers” tend to be smaller operators and non-ops (my eating buddies). The “agreers” tend to be larger, with bigger budgets.  The “small guys” tend to want to rein in the “big guys” and make them go about development in an orderly fashion with maximum collaboration. The big guys tend to favor agreements that allow them drill away; said less charitably, to force operations on the others at-will.

Who says the oil business is monolithic?

It’s Now Easier To Be a Common Carrier Pipeline in Texas

Posted in Eminent Domain, pipelines

pipelineWe now know what it takes to establish common carrier pipeline status in Texas.  According to the Texas Supreme Court in Denbury Green Pipeline Texas LLC v. Texas Rice Land Partners Ltd., all that is required is a reasonable probability that the pipeline will, at some point after construction, serve the public by transporting a product for one or more customers who will either retain ownership or sell it to parties other than the carrier. A “reasonable probability” is “more likely than not”.

Summary judgment evidence established a reasonable probability that at some point after construction, Denbury Green’s CO2 pipeline known as the Green Line would serve the public, and thus Denbury Green is a common carrier as a matter of law. This means no jury trial in Jefferson County at which common-carrier status would be the issue.

A long history

In its original opinion first time up the appellate ladder, the court held that “checking the box” on Railroad Commission Form T-4 was insufficient to establish that a pipeline is a common carrier. The record showed only the possibility of future customers, which is not the same as a probability. Plus, there was objective evidence – from Denbury’s own web site – of its intent to use the pipeline solely for its own purposes. After that opinion, the court of appeals found that the facts at the trial court did not establish common carrier status.

This time around, though, Denbury presented evidence necessary to make its case. For example:

  • Testimony that the line was designed to be close to refineries, plants and other facilities that could use the line to transport and store CO2.
  • Transportation agreements with two unaffiliated entities and a sister company acting on behalf of itself and working interest owners unaffiliated with Denbury.

This was “reasonable proof of a future customer”, thereby demonstrating that the line will transport to or for the public for hire and is not limited in its use to the wells, stations, plants and refineries of the owner.

How else can we make it easier?

The Supreme Court removed two court of appeals-imposed hurdles to common-carrier status:

  • The court eliminated the requirement that agreements with third parties be sufficiently substantial to establish common-carrier status as a matter of law. The Supreme Court ruled that the public interest need not be “substantial”. Evidence of a “reasonable probability”, etc. is substantial enough to satisfy the public use requirement.
  • Evidence is no longer limited to pre-construction events or the proponent’s subjective intent or beliefs at the time of its plan to construct the line.  Post-construction contracts are relevant to the analysis.

Left for another day is whether a contract between affiliated entities that may benefit unaffiliated working interest owners is sufficient to establish common carrier status.

A musical interlude.