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Energy & the Law

Contracts – It’s More About the Drafting Than the Suing

Posted in Contract Disputes
compressorCo-author Brooke Sizer

It’s been said that your most important decisions are made when you write your contract, not when you have to sue on it. Kachina Pipeline Company v. Lillis agrees.

In a gas-purchase agreement, can the pipeline operator (Kachina) deduct costs of compression from its payments to the producer (Lillis).

“No”, said the Texas Supreme Court. Kachina could not charge Lillis for compression costs incurred after it received the gas in order to sell the gas to the third-party processing facility.

Why? Because according to the words of the contract that was the intention of the parties. This is even if, as the dissent argues, given the way things work in the business the parties couldn’t have meant what the words say.

The case construed the following provision:

Seller shall deliver the gas deliverable hereunder, … at a pressure sufficient to enter Buyer’s pipeline against the working pressure maintained therein from time to time. … neither party … shall be obligated to compress any gas … . If Buyer installs compression to effect delivery of Seller’s gas, Buyer will deduct from proceeds payable to Seller hereunder a value equal to Buyer’s actual costs to install, repair, maintain and operate compression, plus 20% … .

Sequence of Events

2001 – Lillis begins selling gas to Kachina (maybe earlier)

2003 – Kachina installs the Barker Central Compression Station

2007 – Kachina installs additional compression

2005 – The contract is made

2005 to 2008 – Kachina buys, transports, and resells Lillis’s gas according to the contract, deducting marketing fees, which include compression costs.

2008 – Lillis enters into a purchase agreement directly with Davis, constructs his own pipeline to its plant, and objects to Kachina’s deductions.

Lillis would transfer gas from his wells into Kachina’s gathering system and Kachina would pay Lillis a percentage of the proceeds from resale to Davis.

Alternative Readings

If the provision authorized deductions for any compression that aids in the final delivery of gas to Davis, then Kachina had been rightfully deducting Lillis’s share of costs.

If the provision only allowed deductions for compression that Kachina installed post-contract. If Lillis failed to deliver at pressures that overcame Kachina’s working pressure at the point of transfer, no deductions were allowed.

The Result

The contract allowed Kachina to deduct only the costs of compression installed during the term of the Agreement if required to overcome the working pressure in Kachina’s system.  In order to discern the intention of the parties the court relied on the four pretty-much standard rules of construction. We’ve stated them in this blog before and don’t need to repeat them. See page 6 of the opinion.

The Dissent
Three justices dissented. It was illogical for Lillis to pay compression costs prior to 2005, but then no longer have to pay them under the 2005 agreement. The believe the parties really didn’t intend the meaning ascribed to them by the majority. Further, “Lillis testified that, under the 2005 GPA, he expected to keep paying compression costs. And though Lillis’ expectations do not determine the meaning of the agreement … they certainly reflect his perspective on the facts: … Kachina’s compression had been and would be effecting delivery of his gas. [We] would not reward Lillis’ efforts to avoid his acknowledged obligation under the GPA.”

Today’s musical interlude is dedicated to Mr. Lillis, whose testimony almost blew his case.

Fracking, Trigger Warnings, and a Safe Room

Posted in Energy Policy, Hydraulic Fracturing

amniotic fluidFirst, an apology. I have brought shame to my own self and this blog for failing to invoke trigger warnings about activities I will mention again, after the appropriate trigger warning. (I had no idea there were so many.)

Trigger Warning

This post will refer to activities in oil and gas production as they are commonly described in the industry. This post will feature the mindset of the industry and its enemies. Don’t take my word for it. Read the links themselves. First, see James Lileks‘ treatment of trigger warnings in National Review.

Fracking (ouch) had mixed poll results in a recent Gallup Poll.  Perhaps that is because of …

Hysteria

Michael Lynch in Forbes cites emotional, bordering on the ridiculous, claims by anti-frackers, including our favorite Yoko and related anti-fracing groups who resort to demagoguery and overuse and misuse of “frac”.

Women in the oil business, do know what you are? Sandra Steingraber is an environmental activist who “peer-reviewed” the study relied on by Gov. Cuomo to ban fracking in New York. She opined that the only jobs for women in the “fossil fuel industry” are as prostitutes and hotel maids. But then, there is …

Science

Energy in Depth reports that according to the California Council on Science and Technology, five myths by fracking opponents have been debunked:

  • Hazardous chemicals are released by hydraulic fracturing,
  • Hydraulic fracturing directly causes ground water contamination,
  • Fluid injected in the process of fracing causes earthquakes,
  • Upstream oil and gas sources represent small proportions of toxics in certain highly-urbanized areas in the South Coast air district. Eliminating oil and gas production would not eliminate air pollution problems in the San Joaquin Valley. (To be fair about it, oil and gas facilities emit significant air toxics in the area and are responsible for a large fraction of H2S emissions.)
  • Fracturing operations use a large amount of fresh water compared to other human water use.

CCST is a “non-partisan, impartial not for profit corporation established in 1988 by an assembly concurrent resolution to provide objective advice from California’s best scientists and research institutions on policy issues involving science.”

According to a grudgingly favorable report from Treehugger, billions of gallons of treated wastewater from fracking operations are being delivered to California almond and pistachio producers for irrigation.

The Massachusetts Institute of Technology reports that electrodialysis may provide a cost effective treatment of salty water from hydraulic fracturing.  Both of these reports show progress in the important area of water use. Do not let the likes of CERES tell you nobody but them is doing anything about it.

Announcing the Gray Reed Safe Room

By now you are aware of “safe rooms” on college campuses – havens for those youngsters who are so traumatized by ideas that offend their firmly and sincerely held personal beliefs that they can’t function. I learned about the one at Brown University from a source not The Onion and not first presented on April 1st. That’s what you get for $48,272 in annual tuition.

Gray Reed goes one better than Brown.  Sand is an irritant to sensitive young skin, a little one could gag on a chunk of Play Doh, and communing with your inner three-year-old isn’t sufficiently therapeutic. In the Gray Reed safe room there will be the frolicking puppies, but also more! To bring a profound and perfect peace to the utterly infantilized, participants in the Gray Reed safe room will be bathed in a warm, gently flowing stream of amniotic fluid. No harsh abrasives or choking hazards. You can’t get any closer to “home” than that.

A Bo Diddley interlude.

Coming soon: Huckleberry Finn, uncensored.

Another Lease Termination Case, a Different Ending

Posted in Lease Disputes
Co-author Matthew Wheatley

We recently discussed failure to produce in paying quantities. Another decision involving the same lessee had a different result. Why?

The question in both cases was whether the well was capable of producing in paying quantities and whether a reasonably prudent operator would continue to operate the well.

In the new case ten wells were on the property. Production declined, and as of June 2012 only one well was producing. Red Deer acquired top leases. BP shut the final well in on June 12 and distributed notice and shut-in royalty checks on June 13. Red Deer sued, claiming the shut-in royalty clause was ineffective because the final well was not capable of producing in paying quantities when it was shut in.

Three Rules    

  • A shut-in royalty will not preserve the lease if the well is not capable of production in paying quantities.
  • A lessee whose title is wrongfully repudiated by notice that the lease is terminated is excused from any obligation to conduct activities necessary to hold the lease in force until the lease controversy is resolved. Establishing repudiation requires proof of a subsisting lease and the lessor’s “unqualified notice” of lease forfeiture or termination.
  • This is important: Repudiation is not available as a defense unless specifically pleaded.

The Result

There was legally sufficient evidence to support the jury’s conclusion that the well was not capable of production in paying quantities at the time it was shut in and that a reasonably prudent operator would not continue to operate the well in the manner BP had been. (Interpretation: That’s what the jury concluded.  Maybe they were right or maybe they weren’t; the appeal court’s job is to determine if there was evidence to support the verdict, not whether it agrees).

There was steady long-term decline in production. The remaining reserves were estimated to be less than one percent of the total reserves. There was testimony that there was nothing BP could do economically to increase the well’s production. At shut-in the well had experienced a five-month period of unprofitable production.

BP did not argue repudiation, and cited no authority for its assertion it “was entitled to shut-in the… well and to keep the well shut in because of Red Deer’s title challenge”. BP’s contention that another well, if drilled, would be a producer was not proof of a well which would support a shut-in royalty.

How is Red Deer Different From Laddex?

Here are a few ways:

  • In Red Deer, production had been declining steadily for a long duration (nine other wells had been shut in.) In Laddex the decline was relatively recent. This was part of the reason the Laddex court held that the 15-month period was unreasonable.
  • There was evidence in Red Deer of the scarcity of remaining reserves and BP’s inability to increase production. Production in Laddex resumed to pre-slowdown levels prior to suit.
  • The Red Deer court held that five months of unprofitability could be probative of a well’s capability to produce. The Laddex court held that limiting the jury’s consideration to a fifteen month period was unreasonable. It seems the Red Deer court gave more weight to factors other than the duration of unprofitability.

A musical interlude.

Royalty Clauses For the Lessor – This Battle is Over

Posted in Lease Disputes, Royalty Disputes

still freeWhat is your guiding principle when writing agreements?

“The more the words the less the meaning, and how does that profit anyone?” Ecclesiastes 6:11.

or

“The beginning of wisdom is the definition of terms.” Socrates

The Legal Issue

A lease grants “a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent … of gross production obtained” for directional wells drilled on the lease but bottomed on nearby land (emphasis mine). Are deductions of post-production costs allowed? No, says the Texas Supreme Court in Hyder v. Chesapeake Exploration, a decision long-awaited by those of us who pay attention to these matters.

The court of appeals decision was the subject of a prior post.  The Supreme Court affirmed the court of appeal, which had affirmed the trial court.

Is This a Big Deal?

It certainly is for the Hyders and lessors with the same provision. Otherwise, I’m not so sure.

  • The court was split five to four.
  • The court emphasized that it was merely determining the parties’ intentions based on the language of the lease, disclaiming a broader agenda.
  • The court recognized a basic proposition in Texas law: A royalty is usually subject to post-production costs, but the parties can modify the general rule by agreement. They just didn’t do it in this case, said the court.
  • The court declined to read into Heritage Resources, Inc. v. NationsBank anything other than that the meaning of a lease is governed by a fair reading of its text.

The Rationale

In the Hyder lease the basis for royalty payment is the price received by the lessee, which the court noted is often sufficient in itself to excuse lessors from bearing post-production costs. “Cost free”, said the majority, is not merely a synonym for an ORRI. Scriveners often include “cost free” in a royalty clause to make certain that everybody understands the royalty is free of production costs, but not necessarily post-production costs, even though the language is not necessary (royalties are cost-free as a matter of law).

The court did not believe that “cost free” means free of post-production costs. But the Ecclesiastes way didn’t serve Chesapeake well.  In order to prevail Chesapeake had to prove that “cost free” could not refer to post-production costs.  The court concluded that the ORRI was to be paid on the price received by Chesapeake after post-production costs are paid.

The Dissent

Four justices would have gone with the default – ORRIs bear post-production costs. The way they saw it:

  • The ORRI clause did not allow valuation of the ORRI downstream at any point of sale. It implicated only one location – the wellhead. Post-production activities would add value to the Hyders’ ORRI, but had not yet done so at the wellhead.
  • Although the ORRI may not have been expressed using the familiar market-value-at-the-well language, they read its value to be just that. The “cost free” designation did not express an intent to abrogate the default rule. They would recognize that “cost free” simply stressed the cost free nature of the royalty without struggling to ascertain any additional meaning.
  • Siding with Socrates, they focused on the vast differences between the royalty and ORRI provisions in the Hyder lease, concluding that if the extensive, specific, and detailed free-and-clear language in the royalty clause was surplusage, so should be bare bones “cost free” designation in the ORRI clause. “Cost free” is redundant, but not meaningless. We discussed the court of appeal interpretation of the detailed royalty clause in another post.

Today’s musical interlude: Backup singers.

Bobby King, Terry Evans, and (?) Herman Johnson

Mary Wilson and Florence Ballard

All of the Platters except the dude in the middle

How an Expert Can Affect Your Oil and Gas Claim

Posted in Litigation
expertCo-author Matthew Wheatley

Your well consultant just cemented 10,000 feet of tubing inside the casing of your eight million dollar well, … a neighboring operator frac’ed his Eagle Ford well into your Austin Chalk completion, thereby trespassing and contaminating your well. Righteousness and vengeance are yours. The jury will draw and quarter the offender.

Not So Fast

Texokan Operating, Inc. v. Hess Corp. is a reminder: To obtain the justice you so richly deserve you need a reliable expert to testify, and your expert must jump through procedural hoops before his testimony will deliver you to the judicial promised land. Texokan’s suit for well contamination required engineering expertise.

The Question

Under what circumstances are an expert’s opinions admissible?

What Doesn’t Work

Plaintiff’s expert determined the “loss of value” of wells based on his “forecast” of future production. He calculated this forecast using historical data from the wells, oil prices at the time, operating expenses, royalties, taxes, and a present value discount factor based on his “experience and education” evaluating “thousands” of oil wells. He admitted that his approach contained a huge amount of subjective judgment.  He had probably used two or three different approaches but could not remember exactly how he reached his conclusions.

Among other deficiencies, there was no evidence that his approach had been subjected to testing or peer review, he could not identify any standards controlling his procedure, he applied SEC standards inconsistently when calculating damages, and he failed to show how his purely subjective method is generally accepted.

What Works

An expert’s testimony must be the product of reliable principles and methods. Factors are:

  • Whether the theory or procedure has been subjected to testing;
  • Whether it has been subjected to peer review and publication;
  • The rate of error and the existence of standards controlling the theory or procedure; and
  • Whether it has attained general acceptance.

The proponent must:

  • Show that the expert has reliably applied the principles and methods to the facts of the case. The court is not required to accept an expert’s opinion if it is connected to data only by his or her “ipse dixit’, which means “I am an engineering god; trust me.” It is also Latin for “because I said it is so”.
  • Provide evidence establishing that the expert’s opinions were the product of reliable principles and methods reliably applied to the case.
  • Show that the expert sufficiently applied his method to the facts of the case. Here, he did not independently evaluate well expenses. He could not remember time frames or the meaning of certain dates in his calculations. Materials Texokan later cited textbooks to bolster his reasoning that were not in the record or referenced anywhere in the expert’s own reports or testimony.

How (Not) to Use An  Expert – Nine Sure-Fire Ways to Scuttle Your Case:

  • Don’t bother to understand the nature of the expertise you need. A reservoir engineer is just like a completions guy is just like a frac guy, right?
  • Hire a hack. He’s the one who pretty much promises a result before he has seen the materials.
  • Don’t waste time reading his writings on the subject. He would never contradict himself for the sake of a fee, would he?
  • Hire your expert late in the proceeding. That saves time and money. You don’t need his help in determining what he might need from the other side to formulate his opinions. Last minute is preferred.
  • Limit the budget. All you need is for him to throw something together just to scare the other side into settling.
  • Give him the materials you think he needs, not what he asks for.  The bad stuff can only hurt you, correct?
  • Assume the other side is too stupid to figure out what you’re up to.
  • For God’s sake don’t spend too much time in depo prep.  You’ve both done this before, so what’s to gain?
  • When all seems lost at trial, devise and present new and heretofore undisclosed theories, claiming you couldn’t have thought of them any sooner.

Good luck!

Some of you know that I recently had an incident with a crawfish pot. Today’s musical interlude is dedicated to myself.

 

Court Arrives at Fair Market Value of Gas Property

Posted in Contract Disputes, Litigation
FMVCo-Author Matthew Wheatley

In Texas, lost profits can’t be recovered as damages unless proven to a “reasonable certainty”.

Question 1: What does that mean?

Question 2: Does it matter if the deal is in Bulgaria?

Let’s get rid of the second one first. Bulgaria or no Bulgaria, it doesn’t matter as long as Texas law applies.  The Texas Supreme Court examined the first one.

The Transactions

CBM Energy had a concession to explore for coalbed methane. It offered Carlton Energy a 48% interest in exchange for funding. Carlton then offered Phillips a 10% interest for $8.5 million. After signing a contract, Phillips informed Carlton that he would be unable to reach an agreement, while at the same time secretly dealing with CBM to take over Carlton’s position.

Carlton sued Phillips and his companies for breach of contract and tortious interference with its CBM contract, claiming damages for its 38% interest in the project.

Phillips’ Bulgarian Two-Step

Phillips tortuously interfered with Carlton’s contract by influencing CBM to terminate their agreement. He told Carlton he had no interest in continuing the project, while at the same time moving forward with CMB to take over Carlton’s interest.

Calculating Fair Market Value

A property’s fair market value is what a willing buyer would pay a willing seller, neither acting under any compulsion. It can be determined by (among other methods) capitalizing net income–that is, profits. Lost profits can be recovered only when the amount is proved with reasonable certainty, which leads to Carleton’s dilemma.

What was the fair market value of Carlton’s 38% interest in the project?

  • Carlton’s engineer testified as to “a range” of the value of the reserves in the ground: $9 to $11 billion.
  • He also testified about the value of the concession if a certain number of wells were drilled: $12 to $38 million.
  • The amount Phillips agreed to pay Carlton for its interest in the project was $31.16 million.

The jury liked Phillips so much it awarded Carlton $66 million.  The trial court ordered a remittitur to $31.16 million.

Were the Damages Speculative?

Some were and some weren’t. Carlton’s lost profits on its 38% interest in the project was based on Phillips’ agreement to pay Carlton $8.5 million for a 10% interest (the third scenario). This was at least some evidence to prove lost profits with a reasonable certainty.

The alternatives were based on “sweeping assumptions” and “conjecture”; there was no basis for determining the reliability of volume predictions; certain assumptions were “demonstratively unrealistic”; the discount rate was arbitrary; he merely assumed that the gas, if produced, would have a market; and he did not characterize the range of values as fair market value.

Lesson

Even a “market of one” can determine fair market value. It’s real. If you’re betting the over-under on a damage award, don’t rely on guesses and unsupportable assumptions.

What if the Contract is Not Signed?

Philips denied there was an agreement with Carlton. But the parties behaved as if they had an agreement and they continued the project for some time as joint venturers.

If there is a mutual assent of the parties, signature and delivery are not essential to a contract unless signatures are explicitly required as a condition of mutual assent.

Did you Know? 

Bulgaria ranked 72nd in the world in 2011 world gas production.

A post mentioning the two step deserves a musical interlude.

Matthew Wheatley is a Gray Reed summer clerk and rising 3L at the University of Texas Law School.

Is Your Well Producing in Paying Quantities? – The Jury Will Decide

Posted in Lease Disputes

genieOne consequence of falling oil prices is leases that cease to produce in paying quantities. The producer’s question: How soon must the well return to profitability? The answer in BP American Production Company v. Laddex, Ltd. is, a “reasonable” period, to be determined by the jury and not the judge.

The Magic Well

The facts aren’t unique: The well on a 40 year old lease produced steadily until August 2005, when production slowed “significantly”. In November 2006 the well “inexplicably” resumed producing in quantities comparable to prior to the slowdown (usually it’s because of higher prices or a workover). In 2007 Laddex took a top lease which would begin when the old lease was terminated, either by BP’s written release or by judgment terminating the old lease.

Laddex sued for termination of the old lease and possession of the mineral estate.

The Test For Paying Quantities

The jury must go through a two-step process to determine whether a lease should be terminated for failure to produce in paying quantities:

(1) Viewed over a reasonable period of time did the lease cease to pay a profit after deducting operating and marketing expenses; and

(2) would a reasonably prudent operator continue to operate under the lease for a profit and not merely for speculation?

The Problem with the Question

The question to the jury focused on a specific fifteen month period. The jury found that the well failed to produce in paying quantities and that a reasonably prudent operator would not continue to operate the well for profit. On the basis of that verdict the trial court entered judgment terminating the old lease and finding that the mineral estate reverted back to the lessor, at which time the top lease began.

What is a “Reasonable” Period?

By the time the top lease was executed the old lease had resumed production in paying quantities.  On appeal BP argued that limiting the inquiry to a specific fifteen months was not a reasonable period.  The court of appeal agreed, and concluded that the trial court arrogated to itself the decision that the relevant period was that particular fifteen months.  Thus, it limited the jury’s consideration to a period of time that was not reasonable.

Evidence that a lease has returned to profitable production is material to the determination of whether the period of time is reasonable under the circumstances. The jury was deprived of the opportunity to consider that evidence.

Lagniappe 

At Gray Reed we urge producers to treat their lessors with respect. Aside from being “the right thing to do” it could help in unexpected ways. Human nature being what it is, juries will want to punish the black-hat. Being reminded that your fate in a paying quantities case could be left to a jury, why give them a reason to punish you?

Invoking lagniappe calls for an extra dose of musical interlude.

Defendants Saved by Louisiana Subsequent Purchaser Rule

Posted in Pollution

james carvilleCo-author Brooke Sizer

Another Louisiana court has ruled that the Subsequent Purchaser Rule applies to damages following a mineral lease. In Bundrick v. Anadarko Petroleum Corp. it is the 3rd Circuit.

The Rule:

An owner of property had no right or actual interest in recovering from a third party for damage which was inflicted on the property before his purchase, in the absence of an assignment or subrogation of the rights belonging to the owner of the property when the damage was inflicted.

The Case

The plaintiffs bought seven tracts in St. Martin Parish that had been previously leased and subject to oil and gas production. They acquired the property after the expiration of the mineral leases and without obtaining an assignment of their predecessor-in-interest’s right to proceed against responsible parties. Oops!

Plaintiffs argued that the 12 defendants were negligent and strictly liable for the damage and that their conduct created a continuing and damaging nuisance and continuing trespass on the property.

They were denied recovery because they had not been assigned the rights of the prior owners to sue for damages. That right is a personal right and is not transferred to a subsequent owner without a clear stipulation to that effect.

Why is This Case Different from Eagle Pipe?

The plaintiffs wanted it to be, but the court said it isn’t. In Eagle Pipe and Supply, Inc. v. Amerada Hess Corp. the Louisiana Supreme Court relied upon the Subsequent Purchaser Rule to deny recovery to plaintiffs for contamination.

In Eagle Pipe the defendants operated under a surface lease and the Supreme Court specifically declined to rule on whether the doctrine applied to mineral leases. A different 3rd Circuit panel had ruled that the Rule did not apply to operations under a mineral lease. But the Supreme Court later told the 1st Circuit that they should apply Eagle Pipe to facts involving mineral leases. In Bundrick the 3rd Circuit did just that.

The plaintiffs also argued a cause of action for remediation of the contaminated property pursuant to Louisiana Mineral Code Art.11, because mineral rights are real rights that pass with the property to the subsequent purchaser without the need for a specific assignment. According to the court, Eagle Pipe clearly stated that leases convey personal rights only and these rights must be expressly assigned.

Why is That Man in This Blog?

Visit here often enough and you won’t usually find agreement with LSU grad James Carville. But then there was his address to the 2015 graduating class of LSU’s Manship School of Communication. Always entertaining, he decried the looming destruction of Louisiana higher education by Gov. Bobby Jindal and asked what the grads – and proud parents – are going to do about it.

Here’s something to do about it: Think of Bobby Jindal as you would an unprincipled, ambitious college football coach.  He cheats, achieves fame and success, and is off to a bigger contract before sanctions hit the fan. Or see him as an abscess. Tea Party tax relief metastacizes, and breaks catastrophically bad for those around him. He is Grover Norquist’s “girlfriend”. His lust for the power of higher office could leave Louisiana healthcare and higher education impoverished for years.

Mr. Carville and the crowd closed with this sing-along.

Can the Tax Man Come After Your Stored Gas?

Posted in Taxation

Co-author Matthew Wheatley

The owner of 33 BCF of gas cant’ just stuff it in his pocket and move it county-to-county to avoid taxes. So, the question: Is gas in storage subject to ad valorem tax on personal property?  taxThe Harris County Appraisal District thought so. The taxman prevailed in ETC Marketing v. Harris County Appraisal District.

The gas was stored in a depleted oil reservoir. The storage agreement between ETC – owner of the gas – and affiliate Houston Pipeline – transporter – enabled ETC to hold the gas for delivery to other states when demand is higher. ETC contended the gas was exempt from taxation because it is in interstate commerce.

When is Personal Property Taxable?

Tangible personal property is appropriate for taxation if it is located in the jurisdiction “for longer than a temporary period.” Property is immune from taxation if the owner can prove the tax:

  • applies to activity lacking a substantial nexus to the taxing state,
  • is not fairly apportioned,
  • discriminates against interstate commerce, or
  • is not fairly related to services provided by the state.

(Notice who has the burden of proof.)

Why Was the Stored Gas Taxable?

There was a substantial nexus between the activity and Texas. The gas was purchased, transported, and stored in Texas, and ETC had facilities and employees in Texas. Houston Pipeline’s facilities are also located entirely within the state.

The tax is fairly apportioned because it is “internally and externally consistent.” It is internally consistent because it is “structured so that if every state were to impose an identical tax, no multiple taxation would result.” The gas was stored in Texas “for longer than a temporary period” and ETC did not attempt to store the gas in any other state at the same time.

The tax is externally consistent because “the state has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed” … the entire volume of gas.

The tax did not discriminate against interstate commerce because it “places no greater burden upon interstate commerce than the state places upon competing intrastate commerce of like character.”  Even if the gas was in interstate commerce, it could be taxed when stored for the business purpose of selling at a later time of the owner’s choosing.  HCAD taxed only that quantity stored in Harris County on the date of taxation and as to which ETC acknowledged ownership.

The tax was fairly related to services provided by the state. ETC enjoys the benefit of police and fire protection and other public services which facilitate gas storage.

Not Everyone Agreed

A dissent made these points:

  • The tax imposes a burden on working gas in interstate trade that is “clearly excessive in relation to the… local benefits.”It threatens the free movement of commerce by placing a financial barrier by imposing a tax not levied by taxing authorities in other jurisdictions.
  • Local law enforcement, fire, and other public services serve the facility itself, which ETC pays substantial property taxes on, in addition to the taxes paid on cushion gas it permanently stores at the facility. The tax is thus not fairly related to state-provided services.

What is it about Kern County?

Two things: It produces 75 percent of all California onshore oil. And it’s home of the “Bakersfield Sound”. Examples:

Buck Owens

Buck disciple Dwight Yoakum

Flatterers

 

How to Manage Credit and Collect Unpaid Bills in Today’s Oil Patch

Posted in Contract Disputes, Litigation

chasing moneyCo-authors Preston Kamin and Joe Virene

Everybody from the well site to the board room has an opinion about when oil prices will “rebound”. Rather than an opinion, we have a question:  How do I collect my money while we’re waiting?

This post is a refresher for service companies and suppliers looking for money from operators, and for operators looking to non-operators.  There are many steps you can take to minimize credit risk and maximize leverage in the event extra efforts become necessary to collect.

Getting to Know You:  Dot the I’s and Cross the T’s at the Beginning

Vendors: Larger operators typically require master service agreements prior to the vendor doing work. Many of those agreements contain lien releases precluding the vendor’s ability to file a lien, or impose stringent limitations on the customer’s liability. When not negotiated, such agreements can leave the vendor vulnerable to liability. For example, indemnities and warranties can be one-sided, and warrant careful review to ensure they are fair and equitable.

Operators: Do you insist on a memorandum of operating agreement to be executed and filed in the public record so that your JOA-imposed operator’s lien can be given priority?

Of equal importance, especially with smaller customers, is investigating a potential customer’s credit.

What to Do When Things go Wrong

If the customer/non-op fails to pay, there are options prior to filing suit. For example:

  • Whatever you do, do it now. The longer you delay, the more likely the debtor will run out of money or someone will get to him first;
  • File a lien. There are time limits, and he is likely to ask you not to so that he can continue to do business unencumbered by questions of solvency.
  • Propose a payout agreement secured by an agreed judgment.
  • If the customer needs additional goods or services and you are willing to provide them, require payment before delivery;
  • If you have the leverage, negotiate for an overriding royalty.

This summary is from a longer article presented in this month’s TIPRO Target.

BB King RIP (music starts at 1:35).