March 2012

A lessee, operator, and contract driller were found to be a “single business enterprise” for the purpose of imposing statutory penalties and attorney fees for failure to pay royalties.  The principle is that if one corporation is wholly under the control of another, the fact is it is a separate entity does not relieve the controlling entity from liability.  The law considers the former corporation to be merely an alter ego of the latter.

Louisiana law imposes statutory penalties on a lessee who fails to pay royalties. Oracle 1031 Exchange, LLC was the actual lessee and Oracle Oil LLC and Delphi Oil, Inc. were the operator and the contract driller.

What is required for one entity to be “wholly under the control” of another?  (1) Delphi and/or Oracle paid royalties from the well; (2) Delphi and/or Oracle received the checks for selling the oil produced from the well; (3) Delphi and/or Oracle paid the severance taxes; (4) all three entities are headed by the same person; and (5) Exchange appeared to be insolvent (by the fact that it appealed devolutively – without a bond or other means to suspend the effect of the judgment).  From all of this, the court concluded that Oracle and Delphi were wholly under the control of Exchange and were Exchange’s alter ego.

One possible reason the court passed liability for underpayment on to Exchange could be that but for the court’s treatment of Oracle and Delphi as, in effect, lessees, the royalty owners would have had no recourse for recovery of their unpaid royalties.

All states do not recognize this theory of recovery.  For example, efforts by plaintiffs in Texas to convince the Supreme Court to adopt this standard have been unsuccessful.

Oracle 1031 Exchange , LLC v. Bourque

With apologies to Click and Clack, from time to time I will post “puzzlers”, questions about title and similar issues that have no apparent answer.  Here is the first one: 

Joe Bob Joiner owns a non-participating royalty interest under a tract.  The amount of interest he owns is tied to the amount of royalty stated in any lease affecting the tract. (i.e. he retains “½ x 3/16 lessor’s royalty”).  Daisy Bradford, the owner of 100% of the minerals on the tract, believes it is her destiny to be the H. L. Hunt of the 21st century and decides to go into the oil business by developing the minerals herself.  Therefore there is no oil and gas lease on the tract.  She drills a well and, lo and behold,  it is a producer!  What interest does Joe Bob the NPRI owner have in production from the tract?

 

If you were wondering whether the debate over the safety and effectiveness of hydraulic fracturing has entered our national conciousness, check this out: 

 

In a serious approach to the issue, the opinion magazine National Review recently joined in the conversation in a piece by Kevin Williamson, The Truth About Fracking – What the Protestors Don’t Know.  The focus is on the Marcellus Shale, but his thesis applies everywhere there is horizontal drilling and fracking.  These days, that is a lot of places. 

Among his observations:

  •  The Pennsylvania Department of Environmental Protection receives high marks for competence and its application of common sense in regulating the handling of frack water.
  • On the other hand is the fear that the EPA will adopt a top-down, one-size-fits-all aproach to fracking and frack-fluid regulation, ignoring the differences in geology and other factors in different producing areas.
  • The industry is addressing the troublesome aspects of fracking.  Frack water is being treated in innovative ways by companies like TerraAqua Resource Management. 
  • Producers like Fort Worth-based Range Resources are recognized for responsible environmental practices and efforts to minmize the impact of drilling on local communities.   
  • George Mitchell, and not your federal government, gets the credit for having the vision, conducting the research, and taking the enormous financial risks necessary to develop modern fracking techniques.
  • He reveals distortions of fact presented in Gasland, the documentary allleging that a Colorado farmer’s tap water caught fire because of fracking. In fact, tap water in that community has been catching fire since at least the 1930’s.
  • Natural gas development is responsible for thousands of new jobs in areas that need them, a fact that we Texans and our neighbors in Louisiana and Oklahoma have known for decades. 

 

 

In a vindication of landowners’ rights, the Texas Supreme Court prohibited a pipeline owner from using eminent domain to take private property.   In Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC, the court said that a pipeline must show that it satisfies the requirements for common-carrier status before it will be allowed to use eminent domain.  (Note, this is a new opinion in the case, superceding the opinion delivered on August 26, 2011).

The court said that the Constitution’s protection of  private property rights requires more of a party seeking eminent domain power than ”checking the right boxes in one-page Railroad Commission form” through a process in which the landowners who will be affected have no participation.  The court rejected the proposition that all the pipeline had to prove was that the pipeline would be available for public use.  There must be a “reasonable probability” that the pipeline will at some point serve the public by transporting gas for one or more customers who will either retain ownership of their gas or sell it to parties other than the carrier.

This case highlights the difference between Texas and other producing states.  See, for example, a Louisiana case allowing the use of “expropriation” as they call it there, if there is “any allocation to a use resulting in advantages to the public at large”.

This case has implications in many situations.  One that comes to mind is the producer who uses a wholly-owned pipeline subsidiary to move production across the lessor’s property, calling it a common carrier and invoking the right of eminent domain to overcome surface use restrictions in the lease.

Maybe you’ve been there.  All signals are “go” for closing on your PSA.  Then the buyer chooses not to complete  the transaction.  What to do? A question your lawyer will think about when asked to enforce a purchase and sale agreement: Does it describe the property well enough to comply with the statute of frauds?  Preston Exploration v. Chesapeake Energy teaches several lessons on this subject:  First, in this case the need for title work before closing did not make the contract unenforceable.  Second, it isn’t always easy to know whether the statute has been complied with (The trial court held for the purchaser who backed out; the appellate court sided with the seller).  Third, related instruments can be read together to determine the intent of the parties.

The statute of frauds requires that a contract for the sale of real property be in writing.  The statute is satisfied when a writing furnishes, within itself or by reference to some other existing writing, the means or data by which the land to be conveyed may be identified with reasonable certainty.

The parties executed a PSA for a $110 million transaction.  The purchaser said it wouldn’t close, asserting that the exhibit describing the leases to be conveyed wasn’t final because title work had to be done.  The lower court said there was no meeting of the minds on what was to be conveyed.  The appellate court saw it another way: The question wasn’t about whether there was a meeting of the minds (a prerequisite to enforcement of any contract).The question  was whether the documents adequately described what was to be conveyed.  The court said they did.   The need for additional title examination meant only that some leases might not be conveyed, but the parties had agreed on the subject matter of the agreement.  The exhibit described the leases by recording information, which satisfied the statute of frauds.

For more than you want to know about the Texas statute of frauds, see a presentation I made on the topic. 2007-Statute of Frauds SBOT

The Dallas Gas Drilling Task Force has issued recommendations for regulation of hydraulic fracturing.  The task force focused on zoning requirements, permitting requirements, air quality issues, and water-related issues.  A few highlights:

  • Locations will be more difficult to find. Wells must be 1,000 feet from residences, churches, schools and other community buildings.  Setbacks of 500 feet would be permitted by majority vote of the City Council.
  • Vacant park land might not be the answer.  Drilling would be permitted on park department land if it is not currently used for a park, is adjacent to an industrial use area, and is not in an environmentally sensitive area.
  • There are no water conservation restrictions; however, the Dallas Water Utilities is urged to consider water use by drilling operations in his drought contingency plans.
  • Drilling costs are likely to be increased.  Salt water disposal wells are prohibited. Operators will be required to pay for water monitoring and must test for a number of specified chemical compounds that could be connected to drilling activities.  The operator must test the soil before, during, and after drilling and comply with remediation laws.
  • There are noise abatement requirements.  Fracking may not exceed 10 decibels above ambient noise levels; other operations cannot be more than five decibels above ambient noise in the daytime and three decibels above at nighttime.
  • The EPA could be more involved in the future.  The recommendations in several places require compliance with standards consistent with TCEQ or EPA regulations.

Go to www.dallasgasdrillingtaskforce.com to see the recommendations and other deliberations of the task force.