dylanIf you’ve ever tried to escape penalties for the operator/producer’s failure to comply with La. R.S §30:103.1 and §103.2, take comfort in XXI Oil & Gas, LLC v. Hilcorp Energy Company.  You are not alone. No excuse has satisfied the courts, and there is none here.

The statutes (links above) require information and certain procedures to be followed by an operator before it can recoup costs of unit drilling operations from an unleased mineral owner. Of particular importance is a detailed sworn statement of costs of the operation and a statement of revenues.

The events unfold

XXI was the lessee of leases comprising 20% of a drilling unit; Hilcorp was the operator.

  • 1/11/11-Hilcorp recompletes a well in the drilling unit and begins producing.
  • 2/11/11-XXI acquires the leases.
  • 4/21/11-XXI sends a letter by certified mail requesting the information required by Section 103.1.
  • 4/21/11-Hilcorp sends XXI an AFE itemizing estimated costs to recomplete the well but including no revenue information.The accompanying letter explains that the unit well had been shut-in and would be returned to production shortly.
  • 5/20/11-XXI elects to participate in the recompletion and signs the AFE as “participant”. .
  • 6/13/11-XXI sends Hilcorp a second letter stating that because Hilcorp failed to provide the statement required by the statute, it could not deduct the cost of recompleting or operating the well from XXI’s revenues.
  • 9/9/11-XXI sues, seeking penalties for failure to comply with the statutory reporting requirements.

Summary judgment was granted for XXI on the basis that Hilcorp did not comply with the statutes.  The statement of costs was neither sworn nor detailed.

Hilcorp appealed, admitting it did not comply with the technical requirements of the statute but asserting that it achieved the intent and purpose the statute by submitting a statement of cost with the AFE. Hilcorp argued that XXI’s position was weakened because it elected to participate in the well after receiving the AFE.

Judgment affirmed

The court of appeal upheld the trial court’s judgment against Hilcorp. Here is the reasoning:

  • Whether the leases had been validly executed by owners of each tract was not relevant to issue of whether operator forfeited its right to demand contribution. Hilcorp offered no authority supporting the proposition that validity of the underlying leases is a required element for the statute to apply.
  • The producer forfeited its rights to demand reimbursement by submitting an unsworn statement of costs.
  • The statutory provisions were subject to strict construction.
  • Where the statute is unambiguous it is not the court’s role to determine the purpose of the statute. “Detailed” is unambiguous.  The text of the statute does not invite an inquiry about its purpose.

REVISION: What’s new about this opinion?

An observation that didn’t make its way into the original post is the court’s application of the statute to a lessee of a mineral owner who did not have a lease with the offending operator.  Prior to this case that was an unanswered question.

Obvious musical interlude

Hey, you of a certain age, sitting in your 60’s and 70’s dorm room you thought “literature” wasn’t what you were doing. Think again. Here are a few good ones from our Nobel Prize winner (from Youtube’s slim pickins):

the acoustic love song Bob

the acoustic protest song Bob

the electric-for-the-first-time song Bob

 

trade secretCo-author David Lisch

Congress has passed the Defend Trade Secrets Act of 2016 and the president is expected to sign it into law. The DTSA allows suits in federal court for misappropriation of trade secrets. Before the DTSA, most litigants would sue in state court under the Uniform Trade Secrets Act (the UTSA), approved by 48 of the 50 states (New York and North Carolina being the exceptions).

What is a trade secret?

It remains what it was: Your interpretations, evaluations, and that other work product that derives economic value from not being generally known to your competition. The operative word is “secret”. The key is to take reasonable steps to prevent unauthorized disclosure. Anything on the wall in your booth at NAPE is pretty much toast.

Why would I use the DTSA instead of the UTSA?

Here are several reasons:

  • It is a federal statute, which means federal court jurisdiction. There could be benefits in a particular case to be in federal court.
  • It allows seizure of property to prohibit the dissemination of a trade secret without advance notice to the other side in “extraordinary circumstances.”
  • It increases penalties for a criminal violation from $5 million to the greater of $5 million or three times the value of the stolen trade secret.
  • It allows recovery of actual damages, restitution, injunctive relief, exemplary damages of up to two times actual damages, and attorney’s fees.
  • If you’ve been paying attention you should already be protected by a confidentiality agreement, but the statute provides additional rights and remedies.

Do I need to act?

The statute does not eliminate the need for confidentiality agreements when showing a prospect. You will want to update your employment agreements to include the immunity notice required under the DTSA so that you can also recover punitive damages and attorney fees from an employee gone wrong.

Speaking of trademarks

This act doesn’t address your logos, slogans and other manifestations of your “brand” that could be protected by existing copyright and trademark laws. You do that by registering. Gray Reed can help.

Why do we need this legislation?

There are two theories. First, there are benefits of uniformity and consistency in the law. Plus, service and discovery is often easier and more orderly in federal court, especially between litigants from different states. And there would be less jockeying between state and federal court.

The competing theory: Having failed to eradicate the federal debt, balance the budget, stabilize Social Security and Medicare for the sake of our grandchildren, replace the Affordable Care Act, reform immigration laws, and slow the avalanche of overbearing federal regulations, Congress chose a bipartisan agenda: Feeding its insatiable need to federalize every aspect of life in our great country. Nothing says “Git Er Done” like a new federal statute that duplicates existing law in 48 states.

There’s more to know

Here is an article on the topic by Gray Reed employment lawyers Michael Kelsheimer, Travis Crabtree and the aforesaid David Lisch.

Guy Clark, RIP. Compare his original to Jerry Jeff’s.

joint biddingCo-author Dominic Salinas

Last week we discussed the pitfalls of joint bidding for oil and gas properties. We didn’t say you can’t do it. It’s like domestic life: There are ways you can tell your beloved that dress makes her look  …, well, never mind. You can do it, … in the right way and for the right reasons.

Joint bidding arrangements and AMI agreements are common in the upstream sector, so how do you go about it?

Joint bidding done successfully

In Gunnison and SG  (from last week), the government didn’t dispute the companies’ joint bidding activity after their agreement was set forth in an AMI and an Option and Participation Agreement. The DOJ determined that the AMI was an integral part of a broad pro-competitive collaboration between the two companies to jointly develop leasehold interests and create a new pipeline system in the area. The agreement allowed the companies to combine their resources and allocate risk. The DOJ concluded that the agreement was “reasonably necessary to achieve the potential benefits of their broad collaboration.” As the Gunnison/SG case suggests, today’s antitrust regulators regard lawful joint bidding arrangements as legitimate means for producers to achieve efficient production.

Even the government likes it

The Antitrust Guidelines for Collaborations Among Competitors, published in 2000 by the Department of Justice and the Federal Trade Commission, recognized that joint bidding and joint ventures often enhance competition by allowing new players to enter the market and achieve objectives that would be unattainable if they were required to act alone.

For joint ventures not deemed as per se unlawful, applying the Standard Oil rule of reason, pro-competitive benefits of the collaborative arrangement are weighed against the restraints that the agreement may place on free competition. The major factors outlined in last week’s case against Gunnison and SG can be used to determine whether a joint bidding agreement would be considered an unreasonable restraint on trade in violation of the Sherman Act or a pro-competitive and beneficial arrangement.

There are plenty of benefits to a legal joint-bidding arrangement. Smaller producers can become players in increasingly expensive upstream and midstream activity while allocating the potential risk appropriately. That is an increasingly important option in today’s price environment.

The takeaway

Engage in joint bidding in the right way and for the right reasons.

So, find partner and win a pep talk from Mavis Staples. You’ll be in the big times that will never end; let’s party like it’s 2013!

Teddy-RooseveltCo-author Dominic Salinas

Wondering what was behind the Department of Justice indictment of the late Aubrey McClendon? The charge was conspiring to rig bids for oil and gas properties in Oklahoma. Read the McClendon indictment and engage in the parlor game of guessing who the co-conspirators were.

Where does this come from?

The Sherman Antitrust Act:

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished …

In 1906, the Roosevelt Administration (Teddy, the speak-softly-and-carry-a-big-stick trust-buster) sued Standard Oil under the Sherman Act for conspiracy to restrain trade.  In upholding the decision by the district court to dissolve the empire, Chief Justice Edward White introduced the “rule of reason” as the basis for judicial evaluation of collaborative efforts among competitors.

Recent history

  • In 2012, Gunnison Energy Corp. and SG Interests paid a $550,000 settlement to the DOJ in the first challenge to anticompetitive joint bidding arrangements for the acquisition of mineral leases.
  • That same year Chesapeake and Encana were charged with dividing up counties to bid on a state auction. The scheme allegedly drove bid prices down from $1,510 per acre to $40. The state settled with Encana for $5 million and Chesapeake for $25 million.
  • And there was the recent McClendon indictment. Noticeably vague on details, count one depicted a bid-rigging arrangement among McClendon, Chesapeake and “Company B” in which McClendon and his co-conspirator agreed not to bid against one another for leaseholds and producing properties in return for a share in the leases ultimately purchased.

The test

Bid-rigging arrangements purposefully designed to restrict competition are considered per se unlawful, and the federal government has the discretion to instigate either a civil or criminal case against the alleged perpetrators.

In Gunnison and SG, an agreement under a written Memorandum of Understanding to not bid against one another for oil and gas leases in an auction was deemed by the DOJ to be a violation of the Act. The DOJ concluded that the agreement was a “naked restraint of trade”:

  • Gunnison and SG appeared to be the only significant bidders acquiring leases in the Ragged Mountain area of Colorado.
  • The companies had a history of bidding against one another for leases; conflicting efforts even led to litigation between them in 2004.
  • Gunnison and SG were not pooling their resources in order to acquire the oil and gas interests; each had the financial capability to complete the purchase independently.
  • Discussions between the two companies regarding a broad collaborative effort in the joint acquisition of assets, improvement of existing pipeline, and development of a new pipeline system had broken down.
  • The MOU was drafted just two days before the lease auction and was never disclosed to other parties in the bidding process.

In the Chesapeake-Encana matter, McClendon asked in an email, “Should we throw in 50/50” on Michigan “rather than bash each other’s brains out on lease buying.” Later he said the companies could save “billions of dollars in lease competition.”

With Merle Haggard’s passing, today is a three-musical-interlude occasion. RIP.

His favorite song

A kind-of country song with George Jones 

A country song

Next week: How to joint bid legally.

st. tammanyCo-author Brooke Sizer

The state laws of Louisiana regulating oil and gas exploration and production will trump local regulations. See St. Tammany Parish Government v. State of Louisiana, Office of Conservation. (Forgive us for that word that should be avoided in a civil society.) 

The conflict

St. Tammany is a home-rule charter parish that adopted a Unified Development Code. The Louisiana Commissioner of Conservation later issued an order adopting a drilling and production unit and issued a permit to Helis Oil & Gas Company for a well that would be located in an area zoned as residential.

St. Tammany Parish sued to declare the drilling permit illegal because their zoning designation trumped prevailed over the right of the Commission to issue the permit.

The State prevails

The trial court and court of appeal ruled for the State. The appellate court first looked at “the extensive body of law that addresses every phase of the oil and gas exploration process … .”  The court focused on La. R.S. 30:28F:

The issuance of the permit by the [C]ommissioner … shall be sufficient authorization … to enter upon the property … and to drill in search of minerals thereon. No other agency or political subdivision of the [S]tate shall have the authority, and they are hereby expressly forbidden, to prohibit or in any way interfere with the drilling of a well or test well in search of minerals by the holder of such a permit. [Our emphasis.]

The court acknowledged that local power to regulate land use and zoning within its boundaries is not preempted unless it is the clear and manifest purpose of the legislature to do so.  However, St. Tammany’s zoning ordinances must yield to state law based on La. R.S. 30:28F.  “… [H]ereby expressly forbidden…” clearly and manifestly evinces the legislative intent to preempt that area of the law.

The pervasiveness of the legislation, which addresses every aspect of oil and gas exploration as well as the need for uniformity and the danger of conflicts between the enforcement of local laws, demonstrates the legislative intent to impliedly preempt that area of the law.  Therefore, local zoning ordinances are preempted by state law insofar as they affect the State’s regulation of oil and gas activity.

The court cited Art VI, §9(B) of the Constitution, “Notwithstanding any provision of this Article, the police power of the [S]tate shall never be abridged.”  The Commissioner’s power is an exercise of the State’s police powers.  The grant of zoning powers to local governments was not as important.

The court rejected the contention that the Constitution gives concurrent power to the State and the local governments to protect health, safety, and welfare, citing Article IX § 1 of the Constitution.

Finally, the court applied the ordinary meaning of “consider” and held that the Commissioner did “consider the master plan” as required by statute.

Musical interlude, presidential edition

Today we honor every voter who promises to emigrate if (insert name of candidate) is elected president.  The first tune is Reggae-inflected, Caribbean-by-white-guys; the second is real Reggae.

“Back in the day, when the Yankees always won the World Series and you could name a park after a Confederate general, we didn’t need no written contract; a man’s word was his bond, … yadda, yadda, yadda”.

Three things about that saying strike me. First, it was always a man; second, “the day” was always a time before the listener came on the scene; third, those fellows used some really bad grammar. R E LeeThe timeless truth is, a written agreement is always better, which returns us to Railroad Commission v Gulf Energy, discussed last week. Another question arose in that dispute: When did the Commission and Gulf Energy form a contract?  The trial court, in effect, decided as a matter of law that the parties had a binding contract.

What the trial court missed: Contract formation

The trial court deprived the jury of the ability to determine when the contract was formed:  At a May 19 meeting between the Commission and Gulf, or shortly after via conversations and emails, either of which was before the well was plugged – or on June 9 when a formal agreement was signed, which was after the unfortunate incident.  You can’t have a breach of contract claim without a contract, so the question was essential.

At trial there was disagreement aplenty among the witnesses about whether a meeting of the minds between the parties was achieved before or after the well was plugged. The Supreme Court decided that when a meeting of the minds occurred was a question of fact to be answered by the jury.

Practice tip

In lieu of our usual, customary, and frequently unconscionable fees for matters such as this, here is some free advice: If you want to avoid the “When was the contract formed?” dilemma, or worse, “Do we even have a contract?”, make it clear in your negotiations (emails, draft agreements, phone calls) something to the effect that that your understandings are subject to a final, binding agreement satisfactory to all parties. Or, if an enforceable agreement is your goal, say something like: The parties agree to cooperate in drafting and execution of future documents. The fact that such additional documents are contemplated does not affect the binding nature of this agreement.

Caveat

I call it “advice”, but what I say in this blog is not fact- or case-specific; I don’t know your situation, so don’t rely on what I say here without consulting a lawyer of your own choosing.

Musical interlude

At a loss for a song celebrating contract formation, think about this: New Orleans isn’t alone in the Africa-inspired musical universe, right? How about the Godfather of Soul and Africa itself?

davy crockettYour Texas legislators have done their work and the citizens are safe for the next two years.  The other good news is that industry supporters generally believe the 2015 Legislature was their friend.

House Bill 2: Set aside $4,471,800 to the University of Texas at Austin Bureau for Economic Geology and appointed a technical advisory committee to study the effects of hydraulic fracturing and disposal wells on earthquakes. The Bill authorized seismic equipment, maintenance of seismic networks, and modeling of reservoir behavior in the vicinity of faults. The committee will have nine members appointed by the governor. Two members will represent higher education institutions and have seismic or reservoir modeling experience, two will be experts in the oil and gas industry, and at least one must be a RRC seismologist. The committee will advise the governor and the House Committee on Energy Resources.

House Bill 40:  Preempts local jurisdiction over subsurface operations. This is the legislative response to the ogre that was Denton’s anti-fracking ordinance.

House Bill 1331: Once an operator has transferred drill cuttings to a third party for subsequent beneficial use, such as recycling, the operator can no longer be held liable in tort for consequences of the subsequent use.

Senate Bill 1589: Requires holders of unclaimed mineral proceeds to include more information when reporting to the Comptroller, such as lease, property and well names, and identification numbers used to identify the lease, property or well.

House Bill 2207: An existing oil and gas lease will remain in effect upon the foreclosure of a security interest if the lease was executed and recorded before the foreclosure sale. If the leased property is sold in a foreclosure sale, the rights granted to the lessee to use the surface will be terminated. Royalty payments which become due after the foreclosure sale will pass to the purchaser of the foreclosed property. A subordination agreement would control conflicting provisions of the law.

House Bill 30: Requires regional water planning groups to include opportunities for benefits of developing large scale desalinization facilities. The point is to establish brackish groundwater production zones that would not affect industry’s use of brackish water. The Texas Water Development Board is to study the use of brackish groundwater. As passed the Bill does not create a scheme for the use of brackish groundwater.

The Ones That Got Away (or Euthanized, If You See It That Way)

House Bill 1552: The allocation well Bill. An operator would have been allowed with a RRC permit to drill, operate and produce from wells that traverse multiple tracts. The Bill would have removed doubts about the legality of allocation wells. Royalty and mineral owners defeated this one.

House Bill 3291: Would have established as a second degree felony the possession transporting, removing or purchasing oil and gas or condensate without a RRC permit. Passed in a version that was far different from the original, then  vetoed by the governor. I’m told the reason was because it would have criminalized what has otherwise been a RRC permitting violation. Thieves and some DA’s were pleased, operators were not.

House Bill 1392: The fieldwide unitization effort that has failed in every session since Davy Crockett realized there wasn’t a back door to the Alamo. This year it was known by the catchy “Cenozoic Era Unitization”. Some have been in favor, some not.

To see the text and history of the Bills, go to www.capitol.state.tx.us/.  Under Search Legislation type in bill number (“SB … or HB …), and search.  If it passed, see the “engrossed” version.

Our legislative interludes:

To the supporters of HB 40

To legislators everywhere who can’t get a bill passed

To legislators everywhere who prevent their colleagues from passing a bill

 

 

tx capitolThe Texas legislature is still busy on energy issues. Is that good or bad? It depends on your situation; oil patch thieves won’t like it.

Wind Energy

Senate Bill 931 would blow away the Renewable Portfolio Standard, established in 1999 to set renewable energy goals for Texas. The bill would also halt construction of transmission lines in Competitive Renewable Energy Zones, through which miles of transmission lines connect West Texas wind energy with cities in the eastern part of the state.

The rationale is that wind energy targets in the original act have attained their goal and thus should be terminated. Here is a discussion of the bill.

Wind energy proponents are unhappy. See, for example, this editorial in the Dallas Morning News by Jim Marston of the Environmental Defense Fund. Among other complaints, he cites a double standard:

Oil and gas subsidies = good

Alternative energy subsidies = bad.

They seem to have a point.  Texas gives tax incentives for certain oil and gas production. What’s the difference?

Allocation Wells

House Bill 1552 would add a provision to the Natural Resources Code to address allocation wells. The high points are:

  • The statute would apply unless expressly prohibited by a lease, deed or other contract.
  •  An operator may obtain a RRC permit allowing it to drill, operate and produce from a well that traverses multiple tracts in order to prevent waste, promote conservation, or protect correlative rights.
  • Absent an agreement among affected owners of royalty or mineral interests regarding how to allocate production among the tracts, production will be allocated to each tract on in the proportion “that the operator or lessee reasonably determines or reflects the amount produced from each tract.”
  • The operator must send written notice to affected royalty and mineral owners.
  • If there is an agreement with a royalty or mineral owner allocating production, the agreement will prevail.
  • An affected owner unhappy with the allocation assigned by the lessee may request a RRC hearing on whether the production will harm the correlative rights of working interest and mineral owners, is necessary to prevent waste, and accurately attributes to each affected owner its fair share of the aggregated production.

If the bill passes I will discuss what its effect might be.

Oil Field Theft

House Bill 3291 establishes the crime of selling oil, gas or condensate without a Railroad Commission permit. The bill specifically includes oil and gas equipment or pipeline equipment. If the value exceeds $10,000 it’s a felony.

How do they do it?

In case you are looking for a new line of work: According to proponents of the bill, one way to steal production is to purchase a well that has ceased to produce for lack of production and claim that it is producing and selling oil stolen from another well.  Then you acquire a vacuum truck and help yourself to what’s not yours.

A Religious Experience, Part 2

As promised last week, here are the other artists “discovered” by Sam Phillips and recorded for the first time at Sun Studio:

Johnny Cash 1955

Carl Perkins 1956

Roy Orbison 1958. This one can’t be beat for its intellectual content.

Co-author Travis Booher.

All legislation is not good legislation. The good news is that some of it fails. Such is the case with H.B. 2590 passed by the 2013 Texas legislature but vetoed by the Governor. We mention it because it will be back in the next session.

The Bill, “An act relating to the foreclosure sale of property subject to an oil or gas lease”, addresses the age old problem of foreclosure of property subject to an oil and gas lease.

Any oil and gas lease acquired after a deed of trust is subordinate to the deed of trust. Title examiners require a subordination agreement from the lender in order to prevent termination of the lease in the event a foreclosure occurs. H.B. 2590 provided that an oil and gas lease on land that has been foreclosed would remain effective after the foreclosure sale ifthe lease was valid, and was:

  • executed and recorded in the real property records of the county before the security interest was recorded; or
  • executed and recorded in the real property records of the county after the security interest was recorded but before the foreclosure sale.

The Bill was drafted with urban drillers in mind, and would be useful where an urban unit includes thousands of home lots.

But there were hidden perils:

  • The Bill required the lessee to “indemnify the purchaser and any mortgagee of the foreclosed real property from actual damages resulting from the lessee’s operations conducted pursuant to the oil or gas lease”.
  • The Bill provided that foreclosure sale “terminates and extinguishes the lessee’s right to use the surface … “.

Supporters argued that if property is foreclosed and there is no subordination agreement the lease would be lost anyway! Correct, and as a result the Bill had great practical application.

Critics disagreed with increased indemnification liability, and were unsettled about the wording of the surface provision. (We call them “critics” and not “opponents” because the Bill was discovered by many industry insiders only after it had passed with no opposition. The sponsors denied any monkey business.)

The Bill created more questions than it answered. For instance, it was writen as if the surface owner always owns 100% of the minerals, and not only portion. This is uncommon in rural acreage. Also, the loss of surface rights could be contrary to the mineral estate’s dominance in tracts covered by more than one lease (where the foreclosure would be of less than 100% of the minerals).

In any event, the Bill died. Expect it to be re-introduced in the next session. If so, it will not escape scrutiny and may not have the opportunity to meet our new governor.

Many years ago, in the days of cheap oil and cheaper natural gas, The Superior Oil Company often hired geologists and engineers away from Mobil Oil. As a result of many years of attracting good talent, Superior became the largest independent producer in the U.S. In 1986 Mobil acquired Superior. It was said at the time that the only reason for the transaction was so that Mobil could get its maps back. Sounds like a joke, but it makes you wonder how often things like that go on in the oil business. I don’t know, but I’d bet the answer is, with electronic records and the thumb-drive, more than you would think.

I’ve written before on the importance of protecting trade secrets, and how miscreants who’ve been careless on their journey to perdition have paid the price. Now it will be more difficult for data thieves.       

The Texas legislature adopted the Uniform Trade Secrets Act, effective September 1, 2013.  I direct you to Tilting the Scales, a blog from Jamie Ribman and Cleve Clinton, two of  my Looper Reed colleagues who explain the changes in the law very well.

The good news is the opportunity for a musical interlude about treachery, one of  a trial lawyer’s favorite topics.