Yellow KEEP OUT Barrier TapeCo-author Chance Decker

We know that in Texas the mineral owner has the right to explore for and produce the minerals. What does that leave for the surface owner? In Lightning Oil Company v. Anadarko E&P Onshore, LLC the Texas Supreme Court tells us he owns the right to possess the specific place or space where the minerals are located. Absent pooling or some other contractual arrangement, with that comes the right to grant (for a price) or deny an off-lease operator the right to drill through the mineral estate to reach minerals under an adjacent tract. Continue Reading Texas Subsurface Trespass Law Clarified

A Black Rhino running towards the camera, Kruger National Park

Forest Oil Corporation v. El Rucio Land and Cattle Inc. et al deserves your attention for four reasons:

  • You won’t see another one involving damage to a rhinoceros pen.
  • It confirms that the Texas Railroad Commission does not have exclusive or primary jurisdiction over private claims for environmental contamination. Welcome to the courthouse.
  • The South Texas redistributionist approach to civil justice includes arbitrations.
  • For once, the Texas Supreme Court declined to eviscerate a multi-million dollar plaintiff victory.

Continue Reading Oil Field Contamination Award Upheld

crawfishIn Re Louisiana Crawfish Producers arises out of the collision between two of Louisiana’s favored enterprises: crawfish and hydrocarbons.

Takeaways

There is lots of legalese, of interest primarily to lawyers who practice in federal court. So, we’ll start with a few things to remember:

  • The mudbug, specifically Procambaras charkii, is Louisiana’s official state crustacean.
  • Louisiana is the only state with an official crustacean.
  • The court cited Wikipedia for the first two takeaways.
  • The Wikipedia cite could have been a bit in jest. Federal courts are loath to rely on Wikipedia for anything important to the case because, according to the courts, it is inherently and admittedly unreliable, is written by volunteers from anywhere, and can be changed on a whim anytime.
  • To be serious for a moment, in this dispute the tension between oil and gas operations and other competing and potentially incompatible land uses is displayed. This tension has always existed and is not going away.

The litigation

The crawfisherpersons sued a number of oil and gas companies claiming that dredging activities caused damage to fisheries in the Atchafalaya Basin (Non-natives: Impress your friends by reminding them the emphasis is on the “cha” not the “Atch”). The question was whether the complaints stated a cause of action for a maritime tort. The district court granted summary judgment in favor of Florida Gas Transmission Company and Southern Natural Gas Company, finding no genuine issue of material fact as to whether the defendants’ activities constituted dredging.

Summary judgment affirmed

The Fifth Circuit affirmed the judgment for Florida Gas. The company said all it did was place a pipeline into an existing canal, which is insufficient to support a maritime tort claim . The plaintiffs did not produce any evidence to create an issue of fact. A Corps of Engineers permit application and other circumstantial evidence was not enough to sustain plaintiffs’ burden to create a fact issue that dredging occurred.

Summary judgment reversed

The court reversed as to Southern Natural. A company representative testified in a deposition that they engaged in dredging activities in connection with spoil banks, and the company admitted in responses to requests for admission to using dredging vessels in the construction of a canal.

The problem was with the trial court’s denial of the plaintiffs’ motion to reconsider its original order. To understand why the Fifth Circuit reversed see the analysis of Federal Rule 59(e) addressing newly discovered evidence and who should be suffer when the judge is unaware of a revised scheduling order (spoiler: not a party; the district court should have considered evidence that was timely filed under the revised order). Worrisome for lawyers is why the district court had to be admonished over its refusal to consider the evidence on a motion to reconsider.

And of course, our musical interlude

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.

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.   

 

 

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.

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?

burning moneyMEMORANDUM

From: Legal Department

To: Accounts Payable

Re: What we learned from Shell Western E&P, Inc. v. Pel-State Bulk Plant, LLC

________________________________________________________________________

Just received notice of a Texas subcontractor’s mineral lien? DO NOT continue to pay the contractor. He hasn’t paid the subcontractor. Think you owe nothing on the well on which the lien will be filed? Think what you owe the contractor is not related to the lien? Both good questions, but it might not matter.

If your contractor is insolvent you’ll pay twice, and your standing with the boss will take a major hit.

________________________________________________________________________

Under Chapter 56 of the Texas Property Code a property owner receiving a mineral subcontractor’s lien notice may withhold payment to the contractor in the amount claimed until the debt on which the claim is based is resolved.

Pel-State was a subcontractor for frac jobs in 11 Shell wells.  Pel-State sent Shell a notice that the contractor was not paying for the sub’s work and then perfected a mineral lien.

The dispute was whether the lien amount was $3.19 million or $713,000. The mineral property owner is not liable to the subcontractor for more than the amount the owner owes the original contractor when the notice of lien is received.

A lesson on the Master Service Agreement 

The source of Shell’s misery was its Master Service Agreement with the contractor. When Shell received Pel-State’s lien notice Shell owed the contractor $11 million and thereafter continued to make payments to the contractor.  Bad call.

Shell owed nothing to the contractor on what it considered to be the contract under which Pel-State claimed a lien. Shell owed only $713,000 for the wells on which Pel-State performed work.

Under the MSA no specific work or a price was agreed upon. Those were determined by separate work orders for each job.  The court concluded that the multiple work orders under the MSA comprised a single contract. Where several instruments executed contemporaneously or at different times pertain to the same transaction they will be read together although they did not expressly refer to each other.

What about the Property Code?

Under Section 56.006 the operator cannot be liable to a subcontractor for an amount greater than the amount agreed to be paid under the contract for furnishing material or labor.  Because the MSA was one contract, the court rejected Shell’s argument that a lien should only apply on the work orders for the wells upon which Pel-State provided work.

Pel-State was entitled to collect from Shell for all work performed under the Shell/contractor MSA, under which Shell owed $11 million. The court affirmed Pel-State’s $3.19 million recovery.

Section 56.043 – a safe harbor

This provision, if used properly, protects the operator from liability.  But he has to stop paying the contractor once he receives a notice. Under this opinion, any limitation on the amount of the subcontractor’s lien must be determined by the state of the account between the property owner and the operator, not by amounts that might be owed on a particular work order or field ticket.

Musical interlude – more Bob

Can’t get enough of Bob Dylan songs of loss, sadness and unrequited love, especially when he’s not singing?

Tomorrow is a Long Time

Boots of Spanish Leather

Farewell

buckwheatIn a case displaying the tactics of anti-fossil fuel advocates, Earthworks’ Oil & Gas Accountability Project v. New Mexico Oil Conservation Commission, a court rejected a challenge to the Commission’s amendment of the “Pit Rule”.  This post is not so much about the Pit Rule itself as it is the absence of legal and factual support for the appellant’s arguments. In case you’re interested, the rule governs pits, closed-loop systems, and below-grade tanks and sumps used in connection with oil and gas operations for the protection of fresh water, public health and the environment.

Lack of Authority? No

Claim:  The Commission had no authority to amend the rule because of a pending appeal of the original rule – the one being amended. No authority was cited.

Result: Earthworks conflated the Commission’s rule-making authority and its adjudicative authority, which was improper.

Arbitrary and Capricious? No

Claim:  The rulemaking was arbitrary and capricious.  To succeed on this claim, the opponent must prove that a rule was beyond the authority of Commission, was not in accordance with law, or was unreasonable and without a rational basis.

Result: The Commission had denied Earthworks’ request to take notice of certain of its prior records; Earthworks asked the court to take notice of records anyway, but again cited no authority to support the position.  The Commission elected not to respond to every concern raised by Earthworks. The Commission’s detailed summaries of its findings were satisfactory.

Economic development is a legitimate basis for a rule 

Claim: The Commission acted improperly by promulgating the rule in order to further economic development.

Result: The Commission acted within its statutory authority when it included economic considerations in its stated reasons for the rule. The Oil and Gas Act and the Commission’s regulations give due consideration to economic factors, and authorize the Commission to do whatever is reasonably necessary to carry out the purposes of the Act.  Economic considerations cannot be the sole purpose for creating or amending a rule, but found no indication that economic considerations were the primary purpose behind the rule.  The Commission cited many reasons why the rule was necessary, including encouraging reuse and recycling of oilfield fluids and reducing surface impacts.

Cost-saving is a legitimate purpose for a rule

Claim: The order adopting the 2008 Rule stated that the Commission had made all changes it could to lessen potential effects on small businesses while still protecting fresh water, human health and the environment. Thus, it was argued, because all possible measures were taken in 2008 there could not be any more cost-saving measures to be made in 2013.

  • Result:  Denied; no factual basis was cited.

Inadequate notice? No

Claim: Public notice of the rule was inadequate.

Result: Again, no authority was cited.

Takeaways

  • Was this suit more to obstruct than obtain legal recourse?
  • Who funds these efforts?
  • What lawyer has the temerity to assert serial arguments citing no authority?

Stanley Dural a/k/a Buckwheat Zydeco RIP.

He did the zydeco

and the N.O R&B.

judgeGemini Insurance Company at al v.  Drilling Risk Management Inc construed control-of-well and redrill/extra-expense provisions in an insurance contract.

The question and the rule

The question was whether an insurance policy covered post-blowout expenses (see facts below), and whether each blowout constituted a separate “occurrence”? If so, there would be two deductibles. The rule is simple: An insurance policy is a contract of indemnity whose scope is limited to that expressly set forth in the agreement.

Gemini denied coverage under the contract. The trial court granted summary judgment in favor of DRMI on the coverage and deductible issues. On appeal, the insurer’s denial of coverage was vindicated. Post-blowout casing and liner and associated expenses were required because of pre-existing hole conditions, not as a result of a well-control incident.

Rather than delve into the minutiae of the policy and the events, none of which would be helpful in your next insurance dispute, be reminded not to read too much into the meaning of one agreement. As with any contract, the meaning of an insurance agreement must be determined by the language of the agreement itself.

The facts

While drilling, DRMI encountered a kick in an unexpected high-pressure zone, resulting in uncontrolled subsurface flow. DRMI sidetracked the well, and encountered a second unexpected weak zone at a depth below the original blowout, resulting in a second underground blowout.

A second sidetrack was unsuccessful, never reaching the depth of the second blowout. DRMI drilled a third sidetrack and installed casing and a liner to isolate the zones that caused the second blowout. This one was drilled to total depth. DRMI sought coverage under the policy and a determination that there was one “occurance”.

Beware, home-town justice

Another issue is presented in this case, which was tried in Kendall County, Texas, in the 216th Court (County  Court at Law judge presiding). The plaintiff sued in its own county rather than the county of the defendant or the location of the events (Houston or Louisiana). After denying a motion to transfer venue, the trial court granted partial summary judgment, construing the contract in favor of the hometown plaintiff.  This put the defendants to trial with their case essentially gutted. The result was a $9 million+ judgment for plaintiff. The trial court got it wrong, ignoring testimony from hometown witness, DRMI president Alan Bloxsom, that undermined the company’s contentions.

To be sure, all trial courts don’t favor the homies. The other good news for the visiting team is that the appellate court can set it right. Full disclosure: Gemini drew my attention because I represented a party in the same court in a case with similar players, similar events, and a similar result.

Musical interlude

Yo, Republicans! Do you yearn for the Republican Party you used to know? The one that existed before the 2016 primaries, or during the time of the Bushes, or Reagan, or Ike, Rockefeller and Lincoln? Cookie and the Cupcakes share your pain.