Benjamin Franklin would be relieved. Just when it seems that the taxman always wins, he doesn’t. In CGG Americas, Inc. v. Commissioner the U. S. Tax Court concluded that a taxpayer need not own underlying hydrocarbons in order to take a deduction for geological and geophysical expenses. Counterintuitive, you say? Read on.
By now, you’ve heard the Trump Administration is conducting a “Section 232 Investigation” into the effect of imported steel and aluminum products on national security. Here’s a primer on the topic.
What is this Section 232 thing anyway? Continue Reading Section 232 and Oil Country Tubular Goods
Co-author Brooke Sizer
Prevails over what, you ask? In Gladney v. Anglo-Dutch Energy, LLC, a conditional allowable from the Office of Conservation didn’t supersede lease royalty obligations.
How did we get here?
Anglo-Dutch completed a gas well on the Gladneys’ lease and then filed a pre-application notice for a compulsory drilling and production unit and applied for a conditional allowable. On May 17, 2012, the application was granted:
All monies generated from the date of first production, the disbursement of which is contingent upon the outcome of the current proceedings before the Office of Conservation for the Frio Zone will be disbursed based upon results of those proceedings.
The next day Anglo-Dutch began sales of production from the well and later submitted a formal unit application. Order No. 124-Y established the unit, effective on and after October 30, 2012.
Perhaps to the surprise of Anglo Dutch, but certainly to its chagrin, the Gladneys demanded payment of the full one-fifth royalty for production from the well prior to October 30th, rather than settle for their share of production on a unit basis.
Anglo-Dutch refused, relying on the conditional allowable which, it said, superseded its lease obligations.
The trial court ruled for Anglo-Dutch, holding that the “allowable covers the royalty payments” because the allowable dated back to first production. The court found no provision in the lease which would require that the Gladneys be paid more than that provided by the commissioner under the allowable and the unitization order.
Reversal from the court of appeal
The court of appeal reversed. “The Mineral Lease … clearly provided Plaintiffs were to get lease-basis royalties on all production from the well and that lease governed the parties’ relationship prior to the unitization order, which was not effective until October 30, 2012.”
Under the Order, the effective date of the unit was October 30, 2012, not the first date of production. The Gladneys were entitled to a full one-fifth royalty from first production until the effective date of the Commission’s Order.
The Gladneys argued, and the court agreed, that the Office of Conservation can’t impede private contract rights. According to an affidavit from a long-time Office of Conservation representative, the conditional allowable was not meant to abridge privately negotiated contract rights. That is consistent with settled Louisiana jurisprudence that meddling in private contracts is beyond the Office of Conservation’s authority.
The court helps those who help themselves
The court was unpersuaded by Anglo-Dutch’s plea that it had no choice other than to pay royalty on a unit basis because otherwise it would have had to pay double royalties. Anglo-Dutch could have amended its lease obligations through a royalty escrow agreement. The Gladneys noted that they suggested this alternative and it was rejected, and that such an arrangement is a common practice in these situations. The court also rejected the argument that the Gladneys were improperly attacking the Commission’s actions.
Anglo-Dutch should have listened to Alabama Shakes.
Perp: David Kent, founder of Oilpro.com
Offense: Wire fraud by computer hacking.
How: Created a “backdoor entry” into the computer system of Rigzone (the company he founded and sold for $51 million) and downloaded the “entire website” onto an external drive that disappeared after he left Rigzone. Then began soliciting Rigzone’s customers.
Perp: Sameer Sethi. This is an SEC civil action.
Offense: Fraudulent sale of securities. (SEC v Sethi Complaint)
How: All sorts of false and misleading statements and omissions to investors of Sethi Petroleum, LLC, to the tune of $4 million.
Result: Cease and desist order. (Memorandum Opinion and Order)
Perps: Gregory P. Warren and Thi Houng Le.
Offense: Mail and wire fraud, conspiracy.
Sentences: After a four-week trial, Le, 84 months in federal prison; Warren, 204 months in federal prison; both, 3 years of supervised release, $25,000 fine. 5 others, including the lawyers who were given the lists, were acquitted.
Perp: James VanBlaricum
Offense: Mail fraud, Ponzi scheme.
How: Represented to 53 investors in Signal Oil & Gas an ‘assured’ rate of return of nine to 15 percent and full refund of their initial investment after a three to five-year investment period. $2 million of $2.6 million raised were commingled with other funds and more than half of investor funds went to payroll and day trading.
Perps: Robert L. Baker and three others. This is an SEC enforcement proceeding.
Offense: Sale of unregistered securities.
How: Worked for Chris Faulkner and Brietling Oil and Gas, which explains a lot. They collectively received nearly $9 million in undisclosed transaction-based commissions; none were registered with the Commission as a broker or associated with a registered broker-dealer.
Penalty: None as of this time.
Perp: Jeffrey Wilson (See, it happens in renewables too!)
Offense: Tax and securities fraud.
How: Falsely portrayed a biofuels company as a legitimate manufacturer in order to receive federal tax incentives. All they were doing was moving the product from one state to another.
Sentence: Awaiting, after an eight day trial.
Perp: Susan Gay Pruitt
Offense: State securities fraud.
How: Amateurish. Plugged numbers from producers’ websites into her projects, which she hadn’t invested in in the first place. Defrauded investors of $225,000.
Sentence: 22 years by a Collin County, Texas, state court. Seems overly harsh relative to others. If she knew she was risking 22 years, should she have swung for the fences …you know, steal more to make it worth her while?
Perp: SandRidge Energy, Inc. This is an SEC enforcement proceeding.
How: Fired whistleblower who raised concerns about the process for calculating publicly reported reserves; Then put language in the employee’s separation agreement that prohibited participating in any government investigation or disclosing information potentially harmful or embarrassing to the company.
A musical interlude dedicated to our subjects.
And another one for those who prefer English.
Co authors David Leonard and Austin Carlson
If you were able to keep your frac trailers from the clutches of your avaricious creditors during the past several unpleasant years, you could be in luck. Owners and lessors of frac trailers may be entitled to a refund for sales tax paid in connection with the purchase, lease, service, or repair of the trailers.
How did this happen?
This new guidance arises from an audit of FracCo (the company was anonymous) in which the Texas Comptroller imposed a tax bill of $9.3 million, plus $1.6 million in interest. FracCo argued it was entitled to a credit because it had erroneously paid sales tax in connection with the purchase of the trailers. The trailers consist of a radiator, engine, transmission, and pump, all mounted on a base trailer, and include fuel tanks and racks to carry high-pressure iron and discharge hoses.
FracCo purchased and/or leased its trailers from an affiliate—thereby creating a taxable event. FracCo argued motor vehicle taxes applied to this transaction; the Comptroller disagreed and argued sales and use taxes applied because the frac trailers were not “motor vehicles”.
An Administrative Law Judge decided in favor of FracCo. The frac trailer qualifies as a motor vehicle because it was designed to tow and carry property separate from itself—i.e., the high-pressure iron and discharge hoses. See 34 Tex. Admin. Code § 3.08(a)(2).
What are the implications?
In a word, significant for some. Texas imposes a general sales and use tax as well as a motor vehicle sales tax. Each has significantly different rules and applications. The sales tax is applicable to purchases, leases, and repairs. In contrast, the motor vehicle tax applies only to purchases, not to leases or repairs.
If you have paid sales and use tax on the lease or repair of a frac trailer, you may be entitled to a refund.
Read this and know what to do
To avail yourself of a refund in light of this ruling:
- determine whether you have paid sales tax in connection with the purchase, lease, service, or labor of a frac trailer. If so, then,
- determine whether the frac trailer is constituted in the same or similar manner as FracCo’s. This is to insure it qualifies as a “motor vehicle” for tax purposes.
If sales tax was paid on a qualifying trailer, request a refund from the Comptroller as soon as possible. To request a refund, a taxpayer must:
- Submit a written claim detailing each reason for the refund;
- Identify the time period during which the claimed overpayment was made; and
- Submit the claim within the limitations period (generally four years from the due date).
In response, the Comptroller may request documentation, such as accounting data and sales paperwork. If the Comptroller denies the refund, the next step is to request a refund hearing within 30 days of the denial.
Can’t get enough of those girl singers
Effective this past August 3, the EPA has new regulations for methane and volatile organic compound emissions from oil and gas operations As you know, reducing methane emissions is a key component of the President‘s climate change agenda.
Why should I care?
Because if you own or operate an oil and gas production, processing, transmission or storage facility, you will be required to comply with the new rule by no later than June 3, 2017. Other than that, don’t worry, be happy, and continue to go about your daily business in blissful ignorance of the impending regulatory burden.
What does it mean?
More expenses for operators of the aforesaid facilities, more demand for good inspectors, more operations for the EPA to
meddle in oversee, and a risk of fines for a substantial failure to comply, whether willfully or by inadvertence.
The summary is an attempt in 22 pages to capture the spirit and effect of the new rule. It was not prepared by a lawyer and is not intended as a legal analysis. It is the product of Keith and his colleagues who will be implementing and conducting the on-site testing required by the rule. It should be viewed, relatively speaking if you aren’t an engineer, as a good place to begin to understand the rules.
- Get familiar with the term “Quad Oa”, an informal reference to the new rule.
- There are two main parts of the rule: Control devices or practices must reduce methane and VOC emissions from certain equipment by 95%, and fugitive emission leak detection and repair (LDAR) applies only to well sites and compressor stations.
- The rule applies to “affected facilities”, specific types of equipment or facilities that are new, modified, or reconstructed after September 18, 2015. Beware, those terms have certain, definite meanings under the rule.
- There will be a reporting and paperwork burden.
- Look forward to quarterly inspections of some midstream facilities.
- Generally, repairs must be made within 60 days.
- See pages 13 and 14 for the EPA’s estimated industry-wide costs of compliance, including projected economic benefits. Honk if you believe the costs will be far higher.
- The rule is based partially on a model called the the “Social Cost of Methane”, and the “methane-related monetized climate benefits” of the rule. Honk twice if you believe those models are based more on ideology than on science.
Time will tell how this rule will work. Among other things, supporters and detractors alike will learn the true extent of methane leakage in our oil and gas infrastructure.
A musical interlude
Today, girl singers you might not have heard of:
In 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.
- 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.
We discussed SEC v. Arcturus et al last week and promised more. Here it is.
Did defendants commit securities fraud?
It doesn’t matter. Violations of Sections 5 of the Securities Act and 15.A of the Exchange Act are strict liability offenses; the defendant’s state of mind is not a consideration. Thus, because they sold unregistered securities through the United States mail or interstate commerce these defendants were liable unless they could prove an exemption. They offered no proof of an exemption (such as registration) so they were liable.
But we still wanna know, did they commit fraud?
Yes. It is unlawful under the Exchange Act to use or employ any manipulative or deceptive or contrivance in contravention of SEC rules to sell a security. If a person makes a material misrepresentation or omission or uses some other fraudulent device in connection with the offer, sale or purchase of a security and acts in interstate commerce he is liable.
The test under Section 17 of the Securities Act is similar. The Fifth Circuit’s standard for misrepresentation is whether the information disclosed, understood as a whole, would mislead a reasonable potential investor. A statement or omission is “material” if there a substantial likelihood that a reasonable investor would consider the information important in making a decision to invest.
What information did the the Parvizian defendants omit? They sold working interests in a prospect that had been forfeited. In other words, they sold interests they didn’t own. Defendants argued that the interests were “in dispute” and they expected to get them back. As you might expect, the court said they should have told that fact to the investors.
Scienter is a mental state involving an intent to deceive, manipulate or defraud. It also includes severe recklessness, the definition of which is lengthy, but includes words like “highly unreasonable”, “extreme” and “inexcusable”. Selling interests that you know were terminated without disclosing that to investors evidences “a high degree of scienter”, said the court.
What about the brokers?
The interests were sold through the Balunas companies, who were not registered as brokers with the SEC. There were “consulting agreements”. Balunas would “introduce” prospective venturors and would receive 12% commission and a $4,000 monthly “retainer”. Balunas would cold-call prospects from a lead list.
The “introducing” part is important. A broker is “any person engaged in the business of effecting transactions and securities for the account of others.” A mere introduction is deemed not to be effecting a transaction.
Investors, think about this
Have you ever considered the relationship between “invest” and “investigate”. They both derive from Latin but, to my surprise, are not from the same root. Nevertheless, in real life – especially when taking a random phone call from a fast-talking stranger – one should do the first only after doing the other.
Musical Interlude; you can’t do it alone
Here are several things to note about SEC v. Arcturus et al:
- Pay attention to this post if you sell oil deals in the way these defendants did.
- This is a civil enforcement suit, so nobody’s headed to jail.
- Not all of the SEC’s many rules make sense. Think Leviticus and the wrong way to sacrifice a goat, except nobody’s headed for the unrelenting wrath of Yahweh.
- Your “good intentions” won’t save you.
- The SEC enforces when there are complaints. Break the rules and you‘d better go “yard” for your investors.
Parvizian controlled Arcturus and Aschere, buying and selling interests in drilling projects. Each project had a managing venturor which supervised the project. Each venture included a confidential information memorandum, PPM, joint venture agreement, subscription agreement, and investor questionnaire.
The SEC alleged that the defendants violated the Securities Act of 1933 and the Securities Exchange Act of 1934, and sought injunctions and money. The SEC contended that the projects were securities. Defendants referred to them as “joint ventures” and the investors as “partners” or “venturors”.
A “security” includes an “investment contract”, but that term is not defined in either statute. The courts say an “investment contract” is a transaction or scheme whereby a person:
- invests his money
- in a common enterprise
- expecting profits derived solely from the efforts of others.
- Parvizian’s power was limited to day-to-day management and was subject to the “affirmative vote” of the venturors.
- The venture was to be “managed and controlled collectively by all the venturors”, including the ability to call a meeting.
- The venturors had voting rights and could remove the managing venturor by a 60 percent vote.
- The court couldn’t find that the venturors had any real powers, based on the way the ventures were actually constituted.
- The venturors had no information about each other and thus no way to actually have a vote. Parvizian refused to disclose the identities of other venturors when requested.
- In a process never disclosed to the venturors, Parvizian combined the assets of the partnerships into pools of accounts held by a third party.
- Parvizian alone controlled and authorized every aspect of drilling and producing operations.
- The venturors had no personal or firsthand knowledge about any activities or decisions related to the venturess and relied completely on information from Parvizian.
- The venturors were unknowledgeable in the oil and gas business.
Courts focus on the “economic realities underlying the transaction and not in the name appended thereto.” Here are factors (among others) that made this investment a security:
- Access to information does not necessarily protect an investor from complete dependence from a third-party when that party is the sole source of the information and advice regarding the venture and the investor does not have the expertise necessary to make the essential management decisions themselves.
- Venturors are not similar to general partners when they have no real power.
- The partners were so dependent on a particular manager that they could not replace him or otherwise exercise ultimate control.
- The venturors were so inexperienced and unknowledgeable in business affairs as to be incapable of intelligently exercising their venture powers.
Did they commit securities fraud, … and what about the brokers?
Co-author Sandra Mazan
U.S. District Court Judge Scott Skavdahl in State of Wyoming et al v. U.S. Department if Interior et al. struck down Bureau of Land Management regulations applying to hydraulic fracking on federal and Indian lands. He concluded that the BLM had no authority from Congress to issue such regulations.
In March 2015, the BLM issued the regulations, which addressed three areas of oil and gas development: wellbore construction, chemical disclosure and water management, each of which is already subject to state or federal regulation. According to BLM, the Rule was enacted in response to public concern about whether fracturing can cause underground water contamination and an increasing need for stronger regulation. In response, industry proponents (the IPAA, Petroleum Association of America, Western Energy Alliance, the states of Wyoming and Colorado, and intervenors the states of North Dakota and Utah and the Ute Indian Tribe of the Uintah and Ouray Reservation) filed petitions for review of the regulations under the Administrative Procedure Act contending that it should be set aside as:
- not in accordance with law,
- in excess of the BLM’s statutory authority, and
- contrary to the federal trust obligation to Indian tribes.
- Hydraulic fracking does not fall within BLM’s jurisdiction. Existing BLM regulations pertaining to surface disturbance, reporting requirements and pollution to groundwater in oil and gas operations do not evidence BLM’s broad authority to regulate the fracking process.
- Congress had not delegated authority to BLM to regulate hydraulic fracking.
- By enactment of the Safe Drinking Water Act (the SDWA) in 1974, Congress delegated authority to the Environmental Protection Agency to regulate hydraulic fracking on federal, state, and Indian lands; however, by amendment in the 2005 Energy Policy Act, Congress unambiguously excluded hydraulic fracking operations (not involving diesel fuels) from EPA regulation under the SDWA. (You may thank U.S. Rep. Joe Barton for that provision.)
- By specifically removing the EPA’s authority to oversee fracking under the SDWA, Congress did not intend for another federal agency (i.e., the BLM) to step in and assume a similar role.
There are several:
- There is no statutory authority for a federal agency’s regulation of fracking.
- Score this as a victory for proper statutory interpretation and the rule of law.
- And a defeat for federal encroachment into activities already regulated by the states.
- We’ll have to wait and see if this remains the status quo. The BLM has appealed.
To commemorate this ruling we need a happy song.