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Energy & the Law

The Model Form JOA in Hard Times (and Farewell, Rally Possum)

Posted in Operating Agreements
Rally Possum May 7 - June 12, 2016

Rally Possum RIP. May 7 – June 12, 2016

Co-author Nathan Cox *

Good morning class. Welcome to an advanced course on what can go wrong with the Model Form just when you need it.

FIRST CASE

Do you know where to file your UCC financing statement?

Operator wants to perfect both a mineral lien and a financing statement against Non-operator, a Delaware Corporation. The property is in Texas. The mineral lien, of course, will be filed in the county where the property is located. Where to file the UCC financing statement? With the Secretary of State of Texas, the state where the property is located, or in Delaware, the state where Non-op is registered?

See Article VII B of the 1989 Model Form Operating Agreement:

“To perfect the lien and security agreement provided herein….Operator is authorized to file this agreement or the recording supplement executed herewith as a lien or mortgage in the applicable real estate records and as a financing statement in the applicable real estate records and as a financing statement with the proper officer under the [UCC] in the state in which the Contract Area is situated and such other states as Operator shall deem appropriate…. ” (our emphasis)

So, you file with the Texas SOS?  Not so fast.

The Uniform Commercial Code itself requires that a financing statement be filed in the proper office (usually the Secretary of State) in the jurisdiction where the entity is organized. One arrives at that conclusion by a circuitous route through UCC Sections 9-501, 9-301 and 9-307.

The 2016 revision repeats the 1989 language, so this problem, if that’s what it is, will be around for a while.

So do this

Record the financing statement both in the state where the lands are located and the state where the debtor is organized. Otherwise, the debtor could make a mess of your foreclosure efforts.

SECOND CASE 

When can you recover attorney’s fees under the Model Form? See Article VII.D.5 of the 1989 form (far different from the 1982 form): “In the event any party is required to bring legal proceedings to enforce any financial obligation of a party hereunder, the prevailing party in such action shall be entitled to recover all court costs, costs of collection, and a reasonable attorney’s fee…”

The answer, according to the U. S. Bankruptcy Court for the Western District of Texas, in In re, WEB LP et alis when you obtain a monetary award, but not when you obtain injunctive relief.

WBH, LP was the operator; USED was a non-operator. WBH failed to pay vendors who filed lien affidavits. USED obtained injunctive relief in state court to remove WBH as operator. WBH filed for bankruptcy and the bankruptcy court adopted the state court injunction. Eventually, the court ordered the sale of the assets to Castlelake, WBH’s lender.  The order of sale provided that the debtors assets were subject to any valid senior liens asserted by USED under the JOA.  USED’s proof of claim totaled $500,000 in attorney fees for the injunction action. The court reasoned that the word in the document was “financial” obligations, which an injunction was not. No attorney’s fees for USED.

EULOGY FOR THE RALLY POSSUM

Our treasured marsupial was with us for a mere 36 days; a life too short but yet so full of memories, beginning a half-inning after he was carried off the Alex Box outfield in a trash bag. Overcoming a nine-run deficit against Arkansas, sweeping Tennessee, taking 3 of 5 from No. 1 Florida, thwarting the Cowbells and the Brainiacs. Done in by sloppy fielding and poor clutch hitting, he has shrugged off the mortal coil, much like a freshman would the “take” sign. But our good Possum is not really gone.  He is with his Higher Power, and we who have faith are solid in our conviction that one day we will be reunited with him in a glorious homecoming in that Heaven that he would call Omaha. That is, if he could talk. But he can’t talk because he’s a possum and he’s dead, so we have to imagine that’s what he would say. (Unless he was “talking” through that lady’s balloon hat at the Super Regional.) Nevertheless, his death is our inspiration to a greater cause, like going 1st-to-3rd on a single to right field.

Let’s hope our journey with Mr. RP does not parallel this musical interlude. May his rallying powers return on September 3.

* Nathan is a 2L at Baylor Law School, U.C. Davis undergrad, clerking at Gray Reed for the summer.

The Accommodation Doctrine Gets Its Feet Wet

Posted in Contract Disputes, Land Titles, operations

gliderLet’s start with a little background: Under the Accommodation Doctrine an oil and gas lessee has an implied right to use the land as reasonably necessary to produce and remove the minerals, but must exercise the right with due regard for the landowner’s rights.

As a result of Kelly Lake Ranch v. City of Lubbock, the doctrine now applies between the landowner and the owner of an interest in the groundwater. You think this decision pertains to ranchers? I report it because as we know from Bernie, you oil people frack the earth, poison our babies, and spend undeserved riches that should go to the government on vast, water-starved ranches in West Texas.

How did we get here?

In 1953, the City bought the Ranch’s groundwater via a deed that had very detailed provisions regarding the City’s rights. The Ranch reserved water for certain specified uses. In 2012, the City announced plans to increase water extraction by drilling as many as 20 test wells and 60 additional wells. The Ranch objected and sued to enjoin the City from implementing its plan.

The Ranch argues … and honors the Lesser Prairie Chicken

  • The City has contractual and common law responsibility to use only that amount of the surface that is reasonably necessary for its operations and to conduct operations with due regard to the rights of the surface owner.
  • Mowing or removing vegetation would cause destructive wind erosion.
  • The City could drill only where the Ranch allows it as long as full access to groundwater is not impaired.
  • Elevated power lines would allow hawks to roost and prey on the Lesser Prairie Chicken, a threatened species. So bury them (the lines, not the chickens).

The City argues

  • The deed gives the City very broad rights to pursue its plan.
  • The City owes no duty to surface owners (as would mineral owners to accommodate surface owners).
  • The City can drill wherever it chooses, even if it could drill in places less damaging to the surface and still access the water.

The deed governs the City’s rights to use the Ranch land.  What is unsaid is whether the City has an “all but absolute” right to use the surface, heedless of avoidable injury, or only what is necessary or incidental to fully access the groundwater.

The Result

The deed alone did not determine the City’s right to use the Ranch.  There are sufficient similarities between mineral and groundwater estates and their conflicts with the surface estate to apply the Accommodation Doctrine.

See pages 10 through 12 for a history of the doctrine in Texas. See page 13 for the elements of a surface owner’s claim under the doctrine.

A concurring opinion pointed to the written agreement allowing the City to drill water wells at any time and location.  Thus, the doctrine should not apply.  It might apply to where and when the City could construct access roads, but not to where it may locate wells.  Access roads could be built only where “necessary or incidental,” which leaves substantial room for disagreement. To that, the concurring justices would apply a reasonableness standard.

This is a Supreme Court opinion, so treat it like it is a big deal.

A musical interlude.

Let’s not forget D- Day

Several years ago I commented about D-Day – which happened 72 years ago yesterday – and my uncle, who was there. It is worth reading again.

Lessee Escapes Termination

Posted in Contract Disputes, Lease Disputes

terminatorCo-author Trevor Lawhorn ∗

Escondido and Justapor. Next up on Tiny Desk Concert? Good guess, but no. They are the parties in Escondido v. Justapor, a Texas case presenting the perils of lease termination clauses and vaguely-drawn contracts.

The agreements

Justapor as lessor and Escondido as lessee entered into an oil and gas lease in 2008 on the 803-acre Justapor Ranch in Webb County. Among other provisions,

  • Escondido must pay royalties within 60 days.
  • Annual “true-up” of royalty underpayments.
  • Termination if Escondido doesn’t pay the correct royalty.

In 2011, the parties entered into a separate agreement under which Escondido would convey certain interests it acquired in the Ranch to an entity designated by Justapor.

The lawsuit

Justapor sued in 2013, alleging intentional failure to make up underpayments in 2012 and 2013, breach of contract, bad-faith trespass, trespass to try title, and declaratory judgment on lease termination and the parties’ rights relating to a 42-acre “vacancy tract” Escondido was to convey per the 2011 agreement.

Everybody moved for summary judgment on lease and vacancy tract issues. The (home town) trial court granted a final summary judgment for Justapor and denied Escondido’s cross-motion. Escondido appealed.

The court of appeals speaks                                         

  • The lease did not terminate due to Escondido’s breach of the true-up provision. The court parsed the lengthy and complicated termination clause and said it could not be applied without rendering the true-up provision superfluous or giving Escondido conflicting deadlines to make payments.
  • Judgment rendered for Escondido on Justapor’s remaining claims.
  • Because the trial court said the lease terminated in 2012, Justapor’s claim for breach of the true-up provision in 2013 was never addressed.  That claim was remanded so that the trial court could address a typo and determine if Escondido breached the true-up provision in 2013.
  • Judgment on the vacancy tract reversed. Justapor never designated an entity for Escondido to convey interests to. Justapor, therefore, could not establish a breach of contract claim.

Lawyers, pay attention

Escondido waived its defenses to Justapor’s breach of contract claim by failing to expressly present the defenses in its summary judgment response. A “mere reference” to facts supporting affirmative defenses was not enough. Summary judgment for Justapor affirmed for Escondido’s breach of the lease.

Takeaways

  • Lessees: Faced with a termination clause? Don’t agree to this Sword of Damocles! At best, it produces sleepless nights. At worst, it could mean an ugly end to your investment.
  • Drafters: Avoid using confusing language that leads to an unanticipated result.
  • Plaintiffs: Make sure you have performed your own obligations before seeking specific performance.
  • Defendants: Never make Her Honor have to guess about your defenses.

∗ Trevor is a 2-L at SMU’s Dedman School of Law, LSU undergrad, clerking at Gray Reed for the summer.

The New Orleans version of the gospel standard is really two halves of one song: The first half is the dirge, wherein the departed is brought to the final resting place; the second half is the march, the celebration by those left behind. Don’t give up on this one too soon.  Whatever it is you need to get back to can wait.

What’s To Know About the Defend Trade Secrets Act of 2016

Posted in Legislation

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.

Neither a Will Nor a Gift Deed?

Posted in Land Titles, Title Issues

cruellaThis narrative about a daughter gone bad is for title examiners, landmen and moralists. Business development persons, skip straight to the lesson.

The background

Elvira owned a home and lived with Johnny. Elvira and Johnny were named managing conservators for her three grandchildren after a daughter died. The grandchildren lived at the house. Elvira and Johnny signed a “March 11, 2005 Will”, handwritten by Johnny. It said that the house would be equally owned by the grandchildren and nothing would be done to the house without their authorization. All the players knew of the document.

Irma wants it all

Elvira and daughter Irma has a history of not getting along. Fast forward to 2009. At trial it was established that Elvira, along with physical maladies, suffered from psychosis, dementia, and Alzheimers. Notes of a nurse at her nursing facility described her as confused, combative, and unable to find her room without assistance. Irma and Elvira met at a Starbucks and Elvira signed a Warranty Deed, prepared at Irma’s request, conveying the home to Irma and husband in exchange for a “love and affection” (Imagine how the jury received that information). The notary knew something was up when Irma asked if Elvira needed to be present for him to notarize the document. Wasting no time, Irma filed the deed of record the day after signing.

Irma changed the locks on the house and denied access to Johnny. A year after the trespass to try title suit was filed by Johnny and the grandchildren, Irma and husband made improvements to the property.

Was the will effective?

No. The will was not attested to by two witnesses.  It could have been a holographic will if it had been written wholly in Irma’s handwriting. Remember, it was handwritten by Johnny.

Was it a gift deed?

No. The will was not acknowledged, witnessed or recorded. Delivery of the property is required but it need not be actual or immediate. Delivery could be constructive. So far so good.

An unrecorded or unacknowledged instrument is binding on the parties to the instrument, their heirs, and a subsequent purchaser who does not pay valuable consideration or who has notice of the instrument (in other words, not a bona fide purchaser for value). The question, then, was …

What was Elvira’s intent?

To be a gift, the donor must intend immediate and unconditional vesting of her ownership interest in the donee. The will did not absolutely and irrevocably divest Elvira of title, dominion and control of the property.  The 2005 “will” was not a gift deed. And Elvira clearly did not have the requisite capacity to sign the 2009 Warranty Deed.

Could Irma and husband recover their improvements?

No, thank goodness. Under the Property Code a defendant in a trespass to trial title action who is not the rightful owner of the property, but who has possessed the property in good faith and made permanent and valuable improvements is either:

  • entitled to the amount by which the value of the improvements exceeds of the use and occupation. or
  • liable for the amount by which the value of the use of and waste or other injuries exceeds the value of the improvements.

The Property Code does not allow for direct reimbursement of money. Receipts for material and labor were not helpful. There was no evidence as to the value of the improvement, and there was no evidence whether the value of their use and occupancy outweighed any increase in the property’s value.

The lesson

This musical interlude is for Irma’s soul.

And while we’re on the harmonica, an analogue for her behavior.

PS: Nothing personal to Irma. I’m only extrapolating.

Here We Go Again: Fractional Royalty or Fraction of a Royalty?

Posted in Royalty Disputes

Fractions


“Blood may be thicker than water, but oil is thicker than both.”  J. R. Ewing.

This family dispute among Ethel’s descendants arose when Ethel’s will employed double fractions in bequeathing royalty interests to her children. Did the instrument create a fixed fractional royalty or a floating fraction of royalty?

Straight to the takeaway

Don’t like math? Avoid a pop quiz by remembering, when describing a royalty conveyance:

  • Do not convey a fraction of a fraction unless that is what you intend to do. Why let ambiguity and confusion ruin your carefully crafted document?
  • Use language appropriate for the time and circumstances, but think ahead. Is change foreseeable in a way you can plan for?

If you don’t believe me read Hisaw v. Dawkins, from the Texas Supreme Court.

Times were different then

When Ethel’s will was written in 1947 Jackie Robinson was a rookie, LSU beat Texas A&M 19-13 (some things never change), and the standard royalty was 1/8th. Was that figure in Ethel’s will a synonym for the lessor’s royalty, or was the royalty interest fixed without regard for the possibility of a higher royalty in the future?

There were three separate parcels of land and each child received the surface and executive rights to one. Ethel’s will contemplated three scenarios for the royalty under all the tracts. Each child would receive:

  • an NPRI of an undivided 1/3rd of an undivided 1/8th of all oil, gas ….
  • 1/3rd of 1/8th royalty  …
  • 1/3rd of the remainder of the unsold royalty, if a conveyance occurred while she was alive.

Clarity from the Supreme Court

The court said it would not embrace a “mechanical approach” to a royalty conveyance that would require “rote multiplication of double fractions”. Bright line rules are arbitrary and will not always give effect to what the conveyance provides as a whole. The court of appeals erred in construing each royalty provision in isolation.

In what it called an analytical approach, the court applied the four corners rule, and attempted to harmonize all provisions of the document. The court reaffirmed its commitment to a “holistic” approach to contract construction by ascertaining the parties’ intent from all words and all parts of the instrument. To harmonize would resolve apparent inconsistencies or contradictions in the document.

The third royalty clause governed. It clearly showed Ethel’s intention to equally divide the royalties among the three children. Each would receive a 1/3rd floating royalty, not a 1/24th fixed royalty (that is, 1/3rd of 1/8th).

The antiquated assumption that all future royalties would be 1/8th did not evidence Ethel’s intent. This is not to say that reference to 1/8th won’t ever mean just that. It might, if the language is clear and unambiguous.

 Prince RIP. His voice and an acoustic guitar are all you need to see what a force he was.

Proposed Methane Rules – Good or Bad?

Posted in Environmental Policy, Pollution, Regulations

wolfLast week we discussed why the EPA’s plan to limit methane emissions from existing oil and gas facilities is good. Now we will consider reasons why the plan is not prudent.

Will the rules be good or bad for America?

The President says good. Will it be as “good” as the ACA?  While you decide for yourself, consider these facts:

Methane is down

From 2005 to 2014 natural gas production increased by 33 percent and methane emissions from natural gas systems decreased 11 percent.  The EPA places the natural gas industry in third place on the list of methane emitters behind landfills and “enteric fermentation” (It’s Blazing Saddles, but with cows).

What’s wrong with the free market?

EPA’s last greenhouse gas inventory in April 2015 specifically credited a 38 percent drop in methane emissions since 2005 to voluntary efforts by producers.  Where is Friedrich Hayek when we need him?

Is it worth the cost?

Methane emissions from natural gas systems represent 3.4 percent of all the greenhouse gases emitted in the United States.  EID has done the math: Assume methane emissions every year from 2025 to 2100 are kept at the target of 45 percent reduction from 2013; that would impact global temperature by .004 degrees Celsius. Some would call that benefit de minimis compared to the cost.

Close enough for government work

In justifying new methane rules the EPA assumed substantially higher natural gas prices than did the EIA. Result: Faulty cost-benefit analysis. How has the agency has fared in other regulations? It estimated its new CAFE standards would save consumers a few thousand dollars on gas and add $948 to the cost of a new car. Three different groups have gauged the additional cost to be more like $3,800 even after fuel savings.

Crazies debunked

EID reports on the debunking of Bill McKibben’s fracking “facts”  Highlights (details in the links):

  • Several of his claims have even been rebuked by the IPCC, the international global-warming alarmist enterprise.
  • The IPCC considers the rapid deployment of hydraulic fracturing as an important reason for the reduction of greenhouse gas emissions.
  • The Harvard study allegedly showing the nation is leaking methane in “massive quantities” doesn’t point to shale gas production as its source.
  • The greatest methane increases have been in areas where there is no shale development.
  • Even the EDF agrees: Study after study shows that emissions are far lower than Ingraffea claims.
  • Gasland has proven to be a fraud.

A contrary look at the EDF study 

Several observations about last week’s EDF’s study:

  • Alex Trembath of the Breakthrough Institute explains that methane leakage is a minor factor in determining the benefit of coal-to-gas transition; such levels are within acceptable ranges.
  • Even after targeting the “super emitters”, the EDF study shows an overall very low methane leakage rate.

Mother’s Day is coming up.  How about a musical interlude for Mom!

EPA Methane Rules Are Coming

Posted in Environmental Policy, Regulations

wolf“Remember, I can do anything to anybody”, deranged and murderous Roman emperor Caligula to his grandmother (Julia, widow of Tiberius and herself no stranger to things done to other people as and when they pleased).

In related news, the White House intends to limit methane pollution from thousands of existing oil and gas wells, pipelines and other facilities.

Why should I care?

Because, if you suspect the new rules are .. pick the word … unnecessary, too expensive for the benefit, anti-capitalist, “overbearing leftist bulls&%t” … you should understand the point of view of those who see it differently. That way you can defend the industry to those who don’t know better. This week is a discussion of the rationale for the rules.

The new rules good for America, aren’t they?

No they aren’t, (That’s an opinion; feel free to disagree). Here are reasons why we need the new rules.

The Environmental Defense Fund, through its Energy Exchange blog, asserts that methane emissions are far higher than EPA estimates. According to EDF, the oil and gas sector is the largest industrial source of methane emissions in the United States and reducing these emissions is the biggest, most cost-effective opportunity to make “fast meaningful reduction in greenhouse gas pollution.”

Reducing methane emissions isn’t as difficult or as costly as the industry claims. For example, Jonah Energy reduced fugitive methane emissions by 75 percent and cut repair time by 85 percent, saving more than $5 million in product. We’ve got to do it now.

Methane traps 84 times as much heat as CO2 over 25 years.  The IPCC suggests methane is responsible for 25 percent of the world’s global warming and is a climate destroying fossil fuel.

According to a recent study published in Environmental Science and Technology, the biggest problem is the “super emitters” – large, unpredictable leaks caused by equipment failure, human error or other factors.  The study recommended that “regularized, widespread monitoring facilities across the supply chain” could quickly find and fix leaks in equipment.

According to the EPA, methane constitutes about 10 percent of total US greenhouse gas emissions.  Methane has a warming potential that is about 25 times greater than carbon dioxide, according to the EPA and the IPCC.

What do the fabulists say?

Bill McKibben, whose fracking “facts” have been debunked more often that your president has apologized to foreign dignitaries, is still at it. Here are his assertions:

  • Fracking would do more climate damage than coal even if only a small percentage of methane is leaked;
  • America’s contribution to global warming increased during the Obama years;
  • the nation is leaking methane in massive quantities;
  • new research backs prior claims of McKibben and Ingraffea;
  • Gasland is one of the classic environmental documentaries of all time.

Next week: Why the new rules are neither good for the industry nor helpful in reducing global warming.

Our musical interlude: Here is where these studies take me.

 

When Joint Bidding Is Not Bid Rigging

Posted in Legislation, Regulations

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!

The Peril in Joint Bidding for Properties

Posted in Legislation, Regulations

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.