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Energy & the Law

The Fracing Verdict – What Didn’t Get To The Jury?

Posted in Hydraulic Fracturing

As we know, the Parrs won a $2.9 million jury verdict against Aruba Petroleum for a nuisance created by gas wells near the Parrs’ home in Wise County, Texas. Let’s see what claims didn’t make their way to the jury.  (See the court’s web site for the motions  discussed below and other filings in the case).

The Pre-Trial Motions

Halliburton argued in a motion for summary judgment that there was no evidence on these claims:

  • Assault, intentional infliction of emotional distress, negligence, gross negligence, negligence per se,
  • private nuisance,
  • trespass and subsurface trespass to real property.

The court granted Halliburton’s motion on all counts.

Motions for summary judgment were filed by producer defendants asserting there was no evidence for these claims:

  • Intentional infliction of emotional distress,
  • Negligence, gross negligence, or negligence per se,
  • Civil conspiracy,
  • Causation between any alleged act or omission by the defendants and the plaintiffs’ injuries.

The court dismissed all plaintiffs’ causes of action except for nuisance and trespass.

Encana then filed a motion for summary judgment on nuisance and trespass, alleging:

  • Of its 42 wells in close proximity of the home, all but three were drilled and completed prior to the time the plaintiffs said they first experienced health symptoms. Twenty other wells were drilled by operators other than EnCana,
  • Air emissions that comply with the federal and Texas Clean Air Acts cannot be unreasonable as a matter of law with respect to a nuisance claim and cannot constitute a trespass,
  • Migratory particles do not constitute trespass as a matter of law,
  • The common law claims were preempted by the Texas and federal Clean Air Acts. Those statutes and their regulations establish permissible levels for emissions and potential contaminants. Activity that comports with those standards could not be the subject of a civil suit for compliant activity.

This motion was denied, and Encana settled before trial. Those of us who weren’t there don’t know what effect, if any, Encana’s motion had on the settlement. It’s possible that the plaintiffs saw a better target in Aruba and didn’t want to confuse the jury. EnCana was a good operator and there was evidence that Aruba had TCEQ compliance problems.

Somewhere in all this were defendants’ unsuccessful motions that the claims were barred by limitations.

Aruba challenged the damage claims in a pre-trial brief:

  • Future property damages are not recoverable for permanent damage to real property,
  • A plaintiff cannot recover for loss market value of property and costs of repair.

What does it mean?

In the end, the court allowed only nuisance and trespass to be considered by the jury. Defendants might think: We’ll still beat ”fracing plaintiffs” on the traditional causes of action. We’ll see what the trial judge and, if not him the court of appeals, does with trespass and nuisance.

Plaintiffs, without studying the evidence and legal arguments in detail, can’t tell if future cases are likely to end up like Parr, with dismissal of the traditional claims. They no-doubt see the case generally as a victory, in that the nuisance claim got to the jury.

This post doesn’t address the plaintiffs’ personal injury claims. We’ll save that for another time.

Today’s musical interlude reflects a simpler time.  Remember when you could classify a person by whether he was “Ford“ or ”Chevy“.  Giddyup.

Condition Precedent Sinks Chesapeake

Posted in Contract Disputes

A condition precedent was the issue in Preston Exploration Company, et al v. Chesapeake Energy Corporation. This opinion was the result of the parties’ second visit to the federal Fifth Circuit Court of Appeals. In the first trip, the issue was whether the Purchase and Sale Agreement between the parties in a $110 million transaction satisfied the statute of frauds. The court ruled in that opinion that it did.  (See this post discussing that opinion.)

Condition precedent: An event or condition that must be performed by one party before he can require the other party to perform. (Looking to get righteous? Check out Matthew 7:3.)

Before closing, Chesapeake objected that Preston did not have good title to certain properties. Preston responded that it would give marketable title at closing.  Cheasapeake refused to attend the closing and litigation ensued.  The court, referring to its 2012 opinion for details, determined that the condition precedent – to have marketable title, that is, title that a reasonable and prudent person in the industry would accept - had been satisfied. The trial court’s judgment for Preston was affirmed, and the parties were put out of their litigation misery.

Takeaways 

  • Let’s skip the legalities and head straight for the place where business people live. It is a truism among those of us who trade in disputes for a living that your contract is only as good as the intentions of the party you have contracted with. If your counterparty has pockets that are deep enough and a desire to avoid his obligation that is strong enough, he can delay your payday for a long, long time, maybe forever.
  • Current Chesapeake management can be consoled by the fact that this problem was caused by the last, deposed regime.

For our musical interlude – unrelated to the issues in the post – let’s evaluate tawdry, guilt-driven extra-marital escapades.  We have two choices:

A different take on an old favorite of mine  and

a country standard.

 

Barnett Shale Drilling Increased North Texas Ozone – Fact or Fiction?

Posted in Environmental Policy, Hydraulic Fracturing

It’s been said that if you torture numbers, they will confess to anything. Perhaps we should call in a UN peacekeeping force to address the treatment of hydraulic fracturing in North Texas.

A University of North Texas study presented to the North Central Texas Council of Governments by student Mahdi Ahmadi, working with his advisor Dr. Kuruvilla John, concludes:

  • The study relied on 6 million data points from 16 monitors and divided the area into a “Fracking Region” and a ”Non-Fracking Region”,
  • there are 17,494 gas wells over a 5,000 square-mile area in 24 counties in North Texas
  • 11,774 gas wells were drilled from 2007 to 2013, 
  • those wells contributed to an increase in ozone, and therefore in smog and adverse health effects, in North Texas,
  • There were higher ozone levels in the “Fracking Region” than in the “Non-Fracking”. 

The report doesn’t characterize all the wells as producing from the Barnett Shale, but one would assume that comprises the majority. 

If you don’t want to read the report itself (entitled ” An evaluation of the spatio-temporal characteristics of meteorogically-adjusted ozone trends in North Texas”) here is a news report, and another one.

The UNT report seems to contradict a 2012 report by the Texas Commission on Environmental Quality, which found no deleterious effect on the atmosphere caused by Barnett Shale drilling activities. I’m not aware of a TCEQ response to the UNT study.

David Blackmon of Energy in Depth concludes otherwise after analyzing the study’s methodology. Blackmon contends that the raw data shows:

  • An overall reduction in ozone across the region, 
  • the difference in ozone levels between the “Fracking Region” and the “Non-Fracking Region” were not meaningful, and
  • the study failed to take into several important factors, such as ozone levels associated with airport activities, which generate lots of ozone (three airports in the “Fracking Region” and one in the “Non-Fracking”), and the effect of heavier-than-usual snow on the ground in the more rural and more westerly “Fracking Region” during the last several winters (which tends to cause a spike in wintertime ozone levels).

I’m not automatically siding with Mr. Blackmon, and I’m not accusing the UNT reserchers of doing an Abu Ghraib on the data. Sounds like more analysis is in order.

Until then, maybe we should all lighten up and do as the Denton (home of UNT) band Brave Combo recommends.

Texas Supreme Court Will Review Reversal of $20 Million Judgment

Posted in Lease Disputes

Two intriguing factors are present in the Texas Supreme Court’s decision to review Hooks v. Samson Lone Star, LP.  It is out of the ordinary for this court to consider a court of  appeals reversal of a large jury verdict. And the discovery rule is again in play in response to a statute of limitations defense. The practical question: How much investigation will the court require of a lessor to discover if he has been lied to?

The Background

Hooks the lessor sued Samson the lessee for fraud and breach of an oil and gas lease. After a summary judgment and jury trial, Hooks garnered a $20 million judgment, which the court of appeal took away on the basis that Hooks waited too long to bring his suit.

The Lie

The lease required Samson to drill a well, pay royalties, or release a portion of the lease if a well was drilled within 1,350 feet of the lease line. Samson directionally drilled a well that bottomed closer than that. Samson’s landman falsified a plat that he not only gave to Mr. Hooks but also filed with the Railroad Commission, showing the bottom hole to be 1,400 feet off the lease line. Hooks was fooled, at least for a while. In the face of Samson’s defense that the plat could be read two ways (and thus it was not really a lie?) several of Samson’s own witnesses agreed that the plat could be read only one way.

The court of appeals, relying on HECI v. Neal, 982 SW 2d 881 (Tex. 1997),  reversed.  Hooks should have investigated Railroad Commission records, where he would have found a Schlumberger directional survey showing that the bottom hole was 1281 feet from the lease line, thus catching Samson in its lie. The premise was that the Railroad Commission records placed Hooks on constructive notice of the fraud. He failed to use reasoanble diligence in protecting his interests. Had he done so he would have timely discovered the fraud. 

What Could it Mean?

  • Will the Supreme Court retreat from its brutal application of the discovery rule to plaintiffs who fail to examine public records to protect their interests?
  • Will a court of appeals be allowed to apply the law in a way that substitutes its view of the facts for the jury’s?
  • How the rule is applied sometimes begs the question: What if the lessor doesn’t suspect a lie?  Is there ever a point at which a lessor may just take his lessee’s word for something? Must he never believe anything his lessee says?  Is an investigation of everything a lessee says always required?
  • Rhetorical question: Should the audacity of the lessee’s lie diminish the lessor’s duty to investigate? In its briefing I never quite hear the lessee say “We didn’t do it”.
  • Personal question: After the jury has heard the evidence and rendered its verdict, must I still refer to everything as “alleged”?

This musical interlude is dedicated to the Samson landman.

Keystone Pipeline is Delayed … Why?

Posted in Energy Policy

In considering how many bad reasons President Obama might have in announcing a delay of his Keystone Pipeline decision, you’ve got to feel like the hungry mosquito at the nudist colony: There is so much opportunity you don’t know where to start. I can think of 253: 199 Democratic members of the U S House, 53 in the Senate, and his own “legacy” of trepidation and fear of offending the more lefty elements of his base (but I repeat myself).  

The project will be delayed until after the November elections, allegedly because federal agencies need more time to weigh in.

Don’t rely on me for advice on this topic. Here is a post from the Heritage Foundation’s newsletter, The Foundry. You might recall that I recently identified the Heritage Foundation as one of the reliable skeptics of climate change, and thus (possibly) driven more by ideology than evidence. But the venerable and liberal Washington Post also objected, calling the decision “absurd”. You might not agree with the entire editorial, such as  the call for a realistic carbon “price”, which rhymes with ”tax”.

Things You Thought You Knew About Keystone

While we are on the topic, you might be interested in what has been described as five myths about the Keystone Pipeline, also offered in the Post by Michael Levi, senior fellow at the Council on Foreign Relations. Interestingly, his myths cut both ways, challenging beliefs on both sides of the debate.  But are they real myths? Media Matters reports the opposite. I’m siding with Mr. Levi.

Because the Keystone delay makes me sad, today we have two musical interludes. The candidates are woe-is-me country music drinking songs:

BR5-49: There Stands the Glass

Leon Russell: Six Pack to Go

 Two choices.  Be courageous. Pick one … before November. 

 

A Plaintiffs’ Jury Verdict in a Texas Fracing Case

Posted in Hydraulic Fracturing, Pollution

Co-author Maryann Zaki

In case you’ve been living in your van down by the river, you’ve heard that a Texas jury awarded $2.9 million to landowners in a case involving alleged hydrocarbon exposure due to hydraulic fracturing operations. Here is the jury verdict. The Parrs sued Aruba Petroleum, alleging that drilling and fracing at Aruba’s 22 wells located within two miles of the Parr’s 40-acre property in Wise County was making them sick. They alleged a wide array of health issues, including nose bleeds, irregular heartbeat, muscle spasms, and open sores, all of which were allegedly caused by hazardous gases and airborne chemicals emanating from Aruba’s well sites.

The Original Claims

The original claims against a number of operators with wells in the area included assault, intentional infliction of emotional distress, negligence, gross negligence, civil conspiracy, private nuisance and trespass. All defendants other than Aruba either settled before trial on undisclosed terms, were dismissed, or obtained summary judgment.

Proceeding on Nuisance

The case proceeded to the jury only on the nuisance claim. The award, for intentionally creating a private nuisance, comprised $275,000 for loss in property value, $2 million for past pain and suffering, $250,000 for future pain and suffering, and $400,000 for past mental anguish. The jury did not find evidence of the malice necessary to justify an award of punitive damages.

The Takeaways

  • What effect will the verdict have? Although this is not the first lawsuit against an energy company for damages related to fracing, the verdict has been coined as the “first fracing verdict in U.S. history.” The trial judge has not yet entered a judgment on the verdict, which will almost certainly be challenged by the defendant in post-trial motions, and on appeal if necessary.
  • Whether a compressor station was a nuisance was discussed in one of our long-ago  entries. See that entry for a general discussion of what constitutes a public nuisance in Texas.
  • It remains to be seen whether the Parrs will ultimately prevail in holding Aruba solely liable for their alleged injuries, when there are dozens of other wells and facilities operated by other companies within a two mile radius of the Parr home.
  • This verdict has inspired debate and raised questions. Will people living near oilfield operations begin running to the courthouse to file similar lawsuits, and will such claims ultimately succeed?
  • Several of our Gray Reed colleagues are participating in litigation similar to Parr. We are following Parr and other cases and from time to time will be commenting.

Acknowledging that those who don’t know better see fracing as malignant, we offer this musical interlude. (Tolerate the ad; the rest is worth it.)

A Cost-Free Royalty Clause That Works – Part Two: The Override

Posted in Lease Disputes, Royalty Disputes

Co-author Travis Booher

Welcome to part two of the hair-splitting decision in Chesapeake Exploration, L.L.C. v. Hyder. See our prior post about the basic facts.

More Facts

In addition to their cost-free royalty clause for wells on the leased premises, the Hyders also received an overriding royalty interest on wells drilled from pads located on the leased premises and completed on adjacent tracts. Chesapeake drilled seven of these “off-lease wells”.

The Royalty Clause

…within sixty (60) days from the date of the first production from each off-lease well, …convey a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent (5%) of gross production obtained from each such well payable….

Again, the parties disagreed over what “cost-free” means.

Chesapeake’s Position

“Cost free” merely reinforces current Texas law that an overriding royalty interest is free of production costs, but subject to its proportionate share of post-production costs.

The Hyder’s Position

“Cost free” refers to all costs (except the Hyder’s portion of production taxes), including post-production costs.

The Court’s Position (The one that matters)

Under Texas law, it is clear that an overriding royalty is normally free of production costs, but subject to post-production costs. However, the parties may modify this default rule by agreement. Chesapeake cited four cases for its position that post-production costs should be deducted, and the court addressed each (we briefly summarize the holdings):

  • XAE Corp. v. SMR Prop. Mgmt. Co., 968 P.2d 1201 (Okla. 1998) – the ORRI was an in-kind interest with delivery at the well head, and the lessee had no duty other than to deliver gas. Therefore, the lessee was not responsible for lessor’s share of post-production costs and expenses. Hyder is not about taking gas in-kind, and the Hyder lease contains a provision that expressly says the ORRI is “cost free.”
  • Heritage Resources Inc. v.  Nations Bank (see the prior post for a link) – the Hyder’s lease specifically says, that “Heritage Resources shall have no application to this lease.” As result, it has no applicability to this ORRI.
  • Martin v. Glass and Dancinger Oil Refineries v. Hamill Drilling Co. – In those Texas cases the ORRI was “free and clear of all costs of drilling, exploration or operation…” and ‘free and clear of operating expenses.” The court noted all of those costs are production costs. Under the Hyder facts, the lease language is not limited to production costs, it simply says “cost free”, meaning all costs – production and post production.

The court concluded by saying parties can modify the default rule that ORRIs “are normally subject to post production costs.” Here, as indicated by the four corners of the document, that is what the parties did. In short, the Hyders are responsible for their portion of production taxes only.

The Takeaway

In writing a lease, say what you mean. Sometimes, a “cost-free royalty” really is a cost free royalty.

In honor of the lawyers and their clients who dance a lot over the words in the lease, we end this offering with a dance contest. Feel ”free” to pick your favorite:

Candidite 1  

 Candidate 2  

 Candidate 3 

 

 

Native Gas and Storage Gas: Who Owns It?

Posted in Eminent Domain

Northern National Gas Company vs. Approximately 9117 Acres in Pratt, Camden and Reno Counties, Kansas shows the relationship between Kansas oil and gas law and the Kansas Underground Storage Act (KSA §55-1201 et seq).

The result: Obtaining authority to condemn a subsurface reservoir works no instantaneous change of ownership in storage gas under Kansas law. Ownership rights are determined by KSA § 55-1210. Under that statute, an injector’s right to retain title to injected storage gas is limited to the certified area where it has already obtained the necessary storage rights and the “adjoining property”.

This case is a good history of not only Northern’s bad fortune, but also the evolution of the relationship between the Storage Act and Kansas oil and gas law and Northern’s misfortune in its litigation on this issue.

Northern’s Predicament

The Cunningham Storage Field is an underground natural gas storage facility in south central Kansas that was substantially depleted after decades of native gas production. Northern had three FERC certificates allowing it to acquire and store gas, first in an underground area covering more than 26,000 acres, second an additional 1,760 acres, and third, in 2010, an additional 12,320 acres. The latter two extension acres were after Northern litigated (and lost) several lawsuits in which it sued nearby operators for producing gas that had migrated from the storage field.

Storage gas had migrated into the 2010 extension area as of the “date of taking” of that area by Northern. The question was Did Northern had to compensate for taking storage gas that migrated into the 2010 extension area, or did the Storage Act require Northern to pay only for native gas?

The Effect of Kansas Oil and Gas Law

Under the “ownership in place” theory, landowners own a present estate in oil and gas in the ground, but when oil and gas escape into other lands or come under another’s control, title in the former owner is lost. That interest is a defeasible interest and under the rule of capture, migrating gas becomes the personal property of the first person to produce it.

Under the Storage Act, when a public utility condemns property it must determine the amount of recoverable native gas and award damages to the owner of the subsurface formations. The result under Natural Gas Act is the same.

Under earlier cases, the rule of capture applied where an entity injects captured gas into a common reservoir underlying its own property and neighboring property, but has no permission to use the neighboring property. When a producer from the neighboring property produced the gas the original injecting entity lost it. That applied when the injector has no condemnation authority from the Kansas Conservation Commission.

When an injecting (see *5) party is a public utility, an exception to the rule of capture is created. At that point the rule is no longer recognized and title to the injecting party’s gas remains with that party.

In 1993, the Storage Act was amended to provide that all natural gas previously reduced to possession and injected into underground storage field or reservoir shall all times be the property of the injector. Thus, only the value of native gas is to be considered when determining compensation.

Jessie WinchesterRIP.  From Bossier City, Louisiana, by way of  Williams College.

More on the Moral Case for Fossil Fuels and Other Topics

Posted in Climate Change, Environmental Policy

My recent post about Alex Epstein and the moral case for fossil fuels told only part of his story. He also says that the global warming “alarmists” have it all wrong. He refers to “unambiguous” data that CO2 emissions have risen from an atmosphere concentration of .03% to .04%, while over the same period climate-related deaths have declined 98%, and drought-related deaths have declined by 99.8%.

Here are some of Alex’s other points:

  • Defenders of fossil fuels, when they publicly endorse “renewable” as the ideal, defeat themselves by essentially agreeing that there is a moral case against fossil fuels.
  • The implication is that “renewables” are the goal and oil and gas is just a temporary necessary evil.
  • Once greenhouse gas emissions are endorsed as a fundamental benchmark of environmental health, the industry is conceding that it is causing catastrophic global warming and that reducing greenhouse gas emissions is moral imperative.

What’s With Honey Boo Boo and Fossil Fuels?

Which leads me to a related topic. In preparing this blog I see more blog posts and news articles than you can imagine about “global warming”, ”climate change” and the like.  I’ve concluded that the issue is so highly politicized, has attracted so many advocacy groups, and has generated so many puroprtedly scientific opinions on one side or the other that I (not being an engineer) don’t know what to believe.

Thus, for the time being I leave it to you to Google “global warming” or “climate change” and decide for yourself. In the meantime here are a few sources I’ve come across that you can rely on, at least for their consistency:

The “Alarmists”: The International Panel on Climate Change  (where it all started), Al Gore and the Huffington Post  (a twofer here), pretty much anything from the New York Times (insidious for what it elects not to print as much as for what it does), Grist (Can you get farther left?).

The “Deniers”: Non-Governmental International Panel on Climate Change ; Bjorn Lomberg (not so much a ”denier” as an alternative thinker); The Foundry, from the Heritage Foundation (far right on just about everything); Powerline; Watts Up With That.

Somewhere out there are “moderates”. Rich and Elizabeth Muller might be two of them. I know they’re U C Berkeley professors. Just read what he has to say.

This GW hiatus doesn’t include the fracking controversy. (Or is it fracing, or frac’ing? I’ve been castigated by my friend, Dallas lawyer Pat Shaw, for using “fracking”. Pat says only the “anti’s” use that spelling).

Having tired of trying to figure out if the world is going to perish by 2020, or 2035, or 2100, or the next presidential election, or never, I’ve moved on to more weighty topics:

  • Noah: Blasphemy or clueless Hollywood entertainment?
  • Lord Grantham:  Anachronistic dilettante or an honorable man preserving noblesse oblige and other worthy institutions?
  • Who will win the AL West? … the SEC West?
  • Should the USA convert to the metric system?
  • Clapton or Hendrix?
  • First place in artistic achievement:  Hoarders, Cheaters, or Here Comes Honey Boo Boo?

As with GW, decide for yourself.

 

Federal Court: General Partnership Interest Could Be a Security

Posted in Litigation, Regulations
By: Martin P. Averill

Are general partnership agreements for oil and gas exploration considered “securities” governed by federal securities regulations?

The U.S. Court of Appeals for the 10th Circuit  thinks they could be. In SEC v. Jeffory D. Shields and Geodynamics, Inc. et al., the court reversed a trial court ruling which dismissed the SEC’s claims that general partnership agreements for oil and gas exploration were actually federal securities. The appellate court adopted a three-factor test adopted from the federal Fifth Circuit to gauge whether a general partnership interest can be a “security.” If any of those factors are met, an investor may overcome the “strong presumption” that a general partnership interest is not a security.

The Analysis

Three key factors were considered by the court:

  • The agreement between the parties leaves so little power in the partners’ hands that it essentially acts as a limited partnership;
  • The partners are so inexperienced and unknowledgeable in the particular business that they are incapable of exercising partnership or venture powers: and
  • The partners depend on unique abilities of the promoter or manager such that they cannot replace the manager or otherwise exercise meaningful partnership or venture powers.

The court found that all three factors were present.

It is important to note that this decision does not mean these investments were actually securities—the court simply ruled that the SEC’s claims were enough to overcome a motion to dismiss for failure to state a claim. The court sent the case back to the trial court for further proceedings and factual development.

Bad Facts Make Bad Law

It is also worth noting that the defendant Shields was in prison for fraud at the time the opinion was issued.  Other facts were also present. Among the most egregious:

  • Of the roughly $5 million raised from investors, only $613,494 went to oil and gas development with the rest goint to Shields directly or to his company;
  • The money was commingled with other investor funds;
  • The drilling was never finished;
  • No oil or gas was ever produced; and
  • The general partners never received any funds.

The Takeaway

Merely crafting an oil and gas investment as a general partnership interest will not automatically insulate it from scrutiny and attack under federal securities regulations. If the “general partners” effectively cannot exercise power, and are at the mercy of the manager of the venture for its expertise, or other egregious facts exist, substance may trump form and federal securities laws may apply.

The 10th Circuit hears cases from Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah. The 5th Circuit hears cases from Texas, Louisiana and Mississippi.

Today’s musical interlude is dedicated to the defendant/jailbird Mr. Shields