Co-author Rusty Tucker

Jatex Oil & Gas, L.P. v. Nadel & Gussman Permian, L.L.C. presents several teachable moments:

  • The Texas Property Owner Rule does not allow a non-expert testify on matters requiring expert testimony.
  • The operator may pay proceeds from a well to the lender to whom the working interest owner made a collateral assignment of net revenues from the well.
  • A claim for failure to act as a reasonbly prudent operator for failing to comply with an operating agreement is a contract claim, not a tort claim.

Jatex owned a working interest and NGP was the operator of the Clyde Prospect in Glasscock County.

Jatex executed a promissory note to Security Bank secured by its working interest in the prospect. Jatex defaulted on the note. Security Bank foreclosed and purchased the working interest for $1,500,000.

History of operations

NGP proposed to deepen the Vaqueros 47 No. 1 Well.  Jatex alleged that NGP improperly included it in the project because Jatex did not make a written election to participate. Jatex contended that because of the resulting erroneous charges, Security Bank foreclosed on the working interest.

Jatex sued for breach of the JOA, failure to act as a reasonably prudent operator, and tortious interference with the promissory note.

The Property Owner Rule

In response to NGP’s motion for summary judgment Jatex submitted a declaration by its owner Truitt estimating the fair market value of the foreclosed working interest. His opinions were not admissible. A property owner is generally qualified to testify to the value of his property even if he isn’t an expert. But the rule doesn’t apply to matters that are of a “technical or specialized nature.” An owner of a working interest isn’t qualified under the Rule to give lay opinion evidence on the value of mineral reserves because of the technical, specialized nature of that valuation.

Deepening costs and withheld revenues

NGP didn’t wrongfully debit drilling expenses from Jatex’s account. NGP asserted that Jatex lacked standing to seek recovery of its share of the deepening costs because Jatex assigned its interest to Security Bank. The court disagreed. Jatex’s assignment did not terminate or release its rights under the JOA. However, Jatex had no claim for withheld revenues because Jatex had assigned them to Security Bank and NGP paid them to the bank.

Foreclosure damages

Relying on Truitt’s opinion, Jatex valued the foreclosed working interest to be worth closer to $12 million than the $1.5 million paid by Security Bank and based its damages on that calculation. Because the Truitt’s valuation was inadimissible that proof failed.

Jatex then cited a letter from Jatex to Security Bank and a “loan history” statement that were part of NGP’s motion for summary judgment. Because Jatex didn’t direct the trial court to the loan history in its response to the motion it could not point to that evidence for the first time on appeal. It didn’t matter anyway; neither the loan history nor the letter supplied a critical element of the income approach for determining fair market value.

Further, NGP could not have reasonably foreseen that debiting Jatex’s account would have likely caused Security Bank to foreclose on the lien. The foreseeability of consequential damages for breach of contract is assessed at the time the contract is formed, not at the time the contract is breached.

Tortious Interference.

Jatex’s assertion that NGP tortuously interfered with an oral forbearance agreement with Security Bank failed because it provided no details about the specific terms of the agreement or how Security Bank may have breached the agreement by foreclosing.

A musical interlude for the season.

Gas flaring, especially in the Permian and the Eagle Ford, is coming in hot these days at the Texas Railroad Commission. Presented here are viewpoints from several stakeholders in the discussion. My comments are summaries. For a fuller understanding please read the reports for yourself.

The players are in general agreement on several points:

  • There needs to be an end to routine gas flaring.
  • Texas flares a lot of gas: About as much annually as all of its residential users combined, or maybe as much as the seven largest cities, or maybe Houston. It depends on who’s talking. Values vary but in the Permian it ranges from $450 Million to $750 Million.
  • Progress is being made, plenty for some, not enough for others.

The Texas Methane and Flaring Coalition

These seven trade associations and 40 operators are members of the Railroad Commission’s Blue Ribbon Task Force for Oil Economic Recovery. Their positon, among others:

  • More detailed data submissions from operators will result in more effective operational and regulatory decisions that will reduce flaring.
  • A proposed flaring matrix (see the report) identifies situations where flaring is necessary and makes recommendations for the application of Rule 32 that will result in overall flaring reductions because of the shortened time frame for administrative approvals.
  • Methane emissions from oil and gas systems are down 23 percent since 1990.
  • Texas flaring intensity is well below that of comparable countries according to the World Bank.

It is worth noticing that during the RRC’s recent prorationing discussions a substantial number of industry players advocated for curtailment of flaring.

The Railroad Commission

Statewide Rule 32 is the mechanism by which the RRC regulates flaring. For its part, the RRC is heeding recommendations of the task force.

  • A revised and significantly more robust Exception Data Sheet is in the public comment process requiring operators to more thoroughly document the circumstances surrounding the need to flare; providing accurate information to assess compliance; and encouraging transparency in understanding the broader reasons for flaring and/or venting.
  • New processes should result in substantial reduction in flaring periods.

The Environmental Defense Fund

  • There are problems. Across the Permian, one out of every 10 flares surveyed in June 2019 were either unlit, venting or combusting methane straight into the atmosphere, or only partially burning the gas they were releasing.
  • Flaring is on the rebound after a steep slide from February through May 2019.
  • Three separate surveys show no improvement in flare performance over time.
  • The industry and regulators need to get much more serious about the problem.
  • They encourage investors to ask tough guestions of operators.

The Houston Chronicle

  • Several investment firms are pressuring operators to eliminate all flaring by 2025.
  • The Commission’s proposed rules require operators to provide more information but set no targets, and the Commission has resisted calls for an outright ban.

Technology

  • As one would expect from a dynamic industry, technological advances will curb flaring. For example, portable LNG plants are being deployed in West Texas. One such technology is Cryobox (see the photo above), by Galileo Technologies.

The Candidates

This is election season, and the RRC candidates have their viewpoints:

The Professor

Gunnar Schade, atmospheric scientist at Texas A&M, observes in a paper entitled The Problem with Natural Gas Flaring:

  • The US is one of the world’s top five flaring nations, just behind Russia, Iran, and Iraq.
  • Gas flaring contributes 1%+/- of man-made atmospheric CO2 emissions globally.
  • Flaring can be the dominant source of nitrogen oxides in rural areas where flaring occurs.

A musical interlude: Barbara Lynn, competing in the ’60’s black left-handed women guitar player/singer category (not to be confused with Her Honor of the U. S. Northern District).

Co-author Rusty Tucker

San Miguel Electric Coop is a Texas nonprofit electric cooperative that owns and operates a power plant that supplies electricity to 38 Texas counties. After a four-week absence, they return to these pages, this time in DCP Sand Hills Pipeline, LLC v. San Miguel Elec. Coop., Inc. Read on to learn about the “paramount importance doctrine”.
Continue Reading Lignite Lease Prevails Over Pipeline Easement

A fellow walks into a bar in New Orleans. “What’ll it be?” “A Corona and two Hurricanes,” says he. “Here you go. That’ll be $20.20.”

Co-author Rusty Tucker

Now, on to operations in hurricane-free New Mexico. Lessons from BEPCO, L.P. v. RMTDC Operations, LLC d/b/a Total Energy Services:

  • Hire a good company man and trust him
  • Get a good expert for trial
  • Prep your witnesses well for deposition and trial

Continue Reading Company Man Wins MSA Dispute

Co-author Rusty Tucker

Devon Energy Prod. Co., et al. v. Sheppard, et al is your kind of case if you are in search of:

  • A roadmap for slicing and dicing royalty calculations in myriad ways,
  • Pretty good summaries of the Supreme Court’s notable decisions in Heritage Resources v. NationsBank, Judice v. Mewborne Oil, Chesapeake Exploration v. Hyder and Burlington Resources v. Texas Crude. (pp 12-19)
  • A description of the gas fractionation process.
  • For you scriveners: Reference to the Supreme Court’s lament for “the considerable time, money and heartache” expended due to the use of “industry jargon, outdated legalese, or tenuous assumptions about how judges will interpret industry jargon or outdated legalese”.

Continue Reading When is a “Gross Proceeds” Royalty not Paid on Gross Proceeds?

Co-authors Marcus Fettinger and Chance Decker

Being from the government and here to help you, the Occupational Safety and Health Administration has issued guidance for oil and gas industry workers and employers in light of the increased risk of workplace exposure to COVID-19. The guidance provides three categories of workplace safety measures for employers to follow:

  • engineering controls;
  • administrative controls; and
  • safe workplace practices.

What is “guidance”? Consider it a suggestion with implications.

Gray Reed partners Chance Decker and Marcus Fettinger explain what oil and gas employers need to know to avoid potential liabilities from OSHA complaints or lawsuits by employees.

And a musical interlude

Co-author Rusty Tucker

In a suit to foreclose a property tax lien, if the taxing authority does not exercise due diligence to support service of citation by a method other than by personal service can the owners, as a matter of due process, raise that defect for the first time after expiration of the statute of limitations? Heidelberg v. DOH Oil Company says “no”.

Continue Reading Challenge to a Tax Sale Comes Too Late

Co-author Rusty Tucker

In Evans Resources, L.P., et al. v. Diamondback E&P, LLC, two agreements left the terms “constructed” and “utilized” undefined. If the terms had been defined would the outcome have been different? Maybe. Should parties define every term in an agreement? No, if they are content to rely on the ordinary meaning of the words.

The agreements

Continue Reading “Construction” of a Well Pad Requires More than a Survey