Is the world hurtling irreversibly toward incinerating, extinction-causing, fossil-fuel induced destruction while we’re doing nothing about it? Maybe not, if you consider overlooked and ignored sources of information.

We You will always have Paris

Despite bailing out of the Paris Climate Accord, the United States led the world in reducing CO2 emissions in 2019. If so, one might ask why we should be a part of it.

Said another way, the US approach works and the Paris way doesn’t.

And Bjorn Lomborg reports on the futility of the Paris promises. His contrarian view of the fires in Australia is behind a paywall.

Battle of the charts

Grist magazine published seven charts proclaiming that during the last decade ….

  • Atmospheric CO2 rose 25 ppm;
  • Climate change got expensive;
  • More and more people believe it’s getting hot and it’s our fault;
  • There is a widening partisan divide when it comes to the environment;
  • Coal continues its death spiral, solar skyrocketed, but fossil fuels still dominate;
  • Coal flatlined and the price of renewables dropped precipitously.

Anthony Watts responded with charts of his own that tell a different story …

  • Increased CO2 is greening the continents;
  • Normalized weather disaster costs paint a different picture;
  • It is not necessarily getting hotter;
  • Worldwide action on climate change ranks very low on the list of citizens’ concerns;
  • The decline of coal is market-driven rather than a nod to environmental concerns;
  • Solar doesn’t work without baseload generation by natural gas;
  • Renewables cost less because of generous government subsidies through tax credit programs.

See his link for eight reasons why the world has just had its best decade in human history.

Does the industry glow in the dark?

Rolling Stone scandalized oil production as producing untold tons of radioactive waste.

Energy In Depth pushed back.

Power to the people

In addition to an immediate fracking ban upon taking office, Comrade Bernie proposes a federal takeover of electricity production.

But blacklisting ended in the’50’s … ?

McCarthyite Skepitcal Science outs researchers, journalists and politicians whom it considers to be “science misinformers”. The purpose, of course, is to ostracize those voices into silence. One such victim is respected Georgia Tech Professor Judith Curry, whom they would like to make “unhireable”, as reported in Forbes magazine by Roger Pielke.

The worste case isn’t

The journal Nature reports that the “worst-case scenario” repeated ad nauseum with no investigation isn’t the accurate, much less the best, data on which to base policy.

Were you nice to your valentineor not?

 

Co-author Stephen Cooney

Recent legislation in Texas to promote the recycling of water produced from oil and gas operations are steps in the right direction but may create as many problems as they fix. As technology improves, our population continues to grow at an unprecedented pace, and our water supplies remain limited, recycling of water is becoming vital.  At issue is the ownership of, and with it the right to profit from, produced water.

A measure passed by the 2013 Legislature (HB 2767, enacting new Section 122 of the Natural Resources Code) and then updated in 2019 (HB 3246, amending Section 122.002) provides that any party that takes possession of produced water to treat it for a subsequent beneficial use takes title to that water.

But wait!

Doesn’t produced water belong to the surface owner? Decisions by Texas courts strongly suggest that is the law, and if operators or re-cyclers are making money off that water, even though it has always been viewed as waste to be disposed as a bothersome component of oil and gas production, surface owners will want compensation.

It is well established in Texas that groundwater is part of the surface estate, owned by the surface owner as a vested property right. It is just as well established that mineral owners and their lessees have the implied right to use as much of the surface estate, including groundwater, as is reasonably necessary to extract and produce oil and gas. Along with that duty is the obligation to dispose of the waste that is the byproduct of production. If part of that waste, i.e., produced water, can be sold by the operator for independent economic gain, surface owners will likely have something to say about it.

It will be interesting to see how this tension plays out, either at the courthouse or reviewed again during the next legislative session that begins in January 2021.

For a more detailed discussion of this timely topic, see the Gray Reed Client Alert prepared by Stephen.

and …

a musical interlude  

and …

RIP Joseph Shabalala

It is no surprise to Texas Supreme Court watchers that in Energy Transfer Partners et al v. Enterprise Products Partners LP et al. the court rejected claims that the parties had created a partnership by actions that varied from the terms of written contracts. The court concluded that parties can conclusively agree that no partnership will exist unless certain conditions are satisfied.

The contracts

Cushing, Oklahoma is a major crude oil trading hub. Enterprise co-owned the Seaway pipeline that sent oil north to Cushing from the Texas Gulf Coast. Driven by a changing market, Enterprise approached ETP about converting the Ocean Pipeline (a gas pipeline) to move crude oil south from Cushing. ETP owns Ocean but Enterprise holds a long-term lease. To convert would require a massive investment and committed customers.

In three written agreements the parties reiterated in myriad ways that neither would be bound until each company’s board of directors approved the potential transaction and a written contract was negotiated, executed and delivered, and then only to the extent of the specific terms of such agreement. Otherwise, neither party would be under any legal obligation by virtue of any written or oral expression.

Enterprise and ETP ran a FERC-required “open season” during which shippers were asked to commit to daily barrel volumes and tariffs. The effort failed. Enterprise then exited the ETP relationship and made a deal with Enbridge for the Seaway, obtaining commitments and investing “billions” to reverse the direction of the Seaway.

ETP sued Enterprise on the theory that despite contractual disclaimers, the parties through their conduct had formed a partnership to market and pursue a pipeline and that Enterprise breached its statutory duty of loyalty by pursuing the project with Enbridge. ETP prevailed at trial and was awarded $535 million in damages.

Freedom of contract prevails

The court of appeal reversed. The Supreme Court affirmed the reversal. The court acknowledged that according to the Uniform Law Commission, under common law parties could inadvertently create a partnership despite their express subjective intention not to do so. That position has never been popular with the court.

The court focused on the public policy that contracts freely entered into are to be enforced. The question: Could freedom to contract for conditions precedent to partnership formation override the Texas Business Organizations Code’s statutory default test? TBOC non-exclusive factors for formation of a partnership are:

  • Receipt or right to receive a share of profits
  • Expression of an intent to be partners
  • Participation or right to participate in control of the business
  • Agreeing to share or sharing losses or liabilities for claims by third parties
  • Agreement to contribute or contributing money or property.

According to ETP, the TBOC’s totality-of-the-circumstances test controls partnership formation to the exclusion of the common law, and the parties’ intent is just one factor to be weighed with others. Enterprise responded with the primacy of freedom of contract and warned about the chaos and dire economic consequences that would result from litigation if ETP’s position were to prevail.

Wiggle room for future litigants

The court agreed that performance of a condition precedent could be waived or modified, by word or deed, by the party to whom the obligation was due. But that would require pleading and a jury finding or conclusive proof of waiver, neither of which happened.

The court further opined that where waiver of a condition precedent to partnership formation is at issue, only evidence directly tied to the condition precedent is relevant. Evidence that would be probative of expression of intent is not relevant. The court was essentially saying that there was no evidence that Enterprise specifically disavowed the requirements in the agreements or intentionally acted inconsistently with those requirements.

An inaccurate musical interlude? Everybody should know.

Co-author Lydia Webb

Ever since the Sabine Oil and Gas Corp. bankruptcy (the top of the first, If it were baseball), where a New York court construed Texas property law to hold that a gathering agreement was not a covenant running with the land, we at Gray Reed, and you if you’re following, have speculated whether a Texas court faced with the question would have come to a different conclusion (see here and here). In Alta Mesa Holdings v. Kingfisher Midstream, a Texas court finally had its say (albeit applying Oklahoma law). For midstream entities, the court did not disappoint.

As we approach the middle innings (47 states to go!), the Alta Mesa court went against Sabine, holding that the dedication in question was a real property interest that could not be rejected in bankruptcy. Along with Badlands Energy, midstream companies have gone from being shut out to being up 2-1 on producers.

Distinguishing Sabine

E&P debtor Alta Mesa contracted with its affiliate, Kingfisher Midstream, to build a gathering system and to transport Alta Mesa’s gas. Once in bankruptcy, Alta Mesa sued Kingfisher for a declaration that the gathering agreement did not constitute a covenant running with the land and thus, could be rejected.

Because the dedicated acreage was in Oklahoma, Oklahoma law governed, although noting that real covenant law in Oklahoma is functionally the same as in Texas. The same two elements at issue in Sabine were at issue: “touch and concern” and “horizontal privity”. But the court was quick to recognize that Sabine was limited to its unique facts and should not be generalized.

The Alta Mesa gathering agreement dedicated all producer’s interest in, among other things, its oil and gas leases within the dedication area. The court held that the dedication satisfied touch and concern because both its benefits and burdens impacted the value of the real property leases. In contrast, in Sabine, the dedication only related to gas “produced and saved,” which the court construed as only affecting personal property interests.

The Alta Mesa court also found that Alta Mesa’s conveyance of a surface easement to Kingfisher satisfied horizontal privity between the parties. The court distinguished Sabine, which held that a related surface easement did not satisfy horizontal privity. Looking again to the dedication of leases, the court noted that the easements at issue were implied in Alta Mesa’s leases. By dedicating the leases to Kingfisher, it was simultaneously conveying the associated easements as well.

And the moral of the story …

It’s all about the dedication language. Since Sabine, midstream companies have tried to draft gathering agreements to get around the problem of gas “produced and saved” by getting a dedication of producer’s interest in the underlying leases. In light of Alta Mesa, in which a dedication of leases satisfies both contested elements of a covenant running with the land, those efforts were not in vain.

As gathering agreements go, so goes our musical interlude.

 

Co-authors Paul Yale and Rusty Tucker

The concurrence and dissent in Briggs et al v. Southwestern Energy Production Company appears to be of little help to property owners complaining of trespass by fracking where there is no invasion of frack fluids on to the neighbor’s property. Justice Dougherty, joined by Justice Donohue, agreed with the majority that the rule of capture “remains effective in Pennsylvania to protect a developer from trespass liability where there has been no physical invasion of another’s property.” And they believed the majority correctly recognized that “if there is such a physical invasion the rule of capture will not insulate a developer engaged in hydraulic fracturing from trespass liability.”

The dissenters spent most of their time on issues of pleading and procedure, arguing that it was erroneous to suggest that Briggs didn’t allege a physical invasion. They would have affirmed the Superior Court’s disposition insofar as it vacated summary judgment and remanded it for further factual development, in particular completion of discovery on the factual question of physical invasion. Continue Reading Pennsylvania Says No Trespass by Fracking – the Dissent

Co-authors Paul Yale and Rusty Tucker

Herein, highlights from the Pennsylvania Supreme Court in Briggs, et al. v. Southwestern Energy Production Company. The rule of capture applies to oil and gas produced from wells completed using hydraulic fracturing and precludes trespass liability for drainage from under nearby property, where the well is drilled solely on and beneath the driller’s own property and frack fluids are injected solely beneath the driller’s own property.

Why is this a big deal?

This decision is only the second application by a state supreme court of the rule of capture to hydraulic fracturing (from Texas, Coastal Oil & Gas Corp. v. Garza Energy Trust was the first). The Pennsylvania Supreme Court has reached a similar result – drainage resulting from hydraulic fracturing does not itself constitute trespass. Continue Reading Pennsylvania Supreme Court Says No Trespass by Fracking

Co-author Ethan Wood

Yet another entry in the Strip and Gore universe (2012’s “Beware of Strips and Gores”, and 2019’s “Strip and Gore 2: The Sequel”) comes to us from Fort Worth Court of Appeals: Richard D. Crawford v. XTO Energy, Inc.

Those of you following along with each chapter of the saga know the drill by now (pun is intended): The strip-and-gore doctrine acts to pass title to lands in addition to lands described in a conveyance when: (1) the “strip” is relatively narrow, small in size and value in comparison to the expressly conveyed land, and no longer important or valuable to the grantor of the larger tract; (2) the “strip” was not included in the property description at issue; and (3) no other language in the deed indicates the grantor intended to reserve an interest in the “strip.” In this case—like those before it—the minerals underlying the 8.235-acre tract passed with a conveyance of the 76 acres to the north and south because said minerals were inaccessible and therefore valueless at the time of conveyance.

The reservation

In 1964, Mary Ruth Crawford conveyed the 8.2355 acre tract to Texas Electric Service Company with the following reservation:

“Grantors reserve unto themselves, [and] their heirs and assigns, the right to all oil and gas in and under the lands herein conveyed but expressly waive all rights of ingress and egress for the purpose of drilling for or producing oil and/or gas from the surface…; provided that wells opened on other lands may be bottomed on the [8.2355 acre tract]”

 

In 1984, Mary conveyed 76 acres to the north and south of the 8.2355 acre tract without reserving any oil and gas interests or mentioning her previously reserved right to the oil and gas under the 8.2355 acre tract. XTO and its predecessors obtained leases from Mary and the owners of the adjacent 76 acres and pooled all of the leases into the Eden Southwest Unit. XTO’s title opinion credited the adjacent landowners and not Mary’s successor-in-interest, Richard. Richard sued to recover royalties.

The question for the Court … and the answer

The primary question was whether the 8.2355 acre tract had “ceased to be of any benefit or importance” to Mary. The court held that although Mary had reserved right to bottom wells on the 8.2355 acre tract in 1964, she effectively stranded her “strip” when she conveyed the 76 acres to the north and the south of it in 1984.

Musical Interlude

Strip-and-gore cases in from the Barnett Shale era may in fact be inevitable, but to that we say, “I am Iron Man.”

To our bad guys, 2019 was a year flush with hope and opportunity; it ended with recidivism, more misery from Venezuela, a charlatan, an Okie who pulled a multi-million dollar fast-one on Chesapeake and, as in years past, a peek into the darker side of the human condition.

_____________________

Perp: Justin Lane Foust.

Crime: Wire fraud, aggravated identity theft and money laundering.

How he did it: Defrauded Chesapeake Energy. Employed by a subsidiary of Chesapeake until 2011. He formed Platinum Express and became an approved vendor. From 2011 until 2014 Chesapeake contracted with Platinum to transport wastewater to disposal facilities in western Oklahoma.

Generated fraudulent invoices, each for less than $5,000, which he knew from his prior work at Chesapeake required a lower level of approval for processing and payment. He forged the signature and employee ID number of a Chesapeake employee.

Once cornered, he panicked: He obstructed justice by using civil lawsuits as a diversionary tactic to implicate others in his wrongdoing, destroyed evidence, staged a fake break-in of his office, and provided false information to law enforcement.

Sentence: 121 months in prison, restitution of $2.6 million and forfeiture of $4.345 million.

_____________________

Perp: Robert J. Magniafico, Jr.

Crime: Would have been Reg D violations. The Texas State Securities Board got him before he could actually steal.

Checkered past: Convicted of six felony violations in separate transactions. Served four years of a 40-year prison sentence for stealing $655,000 from elderly widows in the Dallas area by selling fake annuities.

How he almost did it: Sought investors to buy stakes in Oklahoma oil and gas wells, promising returns of 25 to 52 percent. The securities were not registered in Texas. He formed Premier Resources LLC right after being paroled from prison in December 2017.

Sentence: Emergency cease and desist order.

_____________________

Perp: Christopher Daniel Walsh.

Crime: Fraud, money laundering and felony theft of $492,000 from victims who thought they were oil investors but were really investing in Mr. Walsh’s lifestyle.

How he did it: Used Western Capital Inc. to steal from 12 Investors in oil wells to be drilled in the High Island section of eastern Galveston County, Texas. He used turnkey projects, a financing arrangement in which investors pay a set amount to the promoter, who assumes financial responsibility for cost overruns. These usually involve an astronomical turnkey price that is virtually guaranteed to net the promoter lots of money and the investors none. The promoter wins even if the well is a duster.

Sentence: 18 years in state prison after reaching a plea agreement in his fraud trial in Wichita County, Texas.

______________________

 Perp: Paul Gilman.

Crime: Securities fraud under the federal Exchange Act and Securities Act. He misappropriated stole investor funds.

Checkered past: In a previous incarnation, claiming to be a music visionary he launched a series of unsuccessful businesses that used soundwave technology to optimize sound systems in sports stadiums.

How he did it: When those businesses failed, with absolutely no experience in the oil business, he was going to use his purported soundwave technology to lower the viscosity of oil in enhanced water separation and purification processes. Claimed that viscosity is the “holy grail” of the oil industry and he “captured it”. There was no evidence that he ever spent the money on testing or developing the soundwave technology.

Raised $3.3 million from 40 investors in several states, guaranteeing that their investments would result in substantial profits. Victims included a minister from Tennessee, a psychology professor from Texas and a nurse from Dallas. He put substantially all the money into traditional fraudster uses: luxury Las Vegas hotels, restaurants, designer clothing, and home furniture.

Sentence: None yet

_____________________

Perp: Mark Johnson.

Crime: Wire fraud and conspiracy to commit wire fraud by materially false and fraudulent pretenses to the “Victim Company” (Cairn Energy, a large European E&P company) that was engaged in a multi-billion dollar Europe-to-India transaction. The prosecution featured theft of the Victim Company’s confidential information.

How he did it: A foreign exchange trader who supervised HSBC Bank’s foreign exchange business, Johnson manipulated foreign-exchange rates as the transaction was about to close by trading Sterling, Euros and Dollars, from which he generated significant profits. He did not disclose his own “P Book” trades to the Victim Company. When the company inquired, he blamed everything on the “Russians”. See this insightful Baker Botts analysis of the proceeding.

Sentence: 24 months imprisonment, three years of supervised release and a $300,000 fine.

_____________________

Perps: Rafael E. Pinto-Franceschi and Franz Herman Müller-Huber, president and sales rep of a Miami-based company.

Crime: Violation of the Foreign Corrupt Practices Act, wire fraud, conspiracy to launder money.

How they did it: Bribed three officials of Venezuela’s national oil company PDVSA and took kickbacks $985,000 and $258,000. Talk about feeding at all the troughs, three percent of each kickback payment would go to a Swiss bank account (one would think for the bribees).

As of now, 21 individuals have been charged in this far-reaching victimization of the citizens of this once-proud and prosperous country and 15 have pled guilty.

Sentence: None yet.

A musical interlude in honor of our 2019 perps.

Co-author Ethan Wood

Merry Christmas and Happy Holidays from all of us at Gray Reed! Assuming that most of you have been good this year (stay tuned for 2019’s Bad Guys in Energy to see who hasn’t), we hope Santa brought you everything on your Amazon Wish List. Our sympathies go out to those in the oilfield services industry in Texas—it looks like you got a lump of coal. In Mesa Southern CWS Acquisition v. Deep Energy Exploration Partners the Houston Court of Appeals upended the long-held view that mineral lien waivers violate public policy. Bah Humbug! Continue Reading Oil Field Services: What is the Status of Mineral Lien Waivers?