Any semblance of objectivity on the subject of the day is expressly disclaimed. This post contains distressing words, such as “oil and gas”, “fracking” and “jobs” that could cause severe emotional reactions in sensitive readers. If this post is contrary to your firmly held beliefs, proceed promptly to your downward facing dog.
As a thoughtful reader you might ask, Why should I vote against Proposition 112? Here are a few reasons: Continue Reading Colorado Proposition 112 – More Fuss
Referred to as the Setback Requirement for Oil and Gas Development, here is what Colorado voters will be asked to consider on November 6:
Shall there be a change to the Colorado Revised Statutes concerning a statewide minimum distance requirement for new oil and gas development, and, in connection therewith, changing existing distance requirements to require that any new oil and gas development be located at least 2,500 feet from any occupied structure in any area designated for additional protection and authorizing a state or a local government to increase the minimum distance requirement?
“Any area designated for additional protection” has been described as “sensitive areas”, such as “streams, intermittent streams, canals, and open spaces”. Current setbacks are 500 feet from homes and 1,000 feet from schools. Continue Reading Colorado Proposition 112: What’s the Fuss About?
If you’ve ever tried to escape penalties for the operator/producer’s failure to comply with La. R.S §30:103.1 and §103.2, take comfort in XXI Oil & Gas, LLC v. Hilcorp Energy Company. You are not alone. No excuse has satisfied the courts, and there is none here.
The statutes (links above) require information and certain procedures to be followed by an operator before it can recoup costs of unit drilling operations from an unleased mineral owner. Of particular importance is a detailed sworn statement of costs of the operation and a statement of revenues.
The events unfold
XXI was the lessee of leases comprising 20% of a drilling unit; Hilcorp was the operator.
Summary judgment was granted for XXI on the basis that Hilcorp did not comply with the statutes. The statement of costs was neither sworn nor detailed.
Hilcorp appealed, admitting it did not comply with the technical requirements of the statute but asserting that it achieved the intent and purpose the statute by submitting a statement of cost with the AFE. Hilcorp argued that XXI’s position was weakened because it elected to participate in the well after receiving the AFE.
Judgment affirmed
The court of appeal upheld the trial court’s judgment against Hilcorp. Here is the reasoning:
REVISION: What’s new about this opinion?
An observation that didn’t make its way into the original post is the court’s application of the statute to a lessee of a mineral owner who did not have a lease with the offending operator. Prior to this case that was an unanswered question.
Obvious musical interlude
Hey, you of a certain age, sitting in your 60’s and 70’s dorm room you thought “literature” wasn’t what you were doing. Think again. Here are a few good ones from our Nobel Prize winner (from Youtube’s slim pickins):
the electric-for-the-first-time song Bob
Co-author David LischCongress 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:
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.
Co-author Dominic SalinasLast 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!
Co-author Dominic SalinasWondering 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
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”:
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.
A kind-of country song with George Jones
Next week: How to joint bid legally.
Co-author Brooke SizerThe state laws of Louisiana regulating oil and gas exploration and production will trump local regulations. See St. Tammany Parish Government v. State of Louisiana, Office of Conservation. (Forgive us for that word that should be avoided in a civil society.)
The conflict
St. Tammany is a home-rule charter parish that adopted a Unified Development Code. The Louisiana Commissioner of Conservation later issued an order adopting a drilling and production unit and issued a permit to Helis Oil & Gas Company for a well that would be located in an area zoned as residential.
St. Tammany Parish sued to declare the drilling permit illegal because their zoning designation trumped prevailed over the right of the Commission to issue the permit.
The State prevails
The trial court and court of appeal ruled for the State. The appellate court first looked at “the extensive body of law that addresses every phase of the oil and gas exploration process … .” The court focused on La. R.S. 30:28F:
The issuance of the permit by the [C]ommissioner … shall be sufficient authorization … to enter upon the property … and to drill in search of minerals thereon. No other agency or political subdivision of the [S]tate shall have the authority, and they are hereby expressly forbidden, to prohibit or in any way interfere with the drilling of a well or test well in search of minerals by the holder of such a permit. [Our emphasis.]
The court acknowledged that local power to regulate land use and zoning within its boundaries is not preempted unless it is the clear and manifest purpose of the legislature to do so. However, St. Tammany’s zoning ordinances must yield to state law based on La. R.S. 30:28F. “… [H]ereby expressly forbidden…” clearly and manifestly evinces the legislative intent to preempt that area of the law.
The pervasiveness of the legislation, which addresses every aspect of oil and gas exploration as well as the need for uniformity and the danger of conflicts between the enforcement of local laws, demonstrates the legislative intent to impliedly preempt that area of the law. Therefore, local zoning ordinances are preempted by state law insofar as they affect the State’s regulation of oil and gas activity.
The court cited Art VI, §9(B) of the Constitution, “Notwithstanding any provision of this Article, the police power of the [S]tate shall never be abridged.” The Commissioner’s power is an exercise of the State’s police powers. The grant of zoning powers to local governments was not as important.
The court rejected the contention that the Constitution gives concurrent power to the State and the local governments to protect health, safety, and welfare, citing Article IX § 1 of the Constitution.
Finally, the court applied the ordinary meaning of “consider” and held that the Commissioner did “consider the master plan” as required by statute.
Musical interlude, presidential edition
Today we honor every voter who promises to emigrate if (insert name of candidate) is elected president. The first tune is Reggae-inflected, Caribbean-by-white-guys; the second is real Reggae.
“Back in the day, when the Yankees always won the World Series and you could name a park after a Confederate general, we didn’t need no written contract; a man’s word was his bond, … yadda, yadda, yadda”.
Three things about that saying strike me. First, it was always a man; second, “the day” was always a time before the listener came on the scene; third, those fellows used some really bad grammar. 
The timeless truth is, a written agreement is always better, which returns us to Railroad Commission v Gulf Energy, discussed last week. Another question arose in that dispute: When did the Commission and Gulf Energy form a contract? The trial court, in effect, decided as a matter of law that the parties had a binding contract.
What the trial court missed: Contract formation
The trial court deprived the jury of the ability to determine when the contract was formed: At a May 19 meeting between the Commission and Gulf, or shortly after via conversations and emails, either of which was before the well was plugged – or on June 9 when a formal agreement was signed, which was after the unfortunate incident. You can’t have a breach of contract claim without a contract, so the question was essential.
At trial there was disagreement aplenty among the witnesses about whether a meeting of the minds between the parties was achieved before or after the well was plugged. The Supreme Court decided that when a meeting of the minds occurred was a question of fact to be answered by the jury.
Practice tip
In lieu of our usual, customary, and frequently unconscionable fees for matters such as this, here is some free advice: If you want to avoid the “When was the contract formed?” dilemma, or worse, “Do we even have a contract?”, make it clear in your negotiations (emails, draft agreements, phone calls) something to the effect that that your understandings are subject to a final, binding agreement satisfactory to all parties. Or, if an enforceable agreement is your goal, say something like: The parties agree to cooperate in drafting and execution of future documents. The fact that such additional documents are contemplated does not affect the binding nature of this agreement.
Caveat
I call it “advice”, but what I say in this blog is not fact- or case-specific; I don’t know your situation, so don’t rely on what I say here without consulting a lawyer of your own choosing.
Musical interlude
At a loss for a song celebrating contract formation, think about this: New Orleans isn’t alone in the Africa-inspired musical universe, right? How about the Godfather of Soul and Africa itself?
Your Texas legislators have done their work and the citizens are safe for the next two years. The other good news is that industry supporters generally believe the 2015 Legislature was their friend.
House Bill 2: Set aside $4,471,800 to the University of Texas at Austin Bureau for Economic Geology and appointed a technical advisory committee to study the effects of hydraulic fracturing and disposal wells on earthquakes. The Bill authorized seismic equipment, maintenance of seismic networks, and modeling of reservoir behavior in the vicinity of faults. The committee will have nine members appointed by the governor. Two members will represent higher education institutions and have seismic or reservoir modeling experience, two will be experts in the oil and gas industry, and at least one must be a RRC seismologist. The committee will advise the governor and the House Committee on Energy Resources.
House Bill 40: Preempts local jurisdiction over subsurface operations. This is the legislative response to the ogre that was Denton’s anti-fracking ordinance.
House Bill 1331: Once an operator has transferred drill cuttings to a third party for subsequent beneficial use, such as recycling, the operator can no longer be held liable in tort for consequences of the subsequent use.
Senate Bill 1589: Requires holders of unclaimed mineral proceeds to include more information when reporting to the Comptroller, such as lease, property and well names, and identification numbers used to identify the lease, property or well.
House Bill 2207: An existing oil and gas lease will remain in effect upon the foreclosure of a security interest if the lease was executed and recorded before the foreclosure sale. If the leased property is sold in a foreclosure sale, the rights granted to the lessee to use the surface will be terminated. Royalty payments which become due after the foreclosure sale will pass to the purchaser of the foreclosed property. A subordination agreement would control conflicting provisions of the law.
House Bill 30: Requires regional water planning groups to include opportunities for benefits of developing large scale desalinization facilities. The point is to establish brackish groundwater production zones that would not affect industry’s use of brackish water. The Texas Water Development Board is to study the use of brackish groundwater. As passed the Bill does not create a scheme for the use of brackish groundwater.
The Ones That Got Away (or Euthanized, If You See It That Way)
House Bill 1552: The allocation well Bill. An operator would have been allowed with a RRC permit to drill, operate and produce from wells that traverse multiple tracts. The Bill would have removed doubts about the legality of allocation wells. Royalty and mineral owners defeated this one.
House Bill 3291: Would have established as a second degree felony the possession transporting, removing or purchasing oil and gas or condensate without a RRC permit. Passed in a version that was far different from the original, then vetoed by the governor. I’m told the reason was because it would have criminalized what has otherwise been a RRC permitting violation. Thieves and some DA’s were pleased, operators were not.
House Bill 1392: The fieldwide unitization effort that has failed in every session since Davy Crockett realized there wasn’t a back door to the Alamo. This year it was known by the catchy “Cenozoic Era Unitization”. Some have been in favor, some not.
To see the text and history of the Bills, go to www.capitol.state.tx.us/. Under Search Legislation type in bill number (“SB … or HB …), and search. If it passed, see the “engrossed” version.
Our legislative interludes:
To the supporters of HB 40
To legislators everywhere who can’t get a bill passed
To legislators everywhere who prevent their colleagues from passing a bill
The Texas legislature is still busy on energy issues. Is that good or bad? It depends on your situation; oil patch thieves won’t like it.
Wind Energy
Senate Bill 931 would blow away the Renewable Portfolio Standard, established in 1999 to set renewable energy goals for Texas. The bill would also halt construction of transmission lines in Competitive Renewable Energy Zones, through which miles of transmission lines connect West Texas wind energy with cities in the eastern part of the state.
The rationale is that wind energy targets in the original act have attained their goal and thus should be terminated. Here is a discussion of the bill.
Wind energy proponents are unhappy. See, for example, this editorial in the Dallas Morning News by Jim Marston of the Environmental Defense Fund. Among other complaints, he cites a double standard:
Oil and gas subsidies = good
Alternative energy subsidies = bad.
They seem to have a point. Texas gives tax incentives for certain oil and gas production. What’s the difference?
Allocation Wells
House Bill 1552 would add a provision to the Natural Resources Code to address allocation wells. The high points are:
If the bill passes I will discuss what its effect might be.
Oil Field Theft
House Bill 3291 establishes the crime of selling oil, gas or condensate without a Railroad Commission permit. The bill specifically includes oil and gas equipment or pipeline equipment. If the value exceeds $10,000 it’s a felony.
How do they do it?
In case you are looking for a new line of work: According to proponents of the bill, one way to steal production is to purchase a well that has ceased to produce for lack of production and claim that it is producing and selling oil stolen from another well. Then you acquire a vacuum truck and help yourself to what’s not yours.
A Religious Experience, Part 2
As promised last week, here are the other artists “discovered” by Sam Phillips and recorded for the first time at Sun Studio:
Johnny Cash 1955
Carl Perkins 1956
Roy Orbison 1958. This one can’t be beat for its intellectual content.