wolfEffective this past August 3, the EPA has new regulations for methane and volatile organic compound emissions from oil and gas operations  As you know, reducing methane emissions is a key component of the President‘s climate change agenda.

Why should I care?

Because if you own or operate an oil and gas production, processing, transmission or storage facility, you will be required to comply with the new rule by no later than June 3, 2017. Other than that, don’t worry, be happy, and continue to go about your daily business in blissful ignorance of the impending regulatory burden.

What does it mean?

More expenses for operators of the aforesaid facilities, more demand for good inspectors, more operations for the EPA to meddle in oversee, and a risk of fines for a substantial failure to comply, whether willfully or by inadvertence.

Last weekend I heard Keith Kottrill of Innovative Ventures present a synopsis of the new standards.

The summary is an attempt in 22 pages to capture the spirit and effect of the new rule. It was not prepared by a lawyer and is not intended as a legal analysis. It is the product of Keith and his colleagues who will be implementing and conducting the on-site testing required by the rule. It should be viewed, relatively speaking if you aren’t an engineer, as a good place to begin to understand the rules.

Highlights

  • Get familiar with the term “Quad Oa”, an informal reference to the new rule.
  • There are two main parts of the rule: Control devices or practices must reduce methane and VOC emissions from certain equipment by 95%, and fugitive emission leak detection and repair (LDAR) applies only to well sites and compressor stations.
  • The rule applies to “affected facilities”, specific types of equipment or facilities that are new, modified, or reconstructed after September 18, 2015. Beware, those terms have certain, definite meanings under the rule.
  •  There will be a reporting and paperwork burden.
  • Look forward to quarterly inspections of some midstream facilities.
  • Generally, repairs must be made within 60 days.
  • See pages 13 and 14 for the EPA’s estimated industry-wide costs of compliance, including projected economic benefits. Honk if you believe the costs will be far higher.
  • The rule is based partially on a model called the the “Social Cost of Methane”, and the “methane-related monetized climate benefits” of the rule. Honk twice if you believe those models are based more on ideology than on science.

Time will tell how this rule will work. Among other things, supporters and detractors alike will learn the true extent of methane leakage in our oil and gas infrastructure.

A musical interlude

Today, girl singers you might not have heard of:

 

buckwheatIn a case displaying the tactics of anti-fossil fuel advocates, Earthworks’ Oil & Gas Accountability Project v. New Mexico Oil Conservation Commission, a court rejected a challenge to the Commission’s amendment of the “Pit Rule”.  This post is not so much about the Pit Rule itself as it is the absence of legal and factual support for the appellant’s arguments. In case you’re interested, the rule governs pits, closed-loop systems, and below-grade tanks and sumps used in connection with oil and gas operations for the protection of fresh water, public health and the environment.

Lack of Authority? No

Claim:  The Commission had no authority to amend the rule because of a pending appeal of the original rule – the one being amended. No authority was cited.

Result: Earthworks conflated the Commission’s rule-making authority and its adjudicative authority, which was improper.

Arbitrary and Capricious? No

Claim:  The rulemaking was arbitrary and capricious.  To succeed on this claim, the opponent must prove that a rule was beyond the authority of Commission, was not in accordance with law, or was unreasonable and without a rational basis.

Result: The Commission had denied Earthworks’ request to take notice of certain of its prior records; Earthworks asked the court to take notice of records anyway, but again cited no authority to support the position.  The Commission elected not to respond to every concern raised by Earthworks. The Commission’s detailed summaries of its findings were satisfactory.

Economic development is a legitimate basis for a rule 

Claim: The Commission acted improperly by promulgating the rule in order to further economic development.

Result: The Commission acted within its statutory authority when it included economic considerations in its stated reasons for the rule. The Oil and Gas Act and the Commission’s regulations give due consideration to economic factors, and authorize the Commission to do whatever is reasonably necessary to carry out the purposes of the Act.  Economic considerations cannot be the sole purpose for creating or amending a rule, but found no indication that economic considerations were the primary purpose behind the rule.  The Commission cited many reasons why the rule was necessary, including encouraging reuse and recycling of oilfield fluids and reducing surface impacts.

Cost-saving is a legitimate purpose for a rule

Claim: The order adopting the 2008 Rule stated that the Commission had made all changes it could to lessen potential effects on small businesses while still protecting fresh water, human health and the environment. Thus, it was argued, because all possible measures were taken in 2008 there could not be any more cost-saving measures to be made in 2013.

  • Result:  Denied; no factual basis was cited.

Inadequate notice? No

Claim: Public notice of the rule was inadequate.

Result: Again, no authority was cited.

Takeaways

  • Was this suit more to obstruct than obtain legal recourse?
  • Who funds these efforts?
  • What lawyer has the temerity to assert serial arguments citing no authority?

Stanley Dural a/k/a Buckwheat Zydeco RIP.

He did the zydeco

and the N.O R&B.

We discussed SEC v. Arcturus et al last week and promised more. Here it is.

Did defendants commit securities fraud?

It doesn’t matter. Violations of Sections 5 of the Securities Act and 15.A of the Exchange Act are strict liability offenses; the defendant’s state of mind is not a consideration.  Thus, because they sold unregistered securities through the United States mail or interstate commerce these defendants were liable unless they could prove an exemption.  They offered no proof of an exemption (such as registration) so they were liable.

But we still wanna know, did they commit fraud?

Yes. It is unlawful under the Exchange Act to use or employ any manipulative or deceptive or contrivance in contravention of SEC rules to sell a security.  If a person makes a material misrepresentation or omission or uses some other fraudulent device in connection with the offer, sale or purchase of a security and acts in interstate commerce he is liable.

The test under Section 17 of the Securities Act is similar. The Fifth Circuit’s standard for misrepresentation is whether the information disclosed, understood as a whole, would mislead a reasonable potential investor.  A statement or omission is “material” if there a substantial likelihood that a reasonable investor would consider the information important in making a decision to invest.

Who, me? 

What information did the the Parvizian defendants omit?  They sold working interests in a prospect that had been forfeited. In other words, they sold interests they didn’t own. Defendants argued that the interests were “in dispute” and they expected to get them back. As you might expect, the court said they should have told that fact to the investors.

“Scienter” galore 

Scienter is a mental state involving an intent to deceive, manipulate or defraud.  It also includes severe recklessness, the definition of which is lengthy, but includes words like “highly unreasonable”, “extreme” and “inexcusable”. Selling interests that you know were terminated without disclosing that to investors evidences “a high degree of scienter”, said the court.

What about the brokers?

The interests were sold through the Balunas companies, who were not registered as brokers with the SEC. There were “consulting agreements”. Balunas would “introduce” prospective venturors and would receive 12% commission and a $4,000 monthly “retainer”. Balunas would cold-call prospects from a lead list.

The “introducing” part is important.  A broker is “any person engaged in the business of effecting transactions and securities for the account of others.”  A mere introduction is deemed not to be effecting a transaction.

Investors, think about this

Have you ever considered the relationship between “invest” and “investigate”. They both derive from Latin but, to my surprise, are not from the same root. Nevertheless, in real life – especially when taking a random phone call from a fast-talking stranger – one should do the first only after doing the other.

Musical Interlude; you can’t do it alone

Promoters like Parvizian need backup. Sometimes backup takes center stage. Here’s betting you can’t name the lead singer for the  Reflections,  or the Tokens.

salesmanHere are several things to note about SEC v. Arcturus et al:

  • Pay attention to this post if you sell oil deals in the way these defendants did.
  • This is a civil enforcement suit, so nobody’s headed to jail.
  • Not all of the SEC’s many rules make sense. Think Leviticus and the wrong way to sacrifice a goat, except nobody’s headed for the unrelenting wrath of Yahweh.
  • Your “good intentions” won’t save you.
  • The SEC enforces when there are complaints. Break the rules and you‘d better go “yard” for your investors.

Parvizian controlled Arcturus and Aschere, buying and selling interests in drilling projects.  Each project had a managing venturor which supervised the project. Each venture included a confidential information memorandum, PPM, joint venture agreement, subscription agreement, and investor questionnaire.

The SEC alleged that the defendants violated the Securities Act of 1933 and the Securities Exchange Act of 1934, and sought injunctions and money. The SEC contended that the projects were securities. Defendants referred to them as “joint ventures” and the investors as “partners” or “venturors”.

First, definitions

A “security” includes an “investment contract”, but that term is not defined in either statute. The courts say an “investment contract” is a transaction or scheme whereby a person:

  • invests his money
  • in a common enterprise
  • expecting profits derived solely from the efforts of others.

The agreements

  • Parvizian’s power was limited to day-to-day management and was subject to the “affirmative vote” of the venturors.
  • The venture was to be “managed and controlled collectively by all the venturors”, including the ability to call a meeting.
  • The venturors had voting rights and could remove the managing venturor by a 60 percent vote.

The reality

But,

  • The court couldn’t find that the venturors had any real powers, based on the way the ventures were actually constituted.
  • The venturors had no information about each other and thus no way to actually have a vote. Parvizian refused to disclose the identities of other venturors when requested.
  • In a process never disclosed to the venturors, Parvizian combined the assets of the partnerships into pools of accounts held by a third party.
  • Parvizian alone controlled and authorized every aspect of drilling and producing operations.
  • The venturors had no personal or firsthand knowledge about any activities or decisions related to the venturess and relied completely on information from Parvizian.
  •  The venturors were unknowledgeable in the oil and gas business.

SEC wins

Courts focus on the “economic realities underlying the transaction and not in the name appended thereto.” Here are factors (among others) that made this investment a security:

  • Access to information does not necessarily protect an investor from complete dependence from a third-party when that party is the sole source of the information and advice regarding the venture and the investor does not have the expertise necessary to make the essential management decisions themselves.
  • Venturors are not similar to general partners when they have no real power.
  • The partners were so dependent on a particular manager that they could not replace him or otherwise exercise ultimate control.
  • The venturors were so inexperienced and unknowledgeable in business affairs as to be incapable of intelligently exercising their venture powers.

Next

Did they commit securities fraud, … and what about the brokers?

Our musical interlude desperately needs a theme. Ladies whose names begin with “C”?  Corrine and Colinda?

wolfCo-author Sandra Mazan

U.S. District Court Judge Scott Skavdahl in State of Wyoming et al v. U.S. Department if Interior et al. struck down Bureau of Land Management regulations applying to hydraulic fracking on federal and Indian lands. He concluded that the BLM had no authority from Congress to issue such regulations.

Background

In March 2015, the BLM issued the regulations, which addressed three areas of oil and gas development: wellbore construction, chemical disclosure and water management, each of which is already subject to state or federal regulation. According to BLM, the Rule was enacted in response to public concern about whether fracturing can cause underground water contamination and an increasing need for stronger regulation.  In response, industry proponents (the IPAA, Petroleum Association of America, Western Energy Alliance, the states of Wyoming and Colorado, and intervenors the states of North Dakota and Utah and the Ute Indian Tribe of the Uintah and Ouray Reservation) filed petitions for review of the regulations under the Administrative Procedure Act contending that it should be set aside as:

  • arbitrary,
  • not in accordance with law,
  • in excess of the BLM’s statutory authority, and
  • contrary to the federal trust obligation to Indian tribes.

Court’s Findings

  • Hydraulic fracking does not fall within BLM’s jurisdiction. Existing BLM regulations pertaining to surface disturbance, reporting requirements and pollution to groundwater in oil and gas operations do not evidence BLM’s broad authority to regulate the fracking process.
  • Congress had not delegated authority to BLM to regulate hydraulic fracking.
  • By enactment of the Safe Drinking Water Act (the SDWA) in 1974, Congress delegated authority to the Environmental Protection Agency to regulate hydraulic fracking on federal, state, and Indian lands; however, by amendment in the 2005 Energy Policy Act, Congress unambiguously excluded hydraulic fracking operations (not involving diesel fuels) from EPA regulation under the SDWA. (You may thank U.S. Rep. Joe Barton for that provision.)
  • By specifically removing the EPA’s authority to oversee fracking under the SDWA, Congress did not intend for another federal agency (i.e., the BLM) to step in and assume a similar role.

The Takeaways

There are several:

  • There is no statutory authority for a federal agency’s regulation of fracking.
  • Score this as a victory for proper statutory interpretation and the rule of law.
  • And a defeat for federal encroachment into activities already regulated by the states.
  • We’ll have to wait and see if this remains the status quo. The BLM has appealed.

To commemorate this ruling we need a happy song.

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!

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.

 

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!

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.

beasts of southern wild“You are my friend, kind of.” Hush Puppy, as she stares down the Aurochs in Beasts of the Southern Wild. Is our “friend” the Texas Railroad Commission?

Gulf Energy bought a package of offshore wells out of bankruptcy. Eight needed to be plugged and the Commission undertook that task, given the operator’s insolvency. Oops! The Commission’s contractor plugged one it shouldn’t have. Can Gulf Energy recover damages? The jury, trial court, and appellate court said yes. The Texas Supreme Court said maybe not. The question: Was the Commission entitled to have a jury determine whether it was in good faith when it mistakenly plugged the well?

The Commission awarded Superior Energy Services a contract to plug the wells. A Commission employee made a clerical error by transposing well numbers and Superior plugged well 708S-5 instead of well 707S-5.

Gulf sued the Commission and Superior for breach of contract and negligence. Superior settled.

Lawyers: See the discussion about preserving error when the court rejects your objection to a jury charge.  The result was the jury was not asked to determine whether the Commission was in good faith when it plugged the well.

The Statutory Defense

Under Commission rules, if the owners of a well can’t be found or don’t have sufficient assets, the Commission may plug an abandoned well. Under Chapter 89 of the Natural Resources Code the Commission and its employees “… are not liable for any damages that may occur as a result of acts done or omitted to be done by them … in a good—faith effort to carry out this chapter.”

How many ways can you say “good faith”

Gulf Energy alleged that the defense applies only to acts that involve discretion and do not extend to ministerial acts like plugging a well.  The Supreme Court rejected the argument based on the plain reading of the statute.

The Court had to determine what “good faith” means. After considering definitions from Webster’s Third New International Dictionary, Black’s Law Dictionary, the Uniform Commercial Code, and earlier Supreme Court rulings, it decided that good faith:

“refers to conduct which is honest in fact, free of improper motive or willful ignorance of the facts at hand.  It does not require proof of “reasonable” investigation … stating the proposition conversely …, “bad faith” means more than merely negligent or unreasonable conduct; it requires proof of an improper motive or willful ignorance of the facts.”

Good faith – judge or jury?

Was the good faith defense to be determined by the jury as a fact question or by the judge as a matter of law?  There were enough contradictory facts to raise a question about whether the Commission acted in good faith. For example, there was evidence that the employee presented correct information to Superior several days before the 708S-5 plugged, but they failed to pass it on to the crew boat conducting the operation. Energy urged that there was willful ignorance, which would nullify the good faith defense.

Result

Back to the trial court from whence it came for a new trial.

Things you only learn here 

Beasts of the Southern Wild is, to my knowledge, the only movie ever that employed a nutria consultant.

And a musical interlude worthy of Hush Puppy.