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Co-author Brittany Blakey

[Updated] The North Dakota Supreme Court will hear oral arguments on Thursday to consider who owns the right to profit from the value of the porous spaces within subsurface rock formations. The issue is over Senate Bill 2344, passed by the Legislature in 2019 and, no surprise here, supported by the oil and gas industry.

The Northwest Landowners Association sued North Dakota arguing that SB 2344 is unconstitutional, that it renders the surface owners’ “pore space estate” worthless, and amounts to a “taking” of property owners’ pore space without compensation. Incidentally, the court in Mosser v. Denbury Resources determined in 2017 that subterranean pore spaces are owned by the landowner.

The trial court in the Northeast District, Bottineau County concluded that landowners in North Dakota have a constitutionally protected property right to their subsurface pore space and said pore space has inherent value. SB 2344 prohibits landowners from obtaining compensation for an oil and gas operator’s use of their pore space estate and “[renders] the pore space worthless in every instance of its application[.]” It “acts to give North Dakota landowners’ value from pore space to the oil and gas industry, for free, under the guise of the North Dakota Industrial Commission.”  The opinion was seen as a huge victory for landowners.

Disputes involving pore space are likely to continue in North Dakota given increased oil and gas activity. North Dakota is a promising area for carbon dioxide injection. For example, there are projects in place and envisioned that would transport carbon dioxide from other areas of the country to North Dakota to be injected into pore space for carbon sequestration.

Compare Denbury with the Texas Supreme Court’s ruling in Lightning Oil Company v. Anadarko E&P Onshore:  The mineral owner has the right to explore for and produce the minerals and the surface owner owns the right to possess the specific place or space where the minerals are located. Looks pretty much the same.

Your musical interlude.

Co-author Stephanie Snyder-Zuasnabar*

A subcontractor’s mineral lien in Texas is invalid when, at the time the mineral owner receives notice of the lien affidavit, the mineral owner is not yet obligated to pay the contract price to its contractor.  So says Pearl Resources Operating Co., LLC v. Transcon Capital, LLC,

The real takeaway that drilling contractors already know: A turnkey drilling contract gone wrong is the gateway to a financial apocalypse.

The wild well

Pearl Resources and PDS Drilling agreed in a Turnkey Drilling Contract for PDS to drill a well in Pecos County. Pearl was to pay 30% of the contract price after PDS positioned a rig at the wellsite. The remaining 70% would be paid after delivery of a successful well. PDS was liable for the cost of regaining control of a wild well, along with associated remediation and restoration efforts.

The 30% was paid and as PDS drilled the well, a wild well incident caused an eruption of freshwater out of the well and an adjacent water well. PDS contracted with Cannon to haul away the accumulated water. PDS abandoned the well, notifying Pearl that it did not have the funds to repair the well or drill a replacement.

Cannon sent PDS two invoices requesting payment for services performed before PDS abandoned the well. PDS failed to pay, and Cannon transferred its rights to Transcon. Transcon requested payment of $57,000 based on the two unpaid invoices. When Pearl refused to pay, Transcon sent the statutory notice of its intent to file a Mineral Lien Affidavit. Pearl again refused to pay. Transcon filed a lien affidavit in the Pecos County records.

Pearl sued for a judgment that Transcon’s lien was invalid under Chapter 56 of the Property Code. Transcon counterclaimed for a judgment that its lien was valid and sought to foreclose. The trial court found that Transcon’s lien was valid and awarded an Order of Sale for foreclosure on the lien.

Pearl’s winning argument

Pearl argued that Transcon’s lien was invalid because Chapter 56 only allows a subcontractor’s lien on a mineral owner’s property in the amount the property owner owes to its contractor, if any, at the time it receives notice of the lien affidavit, and Pearl did not owe money to PDS when the lien notice was delivered.  The court of appeals agreed. The mineral lien is “dependent upon the state of the account between the owner and its contractor, and not upon the condition of the account between the contractor and subcontractor when the owner receives notice of the claim.”

Transcon contended the early termination provisions in the Turnkey Contract were invoked when PDS abandoned the well, requiring Pearl to pay PDS for its services. The court determined that the sections referencing early termination and compensation only applied to a Pearl-directed shutdown. Because PDS walked off the job, the contract did not obligate Pearl to pay PDS for Cannon’s services.

In denying Transcon’s argument that Pearl still owed 70% of the total contract price, the court focused on the plain language of the contract which did not obligate Pearl to pay the remaining balance until completion of a successful well, which never occurred. The Court was not willing to rewrite the parties’ contract which expressly obligated PDS, not Pearl, to pay the remediation costs. The trial court erred in finding a valid mineral lien.

Transcon’s claim for quantum meruit was not addressed because actual damages were not awarded by the trial court.

Norma Waterson, RIP. Category, you ask? “Celebrated English folk singers I’ll bet you’ve never heard of”.

*Stephanie is a Universlity of Houston law student and Gray Reed law clerk.

Foote and Cypert v. Texcel Exploration and Decker determined that cattle loitering uninvited around a well and tank battery and causing destruction are trespassers, not licensees.

How it happened

Foote arranged with Yates to graze 650 head of cattle on Yates’ pasture and paid Cypert to take care of them. Texcel operated the Hertel oil and gas lease on the property. Decker was Texcel’s pumper. The lease did not require Texcel to fence off the property or its equipment.  A one-wire electric fence surrounded the wellsite and tank battery to protect the premises from, you guessed it, wandering cattle. If the wire fell to the ground or otherwise hit brush or other material it would ground out and no longer be “hot”.

There was conflicting testimony about who did or did not do what to cause the bovine incursion. In short, 300 cattle, no-doubt drunk on hydrocarbon fumes, pushed over the fence and broke a PVC pipe, spilling saltwater and oil on the ground. 132 perished from drinking oil and others were under their expected weight at sale time.

Foote and Cypert sued Texcel and Decker for failure to construct and maintain an adequate fence around the well site and tank battery which created a dangerous condition that proximately caused the death and injury of cattle. The theories were premises liability and negligent undertaking.

Plaintiffs lost. Here’s why:

In order to recover against a mineral lessee/operator for injury to cattle, an owner or lessee of the surface must obtain a jury finding on one of the following:

  • The lessee/operator intentionally, willfully, or wantonly injured the cattle, or
  • The lessee/operator used more land than was reasonably necessary for carrying out the purposes of the lease and as a result of some negligent act or omission he proximately caused injury to the surface owner’s cattle.

Plaintiffs’ failure was in ignoring these requirements and seeking to expand the law to the same standards for protecting persons from a premises defect. Plaintiffs contended that because Foote was in business with Yates and the landowner (Yates leased the property), his status extended to his cattle on the entire premises, including the area where Texcel operated. The evidence established that the cattle did not have the status of invitees on the area of Texcel’s operations. The premises liability theory concerns the duty an owner or occupier of land owes to a person injured on the property.

By denying the cattle were licensees the jury essentially determined that the cattle were trespassers.  There was abundant evidence for this conclusion.

Texas has never categorized livestock as persons for premises liability purposes. The rule likens wandering cattle and other domestic animals to trespassers upon the legitimate area of oil and gas operations.

Other futile theories

Plaintiffs argued that the cattle were poisoned in an area where they were undisputedly invitees. An operator in Texas has no duty to fence or otherwise protect or prevent livestock from entering the premises of mineral lease. Tercel was not liable for the fluids deposited outside its legitimate area of operations because the cattle caused the fluids to escape.

The plaintiffs contended that the fence was inadequately maintained. Because there was no duty in the first place, the inquiry was whether the defendants acted in a way that required imposition of a duty where one would not otherwise exist. This, the plaintiffs failed to prove.

Your musical interlude: What Muddy Waters went without during Lent..

It was jurisprudential Groundhog Day as the Supreme Court of Texas handed down Nettye Engler Energy v. Bluestone Natural Resources, another in a series of postproduction cost disputes, only two days after Puxsutawney Phil peeked out of his cozy burrow to pronounce six more weeks of winter.

The takeaway

The Court clarified Burlington Resources v. Texas Crude Energy. Contrary to the reasoning of the court of appeals, Burlington did not establish a rule that “delivery into the pipeline” or similar phrasing creates a valuation or delivery point at the well or nearby.  Rather, Burlington reiterated that all contracts are construed as a whole to ascertain the parties’ intent from the language they used to express their agreement.

Recall the basic Texas PPC cost-sharing rule: A royalty interest bears its proportional share of PPC’s from the point of delivery to the purchaser or working interest owner unless the conveyance specifies otherwise. Likewise, a royalty interest is free of PPC’s incurred before delivery. The question in cases such as this, Where is the delivery point?

Facts

Engler’s predecessors conveyed 646 acres by special warranty deed reserving an undivided 1/8th NPRI in and to all the oil, gas, etc. The deed required the royalty “… to be delivered to grantor’s credit free of cost in the pipeline, if any, otherwise free of cost at the mouth of the well or mine …”

Gas produced at the wells is collected in a gas-gathering system on the lease for compression, processing and delivery to third-party transportation pipelines off the lease and then sold to third parties.

Former operator Quicksilver valued Engler’s NPRI at the point of sale to the gas purchaser’s pipeline, freeing Engler’s royalty from the burden of PPC’s. Under current operator Bluestone’s valuation, delivery of Engler’s share occurs at the point where unprocessed gas enters the on-site gathering system, thus bearing its proportional share of PPC’s from that point forward.

Engler argued that the delivery point was downstream of the wellsite at the transportation pipeline, if not farther, because a gas gathering pipeline is not a pipeline and use of the term “otherwise” to introduce the alternative delivery point “at the mouth of the well or mine” negated a construction of “the pipe line, if any” as including any pipeline at or near the wellhead.

 What is a “pipeline”?

The Court rejected Engler’s contention that a gathering system is not a pipeline. Resorting to contemporaneous dictionaries, treatises, decisions, and regulations, the Court concluded that a gas gathering pipeline is a pipeline in common industry and regulatory parlance.  The deed in question did not limit the delivery location to a specific pipeline nor prohibit delivery to a pipeline at or near the well if any.

The result

Bluestone discharged is royalty obligation by delivering Engler’s fractional share of production in the gathering pipelines on the premises. Therefore, Bluestone properly deducted PPC’s between that point and the point of sale. The Court of Appeals held that delivery occurs in the gathering pipeline, but misconstrued Burlington in reaching the correct result.

Lagniappe – no room for expert testimony

The Court rejected affidavits by attorneys purporting to clarify and explain what the original drafting parties could have meant by “in the pipe line.” Courts will consider only objectively determinable extrinsic facts and circumstances surrounding the contract’s execution that do not vary or contradict the contract’s plain language. The instrument was unambiguous and it was within the Court’s province to determine its meaning. The expert testimony Engler relied on to construe the phrase would impermissibly add words of limitation to modify the deed’s terms.

Your seasonal musical interlude 

This just in!

John Kerry has a plan to offset carbon emissions from the conflict in Ukraine.

Consider the power of a single word over the fortunes of the parties to a property deed. Such was the effect of the court’s ruling in Barrow Shaver Resources, LLC, et al v. NETX Acquisitions, LLC, et al.

In 1963, by the Stone Deed, Dawson and Hill conveyed a 181-acre tract in Cass County, Texas, to the Stones (John and Treba, not the Rollings). The granting clause described the land by metes and bounds, and continued, “There is likewise conveyed … 1/8th of the Oil, Gas and Other Minerals … .”  The conveyance was subject to an oil and gas lease then existing. At the time of the suit, Barrow Shaver had an oil and gas lease from Dawson/Hill and NETX had a lease from Merritt (successor to the Stones).

The question and spoiler alert

Did Dawson/Hill convey 1/8th of the minerals or did they convey 100% of the minerals and attempt to reserve 7/8ths in themselves?  Dawson and Hill conveyed 1/8th of the minerals (and the surface, of course).

The Court’s journey to the answer Continue Reading Texas Court Decides What “Likewise” Means in a Conveyance

If you dispose of produced water you are no-doubt aware of the intensive earthquakes being observed across the Midland and Delaware Basins. In West Texas Earthquake Observations, Implications for the Oil and Gas Industry, Scott Pinsonnault and John Shepherd of Ankura Consulting summarize the evolving situation and the Texas Railroad Commission’s response. They also present a series of initial questions that will need to be answered.

You should read the report itself, but in short the Commission has determined that saltwater disposal injections contribute to seismic activity in three particular areas and has taken action, including limiting injections and stopping deep water injections in the area identified as the Gardendale SRA, giving operators 120 days to propose next steps in the Northern Culberson-Reeves SRA, and giving operators in the Stanton SRA 90 days to come up with a response plan. The RRC says it will implement its own plan if it is not happy with the industry’s response.

Surely we’ve not seen the end of this.

Your musical interlude.

The baseball season might be in jeopardy, but litigants are swinging for the fences. In Mary v. QEP Energy, the parties entered into a Pipeline Servitude Agreement over Ms. Mary’s 160 acres. One of QEP’s pipelines extended beyond the servitude by 31 feet and another by 15 feet.

Ms. Mary sued claiming the pipeline was placed in bad faith and sought disgorgement of QEP’s profits or an order permitting removal of the pipeline.

The parties agreed that the case turned on Louisiana Civil Code art. 486:

A possessor in good faith acquires the ownership of fruits he has
gathered. If he is evicted by the owner, he is entitled to
reimbursement of expenses for fruits he was unable to gather.

A possessor in bad faith is bound to restore to the owner the fruits
he has gathered, or their value, subject to his claim for
reimbursement of expenses

The question was whether the standard for good faith was governed by La. CC art. 487 or La. CC art. 670. In granting summary judgment for QEP the district court ruled that art. 670 applied. But art. 670 applies only to construction of a building by a landowner. Under Louisiana law a servitude owner is not a landowner, and a pipeline is not a building.

The Fifth Circuit determined that art. 487 governs:

A possessor is in good faith when he possesses by virtue of an act translative of ownership and does not know of any defects in his ownership.  He ceases to be in good faith when these defects are made known to him or an action is instituted against him by the owner for the recovery of the thing.

What’s next?

Ms. Mary’s at-bat continues. Because the district court incorrectly relied on art. 670, the case was remanded for the district court to determine whether her cause of action for QEP’s intrusion is for trespass, accession, or some other provision of Louisiana law.  The Fifth Circuit instructed the district court to apply the relevant definition of bad faith (assuming the cause of action requires such a showing) to decide whether Ms. Mary is entitled to disgorgement of profits.

Your musical interlude. 

Of course it is. (Apologies for the clickbait.) If further reading would damage you, I recommend a subscription to the Guardian. Otherwise, consider these points of view when conversing with those in need of enlightenment. Counter-arguments abound, but they are not the purpose of this post.

The industry is subject to ad hominem attacks, as gratuitous and relentless as they are hollow and devoid of substance. Big Oil should be flattered to be in the same company as Big Poultry, Big Car, Big Pharma, Big Food and Big Semiconductor.  With the universal DH just around the corner, she should turn her hyper-regulatory energies to Big Sports.

Rebukes based on facts and economics, such as EQT president Toby Price’s response to Senator Warren, are more likely to sustain a meaningful exchange of ideas. His topics include affordability and reliability, China’s energy policies, and more. If you only have time for one of these links, read this one.

Daniel Markind in Forbes and David Frum writing in Defense One.com remind us of the industry’s contribution to national security.

The moral benefits to fracking are ignored by the anti’s, says Jude Clemente in Forbes.

Irina Slav at OilPrice.com says energy transition will be expensive: $15 trillion, then $14 trillion, then $1 trillion for key metals, then hidden costs, then environmental risks … .

Daniel Yergin in the Atlantic starts with the Colorado Oil and Gas Association’s Customer Appreciation Award to North Face and continues to the European energy crisis and other complex issues that must be resolved.

Lyn Arden Schwartzer in Seeking Alpha discuses the significance of oil and energy to the world’s economy.

Your musical interlude, for when you think you’re having a bad day.

Federal Insurance Company et al v. Select Energy Services LLC and Exco et al. is a reminder for negotiators of indemnity and defense obligations in oilfield contracts that choice of law is important. Ignore it when drafting and it will be too late when litigating.

The events

Three workers were injured on an Exco drilling rig in DeSoto Parish. Two sued in Texas, one sued in Louisiana. In the Texas suit Exco demanded that Select indemnify and defend Exco under the parties’ service agreement; Select did, and paid $31MM to settle. In the Louisiana suit the roles were reversed. Exco (through Federal) agreed to defend Select. Exco then withdrew its defense and alleged that the indemnity provision was unenforceable because it contravened La. R.S. 9:2780 the Louisiana Oilfield Anti-Indemnity Act.  Select filed a reconventional demand to recover the amount of the Texas settlement.

The choice of law provision called for Texas law to apply without regard to conflict of laws provisions. In case a court might choose to apply the Louisiana Act, there was a substitute indemnity provision: The indemnity and insurance obligations are separate and apart from each other. The insurance obligation would support, but not in any way limit, the defense and indemnity obligations set forth in the agreement.

The Louisiana and Texas Acts

The Louisiana Act was an attempt to avoid adhesionary contracts in which, due to unequal bargaining power, a contractor would have no choice but to agree to indemnify the oil company lest they risk losing the contract. The Act declares null and void any provision in any agreement which requires defense and/or indemnification where there is negligence or fault on the part of the indemnitee or an independent contractor who is directly responsible. If Louisiana law applied, the statute would invalidate Exco’s defense and indemnity obligations to Select.

On the other hand, the Texas Act generally invalidates oilfield indemnity agreements but allows enforcement of mutual indemnity obligations limited to the scope and amount of contractual indemnity insurance each party as indemnitor has agreed to provide to the other as indemnitee. Thus, a mutual obligation is enforceable but limited to the extent of coverage limits of contractual indemnity insurance.

The insurance provided by the parties in the contract brought the mutual indemnity agreement within the exception. Continue Reading Louisiana Court Considers Texas and Louisiana Oilfield Anti-Indemnity Acts

Like wild mushrooms after a warm summer rain, and undaunted by the COVIDs, the fraudsters, the grifters, and the “the spawn of the Devil’s own strumpet”* were prolific before meeting the wrath of the courts and the regulators in 2021. This year features several potential lifetime achievement awards for recidivism.

Corruption Goes Nuclear

Perps: Former Ohio Speaker of the House Larry Householder and utility First Energy, beneficiary of a $1.3 billion state bailout of the state’s nuclear energy industry.

Crime: Householder was indicted on racketeering and conspiracy charges for taking bribes from FirstEnergy. Others were charged for crimes.

How they did it: The utility paid $56.6 million to an outfit called Generation Now who allegedly siphoned it off to Householder and the others. The money came from customers of First Energy’s distribution and transmission units.

Sentences: Plenty but none yet to the calaboose. Householder’s trial date is coming up. Republicans and Democrats together expelled him from the House; First Energy CEO Charles Jones was fired; two others pled guilty; a lobbyist committed suicide; First Energy was fined $230MM and entered into a deferred prosecution agreement.

The big picture: Forbes’ Ken Silverstein predicts that it will jar an industry that is perpetually trying to regain its balance after much bad publicity. Plus, high capital costs for construction and cheap shale gas have curtailed nuclear development, presenting a problem for the environment. Example: When Southern California Edison closed its San Onofre nuclear station in 2013 CO2 emissions jumped by 35% (That’s green California for you). Factoid: 96 nuclear reactors in 29 states supply about 20% of the country’s electricity and 55% of the carbon free power.

Don’t you know his mother was disappointed

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Perp: Mark Plummer, host of the ironically-named Dallas radio show “Smart Oil and Gas”. Continue Reading 2021’s Bad Guys in Energy