Co-author Rusty Tucker

In Susan Davis Van Dyke et al. v. The Navigator Group. et al., the Eastland court of appeals applied recent fixed-versus-floating NPRI principles to a double-fraction mineral interest reservation.

In a 1924 Deed Mulkey conveyed property to White and Tom and reserved “one-half of one-eighth of all minerals …”

Davis (heirs and assigns of Mulkey) claimed ownership of half of the minerals pursuant to the reservation. Navigator (heirs and assigns of White and Tom) claimed that Davis only owns 1/16th and that Navigator owns the rest. Ruling on dueling motions for summary judgment, the trial court agreed with Navigator and declared, among other things, that the Deed was unambiguous and that the Mulkeys reserved 1/16th of the minerals (1/2 of 1/8th) and conveyed 15/16ths to White and Tom.

Davis asserted claims under the estate misconception theory and the presumed grant doctrine and asserted estoppel defenses. This post can’t do justice to the court’s deep dive into these theories. See this long form summary for more detail. Continue Reading Fixed-or-Floating NPRI Principles Applied to Texas Mineral Reservation

This is the second in a series of Gray Reed energy lawyer Paul Yale‘s examination of three books that raise questions such as:

Can we save the polar bears and the whales, …  Are they in need of saving?

Will we drown by 2100? (Not “we” as in you and me, but you know what I mean.)

Will the heat kill, or can anyone accurately predict what’s going to happen in 2100?

What is the effect on the economy?

What about droughts and wilfdfires?

For today’s musical distractions, we pay homage to the organ:

Garth Hudson

The Farfisa

Music from church

What could possibly go wrong when drill pipe and a delivery ticket are sent to a well location? Well …

The facts

In Knight Oil Tools v. Rippy Oil Company, Knight rented drill pipe to Rippy for an Eagle Ford well.  A delivery ticket represented that the pipe complied with API premium class standards. The pipe, marked with two white bands, was supposed to meet standards for API premium class pipe. Some of the pipe did not comply with the standards.

(The physical condition of used drill pipe is indicated by an industry-recognized system of colored bands, with each color representing a certain physical condition.)

The pipe broke in the hole because of what the parties agreed was fatigue. Rippy abandoned the well and an offset well was unsuccessful. Rippy sued Knight to recover damages for the lost well and Knight counterclaimed for unpaid invoices.

Partial summary judgment for the customer Continue Reading Defective Drill Pipe+Delivery Ticket=Lawsuit

Gray Reed’s in-house Cassandra, energy partner Paul Yale, has set out to educate energy industry professionals, and anyone else willing to learn, on the latest developments in the climate change debate. Here is Part One, in which Paul reviews three books with differing points of view:  The Uninhabitable Earth: Life After Warming, by David Wallace-Wells; Apocolypse Never: Why Environmental Alarmism Hurts Us All, by Michael Schellenberger; and False Alarm, How Climate Panic Costs Us Trillions, Hurts the Poor, and Fails to Fix the Planet, by Bjorn Lomborg.

Beyond educating, Paul’s review arms advocates on all sides of the debate with reasons to be convinced that we are doomed, reassured that all will be well, or hopeful for wiser solutions.

If the Administration’s energy policy feels like a root canal without anesthesia, remember the world still needs you.

 

 

Co-author Brittany Blakey

The lesson from In re First River Energy LLC:  Even though Texas lien law does not require the filing of a financing statement for perfection, file one anyway. It will be helpful in the event a dispute is decided under the laws of another state.

The transactions

Texas and Oklahoma producers sold oil and condensate to First River Energy, a midstream service provider, which was expected to pay the producers by the 20th of the month following delivery. First River was organized under Delaware law and headquartered in Texas. First River filed Chapter 11 bankruptcy in Delaware, by which time it had resold the producers’ oil to downstream purchasers and had $27.6 million+/- in accounts receivable, while the producers’ invoices were outstanding.

The producers from the two states asserted statutory perfected purchase money security interests in the proceeds of the oil and condensate under two statutes: Texas UCC §9.343, or the Oklahoma Lien Act, (Okla Stat. Ann. Tit. 52 §549), respectively. First River’s bank had a competing security interest in the debtor’s funds on deposit and other assets, including accounts and proceeds thereof, by virtue of security agreements executed under Delaware law. The bank’s interest was undisputed. Continue Reading Red River Statutory Rivalry: Texas Lien Statute is Fatal to Texas Producers’ Security Interests

Author David Gair*

In Exxon Mobil Corp. v. United States of America, from the United States District Court for the Northern District of Texas, ExxonMobil learned the hard way that filing amended tax returns can be very costly.

Some of the reasons why an amended return is dangerous are below, but first to the case:

ExxonMobil was involved in oil and gas ventures in Qatar and Malaysia, which for tax purposes were treated as partnerships and reported on the company’s consolidated tax returns. ExxonMobil had historically treated those transactions as mineral leases. In 2014 and 2015, ExxonMobil filed amended tax returns treating the transactions as purchases for tax years 2006-2009 and claiming refunds for overpaid income taxes in the amount of  $1.35 Billion. The IRS not only disallowed the refund claims but also imposed a penalty under 26 U.S.C. § 6676 of approximately $200 million.

ExxonMobil ultimately escaped the penalty but it was not easy and it surely cost them a lot of money to fight it.

Section 6676 imposes a 20 percent penalty for filing an erroneous amended return.  A taxpayer can defend against that penalty by proving to the IRS that it has a reasonable basis/reasonable cause for the amendment.  That determination is highly factually based and ripe for litigation.  In short, penalties can be hard to avoid.

The dangers of amended returns claiming refunds:

  • IRS thinks fraud – Illegitimate tax shelter promoters develop schemes to file amended returns and obtain huge refunds. Thus they are viewed skeptically by the IRS. Any guaranty the promoter offers about success is usually worthless. Big refunds make the IRS think something untoward is going on, even if it is not.
  • You will face an audit – Amended returns claiming refunds will almost assure you of an IRS audit. The cost and stress associated with an audit is substantial.
  • There will be delays ­– It is not uncommon to face delays of months, if not years, in resolving your amended return.

Continue Reading ExxonMobil Discovers That Amended Tax Returns Are Dangerous

Co-author David Leonard

In a precursor of disputes sure to come, in Lyle v. Midway Solar, LLC, a Texas court of appeals delivered a win for solar energy by applying the accommodation doctrine in favor of a solar developer’s actual use of the surface of the land over speculative future development of the mineral estate.

The lesson for mineral and surface owners

Mineral owners: This decision should remind you to diligently monitor surface use and, as appropriate, intervene in the development process with informed feedback about your actual or potential surface use needs.

Surface users: Conversely, you should be willing to incorporate informed feedback from mineral owners into the design of surface projects. An arbitrary and unilateral designation of drilling areas is unlikely to suffice under many circumstances. Continue Reading Solar Beats Minerals in a Texas Accommodation Doctrine Battle

Co-author Brittany Blakey

After a trial court order, two appellate opinions, a dissent, and another appellate opinion, the tension between a well operator and an adjacent mineral owner over whether hydraulic fracturing can constitute a subsurface trespass in Pennsylvania has, for the most part, been resolved. In Briggs v. Southwestern Production Company, several points of Pennsylvania law have been confirmed:

  • Well operators may use hydraulic fracturing to drain oil and gas from under another’s property, at least in the absence of physical invasion.
  • The rule of capture does not preclude trespass liability if the operation creates a physical invasion.
  • The mineral owner’s complaint must specifically allege that the operator engaged in horizontal drilling that extended onto their property or that the operator propelled frack fluids and proppants across the property line.

Continue Reading Pennsylvania Rule of Capture Still Bars Subsurface Trespass Claim

Larceny, that business enterprise with a knack for (fleeting) success regardless of the state of the economy, was busy last year. As Obi-Wan Kenobe would say it: You will never find a more wretched hive of scum and villainy as the bad guys of energy in 2020. Here we go.

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PdVSA

First up, as predictable as the Cowboys underperforming, Venezuela’s national oil company, PdVSA, returns to these pages.

Perps: Lennys Rangel, former head of procurement for a PdVSA subsidiary.

Three other perps have been accused in related prosecutions.

Crimes: Rangel Pled guilty to conspiracy to commit an offense after indictment for receiving $5MM inbribes to secure procurement contracts for a PdVSA joint venture and conspiring to launder the money.  The other two were convicted of similar crimes.

Sentence: Awaiting for Rangel, jail terms for the other two.

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… and more Venezuela

Giving an unintended assist to the green energy movement, Venezuela continues to dismantle its oil business.

Perps: Pres. Maduro and the military officers he put in charge of the national oil company.

Crime: Stupidity. There should be a law against it. In August 2020 Forbes reported that the last drilling rig left the country.

Sentence: Since 1999, poverty and joblessness, served by the citizens of Venezuela.

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International Intrigue, as reported by attorney Michael Volkov’s blog on criminal law issues.

Perp: Javier Aguilar, oil trader for energy commodity and trading company Vitol Oil.

Crime: Indicted for bribery of Ecuadorian government officials to secure a $300 million contract to purchase fuel oil, plus money laundering.

Sentence: None yet, but there are recorded phone calls and the cooperation of two unnamed witnesses.

PS: Vitol itself paid $163.7 million to settle related FCPA charges.

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No year is complete without a Ponzi scheme

Perp: Several Big Law firms, the link being one lawyer.

Crime: None. Sued by a receiver for gross neglegence and aiding and abetting investment fund Equital in a Ponzi scheme. The firms never required waivers of multiple conflicts of interest, and the hundreds of thousands of dollars in legal fees were in exchange for aiding and turning a blind eye to the fraudulent activities … so says the receiver.

Sentence: Sleepless nights, irritability, inability to concentrate, large legal fees.

Moral: This is about real estate; but lawyers, conultants and professionals in any industry, not to mention investors, you’d better know your client/promoter.

Caveat: Receivers, like bankruptcy trustees, tend to sue anybody with a deep pocket or insurance … just sayin’.

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A Iraq two-fer 

Perp 1:  Basil Al Jarah, former Iraq country manager for Unaoil, an oil consulting firm.

Crime: Paying $17MM in bribes to Iraqi officials to secure $1.7B in construction contracts.

Sentence: Three years and four months.

Perp 2: Ziad Akle  also of Unaoil.

Crime: Convicted of paying $500,000 in bribes to Iraqi officials to secure mooring buoy contacts.

Sentence: Five years.

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Fault lines in the seismic data

Perps: Former executives of seismic data company SAExploration, CEO and Chairman Jeffrey Hastings, CEO and COO Brent Whitley, CFO and GC  Brian Beatty, and VP of Operations Michael Scott.  Hastings is the subject of criminal charges in the Southern District of New York.

Wrongdoing: Allegations of multiyear accounting fraud, falsely inflating the company’s revenue by approximately $100 million and concealing the theft of millions of dollars by the executives.

Sentence: Ransacked reputations; this is an SEC enforcement action; the company’s website reflects that the former officers have been purged.

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Garden-variety fraud in Houston, as reported by the Houston business and energy blog by Andrew Jowett.

Perp: Arael Doolittle, owner of Sariel Petroleum.

Crime: Four counts of wire fraud, eight counts of engaging in monetary trasnactions in criminally derived funds. Bilked 21 investors in oil deals by invoking the name of a Chevron-affiliated company and used phony letters, email addresses and bank account.

Sentence: Potential 20-year maximum sentences and possible $250,000 maximum fines.

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Lagniappe for lawyers 

Perp: Scott Blauvelt; Hamilton, Ohio.

Crime:  Driving naked … more than once. (Exposing his privates to a female stranger didn’t help.)

Sentence: Suspension of his law license.

Our musical interlude, for our honorees … and one just for Venezuela.

Author Joshua D. Smeltzer*

The recently passed Consolidated Appropriations Act, providing additional COVID pandemic relief, also includes important extensions for renewable energy tax credits. These extensions represent a significant tax benefit for renewable energy companies and their potential investors. However, if not done correctly taxpayers can lose the tax benefit and potentially face tax penalties. Here’s what you should know about the potential tax benefits and what to consider when claiming the credits.

The Investment Tax Credit

The Investment Tax Credit (ITC) under Internal Revenue Code Section 48 was extended by two years. This tax credit is popular for solar energy projects as well as other technologies (e.g. fuel cells, microturbines, small wind energy.) In general, solar projects beginning construction in years 2020 through 2022 are eligible for a 26% ITC, 22% ITC in year 2023, and 10% after 2023. The ITC is similar for other technologies except that it drops to 0% if construction begins after 2023, or if the project is placed in service after 2025.

The Production Tax Credit

The production tax credit (PTC) under Section 45 was also extended for one year. This tax credit is primarily used for wind projects and they can now begin construction in either 2020 or 2021 and be eligible for a 60% PTC. However, the one year extension also applies to other PTC-eligible technologies (i.e. biomass, geothermal, landfill gas, trash facilities, qualified hydropower and marine and hydrokinetic renewable energy facilities). If construction begins after 2021 then there is no eligibility for any PTC. However, a new tax benefit was also added by the new law in the form of a standalone ITC for offshore wind. These are facilities located in the inland navigable or coastal waters of the United States. Offshore wind projects are eligible for a 30% ITC for projects beginning construction before 2026 without any apparent phase down provisions.

“Legislative grace”

Tax credits are considered, by the IRS and the courts, as a matter of “legislative grace” and the burden is on a taxpayer to prove entitlement.  As such, renewable energy companies and their investors should be careful when incorporating these benefits in their agreements. The IRS and, if necessary, the courts have several tools available to them to recharacterize a transaction and remove claimed tax benefits if they feel that the transaction isn’t what it purports to be. Questions usually occur if the actions or agreements involved fail to show a genuine business venture with motivations beyond tax avoidance. The agreements and actions of the parties must document a clear business purpose outside of the tax benefits and show that all parties have a meaningful upside and downside potential outside of any tax benefit.

Indemnification – yes or no? 

An investor may desire, and a company may be willing to provide, certain guarantees or indemnifications that could prove problematic if the tax credits are later challenged by the IRS.  For example, direct or indirect guarantees of the investor being able to claim the credit, cash equivalents of the credits, guaranteed repayment of capital contributions because the credit can’t be claimed, or guarantees of repayment or indemnification if the credit is challenged by the IRS might cause problems. Therefore, the terms of the agreement must be evaluated carefully for provisions that could raise questions about the parties having a real stake in the transaction. Despite risks, if done correctly, these tax credits provide a great incentive for investors to direct money into the renewable energy sector that companies can use to help fund projects.

Tony Rice RIP

*Joshua is a talented addition to Gray Reed’s tax department.