Technology and innovation will resolve the issues, real and imagined, that confront hydraulic fracturing. I arrive at that opinion because of history:

Before 1914, France had three dozen airplanes, more than all other air forces in the world put together. Germany, Britain, Italy, Russia, Japan and Austria all had no more than four planes each and the United States had just two. During the four years of World War I Britain built 55,000 planes, Germany 48,000 and Italy 20,000. During the course of the war, bombs went from nothing more than “wine bottles filled with gasoline or kerosene with a simple detonator attached” to aerial bombs weighing up to 2,200 pounds. (From One Summer, America 1927, by Bill Bryson).

(In order to boost readership I searched for similar developments in beer manufacturing. I’m sure there’s at least one. I just couldn’t find it.) 

With that out of the way, what’s the connection to energy? When faced with problems it must solve, industry, including oil and gas, develops solutions.  

A few examples:

  • Considering the total water usage for various means of electricity generation, natural gas saves water, even counting use associated with hydraulic fracturing. So says a study by the University of Texas at Austin published in Environmental Research Letters.  For every gallon of water used to produce natural gas through hydraulic fracturing, Texas saved 33 gallons of water by generating electricity with that natural gas instead of coal (in 2011, the last year for which information was available).
  • According to StateImpact (a publication of NPR stations) GasFrac is pioneering waterless fracking technology.
  • Apache Corporation has devised a way to minimize the use of fresh water in fracking, relying instead on chemical treatment of produced and brackish water.
  • EVO CNG  intends to establish CNG fueling stations for long-haul trucks and other vehicles in Fort Worth (its first), Dallas, San Antonio, Austin and El Paso, Texas.
  • According to the New Hampshire Union Leader (of all places) fracking is greener than environmentalists want to admit.

Natural gas isn’t the cure-all for our environmental and energy ills –there is no doubt that wind and solar (and bio-fuels if you don’t count corn) will help as well – but it’s a big help.

The next challenge is leaking methane. I’m sure the industry will make progress there as well.

So, let’s celebrate a clean and bright energy future!

Co-author Tara Trout Flume

As promised in our last post, here is a state-by-state review of the Duhig Rule –  who has adpoted it, who hasn’t, and who might.

Texas – Duhig v. Peavey Moore Lumber Company, 135 Tex. 503, 144 S.W.2d 878 (1940) was a Texas case.  As a result, producing states have Texas to thank for the Duhig Rule.  

 According to Duhig, if there is a reservation of a “specific interest” without mention of the prior reservation, and all parties can’t be made whole, then the grantee is made whole at the grantor’s expense. Like Oklahoma, Texas allows reformation by equity in cases involving mutual mistake. Texas does not apply Duhig to quictclaim deeds.

Arkansas – Adopted Duhig for warranty deeds, but not quitclaim deeds.

California – Has not expressly adopted Duhig. Courts in that state generally try to give effect to the intent of the parties.

Colorado – Has applied Duhig in several cases.

Kansas – Has not explicitly adopted Duhig.

Louisiana – Follows Duhig, same as in Texas.

Mississippi– Has adopted Duhig.

Montana – Has not specifically adopted Duhig, but follows the doctrine of ‘estoppel by deed.’

New Mexico – Has adopted Duhig.

New York – Has not had much case law regarding the issue, but would likely follow, as they will not limit the estate of the grantee in the subsequent conveyance.

North Dakota – Adopted the Duhig Rule for warranty deeds, but a court declined to apply Duhig when the grantee had actual notice of prior reservations – very similar to Texas.

Oklahoma – Generally follows Duhig if a “Warranty Deed reserves a specific interest without acknowledging prior reservations, then the grantee is made whole at the grantor’s expense”. However, if there is mutual mistake, then equity allows reformation of the deed.

Pennsylvania – Likely would follow Duhig.

Utah – Has not formally adopted Duhig , and it is uncertain whether a Utah court would apply it.

Wyoming – Recognizes Duhig and follows Texas.

Where did this compilation come from?

We deviate from a remorseless pursuit of personal glory to give credit to George Snell of Steptoe and Johnson.  The information in this post is from a publication authored by George and Richard Rosprim of the AAPL:

Oil & Gas Law: Nationwide Comparison of Laws on Leasing, Exploration and Production by Topic (George A. Snell, III & Richard A. Rosprim, CPL, eds., 2011).

It’s an excellent publication of the AAPL, and a great resource for anyone dealing with land and title issues in multiple states.

A musical interlude to remember Phil Everly. RIP.

Co-author Tara Trout Flume

Johnson v. Finkle, from North Dakota, centers around the long-standing but oft-forgotten headache that is the Duhig doctrine. If you aren’t familiar, you should be. Here it is:

The Rule

“Where a grantor conveys land in such a manner as to include 100% of the minerals, and then reserves to himself 50% of the minerals, the reservation is not operative where the grantor owns only 50% of the minerals. The deed is construed as undertaking the transfer of 50% of the minerals to the grantee. Both this grant and the reservation cannot be given effect.  The grantor loses because the risk of title loss is on him.”

The facts in this case aren’t novel. So, first we have …

A Practice Tip

Duhig is important in at least two situations: The first, it seems, is when the grantor doesn’t know or doesn’t care how much of the minerals he owns and doesn’t realize that reserving half, let’s say, will leave him with none if all he owns is half.

The second is where the scrivener hasn’t considered the rule and hence doesn’t comprehend the effect of prior reservations. This can be addressed is by making the reservation and conveyance subject to prior reservations and restrictions.  Non-lawyers:  Please don’t try this at home.  Get good legal advice.

The Facts Of Finkle

The Andersons owned 100% of the minerals.  In 1949 they sold a 1/2 mineral interest to the Youngbloods. In 1957, the Andersons entered into a Contract for Deed with the Johnsons that included a 1/4 mineral reservation. (In a contract for deed the seller retains title and finances the sale until the buyer pays in full, at which point title is transferred to the buyer.) In 1962 the Andersons gave a Warranty Deed to the Johnsons with this provision: “The grantor reserves a 1/4 mineral interest, including gas and oil, in the … premises, as of the date of this contract.”

Based on the language of the reservations alone, it appears that the parties intended the mineral ownership to be 1/2 to Youngbloods, 1/4 reserved by Andersons, and the remaining 1/4 conveyed to Johnsons.  (Finkle is the heir of the Andersons.)

Finkle argued that because the Johnsons owned the property under the 1957 Contract for Deed, they owned an outstanding mineral interest and Duhig shouldn’t govern. Not so fast, Mr. Finkle!  Nothing in the 1962 Warranty Deed indicated that the Andersons didn’t own all of the minerals at the time of the conveyance. And therein is the problem – the Johnsons had no notice that the Andersons didn’t own 100% of the minerals.  Based on the Warranty Deed, they intended to take 3/4 of the minerals.

The Ruling

Johnson didn’t have legal title to the property until the 1962 Warranty Deed. Recall that the grantor keeps legal title to the property until the grantor complies with the conditions of the contract. Thus, the Duhig rule applied, and the Andersons didn’t have a “large enough interest to satisfy both their grant to [the Johnsons] and reserve a 1/4 interest.” Thus, the Andersons weren’t able to reserve any of the minerals. This ultimately gave the Johnsons a 1/2 mineral interest in the property.

Next post: Which states apply Duhig?

This musical interlude portrays the heartache of those, like Mr. Finkle’s predecessors, who ignore the doctrine.

Author: Martin P. Averill

In Robinson Township v. Commonwealth of Pennsylvania, the Pennsylvania Supreme Court dealt a major blow to the energy industry. By a 4-2 decision the Court struck down a 2012 law (commonly known as “Act 13”) aimed at preventing municipal interference with oil and gas exploration.

Three different approaches

Interestingly, the precise rationale for the court’s decision was not agreed upon by a majority. Three justices concluded in a 162-page opinion that Act 13 violates a 1971 Environmental Rights Amendment to the Pennsylvania Constitution, which guarantees the right of citizens to “clean air and pure water, and to the preservation of natural, scenic, historic and esthetic values of the environment.”

Another justice concurred in the result but opined that Act 13 is unconstitutional because it violates substantive “due process of law” by preventing municipalities from protecting the rights of individual landowners within their jurisdiction from undue interference by neighboring landowners (here, from alleged harms caused by oil and gas exploration).

Two justices dissented on the basis that Act 13’s uniform standards for the oil and gas industry — including setback requirements, water protection measures and other limitations—were not an unconstitutional exercise of the state’s general police power to regulate the health, safety and welfare of its citizens. Of primary concern to the dissenters was the majority’s failure to accord the proper deference to the decisions of the state’s legislative branch—in other words, the age-old “judicial legislation” criticism—and the broader implications of the majority’s stance that local governments may lodge constitutional challenges against statewide legislation on behalf of individual citizens.

What’s next?

In the aftermath of Robinson Township, Pennsylvania’s prior law regarding oil and gas development will be in force. Pennsylvania jurisprudence prior to Act 13 memorialized a “how/where” distinction regarding local authority to govern the industry. Localities may regulate the “where” of development through their zoning powers, but may not regulate the “how” of development because the manner of conducting oil and gas exploration is expressly governed by the Pennsylvania Oil and Gas Act and regulations promulgated thereunder. This doctrine was most recently set forth in twin decisions of the Pennsylvania Supreme Court in 2009: Huntley & Huntley, Inc. v. Borough Council of Oakmont and Range Resources – Appalachia LLC v. Salem Township.

We begin with a philosophical question: Should a person be rewarded for bad behavior? Despite twerkee Miley Cyrus (and her daddy), the Kardashians and, at least for a while Richard Nixon, the answer should be, no. Texas law agrees.

The express negligence doctrine in indemnification agreements “… mandates that the party use express language within the four corners of the contract specifically stating that the party will be indemnified for liability arising from the party’s own negligence.”

So said Hamblin v. Lamont, a companion case to Lamont vs. Vaquillas Lopeno Energy, et al, For background and a discussion of the facts, go to my recent post discussing Lamont v. Vaquillas.

When Lamont separated from Ricochet Energy and Hamblin, the parties signed a separation agreement containing a broad and comprehensive indemnification provision in which Ricochet and Hamblin agreed to indemnify Lamont against

“… any and all liabilities, obligations or claims arising from any act, occurrence, omission or otherwise which occurs after the Effective Date of this Agreement which in any way pertains to Ricochet Energy, Inc. and/or its operations, actions and in actions. It is the intention of the Parties that Ricochet Energy, Inc. to provide as broad of an indemnity as possible and all ambiguity as to whether Hamblin and Ricochet Energy, Inc. owe the duty of indemnification shall be resolved in favor of providing the indemnity/indemnification.”

In a second paragraph, Hamblin and Ricochet agreed to assume all of Ricochet’s obligations and agreed to indemnify Lamont against past liabilities, using languge virtually identical to the first.

Lamont was found by a jury to have committed intentional torts and the jury awarded Vaquillas several million dollars in damages.

The court denied Lamont’s request for indemnification on the basis of the express negligence test, asking whether the parties intended to protect Lamont from his own actions.

The decision reversed a trial court summary judgment in favor of Lamont. The problem with the language was that Ethyl Corp., Dresser Industries, Flour Corp. and other express negligence cases from the Supreme Court talk in terms of negligence. The court viewed the case in light of the public policy against excuplating a party from the consequences of its own negligence.

According to the court, the concerns associated with such extraordinary risk-shifting in negligence cases cases should apply “with equal or greater force” to intentional torts.

Because the contract did not specifically state an intent to indemnify Lamont for liability arising from his own intentional torts, Hamblin and Ricochet had no obligation to indemnify Lamont for liability arising out of the Vaquillas lawsuit.

The dissent focused on the absence of Texas Supreme Court cases applying the express negligence test to intentional torts, and would have ordered indemnification.

I would expect Lamont to take this one to the Texas Supreme Court. Whether the court accepts it is another question. The result looks pretty fair to me.

Merry Christmas!

It was a triumph of hysteria over common sense, a thrashing of science at the hand of ignorance, capitulation to a small but loud minority of NIMBY protestors. The City of Dallas has passed one of the strictest drilling ordinances in the country. 

The ordinance amounts to a defacto ban on future drilling because of the requirement that no well can be closer than five football fields from a home, school or other “protected use”.  For perspective, walk off 1,500 feet down the street in front of your house and ponder whether such a distance is necessary if the real goal is to balance the interests of homeowners with those of mineral owners and the taxpayers.  

Other essentially sound provisions are rendered meaningless by the 1,500 foot setback:

  • Requirements for base line sampling and testing of air, soil, ambient noise levels, water wells and surface water and an initial gas analysis or raw gas produced.
  • Limitations on noise levels and requirements for noise mitigation.
  • Limitations on hours of operation of different phases of drilling.
  • Requirements on inventory of hazardous materials and chemicals.
  • Required tagging of fracturing fluid to enable tracing of the fluid to a specific pad site.
  • Incident-reporting requirements.
  • Site maintenance requirements.
  • Requirements for reduced emission completion techniques.
  • Required emissions compliance plan if a site receives two or more air quality violations in any 12-month period.
  • Provisions for seismic survey permitting.
  • Regulation of pipelines.

One need only to look at our neighbor to the west, Fort Worth, with its 6oo-foot setback, for evidence of an ordinance that allows safe and profitable drilling operations.  In Dallas, the council even ignored the recommendation of their own task force comprised of citizens from both sides of the debate for a 1,000 foot setback.

The winners and losers

The losers aren’t oil and gas operators. I was asked, What will the drillers do now? That’s easy: Take their sizable job-producing and tax revenue enhancing investments elsewhere.

The losers are Dallas taxpayers, whose leaders have left potentially large tax revenues and royalty income in the ground, and mineral owners, whose once-valuable assets will not be developed.

The winners are no-nothing environmental protestors. Their arguments have either been debunked or were not science-based in the first place. 

The cynic in me wonders if the Council tried to create another loser: Trinity East Energy, the producer who paid the city $19 million in lease bonus, to be told that no drilling permits would be issued.  One wonders if a “strict” regulation, rather than an outright ban, is calculated to give the City a leg up if Trinity East were to sue for the return of their bonus.     

My own council member Jennifer Staubach Gates and my friend Sandy Greyson, whose other decisions have been sound, voted in favor. I hope they will be stronger and smarter in the future.

It’s like we’re in California, but without the ocean views.

UPDATE: I found the song that perfectly reflects the council’s love for the environmental reactionaries and NIMBYs:

http://www.youtube.com/watch?v=yzRhrBCHiBU

 

Co-author Brooke Sizer

In Louisiana, in order to have a valid oral transfer of immovable property under Civil Code Art. 1839, two requirements must be met:

  • Delivery must be actual—physical possession must be in the transferee who claims title, and
  • Recognition by the transferor under oath.

In Harter v. Harter, mineral interests (which are immovables) were properly assigned because the transferor sufficiently admitted to the transfer and there was performance. 

The Facts – Sibling Rivalry Worthy of Jacob and Esau

Mailee Harter died and left four children: Steve, Mike, David, and Jan. Steve was named independent administrator of the estate. Each of the children was a residuary legatee owning a 1/4th interest. Steve, in his capacity as independent administrator, sued Mike. In settlement, Mike agreed to pay off three promissory notes and purchase the interest of Harter Energy, LCC for $1 million cash, transferring all interests to Harter Oil Company (owned solely by Mike). Mike also forfeited his interest in the estate and released all rights he might have against the estate and the remaining heirs or arising out of Steve’s handling of the estate.

David and Jan felt like Steve was mishandling the estate and after discussing the issues with Mike, David, Jan and Mike agreed that Harter Oil would sell a 25% interest to David and a 25% interest to Jan in the leases Mike had purchased from the estate. The sale price was financed by Harter Oil. In return, David and Jan agreed to sue Steve to remove him as independent administrator and any recovery would go to Mike.

Mike decided to sell two of Harter’s Oil leases. The purchaser discovered that David and Jan were working interest owners, so Mike instructed his employee to remove David and Jan from all of Harter Oil’s records. Mike then sent a note to David and Jan telling them that he was not satisfied with the progress of the suit against Steve and while he would continue to pay them $12,000 for the remainder of year, they would then need to reevaluate their deal. The suit with Steve was eventually settled. Mike sold the remaining leases.

David and Jan sued Mike in order to obtain their share of the sale price. (We aren’t surprised, are we?)

The Requirements Are Met

Mike’s actions constituted an actual delivery of the working interests, and internal records reflected a transfer to David and Jan. David and Jan were added to the ownership decks and portions of the money earned were applied to the loans. David and Jan were given monthly checks and 1099s and were kept informed of monthly production.

The Art. 1839 requirement of “recognition under oath” was satisfied by Mike’s admission of issuing monthly payments which were derived from the lease revenues, instructing an employee to make entries in the company’s internal records evidencing a transfer of 25% to each David and Jan and to add them to the ownership decks. This is despite his denial under oath of his intention to make the transfer. 

This was an appeal of an involuntry dismissal in favor of Mike the grantor, so the case was remanded.

Takeaway

Mommas and daddies, die broke; it’s easier on the kids. If you can’t die broke, raise your children to be less like Jacob.

The dude in the picture?  The undisputed King of Zydeco, Clifton Chenier, who died on December 12, 1987.

Co-author Brooke Sizer

Scoundrels often get away with their crimes by scamming lots of victims for small amounts, so that no single investor can afford to prosecute his claim. Big Rock Investors Association v. Big Rock Petroleum, Inc. was an unsuccessful effort by investors to clear this hurdle.

Big Rock Investors Association (BRIA) was created to prosecute claims by 226 investors of $26.8 million in Big Rock Petroleum drilling projects. The allegation was that it was a Ponzi scheme. Of 100+ projects, a substantial majority either never existed or Big Rock never had an interest in them.

On behalf of its members BRIA sued Big Rock for violations of the Texas Securities Act, breach of fiduciary duty, and constructive trust.  

No Association Standing.

BRIA could not withstand a challenge to its standing to sue because each member would have to present individual evidence to obtain the relief they sought. An association has power to bring suit on behalf of its members when: 

  • its members would otherwise have standing to sue in their own right, 
  • the interests it seeks to protect are germane to the organization’s purpose, and 
  • neither the claim asserted nor the relief requests requires the participation in the lawsuit of each of the individual members.

BRIA’s problem was the third prong, which focuses on administrative convenience and efficiency. Claims by an association are allowed when they will advance administrative convenience, efficiency and economy.  When each member would have to present evidence to prove their damages, the goals behind allowing suits by associations are undermined.

Generally, an association has no standing to sue on behalf of its members when the relief sought is monetary damages to individual members and when the damages are not common to the entire membership, nor shared by all to an equal degree.

The individuals didn’t share a common investment portfolio. Each investor would have to present their gains and losses—requiring a fact intensive participation by each member.

Is There Ever Association Standing?

If the association is seeking a declaration, injunction, or another form of prospective equitable relief, then it can be reasonably supposed that the all members would benefit and the concerns regarding efficiency would be advanced. However, the courts will still look at whether individualized evidence must be presented or if the evidence will be redundant. They will also examine whether concerns of judicial economy will truly benefit.

No problem; I’ll be Their Agent.

BRIA claimed that power of attorney status was granted to it by each member via a claims management agreement. But BRIA could not present authority that a power of attorney from each member exempted it from the third prong of the test.

Takeaways

Don’t give your money to strangers with big, unvetted promises.

Use Google, or an investigator, before investing. Too ofen we’ve represented jilted investors who could have learned to avoid their scammers with even minimal investigation.

Here’s what Big Momma Thornton thought about scammers.

Co-author Tara Trout Flume

You won’t get what you don’t ask for. That’s a given. But so is, You can’t always get what you want. That’s the end of most lawsuits for one side or the other. 

Take Wade Oil & Gas, Inc. v. Telesis Operating Company, Inc., et al, for example. Wade, an oil and gas properties broker, entered into a contract with Telesis in which Wade was granted “the exclusive right to solicit and seek offers” to purchase a property for three months in return for a sum of money and an overriding royalty interest. Telesis received an offer from the buyer during the three-month term, sold the property to the buyer with little to no involvement from Wade, and did not assign the override to Wade. Wade sued, arguing that it was owed the override because the offer was received during the exclusive listing period.

Unfortunately for Wade, the contract didn’t say what Wade thought it said (or at least, what he wanted it to say). The agreement read as follows:

“If any offers are received to purchase the Property by Telesis Operating Co., Inc. within 180 days after the [3 month term] that were identified by Wade to Telesis [. . . ] during the [ 3 month term] and a sale is consummated, then Telesis [. . . ] shall be obligated to compensate Wade”

Because Wade did not ‘identify’ the buyer to Telesis, Telesis was not obligated to compensate him with the override. Wade argued that he had an exclusive right to sell the property during the term, but he did not. Instead of Wade obtaining an exclusive right to receive offers and sell, Telesis “reserved its right to sell the property independent of Wade.”

Wade lost out on a large sum of money because his contract didn’t say what he intended it to say; instead it created ambiguity.

It might seem silly to reiterate so frequently the notion that your contract needs to clearly state what you want and expect to come from the agreement and the relationship, this case reminds us that contracts don’t always get written that way.

The takeaway: Negotiate for what you want and then verify that your agreement explicitly states what you intend. Ambiguity works pretty well for presidents and members of Congress, and in some religions (think Episcopalian, but not Baptist) 

The obvious musical interlude. I know its only a rock and roll cliche, but I like it. 

Co-author Alexandra A. Crawley

In Walton v. City of Midland, the surface owner of a 35 acre tract within the city limits of Midland, Texas, contended that a provision in a city permit for an oil or gas well was a regulatory taking because it required the lessee to drill a water well on the surface owner’s property for landscaping purposes and that this requirement exceeded the lessee’s right to use water under its oil and gas lease.

The city granted the lessee a permit to drill a well for oil or gas on the surface owner’s property with the following requirement:

Operator shall drill one (1) freshwater well for the provision of irrigation water to maintain the trees required above. Said water well shall not be closer than five hundred (500) feet to the permitted oil and gas well. Operator shall maintain all required trees in a healthy and growing condition. The operator is authorized to drill only one well for irrigation purposes.

The Elements of a Taking Claim

The elements of an inverse condemnation claim are (1) the governmental entity intentionally performed an act in the exercise of its lawful authority, (2) that resulted in the taking, damaging, or destruction of the claimant’s property, (3) for public use. Such a claim may be based on a physical or regulatory taking. Walton alleged a regulatory taking.  (It is referred to as “inverse” bcause it is the opposite of the typical eminent  domain case, in which the government is the claimant.)

The Reasoning

The court determined there was no regulatory taking, focusing on the various tests applied by the United States Supreme Court that aim to identify regulatory actions that are functionally equivalent to the classic taking in which government directly appropriates private property or ousts the owner from his domain. The tests focus on the severity of the burden that government imposes upon private property rights. Several facts support th result in this case:

  • The provision did not require lessee to drill the well on the surface owner’s property, only that it could not be located closer than 500 feet to the permitted oil and gas well; therefore, the surface owner did not “suffer a permanent physical invasion of his property.”
  • Because the surface owner acquired the property subject to the mineral severance, granting the permit was consistent “with the parties’ already existing property rights” and no affirmative rights were granted to the lessee “to occupy or use” the land.
  • The value of the surface after the lessee drilled the well was $3,000 per acre, which shows “the granting of the permit did not deprive him of all economically beneficial use of the property to the extent that he was only left with a token interest.”

Takeaway

If the government is not specifically granting authority to occupy or use land, or taking away all but a token interest in private property, a regulatory taking action will most likely not succeed in Texas.