Ever the schoolyard bully, the EPA has been pushing its agenda against the will of the states, at least until the principal intervenes.

A minority (that’s the Republicans) report by the U. S. Senate Committee on the Environment & Public Works asserts that the EPA is in violation of “cooperative federalism”, in which the EPA would set national standards on an emissions rule and allow states to administer the regulation in the most cost effective way. The rationale is that states and localities are better suited than the feds to design and implement compliance strategies.

The report says the agency has failed to consult with states or has coerced states to adapt stringent regulation that come at a huge cost to the state’s citizens and economy.

The report focuses on “sue and settle” agreements the EPA makes with environmental activist organizations in which the agency, after being sued by an environmental group, enters into a consent decree allowing regulations to move forward without comment from the states or regulated industries.

The bully doesn’t always get its way.

Alt v. EPA was about the EPA’s assertion of regulatory authority over stormwater runoff from Ms. Alt’s farmyard. She challenged the EPA’s findings that she had violated the Clean Water Act. The case was about the discharge of “particles, dust and feathers” from Ms. Alts’ poultry farm into a federal waterway. Inother words, when it rained, chicken poo-poo ran into “Mudlick Run”.

The EPA found that Ms. Alt was in violation of the Clean Water Act and threatened a civil action in which she could be subject to penalties of up to $37,500 per day. The question was whether Ms Alt’s activity was exempt from liability under the agricultural storm water exception to the definition of a “point source”.

I’ll skip the legal analysis and get to the larger point: According to the court,“it appears to be a central assumption of the EPA’s position that the agricultural stormwater discharge exemption had no meaning whatsoever from the time the exemption was added to the statute until 1987 until the EPA promulgated its new regulations in 2003.”

In rejecting the EPA and ruling for Ms. Alt, the court concluded that “common sense it the most fundamental guide to statutory construction.”

In Iowa League of Cities. v. EPA, the federal 8th Circuit ruled that the agency was pushing a new interpretation of its wastewater treatment rules in letters sent to cities in Iowa in order to prohibit selected internal techniques for treating wastewater during high-flow storm events.

If you would rather not read the opnion, I refer you to the NCPA’s Energy and Environment  newaletter by Sterling Burnett, from which I plagiarize joyfully. The ruling says that what goes on within the plant is not within the EPA’s purview as long as the effluents leaving the plant meet pollution limits. If the EPA wants to regulate an activity, it must go through the rule making process, not simply give opinions. The EPA can’t contradict its own rules.

Makes sense to me.

Co-author Brooke Sizer

The Bureau of Land Management released a new Instructional Memorandum 2013-151, clarifying the re-evaluation of bonds required for operations on federal lands. The purpose was to clearly define the terms and conditions now set out in the regulation governing the subject: 43 CFR § 3104.5(b). Here is a brief summary of the IM: 

The amount of any bond may be increased whenever it is determined that the operator poses a risk due to certain factors:

  • a history of previous violations,
  • a notice from the Service that there are uncollected royalties due,
  • the total cost of plugging existing wells and reclaiming lands exceeds the present bond amount based on the estimates determined by the authorized officer, or
  • other factors not specifically enumerated.

The increase in the bond amount may be to any level specified by the BLM’s authorized officer, but in no circumstances can it exceed:

  • the total of the estimated costs of plugging and reclamation,
  • the amount of uncollected royalties due to the Service, plus
  • the amount of monies owed to the lessor due to outstanding violations.

When Can There Be an Increase?

Re-evaluations of all bonds shall take place at least once every five years, or sooner if warranted in situations such as transfer of title, submission of an application to drill, failure to timely plug and abandon.

What Will Trigger an Increase?

The IM now sets the basis for adequacy reviews performed by the BLM field officers. A point system will examine the well status, compliance history, and reclamation stewardship and each criterion will be assigned a number of points based on the risk it creates. One example: each shut-in/shut-down of operations in the last three years will be credited as 50 points.

The total number of points will determine whether a bond increase will be issued. Less than 100 points accrue means no bond increase. If more than 100 points are accrued, the bond will be increased. The points are calculated at $500 each.

Can I Avoid an Increase?

It is possible in certain situations for the BLM’s Authorized Officer to override a bond increase. The primary situations envisioned by an override are:

  • the operator conducts all operations in a prudent and timely manner and has a history of compliance,
  • average daily oil production per well over the past 12 months is greater than five barrels, but daily gas production per well over the same period averages less than 30 MCF from marginal wells,
  • average daily gas production per well over the past 12 months is greater than 30 MCF, but daily oil production per well over the same period averages less than five barrels from marginal wells.

Happy Witchy Halloween

Even if you aren’t the actual plaintiff in a lawsuit you can still be personally liable for breach of a covenant not to sue. It’s easy! Sign a release in your individual capacity, cause an entity you control to bring a lawsuit, and then financially support the suit. And you can share the liability with your friends who signed with you!  That’s the takeaway in Dallas Gas Partners, LP, et al v. Prospect Energy Corporation.

Muse, Nelson and others formed Dallas Gas Partners, LP (DGP), which got into a feud with Prospect Energy over an agreement to finance the purchase of Gas Solutions. In a transaction to resolve the dispute, the parties executed three documents:

  • DGP’s limited partners signed a “Unanimous Written Consent of the Partners,” approving assignment of the contract to purchase Gas Solutions.
  • Muse, Nelson, Weiss, and Prospect signed a “LLC Membership Interest Purchase Agreement” which included a “Mutual Release” by which each signatory agreed to release all claims arising out of the agreement, and a covenant not to “institute, maintain, or prosecute any action, claim, suit, proceeding or cause of action” relating to the agreement. The agreement provided for recovery of “actual damages”.
  • The DGP partners also signed a “Consent and Agreement of Limited Partners”, by which they consented to the assignment of the right to purchase Gas Solutions and the transfer of the membership interests to Prospect. Each limited partner ratified the Mutual Release.

DGP sued Prospect alleging many bad deeds. Prospect counterclaimed and sued DGP, its general partner, Muse, Nelson, and Weiss for breach of the covenant not to sue.

Prospect prevailed. The court found that Muse, Nelson, and Weiss signed the LLC Purchase Agreement in their individual capacities and were therefore bound by the Mutual Release. Muse, Nelson, and Weiss received “‘significant consideration” in the transaction. There was “uncontroverted evidence” that Muse, Nelson, and Weiss caused and funded the filing of both lawsuits.”

Muse and Nelson argued that, even assuming they were bound personally by the LLC Membership Interest Purchase Agreement, there was no breach because they didn’t personally sue Prospect; DGP did.

But in that agreement the three individuals transferred their individual interests to Prospect. And they signed the Consent and Agreement of Limited Partners as partners.

Focusing on the phrase “institute, maintain or prosecute any action, claim, suit . . . to enforce any of” the released claims the court decided that even though they weren’t the actual plaintiff, the individuals caused the suit to be filed, prosecuted it, and funded it.

The word ‘maintain,’ must be given meaning, the court said, relying on the definition from Merriam-Webster: “to support or provide for.” Based on this definition, Muse and Nelson, as signatories of the agreement, could “maintain”’ a lawsuit by providing financial support. Muse and Nelson violated the mutual release and covenant not to sue by personally funding the suit.

Prospect’s only damages were its attorneys’ fees, which the court awarded as “actual damages”.

Lou Reed RIP. (Ignore the graphics; the song is great)

As another college football weekend approaches, let’s talk whiskey.  All work and no play might save Jack’s liver from decaying into a bile-filled mass of diseased tissue, but the oil man needs a break from the burden of termination clauses, stolen trade secrets, and – as revealed by Yoko and Shawn – desecration of Mother Earth by those toxic gas wells he’s been drilling.

Cheer up, Jack! I’ve reported before on my search. (Perhaps you took the quiz?) Round two is really the neo-Sazerac, and our candidates, all in Dallas, tweak the traditional ingredients to great and tasty effect.

Princi Italia

Alternative ingredient: Black Sambuca instead of Absinthe. It’s lower in alcohol and hence more subtle and smooth than Pernod or Absinthe, with less of an alcoholic jolt. They’ll do it with Woodward Reserve Bourbon if you like. Don’t take them up on the offer – too sweet IMO. Aaron Neville and Linda Ronstadt in a glass.

Hibiscus

Alternative ingredients: Where do I start? Grant, the very excellent mixologist, uses Whistle Pig, a 100 proof rye, and Bitter Truth Aromatic Bitters, 80 proof (higher in alcohol than Pernod or Absinthe). The absinthe is misted, rather than rinsed around the inside of the glass. Very cool. The bitters lingers for an aftertaste that’s as soothing as Eric Clapton channeling Elmore James.

A nice, not harsh, alcohol bite. Talking Heads in a glass.

Bonus drink that has no name: Five 50-proof or less Italian Amaro herbal liqueurs, the names of which I don’t know, with a spritz of something called Bittermen’s orange cream citrate, and who-knows-what-else. It’s an aromatic drink that is complex and … I have no idea … Exotic and incomprehensible? King Sunny Ade in a glass.

The Standard Pour

“Neo” in that they mist the absinthe in the glass and then flame it, giving it a kind of caramelized flavor. A tiny bit too much simple syrup IMO.

The Meters in a glass, with a Barrence Whitfield and the Savages chaser.

Enjoy!

The fellow on the right is after your lease. The result in Cabot Oil & Gas Corporation v. Healey, LP was so bad for the lessee I’m going directly to …

The Takeaways

Landmen: First, when offered a lease with automatic termination language, run away like you’re chased by an Obamacare Navigator who hasn’t undergone a background check, especially when termination is triggered by something as immaterial as failing to share data. I don’t care how much your geologist says that’s where all the hydrocarbons are. 

Second, for all those times you will ignore the first suggestion, redouble your lease administration processes so that burdensome and out-of-the-ordinary lease requirements are not overlooked. I have litigated these provisions.  Protecting your assets from a catastrophe is a matter of having both good processes and good people.

Landowners: If you are in the middle of the play, especially if you have big acreage, see “Second”.  Used in good faith, data-sharing, automatic termination and similar clauses protect you from operators who might otherwise ignore legitimate concerns. 

The Lease

Three oil and gas leases required the lessee to deliver to the lessor daily drilling reports, copies of all logs, monthly production reports for the life of the well, copies of all reports and forms filed with the Railroad Commission, locations, dates of completion and abandonment, and copies of title opinions.

Any breach of the lease “ … shall be grounds for cancellation of this lease …”.

The Lawsuit

Cabot and its predecessor, Enduring Resources, drilled 21 wells without providing all the required information. Healey contacted Cabot, suggested that the leases had been breached, and requested to be treated as a working interest owner. In response, Cabot provided a “sizable amount” of data in accordance with the data-sharing provision.

Healey sought a declaratory judgment that the leases had terminated, that Healey was an unleased co-tenant in the wells, and for an accounting. The jury found that Healey had effectively terminated the lease due to Cabot’s breach. The court signed a judgment declaring that the leases were terminated, the amount of production expense for each well, and determining Healy’s ownership percentage in each of the units and awarded Healey attorney fees.

If you don’t go to trial for a living, you may stop reading now

A declaratory-judgment action is not the proper procedural vehicle for determining whether the lease had been terminated, and the court so ruled. The proper procedure is trespass-to-try-title. But Cabot didn’t preserve the error because it had not filed special exceptions to Healey’s petition.

What you say in a hearing months before trial can haunt you. At a continuance hearing Cabot said it needed to conduct discovery from Enduring on the reasonable and necessary expenses for the wells. Months later, at a limine hearing, the lawyers explained that they had been told to “take a hike”, and didn’t try harder (letters rogatory, depo notices, etc). Thus, there was no evidence of those expenses.

The court discussed Rule 1006 (summaries of voluminous records) and Rule 803(6) (the business records exception to hearsay).

Challenges to the jury questions on substantial compliance, waiver, and quasi-estoppel are worth a look.

Co-author Travis Booher

How is a producer to deal with a demanding and formidable lessor’s insistence on stringent surface protection? How about demands from environmental groups and government entities? One way might be to educate himself and his fellow stakeholders.

One group at the forefront of education efforts is Texas A&M University-Kingsville’s Caesar Kleberg Wildlife Research Institute . The Institute promotes voluntary conservation practices in oil and gas development.  Specifically, it provides information to producers about native grass reseeding efforts. Texas Parks and Wildlife  also provides wildlife-friendly education materials.

Why is this important? Historically, “South Texas” meant brush country, big deer, quail, and late-night border town revelry. I was in south Texas last week, marveling at the development arising from Eagle Ford Shale oil production. Today, “South Texas” is as much about oil derricks, over-travelled roads, “no vacancy” signs, and savvy lessors with significant mineral interests presenting sophisticated and demanding lease provisions (we’re talking about surface use; let’s not even mention royalty and pooling clauses).

Larger rural tracts resulting in greater bargaining power for the mineral owner drive more stringent requirements for surface reclamation. Landowners devote significant effort and attention to their surface. In addition to addressing locations and damages for roads, pads, pits and pipelines, leases often also require reseeding and planting of grasses after production is obtained. Drilling closer to populated areas drives the same interest by governments and environmental groups. (To our knowledge this isn’t prevalent in the Eagle Ford but is an issue elsewhere.)

There is another reason: South Texas is a significant wildlife habitat, and landowners and environmental groups hoping to support the environment, while also enjoying the economic rewards of mineral development, request reseeding with native grasses. To the landowner it’s easy – native grasses encourage vibrant wildlife and support wildlife habitat. It’s not quite “Keep Austin Weird”; it’s more like “Keep South Texas Native”. Satisfying these requirements can be burdensome and costly, and requires knowledge and effort, but it can be good for producers, landowners, hunters, environmentalists and nature lovers in general.

The Big Picture

Landowner and community happiness can often be found in creative surface-use protections. Not coincidentally, producers’ frustrations often lie in the same spot.  Reseeding with native grasses and similar efforts can turn the producer’s frustration into happiness – at least until the royalty and continuous operations clauses kick in.

For another article on this subject, see the July/August 2013 AAPL Landman magazine.

By Jim Reed and David Leonard

The Fifth Circuit has taken steps to fine-tune the interpretation and implementation of the agreement BP negotiated to settle its massive liabilities arising from the April 2010 oil spill following the explosion of the Deepwater Horizon. Interpretation of the 1,000- plus-page settlement agreement—which the court described as one of the “largest and most novel class actions in American history”—has led to several disputes between BP and the plaintiffs’ class counsel. This recent activity should not impact the ability of businesses that employ accrual accounting systems to recover qualified business economic losses under the settlement agreement.

The Issue

Business economic loss claimants must satisfy a complex causation standard established by the settlement agreement in order to recover economic losses. Determining whether a business passes causation requires an analysis of financial performance before and after the April 2010 spill. The financial data required for this causation analysis will rely on different accounting assumptions depending on which accounting system a business employs.

BP has taken specific issue with the treatment of claims submitted by businesses that employ cash (as opposed to accrual) accounting systems. BP argues that financial data generated by cash accounting systems may generate inflated business economic loss awards. BP therefore sought to enjoin the Settlement Administrator from paying business economic loss claims in order to give the court a chance to address these concerns regarding the interpretation and implementation of the settlement agreement with regards to cash accounting systems.

The Solution

Responding to BP’s concerns, the Fifth Circuit ordered the federal district court to ensure the Claims Administrator “is not applying the cash-in, cash-out interpretation to claims that are presented with matched revenues and expenses.” The Fifth Circuit also directed the federal district court to “expeditiously craft a narrowly-tailored injunction that allows the time necessary for deliberate reconsideration of these significant issues on remand.”

To this end, last Friday the federal district court in New Orleans targeted claimants employing cash accounting systems.  The court  ordered the Claims Administrator to immediately suspend payments with respect to those business economic loss claims in which the Claims Administrator determines that the matching of revenues and expenses is an issue. Although this order may jeopardize the ability of businesses employing cash accounting systems to recover under the settlement agreement, it should not endanger the viability of claims supported by accrual accounting systems.

Consider this while celebrating the resurrection of Big Tex: When a lease prohibits post-production cost deductions, can a lessee deduct those costs from a lessor’s royalty? Yes, says Potts v. Chesapeake Exploration, L.L.C. In a market value lease, where lessee sells the gas “at the well” and the court applies the netback approach to calculating market value, the lessee is entitled to deduct post-production costs incurred after the point of sale.

That might make more sense when you know the facts. 

The lease had a “no deduct” provision:

Royalties on gas were ” … the market value at the point of sale of 1/4 of the gas so sold or used. … , [a]ll royalty paid to Lessor shall be free of all costs and expenses related to the exploration, production and marketing of oil and gas production from the lease including, but not limited to, costs of compression, dehydration, treatment and transportation.”

Chesapeake sold the gas “at the well”, and deducted no expenses attributable to Potts’ royalty payments from the time the gas was produced at the well until its first sale. To arrive at the value of the gas at this point Chesapeake took the value of the downstream market-based sale and subtracted costs and expenses incurred between the point of sale and the downstream resale point.

Potts contended that Chesapeake breached the express provisions of the no-deduct clause.

The difference in the parties’ positions arose out of how post-production marketing costs are treated in the calculation. Potts contended that Chesapeake deducted post-production costs to calculate the royalty. Chesapeake, on the other hand, contended that when applying the netback approach, post-production costs may be used to determine the market value of the gas.

The “point of sale” is the point where there is a transfer of title in an arms-length transaction in exchange for compensation.  Potts contended that “point of sale” must be read together with the no-deduct language to ascertain its meaning and when doing so, point of sale means the point where the gas is ultimately sold off of the premises. The court didn’t agree.

According to the court, ” … the netback method requires ascertaining the market value of the gas where available downstream and then subtracting reasonable post-production costs from that point to the point where it is agreed to calculate the market value for royalty purposes. In this case it was the point of sale.

The court distinguished Heritage Resources v. NationsBank, even though the royalty clauses were similar. The factual difference was that the sale in Heritage took place off-premises. Had the royalty in Heritage been calculated at the off-premises point of sale, the no-deduct clause would have prevented deducting post-production costs incurred from the point of production at the well to the point of the off-premises sale.

In this case, the sale was at the well. Therefore, the no deduct provision is consistent with Heritage.

Takeaways – the best-laid plans … 

Potts said their argument had to be correct because they wrote the no-deduct provision to comply with Heritage. But what they didn’t, and perhaps couldn’t, count on was the way Chesapeake sold its gas. Did Chesapeake plan it this way?. That seems unlikely, because at one point prior to litigation it agreed that it couldn’t deduct post-production costs.

Chesapeake’s sale was to an affiliate, about which Potts didn’t  complain. With 20-20 hindsight, maybe he should have.

The court told Potts to give it up or turn it loose (their claim, that is), but not quite in this way.

Co-author Brooke Sizer

The “tradition” of stealing a prospect generator’s maps – and getting caught at it – is alive and well. Lamont et al v. Vaquillas Energy Lopeno Ltd et al is the second recent Texas case on theft of trade secrets and, like the first, resulted in a large judgment against the alleged thieves.

The Players

Ricochet, owned by Hamblin and Lamont, entered into Prospect Generation Agreements with Vaquillas and JOB.

In September 2004, Ricochet’s geologist Maier identified the Lopeno Prospect beneath two contiguous tracts — Worley and El Milagro. Maier created a seismic map of the prospect that became known among the parties as the “Treasure Map”. Vaquillas and JOB agreed to participate as working-interest owners. Ricochet obtained a lease over the Worley property but not El Milagro because it was in litigation over a previous lease. The meetings among Ricochet, Vaquillas and JOB were considered by everyone to be confidential, and the seismic information was to be kept secret.

In August 2006, Lamont notified Hamblin that he wished to separate from Ricochet. In February 2007, agreements dividing Ricochet’s oil and gas prospects and a separating Lamont from Ricochet were signed, and Lamont tendered his resignation as director, officer and chief operating officer, all retroactive to December 31, 2006. Lamont signed a Joint Operating Agreement for the Lopeno Prospect as a 29% working-interest owner. Thereafter Maier sent Lamont a copy of the Treasure Map without requiring him to sign a confidentiality agreement.  The parties drilled the Worley well.

In January 2007 Lamont met Carranco and in February provided Carranco with seismic maps of four different prospects, including Lopeno. In February, Lamont received a copy of the Worley well log and he and Carranco immediately began efforts to lease the El Milagro property under the name of Montecristo. In March, Lamont informed Ricochet that Crazy Horse, a company of Carranco’s, had purchased 10% of Lamont’s 29% working-interest.

Lamont and Carranco, using Montecristo, were successful in leasing the El Milagro property by outbidding Ricochet. They paid a bonus of over $1 million. During the next six months, L.O.G. drilled a well on El Milagro and depleted the Lopeno Prospect reservoir, thereby depriving Vaquillas of the ability to produce from the Worley.

The Incriminating Evidence

Lamont and Carranco did not conduct any independent research of the gas reservoir. It was only after viewing the seismic data and the well log that Lamont and Carranco sought to lease the El Milagro property. Also, in order to secure a bank loan to pay the lease bonus, Lamont submitted a letter containing information that was drawn directly from the seismic data and Treasure Map. Lamont and Carranco claimed the well-log led them to pursue the El Milagro property; however, the log only provided information regarding the Worley well, and Lamont and Carranco began drilling the El Milagro without attempting to obtain any seismic data on that property.

The Questions for the Court

Did the Treasure Map lose its trade secret status in light of Ricochet’s failure to require confidentiality agreements and by showing the map to potential investors? Lamont claims that he owed no duty to Ricochet after the effective date of his resignation.

No. The map did not lose its status as a trade secret. In Texas, employees are forbidden from using trade secrets acquired during employment, and this obligation survives termination. Furthermore, disclosure of a trade secret is not destroyed by limited communication and furtherance of the owner’s economic interests, such as showing protected items to prospective buyers or customers.

Were Lamont and Carranco liable for using a trade secret if the trade secret was discovered by “improper means”?

Yes. Obtaining knowledge of a trade secret without spending time and resources to discover it independently is improper unless the secret is voluntarily disclosed or reasonable precautions to ensure its secrecy are not taken.

 

Before we talk about global warming, which of these statements most matches your view of  politics and policy:

“In all things the mean is praiseworthy, and the extremes neither praiseworthy nor right, but worthy of blame.” Aristotle.

“There’s Nothing in the Middle of the Road but Yellow Stripes and Dead Armadillos.” Title of a book  by Texas populist and former Land Commissioner Jim Hightower.

 Mr. Hightower would be right at home in the latest clusterfukushima that is the disagreement over global warming. The Intergovernmental Panel on Climate Change – the UN sponsored organization that has been reporting for years on the impending doom caused by anthropogenic global warming – is about to issue its fifth report on climate change. The report will reveal (it seems everybody but you and me has read it) that the IPCC has been underestimating global warming for all these years, and climate change could have double the impact previously thought. That’s what Nafeez Ahmed in EarthInsight says.

That’s not at all what the report will say. The IPCC will tone down its climate-change alarmism and substantially reduce its dire predictions about the future rising of global temperatures. So there’s not so much to worry about. That’s what they say in The Spectator.

That’s a lie like all the other lies. The climate change deniers are “industry puppets spewing obscene lies while people drown”. And the recent Colorado floods are all because of climate change.  That’s what David Sirota says, rather emotionallly, in Salon.

That’s slanderous. The “tell” of the “climateers” reflects their bad hand.  Their warnings of catastrophe now say it will happen “some decades from now” rather than “before the Texas Rangers fall totally out of contention for the MLB playoffs”, as was projected. That’s what Powerline says. That deadline was mine, of course. Theirs is “soon”.  

B*#$+ S#*<!  Global warming is every bit as bad as it ever was and anyone who is against it has been writing articles characterized by misinformation. (To wit, a purportedly “humiliating” piece in The Daily Mail). That’s what Bob Ward of the Grantham Institute, associated with the London School of Economics, says.

And to pile on:  Rush Limbaugh is a corpulent, bloviating idiot. So thinks Media Matters.

Talk about bad motives!  The IPCC bureaucrats are all in it for the huge government subsidies and other perks, says Powerline. The NIPCC , a cleverly-named private group, uses its own studies to portray a view of climate change that is “realistic”. 

But NIPCC is a front for former tobacco lobbyists and current fossil-fuel industry stooges, and their conclusions are “absurd”, says desmog.

Trust me; there’s more.  I give up trying to please Aristotle; I’m in the hunt for Diogenes, the guycarrying the lamp.