You are negotiating a master service agreement, exploration agreement, farmout, or other oil-field contract, and the other side proposes that all disputes be resolved by arbitration. Should you agree? 

The answer? It depends. I try lawsuits, advocate in arbitrations, and preside as an arbitrator, so I’m often asked this question. The answer isn’t the same in every case. It depends on the circumstances, but there are factors to consider.

The Advantages

  • It is private. If a lawsuit has ever been used against you as a tool to embarrass and intimidate, you know what I’m talking about. Generally, statements in pleadings and testimony by witnesses are privileged against claims for defamation – not perjury, but that is entirely another matter. Salacious or scandalous assertions, no matter how untrue or irrelevant, that slither their way into the court’s files are public, and can cause major extra-judicial harm to the receiving party. If you want privacy, arbitration is the way to go.
  • No extra innings. You file your papers, conduct your discovery, have your hearing, and it’s over. No new trials, appeals, cross appeals, or petitions for review.
  • It’s quicker and cheaper (in theory, anyway).  If at least one party is willing and the arbitrator is strong, reasonable limits on the manner and amount of pre-hearing discovery can lower the cost of the process.
  • It is beneficial when the subject is arcane. I once represented an operator in a lengthy arbitration over gas plant accounting. Try to explain that to a jury of 12 “regular people” in a rural Texas county. Our panel was a landman, a future FERC commissioner, and a gas-plant accountant. They got it right (code for “we won”). A jury might have done the same, but I’m not sure they would have understood why, and the odds weren’t as good.

Before we continue, Opening Day is around the corner; that bleak and wintry interval between the end of college football and the beginning of baseball is over. Rejoice.  

The Disadvantages

  • No instant replay. If the arbitrator gets it wrong there is no appeal; you are waiving the full judicial process afforded to parties in litigation, which includes protections against a bad ruling. A wacky legal analysis that a court of appeal would laugh at? Too bad; it’s over. An “out of control” monetary award? Ditto. It’s not hopeless; there are a few limited bases for overturning an arbitrator’s ruling, but it’s difficult.
  • It is not necessarily more efficient. If the parties and their lawyers allow it, the costs, hassles and delays can rival those of litigation.
  • The arbitrator is a professional. Why is this a disadvantage? A party having a claim with high emotional appeal – think “jury appeal” – will want a jury. Say the smell of sulfur follows your opponent when he enters the room. “The jury will hate him” you say. You want a jury, the other side won’t, especially if he as good legal bases for resisting your claim. It is generally considered that an arbitrator, usually a trial lawyer who has seen worse, is more immune than a jury to the emotional component.

In the end, whether to arbitrate depends on what you are trying to accomplish. Seek legal advice before deciding.

With Travis Booher

Texas’s proposed Oil and Gas Majority Rights Protection Act(House Bill 100) has many detractors whose reasons are intense and varied. Here are some of them:

It’s About Liberty

It’s my property that I’ve worked for years to develop (or not, but that’s my concern and not yours). I should be able to do business with those I choose and to avoid those I don’t. Your bill deprives me of that freedom. Let’s say I make a good living off my six or seven 20 BOD wells, and there’s room for more, and I can drill ‘em cheap. The decline curves suggest that with my lean operation, these wells will be around for as close to forever as I need them to be. I’m going to educate my kids off the revenues; then I’m going to sell them and retire. But your $30MM CO2 flood will impose huge costs that will take more years to recoup than I have left in this world, made wretched by people trying to steal my leases. And if I don’t have the money? See next.

Severe Penalties

The bill allows bullies to confiscate my leases. There is a 300% “sit out” penalty on those owners who don’t participate in (that is, pay for) operations, and a lien is allowed to secure the operator’s expenses. (§104.108, 203). Small operators who can’t afford the expenditure and long payout necessary for a huge CO2 flood should oppose the bill on this basis alone.

Abrogation of Private Contracts

The Railroad Commission may amend or abrogate surface use protections in pre-existing oil and gas leases that conflict with unit operations so as to prevent or render operations uneconomical. (§104.204) There goes my blueberry patch, for the good of the collective!

The Big Get Bigger at the Expense of the Small

It allows “big oil” to run over the “little guy”. Again, we refer to working interest owners with the small leases who are happy with their current situation and can’t afford to plan tens of millions of dollars down the road. “Big Oil” proposes a $20-$30MM CO2 flood that will not only wipe out the revenue from their small wells but impose huge costs with a long pay-out, or worse – a 300% penalty.

And speaking of the big guys, it will be expensive and time-consuming for small working interest and royalty owners to fight the proponent at the Railroad Commission proceeding, with all the engineers and lawyers that will be required.

The Share of Production is Uncertain

Sharing of proceeds is not on an acreage basis, but on each tract’s “fair share” of unit production (§104.103). When and how will a royalty owner determine if her interests are likely to benefit from the unitization?

Voting Favors Those with the Most Resources

Approval must be of 70% of the royalty owners who actually cast a ballot (§104.056(a)(2)). This doesn’t say 70% of all royalty owners. It means 70% of those who care enough to vote. In the face of a concentrated effort by the proponent with its hoards of landmen and public affairs personnel to woo the undecideds, royalty owner indifference will benefit the proponent.

If you’ve read this far, you probably know that we’ve had several posts on this topic.  We are neither for nor against. We give you the information so that you can decide for yourself. Here’s a little swamp pop to inspire.

By Travis Booher

“Money isn’t everything, Jett.” Leslie Benedict. 

“Not when you’ve got it.” Jett Rink

The ageless struggle between the oil man and the rancher continues. The Texas Supreme Court declined to review LaSalle Pipeline, LP v. Donnell Lands, L.P., (the link is the court of appeals opinion) a pipeline condemnation suit involving land in McMullen County. South Texas landowners deem the decision historic; pipeline operators are shaking their heads in disbelief.

LaSalle filed an eminent domain action to acquire temporary workspace easements and a permanent right-of-way over two tracts owned by Donnell: an 8,034 acre tract and a 46 acre tract. A 15.95 acre permanent easement would come out of the big tract, and a .97 acre easement from the small tract. After Donnell objected to a Special Commissioners’ award in the amount of $226,055, a jury awarded them $658,689: $19,206 for temporary workspace, $34,533 for permanent easements, and $604,950 for diminution in value to the remainder of the tracts. To no one’s surprise, LaSalle appealed.

On appeal, both parties questioned the validity of the other’s expert at trial. Ironically, both sides used the “comparable sales” method, although (not surprisingly) the experts came up with very different results.

Donnell’s expert reviewed sales data from McMullen and Webb counties, and opined that 4100 of the 8,034 acres was damaged 10% by the pipeline, while the small tract was damaged 25%. James Donnell agreed with his expert’s opinion (Are you surprised?), and estimated his damage would be somewhere around $900,000. Mr. Donnell also noted the easements would be a “black mark” on his deed for eternity.

LaSalle’s expert, on the other hand, testified that a pipeline would not diminish the market value of the remainder of the tracts, and relied on approximately 15 transactions in McMullen County (including several of the comparable sales used by Donnell). The expert also noted that differing land values did not simply result from the fact that some lands have pipelines and others do not. The expert also testified that he spoke with either a buyer or a seller in the McMullen County transactions, and the existence or absence of a pipeline had no bearing on the sales price.

It is worth noting that the court recognized that expert testimony is at best “something of a speculation”. Thus, it is up to the trier of fact – the jury – to determine the market value.  

To the delight of landowners, the court of appeals agreed with Donnell and the evidence it presented. However, the Court did agree to reduce the temporary workspace damages by $12,804, thereby giving LaSalle a hollow victory.

The precedential value of the decision has yet to be determined, but landowners are surely empowered by it, and pipeline operators must be cautious of it. Eagle Ford production must be moved by trucks and pipelines. How a buyer and seller may view a pipeline, however, will ultimately be up the buyer, the seller and the free market. Some landowners may view a pipeline right-of-way as a “black mark”, while others may view it as a good sendera to kill their next buck.

Ponder this one: Will those “black mark” landowners think the same about well locations when their royalty money starts flowing like the Frio River in a spring flood?

By Travis Booher

In Texas title law, “it is well settled that a purchaser is bound by every recital, reference and reservation contained in or fairly disclosed by any instrument which forms an essential link in the chain of title under which he claims.” But does this rule apply to mineral reservations in deed restrictions? No, says Farm & Ranch Investors, Ltd. v. Titan Operating, L.L.C., et al.

Caldwell’s Creek, Ltd. owned 60 acres in Colleyville known as Caldwell’s Creek Addition. In 1994, Caldwell recorded a dedication and deed restrictions which stated, among other things, that “all mineral rights shall belong and shall continue to belong to . . . Caldwell’s Creek, Ltd.”

Between 1994 and 1999, Caldwell conveyed nine lots in the subdivision to various parties. None of the nine warranty deeds contained a mineral reservation. The deeds did contain a “subject to” clause, which stated the conveyance was “subject to any and all easements, restrictions, and mineral reservations affecting said property that are filed for record in the office of the County Clerk … .” In 2005, Caldwell conveyed all of the oil, gas and minerals in the Addition to Farm & Ranch Investors, Ltd., which believed it acquired the same.

In 2008, Titan Operating began oil and gas lease negotiations with Farm & Ranch, but eventually acquired leases from the nine lot owners. Titan then filed suit to confirm it owned the mineral rights, and Farm & Ranch counterclaimed for breach of contract. The trial court declared that Titan owned fee simple determinable title to the lots(lawyerspeak for Titan owned the leasehold rights).

On appeal, Farm & Ranch argued that the recorded deed restrictions were effective to reserve the minerals, and the “subject to” provision placed the grantees on notice. The court of appeals disagreed, and said that an “owner cannot reserve to himself an interest in property that he already owns”, and the restrictions were neither a conveyance nor a reservation. Farm & Ranch also claimed the phrase “shall continue to belong” is a future looking statement, and subsequent references to the restrictions should be effective to reserve the minerals. The court again disagreed and held the phrase “shall continue to belong” should not be interpreted as a future reservation.

Intermission, and an interlude about justice that makes a fellow thirsty.

The result: Caldwell failed to effectively reserve the minerals. 

The takeaway: Check your deed restrictions to determine how high the flag can fly, whether you can have a Blue Heeler in the yard, and the color and location of your mailbox, but don’t look there to reserve minerals.

“Science is my most favorite subject, especially the Old Testament.” Kenneth, 30 Rock

Keeping in mind the importance of science, technology, and transparency in evaluating the safety and reliability of fracking, let’s take a look at some of the leaders in the anti-fracking movement. The results are worthy of your attention.

Displaying an understanding of science equal to Kenneth’s, but with far more misdirected zeal, eminent scientists Yoko Ono, Sean Lennon and Susan Sarandon protested the use of fracking, calling for a total ban – as in the whole world! Just what you’d expect from the seductress who broke up the Beatles.

Remember Promised Land? The humble but feisty locals and the heroic environmentalist take on the handsome-and-conflicted landman (Matt Damon) and his Big Oil predator-bosses. It is reported that the movie was funded by a subsidiary of Abu Dhabi Media, which is a wholly owned by the United Arab Emirates, under which lie billions of MCF’s of gas.   Is there an agenda here? Was Hollywood duped? Does Hollywood care?

The advisory committee of the wholeome- sounding Americans Against Fracking is headed by stage and film director Josh “Gasland” Fox, singer Natalie Merchant and actor Mark Ruffalo. To their credit, they also have a Ph. D,  Sandra Steingraber. 

Then there is Artists Against Fracking, in which 100 artists including noted engineer and drilling expert Alec Baldwin are a part. See their web site describe the fracking process. See the image of the casing spurting a black, evil substance directly into the fresh water acquifer. Note the rhetoric: “methane and other dangerous materials” (the same CO2-reducing methane that fuels their homes and workplaces), “willful contamination”, and “explosions” into the aquifer. Next up for this group: “Artists Against Fracking conjures Energy Fairy to replace coal, oil and gas”.   

And this just in: According to the aforesaid Ms. Steingraber, adjudicating guilt by analogy, fracking could be as bad as leaded paint and leaded gasoline and could kill more people than it employs.  Scan the article for facts that support the headline.  Let me know when you find one.

The Earth Justice web site, where skulls and crossbones indicate each “fraccident” site,  offers this “disaster” in Lumberton, in southeast Texas:   In April 2011 a “small fire” burned “five acres of  a park” and ran off four workers, none of whom were injured. Is that it? Next up: “EPA to ban lightning as a fire hazard”.   

So what’s the point?  In order to resolve our energy challenges Americans deserve a debate based on qualifications beyond fame, album sales, and Oscar nominations, and on arguments beyond fear, ignorance and hyperbole.

Co-author Travis Booher

There are plenty of reasons why compulsory unitization is good for Texas, say the proponents of Texas House Bill 100, the Oil and Gas Majority Rights Protection Act.

More production = more money

The foremost benefit of fieldwide unitization is enhanced production.  Oil and or gas that would otherwise be left behind would be produced. For example Mississippi, which has had production since 1939, has seen a substantial increase since C02-enhanced oil recovery projects were initiated. C02 oil now accounts for 49% of total Mississippi production. This increase is oil that presumably would have been left in the ground.  Projections are similar for selected fields in Southeast Texas: Up to 25,000 bopd of production, resulting in $2.2 billion in addtional tax revenues.

This would, of course, mean more money to royalty owners. Oil left in the ground forever never ends up in a royalty check.

Economic prosperity a/k/a JOBS

The community in which fieldwide units are formed see more oil field jobs. The drilling and operation of injection wells, capture wells and other infrastructure in fields that are otherwise depleted create new jobs in areas that probably need them. That leads to more money circulating among local businesses and households.

More efficient production

Unitization in most cases means more production with fewer wells, which prevents waste. More oil will be produced, which leads to a higher utilization of our natural resources. This allows the most efficient development of resources with less environmental impact.

Protection of surface owners

Surface owners, who always like to see fewer tank batteries and other facilities, would benefit. In a typical secondary or tertiary recovery operation, fewer surface facilities are necessary because the owner of each tract is not required to a drill his own well and locate facilities on his tract. Although production will increase, the number of facilities should not increase, thereby resulting in higher utilization of natural resources with less environmental impact.

Defeats the “tyranny of the myopic minority”

Fieldwide units can be established by agreement, but owners who do not agree cannot be forced to join, leaving large swaths of acreage, often in the middle of operations, un-unitized. Without a mechanism for compulsory unitization, a few small owners situated in the wrong place have the power frustrate opportunities the majority would like to pursue. The bill would provide willing lessees and mineral owners an opportunity to obtain their “fair share” without hindrance from the neighbors.

These points demonstrate the purpose of unitization: Conservation of oil and gas, prevention of waste and protection of correlative rights: This is a favorite of law professors and policy wonks (but we repeat ourselves).

We could be more like Louisiana!

Seriously, our neighbor to the east and 38 other producing states have some form of compulsory unitization. Set aside your Texas pride for a moment: Can everybody else be so wrong? Is Texas that much smarter than they are? Given our great state’s inglorious national ranking in elementary and secondary education, I doubt it.

Coming soon: Compulsory Unitization is a Terrible Idea (Rhetorically Speaking)

It’s Mardi Gras. If you see my college-student daughter chasing beads, dubloons and coconuts, tell her to get back to the library where she said she was going.   

In Walton vs. Burns, another legacy pollution case, a Louisiana court of appeal ruled, among other things, that a surface owner has the right to assert a claim under Louisiana Mineral Code Article 22 against a mineral servitude owner for the servitude owner’s obligation to restore the surface insofar as practicable to its original condition before oil and gas operations. This claim is different than the one the surface owner might have against an operator, which is based on Mineral Code Article 122’s obligation of the lessee to act as a “reasonably prudent operator”. These are two distinct legal theories, and also implicate Article 11, requiring the owner of a mineral right to exercise his rights “with reasonable regard to those” of the surface owner.

Walton had a history prior to the Louisiana Supreme Court ruling in Eagle Pipe & Supply, Inc. vs. Amerada Hess in October 2011, in which the court invoked the subsequent purchaser doctrine to deprive certain surface owners of a cause of action for surface damages. Walton involves many procedural goings-on which will be avoided here because they are of an interest only to lawyers who go to the courthouse.

The essential question, according to the Court, was whether mineral servitude owners and oil company defendants as lessees owe the same duties to plaintiff-surface owners for damages and remediation after oil and gas operations have ceased.

The court acknowledged that, especially with the enactment of Act 312 (La. RS 30:29), there is a special procedure to resolve claims of environmental damage arising from oil field operations. The court noted that Act 312 requires those parties whom a court finds legally responsible for damages from operations to develop a plan of remediation.

The Court considered the fact that different defendants – lessees, operators and servitude owners – may have different obligations to evaluate and remedy contamination. In the end the Court decided that given the various rights, obligations and duties under the Mineral Code, servitude owners should be a part of the same lawsuit as lessees.

In keeping with the season, here is Iko Iko.

Other than say, $8.00 crude, the recent national election, or a top-five recruiting class by your most-reviled gridiron enemies, few events are as likely to work an operator into a worst-case-scenario frenzy as a lease termination claim. Lessors love ‘em, of course!

The question of the day:

In a head-to-head contest between a Louisiana statute and language qualifying an automatic termination provision in an oil and gas lease, which one wins?

If the lease contains a “judicial ascertainment”clause then the lease prevails, says a Louisiana court in B.A. Kelly Land Co., L.L.C. v. Questar Exploration & Prod. Co.

In 1971, the lessor granted an oil and gas lease containing a habendum clause, a shut-in clause, and a “judicial ascertainment” provision, providing that after production was secured,

. . . this lease shall not be subject to forfeiture or loss, . . . for failure to conduct operations in compliance with this contract except after judicial ascertainment that Lessee has failed to conduct such operations and has been given a reasonable opportunity after such judicial ascertainment to prevent such loss or forfeiture . . .  .

A successor acquired the mineral rights and sued, claiming the lease was terminated because no minerals were produced and no operations were conducted during certain periods in 1988 and 1989.

The lessor said:

Under Louisiana Revised Statute 31:133, the occurence of an express resolutory condition results in automatic termination of a mineral lease. The judicial ascertainment clause in this lease did not apply because the lease automatically terminated for cessation of production.

The lessee said:

A bona fide dispute existed as to whether cessation of production actually occurred in ’88 and ’89 or whether the cessation of operations fell under the shut-in clause, which would maintain the lease. Because of this dispute, the judicial ascertainment provision trumped any statute providing for the automatic termination of the lease.

And the winner is…

The court reiterated a basic principle of contract law: Absent a violation of law or public policy, the lease is the “law between the parties.” Based on the existence of a bona fide dispute, the judicial ascertainment clause was not against public policy. As the law between the parties, the lease trumped Louisiana law calling for automatic termination upon cessation of production.

Just like the shut-in clause ameliorates the harshness of the habendum clause’s automatic dissolution upon failure to produce in paying quantities, the judicial ascertainment provision is another way to minimize the spectre of automatic termination. When there is a bona-fide dispute between lessor and lessee, the judicial ascertainment provision will govern.

Indidentally, there was lots of procedural goings-on that had little to do with the points of law discussed (I ask for forgiveness for using this lawyer word, but … ) herein. 

A related question:

Considering some operators we’ve seen, you’ve got to ask, what’s the difference between a dilatory litigation tactic and a bona fide defense to a claim?  What if the conclusion is that the “dispute” isn’t “bona fide”? In its discussion of other cases, the court answers: The clause will not be enforced.

With able assistance from Jonathan Nowlin

 

Co-author Travis Booher

“What’s in a name? That which we call a rose by any other name would smell as sweet”. (This situation is more like the star-crossed lovers of this famous passage than you might think; let’s hope this session’s Act III doesn’t end the same way.)

We’ve been called to task because of last week’s reference to HB 100 as a “forced pooling” bill; that it is really about ”fieldwide unitization”. Is there a difference, and does the nomenclature matter? As a matter of oil and gas law, there is a difference. In the eyes of some participants in the business, we aren’t so sure. Let’s discuss.

“Pooling” and “unitization” are analogous and often used interchangeably, but each has a specific meaning. “Pooling” is the joining together of small tracts sufficient for the granting of a drilling permit under applicable well spacing rules.  “Unitization” refers to the joint operation of all or some portion of a producing reservoir. Said another way, unitization is the joining together of tracts in order to cooperatively develop all of a part of a reservoir containing hydrocarbons.

Texas already has a forced pooling law of sorts, the Mineral Interest Pooling Act. However, it is infrequently used and has proven to be of relatively little value in everyday practice. The MIPA has also been limited in function to protection of small-tract lessees.

Examples of true forced-pooling regimes are statutes in Louisiana, Oklahoma and other producing states, in which the regulatory power of the state is invoked to establish drilling units for primary production. Texas has no such statute.

HB 100 is essentially a proposal for compulsory unitization to promote and enable secondary and tertiary operations from fields that have been depleted by primary production. This can be seen from the bill itself: “A plan of unitization may be proposed under this chapter only to establish units . . . for unit operations that are reasonably anticipated to substantially increase the ultimate recovery of oil, gas, or oil and gas to greater volumes than would be recovered by primary recovery alone”. § 104.101(a). Moreover, throughout the bill the scheme is referred to as “unitization” which, as we have said, has a particular definition under the law. Pooling is not mentioned.

On the other hand, there are many who will deem participation in a unit under this legislation to be “forced” in the sense that the interests of a working interest owner or unleased mineral owner would be joined together with other tracts without his permission. Whether pooling or unitization, the result is the same: a collective effort by the owner and others to produce hydrocarbons in an arrangement in which he is no longer the “boss” of his property or his operations.

In the end, we agree that HB 100 should be referred to as a bill for compulsory unitization, and not pooling. For some, “compulsory unitization” and “forced pooling” may be a distinction without a difference.

And another musical interlude.

Next week: How many gas molecules can dance on the head of a drill bit?

Co-author Travis Booher

Efforts to introduce forced pooling into Texas law continue. House Bill 100, the Oil and Gas Majority Rights Protection Act, has been introduced by Rep. Van Taylor in the Texas legislature. Today’s post summarizes the bill. Upcoming entries will ponder whether it is a victory over the tyranny of the myopic minority or a fascist invasion of our God-given and hard-earned property rights.

The bill authorizes a working interest owner to apply to the Railroad Commission for an order for the unit operation of a common source of supply or a part of that common source of supply.

The application must:

• Describe the unit area,

• Identify the operations contemplated,

• Include a copy of the plan and all related agreements, such as an operating agreement (including the provisions you would typically find in an operating agreement),

and allege that:

• The minimum required approval of the plan has been met (more on this later),

• Each owner has been given an opportunity to enter into the unit on the same basis, and

• The applicant has made a good faith effort to voluntarily unitize all the interests.

(§ 104.051)

In order to approve an application the Railroad Commission must make these findings after a hearing:

• The plan is reasonably necessary to conduct unit operations and to prevent waste, protect correlative rights and promote the conservation of oil and/or gas,

• The estimated incremental recovery of oil and/or gas is reasonably anticipated to exceed the estimated incremental expense of the operations,

• Productive limits of the common source of supply have been reasonably defined by exploration and development,

• If only a portion of the common source is to be unitized, operations will not have a material adverse effective on the remainder of the common source,

• Unsigned owners have been given a reasonable opportunity to enter into a unit agreement on the same basis as those who have signed,

• The applicant has obtained the permission of a minimum number of working interest and royalty interest owners (see below for percentages),

• Unit expenses to be charged are reasonable and necessary,

• Expenses for operations will be for the common benefit of all interest owners and will be allocated on a fair and equitable basis and will not favor the unit operator over other unitized owners,

• A working interest owner will have a reasonable right to review all records pertaining to operations.

• The plan is, in all respects, fair, reasonable and equitable.

(§104.054).

To get a plan approved, the applicant must have a super majority of at least 70% of the aggregate working interest and a super majority of at least 70% of owners of royalty interests that complete and return an approval or ratification and a ballot. (§104.056)

A tract’s fair share of production must measure by the value of each tract, taking into account acreage, quantity of oil and gas from the tract, the geological struture, and other factors. (§104.103)

The operator may charge as much as 300% penalty to workingineerest owners who do not pa their share of expenses, and will have a lien on working interests to secure payment of operating expenses. (§104.108)

Surface use is addressed:

• A conflict between a lease and the unit plan is to be resolved in favor of the unit plan.

• Lease or surface use provisions that conflict with the use of the surface for unit operations so as to render the unit plan uneconomical may be amended by the RRC.

(§104.204)

There are provisions for storage of CO2. (§§104.209 and 104.210).

We see benefits to Texas oil and gas production and pitfalls for some royalty and small working interest owners. More to come.