The Texas Railroad Commission is going through the Sunset review required every 10 years for all state agencies. If approved, the pending legislation (House Bill 2166) would:

A New Name

• Change the name of the agency to the Texas Energy Resources Commission.

Campaign Finance Reform

• Limit the ability of commissioners and candidates to accept campaign contributions except at certain times near elections.

• Limit contributions from parties with contested cases before the commission and requires the commission to maintain a list of contested cases and the parties to each case, and to ensure that hearing notices contain information about prohibited contributions.

• Require the resignation of a sitting commissioner upon announcement of candidacy, or upon becoming a candidate, in any election for office other than commissioner, so long as the commissioner’s unexpired term is more than 18 months. The candidacy or announcement of candidacy will serve as an automatic resignation.

An End to Ex Parte Communications

• Instruct the commission to develop a policy prohibiting ex parte communication between hearings examiners and commissioners, or between hearings examiners and technical staff of the commission who has participated in a hearing, including prohibiting a commissioner from communicating with a hearings examiner other than in a formal public hearing.

A Focus on Safety

• Instruct the commission to adopt guidelines for determining the amount of penalties for pollution under Sec. 81.0531 of the Natural Resources Code.

  • There must be differing penalties for differing violations based on seriousness of the violation and hazard to health or safety of the public resulting from the violation.
  • Adds the number of times a permittee’s certificate of compliance has been canceled to the list of items that the guidelines must take into account.

• Require the commission to adopt an enforcement policy that employees must follow that pertains to safety and prevention or control of pollution. The policy must include:

  • a specific process for classification of violations based on the seriousness of any resulting pollution and any resulting health and safety hazard
  • standards on which violations may be dismissed upon coming into compliance and which must be forwarded for enforcement. Employees must take into account violation history.

• Allow the commission to establish fees to pay for the pipeline safety costs.

• Grants pipeline damage prevention jurisdiction over interstate and intrastate hazardous liquid and CO2 pipeline facilities.

• Establishes a $30 million cap on the oil and gas regulation and cleanup fund.

Help for Mineral Owners

• Permit the commission to, upon request of interested party, with approval of other interested parties (maybe there isn’t that much help after all), hold a hearing on a forced-pooling application in or near the county of the proposed unit or allow participation by telephone.

Some of these changes are significant. This is not the final product; the bill has been amended since being introduced and the legislature has time to react to “input” from interested parties.  

 

This post is not from a global warming denier. But I do appreciate even-handed assessments of the situation. Here are two reports that fit the bill. 

In the London Telegraph, Geoffrey Lean says that recent research suggests climate change might not be as catastrophic as the gloomiest forecasts. But he warns that it will be decades, if not centuries, before the full consequences of today’s emissions of CO2 become clear.

Rapid temperature increases in the 1980’s and ‘90s have dramatically slowed for the past decade even as CO2 emissions have continued to increase. But he does not agree with skeptics who say that global warming has stopped. As an example, he cites that eight of the nine hottest years on record have all occurred since 2000. His point is that CO2 may be less potent than has been thought in heating the planet, and soot or “black carbon” may be more to blame.

Recent papers from different, well established scientists, suggest that the rise of temperatures may be closer to the 1.5º C than the 4.5º C range of increase in global temperatures estimated by the IPCC.

The Economist reports that there is “a mismatch between rising greenhouse gas emissions and not-rising temperatures, which is a big puzzle to scientists.”

They also warn that this does not mean that global warming is delusion. Flat as they are, temperatures in the first decade in the 21st century are 1º C above their level in the first decade of the 20th century. They offer several scenarios: Perhaps the 1990s when temperatures were rising was the anomalous period, and not 2000 through 2010. Or the climate may respond differently to higher concentrations of CO2 in ways that are not properly understood.

An unpublished report by the Research Council of Norway (not yet peer reviewed), a government-funded body using a method different from the IPCC’s, believes that the most likely effect of doubling CO2 omissions would be a rise of 1.9º C. This is consistent with projections from other research projects. The IPCC estimates the answer to be about 3º C.

There is a discussion of several different models using several approaches to predict the effect of climate change, which is too much science for a lawyer.

They also agree that soot, or black carbon (from diesel and Third-World cooking fires), may be more to blame than CO2.

Finally, several lines of evidence show that observed trends are pushing temperature predictions down, whereas compter models are pushing temperature predictions up.

And a bonus from the Financial Times and Lawrence Soloman:  A report on the change of heart by some journalists on the subject, based in part on the Economist’s stance. 

Is it Really 4,000?

Here is an introduction to the rest of this post. 

Have you heard that 4,000 scientists from 130 countries support the IPCC’s conclusions about climate change? According to Energy Probe the “consensus” is not as it seems. The work of “2,500+ scientific expert reviewers, 800+ contributing authors, 450+ lead authors from 100+ countries” is not really that. The numbers total 3,750, which is rounded up to 4,000. By elimination of duplications, exaggerations, and input not relevant to the result, Energy Probe whittles down the list of true backers of the IPCC report to approximately 60.

Read the articles and decide for yourself.

Co-author Jonathan Nowlin

I learned to drive on an old, black, stick-shift, straight-six, no-radio, no-A/C automobile manufactured the year after the AAPL’s first  Form 610 – Model Form Operating Agreement was created.  The ’57 Chevy is now considered a classic. Not so with the 1956 Model Form, which is generally considered a relic. Clovelly Oil Co., LLC  v. Midstates Petroleum Co. shows that while the 1956 Model Form might be old, it is still alive and dangerous. In Clovelly, the Supreme Court of Louisiana busted a 242-acre hole in the operator’s Unit Area (as the Contract Area was then called) by ruling that the 1956 Model Form, without more, does not apply to leases acquired after the JOA was executed. What could that “more” be? See below.

Through a series of assignments, Clovelly and Midstates became parties to the JOA. In 2008, Midstates secured a new oil and gas lease that covered acreage in the Unit Area. Clovelly claimed the lease was covered by the JOA, and as such, it was entitled to its working interest described in the JOA and, as operator under the JOA, the right to operate the new lease.

Relying on the language of the JOA, the court held that the original parties entered into the JOA with the intent to explore and develop only the leases and unleased mineral interests owned by the parties at the time they signed the JOA. The ’56 Form used present-tense language when referring to the leases to which the JOA applies. For example, the preamble referred to leases and unleased mineral interests of which the parties “are owners” in the land described, and the parties agreed “to explore and develop these leases and interests.” Also, the JOA defined “oil and gas interests” as “unleased fee and mineral interest in tracts of land lying within the Unit Area which are owned by the parties.”

The court reasoned that holding otherwise would create an absurd result: If all new leases automatically became subject to the JOA, then the parties would be required to share in the costs for those leases—without having the option to elect whether the leases should be subject to the JOA.

If you’ve ever questioned the need for an AMI in an exploration project, ignore Clovelly at your peril.  The rationale could apply to other situations. The court noted that the parties could have easily avoided this problem by including an Area of Mutual Interest provision, an “agreement between or among parties to a JOA by which the parties attempt to describe a geographical area within which they agree to share certain additional leases or other interest acquired by any of them in the future.” The court also noted that an AMI is often established by parties to the AAPL Model Forms when the parties desire to maintain their proportionate interest in newly acquired leases.

What would be the result with the later forms? Find out in a later post.

While you wait for the next post, a musical interlude.

Co-author: Travis Booher

Valid Description? We don’t need no valid stinking description!

Actually, in May v. Buck, a Texas Court of Appeals says you do.  The need for a sufficient property description in a oil and gas transaction seems like an easy-enough and fundamental concept to grasp, but its application has escaped many a contracting party.

Question: Is “ … a 100 acre spacing centered around the David Morris Gas Unit #1 in Leon County, Texas” a valid description? Read on for the answer.

The Facts

 May and Buck entered into a Letter Agreement in which May would cquire certain acreage. Buck was to assign “all the minerals and a 100 acre spacing centered around the David Morris Gas Unit #1 in Leon County, Texas.” The agreement also stated, “[t]he acreage referred to within this agreement is better described in Exhibit A attached to this agreement and made a part of this agreement.” Unfortunately, after May provided the capital for the leases, Buck did not assign the interests, and the parties ended up in the courthouse. Buck defended by asserting that May’s claim was barred by the statute of frauds because of an insufficient description.

May’s Problem

No document existed identifying the “100 acre spacing centered around the David Morris Gas Unit #1” and there was no information about the shape or boundaries of the 100 acres. Exhibit “A” described 563.465 acres described in four tracts and included specific references to instruments filed in Leon County. The 563.465 could be identified, the David Morris Gas Unit could be identified, but both May and Buck’s experts at trial identified several configurations for the 100 acre tract. To make matters worse, the experts disagreed whether the “David Morris #1” reference was to the unit or the wellbore.

The Result

 The court reiterated the well settled rule: “To be sufficient, the writing must furnish within itself, or by reference to some other existing writing, the means or data by which the land to be conveyed may be identified with reasonable certainty.” Because several different configurations were possible, one could not identify the 100 acre tract with reasonable certainty. As a result, May came away without his land and his money.

The Takeaway

 A letter agreement to convey an interest in real property is subject to the statute of frauds (The rule is not limited to deeds and leases). As a result, identifying the subject land should not be like digging for gold, where “X” marks the spot. The agreement must identify the lands with reasonable certainty. If the location of the lands is open to multiple interpretations, the agreement will be invalid.

Valuable Trivia

“We don’t need no stinking badges” is one of the most commonly misquoted lines in movie history.

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)