For the purposes of this conversation let’s agree that global warming exists, and let’s not argue about whether it is, as those who use big words say, “anthropomorphic”  “anthropogenic” or, as you and I might say, “man made”.

Bjorn Lomborg doesn’t focus so much on the causes of rising sea levels; he proposes alternative ways to address the effects. In his latest Newsletter he explains why he disagrees with the conventional reactions to the devastation caused by Hurricane Sandy and advises what should be done to avoid future catastrophes.

His points are, among others:

  • The goal of reducing carbon emissions is far too costly for future generations to afford and won’t make a timely difference anyway. The benefits don’t justify the costs.
  • Because of those costs and the delayed effect it is, in his words, “morally irresponsible” to go about protecting coastlines by CO2 reductions. 
  • Carbon cuts won’t be effective for 50 to 100 years, during which time there will be much human suffering that could be avoided.
  • There are better, more practical, and quicker acting ways to address rising sea levels that attempting to reduce CO2 levels.
  • Prominent “environmental experts” such as Robert Redford and New York Mayor Michael Bloomberg attract lots of attention but have it wrong.

Those who doubt Mr. Lomborg’s position will find comfort in several comments posted with the newsletter. 

A blog from Wendell Cox for the National Center for Policy Analysis on California’s Global Warming Solutions Act is an example of what Mr. Lonborg is worried about. The report questions whether cap and trade is a cost-effective way to reduce carbon emissions.   

An appropriate musical interlude ?

It’s deju vu all over again in Chesapeake Operating, Inc. v. Sanchez Oil & Gas Corp. More accurately, it is a variation of Reeder v. Wood County Energy, LLC, et al. applied to Louisiana operations. For the impact of the exculpatory clause protecting the operator from liability in the 1989 Model Form JOA, see my post (co-authored by Marty Averill), “Operator Not Liable for Breach of 1989 Model Form Operating-Agreement, Part Two”. 

This one is a bit different.  Chesapeake and Sanchez entered into a JOA to operate leases in Louisiana. Chesapeake sued Sanchez for failing to pay its proportionate share of drilling and completion costs. Sanchez asserted the defense that Chesapeake had breached the  JOA in, as the court put it, “several ways”,  and did not perform its work in a good and workmanlike manner.

The key issue was the scope of the exculpatory clause, and whether Sanchez was required to prove that Chesapeake acted with gross negligence when it breached the JOA. The clause mirrors Article V.A of the 1977 and 1982 Model Form JOA’s (I assume one of those forms was at issue, but the court didn’t say):

 Chesapeake  . . .  shall be the Operator  . . .  and shall conduct and direct and have full control of all operations on the Contract Area . . .  . It shall conduct all such operations in a good and workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct.

Sanchez argued that the clause only applied to claims that Chesapeake had not conducted the operations in a good and workmanlike manner; Chesapeake responded that the exculpatory clause also applied to allegations that it breached the JOA.

The court noted that the Fifth Circuit construed an identical clause in Stine v. Marathon Oil Company, and held that protection of the exculpatory clause extended to breaches of the JOA and that the operator was not liable unless its actions were grossly negligent or willful. The court also noted that three Texas appellate courts had reached the opposite conclusion, holding that the clause only applied to claims that the operator failed to act as a reasonably prudent operator.

The court stated that clause would apply to Sanchez’s defenses if Stine controlled but would not apply if the Texas appellate decisions controlled. The court stated that it could only rely on the appellate decisions if they “comprised unanimous or near-unanimous holdings from several—preferably a majority—of the intermediate appellate courts of the state in question.”Here, although the appellate courts were unanimous, they were not a majority of the Texas appellate courts. Thus, the court deemed itself bound to follow Stine.

The clause applied to Sanchez’s affirmative defenses. Because Sanchez had not presented evidence that Chesapeake’s breaches resulted from gross negligence or intentional misconduct, the court dismissed Sanchez’s defenses.

Big and Important Caveat: Chesapeake is a Texas case ostensibly applying Louisiana law. It is not from a Louisiana court.  The parties agreed that Louisiana and Texas law would be identical, so the court looked to Texas cases. I’m sure there are Louisiana non-operators who would (and will) take issue with this result.

Head-scratchers: (1) Is a mineral reservation a fraction of royalty, or a fractional royalty? (2) Is there a difference? (3) Does it matter?

Answers: (1) It depends on how you phrase it. (2) Yes. (3) Yes, if you care about being paid on production, or you are the scrivener of deeds and assignments and want to avoid big trouble, or you pay people based on your interpretation of deeds and assignments and want to avoid big trouble. Otherwise, I guess not.

Moore v. Noble Energy is about the construction of a royalty reservation in a deed executed in 1955, and therefore about the answers to the three questions.

The Grantor reserved “a one-half non-participating royalty interest (one-half of one-eighth of production)”.

The Russells (grantee’s successors) entered into an oil and gas lease with Noble Energy that provided for the payment of a 3/16th royalty. Noble drilled four wells on the property. That’s about the  time everybody started paying attention.  

The Moores (grantor’s heirs) sued, asking the court to declare that they were entitled to one-half of the 3/16th royalty. The Russells argued that the Moores were only entitled to a fixed 1/16th royalty. The court agreed with the Russells.

The court contrasted a fraction of royalty with a fractional royalty:

“A fraction of royalty entitles the owner to a share of the mineral production equal to the stated fraction multiplied by the royalty retained in the lease.”

“A fractional royalty entitles the owner to the stated fraction of gross production, unaffected by the royalty reserved in the lease.”

The court then compared the language typically used to create these interests and concluded that the deed language was typical of that creating a fractional royalty. Given the absence any language indicating that the parties intended to create a fraction of royalty, the court held that the deed was unambiguous and the Moores were only entitled to a fixed 1/16 royalty.

The parenthetical was important in the construction of this reservation. The court observed that the “one-half non-participating royalty” without more would entitle the grantor to 50% of all production, thereby making it virtually impossible to lease in the future. The “(one-half of one-eighth of production)” cleared up any ambiguity, according to the court.

I compare this week’s  musical interlude to the passing game of this year’s LSU football Tigers. Progress is not always forward.  In 1955, the year of this deed, Bilboard’s No. 1 hit was Rock Around the Clock by Bill Haley and the Comets. My October 23rd post was about a 1963 deed. Bilboard’s chart-topper that year was Sugar Shack, by one-hit wonder Jimmy Gilmer and the Fireballs. You decide: Which has better field position?   

Thanks to Bill Drabble for his contribution to this post.

The ghosts of Clinton Manges and people like him continue to haunt executive right owners in Texas. In the 1980’s, Mr. Manges’ abuse of his non-participating royalty owner inspired the Texas Supreme Court to re-affirm the obligations of an executive right owner to the NPRI owner: “utmost fair dealing” and a fiduciary duty.

In Friddle v. Fisher an appellate court went further and imposed on the executive right owner the duty to hold funds belonging to the NPRI owner in a constructive trust for the benefit of the NPRI owner.  The court considered this result to be a remedy for the executive’s breaches and not a duty in and of itself.

Friddle owned a 3/4ths NPRI in the mineral estate in an 84.7 acre tract of land in Hopkins County. Fisher, the owner of the executive right, leased the property. Valence Operating Company drilled an off-site well and pooled the tract into a unit. For nine years, the lessee paid Fisher the entire one-eighth royalty called for in the lease.

Friddle sued, alleging breach of fiduciary duty, unjust enrichment, and conversion. The court ruled in favor of Friddle, holding that Texas law imposes a duty of “utmost fair dealing” on the owner of the executive rights.

But there’s more! The executive owner’s traditional duty to acquire the same benefits for the non-executive interest that he acquires for himself is not his only duty. If he receives royalties rightfully belonging to the NPRI owner, he will be deemed to be acting as a constructive trustee with a duty to hold the funds which would be payable to the NPRI holder for the use and benefit of the NPRI holder.

The court also held that if the executive owner knows the NPRI holder’s name and whereabouts, the executive owner has a duty to notify the NPRI holder of any lease or any other agreement that affects the NPRI holder’s rights. The court did not go so far as to impose a duty on the executive holder to take steps to find the NPRI owner.

Based on the record before it, the court did not impose this liability on Fisher. There was conflicting evidence about whether Fisher knew Friddle’s identity or how to contact him or his predecessors in title. Accordingly, the court ordered a trial so that a jury could make that determination.

What about the NPRI owner’s duty to use reasonable diligence in protecting his interests, as expressed by the Supreme Court in 1998 in HECI v. Neel and its wicked spawn?  That duty was trumped by the executive-right owner’s fiduciary duty. (It’s not the concept in Neel that is odious; rather its application to the royalty owners under those facts was seen by many as unduly harsh). 

Based only on what the court said in this decision, at trial Fisher should be worried about the extent of his obligations, and Fiddle should be concerned about the statute of limitations.

According to a Sunday blog post by Conn Carroll in the Washington Examiner, the EPA is hurrying efforts to implement regulations that would ban coal-fired power plants before the end of the year, in fear that a loss by President Obama in Tuesday’s election would put an end to what would otherwise be on the second-term agenda.

Some will discredit that post as another example of  a “right wing”, get-out-the-vote-in-the-swing-states, fear-mongering polemic.  However, the post refers to a well-researched May 2012 Manhattan Institute paper by Senior Fellow Robert Bryce questioning the wisdom of over-regulation of coal. 

And one could question the need for additional regulation of this sector of the energy industry.  According to an October 15 post by Brad Plumer in the Washington Post, heavy regulation might not be necessary for those who would like to wean America off coal.  

A tongue-in-cheek  musical interlude to remind us what it could be like.

 

For the sake of conversation let’s say I burgle your trade secrets after failing to close a big deal that would have saved your company. I would be in big trouble, according to a bankruptcy court in In re TXCO Resources., Inc., a case study in treachery and self-dealing in the executive suite worthy of J.R Ewing at his most disgruntled.

This short summary of the 69-page opinion can’t do justice to the thorough discussion of the tort of misappropriation, including the definition and examples of trade secrets in the oil patch and their significance in the development of unexplored areas (pp. 22–44), the scope of trade secret protection (pp. 53-54), ways to measure damages (pp. 55-66) and an interesting journey through the life-cycle of a south Texas oil prospect.

TXCO Seeks a Buyer

TXCO held leases on one million acres in southwest Texas. It was 2008 (think $147 per barrel to $35), and TXCO’s financial status became precarious. Peregrine Petroleum showed interest in acquiring TXCO’s assets. TXCO provided confidential information in several stages so that Peregrine could evaluate the deal.

The trade secrets were typical of an E&P company’s confidential information: subsurface data, production data, and operations data. The parties were unable to reach an agreement, and TXCO filed for bankruptcy. TXCO lost its leases and attempted reacquire them and other leases nearby, but the owners leased to Peregrine instead. (You can see where this is going).

TXCO Proves Misappropriation

Suspecting that Peregrine had used the confidential information, TXCO sued for misappropriation of trade secrets, breach of contract, tortious interference, violations of the Texas Theft Liability Act, and unfair competition by misappropriation. The evidence showed that Peregrine had taken the trade secrets and used them to acquire leases that TXCO once owned. Peregrine was liable for misappropriating the data by using it to make leasing decisions.

See pages 45 to 52 for a handy guide on how to steal trade secrets.

And $15,873.383 in Damages

TXCO could not prove lost profits because of its precarious financial situation. TXCO never fulfilled its lease commitments, and several mineral owners testified that they would not have re-leased to TXCO. Furthermore, because the amount of potential production from the leases could not be accurately predicted, TXCO could not prove lost profits proximately caused by Perregrine’s theft to a reasonable certainty.

The court then examined the value of the data to Peregrine. The court did not use Peregrine’s profits as a measure, because Peregrine had not actually produced hydrocarbons. But the court stated that the “lack of actual profits does not insulate the defendants from being obligated to pay for what they have wrongfully obtained in the mistaken belief their theft would benefit them”.  And to recover on this theory does not require the victim to prove a specific injury.

To determine the value of the data to Peregrine, the Court imposed a “reasonable royalty”. The court determined what a fair price for the information would have been at the time the misappropriation occurred. Because the type of information obtained by Peregrine is typically acquired in an exploration agreement, the appropriate measure of damages was “the amount Peregrine would have spent drilling the wells to earn acreage under an exploration agreement with TXCO, discounted by the 50% working interest that Peregrine would have carried.”

 Based on this analysis, the court awarded TXCO $15,873,383. 

The court denied recovery for tortious interference-with-prospective-contractual relations because TXCO could not prove that it would have obtained the leases absent Peregrine’s misconduct. Recall that the mineral owners were reluctant to deal with TXCO because of its financial status, and they had received better offers from other parties.

The Court denied recovery for the other claims because TXCO was unable to prove damages.

Today’s appropriate musical interlude.  I couldn’t find the Allman Brothers’ versionfo ths song, but Elmore James is pretty good.

“If you want a successful gathering of long-lost kinfolks, just manage to find oil on the old homestead. They will come out from under logs, down trees, from out of the blue and down every road and byway, but they’ll get there — even some nobody ever suspected were kinfolks.”

Judge R. T.Brown, who presided over suits against Dad Joiner and H L Hunt over the Daisy Bradford No. 3 in the 1930’s.

I suggest to you that this observation also applies to claims over ancient, musty, faded property conveyances.

In 1963 (or, as the court aptly noted, “Almost a half century ago …”) Mr. Nix, the owner of property in East Texas, executed a deed that contained the following language:

“It being understood and agreed that all oil, gas, and other minerals, excluding coal, lignite, and clay, in and under the above described tract have heretofore been reserved and excepted, together with the right of ingress and egress for the purpose of exploring and drilling for, producing[,] storing [,] and removing the same herefrom.”

 Oops! The declaration that the minerals had been reserved was incorrect. No mineral interests had actually been reserved or conveyed before the deed was executed. The question before the court was whether the provision reserved the mineral estate for the grantor.

In Roberson v. El Paso Exploration & Prod. Co. the court held that it did not. The language merely stated, incorrectly, that the mineral estate had previously been conveyed. It did not reserve the mineral estate for the grantor. And, because courts construe deeds to convey the greatest estate permissible under its language, the deed conveyed the mineral estate to the grantee.

The Ambiguity Conundrum

The court’s job in a contract dispute is to determine the intent of the parties from the four corners of the deed. Sometimes that is not possible. A deed is ambiguous if it is subject to two or more reasonable interpretations. Here, both sides claimed that the deed was not ambiguous (that it can be given a definite or certain meaning), and was to be interpreted in their favor. Non-lawyers (you engineers particularly) who don’t make a living playing with words ask, How can this be?  I tend to agree in this case that it can’t be.

The losing party gets an “A” for effort, but a lower grade, shall we say, for the result. Where in the deed language do you see a reservation of minerals?

Thanks to Bill Drabble for his help on ths post.

Big Tex, 1952-2012, R.I.P.

 If a bird flies into your open-top oil storage tank – or your unprotected reserve pit – and dies, could you be guilty of the crime of violating the Migratory Bird Treaty Act? The short answer is “ Maybe”.

In United States v. CITGO Petroleum Corp., ten dead birds were discovered in storage tanks at CITGO’s Corpus Christi refinery. The government brought criminal charges. CITGO was found guilty and moved to vacate the conviction. Their argument was that the company was engaged in a commercial activity that was not intended to kill birds, while the MBTA was intended to criminalize hunting, trapping, poaching and other activities actually intended to take or kill the birds. The district court upheld the conviction.

Federal courts disagree about whether oil companies can be convicted of violating the MBTA when birds are unintentionally killed as a result of their operations. The appeals court overseeing district courts in Oklahoma, Kansas, New Mexico, Colorado, Wyoming and Utah has held that companies may be criminally responsible. District courts in Louisiana and North Dakota have reached the opposite conclusion.

In CITGO, the Texas court held that companies can be held criminally liable, but due process requires that the defendant’s actions “proximately caused” the birds’ deaths (i.e., the deaths resulting from the activity must be reasonably foreseeable). Testimony at trial was that a number of people had seen birds in the tanks and reported them to management but CITGO failed to act.  CITGO’s failure to cover the tanks violated the Clean Air Act and Texas state regulations.

You don’t operate a refinery, so you’re off the hook, correct? Not so fast. In an earlier decision from Kansas, a producer was convicted under the MBTA after dead migratory birds were discovered lodged in heater treaters. The U.S Fish and Wildlife Service had warned operators and equipment suppliers of potential liablity and their intent to enforce in the future.   

But in another case from Texas, the operator of a well was not guilty when dead birds were found in its unprotected reserve pits.  The difference is that where there was guilt, the underlying activity of the defendant was unlawful (the Kansas operator had been warned that the statute was going to be enforced), whereas for the not-guilties, the activity (such as an un-netted reserve pit) was legal and permissible.

Takeaway:  This is a strict liability crime – no actual intent to take or kill a bird is required.  Guilt will depend on, among other factors, where you operate, whether the deaths were forseeable, and whether other laws were violated. You can’t change geography, but you can be sure you are not violating other law or regulation, and if you have knowledge of a potential death trap for a Northern Flicker on his semi-annual commute, fix it. 

Special thanks to Bill Drabble for his contribution to this post.

Companies can’t go to the penitentiary.  If  they did, this musical interlude explains how they could pass the time:  

http://www.youtube.com/watch?v=JxwjX8UQRrQ

“How long will you torment me and crush me with words?” Job 19:3.

Much like the long-suffering Job, the defendants in  Heasley v. KSM Energy, Inc. et al, did not like the words they were hearing. In this case, the words were their own, in the sense that the words were in the oil and gas lease. The Pennsylvania court reminded litigants that the words actually used in their contract will govern disputes between them. The court held that language in a lease executed in 1942 calling for an annual rental conditioned on production did not continue the lease once production ceased.  Despite the lessees’ best arguments, the condition in the lease was not an “either/or” choice. 

The habendam clause called for a primary term of 20 years and as long thereafter as oil or gas was being produced. The royalty clause provided for a royalty on production and annual rent to the lessor on each well “while the gas from said well is so used.” Production ceased and the lessor sued to terminate the lease based on lack of production. The lessees admitted that oil or gas was not being produced off the land, but contended that annual rental, not continued production, was all that was required to maintain the lease.

The court pointed out that the duration of an oil and gas lease can be tied to the lessor’s compensation in two ways. First, where a lessor’s compensation is subject to the volume of production, the duration of the lease is determined by the period of active production. Second, where a lessor’s compensation is a fixed amount unrelated to the volume of production, the duration of the lease is determined by how long the lessee continues to pay rent, regardless of whether the wells are still producing. In this case, the lease provided for both the payment of a royalty based on the volume of production and a fixed rental per well. But the fixed rental could maintain the lease only as long as “gas from said well is so used.” Accordingly, the payment of the rental was still tied to production and could not extend the lease. Once production ceased, the lease became a tenancy-at-will subject to termination by the lessor at any time.

Incidentally, the “et als” in this case were subsidiaries of Texas-based Exco Resources and EOG Resources.

P.S.: There was no evidence that the lessees complained as much as Job did.

Thanks to Lydia Webb for her valuable assistance with this post.

Ron Curry is the EPA’s new administrator for Region 6, which is responsible for enforcement of federal environmental laws in Texas, Louisiana, New Mexico, Oklahoma and Arkansas.  Mr. Curry replaces Al “Crucify ’em” Armendariz, who was sacked earlier this year after comments, caught on video, in which he likened his tactics to the Romans of antiquity who supressed the villages they conquered by killing the first five men they saw.  It made the rest of the citizenry easier to subjugate, was the rationale. I’m sure it did. 

Here is a selection of news reports about Mr. Curry’s appointment:

The Dallas Business Journal says the industry hopes for science-based regulatory enforcement.  This is ironic, given that the current administration promised just such a policy in the last presidential campaign

The Dallas Morning News reminds us that he is not from  Texas.

The Houston Chronicle says environmentalists are pleased with the appointment.

The New Orleans Times Picayune says that Public Citizen touts Mr. Curry’s ability to work with industry and environmental groups.  

The Texas Tribune says he is an advocate for action to stop climate change.

I close with this seldom-seen video featuring the EPA  in the act of encouraging other agencies to join in on the regulatory frenzy.  In the full moon of this administration’s first, perhaps only, term, hear the howling chorus respond with joy and enthusiasm: the Consumer Financial Protection Bureau, Hugo Chavez, the central planners at the countless boards and commissions created by the Patient Protection and Affordable Care Act, bankrupt California taxing entities, and the town that busted the little girls’ lemonade stand.

DISCLAIMER:  All opinions and feeble attempts at humor are mine alone and not necessarily those of my colleagues at Looper Reed or some of my family members.  My dog Daisy forgives my derisive references to her cousins and generally agrees with my politics.