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.

Occasionally, we venture beyond the comfortable red-state confines of Texas to visit swing states and discuss mineral activity other than oil and gas drilling; and we go back in time. This is one of those journeys, as we go to Ohio, where the court relied on a decision from the time when Chester A. Arthur was president.

In Snyder v. Ohio Department of Natural Resources, mineral reservation language in a deed to 651 acres included “reasonable surface right privileges”. Sixty years later, the court ruled that those privileges did not include the right to strip mine.

The mineral owners wanted to strip mine ten percent of the land, arguing that such a small amount was a reasonable portion of the property to use. The state refused, no doubt because surface estate was now part of the Brush Creek Wildlife Area in Jefferson County. 

The court considered whether the deed language was ambiguous. The court concluded that the right to strip mine must be clearly expressed in the reservation of mineral rights. In this case, it was not.

In Ohio, absent an agreement to the contrary the mineral estate owner has the right to use as much of the surface as is reasonably necessary to reach and remove the minerals. This is the law in all producing states I am aware of. But that right does not include the right to destroy the surface altogether.

The court referred to an 1884 case to show that Ohio courts have long held that the holder of mineral rights cannot destroy the surface unless a waiver of the right to an intact surface is expressed in the deed.  Deed language granting “reasonable surface right privileges” neither authorizes strip mining nor releases the right to surface support. According to the court, strip mining is not a reasonable use of the surface estate, even if it is the only way to obtain the minerals.

One suspects that the mineral owner knew the state of the law when he proposed to mine only ten percent of the land. But his proposal could not overcome the limitations of  his contract – strip mining was not expressly reserved in the deed. The total disruption of ten percent of the surface could not be considered “reasonable use” of the surface estate. The court found that the same test would apply to auger mining because strip mining is statutorily defined to include auger mining.  (No, I don’t know what auger mining is.  I guess it is a lot like strip mining).

 The musical interlude returns:

http://www.youtube.com/watch?v=bDCsc3CU5ww 

Special thanks to Lydia Webb for her contibution to this entry.

 

By Travis Booher – Aggie

For the sake of the game plan, let’s run with Charlie’s lame football analogies, and look at a few more objectives to keep in mind when preparing a runsheet. This time, attention will be on the good guys (the boys in maroon), rather than the gang in purple and gold. Here are five more thoughts:

1. The fields are the same, but the stadiums are unique: The field is 160’ wide and 360’ long, like all other fields, but on game day, Kyle Field is a unique experience. Likewise, each tract being examined is unique, and a roadmap to its history is useful. A deed-plotting program is a tool to confirm if the description closes. If a tract changes shape and size 10 times, 10 separate deed plots do not show the examining attorney how the property developed. Thus, it is always helpful to provide a “boundary history” of the tract on one plat, or to provide overlays to illustrate the boundaries during these ownership changes.

2. What color is his uniform? The 12th Man, wearing their maroon and white, stands during the game, ready to be called to the sidelines. The colors help identify your team. Many times, however, a runsheet shows a recent oil and gas lease acquired from a stranger to the title (an unknown uniform). The landman might tell the lawyer that as a result of running “telephone title”, he heard Old Man Johnson recently died and Bubba Johnson, the lessor in Lease 4, is his son. As a general rule, it is helpful to note in the runsheet who these new players are, as record title will not reflect their ownership (or even their existence). New uniforms create havoc, especially if they are as grotesque as these guys, or even these guys.  They should be adjudged guilty in the court of bad taste.

3. Date the Playbook: Coaches formulate a new playbook for each upcoming game. When preparing a runsheet, always confirm that it has a certification date, so that your examiner can identify the time frame in which the chain of title was run.

4. It’s the Xs and Os: When Kliff Kingsbury calls a play into Johnny Football (see him at right), the formation and routes are carefully detailed in the Xs and the Os. When a title examiner reviews only a Memorandum of Oil and Gas Lease, he understands only a small part of the pattern. If a tract is subject to a Memorandum of Oil and Gas Lease, provide the examining attorney a copy of the unrecorded, underlying lease for review.

5. A flag on the play: When the referee mistakenly throws a flag on the boys in maroon, the penalty is enforced and the yardage is marked off. A lawsuit in your chain of title is like a flag. In order for your title examiner to know and understand the penalty, he will need to review the Order or Final Judgment ending the lawsuit. Flags, like lawsuits, happen, but you have to know the penalty.

 Co-authored byMarty Averill

As promised in our September 9 post, here is a more detailed analysis of Reeder v. Wood County Energy, LLC, et al, the recent Texas Supreme Court decision holding that an operator is not liable for breach of the 1989 model form JOA absent willful misconduct or gross  negligence.

 

It is difficult to resist shameless promotion of natural gas, especially when to do so makes sense.  Here is an article by Bjorn Lomborg,   A Fracking Good Story . Mr Lomborg is is an adjunct professor at the Copenhagen Business School, and founder and director of the Copenhagen Consensus Center and is known as a global warming skeptic, not because he denies the phenomenon, but because he has alternative ideas about how to address it. And he isn’t from Texas or Louisiana!! 

Among other points in this article:

  • U. S. CO2 emissions have dropped 20 percent despite adding 57 million energy consumers.
  • Overall, U.S. emissions have been reduced by 400 to 500 megatonnes a year, which is twice the total effect of the Kyoto Protocol on the rest of the world.
  • Wind turbines in the United States reduce emissions by only one-tenth the amount natural gas does. The European Union, for example, has invested over $20 billion annually into solar and wind energy, but its per capita CO2 emission have fallen by less than half of what the United States has achieved.
  • Natural gas emits 45 percent less carbon per energy unit than coal.

http://www.youtube.com/watch?v=jBDF04fQKtQ