Texas Attorney Blog

Texas Small Business Owners Rail Against Federal Overregulation at Meeting with Congressman Pete Olson

Fri, 11 May 2012 22:19:02 -0600

Washington has been telling Texas small business, including Texas oil and gas companies, how they should be run for a long time. For a few moments, Texas businesses had a chance to tell Washington what to do, and the overriding message was: stop meddling.

Over 30 small Texas business owners met with Republican Congressman Pete Olson to discuss ways in which the federal government could help small businesses create jobs. Most businesses were in the manufacturing, chemical, and oil and gas industries. They complained about the federal government’s heavy hand, especially as represented by the Environmental Protection Agency. One businessman scoffed at the idea that growing levels of carbon dioxide contributed to global warming; instead, he believed that higher levels of carbon dioxide were a natural byproduct of warming.

Mainly, the group of business owners wanted the federal government to use regulation as a force of good, not to hamper small businesses. “They’re like police who just want to getcha,” a businessman complained about the federal regulatory agencies. In particular, the business owners requested that Washington require foreign companies to comply with the same regulations that American businesses comply with, or face higher import duties. They also requested that the federal government stop the process of bundling that results in larger companies being favored for contracts over smaller companies.

Business owners also had a long list of regulations that they wanted cut back or removed altogether. This included repealing the Dodd-Frank Act that purports to reform Wall Street, reducing the power of the Food and Drug Administration, creating sunset provisions on certain taxes and agencies, speeding the process for drilling permits, and reducing the amount of time and effort it takes to complete an Environmental Impact Statement, or eliminate it altogether.

“The jobs are there,” Congressman Olson claimed, “we just need to get the government off the private sector’s back” and allow them to come out. One businessman remarked that due to oppressive government regulations, he had to lay off several employees and move their jobs overseas.

Texas' Proposed Rule 3.29 for Hydraulic Fracturing Chemicals Disclosure

Sun, 06 May 2012 00:23:44 -0600

Last fall, the Texas Railroad Commission held a hearing to consider a new rule for disclosure of hydraulic fracturing chemicals. At the hearing, Chemistry Professor Andrew Barron from Rice University claimed that the rule would serve to demystify the chemicals used and help assure the public that the chemicals were not overly dangerous.

The new rule will be codified as 16 Texas Administrative Code section 3.29 and would implement House Bill 3328. House Bill 3328 has already been passed by the Texas state legislature and signed by Governor Perry. Section 3.29(c) lists disclosure requirements for suppliers, service companies, and operators who are involved with hydraulic fracturing. Under the Rule, not later than 30 days after the completion of a hydraulic fracturing treatment, suppliers and service companies must provide the well operator with the names of each chemical substance that was purposely added to the hydraulic fracturing fluid. In particular, any chemical ingredient that requires a Material Safety Data Sheet must be listed.

The rule defines “chemical ingredient” as “a discrete chemical constituent with its own specific name or identity.” An additive is “any chemical substance or combination of substances” contained in a hydraulic fracturing fluid that is purposely added to the base fluid for a specific reason whether or not that reason is to create fractures in a formation.

Under the rule, operators of wells have the responsibility of submitting information to a hydraulic fracturing chemical disclosure online registry. The data that must be given includes the operator’s name, the date of the treatment, the well’s location, the well’s API number, the amount of water used in the treatment, each chemical treatment used, and several other important pieces of information. Operators must also submit a well completion report for each well that received a hydraulic fracturing treatment to the Railroad Commission. Certain chemical ingredients are exempt from being listed under Section 3.29(d), such as ingredients not disclosed by their manufacturer, or ingredients not intentionally added to the hydraulic fracturing treatment. Ingredients that are trade secrets would also be protected from disclosure.

The proposed rule was published in the Texas Register on September 9, 2011. A 32-day public comment period -- including the October 5th hearing -- has already concluded. Some of the comments came from sources such as Pioneer Natural Resources. In an October 11, 2011 letter, Pioneer’s Vice President of Government Affairs, Roger Wallace wrote: “Pioneer strongly supports mandatory public disclosure of the chemical ingredients used in hydraulic fracturing.” Wallace expressed concern that the Railroad Commission would come under pressure to create a rule that gives suppliers, service companies, and operators too much discretion, and thought that the trade secret section would make it too easy for certain ingredients to be kept hidden. Meanwhile, the Texas Oil and Gas Association -- which produces 90% of Texas’s crude oil and natural gas -- expressed general support and proposed several revisions to the rule. These revisions include clarifying a number of terms, such as “hydraulic fracturing treatment” and “landowner,” and promoting a clearer process for challenging a claim of trade secrets. Already, several oil and gas companies voluntarily post the ingredients of their frac fluids on their websites. I suspect that the disclosures made will allow people to see that the chemicals used are pretty mundane, and hopefully some of the hysteria about fraking will dissipate.

Senate Subcommittee Reports That States Regulate the Shale Oil and Gas Industry Effectively

Tue, 01 May 2012 23:50:53 -0600

Contrary to the Obama administration’s expectations, it sounds as though states are doing a fine job regulating the oil and gas industry, according to members of a shale gas subcommittee in the U.S. Senate. In the Shale Gas Subcommittee 90-day Report subcommittee members reported to the Senate Committee on Energy and Natural Resources during a hearing last fall. The subcommittee was formed to make recommendations about the safety and environmental performance of shale gas production.

The Report made 20 recommendations, including:

1. Improve public information about shale gas operations.

2. Improve communication between state and federal regulators. The subcommittee recommended continued yearly support to STRONGER (the State Review of Oil and Natural Gas Environmental Regulation) and to the Ground Water Protection Council for expansion of a data management system that determines risk, along with similar programs.

3. Improve air quality. The subcommittee had recommendations for reducing general pollutants, ozone precursors, and methane quickly.

4. Protect water quality. The subcommittee recommended a water management system based on “consistent measurement and public disclosure of the flow and composition of water at every stage of the shale gas production process.”

5. Disclose fracturing fluid composition. The subcommittee believed that although the risk was remote that fluid from deep shale reservoirs fractures could leak into drinking water, any chemicals in fracturing fluids should be made available to the public.

6. Manage short-term and cumulative impacts on communities, land use, wildlife, and ecologies.

Apache Corporation Exploring the Texas Panhandle for Future Oil and Gas Projects

Thu, 26 Apr 2012 23:03:22 -0600

For mineral owners in the northern Texas Panhandle, there is an exciting new development: Apache Corporation is planning to conduct a seismic survey in the Pennsylvania Canyon Wash formation to see if it is suitable for horizontal drilling. At present, there are parts of the Panhandle that not been fully explored for oil. Apache intends to drill down for the 3D survey. At 9,200 feet deep, the company believes that Canyon Wash would be well suited to the type of drilling that it wants to do.

Apache, headquartered in Houston, Texas, has grown beyond its humble beginnings in Minnesota to become a successful multinational oil and gas company. Today, Apache has $30 billion in capital and offices in the United States, Canada, Australia, Argentina, Egypt, and the United Kingdom. Yet since the company moved its headquarters to Houston in 1992, it has kept an active interest in Texas projects.

Currently, Apache holds a 75% interest in 122,000 fields south of shallow production in the Panhandle field. The area remains mostly pristine, with just 23 penetrations. Apache hopes to start a multi-rig program in 2012 in the area known as the Cimarron Arch. The company’s Bivins Ranch acreage is situated in Oldham, Potter, and Hartley counties. Apache’s partner in the acreage, Gun Oil Company, already completed a vertical Canyon Wash discovery well in Oldham County in March 2010. The well produced 42,000 bbl within the first nine months. Apache officials believe that the latest exploration will lead to wells that could recover up to 343,000 bbl/well -- or 87% oil. Each well would have an estimated price tag of $3 million. Apache may achieve up to 100 drillable locations from 2012 through 2015.

This is welcome news not only for mineral owners in the Texas Panhandle, but also for anyone who cares about energy that is easy to access and affordable. Owners of land rich with minerals could be in a position to lease to the Apache Corporation and other energy companies that come along to explore, thus helping the local economy. The news is also welcome because it means that companies are finally starting to tap additional areas in the United States ripe for oil extraction. Oil and gas interests have been firm in their belief that energy independence begins at home -- but too often, federal regulators and environmentalists have put a stop to meaningful exploration. Meanwhile, some of the sources that are already tapped in the U.S. may be vulnerable to natural disasters (such as hurricanes in the Gulf of Mexico) or to regulators’ overreaction (such as the Obama administration’s decision first to stop, and then the slow walk deep water oil drilling permits following the Deepwater Horizon tragedy). The result is skyrocketing gasoline prices at the pump.

The Texas Panhandle is out of the reach of hurricane weather. Let us hope that that Apache and other energy companies active in the Panhandle are successful in their exploration. As a country, we won’t ever be weaned from Middle Eastern oil until we are producing more ourselves.

Expanded Oil and Gas Drilling in Texas and U.S. Could Add 1.4 Million Jobs According to API Study

Fri, 20 Apr 2012 12:41:27 -0600

President Obama would have us believe that he considered everything when he came up with his latest plan to create jobs. Yet he ignored a plan that could create 1.4 million more jobs and $803 billion in revenue. According to a the Wood Mackenzie Study, funded by the American Petroleum Institute (API), the United States could increase oil production by 10 million b/d of oil equivalent, create 1.4 million jobs, and generate more than $803 billion by 2030, if we just developed existing resources within the country.

The Wood Mackenzie study was presented at an energy jobs summit in Washington, D.C. The study considered two different scenarios, the Current Path Case Production -- what the job situation would be if the government continued on its current path -- and Development Policy Case. Under the Development Policy Case, the study claimed that a jobs and revenue boon could result if the government opened up federal areas that were currently off-limits to drilling, such as the Eastern Gulf of Mexico, parts of the Rockies, and the Alaskan National Wildlife Refuge (ANWR); if it lifted a drilling moratorium in the state of New York; if more offshore drilling were allowed in the Gulf of Mexico; if the Keystone XL pipeline and other pipelines from Canada to the U.S. are approved; and if regulation of shale is done predominantly at the state level.

If the U.S. follows these steps, oil production would increase 76% over 2010 levels. For every job created directly for energy production, several more would be created indirectly, from revenue spent by the newly employed. Revenue would reach $36 billion by 2015.

At the same time, the Wood Mackenzie study predicts that the current path would simply increase the regulatory burden on domestic producers. Its Current Path Case Production assumes that the federal government will never permit Gulf of Mexico drilling to return to pre-moratorium levels, that it will introduce regulations for hydraulic fracturing and water disposal that are more burdensome than those by state governments, that it will not open up new areas of development, and that it will restrict new pipeline development from Canada. Under this scenario, the job production would remain nearly flat, with just a little over 500,000 jobs added by 2030.

Inevitably, proposals this ambitious would face major fights in Congress and push-back from Obama’s liberal supporters. There is little support for expanding drilling into ANWR, and Obama himself would be too fearful of offending his supporters by expanding offshore leasing to the extent in the study. But this is the sort of big thinking that needs to happen in order to get the U.S. economy back on track. For too long, the Obama administration has found a handy scapegoat in energy producers from Texas and other parts of the country. He claims they are responsible for all of the environmental and economic ills of the country. Yet a Texas oil and gas attorney knows that most energy producers are decent and law abiding. They want to keep their businesses afloat without being drowned in regulations. Obama could make energy producers allies, not enemies, and everyone would benefit.

Make Sure That Your Texas Oil and Gas Agreement Complies With the Texas Statute of Frauds

Fri, 13 Apr 2012 12:35:44 -0600

Any good Texas oil and gas attorney must be fully versed in the Texas Statute of Frauds. The Statute of Frauds is an old concept, requiring that certain contracts have to be in writing and signed to be valid. The Statute of Frauds dates back to at least seventeenth century England, and was exported to the United States as part of common law. It now exists in the Texas Uniform Commercial Code and in the Texas Business and Commerce Code. The Texas Statute of Frauds requires that all conveyances of real property and transfers of mineral interests (including oil and gas leases) be in a writing, signed by both parties.

For an agreement to comply with the Statute of Frauds, it has to include all of the essential elements of the agreement. Basic elements include the time of performance and a description of the property. This may sound fairly straight forward, but time and again, disputes have arisen over oil and gas agreements and conveyances that failed to accurately describe the interest being conveyed -- or in which the conveyance was not in writing at all.

For example, in Quigley v. Bennett (2007), geologist Robert Bennett charged Michael Quigley, an oil and gas operator, with fraudulently inducing him to perform services related to an oil and gas lease. Bennett claimed that he was entitled to an overriding royalty interest that Quigley had conveyed to him orally in return for certain services that Bennett performed. The Texas Supreme Court disagreed. Because Bennett and Quigley never put the conveyance in writing, Bennett had no interest. He therefore was not entitled to the $1 million award that the jury had given him.

More recently, in Preston Exploration Co. v. Chesapeake Energy Co. (2010), the Court reviewed a disagreement over the legal descriptions in Purchase and Sale Agreements for oil leases. Preston argued that the Purchase and Sale Agreements and exhibits complied with the Statute of Frauds because the description identified the property being conveyed with “reasonable certainty.” However, the District Court of the Southern District of Texas found that since neither the Agreements nor the exhibits included specific information about the location of the leases, they failed to comply with the Statute of Frauds.

So if you want to transfer an oil and gas interest, how can you make sure that your agreement complies with the Statute of Frauds? This is one of those situations where you really might want to consider enlisting the assistance of an attorney to make sure it's done right. As mentioned above, the agreement should identify the property with reasonable certainty, which means “the contract must, at least, furnish the property description within itself or by reference to other identified writing then in existence.” Multiple writings can accomplish this purpose as long as the second document refers to the first -- something the agreement in Preston failed to do. In identifying land with reasonable certainty, an agreement should identify characteristics such as the amount of land; the specific tract the land is on; the city, county, or state where the land is located; the specific street address (if any), etc. There should be no doubt about where the land is located. Maps and plats can be used to identify the tract of land, but they must be very specific. Ideally, they should provide information such as the names of the owners in the chain of title, General Land Office Abstract numbers, survey lines of each tract, the amount of acreage in each tract, etc. As the Preston case illustrates, you can’t just refer to a “lease” and expect that to be enough.

In summary, if you are involved in the transfer of an oil and gas interest, you not only need a written document, but also clear and specific language in the document identifying the terms of the agreement and the land involved, namely its size and location. If your agreement complies with the Statute of Frauds, and you hopefully won’t be one of the unfortunate few who have to defend their interests in court.

API Study Reveals That EPA Overstates Benefits of Proposed Ozone Regulations

Sat, 31 Mar 2012 18:13:35 -0600

All industry in Texas, not just the oil and gas industry, could be harmed by new ozone regulations proposed by the EPA. If there were recognizable health benefits, they would probably be worth it. In fact, the EPA has been trying to sell its new, tighter ozone standards based on its claims that they would provide substantial health benefits. However, the American Petroleum Institute, in a recent study entitled Summary and Critique of the Benefits Estimates in the RIA for the Ozone NAAQS Reconsideration, has found that the EPA has misrepresented the benefits of EPA's proposed new ozone standards.

The EPA’s figures are based on escalating benefits due to ozone-related mortality, even though the EPA has found no causal link between ozone levels and mortality. The result could be that industries are forced to make changes to produce less ozone, while the savings that they produce would never materialize.

The EPA seeks to tighten regulations that were put in place under President Bush in 2008. It claims that while the cost would be $90 billion per year, the costs would be offset by $100 billion per year in savings from medical expenses and missed workdays. However, the API study found that ozone benefits alone do not produce these savings. The EPA’s “savings” are based in part on cuts in soot pollution that may occur because of the new regulations. The problem with this is that soot pollution has nothing to do with ozone pollution. The API declares that, overall, the EPA’s plan for tightening standards is “out-of-cycle, not supported by science, and would have devastating economic consequences.” What's more, the EPA has no idea how the new standards would be met, but one guarantee is that they would have a heavy impact on business, especially large businesses. Khary Cauthen, API’s government affairs director, predicts that “operations would close and business moved elsewhere. This isn’t a recipe on how to rebuild an economy.”

These findings throw a wrench in President Obama’s plans to tighten environmental regulations. While normally, the Clean Air Act requires the EPA to review regulations every five years, the administration claims that the standards need to be tightened sooner because the Bush administration ignored the EPA scientific panel’s recommendations. Yet by ignoring the five-year standard, the administration risks catching businesses off guard, which would make it even harder for them to meet the new stringent standards. Khary Cauthen believes that the president should pull the new regulations and wait until 2013 before making any changes. Obama has claimed that he wants regulations based on “science, not politics,” and that he would weigh the costs on businesses and local communities before enacting a rule. The API findings ought to give him plenty of reasons to rethink the new regulations, unless the president believes no other scientists besides the pseudo-scientists at the EPA are credible. There is mounting evidence that this is exactly what he believes.

The API’s findings are a cautionary tale for everyone who thinks that more EPA regulation equals instant health benefits without any real cost to the community. While Texas has been fortunate to escape much of the economic turmoil that has hit the rest of the country, our industries are still vulnerable and could suffer immeasurable harm if Obama allows the new regulations to be set in place. API has urged the public to get in touch with the White House to let the president know that these new regulations could mean lost jobs. The price is too high for the Obama administration to ignore a five-year review precedent that every other administration has followed until now.

What is ultimately most incredible to me is that our tax dollars are being used to fund this pseudo-science going on at the EPA!

New Study Shows That Removing Oil and Gas Industry Tax Credits Would Cost Jobs, Increase the Deficit

Fri, 23 Mar 2012 19:13:24 -0600

The oil and gas industry is under attack not only in Texas, but nationally. Several months ago, a new study by Louisiana State University Professor Joseph Manson, An Economic Analysis of Dual Capacity and Section 199 Proposals for the U.S. Oil and Gas Industry, was released. Professor Manson's study found that tax changes proposed by the Obama administration would actually increase the deficit.

One of Obama's proposals would prohibit oil and gas companies from using the manufacturer’s deduction created by Section 199 of the American Job Creation Act of 2004. The other proposal would create limits on foreign tax credits used by U.S. dual-capacity taxpayers. The Obama administration claims that these changes would lower the deficit and has included them in every annual budget proposal. Instead, Professor Manson demonstrates that these proposals would result in a loss of $53.5 billion a year in tax revenue.

Section 199 allows taxpayers who produce or manufacture in the United States to deduct a certain percentage of domestic production activity from their taxable income each year. The dual-capacity taxpayer rules prevent U.S. firms operating in foreign countries from being doubly taxed. Professor Manson’s study, sponsored by the American Energy Alliance, took a detailed look at the effect that the loss of these credits would have on the oil and gas industry. Professor Manson concluded that there would be a loss of 155,000 lost jobs, a loss of $68 billion in wages, and a loss of $83.5 billion in reduced tax revenues. Not only that, beware the unintended consequences: as more people are laid off, more people will request unemployment benefits, food stamps and other forms of assistance.

Professor Manson made his calculations using the Modern Regional Input-Output Modeling System II, developed by Nobel Economic Laureate Wassily Leontief, which supposes that when a company has to pay $1 more in taxes, it must take it out of other sources, such as workers’ pay. As a result, Professor Manson notes: “[A] tax on just a small number of firms can be felt throughout the economy.” He found that job losses go beyond those strictly related to oil and gas production: construction, retail, food services, and even arts and entertainment would feel the pain. Not only would there be significant job losses, but also the U.S. could suffer $341 million in lost output. The region hardest hit would be the Gulf of Mexico, where the local community has already suffered extensively following the Deepwater Horizon tragedy.

Professor Manson has a long, distinguished history in finance. He has been a Senior Fellow at The Wharton School since 2005. He was a Visiting Scholar for the Federal Deposit Insurance Corporation and the Federal Reserve Bank of Philadelphia. He has consulted for government agencies, research institutions, and corporations on issues ranging from mortgages to consumer lending to valuing distressed securities. He has also testified before numerous government committees, including the Senate Judiciary Committee, the House Financial Services Committee, the Federal Reserve Board, and the European Parliament. His opinions are valued and respected, which is why his conclusions in the new study should not be dismissed.

The repeated introduction of these proposals confirms that the Obama administration’s approach to the oil and gas industry is misguided. It treats all companies as though they are greedy conglomerates hoarding billions at the expense of the average American. In fact, this study shows that oil and gas companies benefit Americans in a variety of industries every day. Singling out these companies by removing these particular tax benefits means that everyone would feel the pain.

Texas Landowners' Groundwater Rights Revisited

Fri, 16 Mar 2012 16:31:08 -0600

The Edwards Aquifer case is sure to be a hot legal topic in Texas this year. The landmark decision by the Texas Supreme Court a few weeks ago will probably effect countless Texas landowners. Joel McDaniel, one of the plaintiffs in the Edwards Aquifer case, noted that “this changes everything for everyone who owns a well.”

I discussed this important decision in my March 5, 2012 article (that you can access here), but there remains a lot to be discussed about this opinion, particularly because the Court's decision raised some questions in addition to answering others. Readers may recall that the Court held that landowners own the groundwater under their land, thus treating groundwater similarly to subterranean minerals, such as oil and gas. However, Judge Hecht's opinion for the Court notes that regulation of groundwater is still within the state’s power. He noted that in many areas of Texas, including where the Edwards Aquifer is located, the demand for water is greater than the available supply. However, the decision goes on to say that although the State of Texas is empowered to regulate, when a landowner believes that the regulation is unreasonable, they can take the issue to the courts.

In the wake of this decision, it is still unclear how the San Antonio area will be affected. The water for that area is controlled by the regulations of the Edwards Aquifer Authority (EAA). The chairwoman of the EAA’s Board of Directors, Luana Buckner, said that this decision left the Authority with more questions than answers about how to move forward. She noted that the decision confirmed that the EAA followed the correct procedures, as set out in the Edwards Aquifer Authority Act. However, she believes that the decision gives no guidance as to whether following the correct procedures to limit water pumping always requires the EAA to compensate landowners for limiting their rights. The Supreme Court of Texas left it up to a trial court to determine whether Mr. McDaniel, the sole surviving Plaintiff in the case, should receive compensation. Supporters of the Plaintiff’s position believe that, regardless of the how the case is finally resolved in the lower court, the Texas Supreme Court’s confirmation that landowners can turn to the courts to adjudicate these groundwater disputes is incredibly important.

Texas law requires that the regulations be reasonable. A spokesperson for the Texas Farm Bureau, an organization that supports the decision in Edwards Aquifer, says of the EAA: “They are basically going to have to make the decision that any government agency has to make: is this a reasonable regulation or does it go too far?” The EAA has voiced concern that with this new ability to bring groundwater disputes to court, there will be an inundation of lawsuits from landowners unhappy that they cannot pump an unlimited amount of water. Judge Hecht addressed this argument in the decision, and stated that the burden on these government agencies does not override the takings clause of the Constitution.

The ultimate ramifications of this landmark Texas property rights case may not be fully understood until the issues in this kind of situation are addressed by further legislation or litigation.

See Our Related Blog Posts:

Groundwater Rights of Texas Landowners Rights Addressed by the Texas Supreme Court

Texas Landowners' Easement Rights Case Clarified by Texas Supreme Court

Sat, 10 Mar 2012 10:13:49 -0600

Readers may recall that last year the Supreme Court of Texas issued an opinion with profound implications for the rights of Texas landowners when they are faced with a request for a pipeline or utility easement. In Texas Rice Land Partners Ltd. and Mike Latta v. Denbury Green Pipeline-Texas LLC, issued on August 26, 2011, the Court addressed the issue of the requirements a pipeline company must meet in order to be deemed a common carrier and thus be entitled to use the power of eminent domain. My discussion of the original opinion can be found here.

In its original decision, the Court limited the eminent domain powers of pipeline companies, stating that they must show more than that the pipeline could be used by others, aside from the company building the pipeline, at some indefinite point in the future. In addition, the Court held that a permit issued by the Texas Railroad Commission, which was previously assumed to confer common carrier status (and thus eminent domain power), no longer has this effect. This decision, therefore, shifts the burden onto the pipeline company to prove that it meets the requirements to be classified as a common carrier. The Court’s decision gives vastly more power to landowners, and the case is likely to impact the attitude of all pipeline and utility companies negotiating with landowners for easements and rights of way.

In an opinion last Friday, the Supreme Court not only denied Denbury Green Pipeline's motion for rehearing, but Court also clarified its previous judgment in significant ways. In stating that a company cannot wield the power of eminent domain for a private oil or gas pipeline, the Court added that "private" means a pipeline that is limited in its use to wells, stations, plants, and refineries of the owner. The Court went on to say that a “common carrier” means that the company is transporting gas for hire and therefore implies more customers for the gas than the owner of the pipeline. In other words, the pipeline cannot be built for the owner’s exclusive use and still be a common carrier.

In this second decision, the Supreme Court affirmed its prior determination that Denbury’s pipeline was for private use only. It found that this pipeline would not serve a public use by transporting gas only from one Denbury property to another Denbury property. The Court also cited an absence of compelling legislative findings and or a sufficient public purpose in support of its conclusion that this pipeline was private. Finally, the Court stated that for an entity planning to build a CO2 pipeline to qualify as a common carrier under Texas Natural Resources Code Section 111.002(6), there must be a “reasonable probability” that at some point in the future the pipeline will serve the public by transporting gas for more than one customer that will either use the gas or sell it to someone other than the pipeline carrier.

While acknowledging that pipeline construction and the Texas energy industry are important to maintain Texas' economic growth, both the Court's original decision and the substituted opinion denying Denbury's motion for rehearing echo hundreds of years of legal and Constitutional precedent protecting individual property rights as a cornerstone of our government. The Court noted that Texas protects landowner rights even more strongly than neighboring states, and it should take more than simply checking a box on a government form to confer common carrier status and all that goes with it, all without a right of judicial review.

See Our Related Blog Posts:

New Ammunition for Negotiation of Oil and Gas Pipeline Easements for Texas Property Owners

Texas Supreme Court Decision Impacts Texas Oil and Gas Pipeline Negotiations

Groundwater Rights of Texas Landowners Rights Addressed by the Texas Supreme Court

Mon, 05 Mar 2012 11:35:33 -0600

Recently, the Texas Supreme Court issued an important opinion that clarified a Texas landowner’s groundwater rights. In the case of Edwards Aquifer Authority and the State of Texas v. Burrell Day and Joel McDaniel the Court was faced with the issue of whether land ownership includes an interest in groundwater in place, which therefore could not be taken for public use without the adequate compensation mandated by the Texas Constitution. The Court found that it does, and used Texas oil and gas law to assist in its reasoning, comparing the characteristics of mineral rights to groundwater rights.

Burrell Day and Joel McDaniel bought land situated over the Edwards Aquifer in 1994 to grow oats and raise cattle. A well for irrigation had been drilled in 1956 but had collapsed or been removed by the early 1980s. However, water continued to flow due to artesian pressure, contributing much of the water to a lake on the property. To continue to use the well or replace it, Mr. Day and Mr. McDaniel needed a permit from the Edwards Aquifer Authority. The Authority has detailed, strict requirements that are based heavily on historical use for water from this aquifer, which supplies most of the water for south central Texas. Mr. Day and Mr. McDaniel requested a permit from the Authority to allow them to draw 700 acre-feet from the well. The Authority granted them a permit for only 600 acre-feet. They took the matter to an administrative judge, who found that the historical use for this property was only 14 acre-feet.

Mr. Day and Mr. McDaniel appealed to the District Court, where they alleged that the Authority's denial of their requested use was an unconstitutional taking without compensation. The Texas Constitution allegation required the State of Texas as a party. The Texas District Court granted Mr. Day and Mr. McDaniel’s claim on the issue of the amount of water allowed to be used, but it denied relief on the constitutional claim. Both sides appealed that ruling. The Texas Court of Appeals reversed, and held that landowners have a right to the water under their land, but that groundwater flowing into a reservoir for public use was “state water” and therefore subject to regulation.

All three parties—Mr. Day and Mr. McDaniel, the Authority, and the State—petitioned to the Texas Supreme Court to hear this case. In a decision by Justice Hecht, the Court found that groundwater in place beneath property is owned by the landowner and restricting its use can constitute a taking under the Constitution which requires adequate compensation. The Supreme Court found that the Authority’s process of allowing water based on historical use was contrary to the Texas Water Code. The State and the Authority failed to show why the Authority’s permit process should be more restrictive than the Water Code. Finally, the Supreme Court held that a landowner cannot be deprived of groundwater under his property either because he did not use it previously or because the water supply is limited.

The Supreme Court discussed, but discarded, the argument by the Authority and the State of Texas that this ruling would flood the courts with litigation on this issue, and said that the burden on government does not override the takings clause of the Constitution. The Court also briefly compared groundwater rights to the treatment of mineral rights under Texas oil and gas law, and found no common law basis to differentiate between the two subterranean resources.

This decision by the Texas Supreme Court illustrates Texas’ leadership on these sorts of complicated property law questions involving the resources below our feet.

See Our Related Blog Posts:

Royalty Owners: Delay in Claiming Lost or Unpaid Oil and Gas Royalties Can Cost You!

Mineral Deeds Can Be Complex!

"Clean" Energy is More Hazardous To the Environment than Oil and Gas Drilling

Thu, 01 Mar 2012 22:17:32 -0600

Environmentalists like to argue that oil and gas are harmful to the planet, that their sources are drying up, and that “clean” green energy is the way of the future. However, more studies are finding that green energy is far from harmless to the environment. In fact, it may actually be more harmful than traditional energy sources.

This is because the batteries that run “clean” energy hybrids, electric cars, and other related products are made up of rare earth elements (REEs). REEs consist of 15 periodic elements of the lanthanide group, along with scandium and yttrium. These metals are in nearly all batteries due to their unique properties.

According to an EPA report, because REEs are generally concentrated evenly throughout the Earth’s crust, there are few locations where they can be economically mined. That doesn’t mean, however, that a determined government would be unable to gain a monopoly over REEs. Or that REEs would not require extensive mining and refining.

While the United States controlled the REE industry up until 1985, in recent years, China has taken over. By some accounts, it now produces 95% of all REEs. China managed to gain control by flooding the market with cheap REEs, due to large high-quality reserves and low labor costs. Since then, China has sent the cost of REE products -- such as fluorescent light bulbs -- soaring. The United States is trying to regain its dominance, and American producers have received permission to conduct exploratory drilling for heavy metals. Currently Mountain Pass mine in California is the only mine that has been used for heavy metal mining. Government and industry have set their sights on the Bokan Mountains in Alaska, Diamond Creek in Idaho, and the Bear Lodge Mountains in Wyoming as other potential mining locations.

Of course, even if the race between China and the U.S. to dominate the REE industry does not result an in international crisis, there is still the matter of REEs’ environmental cost. Preparing REEs for consumer use is a costly and toxic process. First, each element must be extracted from the earth. Then the REE goes through chemical processing, disposal of contaminants, and transportation. Chinese production has resulted in large amounts of harmful gas, as well as large amounts of solid and liquid waste. Once these toxins have been released into the environment, they can rapidly spread through the air, soil, and water. A few months ago, the Chinese government shut down REE production to address the alarming levels of toxins in the environment, often from small REE producers who had little to no oversight. However, it remains to be seen whether China will be able to fix all of its problems -- or whether it is even possible to create an environmentally friendly refining process.

The problems above do not even touch upon what happens when “clean” batteries wear out and how they are disposed. The nickel in these hybrid batteries can leak into the environment, creating health problems for local residents.

So let's see: the leading environmentalist arguments against the oil and gas industry are: extraction is harmful for the environment, oil is becoming increasingly rare and dependence on oil forces us to rely upon other countries with whom we have tense relations. On the other hand, when we consider REEs, we can say that their extraction is harmful for the environment, they are becoming increasingly rare and dependence on REEs forces us to rely upon other countries with whom we have tense relations. After all that, we still have the environmental hazards that result from disposal.

With all that coming from “green” energy, maybe it’s time to give “traditional” energy another chance!!

Do Oil and Gas Prices Really Move in Tandem?

Tue, 28 Feb 2012 00:52:04 -0600

The conventional wisdom is that when oil prices are high, gasoline prices follow. Yet is that really true? Just recently, oil prices were up more than 9%, yet gas prices at the pump actually dropped 15 cents, to 3.30 a gallon. Why is this? Well, it turns out the conventional wisdom is mostly true, but gasoline prices do not follow oil prices perfectly, and each has its own reasons for prices rising and falling.

First, why do gas prices tend to follow oil prices on an upward climb? According to one source, it is simply because when oil prices rise, gas dealers raise their prices in order to avoid losing money. At the same time, when oil prices go down, it can take anywhere from two days to three weeks for gas prices to fall. Another reason may have to do with the type of crude oil on the market. When crude oil is plentiful, but gas prices are still high, the reason may be because the crude is heavy and sour, which requires greater processing -- as opposed to light, sweet crude oil, which is easier to refine.

If this is the case, then why do oil and gas prices sometimes vary? There are several reasons, most very specific to the way oil and gas are produced and to their intended purpose. While nearly half of crude oil -- 42% -- is used for producing gas, the other 58% is used for diesel fuel, jet fuel, and is even used to make everyday products such as tires. Therefore, the more demand for these items, the more the price of oil will be affected.

As for why gas prices rise and fall, the reasons range from the methods of production to the state of the economy. First, gas prices are affected by demand -- when people travel in the summer, prices tend to go up. During the winter, with less travel, prices tend to drop. Second, there is not just demand for oil in the United States, but all across the world. China, India, and Brazil, all enjoying economic expansion, require more energy to keep their economies moving. Less oil means that it is more valuable, which increases the price of any product associated with it, including gas.

Third, gas is not just made of oil, but also of fuels meant to make gas cleaner burning. These fuels, such as ethanol, are often required additives, and their presence increases the cost of a gallon of gasoline. Even when all of these factors are taken into account, probably the biggest reason for gas’s continued high prices -- even while oil prices remain low -- is taxes. Taxes are imposed by both the state and federal government on every gallon you use, adding enormously to what you pay at the pump.

In short, high gas and oil prices are not part of some nefarious scheme cooked up by the oil industry to bilk consumers. There are a variety of reasons for oil and gas prices to be the way they are, mostly just having to do with the way each is processed. That said, if more oil and gas drilling were permitted, some of the pressures might be reduced, resulting in lower prices at the gas pump.

Texas Oil Companies Expanding

Sat, 18 Feb 2012 12:20:40 -0600

In what is hopefully a sign of a healthy Texas oil and gas industry, as well as good news for Texas mineral owners, Apache Corporation (the subject of a recent post) has not only renewed its lease of 365,000 square feet at its Post Oak Central office building, but has also leased another 132,000 square feet of space. This represents a 36 percent office space increase, bringing Apache’s total square footage to 467,000. The company also extended its current lease term to 2018, a five year add-on to their agreement, which was set to expire at the end of this year. The Houston office complex is owned by JP Morgan and is distinct for its three 24 story glass and steel towers.

Apache’s move to expand its operations was likely prompted by the company’s healthy profit margins. The Wall Street Journal recently reported that Apache’s fourth quarter earnings were up 73 percent as the company benefited from high oil prices and increased production. Apache’s fourth quarter profit was $1.9 billion, or $2.98 a share. That is a substantial increase over their $689 million profit and $1.77 share price from 2011. Chief Executive G. Steven Farris said the company expected to spend $9.5 billion on drilling capital this year, up from $8 billion in 2011. Revenue also increased for the company by about 25 percent to $4.3 billion. Apache’s global production was up by 4.2 percent from a year earlier and average prices went up 24 percent for oil and nearly 3 percent for natural gas. These reports on Apache’s success are good news for the Texas energy industry and a benefit to Houston, the company’s headquarters.

This comes on the heels of other big real estate transactions in Houston, a city fortunate to be at the center of the oil and gas industry’s resurgence. In January, Noble Energy signed a lease for 467,000 ft2 of office space at the former headquarters of Hewlett Packard, taking over the northwest Houston building in its entirety. The 10 story building opened in 1998 as the headquarters for Compaq Computer Corporation. The building was one of Houston’s largest vacant office buildings and Noble’s lease is helping bring the city’s vacancy numbers down significantly—showing once again how a robust and profitable energy industry can help the economy as a whole.

In December, Shell Oil renewed its 1.2 million ft2 office lease at One Shell Plaza and Two Shell Plaza in downtown Houston. Shell’s Houston lease was the biggest lease signed in the United States in 2011. Last year, 1.8 million square feet of office space was occupied in Houston and that number is expected to be the same or greater this year, spurring new construction for the first time in years.

This energy boom is rippling across Houston’s economy and not just in real estate circles. Houston is the first major metropolitan area in the US to regain all the jobs lost during the recent recession. The region added 76,000 jobs last year according to the Texas Workforce Commission and is on track to create tens of thousands of more jobs this year, almost entirely thanks to the profitable and growing energy industry.

See Our Related Blog Posts:

Apache Oil Purchase Good News for the Texas Panhandle

Separating Facts from Politics: Recent Studies on Fracing

Fri, 10 Feb 2012 13:01:47 -0600

The battle in Texas and in the country in the oil and gas field over hydraulic fracturing, or “fracing", rages on, of course. There are several recent developments in the effort to uncover the facts about fracing, as opposed to unsubstantiated claims and political posturing. These research efforts are important resources for better understanding of this technology and how it affects the environment and the natural gas industry. With so much discussion and debate on the issue of fracing, a technology used for years but subject to intense criticism only recently, it is especially important to publicize the scientific evidence related to the process, rather than buying into the political hype (see a previous post on my opinions here).

The University of Texas at Austin released its preliminary findings, entitled "Boom or Bane: A Report on Hydraulic Fracturing of Shale", excerpted from an intensive ongoing research and study project on this issue, on November 9, 2011. The University’s Energy Institute examined the use of hydraulic fracturing in shale gas drilling. The preliminary findings indicate that there is no direct link between fracing and groundwater contamination. The researchers suggest that, at worst, any contamination is probably from above ground spills, mishandling of drilling waste products, or faulty cement casings—not the the hydraulic fracturing itself. Dr. Charles “Chip” Groat, a UT geology professor and Energy Institute associate director who is leading this research project, stated at the release of the preliminary findings: “Our goal is to inject science into what has become an emotional debate and provide policymakers a foundation to develop sound rules and regulations.” The final report is expected to be released soon, in the early part of this year. The Energy Institute has two other projects on hydraulic fracturing in shale gas development in the works which may also shed light on the issue in the near future.

In November of last year, the Environmental Protection Agency released its Plan to Study the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources. This study intends to look into the potential effects on drinking water from various natural gas drilling techniques associated with hydraulic fracturing. The EPA plans to use existing data as well as developing case studies at the Haynesville, Marcellus, Bakken, and Barnett fields. They will study drinking water at sites where fracing has already been used and collect data both before and after fracing at new sites where the process has not been used before. This report will be released in two parts, the first of which is expected by the end of 2012. That first report will contain the analysis of existing data. The longer-term results of this EPA project will be released in a supplemental report in 2014, which will include information and conclusions from the case studies of new sites.

On November 10, 2011, the Shale Gas Production Subcommittee of the Secretary of Energy Advisory Board released its final report, entitled "The SEAB Shale Gas Production Subcommittee Second Ninety Day Report", on shale gas production. This report focused on implementation of the 20 recommendations made in a related interim report, including more public information about shale gas production, disclosure of the fracturing fluid’s composition, and the creation of a shale industry organization dedicated to improving best practices. The final report speaks mostly in generalities. It calls for progress in reducing the environmental impact of shale gas production and creating partnerships between the industry, states, and federal agencies.

There will always be some who seek to demonize anything that the oil and gas industry does. However, fair-minded people should ensure that their elected officials base any policy decisions related to fracing on real evidence and not partisan posturing.

NAT GAS Act May Be Misguided Legislation