Texas Attorney Blog

Chesapeake Reduction in Gas Well Drilling & Exploration May Effect Texas Mineral Owners

Sun, 05 Feb 2012 11:48:10 -0600

Texas mineral owners who have signed oil and gas leases with Chesapeake Energy may be faced with some unanswered questions.

The American natural gas industry faces the paradox of having been too successful in recent years. A glut of natural gas on the market due to technological advances have allowed access to previously inaccessible gas, especially through horizontal drilling and hydraulic fracturing. The glut of gas has pushed prices down 45 percent in the past year. In fact, natural gas prices are at a ten year low right now. As a consequence, the second largest natural gas producer in the nation, Chesapeake Energy Corporation, recently announced that it will cut gas production by half. The company will only operate 24 of its dry gas drilling rigs, down from the 50 rigs it operated in 2011.

Chesapeake’s measures will only reduce America’s supply of gas by 1.4 percent. The indications from other natural gas companies regarding cutting gas production has been mixed. EQT Corporation stated that it would suspend natural gas drilling in Kentucky indefinitely because of low prices. Exxon declined to comment. Cabot Oil & Gas has no plans to cut production.

Chesapeake says it will take the $2 billion it plans to cut from natural gas production and shift it into the more profitable area of oil production, as oil prices have remained high even as natural gas prices have fallen. Chesapeake also plans to cut $2 billion from its land buying budget and immediately cut production by 8 percent. It is deferring new dry gas wells and pipeline connections where possible. Chesapeake is considering letting current mineral leases expire. The company expects its lowest expenditures for dry gas drilling since 2005.

While this may be good for Chesapeake’s financial stability and its investors, it raises questions for Texas mineral owners who have already signed mineral leases with Chesapeake. If you are a Texas mineral owner who has already signed a lease with Chesapeake, you may wish to have a Texas oil and gas attorney review your lease to determine what your options may be.

See Our Related Blog Posts:

Apache Oil Purchase Good News for the Texas Panhandle

NAT GAS Act May Be Misguided Legislation

Apache Oil Purchase Good News for the Texas Panhandle

Tue, 31 Jan 2012 13:52:14 -0600

New technology has breathed new life into older Texas oil fields in the Panhandle and in nearby Oklahoma. Apache Corp, one of the nation’s largest energy explorers, recently purchased Cordillera Energy Partners III LLC for $2.85 billion. Apache is paying $600 million in common stock and the rest in cash. The deal brings Apache control of 254,000 acres of the Granite Wash Field, an area of older oil wells in the Texas panhandle and across the Texas-Oklahoma border. It consists of a series of thick, multilayer, liquids-rich sandstone and conglomerates, and the area possesses superior reserve properties compared to other shale.

The remaining oil and natural gas in Granite Wash is between 11,000 and 13,000 feet deep, and there is natural gas at a depth of up to 17,000 feet. At these depths the oil and natural gas was technologically impossible to access in the past. Recent extraction advances broke through that technological hurdle, but the area was still economically nonviable because of the high costs involved. Apparently no longer. This area has estimated reserves of 71.5 million barrels of oil equivalent and a current net production of 18,000 BOE per day.

Apache is not new to the region. In fact, the company was formed in the Panhandle 57 years ago, and Apache has been drilling there for 35 years. Industry growth over the past few years, combined with Apache’s experience in the area, made this recent purchase a logical step for the oil giant. Apache has drilled 79 horizontal wells since 2009, providing the needed experience at accessing previously inaccessible oil and gas deposits using new drilling techniques. These new horizontal drilling options now account for about half of Apache’s Central Region production—about 40,000 net barrels of oil per day at the end of 2011. Hydraulic fracturing ("fracing") will also assist in accessing natural gas wells (see my post on fracing here. Apache’s Chief Executive, G. Steven Farris, stated that they expect to more than triple the activity of the combined Apache and Cordillera acreage in the coming year.

All of this is very good news for Texas Panhandle residents, as increased drilling activity will boost the local economy and create more jobs. It is also good news for the country as a whole. These new innovations and investments in energy have resulted in a resurgence of the oil and gas industry, so much so that natural gas prices fell to a ten year low last week. Apache is not the only company going after older wells with new technology—both Exxon and Chevron are going back to wells in areas that were thought to be tapped out. Apache itself has operations around the world, from Australia to Egypt, and has been trying to expand its production in the US. Now that Apache is acquiring Cordillera, the two companies are looking for further opportunities in oil fields in South Texas, North Dakota, and Pennsylvania. Cordillera Chief Executive George Solich, who began his career at Apache in the 1980s, said they will continue to acquire acreage in the Granite Wash area on behalf of Apache through the closing of the deal.

Texas mineral owners beware: if you own minerals in the Granite Wash area, or in counties adjoining this area, you may receive all kinds of offers to purchase your minerals. Don't ever consider selling your minerals without talking to a Texas oil and gas attorney first. In most cases, they will probably tell you not to sell, because you will probably never get paid what they are really worth!

See Our Related Blog Posts:

The Myth of the "Oil Peak"

Self-Serving Political Posturing Prevents Real Energy Independence

University of South Alabama Studies Impact of Gulf Oil Spill on Real Estate Values

Sun, 22 Jan 2012 13:31:57 -0600

One of the largest offshore oil spills in history occurred when the massive Deepwater Horizon semi-submersible oil drilling platform suffered a drilling-related explosion, was engulfed in flames, and sank. The economic and environmental effects of this event are still not fully understood, so studies are ongoing to determine the impact that it has had on the Gulf region. One such study, entitled "The Gulf Oil Spill and Its Impact on Coastal Property Value Using The Before-and-After Procedure" was completed several months ago by the University of South Alabama on the effect that the spill has had on Alabama coastal property values.

In order to determine the amount of decline in value on affected coastal properties, the study made use of the before and after procedure (BAAP) that is based upon market prices preceding the Deepwater Horizon incident and data indicating the impacted value of those same properties after the accident occurred. The study seeks to determine if a stigma has attached to these properties, which amounts to the perceived blemishes on those properties that have arisen as a result of the spill. The study focused on evaluating properties located directly on the waterfront, multiple types of residential properties, and both developed and undeveloped land. It relied upon sales transaction records in the area for the year prior to the spill as a comparison basis to help determine the possible drop in value attributable to the spill.

The research showed that the possible effect on the studied areas was significant, and vacant residential properties on the waterfront suffered the greatest decrease in values after the spill, as they dropped over 42 percent in value from April 20, 2010, to August 15, 2010. Single-family waterfront residences saw a half-percent drop during the same period, and condominiums saw a 3.5 percent drop. However, much of the decrease in value was likely due to a downturn in prevailing economic conditions. A control group of properties located in Florida (not affected by the spill) was also tracked, and similarly situated properties also saw condo and vacant waterfront land prices drop by over 20 percent during the same time period, though single family residences saw a jump in value of over 30 percent. As such, the numbers indicate that only the drop in undeveloped property prices may have been caused by the oil spill.

While the study rendered a somewhat surprising result for many – that there was not a stigma attached to waterfront properties in the Gulf region of Alabama that caused a decline in property values – it also noted that there are some limitations to the analysis. The BAAP method is best served by having real-time property sales price information for continued evaluation to render more accurate results. Additionally, the BAAP does not factor in a decline in potential buyers in the market, and instead only focuses on sales prices properties during the study’s time period. In order to formulate a more full analysis of the Gulf Oil Spill’s effect on real estate values in the region, an adjustment process for the decline in buying activity is needed.

With the passage of time, we have seen that the long term effects of the Deepwater Horizon incident have been much smaller than expected. If a study were done today, I suspect it would reveal no lingering effect on any property values along the Gulf.

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

Fri, 13 Jan 2012 10:53:46 -0600

A recent decision by a Texas Court of Appeals may be helpful to Texas property owners who are negotiating an oil and gas pipeline right of way or easement on their property. In its opinion rendered in LaSalle Pipeline LP v. Donnell Lands LP, the Texas Fourth Court of Appeals in San Antonio upheld a jury award to a Texas landowner of $604,950.00 for dimunition in value to approximately half of the landowner's 8034 acre ranch in McMullen County, Texas.

LaSalle, the pipeline company, enjoyed the right of eminent domain, or condemnation, of the right of way for its pipeline, because the pipeline it was laying was intended to be a common carrier. However, LaSalle offered the landowner nothing for for the decrease in value to the Donnell's land due to the 16" gas pipeline stretching across almost five miles of their property.

At trial, the Donnell's expert witness, (an M.A.I. appraiser who specialized in farm and ranch land appraisals), testified that he believed the first tract involved would suffer a 10% decrease in value due to the pipeline, and that the second, smaller, tract, would experience a 25% decrease in value. He arrived at his figures by comparing sales of similiar land, with and without pipelines, both in McMullen County and nearby Webb County. The Donnell's expert testified that the landowner was due $902,255.00 in damages, consisting of dimunition in value damages, payments for the right of way itself and the temporary workspace damages. The landowner also testified about why he believed the pipeline would decrease the value of his property. These reasons included: 1) the pipeline would be there forever, and would always be a "black mark" on his land; 2) the pipeline cut right through the middle of his property; 3) the pipeline owner and operator would have permanent access to come and go whenever they wanted; and 4) the pipeline easement could be freely assigned to any other company.

This last reason is especially important. No one can guarantee that the right of way will not be assigned in the future to a company who is less than diligent in doing maintenance, or who is less than careful with the adjoining land, than the current pipeline company.

LaSalle appealed the jury award to the Fourth Court of Appeals in San Antonio. The Court of Appeals made a small adjustment to the temporary workspace damages, but otherwise upheld the jury's verdict and the damage award. LaSalle will no doubt appeal to the Texas Supreme Court.

I'd say that the pipeline company brought this result on themselves, by refusing to offer the landowner any dimunition in value damages (also called "remainder damages") and by taking the position both in the trial court and in the Court of Appeals that the pipeline did not create any damage to the rest of the landowner's property. That is a pretty arrogant, and ultimately, self-defeating attitude.

The Fourth Court of Appeals was not creating new law in this decision. They relied on established Texas law. I never want to be in the position of predicting how the Texas Supreme Court will decide something, but if I was a betting woman, I'd bet that the Texas Supreme Court will uphold this decision.

The pipeline industry is already complaining that this decision injects "uncertainty" into the process of obtaining pipeline easements. What a strange, and frankly, groundless, argument. First, real estate appraisers have been calculating, and Texas courts and juries have been deciding, these kind of damages for many decades. Secondly, landowners have a right to dimunition in value damages because they have a right to be fairly compensated for all damages caused by pipelines and utility lines.

I'm not going to apologize if this next statement sounds naive to you. There is a moral issue here. Sometimes it seems like the pipeline companies are observing that "other" Golden Rule (the one that says "He who's got the gold, makes the rules") rather than the real Golden Rule: "Do unto others as you would have them do unto you". There is also a practical side to this: pipeline companies might find property owners a whole lot easier to negotiate with if the companies are truly fair to the owners. I suspect that a whole lot more right of way can be acquired a lot more quickly and at a lot less cost that way.

NAT GAS Act May Be Misguided Legislation

Thu, 05 Jan 2012 13:54:45 -0600

It is important for all of us to keep informed about proposed legislation related to energy issues. Even if you aren't an oil and gas attorney or involved directly in the energy industry in some way, all of us are affected by energy independence (or lack thereof) and prices. Local, state, and federal legislation often has profound effects on how much energy costs us and whether or not America’s own energy potential is maximized.

Consider the New Alternative Transportation to Give Americans Solutions Act, otherwise known as the NAT GAS Act. Originally, this bill seemed like a good idea. It was introduced in the House by Oklahoma Republican John Sullivan and shepherded through the Senate by Democrats Harry Reid of Nevada and Robert Menendez of New Jersey and Republicans Richard Burr of North Carolina and Saxby Chambliss of Georgia.

The NAT GAS Act would allow consumers or investors who either purchased natural gas vehicles or who built natural gas stations to claim between $5 billion and $9 billion in federal tax credits over the next five years. It had bipartisan support. Many Republicans were happy to sign on initially because of their tendency to support legislation helping the natural gas industry and to give this important sector of our economy a reprieve from some of the currently oppressive taxes. A bevy of prominent business leaders signed on as well, such as T. Boone Pickens .

This support is understandable because America needs more natural gas—an efficient, abundant, and clean energy source. However, it apparently remains a challenge to enact common sense legislation involving natural gas use. Certain segments of the liberal left have been waging a war against natural gas for years. Also, some state legislatures are shortsightedly fighting energy tax savings by actually raising taxes to preserve their own government spending. This ultimately hamstrings industry growth and job creation. Expectedly, President Obama continues his knee-jerk reaction in opposition to any type of sensible fossil fuel policy. The politically-motivated outcry over hydraulic fracturing, and efforts to curtail a demonstrable safe 60 year old practice, (click here for related blog) interferes with rational discussion on the subject.

Despite the real need for sensible energy legislation freeing the natural gas industry for growth, the NAT GAS Act may actually be more of a mirage of responsible legislation than anything else. Recently, 19 Republican co-sponsors have dropped out after considering the real consequences of this legislation. More analysis has shown that the Act does not truly facilitate natural gas production or assuage supply-side concerns, which probably explains why so many Democrats signed on. What the Act really does is skew the market by favoring some consumers over others, which may result in artificially inflating the cost of natural gas. It is may also be unnecessary, as UPS and other companies have fleets of vehicles powered by natural gas without the NAT GAS Act.

At the end of the day, the energy creation environment is complicated enough without further unnecessary laws and regulations being injected into the process. Certain legislation in the area may be helpful, but it is important that it remain revenue neutral, so as not to be used merely to increase federal coffers. The most logical solution is usually to allow the free market to work efficiently and without artificial alterations instead of promoting more unnecessary legislation which distorts natural energy demand.

See Our Related Blog Posts:

Oil & Gas Companies Spend More on Greenhouse Gas Mitigation Than Government and Private Industries

IHS CERA Study Finds That EPA Grossly Overestimates the Amount of Methane Emissions from Shale Gas Wells

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

Tue, 27 Dec 2011 12:36:59 -0600

Assisting royalty owners in locating lost oil and gas royalties, and getting royalty owners paid their rightful royalty payments, is one of the parts of my practice as a Texas oil and gas attorney that I enjoy the most. However, many of my clients are suprised to learn that there is a pretty strict time limit to how far back they can claim unpaid or underpaid royalties. For that reason, if you think you are not getting royalties to which you are entitled, or if you think your royalty payments are not being correctly calculated and that you may be underpaid, it is important to take action to correct the situation sooner, rather than later.

A recent decision last week by the Texas Supreme Court underscores this point. Specifically, the Court issued a decision in Shell Oil Co., et al. v. Ralph Ross which could effect all future royalty disputes in Texas. In a nutshell, the Court solidified the four year limit under Texas law within which a lawsuit for underpaid or nonpaid royalties must be filed.

The case involved a dispute between the Ralph Ross, as the Plaintiff, and Shell Oil Company. Mr. Ross’s family had leased the mineral rights on their land to Shell since 1961. Mr. Ross is an oil and gas attorney and therefore understood the oil and gas industry and the relevant legal issues more than the usual lessor. Under the original lease, Shell was required to pay a certain percentage to the family for any gas produced from the land—a total roughly equaling one sixteenth of the profits. However, between 1994 and 1997, Shell used a different calculation, and underpaid Mr. Ross and his family for their royalties. Shell claimed this was due to a simple accounting mistake.

In 2002, Mr. Ross assumed all rights relating to his family’s oil and gas lease and first became aware of the underpayment. In 2002, Mr. Ross sued Shell Oil for breach of contract, unjust enrichment, and fraud. The family’s legal claims were brought five years after the final underpayment took place. Texas has a four year statute of limitations for filing this type of suit. However, the family argued that the statute of limitations period should be extended, or "tolled", under the “fraudulent concealment doctrine.” The doctrine essentially states that if a defendant conceals information from the plaintiff, and as a result the plaintiff could not have become aware of the problem, then the statute of limitations "clock" will not start to run until the plaintiff actually becomes aware (or should have become aware) of the problem.

Both the trial and appellate courts found for the family, holding that Shell had behaved fraudulently in underpaying for the gas produced from the family's land and that Shell engaged in fraudulent conduct which extended (or "tolled") the four year statute of limitations. Shell appealed the decision of the trial court and court of appeals to the Texas Supreme Court.

Last week the Supreme Court reversed the decision of the lower courts and found for Shell Oil. Justice Lehrmann, writing the opinion, held that contrary to the lower courts’ rulings, the fraudulent concealment doctrine did not toll the limitation period in this case. Justice Lehrmann noted that royalty owners are required to make themselves aware of relevant information which was publicly available to the royalty owners regarding the royalty payments they actually receive (or don't receive) and the payments they should have received. The Court held that if a royalty owner fails to utilize due diligence by finding that information within the 4 year limitations period, then that royalty owner's claim has expired. This opinion was a reiteration of the Court’s decision in BP Am. Prod. Co. v. Marshall.

The Court went on to say that there were significant discrepancies in royalties paid to the Ross family, and that these discepancies put them on notice that Shell was underpaying them. The Court also restated its decision in Wagner & Brown, Ltd. et al v. Horwood, in which they held that even if a reasonable explanation for the suspiciously low royalty payments exists, the royalty owner cannot avoid the due diligence requirement to investigate. The Court concluded that Shell’s alleged fraud could have been discovered by the Ross family if they had acted diligently during the limitations period. As a result, the family could not go forward with their suit.

This ruling is another reminder of how important it is to keep on top of your rights under an oil and gas lease. It is risky to sit on your rights, let suspicious payments slide, or let a land man or company agent explain away issues which may actually be a violation of the lease. Be aware that most disputes regarding royalties end up being settled, and do not end up in a lawsuit in court. However, the four year cutoff is going to apply in a negotiated settlement, as well as in a lawsuit.

With the four year statute of limitations period firmly set in Texas oil and gas law, if you are suspicious or concerned about low royalty payments, or about royalty payments that you should be getting but are not, it is imperative to talk to a Texas oil and gas attorney right away to protect your interests. Waiting too long could very well forfeit your rights to missing, underpaid or unpaid royalties.

See Our Related Blog Posts:

Mineral Deeds Can Be Complex!

Texas Supreme Court Sheds Light on Duty of Owner of Oil and Gas Leasing Rights

Oil & Gas Companies Spend More on Greenhouse Gas Mitigation Than Government and Private Industries

Sun, 18 Dec 2011 15:16:11 -0600

There are a number of misguided environmental "activists" who characterize efforts to reduce greenhouse gas emissions as some kind of a “David vs. Goliath” struggle between forward-thinking environmentalists who love the planet, on one hand, and greedy energy companies who want to plunder the planet, on the other. While this may be a convenient bias for news articles and political debates, it bears little resemblance to reality. As an oil and gas attorney in Texas, I work directly with the oil and gas industry. As a result, it's clear to me that the false dichotomy between those who care about the environment and those in the energy industry is exactly that: false. The truth is that many energy companies involved in obtaining, refining, and selling oil and gas are also environmentalists who work hard to preserve the planet.

For example, oil and gas companies are much better environmental stewards than they are given credit for. Consider a new report from the American Petroleum Institute analyzing investments in greenhouse gas technologies in North America over the last year. This report notes that there was roughly $225 billion spent in on greenhouse gas (GHG) mitigation in 2010. Of that total, U.S. based oil and natural gas companies contributed nearly half: $108 billion. That amount includes about $37 billion in shale gas development technologies and $71 billion in other investments. About $60.5 billion of the industry’s investment went toward oil and gas substitutions—including the shale gas investments. The shale gas advances are included in the data because its use can reduce the use of coal, which can significantly curb methane releases.

Compare these energy industry investments with about $74 billion in total federal government spending (most in projects funded by the “stimulus” package) for GHG mitigation. Private entities (other than energy companies) combined invested roughly $43 billion during that same time period. Most federal spending went toward energy efficient lighting, biofuels, solar power, and wind. The other private investments included efforts in advanced technology vehicles, electricity efficiency, biofuels, and wind power.

The API study was produced by T2 and Associates and is entitled "Key Investments in Greenhouse Gas Mitigation Technologies from 2000 Through 2010 by Energy Firms, Other Industry, and the Federal Government". It was created by analyzing 565 different public documents and databases on the topic, including corporate reports, federal budgets, and other sources.

These figures present a much different picture than that painted by some environmentalists, i.e., of an industry dragging its feet to prevent GHG mitigation efforts. Let us not forget that these large investments were made in the face of a significant and persistent recession. When businesses of every stripe were laying off workers, cutting services, and eliminating all non-essential efforts, the oil and gas industry continued to preserve jobs, produce jobs, and invest in GHG mitigation. In addition, these investments were made despite the significant questions about the psuedo-science that serves as the basis for claims of climate change due to alleged manmade greenhouse gas emissions.

Of course, all of these efforts received little to no attention in the national media. Instead, virtually all public or political mentions of the energy industry continue to be the usual attacks based on skewed or flat-out incorrect assertions about the work of these companies. One can only hope that more fair-minded Americans will become aware of the true story of the oil and gas industry’s efforts like these latest GHG mitigation investment figures. It is when we base our decisions on correct information, rather than psuedo-science, that we can properly balance energy production and environmental preservation.

Mineral Deeds Can Be Complex!

Sat, 10 Dec 2011 15:51:08 -0600

Property transfers involving mineral rights can be complex. As a Texas oil and gas attorney, I help my clients navigate these difficult legal issues. Mineral rights and potential royalties from those minerals can have a significant impact on the value of a property. Therefore, whether you are buying or selling property, it is critical that the deed and other documents accurately address the mineral rights.

One especially tricky, but not uncommon, scenario, was the subject of a recent article in Tierra Grande, a publication from Texas A & M’s Real Estate Center. This situation involves a transfer in which the original sales agreement or earnest money contract reserves the mineral rights to the seller, but the reservation of mineral rights is not stated in the actual deed delivered to the buyer at closing.

Sometimes both parties admit the error and correct it in a non-contentious fashion by executing a correction deed. However, when a friendly solution does not materialize, there are several key legal issues of law that determine whether the deed can be reformed to match the sales contract and include the mineral reservation.

The first legal principle is the statute of frauds, which in Texas is contained in Section 26.01 of the Texas Business and Commerce Code and Section 5.021 of the Texas Property Code. The Texas statute of frauds provides that all terms of a real estate sale must be in writing and signed by both parties to be enforceable. The second legal principle is the merger doctrine, which provides that the deed is the final expression of the parties' agreement and supersedes all prior written or oral agreements, including the sales contract or the earnest money contract. The third legal principle that often applies is the statute of limitations, which, according to Texas Civil Practices and Remedies Code Section 16.051, is four years from the date of delivery of the deed to the buyer. Texas recognizes an exception to the statute of limitations, however, called the "discovery rule". In other words, the seller has four years from the time the seller discovered or reasonably should have discovered the mistake in the deed within which to file suit for reformation of the deed This date may be a later date than four years subsequent to the delivery of the deed.

If the statute of limitations has expired, even with the application of the discovery rule, then the seller's remedies have expired and that's the end of the story. If the statute of limitations has not expired, then we consider the merger doctrine. Generally, the merger rule dictates that the deed is the parties' final agreement. However, an exception to the merger doctrine can be based on a mistake, accident, or fraud in the deed. The concept of mistake is especially interesting in this context. In general, it has to have been a mutual mistake, that is, both parties must have intended to agree to something that did not end up in the deed. A Texas court in Gail v. Berry earlier this year ruled that, if the buyer notices the mistake in the deed at the time the buyer signed it, this will be considered to be a mutual mistake, even though this might appear to be a unilateral mistake by the seller. In the Gail case, the seller was allowed to reform the deed to reflect the mineral rights reservation.

The next question a Texas oil and gas attorney often encounters is what happens when the buyer has signed an oil and gas lease before the deed is reformed? In most cases, if the lessee/oil and gas company did not know about the mistake and could not have reasonably discovered the mistake, it is considered to be a bona fide purchaser, i.e., an innocent party. As a result, the oil and gas lease will be allowed to stand.

There is, of course, a lesson to all this. Have an experienced attorney handle mineral and real estate transactions. The small amount of money you may save by foregoing competent representation could cost you dearly in the long run.

The Myth of the "Oil Peak"

Tue, 06 Dec 2011 14:36:20 -0600

I'll bet that most Texas oil and gas attorneys (and, I'm sure, everyone in the oil and gas business) often hear the myth repeated that someday there will be a peak in oil production, followed by a rapid decline which will cause the collapse of human civilization as we know it. This myth predicts that someday, possibly someday soon, (although that date keeps getting pushed back when it turns out to be wrong) the world will simply run out of oil. Please understand this myth for what it is—unnecessary fear mongering by those with either a political purpose or who are ignorant of the oil production process.

Daniel Yergin , an expert energy researcher and the Pulitzer Prize winning author of "The Prize", excerpts from his new book, "The Quest: Energy, Security and the Remaking of the Modern World", in a recent Wall Street Journal interview. He describes the ways in which the purveyors of this “oil peak” myth are systematically wrong. For example, the myth drastically oversimplifies the complex nature of oil production. It is based on the concept that the world has X amount of oil, and when we use X amount, there will be none left. While in an absolute sense that may be true, oil production is not nearly as simple as that. This country has a long history of feverish predictions that we are running out of oil, going back as far as the 1880s. The actual prospect of running out of oil remains as distant today as it did then.

From 2007 to 2009, for every barrel of oil produced in the world, 1.6 barrels of new reserves were found. In addition, energy technology, including green energy, has advanced to the point where we use oil in a much more efficient way than in the past. As a result, each barrel of oil goes further. But the “oil peak” myth still holds our collective national attention for some reason. Mr. Yergin attributes this in large part to a man by the name of Marion King Hubbert, who studied geology in the first half of the 20th century. The "oil peak" is often referred to as “Hubbert’s Peak.” In 1956, Hubbert theorized that oil production would peak between 1965 and 1970. When production did decline after 1970 and the oil embargo rocked America soon after, his theory seemed vindicated. He also claimed that the generation of children born in 1965 would see oil reserves wiped out in their lifetimes. But what Mr. Hubbert did not count on was the huge increase in newly discovered oil and gas reserves found and produced in the U.S. By 2010, US oil production was three and a half times higher than Mr. Hubbert predicted it would be.

Hubbert apparently did not have a good grasp of economics and technological change, and this hampered his ability to understand the future of oil. Both economics and technological change are critical to understanding how the oil industry works and changes over time. Economics drives production through the forces of supply and demand, but Mr. Hubbert, oddly enough, insisted that oil prices didn’t matter. He was mistaken, of course. High oil prices motivate oil companies to find new reserves and to develop new technology to produce known reserves. Technological innovation has increased dramatically in the oil industry in the last decades, resulting in discovery of new reserves and production of known reserves previously believed to be inaccessible.

Oil production in the US has increased 10% since 2008, assisted by discoveries like the Bakken oil fields in North Dakota (see our previous post). Mr. Yergin suggests that instead of thinking of a peak, it is more accurate to think of oil production as a plateau, which is leveling off because of increased energy efficiency and new technology.

Yergin brings substantial background and insight to both his first book, "The Prize" and now to this new work, "The Quest". The are both recommended reading for anyone interested in the history and the future of oil.

IHS CERA Study Finds That EPA Grossly Overestimates the Amount of Methane Emissions from Shale Gas Wells

Wed, 30 Nov 2011 14:45:19 -0600

The EPA has once again overestimated the amount of pollution that comes from an oil and gas source -- with potentially grave consequences for the industry. This time, the EPA has overestimated the amount of methane gas that comes from shale gas wells. A new report from the IHS Cambridge Energy Research Associates has found that the EPA’s estimates were based on too small a sample of wells, and on a method that did not conform to industry practices.

Because methane is highly flammable, those who drill new shale gas wells make every effort to minimize the emissions. This includes several methods for capturing and relieving gas, such as installing a blowout preventer at the surface.

The report found that rather than base its methane emissions estimates on gas that escaped to the surface, the EPA based them on what was captured. The report noted that if methane emissions were really as high as the EPA supposed, there would be extremely hazardous conditions at the well site. It would be be “unwise” for the EPA to use its methane estimates for the basis of new policy. Furthermore, EPA proposals for more regulation of hydraulically fractured gas wells are already part of industry standards.

How did this come about? The EPA based its 2010 revised estimates on too small a sample -- specifically, two workshop presentations based on just four projects in Wyoming, New Mexico, Texas, and Oklahoma. The presentations described the amounts of methane captured during “green completions” of natural gas wells. Green completions are meant to capture as much methane as possible before it reaches the surface while the well is completed. Therefore, it seems absurd to use it as a basis for estimating methane gas emissions. Yet for some reason, the EPA assumed that the wells that captured this amount methane were an exception, and that every other well must release the methane into the atmosphere because their states do not specifically regulate gas emission. In fact, IHS CERA director Surya Rajan stated that it is “common industry practice… to capture gas for sale as soon as it is technically feasible.”

Rajan further noted that gas that can’t be sold “is flared rather than vented for safety reasons.” The EPA’s estimates assume that the gas is never flared -- that it is simply released. IHS CERA did a revised calculation that took into account that gas well drillers were professionals who knew what they were doing. It found that only 18% of methane gas produced in 2010 came from new wells. Even if the methane gas produced during the 10-day flowback (completion) procedure were vented from every well, it still would produce two-thirds less than EPA estimate.

This is all too common: federal regulators get involved in a situation that they know too little about and threaten to make it worse under the guise of “improvement.” For instance, the EPA ignores the fact that states can and do regulate emissions without their help: Texas has passed new regulations for monitoring emissions this past year. If the EPA does not respond to industry concerns, we could be looking at new regulations that not only don’t address any real problems, but make daily operations more difficult for gas well drillers. That means more unnecessary delays, money wasted and higher prices for gas. As a Texas oil and gas attorney, I find this extremely troubling.

Self-Serving Political Posturing Prevents Real Energy Independence

Fri, 25 Nov 2011 14:59:14 -0600

As is no doubt true of most Texas oil and gas attorneys, I’m always interested in reading about new developments in the oil and gas industry, although they often seem to attract more than their share of political wrangling. Of course, energy independence is a hot-button issue these days (see our recent post on the topic). Unfortunately, political posturing often gets in the way of common sense solutions to this pressing problem.

I was reminded of how politics is the enemy of practicality when I read an interview with Harold Hamm, CEO of Continental Resources in the Wall Street Journal recently. Continental Resources is the 14th largest oil company in the United States. Mr. Hamm is the man who discovered the Bakken oil fields in Montana and North Dakota, which he claims holds 24 billion barrels of oil, and that has already helped make America the world’s third largest oil producer. Mr. Hamm believes that energy independence is within our grasp.

New technological advances are helping the industry grow by leaps and bounds. Horizontal drilling allows economical access to oil reserves that would not have been possible in the past. It has done for oil production what fracing has done for natural gas. Mr. Hamm believes that America’s oil production and reserves will triple in the next five years, which will have a broad impact on the economy. There are 10 million royalty owners today who are earning money from the oil located beneath their land. These royalty owners are not the millionaire Wall Street investors that Obama is so fond of bashing, these are just folks, like you and me, using those royalties to pay help pay bills and to save for retirement.

But instead of investing and promoting the resurgence of this industry, which could create an untold number of good, well-paying American jobs, politics has once again interfered. Obama instead chooses to spend billions of taxpayer dollars on subsidies to companies touting green energy, which supplies only 2.5% of America’s energy needs. These types of energy sources may be useful in the future, but they are not feasible alternatives in the short term. In fact, for a number of reasons, these sources will never provide more than a few percent of our energy needs, no matter how much they are subsidized. Notwithstanding the facts, the Department of Interior continues to delay drilling permits month after month, preventing energy production to meet our needs today, preventing the creation of American jobs, and preventing payment of huge royalties to local, state and the federal government that would help with the current debt crisis.

Please don't tell me that we need to subsidize these "green industries" to prevent pollution. Oil and gas companies spend billions of dollars every year to insure their operations do not polute and do not harm the environment. Those who say otherwise are, frankly, uninformed.

What is even more incredible than the misplaced subsidies is the length to which federal agencies go in harassing oil and gas companies. For example, the Justice Department has brought charges against Continental and six other oil companies for violating the Migratory Bird Act . The maximum penalty for each charge under this Act is six months in prison and a $15,000 fine. What was the heinous wrong that brought down the full force of the Justice Department on Mr. Hamm and his company? Well, a small bird, very common, and not an endangered species, was found dead in one of Continental’s oil pits in North Dakota. I love birds, and I believe that all life is sacred, but there is not even evidence that suggests the bird was killed by this pit.

This case seems even more far-fetched when one considers that some 440,000 birds die from the wind turbines every year, according to the American Bird Conservancy. So, you might ask, what is the Justice Department doing about this? Alas, wind energy is one of Obama's political pet-projects, and the investors and officers of a number of these companies are major Obama supporters. I can find no record of any prosecution based on this law against wind energy companies.

The way Obama rewards his supporters with our tax money, while punishing the industries and companies that create jobs, appears to be cynical, cold-blooded, Chicago-style thug politics at its worst. I only hope enough voters perceive the insanity of this behavior between now and election day.

Oil and Gas Pipeline Easements and Texas’ New Eminent Domain Law

Tue, 22 Nov 2011 08:49:46 -0600

There is a new arrow in the quiver of Texas oil and gas attorneys who represent land and mineral owners! Specifically, there are significant changes to the Texas eminent domain statutes, which went into effect on September 1, 2011. Oil and gas companies can still acquire easements across private property to build pipelines. If the pipeline is a private pipeline, the pipeline company must obtain the voluntary agreement of the property owner. If the pipeline is going to be a common carrier, and the pipeline company and property owner cannot agree on easement terms, the company can commence condemnation, or "eminent domain" proceedings, in which panels of commissioners appointed by a court decide the easement terms.

Another portion of the statute allows landowners to construct roads over the pipeline, although the pipeline company may still impose restrictions on things like the size and road material.

The new law applies to condemnation lawsuits initiated on or after September 1, 2011. These changes strengthen a landowner’s right to defend against eminent domain from both the government and private companies. One of the landmark changes to the eminent domain law is a new “bona fide offer” requirement, which means the purchasing entity must give a written offer for the property 30 days before the final offer is made. Additionally, a certified appraisal of the property in question must accompany the final offer, and that final offer must be of equal or greater value than the appraisal figure. The landowner now has 14 days to respond to the final purchase offer. The new law also allows landowners to obtain relevant information concerning the proposed easements from the potential purchasers.

Prior to the effective date of these new legal requirements, the number of condemnation proceedings surged in those areas of Texas that are experiencing increased oil and gas production. This has especially been the case in South Texas because of the Eagle Ford shale, where natural gas production nearly quadrupled and oil production increased tenfold between 2009 and 2010. According to an article in the Wall Street Journal, at least 184 lawsuits against landowners had been filed already between January and August 2011 in just four South Texas counties, compared to only 24 lawsuits in all of 2010. A district court judge in Lavaca County indicated that the number of lawsuits filed this year is “highly extraordinary.” That county alone registered 62 such lawsuits by August, 2011, compared with only 18 in all of 2010.

These pipeline cases are important to everyone involved, so there is incentive to make the process equitable and fair for all parties. Texas oil and gas companies employ thousands of workers and contribute to a healthy and growing economy. The boom in oil and gas production has also brought prosperity to many areas of Texas. However, it is equally important to consider the rights of private landowners whose property is affected by the pipelines.

It may take time to determine the total impact of revisions to Texas eminent domain law. Hopefully, the original purpose of the law will be fulfilled: giving landowners more knowledge and influence in negotiations with pipeline companies. These companies are going to face more significant hurdles in exercising their eminent domain rights than in the past, especially when this new eminent domain law is combined with the recent Texas Supreme Court decision in Denbury (read our recent blog entry on this case here). The Denbury decision essentially affirmed that there must be a reasonable probability that the pipeline will serve the public before a pipeline company can use eminent domain.

New Cushing to Houston "Wrangler" Crude Oil Pipeline Planned

Fri, 11 Nov 2011 10:14:13 -0600

I was interested to read recently about a new crude oil pipeline to be built by Enterprise Products Partners LP and Enbridge Inc. All new projects like this have the potential to create jobs, maximize local productivity, and ensure that our state’s natural resources are utilized in safe, secure, and productive ways. This latest proposal is unique in that most of the largest new pipelines are designed to carry gas. This line would instead bring oil to the Gulf Coast from the Cushing, Oklahoma storage hub. According to the latest report on the project in the Oil & Gas Journal , under the current plan, a 800,000 barrel-a-day crude oil pipeline would be designed, built and operated to bring oil from Cushing to Enterprise’ Texas Gulf Coast refining complex. This would be the largest pipeline connecting the Oklahoma oil storage hub with Gulf Coast refiners.

If the proposal continues as planned, the 36-in. OD Wrangler Pipeline will begin at the Enbridge Cushing terminal and then extend 500 miles south along pipeline corridors ending in southeast Harris County at Enterprise’s ECHO oil storage terminal. All told, the new crude oil pipeline would provide access to refineries in Texas City, Baytown, and along the Houston Ship Channel. The pipeline is set to accommodate a variety of grades and oil sources. In addition to the main pipeline, the joint project plans also include the creation of an 85 mile line to the Beaumont/Port Arthur refining center. On top of that, additional storage necessary for the operations of the new pipeline will be built and housed at Enterprise’s ECHO site in Harris County, Texas.

The two companies announced a binding open commitment for available capacity on the new pipeline which ran from October 3rd and ended last Wednesday. Depending on the timing of required regulatory approvals and commitments from interested shippers, the companies hope to design, build, and begin operating the new line in less than two years. Under the current proposal, the line would enter service in mid-2013.

Observers note that this line would be the latest entrant into the race to be the first to supply Texas and surrounding areas with crude oil from Cushing. The line will likely compete with a planned pipeline from TransCanada Corp. which would provide 500,000 b/d, as well as the Magellan Midstream Partners’ Longhorn pipeline, which would bypass Cushing and deliver oil from fields in west Texas.

This latest agreement is essentially a combination of separate projects that Enterprise and Enbridge had made previously, but that had stalled. Earlier this year Enterprise had reached an agreement with Energy Transfer Partners LP to build a 400,000 b/d oil pipeline from Cushing to Houston. That announcement was made in April, 2011, but was eventually cancelled in the summer because of insufficient shipper interest. A few months before that, Enbridge has announced its own Monarch project designed to move light oil from Cushing to Houston at 370,000 b/d, expandable up to 480,000 b/d. However, the Wrangler pipeline could replace the Monarch pipeline as a route for delivering the crude oil to Houston.

Texas Comptroller Targets Systemic Flaws of Federal Regulations

Wed, 09 Nov 2011 09:41:03 -0600

As a Texas oil and gas attorney, I have followed with great interest the tumultuous relationship that seems to perpetually exist between Texas and its landowners on one hand, and the United States Environmental Protection Agency (EPA) on the other. Unfortunately, some misguided policymakers are under the mistaken notion that the EPA is working to protect the environment, and that the efforts of Texas and other states to fight those federal regulations are misguided. That oversimplification could not be further from the truth.

As Texas Comptroller Susan Combs explained in a recent editorial published in the Star Telegram, Texans are committed to the well-being of their air, land, and water. If legitimate steps need to be taken to protect the long-term well-being of our resources, Texans have and will continue to be the first to step up and take action. Unfortunately, many of the EPA’s latest regulations and requirements passed in the name of environmental protection actually protect next to nothing, and have no scientific basis whatsoever, yet come with very significant detrimental consequences for Texas residents.

As Combs notes, “private landowners are the best stewards of their own property.” She goes on to say that the EPA continues to ignore the knowledge and reasonableness of our private property owners when making arbitrary decisions that have effects on their land and lives. Even more troubling, at times the Agency seems to specifically target Texas in ways that defy common sense and scientific reality. For example, Combs discussed the EPA’s new “cross-states” air pollution rule. The new regulation will disproportionately affects Texans. The measure targets nitrogen oxide and sulfur dioxide. Texas plants produce roughly eleven percent of the sulfur dioxide targeted by the regulation, yet, inexplicably, Texas is being ordered to absorb a quarter of the reductions—more than double its actual share.

Anyone who understands the energy industry in our state understands the significant impacts the regulation will have. The state’s largest power generator, Luminant, explained that the rule will eliminate 500 Texas jobs as two generating units are being idled and three ignite mine operations halted. In addition, the Electric Reliability Council of Texas reported that the rule may increase electricity rates for consumers, because the state’s generation capacity will be reduced in the peak load months of summer.

Considering the consequences of these regulations, particularly in light of the already tough economic circumstances, one would expect the regulations to be based on some scientific evidence and enacted only after input from those affected. Unfortunately, neither is true. As the Texas Commission on Environmental Quality explained, the EPA’s own forecasting models did not reveal that these emissions had any significant impact on other states. On top of that, Texas wasn’t even included in the new requirements until the final version of the rule was adopted, meaning that no one from the state had the opportunity to provide comment or feedback on the regulations while they were being discussed.

Other examples of EPA overreach abound. Proposed EPA jurisdiction expansions may allow the agency to control isolated wetlands, streams, and other purely local pools of water such as stock tanks. The EPA has not produced a single scientific reason why the expansion is necessary. Yet, the action would place many Texas construction projects in jeopardy. The uncertainty, time delays, and other permitting challenges foisted upon residents by federal bureaucracies will have ramifications throughout the state.

As a Texas oil and gas attorney who works with landowners on a variety of issues, I am well aware of the systemic problems unnecessarily faced by local residents because of misguided EPA conduct. As Comptroller Combs explains in her editorial, it is important for all Texans to remain aware of these developments and to make their voices heard on a national level.

See Our Related Blog Posts:

EPA Proposal to Extend Its Regulatory Authority May Adversely Affect Texas Ranchers

Additional Offshore Workplace Safety Regulations Proposed by DOI & BOEMRE

Texas Mineral Owners: Don't Waste Your Potential Royalties

Sat, 29 Oct 2011 10:44:17 -0600

When a Texas mineral owner asks me to review or negotiate an oil and gas lease offer they have received, one of the first things I do is to determine who the proposed operator, or lessee, will be. Many people do not realize how important it is to know just who you are leasing to. If you do not investigate the proposed lessee before you sign, you may be throwing away the royalties you could have received had you leased to a competent oil and gas company.

First, I determine whether the potential lessee is a licensed oil and gas operator. I strongly urge my clients not to sign a lease with a middleman. Instead, I insist that the actual oil company who will be operating the lease be disclosed so we can do a background check on them. There can be many potential problems if you sign a lease with a middleman. These include, (but are certainly not limited to), the following problems:

1) The company who contacted you may be a broker or a “lease hound”, that is, a person or company who tries to sign up leases cheaply and then sell them to a real oil company for a huge markup. I prefer to see my client be paid that markup, rather than the middleman.

2) They may be an agent for a “boiler-room” operation, who make their money by selling interests in a lease or “drilling program” as an investment. They make their money on the sale of these interests, and could care less about drilling a good well, or treating your minerals or the surface of the property competently. In some cases, they don't care if a well is drilled or not, because they have already made their money.

3) You can end up with the drilling being done by an inexperienced or even unscrupulous operator, who can destroy the surface of your land, leave toxic chemicals, and either refuse to clean up, or go out of business or file bankruptcy to avoid the cost of cleanup.

4) An inexperienced or unscrupulous operator can do an inept job of developing your minerals, damage the reservoir and possibly leave the minerals unrecoverable. In either case, this type of operator can either go out of business or file bankruptcy to avoid the payment of damages.

5) Many reputable oil and gas operators refuse to buy leases from these middlemen. Instead, they wait until the initial term of the lease has expired, and then contact the mineral owner to lease from them directly. An oil and gas lease is almost always “exclusive”, that is, you are prohibited from leasing to anyone else during the initial, or primary, term. Thus, while your minerals are tied up in a lease to a middleman, you may miss out on a good lease with a competent oil and gas company, and lose the royalties you would have been paid during this time. It’s also possible that you will miss your window of opportunity more permanently: by the time your initial term is up, a competent operator may have leased what they need in surrounding areas, and not be interested in leasing from you any longer.

Once we determine who the actual lessee will be, if the proposed lessee is not well known, I strongly recommend that I do a background check on the proposed lessee. While there are many good oil companies and well operators, there are a number that you do not want to lease to for any price. As I indicated above, allowing an inexperienced or unscrupulous operator to drill on your land can result in serious financial consequences for you. A background check is not a guarantee that these things will not occur, but it gives us some idea of whether the operator is legitimately incorporated, how long they have been in business, how many other wells they operate and where, and whether there are or have been any lawsuits or regulatory proceedings against them.

Way too many mineral owners do not investigate who the proposed lessee will be. When they contact me, after the damage is done, it is usually too late.

These lease hounds and brokers and middlemen come out of the woodwork when the price of oil goes up. Please don't waste your mineral assets and the potential royalties those assets can produce for you by leasing to someone without checking them out first! In addition, please be patient. In an area of the state where the brokers and lease hounds are busy, the competent oil companies often follow!