March 27, 2015

Tainted Water Not from Fracing

Another piece of scientific evidence has been published that suggests that the negative press over hydraulic fracturing may be unwarranted. As most of you are aware, there have been many accusations reported in the media that fracing allowed methane to enter and contaminate water wells. While methane is not particularly toxic, it is smelly, explosive and thus potentially dangerous. A new study that you can read here was published last fall in the Proceedings of the National Academy of Sciences. That study concluded that contaminated groundwater in Texas and Pennsylvania is not due to fracing but is primarily the result of problems with pipes and seals at natural gas wells, and particularly with annulus cement, production casing, and failure of the water wells themselves.

The study authors chose research areas in the Marcellus Shale and the Barnett Shale where the most complaints of water contamination were reported. The study addressed two questions: (i) are elevated levels of hydrocarbon gases in drinking-water aquifers near gas wells natural or anthropogenic (i.e., resulting from the influence of human beings); and (ii) if fugitive gas contamination exists, what mechanisms cause it? The study was conducted by analyzing chemicals, like methane, in groundwater using noble gas and hydrocarbon tracers. This process allowed the researchers to determine if gas wells were contaminating the water, if so, which wells and also to determine which part of the drilling process or equipment was to blame. The proportions of elements such as methane, helium, neon, and argon in the groundwater demonstrated that these elements originated from leaky pipes and bad seals. If the contamination had come from fracing, the water would have exhibited different proportions of these elements.

The study identified eight discrete clusters of fugitive gas contamination overall, with seven in Pennsylvania and one in Texas and these results demonstrated contamination that had occurred over time. There were two cases during the study in which the water supplies experienced ten-fold jumps in methane level. A co-author of the study, Rob Jackson, an environmental science professor at Stanford University, said “I don’t think homeowners care what step in the process the water contamination comes from. They just care that their lives have changed because drilling has moved next door.” The lead author of the study, Thomas Darrah, a geochemist from Ohio State University, said this is good news because contamination from these sources is much easier to fix and is also more readily preventable.

The study also demonstrated that the scope of the contamination is fairly modest (although that is no comfort if it's your water supply that is contaminated). Out of 20,000 wells in drilled in Pennsylvania since 2008, the state has identified 243 cases of private water contamination that had been “impacted by oil and gas activities”. In the geographic areas in the study with the most complaints, only a minority of wells showed contamination with any relationship to natural gas drilling or production. The contamination in these cases was the result of naturally occurring methane in the water wells.

Obviously, the oil and gas industry must insure that none of their activities have any impact on potable water wells. However, if fracing is not the problem, we must stop the politically charged and emotional discussions about fracing that have no basis in fact and concentrate on fixing what needs fixing.

See Our Related Blog Posts:

Mitigating Water-Related Business Risks in the Oil and Gas Industry

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March 20, 2015

Texas Railroad Commission Oil & Gas Pipeline Permit Rule

Previously I have discussed the revised Texas Railroad Commission (RRC) Rule 3.70 regarding permits for pipelines. You can access my previous blogs here and here. The RRC approved that new rule on December 3. 2014, and it went into effect on March 1, 2015. You can access the text of the new rule here.

There were many comments and suggestions made during the Public Comment period required by Texas law for any new administrative rule. The RRC included a few of these suggestions in the revised rule. However, there were a number of important comments and requests that were neither significantly addressed nor included in the revised rule. These include:

1. The Texas Land and Mineral Owners Association, along with other landowner groups, commented that the new rule does not address the shortcomings highlighted by the Texas Supreme Court in the recent Denbury Green case and that even with the changes, Rule 3.70 still amounts to “registration, not adjudication” and includes no meaningful review of the eminent domain authority. The TLMA suggested adding language for the pipeline company as follows: “Applicant understands and agrees that this registration is not determinative of Applicant’s authority to utilize the power of eminent domain to acquire right of way for the pipeline referenced herein.” They also suggested that the permit should include language stating that: “The RRC is not, by granting this registration, making any determination regarding Applicant’s authority to utilize the power of eminent domain to acquire right of way for the pipeline referenced herein.”

2. Several public comments suggested that the pipeline permit process should include a full investigation of whether the factual assertions in the permit by the pipeline company are correct.

3. A number of public comments indicated that there should be public notice given for a permit as well as a public evidentiary hearing so that affected landowners could have a chance to be heard and so the factual assertions in the permit by the pipeline company could be examined.

The RRC has stated that a pipeline permit is not an authorization to exercise eminent domain for pipeline easements and that the RRC classification of pipelines is used only to determine which RRC regulations apply to specific pipelines. However, when a landowner challenges a pipeline’s common carrier status in court, it is likely that a pipeline company will produce their RRC pipeline permit as evidence of their “common carrier” status. Perhaps the RRC comments to the new rule will eliminate that possibility.

The new RRC pipeline permit rule appears to have significant flaws. In the coming year, we may be able to get an idea of how the new rule functions and whether those flaws will create new problems for landowners.

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March 13, 2015

Texas Senate Committee Aproves "Transfer at Death Deed"

Earlier this week, the Texas Senate State Affairs Committee approved the draft of a new statute entitled the Texas Real Property Transfer on Death Act (Senate Bill 462). You can review a draft of the bill here. This bill would create a procedure for a non-testamentary transfer of real property. In this case, non-testamentary means that it passes outside of someone’s will and avoids the entire probate process.

We don’t yet know if the bill will end up as a statute. If it does, it will go into effect on September 1, 2015. The potential statute contains a number of traps for the unwary. For example, the specialized deed authorized by the bill applies only to a person who owns real property as a joint tenant with right of survivorship. As currently written, the bill does not apply to an owner who is a tenant in common or an owner of community property with or without a right of survivorship. As currently written, Section 114.055 of the bill has some very specific requirements that must be complied with if this specialized deed is to be effective. It will also be important to be aware of the conditions that will revoke the deed, described in Section 114.057 of the bill. Interestingly, a contrary provision in a will does not revoke or supersede a transfer on death deed.

This bill has the potential to save people money because it allows the transfer of title to real property, in certain specified circumstances, without the expense of probating a will. On the other hand, the bill has very narrow circumstances in which it applies and there is a substantial chance that subsequent behavior may result in an inadvertent voiding of the transfer. If the bill makes it into law, it will be important to consult an attorney if you wish to use the "Transfer at Death Deed".

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January 30, 2015

Texas Supreme Court Decision on Implied Easements

An interesting case that involved easements was recently decided by the Texas Supreme Court. The case is David Hamrick, et al. v. Tom Ward and Betsy Ward and the issue presented to the Court was whether an implied easement of necessity by prior use continues after the necessity has ended. There are two basic types of easements. Express easements, that are created by an agreement (usually written) and implied easements, that arise by operation of the law due to certain specific facts. In Texas, implied easements are split further into a number of subcategories, including easements of necessity and easements by prior use.

grass-landscape-with-road-1440659-m.jpgThe Facts

In 1936 O.J. Bourgeois owned certain property in Harris County, Texas. Mr. Bourgeois gave two acres of the land to his grandson. While the grandson owned this land, a dirt road was built across Mr. Bourgeois' remaining property to allow the grandson access to the public road. Subsequent owners of the grandson's property also used the dirt road for access. Eighty years later, Tom and Betsy Ward were the owners of the grandson’s land and still used the dirt road. The Wards put gravel on the road so they could use it for construction of a new house on their property. The Hamricks owned the land that the dirt road crosses, formerly the property of Mr. Bourgeois. The Hamricks filed a lawsuit asking for a temporary injunction preventing the Wards from using this road. The temporary injunction was granted in April 2006. So as not to delay construction of their new house, the Wards built a new driveway to access the main road. In the suit, the Wards requested a declaratory judgment that they had an implied easement for the dirt road. The trial court granted the Wards motion for summary judgment and the Court of Appeals agreed and held that the Wards had a prior use easement across the Hamricks land.

The Texas Supreme Court Ruling

In a judgment written by Justice Eva Guzman, the Texas Supreme Court reversed the judgment for the Wards and remanded the case. The Court found that the easement was one of necessity, not prior use. Necessity easements have stricter proof requirements than a prior use easement. The Court found that easements for road access for previously landlocked parcels of land must be considered under the necessity easement doctrine. The proponent of the easement must demonstrate a historical necessity for the easement since the time the land was severed and must also show that a continuing, current necessity exists.

The Wards did not plead or offer evidence of an easement of necessity in the first trial. Because this case has been returned to the original trial court, the Wards will have the opportunity to do so.

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January 23, 2015

Another Oil Company Expands in the Texas Permian Basin

Parsley Energy Inc., based in Midland, Texas, has been buying undeveloped and productive land in Reagan County.

Parsley Energy is an independent oil and natural gas company founded in 2008 with operations in the Permian Basin. The company develops unconventional oil and gas reserves. It has grown exponentially in the past few years, from a start up with two people to a company that operates several hundred wells and produces more than 12,000 barrels of oil equivalent per day. The company owns more than 97,371 surface acres in the Midland basin and 121,211 surface acres in the Permian. They have horizontal and vertical wells in the core of the Midland basin and expect to continue to grow and produce good rates of return on investments. This appears to be borne out by their latest $252 million purchase in Reagan County, which breaks down into $26,000 per net acre with $60,000 per flowing barrel of oil equivalent. They have added more than 16,000 net acres and 456 net horizontal drilling locations, including these newly announced locations in Reagan County, since their initial public offering in May 2014.

As Parsley Energy develops its assets in Reagan County, they will be requesting leases from mineral owners. This means mineral owners in Reagan County need to consult with an oil and gas lawyer before signing any leases. Signing leases without consulting a lawyer can lead to financial losses and stress. See my previous posts on this issue here and here. It's not worth the risk yo your land or your finances not to get input from an oil and gas attorney.

Many of Parsley's plans were in place before the recent drop in oil prices. It remains to be seen how lower prices will impact their plans.

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January 16, 2015

Fracing Case Goes to Texas Supreme Court

Steve Lipsky and his wife Shyla became famous as Texas landowners who claimed they could set their water on fire--and they alleged this was due to methane contamination from nearby hydraulic fracturing. The couple sued Range Resources who operated a well near their house in Weatherford, Texas. The Lipskys claimed they noticed problems with their water after Range drilled two natural gas wells near their house in 2009.

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The Environmental Protection Agency, without any scientific basis whatsoever, concluded that Range had caused or contributed to the water contamination. The Railroad Commission of Texas did actual did scientific testing and determined that the methane came from a shallower rock formation than the one drilled, and allowed production at the wells to continue. Many people do not realize that methane occurs naturally in many water deposits, but is not drawn into the water pump until the water level falls below a certain level. With lots of fanfare, the EPA sued Range Resources in federal court for the alleged contamination. That suit was later quietly dismissed in its entirety.

Range sued the Lipskys and another person, Alisa Rich, for civil conspiracy, aiding and abetting, defamation, and business disparagement over their claims about fracing contaminating their well. The case is In Re: Lipsky. The Lipskys and Ms. Rich filed motions to dismiss all the Range claims. The trial court in Parker County, Texas denied the motions.

The Texas Second Court of Appeals decided that the trial court “clearly abused” its discretion in denying the Lipsky’s motions to dismiss all claims and in ruling that they had no remedy to appeal. The appellate court ordered the trial court to enter an order dismissing Range Resource’s claims based on conspiracy and aiding and abetting. The appellate court left pending Range’s claims of defamation and business disparagement. You can read the appellate opinion here.

The Supreme Court of Texas heard oral argument on December 4, 2014. The issues that will be determined by the Supreme Court are: (1) whether the Texas Citizens’ Participation Act requires heightened proof – clear and specific evidence – of each essential element of a claim under that Act, and if so, (2) whether Range presented clear and specific evidence of defamation and business-disparagement claims.

Given the widespread use of fracing, and the increasing proximity of fraced gas wells to residential areas, this will be an important decision by the Texas Supreme Court. If the Lipskys had a legitimate evidentiary basis for their claims, they should not be the subject of a retaliatory lawsuit. On the other hand, if they did not have a legitimate basis for their claims, then they should be held accountable for any damage their unsupported claims may cause.

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January 9, 2015

USW Strikes at Oil Refineries: The Worst Possible Timing

The number of U.S. refineries and petrochemical production plants that have been subjected to United Steelworkers strikes has now reached eleven locations in California, Kentucky, Texas and Washington. It's hard to imagine a more outrageous case of bad timing. Let's see: oil and gas are at their lowest prices in years, the oil industry is hog tied by out-of-date export restrictions that prevent many sales to non-U.S. buyers, and the true unemployment rate (hint: it's not the number the U.S. Labor Department puts out) is depressingly high, about 12.6%. Yet, the United Steelworkers are striking. Go figure.

Part of my growing up years were spent in Detroit, Michigan, where it was not uncommon for violence to be used by the United Auto Workers to force folks to join the union. The father of a girl I went to high school with was murdered because his employees resisted unionizing his small trucking company: His car blew up in the driveway of their home when he got in and turned on the ignition to go to work. No doubt his employees got the message.

Unions have done some good things for workers, but most of those accomplishments are in the past. Today, unions are more often a barrier and an impediment to increasing workers' productivity, which ironically hurts the workers the most: when workers are more productive they command higher wages. In the case of education, it is often the teachers unions that keep poor and mediocre teachers in place and it's our children who suffer.

Apparently, union membership in many industries is diminishing. It may be that workers are starting to recognize that their union, like the USW with its ill-timed strikes, isn't doing them much good.

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January 2, 2015

Texas Veterans Land Board Increases Loan Limits for Texas Veterans

Good news for T exas veterans who want to buy land! In his first act as chairman of the Texas Veterans Land Board (TVLB) Texas Land Commissioner George P. Bush increased the land loan limit . The previous land loan limit was $100,000. Texas veterans are now eligible for low-interest land loans up to $125,000. This is the apparently the maximum loan by the TVLB allowed by Texas law.
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The TVLB loan requirements are:

1. For the purchase of one acre or more.

2. Up to $125,000 for a 30-year, fixed-rate loan.

3. Minimum 5% down payment.

4. A certified survey.

5. A $325 appraisal and contract service fee.

6. Applicants must be veterans who were honorably discharged, served at least 90 days on active duty and who live in Texas.

Keep in mind that the TVLB originates all its land loans, so don't let a mortgage broker tell you otherwise. You can get more information and begin the application process here.

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December 26, 2014

Drainage of Oil and Gas in Texas

A federal appellate court decision demonstrates some lessons for Texas mineral owners. That decision was issued by the Fifth Circuit Court of Appeals in the case of Breton Energy, L.L.C., et al. v. Mariner Energy Resources, Inc., et al. The Plaintiffs in this case own and operate an off-shore lease in the Gulf of Mexico that includes an area known as the K-1 sands. The Defendants own and operate an adjacent off-shore lease that covers an area known as the K-2 sands. The Plaintiffs claimed that the Defendants engaged in “unlawful drainage” from the Plaintiffs' lease in violation of federal and state law.

The Facts:

Breton Energy LLC
and Conn Energy Inc. sued International Paper Co. and its successors in interest, consisting of eleven oil companies including Apache Corporation, Chevron and I.P. Petroleum Co. The Plaintiffs claimed specifically that IP Petroleum perforated and drained an oil reservoir under the Plaintiffs' lease on the Outer Continental Shelf in the K-1 sands. The Plaintiffs also claimed that IP co-mingled resources from this reservoir with hydrocarbons from a nearby reservoir, making it impossible for the Plaintiffs to produce oil and gas from its own wells.The evidence showed that I P Petroleum, even though it had been ordered by the federal Minerals Mining Service not to complete wells in both the K-1 and K-2 sands, did in fact complete wells in both areas. There was also evidence that I P Petroleum's production exceeded their estimate by almost 30%, which would make sense if they were producing from someone else's reservoir as well as their own.

The District Court dismissed the Plaintiffs' claims, and they appealed to the Fifth Circuit.


sunrise-series-1446056-1-m.jpg The Opinion

The Fifth Circuit partially vacated the District Court’s order, in part affirmed the order , and remanded part of the case back to the District Court in a decision written by Judge Stephen Higginson. The Fifth Circuit held that the Plaintiffs had pled sufficient facts to state a claim of waste against IP, but not against the other Defendants. The Court also determined that the Plaintiffs had made a plausible allegation that IP contributed to waste from the reservoir, which was enough to pass the pleadings test in the U.S. Supreme Court's decision of Bell Atlantic Corp. v. Twombly. The Court found that the neighboring reservoir had been overproduced and this supported the Plaintiffs' claim that minerals were commingled and that recoverable hydrocarbons had been lost. In upholding the District Court’s dismissal of claims for unlawful drainage against other Defendants, the Fifth Circuit relied on Louisiana law that prohibits landowners from filing claims against neighbors who drain liquids or gases from under their property.(Louisiana law allows production of oil and gas that migrates from other people's properties. Texas has pooling regulations to prohibit one person from benefiting from their neighbors minerals).

Breton Energy called the decision of the Fifth Circuit a “great ruling for us” and said that “(t)he focus from the beginning and the target was IP, because they actually performed the perforation. The other parties were sued on the grounds that they should have been aware of the perforation and done something about it.” Breton Energy and Conn are currently preparing for a new trial in the District Court.

One of the lessons of this case is that it is difficult to successfully prosecute an oil and gas drainage and waste claim. Both parties in this lawsuit retained a lot of expensive petroleum engineering and geology talent to try to prove their side of the case. While the Plaintiffs in this particular case survived a dismissal based on their pleadings, it is not at all clear that they will prevail on the merits. It will be very interesting to see how this case turns out.

See Our Related Blog Posts:

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December 19, 2014

Oil Production in the Texas Permian Basin

This blog frequently shares news regarding developments in the oil and gas industry, particularly in Texas, and how growth in that industry effects Texas mineral owners. As the industry grows, increased opportunities arise for Texas land owners, such as the opportunity to negotiate oil and gas leases. (for more information on leasing, please see my previous blog on this topic that you can access here.

Texas has an oil output of more than 3 million barrels per day, which is one third of the total U.S. oil production. Texas could soon outpace the second biggest oil producing country in Organization of the Petroleum Exporting Countries (OPEC), which is Iraq (after top producer Saudi Arabia).

Production data from the Permian basin shows that in the last year it has become the largest crude oil producing region in the U.S. In 2013, Permian oil was 18% of total U.S. crude oil production according to the U.S. Energy Information Administration. Production in the Permian basin has increased to 1.35 million barrels per day up from 850,000 b/d in 2007 and is exceeding production from the federal leases in the Gulf of Mexico.

Production in the Permian basin is largely from six low-permeability formations: Wolfcamp, Spraberry, Bone Spring, Glorieta, Yeso, and Delaware. The Energy Information Administration says that “(p)roduction from these formations has helped drive the increase in Permian oil production—particularly since 2009—despite declining production from legacy wells. [A]lmost three quarters of the increase in Permian crude oil production came from the Spraberry, Wolfcamp, and Bone Spring formations.”

The Spraberry, Wolfcamp, and Bone Spring formations have increased their production from 140,000 b/d in 2007 to 600,000 b/d last year. In 2007 these three formations were 16% of the total production in the Permian basin, and last year the three comprised 44% of total Permian production. They have initial well production rates similar to those in the Bakken formation and the Eagle Ford formation. The Energy Information Administration said that “(a)lthough oil production has previously come from the more permeable portions of the Permian formations, the application of horizontal drilling and hydraulic fracturing has opened up large and less-permeable portions of these formations to commercial production.” In the other three formations, the Delaware, Yeso, and Glorieta, the production increased during the same years but less than in the other formations.

One thing holding the Permian basin and other shale areas back is a lack of infrastructure. Oil and pipeline companies are struggling to keep up with the fast evolving field. More pipelines will probably be needed, and so more Texas landowners will receive requests for pipeline easements. For example, Sunoco Logistics Partners has been looking for shippers who will commit to a new pipeline. They have a new project, the Permian Longview and Louisiana Extension pipeline. It will take the oil from west Texas to refiners in east Texas and Louisiana and then to the market. Sunoco expects the project will have an initial capacity of 100,000 barrels per day and be operational by the end of 2016.

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December 12, 2014

Oil & Gas Activity in the Wolfcamp Shale in Texas

The Permian Basin is on its way to becoming the most productive oil play in the United States. In the next few years, the Wolfcamp Shale in this basin could by itself overtake the Bakken Shale in North Dakota and Montana in the amount of money spent for exploration and production in tight oil plays.

Currently, the exploration of the Wolfcamp Shale is occurring in the following Texas counties: Glasscock, Sterling, Reagan, Irion and Crockett. As the area is explored further, adjacent counties may be involved.

Wood Mackenzie, a research and consulting organization, did an analysis on Wolfcamp recently and came to the conclusion this could happen as early as 2017. At present, Wolfcamp comes in third in expenditures after the Bakken and Eagle Ford Shales. This year's expenditure in the Wolfcamp is more than $12 billion, mainly due to an increase in drilling rigs in the first and second quarter of 2014, which is 80% of what was spent this year in the Bakken Shale. Wood Mackenzie increased its projections for Wolfcamp capital expenditures in 2015 by more than $4.3 billion to $13.9 billion. Crude and condensate production is about 200,000 barrels per day now but is expected to reach 700, 000 barrels per day by 2020.

The Wood Mackenzie analysis pointed out that the Wolfcamp is still in the early stages of development with only 10% of the projected capital outlay spent so far. Expectations are that the Midland Wolfcamp will outpace the Delaware Wolfcamp due to higher oil cuts, lower well costs and better infrastructure. Wood Mackenzie expects the Midland to drive oil production for the next twenty years in this area. This year, new entrants into the Permian basin have hoped to cash in on the stacked pay potential in Wolfcamp.

Benjamin Shattuck, an upstream analyst for Wood Mackenzie, said that “(t)here is reason to be cautiously optimistic. While we have seen performance improve across all benches of the Wolfcamp, we are still waiting for an operator to effectively develop multiple benches over a sizeable acreage position.”

Mr. Shattuck said “(i)t’s not based on location. It boiled down to attention to the Permian: How long have these operators been operating in the Permian and, if they hadn’t been operating in the Permian for long, how focused are they?” He also noted that “(a)s operators have been out there for the past couple of years, they’ve been exploring up and down the stratigraphic column. The results in these benches continue to improve.”

Companies are responding to the new opportunities. Energen Corporation has tested five new Wolfcamp exploratory wells in the Permian Basin and drilled 19 new wells through June 30, 2014 as part of its Wolfcamp development program in southern Glasscock County.

If you own mineral interests in one of the Wolfcamp Shale counties, you may be contacted by a landman representing an oil company who want to lease your minerals. Be smart and have an oil and gas attorney review the lease before you sign it so you can get a good lease for your minerals.

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December 5, 2014

Cline Shale Boom in Texas

When the news discusses Texas’ big oil and gas shale plays, they usually mean the Eagle Ford and the Barnett shale. The University of Texas at San Antonio produced a study recently, the “Economic Impact of Oil and Gas Activities in the West Texas Energy Consortium Study Region”, that highlights the opportunities in the Cline shale.

clineshalegraphic.jpg The study estimates that by 2022 the Cline shale will bring more than 30,000 jobs to west Texas and have a $20 billion dollar economic impact. The Cline shale covers less surface area than the Eagle Ford or Barnett, but its hydrocarbons are denser. There is a potential for 3.6 million barrels of oil per square mile to be recovered, for a total of about 30 billion barrels. These numbers indicate that the Cline shale may be larger than both the Eagle Ford and the Bakken field in North Dakota. In fact, the Cline shale may be bigger than both those two plays combined.

The study was done by the Center for Community and Business Research, part of the Institute for Economic Development at UTSA. The study notes that in 2012 $14.5 billion was added to the west Texas economy by oil and gas development and 21,450 full time jobs were created from the oil and gas industry in west Texas. These employees received $1 billion was paid in salaries and benefits in 2012 alone. The study estimated that about 854 vertical wells and 57 horizontal wells were completed in 2012 in this region. The goal of the study was to create a 2012 baseline of industry activity in the region and create forecasts through 2022. “This baseline study is intended to help communities in West Texas plan and prepare for the prospect for increased oil and gas production in the area down the line. For many counties, activity is clearly in the early stages,” said Thomas Tunstall, the research director for this study.

The oil and gas industry is taking notice of this data. For example, Taylor Consulting, Inc . is acquiring land near the Cline shale based on expectations that this may be the biggest oil and gas boom in U.S. history. And Taylor is not alone--substantial increases in new business and residents is expected. Taylor is building temporary housing, infrastructure and entertainment amenities.

Mineral owners in the Texas counties within the Cline shale have been and will be getting lease offers. Please don't sign anything without getting a review by an oil and gas attorney.

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