April 18, 2014

Ruling Could Prove Important for New Texas Pipelines

A case is winding its way through the courts could be especially important in light of the large number of new oil and gas pipelines being constructed in Texas today. The case was heard by theTexas Court of Appeals in Tyler last year and is currently being heard by the Texas Supreme Court.

The case, Enbridge Pipelines (East Texas) LP v. Gilbert Wheeler, Inc., concerns landowners seeking property damages for the pipeline company's violation of a pipeline right of way easement agreement. There are two main issues. The first issue is whether the cost to restore the property is the proper measure of damages for the breach of contract alleged by the landowners. The second issue is whether the Court of Appeals erred by holding that the landowners waived their claims by failing to submit a jury question on the nature of the property injury.

Factual Background

Gilbert and Katherine Wheeler own a 153 acre tract of land in Shelby County, Texas. The property was wooded and the Wheelers had a cabin where they enjoyed relaxing in the natural surroundings. In 2007, the Wheelers began negotiations for a pipeline easement with Enbridge for a pipeline. From the start, Mr. Wheeler was specifically concerned about maintaining the trees on the property. The easement agreement, drafted by the Wheeler’s son, was signed by both parties and filed with the Shelby County Deed Records. The agreement stated in part that "The Grantee agrees to lay the pipeline by using the boring method and without any excavation on said easement." Alas, when construction began, the Enbridge contractors bulldozed the land, uprooted the trees, and disrupted a stream, all within sight of the cabin! What a nightmare!

Trial Court and Court of Appeals

The Wheelers filed a lawsuit for breach of contract and trespass and sought the cost to restore the property. The trial court found for the Wheelers and awarded them $300,000.00 as costs to restore the property. The Tyler Court of Appeals, in a decision written by Chief Justice James T. Worthen in February 2013, reversed the trial court’s judgment and entered judgement that the Wheelers should recover nothing. The primary basis for this ruling was that the jury was not asked to determine whether the injury to the Wheeler's land was temporary or permanent.

In connection with the damages issue, the Court of Appeals noted existing Texas law:

"Where land is found to have been permanently injured, the landowner is entitled to recover the difference in the value of the property before and after its injury or, in cases where there is no reduction in market value, the landowner may recover intrinsic value damages. See Yancy, 836 S.W.2d at 340; see also Porras v. Craig, 675 S.W.2d 503, 506 (Tex.1984) (discussing recovery of intrinsic value damages arising from destruction of ornamental vegetation). On the other hand, where the injury to the land is found to be temporary, the plaintiff can recover the amount necessary to place it in the same position it occupied before the injury, i.e., the cost to restore. See Trinity & S. Ry. v. Schofield, 72 Tex. 496, 10 S.W. 575, 576-77 (1889); Weaver Constr. Co. v. Rapier, 448 S.W.2d 702, 703 (Tex. App.-Dallas 1969, no writ)". In this case, if the injury was permanent, the Wheelers could be awarded the cost to restore their land. If the injury was temporary, they could recover the diminution in market value due to the destruction, or the intrinsic value of the destroyed trees, vegetation and stream. Because of an omitted jury question, they got nothing. This is an incredibly unjust result.

Texas Supreme Court

Now these issues will be examined by the Texas Supreme Court. Oral argument took place February 27, 2014. No opinion has been published so far. The parties briefs can be accessed here. Whichever way the Texas Supreme Court decides will have repercussions for both landowners and pipeline companies.

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April 11, 2014

Is Deep Subsurface Waste Water Migration a Trespass in Texas?

The Texas Court of Appeals in Beaumont, Texas recently decided a very interesting the case that has huge implications for Texas land and mineral owners: Environmental Processing Systems LC v. FPL Farming Ltd. The Texas Supreme Court recently heard oral argument on this case.

The Facts

As many Texas mineral owners are aware, salt water is often produced by an oil well in conjunction with the oil. Generally, this salt water is required by law to be collected and taken to saltwater injection wells that are licensed by the Texas Railroad Commission. The salt water is then injected back into the subsurface, where it came from. But one cannot always control where the saltwater goes after it is injected.

Environmental Processing Systems ("EPS") operates injection wells in Liberty County, Texas for the disposal of industrial waste water. FPL Farming ("FPL") alleged that waste water from these wells could or did migrate into and contaminate its aquifer. FPL had no present plans for the water in this aquifer, but was concerned that contamination would diminish the value of its land. The injection well itself was 400 feet away from FPL's land, but EPS injected more than 100 million gallons of waste water into the injection well in question, making the underground footprint potentially substantial. There was evidence at trial that salt water already existed naturally at the depth used by the injection wells. This is important because salt water is also considered a waste product that is injected into disposal wells. The aquifer in question was more than a mile below the surface, but FLP alleged that they may want to use that water in the future. FPL did not claim that EPS’s pollutants have migrated to the surface or are affecting drinking water. Apparently, FPL had no evidence that migration had actually occurred: FPL brought suit because they feared "that EPS’s waste plume had or was about to enter the subsurface of its property". FPL claimed that the waste water intrusion, whether threatened or actual, was a trespass and sought injunctive relief and damages for trespass and for negligence and unjust enrichment.

The Rulings

The jury in the trial court found that no trespass had occurred, that EPS was not negligent, and that EPS had not been unjustly enriched. The Beaumont Court of Appeals affirmed the trial court decision and FPL appealed to the Texas Supreme Court. The Texas Supreme Court in FPL Farming Ltd. v. Envtl. Processing Sys., L.C., 351 S.W.3d 306, 308, 314 (Tex. 2011), held that the fact that EPS had a permit from the Texas Railroad Commission for the injection well was not a shield against trespass and damages and sent the case back to the Beaumont Court of Appeals to consider all issues raised by the parties. The main issues were whether a trespass can exist for deep subsurface-water migration; whether a lack of consent must be proven as an element of trespass or whether it is an affirmative defense; and whether the trial court should have issued a directed verdict on the consent issue because FPL could not have consented to a trespass that did not occur.

On remand, EPS claimed that common law trespass does not extend to deep subsurface water migration. FPL contends that Texas landowners own the subsurface water below their land and should be allowed to use Texas trespass law to protect their subsurface rights.

Some oil and gas industry groups have filed amicus briefs supporting EPS. They worry that a decision in favor of FPL could expose oil and gas operators and injection well operators to substantial litigation, even when there is no evidence of migration. For example, a landowner who disagreed with energy development on nearby lands could threaten costly litigation over injection wells in order to obtain a better oil and gas lease. Of course, no one can guarantee that someone won't file frivolous litigation. It happens. However, the possibility of frivolous litigation should never prevent the law from allowing a landowner to protect a valuable property right like subsurface water. This is especially true as water becomes more and more scarce and thus more and more valuable.

There has not yet been a case in Texas that recognizes a trespass via salt or waste water of a deep aquifer. Therefore, the outcome in this case will be closely watched by landowners, injection well operators and oil companies alike. Oral argument before the Texas Supreme Court took place on January 7, 2014. At the hearing, the justices did not show any signs of how they were leaning, except that Justice Paul Green said he had a hard time understanding a trespass that was under tons of rock and earth and noted it would be hard to determine when the trespass took place and how much of the groundwater was damaged.

Actually, the technology does exist to determine at least whether there is migration from an injection well to an aquifer by the use of dyes and radioactive particles. I searched the briefs of both parties (which you can access here), but neither indicated that this kind of testing had been done in this case. Obviously, without testing, it isn't possible to determine if migration from an injection well has occurred.

This case involved waste water injection, not salt water. However, because salt water is so often produced along with oil, because the law requires that it be disposed of properly, and because that disposal often involves injecting it into a well, this case will be of great interest to Texas landowners and the operators of injection wells to see how the Texas Supreme Court decides. Stay tuned.

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April 4, 2014

New Partnership for Oil and Gas Shale Drilling and Manufacturing

A new partnership has been formed in the energy industry that may benefit shale oil and gas drilling in Texas: the American Shale and Manufacturing Partnership. The member organizations include manufacturing, labor, environmental, academic, and business organizations. It was launched November 19, 2014 at the National Press Club in Washington, DC. The goal of the new group is a renaissance in American manufacturing, and to remind policymakers that hindering the development of shale oil and gas could hamper an already fragile economic recover in the United States.

Charles T. Drevna, president of the American Fuel and Petrochemical Manufacturers, a member of the new partnership, said: “The dream of bringing manufacturing back to the United States is very real, but it requires our government developing policies that encourage growth instead of putting regulatory barriers in the way.” Matthew Sanfilippo, senior executive director of research initiatives at Carnegie Mellon University’s College of Engineering, noted that new technologies and domestic energy options like shale gas can transform American manufacturing.

Shale gas has created 2.1 million American jobs already, and it is expected to create another 1.25 million in the next ten years. Tax revenue from the industry is also expected to total $2.5 trillion by 2035 according to the US Chamber of Commerce’s Institute for 21st Century Energy. These statistics demonstrate why shale gas is so critical for manufacturing, especially due to job creation. “It is critical that the opportunities created by gas are compounded to deliver a reconstruction of our manufacturing base that will produce good community-building jobs, reduce trade deficits, and enhance our nation’s competitiveness and security,” said Walter Wise from the International Association of Bridge, Structural, Ornamental and Reinforcing Iron Workers.

Some related industries, like the chemical manufacturers, explained that they are already heavily regulated and that policymakers should take a closer look at which regulations are truly necessary and which are burdensome to the domestic specialty chemical industry. A topic of concern for the members of the new partnership are the federal regulations being added on top of current state and local regulations, causing duplications or even negating state regulations that already work well.

“Let the states keep doing what they’re doing well. We don’t want to skirt environmental regulations, but we need to make agencies do their jobs within a reasonable timeframe…. This is the economic stimulus package. We have the opportunity to increase employment in it in the next 10 years. We want to show a united front to all the people who are making decisions,” noted Karen Alderman Harbert from the Chamber of Commerce’s Institute for 21st Century Energy.

In terms of involvement with the federal government, two bills are being considered in the U. S. House of Representatives that the partnership thinks may be positive developments One is HR 1900, which would put a one year deadline on review of gas pipeline applications by the Federal Energy Regulatory Commission. The second is HR 2728, which would prohibit federal regulation of hydraulic fracturing.

One thing that people do not always realize is that the loss of manufacturing facilities in the United States may contribute in a very real way to global air pollution. Specifically, many of these manufacturers leave the United States, where we have rather high level air quality laws, and relocate in China or India, where there is an almost total absence of air quality regulation. Therefore, getting some of these manufacturers back to the United States could have a real impact in global air quality, as well as in terms of job growth. It's going to be important to look at why these manufacturers left in the first place. Part of the reason has to do with unnecessary and labyrinthian federal regulation. Another reason is that in some industries, labor unions resulted in labor prices that were unworkable. It will be interesting to see if the new partnership can impact these issues.

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March 28, 2014

U.S. Park Service Withdraws Fracing Comments

Over the past few months there have been letters going back and forth between the National Park Service Director Jonathan B. Jarvis and Representative Rob Bishop, the Chairman of the House Subcommittee on Public Lands and Environmental Regulation.

On September 6, 2013, Representative Bishop sent Director Jarvis a letter (that you can view here) in which he questioned comments made by the National Park Service to the Bureau of Land Management about well stimulation and hydraulic fracturing on Federal and Indian lands. In his letter, Representative Bishop questioned the scientific integrity of the sources and data upon which the comments of Director Jarvis were based. As authority for his comments, the Park Service Director used a New York Times opinion piece written by Anthony Ingraffea. Mr. Ingraffea wrote that shale gas is a gangplank to global warming because of alleged methane leaks. The section of the Park Service’s comments quoting Mr. Ingraffea stated that methane leakage rates were 2.3% to 17% of annual gas production and claimed to get these numbers from the National Oceanic and Atmospheric Administration. Representative Bishop’s letter questioned why the Park Service was relying on a reporter's opinion as a source of data and requested a determination of the information’s accuracy.

On November 12, 2013, Director Jarvis wrote a letter in response (that you can read here) to these questions. Jarvis admitted including a quote from a New York Times Op-Ed was inappropriate and sources should have been peer-reviewed scientific studies. He wrote that the Park Service does not rely on opinion pieces in newspapers as a basis for decision making. He also admitted the comments the Park Service made to to BLM were not adequately reviewed before they were delivered. He said that no one from management looked at these comments and he claims they were erroneously uploaded onto regulations.gov, contrary to established protocol. Because of these issues, Director Jarvis withdrew the National Park Service comments.

The discussion of natural gas and hydraulic fracturing continues to be based on political, rather than scientific, issues in Washington. As the Park Service now withdrawn comments illustrate, the opponents of fracing stretch the bounds of what is considered “science” and “data” to make a political point, rather than engage in an honest discussion about an available fuel that even President Obama’s Energy Secretary Ernest Moniz describes as a near-term option to curb greenhouse emissions.

In response to the Park Service comments, Representative Bishop stated: “It concerns me that the National Park Service attempted to pass off unsubstantiated information as ‘science.’ This thinly veiled attempt to vilify energy production and hydraulic fracturing on our public lands illustrates a shared agenda between the administration and anti-energy special interest groups.” He followed up saying he hopes the Park Service will “direct [its] efforts toward promoting the responsible use of our diverse lands and resources and away from misleading the American people.”

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March 21, 2014

Texas Supreme Court to Address Use of Surface by Mineral Interest Owner

The Houston Court of Appeals in Texas recently addressed the issue of surface owners rights in the case of Key Operating & Equipment Inc. v. Will and Loree Hegar. The case involves the use of the surface of the Plaintiffs' land by an oil and gas operator. In Texas, the owner of the minerals generally has an implied easement for reasonable use of the surface in order to explore, develop and extract the minerals. In this case, the mineral owner wanted to make continued use of a road on the Plaintiffs' surface estate to access minerals on other tracts, after that surface estate had been severed from its minerals, and after the minerals under the Plaintiffs'' tract and the minerals under the other tracts had been pooled.

The Defendant, Key Operating and Equipment owned mineral rights and operated wells on two tracts of land (the Richardson and Rosenbaum-Curbo tracts) in Washington County, Texas since the late 1980's. The mineral leases allowed for pooling, and in 2002, Key pooled mineral interests in the two tracts, and used the road across the Curbo tract to access their two producing wells on the Richardson tract. At the time of the suit, there was no longer a producing well on the Curbo tract. In 2002, the Hegars bought the surface of the Curbo tract and a 1/4 interest in the minerals. They knew about the lease and the road--which they used themselves to get to their house. They objected, however, when Key drilled a new well on the Richardson tract and used the road more frequently. Mr. Hegar stated, “We’re trying to raise a family and we can’t do it with a highway going through our property.” So in 2007, they sued Key for trespass and asked for a permanent injunction to prohibit Key from using the road. The Hegars claimed that no oil is actually being produced from the Curbo tract and Key only pooled the interests in order to continue to use the access road. Key claimed that the Curbo oil is migrating towards the Richardson tract, and that is why they pooled the two tracts.

The trial court agreed with the Hegars and permanently enjoined Key from using the road “for any purpose relating to the extraction, development, production, storage, transportation, or treatment of minerals produced from an adjoining” tract.

On appeal, Key argued that the both its oil and gas leases and the pooling of the two tracts authorized the use of the road. The Hegars contended that the road could be used only for production of minerals from the Curbo estate but could not be used for the production of minerals from adjacent tracts despite the pooling of the two tracts, since the pooling declaration had been executed after the severance of the surface and minerals of the Curbo tract.The Hegars contended that Key's use of their surface is limited to the rights that existed when the surface and minerals in the Curbo tract were severed, and the severance occurred before the oil and gas leases and the pooling agreements were executed.

The Houston Court of Appeals agreed with the Plaintiffs that the Key leases and pooling agreement were not part of the Plaintiffs' chain of title and did not bind them. However, the Court decided that Key had “the right to use the surface of the Curbo tract to produce oil from beneath the surface, regardless of whether that oil is co-mingled with oil from other tracts.” The Court explained that Key's right to use the road can arise from the usual implied easement of a mineral owner to use the surface, so long as some of the oil is being produced comes from beneath the Curbo tract. The Court of Appeals noted that there was evidence at trial that the oil being produced from the wells on the Richardson tract did not from beneath the Curbo tract. As a result, the Court of Appeals affirmed the issuance of the permanent injunction prohibiting Key's use of the road across the Plaintiffs' property.

This case illustrates the tensions that often arise between a surface owner and the mineral owner. It will be interesting to see what the Texas Supreme Court decides.Oral argument before the Texas Supreme Court occurred on February 4, 2014 but the opinion has not yet been issued.
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March 14, 2014

Texas Tops List of Best Places to Invest in Oil & Gas

Texas tops the list of most attractive jurisdictions for petroleum exploration and production investment, while Oklahoma leads the world with the most desirable policy environment, according to the annual Global Petroleum Survey compiled by the Fraser Institute.

The survey attempts to provide information about perceptions affecting investment decisions, including those on tax rates, regulatory obligations, uncertainty over environmental and other administrative regulations, as well as concerns regarding political stability and the security of personnel and equipment. These perceptions were assessed via a survey evaluating 157 jurisdictions, and compiled into the Fraser Institute’s Policy Perception Index.

panhandle.jpg In order, the jurisdictions perceived as having the policy environment most favorable to petroleum exploration and production investment are Oklahoma, Mississippi, Saskatchewan, Texas, Arkansas, Kansas, Alabama, North Dakota, Manitoba, and the Netherlands/North Sea. The jurisdictions perceived as the worst for petroleum exploration and production investment are Russia (except Offshore Arctic, Offshore Sakhalin, and Eastern Siberia), Iraq, South Sudan, Russia/Eastern Siberia, Uzbekistan, Russia/Offshore Arctic, Bolivia, Iran, Ecuador, and Venezuela.

To correlate policy perceptions with geologic desirability, the Fraser Institute sorts jurisdictions into tiers. Texas leads the pack in Tier One, the category of jurisdictions that hold at least one percent of the world’s total proved oil and gas reserves. Following Texas in the first tier are Qatar, Alberta, the United Arab Emirates, and Norway/North Sea. The least favorable policy environments among jurisdictions in Tier One are Iraq, Russia – East Siberia, Russia/Offshore Arctic, Iran, and Venezuela. The most favorable jurisdictions in Tier Two, or jurisdictions containing between 0.1% and 1% of the world’s proved oil and gas reserves, are Oklahoma, Arkansas, North Dakota, the Netherlands, and Louisiana. The least favorable jurisdictions in Tier Two are Ukraine, South Sudan, Uzbekistan, Bolivia, and Ecuador. In Tier Three, or jurisdictions with very little proved oil and gas reserves, the most attractive policy environments were found to be in Mississippi, Saskatchewan, Kansas, Alabama, and the Netherlands/North Sea, while the least attractive in Tier Three are Argentina, Kyrgyzstan, Somaliland, and Guatemala.

The Global Petroleum Survey is in its seventh year, and the data collected is also used by the Institute to track trends in perception. Perception of barriers to investment have increased in jurisdictions including Colorado and New Mexico, jurisdictions that have seen political subdivisions implement hydraulic fracturing bans in the last year, as well as in California, where there is a growing popular sentiment in favor of a fraccing ban. Several jurisdictions improved their policy perceptions dramatically, including Chile, Jordan, Mali, and Pakistan. In North America, New Brunswick was the most improved jurisdiction.

Additional questions in the survey asked how respondents perceptions might change as a result of policy changes in the US and Canada. Specifically, the survey asked respondents how they would change their assessment of investment potential if the United States implemented federal control of hydraulic fracturing. Slightly more than half of the survey respondents said such a change would negatively affect their assessment of the policy environment in US jurisdictions, while a quarter of respondents would not change their assessment. Respondents were also asked how their assessment of Western Canada and the Northwest Territories would change if Canada continues to face difficulties in creating sufficient infrastructure to transport oil out of the region. More than two thirds of the respondents said it would negatively affect their opinion of investment opportunities in the region, while a third responded that it would not change their assessment.

Considering the trends over the last few years, those of us working in the Texas oil and gas industry are not surprised to see our state fare so well in this petroleum exploration and production investment study.

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March 7, 2014

Fracing Bans Challenge Independent Oil & Gas Producers

Faced with a rising tide of sweeping municipal legislation banning hydrocarbon extraction, mineral owners and oil and gas operators are taking the fight to court. The Independent Petroleum Association of New Mexico, along with an individual landowner and two limited liability corporations, are suing Mora County, New Mexico, alleging that the ordinance passed by the county violates the Plaintiff’s constitutional rights and exceeds the authority of the county council.

The Mora County ordinance, the first of its kind in the United States, is described by the county as a measure to protect the local water sources and the communities that rely on them. However, the ordinance specifically targets oil and natural gas extraction. The suit alleges that the real purpose of the ordinance, rather than protection of natural water sources, is to prevent lawful development of oil and natural gas resources within Mora County. The ordinance prohibits the extraction of water for use in the extraction of subsurface oil or gas, and also prohibits importing water into the county for that purpose. The ordinance further provides that no permits, licenses, privileges or charter issued by any state or federal agencies that violate the ordinance will be valid. The ordinance passed by Mora County is a variation on an ordinance developed by Pennsylvania attorney Thomas Linzey and adoption of similar ordinances is being considered by dozens of communities across the country.

The Independent Petroleum Association argues that the ordinance violates the substantive due process rights of the organization’s members and exceeds the authority of the county council. They further argue that the ordinance violates fundamental property rights, and that the ordinance does not meet the strict scrutiny standard because the ban is not narrowly tailored to serve a compelling governmental interest. In particular, they note that even though the stated purpose of the ban is to protect the water supply, the ban applies only to hydrocarbon extraction while ignoring the agricultural industry, a source of significant water pollution.

In Colorado, voters in Fort Collins and Boulder banned fracing for the next five years, and voters in Lafayette passed a prohibition on new oil and gas wells. Colorado Governor John Hickenlooper is suing to overturn the city of Longmont’s fracing ban, passed one year ago. The Governor, a former mayor of Denver, insists that cities do not have the power to ban fracing. Activists in some states are reportedly planning to seek statewide bans, and there is apparently some public support for a statewide ban in California.

The specific powers of cities and counties vary from state to state and depend on state constitutions and “home rule” provisions. The law regarding whether city or county ordinances are pre-empted by state law also varies from state to state. Attorneys from the Independent Petroleum Association of New Mexico argue that the New Mexico Oil and Gas Act and the Oil Conservation District’s rules create a regulatory scheme so pervasive that the Mora County anti-fracing ordinance interferes with state law.

There are several important issues involved in any fracing litigation. First, it is obviously critical to safeguard water supplies. Water is becoming an increasingly scarce commodity and must be protected. However, to date, the opposition to fracing has been based on hysteria and assumptions, rather than facts. In fact, so far, there has been no research that has definitively tied fracing to any water quality issues. Each of the claims of water contamination due to fracing so far have, upon legitimate investigation, been shown to be unfounded. in addition, consider that the people that own minerals are not usually huge corporations. They are often individuals, including retired persons, who depend on the royalty income to live. Don't these people have the right to use their property in legitimate ways, rather than have their property rights taken away from them for frivolous reasons? They also have a constitutional right not to have their property taken from them, in effect, without just compensation. Protection of water sources is critical, but protection of constitutionally granted property rights is also important.

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February 28, 2014

Lessons from Gas Pipeline Explosions in Texas

Late last year a pipeline explosion occurred in a west Texas liquified petroleum pipeline, near the small town of Milford in Ellis County, about 50 miles south of Dallas. Emergency officials had to evacuate some residents and students at a nearby school. The Texas Department of Transportation had to close U.S. Highway 77 and FM 308 near the fire site. The Environmental Protection Agency also sent a crew from their Dallas office.

The accident happened when a rig drilling crew accidentally punctured a 10 inch liquefied petroleum pipeline owned by Chevron in partnership with Atlas Pipeline Partners LP. The rupture created a large fire, which was allowed to burn out after about 24 hours. Employees on the rig were able to escape to safety.

The explosion occurred in part of a 2,700 mile West Texas LPG Pipeline, which extends from natural gas processing plants in west Texas and New Mexico to storage facilities in Mont Belvieu, Texas. There was a prior incident in September 2011, when a fire was ignited by a production pump, according to the U.S. Pipeline and Hazardous Materials Safety Administration. That incident caused more than $1.5 million in property damage and released more than 13,000 bbl in liquified petroleum. Readers may also recall the recent pipeline accident in Mayflower, Arkansas, when an ExxonMobil pipeline ruptured. PHMSA recently found that Exxon had violated nine pipeline safety regulations and was fined $2.6 million in civil penalties. The largest portion of the fine was due to ExxonMobil not following its own operations and maintenance procedures! ExxonMobil issued a statement saying it was disappointed a Notice of Probable Violations was issued but that it was working with PHMSA on investigating the rupture. My guess is that "disappointment" doesn't begin to cover the feelings of the nearby residents whose homes and businesses were impacted by this rupture.

The pipeline near Milford is an intrastate pipeline, and so is regulated by the Railroad Commission of Texas. Waco Fire Chief John Johnson noted that the pipeline industry provides maps of all pipeline locations to local fire departments and also donates money to train first responders to deal with disasters. He said residents should call 811 before beginning any project involving digging or drilling at least two days ahead of time.

While pipeline incidents like these are not common, they illustrate how important it is to have strict regulation of pipeline construction and operation. Even though these incidents are rare, they invariably cause huge amounts of damage. At the same time, it is important to remember that it is actually still safer to live near an oil or gas pipeline pipeline than it is to drive to the grocery store or travel by airplane. No mode of transport is without risk. The fact is that pipelines have far fewer accidents, are less dangerous to the environment and to the safety of people nearby than any other means of transporting oil and gas. Thus, while pipeline companies should be held fully liable for the damages these Incidents cause, we also need to keep the use of pipelines in perspective.

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February 21, 2014

Texas Oil and Gas Lease Decision from the Texas Court of Appeals

An interesting case involving a Texas oil and gas lease was decided recently by the Texas Court of Appeals in El Paso. The case was Community Bank of Raymore v. Chesapeake Exploration LLC and Anadarko Petroleum Corporation. The issue was whether the lessee's right to extract minerals found deeper than the stratum or level below the deepest producing well in a particular unit terminated when the lease’s primary term expired.

The oil and gas lease in question covered 16,000 acres, split into four blocks, located in Loving County, Texas. In Block 2 of the leased area, Chesapeake Exploration drilled 13 wells, the deepest of which was at 5,672 feet when the primary term of the lease expired on January 26, 2010. Community Bank of Raymore ("CBR") requested that Chesapeake release its mineral rights below the depth of the deepest well, but Chesapeake refused. CBR file suit for breach of the lease.

CBR argued that the Pugh clause applied, which terminates an oil and gas lease at the end of the primary term as to any portion of the leased land which is not being produced. Chesapeake disagreed, relying on the continuous development clause, saying the Pugh clause was thus never triggered because Chesapeake developed Block 2 and paid royalties from existing wells in that block. Chesapeake said that its continued development of Block 2 was “sufficient to maintain the undeveloped, deep-lying formations beyond the primary term and satisfy the lease’s continuous development requirement.”

The trial court decided for Chesapeake and said that “there has been no partial termination of the [lease]” and that the “[lease] . . . remains valid and in effect as to all of the Leased Lands in Block 2 . . . so long as [Chesapeake] engages in a continuous development program with no lapse in the time period provided.”

The Texas Court of Appeals, in a decision written by Justice Yvonne Rodriguez and joined by Chief Justice Ann Crawford McClure and Justice Guadalupe Rivera, affirmed the decision of the trial court. The Court of Appeals reasoned that the Pugh clause never sprung into life, because that clause has no effect until either the end of the primary lease term or the conclusion of the continuous development program. No cessation of the continuous development had occurred, so the Pugh clause never applied. The Court of Appeals found no merit in CBR’s contention that at the end of the primary lease term, the lease’s severance clause was triggered. The severance clause in this particular lease did not apply, again due to the continuous development clause.

This is an interesting case for mineral owners because it shows the interplay between the Pugh clause and the continuous development clause, which, because of the language of this lease, overrode the Pugh clause. It will be interesting to see if this case goes to the Texas Supreme Court, and if so what will be decided, as it could be a significant case for both oil and gas lease lessors and lessees in Texas.

It is critical to remember that the decision in this case was based on the precise language of this particular lease. There is no such thing as a "standard oil and gas lease" in Texas, therefore, the results may differ if this question comes up in connection with your lease. If you are ever presented with this kind of question in connection with your mineral interests, it is wise to seek the input of an experienced Texas oil and gas attorney.

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February 14, 2014

Water Recycling for Texas Oil and Gas Drilling

In Texas, a properly drafted oil and gas lease will prohibit the use of the landowner's surface or ground water. The well driller or operater must bring in water from another source for fracing. Hydraulic fracturing, or fracing, of wells requires substantial amounts of water. About 20% of that water is recovered, but the recovered water often contains various chemicals (generally nontoxic) and other debris. Fracing water used to be considered waste and was put into injection wells deep underground. More recently, the oil and gas industry has come up with another solution that may benefit everyone: water recycling.

In a lot of areas, there have been droughts or there is a shortage of freshwater--including in Texas, where fracing accounts for 50% of water use in select locations. For this reason, interest in recycling the water used in fracing has been growing in the last few years. It is now seen as an economical, and more sustainable, option for the oil and gas industry. Halliburton, ExxonMobil, and XTO conducted a study on recycling recently and presented a paper showing savings of between $70,000 and $100,000 per well, with no loss of production. Walter Dale of Halliburton said: "It is a paradigm shift.”

There are different methods of recycling fracing water, but the goal is to reuse most of the water used in fracing instead of sending it away as waste. Water Rescue Services has a process that separates the water from the chemicals and other waste, taking the 5% that is waste to a dump but reusing 95% of the water. Pure Stream recycles water for use in an oil patch using a more expensive system that cleans water sufficiently that it can be returned to lakes or rivers or used for agriculture. In Texas, Fasken Oil and Ranch is attempting to use no freshwater at all in its fracing operations. By recycling water and using briny water from an aquifer, the company hopes to achieve this within six months.

In Texas this year, the Railroad Commission of Texas revised its regulations on water recycling for fracing. Now drillers do not need a permit for recycling water on their own lease or on a third-party’s property. Previously, a permit was needed. Permit requests shot up between 2011 and 2012, leading the Commission to rethink requiring a permit. Next year when the Environmental Protection Agency (EPA) issues its study on fracing it could also propose rules on recycled water.

Critics claim that water recycling does nothing to address concerns about contaminating groundwater through the fracing process. Myron Arnowitt, Pennsylvania director for Clean Water Action, claimed that "(i)t doesn't lessen the potential for groundwater contamination, and it can increase the amount of contaminants that you are exposing the groundwater to.” Of course, Mr. Arnowitt needs to do his homework. As I have discussed in prior blogs, there has yet to be a scientifically documented case of groundwater contamination due to fracing. Even the EPA backed off its claims of fracing contamination. However, many people are still cautious about fracing's long term effects.

I suspect that recycling of fracing water will become more and more common, given the cost savings, the environmental benefits and the increasing scarcity of water in many places. Already, in the Marcellus shale, as much as 90% of fracing water is recycled. It's a good thing to see technology put to use to decrease the environmental impact of oil and gas exploration and production.

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February 7, 2014

U.S. Supreme Court Reviewing EPA Approach to Greenhouse Gases

In October 2013, the U.S. Supreme Court granted certiorari in the case of Chamber of Commerce et al v. EPA et al. The case will decide the question of “(w)hether the EPA [Environmental Protection Agency] permissibly determined that its regulation of greenhouse gas emissions from new motor vehicles triggered permitting requirements under the Clean Air Act for stationary sources that emit greenhouse gases.”

The grant of certiorari followed Texas Attorney General Greg Abbott’s petition to the Court in April 2013, along with 11 other state attorneys general. The 11 other states involved, in addition to Texas, are Alabama, Florida, Georgia, Indiana, Louisiana, Michigan, Nebraska, North Dakota, Oklahoma, South Carolina and South Dakota. The attorneys general argued in their petition that the EPA violated the Constitution as well as the federal Clean Air Act by “concocting” its greenhouse gas regulations without Congressional authorization. Attorney General Abbot said that the regulations are threatening Texas jobs and employers and the EPA is a “runaway federal agency”. He was pleased the Obama administration would have to defend these regulations before the Supreme Court.

Organizations representing the oil and gas industry were also pleased that the Supreme Court decided to take this case. These organizations include the American Petroleum Institute and the American Petrochemical & Fuel Manufacturers. The issue doesn't effect just the energy and manufacturing industries. Millions of other stationary sources could be affected by strict permitting requirements according to the president of the National Association of Manufacturers, who said that the regulations threaten the global competitiveness of the U.S.

Harry Ng, API’s vice president, applauded the move and said that “(t)he Clean Air Act clearly only requires preconstruction permits for six specific emissions that impact national air quality—not greenhouse gases. That kind of overreach can have enormous implications on U.S. competitiveness and the prices that consumers pay for fuel and manufactured goods.” The General Counsel of AFPM, Rich Moskowitz, echoed that under the EPA’s current regulations the Clean Air Act’s Prevention of Significant Deterioration program would be turned into a “far-reaching regulatory program” that might apply to sources Congress didn’t originally intend and would impose “onerous permitting requirements.” He continued that the “EPA does not have the authority to rewrite specific statutory emission limits in an effort to avoid the absurd results created by its attempt to use GHGs as a regulatory trigger under the PSD program.” The American Chemistry Council also issued a statement in support of the Court’s granting of certiorari, which said in part: “We hope the Court will correct EPA’s egregious misreading of the Clean Air Act, which even the agency concedes leads to ‘absurd results.”

An amicus brief in the case stated the EPA had “opened a pandora’s box” of expansive greenhouse gas regulation that is likely to spread to the entire economy. People across the U.S. should be paying close attention to this case, as it not only affects the oil and gas and manufacturing industry, but the overall health of the economy. The Supreme Court’s decision has the potential to have a big impact.

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January 31, 2014

Innovation and Increased Demand Help Texas Natural Gas Production

The Energy Information Administration (EIA) recently predicted that natural gas heating for homes will cost 13% more this winter than last winter. The average price over the winter this year will be about $679 for a household, which is actually still lower than the previous five year average cost. The increase in demand this winter and resultant small increase in natural gas prices may help sustain natural gas production.

Another key component in sustaining natural gas production is innovation. Even with lower prices, innovation can continue to drive the natural gas boom in the United States. This was the topic for discussion at the Decision Strategies Oilfield Breakfast Forum, which occurred in October 2013 in Houston, Texas. Steven Mueller, president and CEO of Southwestern Energy, said the industry is still in its early stages of learning, specifically on unconventional plays. He noted that in these unconventional plays, the U.S. “has a national treasure with long-term, low-price implications.” He also noted that, while it is a learning process, gas projects are the largest they’ve been in a century and are more efficient than ever. Gas industry strategies themselves are helping push gas prices down, and also make the price of gas less volatile.

James W. Wicklund, managing director of energy research, at Credit Suisse LLC, said: “We are not only awash in gas; we are awash in cheap gas.” Another speaker at the Houston Forum, Matt Fox, an executive vice president at ConocoPhillips, discussed his company’s strategy for innovation, saying “(p)ick a core strategy, carry contingent elements for strategic flexibility, and monitor scenario signposts.” The CEO of Huisman Equipment, Joop Roodenburg, also highlighted the importance of collaboration to overcome a divergence in priorities among various players, like offshore drillers, drilling contractors, and suppliers. The divergence, in his mind, suppressed innovation.

The same day as the Forum in Texas, at the Woodrow Wilson International Center for Scholars in Washington, DC, an important publication was announced, the second and updated edition of "Energy and Security: Strategies for a World in Transition". The discussion at the Wilson Center event focused on how most people do not realize that America’s current abundance of oil and gas has greatly changed America’s foreign policy options in the space of only five years. One of the editors of the latest edition, Jan H. Kalicki, a counselor for international strategy at Chevron Corporation, noted that: “It’s time to connect the dots between energy and international security. We have enormous negotiating power now.” The book’s other editor, David L. Goldwyn, president of Goldwyn Global Strategies, stated that “(w)e’re freer now to speak out on behalf of democracy and freedom because we’re not dependent on oil imports from countries where those practices are suppressed.”

Both of these events reflect a healthy energy picture for the United States. We are working on innovation and new technologies to make our resources even more productive and efficient. Increased demand for natural gas this winter will increase prices a bit and help fund some of those innovations, which will increase our production. The picture for this winter has been bright.

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