October 17, 2014

Texas Oil Prices are Dropping

The price of crude oil has been continuing to fall over the last few days. By some benchmarks, crude oil prices in Texas and globally are near to a four year low. For example, West Texas Intermediate (“WTI”) was recently reported at $81.84 per barrel, well below the $100 to $120 per barrel evident more recently. In fact the WTI price closed down 4.77% recently, which is a substantial decrease. The current Brent Crude Oil price of $85.04 represents a decrease of $3.85 or 4.53%.

What is happening here? For many years in the past, conflict in the Middle East caused prices to increase. Currently, due certainly to the advances of ISIS but also because of other factors, the Middle East is in great turmoil, yet prices are sliding. Probably the general and economic malaise in this country has a lot to do with the slide in oil prices. Although the federal government minions feed us sound bites about how the economy is doing better, people out here in flyover country know better. Recently, President Obama touted the decreased unemployment rate. What he does not say, however, is that so many people who want to work have left the workforce that the resulting unemployment rate looks artificially better. Not only is the poor economic condition of our country a factor, the incredible threat of an Ebola epidemic, with its potentially catastrophic personal and economic consequences, is also playing a part.

Lower crude oil prices mean that gasoline is cheaper at the pump. However, there are some major negative impacts. For one thing, if the price of oil stays down below a certain level, oil exploration and production will decrease. Oil wells that can make a profit when oil is $100 per barrel may be losing money when oil is $85 per barrel and those wells may be plugged. Additionally, most of the oil and gas exploration in this country is done by small, independent oil and gas companies. When the price of oil declines, the smaller companies, with smaller capital reserves than the large oil companies, can no longer afford exploration activities. Taken together, both these reasons result in a decrease in domestic production of oil which results in larger imports from unstable countries in the Middle East

On a more personal level, lower oil prices and decreased exploration and production means that the many people who depend on oil and gas royalties to live on are going to need to tighten their belts. The vast majority of royalties go to individuals, not corporate conglomerates. For many of these individuals, the royalties constitute retirement income that is a necessary supplement to meager Social Security payments. For everyone in this situation, the lower prices are truly not good news.

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October 10, 2014

Fracing of Oil and Gas Wells Explained

The Real Estate Center at Texas A & M University has recently made available an educational video entitled "Inside Fracking" that explains the process of fracing oil and gas wells. (I still believe the correct spelling is "fracing"). You can access the video here. If you are wondering just what fracing is and why it is used, this video offers some clear explanations.

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October 3, 2014

Expansion of Shale Gas Facilities in Texas Gulf

It's good news for Texas mineral and royalty owners that oil and gas production in Texas is increasing, due in large part to the spike in natural gas production from shale reservoirs. It's also good news that plants that use that gas are being built.

For example, ExxonMobil Corporation is expanding its capacities on the Gulf of Mexico coast after EPA’s finalization of their permit on May 14, 2014. In Baytown, Texas, Exxon has begun work on a multibillion dollar expansion of their refining and petrochemical infrastructure to process shale-derived natural gas into plastics and other products. They plan to construct something called an ethane cracker, which is a facility in which complex organic molecules such as kerogens or heavy hydrocarbons are broken down into simpler molecules such as light hydrocarbons. The cracker will be able to process 1.5 million tons of gas per year and make ethylene stocks available for downstream chemical processing. The downstream facilities include an Exxon plastic plant in Mont Belvieu, Texas which processes 650,000 tons per year in two high performance polyethylene facilities. Ethylene is processed into polyethylene, which is a basic plastic that is used to make bags, bottles and other products.

In Mont Belvieu, Mitsubishi Heavy Industries is going to build the two polyethylene facilities. The Baytown olefins plant has also awarded contracts to Linde Engineering North America Inc. and Bechtel Oil, Gas & Chemicals Inc. to build olefin recovery units. Mitsui Engineering & Shipbuilding Co. Ltd. and Huertey Petrochem SA are building the olefin furnaces.

Construction will begin immediately and production is expected to commence in 2017, according to a statement by Exxon. Steve Pryor, head of ExxonMobil Chemical Co., said, “Shale development has provided U.S. chemical producers a double benefit as an energy source and as a key raw material to make plastics and other essential products, creating jobs and economic activity across the value chain.”

When there is an increased market for gas produced in Texas such as the Exxon plants described above, the incentive for oil and gas companies to continue to explore, drill for and produce gas increases. That in turn means more royalty payments and higher income to Texas mineral owners and royalty owners.

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September 26, 2014

Texas Property Owners Receive Large Award in Fracing Nuisance Claim

An interesting case was in the news recently and oil and gas attorneys have been following it with interest. The case is Lisa Parr, et al. vs. Aruba Petroleum, Inc., et al.; County Court at Law No. 5, Dallas County, Texas; Cause Number: CC-11-01650.

The Background

The Parrs have a 40 acre ranch in Decatur, Texas which is about 60 miles northwest of Dallas, Texas. The ranch sits on the Barnett Shale. Robert and Lisa Parr and their 11 year old daughter Emma alleged that they started having health problems in 2008, including migraine headaches, dizziness and nausea. By 2009, Lisa Parr said: "(m)y central nervous system was messed up. I couldn't hear, and my vision was messed up. My entire body would shake inside. I was vomiting white foam in the mornings." She claimed that her husband and daughter had nosebleeds, vision problems, nausea, rashes and blood pressure issues.

The Lawsuit

The Parr family filed a lawsuit against Aruba Petroleum and a number of other well operators with wells in the area in 2011, requesting $66 million in damages. Aruba Petroleum had 22 natural gas wells within two miles of the Parr’s land, with three wells close to the Parr’s house: the closest well was 791 feet from their house. The lawsuit claimed that Aruba Petroleum poorly managed the wells and did not have proper emissions controls, leading to a “private nuisance” of air pollution and the family's exposure to emissions, toxic air pollution and diesel exhaust. They claimed they got so sick that they could not work, and sometimes had to stay in Robert Parr’s office to escape the toxic environment.

Aruba claimed that: 1) the Parrs had no evidence that proved that diminished air quality at their home was due to the drilling of its wells; 2) Aruba had eliminated any environmental problems immediately and any contaminants were within air quality standards set by the Texas Commission on Environmental Quality; 3) all operations of Aruba's wells complied with requirements of the Texas Railroad Commission; 4) the operation of the wells complied with all federal law and standards; and 5) any substances released into the air near the wells could not have made anyone sick.

The original lawsuit was not only against Aruba Petroleum, but also other oil and gas companies operating nearby. Halliburton won summary judgment against the Parrs last year. Other companies, including a subsidiary of ConocoPhillips Co., settled with the family.

The Judgment

In April 2014 the jury in the Dallas County Court of Law No. 5 awarded the Parr family $3 million dollars in a five to one jury verdict. The jury found that Aruba Petroleum took intentional steps to substantially interfere with the Parr family’s use of their home. The jury did not find that Aruba acted with malice however, and so the Court dismissed the Parr’s claims for exemplary damages. The award included $275,000 for loss of value to their property, $2 million for past physical pain and suffering of the three, $250,000 for future pain and suffering, and $400,000 for mental anguish. The judgement was signed by Judge Mark Greenberg on July 19, 2014. Judge Greenberg signed an order denying Aruba's motion for new trial on September 10, 2014 and Aruba has posted a supersedeas bond, which prevents the Plaintiffs from collecting the judgement until all appeals are exhausted.

Aruba said that it plans to appeal the decision to the Fifth Circuit Court of Appeals. An Aruba representative said: “There were hundreds of wells drilled in the area. Trying to tie the diminution of property value and the health effects to Aruba alone makes no sense.”

I am all in favor of oil companies paying for whatever damage they may cause. I have to confess that I am a bit mystified as to how the Parrs could prove, by a preponderance of the evidence, that it was only the Aruba wells that caused their problems, when there were dozens of other wells in the area. It will be interesting to see what the Fifth Circuit Court of Appeals does with this case.

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September 19, 2014

Paradigm Oil & Gas Expanding Texas Operations

Another oil and gas company is expanding its operations in Texas. Paradigm Oil and Gas Inc. is adding 50 new wells to its Texas operations through new leases from Magnum Oilfield Services, Bitter Creek Petroleum and Blackjack Services. The deal includes cash and stock, with Paradigm keeping between 70% to 95&% interest in the wells. Paradigm will be the operator of the wells. Some of the new leases are the Miller, Adobe, Somerset, WH Summers, Hall, Don & Ruby Roberts, Cole, Colley and Brinkmayer A. A full list and details of the transaction will be released later. These leases are in Tyler County, Liberty County, Bexar County, Atascosa County, Kaufman County and Callahan County, Texas.

Paradigm is an expanding oil and gas producer, and currently has 30 leases with nearly 300 wells. Recently, Paradigm announced that its April 2014 oil shipments produced record returns. The CEO of Paradigm, Vince Vellardita, told reporters that “(w)e shipped two loads in April from leases in Texas and Louisiana totaling nearly 309 barrels. Those wells have since produced another 466 barrels which are ready for pick up. This oil production and (these)shipments send a clear message to shareholders that we are delivering on our promise to generate revenue and achieve sustained profitability.” Many of the new Paradigm leases are between Dallas, Texas and Houston, Texas and others cover almost 4,000 acres in the Permian Basin and the Eagle Ford shale. Of the 50 new wells, 20 are producing revenue oil and gas already. A Paradigm operations division worker said it was another example of Paradigm’s “due diligence” in going after low-risk, high return properties that are very lucrative for the company.

Let's hope that Paradigm's efforts will result in increased royalties for Texas mineral owners whose leases will now be operated by Paradigm.

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September 12, 2014

Expansion of the Koch Oil & Gas Pipeline in Texas

The rapid pace of construction of new oil and gas pipelines to transport current energy production in Texas and North America continues. In fact, there has been an explosion of pipeline development in Texas. According to a recent study the industry needs to invest $200 billion nationally in capital for pipelines, storage and other facilities to meet demands from shale oil and gas by 2035. One example is River Rock Energy LLC, based in San Antonio, Texas, that has committed $125 million to fund logistics and infrastructure for the oil and gas industry, including the development of pipelines, railways and storage. The money comes from the private equity firm EnCap Flatrock Midstream. Wood Mackenzie, an energy research firm, expects about $23 billion in investment in the Eagle Ford shale alone, which is less than the $28 billion last year. The difference according to Wood Mackenzie is due to increased efficiency.

Recently, Koch Industries Inc., headed by the well-known conservative political donors Charles Koch and David Koch, announced that its subsidiary Koch Pipeline Co. LP plans to build a 24 mile, 16 inch pipeline in San Patricio County, Texas that is expected to be in service by the second quarter of 2014. Koch Pipeline has not released information on the cost of this new project.

tracks-in-field-1435693-s.jpg Koch Pipeline is based in Wichita, Kansas and already has about 4,000 miles of pipelines in six states including Texas, Wisconsin, Minnesota, Missouri, Iowa and Illinois. Koch's pipelines transport a number of products, such as crude oil, refined products, ethanol, natural gas, and chemicals. The new pipeline will have a capacity of 200,000 barrels per day of crude oil and will expand Koch’s South Texas crude oil pipeline system. Their South Texas infrastructure already has 540 miles of pipeline to move crude oil to Corpus Christi’s Flint Hills Resources refinery, which is also affiliated with Koch Industries. The refinery processes locally produced crude oil from the Eagle Ford shale and has a capacity of approximately 300,000 barrels of crude oil per day, producing a variety of petroleum products. From the refinery, Koch has pipelines that move crude oil to San Antonio, Dallas, and other markets in Texas.

Koch Pipeline’s senior vice president Bob O’Hair said in a statement that “South Texas is an important area for Koch Pipeline, and we’ll continue to invest in it to ensure we have a system that meets the shippers’ needs in terms of capacity and reliability.” He went on to say that “(w)e are seeing additional opportunities with the Eagle Ford shale play and this new pipeline will help us move domestic crude to the U.S. market more efficiently by using a combination of new and existing pipeline infrastructure.”

This new pipeline builds on Koch Pipeline’s recent Eagle Ford investments. In 2012 a 20 inch crude oil pipeline was built between Pettus, Texas and the refinery in Corpus Christi, Texas. That pipeline can carry 250,000 barrels of crude oil per day.

Obviously, if new pipelines are being laid, landowners will get easement requests from pipeline companies. If you are a landowner and receive a request for an easement from a pipeline company, tell them that you would be glad to talk to them but that you will have the easement reviewed by an oil and gas pipeline attorney and that your attorney will be in touch with them promptly. Then, get the input of an experienced oil and gas pipeline attorney to make sure that your property is properly protected and that you are paid appropriately for the pipeline and any temporary construction areas. These easements often last longer than your lifetime and can have a substantial impact on your property. It makes sense to get professional input on a contract that is this important.

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September 5, 2014

Texas Oil and Gas Industry Attracting Best and Brightest

The oil and gas industry both nationwide and in Texas has provided a steady stream of good economic news. Wells are being drilled and pipelines are being built and investment in infrastructure (particularly in areas with shale gas) and in technological improvements is increasing. For quite a while it seemed that an older workforce dominated the industry. That has been changing.

Businessweek recently discussed how a growing number of young people, the so-called “Millennials”, are getting involved in the oil industry. Today about 71% of the oil industry’s workforce is over 50 years old, but the industry is now undergoing what the Independent Petroleum Association of America is calling the “great crew change”.

This change has resulted in part from the excitement of the new drilling technology in the U.S. A new generation of wildcatters, landmen, engineers, investors, entrepreneurs and aspiring oil barons are coming of age and creating even more opportunities. One such new entrepreneur is 27 year old Mark Hiduke, who calls himself a Texas oilman. His company, PetroCore LLC is based in Dallas and is just a few months old. As of May, 2013 he obtained $100 million from a local private-equity firm this month. The company plans to purchase underdeveloped land and drill shale wells. He told Businessweek that the opportunities were arising from new energy technology and that the shale boom had created many opportunities to “jump in and be given enormous responsibility”.

Mr. Hiduke is not alone. Young entrepreneurs are forming companies dealing with all aspects of the industry and are competing with industry veterans, and also collaborating with them. Kimberly Lacher, who is 38 years old, and her business partner Wood Brookshire, who is 31, run Vendera Resources. Their first fund began with a few hundred thousand dollars and grown into a $4 million fund. The company has invested $50 million in 1,200 wells.

T. Boone Pickens, an 85 year old oilman and billionaire, said: “I’ve never seen an industry do what the oil and gas industry has done in the last 10 years. Ten years ago I could not have made this statement that you have picked the right career [in the oil and gas industry].” The Dallas chapter of Young Professionals in Energy has seen membership shoot up 60% since 2009, primarily due to new members under age 37. It now has about 4,000 members. Nathen McEown, a 33 year old accountant at Whitley Penn LLP in Dallas, said: “These guys are going to be the poster children of self-made oil and gas tycoons.”

The energy industry needs new ideas and fresh faces to keep innovating and growing, and the fact that a younger generation of well-educated professionals, with many opportunities in many different industries, are choosing the oil and gas industry for their careers is going to bring benefits for decades to come.

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August 29, 2014

New Texas Permian Basin Pipeline

Another new oil pipeline is being laid in the Delaware Basin in Texas, which is part of the greater Permian Basin in west Texas. According to Benjamin Shattuck, an analyst with energy research firm Wood Mackenzie, “(t)he Permian is one of the most exciting areas in the lower 48 states right now.”

Western Refining Inc. has announced plans to build 40 miles of pipeline for light crude oil and condensate from the region. Western Refining is a refining and marketing company with headquarters in El Paso, Texas. Western has refineries in El Paso and in Gallup, New Mexico with a combined capacity of 153,000 barrels per day. These refineries primarily process sweet crude oil and are in a good position to buy crude at a discount from Delaware Basin producers.

The new 40 mile pipeline in the Delaware Basin will connect with the Mason Station crude oil facility in Reeves County, Texas owned by a sister company, Western Refining Logistics LP with a new facility at Wink Station in Winkler County, Texas. From Wink Station, the crude oil and condensate will be sent through other currently existing pipelines for delivery to the market. Mason Station was built last year as part of Western Refining’s expansion plans and was the first phase of its Delaware Basin Crude Oil Gathering System.

This new section of the pipeline will deliver up to 125,000 barrels of liquids with a greater than 45 degree gravity each day, and service is expected to start around June 2015. Western hopes to increase the capacity of its $60 million Delaware crude oil system and capitalize on the rapid growth of the area’s oil production. It plans to do this by expanding oil delivery capacities through the new pipeline, while using the company’s existing locational advantage and infrastructure. No cost for the 40 mile pipeline project has been disclosed so far.

The President and CEO of Western Refining, Jeff Stevens, said that "(g)iven the growth of light crude oil and condensate production in the Delaware Basin, we believe there is an opportunity to continue to expand and enhance our logistics capabilities. Our unique location and existing infrastructure present us with a number of opportunities to maximize our capabilities to deliver shale crude oil to both our refineries and third parties."

New pipeline plans mean that new pipeline easements will be requested from landowners along the route of the new pipeline. Remember that pipeline easements are complex documents, and they will probably be in force for the rest of your lifetime. Be sure to consult an attorney that is familiar with pipeline easements so that any easement you sign has proper protections for your property and that you are getting the most compensation possible in your area.

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August 22, 2014

The Risk of Signing Something You Don’t Read

As a Texas oil and gas attorney, I often explain to clients how important it is to be smart and review oil and gas leases, contracts and other legal documents before signing anything. So many people sign documents without reading or understanding them first and come to me after the fact, when it is much harder and often impossible to do anything about it--money and peace of mind have already been lost. I recently read a case, Ayala and Chesapeake Exploration LLC v. Soto, that exemplifies exactly this situation.

Natividad Soto is a 75 year old man and land and mineral owner in LaSalle County, Texas. He cannot read or write in English. He was approached by Henry Gilbert Ayala, a prison guard and mayor pro tem of Cotulla, Texas who was an acquaintance of Soto's niece. Mr. Ayala allegedly pressured Mr. Soto into signing what Mr. Soto thought was an oil and gas lease. Mr. Soto actually signed a durable power of attorney to Ayala, giving Ayala authority to sign oil and gas leases and certain other documents for Mr. Soto.. Mr. Soto claims no one explained what the document was and he did not seek assistance from anyone before he signed. Mr. Ayala filed the power of attorney in the county deed records and then signed two mineral leases with Chesapeake Exploration.

A few days later, Mr. Soto consulted an attorney. The attorney prepared and filed revocations of the power of attorney with the county clerk’s office. A few weeks later, Chesapeake sent a check of almost $239,000 as lease bonus to Ayala. Ayala kept the money and claimed that Soto agreed that Ayala could keep the bonus funds as his fee.

The trial court agreed with Mr. Soto and entered summary judgment on Soto's claims to quiet title and cancel the lease. The court declared the lease and memorandum of the lease null and void. Chesapeake and Mr. Ayala appealed the judgment. The Fourth Court of Appeals in San Antonio, in a decision written by Justice Karen Angelini, reversed the trial court’s decision. The Court of Appeals found that the mineral lease with Chesapeake was valid, that Chesapeake was a bona fide purchaser and that Chesapeake never received actual notice of Mr. Soto’s revocation of the power of attorney.

What a sad result for Mr. Soto. Had he just sought out his attorney before he signed the power of attorney, all of this could have been avoided. The case has been appealed to the Texas Supreme Court, but no date for submission has been set yet.

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August 15, 2014

Texas Supreme Court to Decide Oil Royalties Case

The Supreme Court of Texas will be considering an interesting case about oil and gas royalties for a Texas mineral owner. The case is Charles G. Hooks III et al. v. Samson Lone Star L.P.

The case arises from a dispute over oil and gas leases in Jefferson County and Hardin County, Texas. The mineral and land owner is Charles G. Hooks, III, who is also an oil and gas attorney. The Jefferson County lease provided that the lessee, Samson Lone Star LLC pay compensation to Mr. Hooks if drilling occurred within 1,320 feet of his property line. Samson drilled a directional well that bottomed out within that distance, but Samson never compensated Mr. Hooks as the lease required. With the two Hardin County leases, Mr. Hooks gave Samson permission to pool his mineral interests, but Mr. Hooks contended that Samson did not pay him for all production within the pool. Mr. Hooks also claimed that Samson was required to pay both royalties on the sale of oil and gas and on the same oil and gas as it existed in the reservoir, so called “formation production”.

In the trial court, Mr. Hooks was awarded more than $21 million on these claims. The case was appealed to the Houston Court of Appeals, which reversed the judgment of the trial court in a majority decision written by Justice Evelyn V. Keyes in 2012. The Houston Court of Appeals determined that, as to the Jefferson County lease, Mr. Hooks' claim was barred by the statute of limitations and was based on an incorrect interpretation of his oil and gas lease. The Court noted that surveys on file for this well at the Texas Railroad Commission in 2000 and publicly accessible put Hooks on notice of the location of the bottom of Samson's directional well, and as an oil and gas lawyer, Hooks should have been aware of his claim if he reviewed both those surveys. Unfortunately, Hooks did not file the lawsuit against Samson until after the four year statute of limitations that applied to his claim had expired.

On the Hardin County leases, the Court also determined that Mr. Hooks' claim was barred by the statute of limitations. The Court wrote: “We conclude that Hooks knew or should have known of information that would have led to the discovery of the alleged fraud no later than February 2001, as the necessary information was a matter of public record at that time.” In addition, the Court of Appeals determined that Mr. Hooks other claims were based on misinterpretations of the leases.

The appeal to the Texas Supreme Court is set for oral argument on September 17, 2014. The Texas Supreme Court’s summary of the issues states that the principal issue is “whether a mineral-rights owner exercised reasonable diligence, to avoid limitations, by obtaining a copy of the Samson plat filed with the Texas Railroad Commission but not a third-party survey in Railroad Commission records that would have shown the operator’s fraud.” Other issues are whether Mr. Hooks ratified the pooling agreement by accepting royalties from the new unit; whether Samson Lone Star must pay royalties on the “most favoured nation” clause in these leases; whether an agreement for attorney fees is applicable on Hooks' claims when liability and damages were stipulated and not pled; and whether post-judgment interest on royalties paid late should be 18% or the normal Texas judgment rate of 5%.

Whatever the Texas Supreme Court decides, the facts of this case illustrate an important caution: if you think there's a problem with your oil and gas lease, your royalties or the activities of the operator, investigate your suspicions now rather than later. If you wait, the statute of limitations may prevent you from correcting the situation or from recovering damages to which you may otherwise be entitled.

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August 8, 2014

Oil and Gas Investors: Beware of Oil and Gas Scams!

A recent case decided by the U.S. Sixth Circuit Court of Appeals holds a cautionary tale for Texas investors or any one who may want to invest in oil and gas. The case is United States v. Smith decided on April 15, 2014.

This case involved the Smith brothers, Michael and Christopher, who operated a company called Target Oil. Target conducted speculative oil drilling in several states, including Texas, but also in Kentucky, West Virginia, and Tennessee. The Smiths told potential investors that certain wells were sure-fire investments, but these wells often produced no oil at all. In fact, some of the wells had not even been drilled. Investigators discovered that from 2003 to 2008, Target Oil received approximately $15.8 million from investors, but only distributed royalties amounting to $460,000. Their operation was a classic Ponzi scheme. That means that the Smith brothers paid new investors from the investment funds of previous investors, rather than from the production proceeds from the wells they were supposed to be drilling. As in all Ponzis, for the first few months the investor thinks they've made a good investment. At some point, as in all Ponzis, the fraudsters run out of new investors to scam and the returns to investors stop. The newer investors get nothing at all. These kinds of schemes seem to come out of the woodwork when the price of oil approaches $100 per barrel.

Michael and Christopher Smith were arrested and charged with conspiring with others to defraud investors of millions of dollars. In the trial court, Michael Smith was convicted of conspiracy to commit mail fraud and of 11 substantive counts of mail fraud. He was sentenced to 120 months in prison and ordered to pay $5,506,917 in restitution. Christopher Smith was convicted by the same jury on seven counts of mail fraud. He was sentenced to 60 months in prison and ordered to pay $1,652,075 in restitution. The Sixth Circuit Court of Appeals affirmed the convictions in an opinion written by Justice Ronald Lee Gilman. The Court rejected the Smith brothers’ complaints of insufficient evidence, that the government introduced evidence that effectively amended the indictment, that a defense witness was erroneously excluded, that their sentences were procedurally and substantively unreasonable and that their forfeiture judgment was excessive.

I don't think the sentences were harsh enough! This case involving the unscrupulous Smith brothers is just one example of many oil and gas investment scams, including many that affect Texas residents. It is a vivid reminder of the need to get advice before you invest. A background check by an oil and gas attorney is absolutely critical before making these kinds of investments. A background check is not a guarantee that the investment is not a scam, but it can usually uncover a number of facts that are strong indicators of fraudulent activity. For example, a background check can determine if a company really owns the leases and wells that they say they own.

I get two to three calls each month from people who invested huge sums in Ponzi schemes just like the one run by the Smith brothers and who are trying to get their money back. In a few cases, I am able to do so. In many cases, the criminals have spent the funds and a civil lawsuit would be an empty exercise. Save yourself some heartache and have an attorney do some investigating before you invest! The fee is quite modest and it is just good business to get some independent verification for a substantial investment.

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August 1, 2014

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

This blog previously addressed the serious issues presented with the use of water by the oil and gas industry , especially where the water is used for drilling and fracing in drought affected states. It has become an especially pronounced issue in the western states, like Texas, that have both significant oil and gas reserves and a limited water supply. A report from Wood Mackenzie Ltd., using data and analysis from the World Resources Institute (WRI) and published late last year, determined that almost all forms of energy production and power generation are dependent on water, although the impact differs depending on type of energy being produced and the location. The report indicated that the oil and gas industry is expected to use technology to mitigate water-related risks as water supplies become more scarce. The report found that some companies are able to mitigate some water risks by understanding their specific water requirements, identifying the water risk involved and developing a clean water strategy.

heron-1444867-s.jpg The World Resources Institute publishes an Aqueduct Risk Atlas which surveys water risk in the most active energy producing regions of the world. Among the regions found to have the highest water risk were U.S. shale gas plays, coal production (particularly in China), and crude oil production in the Middle East. In the U.S., more than half of the shale plays and gas reserves are in areas of mid to high-level water stress, where the oil and gas industry must compete with agriculture and other industries for water. This is true in Texas for the Eagle Ford Shale play.

The Wood Mackenzie report noted however that hydraulic fracturing requires large amounts of water only for a short period of time, and the rest of the time individual wells do not require a high volume of water. This means that shale gas drillers actually use a smaller percentage of water than many other industries. Still, the report notes, “These short but intense demands add up and can threaten to displace other water users. Over time, freshwater availability in shale development areas could decline as demand from homes and farms starts competing with hydraulic fracturing operations.”

As stated above, the World Resources Institute finds that increased demand for water in the oil patch is not just an American problem but a global concern. In the ten countries with the most shale gas reserves, 60% are in areas with mid to high-level water stress. It is expected that water scarcity and water pollution will be issues of increasing importance in the years to come. For example, in southern Iraq a lack of water is already prohibiting exploration and production in oil rich areas of the country.

Some companies are already working on possible solutions. For example, Antero Resources Inc. is planning to spend $500 million for an 80 mile pipeline to bring water to its shale development. In the Middle East, already an arid region. 93% of the onshore oil reserves are in mid to high-level water water stress areas.

There is a growing demand for another alternative water source, desalination, to counter the lack of fresh water, but the desalinization process consumes huge amounts of energy that would otherwise be exported at higher profit for that particular country. For example, in Saudi Arabia the government currently sells oil for powering desalination plants at $4/bbl instead of about $100/bbl when it sells the oil for export.

The report noted, “Some energy firms have already started planning risk-mitigation strategies to account for potential scarcity, even though they are costly. Unless all stakeholders work together to protect shared water resources, risks will steadily increase.”

I suspect that as water for all uses, including water for the oil and gas industry, becomes more and more scarce, the costs of alternative water strategies are going to look more and more reasonable. I heard someone say recently that water is going to be the new gold. That's a safe bet, not just in Texas, but worldwide.

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