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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July 25, 2014

GMU Oil and Gas Conference Poses Interesting Questions

A day-long conference at George Mason University titled “Old Fuels, New Technology, and Market Dynamics” was held at the Arlington, Virginia campus last week. It was put on by the Law and Economics Center, which is part of the law school.

Rapid growth in the U.S. oil and gas industry, particularly due to hydraulic fracturing and other unconventional oil and gas production, has intensified the discussion on government regulation at all levels. Some speakers noted that states, rather than either federal or local governments, are the best qualified to regulate hydraulic fracturing. One speaker in a panel, Michael L. Krancer, from the Philadelphia law firm Blank Rome LLP and former head of Pennsylvania’s Department of Environmental Protection, said that “(t)here’s no convincing basis for the federal government coming in and trying to regulate fracing. But it’s not a Republican or Democratic issue. Folks of all political stripes are getting involved.”

Mr. Krancer noted that the U.S. Environmental Protection Agency spent millions of dollars investigated drinking water in Dimock, Pennsylvania, Pavillion, Wyoming, and Parker County, Texas, and found no contamination that could be traced to nearby fracing wells. He also noted that state regulation of the oil and gas industry is working well so far, particularly with the State Review of Oil and Natural Gas Environmental Regulations (Stronger) where various stakeholders, including representatives from industry and environmental groups, review waste management programs.

Another panelist, Thomas W. Merrill, the Charles Evans Hughes Professor at Columbia University’s Law School, also asserted that regulation at the state level is most effective, except with cases of potential interstate environment impacts. Mr. Merrill also noted that tort law, which is the body of civil law that usually applies to personal or property damage, is a creature of state, not federal, law. Professor Merrill said, “I think most of these problems should be left to the states, with the exception of methane leaks and other potential environmental impacts.”

A third panelist opined that state regulation is more hit or miss. Sharon Buccino from the Land and Wildlife Program at the Natural Resources Defense Council, said that Colorado is diligent about notifying landowners about drilling applications, but other states are not. She said that “(s)tates are on the front lines of ensuring enforcement people can count on. But many don’t have the necessary resources. There were 500 spills last year in Wyoming, and no fines. One solution is to incorporate environmental monitoring costs into drilling permit charges.” She said that states can do some regulations well, but also said “(w)hen we’ve done enough, we won’t have the fear and outrage that’s out there. I’ve sat across the kitchen tables of people who have a drilling rig on the property of a neighbor who’s getting the royalties while they get all the noise and pollution.”

Despite the rather emotional pronouncements of Ms. Buccino, the state level is still the best place for enforcement of oil and gas and environmental protection laws. What this speaker does not realize is that if the federal government oversees oil and gas exploration and production, you may still have spills and no fines, you will just pay a lot more through your taxes for the privilege. Or, on the other hand, you may have fines that are exorbitant in relation to the harm done (so as to pay the salaries of all the federal enforcement bureaucrats), smaller companies being driven out of business, and the price of oil and gas going up for everybody.

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July 18, 2014

What Happens When You Don't Use a Lawyer to Review Your Oil & Gas Lease?

Not all Texas folks consult an attorney to prepare a will or to review an oil and gas lease or a pipeline easement they have been offered. Maybe they think lawyers are expensive and only for the wealthy or maybe they don't want to take the time. Fortunately, there are affordable attorneys for virtually all situations, including those who review oil and gas leases. In fact, there are instances where it is critically important to consult a lawyer, and the legal fee for a specific service is often a fraction of what people end up losing by signing boilerplate legal documents without understanding the the documents or the implications those documents may have for their family’s future.

A recent case from Florida highlighted this problem. The case is James Michael Aldrich vs. Laurie Basile et al from the Supreme Court of Florida. The case involved the will of Ann Aldrich. In 2004, she made a will using an “E-Z Legal Form”. The will left her property to her sister, and if her sister died before Ann did, then to her brother. Ms. Aldrich’s sister died first, so her brother was the sole heir to her estate according to the will. However, this “E-Z Legal Form” didn’t have a residuary clause. Ms. Aldrich also left a written note after her sister died leaving her possessions to her brother, except for certain bank accounts that were to be left to this brother’s daughter. But the document only had one witness, which made it invalid as a will under Florida law.

When Ms. Aldrich died, two nieces sued to receive part of the estate. These nieces were the daughters of a different brother of Ms. Aldrich, who had also already died before Ms. Aldrich. Even though these two nieces are not mentioned anywhere in the will, the Florida Supreme Court decided in their favor in a decision written by Justice Peggy Quince. Since the “E-Z Legal Form” did not have a residuary clause, Ms. Aldrich only intended for the property specifically mentioned in the will to be distributed. The Court found that all other assets, such as money acquired after the will was signed in 2004, had to be distributed under the laws of intestacy, which is the law that covers the distribution of property of someone who does not have a will.

Justice Barbara Pariente concurred, and discussed Ms. Aldrich’s will as a cautionary tale. She wrote: “While I appreciate that there are many individuals in this state who might have difficulty affording a lawyer, this case does remind me of the old adage ‘penny-wise and pound-foolish.’” She went on to say that “(a)s this case illustrates, that decision can ultimately result in the frustration of the testator’s intent, in addition to the payment of extensive attorney’s fees—the precise results the testator sought to avoid in the first place.”

This cautionary tale involves a will, but people call me all the time about oil and gas leases they have signed without consulting a lawyer, or even reading it themselves, and then are dismayed to learn how much money they’ve lost or that their land is damaged by oil and gas operations that are authorized by the lease. For important legal documents, having an attorney review it is not expensive, may save you significant money, and may spare you future heartache.

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July 11, 2014

Texas Mineral Owners: Don’t Sign a "Standard" Oil & Gas Lease Form for Oil and Gas Leases

A recent case that was decided by the Texas Court of Appeals in San Antonio illustrates the problems when mineral owners sign a "standard" form for their oil and gas lease and why they should consider getting the opinion of an experienced Texas oil and gas attorney before they sign. Failing to do so could end up costing you money every month.

The decision is Chesapeake Exploration, LLC v. Hyder. The Court, in a unanimous decision written by Justice Sandee Bryan Marion, ruled that, despite the claims of the well operator, post-production costs could not be deducted from the mineral owner's royalties, based on the specific language of the lease before the Court. This particular lease was most definitely not a standard form and appeared to have been carefully drafted by the Hyder's attorney.

The Hyder lease was executed on September 1, 2004 with another oil company, and then the lease was assigned to Chesapeake Exploration LLC. The leased premises consisted of two tracts of 1,037 acres and 948 mineral acres in Johnson County and Tarrant County. The lease allowed Chesapeake to drill from existing well sites adjacent to the leased premises, as well as within the leased premises itself. For the wells on the leased premises, the Hyders were paid a precentage royalty. For wells outside the leased premises, the Hyders were to be paid a specified percentage as overriding royalties.

As of December 2011, Chesapeake had 22 wells on the leased premises and seven wells on the adjacent land. Chesapeake deducted certain costs from both kinds of royalty. The Hyders alleged that the deduction of costs from either royalties or overriding royalties was a violation of the lease. Chesapeake counterclaimed to recover royalty overpayments. In spite of a pretty clear and specific clause in the Hyder lease that prohibited deduction of any costs, Chesapeake argued that, as to the regular royalties, the lease authorized the deduction of the Hyders' share of post-production costs and expenses between the point of delivery of the oil and gas and point of sale, and that the overriding royalty clause for the wells adjacent to the leased premises also allowed them to deduct the Hyders’ share of post-production costs and expenses from the overriding royalties.

The trial court awarded the Hyders a $1 million judgment against Chesapeake for breach of the royalty and overriding royalty clauses, attorney’s fees and interest. The Court of Appeals affirmed. Justice Marion wrote in the decision, "[w]hile we acknowledge an overriding royalty is normally subject to post-production costs, we also acknowledge Texas law allows the parties to modify this default rule." The opinion noted that in the Hyder lease, the following language appears: “[Royalty owners] and [Chesapeake] agree that the holding in the case of Heritage Resources, Inc. v. Nationsbank, 939 S.W.2d 188 (Tex. 1996) shall have no application to the terms and provisions of this Lease.” (The Heritage case described a rule for cost deduction based on the language in that particular lease). The Court also pointed out the specific phrases "no deduction of costs" and "cost-free" in the Hyder lease.

The Court of Appeals confirmed the ruling of the trial court on a second issue involving damages. The Hyders wanted reimbursement for a quantity of gas that was apparently lost and thus unaccounted for. The Court held that since the unaccounted-for gas was neither sold by Chesapeake nor used at the leased premises (the two situations where the lease said that royalty was due), the Hyders could not be reimbursed for it.

The kind of hairsplitting that was the basis of Chesapeake's arguments made me embarrassed for them. Chesapeake's financial woes of have been reported on in the media for many months. I can only guess that Chesapeake ordered its accounting department and attorneys to seek out recovery of costs wherever they could, even if it meant advancing somewhat specious arguments in court.

This case illustrates that the language of the lease is critical, and since post-production costs can be quite substantial, the language of the lease can have a large impact on the amount of royalties that a mineral owner gets. Elimination of post-production costs clauses in an oil and gas lease is something that the oil company almost never offers; it really has to be negotiated. It generally requires an experienced oil and gas attorney to get the most favorable cost provisions given the mineral owner's particular circumstances.

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July 4, 2014

Oil and Gas Benefits and Challenges for Texas

More Texas oil and gas companies are expanding. In January 2014 Brenham Oil and Gas Inc. announced the purchase of a 100% and 74% revenue interest in the 332 acre Inez field prospect. This prospect is located in Victoria County, Texas. Brenham plans to drill a well to regain the potential of the Yegua, where a well was originally drilled in 1990 by Ken Petroleum Corp. Reserves in the well are estimated at four bcf of gas and 160,000 bbl of condensate. In the new well, Brenham plans to explore several intervals in the Jackson shale to conduct a petrophysical study. Brenham believes it can drill three to four new wells on the Inez lease.

Late last year, FieldPoint Petroleum Corp. and Riley Exploration Group signed a joint exploration agreement to horizontally drill in the Serbin field, which is 50 miles east of Austin, Texas. The Serbin field lies in Lee County and Bastrop County. FieldPoint will have a 25% interest and Riley a 75%. The two companies will pool their lease interests and drill 12 new horizontal wells in 2014. FieldPoint already has a working interest in 72 producing oil and gas wells in this field.

All of this has been continued good news on the growth of the oil and gas industry in our state. Last year at the annual meeting of the Permian Basin Petroleum Association, the Speaker of the Texas House of Representatives, Joe Straus, said, “Every Texan should be grateful for the success of the state’s oil and gas industry. Every child in public school, every family that visits a state park, every business that transports personnel or equipment over roads.” He credited much of Texas’ successful economy and job creation to the oil and gas industry. Speaker Straus noted that all the success and booming economy had created some challenges. In the last decade, Texas’ population has grown by 6 million people, enough people to fill a whole other city the size of Houston.

As growth continues, there will be increased demand for things like water, electricity, roads and schools. But Speaker Straus believes Texas is meeting the challenges, and cites recent increases in funding for public schools and universities. The state government has also allocated $450 million for roads in the oil and gas corridor that has seen such an increase in traffic. So while the US Congress is reviled with a less than 10% approval rating, the Texas Legislature has a 53% approval rating and is trying to find viable solutions to these challenges, particularly in areas like education, water, and transportation. These are core areas Speaker Straus says the government should focus on. While the booming oil and gas sector has brought challenges, Speaker Straus said “(w)e cannot address our most serious issues without a healthy, vital oil and gas sector.”

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June 20, 2014

US Supreme Court Decision Important for Texas Land and Mineral Owners

The United States Supreme Court recently issued an opinion that effects many Texas property and mineral owners. Specifically, the Court decided the case of Marvin M. Brandt Revocable Trust v. United States in an 8 to 1 decision. The Court determined that certain rights-of-way for railroads revert to private property owners following the railroad's abandonment of the right-of-way easement. The ownership of the easement may carry with it ownership of the mineral estate. Where it does, and when the easement covers many acres, the mineral interests could be very valuable.

This case is significant for Texans because there are many railroads and railroad rights-of-way throughout Texas. The decision, written by Chief Justice John Roberts, addressed this central question: what happens to the ownership of the right-of-way easement when a railroad abandons its right-of way. In this case, the right-of-way was granted to the railroad under the General Railroad Right-of-Way Act of 1875. This Act gives railroads the right-of-way through public lands in the United States. The land at issue in this case was a ten-mile strip in Wyoming, upon which the right-of-way was created in 1908. Subsequently, in 1976, the federal government conveyed the land to Marvin and Lulu Brandt. The railroad later abandoned the right-of-way, and by 2004 all the track had been removed. In 2006, the U.S. government requested a judicial declaration of their title. The Brandts' deed (which was a land patent) didn’t specify what would happen if the railroad gave up the right-of-way. Mr. Brandt argued that the right-of-way had been an easement, and that once it was abandoned, it was terminated and the easement area belonged to him. The U.S. government argued that after abandonment, title to the right-of-way land reverts back to the government. The U.S. District Court awarded title to the U.S. government and the Tenth Circuit Court of Appeals affirmed.
train-tracks-1336056-m.jpg

Chief Justice Roberts reversed the lower courts’ rulings. The Supreme Court’s majority opinion found that the right-of-way was terminated at the time of the abandonment, and that the Brandts owned the property. The Court found that the language, legislative history, and subsequent administrative interpretation of the 1875 Act supported this decision. The Court cited Great Northern Railway Co. v. United States, decided in 1942, in support of its decision. In that case, also decided that under the 1875 Act, the U.S. government granted the railroad only an easement, not fee simple title in the easement property, and therefore, the easement disappeared once it was abandoned. The Court found that in the Brandts' case that the railroad abandoned the easement in 2004 and the government did not have any interest in the land after. Title to the easement property reverted to the Brandt Revocable Trust as the current owners of the land.

Justice Sonia Sotomayor was the only dissenting justice in the case. She stated that there is a judicial precedent for the concept that when Congress granted land to railroad companies, they did not intend to have these land grants end up in private hands. Justice Sotomayor would have decided that, even if this was an easement under the 1875 General Railroad Right-of-Way Act, it was not an ordinary easement and it should have been determined in favor of the United States. Luckily for property owners who have abandoned railroad rights-of-way on their land, Justice Sotomayor's view did not prevail.

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June 13, 2014

EPA Reconsiders 2013 Cellulosic Biofuel Quotas

In October 2013, the American Petroleum Institute and the American Fuel & Petrochemical Manufacturers (AFPM) submitted information to the Environmental Protection Agency (EPA) asking the EPA to lower the 2013 cellulosic biofuel quota because oil refiners would be forced to buy millions of dollars in unnecessary "credits" for cellulosic biofuel because the actual biofuel was unavailable.

In a very helpful (and surprising) turn, on January 23, 2014, the EPA announced that it would reconsider the 2013 quote due to this new information. The EPA determined the information was relevant and met statutory requirement for granting a reconsideration.

The government has hoped that cellulosic biofuel would replace ethanol, which has caused complaints over driving up prices of corn and the damage to engines. However, costs in producing cellulosic biofuels have delayed production, and so production hasn’t kept pace with government quotas. AFPM President Charles Drevna pointed out that the 2013 quota for cellulosic biofuels was six million gallons, which is absurd when only one million gallons were produced. Since they obviously cannot buy biofuel that doesn’t exist, EPA requires oil refiners to buy "credits" instead. API estimated that buying these credits would cost oil refiners $2.2 million in 2013. Mr. Drevna explained that in March 2013 the EPA set the 2012 quota at zero. In reality, these credits are a penalty for not complying with a law that is impossible to comply with!

A spokesman for the biofuel industry said: "These blending targets are based on expected output from a very small number of companies. A short delay, not uncommon for any new refinery, can change the landscape with regard to compliance." Another spokesman for the industry admitted developing cellulosic biofuel has had setbacks and delays but stated the industry would be back on track.

That doesn’t change reality for today, though. Both oil and gas trade organizations received a letter (that you can read here) from EPA Administrator Gina McCarthy. The letter states that the EPA will commence a notice and comment period on the issue of the cellulosic biofuel standards. The letter also stated: “Other objections to the cellulosic biofuel standard noted in your petition may be raised in the context of this future rulemaking if you continue to believe they are relevant. We will respond at a later date to components of your petition for reconsideration of the 2013 RFS rule that are related to matters other than the cellulosic biofuel standard.”

API’s Bob Greco, to whom the letter was addressed, called it “refreshing” that the EPA was willing to reconsider its public policy mandating biofuels that don’t actually exist. He told reporters: “We continue to ask that EPA base its cellulosic mandates on actual production rather than projections that—year after year—have fallen far short of reality. For 4 years running, biofuel producers have promised high cellulosic ethanol production that hasn’t happened.” AFPM President Charles T. Drevn agreed with Mr. Greco and applauded the EPA’s decision: “The agency’s optimism for cellulosic biofuel appears to have been tempered by reality. EPA used common sense when making this decision and we believe common sense should also prevail in resetting the 2013 cellulosic RVO, which would mean that our members will not be required to purchase credits for a fuel that does not exist.” said Mr. Drevna.

The bottom line is that the purchase of unnecessary government mandated "credits" because refiners can't buy a product that does not exist will result in higher prices for fuel. This impacts consumers directly, at the gas pump, as well as indirectly due to increases in the cost of goods and services. These price increases will disproportionately impact lower and middle class consumers and older persons on social security. This is one more example of how the Obama administration puts its political agenda ahead of the welfare of people.

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June 6, 2014

Texas Oil & Gas Operator Fracing Without Fresh Water in Drought Area

Areas of Texas and the western states where much of the U.S. oil and gas potential is located have been hit by drought in recent years, causing worries about water supplies and the use of water in hydraulic fracturing. Fracing takes a lot of water! But Apache Corporation has created a system to frac in the Wolfcamp shale in west Texas without using fresh water. This is an important shale area: just a few months ago Scott Sheffield, the CEO of Pioneer Natural Resources Co., said: "The Wolfcamp could possibly become the largest oil and gas discovery in the world.”

This new approach couldn’t come at a better time, since Texas has been in a drought since 2010 and in November 2013 Texas voters approved Proposition 6, which allocates $2 billion from the Economic Stabilization Fund to the new Texas Water Implementation Fund.

Apache is working with a closed loop system that only uses brackish and recycled water in the Barnhart project area in Irion County. This water is taken from the Santa Rosa Formation in the Dockum Aquifer and treated to remove substances that could damage pipelines and pumping equipment. The treated water is then stored in retention ponds and then can be pumped directly into drilling sites in the area. There is a significant amount of water that returns to the surface after fracing. The U.S. Environmental Protection Agency estimates between 10% to 70% of the injected water, depending on the geologic formation, is returned to the surface. Reusing water that is produced and recovered from fracing conserves fresh water for drinking and agricultural use, and it also saves Apache money since they don't have to haul water in and out. That in turn reduces wear on local roads, and eliminates the need for a used water disposal facility. Greg Hicks, Apache’s production engineer manager, said: “It’s a win-win situation for the environment and us.”

canyon-1434840-m.jpg The Wolfcamp shale is a big area for Apache, which holds 345,000 acres in the area and figures this holds about 347 million barrels of hydrocarbons from 971 identified drilling locations. Apache is not only applying this water-saving technique in the Wolfcamp but also at vertical wells drilled in its Garden City project near Midland and its Andrews project near Odessa.

The first company to get a permit for such a fracing water recycling system was Fountain Quail Water Management, and Apache is now one of their customers. Fountain Quail has two types of semi-mobile water treatment units that can process the recycled water and brine on site. Their Chief Operating Office Brent Halldorson said the Texas Railroad Commission has recently removed some barriers to water recycling by eliminating the need for permits from the Commission and also by reforming some rules to make them more compatible to this technique. A new law was passed in May 2013 that allows producers to take water they recycle and sell it to another company. Before that law, companies were not willing to sell recycled water because of potential liability, but now the liability transfers to the company that buys the water. Mr. Halldorson said he is excited and feels like the oil and gas water recycling industry has finally “broken into the mainstream”.

It is critical for an oil and gas lease or surface use agreement to address (and usually prohibit) the use of your ground water and underground water by an oil company. These new techniques give oil companies a workable alternative to using the landowner's water supply.

See Our Related Blog Posts:

Water Recycling for Texas Oil and Gas Drilling

Texas Eagle Ford Oil & Gas Activity Benefits Local Economies

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May 30, 2014

Oil and Gas Drilling Boom

As I've discussed before, oil and gas drilling and production benefits Texas mineral owners, but also has a positive impact on the economy as a whole, especially in energy producing states like Texas. There are countless examples in recent years verifying that impact. For example, recently the Manhattan Institute published a report written by Mark P. Mills, a Senior Fellow and founder and CEO of Digital Power Group, entitled, “Where the Jobs Are: Small Businesses Unleash Energy Employment Boom”.

This report indicates that the energy boom, fueled by oil and gas drilling and production, is creating jobs at a faster rate than the economy overall and producing enough wealth by itself to stop a slide back into recession. The report notes that more than 400,000 jobs have been created in the oil and gas sector since 2003. Another two million indirect jobs have been created as well, in transportation, construction and information services in the new shale boom. Oil and gas jobs have grown by 40% since the recession. Other related sectors, like chemical production, manufacturing, steel production, and textiles have also been revitalized due to lower energy costs. In states with oil and gas resources, job creation has greatly outpaced the national average.

While this information is great news, the Manhattan Institute report highlights two key features of the growth that have not been publicized much so far. First, the new jobs are in diverse geographic areas. Sixteen different states have 150,000 or more direct oil and gas jobs. In addition, most of the new jobs aren’t for large oil companies or big multinationals but rather for small businesses. The average oil and gas industry employer has less than 15 employees. These small and medium size oil and gas companies are helping increase jobs not only in direct oil production, but across the economy. These jobs in oil and gas and related industries are also mostly middle-class jobs, not part time or low wage work. Another important point is that this growth reduces the U.S. trade deficit, which is a drag on the economy. Oil and gas produced domestically means less foreign oil and gas is imported, which lowers our trade deficit.

The report noted that the U.S. is the world’s largest and fastest-growing producer of hydrocarbons. In fact, the U.S. has overtaken Russia as the biggest producer of gas.The International Energy Agency even predicts that by 2015, the U.S. will surpass both Russia and Saudi Arabia in oil production.

Almost one million Americans work for the oil and gas industry. The report estimates that 10 million more people are working in jobs related to the industry. The energy boom contributes $300 billion to $400 billion per year to the economy, without which the U.S. might have been stuck in an even deeper recession. The report fairly calls the oil and gas industry “the brightest corner of the economy”.

See Our Related Blog Post:

Innovation and Increased Demand Help Texas Natural Gas Production

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