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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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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