Texas Attorney Blog

When a Texas mineral owner asks me to review or negotiate an oil and gas lease offer they have received, one of the first things I do is to determine who the proposed operator, or lessee, will be. Many people do not realize how important it is to know just who you are leasing to. If you do not investigate the proposed lessee before you sign, you may be throwing away the royalties you could have received had you leased to a competent oil and gas company.

First, I determine whether the potential lessee is a licensed oil and gas operator. I strongly urge my clients not to sign a lease with a middleman. Instead, I insist that the actual oil company who will be operating the lease be disclosed so we can do a background check on them. There can be many potential problems if you sign a lease with a middleman. These include, (but are certainly not limited to), the following problems:

1) The company who contacted you may be a broker or a “lease hound”, that is, a person or company who tries to sign up leases cheaply and then sell them to a real oil company for a huge markup. I prefer to see my client be paid that markup, rather than the middleman.

2) They may be an agent for a “boiler-room” operation, who make their money by selling interests in a lease or “drilling program” as an investment. They make their money on the sale of these interests, and could care less about drilling a good well, or treating your minerals or the surface of the property competently. In some cases, they don't care if a well is drilled or not, because they have already made their money.

3) You can end up with the drilling being done by an inexperienced or even unscrupulous operator, who can destroy the surface of your land, leave toxic chemicals, and either refuse to clean up, or go out of business or file bankruptcy to avoid the cost of cleanup.

4) An inexperienced or unscrupulous operator can do an inept job of developing your minerals, damage the reservoir and possibly leave the minerals unrecoverable. In either case, this type of operator can either go out of business or file bankruptcy to avoid the payment of damages.

5) Many reputable oil and gas operators refuse to buy leases from these middlemen. Instead, they wait until the initial term of the lease has expired, and then contact the mineral owner to lease from them directly. An oil and gas lease is almost always “exclusive”, that is, you are prohibited from leasing to anyone else during the initial, or primary, term. Thus, while your minerals are tied up in a lease to a middleman, you may miss out on a good lease with a competent oil and gas company, and lose the royalties you would have been paid during this time. It’s also possible that you will miss your window of opportunity more permanently: by the time your initial term is up, a competent operator may have leased what they need in surrounding areas, and not be interested in leasing from you any longer.

Once we determine who the actual lessee will be, if the proposed lessee is not well known, I strongly recommend that I do a background check on the proposed lessee. While there are many good oil companies and well operators, there are a number that you do not want to lease to for any price. As I indicated above, allowing an inexperienced or unscrupulous operator to drill on your land can result in serious financial consequences for you. A background check is not a guarantee that these things will not occur, but it gives us some idea of whether the operator is legitimately incorporated, how long they have been in business, how many other wells they operate and where, and whether there are or have been any lawsuits or regulatory proceedings against them.

Way too many mineral owners do not investigate who the proposed lessee will be. When they contact me, after the damage is done, it is usually too late.

These lease hounds and brokers and middlemen come out of the woodwork when the price of oil goes up. Please don't waste your mineral assets and the potential royalties those assets can produce for you by leasing to someone without checking them out first! In addition, please be patient. In an area of the state where the brokers and lease hounds are busy, the competent oil companies often follow!

I spend a significant amount of time as a Texas oil and gas attorney assisting landowners with negotiation of easements and rights-of-way for oil or gas pipelines. As my client and I work through the negotiation process, it is vital to understand the various options available to the pipeline company if we are unable to reach an agreement. While we always try to reach a fair agreement, knowing what the other party can do if a deal is not reached is a key part of crafting an appropriate strategy so that you, as a landowner, can get the most value out of the agreement. Earlier this year, the Texas Supreme Court handed down a landmark decision which may affect the options available to pipeline companies when they negotiate with landowners. The case, Texas Rice Land Partners, Ltd. and Mike Latta v. Denbury Green Pipeline-Texas, addressed issues regarding when a pipeline company is a common carrier and therefore, when the eminent domain power is available to pipeline companies.

The Texas Natural Resources Code allows “common carrier” pipelines to wield the eminent domain power only if they are going to transport gas “to or for the public for hire.” Of course, this statute reflects the constitutional requirement that property cannot be taken from an owner if it will be used merely for private purposes. In Denbury, the Texas Supreme Court provided further clarification on what a pipeline must do to qualify as a common carrier so that they can utilize the eminent domain power. In the past, it was assumed by most involved parties, including Texas oil and gas attorneys, that the issuance of a common carrier permit by the Texas Railroad Commission was sufficient to satisfy the requirement. In other words, if a pipeline company received the permit, then they could utilize the eminent domain power if they could not negotiate a right of way with the landowner. The Denbury case changes that.

In this case, Denbury Green received a T-4 permit from the Texas Railroad Commission to construct and operate a CO2 pipeline at the Texas-Louisiana boarder and extending to the Hastings Field in Brazoria and Galveston counties. As part of the permit application, the company checked a box which indicated that the pipeline would be used as a common carrier, instead of as a private line. After receiving the permit, Denbury Green visited part of the proposed location where the pipeline would be put. However, the owners of the land in question, Texas Rice Land Partners, refused to give the company access. Denbury Green and the Texas Rice Land Partners had previously negotiated on the company’s use of the land, but they had not reached agreement. Denbury Green sued to have access to the site to survey in preparation for condemning the pipeline easement.

The case eventually made its way up to the Texas Supreme Court. Denbury Green argued that it should be deemed a common carrier with the power of eminent domain because the permit issued by the Railroad Commissions deemed it as such. However, the Supreme Court rejected that argument. They noted that “the T-4 permit alone did not conclusively establish Denbury Green’s status as a common carrier and confer the power of eminent domain.” Instead, the Court stated that whether or not a pipeline company is deemed a common-carrier is a judicial question. The Railroad Commission’s granting of a permit is an administrative tool based upon the self-reporting of the company involved. Such a process is not subject to the adversarial testing present in the judiciary to determine if the company will actually use the pipeline for public purposes.

The Court reiterated that the extraordinary power of eminent domain cannot be taken lightly. It explained that landowners cannot be subject to a forcible taking of their private land “with such nonchalance via an irrefutable presumption created by checking a certain box on a one-page government form. Our Constitution demands far more.” The Court went on to declare that a pipeline company must do more to conclusively establish itself as a common carrier. Not only is the permit insufficient, but merely making the pipeline available for public use is also insufficient. In many cases, a pipeline will never actually serve a purpose for anyone other than the company building it. Therefore, mere claims that it could be used by others cannot be a loophole to get around the constitutional requirement that eminent domain power not be available for mere private purposes.

This decision may have significant effects on all future negotiations where a common carrier permit is involved or the use of eminent domain power is threatened. While the permit’s indication of common-carrier status will remain prima facie valid, a landowner may now challenge that status. At that point, the burden shifts to the pipeline company to prove that there is a reasonable probability that the pipeline will actually serve the public and not that it may serve the public “in theory.” Many more pipeline companies will need to negotiate with landowners much more, shall we say, earnestly, now that their ability to forcibly take an easement or right-of-way via eminent domain may be limited.

See Our Related Blog Posts:

Talk to an Oil and Gas Attorney Before You Sign That Lease

Have a Texas Oil and Gas Attorney Review Your Pipeline Easement

When the federal government began giving billions of dollars to the banking industry through the Troubled Asset Relief Program (TARP), we discovered that many financial institutions had gotten themselves into their dire situations by making or investing in high-risk home loans. Subsequent to that discovery, there was a push to reform residential lending practices.

One piece of legislation aimed at curbing such high-risk lending for homes is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In part, this law gives federal bank regulators the authority to set mortgage lending standards to attempt to prevent the lending mistakes of the past. Using this authority, the newly empowered regulators have created a new Qualified Residential Mortgage (QRM) standard and proposed guidelines to govern it. This standard is meant to increase the number of loans that are of high credit quality and have a low likelihood of default.

According to the Community Associations Institute, as proposed, these QRM loans require that a person be able to provide a 20 percent down payment (or more), pay full closing costs out-of-pocket, provide full income documentation, and be current on all existing debt payments. Additionally, applicants are subject to strict debt-to-income ratio limitations, must not have been more than 60 days delinquent on a debt obligation for two years, have had neither property repossessed nor been party to a bankruptcy proceeding, foreclosure, short-sale, or deed in lieu of foreclosure within the last three years, and have never been subject to a Federal or state judgment for collection of any unpaid debt. QRM loans are also only available as first-lien mortgages for a purchaser’s primary residence or second-liens for refinancing existing loans. Finally, adjustable rate mortgages are only to be adjusted only twice per year, and those adjustments cannot exceed six percent during the life of the loan.

The new guidelines impose much stricter standards than previous lending practices. For example, previously closing costs (which can be several thousands of dollars) could be financed. The 20 percent down payment requirement is perhaps the greatest change, as it doubles the 10 percent down payments that were routinely made by first time home buyers in previous years. What is so onerous about saving up the amount needed for closing costs and down payment, like we all used to? In addition, if buyers have more invested in their home purchase, they are less likely to just walk the loan, as so many have done.

The Dodd-Frank Act, ironically, was brought to you by the same legislators who forced Fannie Mae and Freddie Mac to lower their standards for the mortgage loans they purchased in the first place. Those decreased standards bear the primary responsibility for the housing "boom" and subsequent bust. This Act has many, many problems, but increasing the investment needed for a house purchase is not one of them.

It is incumbent upon a Texas oil and gas lawyer to keep abreast of all relevant decisions from appellate courts and the state’s highest court. Proper advocacy demands that attorneys understand changes in the law and be able to incorporate those changes in their legal representation. Lawyers must have an awareness of all the legal tools at their disposal so they can provide zealous advocacy and competent representation for a client, whether in a dispute, guiding a landowner through the negotiation process for a lease, preparing a mineral deed or a number of other tasks.

There remain many areas of Texas oil and gas law with questions that are unanswered, and our courts are frequently providing guidance on those issues. For example, the Texas Supreme Court recently handed down a decision in Lesley v. Texas Veterans Land Board that provided further clarification on the rights and responsibilities that executive rights holders owe to mineral owners.

A mineral estate is basically a bundle of various property rights. One of those rights is known as the “executive right”, which is the ability to enter into an oil and gas lease. This is distinct from other rights of mineral ownership, such as the right to collect royalties, bonus or delay rentals pursuant to an oil and gas lease. More often than not a single owner will possess all of these rights, meaning they can choose to lease and will receive payment for royalties due under that lease. However, these rights can be split between one or more persons or entities. When those rights are split, the holder of the executive right owes a duty of “utmost fair dealing” to other owners of a mineral interest.

In the Lesley decision, the Texas Supreme Court elaborated on what that duty actually encompasses. The case involved a mineral estate that had been split between several parties with each owning part of the mineral estate but only one having the executive right. In other words, several parties would receive royalties upon the lease of the minerals, but only one party had the power to actually negotiate and sign the lease. The executive right holder was a land developer who had turned the property involved into a subdivision of over 1,200 lots. When those lots were sold to others, the deeds included restrictive covenants which prohibited “commercial oil drilling, oil development operations, oil refining, quarrying or mining operations.” Evidence was presented in the case which suggested that the subdivision was sitting on $610 million worth of minerals that cannot be reached from outside the subdivision. The non-executive interest holders sued the executive interest holder because the restrictive covenants essentially made it impossible for the land to be leased and for mineral owners to develop their minerals and receive royalties.

The original plaintiffs argued that the use of restrictive covenants amounted to a breach of the duty they were owed by the executive interest holder. Put more succinctly, the Court was presented with the question of whether inaction by the executive interest holder was a breach of any duty to the mineral owners. In answering this question, the Court did not provide a general rule, but instead explained that under certain circumstances, the failure to lease would constitute a breach of the executive holder’s duty of utmost fair dealing to the mineral owners. In this case, the Court ruled that the restrictive covenants included in each deed when a person bought land in the subdivision were unnecessarily restrictive, because they essentially prohibited all future leases. In the Court's view, this was a step too far that unfairly harmed non-executive mineral rights owners.

The Court did not go so far as to declare that all inaction on the part of the executive rights holders amounted to a breach of duty, just that the restrictive covenants in this case went too far. This is an interesting decision in another sense, for this reason: the buyers of land in the subdivision were given a copy of the restrictive covenants before they bought their land, as is required by law. However, the deeds from the developer to each buyer did not contain a reservation of the executive rights! Since a grant of minerals ordinarily conveys all the rights in the mineral estate, the failure of the developer to reserve the executive rights, in writing, in the deed to each buyer, was a big reason why the buyers won.

The Lesley decision may be important to you if you own minerals, but not the right to lease them.

Why You Should Have a Texas Oil and Gas Attorney Review Your Oil and Gas LeaseOil and Gas

Leasing in the Eagle Ford Shale in Texas

Practicing oil and gas law in Texas competently also requires being aware of the "bigger picture" in which I work. One component of that bigger picture these days is the issue of energy independence.

Energy independence has become a major political issue in recent years, and has resulted in increased efforts to find ways to reduce the United States’ dependence on importing foreign oil to meet our nation’s energy needs. Renewable energy sources and nuclear solutions have been discussed as alternatives to importing oil, but our country’s natural gas reserves are also an important part of our national energy policy moving forward. Ancillary to this national discussion, the production of natural gas, and in particular, the practice of hydraulic fracturing, or fracing, has come under attack.

Natural gas is often contained within dense shale formations underground, and fracing is a process used to extract those reserves of natural gas. The process itself involves the use of water combined with sand and chemicals and pumped into the shale formations to fracture them and allow the release of the gas held in the rock.

To my knowledge (and I research this issue), there has never been a documented case of the fracing process injuring a water well. Those who suggest otherwise (such as the producers of "Gasland") are not being honest with the public or themselves. I wrote a previous article on this blog outlining the reasons for my statement.

Notwithstanding the lack of evidence of injury to water wells, there has been so much hysteria generated by this issue, that in depth studies by experts are welcome.

The New York Times reports that U.S. Secretary of Energy Steven Chu has appointed a panel of seven individuals to perform the study. John Deutch is the chairman of the panel, and is a professor and dean of science at the Massachusetts Institution of Technology. He was the undersecretary of Energy in the Carter administration and the deputy secretary of defense and director of the Central Intelligence Agency during the Clinton administration. He is also a member of the board of directors at Raytheon and Cheniere Energy. Deutch is tasked with finding ways to improve the safety of fracing and providing advice to state and federal agencies that will enable them to safeguard citizens’ health. Given the lack of industry experience of Mr. Deutch, one wonders if the results of this particular study will be accurate, or merely political fodder.

On the other hand, the Houston Chronicle reports that the University of Texas will also be studying the effects of fracing and the effectiveness of current regulations at making fracing a safe process. Chip Groat, the current dean of the Jackson School of Geosciences at the University of Texas is leading this study. Dr. Groat was the head of the United States Geological Society during the Clinton and Bush administrations, and will bring his expertise in understanding complex natural water systems to bear on the issue of hydraulic fracturing.

Finally, the Environmental Protection Agency has also been tasked with studying the effects of fracing on public and environmental health, and formed a panel of 22 people to provide advice and recommendations on the study plan. Dr. David A. Dzombak, a Senior Professor of Environmental Engineering at Carnegie Mellon University in Pennsylvania was named as the chairman of the panel. He is the faculty director of the Steinbrenner Institute for Environmental Education and Research, and has served on the EPA’s Science Advisory board for four years. His expertise is in aquatic chemistry, the transport of chemicals in water, soil, and sediment, and the restoration of watersheds and rivers.

Hopefully, given the range of relevant experience and knowledge of at least some of the people involved with these studies, if there are real problems with fracing, they can be identified, and the hysteria regarding fracing can be put to rest.

As a Texas oil and gas lawyer, I work frequently with Texas ranch owners to negotiate oil and gas leases or pipeline easements that effect their ranches. A recent development threatens to add yet another layer of regulation for the operation of these ranches. Specifically, the United States Environmental Protection Agency (EPA) has recently proposed new guidance rules regarding what bodies of water are protected by the federal Clean Water Act (CWA). Bodies of water protected by the CWA are regulated by the EPA, and the draft guidance that the agency has submitted seeks to expand the types of waterways that are within the gamut of the CWA. These rules purport to increase the EPA's jurisdiction under the auspice of both the statutory language of the Act and federal case law, such as the Rapanos v. United States decision handed down by the United States Supreme Court several years ago.

Generally, the Clean Water Act covers navigable waterways that are "relatively permanent, standing or continuously flowing bodies of water" under Rapanos. The new guidance rules, however, are based upon Justice Kennedy's concurrence opinion in Rapanos, in which he stated that the CWA covers waters that "significantly affect the chemical, physical, and biological integrity" of navigable waterways. According to the EPA website, using this broader standard allows the EPA to evaluate "groups of waters holistically" instead of using the waterway-by-waterway piecemeal evaluations that are currently performed by the agency. The new rules mean that a surface connection to a navigable waterway is not necessarily needed for that waterway to be protected under the CWA. Additionally, the guidance states that waters which flow between two or more states are protected under the Act as well.

The draft guidance will be open for public comment for 60 days once it is published in the Federal Register, and cattle ranchers, in particular, have voiced opinions that are strongly opposed to the EPA's proposal. According to the Texas and Southwestern Cattle Raisers Association (TSCRA), the guidance, if approved as is, may give the Environmental Protection Agency regulatory authority over stock tanks, drainage ditches, and other intermittently flowing bodies of water that are currently not within its jurisdiction. As a result of the agency's additional authority, ranchers would have to submit to an additional permitting process -- and incur the cost of hiring both engineers to evaluate the bodies of water and lawyers to explain the regulations and help the ranchers successfully navigate that process -- and allow federal inspections of their private property. This increased regulation would prove a significant financial hardship to those who raise cattle.

The EPA states that the new guidance does not remove or modify any of the existing agricultural exemptions under the Clean Water Act. It also claims that "artificial lakes or ponds, including farm and stock ponds" are not covered under the new guidance document. However, given the sweeping language contained within the proposed guidance rules, it is not difficult to see how such bodies of water could be found to have an impact on the chemical or biological integrity of navigable waterways in the area. It is difficult to predict exactly how these guidance rules will affect ranchers, but perhaps the comment period will provide more information regarding their impact. Hopefully, a balance can be struck to both protect our nation's waterways and preserve the cattle industry. Many Texas ranches are small operations, and simply cannot afford another layer of federal bureaucracy.