Articles Posted in Oil and Gas Law

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I tell all my Texas clients (and anyone else who will listen) never to sell their mineral interests. There are a number of reasons why:

1. About 99.9% of the companies who claim to buy mineral interests are scams. What often happens is that they send you a solicitation letter which makes an incredibly high monetary offer for your mineral interests. They ask you to sign a deed, which is either enclosed with the letter or that they send you if you contact them, and request that you send the signed deed back to them. Next they file the deed in the deed records. After the deed is filed in the county deed records, they contact you and say that they discovered certain ambiguous “problems” with your title to your minerals, or the market for mineral interests has changed, or some other nonsense. They then tell you they will pay you, not what they offered in the letter, but a tiny fraction of what they offered. If you don’t take it, you are stuck with the deed filed in the deed records that shows you sold your mineral interest to them. In many cases, I’ve had to sue the company on a client’s behalf to force the company to cancel the deed. Even if the company cannot be found or has gone out of business, you will still probably have to file a lawsuit to get a court order cancelling the filed deed. Given the expense of litigation, this can be a huge burden.

One way to tell if a company is a legitimate concern or not is to tell them that you might be interested in selling your minerals but your requirements are: 1) they need to send you a written contract of sale with a specific price and an earnest money deposit which, if acceptable to you, you will sign and take with the earnest money to a title company; 2) the deed will be prepared by your attorney; 3) the transaction will be closed in a title company; and 4) they will be required to deposit the balance of the purchase price in good funds with the title company before they receive the deed. Most of these companies will tell you that is an unnecessary expense, or “they don’t do it that way”. This is a huge red flag. However, in my experience, even some of the scam artists will agree to this, but once you have paid your attorney to draft the deed and it’s time for them to put the purchase price in escrow, they will disappear or pull out.

2. Companies who are legitimate purchasers of mineral interests generally do not send out mass mailings to potential purchasers. The fact that you received the letter in the first place is a sign that the company is a scam.

3. If a company is trying to buy your mineral interests, it may be because they’ve heard something about your mineral interests that will make them increase in value. For example, maybe the oil company who is producing your minerals may be getting ready to deepen or rework its wells or is preparing to drill new wells but has not announced their plans publicly. Either of these events would result in greater production and more royalties for you. The scam artists are trying to get you to sell them your minerals on the cheap with their bait and switch tactics, and before you have heard anything from the oil company, so that they can reap the benefits of increased royalties later on.

4. You will never get what your minerals are really worth if you sell to one of these scam artists and sometimes even if you sell to a legitimate buyer. The reason is that it is extremely difficult to value a mineral interest. I research and prepare valuations of mineral interests for clients, and I must tell you that it is often part skill and science and part crystal ball. Specifically, the value of a mineral interest depends on the stream of income in the form of royalties from a given well or wells. That stream of income, in turn, depends on many factors: what the price of oil and gas is in the future, whether the reservoir is becoming depleted or not, whether the equipment at the well breaks down and cannot be economically repaired, etc. It is truly impossible for anyone to predict some of these factors. However, even though valuations are very challenging, they can still be helpful and so I urge clients not to sell until and unless they have had someone do a proper valuation of their mineral interests.

5. If and when you sell your mineral interests, there must be special language in the deed that is required by Texas law in order to cut off your liability for the well and the operator’s behavior after the date of the sale. I have never, in the entire time I’ve been practicing oil and gas law, seen a deed from one of these companies that has the required language in it. From their point of view, it’s a good thing for you to continue to be liable. Obviously, that is not a good thing from a seller’s point of view.

6. Even with the proper “magic language” required by Texas law to cut off your liability, there are still situations in which you could be held liable even though you have no remaining interest in these minerals. Specifically, where an oil and gas operator has gone out of business or has no assets and whose operation has created contamination at the well site, the federal Environmental Protection Agency (“EPA”) is allowed by their regulations in some situations to sue everyone in the chain of title of the property and/or mineral interests for the cost to clean up and remediate the site. The  EPA has taken the position in some cases that anyone who once profited from this property is liable for the cost to clean it up, even though they have no current interest in the property. Incredible, but true. The moral is: know who you’re selling to. In other words, before you expose yourself to potential liability for environmental problems, do some due diligence research on the company. Have they been sued or fined by the Texas Railroad Commission or the EPA in the past? Are they on shaky financial ground so that it would be unlikely for them to be able to pay for the cost of an environmental remediation? The clients for whom I have performed due diligence research think of a due diligence investigation as insurance against a potential future catastrophe. In most cases, my fee for the investigation can be included in the purchase price and so it will cost you nothing.

If you receive an offer to purchase your mineral interests and despite what I have said, really do need or want to sell, give me a call and we can discuss the pros and cons in connection with the potential buyer, and also perhaps determine if a due diligence investigation is warranted.

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On May 18, 2015, the Texas Governor Greg Abbott signed HB 40 into law. The law is effective September 1, 2015. This new law effectively prohibits local city and county governments and subdivisions from regulating surface oil and gas activity in their jurisdictions. The law provides that all such regulation is now preempted by the state of Texas. The new law does have an exception, but it is so narrow as to be effectively useless.

This is not a good day for Texas property owners.  I foresee the law of unintended consequences coming into play here. Specifically, as oil and gas activities encroach on residential areas, the market value of those properties will decline, and may decline substantially. That means appraisal districts will have to reappraise these properties at a lower level. That in turn results in lower tax revenues. Texas counties are already pinched financially. Will Texas counties simply increase the tax rate to make up for the lost revenues? Texas property owners already bear huge tax burdens from county and school taxes. Many counties spent like drunken sailors when taxes were buoyed by taxation of oil and gas production during times of high oil and gas prices. Now they have huge overhead and new programs that they cannot pay for. What happens next will depend on how much oil and gas activity occurs in residential areas where it was previously prohibited and what impact that has on local taxes. To be announced.

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As of November 4, 2014 Denton, Texas was the first Texas city to ban fracing inside city limits with a ballot initiative that passed with almost 59 percent of the vote. The next day, the state’s energy lobby, Texas Oil and Gas Association, filed an injunction in response. The Texas General Land Office also separately filed suit to prevent Denton from enacting the ordinance. Arguments in both suits were based on the fact that well completion techniques, which include fracing and disposal, are preempted by the state regulation and that the ban cannot be enforced by a city. Opponents of the ban have also argued that the ban constitutes an unlawful taking of mineral rights. It is unclear if the courts would find the fracing ban to be an unconstitutional taking of property in violation of the Texas Constitution because it is not a ban on gas well drilling, only a ban on one type of gas recovery technique used during production.  More recently, the Texas legislature has prepared legislation that would actually ban all local regulation of oil and gas drilling, and not just fracing.

Implied Preemption in Texas

In Texas there is no doctrine of implied preemption under state law. This means that in order for a city or municipal regulation to be preempted by state law the Texas State Legislature must “with unmistakable clarity” dictate that state law controls. In January 2014, the state of Texas adopted new rules in the Texas Administrative Code relating to hydraulic fracturing in Texas. The new rules do not specifically preempt municipalities from adopting additional regulations.

State Representative Drew Darby, R-San Angelo, recently introduced House Bill 40 (HB40) that provides that cities can regulate surface activity for oil and gas operations if the regulations are “commercially reasonable” and do not prohibit operations. The bill defines “commercially reasonable” as “a condition that would allow a reasonably prudent operator to fully, effectively, and economically exploit, develop, produce, process, and transport oil and gas”. The bill’s definition of “oil and gas operation”  includes activity associated with hydraulic fracture stimulation and disposal operations.

The exceptions to state preemption provided in HB40 relate only to above ground activity relating to fire and emergency response, traffic, lights, noise, and reasonable setback requirements. Jason Modglin, Darby’s chief of staff, has stated that the proposed bill would not overturn the Denton frac ban because it is not retroactive. However, if passed, the bill would prevent other Texas cities and municipalities from enacting similar bans on not just hydraulic fracing and disposal, but any other operation such as drilling.

Two other bills of note that would make it difficult for cities to ban fracing have also been introduced in the Texas legislature. House Bill 539 would require cities to determine how much a frac ban would cost in lost royalties and make the city liable for payment if the bill passes. House Bill 540 would require all referendum and initiative petitions be reviewed by the Texas Attorney General for a determination of whether the proposed action would result in a government taking of mineral rights without compensation, prior to being placed on a city ballot.

Frankly, I have a major problem with these proposed bills, other than the fact that they are clearly being introduced at the behest of the Texas oil and gas industry without regard to the rights of individual homeowners. First, keep in mind that many people sign leases for their mineral rights in which they prohibit surface use of their property. In other words, their minerals are pooled with the minerals from other properties on which the surface can be used. Since most oil and gas wells require some type of pooling unit, sometimes several hundred acres in size, a prohibition of surface use does not automatically mean that a mineral owner can’t realize a return on their mineral interest. Secondly, many folks have bought property and built homes in reliance on a local prohibition against surface or drilling activity found in a municipal or county ordinance or in subdivision regulations. The value of their homes is in part derived from this protection. If drilling activity is allowed anyway, the value of their home and their property can decrease dramatically because of the noise. the smell, the traffic and invasion of privacy that nearby oil and gas operations would involve. This is a form of inverse condemnation, for which compensation should be paid by the oil companies and the mineral owners.

Local governments are in the best position to determine what their citizens want and need. Let’s not add a statewide “one-size-fits-all” solution. And let’s especially not undermine individual homeowners who have bought land and built homes in reliance on a local ordinance! This bill was sent to the Governor for signature on May 6, 2015. Let’s hope he does not sign it.

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The United States Court of Appeals for the Fifth Circuit recently decided the case of Breton Energy, L.L.C., et al. v. Mariner Energy Resources, Inc., et al which concerned claims of waste and drainage against Defendants who were operators of a neighboring mineral lease. The issue was whether the Plaintiffs sufficiently plead a claim for relief against each Defendant. The Fifth Circuit concluded that the claims of drainage against all Defendants should be dismissed, and the claims of waste should be dismissed as to all but one Defendant, IP Petroleum Co. (“IP”).

The Facts
Conn Energy, Inc. (“Conn”) owned a mineral lease named West Cameron 171 (“WC 171”) in the Gulf of Mexico. In 2009, Conn had an agreement with Breton Energy, LLC (“Breton”), allowing Breton to explore WC 171 for hydrocarbons. Conn and Breton sued the owners and operators of a neighboring lease called West Cameron 172 (“WC 172”). It was significant in this case that the WC 171 and the WC 172 shared a hydrocarbon reservoir: the K-1 sands. The other Defendants were other lease owners and operators or predecessors or successors to the current operators.

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Previously I have discussed the revised Texas Railroad Commission (RRC) Rule 3.70 regarding permits for pipelines. You can access my previous blogs here and here. The RRC approved that new rule on December 3. 2014, and it went into effect on March 1, 2015. You can access the text of the new rule here.

There were many comments and suggestions made during the Public Comment period required by Texas law for any new administrative rule. The RRC included a few of these suggestions in the revised rule. However, there were a number of important comments and requests that were neither significantly addressed nor included in the revised rule. These include:

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An interesting case that involved easements was recently decided by the Texas Supreme Court. The case is David Hamrick, et al. v. Tom Ward and Betsy Ward and the issue presented to the Court was whether an implied easement of necessity by prior use continues after the necessity has ended. There are two basic types of easements. Express easements, that are created by an agreement (usually written) and implied easements, that arise by operation of the law due to certain specific facts. In Texas, implied easements are split further into a number of subcategories, including easements of necessity and easements by prior use.

grass-landscape-with-road-1440659-m.jpgThe Facts
In 1936 O.J. Bourgeois owned certain property in Harris County, Texas. Mr. Bourgeois gave two acres of the land to his grandson. While the grandson owned this land, a dirt road was built across Mr. Bourgeois’ remaining property to allow the grandson access to the public road. Subsequent owners of the grandson’s property also used the dirt road for access. Eighty years later, Tom and Betsy Ward were the owners of the grandson’s land and still used the dirt road. The Wards put gravel on the road so they could use it for construction of a new house on their property. The Hamricks owned the land that the dirt road crosses, formerly the property of Mr. Bourgeois. The Hamricks filed a lawsuit asking for a temporary injunction preventing the Wards from using this road. The temporary injunction was granted in April 2006. So as not to delay construction of their new house, the Wards built a new driveway to access the main road. In the suit, the Wards requested a declaratory judgment that they had an implied easement for the dirt road. The trial court granted the Wards motion for summary judgment and the Court of Appeals agreed and held that the Wards had a prior use easement across the Hamricks land.

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Steve Lipsky and his wife Shyla became famous as Texas landowners who claimed they could set their water on fire–and they alleged this was due to methane contamination from nearby hydraulic fracturing. The couple sued Range Resources who operated a well near their house in Weatherford, Texas. The Lipskys claimed they noticed problems with their water after Range drilled two natural gas wells near their house in 2009.


The Environmental Protection Agency, without any scientific basis whatsoever, concluded that Range had caused or contributed to the water contamination. The Railroad Commission of Texas did actual did scientific testing and determined that the methane came from a shallower rock formation than the one drilled, and allowed production at the wells to continue. Many people do not realize that methane occurs naturally in many water deposits, but is not drawn into the water pump until the water level falls below a certain level. With lots of fanfare, the EPA sued Range Resources in federal court for the alleged contamination. That suit was later quietly dismissed in its entirety.

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sunrise-series-1446056-1-m.jpgA federal appellate court decision demonstrates some lessons for Texas mineral owners. That decision was issued by the Fifth Circuit Court of Appeals in the case of Breton Energy, L.L.C., et al. v. Mariner Energy Resources, Inc., et al. The Plaintiffs in this case own and operate an off-shore lease in the Gulf of Mexico that includes an area known as the K-1 sands. The Defendants own and operate an adjacent off-shore lease that covers an area known as the K-2 sands. The Plaintiffs claimed that the Defendants engaged in “unlawful drainage” from the Plaintiffs’ lease in violation of federal and state law.

The Facts:

Breton Energy LLC
and Conn Energy Inc. sued International Paper Co. and its successors in interest, consisting of eleven oil companies including Apache Corporation, Chevron and I.P. Petroleum Co. The Plaintiffs claimed specifically that IP Petroleum perforated and drained an oil reservoir under the Plaintiffs’ lease on the Outer Continental Shelf in the K-1 sands. The Plaintiffs also claimed that IP co-mingled resources from this reservoir with hydrocarbons from a nearby reservoir, making it impossible for the Plaintiffs to produce oil and gas from its own wells.The evidence showed that I P Petroleum, even though it had been ordered by the federal Minerals Mining Service not to complete wells in both the K-1 and K-2 sands, did in fact complete wells in both areas. There was also evidence that I P Petroleum’s production exceeded their estimate by almost 30%, which would make sense if they were producing from someone else’s reservoir as well as their own.

The District Court dismissed the Plaintiffs’ claims, and they appealed to the Fifth Circuit.

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The Railroad Commission of Texas (the RRC) is planning to amend their permit rule for oil and gas pipelines. The section to be amended, section 3.70, involves the pipeline permit procedure. The RRC invited comments on the changes until August 25, 2014. The issue has become a hot topic, especially since Texas already has substantial case law on what constitutes a common carrier.

Current Texas Law
Texas law requires that to be considered a common carrier a pipeline must serve a “public purpose” in carrying products for third parties for compensation, as discussed in the Denbury Green opinion by the Supreme Court of Texas. (You can access my previous blog post about this case here). In the Denbury Green case, the Supreme Court said that when a landowner challenges a pipeline’s claim of common carrier status, the burden is on the pipeline company to prove it meets the definition of a common carrier.

Under the RRC rules in effect and discussed in Denbury, a pipeline company merely had to check a box on the permit form indicating that they are a common carrier. This has lead to litigation about whether a pipeline actually qualifies as a common carrier or not.

The proposed amendment intends to allow a private carrier to have common carrier status as long as certain documentation is supplied to the RRC. The documentation would include a sworn statement by the company detailing its common carrier claim. The RRC would then have 45 days to review the documentation. The RRC would have power to revoke the permit if the company violates the law and requires permits be renewed on an annual basis.

The issue of common carrier status is an important one because common carrier status confers the right of eminent domain (also known as condemnation) to obtain easements for the pipeline. If a pipeline that is not classified as a common carrier must negotiate an easement with landowners, much like any other private real estate transaction.

As a Texas lawyer who spend a considerable amount of time negotiating pipeline easements, I’m concerned that the rule change may not be good for landowners. There is a lot of definitive Texas law defining common carrier status, and now the Railroad Commission proposes replacing that law with an administrative determination. There should also be a way for a landowner to challenge the RRC determination that a pipeline crossing that owner’s land is common carrier, and that is not included in the proposed change although the RRC claims the ultimate authority to determine common carrier status will remain with the courts. Finally, the landowner has the best incentive to keep the pipeline companies honest by having the ability to challenge common carrier status. This is not to cast any aspersions on the RRC: they generally do a good job. However, there are 426,000 miles of pipeline in Texas, and one wonders where the staff and funds will come from to do a thorough review in this era of diminished budgets.

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The Texas Railroad Commission approved a substantial amendment to its oil and gas pipeline permit rule on December 2, 2014, and the amendment has major significance for Texas landowners and Texas mineral owners. The rule is Texas Railroad Commission Rule 3.70, and the amended rule goes into effect on March 1, 2015.

The Railroad Commission received a substantial amount of written comment from individuals, oil companies and trade organizations. Comment and testimony was also received at the public hearing on the proposed amendment held in Austin, Texas on September 22, 2014. The amended Rule 3.70 and the discussion of public comments by the Commission’s General Counsel can be accessed here.

The amended Rule 3.70 provides that each operator of a pipeline or gathering system (other than production lines or flow lines that are general confined to the leased premises) must obtain a permit from the Commission and renew the permit annually. The permit application must now include the following:

1. the contact information for the person who can respond any questions concerning the pipelines construction, operation or maintenance;

2. the requested classification and the purpose of the pipeline as a common carrier, a gas utility or a private pipeline;

3. a sworn statement from the permit applicant that provides the pipeline operator’s factual basis in support of its requested classification and purpose, including, if applicable, attestation to the applicant’s knowledge of the eminent domain provisions in the Texas property code and the Texas Landowners Bill of Rights published by the Texas Attorney General;

4. documentation to provide support for the classification and purpose being sought for the pipeline and any other information requested by the Commission.

The memorandum to the Railroad Commission from its General Counsel on November 25, 2014, (which you can read here), summarizes many of the written and verbal comments about the proposed amended rule. Many commentators wanted the Commission to take a more active role in the route of a pipeline and in the determination of whether a pipeline was a common carrier pipeline or not. In Texas, whether a pipeline is a common carrier pipeline is hugely important. A common carrier pipeline has the right of condemnation (or “eminent domain”) if they cannot reach a pipeline easement agreement with the landowner. Other types of oil and gas pipelines do not have this power.

The comments in the memorandum by the Railroad Commission General Counsel make clear that the Commission does not believe it has authority to adjudicate whether a pipeline is a common carrier or not. The memorandum also notes that the Railroad Commission has no authority over the routing of a pipeline nor do they have authority to become involved in private property rights, including pipeline easement negotiations.

On the other hand, the amended rule provides that the Railroad Commission will make a determination of the “sufficiency” of the information provided with the permit application. What will constitute “sufficient” documentation of common carrier status remains to be seen. In addition, the Commission’s press release about the amendment states that: “Texas Railroad Commissioners have unanimously adopted pipeline permit rule amendments designed to clarify how a pipeline operator may be classified by the Commission as a common carrier.” That statement makes it sound as if the Commission is making a “common carrier” determination!

Readers may recall that in 2012, the Texas Supreme Court, in the case of Texas Rice Partners Ltd. vs. Denbury Green Pipeline, 363 S.W.3d 192, held in part that the fact that a pipeline permit applicant checked a block on the permit application that indicated that it was a common carrier pipeline did not in fact make the pipeline a common carrier line. That case is still good law. The amendment to Rule 3.70, while not providing for a forum or process for determination of whether a pipeline is a legitimate common carrier or not, will still be helpful to landowners who are negotiating a pipeline easement. The information that the Railroad Commission requires a pipeline operator to supply with its permit application should be the first thing that a landowner or their oil and gas pipeline attorney looks up when negotiating a pipeline easement.