Texas Attorney Blog

Texas mineral owners who have signed oil and gas leases with Chesapeake Energy may be faced with some unanswered questions.

The American natural gas industry faces the paradox of having been too successful in recent years. A glut of natural gas on the market due to technological advances have allowed access to previously inaccessible gas, especially through horizontal drilling and hydraulic fracturing. The glut of gas has pushed prices down 45 percent in the past year. In fact, natural gas prices are at a ten year low right now. As a consequence, the second largest natural gas producer in the nation, Chesapeake Energy Corporation, recently announced that it will cut gas production by half. The company will only operate 24 of its dry gas drilling rigs, down from the 50 rigs it operated in 2011.

Chesapeake’s measures will only reduce America’s supply of gas by 1.4 percent. The indications from other natural gas companies regarding cutting gas production has been mixed. EQT Corporation stated that it would suspend natural gas drilling in Kentucky indefinitely because of low prices. Exxon declined to comment. Cabot Oil & Gas has no plans to cut production.

Chesapeake says it will take the $2 billion it plans to cut from natural gas production and shift it into the more profitable area of oil production, as oil prices have remained high even as natural gas prices have fallen. Chesapeake also plans to cut $2 billion from its land buying budget and immediately cut production by 8 percent. It is deferring new dry gas wells and pipeline connections where possible. Chesapeake is considering letting current mineral leases expire. The company expects its lowest expenditures for dry gas drilling since 2005.

While this may be good for Chesapeake’s financial stability and its investors, it raises questions for Texas mineral owners who have already signed mineral leases with Chesapeake. If you are a Texas mineral owner who has already signed a lease with Chesapeake, you may wish to have a Texas oil and gas attorney review your lease to determine what your options may be.

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Apache Oil Purchase Good News for the Texas Panhandle

NAT GAS Act May Be Misguided Legislation

New technology has breathed new life into older Texas oil fields in the Panhandle and in nearby Oklahoma. Apache Corp, one of the nation’s largest energy explorers, recently purchased Cordillera Energy Partners III LLC for $2.85 billion. Apache is paying $600 million in common stock and the rest in cash. The deal brings Apache control of 254,000 acres of the Granite Wash Field, an area of older oil wells in the Texas panhandle and across the Texas-Oklahoma border. It consists of a series of thick, multilayer, liquids-rich sandstone and conglomerates, and the area possesses superior reserve properties compared to other shale.

The remaining oil and natural gas in Granite Wash is between 11,000 and 13,000 feet deep, and there is natural gas at a depth of up to 17,000 feet. At these depths the oil and natural gas was technologically impossible to access in the past. Recent extraction advances broke through that technological hurdle, but the area was still economically nonviable because of the high costs involved. Apparently no longer. This area has estimated reserves of 71.5 million barrels of oil equivalent and a current net production of 18,000 BOE per day.

Apache is not new to the region. In fact, the company was formed in the Panhandle 57 years ago, and Apache has been drilling there for 35 years. Industry growth over the past few years, combined with Apache’s experience in the area, made this recent purchase a logical step for the oil giant. Apache has drilled 79 horizontal wells since 2009, providing the needed experience at accessing previously inaccessible oil and gas deposits using new drilling techniques. These new horizontal drilling options now account for about half of Apache’s Central Region production—about 40,000 net barrels of oil per day at the end of 2011. Hydraulic fracturing ("fracing") will also assist in accessing natural gas wells (see my post on fracing here. Apache’s Chief Executive, G. Steven Farris, stated that they expect to more than triple the activity of the combined Apache and Cordillera acreage in the coming year.

All of this is very good news for Texas Panhandle residents, as increased drilling activity will boost the local economy and create more jobs. It is also good news for the country as a whole. These new innovations and investments in energy have resulted in a resurgence of the oil and gas industry, so much so that natural gas prices fell to a ten year low last week. Apache is not the only company going after older wells with new technology—both Exxon and Chevron are going back to wells in areas that were thought to be tapped out. Apache itself has operations around the world, from Australia to Egypt, and has been trying to expand its production in the US. Now that Apache is acquiring Cordillera, the two companies are looking for further opportunities in oil fields in South Texas, North Dakota, and Pennsylvania. Cordillera Chief Executive George Solich, who began his career at Apache in the 1980s, said they will continue to acquire acreage in the Granite Wash area on behalf of Apache through the closing of the deal.

Texas mineral owners beware: if you own minerals in the Granite Wash area, or in counties adjoining this area, you may receive all kinds of offers to purchase your minerals. Don't ever consider selling your minerals without talking to a Texas oil and gas attorney first. In most cases, they will probably tell you not to sell, because you will probably never get paid what they are really worth!

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The Myth of the "Oil Peak"

Self-Serving Political Posturing Prevents Real Energy Independence

One of the largest offshore oil spills in history occurred when the massive Deepwater Horizon semi-submersible oil drilling platform suffered a drilling-related explosion, was engulfed in flames, and sank. The economic and environmental effects of this event are still not fully understood, so studies are ongoing to determine the impact that it has had on the Gulf region. One such study, entitled "The Gulf Oil Spill and Its Impact on Coastal Property Value Using The Before-and-After Procedure" was completed several months ago by the University of South Alabama on the effect that the spill has had on Alabama coastal property values.

In order to determine the amount of decline in value on affected coastal properties, the study made use of the before and after procedure (BAAP) that is based upon market prices preceding the Deepwater Horizon incident and data indicating the impacted value of those same properties after the accident occurred. The study seeks to determine if a stigma has attached to these properties, which amounts to the perceived blemishes on those properties that have arisen as a result of the spill. The study focused on evaluating properties located directly on the waterfront, multiple types of residential properties, and both developed and undeveloped land. It relied upon sales transaction records in the area for the year prior to the spill as a comparison basis to help determine the possible drop in value attributable to the spill.

The research showed that the possible effect on the studied areas was significant, and vacant residential properties on the waterfront suffered the greatest decrease in values after the spill, as they dropped over 42 percent in value from April 20, 2010, to August 15, 2010. Single-family waterfront residences saw a half-percent drop during the same period, and condominiums saw a 3.5 percent drop. However, much of the decrease in value was likely due to a downturn in prevailing economic conditions. A control group of properties located in Florida (not affected by the spill) was also tracked, and similarly situated properties also saw condo and vacant waterfront land prices drop by over 20 percent during the same time period, though single family residences saw a jump in value of over 30 percent. As such, the numbers indicate that only the drop in undeveloped property prices may have been caused by the oil spill.

While the study rendered a somewhat surprising result for many – that there was not a stigma attached to waterfront properties in the Gulf region of Alabama that caused a decline in property values – it also noted that there are some limitations to the analysis. The BAAP method is best served by having real-time property sales price information for continued evaluation to render more accurate results. Additionally, the BAAP does not factor in a decline in potential buyers in the market, and instead only focuses on sales prices properties during the study’s time period. In order to formulate a more full analysis of the Gulf Oil Spill’s effect on real estate values in the region, an adjustment process for the decline in buying activity is needed.

With the passage of time, we have seen that the long term effects of the Deepwater Horizon incident have been much smaller than expected. If a study were done today, I suspect it would reveal no lingering effect on any property values along the Gulf.

A recent decision by a Texas Court of Appeals may be helpful to Texas property owners who are negotiating an oil and gas pipeline right of way or easement on their property. In its opinion rendered in LaSalle Pipeline LP v. Donnell Lands LP, the Texas Fourth Court of Appeals in San Antonio upheld a jury award to a Texas landowner of $604,950.00 for dimunition in value to approximately half of the landowner's 8034 acre ranch in McMullen County, Texas.

LaSalle, the pipeline company, enjoyed the right of eminent domain, or condemnation, of the right of way for its pipeline, because the pipeline it was laying was intended to be a common carrier. However, LaSalle offered the landowner nothing for for the decrease in value to the Donnell's land due to the 16" gas pipeline stretching across almost five miles of their property.

At trial, the Donnell's expert witness, (an M.A.I. appraiser who specialized in farm and ranch land appraisals), testified that he believed the first tract involved would suffer a 10% decrease in value due to the pipeline, and that the second, smaller, tract, would experience a 25% decrease in value. He arrived at his figures by comparing sales of similiar land, with and without pipelines, both in McMullen County and nearby Webb County. The Donnell's expert testified that the landowner was due $902,255.00 in damages, consisting of dimunition in value damages, payments for the right of way itself and the temporary workspace damages. The landowner also testified about why he believed the pipeline would decrease the value of his property. These reasons included: 1) the pipeline would be there forever, and would always be a "black mark" on his land; 2) the pipeline cut right through the middle of his property; 3) the pipeline owner and operator would have permanent access to come and go whenever they wanted; and 4) the pipeline easement could be freely assigned to any other company.

This last reason is especially important. No one can guarantee that the right of way will not be assigned in the future to a company who is less than diligent in doing maintenance, or who is less than careful with the adjoining land, than the current pipeline company.

LaSalle appealed the jury award to the Fourth Court of Appeals in San Antonio. The Court of Appeals made a small adjustment to the temporary workspace damages, but otherwise upheld the jury's verdict and the damage award. LaSalle will no doubt appeal to the Texas Supreme Court.

I'd say that the pipeline company brought this result on themselves, by refusing to offer the landowner any dimunition in value damages (also called "remainder damages") and by taking the position both in the trial court and in the Court of Appeals that the pipeline did not create any damage to the rest of the landowner's property. That is a pretty arrogant, and ultimately, self-defeating attitude.

The Fourth Court of Appeals was not creating new law in this decision. They relied on established Texas law. I never want to be in the position of predicting how the Texas Supreme Court will decide something, but if I was a betting woman, I'd bet that the Texas Supreme Court will uphold this decision.

The pipeline industry is already complaining that this decision injects "uncertainty" into the process of obtaining pipeline easements. What a strange, and frankly, groundless, argument. First, real estate appraisers have been calculating, and Texas courts and juries have been deciding, these kind of damages for many decades. Secondly, landowners have a right to dimunition in value damages because they have a right to be fairly compensated for all damages caused by pipelines and utility lines.

I'm not going to apologize if this next statement sounds naive to you. There is a moral issue here. Sometimes it seems like the pipeline companies are observing that "other" Golden Rule (the one that says "He who's got the gold, makes the rules") rather than the real Golden Rule: "Do unto others as you would have them do unto you". There is also a practical side to this: pipeline companies might find property owners a whole lot easier to negotiate with if the companies are truly fair to the owners. I suspect that a whole lot more right of way can be acquired a lot more quickly and at a lot less cost that way.

It is important for all of us to keep informed about proposed legislation related to energy issues. Even if you aren't an oil and gas attorney or involved directly in the energy industry in some way, all of us are affected by energy independence (or lack thereof) and prices. Local, state, and federal legislation often has profound effects on how much energy costs us and whether or not America’s own energy potential is maximized.

Consider the New Alternative Transportation to Give Americans Solutions Act, otherwise known as the NAT GAS Act. Originally, this bill seemed like a good idea. It was introduced in the House by Oklahoma Republican John Sullivan and shepherded through the Senate by Democrats Harry Reid of Nevada and Robert Menendez of New Jersey and Republicans Richard Burr of North Carolina and Saxby Chambliss of Georgia.

The NAT GAS Act would allow consumers or investors who either purchased natural gas vehicles or who built natural gas stations to claim between $5 billion and $9 billion in federal tax credits over the next five years. It had bipartisan support. Many Republicans were happy to sign on initially because of their tendency to support legislation helping the natural gas industry and to give this important sector of our economy a reprieve from some of the currently oppressive taxes. A bevy of prominent business leaders signed on as well, such as T. Boone Pickens .

This support is understandable because America needs more natural gas—an efficient, abundant, and clean energy source. However, it apparently remains a challenge to enact common sense legislation involving natural gas use. Certain segments of the liberal left have been waging a war against natural gas for years. Also, some state legislatures are shortsightedly fighting energy tax savings by actually raising taxes to preserve their own government spending. This ultimately hamstrings industry growth and job creation. Expectedly, President Obama continues his knee-jerk reaction in opposition to any type of sensible fossil fuel policy. The politically-motivated outcry over hydraulic fracturing, and efforts to curtail a demonstrable safe 60 year old practice, (click here for related blog) interferes with rational discussion on the subject.

Despite the real need for sensible energy legislation freeing the natural gas industry for growth, the NAT GAS Act may actually be more of a mirage of responsible legislation than anything else. Recently, 19 Republican co-sponsors have dropped out after considering the real consequences of this legislation. More analysis has shown that the Act does not truly facilitate natural gas production or assuage supply-side concerns, which probably explains why so many Democrats signed on. What the Act really does is skew the market by favoring some consumers over others, which may result in artificially inflating the cost of natural gas. It is may also be unnecessary, as UPS and other companies have fleets of vehicles powered by natural gas without the NAT GAS Act.

At the end of the day, the energy creation environment is complicated enough without further unnecessary laws and regulations being injected into the process. Certain legislation in the area may be helpful, but it is important that it remain revenue neutral, so as not to be used merely to increase federal coffers. The most logical solution is usually to allow the free market to work efficiently and without artificial alterations instead of promoting more unnecessary legislation which distorts natural energy demand.

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Oil & Gas Companies Spend More on Greenhouse Gas Mitigation Than Government and Private Industries

IHS CERA Study Finds That EPA Grossly Overestimates the Amount of Methane Emissions from Shale Gas Wells

Assisting royalty owners in locating lost oil and gas royalties, and getting royalty owners paid their rightful royalty payments, is one of the parts of my practice as a Texas oil and gas attorney that I enjoy the most. However, many of my clients are suprised to learn that there is a pretty strict time limit to how far back they can claim unpaid or underpaid royalties. For that reason, if you think you are not getting royalties to which you are entitled, or if you think your royalty payments are not being correctly calculated and that you may be underpaid, it is important to take action to correct the situation sooner, rather than later.

A recent decision last week by the Texas Supreme Court underscores this point. Specifically, the Court issued a decision in Shell Oil Co., et al. v. Ralph Ross which could effect all future royalty disputes in Texas. In a nutshell, the Court solidified the four year limit under Texas law within which a lawsuit for underpaid or nonpaid royalties must be filed.

The case involved a dispute between the Ralph Ross, as the Plaintiff, and Shell Oil Company. Mr. Ross’s family had leased the mineral rights on their land to Shell since 1961. Mr. Ross is an oil and gas attorney and therefore understood the oil and gas industry and the relevant legal issues more than the usual lessor. Under the original lease, Shell was required to pay a certain percentage to the family for any gas produced from the land—a total roughly equaling one sixteenth of the profits. However, between 1994 and 1997, Shell used a different calculation, and underpaid Mr. Ross and his family for their royalties. Shell claimed this was due to a simple accounting mistake.

In 2002, Mr. Ross assumed all rights relating to his family’s oil and gas lease and first became aware of the underpayment. In 2002, Mr. Ross sued Shell Oil for breach of contract, unjust enrichment, and fraud. The family’s legal claims were brought five years after the final underpayment took place. Texas has a four year statute of limitations for filing this type of suit. However, the family argued that the statute of limitations period should be extended, or "tolled", under the “fraudulent concealment doctrine.” The doctrine essentially states that if a defendant conceals information from the plaintiff, and as a result the plaintiff could not have become aware of the problem, then the statute of limitations "clock" will not start to run until the plaintiff actually becomes aware (or should have become aware) of the problem.

Both the trial and appellate courts found for the family, holding that Shell had behaved fraudulently in underpaying for the gas produced from the family's land and that Shell engaged in fraudulent conduct which extended (or "tolled") the four year statute of limitations. Shell appealed the decision of the trial court and court of appeals to the Texas Supreme Court.

Last week the Supreme Court reversed the decision of the lower courts and found for Shell Oil. Justice Lehrmann, writing the opinion, held that contrary to the lower courts’ rulings, the fraudulent concealment doctrine did not toll the limitation period in this case. Justice Lehrmann noted that royalty owners are required to make themselves aware of relevant information which was publicly available to the royalty owners regarding the royalty payments they actually receive (or don't receive) and the payments they should have received. The Court held that if a royalty owner fails to utilize due diligence by finding that information within the 4 year limitations period, then that royalty owner's claim has expired. This opinion was a reiteration of the Court’s decision in BP Am. Prod. Co. v. Marshall.

The Court went on to say that there were significant discrepancies in royalties paid to the Ross family, and that these discepancies put them on notice that Shell was underpaying them. The Court also restated its decision in Wagner & Brown, Ltd. et al v. Horwood, in which they held that even if a reasonable explanation for the suspiciously low royalty payments exists, the royalty owner cannot avoid the due diligence requirement to investigate. The Court concluded that Shell’s alleged fraud could have been discovered by the Ross family if they had acted diligently during the limitations period. As a result, the family could not go forward with their suit.

This ruling is another reminder of how important it is to keep on top of your rights under an oil and gas lease. It is risky to sit on your rights, let suspicious payments slide, or let a land man or company agent explain away issues which may actually be a violation of the lease. Be aware that most disputes regarding royalties end up being settled, and do not end up in a lawsuit in court. However, the four year cutoff is going to apply in a negotiated settlement, as well as in a lawsuit.

With the four year statute of limitations period firmly set in Texas oil and gas law, if you are suspicious or concerned about low royalty payments, or about royalty payments that you should be getting but are not, it is imperative to talk to a Texas oil and gas attorney right away to protect your interests. Waiting too long could very well forfeit your rights to missing, underpaid or unpaid royalties.

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Mineral Deeds Can Be Complex!

Texas Supreme Court Sheds Light on Duty of Owner of Oil and Gas Leasing Rights

There are a number of misguided environmental "activists" who characterize efforts to reduce greenhouse gas emissions as some kind of a “David vs. Goliath” struggle between forward-thinking environmentalists who love the planet, on one hand, and greedy energy companies who want to plunder the planet, on the other. While this may be a convenient bias for news articles and political debates, it bears little resemblance to reality. As an oil and gas attorney in Texas, I work directly with the oil and gas industry. As a result, it's clear to me that the false dichotomy between those who care about the environment and those in the energy industry is exactly that: false. The truth is that many energy companies involved in obtaining, refining, and selling oil and gas are also environmentalists who work hard to preserve the planet.

For example, oil and gas companies are much better environmental stewards than they are given credit for. Consider a new report from the American Petroleum Institute analyzing investments in greenhouse gas technologies in North America over the last year. This report notes that there was roughly $225 billion spent in on greenhouse gas (GHG) mitigation in 2010. Of that total, U.S. based oil and natural gas companies contributed nearly half: $108 billion. That amount includes about $37 billion in shale gas development technologies and $71 billion in other investments. About $60.5 billion of the industry’s investment went toward oil and gas substitutions—including the shale gas investments. The shale gas advances are included in the data because its use can reduce the use of coal, which can significantly curb methane releases.

Compare these energy industry investments with about $74 billion in total federal government spending (most in projects funded by the “stimulus” package) for GHG mitigation. Private entities (other than energy companies) combined invested roughly $43 billion during that same time period. Most federal spending went toward energy efficient lighting, biofuels, solar power, and wind. The other private investments included efforts in advanced technology vehicles, electricity efficiency, biofuels, and wind power.

The API study was produced by T2 and Associates and is entitled "Key Investments in Greenhouse Gas Mitigation Technologies from 2000 Through 2010 by Energy Firms, Other Industry, and the Federal Government". It was created by analyzing 565 different public documents and databases on the topic, including corporate reports, federal budgets, and other sources.

These figures present a much different picture than that painted by some environmentalists, i.e., of an industry dragging its feet to prevent GHG mitigation efforts. Let us not forget that these large investments were made in the face of a significant and persistent recession. When businesses of every stripe were laying off workers, cutting services, and eliminating all non-essential efforts, the oil and gas industry continued to preserve jobs, produce jobs, and invest in GHG mitigation. In addition, these investments were made despite the significant questions about the psuedo-science that serves as the basis for claims of climate change due to alleged manmade greenhouse gas emissions.

Of course, all of these efforts received little to no attention in the national media. Instead, virtually all public or political mentions of the energy industry continue to be the usual attacks based on skewed or flat-out incorrect assertions about the work of these companies. One can only hope that more fair-minded Americans will become aware of the true story of the oil and gas industry’s efforts like these latest GHG mitigation investment figures. It is when we base our decisions on correct information, rather than psuedo-science, that we can properly balance energy production and environmental preservation.

Property transfers involving mineral rights can be complex. As a Texas oil and gas attorney, I help my clients navigate these difficult legal issues. Mineral rights and potential royalties from those minerals can have a significant impact on the value of a property. Therefore, whether you are buying or selling property, it is critical that the deed and other documents accurately address the mineral rights.

One especially tricky, but not uncommon, scenario, was the subject of a recent article in Tierra Grande, a publication from Texas A & M’s Real Estate Center. This situation involves a transfer in which the original sales agreement or earnest money contract reserves the mineral rights to the seller, but the reservation of mineral rights is not stated in the actual deed delivered to the buyer at closing.

Sometimes both parties admit the error and correct it in a non-contentious fashion by executing a correction deed. However, when a friendly solution does not materialize, there are several key legal issues of law that determine whether the deed can be reformed to match the sales contract and include the mineral reservation.

The first legal principle is the statute of frauds, which in Texas is contained in Section 26.01 of the Texas Business and Commerce Code and Section 5.021 of the Texas Property Code. The Texas statute of frauds provides that all terms of a real estate sale must be in writing and signed by both parties to be enforceable. The second legal principle is the merger doctrine, which provides that the deed is the final expression of the parties' agreement and supersedes all prior written or oral agreements, including the sales contract or the earnest money contract. The third legal principle that often applies is the statute of limitations, which, according to Texas Civil Practices and Remedies Code Section 16.051, is four years from the date of delivery of the deed to the buyer. Texas recognizes an exception to the statute of limitations, however, called the "discovery rule". In other words, the seller has four years from the time the seller discovered or reasonably should have discovered the mistake in the deed within which to file suit for reformation of the deed This date may be a later date than four years subsequent to the delivery of the deed.

If the statute of limitations has expired, even with the application of the discovery rule, then the seller's remedies have expired and that's the end of the story. If the statute of limitations has not expired, then we consider the merger doctrine. Generally, the merger rule dictates that the deed is the parties' final agreement. However, an exception to the merger doctrine can be based on a mistake, accident, or fraud in the deed. The concept of mistake is especially interesting in this context. In general, it has to have been a mutual mistake, that is, both parties must have intended to agree to something that did not end up in the deed. A Texas court in Gail v. Berry earlier this year ruled that, if the buyer notices the mistake in the deed at the time the buyer signed it, this will be considered to be a mutual mistake, even though this might appear to be a unilateral mistake by the seller. In the Gail case, the seller was allowed to reform the deed to reflect the mineral rights reservation.

The next question a Texas oil and gas attorney often encounters is what happens when the buyer has signed an oil and gas lease before the deed is reformed? In most cases, if the lessee/oil and gas company did not know about the mistake and could not have reasonably discovered the mistake, it is considered to be a bona fide purchaser, i.e., an innocent party. As a result, the oil and gas lease will be allowed to stand.

There is, of course, a lesson to all this. Have an experienced attorney handle mineral and real estate transactions. The small amount of money you may save by foregoing competent representation could cost you dearly in the long run.

I'll bet that most Texas oil and gas attorneys (and, I'm sure, everyone in the oil and gas business) often hear the myth repeated that someday there will be a peak in oil production, followed by a rapid decline which will cause the collapse of human civilization as we know it. This myth predicts that someday, possibly someday soon, (although that date keeps getting pushed back when it turns out to be wrong) the world will simply run out of oil. Please understand this myth for what it is—unnecessary fear mongering by those with either a political purpose or who are ignorant of the oil production process.

Daniel Yergin , an expert energy researcher and the Pulitzer Prize winning author of "The Prize", excerpts from his new book, "The Quest: Energy, Security and the Remaking of the Modern World", in a recent Wall Street Journal interview. He describes the ways in which the purveyors of this “oil peak” myth are systematically wrong. For example, the myth drastically oversimplifies the complex nature of oil production. It is based on the concept that the world has X amount of oil, and when we use X amount, there will be none left. While in an absolute sense that may be true, oil production is not nearly as simple as that. This country has a long history of feverish predictions that we are running out of oil, going back as far as the 1880s. The actual prospect of running out of oil remains as distant today as it did then.

From 2007 to 2009, for every barrel of oil produced in the world, 1.6 barrels of new reserves were found. In addition, energy technology, including green energy, has advanced to the point where we use oil in a much more efficient way than in the past. As a result, each barrel of oil goes further. But the “oil peak” myth still holds our collective national attention for some reason. Mr. Yergin attributes this in large part to a man by the name of Marion King Hubbert, who studied geology in the first half of the 20th century. The "oil peak" is often referred to as “Hubbert’s Peak.” In 1956, Hubbert theorized that oil production would peak between 1965 and 1970. When production did decline after 1970 and the oil embargo rocked America soon after, his theory seemed vindicated. He also claimed that the generation of children born in 1965 would see oil reserves wiped out in their lifetimes. But what Mr. Hubbert did not count on was the huge increase in newly discovered oil and gas reserves found and produced in the U.S. By 2010, US oil production was three and a half times higher than Mr. Hubbert predicted it would be.

Hubbert apparently did not have a good grasp of economics and technological change, and this hampered his ability to understand the future of oil. Both economics and technological change are critical to understanding how the oil industry works and changes over time. Economics drives production through the forces of supply and demand, but Mr. Hubbert, oddly enough, insisted that oil prices didn’t matter. He was mistaken, of course. High oil prices motivate oil companies to find new reserves and to develop new technology to produce known reserves. Technological innovation has increased dramatically in the oil industry in the last decades, resulting in discovery of new reserves and production of known reserves previously believed to be inaccessible.

Oil production in the US has increased 10% since 2008, assisted by discoveries like the Bakken oil fields in North Dakota (see our previous post). Mr. Yergin suggests that instead of thinking of a peak, it is more accurate to think of oil production as a plateau, which is leveling off because of increased energy efficiency and new technology.

Yergin brings substantial background and insight to both his first book, "The Prize" and now to this new work, "The Quest". The are both recommended reading for anyone interested in the history and the future of oil.

The EPA has once again overestimated the amount of pollution that comes from an oil and gas source -- with potentially grave consequences for the industry. This time, the EPA has overestimated the amount of methane gas that comes from shale gas wells. A new report from the IHS Cambridge Energy Research Associates has found that the EPA’s estimates were based on too small a sample of wells, and on a method that did not conform to industry practices.

Because methane is highly flammable, those who drill new shale gas wells make every effort to minimize the emissions. This includes several methods for capturing and relieving gas, such as installing a blowout preventer at the surface.

The report found that rather than base its methane emissions estimates on gas that escaped to the surface, the EPA based them on what was captured. The report noted that if methane emissions were really as high as the EPA supposed, there would be extremely hazardous conditions at the well site. It would be be “unwise” for the EPA to use its methane estimates for the basis of new policy. Furthermore, EPA proposals for more regulation of hydraulically fractured gas wells are already part of industry standards.

How did this come about? The EPA based its 2010 revised estimates on too small a sample -- specifically, two workshop presentations based on just four projects in Wyoming, New Mexico, Texas, and Oklahoma. The presentations described the amounts of methane captured during “green completions” of natural gas wells. Green completions are meant to capture as much methane as possible before it reaches the surface while the well is completed. Therefore, it seems absurd to use it as a basis for estimating methane gas emissions. Yet for some reason, the EPA assumed that the wells that captured this amount methane were an exception, and that every other well must release the methane into the atmosphere because their states do not specifically regulate gas emission. In fact, IHS CERA director Surya Rajan stated that it is “common industry practice… to capture gas for sale as soon as it is technically feasible.”

Rajan further noted that gas that can’t be sold “is flared rather than vented for safety reasons.” The EPA’s estimates assume that the gas is never flared -- that it is simply released. IHS CERA did a revised calculation that took into account that gas well drillers were professionals who knew what they were doing. It found that only 18% of methane gas produced in 2010 came from new wells. Even if the methane gas produced during the 10-day flowback (completion) procedure were vented from every well, it still would produce two-thirds less than EPA estimate.

This is all too common: federal regulators get involved in a situation that they know too little about and threaten to make it worse under the guise of “improvement.” For instance, the EPA ignores the fact that states can and do regulate emissions without their help: Texas has passed new regulations for monitoring emissions this past year. If the EPA does not respond to industry concerns, we could be looking at new regulations that not only don’t address any real problems, but make daily operations more difficult for gas well drillers. That means more unnecessary delays, money wasted and higher prices for gas. As a Texas oil and gas attorney, I find this extremely troubling.

As is no doubt true of most Texas oil and gas attorneys, I’m always interested in reading about new developments in the oil and gas industry, although they often seem to attract more than their share of political wrangling. Of course, energy independence is a hot-button issue these days (see our recent post on the topic). Unfortunately, political posturing often gets in the way of common sense solutions to this pressing problem.

I was reminded of how politics is the enemy of practicality when I read an interview with Harold Hamm, CEO of Continental Resources in the Wall Street Journal recently. Continental Resources is the 14th largest oil company in the United States. Mr. Hamm is the man who discovered the Bakken oil fields in Montana and North Dakota, which he claims holds 24 billion barrels of oil, and that has already helped make America the world’s third largest oil producer. Mr. Hamm believes that energy independence is within our grasp.

New technological advances are helping the industry grow by leaps and bounds. Horizontal drilling allows economical access to oil reserves that would not have been possible in the past. It has done for oil production what fracing has done for natural gas. Mr. Hamm believes that America’s oil production and reserves will triple in the next five years, which will have a broad impact on the economy. There are 10 million royalty owners today who are earning money from the oil located beneath their land. These royalty owners are not the millionaire Wall Street investors that Obama is so fond of bashing, these are just folks, like you and me, using those royalties to pay help pay bills and to save for retirement.

But instead of investing and promoting the resurgence of this industry, which could create an untold number of good, well-paying American jobs, politics has once again interfered. Obama instead chooses to spend billions of taxpayer dollars on subsidies to companies touting green energy, which supplies only 2.5% of America’s energy needs. These types of energy sources may be useful in the future, but they are not feasible alternatives in the short term. In fact, for a number of reasons, these sources will never provide more than a few percent of our energy needs, no matter how much they are subsidized. Notwithstanding the facts, the Department of Interior continues to delay drilling permits month after month, preventing energy production to meet our needs today, preventing the creation of American jobs, and preventing payment of huge royalties to local, state and the federal government that would help with the current debt crisis.

Please don't tell me that we need to subsidize these "green industries" to prevent pollution. Oil and gas companies spend billions of dollars every year to insure their operations do not polute and do not harm the environment. Those who say otherwise are, frankly, uninformed.

What is even more incredible than the misplaced subsidies is the length to which federal agencies go in harassing oil and gas companies. For example, the Justice Department has brought charges against Continental and six other oil companies for violating the Migratory Bird Act . The maximum penalty for each charge under this Act is six months in prison and a $15,000 fine. What was the heinous wrong that brought down the full force of the Justice Department on Mr. Hamm and his company? Well, a small bird, very common, and not an endangered species, was found dead in one of Continental’s oil pits in North Dakota. I love birds, and I believe that all life is sacred, but there is not even evidence that suggests the bird was killed by this pit.

This case seems even more far-fetched when one considers that some 440,000 birds die from the wind turbines every year, according to the American Bird Conservancy. So, you might ask, what is the Justice Department doing about this? Alas, wind energy is one of Obama's political pet-projects, and the investors and officers of a number of these companies are major Obama supporters. I can find no record of any prosecution based on this law against wind energy companies.

The way Obama rewards his supporters with our tax money, while punishing the industries and companies that create jobs, appears to be cynical, cold-blooded, Chicago-style thug politics at its worst. I only hope enough voters perceive the insanity of this behavior between now and election day.

There is a new arrow in the quiver of Texas oil and gas attorneys who represent land and mineral owners! Specifically, there are significant changes to the Texas eminent domain statutes, which went into effect on September 1, 2011. Oil and gas companies can still acquire easements across private property to build pipelines. If the pipeline is a private pipeline, the pipeline company must obtain the voluntary agreement of the property owner. If the pipeline is going to be a common carrier, and the pipeline company and property owner cannot agree on easement terms, the company can commence condemnation, or "eminent domain" proceedings, in which panels of commissioners appointed by a court decide the easement terms.

Another portion of the statute allows landowners to construct roads over the pipeline, although the pipeline company may still impose restrictions on things like the size and road material.

The new law applies to condemnation lawsuits initiated on or after September 1, 2011. These changes strengthen a landowner’s right to defend against eminent domain from both the government and private companies. One of the landmark changes to the eminent domain law is a new “bona fide offer” requirement, which means the purchasing entity must give a written offer for the property 30 days before the final offer is made. Additionally, a certified appraisal of the property in question must accompany the final offer, and that final offer must be of equal or greater value than the appraisal figure. The landowner now has 14 days to respond to the final purchase offer. The new law also allows landowners to obtain relevant information concerning the proposed easements from the potential purchasers.

Prior to the effective date of these new legal requirements, the number of condemnation proceedings surged in those areas of Texas that are experiencing increased oil and gas production. This has especially been the case in South Texas because of the Eagle Ford shale, where natural gas production nearly quadrupled and oil production increased tenfold between 2009 and 2010. According to an article in the Wall Street Journal, at least 184 lawsuits against landowners had been filed already between January and August 2011 in just four South Texas counties, compared to only 24 lawsuits in all of 2010. A district court judge in Lavaca County indicated that the number of lawsuits filed this year is “highly extraordinary.” That county alone registered 62 such lawsuits by August, 2011, compared with only 18 in all of 2010.

These pipeline cases are important to everyone involved, so there is incentive to make the process equitable and fair for all parties. Texas oil and gas companies employ thousands of workers and contribute to a healthy and growing economy. The boom in oil and gas production has also brought prosperity to many areas of Texas. However, it is equally important to consider the rights of private landowners whose property is affected by the pipelines.

It may take time to determine the total impact of revisions to Texas eminent domain law. Hopefully, the original purpose of the law will be fulfilled: giving landowners more knowledge and influence in negotiations with pipeline companies. These companies are going to face more significant hurdles in exercising their eminent domain rights than in the past, especially when this new eminent domain law is combined with the recent Texas Supreme Court decision in Denbury (read our recent blog entry on this case here). The Denbury decision essentially affirmed that there must be a reasonable probability that the pipeline will serve the public before a pipeline company can use eminent domain.

As a Texas oil and gas attorney, I have followed with great interest the tumultuous relationship that seems to perpetually exist between Texas and its landowners on one hand, and the United States Environmental Protection Agency (EPA) on the other. Unfortunately, some misguided policymakers are under the mistaken notion that the EPA is working to protect the environment, and that the efforts of Texas and other states to fight those federal regulations are misguided. That oversimplification could not be further from the truth.

As Texas Comptroller Susan Combs explained in a recent editorial published in the Star Telegram, Texans are committed to the well-being of their air, land, and water. If legitimate steps need to be taken to protect the long-term well-being of our resources, Texans have and will continue to be the first to step up and take action. Unfortunately, many of the EPA’s latest regulations and requirements passed in the name of environmental protection actually protect next to nothing, and have no scientific basis whatsoever, yet come with very significant detrimental consequences for Texas residents.

As Combs notes, “private landowners are the best stewards of their own property.” She goes on to say that the EPA continues to ignore the knowledge and reasonableness of our private property owners when making arbitrary decisions that have effects on their land and lives. Even more troubling, at times the Agency seems to specifically target Texas in ways that defy common sense and scientific reality. For example, Combs discussed the EPA’s new “cross-states” air pollution rule. The new regulation will disproportionately affects Texans. The measure targets nitrogen oxide and sulfur dioxide. Texas plants produce roughly eleven percent of the sulfur dioxide targeted by the regulation, yet, inexplicably, Texas is being ordered to absorb a quarter of the reductions—more than double its actual share.

Anyone who understands the energy industry in our state understands the significant impacts the regulation will have. The state’s largest power generator, Luminant, explained that the rule will eliminate 500 Texas jobs as two generating units are being idled and three ignite mine operations halted. In addition, the Electric Reliability Council of Texas reported that the rule may increase electricity rates for consumers, because the state’s generation capacity will be reduced in the peak load months of summer.

Considering the consequences of these regulations, particularly in light of the already tough economic circumstances, one would expect the regulations to be based on some scientific evidence and enacted only after input from those affected. Unfortunately, neither is true. As the Texas Commission on Environmental Quality explained, the EPA’s own forecasting models did not reveal that these emissions had any significant impact on other states. On top of that, Texas wasn’t even included in the new requirements until the final version of the rule was adopted, meaning that no one from the state had the opportunity to provide comment or feedback on the regulations while they were being discussed.

Other examples of EPA overreach abound. Proposed EPA jurisdiction expansions may allow the agency to control isolated wetlands, streams, and other purely local pools of water such as stock tanks. The EPA has not produced a single scientific reason why the expansion is necessary. Yet, the action would place many Texas construction projects in jeopardy. The uncertainty, time delays, and other permitting challenges foisted upon residents by federal bureaucracies will have ramifications throughout the state.

As a Texas oil and gas attorney who works with landowners on a variety of issues, I am well aware of the systemic problems unnecessarily faced by local residents because of misguided EPA conduct. As Comptroller Combs explains in her editorial, it is important for all Texans to remain aware of these developments and to make their voices heard on a national level.

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EPA Proposal to Extend Its Regulatory Authority May Adversely Affect Texas Ranchers

Additional Offshore Workplace Safety Regulations Proposed by DOI & BOEMRE

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.

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

Have a Texas Oil and Gas Attorney Review Your Pipeline Easement

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.

An experienced oil and gas lawyer understands how politics influences the rules and regulations placed upon those working in the energy industry. Unfortunately, that political influence means that decisions about how the industry is regulated are often not guided by common sense, logic, and fair-minded decision-making. Instead, oil and gas regulations are frequently spurred by knee-jerk, reactionary administrators who are more concerned with appeasing loud public voices than making choices that are necessary and reasonable in light of all the information.

One is hard pressed to turn on a television news channel or flip open a newspaper without hearing or reading some story vilifying oil and gas companies and calling for new measures to control their activities. A cruel caricature is often painted of those who work in the energy industry which ignores the fact that these individuals are regular citizens working each day in a business that remains vital to national productivity. The unflattering and inaccurate public portrayal of the industry often causes appointed bureaucrats to impose new regulation after new regulation on these businesses. To make matter worse, those making these regulatory decisions are rarely knowledgeable about the day-to-day activities of those working in this field, and they usually ignore the effect that their arbitrary rules have on the business.

For example, the US Department of Interior (DOI) and Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE) announced a spate of new workplace regulations recently for all offshore oil and gas producers. As reported last week in the Oil and Gas Journal, these new regulations will require certain actions be performed on these rigs in an apparent effort to improve workplace safety. These include guidelines for reporting unsafe work conditions, stop-work action procedures, safety audit requirements, and a variety of other mandates. While everyone can agree that safety should always be prioritized, heaping new requirements on the industry is rarely the best way to achieve that goal.

If history is any indication, these new rules from federal regulators will likely do little to address the actual safety goals and instead only stifle each company’s ability to respond on its own to the unique safety challenges that it faces on the ground. As those working in the field of oil and gas law know, when push comes to shove it almost always makes more sense for those actually working in these environments to decide the ideal safety protocols instead of regulations being handed down on high from those walking the halls in Washington D.C.

When announcing the new regulations, BOEMRE Director Michael R. Bromwich also took the time to attack those who have asked questions about the bureau’s slow-walking of permits. He cited the total number of overtime hours worked by employees in his office as proof that the agency was working as quickly as possible to evaluate plans. Of course, the fact that employees are logging a certain number of hours in no way exonerates the bureau from serious concerns that it is unfairly managing the application process. There remain persistent criticisms by legitimate sources that BOEMRE is sitting on permits.

After decades of experience as a Texas oil and gas lawyer helping owners and lessors on a variety of issues, I have come to appreciate the hard work conducted day in and day out by those running these industries. It is disappointing to learn of new regulations that are continually thrown upon these businesses, and are usually drafted by those who have little understanding of how the industry actually operates. In the end, these regulations are likely to do more harm than good.

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A Texas Oil and Gas Attorney Reviews Proposed New Onshore Drilling Regulations

Texas Oil and Gas Operator Obtained Deepwater Drilling Permit After Federal Drilling Moratorium

Texas oil and gas attorneys are watching with trepidation as Obama seeks to cripple domestic mineral production with his ill-conceived policies. In our previous post, we discussed the Obama administration's push to eliminate some of the tax subsidies that oil and gas producers in the United States currently enjoy. One of the subsidies that will be cut -- if the President's Fiscal Year 2012 Budget is approved -- is percentage depletion for oil and gas wells, or the "oil depletion allowance" as Speaker Boehner recently called it. According to an article on Texas Insider, the Office of Management and Budget (OMB) estimates that repealing percentage depletion would generate 607 million dollars in 2012, and 11.2 billion dollars over the next decade, in additional tax revenue. While that extra income would surely help the federal government's bottom line, it is not a smart policy due to the adverse affects it will have on oil and gas exploration and ultimately, retail gas prices. Before we can address these potential effects, however, it is helpful to have an understanding of what the "oil depletion allowance" is.

Depletion allowances let the owner of an asset account for the portion of that product as it is used up. Depletion allowances are similar to depreciation in that they provide cost recovery for capital investments -- it is a tax structure to ensure that the financial burden of using resources is not borne by businesses in a lump sum. There are two types of depletion allowances available to oil and gas producers: cost depletion and percentage depletion. Cost depletion allows a taxpayer to recover the actual capital investment through the period of income production of the oil and/or gas reserves, and the cumulative amount recovered through cost depletion cannot exceed the taxpayer's original capital investment. The other form of depletion is percentage depletion, which allows oil and gas producers and mineral rights owners to recover a portion of the mineral that is used up, or depleted, at a rate of fifteen percent of the average daily gross income from their operation each year. Unlike cost depletion, cumulative depletion deductions under the percentage model can be greater than the original capital investment made to exploit those resources.

The White House's 2012 budget seeks to eliminate percentage depletion for oil and gas wells, leaving only cost depletion as a means for recovering such capital investment costs for the domestic independent oil and gas industry. The effects of such a change would be substantial. According to the Independent Petroleum Association of America (IPAA), removing percentage depletion as an option for small oil producers would force these companies to reduce their drilling budgets anywhere from twenty to thirty-five percent. The IPAA goes on to say that the independent oil industry accounts for almost four million jobs in the United States, and that the elimination of percentage depletion will increase taxes and result in fewer employment opportunities for Americans. Furthermore, the IPAA asserts that the elimination of percentage depletion will increase our nation's dependence on foreign oil and result in less governmental revenue going forward.

This is yet another example of short-sightedness on the part of the current administration. Yes, eliminating percentage depletion might raise additional revenue in the short run, but at the cost of American jobs and independence from foreign oil, two things that are in short supply these days. It is likewise disheartening to hear Obama decry the depletion allowance as some kind of tax break that only benefits "big oil" (whoever that is), when the largest portion of our domestic oil and gas production comes from small, independent companies.

Texas oil and gas attorneys are watching the recent series of drilling moratoriums by the federal government with great interest. In a recent blog post, I discussed the legal background behind the first deepwater drilling moratorium and the litigation that followed.

Because a federal judge ruled that the first deepwater drilling moratorium should be set aside as “arbitrary and capricious” under the Administrative Procedure Act ("APA"), the U S Department of the Interior ("DOI") was left with a choice: either lift the deepwater drilling moratorium completely, or try to instate a new moratorium that might pass APA muster.

In an unsurprising move, the DOI issued a second deepwater drilling moratorium. The second moratorium banned exactly the same activities as the first moratorium, although it used slightly different grounds to do so. While the first moratorium banned activities occurring at depths greater than 500 feet, the second moratorium restrained all rigs that use subsea blowout preventers or surface blowout preventers on a floating facility. In reality, the second moratorium restrained precisely the same rigs as the first moratorium. The DOI defended their second attempt by explaining that, although the second moratorium was similar in effect to the first moratorium, the second moratorium did address the technical concerns highlighted in the District Court's first order.

In November 2010, the DOI lifted the second moratorium. However, despite the fact that the moratorium was lifted, the DOI was slow to issue new permits for activities covered by the two moratoriums.

In light of what the Louisiana District Court deemed “purposeful defiance” of its ruling, the Court held that the DOI was in "contempt of court." In its contempt ruling, the District Court noted that “each step the government took following the Court's imposition of a preliminary injunction showcases its defiance.” In light of what the District Court viewed as “dismissive conduct,” Judge Feldman held that the plaintiffs had demonstrated the government's contempt by clear and convincing evidence. Judge Feldman's contempt order was dated February 2, 2011. Later that month, the DOI started issuing the first deepwater drilling permits since the BP disaster.

Many in the oil and gas industry are still unhappy. They note that the only projects being permitted right now are those that were already given the green light before the BP oil disaster.

This saga is sure to continue in the coming weeks and months, although slowly, more and more drilling permits are being granted. For example, Texas-based Exxon Mobile recently became the fourth company cleared for drilling.

As a Texas oil and gas attorney, I have followed with great interest the actions of the US Department of Interior (DOI) to finally lift the post-BP Oil Spill moratorium on deepwater drilling. It has been a long and legally complex road, but finally the DOI has taken the initial steps necessary to end the moratorium and re-start deepwater drilling in the Gulf of Mexico. So far, three deepwater drilling projects have been approved. A project sponsored by a Texas corporation, ATP Oil & Gas, was one of the lucky three.

In my next two blog posts, I'll discuss the legal background behind the two deepwater drilling moratoriums issued by the Obama administration, the litigation challenging those moratoriums, and the current state of deepwater drilling operations.

Immediately after the BP oil spill disaster, the DOI issued a “Moratorium Notice to Lessees and Operators,” which: 1) directed oil and gas lessees and operators to cease drilling new deepwater wells; 2) prohibited the spudding of any new deepwater wells; and 3) notified oil and gas lessees and operators that, with only a few exceptions, no new deepwater drilling permits would be issued for six months. The moratorium affected deepwater drilling operations occurring at depths greater than 500 feet, and operators whose wells fell under the moratorium were told to take the next safe opportunity to secure their wells, cease operations, and temporarily abandon their wells until they received further guidance from the DOI. It is interesting to note that, at this point, Salazar had no real proof of what had caused the problems with the BP well.

US Secretary of Interior, Ken Salazar, argued that the moratorium was justified in light of the recent environmental disaster in the Gulf, at least until a thorough safety review could be completed.

The DOI's drilling moratorium was challenged in the US District Court for the Eastern District of Louisiana by a group of plaintiffs who perform various services to support oil and gas drilling. The plaintiffs argued that the drilling moratorium did nothing to improve environmental safety in the Gulf of Mexico, and that the moratorium unfairly and hastily punished all deepwater drillers for the allegedly unsafe practices of one company.

Continue reading "Texas Oil and Gas Operator Obtains Deepwater Drilling Permit After Federal Drilling Moratorium – Part I" »

As a Texas oil and gas attorney, I am keenly interested in the political climate in which the oil and gas industry operates. Politics has a lot to do with how much oil and gas this country produces. For example, in the White House's proposed Budget for the Department of Energy in fiscal year 2012, Barack Obama set forth a budget that "eliminates inefficient fossil fuel subsidies." The administration did so as a part of its ongoing plan to shift the nations energy policy toward investments in "clean energy sources" like photovoltaics and wind power generation. This issue is one that has gained even greater notoriety when Republican House Speaker John Boehner recently informed ABC News that he was open to eliminate one of these tax breaks -- the " oil depletion allowance" -- for large oil companies as a measure to help maintain the fiscal health of the government. He went on to state that he was open to evaluating the President's proposed subsidy cuts as well. In response, the President wrote a letter to Speaker Boehner and other Congressional leaders asking them to support the elimination of the oil and gas industry tax subsidies.

In the aforementioned interview, Speaker Boehner stated that small and independant oil producers in the United States need the "oil depletion allowance." Representative Boehner went on to say that smaller oil firms need those subsidies to continue the current rate of exploration for new sources of petroleum reserves within U.S. borders. A later statement issued by his office stated that Boehner wishes to increase the amount of energy produced in the country to free the country from the market vagaries of oil sourced abroad, and that the President's proposed plan would boost gas prices higher. Should the budget be approved unamended by Congress, around 4 billion dollars worth of subsidies and tax breaks will disappear, and the ramifications of such a move could have an adverse effect on our recovering economy.

Boehner's statements to ABC illustrate the importance of evaluating all sides to this issue, and highlight the fact that the domestic oil industry is not solely comprised of billion dollar corporations. In fact, according to the Independent Petroleum Association of America (IPAA), small scale oil producers do the majority of oil exploration in the United States. Such organizations employ only twelve individuals on average, but they drill ninety-five percent of new oil wells, and produce two-thirds of our nation's domestic oil and natural gas. In our next post, we will examine the existing "oil depletion allowance," the proposed budget's tax subsidy cuts, and the effect such changes could have on independent oil producers in the US.

As a Texas oil and gas attorney, I have authored a series of articles on this site concerning the pros and cons of alternative energy. As I prepared to return to the topic, I began to ponder a more general question. When we use the phrase “alternative energy” or “alternative fuels,” what exactly do we mean? Any lawyer will tell you that words have very precise meanings: when you are using a word, it is very important that you are clear what you mean when you use that word. Let us avoid the error of the Cheshire Cat in Alice in Wonderland, who made words mean anything he chose! Therefore, in writing about alternative energy, I have to ask two important questions: first, an alternative to what? And secondly, what alternative?

The dictionary defines alternative in one usage as “different from the usual or conventional.” So when we speak of alternative energy, we are talking about sources of energy different from the usual or conventional sources. But “usual or conventional sources” can mean different things.

Alternative energy is often spoken of in relation to oil. With every spike in the price of oil and the resulting rise in the price of gasoline, the usual cries are heard: we are too dependent on imported oil, our economy is too vulnerable to increases in energy costs as a result of that dependence, and for our own economic and national security we need to reduce that dependence. The natural choice, at least in the near future, would be to develop our own domestic sources of oil. That choice, however, has been to date choked off because of environmental concerns: exploration in the Alaskan National Wildlife Refuge was rejected by Congress, and the moratorium on new oil exploration in the Gulf imposed by the Obama administration after the Deepwater Horizon spill are the two most prominent examples of the roadblocks placed by environmentalists and their allies in Washington. So, it would seem that, for some, alternative energy does not mean using alternative sources for the current dominant energy source of oil.

In addition to developing new sources of oil, alternative energy can mean expanding the use of existing sources of energy. Three such sources are coal, natural gas, and nuclear power. Each has their advocates. Coal is still plentiful in the United States, and efforts are underway to develop clean coal technology designed to reduce emissions claimed to contribute to man-made global warming. Natural gas is also plentiful, given current estimates of reserves, and it is also the cleanest burning of the fossil fuels with almost no greenhouse gas emissions compared to coal or oil. Finally, in spite of safety concerns over the last several decades, nuclear energy has gained it's advocates as the energy source least likely to contribute to global warming. All three sources are proven technologies and have the production and delivery infrastructure in place to reduce oil's percentage of America’s energy production. But none of them are particularly popular among environmentalists who advocate the reduction of greenhouse gas emissions; coal and natural gas are still fossil fuels that are non-renewable and are claimed to exact a toll on the environment in their production and use. As far as nuclear energy—well, the vast majority of environmentalists have nothing good to say, pointing to issues involving waste disposal and fears of some catastrophic Chernobyl-type disaster. These, then, are not the alternatives that advocates of alternative energy intend when they speak of alternative energy.

What, then, are the alternatives acceptable to the main advocates of alternative energy? The key words to remember are "renewable" and "green." Acceptable alternatives are those that can be reproduced or, ideally, can never run out. In addition, they cannot be based on any source that could possibly harm the environment. That automatically excludes hydroelectric power, which is renewable and uses existing technology, but involves altering the physical environment and the habitats of various forms of wildlife (remember the story of the Snail Darter?). So, what's left? Solar power and wind power. These two (along with ethanol to a lesser extent) are the gold standard of acceptable alternatives. Both are renewable and are sources that appear to do no harm to the environment.

Other than being renewable and green, what else to solar and wind have in common? What do they share that make them impractical as alternatives to fossil fuels? We'll look at those questions over the next few weeks.

As a Texas oil and gas attorney, I am deeply concerned at the constant beating the oil and gas industry takes from Obama and his administration. Obama paints oil and gas companies as Machiavellian monoliths, with their CEO's sitting around in tails and top hats like the millionaire in the Monopoly game. I can't recall a president as antagonistic to the industry since Jimmy Carter's ill-informed and destructive policies resulted in a great deal of oil production being driven from the United States. However, Obama may surpass Carter in his destructiveness. This is the behavior of a misguided idealogue and a demagogue, especially because the announced basis for these policies is so inaccurate. Obama's speeches appear calculated to generate some kind of "us against them" mentality. But it is not a case of "us against them". We are them. Most of our oil and gas comes from smaller, independent producers, not the big companies. This assault will cost us jobs and energy at a time when both are in short supply.

The latest assault on the oil and gas industry is Obama's announcement that he wants to end "oil and gas subsidies". I think this is Obama-speak for eliminating the depletion allowance. However, Obama does not apply the same view towards all the other subsidies the federal government hands out. For example, most informed people are aware that the real estate debaucle and resultant depression of the last few years is a direct result of the goal of Democrats to buy votes by making sure everybody bought a house, whether they could afford it or not. This policy was expressed in the insistence of a Democratic Congress that Fannie Mae and Freddie Mac lower their standards in loan qualification (if they are breathing and have a copy of their last utility bill, they qualify), and in the easy money policy of the Federal Reserve. We all know how that turned out. Incredibly, both those policies are still in place. Not only are these policies still in place, but now we have other federal programs to bail out the people who could not afford their mortgage in the first place. This is insanity!

I ran across a quote by Glenn Reynolds recently, that put it far better than I could. Professor Reynolds is a law professor at the University of Tennessee. His blog, Instapundit, is the source of many thoughtful comments. Here is a quote from his blog regarding subsidies:

The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits — self-discipline, the ability to defer gratification, etc. — that let you enter, and stay, in the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them. I don’t think Obama grasps this.

This is spot on. Thanks to Professor Reynolds for putting it so well!

Like many Texas oil and gas attorneys, I am keenly interested in the struggle unfolding between the EPA, Congress and the State of Texas. In a previous blog post, I discussed the EPA's recent efforts to regulate greenhouse gasses across the nation. Today, I'll describe the State of Texas' and the US Congress' responses to the EPA's new greenhouse gas rules.

The EPA's greenhouse gas regulations require the states to implement a federally mandated greenhouse gas permitting system. Under EPA greenhouse gas regulations, new, large power plants that are already required to obtain pollution permits must also obtain a greenhouse gas permit. The permit would require those new power plants to implement the newer technologies available to control carbon dioxide emissions.

Most states agreed to implement the EPA's new greenhouse gas plan. Texas and Wyoming, on the other hand, filed legal challenges to the program.

Texas Governor Rick Perry publicly refused to go along with the EPA. Governor Perry's spokeswoman called the EPA's plans “misguided,” “unnecessary,” and “burdensome,” and said that the the permitting system threatens “hundreds of thousands of Texas jobs” and imposes “increased living costs on Texas families.”

The EPA caught wind of Perry's refusal and took matters into their own hands. Because it was clear that Texas would not implement the new greenhouse gas rules, the EPA decided to take over Texas' greenhouse gas permit program. So, new power plants that are required to get a greenhouse gas permit under the EPA's greenhouse rules would need to get that permit directly from the EPA, rather than the State of Texas.

Continue reading "Texas and Congress Take on EPA in Greenhouse Gas Battle" »

Much to the chagrin of many Texans, the US Environmental Protection Agency (EPA) recently decided to regulate greenhouse gasses around the nation. This decision was a long time in the making and has important implications for the State of Texas and the whole nation. In this blog post, I'll describe the legal backdrop of greenhouse gas regulation, and I'll summarize the EPA's proposed plans to tackle greenhouse gasses.

Greenhouse gasses are heat trapping gasses that some scientists believe cause global warming. Carbon dioxide is one of the most abundant greenhouse gasses, and some climate change experts believe that the compound's increased presence in the Earth's atmosphere causes global climate change. The compound is created naturally through human and animal respiration, and it is also a natural by-product of combustion. When humans burn things, like coal, oil or natural gas, carbon dioxide is released into the atmosphere. It is not yet definitely proven, in my mind, that man-made carbon dioxide has any appreciable impact on the earth's temperature.

In the 2007 US Supreme Court case Massachusetts vs. EPA, the Court held that the EPA is required to study greenhouse gas emissions and determine whether greenhouse gas regulation is appropriate under the Clean Air Act (CAA).

The Supreme Court held that CAA section 202(a)(1) applies to greenhouse gasses, in addition to more traditional pollutants. The Court cited Section 202(a)(1) which requires the EPA Administrator to set emission standards for "any air pollutant" . . . "which in his judgment cause[s], or contribute[s] to, air pollution which may reasonably be anticipated to endanger public health or welfare." While the Supreme Court did not hold that the EPA must regulate greenhouse gasses, it did require the EPA Administrator to take the first step and determine whether or not greenhouse gasses are reasonably anticipated to endanger public welfare.

In 2009, the EPA Administrator made two important findings. The Administrator found that current and projected concentrations of six key, well-mixed greenhouse gasses 1) contribute to man-made global warming, and 2) threaten the public health and welfare of current generations. Remember that under Massachusetts v. EPA's interpretation of the CAA, the EPA must regulate air all pollutants that are reasonably anticipated to endanger public health or welfare. Once the EPA determined that greenhouse gasses lead to global warming, the EPA was poised to set emissions standards for greenhouse gasses, as required by Massachusetts v. EPA's interpretation of the CAA.

Continue reading "EPA Takes Aim at Texas Greenhouse Gas Emissions" »

This week we continue our examination of ethanol as an alternative energy source. As a Texas oil and gas attorney, I am particularly interested in the impact that a shift from fossil fuels to alternatives would have on our economy and on our society. It is an unavoidable fact that we are a fossil fuel-based society; any shift from fossil fuels to alternative energy sources will have costs associated with them. While we don't know what all those costs will be, our experience with ethanol shows that the costs—at least in the early stages of development—can at best limit, and at worst outweigh, any benefits gained from the use of alternative fuels.

What are some of the costs of using ethanol as an alternative energy source? After looking at the issue, I believe there are three primary costs:

• The cost to us as taxpayers
• The cost to us as consumers
• The cost to our environment

These costs are well documented in study after study, but you never hear about them in the media. The media and the public seem to have bought the idea of limitless and cost-free benefits accruing to our society. There are some benefits, as other studies have shown. But if we don't look at the costs, how can we decide if the benefits are worthwhile?

What are the costs to us as taxpayers? In order to encourage ethanol production, Congress has approved generous subsidies to farmers and refiners. Since 1978, the Volumetric Ethanol Excise Tax Credit (VEETC) has provided refiners with an incentive to blend corn ethanol with gasoline. According to the the Government Accountability Office, in 2008 the government gave a total of $4 billion dollars in subsidies for corn-based ethanol; in 2009 the figure jumped to $6 billion dollars. Ethanol production in that year replaced a mere 2% of the U.S. gasoline supply. The average cost to the taxpayer was the equivalent of $82 a barrel, or $1.95 a gallon on top of the gasoline price. According to the Congressional Budget Office, the cost of replacing one gallon of conventional gasoline was $1.78 per gallon for corn ethanol in 2009. In addition to the tax credit, there is the Renewable Fuels Standard (RFS) which currently requires 36 billion gallons of renewable fuel (primarily ethanol) to be blended with gasoline by 2022 as well as a tariff on the importation of ethanol which functions much the same way a tax would, by increasing the cost of imports to consumers.

Continue reading "A Rational Analysis of Ethanol-Part Two" »

As a Texas oil and gas attorney, I have spent 33 years observing the Texas Railroad Commission, the agency in Texas that regulates oil and gas drilling, production and pipelines (among other things). In my experience, the Railroad Commission is tough and efficient. I have never seen them act as a rubber stamp for the oil and gas industry. Each time I have assisted a client with a complaint to the Railroad Commission, I have been pleased with their grasp of the situation and their sensitivity to consumers. In my experience (and even though I don't always agree with them), they do a good job.

The demonstrable competency of the Railroad Commission is one reason that the most recent intrusion by the federal government into Texas' affairs is especially disturbing. I am speaking, of course, of the emergency order issued on December 7, 2010 by the Environmental Protection Agency (the "EPA") to Range Production Company, forcing a cessation of it's activities in Parker and Hood Counties, Texas. This latest arrogance by the feds is unconscionable. In support of my statement, (and lest you think I am being extreme here), please consider the following:

Item One: The EPA order shuts down legitimate business operations, puts people out of work, and interrupts the production of a clean and environmentally sound fuel. So, you might assume the EPA had some evidence for what they are doing. You would be wrong.
The EPA has apparently viewed the "documentary" (and I am using that term very loosely) called "Gasland" and taken it for fact. Certainly, many homeowners who live near wells have watched it, and probably thought it was factual. The truth is that most of what is depicted in this film is patently false. For example, in at least two scenes, homeowners in Colorado are shown lighting their tap water on fire, presumably due to contamination from gas well drilling, fracking or production.The truth is that these occurrences were thoroughly investigated by the Colorado Oil and Gas Conservation Commission (the "COGCC"). The result of the investigation? There was methane in the water from naturally occurring methane deposits. The drilling of, fracking for and production of gas from wells in the vicinity had nothing, I repeat, NOTHING, to do with it. You can read a summary of the COGCC's report here.

Continue reading "An Analysis of the Latest Federal Debaucle Analyzed by a Texas Oil and Gas Lawyer" »

When discussing the issues involved in national energy and environmental policy, the subject of alternative energy frequently comes up. As a Texas oil and gas attorney, I follow these discussions with great interest. The outcomes of our decisions about alternative energy sources will eventually effect anyone even tangentially connected with the oil and gas industry in this country. That's why a balanced evaluation of the proposed alternatives to fossil fuels is so important. In this first of several blogs about alternative energy, we'll be looking at one of the most widely used today—ethanol.

Ethanol, or grain alcohol, has been around as a fuel for well over a century. Henry Ford's first vehicle, the Quadricycle, was designed to run on pure ethanol; later, his Model-T could run on pure ethanol, gasoline, or a mixture of both. In fact, Ford continued to be an advocate for ethanol as a motor fuel well into the 1920s, long after cheap and plentiful gasoline became the fuel of choice. The low price of gasoline until the 1970s dampened the further use of ethanol (save for a brief time during World War II). This changed with the gasoline price shocks of the 1970s. Interest in ethanol revived, spurred by government subsidies targeting the development of synthetic fuels. When gasoline prices plummeted in the 1980s, research into the commercial production of synthetic fuels stopped to a great extent. Interest in ethanol, however, remained.

The interest in ethanol, at least through the 1990s and early 2000s, was not as a replacement for gasoline but as a fuel additive for environmental reasons. The Clean Air Act of 1990 and the Alternative Motor Fuels Acts mandated the use of oxygenates to reduce carbon emissions from automobiles. The two most widely used oxygenates were MTBE (methyl tert-butyl ether) and ethanol. By the early 2000s, however, the EPA mandated the phasing out of MTBEs because of fears of groundwater contamination. Today, ethanol is the most widely used gasoline additive, with most areas requiring a blend of 10% ethanol and 90% gasoline.

With the rising price of gasoline worldwide, along with fears of man-made climate change, the possibility of ethanol partially—or fully—replacing fossil fuels for motor vehicles has gained great currency. From 2007 to 2008, ethanol's share in global gasoline-type fuel used increased from 3.7% to 5.4%; in 2009 world production reached 19.5 billion gallons. The world leaders in ethanol production are Brazil and the United States, with a combined 80% share. (See Executive Summary: "Assessing Biofuels" UNEP 2009). Ethanol can be produced from a wide variety of grains and other feedstock such as corn (the predominate source in the United States) and sugar cane (the predominate source in Brazil), along with sugar beets, sorghum, switchgrass, wheat, cotton, and even the waste left over from harvesting (referred to as cellulose waste). While the production of ethanol from these other sources is in the research stage, commercial production of ethanol in the United States from corn is commonplace.

Production of corn ethanol in the United States is driven by statutory mandate and government subsidies. Oil refineries are required by law to use ethanol to blend with gasoline to reduce carbon emissions. The problem is that ethanol is very expensive to produce; according to a 2005 Department of Agriculture study, a gallon of ethanol costs an average of $2.53 to produce; by contrast, a gallon of gasoline takes only an average of $1.95 to produce. As of 2007, ethanol subsidies amounted to 42% to 55% of ethanol's wholesale market price. This means that the real cost of producing a gallon of ethanol is almost $4.00 per gallon. Without the subsidies, ethanol would not be economically viable to produce as a fuel, much less to use as a fuel additive.

In spite of the costs involved, the advocates of corn-based ethanol continually tout its benefits to the economy and the environment. Ethanol, they say, reduces toxic emissions and the growth of greenhouse gases in the atmosphere, leads to American energy independence from imported foreign oil, aids farmers and rural communities by increasing demand for their crops, and is responsible for the creation of thousands of new jobs in communities all across the nation.

Are these benefits real? Are they worth the cost? And, finally, what are the real costs of ethanol production? I'll look at these in my next blog.

Although I am primarily a Texas oil and gas attorney, I am interested in all energy sources, and I am especially interested in the ongoing national discussion about what are called alternative energy sources. One of the hottest topics in the world of energy is the discussion of alternatives to fossil fuels. While the definition of "alternative energy" has changed over time, the discussions today center on energy sources other than oil, gas and coal, and include such energy sources as solar, wind, biomass, hydrogen, and geothermal energy. These discussions are presumably driven by concerns over America's dependence on imported oil and the effects of allegedly manmade climate change. Often, advocates of alternative energy sources make extravagant claims when touting their alleged benefits when compared to fossil fuels. One alternative energy website says that alternative energy sources “have no undesired consequences”; in fact, some people claim that alternative energy sources “are renewable and are 'free’ energy sources." The move from traditional to alternative energy sources is not only touted as the solution to a whole host of environmental problems, but the Obama administration says the “green jobs” resulting from this shift are a key to economic recovery and the basis of a strong middle class.

Alternative energy sources seem to offer the world a future environment free of the deleterious effects of obtaining and burning fossil fuels and an economy growing rapidly and unfettered on the back of unlimited and free (e.g. no cost) energy and a green jobs revolution. It sounds almost too good to be true.

The question is: is it? Is alternative energy a “no cost” solution to all our environmental, energy, and economic problems? Well, as Robert Heinlein popularized in his classic science fiction novel, The Moon is a Harsh Mistress, TANSTAAFL (“there ain't no such thing as a free lunch.”). Everything comes with a cost—even in the Brave New World of alternative energy. These costs seem to get lost in the hype.

Continue reading "A Texas Oil and Gas Attorney Examines the Pros and Cons of Alternative Energy" »

As the price of oil creeps back up, the pace of oil and gas leasing has picked up as well. As a Texas oil and gas attorney, I regularly get calls from folks who ask me why they should go to the expense of having an attorney review their oil and gas lease. Here are the reasons I hear for not consulting an attorney, and my response to each, explaining why consulting an attorney is important:

1. "The landman told me that the lease was just a standard form". Watch my lips on this one: there is no such thing as a standard oil and gas lease. The landman may have meant that the lease they offered was standard for that particular landman, or for the particular oil company the landman was representing. However, there is simply no such thing these days as a standard, industry-wide form.

2. "The lease did not look that complicated". If you are not an oil and gas lawyer, do you really know what the terms in that lease mean? Do you know when words in the lease have one meaning in ordinary use and another meaning in the oil and gas industry? Even more important: do you know what's missing?

3. "I'm getting the bonus and royalty I want, so why should I care about the fine print?" The truth is that what is in the body of the lease, in the "fine print", can have a greater impact on your pocketbook in the long run than the amount of the bonus or royalty. In some cases, depending on the lease, the financial gains to you of a few changes in the lease can result in much greater compensation to you than what you receive in bonus and royalty!

4. "The lease said it had a term of only three years, and that's not very long so I didn't think what the lease said was that important". Oil and gas leases have a "primary term" of between two to five years. The oil and gas company, with some exceptions depending on the exact language of the lease, must drill a well within that time that is capable of producing oil or gas in commercially paying quantities. If they do not, (again, subject to various exceptions and extensions used in some leases), then the lease expires. If they successfully drill a well within the primary term that is capable of producing oil or gas in commercially paying quantities, then the lease will go on for so long as the well produces in commercially paying quantities. That means that the term of that lease may go on past your lifetime. Since it is possible that the oil and gas lease you sign may go on for a long, long time, isn't it just common sense to make sure that it's a lease you can live with for that long?

5. "The landman was just so nice". Yes, he was nice. It is his job to be nice. If he wasn't nice, he would have been fired a long time ago. Secondly, whether the landman was nice or not, the landman's legal allegiance is to the oil and gas company the landman represents, and not to you.

6. "It costs too much to see a lawyer". There are many oil and gas attorneys in Texas whose fees are not only reasonable, but whose rates are a fraction of the amount of damage that can be done to your land because of an improper agreement. In addition, the attorneys fees are sometimes offset by the increased bonus payment as the result of a lease negotiated by an attorney. Finally, this lease may last your lifetime. Doesn't it make sense to be sure you can live with it?

7. "The oil and gas company promised me everything I wanted, so I didn't care if it was actually written in the oil and gas lease". Unfortunately most (there are a few exceptions) verbal promises by the oil and gas company or its landman are not enforceable under Texas law.

8. "The landman told me I had to sign right away, or they would withdraw their offer and I wouldn't get the money they were offering". It usually takes a while to lease all the acreage that the oil and gas company is required to lease before they drill. There is rarely a situation where it is truly a case of "sign right now or no deal".

9. "My mineral interest is so small, the oil company wouldn't make any changes anyway". It is certainly true that someone who owns many acres and owns 100% of their minerals will have more leverage with the oil company than someone who owns a small fractional interest in a few acres. However, sometimes even small interests count, when it is just those interests or acres that the oil company needs to make up its production unit. Secondly, many times owners of small interests, such as family members, go together and retain me to negotiate their lease, and together, they have more leverage than they did acting individually. In my office, the cost to review, evaluate and negotiate a lease is the same whether it's for one family member of twenty. Finally, most oil and gas companies are reasonable, and are open to making reasonable changes even when your interest is small. The key is to have someone who is experienced and who knows what changes are appropriate to ask for given the size of your interest. Even small changes can make a big difference in the overall fairness of a lease.

10. "I want to negotiate my own lease and save the money I would have spent on an attorney." Unless you have experience in negotiating an oil and gas lease, you are almost always not going to get the best deal for yourself. Landmen can spot an inexperienced person a mile away, and they are not going to cut you any slack! Remember, their loyalty is to the oil company, and not to you.

If you get an offer from an oil and gas company or its landman, simply smile and say: "Thank you. I will seriously consider this. I will send it to my attorney promptly and we will be in touch with you soon". And then call your attorney!!

As a Texas oil and gas lawyer, I have followed with interest the proposals to add new regulations for onshore, as well as offshore, drilling in the wake of the Gulf of Mexico oil spill. Several initiatives to tighten federal regulation of offshore drilling are making their way through the halls of Congress. These bills are perhaps inevitable, considering the magnitude of the spill, the confused federal and BP response to the spill and the adverse public reaction to both the spill and the subsequent mitigation and clean up efforts. At the same time, however, environmental groups and some in Congress are using the push for new offshore drilling regulations to call for tighter federal rules for onshore oil and gas drilling. These new regulations are designed to make it more difficult for oil and gas companies to start drilling in the first place, and to more closely monitor their post-drilling operations for alleged threats to public health and the environment.

It's perhaps a little too simplistic to blame the BP spill for the new regulatory push onshore. Given the Obama administration's stated goals of favoring alternative energy and the environment over the pro-drilling energy policies of the Bush administration, perhaps new regulations were inevitable. But the debate appears to have taken on greater urgency in some quarters. As Kevin Book of Clear View Energy Partners says (referring to shale drilling), “the perception of risk has changed, and the reason for it can be summed up in one word—Macondo.”

The first signal of new regulations to come surfaced in May, when Interior Secretary Ken Salazar announced tighter regulations for oil and gas drilling on public lands. These new rules make it much more difficult for oil and gas companies to obtain drilling approval, and drilling on certain public lands would require a period of public comment. While environmental groups praised the regulations as reversing the allegedly destructive Bush administration drilling policies, the Independent Petroleum Association of the Mountain States (now the Western Energy Alliance) stated in a press release that the new rules would “delay the development of clean, domestic natural gas on Western federal lands.”

The desire for tighter regulations focused Congress' attention on two bills introduced over a year ago. One, the Consolidated Land, Energy, and Aquatic Resources Act (the CLEAR Act), passed the House on July 30, 2010 and went to the Senate. Among other things, the bill requires oil and gas companies engaged in drilling on federal lands to adopt “best management practices” designed to minimize threats to health and the environment; requires public disclosure of the chemicals used in drilling or hydraulic fracturing (often referred to as "fracing" in the oil industry or "fracking" by the media); and repeals 2005 legislation allowing companies to drill on public lands without a full environmental review process. Another bill, the Fracturing Responsibility and Awareness of Chemicals Act (the FRAC Act), originally introduced last summer, specifically targets the practice of hydraulic fracturing by removing the exemption of the practice from regulation by the EPA under the Safe Drinking Water Act. This bill and a companion bill introduced at the same time in the Senate have never come up for a vote. Similar language was stripped from the CLEAR Act, but the Clean Energy Jobs and Oil Company Accountability Act, introduced in the the Senate by Majority Leader Harry Reid (D-Nev.) would require companies to make their fracing formulas public on the Internet.

While the ultimate fate of all these bills has yet to be determined, these initial efforts to increase federal regulation of onshore drilling spurred calls for even further regulation. In late July 2010 a number of environmental groups, including the National Audubon Society, the Natural Resources Defense Council, and the Sierra Club, sent a letter to Senate Majority Leader Harry Reid and Speaker of the House Nancy Pelosi, urging the passage of new onshore drilling regulation to target what they call the damaging environmental and health effects of current practices. In addition, they urged an end to tax benefits for oil and gas companies, more federal money for research into public safety and environmental protection, and an end to “fast-track” approval of oil and gas drilling on federal lands.

What impact will increased federal regulation have on domestic oil and gas drilling? Only time will tell. Oil and gas companies oppose federal regulations, saying that existing state regulations are quite sufficient to protect the environment and public health and safety. Marc Smith, the executive director of the Western Energy Alliance, points out the folly of giving more oversight of onshore drilling to the same federal regulators who failed to prevent the BP oil spill: “It doesn't make sense to take more control away from state oil and gas regulators and give it to the federal agency that just oversaw the worst environmental catastrophe in the history of our nation.” Here in Texas, for example, we have the Texas Railroad Commission, which does an excellent job of regulating oil and gas drilling and production. Industry representatives also claim that the regulations embodied in the CLEAR Act will make drilling on public lands more expensive, increase Government control over the market, and create a new and unnecessary layer of bureaucracy.

There is an economic and national security aspect of these proposed regulations that sometimes gets lost in the debate. If regulations for onshore drilling are increased, oil companies will need to spend more time and money in compliance. That means the cost of oil and gas and the products derived from oil and gas will increase for consumers. In addition, increased regulation will almost certainly mean fewer wells will be drilled, and this will result in even greater unemployment for workers in the oil and gas industry and all the many industries that service the oil and gas companies (the majority of which are small businesses). Ultimately, if the higher regulatory cost leads to lower domestic production, we will have to increase, rather than decrease, our reliance on Mid-East oil. This factors should make us consider carefully: is increased reulation is really the direction we should be heading?

As a Texas oil and gas attorney, I have had occasion from time to time to observe the environmental, administrative and legal ramifications of an onshore oil spill, usually caused by vandalism or malfunctioning equipment. Along with everyone else in the world, I am horrified as the tragedy in the Gulf of Mexico unfolds, and along with everyone along the Gulf, I am intensely frustrated that the spill has not been stopped yet.

Something else, besides the damage to persons, property and the environment, concerns me. Specifically, there is a lynch mob mentality about BP that has this country in its grip. They have been tried and found guilty in the court of public opinion, and the tar and feathers await.

I am not going to defend BP. They have a long history of regulatory problems. Moreover, from what we know so far, it appears that a couple of very stupid and very negligent decisions by BP may have caused this disaster. However, as John Adams famously said in the Novanglus Essay No. 7, we are "a government of laws, not of men." We also live under state and federal constitutions that promise that we are innocent until proven guilty. Nothing about the cause of this spill or who is responsible has been proven yet. We would be better served by focussing our attention on stopping the spill at this point, rather than flogging BP.

As a Texas oil and gas attorney, I regularly get calls from folks who, long after they have signed an oil and gas lease, are upset with an oil and gas company for something the company is doing or not doing. In most cases, once we review the oil and gas lease, it becomes obvious that they have already given permission for the oil company to do what they are doing in the language of the lease they signed.

I customarily ask these folks why they did not have an attorney look at the lease before they signed it. I have been making a list of the reasons they give. Here are the reasons I hear most often, and my response to each one:

1. "The landman told me that the lease was just a standard form". Watch my lips on this one: there is no such thing as a standard oil and gas lease. The landman may have meant that the lease they offered was standard for that particular landman, or for the particular oil company the landman was representing. However, there is simply no such thing these days as a standard, industry-wide form.

2. "The lease did not look that complicated". If you are not an oil and gas lawyer, do you really know what the terms in that lease mean? Do you know when words in the lease have one meaning in ordinary use and another meaning in the oil and gas industry? Even more important: do you know what's missing?

3. "I'm getting the bonus and royalty I want, so why should I care about the fine print?" The truth is that what is in the body of the lease, in the "fine print", can have a greater impact on your pocketbook in the long run than the amount of the bonus or royalty. In some cases, depending on the lease, the financial gains to you of a few changes in the lease can result in much greater compensation to you than what you receive in bonus and royalty!

4. "The lease said it had a term of only three years, and that's not very long so I didn't think what the lease said was that important". Oil and gas leases have a "primary term" of between two to five years. The oil and gas company, with some exceptions depending on the exact language of the lease, must drill a well within that time that is capable of producing oil or gas in commercially paying quantities. If they do not, (again, subject to various exceptions and extensions used in some leases), then the lease expires. If they successfully drill a well within the primary term that is capable of producing oil or gas in commercially paying quantities, then the lease will go on for so long as the well produces in commercially paying quantities. That means that the term of that lease may go on past your lifetime. Since it is possible that the oil and gas lease you sign may go on for a long, long time, isn't it just common sense to make sure that it's a lease you can live with for that long?

5. "The landman was just so nice". Yes, he was nice. It is his job to be nice. If he wasn't nice, he would have been fired a long time ago. Secondly, whether the landman was nice or not, the landman's legal allegiance is to the oil and gas company the landman represents, and not to you.

6. "It costs too much to see a lawyer". There are many oil and gas attorneys in Texas whose fees are not only reasonable, but whose rates are a fraction of the amount of damage that can be done to your land because of an improper agreement. In addition, the attorneys fees are sometimes offset by the increased bonus payment as the result of a lease negotiated by an attorney. Finally, this lease may last your lifetime. Doesn't it make sense to be sure you can live with it?

7. "The oil and gas company promised me everything I wanted, so I didn't care if it was actually written in the oil and gas lease". Unfortunately most (there are a few exceptions) verbal promises by the oil and gas company or its landman are not enforceable under Texas law).

8. "The landman told me I had to sign right away, or they would withdraw their offer and I wouldn't get the money they were offering". It usually takes a while to lease all the acreage that the oil and gas company needs before they drill. There is rarely a situation where it is truly a case of "sign now or no deal".

9. "My mineral interest is so small, the oil company wouldn't make any changes anyway". It is certainly true that someone who owns many acres and owns 100% of their minerals will have more leverage with the oil company than someone who owns a small fractional interest in a few acres. However, sometimes even small interests count, when it is just those interests or acres that the oil company needs to make up its production unit. Secondly, many times owners of small interests, such as family members, go together and retain me to negotiate their lease, and together, they have more leverage than they did acting individually. In my office, the cost to review, evaluate and negotiate a lease is the same whether it's for one family member of twenty. Finally, most oil and gas companies are reasonable, and are open to making reasonable changes even when your interest is small. The key is to have someone who is experienced and who knows what changes are appropriate to ask for given the size of your interest. Even small changes can make a big difference in the overall fairness of a lease.

If you get an offer from an oil and gas company or its landman, simply smile and say: "Thank you. I will seriously consider this. I will send it to my attorney promptly and we will be in touch with you soon". And then call your attorney!!

As a Texas oil and gas attorney, I have viewed the "global warming" debate with growing alarm. When the United Nations International Panel on Climate Change ("IPCC") initially issued its fourth report, I was concerned because the IPCC is made up primarily of politicians, not scientists. Next, I read the report thoroughly and then did my own research. My independent research led me to the conclusion that the IPCC's findings were in large part: 1) based on no research at all; 2) were based on non-peer-reviewed research; or 3) illogical, tenuous or unjustified extrapolations from unrelated research. Despite these problems with the report, large numbers of people wanted to join the IPCC and Al Gore in proclaiming that global warming was caused by manmade greenhouse gases. It is even more alarming at how many people continue to chant this mantra, even after the flawed science (or lack of science) behind the IPCC's report has been revealed.

Recent news has demonstrated to an even greater degree just how ill-conceived, biased and misguided the IPCC's report was. Notwithstanding the evidence of how flawed the IPCC's report is, the EPA, at the direction of the Obama Administration, has sought to treat greenhouse gases as toxic, and to regulate them.

Major industries in Texas, including agriculture and oil and gas production, unquestionably produce some carbon dioxide. The idea of regulating the greenhouse gases, and in particular, the CO2, produced by these industries as a toxic substance is irresponsible, however. Not only is this kind of regulation misguided and politically motivated, the economic costs of regulation could be staggering, especially in this recession. Why would the federal government want to beat on us when we're down??

It is especially heartening to see the Texas Governor, Rick Perry, take on the EPA by bringing suit to stop EPA from regulating greenhouse gases in Texas. Many of us are cheering for him!

Texas oil and gas attorneys and mineral owners may see more leasing activity in 2010 in the Eagle Ford Shale, a field in southern Texas that oil and gas companies have known about for some time, but that is just now being explored. The field is named after the city of Eagle Ford, Texas, hometown of Bonnie Parker of "Bonnie and Clyde" notoriety. (The city of Eagle Ford was incorporated into the City of Dallas in 1956).

Several oil and gas operators, beginning with Petrohawk Energy Corporation, and including many of the larger companies (Anadarko Petroleum Corporation, XTO Energy Inc., Chesapeake Energy Corporation and several others), are quietly signing up leases and drilling exploratory wells. The "word on the street" is that the cost of drilling a gas well in the Eagle Ford Shale may be substantially less than in the Barnett Shale or the Haynesville Shale, although drilling in the heavy clay present in portions of the Eagle Ford shale presents its own challenges.

The Eagle Ford Shale underlies large portions of Texas, but it doesn't always contain gas. Currently, leasing appears to be limited to Colorado, Dewitt and Karnes Counties. Other counties that may see leasing activity include Bee, Dimmit, Goliad, LaSalle, Lavaca, Live Oak, McMullen, and Webb Counties. An increase in the price of gas (which, given the large amount of current reserves, probably won't happen for a while) would certainly accelerate activity in this play.

As a Texas oil and gas attorney, I have observed that it has been a slow year so far for leasing and drilling activity. But some experts are predicting a change on the horizon for 2010. An article this morning by Jamaal O'Neal in the Longview-Journal.com quotes Professor Ken Morgan, Texas Christian University geology professor and director of the TCU Energy Institute, as saying that higher oil and gas prices may be ahead for 2010. The article quotes research by Baker Hughes that natural gas, which was selling for $10.00 per thousand cubic feet or more in mid 2008, is currently selling for as low as $3.60 per thousand cubic feet. A barrel of crude oil that sells for about $69.00 currently, was bringing $150.00 a barrel during the summer of 2008. Professor Morgan opines that the large amount of natural gas reserves, as well as the world-wide recession, has kept prices for oil and gas low.

Basic economics dictates that when prices are low, oil and gas companies are reluctant to expend the large sums necessary to drill new wells. They are not going to make the investment if they can't get a return. As the world economy recovers, demand for oil and gas will increase, the price of oil and gas will increase and the drilling of new wells will once again generate sufficient returns to support the cost of drilling. Once oil and gas companies begin to drill again, mineral owners will begin to get calls from landmen working for the oil and gas companies, seeking new leases. I may be a bit optimistic, but I see leasing and drilling activity in Texas picking up by March and April 2010.

As a Texas oil and gas attorney for many years, I have seen many booms come and go. During a "boom" period, prices for oil and gas increase. The increase in prices encourages exploration of new sources of oil and gas and development of existing sources. Mineral owners tend to see much more leasing activity during boom periods, and oil and gas companies are much more amenable to entering into leases that are fair to both mineral owner and operator. Conversely, when prices of oil and gas are low, exploration and development sags, leasing activity falls off and when a mineral owner is offered a lease, it is usually a very one-sided lease that favors the oil and gas operator and is very unfair to the mineral owner. We are just coming off a very down period for oil and gas exploration and development in many areas of Texas. I have counseled many mineral owners over the years during these down periods who were offered leases that were, frankly, onerous. In most cases, my client decided to decline the oil and gas company's offer, and await a better offer. So far, each of these owners was ultimately offered a better deal, a fairer lease, and a lease with better compensation for their minerals because they waited. As in life, there are no guarantees in the oilpatch. For example, there is no guarantee that you will be offered another lease, although it is certainly likely that you will. There are some cases in which even a poor lease might be better than no lease at all, especially if you are faced with a situation where your minerals may be drained without compensation if you don't execute a lease. It is also important to realize that even in boom markets, you don't always get everything you want in a lease. It is always a matter of give and take. Frankly, only someone experienced in this area can give you the input to help you make an informed judgment about whether to lease or not, and if you do lease, on what terms.

Any Texas oil and gas attorney who has practiced for any length of time has been through the cycle many times: oil prices go up, and leasing and drilling activity increases. Oil and gas prices decline, and many oil and gas companies pull back on their leasing and drilling efforts. The past year has seen an especially extreme example of this cycle. Last summer, according to WTRG Economics, the price the operator received for oil in some areas of Texas reached $150.00 per barrel or more. According to the Energy Information Administration (a division of the Department of Energy), gas was going for $8.00 per mcf at the wellhead in some places. Leasing was going on at a frantic, almost giddy, pace and substantial primary term payments and royalty percentages were the norm. Then prices declined sharply, to less than $30.00 per barrel of oil and $3.00 per mcf for gas at the wellhead in many areas of Texas. Most operators pulled way back, some walking away from signed leases and others signing leases only at substantially reduced bonus and royalty levels.

Now the price of oil and gas is increasing, and phoenix-like, the Texas energy industry begins to rise from the ashes. This time, there are some dark clouds on the horizon, coming in from our nation's capitol, that do not bode well for the energy industry. President Obama, while proclaiming that he wants to achieve independence from foreign oil sources, is considering two things that would cripple our domestic oil and gas industry. Specifically, he wants to eliminate intangible drilling costs and depletion allowance as deductions for oil and gas operators on their federal income tax. He wrongly calls these "subsidies", in an attempt to gain support for this policy.

The deduction for intangible drilling costs allows oil and gas companies to deduct the cost of exploring for oil and gas from later oil and gas income. These costs include such things as seismic tests, surveys, engineering fees, wages, etc. The intangible drilling cost deduction encourages oil and gas companies to explore for new energy sources. The depletion allowance allows oil and gas companies to deduct a portion of the value of their mineral deposits as those deposits are used up, just as the owner of a machine used to produce goods is allowed to depreciate his machine.

It took decades for the domestic energy industry to recover from the ill-conceived, poorly timed and wrongly executed policies of Jimmy Carter. President Carter's policies drove many smaller companies out of business, and encouraged other producers and refiners to move outside of the United States. When we experience those times of high gasoline prices in the United States, it is primarily Carter that we have to thank. Unfortunately, we now seem to have another President headed down this same irresponsible path.The announced policies of Obama are bad policy policy for at least four reasons: 1) most energy production in this country comes from small, independent companies, not "big guys" like Exxon or Mobil, and these small companies are going to be hurt badly by this policy; 2) these policies will result in much higher prices at the pump for consumers, who are having a hard enough time already; 3) Carter's policies drove the "big guys" overseas, and now Obama's policy would diminish the remaining independents; and 4) the higher energy prices will contribute in a big way to inflation. Is this really the way to achieve energy independence? I think not!

Part of what I do for clients as a Texas oil and gas attorney is to calculate oil and gas royalties so that they can be sure they are being paid correctly. I thought it might be useful to you to explain how an ownership percentage and royalty are calculated.

1. First, we take your percentage of mineral ownership in the land in question, and we multiply that by the number of surface acres in your entire tract. The resulting number is your net mineral acres. For example, if two relatives together own a one-half interest in a forty acre tract, or ½ times 40, they have twenty net mineral acres.

2. Secondly, if the land is located in a pooling unit, (sometimes also called a pro-ration unit), we multiple the total number of acres in the tract by a pro-ration fraction. The reason for this is that each royalty owner in a pooling unit is only entitled to their proportionate share of the oil or gas produced by the entire pooling unit. A pooling unit is an area around a well that is set by the Texas Railroad Commission, and is intended to approximate the area drained by a producing well. Pooling units can range in size from 80 to 640 acres or more. For example, for a forty acre tract that is located in a 320 acre pooling unit, that forty acre tract is entitled to 40/320, or 0.12500, of the minerals (whether oil or gas or both) produced by that 320 acre unit.

3. Third, we multiply that result by the royalty fraction in the oil and gas lease you signed.

4. Finally, we divide that result by the number of current owners to determine what portion of the total production from the pooling unit each owner is entitled to.

By way of example, let’s say you and a relative own 20 net mineral acres in a 40 acre tract. Let’s also say that the pooling unit is 320 acres. This fraction in our example would be 40/320. Next we multiply that result by the royalty fraction in the oil and gas lease that was signed, which in our example is 1/6. Finally, we divide that result by the number of owners, which in our example is two.

Here is the calculation for our example in numeric form:

First, I convert the fractions to decimals so they are easier to multiply:

20/40 = 0.5

40/320 = 0.12500

1/6 = 0.166666

1/2 = 0.5

Next, I multiply out the calculation:

0.5 X 0.12500 X 0.166666 X .5 = 0.005206

The result of this calculation is that for every dollar of gas sold from the well, you and your sister in our example would each get 0.005206 of that dollar. This does not seem like much, but a good gas well can produce millions of BTU's of gas, and so the royalty payments can be substantial.

Oil and gas companies can and do make mistakes in calculating a mineral owner's royalties. If you think your royalties are not being calculated correctly, give me a call.

As oil and gas lawyers in Texas are well aware, there is a lot of pipeline construction going on in Texas as well as in other parts of the United States. I had a fascinating conversation not long ago with Victoria Myers, Senior Editor for The Progressive Farmer Magazine. If you have not looked at this publication before, it is really an excellent resource for folks who make a living from farming, as well as those "gentlemen (gentlewomen?) farmers out there. (You know who you are!) Since I am a Nebraska farm girl myself (Thayer County, to be precise), I find it especially interesting.

Victoria is the author of an article in an upcoming issue of Progressive Farmer regarding pipeline easements and rights-of-way. My discussion with her has caused me to update my list of issues involved in these kind of agreements by adding a few from her list. Here is the updated list:

1. Is the easement limited to a specific area, or is it a blanket easement over your entire property?
2. Is the pipeline going to be buried to an appropriate depth, in light of your future use of that property, what the pipeline will carry and the anticipated size of the pipeline?
3. Does the easement obligate the pipeline company to refill to the original contour of the land and maintain that contour as the fill packs down?
4. Is the pipeline company obligated to remove and save the top soil from the easement area separately, to replace the topsoil and reseed with whatever grass was there originally and in general to restore the easement area to its original condition?
5. Will any waterways or drainage tiles be impacted by the pipeline? If so, is the pipeline company obligated to repair these to their original condition and possibly pay damages for temporary loss of use?
6. If your land is used for agricultural purposes, can construction, installation and maintenance be performed when the ground is cold or frozen to reduce soil compaction?
7. Is there a "temporary work area" in addition to the easement itself? Are you receiving an additional payment for use of this area?
8. Pipeline installation can involve a lot of very heavy equipment which will compact the soil. Is the temporary work area situated so that the soil compaction is kept to a minimum? Are you being paid damages if the compaction that does occur prevents future crops in this area?
9. Will you be compensated for crop loss or crop damage caused by the installation and construction phase as well as by the permanent pipeline?
10. Is the pipeline company required to notify you prior to use of herbicides for brush or weed control?
11. If fences will be effected, is the pipeline company obligated to use temporary fencing and to restore the original fence to same or better than the original?
12. If fences must be cut, will a gate be installed that is of a design and quality suitable for the use of that gate?
13. Will you have rights to use the surface in any manner that does not interfere with the pipeline?
14. Will the pipeline company agree to avoid important trees and not to remove or trim trees without your consent?
15. Will the pipeline company agree to mark the pipeline route with durable and permanent markers?
16. Will the pipeline company agree to be responsible for any damages that are caused directly or indirectly by the installation, operation, maintenance or removal of the pipeline?
17. Does the easement terminate if it is unused for a certain length of time?
18. Will there be above-ground equipment along the pipeline route? If there is going to be above-ground equipment, are you going to be separately and appropriately compensated for it?
19. Will you get a separate payment for the easement and for damages?

These are just a sample of the kinds of serious issues involved in negotiating a pipeline easement or right of way agreement. Each of these can be major issues if not properly addressed in the easement. For example:

1. If there is no right on your part to declare an unused easement to be abandoned, that easement will show up on your title forever, even if it has not been used for many years. This can create a major impediment to future uses of your property. You can try to get a release of the easement, but the pipeline company may not exist any longer, and there may be no one to sign a release. You may even need to file a suit and obtain a court order to declare the easement terminated.

2. Above-ground equipment can include valves, gas compressors (that can be very loud and messy) loops or pig entry sites or measurement equipment that may interfere with irrigation equipment.

3. Regarding payments, currently easement payments are taxed as capital gains but damages payments are not taxable. If you get one check and the payment for the easement is combined with the payment for damages, the IRS may well assume that the entire payment is taxable.

4. Construction equipment may prevent irrigation of a field at a critical time. In fact, the construction phase may render the entire field unusable, with the resulting loss of the crop from that field. You need to be sure the compensation paid to you includes the value of the lost crop.

For all these reasons, many landowners consider it simply good insurance to consult an attorney before they sign a pipeline easement. The cost of an attorney is a small fraction of the amount of potential damages caused by pipeline construction. In many cases, an attorney will pay for themselves because they are able to negotiate more complete damage payments from the pipeline company.

As a Texas oil and gas attorney, one of the things I do often, and really enjoy, is assisting people in locating oil and gas royalties due to them from old oil and gas leases signed by their ancestors. In a previous blog here, I discussed how these royalties get lost. Today I'd like to discuss how I go about determining whether you may have oil and gas royalties due to you and your family.

First, I will need to know the Texas county in which you believe your relative or ancestor owned property or minerals. In addition, if you have any written documentation regarding this ownership, I ask you to provide me with copies. Any documentation, such as an old deed, an old oil and gas lease, a will, an old tax statement, a plat, a survey, a copy of the county appraisal district map showing the land, a stub from an old royalty check, or even just an address, can be very helpful. It is certainly possible to research all counties in Texas, but since there are 254 counties in Texas, the expense would be substantial.

Next, I research the status of your relative’s ownership of the real property that may be subject to an oil and gas lease or leases. Even if you already have a legal description of the property, it is essential to make sure that your relative has not, unknown to you, conveyed or transferred the property in question to a third party, or perhaps lost the property due to delinquent taxes. If we proceed without the precise legal description of each parcel of real property, or if the legal description is inaccurate or incomplete, or if your relative has sold or lost the property or the mineral interest, the time and expense involved in further work will be wasted.

Once we have completed the real estate research, I identify any oil and gas wells that have been or are located on your relative’s property. In addition, I determine whether your relative’s lease was part of a pooling or production unit. I obtain copies of the pooling documents so that I can calculate your relative’s ownership percentage and royalty.

If a well or wells have been identified, I then perform a royalty analysis. There are three components to this analysis. First, I determine the historical production from these wells. Secondly, I use historical price data to calculate the approximate income from the production from any wells. Thirdly, I use the ownership percentage formula to determine royalties due to you and your relatives.

The final step is to assemble a package of the research and transmit this with a demand letter to the well operator and/or owner to pay royalties to you and any relative who shares ownership of the minerals with you.

Sometimes we find property owned by your ancestor that has never been put in your name. If that is the case, there are simple legal procedures to cure this situation that I will be happy to discuss with you. These procedures will both clear title to family land (so future generations won't have to face these issues) as well as clear the way to getting oil and gas royalties paid to you instead of escheated to the State of Texas!

As a Texas oil and gas attorney, I negotiate a large number of oil and gas pipeline easements and rights-of-way throughout Texas, as well as easements for other types of utility lines. While the landowner and I may not get everything we want in the negotiated agreement, it is almost always more fair than the agreement the pipeline company originally offered.

I also get a couple calls a month from someone who signed an oil and gas pipeline easement or right-of-way without consulting an attorney before they signed. Usually, they are seeing activity by the pipeline company that disturbs them and they want to know if the agreement they signed "lets them to do that?" The answer most of the time is "Yes". Their next question almost always is: "Can I cancel this agreement or get out of it somehow?" The answer to that question is usually "No".

I am intrigued by why people would sign such a long term, complex, agreement, without legal advice. I have been cataloging the reasons I hear, out of curiosity. Here are some of the reasons I have heard thus far, and my parenthetical response.

1. "The landman was just so nice". (Yes, he was nice. It is his job to be nice. If he wasn't nice, he would have been fired a long time ago. Besides, have you ever been taken advantage of by someone who wasn't nice?)

2. "The contract did not look that complicated". (Well, if you are not an oil and gas lawyer, do you really know what those words mean? Do you know when words in the agreement have one meaning in ordinary use and other meaning in the oil and gas field? Even more important: do you know what's missing?)

3. "It costs too much to see a lawyer". (There are many oil and gas attorneys in Texas whose fees are not only reasonable, but whose rates are a fraction of the amount of damage that can be done to your land because of an improper agreement. In addition, the attorneys fees are sometimes offset by the increased pipeline company payment as the result of a negotiated agreement.)

4. "The pipeline company promised me everything I wanted, so I didn't care if it was in the easement". (Unfortunately most [though not all] verbal promises by the pipeline company or it's landman are not enforceable under Texas law).

5. "The landman told me I had to sign right away, or they would withdraw their offer and I wouldn't get the money they were offering". (It takes a long, long time to acquire all the right-of-way for a pipeline. There is rarely a situation where it is truly: "sign now or no deal".)

If you get an offer from a pipeline company or it's landman, simply smile and say: "Thank you. I will seriously consider this. I will send it to my attorney promptly and we will be in touch with you soon". And then call your attorney!!

.

As Texas oil and gas attorneys know, each year, probably hundreds of thousands, maybe even millions, of dollars in oil and gas royalties from wells produced in Texas are lost to their rightful owners through a process called escheat. Specifically, when oil and gas companies cannot find the correct owner of mineral royalties, they are required to turn this money over to the Texas Comptroller.

How this happens is not difficult to understand. Let's say Mom and Dad bought 100 acres in Texas many years ago. They got a deed to the land and the deed was filed in the deed records of the county where the land is located. They purchased both the surface and the minerals. A while later, they sign an oil and gas lease, and shortly after that, they began getting royalty checks. They don't tell their children about the royalties, or maybe they do and the children forget about them. Many years later, Mom and Dad die, leaving five children. Maybe Mom and Dad died without leaving a will, or maybe they both had wills, but none of the children, for whatever reason, decided to have the wills probated. The five children just assume they each now own a one-fifth share of Mom and Dad's land, or 20 acres each.

Three factors now come into play that result in royalties to Mom and Dad being overlooked by the children. First, most oil and gas companies have certain minimum amounts of royalties that must accrue before they will send a check. If an individual mineral owner has a small share of the royalties on a well, checks may be sent out every few months, or even once a year. Secondly, all wells are shut down from time to time, for repairs or perhaps while a new gas pipeline contract is being negotiated. During this time royalty checks may not be sent out. One of the children or a grandchild may collect Mom and Dad's mail for a time after Mom and Dad die. At some point, they stop doing so, or perhaps the Post Office forwarding order expires and is not renewed. When royalty checks resume, they are returned to the oil or gas company as undeliverable. At that point, Mom and Dad's royalty account is put in suspense, or on hold. After a certain amount of time, the oil or gas company is required by the Texas Property Code to turn all accrued royalties over to the Texas Comptroller.

A third factor that contributes to royalties being overlooked by heirs is that the well that produces royalties for Mom and Dad may not be on the family land. In fact, the well may be a considerable distance away from the family land. The reason is that most oil or gas wells are required by law to be part of a pooling unit. The pooling unit may be as small as eighty acres, in the case of an oil well, or it may be several hundred acres in size, in the case of a gas well. When the well is a distance from the family land, it may not occur to the heirs that the family land is actually part of that well's pooling unit.

(Keep in mind that the oil and gas company must depend on the county deed records to determine property ownership. If Mom and Dad did not have wills, or if they did and they were not probated, or if the wills were probated but the executor of the wills did not prepare a deed transferring the family land to the heirs, or if deeds were prepared but were not actually filed in the county deed records, then nothing shows up in the deed records to show the change of ownership! In addition, keep in mind that it is the heirs' responsibility to keep the oil or gas company informed of changes in ownership. It is not the oil or gas company's job to keep up with the heirs!)

One day, a grandchild or great grandchild may decide to investigate whether royalties are due, and if so, from what company. They will want to be sure that any royalties are paid to the current heirs. The good news is that a Texas oil and gas attorney with experience in this type of investigation can do this for you. Usually, all that is needed is one document relating to the land, such as a deed, an old tax statement, a plat, a survey, a copy of the county appraisal district map showing the land, a stub from an old royalty check, or even just an address. With just this small bit of information, an experienced oil and gas attorney can determine whether this land is part of a pooling unit, whether the well in the unit is producing, and whether royalties are due. Your attorney can then get the records corrected both with the county and the oil or gas company so that royalties are sent to the current heirs.

My office charges a modest fixed fee for this kind of investigation. The payoff for a small investment might just be substantial, not only in terms of monetary return, but also in terms of having title to the family land cleared up for future generations! Please call me if you think there may be missing royalties in your family.

As a Texas oil and gas attorney, I have occasion to review and negotiate many oil and gas leases in Texas for clients all over the United States (hopefully before the lease has been signed). However, having an attorney review a pipeline easement is every bit as important. Here are just a few of the critical questions that a pipeline easement should address:

1. Is the easement limited to a specific area, or is it a blanket easement over your entire property?
2. Is the pipeline going to be buried to an appropriate depth, in light of your future use of that property, what the pipeline will carry and the anticipated size of the pipeline?
3. Does the easement obligate the pipeline company to refill to the original contour of the land and maintain that contour as the fill packs down?
4. Is the pipeline company obligated to remove and save the top soil from the easement area separately, to replace the topsoil and reseed with whatever grass was there originally and in general to restore the easement area to its original condition?
5. Will you have rights to use the surface in any manner that does not interfere with the pipeline?
6. Will the pipeline company agree to avoid important trees and not to remove or trim trees without your consent?
7. Will the pipeline company agree to mark the pipeline route with durable and permanent markers?
8. Will the pipeline company agree to be responsible for any damages that are caused directly or indirectly by the installation, operation, maintenance or removal of the pipeline?
9. Does the easement terminate if it is unused for a certain length of time?
10. Will there be above-ground equipment along the pipeline route? If there is going to be above-ground equipment, are you going to be separately and appropriately compensated for it?
11. Will you get a separate payment for the easement and for damages?

These can be major issues if not properly addressed in the easement. For example, if there is no right on your part to declare an unused easement to be abandoned, that easement will show up on your title forever, even if it has not been used for many years. This can create a major impediment to future uses of your property. You can try to get a release of the easement, but the pipeline company may not exist any longer, and there may be no one to sign a release. You may even need to file a suit and obtain a court order to declare the easement terminated.

In connection with above-ground equipment, this can include valves, gas compressors (that can be very loud and messy) loops or pig entry sites or measurement equipment (that may interfere with irrigation equipment).

Regarding payments, currently easement payments are taxed as capital gains but damages payments are not taxable. If you get one check and the payment for the easement is combined with the payment for damages, the IRS may well assume that the entire payment is taxable.

If you are the kind of person who takes out their own appendix, then by all means, negotiated your own pipeline easement. However, the small amount you pay an attorney to review and negotiate that easement now is very likely going to save you a lot of expense and distress in the future!

As an oil and gas attorney representing clients throughout Texas, I have had many occasions to draft an assignment of one party's interest in a well or a joint operating agreement to another, such as when a well is sold and the first operator's rights under the operating agreement are assigned to the new operator, or when the original owner of a non-operating working interest sells their interest to a new entity. Most assignments contain language that provides that the assignor is no longer liable for claims and expenses in connection with the wells after the date of the assignment, and also provide that the assignee indemnify the assignor for these expenses.

There is an old saying in the oil patch that once you have been involved with an oil or gas well, you are always potentially liable. A Texas Supreme Court case in 2006, as well as a federal court case in 2008, illustrate this point. In the first case, Seagull Energy E & P, Inc. v. Eland Energy, Inc., the Texas Supreme Court held that Eland, as an intermediate assignee of an oil and gas lease, remained liable for costs and expenses arising pursuant to a joint operating agreement, even though the costs occurred after Eland had sold and assigned all of its interest in the leases to an unrelated third party. The Court based its decision on two facts: 1) the joint operating agreement was silent on the question of the liability of a working interest owner after it sold its interest; and 2) the assignment did not contain a release of liability that was agreed to by both Seagull, as operator, as well as the new owner.

Not surprisingly, after this opinion was issued, oil and gas practitioners made certain that their forms met the criteria described in the Seagull case. Unfortunately, even terminology that met the Seagull criteria failed to protect a working interest owner in GOM Shelf, LLC v. Sun Operating Limited Partnership 2008 WL 901482 (S.D. Tex. 2008). In GOM, despite language in the joint operating agreement like that required by the Seagull decision, the Court held that: 1) the obligation to plug and abandon the wells accrued prior to the date of the assignment; and 2) the plugging and abandonment liability was not expressly released by the release language in the joint operating agreement. As a result, the former interest owner was held liable for plugging costs.

I guess there are really two lessons here. The first is to be careful who you sell your interest to. If the new interest owner is a thinly capitalized sham company trying to make a quick buck, who folds without meeting their obligations under the operating agreement and the Texas Railroad Commission rules, you may get the bill when the Railroad Commission is looking for someone to pay for well plugging and clean up. Secondly, it is probably good insurance to have an oil and gas attorney draft the necessary documents when you are selling or acquiring an interest in oil and gas properties. While in oil and gas law, as in life, there are no guarantees, you will at least have the full benefit of all protections offered by the law at that time. I can guarantee one thing: the cost of proper documentation is light years less than the cost of remediation of an abandoned well site.

As an oil and gas attorney representing clients from all over Texas and from all over the world who have land in Texas, I have been getting quite a number of calls from people who signed a document before consulting an attorney and have lived to regret it, I'm sorry to say. It is apparent that there are a number of scams going on out there. One woman I talked to said that she was presented with a document that she was verbally told was merely permission to do seismic testing on her land. The document turned out to be an oil and gas lease. The terms were not very favorable to her and were substantially less than what the oil company was offering other lessors. Another woman called me recently to say that her elderly mother had signed a document that had been verbally represented to be an oil and gas lease. The document turned out to be a mineral deed, which means the woman had sold her minerals in their entirety forever!

Please folks, do not sign anything until you have a lawyer look at it. There are many honest oil companies and land men and women out there. However, even the honest oil companies are not going to offer you their best lease deal at first. In addition, oil and gas is an area that has its own language and concepts, and unless you have an oil and gas background, you are not going to be familiar with these. Finally, be aware that an oil and gas lease, in most cases, continues for as long as there is paying production, so that lease may be in place for your lifetime or longer.

Where a lease or deed has been obtained fraudulently, you may be able to sue to get the lease or deed canceled, but that is usually going to be a long, expensive and uncertain process. Please do yourself a favor: 1) do not sell your minerals, only lease them; 2) have an oil and gas attorney look at any document before you sign it, whether it is a seismic testing agreement, a pipeline easement or an oil and gas lease; and 3) please tell your elderly relatives to call you immediately if they are approached to sign anything, and not to meet with anyone about signing documents unless you are present.

As a Texas oil and gas attorney representing clients from all over the country with oil and gas leases in Texas, I am continually amazed at how many people sign an oil and gas lease without reading it!

My flight instructor used to have a rule he would use when I was doing something bad while I had the plane and he wanted me to stop it immediately because I was getting ready to kill both of us. He called it "Rule 13" and it meant "Whatever you are doing, stop it!" To all of you folks out there who sign a lease without reading it, or who read a lease and don't understand it or who don't understand the legal ramifications of what you are signing, I would say: "Rule 13...Don't do that!". In most cases, I can negotiate with the oil company to make changes that will make the lease much more fair and much more favorable to you. In almost every lease I have negotiated, the oil company has accepted most, if not all, of these changes. For most leases, I charge a very modest set fee. Many of my clients find that the increase in their bonus or royalty check more than pays for my legal service. An oil and gas lease is a serious legal contract that is going to control your land, in many cases, for many years to come. So please seek legal advice before you sign that lease!