Articles Posted in Oil and Gas Law

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Earlier this year, several Texas senators introduced Senate Bill 740 that would have increased landowner protections in the event a pipeline company sought to obtain an easement on their property using eminent domain. You can read the full text of the bill here.

The bill contains amendments to the “Bill of Rights” contained in the Texas Government Code and numerous amendments to the Texas Occupations Code dealing with right-of-way agents, but most importantly, it contains amendments to the Texas Property Code dealing with offers to land owners by pipeline companies seeking pipeline easements. Examples of the new provisions are:

  • a requirement pipeline company must provide any new, amended or updated appraisals to the property owner within a specific time
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The Texas Railroad Commission is the state’s oil and gas regulator, and last year it bumped heads with the U.S. Army Corps of Engineers concerning whether the Corps has the authority to implement rules about where oil wells and injection wells can be drilled. The controversy surrounds the Joe Pool Lake, located in Tarrant County, Dallas County and Ellis County, and specifically whether drilling and injecting should be permitted within a certain distance of the dam.

Injection Wells Linked to Increases in Seismic Activity

There have been claims asserted in some circles that fracing or the use of injection wells to dispose of waste water has been linked to an increase in seismic activity near drill sites. The Corp recently obtained a study concerning the impact induced seismic activity could have on the structural integrity of the Joe Pool Lake dam. The study concluded that with respect to production, a 5,000-foot standoff distance — which is slightly larger than the one set by the Army Corps — had little effect on subsidence, or caving and settling, at the dam. In fact, the study did not recommend any change in the current ban area. Somehow, despite the study’s conclusions, the Army Corps is concerned that drilling within four thousand feet of the Joe Pool Lake dam or hydraulic fracturing within five miles of the dam could increase the risk of man-made earthquakes in the area, which could in turn structurally damage the dam. (There is already a drilling ban in effect within three thousand feet of the dam). The expansion of the ban area would encompass land from the cities of Grand Prairie, Arlington and Dallas.joepool2

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The Texas Supreme Court recently ruled in the case of Forest Oil Corporation v. El Rucio Land and Cattle Co. The Court originally denied the review of the Corpus Christi Appeals Court decision affirming a $15 million dollar arbitration award against Forest Oil Corporation (now Sabine Oil & Gas), however, after a motion for rehearing the Court granted the petition for review. The primary issue is who has jurisdiction of a landowner’s claim against an oil and gas company for the contamination of a landowner’s property.

Background

Forest Oil leased roughly 1500 acres from McAllen Ranch (owned by James McAllen) in the mid-1980’s, where it has been producing and processing natural gas. About a decade after the lease was signed, McAllen Ranch and Forest Oil entered into another agreement in which Forest agreed to remove and clean up any hazardous materials from the lease site. The parties agreed that any disputes would be resolved by arbitration rather than by going to court.

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A case that has gained attention in the Texas oil and gas industry is the case of Samson Exploration v. T.S. Reed Properties which is currently awaiting a decision by the Texas Supreme Court. The case involves three gas wells and two mistakenly overlapping pooling units in Hardin County, Texas.  The boundaries of the first unit were amended by the well operator, but the boundaries of the second unit were not. The two main issues, as stated by the Texas Ninth Court of Appeals, are : “First, whether the stakeholders participating in (the first unit) can recover damages from the operator of the unit when the operator amended the boundaries of the unit to exclude a well that was within the boundaries of the original unit, and where the stakeholders accepted royalties attributable to the amended unit without challenging the operator’s authority to amend the original unit’s boundaries. Second, whether the stakeholders in (the second unit), based on their claims for breach of contract, can recover damages from the operator due to the operator’s failure to pay royalties on oil and gas produced from a well that the operator contends was (originally)  included in that unit by mistake”.

In October 2015, the Texas Ninth Court of Appeals opinion ruled that the stakeholders in the first unit had ratified the amendment to the unit by accepting royalties attributable to the amended first unit. Therefore, those stakeholders should recover nothing. The Ninth Circuit further determined that the stakeholders in the second unit could recover damages from the well operator for the operator’s failure to file an amendment to the description defining the pooling unit’s boundaries, but that the award of damages in the trial court was excessive because it awarded royalties for prior to the time the unit existed.

Many in the Texas oil and gas industry, like Texas Alliance of Energy Producers, support Samson’s claim that the royalty owners in the first gas unit ratified the unit amendment by accepting royalties after the unit was amended, and that they should not be required to pay royalties from one well to lessors in both gas units.

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The Texas 14th Court of Appeals recently decided the case an interesting case,  Clay Exploration, Inc. v. Santa Rosa Operating, LLC, concerning who has the right to execute oil and gas leases for unknown owners. In 1889 Frederick Kastan and Gustav Heye purchased 102 acres in Grimes County, Texas. Subsequently, Kastan left Texas and moved to Germany. In 1999, after conducting an unsuccessful effort to locate Kastan or his heirs, Marathon Oil petitioned a local court for a receiver to sign oil and gas leases for the 102 acres purchased by Kastan and Heye. Marathon’s petition requested that the receiver “take charge of and execute an oil, gas, and mineral lease, or leases” on behalf of unknown owners of the mineral rights, which included Kastan and his unknown heirs. This is pretty standard practice in Texas when an oil company can’t locate all the owners. The trial court appointed a receiver, Charles Ketchum, and ordered Ketchum to execute mineral leases with Marathon. The Marathon leases required Marathon to drill and produce within three to five years or the lease would expire.

Apparently the Marathon leases expired, and in 2011 two new oil companies, Clay Exploration, Inc. and Santa Rosa Operating, LLC decided they wanted to lease the 102 acres.  Santa Rosa petitioned a local court to appoint another receiver to lease the Kastan mineral rights. While the Santa Rosa petition was pending, Clay Exploration contacted the original receiver, Ketchum, who signed a lease with Clay in January 2012.

In April 2012 Santa Rosa intervened in the original Marathon receivership action, alleging that Ketchum had only been authorized to sign a lease with Marathon and no one else. Meanwhile, Santa Rosa located the unknown Kastan heirs and obtained leases directly from them. Santa Rosa filed a motion to set aside and invalidate the Clay leases on the grounds that Clay was aware that the Kastan heirs were no longer unknown and that Ketchum was authorized to sign a lease only with Marathon.” Santa Rosa also alleged that Marathon never drilled or operated on the tracts, although there was apparently no evidence on this. In response, Clay filed a motion to confirm the lease they signed with Ketchum.

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The case of Rippy Interests LLC. v. Nash, LLC is interesting because it examines what type of operations will keep a Texas oil and gas lease in force after the primary term has expired, and also what constitutes a repudiation of an oil and gas lease in Texas.

On January 18, 2006 Range Production I, L.P. acquired a mineral lease (hereinafter the “Range Lease”) on acreage in Leon County owned by Nash LLC. The primary term of the lease was for three years, with an option to extend the lease for an additional two years. Range exercised the option and extended the term of the Range Lease to January 18, 2011. In the fall of 2009, Range assigned its lease to Rippy Interest LLC. A year later, Rippy received a drilling permit to drill a well on the Range Lease.

The same month that Rippy received the drilling permit, Nash LLC granted a top lease for the acreage to KingKing, LLC (hereinafter the “KingKing Lease”), which was expressly subordinate to the Range Lease and would only take effect upon the expiration of the Range Lease. The Range Lease contained the following two clauses, which are fairly standard clauses (in one form or another) in Texas oil and gas leases:

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In 2015, Enterprise Product Partners announced plans for a new pipeline that will run over 400 miles from Midland, Texas to Sealy, Texas. The yet-to-be-named pipeline will originate at Enterprise Product Partners’ trading and storage hub in Midland and will connect with the eighty mile Rancho II pipeline in Sealy. The Rancho II pipeline came on line in 2015 and will connect Sealy with the storage hub, the Enterprise Crude Houston Oil (“ECHO”) terminal, located in the southeast of Houston, Texas. The ECHO terminal was developed by Enterprise Product Partners in 2010 and functions as a central storage and distribution hub. The connection to ECHO will allow Enterprise Product Partners to access the Gulf of Mexico via Texas City. Enterprise is planning on continuing to take advantage of a recently passed exception to the 1970’s crude export ban by offering approved processed condensate at the Gulf. Currently Enterprise Product Partners is one of the most active condensate exporters in the region.figure1_148

The unnamed pipeline will have a capacity of 540 million barrels per day and is expected to come on line in the second quarter of 2017. The new pipeline will be capable of segregated transport and used to transport four different grades of crude: West Texas Sour, West Texas Intermediate, Light West Texas Intermediate, and condensate. The pipeline will be fed by both tanker trucks and pipelines that currently terminate at the Midland Hub. A map of the currently proposed pipeline which was presented in an Enterprise Product Partners presentation is shown to the right.

If you live in one of the counties through which this pipeline will be installed, you may be getting a call from a land man representing Enterprise. Keep in mind that there are many legal and safety issues involved in having a pipeline installed across your property. In addition, there is no such thing as a “standard pipeline easement form”despite what the land man may tell you. You and your property are best served by seeking the input of an experienced Texas oil and gas pipeline attorney to assist you in evaluating the easement offer and in getting just compensation for the easement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The United States Court of Appeals for the Fifth Circuit issued an unpublished opinion last year in Waggoner v. Denbury Onshore, LLC, et al. concerning the application of state antitrust law to  royalty payments. It should be noted that while the opinion is instructive on how the 5th Circuit Court of Appeals views the issues discussed, the opinion is explicitly not intended as precedent, except under the limited circumstances set forth in the Fifth Circuit Rule 47.5.4.

Background of the Case:

In 1984, James Waggoner acquired an oil, gas, and mineral lease for a section of a carbon dioxide (CO2) formation in Rankin County, Mississippi. Subsequently, Shell Western E&P Inc., a subsidiary of Royal Dutch Shell Inc., petitioned the Mississippi State Oil and Gas Board for authority to pool the interests in a large section of land, which included Waggoner’s interest. Waggoner entered an agreement with Shell to place 77 acres of his land into the pooled tract of land in exchange for a 6.25% overriding royalty interest in the well until payout with an option to convert the overriding royalty interest into a 40% working interest at a later date. Waggoner and Shell  also entered into an Operating Agreement that dictated that the price of CO2 (upon which royalties were to be calculated) would be the “volume weighted average price”. After the well paid out, Waggoner converted the overriding royalty interest into a working interest, which allowed Waggoner to take either a proportional share of the CO2, or a proportional share of the volume weighted average price of the CO2 that Shell received.

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On May 12, 2016, the United States Environmental Protection Agency (EPA) issued its final Methane Rule,  mandating new limits on methane gas emissions, volatile organic compounds (VOCs) emissions and other by-products such as benzene associated with oil and natural gas production wells and storage tanks. The new EPA rule is meant to apply to new as well as existing, reconstructed and modified oil and gas wells and even those wells producing fewer than 12 b/d of oil. Methane is a major component of natural gas. The stated goal of the new rule is to reduce methane and other toxic gas emissions by 40% to 45% of 2012 levels by the year 2025.

Unfortunately, but not unexpectedly, the EPA’s Methane Rule is a one-size fits all scheme that is meant to be adopted across the board by oil and gas producers in all states. When the EPA announced its final rule on this matter, many groups were openly and adamantly critical of the new rule. Many in the oil and natural gas industry voiced concern about the financial stress that the new rule would put on producers. For instance, the rule is especially burdensome for stripper and marginal well operators, and given the low price of oil and gas these days, there are many more marginal well operators these days.

Fifteen States Object to the EPA’s New Rule And File A Lawsuit

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In 1994 Roland Oil Co. acquired the North Charlotte Field Unit Lease in Atascosa County, Texas. The Lease contained 31 wells, with the oldest wells drilled sometime in the 1950s. The Lease contained both active and inactive wells. Rule 14 of the Texas Railroad Commission requires that “dry or inactive wells” be plugged within one year of the termination of drilling operations. Delinquent inactive wells are required to be plugged “immediately unless the well is restored to active operation.” Rule 14 also requires structural testing of inactive wells that are more than twenty five years old prior to plugging and abandonment operations. If an operator fails to meet these requirements, the Railroad Commission can prohibit an operator from producing from any wells under the lease.

In 2005, Roland requested an extension of time to complete the required testing on some of the inactive wells on the Lease. The Railroad Commission determined that Roland had been delinquent on the required testing since 1994, denied the request, and also issued an order barring Roland from producing from any well on the Lease. Roland halted production from May 2005 to August 2006 to conduct repairs and to complete the testing required by the Railroad Commission. The Railroad Commission lifted the order barring production in August 2006.

Meanwhile, in June 2006, a mineral owner under the Lease notified the Railroad Commission that the lease had terminated for lack of production. In response, Roland claimed the Lease had not terminated for two reasons: First, the Lease contained a provision stating that the term of the Lease is “for the time that oil and gas are produced in paying quantities and as long thereafter as Unit Operations are conducted without a cessation of more than ninety consecutive days.” Roland argued that repairs and testing activities during the period of non-production met the definition of Unit Operations under the Lease. Secondly, Roland argued that the Railroad Commission order preventing production constituted “force majeure” which kept the Unit Lease alive despite lack of production.