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EIA issued its 2nd quarter financial review of the E&P industry, found here. Highlights:

Production is declining for the first time since the beginning of 2014 (click to enlarge).

EIA second quarter production

Companies are losing cash (click to enlarge):

EIA cash balance change

Profit is down to zero (click to enlarge):

EIA profitability

Debt increased (click to enlarge):

EIA debt

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Texas Tribune September 24, 2015 – by Ross Ramsey:


What happens when an elected official says “we” is that we think they’re talking about us — the people who elected them. Sometimes, that’s right. In fact, it’s right most of the time.

Not at the Texas Railroad Commission. It’s a three-person state commission elected by Texas voters and seemingly owned and operated by the oil and gas industry it regulates. Go hear one of their speeches at an industry conference sometime and listen for this: Do they call it “your industry” when talking to oil and gas people, or do they call it “our industry.” A recent sampling suggests the latter.

The latest chapter in the remarkably consistent history of the Railroad Commission is about a letter from Chairman David Porter to the Federal Communications Commission.

The FCC is suffering from a case of regulatory constipation, as reported by The Texas Tribune’s Jim Malewitz, that is blocking some oil and gas companies from getting their hands on some wireless frequencies that would help them monitor their pipelines.

The companies want the FCC to free the frequencies, which are licensed to an unrelated outfit that has encountered bankruptcy and other legal challenges.

One of them wrote a letter and got Porter to put it on Railroad Commission of Texas letterhead and sign it himself.

This is all documented in emails, which are surely the greatest thing ever invented for lawyers and others who want to piece a story together after the fact.

Porter’s chief of staff, Caleb Troxclair, traded messages last month with Justin Stegall, a Houston intermediary for Enbridge, one of the companies hoping to get its hands on those wireless frequencies. The company’s Washington, D.C., lawyers drafted a letter that he forwarded to Porter’s office with some suggestions about adding some language of their own.

Troxclair wrote back a couple of days later, saying Porter had agreed to send it. Two days later, he sent along a version on state letterhead that was added to the FCC’s files by the lawyers in Washington.

None of this cost taxpayers much money. There was a little staff time involved, but it’s not like anyone on the state payroll had to write his or her own letter or anything.

It also is not the sort of request that has much effect on anyone but the companies involved. If they get the radio frequencies they want, they can save some money monitoring their pipelines and perhaps even speed up their responses if something goes wrong.

A competent public relations professional could probably make it sound like a small miracle of efficiency and environmental responsibility. Troxclair made a stab at that responding to the original story, saying “Chairman Porter determined that sending the letter was in the best interest of pipeline safety in Texas.”

Pipeline safety was the spin from Enbridge’s spokesman, too. Message discipline is important, and these guys are on the same page.

This does not appear to be a tit-for-tat thing. Enbridge hasn’t contributed to Porter.

But it does seem like a regulator would want the companies that stand to benefit to write their own letters and put their own names on them and print them under their own company letterheads, instead of enlisting the help of a provincial government official who might win some attention in Washington by flashing the state seal.

Come to think of it, this could increase Porter’s own suspicions about letters sent to the Railroad Commission from mayors, county commissioners and other local officials. It becomes harder and harder to distinguish logrolling from heartfelt testimonials, cheapening the regulatory process.

Porter is not doing anything illegal or even unusual, and that’s the trouble. He’s just helping his constituents — the oil and gas people. That’s who Texas Railroad Commissioners talk about when they use the word “we.”

This article originally appeared in The Texas Tribune at

See also

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The Texas Railroad Commission has submitted its “Self-Evaluation Report” to the Texas Sunset Commission, in anticipation of Sunset Commission review of the RRC in the next legislative session in 2017.

Under Texas’ sunset law, every Texas agency must periodically undergo review by the Sunset Commission and be re-authorized by legislative action. The Sunset Commission reviews and recommends changes to legislation governing the agency – or may recommend abolishment of the agency.

Initially reviewed in 2011, the Railroad Commission’s Sunset bill did not pass in the 2011 legislative session. Instead, the 82nd Legislature continued the Railroad Commission under Sunset review for another two years. In 2013, the Sunset Commission again reviewed the RRC and recommended significant changes, including changing the agency’s name, limiting when Commissioners could solicit and receive campaign contributions, and requiring the automatic resignation of a Commissioner running for another elected office. The Sunset Commission also recommended several funding changes, including eliminating the statutory cap on the Oil and Gas Regulation and Cleanup Fund and creating a new pipeline permit fee to help support the agency’s pipeline safety program.

The Sunset recommendations were incorporated into Senate Bill 212. The Senate passed this bill in 2013, but ultimately the bill was left pending in the House Energy Resources Committee. The only significant legislation that did pass was a requirement that commissioners resign to run for another office – a bill vetoed by the Governor. The legislature required the RRC to undergo sunset review again in 2017.

The RRC’s Self-Evaluation Report, required by the Sunset Commission, can be found here. Largely self-laudatory, it does contain lots of data about RRC activities. Excerpts: Continue reading →

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During my vacation I read The Quartet: Orchestrating the Second American Revolution, 1783-1789, by Joseph J. Ellis. Ellis tells the story of the writing and passage of the US Constitution, orchestrated, he asserts, by George Washington, Alexander Hamilton, John Jay and James Madison (the quartet).

Before the adoption of the Constitution, the thirteen states were essentially independent countries who had won their independence but failed to found a new country. The “United States” were always referred to in the plural. The genius of the quartet, says Ellis, was the compromise they crafted in the Constitution in the debate over federal vs. state power. States were understandably reluctant to relinquish their sovereignty, but the quartet knew that the new nation, to survive, had to have federal power – to levy taxes, provide for common defense, and regulate commerce among the states. The Constitution enumerates the powers of the federal government. The Bill of Rights – the first ten amendments to the Constitution, passed simultaneously — enumerates the rights retained by the states and the people, limitations on federal power. The tenth amendment provides: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The contours of this compromise are still being debated in courts across the land. “States rights” were fighting words in the civil war, and today are the battle cry of states seeking to curb the federal government’s regulation of health care, water quality, voting rights, and abortion.

Continue reading →

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In January, the El Paso Court of Appeals decided the appeal of Lazy R. Ranch, LP, et al. vs. ExxonMobil Corporation. The court reversed a summary judgment in favor of Exxon and remanded the case to the trial court for a trial on the merits. Exxon has asked the Texas Supreme Court to review the El Paso Court’s decision. Exxon argues that it has conclusively proven that Lazy R’s claims are barred by limitations.

The Lazy R Ranch is 20,000 acres in Ector, Crane, Ward and Winkler Counties. Exxon had operations on the ranch for many years. In 2009, the Ranch hired an environmental firm to investigate several sites on the property for oil-related contamination. The environmental firm found substantial hydrocarbon contamination at five sites, and found that at one of the sites the contamination had percolated down into the groundwater and that contamination at the other sites also posed a risk of leaching down into the groundwater. Lazy R sued Exxon for an injunction to require Exxon to take sufficient steps to prevent further spread of the contamination into the subsurface and groundwater.

The trial court ruled that the Ranch had waited too long to sue and dismissed its claims. The El Paso Court of Appeals reversed, holding that the statute of limitations does not apply because the Ranch is only suing for an injunction to require Exxon to abate a continuing nuisance, the spread of hydrocarbon contamination into the subsurface.

Both parties have now filed their briefs in the Texas Supreme Court, which has not yet decided whether to hear the case.

Groundwater contamination from older oil and gas operations, especially from tank batteries and compressor stations, is a big issue in Texas and has been for a long time. Once hydrocarbons, particularly condensate, leach into groundwater they are practically impossible to clean it up.

The agency in Texas responsible for enforcing cleanup of sites contaminated by oil and gas production operations is the Texas Railroad Commission. Companies found to have contaminated groundwater must obtain approval from the RRC of a “remediation plan” to remediate the property. For groundwater contamination, this usually involves taking steps to stop the spread of the contamination and then leave it to natural processes for the hydrocarbons in the groundwater to gradually degrade over time, called “natural attenuation.” That may take tens or even hundreds of years. In the meantime, the company responsible must obtain agreement from the landowner not to use the contaminated groundwater – a restrictive covenant that is binding on the property in perpetuity.

Landowners have a private cause of action for damages to the land resulting from contamination. The problem with such claims has been that the statute of limitations to bring the claims is either two or four years, depending on the claim. The landowner may not realize that the contamination, although evident on the surface of the property, has seeped into the groundwater until years after the contamination began. By then it’s too late to sue for damages.

The Lazy R Ranch has proposed a different remedy that, as far as I know, no Texas court has addressed — suing for an injunction to require the company to remediate the contamination, to prevent it from spreading further. This typically requires removal of the contaminated soil, which may be hugely expensive. Witness Exxon’s pleas to the Texas Supreme Court to dismiss Lazy R’s claims.

Exxon argues that, under established Texas precedent, the measure of damages for “permanent” damage to land is the diminution in the value of the property. It argues that the land contaminated on the Lazy R Ranch is only 1.2 acres, worth only $50/acre, but it would cost it millions of dollars to clean up the contamination. Exxon argues that Lazy R’s effort to use an injunction as a remedy is an “attempt at an end-run around the law,” which is really only a request for remediation damages that violate the measure of damages for permanent damage to land.

I have written before about my view of the inadequacy of established legal remedies in Texas for contamination like that allegedly caused by Exxon to the Lazy R Ranch.  In 2009, I filed an amicus brief (Senn v. Premrose Amicus) for the Texas Land and Mineral Owners’ Association in Primrose Operating Co. v. Senn, 161 S.W.3d 258 (Tex.App.-Eastland 2005, Pet. denied), asking the Texas Supreme Court to address the issue. That case applied the “permanent damage” measure of damages advocated by Exxon to contamination of the Senns’ ranch. The court of appeals held that the Senns’ property had not been damaged by the admittedly substantial contamination because the value of the property had actually increased from the time it discovered the contamination to the time of trial. Because the damages were “permanent,” and because there was no diminution in the value of the land resulting from the contamination, the Senns had not been harmed.

So this case may have important implications for landowners in areas of the state contaminated by legacy oil and gas operations.

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A federal judge in Dallas has ruled that Chesapeake cannot deduct post-production costs on the Plaintiffs’ leases covering lands in Tarrant and Johnson Counties, in the Barnett shale.  The order can be viewed here: Winscott – Order on MSJs 

The case is Trinity Valley School, et al. vs. Chesapeake Operating, Inc., et al., No. 3:13-CV-08082-K, in the US District Court for the Northern District of Texas, Judge Ed Winscott presiding. The order, although a partial summary judgment, appears to resolve Chesapeake’s claim of right to deduct post-production costs. Plaintiffs include Ed Bass, the Harris Methodist Southwest Hospital and Texas Health Presbyterian Hospital Dallas. The language construed in the leases varies, but all of the leases contain language dealing with sales to an affiliate.

As I have discussed before, Chesapeake sells its gas at the well to its affiliate Chesapeake Energy Marketing (CEMI). The price on which Chesapeake pays royalties is based on the weighted average price CEMI receives for the gas less gathering and transportation costs incurred by CEMI and a CEMI marketing fee.

The Bass leases at issue allowed deduction of post-production costs only if

(i) charged at arms-length by an entity unafilliated with Lessee; (ii) actually incurred by Lessee for the purpose of making the oil and gas produced hereunder ready for sale or use or to move such production to market; and (iii) incurred by Lessee at a location off of the Leased Premises …

The Court agreed with the Basses that, under Chesapeake’s marketing scheme, its sales of gas failed to meet any of these three requirements. The costs were charged by CEMI, an affiliate by an entity unafilliated with Chesapeake; the costs were not “actually incurred by Lessee,” because Chesapeake sold the gas at the well to CEMI, which incurred the charges; and the costs were not incurred “at a location off of the Leased Premises” because Chesapeake sold the gas at the well, where the charges were incurred.

Chesapeake found itself in the awkward position of arguing that the costs that were actual third-party transportation costs, as opposed to CEMI’s fees, were really “incurred” by Chesapeake, even though it created the scheme of selling at the well to its affiliate and its affiliated incurred the costs. It argued that the meaning of the lease “turns on the meaning of ‘incur’.” (Reminds me of Bill Clinton.)

The leases provide that, if Chesapeake sells to an affiliate, the royalties shall be based on the average of the two highest prices for gas being paid by purchasers in Tarrant County. The Plaintiffs said that this should, at least, be the weighted average price (WASP) for which CEMI sold their gas, without deductions for post-production costs. Chesapeake cried unfair; that price was for sales at locations remote from the wells, after post-production costs had been incurred. The price, Chesapeake argued, should be based on the value of the gas at the well.  The Court disagreed. “Because the market value is determined by a reference price, rather than a value at a geographical point, and WASP qualifies as a reference price, the Court finds that the WASP establishes a minimum price for the market value inquiry.”

In this case, Chesapeake’s sales to its own affiliate have come back to haunt it. Had Chesapeake sold its gas in the normal manner rather than through its affiliate, it would have been entitled to deduct legitimate third-party costs from the Plaintiffs’ royalty.


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Last week, the US Energy Information Administration provided a summary of states’ severance tax revenue (click on image below to enlarge):


With the precipitous decline in oil prices, Alaska, North Dakota and Wyoming will be hurting.

According to EIA, Texas

collected $931 million in severance tax revenues in the first quarter of 2015—more than Wyoming collects in an entire fiscal year. The first-quarter total is down 46% from the $1.7 billion collected in the third quarter of 2014. However, severance taxes cover only 11% of the state operating budget. Texas state and local governments also derive greater oil and natural gas revenues from state land leases and local property taxes. Like Alaska and Wyoming, Texas does not have an individual income tax.

Most of the money in Texas’ Rainy Day Fund comes from severance taxes. In fiscal 2014, the Fund received more than $2.5 billion in severance taxes. In November 2014, Texas voters passed a constitutional amendment dedicating another portion of severance taxes to the State Highway Fund. Clearly, both funds will suffer from the drop in oil prices. Texas is most dependent on sales taxes for its revenue, and those too will suffer from the drop in oil prices. But Texas won’t suffer like Alaska, North Dakota and Wyoming. So far, the industry has staved off efforts in Pennsylvania to pass a severance tax.

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Big news this week about the Environmental Protection Agency’s new proposed regulations to limit emissions of methane and volatile organic compounds (VOCs) from oil and gas drilling, operating, compression and processing facilities. EPA’s proposed new rules can be viewed here. Among other things, the proposed regs would require operators to use “green completion” technology in drilling and completing wells, to reduce emissions of natural gas during those operations. The proposed rules would apply only to “new sources” of emissions, not existing facilities.

Representative Lamar Smith, R-San Antonio, called the proposed rules “yet another example of the Obama administration’s war on American energy jobs.”  Barry Russell, CEO of the Independent Petroleum Association of America, said the proposed rules would cause “unnecessary costs and added uncertainty” that would “inflict more pain on the men and women who work in the oil and gas industry at a time when market forces are already creating economic challenges.” Environmentalists praised the proposed regulations, but said that EPA needs to begin regulating emissions from existing facilities.

VOCs are carbon-based molecules that evaporate at ordinary temperatures and pressures, and are emitted into the air during oil and gas production, gathering, transportation and processing activities. They include  benzene, ethylbenzene, and n-hexane, which are harmful to human health. VOCs and methane are also powerful greenhouse gases, contributing to global warming according to scientific consensus.

Meanwhile, a study was published this week in Environmental Science and Technology, led by Colorado State University and sponsored by the Environmental Defense Fund and based on a comprehensive review of methane emissions in oil and gas facilities. It found that emissions from natural gas pipelines and processing facilities are much higher than estimated by EPA or the Energy Information Administration. The study concludes that the methane escaping from natural gas pipelines and processing facilities could to power more than 3 million homes.

It appears that most emissions of methane from production and processing facilities result from poor oversight, monitoring and maintenance. Good operating practices would greatly reduce such emissions. Other emissions can be reduced only by installing new or different equipment that does not emit methane as part of normal operations. If the industry wants to limit the intrusiveness of EPA regulations on its operations, it needs to clean up its own house by identifying bad actors and encouraging compliance with good industry standards, by increased monitoring of emissions and fixing problems when they occur,  and by cooperating with EPA in crafting regulations that allow the industry to address the problem in its own way.

The Cynthia and George Mitchell Foundation has endorsed the proposed rules. George Mitchell, now deceased, is the father of the modern method of hydraulic fracturing that has transformed the US energy industry.

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Chesapeake is spending a lot of money on lawyers.

Dan McDonald, a Fort Worth attorney, has filed some 250 cases against Chesapeake contending that it is underpaying its royalty owners. Companies affiliated with former House of Representatives Speaker Tom Craddick have now been added to McDonald’s client list. So many cases have been filed against it in Texas that Chesapeake asked the cases to be granted multidistrict litigation status, so that one judge could control pretrial discovery and motions and settings. Two judges have been appointed for that purpose, one for McDonald’s cases and another for cases brought by other attorneys. Chesapeake is settling cases as fast as it can.

Most of the claims against Chesapeake arise from its structure for selling gas. Chesapeake sells its gas at the wellhead to its wholly owned subsidiary Chesapeake Energy Marketing. Chesapeake Energy Marketing arranges for the gathering of the gas and delivery to central sales points, and pays Chesapeake for the gas based on a weighted average price of all sales at those central gathering points, less costs of compression, gathering, treating and transportation, and less a “marketing fee” charged by Chesapeake Energy Marketing. The costs incurred between the wellhead and the point of delivery to the purchaser were formerly incurred by another Chesapeake affiliate, Access Midstream. Chesapeake spun off its gathering systems into a separate company a few years ago, and as part of that deal it guaranteed a minimum rate of return on those gathering systems to the new spin-off company, thereby receiving a premium price in the market for the new company’s shares. Chesapeake pays royalties based on the new price it receives from Chesapeake Energy Marketing, after deduction of post-production costs and marketing fees. McDonald says that these “costs” are “sham sales” and “fraudulent transactions.”

McDonald’s first ten cases against Chesapeake are set for trial early next year. McDonald’s cases are mainly for wells in the Barnett Shale, where Chesapeake has sold a share in its wells to Total, the French energy company. Total is also named as a defendant, and it markets its share of gas in a manner similar to Chesapeake.

Chesapeake recently reported a $4 billion loss and has eliminated its dividend. It recently sued its founder and former CEO Aubrey McClendon for allegedly stealing trade secrets when he was fired by the company.

Chesapeake recently lost an important case in the Texas Supreme Court, Chesapeake v. Hyder, and the opinion in that case has other companies concerned about their ability to deduct post-production costs from royalties. Chesapeake recently filed a motion for rehearing in that case, and amicus briefs urging the court to reconsider its opinion have been filed by Texas Oil & Gas Association, BP, Devon, EOG, Exco, Shell, XTO and others. With low gas prices, the ability to force royalty owners to share in post-production costs can mean the difference between profit and loss for some companies.


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