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Modern oil and gas leases often contain restrictions on the right of the lessee to assign the lease to third parties. The lease may require the consent of the lessor to any assignment, or it may impose conditions on the right to assign — for example, that the lessee retain an interest in the lease and/or remain operator.

Recently I received a draft of an article that will be published next year in the Buffalo Law Review addressing the validity of restrictions on assignments in oil and gas leases, and the authors asked that I make it available on this blog. It is titled “The Validity of Restraints on Alienation in an Oil and Gas Lease,” and it is authored by  Luke Myer and Rory Ryan, professors at Baylor Law School. There are actually two draft articles, one explaining the issue in layman’s terms and a second providing a more scholarly legal analysis with citations. The second article is titled “Aggregate Alienability.” The articles I think give a good analysis of the issue. There is actually little authority on whether restrictions on assignment, or “restraints on alienability,” in an oil and gas lease are valid. The authors make a good argument that such restrictions are valid. Good information for oil and gas lawyers, including tips on how to draft restrictions that are more likely to be upheld and enforced. The draft articles can be viewed here and here.

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This graphic from Bloomberg article, US Fracklog Triples as Drillers Keep Oil from Market (click to enlarge):

Fracklog

Bloomberg says that these uncompleted wells, if completed (that is, hydraulically fractured), would produce 322,000 bbls/day, equivalent to the current production of Libya. Total drilled but uncompleted wells, according to Bloomberg: 4,731.

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In 2013, the Texas Legislature passed House Bill 724, creating the Texas Unclaimed Mineral Proceeds Commission, and charged the commission to study and provide recommendations regarding distribution of unclaimed mineral proceeds held by the Texas Comptroller of Public Accounts. The bill was sponsored by State Representative Ryan Guillen. The Commission met eight times during 2014, took voluminous testimony, and produced a 100-page report last December that is fascinating reading, at least for an oil and gas attorney in Texas. Most Texans know that large portions of South Texas were settled during the 17th and 18th centuries when the territory was governed by the King of Spain and later the government of Mexico. Those governments granted lands to their citizens (including Stephen F. Austin), and many subjects settled in South Texas on the lands granted to them. When Texas gained its independence, it recognized the validity of land grants made by Spain and Mexico. But immigration of settlers from the United States into these territories, prior to and after Texas’ independence, produced social and economic disruption and displacement of some of the Spanish and Mexican settlers and uncertainty regarding their land titles.

Anglo-American newcomers, with clear advantages in their knowledge of the new legal system, its procedures and language, now competed for the natural resources of the region, pressing their legal and economic advantages – supplemented at times by extralegal means – to acquire ownership of the land. In addition, loss of records, the difficulty of locating original boundary lines, the clouds on many of the titles, and complications of collective family ownership were potential sources of disputes and acrimony among competing parties of all stripes. The resulting resentment, sense of dispossession and injustice, suspicion, and bitterness flared into open conflict at times in South Texas in the nineteenth century and, justified or not, lingers even today.

Galen Greaser, New Guide to Spanish and Mexican Land Grants in South Texas, p. 4. This “sense of injustice and bitterness” led to the appointment of the Commission. For many years, I have occasionally received calls from persons who say they are descendants of the original grantee of a Spanish or Mexican land grant somewhere in South Texas and claim to still own mineral interests in those lands, as heirs of their ancestor. Of course there are thousands of descendants of those original settlers still in Texas. Many tell stories handed down in their families of how their ancestors were dispossessed from their lands by unscrupulous lawyers and land speculators. They have been led by persons who prey on their sense of injustice to believe that they can still claim part of their ancestors’ land grant. Land titles in South Texas are messy. (That’s a legal term.) Case books are filled with lawsuits over land titles. Some of these cases reveal the skullduggery practiced by speculators who preyed on descendants of original Spanish and Mexican settlers. Padre Island is a prime example. The island, some 50,000 acres of land, was granted by Mexico to Padre Nicolas Balli and his nephew Juan Jose Balli in 1829.  Since then, multiple suits have ensued over its title, including a suit by the State of Texas contending that the original grant was invalid. State v. Balli, 144 Tex. 195, 190 S.W.2d 71 (1944), cert. denied Texas v. Balli, 328 U.S. 852 (1946).  See also Grisanti v. Am. Trust Co. of New Jersey, No. 18 (C.C.S.D. Tex. Nov. 16, 1905), and Havre v. Dunn, No. 12469 (103rd Dist. Ct., Cameron County, June 9, 1928), and Staples v. Callahan, 138 S.W.2d 206 (Tex.Civ.App.-San Antonio 1940), aff’d, Callahan v. Staples, 161 S.W.2d 489 (Tex. 1942). The latest case involving Padre Island is Kerlin v. Sauceda, 263 S.W.3d 920 (Tex. 2008). In that case, descendants of Juan Jose Balli sued to recover mineral interests in Padre Island. Juan Jose acquired title to the northern part of Padre Island after his uncle Padre Nicolas died. In 1830, Juan Jose conveyed the land to Santiago Morales. Several months later, Morales and Juan Jose signed a “rescission agreement” after Morales became concerned about Juan Jose’s title. But despite the rescission agreement, Morales continued to treat the property as his and later conveyed the land to Jose Maria Tovar. In 1937, heirs of Juan Jose Balli discovered the rescission agreement between Juan Jose and Morales, and they contacted Frederick Gilbert. Gilbert had a nephew, Gilbert Kerlin, who was an attorney. Kerlin went to Padre Island and contacted Primitivo Balli, one of the Balli heirs, who agreed to assist Kerlin in acquiring deeds from Juan Jose’s heirs to clear title. They obtained several deeds, each reserving to the Balli heirs a 1/16th of 1/8th, royalty. Kerlin went on to challenge the title of the successors to Morales, and reached a settlement in which Kerlin acquired title to 1,0000 acres of minerals and 20,000 acres of land in Padre Island. But Kerlin failed to notify any of the heirs of Juan Jose, and he refused to recognize their right to a royalty interest in the land. In 1985, after Juan Jose’s heirs learned about Kerlin’s settlement, they sued Kerlin to get their royalty interest. After many years of litigation, the Texas Supreme Court ruled in 2008 that the Ballis waited too long to bring their claim and their suit was barred by limitations. As this case illustrates, examining title in South Texas is not for the faint of heart. The report of the Texas Unclaimed Mineral Proceeds Commission spends a good deal of time discussing the testimony and claims of Eileen McKenzie Fowler. Ms. Fowler is an attorney in LaPorte, Texas, and she has dedicated her practice to representing descendants of the grantees of original Spanish and Mexican land grants in Texas. She has her own website, www.eileenmckenziefowler.com, where she posts information about Spanish and Mexican land grants, and a brochure containing information about Heirs Enforcing Inheritance Rights (HEIRS), a membership organization she promotes. It appears that Ms. Fowler agrees to represent heirs in suits to determine heirship – legal proceedings in which she proves the lineage of descendants of land-grant grantees. According to the report, Ms. Fowler says she charges “$300 per client, and in some cases as much as $375 per client. If true, she has collected millions of dollars in legal fees from the descendants. To date, she admits she has not recovered any mineral proceeds for her clients.” The Commission goes to some length to disprove some legal claims made by Ms. Fowler. One statement on Ms. Fowler’s website is that “in the case of land grants, if no mention is made of the minerals or the transference of minerals by sale or conveyance of the land, the minerals are retained by the seller and pass to his or her heirs.” In other words, when the original grantee of the land grant sold his land, the deed did not pass title to the minerals unless it specifically so provided. All Texas attorneys know that this is not the law. A deed of land passes title to all minerals owned by the grantor unless those minerals are specifically reserved in the deed. The Commission concluded:

The importance of focusing on the quoted statement from the HEIRS brochure and Ms. Fowler’s views is that, in the Commission’s opinion, these have served as a foundation for Ms. Fowler’s enterprise and the creation of hopes and expectations on the part of the “descendants” far beyond any reasonable level of attainment under current law.

 Another tactic of Ms. Fowler is apparently to point to Texas Railroad Commission records that list well locations as “unknown,” and use that as “proof” that ownership of the mineral and royalty interests in the land where the well is located is “unknown.” The Commission report also carefully but thoroughly debunks this falsehood. One of the judges who has presided over one or more of Ms. Fowler’s actions to declare heirship is David Peeples, who is Chief Administrative Judge of the Fourth Administrative Judicial Region of Texas. He provided a copy of an order he entered in one of Ms. Fowler’s cases. In that order, Judge Peeples states:

 Two separate realities must be understood.

First, the declaratory judgments show biological lineage or descendency, not legal inheritance or ownership. The declaratory judgments do not show that ownership of land or minerals by previous generations passed to the biological heirs. the judgments do not address the possibility that ownership passed (through will, sale, gift, mineral severance) to someone outside the family in previous years.

Second, even if legal inheritance is proved, the amounts of the claims may be very small when compared to the cost of asserting the claims and the time spent compiling the proof needed.

 The Commission also examined claims by witnesses that owners of Mexican and Spanish grants were not treated fairly after Texas gained its independence. Those witnesses advocated re-opening the adjudication process by creation of a new state agency or court similar to one created in New Mexico. As one might imagine, even though Texas agreed to recognize the validity of prior Spanish and Mexican land grants, the process of identifying those grants and determining which of them were valid under Spanish and Mexican law was not an easy one. Records were scarce, and most of those records resided in Mexico.  As a result, the Texas Legislature created a commission to adjudicate land grants and recommend to the legislature which grants should be recognized as valid. This commission, the Bourland and Miller Commission, began its work in 1850 and finished in 1852. The history of this commission is documented by the Texas State Historical Association on its website, and includes the sinking of a ship, the Anson, on which Bourland was carrying back original grant documents he had obtained from Mexico. The Commission compared the process of adjudicating land titles in South Texas with the experience of the federal government, which adjudicated titles in New Mexico and California. The Commission concluded:

 Unlike New Mexico and other western states, Texas retained title to its unappropriated vacant lands when it became a state. Thus the task of confirming or adjudicating previously issued titles fell upon the state rather than the federal government. … The confirmation process began with an Act of 1850, under which the so-called “Bourland and Miller commission” was created, and continued through an Act of 1901.

 In Texas, the adjudication process in the Trans-Nueces was quick, and it favored Mexican land tenure. Thus by 1852 the legislature confirmed 209 claims with only a handful of outright rejections. The state courts then proceeded to validate sixty-seven additional claims, all but seven of them before the Act of 1901. The courts rejected only two claims in the 1920s. Equity, however, favored Mexican landholders for the most part. In the end only twenty-four land grants were never adjudicated for sundry reasons.

 (A minority report of the Commission recommends creation of creation of a special claims court “dedicated to resolving the claims by proven descendants for unclaimed and presumed abandoned mineral proceeds not reported to the Comptroller.”) The Commission’s report also contains a good history of Texas’ escheat statutes, at Title 6 of the Texas Property Code. When oil companies cannot find or lose track of royalty owners to whom they owe money, under this law they must deliver (“escheat”) those funds to the State. In Texas, if the royalties are not claimed within three years, the company must pay the funds to the Texas Comptroller of Public Accounts, where they are placed in the State’s unclaimed property fund. If a royalty owner later learns of her interest, she can make application to claim her monies from the Comptroller’s fund. See http://www.window.state.tx.us/up/  and www.ClaimItTexas.org . Since 1986, the Comptroller has received more than $600 million in unclaimed royalties. In 2014, royalties escheated to the state exceeded $70 million. The Comptroller requires annual reports from all royalty payors and regularly audits them for compliance. The Commission report recommends several changes in how the Comptroller requires companies to report unpaid royalties, to be implemented either by new rules or new legislation. The recommended changes focus on the fact that the information reported by the companies does not identify the properties connected to the unpaid royalties. The Commission recommends that companies provide to the Comptroller the same information on escheated royalties that would be provided to those owners if they could be identified — in other words, the same information provided to all royalty owners with their checks: the lease, property or well name, county, payment data, etc. I applaud the Commission for its good work, and I hope that its recommendations will be adopted. I also hope that its report will convince some descendants of original grantees that paying Ms. Fowler to establish their lineage will not result in recovery of unpaid royalties.

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Christi Craddick, Chairman of the Texas Railroad Commission, testified in Washington yesterday before the House Science and Technology Committee, chaired by Lamar Smith, as part of a panel addressing environmental effects of hydraulic fracturing and wastewater disposal.  Introductory remarks and testimony can be viewed here.  The testimony reflects, I think, the political polarization in Washington. Because of recent reports about earthquakes in North Texas and Oklahoma, a lot of the testimony related to those issues, as well as the ability of local municipalities to regulate drilling in their jurisdictions – an issue now before the Texas Legislature.

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Oklahoma regulators have finally awakened to the seismic activity caused by water well injection in their state. Take a look a this new website unveiled this week by the Oklahoma Corporation Commission.  And look at their interactive map showing seismic events and injection wells. Oklahoma now surpasses California in seismic activity. Railroad Commission, where are you? Don’t let the Sooners show you up.

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Beginning in 2013, the town of Azle, in the heart of the Barnett Shale, experienced a “swarm” of earthquakes. Its citizens complained to the Texas Railroad Commission, blaming injection wells for the quakes. When the RRC held a meeting in Azle, refusing to link the quakes to the injection wells, the citizens decided to protest in Austin. They bussed themselves to a RRC open meeting, where they serenaded the commissioners with a song from Elvis, “All Shook Up.”

Southern Methodist University scientists have now published a paper concluding that the Azle quakes were “most likely” caused by the injection wells, together with withdrawals of produced water by the seventy-plus producing wells in the area. SMU installed monitors around Azle after the quakes began,and identified a fault running through the area. The scientists developed a model showing that the changes in pressure caused by the withdrawals on one side of the fault and the injections on the other were the likely cause of the quakes. Heather DeShon, one of the SMU researchers, said that “What we refer to as induced seismicity – earthquakes caused by something other than strictly natural forces – is often associated with subsurface pressure changes. We can rule out stress changes induced by local water table changes. While some uncertainties remain, it is unlikely that natural increases to tectonic stresses led to these events.”

SMU quake study picture

The Texas Railroad Commission website stills says that  “Texas has a long history of safe injection, and staff has not identified a significant correlation between faulting and injection practices.” After Azle’s visit to the RRC, it hired its own seismologist, David Pearson. In response to the SMU report,  Pearson said that “We will not be suspending activity at the two wells, especially given the fact that we have not seen any continuation of large-scale earthquakes in the Azle area that would give us any cause for alarm. The swarm has died out and has been quiet for some time.” Milton Rister, the Railroad Commission’s executive director, wrote a letter requesting a meeting with the SMU researchers.

The earliest quakes blamed on oil and gas activity occurred in 2008 around the Dallas-Fort Worth Airport. More recently there has been a swarm of quakes in the Dallas area.

The SMU study can be found here.

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FuelFix reports that companies have drilled but not completed wells, in effect storing the reserves in the ground until oil prices rise and completion costs decline. FuelFix says that IHS Energy counts 3,000 uncompleted wells in the US, including 1,500 uncompleted wells in the Eagle Ford alone. It says that Apache, Anadarko and Cabot have 845 uncompleted wells in Texas, with a potential to produce 373,000 barrels of oil and 528 million cubic feet of gas a day.

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Last month I wrote about the Texas legislature’s efforts to limit cities’ authority to regulate drilling within their jurisdictions, after the City of Denton passed a ban on hydraulic fracturing. The bill that has emerged is House Bill 40, sponsored by Drew Darby, chairman of the House Energy Resources Committee. It passed out of committee, but yesterday was returned to committee on a technicality. A companion bill in the Senate, Senate Bill 1165, has also passed out of its Natural Resources committee.

The bill would greatly limit cities’ ability to regulate drilling. It provides that cities may only regulate “aboveground activity related to an oil and gas operation that occurs at or above the surface of the ground, including a regulation governing fire and emergency response, traffic, lights, or noise, or imposing notice or reasonable setback requirements.” Any ordinance must be “commercially reasonable,” defined as “a condition that would allow a reasonably prudent operator to produce, process and transport oil and gas, as determined based on the objective standard of a reasonably prudent operator and not on an individualized assessment of an actual operator’s capacity to act.”

The bill leaves may questions unanswered. For example, Fort Worth has an ordinance that regulates saltwater pipelines.  Are pipelines an “aboveground activity” that cities can regulate?

Last weekend, about 50 residents living close to a well being completed by Vantage Energy were evacuated because of a mechanical failure in the well during the fracing operation.  Well blow-out experts were called in to regain control of the well. The incident is being cited by opponents of House Bill 40 to argue against restrictions on municipal regulation. A Dallas Morning News editorial yesterday said that “Homeowners and cities should have the right to see events like what happened over the weekend in Arlington and determine for themselves whether drilling is in the best interests of their community.” Protesters planned an all-night vigil on the Capitol steps in opposition to the bill. And last week, the Environmental Defense Fund filed applications for rulemakings with the Texas Railroad Commission, requesting that it adopt rules replacing municipal regulations for pipeline, truck traffic and special safety measures needed in case of a natural disaster. The EDF applications were undoubtedly intended to impress the legislature on the lack of RRC regulation of drilling in urban areas.

 

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Yesterday the Energy Resources Committee of the Texas House of Representatives heard testimony on HB 1552, introduced by one of its members, Rep. Tom Craddick. The bill deals with “allocation wells,” of which I have written before. An allocation well is a horizontal well that crosses over two or more tracts without combining those tracts into a pooled unit or obtaining agreement from the royalty owners in the tracts on how production from the well will be allocated among the tracts.

Although the Texas Railroad Commission issues permits for allocation wells, there has been a lot of speculation about whether leases grant the authority to drill such wells. At the hearing, representatives of operators spoke in favor of the bill, and mineral owners spoke in opposition. I spoke in opposition on behalf of Texas Land and Mineral Owners Association.

A substitute for the original filed bill was introduced at the hearing.  HB 1552 substitute

Testimony at the committee hearing was taped and can be viewed here.

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Everyone knows this quote and that it is from Shakespeare. It is from Henry VI, Part 2. And it has generated some controversy.

Defenders of lawyers (mostly lawyers) say that it is misunderstood and was intended as a “complement to lawyers and judges who protect the people from tyranny and anarchy.” This argument stems from the identity of the character speaking, Dick the Butcher, a dastardly villain and follower of the rebel Jack Cade, a pretender to the throne and a sort of libertarian. Dick the Butcher was supporting Jack Cade’s campaign and encouraging him in his quest for anarchy.

But not so fast, say others.  In fact, Dick the Butcher is making a joke, as Shakespeare was wont to do, at the expense of lawyers.

“Far from “eliminating those who might stand in the way of a contemplated revolution” or portraying lawyers as “guardians of independent thinking”, it’s offered as the best feature imagined of yet for utopia. It’s hilarious. A very rough and simplistic modern translation would be “When I’m the King, there’ll be two cars in every garage, and a chicken in every pot” “AND NO LAWYERS”. “

Perhaps Shakespeare was not taking sides, but commenting on the ambiguous status of lawyers in his own day. And perhaps it is so popular today because it still evokes the same ambiguity. The legal industry was growing in Shakespearian England. According to David Riggs, a retired Stanford University professor of English, Shakespeare may have been dramatizing social divisions within Elizabethan society while keeping an ironic distance from lawyer-haters.

The line was even commented upon by former Supreme Court Justice John Paul Stevens in a 1985 dissent: “As a careful reading of that text will reveal, Shakespeare insightfully realized that disposing of lawyers is a step in the direction of a totalitarian form of government.”

So take your pick. If nothing else, this debate speaks of the Bard’s lasting influence.

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