July 23, 2014

Texas Railroad Commission Proposes New Rule on Authority of Pipelines to Condemn Private Property

The Texas Railroad Commission has published a proposed rule that will change how pipelines are classified as "common carriers" and "gas utilities." That classification determines whether pipelines can exercise the power of eminent domain -- the power to condemn rights-of-way for pipelines.

In 2011, the Texas Supreme Court held in Texas Rice Land Partners v. Denbury Green Pipeline-Texas, LLC that the Railroad Commission's method of classifying pipelines as common carriers and gas utilities was not sufficient to grant them eminent domain authority. The court held that, in order for a pipeline to have condemnation powers, it must serve a "public purpose," and that in order for a pipeline to serve a public purpose, "a reasonable probability must exist, at or before the time common-carrier status is challenged, that the pipeline will serve the public by transporting gas for customers who will either retain ownership of their gas or sell it to parties other than the carrier." Once a landowner challenges its status as a common carrier, "the burden falls upon the pipeline company to establish its common-carrier bona fides if it wishes to exercise the power of eminent domain." The court held that the RRC's policy of classifying pipelines as common carriers or gas utilities based solely on the pipelines' checking of a box on a form filed with the RRC was not sufficient to establish the public purpose of the line. 

Since Denbury, the pipeline industry has struggled to find a way to efficiently establish pipelines' common-carrier status without having to litigate the issue with every landowner it wants to cross over. Initially the industry sought legislation authorizing the RRC to have one hearing to establish that a proposed new line will in fact qualify for common-carrier status. Under the bill, that determination would then be binding on all landowners whose property will be crossed by the pipeline. Those landowners would be given the opportunity to participate in the hearings; notice of the hearings would be given by publication in local newspapers. The Texas Farm Bureau, the forestry industry, and other landowner groups opposed the bill. Most major oil and gas associations favored the bill. The bill never made it out of committee.

The RRC's proposed rule essentially proposes to do the same thing that the failed bill did, with one big difference. Under the proposed rule, whenever a pipeline wants to build a new line it must file an application for a permit with the RRC. In that application, the pipeline must submit "a sworn statement from the pipeline applicant providing the operator's factual basis supporting the classification [as a common carrier or gas utility] and purpose being sought for the pipeline," and "documentation to provide support for the classification and purpose being sought for the pipeline." Once the application is complete, the RRC has 30 days to grant or deny the permit. If the permit is granted and the requested classification is approved, presumably the pipeline will have established its right to condemn right-of-way. At least that is what the pipeline industry is hoping.

The difference between the failed bill and the proposed rule is that no public notice of the permit application is given. Without public notice, there is no opportunity for those affected by the proposed pipeline to question the evidence submitted by the pipeline for the "public purpose" of the proposed line.

Comments on the rule must be submitted by August 25 to Rules Coordinator, Office of General Counsel, Railroad Commission of Texas, P.O. Box 12967, Austin, Texas 78711-2967.

July 16, 2014

More About "Allocation Wells"

Mike McElroy of the Austin firm McElroy, Sullivan, Miller, Weber & Olmstead, has written an article in the Section Report of the Oil, Gas & Energy Resources Law (Spring 2014), titled "Production Allocation: Looking for a Basis for Discrimination," defending the practice of oil and gas operators' drilling of "allocation wells."  The term "allocation well" has come to be used by staff at the Texas Railroad Commission and by the industry to refer to a horizontal well that is drilled across lease lines without pooling the tracts on which the well is located.  Mike argues that the RRC has authority to issue allocation well permits and that a standard oil and gas lease, with or without a pooling clause, authorizes the lessee to drill allocation wells.

This firm represented the complaining party in the Klotzman case, in which we argued that the RRC has no authority to issue allocation well permits and that the drilling of an allocation well violates the terms of a typical oil and gas lease unless the lease expressly grants such authority.  So, below is a rebuttal to some of the points made by Mike McElroy in his article.

Mike says that "Lessors and their lawyers see horizontal drilling and production allocation as opportunities to amend (re-trade) old leases."  The question that must be asked is, does the lease authorize the lessee to drill an allocation well? If the answer is no, then the lessee must obtain an amendment of the lease to drill the well. The lessor may bargain for consideration in exchange for granting the lessee the right to drill the well.  If the answer is yes, as Mike argues, then the lessee needs no agreement from the lessor to drill the well.

Mike agrees that a lease can prohibit a lessee from drilling an allocation well, and he quotes some provisions from recent leases that do just that.  Again, same question: would a lease that does not authorize, but does not expressly prohibit, the drilling of an allocation well grant the right to drill such a well?

An oil and gas lease requires the lessee to pay royalties on production from the leased premises or lands pooled therewith.  If a lessee drills an allocation well, it cannot comply with that obligation, because the lessee cannot determine how much of the production from the well is produced from the leased premises and how much is produced from the other tract(s) on which the wellbore is located. Mike's answer is that the lessee should just make the best estimate that it can:

An operator who has finished drilling an allocation well should closely inspect all the data gathered during those operations to determine whether there is any data demonstrating that a part of the wellbore should be treated better or worse than every other part of the wellbore. In the absence of such data, the operator should treat each drill site tract consistently, allocating production in proportion to each drill site tract's share of the open wellbore in the pay zone. ... Unless clear evidence justifies a contrary position, an operator should treat all portions of a horizontal wellbore in the pay zone in a non-discriminatory manner, thereby ensuring each owner their fair share of their rights under Texas property law.

I doubt that royalty owners will be comforted by their lessee's assurance that its allocation method is giving the lessee its "fair share" of production from the well, based on the lessee's analysis of wellbore data.

Mike argues that by drilling an allocation well the lessee is not pooling the tracts across which the well is drilled. Pooling is a method of allocating production from a well by agreement among different tracts. While most pooling clauses provide that production will be allocated on an acreage basis, the parties could agree to any method of allocation, including the one Mike advocates, based on the length of the productive lateral on each separate tract. Allocation by a production sharing agreement usually follows this method. Whether the allocation is done by creation of a pooled unit authorized by the lease or by a production sharing agreement, the result is the same: the lessors and lessee have agreed on a method of allocating production of a well among separate leases. The only difference in the case of an allocation well is that the lessee is making the allocation without any agreement of the lessors, based on the lessee's determination of what is "fair."

Mike argues that the RRC has authority to issue allocation well permits -- indeed, he says that the RRC has no authority to deny an allocation well permit.  The examiners in the Klotzman case disagreed with that conclusion. 2013-06-25 PFD EOG Klotzman (2).pdf  Although the Commissioners overruled the examiners, they did not provide any basis for their decision. No RRC rule authorizes the issuance of a permit for a well that crosses lease boundaries unless the lessee certifies that it has authority to pool the acreage to be crossed by the well. There are no RRC rules that even use the term "allocation well." The absence of regulations prohibiting issuance of a permit does not authorize the RRC to grant a permit.

I'm sure the debate will continue until the courts rule on the issue. In the meantime, it's nice to have someone like Mike to debate with.

 

 

July 9, 2014

The Declining Cost of Solar Energy

Austin Energy, the City of Austin's municipally owned electric utility, recently announced a deal with Recurrent Energy to buy up to 150 megawatts of electricity from a solar farm to be constructed by Recurrent in West Texas, at 5 cents per kilowatt hour, guaranteed for 20 years.  Austin Energy is the nation's 8th-largest municipal utility. As reported in the Austin Chronicle, the deal means that Austin Energy could reach its goal of 200 megawatts of solar power by 2020 well ahead of schedule. Austin Energy has its own solar farm in Webberville that can generate up to 30 megawatts. Austin Energy's current plans provide for increased reliance on renewable energy sources:

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The cost of solar electricity has now become competitive with other fuels -- although still with support from tax credits.  Austin Energy's estimate of its fuel costs:

Wind (West Texas):                 2.6-6.1 cents/kWh

Wind (South Texas):                3.6-7.5 cents/kWh

Solar (West Texas):                 4.5-11.4 cents/kWh

Combined Cycle (Natural Gas): 6-9 cents/kWh

Solar (Local):                           9.0-21.3 cents/kWh

Coal:                                       9.2-11.4 cents/kWh

Biomass:                                10-15.4 cents/kWh

Geothermal:                            10-15.1 cents/kWh

Nuclear:                                  11.6-15.6 cents/kWh

Solar beats nuclear, coal and natural gas, even at the presently low cost of natural gas.

If Austin Energy gets 250 megawatts of solar on line, it will constitute about 10% of its total capacity. Two hundred fifty megawatts can supply electricity for about 125,000 Austin residences under normal conditions.

Austin Energy also has contracts for 850 megawatts of electricity from wind.

The availability of wind and solar power to Austin was largely made possible by the state's CREZ project, the construction of transmission lines from West Texas over the last several years to make wind and solar resources, abundant in West Texas, available to the urbanized areas around Dallas, San Antonio, Austin and Houston. At a cost of $5 billion, the CREZ lines will eventually transmit more than 18,000 megawatts of power from West Texas and the Panhandle to metropolitan areas of the state.

July 7, 2014

Texas and the EPA

The State of Texas and the EPA have been at loggerheads on energy policy and federal regulation for some time. The latest blast from Texas comes in response to the EPA's new proposed regulations to limit carbon emissions from power plants.  On June 2, the EPA published proposed rules that would require states to develop a program to reduce their carbon emissions. Under the proposed rules, each state is given a target for emissions reductions by 2030. Texas' target: to reduce carbon emissions from power plants by 38 percent by 2030. States are given broad flexibility in how to achieve their assigned target.

Texas emitted 656 million metric tons of carbon dioxide in 2011, nearly twice as much as California, and about 12 percent of the nation's total. Power plants in Texas emit about 40 percent of Texas' carbon dioxide. Texas generates more electricity than any other state, and a large portion of that comes from coal plants.

EPA measures states' emissions of carbon dioxide in pounds of carbon dioxide per megawatt-hour of electricity produced. Texas emits about 1,284 pounds of carbon dioxide per megawatt-hour of electricity produced. More than 30 other states emit more carbon per megawatt-hour than Texas. Under EPA's proposal, 13 other states must make a larger percentage reduction in emissions per megawatt-hour than Texas, including Washington, Oregon and New York.

Governor Perry called the proposed regulations a part of the Obama administration's "war on coal," and said that the new regulations would devastate an important industry and "only further stifle our economy's sluggish recovery and increase energy costs for American families."  But in an Austin American Statesman article, Asher Price quotes Michael Webber, deputy director of UT's Energy Institute, as calling the EPA proposal a "hug to Texas from Obama." Texas has abundant natural gas, wind and solar resources, which could easily replace coal-fired power plants, resulting in a boon to Texas' economy, according to Weber. Asher quotes Jim Marston, head of Texas' office of the Environmental Defense Fund, as saying: "If Rick Perry were governor of West Virginia," a coal-dependent state, "I could see why he might say this could harm the state's economy some. The fact he's from Texas and criticizes this rule is simply crazy."

A New York Times article, "Taking Oil Industry Cue, Environmentalists Drew Emissions Blueprint," says that the proposed EPA regulation is based largely on a proposal drawn up by the Natural Resources Defense Council.

The proposal is highly innovative in leaving details to the states, but also more vulnerable to legal attack. Asher Price's article quotes Scott Tinker, head of the University of Texas Bureau of Economic Geology, as saying that top-down regulation like that proposed by the EPA has not significantly reduce carbon emissions in other parts of the world. At the end of the day, Tinker said, "Will (the EPA regulations) even matter?"

An op ed piece in the American Statesman by Roger Meiners, a professor of economics at the University of Texas at Arlington, criticizes the EPA proposal, saying that Obama's "war on coal" will only harm the economy and that carbon emissions from coal will increase in other countries and increase fuel prices. He advocates government programs to encourage carbon capture projects.

July 2, 2014

Texas Railroad Commission's New GIS Viewer Up and Running

In the last legislative session, the Texas Legislature gave the Texas Railroad Commission money to upgrade its website. The RRC's new GIS Viewer is now available for use.  http://wwwgisp.rrc.state.tx.us/GISViewer2/  This map-based access to RRC information on wells, pipelines and records makes it much easier for the public to access RRC records.

One of its tasks that the RRC does well is provide easy access to its records. It has always been one of the most open and accessible regulatory agencies in the state, and it goes to great lengths to make its records easily available to the public. Its new GIS Viewer greatly enhances this capability.

There is as yet no tutorial on how to use the new Viewer, but if you play with it for a while, you will see how easy it is to use.  When you open it, you see a map of the State, with the RRC' district boundaries shown.

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You can select a county from the menu at the top of the page to zoom in on that county.

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Then use your mouse to navigate within the county and find the area you are interested in. When you zoom in far enough, you will see symbols for wells.

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Click on one of the well symbols, and you can access the information available for that well, including permits, completion reports, and well production, and images of all of the filings for that well.

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You can also use a well's API number to find the well. A well's API number is a unique number assigned to every oil and gas well in the U.S. A complete API number for the well identified above is 42-177-32136. On the Viewer, the first two numbers are not used, and the dash between 177 and 32136 is not used. To search for this well using its API number, type 17732136 in the search box in the upper right-hand corner of the Viewer.

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Press enter, and the map zooms to the well.

The map has different layers that can be turned on and off to view particular items. For example, below are the layers showing pipelines and land survey boundaries.

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Hover over a pipeline and you will see its operator and what commodity the pipeline is carrying.

The Viewer is still being enhanced, and additional data will be included.

The Commission is to be congratulated on its work in providing this valuable tool.

 

June 26, 2014

Amarillo Court of Appeals Refuses to Apply Accommodation Doctrine to Groundwater

Last week, the Amarillo Court of Appeals issued its opinion inn City of Lubbock v. Coyote Lake Ranch, LLC, No. 07-14-00006-CV, holding that the accommodation doctrine did not apply to restrict the City's use of Coyote's land to develop the City's groundwater under the land.

In 1953, the City of Lubbock bought the rights to groundwater under the land now owned by Coyote Lake Ranch. In that deed, the City acquired all groundwater rights, and "the full and exclusive rights of ingress and egress in, over and on said lands so that the Grantee of said water rights may at any time and location drill water wells and test wells on said lands for the purpose of investigating, exploring, producing, and getting access to percolating and underground water." The deed granted the right to lay water lines, build reservoirs, booster stations, houses for employees, and roads, "together with the rights to use all that part of said lands necessary or incidental to the taking of percolating and underground water and the production, treating and transmission of water therefrom and delivery of said water to the water system of the City of Lubbock only."

In 2012, the City proposed a well field plan for the property and began testing and development under that plan. Coyote sued, asking for a temporary injunction to halt the City's activity. Coyote claimed that the City failed to accommodate Coyote's existing uses of the property (the opinion does not say what those uses are), and that the City could use alternatives that would lessen damage to Coyote's use of the land. The trial court granted the temporary injunction, holding that Coyote was likely to be able to show at trial that the City's plan could be "accomplished through reasonable alternative means that do not unreasonably interfere with [Coyote's] current uses." The City appealed from that order.

In the Court of Appeals, the City made two arguments: first, it argued that the accommodation doctrine does not apply to the relationship between the owner of the surface and the owner of groundwater. Second, it argued that the express language in the water rights deed would prevail over general accommodation doctrine principles.

The Court of Appeals reversed, agreeing with the City that the accommodation doctrine does not apply to limit the rights of holders of groundwater rights. The Court said that the Texas Supreme Court has not extended the accommodation doctrine to groundwater, and that "changes in the law should be left to the Texas Supreme Court or the Texas Legislature."

The accommodation doctrine was developed to ameliorate the harsh results of the rule that the mineral estate is the dominant estate and mineral owners have the right to use as much of the surface of the land as is reasonably necessary to explore for and extract minerals, without compensation to the surface owner. The doctrine requires the mineral owner to accommodate existing surface uses where that can be done using established industry practices. The Court's opinion does not provide any logical reason why the accommodation doctrine should not apply also to severed groundwater rights. Indeed, the City's use of Coyote's land to develop its groundwater might be more intrusive than would surface use for development of mineral rights under the land.

The opinion does not address the City's second argument, that the express language in its deed granting the City extensive rights to surface use should make the accommodation doctrine inapplicable. Many deeds granting or reserving mineral interests contain express language granting the mineral owner the right to use the surface estate for oil and gas exploration and development. I have not seen a case involving the accommodation doctrine in which the mineral owner contended that the express language in its deed granting access rights prevailed over the accommodation doctrine.

Severance of groundwater from the surface estate is not as common in Texas as severances of minerals. But with increased demands for and value of groundwater, such severances will become more common, and other conflicts between the surface owner and the owner of groundwater will likely arise. I expect that the Texas Supreme Court will have to address the applicability of the accommodation doctrine to severed groundwater rights in the near future.

June 23, 2014

Texas Supreme Court Decides Key Operating v. Hegar

The Texas Supreme Court last week decided Key Operating & Equipment, Inc. v. Hegar, No. 13-0156, reversing the courts below and holding that Key Operating has the right to use a road crossing Hegar's tract to produce from a well on adjacent lands.

The legal principle the Court applied is not surprising and did not substantially change existing precedent. But the unusual facts of the case illustrate how far the Court will go to protect the rights of mineral lessees when those rights conflict with interests of the surface owner.

The legal precedent the Court followed is this:  when two tracts are combined to create a pooled unit, the operator of the unit has the right to use the surface of all of the land covered by the leases included in the unit to operate wells located anywhere on the unit, regardless of the location of the well.

The facts of the case are these:  Hegar bought 85 acres of land in 2002, and built a house there in 2004. The 85 acres was originally part of a 191-acre tract, the Curbo/Rosenbaum tract.  When the Hegars bought the land, 1/8th of the minerals under the Curbo/Rosenbaum tract were owned by the owners of Key Operating, who had leased the mineral interest to Key Operating. Key had a well on an adjacent tract, the Richardson #1, and had created a pooled unit including 10 acres of the Curbo/Rosenbaum tract and 30 acres of the Richardson tract. An existing road crossed the Hegar land and led to the Richardson #1. After the Hegars built their home, Key Operating drilled another well on the pooled unit, the Richardson #4, and traffic on the road increased substantially. The Hegars filed suit, arguing that Key had no right to "access or use the surface of the Hegar Tract in order to produce minerals from the Richardson Tract."  At trial, the Hegars produced expert testimony that the Richardson #4 Well was draining only 3 1/2 acres, and that the well's drainage area did not reach the Hegars' property and was not draining the Hegars' property. The trial court held that Key did not have the right to use the road across the Hegars' property to produce from a well that was not actually draining their property. The court of appeals affirmed. 403 S.W.3d 318 (Tex.App.--Houston [1st Dist] 2013).

The facts recited in the opinion reveal that Key appears to have created the pooled unit primarily if not solely to preserve its right to use the existing road to get to the Richardson #1 well. Key's owners apparently bought 1/8th of the minerals under the Curbo/Rosenbaum tract so that they could lease the interest to their own company and create the pooled unit. The opinion does not say for sure, but Key apparently pooled its lease of the 1/8th mineral interest in 10 acres from the Curbo/Rosenbaum tract even though it had no lease on the other 7/8ths of the minerals in that 10 acres. Because the new well, the Richardson #4, was not draining the Curbo/Rosenbaum tract, there was apparently no geological reason to create the pooled unit.

Even so, the Supreme Court held that, once the pooled unit was formed, Key had the right to use the Curbo/Rosenbaum tract to produce from wells on the pooled unit. The court held that

once pooling occurred, the pooled parts of the Richardson and Hegar Tracts no longer maintained separate identities insofar as where production from the pooled interests was located. So the legal consequence of production from the pooled part of the Richardson Tract is that it is also production from the pooled part of the Hegar Tract, and the Hegars do not contend that Key did not have the right to use the road to produce minerals from their acreage. Because production from the pooled part of the Richardson Tract was legally also production from the pooled part of the Hegar tract, Key had the right to use the road to access the pooled part of the Richardson tract.

So the Hegars will have to put up with the road and the traffic. They are bound by the legal fiction, found to be untrue as a matter of fact, that production from the pooled part of the Richardson tract was "legally" production from the their tract, thus giving Key the right to use its road.

A footnote in the Supreme Court's opinion raises an interesting question: "The Hegars do not argue that the Richardson lease does not grant the right to pool or that the pooling was in bad faith."  Clearly, the mineral owners under the Richardson tract could complain that the pooling of their lease with 10 acres of the Curbo/Rosenbaum tract was in bad faith because the Richardson #4 was not in fact draining the Curbo/Rosenbaum tract. But would the Hegars, who apparently had no mineral interest in their tract and no right to share in production from the unit, have standing to argue that the pooled unit was created in bad faith? The court does not say, but the footnote implies as much.

June 19, 2014

Concerns Continue of Water Well Contamination from Hydraulic Fracturing

Investigations continue in response to complaints of alleged contamination of water wells from drilling activity in the Barnett Shale.

In May, the Texas Railroad Commission issued a report of its investigation of complaints of well contamination by methane in Parker County. It concluded that "the evidence is insufficient to conclude that Barnett Shale production activities have caused or contributed to methane contamination in the aquifer beneath the neighborhood."

But Parker County resident Steve Lipsky, who's complaint at the RRC caused it to conduct its new study, continues his battle with Range Resources, arguing that its wells are responsible for the methane in his water well.  Two other scientists who have reviewed the RRC test data concluded that the gas in Lipsky's water is definitely the result of fracking operations.

Lipsky's battle with Range continues in the Texas Supreme Court, where Lipsky and Range have both filed petitions for writs of mandamus. Lipsky has asked the court to dismiss Range's claims against Lipsky for defamation and business disparagement. Range accused Lipsky and his expert Alisa Rich of fabricating evidence in Lipsky's suit for damages for contaminating his well.  Range asks the court to reinstate its claims that Lipsky and his wife and Rich conspired to fabricate evidence to defame the company. The court has not yet ruled on the petitions.

Meanwhile, the University of Texas at Arlington, along with UT's Bureau of Economic Geology, are conducting a study of 550 water wells in North and West Texas, including baseline testing of wells in Nolan County using samples taken before commencement of drilling in that county, to investigate the impact of drilling and disposal operations over time. Some states, including Pennsylvania -- but not Texas -- require drillers to test nearby water wells before drilling to provide baseline data on groundwater.

June 9, 2014

Reclamation of Lands Impacted by Oil and Gas Operations

In the last century in West Texas, oil and gas exploration in the Permian Basin scarred the landscape. Below is a Google Earth view of an area of Ward County in far West Texas, showing the drilling pads and roads from oil and gas development.

Ward County Google.JPG

At the time of this development the surface of this land, dry and semi-desert, was considered relatively worthless, and the impact of oil exploration to the surface of the land was considered a small price to pay for the wealth of oil found under the ground.

Today, landowners have become more ecologically conscious and protective of the natural environment of their lands. Increasingly, oil and gas leases are including provisions requiring restoration of the surface by exploration companies. But restoration of semi-arid lands in West Texas is not a simple task and requires patience and expertise, as well as significant resources.

I recently ran across a series of publications by the University of Wyoming that describes strategies for restoring Wyoming lands disturbed by oil and gas activities. The University has created a Reclamation and Restoration Center in its College of Agriculture and Natural Resources, working with its School of Energy Resources. It has published a series of informative bulletins describing best practices for restoration of severely disturbed lands - how to preserve topsoil, re-establish plant species, and preserve natural habitat.  One bulletin describes considerations for including restoration requirements in oil and gas leases on private lands. The bulletins are online and can be found here. While Wyoming habitat is not the same as West Texas habitat, they have a lot in common.

A resource for landowners wishing to learn more about habitat restoration in South Texas is the Caesar Kleberg Wildlife Research Institute at Texas A&M University in Kingsville, which has experts on native habitat and vegetation.

June 5, 2014

Groningen Gas Field

Ever heard of the Groningen gas field? Neither had I, until I read a recent article in the New York Times. It is in the Netherlands, and was discovered in 1959. 

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The field is operated by a joint venture of Royal Dutch Shell and Exxon Mobil. Today, the field produces about one-third of all natural gas produced in the European Union.  It produces more gas each year than Russia recently committed to sell to China, and contributes some $16.4 billion a year to the Netherlands' national government. According to Wikipedia, as of 2009 the field had produced 39.3 trillion cubic feet, 60% of total reserves, and production is expected to last for another 50 years. It is listed as the ninth largest gas field in the world, based on estimated recoverable reserves. For comparison, the EIA estimates total U.S. proved shale gas reserves at about 129 tcf.  Some gas field.

The NYT article reports that earthquakes linked to the depletion of the field have recently been increasing in number and intensity, and the Dutch government has required the operator to reduce production by 20% to see if that will quell the tremors. That will put more pressure on the EU to find alternate gas supplies.

May 28, 2014

A Second Nuisance Verdict in Barnett Shale

A jury has awarded damages in a second nuisance case against an operator, this time against Chesapeake Energy.  In Crowder et al. v. Chesapeake Operating Inc., case number 2011-008169-3, in Tarrant County Court at Law, the jury awarded the Crowders $20,000 for what the jury found to be a temporary nuisance - drilling operations conducted by Chesapeake in a field behind their house, where Chesapeake has drilled 13 wells. The Crowders complained of offensive odors and extensive noise. The jury failed to find that Chesapeake's operations created a permanent nuisance, which would have entitled the Crowders to additional damages. The Crowders filed their suit in 2011.

While the jury award in Crowder will not excite plaintiffs' attorneys to look for additional such cases -- unlike the $2.9 million verdict recently awarded in another case, Lisa Parr v. Aruba Petroleum, Cause No. 11-01650-E, in the County Court at Law No. 5 of Dallas County -- the case does show the viability of nuisance claims aimed at oil and gas operations near residences, especially in urban areas.

The Dallas city council recently adopted a drilling ordinance prohibiting well locations within 1,500 feet of any residence, effectively prohibiting most drilling within the city limits. The setback in Fort Worth is 600 feet. There are more than 1,700 wells in the City of Fort Worth.

May 23, 2014

Two New Technologies Could Change How We Use Energy

Here are two emerging technologies that could change how we might use natural gas to fuel our cars and electrify our homes and offices.

A company called Redox Power Systems is building a plant in Florida to produce The Cube, a dishwasher-sized system that generates electricity from natural gas using electro-chemical fuel cell technology. 

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With almost no moving parts, The Cube can provide enough electricity to power a gas station or a small grocery store. It also generates heat that can be used to heat a home or business. It's technology was developed at the University of Maryland. The system also emits carbon dioxide, but according to a review by MIT, its emissions should be lower than those associated with power from the grid. Redox plans to complete a 25-kilowatt prototype and start selling complete systems by the end of this year.

A company named Siluria Technologies is making low-carbon gasoline from natural gas using a catalyst grown from a genetically modified virus. Siluria claims that its gasoline carries half the carbon footprint of gasoline refined from oil, and that it can produce gasoline for about $15 a barrel, not counting the price of the natural gas consumed.  According to Sliuria's website: "At commercial scale, Siluria's process will enable refiners and fuel manufacturers to produce transportation fuels that cost considerably less than today's petroleum-based fuels, while reducing overall emissions, NOx, sulfur and particulate matter. Fuels made with Siluria's processes are also compatible with existing vehicles, pipelines and other infrastructure and can be integrated into global supply chains."

May 12, 2014

Green Lake and "Holes"

Recently my son was watching the movie "Holes," a great adventure movie based on a book by the same name written by Louis Sacher in 1988. Sacher also wrote the screenplay for the movie, which came out in 2003. In the story, Stanley Yelnats IV, a teenager, is sent to Camp Green Lake, a juvenile detention camp, for stealing a pair of sneakers. Green Lake was a dried-up lakebed in Texas where the camp detainees were forced by the evil warden (played by Sigourney Weaver) to dig holes looking for a buried treasure. It's a great growing-up story. 

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The movie reminded me that Green Lake is a real place in Texas that has its own fascinating legal history.

Green Lake is the largest natural fresh-water lake in Texas. Located in Calhoun County near the coast, it covers an acre of about 10,000 acres.

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Historically, the lake was filled by overflow from the Guadalupe River, and the lake sometimes dried up during times of drought. Its average depth when full is about 4 feet.

Before the Civil War the area was settled by ranchers and cotton farmers and grants were made of the surrounding land. A small settlement, Green Lake, was established near the lake.

Sometime before 1917, the landowners surrounding Green Lake sued the State of Texas contending that their surrounding grants extended to the center of the lake, and that the State did not own title to the bed of the lake. 

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In 1917, the Austin Court of Appeals held that the bed of the lake belonged to the State. Welder v. State, 196 S.W. 868 (1917).  "Under the law as it now exists in this state, Green Lake cannot be sold ..., but is under the jurisdiction of the game, fish, and oyster commissioner...."

In 1913, while Welder v. State was pending, Elmer Yates made application to the Texas General Land Office to buy the bed of Green Lake. In 1918, after the Welder case was decided, the Land Commissioner, James Robison, sold the bed of the lake to Yates. His decision was apparently based on evidence presented by Yates that the lake wasn't really a lake. 

In the 1940's, Price Daniel, then Texas' Attorney General (and later Governor and Supreme Court Justice), sued the successors to Yates to recover the State's title to the bed of Green Lake, arguing that the Land Commissioner had no authority to sell it in 1918. In Texas at the time, the Land Commissioner had authority to sell state land only if it was dedicated to the Public School Fund; Daniel argued that under Texas law the beds of lakes and rivers are not Public School Lands and not subject to sale. In State v. Bryan, 210 S.W.2d 455 (1948), the Austin Court of Appeals upheld the sale.  Its decision was based on a statute that provided that, if a sale was made by the state "under color of law," it could not be challenged unless suit was brought within one year from the date of the sale. The court concluded that the Land Commissioner's sale was "under color of law" because there was evidence considered by the commissioner that the lake was in fact dry most of the time. Yates submitted evidence that the bed of the lake was "bone dry" in 1895 and again in 1900, and that between 1900 and 1912 it was sometimes flooded and sometimes dry, and was "completely dry" between 1917 and 1918. "There certainly was a fact question at least as to whether the area was the bed of a navigable [lake], a non-navigable lake, or merely overflow land. Even under the factual situation detailed in the Welder opinion, the conclusion therefrom that the lake was navigable was, to say the least, questionable."

So two courts ruled on the legal status of the lake, one holding that it was a lake and the other that it was not. Here's a photo of Green Lake today from Google Earth:

Green Lake Google Earth.JPG

 

But wait, there's more.

In 1988, the Texas Supreme Court decided the case of Indianola Company v. Texas Water Commission, 749 S.W.2d 771 (Tex. 1988). In that case, the then owner of the lands that were the bed of the area called Green Lake (that wasn't really a lake) sued to determine who owns the water in the lake. In Texas, the State owns all waters in lakes and rivers, but "storm water, floodwater, and rainwater of a depression" can be captured and owned by private landowners. "We agree that Green lake is a 'lake', and thus public water under Tex. Water Code section 11.021," declared the court.

Thus far, I have found no opinion determining legal title to the treasure that Stanley Yelnats IV found in the bed of the lake. For that, you'll have to watch the movie.

May 5, 2014

Texas Supreme Court Agrees to Hear Hooks v. Samson

The Texas Supreme Court has granted the plaintiffs' petition to review a case important for Texas mineral owners, Hooks v. Samson Lone Star. I wrote about this case when it was decided by the Houston First Court of Appeals in 2011. The court of appeals' opinion reversed a judgment for $21 million against Samson Lone Star in a case involving alleged bad-faith pooling and fraudulent misrepresentations by the Hooks' lessee. The court of appeals threw out the judgment, holding that Texas Supreme Court precedent required it to hold that the Hooks' claims were barred by the applicable statute of limitations.

The statute of limitations bars claims if they are not filed within four years (or two years for some claims) of the event that caused the damages or injury for which the claim is brought. In some cases, courts have excused the delay in filing claims if the damage or injury was not discovered until a later date. Under this "discovery rule," the statute of limitation is "tolled" until the plaintiff discovered or, with reasonable diligence, should have discovered, her injury. Also, courts have held that the statute of limitations is tolled where the defendant fraudulently conceals the facts giving rise to the damage or injury.

Over the last several years, the Supreme Court has severely narrowed the circumstances under which plaintiffs can invoke the discovery rule or claim fraudulent concealment to toll limitations on a claim, particularly in suits by mineral owners against their lessees. In Exxon v. Emerald in 2009, the Supreme Court reversed an $18 million judgment against Exxon on the basis that the mineral owners' claims were barred by limitations -- despite an express finding by the jury that the plaintiffs had filed their claim within four years after they discovered or should have discovered Exxon's fraudulent conduct. In 2011, the Supreme Court in BP v. Marshall overruled a jury verdict in favor of royalty owners, holding that their claim was barred by limitations as a matter of law even though the jury had found that the lessee had fraudulently concealed the facts and that the plaintiffs had no reason to discover the true facts until less than two years prior to filing suit.

One justice on the Houston First Court of Appeals wrote a concurring opinion that may have influenced the Supreme Court to take the case, which bears repeating here:

It is undisputed that Samson drilled a directional well bottomed within the "buffer zone" established in the Hooks' Jefferson County Lease (the "Lease") and failed to elect between the three alternatives outlined in the Lease, thus exposing itself to liability for breach of contract. If the Lease had allowed pooling, Samson could have solved the problem by pooling the lands covered by the Lease with the adjacent lands. The Lease, however, did not allow pooling.

Samson's solution to this problem was to begin misrepresenting various "facts" to escape the consequences of its actions. Its landman, Lanoue, filed papers with the Railroad Commission falsely certifying that Samson had pooling authority from the Hooks. He later filed paperwork in the county's real property records falsely indicating that the Hooks had already agreed to pool. Lanoue then sent a letter to the Hooks asking them to agree to pool the westernmost 50 acres of the Hooks' acreage in the Lease into the BSM 1 Unit. When Charles Hooks called Lanoue and asked for more information about the well's location, Lanoue represented to Hooks that the well was located approximately 1500 feet from the lease line, a location outside the buffer zone. When Charles Hooks asked for a plat, Lanoue faxed him one that represented a bottom-hole location that was +/- 1400 feet from the lease line, the accuracy of which he, Lanoue, had certified with no reference to an actual bottom-hole location, although it was ascertainable from a prior directional survey. Instead, when asked the origin of those measurements, he answered: "I got them from myself." On this basis the Hooks agreed to the formation of the unit.

Thus it is clear that Samson, through its representative, took action to cover up its own error by both oral and written misrepresentations to its lessor, born of "assuming" and "hoping." It is further clear that the Hooks, after asking for and receiving verification of Lanoue's oral representation in the form of a plat, believed its lessee's representations and made no attempt to go beyond them to discover the truth or falsity thereof. On these facts, the majority has found that the discovery rule does not apply to the Hooks' fraud, fraudulent inducement, and statutory fraud claims and that they are barred by limitations as a matter of law.

I reluctantly concur, based on the Texas Supreme Court's holding in BP America Production Co. v. Marshall, 342 S.W.3d 59 (Tex. 2011). In that case, the Texas Supreme Court makes clear that no lies on the part of a lessee, however self-serving and egregious, are sufficient to toll limitations, as long as it is technically possible for the lessor to have discovered the lie by resort to the Railroad Commission records. This burden the Court imposes upon lessors is severe. It is now a lessor's duty to presume that any statement made by its lessee is false and to ransack the esoteric and oft-changing records at the Railroad Commission to discover the truth or falsity of its lessee's statements. If, as is often the case, these records are technical in nature and require expert review to ferret out the truth, it is the lessor's job to hire experts out of its own pocket to perform such a review. If a lessor fails to take these steps, then it will have failed in exercising reasonable diligence to protect its mineral interests and, if the lessee's fraud is successful for longer than the limitations period, the lessor's claims will be barred by limitations.

Such is the case here. Had the Hooks presumed that Samson's oral representations, followed by written representations, about the bottom-hole location of the well were false, and had they hired an expert to resort to Railroad Commission records to trace the various filings (some of which were also false), that expert could have hit upon the directional survey and, by virtue of his expertise, interpreted it to prove the falsity of the representations. Instead they merely relied on the oral and written representations of their lessee, without undergoing what doubtless seemed to them the useless expense of hiring an expert to rake through the Railroad Commission records with an eye towards exposing a potential falsehood.

I believe the Texas Supreme Court has placed an unnecessary and very heavy burden on lessors by its ruling in BP America, one that will result either in much money being spent unnecessarily on prophylactic forensic review of Railroad Commission records or in many viable claims being lost to limitations. As we are, however, bound to follow the Court's rulings, I reluctantly concur in that part of the opinion that finds the Hooks' fraud, fraudulent inducement, and statutory fraud claims barred by limitations as a matter of law.

Amicus briefs supporting Samson Lone Star were filed by the Independent Petroleum Association of America, the Texas Alliance of Energy Producers, and the Texas Oil & Gas Association. Amicus briefs supporting the Hooks' application were filed by the Texas Land & Mineral Owners' Association and by Cardwell, Hart & Bennett, a law firm that regularly represents landowners in oil and gas cases. Links to the briefs of all parties and amici can be found here. The court has not yet set a date for oral argument.

April 28, 2014

$3 Million Verdict for Nuisance in Barnett Shale Case

There's lots of buzz about a recent verdict in a case filed by a landowner in Dallas County alleging injuries from air emissions from drilling and production of Barnett Shale wells in Wise County. The case is Lisa Parr v. Aruba Petroleum, Cause No. 11-01650-E, in the County Court at Law No. 5 of Dallas County. The jury returned a verdict for personal injury and property damages of $2.9 million. According to the petition (Parr - 11th Amended Petition.pdf), Aruba had 22 wells within two miles of the Parrs' 40 acres, including one within 800 feet.

CNN quotes the plaintiff, Lisa Parr, as saying that says she's not opposed to the work oil companies do. She simply wants them to do their business responsibly.

"We are not anti-fracking or anti-drilling. My goodness, we live in Texas. Keep it in the pipes, and if you have a leak or spill, report it and be respectful to your neighbors. If you are going to put this stuff in close proximity to homes, be respectful and careful."

Here is a chart of pending cases related to hydraulic fracturing done last year by Arnold and Porter:  http://www.arnoldporter.com/resources/documents/Hydraulic%20Fracturing%20Case%20Chart.pdf