May 2009 Archives

May 29, 2009

Continuous Operations Clauses in Oil and Gas Leases

As landowners have become more sophisticated in their negotiations of oil and gas leases, they have begun to insist on the inclusion of a "continuous operations" or "continuous drilling" clause in their leases. The idea behind such clause is that the lessee should have a reasonable time to fully develop the leased premises, after which the lessee should release that portion of the leased premises not necessary for the production of the wells it has drilled.

There is no "standard form" of continuous operations clause. Generally, a continous operations provision should address the following:

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May 22, 2009

Expanded Use of Mineral Interest Pooling Act?

The Texas Railroad Commission handed down an interesting order last August that may have broad application for operators' use of Texas' Mineral Interest Pooling Act to force unleased mineral owners into pooled units. In Docket No. 09-0252375, Finley Resources applied under the MIPA to form a pooled unit in the Barnett Shale consisting of 96.32 acres, for the drilling of a horizontal well. The proposed unit is in an urbanized area with numerous lots, and Finley was evidently unable to get all lot owners to sign leases. A plat of the proposed unit is shown below. As can be seen from the plat, there are a lot of unleased lots (the white spaces) in the proposed unit.



Finley Unit.JPG 

Under the MIPA, the operator seeking to form the unit must make a "good faith offer" to unleased owners before filing an MIPA application to force them into the unit. Finley offered the unleased lot owners the right to receive a 1/5th royalty and a 4/5ths working interest, which means that 45ths of those owners' share of production from the well would bear its share of the drilling and operating costs of the well. After studying the matter for a year, the Railroad Commission approved Finley's application. One unusual aspect of the order is that the unleased owners suffer no "risk penalty." In most MIPA applications, a party who has refused to join the unit voluntarily must bear its share of the drilling costs plus a "risk penalty," not to exceed 100% of the drilling and completion costs, before participating in revenues from the well. The Commission's order in Finley allows the unleased owners to participate in revenues as a working interest owner once the operator has recovered 100% of drilling and completion costs, with no "risk penalty."


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May 18, 2009

A Good Resource for Facts Regarding U.S. Energy Policy

Last week I attended an Energy Syposium sponsored by South Texas Money Management, Ltd. in San Antonio. One of the speakers was Amy Myers Jaffe, who is the Wallace S. Wilson Fellow in Energy Studies at the James A. Baker III Institute for Public Policy at Rice University and associate director of the Rice University Energy Program. Ms. Jaffe is co-author of " U.S. Energy Policy FAQ- The U.S. Energy Mix, National Security and the Myths of Energy Independence.pdf" published by the Institute in 2008. A good read. Excerpts:

  • "The United States consumes about 20.6 million barrels per day (b/d) of oil, or roughly 25 percent of global demand. By comparison, China is the second largest consumer of oil at 7.2 million b/d and Japan the third at 5.2 million b/d. Russia and Germany are fourth and fifth, respectively, at 3.1 million b/d and 2.6 million b/d. India's oil demand also is rising quickly, increasing by almost 40 percent since 1995 to the current average of about 2.5 million b/d. The most glaring differences in demand exist in the transportation sector. U.S. road pertoleum use represents 33 percent of all road petroleum use globally, which is twice as high in percentage terms as all of Europe. China, by contrast, currently represents 5 percent of all global road petroleum use."


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May 7, 2009

Momentum Increasing for Use of Natural Gas in Vehicles

Boone Pickens' efforts to promote natural gas as an alternative to gasoline in vehicles seems to be gaining momentum. In a column published by the Huffington Post, Pickens said that the recent advances in extraction of natural gas from shales is a "game-changer." "One study estimates that we have enough natural gas to satisfy current demand for the next century."  Pickens reports that H.R. 1835, the NAT GAS Act, has strong bipartisan support in Congress. the NAT GAS Act provides incentives for installation of compressed natural gas (CNG) fueling stations and use of CNG in large trucks and fleet vehicles.

Natural gas gives off 25% less carbon dioxide than oil for the same amount of energy produced. About 1/3 of total U.S. carbon dioxide emissions come from burning of gasoline in internal combustion engines. For a good summary of the use of CNG, go to the U.S. Department of Energy's website on Energy Efficiency and Renewable Energy. 

Although Texas leads the nation in natural gas production, it is behind ten other states in the number of CNG fueling stations.


CNG Stations.JPG Louisiana is considering its own legislation offering incentives to convert existing vehicles to natural gas and the installation of CNG fueling stations. Chrysler's recently announced plan to sell its best assets to Fiat may present a major opportunity to increase sales of natural gas vehicles (NGVs) in the U.S. Fiat plans to sell 120,000 NGVs in Italy this year. Only one NGV passenger car, the Honda Civic GX, is sold in the U.S. and there are only about 130,000 NGVs of all types currently on U.S. roads.
May 4, 2009

Look for Severance Tax Refunds on Shale Wells

Royalty owners should be aware that they are entitled to severance tax refunds on gas wells drilled in certain "tight sand" formations, including the Barnett Shale. If a field is designated as a "tight sand," Texas law provides for a reduction in severance tax from 7.5% to 2% for a period of ten years, or until the operator has recovered one-half of the well's drilling and completion costs, whichever comes first. But the operator must apply for this exemption to the Texas State Comptroller's office after the well has been completed. Until the exemption is granted for the well, the operator pays severance tax at the 7.5% rate, and once the exemption is granted the Comptroller refunds the excess tax paid to the operator. The operator should then pass on to the royalty owners their share of the refund, since the royalty owner bears his/her share of the severance tax. This refund could occur several months after production first commences.

According to Gene Powell's Barnett Shale Newsletter, there are 1,452 Barnett Shale wells in the "pending file" at the Texas Railroad Commission. Wells in the pending file have not yet been assigned a lease code number. Until a lease number has been assignd by the Railroad Commission, the operator cannot file for a tight sand exemption to the Comptroller. Powell says that the 1,452 pending wells have been producing for an average of eight months, so the operators of those wells are entitled to severance tax refunds of millions of dollars, once the paperwork is done.

Royalty owners should inquire with their lessees as to the status of the lessee's severance tax exemption. The additional royalty resulting from the exemption should be 5% of the gas royalties previously paid, from date of first production.