March 2010 Archives

March 31, 2010

Strauss Charges Texas Legislature to Look at Local Ordinances Governing Surface Use in Barnett Shale

Speaker of the House Joe Strauss has charged the House Committee on Energy Resources as follows for the next legislative session:

"Survey current local ordinances governing surface use of property in oil and gas development. Recommend changes, if any, to the authority of the Railroad Commission to regulate the operation of oil and gas industries in urban areas of the state, particularly the Barnett Shale."

It seems evident from this charge that operators in the Barnett Shale will be asking the Texas Legislature to curtail the authority of municipalities to issue drilling permits for areas within their jurisdiction, or at least to limit what conditions they can place in those permits. Drilling ordinances such as those in Fort Worth and surrounding cities are becoming quite sophisticated, and place significant conditions on the granting of permits, including distances from houses and other structures, sound limits, handling of frac water, produced water and other wastes, safety requirements, traffic, and damage to surrounding streets. The City of Grapevine has revised its drilling ordinance to require an 8-foot masonry wall around the wellsite and shrubbery between 3 and 5 feet high along the wall. The City of Flower Mound is considering revision of its drilling ordinance to require companies to report their airbrorne emissions and use vapor recovery technology. In some cases, municipal ordinances are so stringent that as a practical matter they prevent drilling within city limits. I expect that eventually constitutional takings claims will be made against cities whose restrictions prevent any mineral development within their limits.

If the Legislature restricts municipal permitting authority, it could enlarge the requirements that the Railroad Commission must impose, or at least consider, when granting permits in urban areas, to include environmental considerations. The Austin Court of Appeals recently held that the Commission must consider the impact of traffic when ruling on an application for a disposal well permit. The Commission has appealed that decision, and the Texas Supreme Court has agreed to consider the case. Texas Citizens for a Safe Future and Clean Water v. Railroad Commission of Texas, 254 S.W.3d 492 (Tex.App.-Austin 2007, review granted March 12, 2010). It appears that the Commission would not relish the idea of regulating issues of traffic, noise, safety and pollution issues in urban settings, in connection with applications for well permits.

March 14, 2010

Devon Appeals Temporary Field Rules for Carthage (Haynesville Shale) Field

In a previous post I reported on the application of Devon Energy asking the Texas Railroad Commission to include in the new Field Rules for the Carthage (Haynesville Shale) Field a provision allowing it to drill horizontal wells across lease or pooled unit boundaries.  These new rules apply to wells drilled in the Haynesville and Bossier formations in Harrison, Nacogdoches, Panola, Shelby and Rusk Counties in East Texas. Devon asked that the rules provide what it calls a "default allocation method" for horizontal wells drilled across unit boundaries.The rule proposed by Devon reads as follows:

"Operators shall be permitted to drill and complete horizontal wells that traverse one or more units and/or leases as long as that operator has a lease or other mineral ownership right to produce from each such unit or lease. If such a well is not already subject to an agreement regarding the allocation of production, the following allocation formula will be presumed to constitute a fair and reasonable allocation of production from a well in this field and shall be utilized by the Commission in assigning acreage attributable to the separate units/leases traversed by the horizontal drainhole: an allocation of acreage and production to each of the units and/or leases traversed by and completed in the horizontal well based on the percent of said horizontal well from first take point to last take point that lies under each unit or lease."

The Commission concluded that it had no authority to adopt such a rule, because pooling is a contractual issue between private parties, and (except as provided in the Mineral Interest Pooling Act) the Commission has no right to impose allocations of production among different tracts penetrated by a horizontal well.

In its appeal, Devon argues that the Commission's refusal to adopt its proposed "allocation rule" is arbitrary and an abuse of its discretion, without a rational basis, discriminates against producers in the Carthage Field, and will result in the waste of oil and gas.

I believe that Devon has little chance of forcing the Commission to adopt its proposed "allocation rule." But if it is successful, it is certain that operators in the Barnett Shale and other shale fields now being developed in Texas will ask for a similar rule. Such a rule would have significant impacts on royalty owners and their rights to consent to pooling of their royalty interests.

 

March 1, 2010

Chesapeake Shale Plays

Chesapeake Energy Corporation summarized its activities in the country's "Big 6" shale plays in its Operational Update issued on February 16. The report reveals the huge impact Chesapeake has had on shale plays from New York to South Texas.

Chesapeake is the eighth largest E&P company ranked by total assets according to the Oil & Gas Financial Journal, behind ExxonMobil, Chevron, ConocoPhillips, Anadarko, Marathon, Occidental and XTO Energy. It also ranks eighth in exploratory spending and market capitalization, and twelfth in total revenue. (Chesapeake's market cap is 18% of ExxonMobil's.) In 2009, Chesapeake drilled 1,148 gross operated wells, which it called "the industry's most active drilling program," spending $2.941 billion. Its leashold inventory at the end of 2009 was 13.7 million net acres.

Here are some highlights from Chesapeake's report:

 

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