October 2011 Archives

October 28, 2011

News from the Oil Patch

Recent news of interest:

New York Times reporter Ian Urbina has a recent article claiming that lenders taking mortgages on real estate are restricting their borrowers from granting oil and gas leases on the mortgated property. The article also discusses whether the granting of a lease on mortgaged property might violate the terms of the mortgage. Urbina says Congressmen Ed Markey and Maurice Hinchey asked Fannie Mae and Freddie Mac how they deal with oil and gas leases on mortgaged property. Chesapeake said that they don't seek approval from lenders before acquiring leases on mortgaged property, but wait until they are ready to drill to ask the mortgage company to subordinate their lien to the mortgage.

In my experience in Texas, the standard practice has been for the oil company to lease the land first, then determine if it is mortgaged, and if so ask the lender to subordinate is lien. Lenders are generally agreeable, believing that, if a well is drilled, the value of their collateral will be enhanced, since they will still have a lien on the royalty interest reserved by their borrower. I recently learned, however, that Fannie Mae is requiring that its borrowers on commercial properties insert specific provisions in the lease before agreeing to the lease, as well as charging a substantial fee. On new leases of residential lots in the Barnett Shale, Chesapeake is sending a lender subordination form to the lot owner along with the lease and asking the owner to get their mortgagee's consent before paying for the lease.

The Booming Eagle Ford Shale

There are now 1,231 wells producing from the Eagle Ford Shale in South Texas, in 25 counties. Total production to date is more than 37 million barrels of oil/condensate and 311 Bcf of gas. The biggest counties are DeWitt, Karnes, Dimmit, Webb and La Salle.  DeWitt and Karnes Counties are the best oil producers so far. In DeWitt County, 99 Eagle Ford Wells have produced 6.8 million barrels, and the average peak month daily production was 555 barrels. Webb County is tops on Eagle Ford gas production, with 116 Bcf of gas to date, and an average initial production rate in the first month of 3.4 mmcf from 215 wells. As of last month, 238 rigs were running in the Eagle Ford play (compared to 115 in the Marcellus). Drilling in the Barnett Shale play, a gas play, has declined to its lowest level in seven years because of the low price of natural gas.

Eagle Ford.jpg

 

 Kinder Morgan Buys El Paso Corp. for $21 Billion

Kinder Morgan's acquisition will make it the largest operator of gas pipelines in the US and the fourth largest energy firm in North America. Kinder Morgan is reportedly planning to sell El Paso's exploration and production assets, for as much as $7 billion.

Brigham Exploration Sold to Statoil for $4.4 Billion

On the local front, in my home town of Austin, the two Brigham brothers have cashed in, selling their company for $4.4 billion to Norway's Statoil. The Brighams started their company here in Austin several years ago, taking in public, and recently acquired 375,00 acres on the Bakken and Three Forks plays in North Dakota and Montana. Brigham has already been sued by its shareholders, who say that Statoil's price of $36.50 per share is too low.

 RRC Eagle Ford Task Force Adopts "Advisements"

A task force appointed by the Commissioner David Porter of the Texas Railroad Commission has adopted "advisements" regarding construction of pipelines and roads in the area of the Eagle Ford Shale play. The task force was appointed in July to "open the lines of communication between all parties, establish best practices for developing the Eagle Ford Shale, and promote economic benefits locally and statewide."  The task force has twenty members:

  • Leodoro Martinez - Middle Rio Grande Development Council, Executive Director, Cotulla
  • Kirk Spilman - Marathon Oil, Asset Manager Eagle Ford, San Antonio
  • The Honorable Jaime Canales - Webb County Commissioner, Precinct 4, Laredo
  • Teresa Carrillo - Sierra Club, Executive Committee Member - Lone Star Chapter, Treasurer - Coastal Bend Sierra, Corpus Christi
  • James E. Craddock - Rosetta Resources, Senior Vice President, Drilling and Production Operations, Houston
  • Erasmo Yarrito - Texas Commission on Environmental Quality, Rio Grande Valley Water Master, Harlingen
  • Steve Ellis - EOG Resources, Senior Division Counsel, Corpus Christi
  • The Honorable Daryl Fowler - Dewitt County Judge, Cuero
  • Brian Frederick - DCP Midstream, Southern Unit Vice President for the East Division, Houston
  • Anna Galo - Vice President, ANB Cattle Company, Laredo
  • The Honorable Jim Huff - Live Oak County Judge, George West
  • Stephen Ingram - Halliburton, Technology Manager, Houston Business Development & Onshore South Texas, Houston
  • Mike Mahoney - Evergreen Underground Water Conservation District, General Manager, Pleasanton
  • James Max Moudy - MWH Global, Inc., Senior Client Service Manager, Houston
  • Trey Scott - Trinity Minerals Management, LTD, Founder, San Antonio
  • Mary Beth Simmons - Shell Exploration and Production Company, Senior Staff Reservoir Engineer, Houston
  • Terry Retzloff - TR Measurement Witnessing, LLC, Founder, Campbellton
  • Greg Brazaitis - Energy Transfer, Vice President, Government Affairs, Houston
  • Glynis Strause - Coastal Bend College, Dean of Institutional Advancement, Beeville
  • Susan Spratlen - Pioneer Natural Resources, Senior Director, Corporate Communications & Public Affairs, Dallas
  • Chris Winland - Good Company Associates; University of Texas at San Antonio, Interim Director, San Antonio Clean Energy Incubator, Austin/San Antonio
  • Paul Woodard - J&M Premier Services, President, Palestine

The task force adopted the following advisements regarding pipelines and roads.

Pipelines:

• Placement of pipelines should avoid steep hillsides and watercourses where feasible.

• Pipeline routes should take advantage of road corridors to minimize surface disturbance.

• When clearing is necessary, the width disturbed should be kept to a minimum and topsoil material should be stockpiled to the side for replacement during reclamation, accelerating successful revegetation.

• Proximity to buildings or other facilities occupied or used by the public should be considered, with particular consideration given to homes.

• Unnecessary damage to trees and other vegetation should be avoided.

• After installation of a new line, all rights-of-way should be restored to conditions compatible with existing land use.

Roads:

• Trucking companies partnering with the Texas Department of Public Safety to develop a program that would alert companies when their drivers receive moving violations or drivers license suspensions.

• Creation of road use agreements or trucking plans between operators and local authorities, including parameters such as:

1. Avoiding peak traffic hours, school bus hours, and community events.

2. Establishing overnight quiet periods.

3. Ensuring adequate off-road parking and delivery areas at all sites to avoid lane/road blockage.

The task force is supposed to meet monthly.

 

In the Marcellus:

 

  •  Democratic representatives in Ohio are calling for a moratorium on hydraulic fracturing in that state until the EPA completes its study of fracking.
  • ABC News reported that the Marcellus and Utica shale plays have created thousands of jobs in Ohio, causing people to flock to Steubenville, Ohio, which last year had an unemployment rate of 15%.
  • The Pennsylvania Department of Environmental Protection has told Cabot Oil & Gas that it can stop delivering water to residents of Dimock Township. Cabot was required to furnish water to residents after claims that its wells had contaminated groundwater there. The residents still have a pending case against Cabot.
  • Range Resources is challenging the constitutionality of a town's drilling ordinance in South Fayette, Pennsylvania as so strict as to prevent any drilling in the town, causeing a taking of Range's mineral rights. Range's action is being considered a test case on the limits of municipal regulation of drilling in Pennsylvania.
  • Companies are considering abandonment of their acreage in New York after reviewing that state's proposed rules on horizontal drilling and fracking.

 

October 25, 2011

Mineral Owners Lose Another Big Judgment based on Limitations

Mineral owners have lost another substantial verdict against an oil company based on their failure to bring the claim within four years. In Samson Lone Star v. Hooks, No. 01-09-00328-CV, the Houston First District Court of Appeals reversed a verdict and judgment against Samson for $21 million, holding that the claim was barred by the four-year statute of limitations as a matter of law -- even though the jury had found that the Hooks should not have discovered Samson's fraudulent conduct until April 2007, less than four years prior to their suit.

The case is reminiscent of a similar case, Exxon v. Emerald, decided by the Texas Supreme Court in 2009, in which the Supreme Court reversed an $18 million verdict against Exxon, again 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. (Pat Lochridge, the lawyer who represented Exxon in the trial court in Exxon v. Emerald, represented the plaintiffs in Samson v. Hooks. You win some, you lose some.)

The Supreme Court did it again in BP v. Marshall, decided earlier this year. Again the Court overruled a jury verdict in favor of royalty owners, holding that their claim was barred by limitations as a matter of law.

One justice wrote a separate opinion in Samson v. Hooks, reluctantly concurring with the majority on the limitations issue and agreeing that the court was bound by the Supreme Court precedent in BP v. Marshall, but urging the Supreme Court to revisit its prior rulings. In my view, it is an eloquent argument against the prior rulings of the Supreme Court. Here is the relevant portion of Justice Jim Sharp's concurring opinion:

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.

The case will surely be appealed, so we shall see if the Supreme Court revisits the issue.

October 15, 2011

Chief Justice John Hemphill - Judge of the Long Knife

The Texas Supreme Court Historical Society has published an article by David A. Furlow on the life of John Hemphill, the first Chief Justice of the Supreme Court of the State of Texas. John Hemphill was a remarkable character, one of the pioneering men and women who settled in Texas during its birth as a nation and then a state.

John Hemphill was born in 1803 in South Carolina to a Presbyterian minister and his wife; went to Jefferson College (now Washington and Jefferson College) in Washington, Pennsylvania; began his legal studies "reading the law" in Columbia, South Carolina in 1829; practiced law in Sumter, South Carolina; served in the U.S. Army in the Seminole War of 1836 in Florida; and moved to Texas in 1838, at the age of 35, two years after Texas won its independence from Mexico. He set up his law practice in Washington-on-the-Brazos.

In 1840, President Mirabeau B. Lamar appointed Hemphill to the Texas Supreme Court. He also served as a judge of the Fourth Judicial District. On December 5, 1840, he won election to replace Thomas J. Rusk as Chief Justice of the Supreme Court. In 1846, when Texas joined the Union, Governor J. Pinckney Henderson appointed Hemphill the first Chief Justice of the new Texas Supreme Court, where he served until November 1858. He resigned from the Court to take Sam Houston's place as United States Senator, when Houston resigned because he refused to support Texas' withdrawal from the Union. After Texas joined the Confederacy, Hemphill served in the Provisional Confederate Congress, and he died of pneumonia in Richmond, Virginia, in January 1862.

On March 19, 1840, Hemphill presided over an unusual and historic meeting between Comanches and Texas representatives seeking to make peace with the Chomanche tribes, held in San Antonio. The meeting did not go well. The Comanches brought with them a sixteen-year-old-girl, Matilda Lockhart, who had been abducted by the Comanches in 1838. Mary Ann Maverick (a member of the Maverick family that gave their name to unbranded cattle) was there and described Matilda: "Her head, arms and face were full of bruises and sores, and her nose [was] actually burnt off to the bone--all the fleshy end gone, and a great scab formed on the end of the bone. .... She told a piteous tale of how dreadfully the Indians had beaten her, and how they would wake her from her sleep by sticking a chunk of fire to her flesh, especially to her nose." Matilda's treatment did not endear the Comanches to the Texans present. Matilda, who understood the Comanche language, told the Texans that the Comanches held another fifteen Texas hostages, whom the Comanches intended to ransom one by one to the Texans for the highest price they could get. The result was a fight, later named the Council House Fight, in which several of the Comanches were killed. Hemphill, attacked by one of the chiefs, pulled a "long knife from under his judicial robes and slew his antagonist." True frontier justice. The result of this failed attempt at peace-making was a long-running war between Texans and Comanches that was not finally concluded until after the Civil War.

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October 10, 2011

Chesapeake's Aubrey McClendon

Christopher Helman has recently written two articles on Aubrey McClendon, CEO of Chesapeake Energy, one in the October 24 edition of Forbes, and one -- an interview with McClendon --  on Helman's blog. McClendon is the Steve Jobs of the US oil & gas exploration industry, in many ways the face of the industry. And he's not bashful about taking that role. Helman's articles provide a good summary of McClendon's and Chesapeake's meteoric rise and the controversies surrounding him and the industry.

Chesapeake has a market capitalization of $17 billion and is estimated to have $2 billion in profits on $9.5 billion in revenues this year. It has 12,000 employees and added 3,300 employees this year. The company has 4,500 land scouts acquiring oil and gas leases from Ohio to Pennsylvania to Michigan to South Texas. Chesapeake is expanding beyond the E&P business into the oilfield service industries. According to McClendon, it is the fourth-largest drilling company in the US, the second-largest compression company, and in the top three in oilfield trucking and tool rental. Chesapeake intends to spin off its oilfield services businesses next year into a new public entity.

McClendon's great uncle was Robert Kerr, founder of Kerr-McGee Oil & Gas and a goveronor of Oklahoma. At age 23, he partnered with Tom L. Ward to start Chesapeake, and it went public in 1993. Ward and McClendon parted ways in 2006, and Ward started his own company, SandRidge Energy. McClendon owns a huge wine collection that is served at his Oklahoma eatery the Deep Fork Grill. He recently sold his personal collection of antique maps to his company for $12 million. 

Now 52 years old but looking much younger, according to Forbes McClendon is worth $1.2 billion. He owns 2.5% of every well Chesapeake drills--interests now worth some $500 million. "You could say I'm the only CEO in America who truly participates alongside his company in the day-to-day business activity on the same basis as the company," he says. "Would we have had the financial collapse in 2008 if every CEO of a bank, of a mortgage company or a securities firm had been forced by his board to participate personally in some proportionate part of every loan made, every mortgage-backed security sold or every real estate deal financed by those firms?" In 2009 his Chesapeake compensation package was valued at $100 million, including $20 million in CHK stock.

Chesapeake is admired and hated in the industry. The company sweeps into each new play paying the highest prices for leases and gobbling up all acreage in sight. In the past five years the company has acquired 600,000 leases covering 9 million acres, paying $9 billion in bonuses. Chesapeake paid $1.7 billion for 700,000 acres in the Eagle Ford in 2010; then in November 2010 the company sold a one-third share of that acreage to China's state-owned oil company for $1.1 billion and an additional $1.1 billion in future drilling costs. Chesapeake has entered into similar agreements withe BP, Statoil and Total to lay off interests in its acreage.


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