December 2011 Archives

December 30, 2011

Year in Review

I started writing this blog in February 2009. This is my 136th post. It's been fun. I had no idea I could find enough topics to write about, but material has not been a problem. A lot has changed in the oil and gas industry in the last three years. The development of unconventional shale plays. The BP oil spill in the Gulf. Falling gas prices. Rising oil prices. The "fracing controversy."

All of this news pales in comparison to my personal year-end tragedy: My secretary of 27 years is retiring.

I have looked back on my posts from the last year, and here are some parting thoughts for 2011:

Range Resources' fight with landowners in Parker County over alleged contamination of groundwater continues. The fight began in 2010 when the EPA issued an "emergency order" against Range, alleging that its Barnett Shale wells had charged landowners' groundwater supply with methane. Range has fought back fiercely. It appealed the EPA's order to the 5th Circuit court of appeals, and it called a Railroad Commission hearing, at which it presented extensive evidence showing that its wells were not the source of the methane in the landowners' water. The EPA and the landowners declined to participate in that hearing. Instead, the EPA filed suit in federal court to enforce its order. That court has stayed EPA's action until the 5th Circuit issues its opinion. The landowners also brought suit against Range in state court. Range filed a counterclaim, also suing the landowners' consultant Alisa Rich, alleging a conspiracy between the landowners, Rich and the EPA, and seeking damages for civil conspiracy and defamation.

Range's fight is one chapter in the larger controversy over hydraulic fracturing that continues to occupy the media. Most recently, the EPA issued a report concluding, after extensive study and testing of groundwater around Pavillion, Wyoming, that fracing is "likely" the cause of contaminated local water supplies. Every major media outlet picked up the story. Just Google Pavillion Wyoming to see the media frenzy. Encana, an operator in the Pavillion field, called for an independent review of the EP's findings and labelled the agency's report "irresponsible." The American Petroleum Institute and Wyoming regulators have also questioned the study's scientific soundness.

The EPA is continuing with its ponderous design of a study of fracing, mandated by Congress. Results of its study are not expected until 2013. The State of New York, which has imposed a moratorium on fracing, issued a draft environmental impact statement that contains a remarkably thorough study of alleged incidents of groundwater contamination and detailed recommendations of best practices to reduce risks to groundwater. Major studies have been done by several universities, including Duke and MIT, and the University of Texas is proposing its own study. The Department of Energy appointed an advisory panel to study the issue.

Meanwhile, the media continues its frenzied coverage of the "fracing controversy." A so-called documentary on the issue, Gasland, was even nominated for an Oscar.

The Texas Leglisature passed legislation requiring oil companies to post on the internet the chemical content of their frac fluid. The RRC has proposed rules implementing the new law. Similar legislation has been passed or is pending in other states.

The EPA has also issued proposed regulations to reduce emissions of contaminants into the air at all oil and gas facility sites, viewed by the industry as an attempt by EPA to extend is regulation of the industry.

The huge increase in gas supplies resulting from the shale boom has cause gas prices to decline further and companies to shift their exploration budgets to oil shale plays, including the Eagle Ford and the Barnett Shale oil "window" in Texas and the Bakken in North Dakota. Rigs drilling gas wells in Texas declined from 941 to 820 this year, and rigs drilling oil wells increased from 756 to 1,196. There are now 240 rigs drilling in the Eagle Ford alone. Meanwhile, the gas price has dropped to around $3.00/mmBtu, whereas the oil price has moved between $85 and $100/bbl.

The Texas Supreme Court issued several opinions of importance to royalty owners this year: In Shell v. Ross, BP v. Marshall, and Samson Lone Star v. Hooksthe court threw out landowners' jury verdicts against oil companies based on statutes of limitation. In FPL Farming v. Environmental Processing Systems, the court held that injection well operators could be held liable for subsurface trespass.  In Leslie v. Veteran's Land Board, the court appeared to reverse its prior rulings that the holder of executive rights has no duty to lease.  And in Texas Rice Land Partners v. Denbury Green Pipeline, the court said that pipeline companies must prove that they are in fact common carriers in order to exercise condemnation powers.

Meanwhile, oil companies keep leasing and drilling. The demand for energy will not soon abate. A happy new year to all.

 

December 20, 2011

Demand for Groundwater in the Eagle Ford Shale

The Wall Street Journal published a front-page article in its December 6 edition, "Oil's Growing Thirst for Water," that highlights issues with the oil and gas industry's demand for water in the Eagle Ford and other shale plays. The article quotes Darrell Brownlow, a hydrologist and geochemist and a landowner in South Texas about whom I have written previously. The WSJ article highlights the coming conflict between the oil and gas industry's demand for water and the growing demands on groundwater in Texas.

According to Dr. Brownlow, it makes simple economic sense to use groundwater as a resource for oil and gas exploration: The WSJ says: "Mr. Brownlow ... says it takes 407 million gallons to irrigate 640 acres (one square mile) and grow abaout $200,000 worth of corn on the arid land. The same amount of water, he says, could be used to frack enough wells to generate $2.5 billion worth of oil. 'No water, no frack, no wealth,' says Mr. Brownlow, who has leased his cattle ranch for oil exploration."

Most of the Eagle Ford lies above the Carrizo aquifer, which stretches from Webb County on the Rio Grande River up through Fayette County. Dr. Brownlow, a hydrologist, concludes that there is plenty of water in the Carrizo, in most places, to meet the demands for frac water. His estimates:

  • There are about 6 million acres in the Eagle Ford play, and a possible 20,000 oil and gas wells (one well per 300 acres).
  • An average frac job uses 15 acre-feet of water (4,887,765 gallons, or 115,375.5 42-gallon barrels).
  • So, the frac jobs on those 20,000 wells would use about 300,000 acre-feet of water over the life of the play.
  • Current withdrawals from the Carrizo Aquifer are about 275,000 acre-feet per year; so the entire demand for frac water from Eagle Ford wells would equal about one year's withdrawal of water from the aquifer.  At a rate of withdrawal of 275,000 acre-feet per year, groundwater management studies estimate that the Carrizo water table will drop an average of 30 to 35 feet by 2060.

Dr. Brownlow says that, if a successful Eagle Ford well makes 300,000 to 400,000 barrels of oil at $80/bbl, the return to the landowner would be $520,000 per acre-foot ($1.60 per gallon). In contrast, the return to a farmer using  the same acre-foot of water to irrigate corn, peanuts or coastal hay would be $500 to $1,000 per acre, or about $250 per acre-foot of irrigation water. "The point here is that using groundwater from the Carrizo for hydraulic fracturing in the Eagle Ford Shale has enormous economic potential for landowners, oil production companies and the entire region. Moreover, from a geologic and water planning perspective, additional impact on the aquifer appears minimal," says Dr. Brownlow.

Below is an analysis of data from the Texas Water Development Board, done by the WSJ:

WSJ TWDB data analysis.jpg

The oil and gas industry uses only 1.6% of the water consumed in the state. But this use is concentrated in areas where drilling activity is located, often in arid portions of the state, and the use is growing rapidly. As can be seen from the above graph of one water well, if your well is the one affected, it is an important issue. And the water used for fracing in the Eagle Ford is not returned to the ecosystem; it either remains in the formation, or if it returns to the surface, is it reinjected into licensed disposal wells.

In Texas, the oil and gas industry is exempted from regulation by local underground water districts, which have authority to permit and regulate withdrawals from underground aquifers. Those water districts are now in the middle of establishing "desired future conditions" for the aquifers within their jurisdiction and rules to assure that withdrawals are regulated so that those desired future conditions are met. Because those water districts have no authority to regulate wells used for oil and gas exploration, they cannot predict or control the effect of industry uses on their future supplies of water.

The issues raised by industry use of groundwater just go to prove the old Texas saying, "Whiskey's for drinkin', water's for fightin'."

 

December 16, 2011

Another Royalty Owner Bites the Dust

The Texas Supreme Court has once again reversed a jury verdict in favor of a royalty owner, holding that their claim is barred by limitations. The Court today issued its opinion in Shell Oil Company v Ross, reversing the judgments of the courts below in favor of Ross for $72,000 in unpaid royalties.

I wrote about this case back in January, see my previous post here.

Ross' lease required that royalties on gas be based on the "amount realized" by the lessee. But from 1988 to 1994 Shell paid royalties based on a weighted-average price instead of the price it received for the gas. Then from 1994 to 1997, Shell paid royalties based on an internally generated "transfer price," which Shell admitted it could not explain. In both cases, Shell admitted that it had not paid royalties as required by the lease. Its sole defense was that the royalty owner had failed to bring his claim within the four-year statute of limiations.

The jury found that Shell fraudulently concealed its failure to pay royalty, and that Ross, exercising reasonable diligence, could not have discovered the royalty underpayment until 2002. The court of appeals affirmed, holding that there was sufficient evidence in the record to support the jury's findings.

The Supreme Court, in an opinion by Justice Lehrman, held that, "as a matter of law," the evidence showed that Ross should have discovered the royalty underpayments when they were made from information that was "readily accessible and publicly available."

Ross argued that he reasonably relied on the gas price Shell put in his royalty statements, because a Texas statute requires Shell to report on the check stub the price it received for the sale of the gas. The Court disagreed. It held that a royalty owner in effect must assume that the gas price on the royalty check stub is not accurate. "Reasonable diligence requires that owners of property interests make themselves aware of relevant information available in the public record."

What public information should Ross have looked at? First, said the Court, Ross should have asked Shell what price it was receiving for the gas. Or, Ross could have asked the companies to whom Shell sold the gas what price they paid. Or, Ross could have compared the price to a publicly available index price, which "would have informed the Rosses that Shell was underpaying royalty." Ross could have researched records at the Texas General Land Office to see what price the State was receiving for its royalty interest in the same wells.

The Court's opinion confirms the statements made by Justice Sharp of the Houston First District Court of Appeals in Samson Lone Star v. Hooks, decided earlier this year:

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.

The lesson: mineral owners should reserve the right to audit their royalty payments, and they should exercise that right at least every 3 to 4 years, to be sure that their royalties are being paid in accordance with their lease.

December 7, 2011

Dealing With Landmen

Ian Urbina, the New York Times reporter who has written several articles recently about oil and gas exploration and the perils of hydraulic fracturing, recently wrote an article, "Learning Too Late of Perils in Gas Well Leases," that appeared on the front page of the Times on December 2. In research for the article the Times obtained and reviewed more than 111,000 oil and gas leases covering lands in Texas, Maryland, New York, Ohio, Pennsylvania and West Virginia - a remarkable effort. Urbina's article points out several ways in which the leases fail to protect the interests of landowners:

-- They do not require companies to compensate landowners for water contamination.

-- They do not address well locations, destruction of trees, or other surface use issues.

-- They do not disclose environmental risks and liabilities.

-- They allow extensions of the primary term without landowner approval.

-- They don't contain Pugh clauses requiring release of lands not included in units.

-- They don't require the operator to test the quality of nearby water wells before commencing operations.

Urbina also discusses the pressure tactics employed by some landmen to convince owners to sign leases.

As a lawyer representing landowners in lease negotiations, I consider Urbina's article a good advertisement for why owners should retain attorneys to help them with their leases. The article also got me to thinking about my experience with landmen and their style and tactics in obtaining oil and gas leases. I thought it might be a good topic for this venue.

My experience with landmen is principally in Texas, where landmen have been practicing for many years. In general my experience has been good; when dealing with me, landmen generally are professional, avoid pressure tactics, are not misleading, and value their reputation for fair dealing and veracity. As with any profession (including attorneys), there are exceptions. I have learned to spot landmen who do not live up to professional standards.

My advice to landowners dealing with landmen:

First: Find out who the landman works for. Exploration companies usually hire groups of independent landmen on a contract basis to research title in an area and acquire leases from mineral owners on behalf of the company. Sometimes the landman will acquire the lease in the name of their landman group rather than in the name of the company for whom they are working. The company may want to keep its presence in the play confidential for as long as possible, to avoid escalation of bonuses. My advice is to insist that the real party in interest be disclosed.

Second: Don't be afraid to ask questions. Why is the company leasing in this area? What other companies are leasing in the area? How much acreage has the company acquired so far? What other leases does the company have covering adjacent lands, or other undivided interests in the same tract? How did the landman determine the mineral interest I own? What kind of wells are likely to be drilled - oil, gas, horizontal, depth? Are there any recently drilled wells in the area? Particularly if you are not certain about your ownership, this is the opportunity to get good title information about your interest. Get the landman to explain to you how you came to own the interest that he/she wants to lease. Ask for copies of the relevant documents.

Third: Do your homework. Don't take the landman's information for granted. If you know other landowners in the area, find out what they know. Find out what wells have been drilled so far in the area and their rates of production. Go on the web and check out the company. If there are any publicly owned lands in the area, find out if they have been leased and what lease terms were negotiated.

Fourth: Understand the lease you have been offered. If you need help, get it. You wouldn't sell your land without professional help - why should you sign a lease, which might have much more financial value than a sale, without professional assistance?

Fifth: Investigate state and local laws relating to oil and gas exploration and development. Some states have laws requiring the company to compensate the surface owner for uses of and damage to the land. State laws regulate well spacing and pooling. Local ordinances may affect well locations, drilling practices and well production activities.

Sixth: If you feel that the landman with whom you are negotiating is not being helpful or truthful, ask to speak to his boss, or to a company representative. Companies know that landmen are representing them, and the company should be told if a landman they hired is engaging in unhelpful or unethical negotiation tactics.

Seventh: Don't get in a hurry. Landmen often leave the impression that you may lose the opportunity to lease if you don't sign up soon. That is seldom the case. To be a good negotiator you must leave the impression that you can take it or leave it, depending on whether you get the terms you want. Don't make or accept an offer unless and until you are confident that you will be happy with it.

Urbina's article mentions two websites as helpful to landowners negating leases. One of these, Landman Report Card, is an interesting effort by the Center for Future Civic Media at Massachusetts Institute of Technology, in collaboration with the Oil and Gas Accountability Project. It allows individuals who have had good or bad experiences with a particular landman to post their experiences and grade the landman's performance - along the same lines as Angie's List. It appears to be just getting off the ground - there are only a few posts so far, and there are thousands of landmen now working to acquire leases, from Pennsylvania to Ohio to Colorado. The other is PAGasLeases.com, which focuses on leasing in the Pennsylvania Marcellus Shale.

Landmen have resisted efforts at mandatory licensing of the profession, so there is no requirement that they have any particular skills or education. Anyone can call him or herself a "landman" and jump right in. Particularly in new areas such as the Marcellus and now the Utica and Antrim plays in Michigan and Ohio, I suspect that companies have hired people as landmen who have very little experience. The best landmen are members of the American Association of Petroleum Landmen, which has developed ethical standards that all of its members must agree to abide by. AAPL has very good education programs for its members and certifies landmen as having met certain education requirements and professional qualifications. If you have bad experiences with a landman who is an AAPL member, you can report such conduct to the AAPL.

In general, I have found landmen to be an interesting group - independent, gregarious, friendly, and knowledgeable. Just remember that their job is to acquire a lease with the lowest bonus and royalty that they can negotiate for their client, the company. They are not representing your interest. Be courteous, but be smart.