September 2012 Archives

September 27, 2012

Two Interesting Graphs from EIA

As readers may know, I love graphs, and the Energy Information Administration is good at making them. Here are two particularly interesting ones.

China Energy Consumption.jpg


Iraqi production.jpg


September 26, 2012

Another Chapter in Jimmy McAllen's Long-Running Case Against Forest Oil

Last week, a Texas district court ruled that Jimmy McAllen could keep his $20 million arbitration award against Forest Oil Corp. This fight goes back to 1992, when Forest Oil gave McAllen used drilling pipe to build animal enclosures on his exotic wildlife ranch, on which McAllen kept rhinoceroses. The pipe had scale that contained radioactive materials, and McAllen claimed that it made the animals ill. McAllen also contracted cancer, which he blamed on the pipe. McAllen also alleged that Forest secretly buried mercury, drilling waste and other radioactive material on his property. McAllen sued Forest in 2005. Forest claimed that McAllen was required to arbitrate the dispute under the terms of a prior settlement agreement between Forest and McAllen arising out of a suit for unpaid royalties. Forest's argument eventually made it to the Texas Supreme Court, which held that the prior settlement agreement was binding on McAllen and required him to arbitrate the dispute. Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008).

The case then went to an arbitration panel consisting of Houston attorney Daryl Bristow and South Texas attorneys Clayton J. Hoover and Donato D. Ramos. On February 29, 2012, the panel issued a split decision, 2-1, awarding McAllen $21.9 million plus $5 million in attorneys' fees and additional injunctive relief requiring Forest to post a $10 million bond for the life of the lease to assure cleanup of any pollution found on the ranch. In a 40-page dissent, Daryl Bristow said that the panel's award "turn[ed] the law on its ear" and "fabricate[s] a damages number without any principled foundation in the record."

Forest then filed suit to overturn the award. On September 19, Judge Jeff Shadwick, of the 55th District Court in Harris County, denied Forest's motion to overturn the award. The court's order said that "the panel reached its conclusions based on little to no admissible evidence," but that this "is one of the unfortunate hazards of arbitration." "The court is not at liberty to substitute its judgment for that of the arbitrators merely because it would have reached a different decision." Judge Shadwick did overturn the arbitration panel's requirement that Forest post a bond for future cleanup, saying that the panel had no jurisdiction to issue such relief.

Forest is sure to appeal the trial court's decision. It will be in the uncomfortable position of challenging an arbitration award after it fought all the way to the Supreme Court to force the case into arbitration. And so Jimmy McAllen's fight will likely continue for some time to come.

September 18, 2012

Congressmen Weigh In on Proposed BLM Rules on Hydraulic Fracturing

This summer, the Department of Interior's Bureau of Land Management issued proposed rules relating to disclosure of the content of frac fluids and handling of frac fluids used in wells drilled on puclic lands managed by the BLM. Last week a group of Congressmen led by Congressman Edward J. Markey, D. Mass., head of the House Natural Resources Committtee, have submitted an extensive letter commenting on the proposed rules.

The letter criticizes BLM's rules for (1) not requiring disclosure of chemicals in frac fluids prior to drilling of a well rather than after the fact, (2) proposing to use FracFocus as the method for disclosure of frac fluids, (3) allowing flowback fluids to be stored in earthen pits, (4) not imposing requirements for proper well construction, cement and casing design and installation, and (5) not establishing minimum setbacks between wells and public buildings to minimize harm from air emissions during well completions.

As I have reported earlier, the Texas Railroad Commission recently published proposed rules tightening regulations on well construction and cementing, as well as more stringent regulation of disposal wells, to better protect against contamination of groundwater.

The Congressmen's comments reveal an interesting problem with use of FracFocus for disclosure of chemicals in frac fluids. FracFocus is a project of the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission. Several states, including Texas, have required companies to post the contents of their frac fluids on this website. The Congressmen's letter cites a brief done by the Natural Resources Defense Council comparing the disclosure rules of different states and the capability of the FracFocus website to contain all the information required by the state's rules. "[B]ecause the standardized disclosure form of FracFocus contains fields for only a very limited set of information, there is not a single state in which disclosures on the site contain all the information required by the state rule. For example, Texas requires in its state rules that companies report on FracFocus the amount and type of the base fluid used (i.e. fresh water, recycled water, other fluid, etc). However, the form on FracFocus provides no field entry for the base fluid type at all and instead allows only for reporting of the 'Total Vlume of Water'." BLM's proposed rules require disclosure of the type of base fluid and where the fluid was obtained, pump pressures of the fluid and information on the chemical additives, none of which FracFocus can accommodate in its present configuration. In addition, the Congressmen's letter says that the information is posted on FracFocus in pdf format rather than a spreadsheet or database format, so it is practically impossible for a researcher to use the data as an analytical tool to aggregate and analyze the data. "In fact, the terms of use for FracFocus forbid exactly this sort of broad use of the chemical information it contains for analysis, significantly limiting its scientific usefulness and ability to inform future policy decisions." A Department of Energy report on the impact and safety of hydraulic fracturing specifically recommended that FracFocus should be updated so that "information can be searched, sorted and aggregated by chemical, by well, by company and by geography."


September 12, 2012

5th Circuit Affirms $20 million Judgment Against Chesapeake

The 5th Circuit affirmed a judgment today against Chesapeake Exploration for $19,951,004 in favor of Peak Energy Corporation, for breach of a contract to purchase oil and gas leases in the Haynesville Shale area of Harrison County, Texas. Coe v. Chesapeake Exploration, No. 11-41003.  The Court's summary of the case:

In July 2008 Chesapeake Exploration LLC entered into an agreement to purchase deep rights held by Peak Energy Corporation in certain oil and gas leases in the Haynesville Shale formation, for the hefty sum of $15,000 per acre. When the price of natural gas plummeted several months later, Chesapeake refused to honor its commitment. In response to the complaint filed by Peak it contended that the parties' agreement was unenforceable under the Texas statute of frauds, fatally indefinite, and that the plaintiffs had failed to tender performance. The district court disagreed, rendering judgment in favor of Peak and its principals and awarding them damages in the amount of $19,951,004, prejudgment and post-judgment interest, and attorneys' fees and costs. Finding no error, we affirm.

In 2008, gas prices were high and the boom was on in the Haynesville Shale. Chesapeake was buying all of the acreage it could find. Its brokers identified leases covering 5,405 acres in Harrison County, Texas owned by Peak Energy, and on July 2, Chesapeake sent Peak a letter offering to buy all rights in its leases below the base of the Cotton Valley formation for $15,000 per net acre, with Peak delivering a 75% net revenue interest and reserving an overriding royalty on any excess over 75%. A map generated by Chesapeake was attached to the letter agreement showing the tracts Chesapeake had identified in which Peak had leases. The letter said that it was a "valid and binding agreement," and that the closing would occur on August 31. Peak signed and returned the letter.

The parties worked to assemble the list of leases and other closing documents. But in the meantime, the stock market and the gas market plunged precipitously. In October, there had still been no closing of the deal, and Chesapeake informed Peak that it would not be completing the transaction. Peak sued. At trial, Peak said it was able to deliver only 1,645.9 acres of leases with a minimum 75% net revenue interest; it showed that the market value of the deep rights in those leases was $3,000 per acre; and it sought damages equal to $12,000 per acre, based on the difference between the contract price of $15,000 per acre and the market price on the date of the breach, $3,000 per acre. The judge agreed with Peak and awarded the damages sought, plus interest and attorneys fees of more than $435,000.

Chesapeake claimed that the contract was not enforceable because the map attached to the letter agreement did not provide an adequate description of the property. The 5th Circuit disagreed. It said that the map provided an adequate nucleus of description to allow a knowledgeable person to identify the leases with reasonable certainty from public records.

Chesapeake claimed that the contract was not enforceable because it did not include "essential terms." The court said that the letter agreement did provide all of the essential terms - the property to be conveyed, the price, the closing and delivery date, and the purchaser's interest in the property. The court said that the lack of a final lease schedule, and the fact that the parties did not agree on warranty of title, non-compete provisions, and options to purchase additional acreage, were not essential terms fatal to a binding agreement. "Although the parties must agree to all material terms, they may choose to leave non-essential terms open for later negotiatin without rendering the agreement unenforceable."

Finally, Chesapeake claimed that the agreement was not enforceable because Peak could not perform its obligations under the agreement. Peak conceded that it could only deliver 1,645 acres of leases meeting the agreement's specifications. The court said that Chesapeake was bound by the agreement to purchase the leases that Peak could deliver.

It appears to me that Chesapeake did not have any viable defenses to the claim, and that the court clearly reached the correct result. More importantly, the case sheds light on Chesapeake's attitude about its contractual commitments. Others contemplating deals with Chesapeake, especially on buying oil and gas leases, may be reluctant to deal with the company if this case is representative of its willingness to go back on its deals.

September 6, 2012

Texas Supreme Court Reverses Two Jury Verdicts for Landowners in Condemnation Cases

The Texas Supreme Court issued two important condemnation cases on the last day of its term, both reversing judgments after jury trials in condemnation suits.

In City of Austin v. Harry M. Whittington, the court resolved the Whittington's ten-year battle with the City over condemnation of a city block adjacent to the City's convention center. The jury found that the City's determination that its condemnation of the property was for a "public use" was fraudulent, in bad faith, and arbitrary and capricious. The Court said that "the Whittingtons do not dispute the underlying facts on these issues; rather, they dispute the legal effect of those facts (e.g., whether those facts amount to fraud, bad faith, or arbitrariness and capriciousness). Because these issues are legal questions, we review them de novo." In other words, the Court held that it was not bound to support the jury's verdict, but could look at the evidence and decide for itself. It decided that the evidence did not show that the City was guilty of fraud, bad faith, or arbitrary or capricious behavior. The City condemned the block for a private developer to build a parking garage for the convention center. Two Justices dissented.  (My firm represented the Whittingtons in this case.)

In Enbridge Pipelines (East Texas) L.P. v. Avinger Timber, the jury awarded Avinger $20,955,000 for Enbridge's condemnation of a site owned by Avinger on which a gas processing plant was located. The site was subject to a long-term lease that expired, and when the parties were unable to agree on terms for extension of the lease, Enbridge sued to condemn the property. The issue on appeal was whether the testimony of the valuation experts for Enbridge and Avinger was admissible. The Court held that both experts' testimony was inadmissible and remanded the case to the trial court for a new trial. The Court held that the landowner's appraiser violated the "value-to-the-taker" rule--meaning that he impermissibly took into account the unique value of the land to the condemning gas processing company (as opposed to considering the value to a hypothetical willing buyer, as the law requires). In particular, the appraiser had taken into account the cost to the company of removing the plant on the land if it were sold; the Court held that the appraiser should not have factored in those costs because that was a cost unique to the condemnor and not one that impacted the value of the land to a potential buyer.

But on the other hand, the Court ruled that the condemnor's appraiser was wrong to value the property as rural, unimproved land, ignoring the pipeline infrastructure that had built up over the years and the current suitability of the property for use as a gas-processing facility.

Add these to the list of cases in which the Court has reversed judgments in favor of landowners. See Samson Lone Star v. Hooks, Shell v. Ross, BP v. Marshall, Exxon v. Emerald.