January 26, 2012

EIA Annual Energy Outlook 2012

The Energy Information Administration has issued its annual energy projections.

Highlights:

Domestic crude oil production is expected to grow by more than 20 percent over the coming decade: Domestic crude oil production increased from 5.1 million barrels per day in 2007 to 5.5 million barrels per day in 2010. Over the next 10 years, continued development of tight oil combined with the development of offshore Gulf of Mexico resources are projected to push domestic crude oil production to 6.7 million barrels per day in 2020, a level not seen since 1994.

With modest economic growth, increased efficiency, growing domestic production, and continued adoption of nonpetroleum liquids, net petroleum imports make up a smaller share of total liquids consumption: U.S. dependence on imported petroleum liquids declines in the AEO2012 Reference case, primarily as a result of growth in domestic oil production of over 1 million barrels per day by 2020, an increase in biofuel use of over 1 million barrels per day crude oil equivalent by 2024, and modest growth in transportation sector demand through 2035. Net petroleum imports as a share of total U.S. liquid fuels consumed drop from 49 percent in 2010 to 38 percent in 2020 and 36 percent in 2035 in AEO2012.

U.S. production of natural gas is expected to exceed consumption early in the next decade: The United States is projected to become a net exporter of liquefied natural gas (LNG) in 2016, a net pipeline exporter in 2025, and an overall net exporter of natural gas in 2021. The outlook reflects increased use of LNG in markets outside of North America, strong domestic natural gas production, reduced pipeline imports and increased pipeline exports, and relatively low natural gas prices in the United States compared to other global markets.

Use of renewable fuels and natural gas for electric power generation rises: The natural gas share of electric power generation increases from 24 percent in 2010 to 27 percent in 2035, and the renewables share grows from 10 percent to 16 percent over the same period. In recent years, the U.S. electric power sector's historical reliance on coal-fired power plants has begun to decline. Over the next 25 years, the projected coal share of overall electricity generation falls to 39 percent, well below the 49-percent share seen as recently as 2007, because of slow growth in electricity demand, continued competition from natural gas and renewable plants, and the need to comply with new environmental regulations.

Total U.S. energy-related carbon dioxide (CO2) emissions remain below their 2005 level through 2035: Energy-related CO2 emissions grow by 3 percent from 2010 to 2035, reaching 5,806 million metric tons in 2035. They are more than 7 percent below their 2005 level in 2020 and do not return to the 2005 level of 5,996 million metric tons by the end of the projection period. Emissions per capita fall by an average of 1 percent per year from 2005 to 2035, as growth in demand for transportation fuels is moderated by higher energy prices and Federal fuel economy standards. Proposed fuel economy standards covering model years 2017 through 2025 that are not included in the Reference case would further reduce projected energy use and emissions. Electricity-related emissions are tempered by appliance and lighting efficiency standards, State renewable portfolio standard requirements, competitive natural gas prices that dampen coal use by electric generators, and implementation of the Cross-State Air Pollution Rule.

http://www.eia.gov/forecasts/aeo/er/  

January 25, 2012

Gas Price Drop In the News

Natural Gas Glut.jpg

Natural gas prices are much in the news. Prices have fallen precipitously in the past few weeks. Natural gas futures have fallen 35% in the past year. Warm weather this winter has created a gas glut. In his state of the union address, President Obama said the US now has 100 years of natural gas supply and touted gas as the energy future. Analysts are predicting that prices will continue to fall. Predictions are that natural gas storage capacity will be tested this year.

http://www.usatoday.com/money/industries/energy/story/2012-01-16/low-natural-gas-prices/52592508/1

http://finance.yahoo.com/news/natural-gas-prices-fall-further-183315966.html  

 

Fallout from lower gas prices:

Exploration companies are moving to oil plays and drilling only those gas wells necessary to hold acreage. In many plays, such as the liquids-rich portion of the Eagle Ford, lots of gas is being flared in order to get the liquids to market. That gas will eventually go on line, further increasing supply. Producers in some areas can give the gas away and still make money on the liquids. In the Barnett Shale, gas production continues to increase despite the decline in drilling rigs. Barnett shale production set an all-time high of 5.9 Bcf/day in October 2011, with 2/3rds less drilling activity.

http://www.eenews.net/public/Greenwire/2012/01/20/4  

Chesapeake, the nation's second-largest gas producer, recently announced that it is shutting in as much as one Bcf/d of its production - about 16% of its total -- until prices improve.

http://af.reuters.com/article/energyOilNews/idAFL2E8CNATD20120123?pageNumber=2&virtualBrandChannel=0  

Most analysts are revising their price predictions down. But Anadarko predicts that natural gas prices will rise as soon as drilling slows.

http://www.platts.com/RSSFeedDetailedNews/RSSFeed/NaturalGas/3901910  

Electricity prices are falling - good for consumers, not so good for power producers. Prices of fertilizer and plastics are also falling. More electric power plants are switching from coal to gas, and coal plants on the drawing board are being reconsidered. Over the past decade, electricity from gas-fired plants has increased by 50 percent, while coal-fired electric generation has declined. Gas-fired power plants are cheaper to build and easier to get permitted. They are also easier to turn on and off, as electricity demand fluctuates. The power industry is beginning to have some confidence in the domestic gas supply. Export of excess supplies of U.S. natural gas are being discussed and planned.

http://fuelfix.com/blog/2012/01/16/electric-plants-shift-from-coal-to-natural-gas/  

Low gas prices have dampened enthusiasm for nuclear power plants and generation from wind and solar. The cost, including construction, to generate one megawatt hour of gas-fueled electricity is now less than that for coal, wind and solar, according to Bloomberg.

http://www.bloomberg.com/news/2012-01-17/electricity-declines-50-in-u-s-as-shale-brings-natural-gas-glut-energy.html  

But Energy Secretary Steven Chu says that the alternative energy industry can benefit from low gas prices. Because of gas generating plants' ability to "swing" in output, it should be easier for wind and solar generation to sell into the market when they are able to provide generating capacity.

http://www.cleveland.com/business/index.ssf/2012/01/doe_boss_says_shale_gas_could.html  

Cheap gas has caused owners of a methanol plant in Chile to consider moving a methanol plant to Louisiana. Natural gas is the feedstock for methanol.

http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2012/01/18/bloomberg_articlesLY00LK6S972H01-LY0LC.DTL#ixzz1juRrY5NE  

To take advantage of low gas prices, the Texas Commission on Environmental Quality is offering $4.5 million in grants to build natural gas fueling stations, to encourage use of natural gas in the transportation sector.

http://www.tceq.texas.gov/news/releases/1-12CTT1-18

Meanwhile, the debate over the safety of hydraulic fracturing continues. One report says that state agencies who have traditionally regulated the oil and gas exploration industry are tightening their regulations to avoid a takeover of their responsibilities by the EPA.

http://energy.aol.com/2012/01/18/states-toughen-fracking-rules-ahead-of-epa/  

And, the debate continues (at least in Ithaca NY) over whether burning natural gas in fact has less of a global warming impact than coal.

http://online.wsj.com/article/AP5a65cb4fae304d60ba49904e3053e259.html  

 

January 16, 2012

Industry News

Recent news of interest:

The new Texas law requiring reporting of chemicals in frac fluids becomes effective February 1. The law also requires operators to report the volume of water used. Dr. Dan Hardin, resource planning director of the Texas Water Development Board, projects that in 2020, more than 40 percent of water demand in La Salle County (in the Eagle Ford Shale) will go toward fracing. http://www.nytimes.com/2012/01/15/us/new-texas-rule-to-unlock-secrets-of-hydraulic-fracturing.html

Last year, Dr. Robert Howarth, a professor at Cornell University, published an article concluding that natural gas causes more global warming per unit of energy created than coal, upsetting the widely published belief that natural gas is a more climate-friendly fuel. Dr. Howarth said that previous studies did not take into account that as much as eight percent of produced natural gas escapes into the atmosphere between the wellhead and its consumption. Now a colleague of Howarth at Cornell has published a study challenging Howarth's fugitive gas estimate. Dr. Lawrence Cathles concludes that gas has one-half to one-third the greenhouse gas footprint of coal.

The U.S. Energy Information Administration said that the average wellhead price for natural gas fell from $4.37 per MMBu in 2010 to $3.98 in 2011, the lowest since 2002. http://fuelfix.com/blog/2012/01/10/natural-gas-production-drives-price-down/ Cheap natural gas is making it hard for wind and solar projects to compete. http://blogs.desmoinesregister.com/dmr/index.php/2012/01/05/cheap-gas-a-threat-to-renewables/http://www.npr.org/2012/01/05/144526652/solar-panels-compete-with-cheap-natural-gas 

With low gas prices and high oil prices, rigs continued to move toward shale plays:

 

Baker Hughes Rig Count.jpg

 

 

NGI's shale rig count.jpg

 

2011 saw a record $86 billion in 2011 U.S. oil and gas upstream deals, up 15% from 2010 -- a year that was itself a record. Top deals in 2011: BHP Billiton's acquistion of Petrohawk, $15.1 billion; Kinder Morgan's acquisition of El Paso Corp, $7.2 billion; BHP Billiton's acquisition of Chesapeake's Fayeteville Shale properties, $4.75 billion; Statoil's acquisition of Brigham Exploration, $4.7 billion; Marathon's acquistion of Hilcorp Marcellus Shale interests for $3.5 billion. All of these deals were driven by shale plays. China's Sinopec oil company recently announced that it will pay $2.2 billion for a one-third stake in Devon Energy's plays in five shales in Mississippi, Colorado, Ohio, and Michigan. Oil & Gas Journal estimated that E&P spending will rise 9.3% this year to a record $595 billion.

In New York, the four-month comment period is closing on regulations proposed by the Department of Environmental Conservation for fracing. The DEC received more than 20,800 comments, a record. State Democratic leaders called on the governor to withdraw the proposed regulations and for a permanent ban on fracing. Industry lobbyists called the proposed regs excessively restrictive, inequitable and unjustified. The Independent Oil and Gas Association of New York claimed that the rules would render half of the desirable drilling parcels unuseable. Environmental groups are divided. The Sierra Club,the Natural Resources Defense Council and the Nature Conservancy have been working with regulators and the industry to come up with workable regulations, seeing natural gas as a cleaner "bridge fuel" for transition to renewable energy sources. Other local environmental groups are opposed to any regulations that would allow development of the Marcellus in New York. Clair Sandberg, a founder of Frack Action, called the cooperation between national environmental industry groups and industry a "marriage of convenience." "It was too daunting to try to take on coal and gas at the same time. Now they find themselves with a mutiny on their hands."

Reports continue to surface in Pennsylvania of methane contamination of water wells allegedly caused by fracing. The Pennsylvania Department of Environmental Protection cited Cabot (again) for contaminating three water wells in Lenox Township, citing inadequate casing. DEP is also investigating methane contamination in wells in Wyoming County, Pa. operated by Chief Oil & Gas. A Chief spokesman said that the levels of methane in the water matched levels found in the water before the wells were drilled.

 

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.

November 29, 2011

LaSalle Pipeline v. Donnell Lands - a Case to Watch

Another interesting case is pending before the Texas Supreme Court, this one involving condemnation of a pipeline easement. The San Antonio Court of Appeals, in LaSalle Pipeline v. Donnell Lands, affirmed a jury verdict awarding $650,000 to the landowner. The Supreme Court has asked for briefs on the merits but has not yet agreed to hear the case.

The Donnell family own an 8,000-acre ranch in McMullen County. LaSalle Pipeline sued to condemn an easement for a sixteen-inch gas pipeline across the ranch, for a length of 4.4 miles. In Texas, a condemnation case originally goes to three "commissioners" - citizens in the county appointed by the court to determine the amount to be awarded the landowner for the pipeline easement. The commissioners awarded the Donnells $226,000 for the easement - about $160 per rod, or $9.73 per foot. (A rod is 16.5 feet.) The Donnells appealed to the district court in McMullen County, where there was a trial de novo, meaning that the commissioners' award was not considered and the jury was asked to determine the amount of the award based on evidence at the trial.

There are three elements of damages in a pipeline condemnation case: the damage to the land within the permanent easement; the temporary damage caused to the land by the additional workspace needed to lay the pipeline; and the diminution in value of the remaining property caused by the existence of the pipeline. These damages are estimated by qualified real estate appraisers, who testify as experts at the trial.

The Donnells' real estate expert testified that the land within the easements was damaged by $34,500; the temporary workspace easement caused damage of $19,200; and the damage to the Donnells' remaining land caused by the easement was $820,000. He said that the portion of Donnell's property which was affected by the pipeline was 4,100 acres, and that the value of that 4,100 acres was decreased about 10% by having a sixteen-inch pipeline across it. LaSalle's expert testified that the pipeline had no effect on the value of the Donnells' property.

The jury awarded the Donnells $658,533 (about $468 per rod). The San Antonio Court of Appeals reduced the trial court's award for the temporary construction easement by $12,800, but otherwise affirmed the trial court's judgment.

In its appeal to the San Antonio court, LaSalle argued that the Donnells' appraiser's testimony could not support the jury's award for damage to the remainder of the Donnells' land. LaSalle argued that the evidence was "legally and factually insufficient" to support the verdict. In Texas, our intermediate appellate courts can overturn a jury verdict if it finds that the evidence is "factually insufficient" to support the jury's verdict. The court may overturn a jury's verdict "if the evidence is so weak or if the finding is so against the great weight and preponderance of the evidence that it is clearly wrong and unjust." The San Antonio court found that the Donnells' evidence was factually sufficient to support the verdict.

Our Texas Supreme Court has authority to overturn a jury verdict only if the evidence is "legally insufficient" to support it. In other words, the Court may not "weigh" the evidence and may not overturn a verdict on factual insufficiency grounds. The Court may reverse a verdict only if there is a complete absence of evidence of a vital fact or the evidence offered to prove a vital fact is "no more than a mere scintilla," or if the evidence establishes conclusively the opposite of the vital fact. All of this may sound a little bit arcane, but in the world of lawyers this distinction is important. In LaSalle's appeal to the Supreme Court, it has a harder burden to prove that the jury's award should be overturned. LaSalle must show that there was "no" competent evidence to support the verdict.

This is an important case to pipeline companies, who are busily condemning pipelines in the Eagle Ford Shale play. As LaSalle's brief says, "under the Fourth Court of Appeals' reasoning, there can be no certainty or predictability in the budgeting for land costs associated with such projects, because under the Court of Appeals' opinion landowners may impermissibly reap substantial remainder damages based solely upon speculation and conjecture. The appellate decision in this case is being cited by landowners in condemnation actions pending throughout South Texas and the Eagle Ford Shale area for the proposition that substantial remainder damages are due in every pipeline condemnation case."

If the Supreme Court elects to take this case, it will be interesting to see if it decides once again to overturn a jury verdict in favor of a landowner.

November 15, 2011

Drilling in the Eagle Ford Shale

 

Wells Fargo Bank recently had a presentation about aspects of drilling in the Eagle Ford Shale. Some of its slides are enlightening.

First, below are two pictures of a wellsite during the fracing of a well:

Fracing a Well.jpg

 

Fracing a Well 2.jpg

 

These photos illustrate the impact of drilling operations. A typical drillsite for these types of wells may be five to ten acres. During fracing, it looks like an industrial site. These pads are designed to drill multiple wells from a single site.

 

Below are illustrations of drilling being done by Rosetta Resources on its Gates Ranch Lease. The lease covers some 19,000 acres in Webb County. To date, Rosetta has drilled about 62 horizontal Eagle Ford wells on the ranch. At the time of the slide below, Rosetta had drilled 40 wells:

 

Gates Ranch 1A.jpg 

Rosetta originally planned to space its wells so that there would be one well per 100 acres:

 

Gates Ranch 2.jpg 

 

Rosetta is now experimenting with closer spacing - in other words, one well may not drain 100 acres:

 

Gates Ranch 3.jpg 

Rosetta may end up drilling wells on 55-acre spacing - 340 wells altogether. If three wells are drilled from each pad site, that is 113 pad sites.

  

Gates Ranch 4.jpg 

If one of these wells costs $6 million to drill and complete, that would be $2.04 billion to drill all 340 wells, or close to $70 million per 640-acre section, if spaced at 55 acres per well.

55-acre spacing, for wells with 5,000-foot laterals, requires that the wells would be spaced about 460 feet apart. That means that the wells would drain only 230 feet from the well bore. 

 

Here is an illustration of the lithology of a typical Eagle Ford well drilled in Dimmit County:

 

Eagle Ford Type Log.jpg 

You can see that the Eagle Ford lies between the Austin Chalk and Buda formations, and that it is divided into the Upper Eagle Ford and the Lower Eagle Ford. On this well, the Eagle Ford is about 450 feet thick.

 

Here is the growth in oil production from the Eagle Ford since 2008. It looks like 2011 production will double 2010's.

Eagle Ford Oil Production.jpg

 

 

 

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.

Continue reading "Chief Justice John Hemphill - Judge of the Long Knife" »

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.


Continue reading "Chesapeake's Aubrey McClendon" »

September 29, 2011

State of Texas v. Cemex - the meaning of "minerals"

The Eighth Court of Appeals in El Paso has issued its opinion in State of Texas v. Cemex Construction Materials South, LLC. The court reversed a summary judgment for Cemex and granted the State's summary judgment, returning the case to the trial court to assess damages. The State is seeking damages of $558 million.

Cemex is the world's leading supplier of ready-mix concrete, and one of the world's largest producers of White Portland Cement. Cemex is based in Monterrey, Mexico, and has operations across North and South America, Europe, Africa, the Middle East and Asia. It has annual sales of more than $14 billion.

Cemex operates a quarry for sand, gravel and caliche in El Paso County. According to the State's petition, Cemex and its predecessors have mined about 100 million tons of materials from the quarry since 1940. Cemex bought the quarry from the British group RMC in 2005.

The State claims to own the rights to the materials mined from the quarry because the sand, gravel and caliche are "minerals" reserved by the State when the lands were originally granted in 1900, 1906 and 1912. The El Paso court held that the lands were classified as "mineral" at the time of the original grants and are therefore "mineral-classified lands," and that the sand, gravel and caliche consitute "minerals" and are therefore owned by the State as a matter of law. (See my previous article on mineral-classified lands here.)

The Court of Appeals relied on the opinion of the Texas Supreme Court in Schwarz v. State, 703 S.W.2d 187 (Tex. 1986), which held that the State owns all coal and lignite under mineral-classified lands in Texas. Schwarz is notable because it applies a different rule in determining what substances are "minerals" for purposes of minerals reserved to the State than the rule it has adopted for construction of instruments reserving "minerals" between private parties. Some substances are not considered "minerals" in a private transaction if the removal of those substances would destroy the surface estate. But the Court in Schwarz rejected this rule for classification of "minerals" reserved to the State. So, according to the El Paso court's opinion, the State owns all sand, gravel and caliche in mineral-classified lands even if mining of those substances would destroy the surface estate.

The El Paso court's opinion in Cemex does not discuss what test should be applied under Schwarz to determine whether a substance is a "mineral" and therefore owned by the State. For conveyances and reservations between private parties after June 8, 1983, whether a substance is a "mineral" is determined by the "ordinary-and-natural-meaning" test. Under this test, "other minerals" includes "all substances within the ordinary and natural meaning of that word" regardless of how they are extracted. Moser v. U.S. Steel Corp., 676 S.W.2d 99 (Tex. 1984). Limestone, building stone, sand, gravel and caliche have been held not  to be "other minerals" under this test. The court in Schwarz appears to be applying the ordinary-and-natural-meaning test in classifying lignite as a "mineral": "It is clear that the sovereign in Texas has always claimed all of the substances commonly classified as 'minerals' and only gives away those substances by an express release or conveyance." 703 S.W.2d at 191 (emphasis added). Clearly, the El Paso court did not apply this test to the State's mineral reservation:

[B]ecause the State did not unequivocally grant to the original purchasers in clear and explicit terms the dirt, caliche, sand, gravel, limestone and other minerals and materials to which Cemex now claims ownership, those items were withheld from the State's conveyances of the ... lands and any ambiguity or obscurity in the terms of the statute, such as the terms "the minerals," "stones valuable for ornamental or building purposes," and "other valuable building material," must be interpreted in favor of the State.

The El Paso court appears to be holding that any substance of economic value that can be removed from the land is a "mineral" for purposes of the State's title.

Cemex will undoubtedly be asking the Texas Supreme Court to review the case.

September 19, 2011

Fight Over King Ranch Heir's Estate - In re Estate of Belton Kleberg Johnson

Earlier this year, the San Antonio Court of Appeals issued an opinion in a case contesting the will of Belton Kleberg (B.K.) Johnson, greatgrandson of the founder of the King Ranch. Johnson died in 2001 at the age of 71. In the 1950's, Johnson was passed over to head the management of the 825,000-acre King Ranch lands, and he sold his interest in the Ranch in 1976, but kept his royalty interests.

Johnson's life and the will contest opinion give a rare glimpse into the world of the rich and powerful in South Texas. Johnson was educated at Deerfield Academy, Cornell and Stanford. He served on the board of directors of AT&T, Tenneco, Campbell Soup, the Southwest Foundation for Biomedical Research, and several Texas banks. He was the owner of Chaparrosa south of San Antonio, where he lived and raised his family and raised registered Santa Gertrudis cattle. He owned the Hyatt Regency Hotel on the San Antonio Riverwalk, and he restored the Fairmount Hotel in San Antonio.

Johnson was married three times. He and his first wife, Patsy, had three children: Ceci, Sarah and Kley. Kley died in a car accident in 1991, survived by his wife and two children. Sarah married Steven Pitt and they have three children. Ceci married Mark McMurrey, and they have three children.

Johnson divorced Patsy in 1987, and in 1991 he married Lynne, who died of cancer in 1994. In 1996, he married Laura, to whom he was married when he died in 2001.

At the time of his death, Johnson's latest will, written in 1999, left his estate to a trust. His wife Laura was the beneficiary of the trust for the remainder of her life. The trust gave Laura the right to name Johnson's children and grandchildren as beneficiaries of up to 1/2 of the trust property (a "power of appointment"), and the other half (or the entire trust estate if Laura did not exercise her power of appointment) would go to a foundation created by Johnson, the Belton Kleberg Johnson Foundation. So the 1999 will essentially left 1/2 of his estate to his foundation, and gave Laura control over whether his children and grandchildren would get any of the other half.

Johnson's daughters and grandchildren were not pleased with the estate plan created by Johnson's 1999 will, so they brought suit contesting the will, alleging that Laura had exercised "undue influence" over Johnson to get him to sign this will. The jury found that Laura had exercised undue influence. The Court of Appeals affirmed. The court also affirmed the trial court's award of $6.1 million in attorneys' fees to the lawyers for Johnson's children and grandchildren.

Additional appeals and fights will undoubtedly follow.