October 15, 2011

Chief Justice John Hemphill - Judge of the Long Knife

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

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

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

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

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October 10, 2011

Chesapeake's Aubrey McClendon

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

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

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

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

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


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.

September 5, 2011

Texas Railroad Commission Staff Proposes Draft Rule for Disclosure of Frac Chemicals

The staff of the Texas Railroad Commission has proposed to the Commision rules to implement House Bill 3328, passed by the last Legislature, requiring the disclosure of chemicals used in frac fluids. The rules will be subject to a period for public comment, and a hearing will be held on the rules, now proposed for Wednesday, October 5.

Earlier this year, the 82nd Texas Legislature passed HB 3328, requiring the RRC to adopt rules requiring disclosure of chemicals in frac fluids. The draft rule would require operators to disclose chemical content of frac fluids on FracFocus, a website developed by the Ground Water Protection Council and the Interestate Oil and Gas Compact Commission. (The website contains a lot of good information about hydraulic fracturing and its benefits and risks.)  FracFocus was launched on April 1, 2011. As of August 16, 2011, according to RRC staff, operators had registered 950 Texas wells on the website, including wells drilled by Anadarko, Chesapeake, Chevron, Conoco-Phillips, Devon, El Paso, Energen, EOG, Forest, Newfield, Occidental, Penn Virginia, Petrohawk, Pioneer, Plains, Range, Rosetta, Shell, Williams, and XTO. You can search for a well near you by using FracFocus's search feature. An example of the information disclosed can be found here:  4243935364-3212011-10792272-CHESAPEAKE[1].pdf The disclosure includes the percentage by mass of each chemical used in the frac fluid.

Under the proposed rule, an operator must also provide the same information with its completion report for the well, as part of the completion report. The completion report for all Texas wells can also be found on the RRC's website.

RRC's staff's discussion of the proposed rule estimates that 13,000 wells undergo frac treatment in Texas each year -- 85% of all wells drilled in Texas.

A supplier, service company or operator is entitled under the draft rule to claim trade-secret protection for a chemical additive. If such protection is claimed, the particular chemical and its concentration need not be provided, but the operator must disclose the chemical family of the ingrediant and the properties and effects of the chemical. The claim of trade-secret protection may be challenged by the landowner on whose property the well is drilled or any adjacent landowner, or by any state department or agency with jurisdiction over issues related to health and safety. Any such challenge must be filed within 2 years after the claim of trade-secret protection was filed. If a challenge is filed (with the RRC), the RRC refers the matter to the Texas Attorney General who makes a determination, based on evidence submitted by the person claiming trade-secret protection, of whether the identity of the chemical is in fact a trade secret under Texas law. The AG's determination may be appealed to a state district court. If a trade-secret exemption is claimed, a health professional or emergency responder may still obtain the information but must keep it confidential except to the extent it must be disclosed to protect health and safety.

An operator who fails to disclose as required by the rule may have its operating permit revoked.


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August 27, 2011

Three Important Texas Supreme Court Opinions Issued

The Texas Supreme Court issued three opinions last week of interest to Texas land and mineral owners: one dealing with the duties of holders of executive rights, one limiting the condemnation powers of pipelines, and one addressing whether injection well operators can be held liable for trespass if the injected substances migrate onto adjacent lands.

Leslie v. Veteran's Land Board - The duty of the executive rights holder

The Supreme Court again considered what duty the holder of the right to lease ("executive right") minerals owned by another has to the non-executive mineral interest owner. The court significantly weakened its prior decision in In re: Bass, and increased the duties of the holder of the executive right. The right to lease is often separated from the mineral interest. For example, if I sell a tract to a developer, but want to keep part of the mineral interest, the developer may object, worried that I, as a mineral interest owner, might lease my interest and allow a company to drill wells on the property he intends to develop for a residential subdivision. A common solution to this problem is for me to retain a part of the mineral interest (or a part of the royalty interest) but convey to the developer the exclusive right to lease the minerals. The developer is then protected, because no mineral development can take place without his consent. Whenever the right to lease is separated from the mineral or royalty interest, the holder of the leasing right is called the holder of the "executive right," and the other mineral or royalty owner without any leasing right is called the owner of the "non-executive" interest.

In the Leslie case, a developer named Bluegreen purchased 4,100 acres of land in southwest Tarrant County, outside of Fort Worth, to develop a large residential subdivision, Mountain Lakes, of over 1700 lots. Bluegreen acquired some of the minerals in the 4,100 acres and all of the executive rights to the minerals. Bluegreen then imposed restrictive covenants on its development to govern what kinds of homes could be built, what uses of the property could be made, etc. One of those restrictive covenants prohibited "commercial oil drilling, oil development operations, oil refining, quarrying or mining operation." Later, development of the Barnett Shale formation in Tarrant County occurred, and companies sought to lease the 4,100 acres to drill Barnett wells, but found that the restrictive covenant prohibited development. Evidence in the case showed that "Mountain Lakes is sitting on $610 million worth of minerals that, in large part, cannot be reached from outside the subdivision." So the non-executive mineral owners sued, seeking to have the restrictive covenants declared void. Their theory was that, by imposing the restrictive covenant prohibiting mineral development, Bluegreen had breached its duty as the holder of the executive rights. The trial court declared the restrictive covenant void, but the Eastland Court of Appeals upheld it. The Supreme Court agreed with the trial court, holding that "Bluegreen breached its duty to [the non-executive mineral owners] by filing the restrictive covenants. The remedy, we think, should be the ... cancellation of the restrictive covenants."

Continue reading "Three Important Texas Supreme Court Opinions Issued" »

August 19, 2011

Supreme Court Overrules Motions for Rehearing in BP v. Marshall

The Texas Supreme Court on August 19 overruled the royalty owners' motions for rehearing of their decision in BP v. Marshall. For my prior discussion of this case, go here. To see the Court's original opinion, go here.
July 28, 2011

EPA Issues Proposed Rules to Reduce Emissions from Well Drilling and Production

The U.S. Environmental Protection Agency has issued proposed rules to cut down on emissions of volatile organic compounds (VOCs) and methane from well drilling and production sites. The rules were issued pursuant to a settlement of a suit by environmental groups alleging that EPA was not enforcing air emissions laws against the E&P industry.

Among other things, the proposed rules would require installation of vapor recovery units on storage tanks at wellsites and other E&P facilities to prevent emission of VOCs. The EPA has calculated that the rules would cost the industry $754 million, but that the gas and condensate captured by the vapor recovery units would be sold for $783 million. The rules would apply to oil and gas wells, natural gas processing plants, compressor stations and pipelines.  Similar emissions control requirements have been recommended by the New York Department of Environmental Protection in its study of the impact of Marcellus Shale drilling in New York.

For more information about the proposal on EPA's website, go here.

July 27, 2011

New York Issues Revised Study of Fracing in the Marcellus

The New York State Department of Environmental Conservation (DEC) has been engaged in a comprehensive review of the potential environmental impacts of development of the Marcellus Shale in New York since 2008. The DEC is the regulatory agency in New York responsible for issuing drilling permits and regulating oil and gas exploration and production. The DEC had previously studied the environmental impacts of hydraulic fracturing in 1992, at which time it issued a Generic Environmental Impact Statement recommending certain safeguards in that practice. In 2009, the DEC issued for public comment a "Draft Supplemental Generic Impact Statement" analyzing the impact of hydraulic fracturing of horizontal Marcellus wells. As a result of comments received, the DEC has issued a revision of that draft report, which will be finalized later this year and again issued for public comment. During this study, New York has imposed a moratorium on issuance of any permits for horizontal wells in the Marcellus Shale.

The Marcellus extends over a huge area from West Virginia through Pennsylvania and covers a substantial part of New York State. Potential Marcellus reserves in New York are huge, and exploration companies have leased huge areas in New York for exploration. New York landowners have watched impatiently as wells have been drilled in Pennsylvania, while environmental activists in New York have opposed any drilling in that state.

The most recent version of the New York DEC's study and recommendations is several hundred pages and provides a thorough study of the potential impacts of drilling Marcellus wells on the environment, including impacts on groundwater, surface water, air quality and wildlife. The report proposes many revisions to DEC's existing regulations concerning the construction of well pads, the drilling and casing of horizontal wells, the handling and disposal of frac fluids and chemicals, the disposal of returned frac water and drill cuttings, the use of best available technology to reduce emissions from equipment during drilling and completion operations, and the protection of groundwater and surface water. The report discusses the current state of technologies for use of fluids other than fresh water for hydraulic fracturing and for the recycling of frac water. The authors also discuss recent incidents in Pennsylvania of groundwater and surface water contamination from drillsites and their cause. There is a comprehensive summary of the geology of shale formations and water resources in New York.

Continue reading "New York Issues Revised Study of Fracing in the Marcellus" »

July 13, 2011

Recent News: EPA Fracing Study, Report on Eagle Ford, Frac Water Recycling, Range v. EPA,

WSJ Weighs In On Fracing Controversy

The Wall Street Journal gives its opinion on the dangers of hydraulic fracturing, siding with the industry: "The shale gas and oil boom is the result of U.S. business innovation and risk-taking. If we let the fear of undocumented pollution kill this boom, we will deserve our fate as a second-class industrial power."

Powell Shale Digest Issues Report on Eagle Ford

The Digest reported on wells drilled so far in Eagle Ford fields in Texas. Enough information is now publicly available to begin to see where the play is headed, and where it's most successful.

Powell Eagle Ford Map.jpg

The counties with highest oil and gas production are Dimmit, Karnes, Webb and La Salle. The counties with the best results per well are Karnes and DeWitt:

Powell Oil Prod.jpg

Powell Gas Prod.jpg

Baker Hughes' oil rig count reached 1,000 for the first time since it began tracking oil and gas rigs separately in 1987. 843 oil and gas rigs are currently located in Texas. 

 

Continue reading "Recent News: EPA Fracing Study, Report on Eagle Ford, Frac Water Recycling, Range v. EPA, " »

June 29, 2011

New York Times Articles on Shale Plays Create a Stir

Two recent articles by a New York Times reporter, Ian Urbina, have caused strong reactions among the industry and those following shale plays in the U.S. Urbina's articles may be found here and here. Urbina's basic theme is that the new reserves of natural gas attributed to shale plays are not real, but are a "Ponzi scheme" created by overestimates of reserves by companies desiring to pump up their stock prices. Urbina bases his conclusions on emails from different industry players and analysts, including the Energy Information Administration, PNC Wealth Management and IHS Drilling Data, and anonymous sources in the industry, including Chesapeake and Enron. Links to these emails are in the articles. Many of them date back to 2009. "In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves. Many of these e-mails also suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles," says Urbina.

Urbina's articles have provoked strong responses.

  • ExxonMobil responded with a post on its "Perspective" blog page:   

"It is unfortunate that the words "rigorous" and "methodical" can't be applied to the New York Times' recent articles. Understanding the facts surrounding the potential for development of our nation's energy resources is every American's business.  Our economic recovery, environmental progress and energy security depends in part on a sound, stable and sensible policy and regulatory framework informed by honest, fact-filled debate.  The Times' current campaign undermines this debate and is a disservice to its readers."

  • The Energy Information Administration issued a press release defending its estimates of shale gas reserves.

 

  • Chesapeake weighed in with its criticism of the NYT articles:

"The Times story was obviously motivated by an anti-natural gas agenda. It is telling that the reporter chose not to interview a single reliable source and instead selectively quoted emails from unnamed sources or well-known industry critics dating back to as early as 2007 to invent a series of inaccurate and misleading allegations. If the Times was interested in reporting the facts and advancing the debate about the prospective benefits of natural gas usage to energy consumers, it could easily have contacted respected independent reservoir evaluation and consulting firms that annually provide reserve certifications to the U.S. Securities and Exchange Commission or contacted experts at the U.S. Energy Information Administration, the Colorado School of Mines' Potential Gas Committee, the Massachusetts Institute of Technology, Navigant Consulting and others who would gladly have gone on record to confirm the abundant resources that have been made available thanks to the horizontal drilling and hydraulic fracturing techniques that Chesapeake and other industry peers have pioneered in deep shale formations across the U.S."

  • IHS CERA responded to the Times that
"Emails referenced in the article were written in 2008 and 2009, early in the understanding of the performance metrics for shale gas and have been proven completely wrong by events. One of the emails that was referenced in the article as from IHS was apparently written by someone misidentified as an IHS employee when in fact that person had not been employed by IHS for more than a year.

 

"Unconventional technologies and resources have moved with great speed. There is much more information about the performance and potential of shale resources available today than in the past. Shale gas supplies have built up very rapidly and now are 25 percent of total U.S. gas supply, as costs have come down dramatically and experience and knowledge have progressed.

 

"In February 2009, the IHS CERA report, "The Shale Gale," stated that the "recent revolution in the production of unconventional shale gas" would result in "a substantial increase in shale production and reserves"' and "a rapid growth of shale gas supply."  Also in February 2009, IHS CERA's study Rising to the Challenge said: "Unconventional gas will drive growth."  

 

"That was the IHS position then and it continues to be our position today.  Both of these reports were released well before the 2009 email cited in the NY Times story."
 
  • ProPublica published its own article alleging that the SEC revised its rules on how reserves are calculated, allowing companies to greatly increase their reserve estimates, relying heavily on the Times articles and research.

 

  • Forbes Magazine published a blog post calling the Times "all hot air on shale gas." 

The best and most thoughtful response to the Times articles is from this post by Michael Levi of the Council on Foreign Relations: "I can't say that I've read through all of the hundreds of pages of documents that the Times has posted on its site. But I've gone through a good enough slice of them (including all the emails that the Times references in its articles) to get a feel for how Urbina went about using them in his stories. There's a pattern: Urbina was clearly looking for negative views of shale gas, and had no problem finding them." Levi goes on to write that Urbina did raise some significant issues about how shale gas reserves should be assessed, but he did so without really understanding the economics of the E&P industry.

This is not the first criticism of industry estimates of shale gas reserves. In 2009, Arthur Berman, a geologist and then consultant with World Oil, published a gloomy analysis of Barnett Shale economics and reserves in 2009. See my earlier post about Berman here.

June 23, 2011

Oil and Gas-Related Legislation from the 82nd Texas Legislative Session

Bills of Interest from the Texas Legislature's now-completed session:

  • SB 652 - re-authorized the Texas Railroad Commission for two more years. The Lege was unable to agree on changes recommended by the Sunset Commission to reform the RRC. See my discussion of Sunset recommendations here and here. Legislators could not agree on a provision changing the terms of the three commissioners from 6 to 4 years, and could not agree on a provision transferring hearings involving enforcement and gas utility rates to the State Office of Administrative Hearings.  See story here.
  • HB 3134 - Revises earlier legislation (HB 2259, passed in the previous session) that made it more difficult for an operator to renew its operating license if it had unplugged wells not in compliance with rules. The revision gives the operators more time to achieve compliance, and will make it more difficult to require operators to plug inactive wells. See my description of HB 2259 here.
  • HB 3328 - mandates public disclosure of chemicals used in hydraulic fracturing treatments in Texas. The oil and gas industry supported the measure. Environmental groups called the legislation a mixed bag.  EDF advisor Scott Anderson said that the bill doesn't allow for a "simple, statewide list of what chemicals are used by whom and in what quantities." Also, the bill may not be fully implemented until 2013.  Railroad Commissioner David Porter said he would push the RRC to complete its rulemaking on the bill by July 1, 2012, a full year before the deadline set out in the bill.
  • SB 875 - prohibits nuisance suits against gas companies as long as they have a valid permit and are in compliance. The bill was pushed by the industry to prevent nuisance lawsuits related to emissions and noise from gas compressor facilities and other installations near populated areas.
  • SB 332 - provides that a landowner "owns the groundwater beneath the surface of the landowner's land as real property," and entitles the landowner to drill for and produce the groundwater, subject to reasonable regulation. This bill as originally filed provided that a landowner "has a vested ownership interest in and right to produce groundwater below the surface of the landowner's property." The bill is likely to give rise to litigation about the ability of groundwater districts to regulate water wells.

Other legislation of interest that did not pass:

  • HB 2087 - would have allowed operators to force-pool non-participating royalty interests. The bill was opposed by landowners, including the Texas Land and Mineral Owners' Association.
  • HB 2939- would have required operators to submit an annual report of groundwater used to the RRC, the TCEQ and the TWDB.
  • HB 3586 - would have allowed for compulsory unitization for purposes of enhanced oil recovery and CO2 storage.
June 17, 2011

Motions for Rehearing in BP America v. Marshall Blasts Supreme Court

Counsel for the plaintiffs in BP v. Marshall filed unusual motions for rehearing after the Texas Supreme Court reversed the judgments of the courts below awarding substantial damages for fraud. See my discussion of the Supreme Court's decision here. The Marshalls' attorneys' motion for rehearing accuses the court of engaging in "de novo review of a jury finding," exceeding the court's constitutional authority, violating the Marshalls' constitutional right to a jury trial, ignoring uncontradicted expert testimony, and ignoring its own prior precedent. The motion calls the court's reasoning "disingenuous." The Vaquillas attorneys' motion for rehearing says that "the decisional process has gone awry," and the court "has not decided, or even recognized, the main issue in the Vaquillas-Wagner case." From the Vaquillas motion for rehearing:

"The Opinion resolves the BP-Marshall dispute on a legal insufficiency point, but the Opinion never uses the phrase 'standard of review,' never alludes to the standard of review, and never undertakes to apply one."

"Perhaps the Court has in mind an explanation -- maybe even a devastating explanation -- for making the evidence that supports the verdict all vanish. Very well, then, but the Opinion ought to opine on these things, rather than leaving the world wondering."

"Again, any fair observer will acknowledge the Court's heavy workload, with many administravie duties and 900 cases a year clamoring for review. The torrent of cases means that not every Justice can read every record. A system of triage is inevitable. Still, when an Opinion can miss the main issue in one half of the case, forget the standard of review in the other, and speak of an 'adverse possession cause of action' -- while still going out the door unanimously -- something would seem to be wrong."

"The Opinion analyzes the accrual issue in terms of 'Wagner's adverse possession cause of action.' But Wagner has no 'adverse possession cause of action.' Nobody does. Adverse possesssion is not a cause of action, and this Court has never before uttered the phrase 'adverse possession cause of action.'"

"These issues need attention. For one thing, the Court has built a reputation as a leading American tribunal, perhaps the leading American tribunal, for oil and gas cases. Mistakes that might matter little if made by the Supreme Court of Vermont may have more far-reaching effects if made by the Supreme Court of Texas. Further, the Court faults the Marshalls for not acting as a 'sophisticated lessor' should. Under those circumstances, it is in the Court's interest to ensure that its Opinion displays the kind of precision that has historically characterized the Court's oil and gas cases."

"The Court should vacate its decision and start over."

Not your usual motions for rehearing.

 

June 16, 2011

New MIT Study, "The Future of Natural Gas," Touts the Future of Natural Gas Shale Development

A study group sponsored by the Massachusetts Institute of Technology has issued a report, The Future of Natural Gas, the fourth in a series of MIT multidisciplinary reports examinging the role of various energy sources and the effects of carbon dioxide emissions restraints.  The full 170-page report can be found here. The report analyzes the relative carbon footprint of natural gas compared to other fuels and the environmental impact of the development of shale gas reserves, among other topics. Here are some excerpts:

Major conclusions of the report:

  • "There are abundant supplies of natural gas in the world, and many of these supplies can be developed and produced at relatively low cost."
  • "The role of natural gas in the world is likely to continue to expand under almost all circumstances, as a result of its availability, its utility and its comparatively low cost."
  • Natural gas is "one of the most cost-effective means by which to maintain energy supplies while reducing CO2 emissions."

Regarding gas's carbon footprint, the report concludes that "Among the fossil fuels, it has the lowest carbon intensity, emitting less CO2 per unit of energy generated than other fossil fuels. It burns cleanly and efficiently, with very few non-carbon emissions. Unlike oil, natural gas generally requires limited processing to prepare it for end use."

Regarding potential natural gas supply:

  • "The mean projection of [worldwide] remaining recoverable resource [of natural gas] in this report is 16,200 Tcf, 150 times current annual global natural gas consumption .... Of the mean projection, approximately 9,000 Tcf could be developed economically with a natural gas price at or below $4/Million British Thermal units (MMBtu) at the export point."
  • "The mean projection of recoverable shale gas resource in this report is approximately 640 Tcf, with low and high projections of 420 Tcf and 870 Tcf, respectively. Of the mean projection, approximately 400 Tcf could be economically developed with a natural gas price at or below $6/MMBtu at the wellhead."

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June 1, 2011

Discussion and Debate Increase on Environmental Hazards of Fracking

Fracking has become more and more a topic in the general media and part of the state and federal environmental energy agenda, with new stories appearing daily. A sample:

Secretary of Energy Steveb Chu has appointed an advisory panel, officially called the Secretary of Energy Advisory Board's subcommittee on natural gas, to study the environmental issues around hydraulic fracturing and shale gas production.  Members of the subcommittee are John Deutch, former head of the CIA during the Clinton administration, in the Department of Energy during the Carter administration, now a professor at MIT, and former board member of Schlumberger, Ltd.; Daniel Yergin, IHS Cambridge Energy Research Associates Chairman; Susan Tierney, Chair of the board of the Energy Foundation; Stephen Holditch, chair of the Department of Petroleum Engineering at Texas A&M; Fred Krupp, President of Environmental Defense Fund; Kathleen McGinty, former head of Pennsylvania's Department of Environmental Protection; and Mark Zoback, geophysics professor at Stanford University. Steven Chu, Secretary of Energy, has charged the subcommittee to make recommendations on ways to improve safety of fracking in 90 days, and offer advice to other agencies within six months on how they can better protect the environment from shale gas drilling.  http://thehill.com/blogs/e2-wire/677-e2-wire/164057-overnight-energy-fracking . Beginnings of the subcommittee's work have not shown promise: at the first meeting of the committee, Dusty Horwitt of the Environmental Working Group said its chairman John Deutch should resign because of his former ties to Schlumberger and Cheniere Energy. On the other side, Republicans including Darrel Issa (R-Calif), chair of the House Oversight and Government Reform Committee, have said that Chu's subcommittee is composed primarily of Democratic appointees hostile to drilling interests. 

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