Oil and Gas Lawyer Blog

Speaker of the House Joe Strauss has charged the House Committee on Energy Resources as follows for the next legislative session:

"Survey current local ordinances governing surface use of property in oil and gas development. Recommend changes, if any, to the authority of the Railroad Commission to regulate the operation of oil and gas industries in urban areas of the state, particularly the Barnett Shale."

It seems evident from this charge that operators in the Barnett Shale will be asking the Texas Legislature to curtail the authority of municipalities to issue drilling permits for areas within their jurisdiction, or at least to limit what conditions they can place in those permits. Drilling ordinances such as those in Fort Worth and surrounding cities are becoming quite sophisticated, and place significant conditions on the granting of permits, including distances from houses and other structures, sound limits, handling of frac water, produced water and other wastes, safety requirements, traffic, and damage to surrounding streets. The City of Grapevine has revised its drilling ordinance to require an 8-foot masonry wall around the wellsite and shrubbery between 3 and 5 feet high along the wall. The City of Flower Mound is considering revision of its drilling ordinance to require companies to report their airbrorne emissions and use vapor recovery technology. In some cases, municipal ordinances are so stringent that as a practical matter they prevent drilling within city limits. I expect that eventually constitutional takings claims will be made against cities whose restrictions prevent any mineral development within their limits.

If the Legislature restricts municipal permitting authority, it could enlarge the requirements that the Railroad Commission must impose, or at least consider, when granting permits in urban areas, to include environmental considerations. The Austin Court of Appeals recently held that the Commission must consider the impact of traffic when ruling on an application for a disposal well permit. The Commission has appealed that decision, and the Texas Supreme Court has agreed to consider the case. Texas Citizens for a Safe Future and Clean Water v. Railroad Commission of Texas, 254 S.W.3d 492 (Tex.App.-Austin 2007, review granted March 12, 2010). It appears that the Commission would not relish the idea of regulating issues of traffic, noise, safety and pollution issues in urban settings, in connection with applications for well permits.

Exxon Mobil announced that it would acquire XTO Energy in an all-stock deal worth $41 billion. The acquisition is viewed as Exxon's decision to enter the domestic onshore gas shale play, which to date has been developed almost exclusively by independent producers. But the deal includes an exit clause in the event Congress passes legislation that would make hydraulic fracturing illegal or "commercially impracticable." Shale gas development would be impossible without hydraulic fracturing technology. Bills are pending in Congress (known as the FRAC Act) to subject fracturing to federal regulation under the Safe Drinking Water Act. The bills would require companies to publicly disclose the chemicals used in frac fluids. And U.S. Rep. Ed Markey, Dem. Massachusetts, said he would hold hearings in the House Energy and Commerce Committee to review the Exxon-XTO deal and to address environmental concerns about hydraulic fracturing.

America's Natural Gas Alliance, a recently formed energy lobbying group formed by natural gas producers, has issued a press release praising the Senate's version of a climate bill.  Without actually endorsing the bill, the Alliance commended the bill's authors for "including provisions in their bill that will enable us to continue to engage in the process of developing language that will effectively promote natural gas as part of the climate solution."

The Alliance was formed in March 2009, and according to its website it represents 28 of North America's largest independent natural gas producing companies, whose members produce more than 40 percent of total U.S. natural gas supplies, about nine trillion cubic feet per year. Its members include Anadarko, Apache, Chesapeake, Devon, El Paso, Encana, Petrohawk, Pioneer, Plains, and XTO. The Alliance's position on the Kerry-Boxer energy bill is markedly different from that of the American Petroleum Institute and the Texas Alliance of Energy Producers, long-time lobbyists for the energy industry which have come out strongly against cap-and-trade legislation. Alex Mills, President of Texas Alliance of Energy Producers, is in particular an opponent of cap-and-trade, saying that it will wreak havoc on the energy industry. Chesapeake, Devon, Encana, and XTO are also members of the Texas Alliance. Politics makes strange bedfellows.

But companies relying mainly on gas production -- more than 90 percent of Chesapeake's total production is natural gas -- believe that natural gas producers can benefit from climate legislation, since natural gas is a clean-burning fuel with much lower carbon emissions per unit of energy than oil or coal. Tom Price, Senior V.P. of Chesapeake for corporate development and government relations, said that "We think Texas, Oklahoma, Louisiana, Arkansas and the states that are primarily natural gas producers will come out very favoarable to a legislation that differentiates among the low-carbon fuels."

Prior to the Texas Legislature's passage of House Bill 2259, an operator could leave an inactive well unplugged indefinitely, as long as the oil and gas lease on which the well is located remains in effect, by simply filing an annual form. House Bill 2259, effective September 1, 2009, imposes additional requirements on operators desiring to delay plugging of the well.

An operator may not operate wells in Texas unless its annual Organization Report, form P-5, has been filed and accepted by the RRC. When filing the P-5, the operator must provide a form of financial assurance that it has the ability to properly plug all wells for which it is the designated operator.

The additional requirements imposed by H.B. 2259 require an operator to file certain forms each time the operator files its annual Organization Report, Form P-5, with the Texas Railroad Commission (RRC). The new forms related to inactive wells operated by the operator. An "inactive well" is a well that has had no activity for 12 consecutive months.

H.B. 2259 amends Chapters 98 and 91 of Texas Natural Resources Code. The new law provides that, if an operator has any inactive wells at the time its Organization Report is due, it must file an "Application for Extension" requesting that it not be required to plug those inactive wells. In order to be granted the extension, the operator must do each of the following four things:

Continue reading "House Bill 2259 Imposes Additional Requirements on Operators of Inactive Wells" »

A Delaware bankruptcy judge has ruled in the SemCrude bankruptcy that the claims of Texas producers for unpaid revenues from oil sales are subordinate to the claims of SemCrude's bankers. As a result, the Texas producers (and perhaps their royalty owners) may lose up to $57 million.

SemCrude filed for protection under Chapter 11 of the Bankruptcy Code in July 2008. SemCrude was a large purchaser of crude oil in Texas and seven other states. At the time of the filing, the SemCrude entities owed their banks $2.55 billion. It also owed more than one thousand oil and gas producers millions of dollars for oil purchased but not paid for in June and July 2008, including $57 million owed to oil and gas producers in Texas.

The court in the SemCrude bankruptcy recently ruled that the claims of Texas Producers for the $57 million in unpaid proceeds of oil and gas sales are subordinate to the claims of SemCrude's Banks, who hold liens on all os SemCrude's assets, despite a Texas statute that grants the Texas Producers a lien on their production and all proceeds of sale to secure the purchaser's obligation to pay.

The arguments made in the dispute between the Banks and the Texas Producers are complicated because they involve the interpretation of Article 9 of the Uniform Commercial Code, a code that has been the bane of many law students' studies. The judge's ruling will be appealed and so is not the final word on the matter, but if the ruling stands it will adversely affect the rights of royalty owners in bankruptcy proceedings of oil and gas purchasers and producers, and could greatly reduce their rights to recover payments for their royalties.

Here is a simplified summary of the judge's ruling:

Continue reading "Delaware Bankruptcy Court Rules Against Texas Producers (and Royalty Owners)" »

Until fairly recently, there has been little governmental regulation of the drilling of and production of groundwater in Texas. Texas historically followed the common-law "rule of capture," which holds that, unless the groundwater rights have been severed from the surface, the surface owner is the owner of all groundwater he/she can produce from a well located on his/her land and has no liability to adjacent owners whose groundwater might be damaged by such production.  But the rule of capture is quickly changing. Groundwater rights are now being placed under the control of Groundwater Conservation Districts, which have authority to regulate the drilling of and production from water wells within their jurisdiction. What follows is a brief summary of what is now happening - the development of a plan to regulate the production of groundwater from all of the major aquifers in Texas.  Landowners should be aware of these happenings.

Continue reading "What Landowners Should Know About Groundwater Rights in Texas" »

The NAT Gas Act has been introduced in the U.S. Senate, as S. 1408, sponsored by Senators Robert Menendez, D-NJ, and Orrin Hatch, R-UT. The Act provides incentives for increased use of vehicles powered by natural gas. It was previously introduced in the House as H.R. 1835. The Act increases the tax credit for purchasing natural gas vehicles and provides incentives for installation of natural gas fueling stations.

Freightliner, a large truck maker, announced its first natural gas-powered truck model. The company claims that the truck will save $6,000 per year in fuel and maintenance costs.

Clean Energy Fuels Corporation last week opened what it says is the world's largest natural gas truck fueling station, in the Ports of Los Angeles and Long Beach, California.

It appears that someone is listening to Boone Pickens.

Four legislators from Colorado, New York and Pennsylvania have introduced a bill making hydraulic fracturing subject to regulation by the Environmental Protection Agency under the Safe Water Drinking Act.  Dubbed the Fracturing Responsibility and Awareness of Chemicals Act, or FRAC Act ( FRAC Act.pdf), the bill would amend the Safe Drinking Water Act to require companies to disclose the chemicals they use in their fracturing processes. The press release ( Press Release FRAC Act.pdf) from the legislators states that "It's time to fix an unfortunate chapter in the Bush administration's energy policy and close the 'Halliburton loophole' that has enabled energy companies to pump enormous amounts of toxins, such as benzene and toluene, into the ground that then jeopardize the quality of our drinking water." (Benzene and toluene are not additives to frac fluid.)

An energy lobbying group, Energy in Depth, has denounced the bill as an "unnecessary financial burden" on the industry which could result in more than half of U.S. oil wells and one-third of gas wells being closed, and reduction in natural gas production of up to 245 billion cubic feet per year.

 

Continue reading "Bill to Regulate Hydraulic Fracturing of Wells Introduced in Congress" »

A study ( Armendariz Study.pdf) published last February by Al Armendariz, an engineering professor at Southern Methodist University, concluded that gas drilling in the Barnett Shale contributes about as much air pollution to the D-FW area as emissions from cars and trucks. Dr. Armendariz's study was financed by the Environmental Defense Fund. Dr. Armendariz concluded that in the nine counties included in the D-FW metroplex area, gas drilling produced about 112 tons per day of pollution, compared with 120 tons per day from vehicle traffic. Dr. Armendariz suggested that pollution from drilling activities could be greatly reduced by requiring vapor recovery units on tank batteries and "green completions" of wells to prevent gas from being vented when a well is being completed.

Representatives of the industry quickly refuted Dr. Armendariz's conclusions, arguing that his facts were all wrong. 

The Texas Commission on Environmental Quality has reviewed Dr. Armendariz's report and finds its conclusions consistent with the TCEQ's own analysis. Andrea Morrow, a spokeswoman for the Texas Commission on Environmental Quality, was quoted by the Fort Worth Star Telegram as saying that "The estimates Dr. Armendariz provides for individual source categories are comparable to the TCEQ estimates."  TCEQ estimates that gas drilling in the nine-county area generates 90 tons per day of pollution.

The D-FW metroplex area is a designated "non-attainment zone," required by the Environmental Protecton Agency to take measures to reduce the amount of ground-level ozone. The TCEQ believes that the best way to reduce ozone levels is to regulate nitrous oxides by reducing pollution from cars and trucks. A bill to require green completions in the Barnett Shale died in the recent Texas legislative session.

Expect future efforts to require companies to take measures to reduce venting of methane and volatile organic compounds in oil and gas exploration activities.

Boone Pickens' efforts to promote natural gas as an alternative to gasoline in vehicles seems to be gaining momentum. In a column published by the Huffington Post, Pickens said that the recent advances in extraction of natural gas from shales is a "game-changer." "One study estimates that we have enough natural gas to satisfy current demand for the next century."  Pickens reports that H.R. 1835, the NAT GAS Act, has strong bipartisan support in Congress. the NAT GAS Act provides incentives for installation of compressed natural gas (CNG) fueling stations and use of CNG in large trucks and fleet vehicles.

Natural gas gives off 25% less carbon dioxide than oil for the same amount of energy produced. About 1/3 of total U.S. carbon dioxide emissions come from burning of gasoline in internal combustion engines. For a good summary of the use of CNG, go to the U.S. Department of Energy's website on Energy Efficiency and Renewable Energy. 

Although Texas leads the nation in natural gas production, it is behind ten other states in the number of CNG fueling stations.

 

 Louisiana is considering its own legislation offering incentives to convert existing vehicles to natural gas and the installation of CNG fueling stations. Chrysler's recently announced plan to sell its best assets to Fiat may present a major opportunity to increase sales of natural gas vehicles (NGVs) in the U.S. Fiat plans to sell 120,000 NGVs in Italy this year. Only one NGV passenger car, the Honda Civic GX, is sold in the U.S. and there are only about 130,000 NGVs of all types currently on U.S. roads.

Congress passed the 2010 federal budget without adopting the Obama Administration's proposal to eliminate several tax provisions favorable to the oil and gas industry, including percentage depletion and expensing of intangible drilling costs. See my earlier post discussing these tax provisions.  Adam Haynes, EVP of Texas Independent Producers and Royalty Owners Association (TIPRO), was quoted in TIPRO's April 17 newsletter as saying that that the industry had "dodged a bullet," and that repeal of these tax provisions, which purportedly cost taxpayers $80 billion a year, "would very negatively impact the exploration for needed energy here and throughout the nation."

President Obama, in an attempt to recoup some of the money being spent to revive the economy, proposes to repeal several tax provisions near and dear to the oil and gas industry:

• Enhanced oil recovery credit
• Marginal well tax credit
• Expensing of intangible drilling costs
• Deduction for tertiary injectants
• Passive loss exception for working interest owners in oil and gas properties
• Manufacturing tax deduction for oil and gas companies
• Percentage depletion deduction for oil and gas
• Not surprisingly, the oil and gas industry is mounting a huge lobbying campaign to prevent loss of these tax benefits. 

The only one of these tax benefits that directly affects royalty owners is the percentage depletion deduction.  Currently, 15% of royalty income is deductible as "percentage depletion."  The deduction is intended to recognize that the sale of oil and gas is in part the sale of a depleting asset, so that a portion of the royalty should be treated like a return of capital rather than as income.

The principal argument being made against repeal of these tax benefits that are peculiar to the oil and gas industry is that their repeal would reduce the amount of oil and gas produced in the U.S., because those who invest in exploration and production would be less willing to do so, or would invest less.  The argument would be difficult to defend if oil were above $100 per barrel and gas were above $12 per mcf, as they were last summer.

The oil and gas industry has always been subject to price volatility.  When prices are low, the industry obtains tax breaks by using the argument that the breaks are necessary to avoid declines in domestic production.  When prices are high, the same tax breaks provide a windfall to the industry.

It will be interesting to see if the Administration's plan can withstand the onslaught of opposition from the industry and royalty owners.

H.R. 1835, the New Alternative Transportation to Give Americans Solutions Act of 2009 (NAT GAS Act) was introduced in the U.S. House of Representatives by Dan Boren (D-OK), John Larson (D-CT) and John Sullivan (R-OK).  Its purpose is to promote the use of natural gas in vehicles, with an emphasis on large trucks and fleet vehicles.  It wiould provide incentives for installation of natural gas fueling stations.  It is the first legislation to promote Boon Pickens' plan to use domestic natural gas to reduce dependence on foreign oil.