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   Suppose that the fluids injected into a disposal well migrate beyond the boundary of the tract where the well is located; does that incursion of the injected fluids into and under the neighbor’s property constitute a trespass?  Until recently, this question had never been addressed by a Texas appellate court, and the assumption in the disposal industry was that such incursion was not actionable. The Beaumont Court of Appeals, in FPL Farming Ltd. (“FPL”) v. Environmental Processing Systems, L.C. (“EPS”), concluded that the neighbor does have a trespass claim. 

  The Beaumont Court of Appeals has issued two opinions in the case; the first was appealed to the Supreme Court which reversed and remanded to the Court of Appeals, and the second has also been appealed to the Supreme Court, where it is now pending. FPL Farming Ltd. v. Environmental Processing Systems, L.C., 305 S.W.3d 739 (Tex.App.-Beaumont), reversed and remanded 351 S.W.3d 306 (Tex. 2011), on remand 383 S.W.3d 274 (Tex.App.-Beaumont May 24, 2012, pet. filed 1/18/13).  

  The facts in FPL are these:  EPS operates an injection well for non-hazardous waste on land adjacent to the land owned by FPL. FPL previously objected to an amendment of EPS’s permit that increased the rate and volumes allowed to be injected. The Austin Court of Appeals affirmed the permit amendment over FPL’s objections, ruling that “the amended permits do not impair FPL’s existing or intended use of the deep subsurface.” FPL Farming Ltd. v. Tex. Natural Res. Conservation Comm’n, 2003 WL 247183 (Austin 2003, pet. denied).

   FPL then sued EPS for trespass and negligence, alleging that injected substances had migrated under FPL’s tract causing damage. FPL lost a jury trial and appealed. The Beaumont Court affirmed, holding that because EPS held a valid permit for its well, “no trespass occurs when fluids that were injected at deep levels are then alleged to have later migrated at those deep levels into the deep subsurface of nearby tracts.” FPL Farming Ltd. v. Environmental Processing Systems, L.C., 305 S.W.3d 739, 744-745 (Tex.App.-Beaumont). The Supreme Court reversed, holding that Texas laws governing injection well permits “do not shield permit holders from civil tort liability that may result from actions governed by the permit.” FPL Farming Ltd. v. Environmental Processing Systems, L.C., 351 S.W.3d 306, 314 (Tex. 2011). But the court was careful to say it was not deciding that owners of injection wells could be guilty of trespass if their injected fluids migrated onto other lands. “We do not decide today whether subsurface wastewater migration can constitute a trespass, or whether it did so in this case.” Id.  The court remanded to the court of appeals for it to consider the other issues raised by the appeal.

  In its second opinion, the Beaumont court held that FPL did have a cause of action for trespass: “[T]he Texas Supreme Court has, by implication, recognized that the law of trespass applies to invasions occurring on adjacent property but at a level beneath the surface.”  Testimony was presented that the waste plume affected the briny water in place under FPL’s property, “even though it was not presently using the briny water.” The court said that the briny water belongs to the surface owner, and that EPS’s permits did not give EPS an ownership interest in the formations below FPL’s property. The Beaumont court reversed and remanded the case for a new trial, holding that the trial court’s jury instruction erroneously put the burden on the landowner to prove that he had not consented to the injection under his property. Additionally, the court noted that the fact that EPS is using the deep subsurface for commercial purposes indicates that the subsurface levels at issue have economic potential for storing waste, which otherwise, absent its safe storage, has the potential to adversely affect the environment. Thus, without a trespass remedy, a party–in this case, FPL–does not have all of the legal remedies typically available to owners to protect the owner’s right to the exclusive use of its property.

  EPS also claimed that its trespass onto FPL’s property did no actual harm. The court said that EPS had failed to show as a matter of law that no injury had occurred, and that FPL was entitled to a jury trial on that issue.

   So the Beaumont court of appeals’ opinion, if it stands, recognizes a trespass claim for subsurface migration of injected fluids.  The fear for the industry is not necessarily a suit for damages, which may be too difficult to prove.  If subsurface trespass is found to be a viable claim, potential plaintiffs could seek an injunction to stop a well from injecting fluids underground.

  The Texas Supreme Court has set the case for oral argument at 9 am on January 7. You can view the oral argument online.

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Lawsuits against Chesapeake Exploration for wrongfully deducting post-production costs from its gas royalty payments are hitting a boiling-point. Suits are being pursued against the company in every jurisdiction where it operates, including Texas, Arkansas, Lousiana, Kansas, Ohio, West Virginia, Oklahoma and Pennsylvania. Chesapeake has recently been much more aggressive in deducting post-production costs. In the Barnett Shale in North Texas, its post-production cost deductions have been as much as $.70 to $1.00 per mcf, and with such low gas prices, some royalty owners’ payments have been halved by such deductions. Chesapeake’s royalty payments in North Texas have reportedly been on a net price of as little as eleven cents per mcf, and as little as 11% of the price other producers have based their royalty payments on. A recent Bloomberg article summarizes Chesapeake’s royalty payment practices.

Chesapeake has settled some claims, including large royalty owner claims in Pennsylvania. Chesapeake’s marketing practices in Pennsylvania mirror those it uses in the Barnett Shale.  Last year, Chesapeake settled a claim brought by the Dallas-Fort Worth Airport for underpayment of royalties for $5 million. The Bass family in Fort Worth recently sued the company for wrongfully deducting post-production costs.

Chesapeake’s tactics for how it calculates its royalties cannot be understood without knowing something about how Texas courts have addressed deductibility of post-production costs. I have previously written three posts on this topic that can be seen here, here and here.

Oil company oil and gas lease forms historically have provided that royalties on natural gas are based on “market value at the well” or the “net amount realized at the well.” Texas courts have construed such leases to allow the producer to deduct from gas sale proceeds the costs of gathering, transporting, treating and processing gas after it has been produced but prior to sale. In response, mineral owners in Texas began adding “no-deduction” clauses to their leases, prohibiting deduction of such costs for purposes of calculating their royalty.  One such clause from a famous Texas Supreme Court case, Heritage Resources v. Nationsbank, 939 S.W.2d 118 (Tex. 1996), said: “provided, however, that there shall be no deductions from the value of the Lessor’s royalty by reason of any required processing, cost of dehydration, compression, transportation or other matter to market such gas.”  To most oil and gas attorneys’ suprise, the Supreme Court in Heritage v. Nationsbank held that, despite this no-deduction clause, Heritage Resources was entitled to deduct transportation costs from Nationsbank’s royalty. The court reasoned that, because the lease provided that royalty would be based on the “market value at the well” of the gas, no deductions were being made from that value in calcluating Nationsbank’s royalty. The Supreme Court deemed the no-deduction language to be “surplusage.”

Since Heritage v. Nationsbank, landowners have begun to include language in their leases expressly stating that their lease should not be construed like the lease in Heritage. But despite such efforts, Chesapeake has relied on the Heritage case to continue deducting post-production costs from its royalty payments.

Two Texas cases challenging Chesapeake’s right to deduct post-production costs are now on appeal to the U.S. Court of Appeals for the Fifth Circuit, both appealed from the U.S. District Court in Dallas:  Potts v. Chesapeake, Case No. 13-1061, appealed from the U.S. District Court in Dallas; and Warren v. Chesapeake, District Court No. 3:12-cv-03581-M. In both cases, Chesapeake won in the trial court and the royalty owners are appealing.

The cases reveal that, in the Barnett Shale, Chesapeake sells its gas to its wholly-owned subsidiary, Chesapeake Energy Marketing Inc. (CEMI). The sales contract provides that CEMI takes custody of the gas at the wellhead.  CEMI then gathers the gas and sells it to various purchasers at various prices. The Chesapeake-CEMI contract provides that the price paid to Chesapeake for the gas will be the weighted-average sales price of all gas sold by CEMI from Chesapeake wells in the area, less post-production costs incurred by CEMI. By structuring its sales through its affiliate and providing for the contract point of delivery to be at the wellhead, Chesapeake seeks to take advantage of its leases that provide for royalties based on “market value at the well,” as construed by Heritage v. Nationsbank.

The oil and gas lease construed in Warren v. Chesapeake appears to fall squarely within the Heritage holding: it provides for royalty based on “the amount realized by Lessee, computed at the mouth of the well.” A provision added by the landowner states:

Notwithstanding anything to the contrary herein contained, all royalty paid to Lessor shall be free of all costs and expenses related to the exploration, production and marketing of oil and gas production from the lease including, but not limited to, costs of compression, dehydration, treatment and transportation. Lessor will, however, bear a proportionate part of all those expenses imposed upon Lessee by its gas sale contract to the extent incurred subsequent to those that are obligations of Lessee.

The lease construed in Potts v. Chesapeake is much more interesting, and presents a closer case. Its language is contained in two paragraphs. The first provides that royalty shall be based on the “market value at the point of sale,” and that “all royalty paid to [Lessors] shall be free of all costs and expenses related to the exploration, production and marketing of oil and gas produced from the lease including, but not limited to, costs of compression, dehydration, treatment and transportation.” A separate paragraph provides that “Payments of royalties to Lessor shall be made monthly and shall be based on sales of leased substances to unrelated third parties at prices arrived at through arms length negotiations.”

The plaintiff in Potts argues that his lease is not controlled by Heritage v. Nationsbank; his royalties are to be based on the price “at the point of sale,” not “at the well”; and his royalties must be based on the sale price to unrelated parties arrived at in arms-length negotiations, not the price in the Chesapeake contract with its affiliate CEMI.

Chesapeake argues that it has complied with both lease provisions. First, since it sells its gas at the well, the “market value at the point of sale” is the same as the “market value at the well,” so it is in compliance with the first lease provision in paying based on the price it receives from CEMI.  Second, because the price CEMI pays Chesapeake for the gas is based on the weighted-average price for CEMI’s sales of gas to unrelated parties in arms-length transactions, it is complying with the second lease provision.

It seems clear that the landowner in Potts was attempting to draft his lease to prevent deduction of post-production costs and to require that his royalties be based on the price received in the first arms-length sale of his gas.  Whether he accomplished that intent is a matter for the Fifth Circuit Court to decide.


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WoodMackenzie has recently come out with its 2013 ranking of the world’s twenty largest oil companies, and their change in production over the last ten years:

Twenty Biggest Oil Companies3.JPG

(BOE is barrels of oil equivalent.)  As you can see, most are state-owned companies. Russia re-acquired its privately-owned companies. Saudi Arabia has increased its production 28% in the last 10 years.  Iran, despite the embargo, has increased its production by 24%, in part because of increased export of natural gas. Venezuela’s production has suffered from politicization of its national oil company. Shell’s efforts to increase production by acquiring a position in U.S. shale plays has not been successful. BP has sold off a substantial part of its production. China has invested big-time to fuel its economy. And the world economy has managed to survive $100 oil.  For comparison, the total world production in 2010 was about 137 BOE/day. These top twenty companies together produced about 60% of that total.

For a good article on these numbers, see Forbes’ article, The World’s Biggest Oil Companies – 2013, here.

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A group of environmentally conscious social and investor organizations has produced a report, Disclosing the Facts: Transparency and Risk in Hydrualic Fracturing Operations. The report grades companies on how well they report risks attendant to operations in the major US shale plays.

The report is a collaboration of four organizations: As You Sow, Boston Common Asset Management, Green Century Capital Management, Inc., and The Investor Environmental Health Network.  It was made possible by grants from several foundations, listed in the report.

The report assesses the public disclosures of 24 oil and gas companies on their quantitative reporting in five areas of environmental, social and governance metrics: toxic chemicals, water and waste management, air emissions, community impacts, and management accountability. Each company is graded on these metrics based on how well they measure and disclose, quantitatively, their performance in these areas. The grades are based solely on publicly available information provided by the companies. Example criteria:

  • Does the company report its use of diesel fuel and TBEX in frac fluids?
  • Does the company report its testing of water wells within a specified distance of a new well before and after drilling?
  • Does the company report its percentage of flowback water reuse, its total water use, and its water use intensity?
  • Does the company report the extent to which it uses closed-loop systems to manage drilling fluids?
  • Does the company report the percentage of “green completions” (capturing natural gas produced during drilling rather than releasing or flaring the gas)?
  • Does the company track community impact concerns (road damage, traffic congestion, etc.)?

The idea behind the report is to convince companies (and their shareholders) that monitoring and reporting of environmental and social impacts is good for business. It is a follow-up to an earlier report, Extracting the Facts: An Investor Guide to Disclosing Risks from Hydraulic Fracturing Operations, by The Investor Environmental Health Network, in 2011.

The highest scoring company was Encana, with a score of 14 out of a possible 32.

The report contains many good links to other reports and information. For example:

Resources for the Future, “The State of State Shale Gas Regulation” (2013):

Model regulations for chemical disclosure and strengthening well drilling and completion practices, developed in collaboration with Southwestern Energy and the Environmental Defense Fund:

George King, “Hydraulic Fracturing 101: What Every Representative, Environmentalist, Regulator, Reporter, Investor, University Researcher, Neighbor and Engineer Should Know About Estimating Frac Risk and Improving Frac Performance in Unconventional Gas and Oil Wells” (Society of Petroleum Engineers Paper SPE 152596 (2012)

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I have recently seen articles predicting the end of the shale boom, coming not only from those who have consistently predicted that shale production would never amount to anything, but also from respected sources whose predictions have previously proven accurate. A recent Houston Chronicle article quotes from a paper written by Amy Myers Jaffe, executive director for energy and sustainability at the University of California, Davis, and Mahmoud El-Gamal of Rice University, saying that “The most likely scenario – absent war – is for oil prices to decline significantly.” A significant decline in oil prices would make many if not most wells shale wells now being drilled in the Eagle Ford and Permian areas of Texas uneconomical. Jaffe expects oil prices to decline in the next three to five years. “To hold up prices it would have to be a regime change in several countries that results in lasting civil wars with lots of infrastructure being blown up,” she said.

An article in Business Week says that the break-even price for profitability in the Cline Shale play of the Permian Basin is $96 per barrell; in the Eagle Ford, it’s $78/barrel, and in the Bakken, $84.  Here is one analyst’s prediction of future oil prices:

Business Week graph.JPG

Falling fuel demand is a big part of the prediction.  Jaffe believes demand will fall even with continued growth in China and other emerging nations. The average fuel economy for new vehicles in the US is up 4.7 mpg since October 2007. And Americans are driving less.  Lower-priced natural gas will replace some of the oil demand.  From the Energy Information Administration:

US Crude Oil and Energy Consumption.JPG

And, as with natural gas in the latter part of the last decade, US crude oil production and resulting supply are increasing:

Crude Oil Production and Ending Stocks.JPG

EIA has begun publishing a new report, its “Drilling Productivity Report,” focusing on production in the six major shale plays in the US.  The report appears to me to highlight two attributes of shale plays:  first, companies are lowering the cost of drilling and completing wells in these plays, increasing the efficiency of putting new production online; and second, the industry has to continue to drill wells to replace the rapid decline in production from these plays. Here are a couple of the EIA’s charts from its recent analysis of Eagle Ford wells that illustrate these attributes:

Eagle Ford new well production per rig.JPG

This shows that fewer rigs are needed to continue the increase in production from the Eagle Ford.

On the other hand, it takes continuous drilling to replace the decline in existing production:

Eagle Ford change in oil production.JPG

The above chart tells me that, if and when oil prices decline, the growth in oil production from the Eagle Ford will quickly turn into a rapid decline, when rigs leave the play.


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I recently came across a study just published by a group of sociology professors testing our ability to make decisions based on facts. It takes a little explanation, but it is worth looking at. The question they asked:  Why does public conflict over societal risks persist in the face of compellng and widely accessible scientific evidence? To find out, the professors asked 1,111 participants a series of questions designed to gauge their political views, and then they were asked to solve a word math problem. Half of the participants were given the following problem:

Math problem 1.JPG

The correct answer?  Patients who used the skin cream were more likely to get worse than those who didn’t.  Roughly 1 in 3 patients who used the skin cream got worse, but roughly 1 in 5 of those who didn’t use the skin cream got worse. Solving the problem requires skill in “numeracy”, basically the ability to solve math problems. (For the study, the data were reversed for half of the participants and presented so that they suggested that the skin cream did work.)  59% of those in the study got the answer wrong. The more “numerate” the study participants were, the more likely they were to get the problem right. That was true whether the participants were liberal Democrats or conservative Republicans.

The other half of the participants were given a different problem:  they were asked to determine the effectivenes of laws “banning private citizens from carrying concealed handguns in public.” Participants were given data about cities that had or had not passed concealed carry bans, and where crime in these cities had or had not decreased. The numbers used in this problem were exactly the same as those in the skin-rash problem. The results are shown below:

Math problem summary.JPG


Even though the numbers in both problems were exactly the same, the answers of participants were quite different. This time, the political leanings of the participants had a significant impact on their responses. Liberal Democrats did much better on the gun problem when the right answer was that crime decreases with gun control; conservative Republicans did much better when the right answer was that crime does not decrease with gun control. Here are the results shown graphically:

Math graphs.JPG


In other words, more knowledge (numeracy) does not increase people’s ability to reason when it comes to politically charged issues like gun control. People let their biases get in the way.

Here are two good articles on the problem of rational decision-making, commenting on the study:

So what does this have to do with oil and gas? It reminds me of the debate over hydraulic fracturing. It appears that the more those in favor of fracing are presented with facts showing its dangers, the more they deny those facts and argue it is safe; and the more those opposed to fracing are presented with facts showing its benefits, the more they argue in opposition. The same could be said of global warming, the Affordable Care Act, the presence of weapons of mass destruction in Iraq, abortion rights, gay marriage, evolution, etc.

Leon Festinger, a famous Stanford University psychologist, said that “A man with a conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point.”  Changing one’s point of view on difficult politically charged issues is difficult.

A group called “Ark Encounter” is raising money to construct a replica of Noah’s Ark in Williamstown, Kentucky, using the exact dimensions and directions found in Genesis. It will be more than 500 feet in length, three stories high, and built with planks, beams and pegs. When asked how they were going to get the more than 2 million species of animals now on the planet in the ark, they say that, in Noah’s time, there were only some 2,000 types of animals, and that all animals today descend from those original animals. Fitting myth to reality is no problem for believers. Changing their minds about the facts is more of a problem.


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Texans for Public Justice,, issued its report on 2012 Election Cycle Spending by Texas political action committees.  You can see it here. Some highlights:

Of the $70 million spent by Texas business PACs in 2011-12, $11.9 million, or 9%, was spent by PACs devoted to energy and natural resources issues/candidates. Here are the top spenders:

Energy PACs.JPG

The above figures represent spending by these PACs both in-state and out-of-state.

Energy Future Holdings is the successor to TXU Corp., acquired by EFH in a $45 billion leveraged buyout. EFH, now threatened with bankruptcy, is one of the state’s largest electricity generators. The five EFH PACs spent more than $750,000. 

Valero Energy’s PAC spent $729,000 of its $2 million in Texas and was a larger supporter of Senator Ted Cruz. ConocoPhillips’ PAC spent $221,000 in Texas and gave large sums to Texas Railroad Commissioners.

Lawyer and lobbyist PACs were also big spenders:

Lawyer PACs.JPG

In 2010, Public Citizen issued a report on political contributions to Texas Railroad Commissioners. It found that total funds raised by commissioners increased from $511,000 in 2000 to $3.5 million in 2007-2008. Industry donors increased from $230,000 in 2000 to more than $2.1 million in 2008:

RRC contributions.JPG

Contributions to sitting commissioners increased substantially in 2006 and 2008 election cycles:

contributions to sitting commissioners.JPG

Public Citizens’ conclusions:

  • Most of the increase in funding of commission races is driven by industry and those who have an economic interest in the decisions made by the commission.
  • Increased spending by large donors is likely putting pressure on smaller, independent operators to contribute.
  • Fundraising rarely ceases, except just after an election.

The Railroad Commission has been up for review by the Texas Sunset Commission in the last two sessions of the Texas Legislature, and both times the legislature failed to enact any of the recommendations of the Sunset Commission — save one. In 2012, the legislature passed a bill requiring commissioners to resign if they decide to run for another elective office.  Governor Rick Perry vetoed that bill.  Among the Sunset Commission’s recommendations was that the commission should levy more fines for violation of commission rules.  In the first quarter of 2013, the commission issued almost 14,000 notices of violations; it collected less than $200,000 in fines.

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Last week I attended the State Bar Annual Advanced Oil, Gas and Energy Law Conference in Houston. This year is the 75th anniversary of the Oil, Gas and Energy Section of the Texas Bar (older than the State Bar itself), and there was a special dinner to honor the occasion, at which Daniel Yergin spoke.  He is the author of the Pulitzer-prize-winning book The Prize, a history of the global prusuit of oil, money and power — a great read. More recently Yergin published his follow-up, The Quest: Energy, Security, and the Remaking of the Modern World, updating the history of global energy production and demand from the first Gulf War to the present.

Some tidbits from Yergin’s talk:  politically, the biggest risk to the industry is the opposition to hydraulic fracturing — not a big issue in Texas, but a huge issue in eastern states and California — and the pressure for increased federal regulation of drilling.  The biggest practical challenges to the industry in the US are dealing safely with wastewater from oil and gas operations, and, in some parts of the US, the industry demand for fresh water for fracing. Once again, peak-oil predictors have been proven wrong, by the triumph of technology.  Texas has long been a leader in the industry not only because of its abundance of natural resources but also because of private ownership of oil and gas and the development of the legal theories and framework for the industry by the Texas bar and courts in the 20th century. 

To see Yergin’s “world energy timeline, click here.

I highly recommend Yergin’s books – hugely informative and very readable.

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