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In Bell v. Chesapeake Energy Corporation, No. 04-18-00129-CV, the San Antonio Court of Appeals heard a permissive accelerated appeal of an issue addressed by the trial court in a multi-district litigation brought by many royalty owners in the Eagle Ford against Chesapeake, In re: Chesapeake Eagle Ford Royalty Litigation, involving multiple claims against Chesapeake for breach of the plaintiffs’ oil and gas leases. The Court issued its opinion last week. The issue addressed by the Court was the interpretation of clauses in two oil and gas leases requiring the lessee to either drill and offset well or pay compensatory royalty.

The trial court in the multi-district litigation was asked to construe offset clauses in several oil and gas leases, among them the Bell and Ward leases. Those two leases contain similar clauses regarding protection against drainage by wells drilled on adjacent leases. I will quote the Bell lease here:

In the event a well (“Adjacent Well”) producing Oil or Gas in Paying Quantities is drilled and completed after the date of this Lease on land under which Lessor does not own the quantity of minerals or royalty as under the lands covered by this Lease, and such Adjacent Well is draining the Leased Premises or is deemed draining if the adjacent Well is located within three hundred thirty (330) feet of the Leased Premises, or, when Lessee has an economic interest in said Adjacent Well and said Adjacent Well is located within four hundred sixty seven (467) feet of the Leased Premises (in the case of a Vertical Well, distance will be measured from the surface location or bottom hole location of the Adjacent Well, whichever is closer; in the case of a Horizontal Well distance will be measured from the surface location or the subsurface path of a horizontal drainbore, from its point of entry into the productive horizon to its terminus, whichever is closer), then Lessee agrees to drill such offset wells which is[sic]reasonably designed to protect the Leased Premises from drainage, or at the option of Lessee, shall pay to Lessor the Compensatory Royalties set forth below, or execute and deliver to Lessor a release in recordable form releasing acreage in an amount equivalent to the number of acres required or permitted by the Texas Railroad Commission to drill an offset well to the formation of such Adjacent Well. Lessee shall have ninety (90) days from the date of first production of such Adjacent Well within which to Commence Actual Drilling Operations of an offset well or release offsetting acreage, and thereafter, Lessee’s sole obligation shall be to pay Compensatory Royalties as set forth herein. …

In lieu of Drilling an Offset well required hereunder or releasing acreage as provided above, then Lessee shall pay to Lessor as a Compensatory Royalty an amount equal to the Royalty Share of Gross Proceeds of production from the Adjacent Well. Continue reading →

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Like most subjects, understanding oil and gas law is often a matter of knowing the terminology – WI, RI, ORRI, NPRI. These terms are often used in a confusing way and the definitions sometimes overlap. So I’m going to try to clear things up.

It all starts with the mineral estate. In Texas, the mineral estate can be separated (“severed”) from the surface estate. This can be done either by a conveyance or a reservation. I grant Blackacre to John Doe, reserving the mineral estate; or I convey the mineral estate in Blackacre to John Doe.  The mineral estate is considered an ownership interest in land, just like the surface estate. It carries with it certain rights – the right to explore for and extract the minerals under the land. To make that right effective, the owner of the mineral estate must have the right to use the surface estate – to go on the land and drill wells. So the mineral estate is called the “dominant estate,” because the surface estate is subject to the rights of the owner of the mineral estate to use the land to extract minerals.

The mineral owner may grant an oil and gas lease to an exploration company to drill wells on the land. In Texas, an oil and gas lease is a conveyance to the lessee of the mineral estate for the term of the lease, reserving a royalty interest.  An oil and gas lease severs the mineral estate into two interests – the lessee’s interest, often called the “working interest,” and the reserved royalty interest. When the lease expires, those two estates merge back together into the mineral estate.

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Tiffany Dowell, author of the Texas Agriculture Law Blog, has a great post providing resources for landowners faced with a pipeline wanting to cross their land. You can view it here. She also has a good checklist for landowners negotiating pipeline easements, which you can download here. And you can listen to her interview with eminent domain lawyer Zach Brady here.

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Last month the Environmental Defense Fund released an analysis of NOAA satellite data estimating volumes of gas flared in the Permian Basin in 2017. Its findings: operators report half of the amount of gas actually flared.

Flaring-graphic

104 Bcf of gas is enough to serve all needs of Texas’ seven largest cities – $322 million worth of gas. The State also does not collect severance tax on that gas.

Operators must obtain permits to flare gas and report volumes flared. The RRC has not denied any permits. Between 2016 and May 2018, the RRC issued more than 6,300 flaring permits in the Permian. Between 2008 and 2010, the RRC issued fewer than 600 flaring permits for all of the state.

EDF’s analysis also compared the top 15 oil producers in the Permian (click on image to enlarge):

Operator-flaring-in-Permian

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The cover story in The Economist this week is titled “Crude awakening – The truth about Big Oil and climate change.”  It comes in the wake of the introduction by a group of new Democratic Congress members of a proposed “Green New Deal” to tackle climate change.

When I began my career some forty years ago the effect of carbon emissions on the earth’s climate was not a matter of concern. The focus was on cleaning up our water and air – under the Clean Water Act and the Clean Air Act. And those acts have had a big impact on our environment. Although burning fossil fuels contributed to air pollution and pollution from fossil fuels has been greatly reduced, the emissions regulated and reduced did not include carbon dioxide, which was not considered harmful to the environment. Remember catalytic converters? They have greatly reduced emissions of harmful chemicals, but not CO2.

The world has now come to the realization that climate change is real. A poll by Yale University late last year found that 73% of Americans agree. Extreme climate events in recent years have contributed to that change of opinion.

Yet the world’s dependence on fossil fuels is not receding. World demand for oil continues to grow by about 1-2% a year. CO2 emissions in the US, the second-largest polluter on the planet, are now rising again. ExxonMobil  says that global oil and gas demand will increase by 13% by 2030. It intends to spend more than $200 billion over the next seven years to develop its reserves. Continue reading →

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The big guys are moving into the Permian Basin.

Chevron, which owns substantial fee minerals in the Permian, saw its profits jump 19 percent in the fourth quarter, increasing its oil production 71 percent in the Permian to 310,000 bbls/day.  Chevron’s completions in 2018:

Chevron-Completions
In its DR State Wise Unit in Culberson County, Chevron has completed or is drilling seven two-mile laterals.

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Tiffany Dowell, author of the Texas Agriculture Law Blog at Texas A&M, gave me permission to re-publish her excellent article on what landowners should consider when a pipeline company asks permission to survey. Here is her article. The only thing I would add is that the landowner should find out the tentative proposed route, and if it is not acceptable, try to negotiate an alternate route before the surveyors begin their work.

Thanks to Tiffany. You might want to subscribe to her blog.

Question:  If a company with eminent domain power has contacted me about obtaining an easement across my property and now wants access to survey, can I keep them off of my land?

survey-1-e1545162613218-768x1024

Answer:  No.

In Texas, courts have held that by granting condemning entities the right to condemn land, this includes the right to enter onto the property to conduct surveys to select lands to be acquired.  Of course, this means that surveys may be conducted prior to the property actually being condemned. “Ancillary to the power of eminent domain is the authority to enter upon the land to make a preliminary survey.”  I.P. Farms v. Exxon Pipeline Co., 646 S.W.2d 544 (Tex. Ct. App. – Houston (1st Dist.) 1982).  Courts have issued injunctions against landowners attempting to interfere with this right.

There is a line of court cases that limit this right to visual inspections and lineal surveys only, refusing to allow more invasive procedures like core drilling or subsurface soil testing.  See Coastal Marine Serv. v. City of Port Neches, 11 S.W.3d 509 (Tex. Ct. App. – Beaumont 2000).

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I ran across an excellent article, “A Primer on the Geopolitics of Oil,” by Anand Toprani, assistant professor of Strategy & Policy at the U.S. Naval War College. He has a book in the works, Oil and the Great Powers: Britain and Germany, 1914-1945.

Oil has been a commodity different from all others in world politics since it became the principal source of energy in the early 20th century. And it will remain so as long as the world is dependent on hydrocarbons for its energy needs. Toprani’s article reminds us how oil supply, demand and price affect our relations with other nations as well as our environment and our personal lives.

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The Energy Information Administration appears to be at work during the government shutdown. Yesterday it released its regularly scheduled weekly reports.  Among them:

Crude-Futures-EIAYou can sign up for an email from EIA to receive a link to all of its reports at https://www.eia.gov/tools/emailupdates/?src=email .

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Morningstar has published a report analyzing oil pipeline and refining capacities along the Texas Gulf Coast – “Pipeline Plans Suggest Tsunami of Crude Exports – Midstream companies looking to double Gulf Coast shipments.”  pipeline-plans-suggest-tsunami-of-crude-exports-FINAL  If all planned pipelines are built and run to capacity, new lines “would carry as much as 7.7 mmb/d of new crude to the Gulf Coast, the majority of which would be light shale crude looking for a home in the export market.”

MorningstarThe result:  a fourfold increase in crude exports to more than 8 mmb/d after 2021.  Morningstar concludes:

Fortunately, current production forecasts don’t match the volume of pipeline projects, and crude growth over the next three years is likely to be closer to 3 mmb/d. The mismatch suggests an infrastructure overbuild is underway in the short term, and we expect consolidation of many of these projects before they’re built. Yet the history of shale expansion has taught us that the most optimistic forecasts frequently appear in the rearview mirror.

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Contact Information
John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
401 Congress Avenue, Suite 2700
Austin, Texas 78701
Phone: 512-480-5618
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