Oil and Gas Lawyer Blog

Published on: May 22, 2019

Texas Railroad Commission Sued to Force Regulation of Pipeline Route

Hays County and the City of Kyle, and private landowners, have sued Kinder Morgan, the Texas Railroad Commission and its commissioners over the route for Kinder Morgan’s Permian Highway Pipeline, a gas pipeline 42 inches in diameter, set to cross through the Texas hill country and Hays County. The suit claims that the RRC has failed to establish regulations that implement the Legislature’s requirement, imposed by Section 121.052 of the Texas Utilities Code, to “establish fair and equitable rules for the full control and supervision of the pipelines … in all their relations to the public” and to “prescribe and enforce rules for the government and control of pipelines … in respect to transporting … facilities.” The petition explains that, to obtain the right to condemn a pipeline easement, the pipeline company only needs to file a form T-4 with the RRC. The Commission “conducts no investigation, evaluates no alternative routes, entertains no adversarial inquiry, provides no notice, allows no hearing, and considers no evidence.” “The pipeline’s chosen route crosses some of the most sensitive environmental features in Central Texas and the Texas Hill Country, including the recharge zones of the Edwards and Edwards-Trinity Aquifers (which provide the drinking water supply for towns and cities such as Fredericksburg and Blanco) and endangered species habitat.”

The suit asks the court to find that the RRC has unconstitutionally delegated to Kinder Morgan the legislative and constitutional requirement that a government entity review and determine the necessity for the pipeline route, and enjoining Kinder Morgan from proceeding with condemnation until that has been accomplished.

Plaintiffs are represented by Richards Rodriguez & Skeith, LLP and Renea Hicks. The suit is No. D-1-GN-19-002161, in the 345, District Court of Travis County. A copy of the petition can be seen here: 01-OrigPet-Sansom

Published on: May 9, 2019

Increased Gas Flaring in the Permian

By John McFarland

Rystad Energy has released an analysis of gas flaring in the Permian Basin. Operators flared 533 million cubic feed per day during the fourth quarter of 2018 – more than some states use in a year. Capture The flared volumes represented an average of less than 5% of all gas produced. But results varied greatly by operator. (click to enlarge)

According to a report by the Environmental Integrity Project, a result of the increased volumes of flared gas and emissions, excessive emissions of sulfure dioxide and hydrogen sulfide have increased pollution levels in Ector County above standards set by the EPA.

Published on: May 6, 2019

Players in the Permian

By John McFarland

Below is a Drillinginfo map of players in the Permian. Also see Forbes article here. Chevron’s position is derived from Texas Pacific Land Trust‘s spinoff of minerals under TPLT’s lands, subsequently acquired by Texas. It owns fee minerals in those lands. Click on image to enlarge. As Forbes says, ripe for consolidation.

Published on: April 29, 2019

Strickhausen v. Petrohawk – Ratification of Pooled Units

By John McFarland

The San Antonio Court of Appeals handed down its opinion last week in Strickhausen v. Petrohawk Operating Company, No. 04-18-00636-CV. The issue: Did Ms. Strickhausen ratify a pooled unit not authorized by her lease, or is she estopped from contesting the validity of the unit, because she accepted royalty checks calculated on her unit interest in production? The trial court held that she did; the Court of Appeals reversed and remanded, holding that there were issues of fact as to whether she intended to ratify or was estopped.

The issues relate to Petrohawk’s WK Unit 4 1H Well in La Salle County:

Ms. Strickhausen owns a 1/2 mineral interest in Tract 3 shown above. Her lease prohibits pooling without her consent. Without obtaining her consent, Petrohawk filed a pooled unit designation including her lease and drilled the well. It then asked Ms. Strickhausen to ratify the unit. Settlement negotiations were unsuccessful. Petrohawk sent Ms. Strickhusen checks for her share of unit production, which she cashed, but her attorney continued to tell Petrohawk that she objected to the pooled unit.

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Published on: April 18, 2019

Texas Outfitters v. Nicholson and the Duty of the Holder of the Executive Right

By John McFarland

Last week the Texas Supreme Court handed down its opinion in Texas Outfitters, Limited, LLC v. Nicholson, No. 17-0509, once again addressing the duty of the holder of executive rights to minerals owned by another. The Court affirmed a judgment of $867,654.32 plus interest and costs against Texas Outfitters for breaching that duty.

Dora Jo Carter owned the surface estate of 1,082 acres of land in Frio County. She and her two children owned 50% of the minerals; the other 50% were owned by the Hindes Family. In 2002 the Carters sold the land to Texas Outfitters, owned by Frank Fackovec, for $1 million, financing a part of the purchase price. Fackovec intended to live on the ranch and operate a hunting business. The Carters sold Texas Outfitters 1/24 of the minerals along with the land, and also conveyed to Texas Outfitters the exclusive right to lease the 11/24 mineral interest retained by the Carters. Fancovec wanted the right to lease the entire 50% mineral interest to be sure his surface estate was protected if and when oil and gas development took please. This right to lease the Carters’ minerals, the executive right, became the source of the later controversy.

In June 2010 the Hindes family leased their 50% mineral interest in the ranch to El Paso Exploration for $1,750 per acre and 25% royalty. El Paso made the same offer to Fackovec, but he declined the offer, despite the Carters’ request that he accept it. The Carters and Facovec then had settlement negotiations, resulting in a tentative settlement in which (1) Texas Outfitters would convey back to the Carters the executive rights to their 11/24 mineral interest, (2) the parties would agree to as-yet unspecified restrictive covenants burdening the mineral estate for the protection of the surface estate, (3) the Carters would forgive $263,000 of the note they held from Texas Outfitters, and the parties would sign a lease to El Paso. This settlement later fell apart over failure to reach agreement on the terms of the restrictive covenants. The Carters sued Texas Outfitters and Fackovec in June 2011, alleging that he had breached his duty as holder of their executive rights by refusing to lease to El Paso. Continue reading →

Published on: April 9, 2019

The Law of Hydraulic Fracturing

By John McFarland

Paul Yale and Brooke Sizer, lawyers at Gray Reed & McGraw in Houston, published an article in the most recent Section Report of the Oil, Gas & Energy Resources Law Section of the State Bar, “ A Brief Look at the Law of Hydraulic Fracturing in Texas and Beyond.” It will be published in a future issue of The South Texas Law Review. It is an excellent overview of the development of horizontal drilling and hydraulic fracturing and the law and controversies surrounding their use. The article is balanced and fully supported by citations to resources and authorities.

The authors cover the benefits and risks of hydraulic fracturing, including reduction of foreign imports, jobs, reduced prices for consumers, water quality and usage, air quality, earthquakes, and social impacts. It gives a balanced view of the ongoing debate over whether increased use of natural gas for generation of electricity reduces greenhouse gas emissions, whether there is a connection between hydraulic fracturing and earthquakes, and adverse impacts on roads and other infrastructure.

The article also contains information on the process of hydraulic fracturing itself:

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Published on: March 25, 2019

Net Royalty Acres Defined

By John McFarland

I’ve been asked what is a “net royalty acre.”

The term “net royalty acre” is used by mineral and royalty buyers to price a mineral or royalty interest that is subject to an oil and gas lease. It is related to, but different from, a “net mineral acre.”

To illustrate, consider the following hypothetical: I own a 1/4 mineral interest in Blackacre, containing 640 acres. My mineral interest is subject to an oil and gas lease reserving 1/4 royalty. There is one producing well on the tract and there are prospects for additional drilling.

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Published on: March 18, 2019

San Antonio Court of Appeals interprets an express offset clause in an oil and gas lease

By John McFarland

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 →

Published on: March 12, 2019

Herein of mineral interests, royalty interests, working interests and overriding royalty interests

By John McFarland

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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Published on: March 4, 2019

Great post by Tiffany Dowell on Eminent Domain

By John McFarland

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.