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Published on: July 18, 2016

Debate over Allocation Wells Continues

Three recent articles have intensified the debate over whether allocation wells are authorized by a typical oil and gas lease. Two of the articles appear in the most recent edition of the Section Report of the Oil, Gas & Energy Resources Law Section of the State Bar. The first, written by Ernest E. Smith, makes clear in its title the position of the author: Applying Familiar Concepts to New Technology: Under the Traditional Oil and Gas Lease, a Lessee Does not Need Pooling Authority to Drill a Horizontal Well that Crosses Lease Lines. View here: Applying Familiar Concepts A later version of his article will be published in the Texas Journal of Oil, Gas and Energy Law at the University of Texas School of Law. The second article is by Ronald D. Nickum, an oil and gas attorney in Amarillo, titled Non Consent Allocation – Will it Survive Judicial Scrutiny. View here: Non Consent Allocation Mr. Nickum’s article is more skeptical about the legality of allocation wells.

Professor Smith’s article is written in rebuttal to an article to be published in the Baylor Law Review written by Professor Bret Wells, Allocation Wells, Unauthorized Pooling, and the Lessor’s Remedies, which can be viewed here. Professor Wells argues that allocation wells are a form of pooling not authorized by a typical oil and gas lease and give rise to claims for trespass and punitive damages.

The Texas Railroad Commission ruled in the Klotzman case that it had the authority to issue permits to drill horizontal wells that cross multiple lease lines without pooling those leases together. Although the Commission has never adopted a rule defining or authorizing permits for such wells, an “allocation well” has generally come to be understood as a well that crosses one or more lease lines and that produces from more than one lease without pooling those leases and without any agreement with the royalty owners as to how production will be allocated among the leases crossed by the well. Because of the uncertainty as to the legality of allocation wells, exploration companies sought legislation in the last legislative session expressly authorizing such wells. That bill, HB 1552, died in committee. It is expected that similar legislation will be filed in the upcoming session.

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Published on: April 18, 2016

GDHM 3rd Annual Landowners’ Seminar – Register Today!

By John McFarland

Our firm’s third annual seminar for land and mineral owners is May 6th at the Stephen F Austin Intercontinental Hotel from 9am to 6pm.

As a reader of my blog, if you use the coupon code BLOG, you will save $5 off the registration fee.

Topics covered throughout the day will include:

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Published on: April 4, 2016

$4.2 MM Verdict Against Cabot in Dimock, PA

By John McFarland

The township of Dimock, Pennsylvania has been the focus of controversy over the environmental impact of hydraulic fracturing. Residents of Dimock rely on groundwater, and in 2009 they were forced to obtain alternate sources because of contamination of their groundwater that they blamed on wells drilled by Cabot. Cabot had drilled and fracked 62 wells in an nine-square-mile area around Dimock. Cabot denied, and has continued to deny, that its wells were responsible for the contamination. Dimock featured prominently in the anti-fracking “documentary” Gasland.

Last month, a case filed by Dimock residents against Cabot, Ely v. Cabot Oil & Gas Corporation, filed in 2009, finally went to trial. A large number of residents originally joined the suit, but most settled with Dimock in 2012. Cabot, represented by Norton Fulbright, vigorously fought the case with pretrial motions. The plaintiffs originally had claims for negligence, gross negligence, private nuisance, strict liability, breach of contract, fraudulent misrepresentation, and claims under the Pennsylvania Hazardous Sites Cleanup Act. By the time of trial, Cabot had convinced the judge to dismiss all of plaintiffs’ claims except negligence and private nuisance. Two families remained as plaintiffs, the Elys and the Huberts. They still live in Dimock and still truck their drinking water to their homes. The Elys and Huberts, represented by two local attorneys, Leslie Lewis and Elisabeth Radow. Their case was financed by crowd-funding and the Energy Justice Network.

During trial, the judge dismissed the plaintiffs’ negligence claim and held that potential damages in the sole remaining claim for private nuisance should be limited to “inconvenience and discomfort” cause by the nuisance, excluding any claim for mental and emotional discomfort or the cost of replacing the water. The judge also ruled that plaintiffs could not discuss before the jury consent decrees between Cabot and the Pennsylvania Department of Environmental Protection relating to the Dimock groundwater contamination.

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Published on: February 10, 2016

Bloomberg Estimates of Breakeven Prices in Shale Plays

By John McFarland

Bloomberg’s estimates of the oil price necessary to recover drilling, completion and operating costs in various shale plays (click to enlarge):

The winners: DeWitt County in the Eagle Ford Shale, $23/bbl, the Wolfcamp in Reeves County, $24/bbl, and the Bone Spring in Ward County, $25/bbl. Except for DeWitt County, all breakeven prices below $30/bbl are in the Permian Basin.

Published on: December 16, 2015

Texas Railroad Commission Candidates

By John McFarland

The filing deadline is now past, and eight Republicans, three Democrats and a Libertarian have said they will run for a seat on the Texas Railroad Commission to replace David Porter, who unexpectedly decided not to run for re-election. Here’s the lineup:

Gary Gates, Republican. Gates is a wealthy real estate developer and rancher from Rosenberg and a social conservative. He spent more than $1 million of his own money in an unsuccessful effort to take Comptroller Glenn Hegar’s former senate seat, losing to Lois Kolkhors in a special election – the fourth time he failed to win an election for the Texas legislature.
John Greytok, Republican. He’s a lawyer and registered lobbyist and an early supporter of Ted Cruz. He wants the RRC to lead the charge against the Obama administration’s environmental policies.

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Published on: November 9, 2015

More Interesting Data from EIA

By John McFarland

These two graphics from the Energy Information Administration (click to enlarge):

The first shows increased re-fracking of existing wells, and reduction in time needed to drill a horizontal well:

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The second shows how production has held up, despite decreased drilling activity:

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Published on: September 14, 2015

The Power to Regulate Pollution

By John McFarland

During my vacation I read The Quartet: Orchestrating the Second American Revolution, 1783-1789, by Joseph J. Ellis. Ellis tells the story of the writing and passage of the US Constitution, orchestrated, he asserts, by George Washington, Alexander Hamilton, John Jay and James Madison (the quartet).

Before the adoption of the Constitution, the thirteen states were essentially independent countries who had won their independence but failed to found a new country. The “United States” were always referred to in the plural. The genius of the quartet, says Ellis, was the compromise they crafted in the Constitution in the debate over federal vs. state power. States were understandably reluctant to relinquish their sovereignty, but the quartet knew that the new nation, to survive, had to have federal power – to levy taxes, provide for common defense, and regulate commerce among the states. The Constitution enumerates the powers of the federal government. The Bill of Rights – the first ten amendments to the Constitution, passed simultaneously — enumerates the rights retained by the states and the people, limitations on federal power. The tenth amendment provides: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The contours of this compromise are still being debated in courts across the land. “States rights” were fighting words in the civil war, and today are the battle cry of states seeking to curb the federal government’s regulation of health care, water quality, voting rights, and abortion.

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Published on: August 25, 2015

States’ Reliance on Severance Tax and Oil Price Decline

By John McFarland

Last week, the US Energy Information Administration provided a summary of states’ severance tax revenue (click on image below to enlarge):

With the precipitous decline in oil prices, Alaska, North Dakota and Wyoming will be hurting.

According to EIA, Texas

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Published on: April 15, 2015

1,500 Uncompleted Wells in Eagle Ford Shale?

By John McFarland

FuelFix reports that companies have drilled but not completed wells, in effect storing the reserves in the ground until oil prices rise and completion costs decline. FuelFix says that IHS Energy counts 3,000 uncompleted wells in the US, including 1,500 uncompleted wells in the Eagle Ford alone. It says that Apache, Anadarko and Cabot have 845 uncompleted wells in Texas, with a potential to produce 373,000 barrels of oil and 528 million cubic feet of gas a day.

Published on: April 7, 2015

House Bill 1552 and Allocation Wells

By John McFarland

Yesterday the Energy Resources Committee of the Texas House of Representatives heard testimony on HB 1552, introduced by one of its members, Rep. Tom Craddick. The bill deals with “allocation wells,” of which I have written before. An allocation well is a horizontal well that crosses over two or more tracts without combining those tracts into a pooled unit or obtaining agreement from the royalty owners in the tracts on how production from the well will be allocated among the tracts.

Although the Texas Railroad Commission issues permits for allocation wells, there has been a lot of speculation about whether leases grant the authority to drill such wells. At the hearing, representatives of operators spoke in favor of the bill, and mineral owners spoke in opposition. I spoke in opposition on behalf of Texas Land and Mineral Owners Association.

A substitute for the original filed bill was introduced at the hearing. HB 1552 substitute

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