Oil and Gas Lawyer Blog

Published on: March 22, 2018

The Kildays’ Adventure in Cambodia

Although this has nothing to do with oil and gas, I’d like to share a great story about one of my partners, Doug Kilday. Doug is one of Graves Dougherty’s senior litigators. He and his family are also active members of Covenant Presbyterian Church in Austin. In 2017, the Kildays decided to combine their professional skills and their call to service and ministry by spending a year in Cambodia.

Doug and his wife Thais worked for International Justice Mission (IJM) (https://www.ijm.org/), the largest international anti-slavery organization in the world, working to end all forms of human trafficking, which currently victimizes more than 40 million people across the globe. IJM works to rescue victims, restrain and prosecute criminals, and restore survivors. The Kildays worked in IJM’s Phnom Penh office with local IJM employees. Doug’s job was to assist in prosecuting cases against traffickers in slave labor. Thais created systems to help the office manage their many cases. During their year in Phnom Phen Doug and the team conducted IJM’s first labor trafficking trial in Cambodia. Over the course of the year Doug helped conduct eight trials resulting in eighteen convictions. Doug: “There are more people in slavery today than at any other time in history. It is a 150 billion-dollar per year industry.”

Doug and Thais’ three children, Naeda (15), Lincoln (12) and David (9), attended Hope International School, which welcomed kids from thirty countries.

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Published on: March 13, 2018

Challenge to Devon Allocation Well

By John McFarland

Our firm filed suit last week to challenge Devon Energy Production Company’s permit for an “allocation well” in Ward County. Monroe Properties, Inc., et al. v. Railroad Commission of Texas, Cause No. D-1-GN-18-001111, 53rd District Court, Travis County. A copy of the petition may be viewed here. Monroe v. RRC

Devon’s proposed well is called the NI Helped 120 6H Well. (The odd name comes from an old TV commercial in which the line “‘n I helped!” appears.) The permit and plats for the well can be viewed here. N I Helped 120 6H Permit and Plat

Our firm filed a similar suit a few years ago on behalf of the Klotzman family challenging an allocation well permitted by EOG. EOG and the Klotzmans settled their dispute shortly after they appealed the RRC’s grant of EOG’s permit. For my discussions of the Klotzman case, search for “Klotzman” in this site’s search engine.

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Published on: March 5, 2018

Has the Oil Market Fundamentally Changed?

By John McFarland

An article in the Harvard Business Review, Oil’s Boom-and-Bust Cycle May Be Over. Here’s Why, provides an excellent overview of how the global oil market has been changed fundamentally by development of shale oil resources. Excerpts:

U.S. shale producers “now represent half of U.S. oil production, up from a mere 10% just seven years ago in 2011. In fact, 2018 may mark the first year shale producers will be able to fund future expansions of drilling programs through their own cash flow.”
” Oil companies will need to develop both new conventional and unconventional crude oil resources to keep up with current demand for roughly one million more barrels of oil every year in addition to replacing the approximately four million barrels lost annually as reservoirs are naturally depleted. In total, we estimate that the oil and gas industry will have to replace about 40% of today’s oil production over the next seven to nine years.”

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Published on: February 26, 2018

Liquidated Damages and Penalties

By John McFarland

Lawyers for royalty owners have filed multiple suits against Chesapeake Energy in Dimmit County seeking damages for breach of Chesapeake’s leases. These cases were consolidated for discovery and case-management purposes into a single matter, In re: Chesapeake Eagle Ford Royalty Litigation, Cause No. 2016CI22098, in the 224th District Court in San Antonio.

In addition to claims for underpayment of royalties, the plaintiffs in the Dimmit County cases allege that Chesapeake has breached clauses in the leases requiring the lessee to protect the lease against drainage from adjacent wells – sometimes called an express offset clause. Chesapeake has filed a motion for summary judgment arguing that these clauses are unenforceable because they impose a “penalty.”

One of the implied covenants in all oil and gas leases is the covenant to protect the lease against drainage from wells on adjacent tracts. The implied covenant requires the lessee to drill an “offset well” to the draining well if a reasonable and prudent operator would do so. Damages for breach of the implied covenant are the value of the royalty lost to the lessor, based on the amount of drainage that would have been prevented by the drilling of the offset well. Liability and damages for breach of the implied covenant are difficult to prove, so lessors have come up with an alternative – the express offset clause.

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Published on: February 20, 2018

Production Sharing Agreements

By John McFarland

A client recently asked me whether he should sign a production sharing agreement. I replied that this is not an easy question to answer.

First, the nomenclature. These terms are not defined anywhere and their usage is not always consistent, but here’s what I mean when I use these terms:

Allocation Well. A horizontal well drilled across two or more lease lines without creating a pooled unit including the leases. Because no provision of the leases dictates how production will be shared among the leases, production must be “allocated” among the leases.

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Published on: February 15, 2018

Retained Acreage Clauses

By John McFarland

I recently ran across an excellent article explaining the relationship between retained acreage clauses in oil and gas leases and density and proration rules promulgated by the Texas Railroad Commission: “Fun New Ways for Density and Proration Rules to Bust Your Lease: Retained Acreage Clauses and ‘Governmental Authority’ Language in the Wake of Three Recent Texas Cases,” by Brandon Durrett, of Dykema Cox Smith. You can view it here: 140_Durrett – Fun New Ways Brandon summarizes the history of case law construing lease language that adopts RRC spacing rules as the basis for limiting pooled units and designation of acreage that can be held under an oil and gas lease.

At the time of Brandon’s article the Texas Supreme Court had denied petitions in two cases dealing with retained acreage clauses, Endeavor Energy Resources v. Discovery Operating and XOG Operating v. Chesapeake. Since then, the Supreme Court changed its mind and agreed to hear the cases and they were recently argued.

I have previously written that it is a mistake to adopt RRC field rules as the basis for retained acreage clauses. These two recent cases are Exhibit A for that argument.

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Published on: February 5, 2018

The Treaty of Guadalupe Hidalgo

By John McFarland

On February 2, 1848, the United States and Mexico signed the Treaty of Guadalupe Hidalgo, ending the Mexican-American War. I’ve been reading the biography of Stonewall Jackson; he and many of the generals in the Civil War first experienced combat in that war. As part of the treaty Mexico ceded the portion of Texas between the Nueces and Rio Grande Rivers, and Texas and the U.S. recognized the validity of titles to land granted by Mexico and Spain in this area, known as the Nueces Strip.

Of course the treaty didn’t settle matters in the Nueces Strip. In 1850 a movement arose to establish a Rio Grande territory separate from Texas. Its leaders called for a convention to form a provisional government and a petition to Congress to recognize the area as a separate territory. Part of the reason for the movement was fear that Texas wouldn’t recognize their land titles.

In response, on February 22, 1850, the Texas Legislature passed a law establishing a commission to investigate and recommend for confirmation title claims emanating from Spanish and Mexican land grants. Known as the Bourland Commission, it consisted of two commissioners, William Bourland and James Miller, and Robert Jones, a well-known lawyer and judge, to serve as the commission’s attorney. The commissioners gathered evidence, including documents, affidavits and testimony, and prepared an abstract on each claim and a recommendation as to whether the claim should be confirmed or rejected. The legislature then acted to confirm or deny applications for recognition of the land titles.

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Published on: January 30, 2018

Hooks v. Samson – The Last Chapter

By John McFarland

The Texas Supreme Court yesterday denied Samson Exploration’s petition for review, ending a long-fought fraud case against Samson that began in 2007. The case was before the Court for the second time; in its first opinion in 2015 the Supreme Court reversed a court of appeals’ judgment throwing out the Hooks’ $21 million judgment against Samson and remanded to the court of appeals for further proceedings. In 2016 the court of appeals affirmed all but $2.6 million of the judgment, leaving in place a judgment for $17.5 million plus interest.

The Hooks claimed damages resulting from Samson’s fraudulent misrepresentation of the location of a well it drilled adjacent to the Hooks’ property. The Houston Court of Appeals’ first opinion in the case threw out the judgment because the Hooks’ claim was barred by limitations. But one Justice on the court made clear that he was joining the majority only because he was bound to do so by the Supreme Court’s opinion in BP v. Marshall:

In that case, the Texas Supreme Court makes clear that no lies on the part of a lessee, however self-serving and egregious, are sufficient to toll limitations, as long as it is technically possible for the lessor to have discovered the lie by resort to the Railroad Commission records. This burden the Court imposes upon lessors is severe. It is now a lessor’s duty to presume that any statement made by its lessee is false and to ransack the esoteric and oft-changing records at the Railroad Commission to discover the truth or falsity of its lessee’s statements. If, as is often the case, these records are technical in nature and require expert review to ferret out the truth, it is the lessor’s job to hire experts out of its own pocket to perform such a review. If a lessor fails to take these steps, then it will have failed in exercising reasonable diligence to protect its mineral interests and, if the lessee’s fraud is successful for longer than the limitations period, the lessor’s claims will be barred by limitations.

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Published on: January 22, 2018

Pecos County is Center of Solar Power Boom

By John McFarland

174 Power Global Corp., a subsidiary of South Korea’s Hanwha Energy, held its groundbreaking last week for the largest solar power project in Texas: a 236-MW plant to be built in Pecos County. It will sell its power – enough to power more than 50,000 homes – to Austin Energy, Austin’s municipally owned power provider.

Other Texas solar projects:

NRG’s Buckthorn Solar Farm, 200 MW in Pecos County, to supply the City of Georgetown, the largest municipality in the country powered solely by renewable sources.

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