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Great Permian Graphic
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The Rise of Solar Power
For a few hours on March 11, for the first time, more than half the electric power used in California came from solar power, according to the US Energy Information Administration. The wholesale price for electricity went negative. In other words, power generators had to pay wholesalers to take their electricity. Conventional power generators would prefer to pay customers to take their power rather than shut down their plants. Germany, with lots of solar and wind generation, sometimes has to pay neighboring countries to take its electricity. Lack of a viable way to store electricity still presents an obstacle for transition to renewable power sources, but clearly wind and solar have come to stay.
Solar farms are under development or in various stages of construction in West Texas, able to hook into the new transmission lines constructed originally to bring wind power from North and West Texas. A facility in Pecos County that went on line April 5 covers about 1,000 acres with 1.2 million solar panels, and took about a year to construct. Austin’s municipally owned utility Austin Energy has contracted to buy all of its output, which is capable of supplying enough electricity to serve the equivalent of 24,000 homes in the summer and 40,000 to 50,000 homes in the winter. Austin Energy aims to obtain 55 percent of its electricity from renewable energy sources and now is at 30 percent.
In Plano, Texas, a solar system is being installed at Toyoto’s new headquarters, atop four parking garages. It will consist of 20,000 solar panels covering the equivalent of ten football fields and shading the cars beneath.
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Judge Strikes Down Dimock Verdict
In March 2016, a jury awarded two families $4.2 million against Cabot Oil & Gas for contaminating their drinking water. On Friday, the judge set aside the verdict and said the case will have to be retried. The judge wrote that
(T)he weaknesses in the plaintiffs’ case and proof, coupled with serious and troubling irregularities in the testimony and presentation of the plaintiffs’ case – including repeated and regrettable missteps by counsel in the jury’s presence – combined so thoroughly to undermine faith in the jury’s verdict that it must be vacated and a new trial ordered.
The case was originally filed in 2009 by a large number of residents of the township of Dimock, Pennsylvania, alleging that Cabot was responsible for contamination of their groundwater, forcing them to truck water for drinking. The plaintiffs claimed negligence, gross negligence, private nuisance, strict liability, breach of contract, fraudulent misrepresentation, and claims under the Pennsylvania Hazardous Sites Cleanup Act. Most plaintiffs settled with Cabot before trial, but two families, the Elys and Huberts, went to trial. The judge dismissed all of their claims except nuisance and excluded any claims for mental or emotional discomfort or the cost of replacing the water. Despite these setbacks, the jury awarded them $2.4 million on their nuisance claim. Now the Elys and Huberts have to start over. A more complete report on the dispute and ruling can be found here.
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EIA Report on Energy Production and Consumption
I have said before that I love graphs, and the Energy Information Administration has nifty interactive graphs of energy production and consumption. Here is one (click on image to enlarge):
You can revise the graphs to cover any time period. For example:
Here’s another interesting one:
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Consent-to-Assign Provisions in Oil and Gas Leases
Provisions in oil and gas leases requiring the lessor’s consent to assignment of the lessee’s interest are common. A lessor may have reasonable concerns about assignment of the lease, especially if the lessor is also the owner of the surface estate of the leased premises. The lessor may have agreed to lease in part because of the reputation and financial condition of the lessee, and he or she may justifiably wish to have control over whether the lease can be assigned to a third party.
Lessees, on the other hand, dislike consent-to-assign provisions in leases. Such provisions may substantially impair the lessee’s perceived value of the leasehold estate it has paid for. Leases are bought and sold like commodities. In the Permian Basin last year, more than $25 billion of transactions took place transferring mineral leasehold interests. Those transactions are made more difficult when lessors’ consents must be obtained to close the transaction.
Before closing a deal to purchase a package of oil and gas leases, the buyer will review the terms of the leases, and included in that review will be identifying leases that require consent to assign. Typically such review will uncover consent-to-assign provisions, in which event the buyer will have to determine whether obtaining such consent will be a condition to closing the deal. In my experience, companies acquiring leases will typically divide the leases containing consent-to-assign provisions into two categories, those with “soft-consent” provisions and those with “hard-consent” provisions. A “hard-consent” provision specifies the consequences of failure to obtain consent — for example, that such a breach is grounds for cancelling the lease, or that specified liquidated damages must be paid for the breach. A “soft consent” is one that prohibits assignment without consent but does not specify a remedy for the breach. Companies may elect to acquire leases with soft-consent provisions without requiring the seller to obtain consent, based on the reasoning that the lessor will have to prove damages for the breach, that damages would be difficult to prove, and that the lessor probably will not sue for the breach. Without a specified remedy for breach in the lease, in particular a right to terminate for the breach, the reasoning is that termination of the lease for breach of the consent-to-assign provision would not be a remedy available to the lessor. The buyer will, however, require the seller to obtain consent for leases containing a hard-consent lease provision, especially if it specifies that breach of the provision would allow the lessor to terminate the lease.
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Lightning Oil v. Anadarko Set for Oral Argument in Supreme Court
Lightning Oil v. Anadarko will be argued before the Texas Supreme Court on March 21. I wrote about the court of appeals’ opinion here. The issue: whether the owner of a mineral estate has a cause of action for trespass if a horizontal well is drilled through the tract to produce from an adjacent tract. The parties’ briefs may be found here.
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Texas Supreme Court Declines to Address Injunctive Relief as Remedy to Prevent Groundwater Contamination in ExxonMobil v. Lazy R Ranch
On February 24, the Texas Supreme Court issued its opinion in ExxonMobil Corporation v. Lazy R Ranch, LP, et al., No. 15-0270. ExxonMobil v. Lazy R Ranch The 8-0 opinion was authored by Chief Justice Nathan Hecht. The case provides important reminders to landowners who have oil and gas operations on their property.
In 2008, Exxon sold its lease on the Lazy R Ranch, a 20,000-acre ranch near Monahans, where it had conducted operations for almost 60 years. The ranch owners hired an environmental engineer to investigate whether Exxon’s operations had caused contamination that should be remediated. The investigator found four sites with contamination and warned that the contamination could threaten groundwater. Exxon refused to remediate the sites, and the landowner sued.
The suit sought monetary damages for the contamination and injunctive relief to require Exxon to remediate the four contaminated sites. Exxon filed a summary judgment motion arguing that the claims were barred by limitations. The trial court granted Exxon’s motion. The 8th Court of Appeals reversed and remanded. Continue reading →
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Burlington v. Texas Crude – Another Post-Production Cost Case
The Court of Appeals in Corpus Christi issued its opinion today in Burlington Resources Oil & Gas Company LP v. Texas Crude Energy, LLC, et al. Link to the opinion is here: burlington v texas crude
This is the first case to follow Chesapeake v. Hyder, the Texas Supreme Court’s most recent case addressing deductability of post-production costs from royalty payments.
Like Hyder, the instrument construed in Burlington v. Texas Crude involved an overriding royalty interest. The language construed by the court in Burlington provided that the overriding royalty would be paid on the “amount realized” by the lessee, and said that the overriding royalty would be paid “free and clear of all development, operating, production and other costs.” The Court of Appeals concluded that the Supreme Court’s ruling in Hyder controlled its construction of the language and that Burlington had to pay the overriding royalty without deducting post-production costs.
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What Does the Country Really Think About Global Warming?
I ran across this website from the Yale Program on Climate Change Communication, an interactive map that allows one to view different perspectives about global warming across the country. Fascinating to play with. Remarkably, for instance, a large majority of the population in the Rio Grande Valley and far West Texas believe that global warming is happening and a majority there believe it is caused mostly by human activities. Likewise in most of New Mexico and Arizona. While much of the country’s opinions about global warming does appear to be split along ideological and urban/rural lines, that is not necessarily the case. The data, from 2016, shows that 53% of the country believes that global warming is caused mostly by human activities. 58% of the population is “worried about global warming.” 82% of those polled support funding research into renewable energy sources, and 75% think CO2 should be regulated as a pollutant.
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What Landowners Need to Know about Field Rules
Two recent appellate opinions illustrate why landowners and their counsel need to know the basic fundamentals of field rules and how they can affect provisions in oil and gas leases. I wrote about those cases in 2015. Both involve the interaction between field rules and lease provisions. ConocoPhillips Co. v. Vaquillas Unproven Minerals, Ltd., 2015 WL 4638272 (Tex.App.-San Antonio Aug. 5, 2015), was appealed to the Texas Supreme Court but settled before the court acted on ConocoPhillips’ petition. Endeavor Energy Resources, L.P. v. Discovery Operating, Inc., 448 S.W.3d 169 (Tex.App.-Eastland 2014), has been briefed on the merits and is awaiting the court’s decision on whether to grant review. You can read my summary of the two cases here.
The root of the issue is that oil and gas lease forms typically refer to and adopt field rules to regulate how large pooled units and earned acreage units can be. For example, a printed form oil and gas lease that has been commonly used in Texas for many years contains the following provision:
Lessee is hereby granted the right, at its option, to pool ur unitize any land covered by this lease with any other land covered by this lease, and/or with any other land, lease, or leases, as to any or all minerals or horizons, so as to establish units containing not more than 80 surface acres, plus 10% acreage tolerance; provided, however, units may be established … so as to contain not more than 640 acres plus 10% acreage tolerance, if limited to … gas, other than casinghead gas…. If larger units than any of those herein permitted, either at the time established, or after enlargement, are required under any governmental rule or order, for the drilling or operation of a well at a regular location, or for obtaining maximum allowable from any well to be drilled, drilling or already drilled any such unit may be established or enlarged to conform to the size required by such governmental order or rule.
To understand how the italicized sentence in this lease form works, one must know what governmental rules govern the size of units for drilling wells at a “regular” location, and for “obtaining maximum allowable” from a well. These regulations are included in “field rules” adopted by the Texas Railroad Commission. (Warning: this post is longer than usual, so be prepared.) Continue reading →