Oil and Gas Lawyer Blog

Published on: February 22, 2016

Denbury Case Returns to Texas Supreme Court

Texas Rice Land Partners v. Denbury is back before the Texas Supreme Court. The case that caused such controversy when originally decided by that court in 2012, involves when a pipeline company can exercise the right of eminent domain to condemn pipeline easements.

Denbury decided to build a pipeline to carry carbon dioxide from Mississippi to the Hastings Field in South Texas, to inject in the field for tertiary recovery. Denbury sought an easement across land owned by Texas Rice Land Partners, but Texas Rice refused. Denbury sought to condemn an easement across the property, but Texas Rice claimed that Denbury did not have authority to condemn an easement. In its first decision in the case, 363 S.W.3d 192 (Tex. 2012), the Texas Supreme Court held that Texas Rice had raised a fact issue as to whether Denbury had authority to condemn, and it remanded the case to the trial court for further proceedings.

Prior to the Denbury decision, pipeline companies routinely asserted the right to condemn by filing a form with the Texas Railroad Commission, form T-4, checking a box to say that the owner of the pipeline to be constructed elected to be a “common carrier” pipeline. A “common carrier” is a pipeline that holds itself out to transport oil, gas, or in Denbury’s case CO2, for others for hire. In the Denbury decision, the Court said that filing this form was not enough to grant condemnation powers:

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Published on: February 16, 2016

Oklahoma Shakin’

By John McFarland

On Saturday, Oklahoma experienced the third-largest earthquake on record in the state, a 5.1-magnitude quake in northwest Oklahoma. It was felt across Arkansas, Iowa, Kansas, Missouri, Nebraska, New Mexico and Texas, and was followed by 10 smaller quakes ranging from 2.5 to 3.9. In response, the Oklahoma Corporation Commission announced that it would implement a regional plan to address earthquakes in the state, which are linked to the large increase in disposal of produced water. A spokesman for the Commission said that “the plan will involve a large-scale regional reduction in oil and gas wastewater disposal for an approximately 5,000 square mile area in western Oklahoma.” The plan is to be released today. A big loser in the Commission’s plan will likely be Sandridge Energy, a company that has invested heavily in production activities that require disposal of huge volumes of produced water in Oklahoma.

Earthquakes have also been linked to wastewater disposal operations in North Texas, and the Texas legislature last year funded a study now being conducted under the supervision of the University of Texas Bureau of Economic Geology to investigate the causal link between increased seismic activity and wastewater disposal in North Texas. Although the Texas Railroad Commission hired its own seismologist last year, the RRC has so far refused to admit any connection between quakes and disposal operations in Texas. After a study led by scientists at Southern Methodist University linked quakes near Azle, Texas to two disposal wells nearby, the RRC called two “show cause” hearings to require the companies operating those wells to show cause why their disposal operations should not be halted or curtailed; after those hearings, the RRC held that the companies had proven that there was no causal link between the disposal wells and the earthquakes, despite the SMU study.

At a recent forum of Republican candidates for the open RRC seat, no candidate was willing to admit any causal link between recent quakes in the DFW region and increased wastewater disposal activities in that area.

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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: February 9, 2016

Republican RRC Candidates Forum at Texas Tribune

By John McFarland

Republican candidates for the open seat on the Texas Railroad Commission were interviewed by Evan Smith of the Texas Tribune in an open forum yesterday. They were asked about global warming, earthquakes, the EPA, House Bill 40 and municipal regulation of drilling, Sunset Commission review of the Commission in the upcoming legislative session, and the role of the Commission in both regulating and promoting oil and gas development in the state. You can watch the forum here. The Tribune has apparently decided not to hold a similar forum for the Democratic candidates running for the same seat.

My take:

With two exceptions, the candidates refused to admit that human activity contributes to global warming, although they did appear to admit that global warming is occurring.

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Published on: February 8, 2016

Supreme Court Decides Hysaw v. Dawkins

By John McFarland

On January 29, the Texas Supreme Court issued its opinion in Hysaw v. Dawkins, a unanimous decision with opinion by Justice Guzman. Our firm represents one group of the plaintiffs in the case, which concerns construction of Ethel Hysaw’s will.

Ethel Hysaw had three children: Dorothy, Howard and Inez. Her will, executed in 1947, divided her lands in Karnes County among her three children. She gave one tract to each child. But she divided the royalties on oil and gas differently, and the dispute in the case was over how the will disposed of her royalty interest in the three tracts. The descendants of Dorothy and Howard argued that Ethel’s will divided all oil and gas royalties equally among Dorothy, Howard and Inez. The descendants of Inez argued that Ethel’s will divided a 1/8th royalty equally among her children, but left all other royalties to the child who got the surface of the property. Wells producing from the Eagle Ford shale were drilled on the lands willed to Inez, and the lease signed by Inez’s descendants provides for 22.5% royalty. Inez’s heirs argued that Dorothy and Howard’s descendants each should receive 1/3 of 1/8th royalty, or 4.1666%, from those wells, and that they should receive the rest, .141666%. Dorothy and Howard’s descendants argued that each family should receive 1/3 of the 22.5% royalty, or 7.5% each.

Ethel’s will provided that

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Published on: February 1, 2016

Texas Supreme Court Denies Motion for Rehearing in Chesapeake v. Hyder

By John McFarland

Last week the Texas Supreme Court denied Chesapeake’s motion for rehearing in Chesapeake v. Hyder. The court originally affirmed the lower courts’ opinions in favor of the Hyders, with four justices dissenting. On rehearing, the court’s alignment did not change, but Justice Hecht issued a new opinion for the majority, and Justice Brown issued a new dissenting opinion, joined by Justices Willett, Guzman and Lehrmann.

These new opinions end a long fight between Chesapeake and the Hyders over the deductability of post-production costs from their gas royalties in the Barnett Shale area. Although the leases contain strong language against deduction of post-production costs, Chesapeake argued that, under the precedent of the prior Supreme Court decision of Heritage Resources v. NationsBank, 929 S.W.2d 118 (Tex. 1996), it could deduct post-production costs. Chesapeake lost in the trial court and the court of appeals. The Supreme Court granted Chesapeake’s petition for review but affirmed the decisions below, split 5 to 4. With the denial of Chesapeake’s motion for rehearing, that decision is now final.

The Hyders’ lease allows Chesapeake to drill horizontal wells from surface locations on the Hyders’ property which produce from adjacent lands — in other words, to use the Hyders’ land to produce oil and gas from adjacent properties. As consideration for that right, the Hyder lease grants the Hyders a royalty interest in production from those wells — an “overriding royalty,” carved out of Chesapeake’s working interest in the leases covering those adjacent lands. The Hyder lease provides that the Hyders are granted “a perpetual, cost-free (except only its portion of production taxes) overriding royalty of five percent of gross production obtained” from such wells. The argument was over the meaning of that language. Chesapeake argued that “cost-free” meant free of production costs; the Hyders argued that “cost-free” means fee of production and post-production costs.

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Published on: January 26, 2016

RRC Public GIS Viewer

By John McFarland

The Texas Railroad Commission website includes a tool it calls the Public GIS Viewer, that all mineral owners should become familiar with. It can be found at http://wwwgisp.rrc.state.tx.us/GISViewer2/, and it looks like this (click to enlarge):

The RRC website also has a page showing you how to use the viewer, found here.

You can locate wells and permits, and find permit plats, P-12’s, and other records in the permit file. Spend a little time playing around on the viewer to become familiar with its tools.

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Published on: January 19, 2016

Oil at $1.50 a Barrel?

By John McFarland

Flint Hills Resources, LLC, a refiner owned by Charles and David Koch, offered to pay $1.50/bbl for North Dakota Sour crude, from the Bakken shale. Flint Hills originally posted a price of -$0.50/bbl (that’s right, minus fifty cents) for the sour crude, but later said that was a mistake and corrected the posting to $1.50. There is a lack of pipeline capacity for this ultra-low quality crude.

Plains All American, another oil buyer, offered $13.25/bbl for South Texas Sour and $13.50 for Oklahoma Sour.

West Texas Intermediate futures traded as low as $28.36/bbl in New York, and Brent Crude futures settled at $28.55/bbl in London.

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Published on: January 8, 2016

Aycock v. Vantage Fort Worth Energy – Effect of Lease Ratification

By John McFarland

The Texas Supreme Court recently denied a petition for review filed by the Aycocks in their suit against Vantage Fort Worth Energy. The trial court and court of appeals both ruled against the Aycocks’ claims. The holding in the case is not surprising, but dicta in the court of appeals’ opinion may raise some eyebrows among oil and gas lawyers.

Desdemona Cattle Company owned an undivided mineral interest in 1,409 acres in Erath County. In March 2008 Desdemona leased its undivided interest to Vantage Fort Worth Energy for $750 per net mineral acre, for a total of $394,574.60. The Aycocks also owned an undivided mineral interest in the 1,409 acres, and when they learned of Desdemona’s lease to Vantage, they contacted Vantage and sought to lease their interest. Vantage never replied. No well was ever drilled, and the Desdemona lease expired in March 2011.

In May 2012, the Aycocks sued Vantage. They claimed that they had ratified the Desdemona lease and were entitled to be paid a bonus of $750 per net mineral acre for their mineral interest. The trial court denied the Aycocks’ claim. The Eastland Court of Appeals affirmed, holding that the Aycocks had no basis to assert a claim for unpaid bonus against Vantage.

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Published on: December 23, 2015

Classification of Wells Becomes a Political Issue

By John McFarland

An article by Jim Malewitz in The Texas Tribune, “As Oil Prices Plunge, Questions about Big Tax Credit,” sheds light on an arcane and technical issue not well understood even by most oil and gas lawyers – classification of wells as “oil wells” or “gas wells” by the Texas Railroad Commission. While most wells produce both oil and gas, under RRC rules a well must be either one or the other. Different rules apply depending on well classification. Why does it matter?

For one thing, oil and gas leases traditionally have allowed larger pooled units for gas wells than oil wells – allowing operators to hold more acreage with a single well. This distinction is based on the theory that gas wells drain a larger area than oil wells – probably true in most conventional reservoirs, where oil and gas migrate through the formation as wells withdraw production. Not so true for new unconventional shale formations, which have very low permeability and porosity, and where oil and gas don’t “flow” through the formation but are produced through artificially induced fractures.

But operators recently are rushing to “reclassify” wells as gas wells that were originally classified as oil wells. According to Malewitz, the RRC granted operator applications to reclassify 844 wells from oil to gas this year – nearly six times the number reclassified in 2013. And Devon Energy has asked the RRC to reclassify more than 200 of its wells from oil to gas. The reason? Tax credits. Continue reading →