Oil and Gas Lawyer Blog

Published on: February 16, 2015

Texas Supreme Court Rules for Mineral Owner in Hooks v. Samson

On January 30, the Supreme Court issued its opinion in Hooks v. Samson Lone Star, Limited Partnership, No. 12-0920. In doing so, it kept alive a $21 million verdict against Samson and limited its prior holdings barring suits by mineral owners based on the statute of limitations.

The principal claim the Hooks made against Samson alleged breach of a lease provision intended to protect the Hooks’ lease against drainage from wells on adjacent lands. The lease provided that, if a gas well is drilled within 1,320 feet of the lease, Samson must either drill an offset well, release sufficient acreage for an offset well to be drilled, or pay “compensatory royalty” – the amount of royalty the Hooks would be entitled to if the well on adjacent lands had been drilled on their lease.

In 2000, Samson permitted a well on lands adjacent to the Hooks lease, and it approached the Hooks asking permission to pool portions of the Hooks land with that well. Mr. Hooks asked Samson how close the well would be to the Hooks lease boundary. Samson sent him a plat showing that the location of the well would be 1,400 feet from the lease. Based on this, the Hooks agreed to the pooling.

In 2007, in connection with related litigation, the Hooks discovered that the adjacent well in fact was located within 1,320 feet of the Hooks lease, and the Hooks sued Samson for misrepresenting the well’s location and inducing them to agree to the pooling. They sought damages under the lease compensatory royalty clause – the royalty they would have received had the offending well been located on the Hooks’ lease. They argued that the four-year statute of limitations applicable to their claim should not apply because Samson had fraudulently induced them to believe that the well was 1,400 feet from their lease. The jury found that the Hooks should not have discovered the true facts until less than four years before bringing suit. It awarded more than $20 million damages to the Hooks. Continue reading →

Published on: February 2, 2015

Texas Railroad Commission Adopts Rules Aimed at Earthquakes

By John McFarland

Earthquakes linked to oil and gas activity are in the news. A recent study in Ohio linked a rash of small earthquakes to fracing of wells in the area. Earthquakes in Oklahoma have increased tenfold since 2009. A swarm of small earthquakes hit the Dallas-Fort Worth area recently. The US Geological Survey is raising its evaluation of earthquake hazard risk in Texas as a result.

In Texas, the spate of small earthquakes is tentatively tied to injection wells rather than fracing of new wells. The theory is that the injected water lubricates lithologic layers, allowing them to slip and causing quakes.

The Environmental Protection Agency estimates that there are 144,000 Class II injection wells in the US. The RRC has permitted more than 50,000 Class II injection wells in Texas since the 1930’s. These injection wells are used to dispose of water and waste produced from wells, both that from the fracing process and water produced with oil and gas in the production phase. Many oil wells produce hundreds of barrels of water for each barrel of oil produced. Without injection wells, the Texas oil and gas industry would screech to a halt.

Continue reading →

Published on: January 27, 2015

The Economist – “Let There Be Light”

By John McFarland

In a special section of the January 17 edition of The Economist, Edward Lucas gives a broad overview of the world energy outlook and the future for renewable energy. His is an optimistic forecast for cleaner, cheaper and more plentiful energy. His article can be found online here.

First, the article provides this view of current world energy production and consumption:

This picture doesn’t present a very optimistic view. Almost 60% of energy production is “wasted energy.” Oil still provides 33% of all energy consumed, while wind supplies only 1.1%, and solar only 0.2%. And the EIA projects that global demand for energy will increase by 37% in the next 25 years.

Continue reading →

Published on: January 20, 2015

The Oil and Gas Lease – Part V: Implied Covenants

By John McFarland

Over the last 100 years courts have developed a body of case law in disputes between lessors and lessees of oil and gas leases. Courts have held that certain provisions are “implied” in the contracts, even though there is no language in the lease to support those provisions. The rationale behind these implied provisions goes back to cases interpreting hard mineral leases, and back to the cradle of the oil industry, Pennsylvania. The idea behind these implied provisions is that they are necessary for both parties to get the benefit of their bargain and to make the lease work as intended. Because the lessee has control over what operations are conducted under the lease, most of these implied provisions are intended to benefit the lessor, who generally has less bargaining power in negotiation of the lease and no say in whether and how the lease is developed.

An example: oil and gas leases generally provide that the lease will remain in effect for the primary term and for as long thereafter as oil or gas is produced from the leased premises. Courts have implied a requirement that, for the lease to remain in effect, the production must be in “paying quantities.” The production must be sufficient for the lessee to realize a profit over operating costs.

Another example: what if the well on the lease temporarily ceases production at some point after the end of the primary term. Does the lease terminate, even if the well can be repaired and restored to production? Courts developed the implied provision that a “temporary” cessation of production will not cause the lease to terminate, as long as the lessee acts with reasonable diligence to restore production.

Continue reading →

Published on: January 14, 2015

Colorado Oil & Gas Conservation Commission Initiates Online Complaint Process

By John McFarland

The Colorado Oil and Gas Conservation Commission now allows landowners with complaints against operators to file their complaint online. Go to http://cogcc.state.co.us/ and click on “Complaints” in the left-hand column.If you’re a surface owner with no mineral rights and you have objections to a proposed well location, you can also get the COGCC to inspect the site and consider your objections and require the operator to accommodate your concerns.

The online portal is very user-friendly and a real effort to make it easier for the public to participate in the process. The Texas Railroad Commission should take note. The COGCC has also significantly increased its oversight staff, increased its collaboration with local governmental entities, sponsored studies on air and water impacts, and adopted policies on health and safety issues.

Published on: January 13, 2015

Break-Even Prices in Shale Plays

By John McFarland

Here is a chart I came across estimating what oil price is necessary to achieve a 20% after-tax rate of return on wells in various shale plays. Not pretty in light of current oil prices.
Break even chart.JPG

Published on: January 12, 2015

Earthquakes in Irving

By John McFarland

A recent “swarm” of small quakes in Irving has caused a stir and ignited a series of articles about the relation between oil and gas activity and seismic events. The quakes in Irving were strong enough to knock some books off of shelves.

After residents of the town of Azle experienced a series of quakes in 2013, residents protested in Austin before the Texas Railroad Commission, and as a result the RRC hired its own seismologist to study the problem. Most scientists have linked quakes in Texas and Oklahoma to injection of large volumes of produced water. Recently one study in Ohio linked quakes there to recent fracking of wells in the area.

Most if not all of the actual studies of recent quake activity are being done by Southern Methodist University. It has studied the quakes around Azle, and a report of its study is expected soon. After the quakes in Irving, SMU is installing seismic monitors in that area.

Continue reading →

Published on: January 7, 2015

Prices Continue to Plummet

By John McFarland

Here are Flint Hills postings for Texas for January 1, 2, 5 and 6:

Eagle Ford West Light Crude has dropped from $42/bbl on January 1 to $36.75/bbl yesterday. Amazing.

View all Flint Hills postings here: http://www.fhr.com/refining/bulletins.aspx

Continue reading →

Published on: December 23, 2014

The Oil and Gas Lease – Part IV: The Royalty Clause

By John McFarland

The only three essential terms of an oil and gas lease are the granting clause, including a description of the property, the habendum clause, which defines the term of the lease, and the royalty clause. The following would be a valid, enforceable lease:

John Doe hereby leases to Gusher Oil Company the oil and gas in and under Section 5, Block 4, T&N RR Co. Survey, Jones County, Texas, for the purpose of exploring for and producing oil and gas. This grant shall be for a term of three years and as long thereafter as oil or gas is produced from the property. John Doe reserves a royalty of 1/4th of all oil and gas produced and saved.

Dated ___________________, 2014

Continue reading →

Published on: December 18, 2014

TLMA and NARO Texas File Amicus Brief in Chesapeake v. Hyder

By John McFarland

As I have written, Chesapeake has asked the Texas Supreme Court to reverse the San Antonio Court of Appeals’ decision in Chesapeake v. Hyder. The court of appeals ruled that Chesapeake could not deduct post-production costs from the Hyders’ royalty.

The Texas Land & Mineral Owners’ Association and the National Association of Royalty Owners – Texas have filed an amicus brief in Hyder supporting the Hyders’ case. The brief can be viewed here. Final Amicus_Brief_Chesapeake_v__Hyder.pdf It was authored by my firm and by Raul Gonzalez, who was a member of the Texas Supreme Court when the court decided Heritage v. NationsBank, the case relied on by Chesapeake as authority for its deduction of post-production costs.