Oil and Gas Lawyer Blog

Published on: July 16, 2014

More About “Allocation Wells”

Mike McElroy of the Austin firm McElroy, Sullivan, Miller, Weber & Olmstead, has written an article in the Section Report of the Oil, Gas & Energy Resources Law (Spring 2014), titled “Production Allocation: Looking for a Basis for Discrimination,” defending the practice of oil and gas operators’ drilling of “allocation wells.” The term “allocation well” has come to be used by staff at the Texas Railroad Commission and by the industry to refer to a horizontal well that is drilled across lease lines without pooling the tracts on which the well is located. Mike argues that the RRC has authority to issue allocation well permits and that a standard oil and gas lease, with or without a pooling clause, authorizes the lessee to drill allocation wells.

This firm represented the complaining party in the Klotzman case, in which we argued that the RRC has no authority to issue allocation well permits and that the drilling of an allocation well violates the terms of a typical oil and gas lease unless the lease expressly grants such authority. So, below is a rebuttal to some of the points made by Mike McElroy in his article.

Mike says that “Lessors and their lawyers see horizontal drilling and production allocation as opportunities to amend (re-trade) old leases.” The question that must be asked is, does the lease authorize the lessee to drill an allocation well? If the answer is no, then the lessee must obtain an amendment of the lease to drill the well. The lessor may bargain for consideration in exchange for granting the lessee the right to drill the well. If the answer is yes, as Mike argues, then the lessee needs no agreement from the lessor to drill the well.

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Published on: July 9, 2014

The Declining Cost of Solar Energy

By John McFarland

Austin Energy, the City of Austin’s municipally owned electric utility, recently announced a deal with Recurrent Energy to buy up to 150 megawatts of electricity from a solar farm to be constructed by Recurrent in West Texas, at 5 cents per kilowatt hour, guaranteed for 20 years. Austin Energy is the nation’s 8th-largest municipal utility. As reported in the Austin Chronicle, the deal means that Austin Energy could reach its goal of 200 megawatts of solar power by 2020 well ahead of schedule. Austin Energy has its own solar farm in Webberville that can generate up to 30 megawatts. Austin Energy’s current plans provide for increased reliance on renewable energy sources:

Austin Energy.JPG

The cost of solar electricity has now become competitive with other fuels — although still with support from tax credits. Austin Energy’s estimate of its fuel costs:

Wind (West Texas): 2.6-6.1 cents/kWh

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Published on: July 7, 2014

Texas and the EPA

By John McFarland

The State of Texas and the EPA have been at loggerheads on energy policy and federal regulation for some time. The latest blast from Texas comes in response to the EPA’s new proposed regulations to limit carbon emissions from power plants. On June 2, the EPA published proposed rules that would require states to develop a program to reduce their carbon emissions. Under the proposed rules, each state is given a target for emissions reductions by 2030. Texas’ target: to reduce carbon emissions from power plants by 38 percent by 2030. States are given broad flexibility in how to achieve their assigned target.

Texas emitted 656 million metric tons of carbon dioxide in 2011, nearly twice as much as California, and about 12 percent of the nation’s total. Power plants in Texas emit about 40 percent of Texas’ carbon dioxide. Texas generates more electricity than any other state, and a large portion of that comes from coal plants.

EPA measures states’ emissions of carbon dioxide in pounds of carbon dioxide per megawatt-hour of electricity produced. Texas emits about 1,284 pounds of carbon dioxide per megawatt-hour of electricity produced. More than 30 other states emit more carbon per megawatt-hour than Texas. Under EPA’s proposal, 13 other states must make a larger percentage reduction in emissions per megawatt-hour than Texas, including Washington, Oregon and New York.

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Published on: July 2, 2014

Texas Railroad Commission’s New GIS Viewer Up and Running

By John McFarland

In the last legislative session, the Texas Legislature gave the Texas Railroad Commission money to upgrade its website. The RRC’s new GIS Viewer is now available for use. http://wwwgisp.rrc.state.tx.us/GISViewer2/ This map-based access to RRC information on wells, pipelines and records makes it much easier for the public to access RRC records.

One of its tasks that the RRC does well is provide easy access to its records. It has always been one of the most open and accessible regulatory agencies in the state, and it goes to great lengths to make its records easily available to the public. Its new GIS Viewer greatly enhances this capability.

There is as yet no tutorial on how to use the new Viewer, but if you play with it for a while, you will see how easy it is to use. When you open it, you see a map of the State, with the RRC’ district boundaries shown.

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Published on: June 26, 2014

Amarillo Court of Appeals Refuses to Apply Accommodation Doctrine to Groundwater

By John McFarland

Last week, the Amarillo Court of Appeals issued its opinion inn City of Lubbock v. Coyote Lake Ranch, LLC, No. 07-14-00006-CV, holding that the accommodation doctrine did not apply to restrict the City’s use of Coyote’s land to develop the City’s groundwater under the land.

In 1953, the City of Lubbock bought the rights to groundwater under the land now owned by Coyote Lake Ranch. In that deed, the City acquired all groundwater rights, and “the full and exclusive rights of ingress and egress in, over and on said lands so that the Grantee of said water rights may at any time and location drill water wells and test wells on said lands for the purpose of investigating, exploring, producing, and getting access to percolating and underground water.” The deed granted the right to lay water lines, build reservoirs, booster stations, houses for employees, and roads, “together with the rights to use all that part of said lands necessary or incidental to the taking of percolating and underground water and the production, treating and transmission of water therefrom and delivery of said water to the water system of the City of Lubbock only.”

In 2012, the City proposed a well field plan for the property and began testing and development under that plan. Coyote sued, asking for a temporary injunction to halt the City’s activity. Coyote claimed that the City failed to accommodate Coyote’s existing uses of the property (the opinion does not say what those uses are), and that the City could use alternatives that would lessen damage to Coyote’s use of the land. The trial court granted the temporary injunction, holding that Coyote was likely to be able to show at trial that the City’s plan could be “accomplished through reasonable alternative means that do not unreasonably interfere with [Coyote’s] current uses.” The City appealed from that order.

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Published on: June 23, 2014

Texas Supreme Court Decides Key Operating v. Hegar

By John McFarland

The Texas Supreme Court last week decided Key Operating & Equipment, Inc. v. Hegar, No. 13-0156, reversing the courts below and holding that Key Operating has the right to use a road crossing Hegar’s tract to produce from a well on adjacent lands.

The legal principle the Court applied is not surprising and did not substantially change existing precedent. But the unusual facts of the case illustrate how far the Court will go to protect the rights of mineral lessees when those rights conflict with interests of the surface owner.

The legal precedent the Court followed is this: when two tracts are combined to create a pooled unit, the operator of the unit has the right to use the surface of all of the land covered by the leases included in the unit to operate wells located anywhere on the unit, regardless of the location of the well.

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Published on: June 19, 2014

Concerns Continue of Water Well Contamination from Hydraulic Fracturing

By John McFarland

Investigations continue in response to complaints of alleged contamination of water wells from drilling activity in the Barnett Shale.

In May, the Texas Railroad Commission issued a report of its investigation of complaints of well contamination by methane in Parker County. It concluded that “the evidence is insufficient to conclude that Barnett Shale production activities have caused or contributed to methane contamination in the aquifer beneath the neighborhood.”

But Parker County resident Steve Lipsky, who’s complaint at the RRC caused it to conduct its new study, continues his battle with Range Resources, arguing that its wells are responsible for the methane in his water well. Two other scientists who have reviewed the RRC test data concluded that the gas in Lipsky’s water is definitely the result of fracking operations.

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Published on: June 9, 2014

Reclamation of Lands Impacted by Oil and Gas Operations

By John McFarland

In the last century in West Texas, oil and gas exploration in the Permian Basin scarred the landscape. Below is a Google Earth view of an area of Ward County in far West Texas, showing the drilling pads and roads from oil and gas development.

Ward County Google.JPG

At the time of this development the surface of this land, dry and semi-desert, was considered relatively worthless, and the impact of oil exploration to the surface of the land was considered a small price to pay for the wealth of oil found under the ground.

Today, landowners have become more ecologically conscious and protective of the natural environment of their lands. Increasingly, oil and gas leases are including provisions requiring restoration of the surface by exploration companies. But restoration of semi-arid lands in West Texas is not a simple task and requires patience and expertise, as well as significant resources.

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Published on: June 5, 2014

Groningen Gas Field

By John McFarland

Ever heard of the Groningen gas field? Neither had I, until I read a recent article in the New York Times. It is in the Netherlands, and was discovered in 1959.

The field is operated by a joint venture of Royal Dutch Shell and Exxon Mobil. Today, the field produces about one-third of all natural gas produced in the European Union. It produces more gas each year than Russia recently committed to sell to China, and contributes some $16.4 billion a year to the Netherlands’ national government. According to Wikipedia, as of 2009 the field had produced 39.3 trillion cubic feet, 60% of total reserves, and production is expected to last for another 50 years. It is listed as the ninth largest gas field in the world, based on estimated recoverable reserves. For comparison, the EIA estimates total U.S. proved shale gas reserves at about 129 tcf. Some gas field.

The NYT article reports that earthquakes linked to the depletion of the field have recently been increasing in number and intensity, and the Dutch government has required the operator to reduce production by 20% to see if that will quell the tremors. That will put more pressure on the EU to find alternate gas supplies.

Published on: May 28, 2014

A Second Nuisance Verdict in Barnett Shale

By John McFarland

A jury has awarded damages in a second nuisance case against an operator, this time against Chesapeake Energy. In Crowder et al. v. Chesapeake Operating Inc., case number 2011-008169-3, in Tarrant County Court at Law, the jury awarded the Crowders $20,000 for what the jury found to be a temporary nuisance – drilling operations conducted by Chesapeake in a field behind their house, where Chesapeake has drilled 13 wells. The Crowders complained of offensive odors and extensive noise. The jury failed to find that Chesapeake’s operations created a permanent nuisance, which would have entitled the Crowders to additional damages. The Crowders filed their suit in 2011.

While the jury award in Crowder will not excite plaintiffs’ attorneys to look for additional such cases — unlike the $2.9 million verdict recently awarded in another case, Lisa Parr v. Aruba Petroleum, Cause No. 11-01650-E, in the County Court at Law No. 5 of Dallas County — the case does show the viability of nuisance claims aimed at oil and gas operations near residences, especially in urban areas.

The Dallas city council recently adopted a drilling ordinance prohibiting well locations within 1,500 feet of any residence, effectively prohibiting most drilling within the city limits. The setback in Fort Worth is 600 feet. There are more than 1,700 wells in the City of Fort Worth.