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Ian Urbina, the New York Times reporter who has written several articles recently about oil and gas exploration and the perils of hydraulic fracturing, recently wrote an article, “Learning Too Late of Perils in Gas Well Leases,” that appeared on the front page of the Times on December 2. In research for the article the Times obtained and reviewed more than 111,000 oil and gas leases covering lands in Texas, Maryland, New York, Ohio, Pennsylvania and West Virginia – a remarkable effort. Urbina’s article points out several ways in which the leases fail to protect the interests of landowners:

— They do not require companies to compensate landowners for water contamination.

— They do not address well locations, destruction of trees, or other surface use issues.

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Another interesting case is pending before the Texas Supreme Court, this one involving condemnation of a pipeline easement. The San Antonio Court of Appeals, in LaSalle Pipeline v. Donnell Lands, affirmed a jury verdict awarding $650,000 to the landowner. The Supreme Court has asked for briefs on the merits but has not yet agreed to hear the case.

The Donnell family own an 8,000-acre ranch in McMullen County. LaSalle Pipeline sued to condemn an easement for a sixteen-inch gas pipeline across the ranch, for a length of 4.4 miles. In Texas, a condemnation case originally goes to three “commissioners” – citizens in the county appointed by the court to determine the amount to be awarded the landowner for the pipeline easement. The commissioners awarded the Donnells $226,000 for the easement – about $160 per rod, or $9.73 per foot. (A rod is 16.5 feet.) The Donnells appealed to the district court in McMullen County, where there was a trial de novo, meaning that the commissioners’ award was not considered and the jury was asked to determine the amount of the award based on evidence at the trial.

There are three elements of damages in a pipeline condemnation case: the damage to the land within the permanent easement; the temporary damage caused to the land by the additional workspace needed to lay the pipeline; and the diminution in value of the remaining property caused by the existence of the pipeline. These damages are estimated by qualified real estate appraisers, who testify as experts at the trial.

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Wells Fargo Bank recently had a presentation about aspects of drilling in the Eagle Ford Shale. Some of its slides are enlightening.

First, below are two pictures of a wellsite during the fracing of a well:

Fracing a Well.jpg

 

Fracing a Well 2.jpg

 

These photos illustrate the impact of drilling operations. A typical drillsite for these types of wells may be five to ten acres. During fracing, it looks like an industrial site. These pads are designed to drill multiple wells from a single site.

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Recent news of interest:

New York Times reporter Ian Urbina has a recent article claiming that lenders taking mortgages on real estate are restricting their borrowers from granting oil and gas leases on the mortgated property. The article also discusses whether the granting of a lease on mortgaged property might violate the terms of the mortgage. Urbina says Congressmen Ed Markey and Maurice Hinchey asked Fannie Mae and Freddie Mac how they deal with oil and gas leases on mortgaged property. Chesapeake said that they don’t seek approval from lenders before acquiring leases on mortgaged property, but wait until they are ready to drill to ask the mortgage company to subordinate their lien to the mortgage.

In my experience in Texas, the standard practice has been for the oil company to lease the land first, then determine if it is mortgaged, and if so ask the lender to subordinate is lien. Lenders are generally agreeable, believing that, if a well is drilled, the value of their collateral will be enhanced, since they will still have a lien on the royalty interest reserved by their borrower. I recently learned, however, that Fannie Mae is requiring that its borrowers on commercial properties insert specific provisions in the lease before agreeing to the lease, as well as charging a substantial fee. On new leases of residential lots in the Barnett Shale, Chesapeake is sending a lender subordination form to the lot owner along with the lease and asking the owner to get their mortgagee’s consent before paying for the lease.

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Mineral owners have lost another substantial verdict against an oil company based on their failure to bring the claim within four years. In Samson Lone Star v. Hooks, No. 01-09-00328-CV, the Houston First District Court of Appeals reversed a verdict and judgment against Samson for $21 million, holding that the claim was barred by the four-year statute of limitations as a matter of law — even though the jury had found that the Hooks should not have discovered Samson’s fraudulent conduct until April 2007, less than four years prior to their suit.

The case is reminiscent of a similar case, Exxon v. Emerald, decided by the Texas Supreme Court in 2009, in which the Supreme Court reversed an $18 million verdict against Exxon, again on the basis that the mineral owners’ claims were barred by limitations — despite an express finding by the jury that the plaintiffs had filed their claim within four years after they discovered or should have discovered Exxon’s fraudulent conduct. (Pat Lochridge, the lawyer who represented Exxon in the trial court in Exxon v. Emerald, represented the plaintiffs in Samson v. Hooks. You win some, you lose some.)

The Supreme Court did it again in BP v. Marshall, decided earlier this year. Again the Court overruled a jury verdict in favor of royalty owners, holding that their claim was barred by limitations as a matter of law.

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The Texas Supreme Court Historical Society has published an article by David A. Furlow on the life of John Hemphill, the first Chief Justice of the Supreme Court of the State of Texas. John Hemphill was a remarkable character, one of the pioneering men and women who settled in Texas during its birth as a nation and then a state.

John Hemphill was born in 1803 in South Carolina to a Presbyterian minister and his wife; went to Jefferson College (now Washington and Jefferson College) in Washington, Pennsylvania; began his legal studies “reading the law” in Columbia, South Carolina in 1829; practiced law in Sumter, South Carolina; served in the U.S. Army in the Seminole War of 1836 in Florida; and moved to Texas in 1838, at the age of 35, two years after
Texas won its independence from Mexico. He set up his law practice in Washington-on-the-Brazos.

In 1840, President Mirabeau B. Lamar appointed Hemphill to the Texas Supreme Court. He also served as a judge of the Fourth Judicial District. On December 5, 1840, he won election to replace Thomas J. Rusk as Chief Justice of the Supreme Court. In 1846, when Texas joined the Union, Governor J. Pinckney Henderson appointed Hemphill the first Chief Justice of the new Texas Supreme Court, where he served until November 1858. He resigned from the Court to take Sam Houston’s place as United States Senator, when Houston resigned because he refused to support Texas’ withdrawal from the Union. After Texas joined the Confederacy, Hemphill served in the Provisional Confederate Congress, and he died of pneumonia in Richmond, Virginia, in January 1862.

On March 19, 1840, Hemphill presided over an unusual and historic meeting between Comanches and Texas representatives seeking to make peace with the Chomanche tribes, held in San Antonio. The meeting did not go well. The Comanches brought with them a sixteen-year-old-girl, Matilda Lockhart, who had been abducted by the Comanches in 1838. Mary Ann Maverick (a member of the Maverick family that gave their name to unbranded cattle)
was there and described Matilda: “Her head, arms and face were full of bruises and sores, and her nose [was] actually burnt off to the bone–all the fleshy end gone, and a great scab formed on the end of the bone. …. She told a piteous tale of how dreadfully the Indians had
beaten her, and how they would wake her from her sleep by sticking a chunk of fire to her flesh, especially to her nose.” Matilda’s treatment did not endear the Comanches to the Texans present. Matilda, who understood the Comanche language, told the Texans that the Comanches held another fifteen Texas hostages, whom the Comanches intended to
ransom one by one to the Texans for the highest price they could get. The result was a fight, later named the Council House Fight, in which several of the Comanches were killed. Hemphill, attacked by one
of the chiefs, pulled a “long knife from under his judicial robes and slew his antagonist.” True frontier justice. The result of this failed attempt at peace-making was a long-running war between Texans and Comanches that was not finally concluded until after the Civil War.
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Christopher Helman has recently written two articles on Aubrey McClendon, CEO of Chesapeake Energy, one in the October 24 edition of Forbes, and one — an interview with McClendon —  on Helman’s blog. McClendon is the Steve Jobs of the US oil & gas exploration industry, in many ways the face of the industry. And he’s not bashful about taking that role. Helman’s articles provide a good summary of McClendon’s and Chesapeake’s meteoric rise and the controversies surrounding him and the industry.

Chesapeake has a market capitalization of $17 billion and is
estimated to have $2 billion in profits on $9.5 billion in revenues this year. It has 12,000 employees and added 3,300 employees this year. The
company has 4,500 land scouts acquiring oil and gas leases from Ohio to
Pennsylvania to Michigan to South Texas. Chesapeake is expanding beyond
the E&P business into the oilfield service industries. According to
McClendon, it is the fourth-largest drilling company in the US, the
second-largest compression company, and in the top three in oilfield
trucking and tool rental. Chesapeake intends to spin off its oilfield
services businesses next year into a new public entity.

McClendon’s great uncle was Robert Kerr, founder of Kerr-McGee Oil
& Gas and a goveronor of Oklahoma. At age 23, he partnered with Tom
L. Ward to start Chesapeake, and it went public in 1993. Ward and
McClendon parted ways in 2006, and Ward started his own company,
SandRidge Energy. McClendon owns a huge wine collection that is served
at his Oklahoma eatery the Deep Fork Grill. He recently sold his
personal collection of antique maps to his company for $12 million. 

Now 52 years old but looking much younger, according to Forbes McClendon is worth $1.2 billion. He owns 2.5% of every well Chesapeake
drills–interests now worth some $500 million. “You could say I’m the
only CEO in America who truly participates alongside his company in the
day-to-day business activity on the same basis as the company,” he says.
“Would we have had the financial collapse in 2008 if every CEO of a
bank, of a mortgage company or a securities firm had been forced by his
board to participate personally in some proportionate part of every loan made, every mortgage-backed security sold or every real estate deal
financed by those firms?” In 2009 his Chesapeake compensation package
was valued at $100 million, including $20 million in CHK stock.

Chesapeake is admired and hated in the industry. The company sweeps
into each new play paying the highest prices for leases and gobbling up
all acreage in sight. In the past five years the company has acquired
600,000 leases covering 9 million acres, paying $9 billion in bonuses.
Chesapeake paid $1.7 billion for 700,000 acres in the Eagle Ford in
2010; then in November 2010 the company sold a one-third share of that
acreage to China’s state-owned oil company for $1.1 billion and an
additional $1.1 billion in future drilling costs. Chesapeake has entered into similar agreements withe BP, Statoil and Total to lay off
interests in its acreage.

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The Eighth Court of Appeals in El Paso has issued its opinion in State of Texas v. Cemex Construction Materials South, LLC. The court reversed a summary judgment for Cemex and granted the State’s summary judgment, returning the case to the trial court to assess damages. The State is seeking damages of $558 million.

Cemex is the world’s leading supplier of ready-mix concrete, and one of the world’s largest producers of White Portland Cement. Cemex is based in Monterrey, Mexico, and has operations across North and South America, Europe, Africa, the Middle East and Asia. It has annual sales of more than $14 billion.

Cemex operates a quarry for sand, gravel and caliche in El Paso County. According to the State’s petition, Cemex and its predecessors have mined about 100 million tons of materials from the quarry since 1940. Cemex bought the quarry from the British group RMC in 2005.

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Earlier this year, the San Antonio Court of Appeals issued an opinion in a case contesting the will of Belton Kleberg (B.K.) Johnson, greatgrandson of the founder of the King Ranch. Johnson died in 2001 at the age of 71. In the 1950’s, Johnson was passed over to head the management of the 825,000-acre King Ranch lands, and he sold his interest in the Ranch in 1976, but kept his royalty interests.

Johnson’s life and the will contest opinion give a rare glimpse into the world of the rich and powerful in South Texas. Johnson was educated at Deerfield Academy, Cornell and Stanford. He served on the board of directors of AT&T, Tenneco, Campbell Soup, the Southwest Foundation for Biomedical Research, and several Texas banks. He was the owner of Chaparrosa south of San Antonio, where he lived and raised his family and raised registered Santa Gertrudis cattle. He owned the Hyatt Regency Hotel on the San Antonio Riverwalk, and he restored the Fairmount Hotel in San Antonio.

Johnson was married three times. He and his first wife, Patsy, had three children: Ceci, Sarah and Kley. Kley died in a car accident in 1991, survived by his wife and two children. Sarah married Steven Pitt and they have three children. Ceci married Mark McMurrey, and they have three children.

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The staff of the Texas Railroad Commission has proposed to the Commision rules to implement House Bill 3328, passed by the last Legislature, requiring the disclosure of chemicals used in frac fluids. The rules will be subject to a period for public comment, and a hearing will be held on the rules, now proposed for Wednesday, October 5.

Earlier this year, the 82nd Texas Legislature passed HB 3328,
requiring the RRC to adopt rules requiring disclosure of chemicals in
frac fluids. The draft rule would require operators to disclose chemical content of frac fluids on FracFocus, a website developed by the Ground Water Protection Council and the Interestate Oil and Gas Compact Commission.
(The website contains a lot of good information about hydraulic
fracturing and its benefits and risks.)  FracFocus was launched on April 1, 2011. As of August 16, 2011, according to RRC staff, operators had
registered 950 Texas wells on the website, including wells drilled by
Anadarko, Chesapeake, Chevron, Conoco-Phillips, Devon, El Paso, Energen,
EOG, Forest, Newfield, Occidental, Penn Virginia, Petrohawk, Pioneer,
Plains, Range, Rosetta, Shell, Williams, and XTO. You can search for a
well near you by using FracFocus’s search feature. An example of the
information disclosed can be found here:  4243935364-3212011-10792272-CHESAPEAKE[1].pdf The disclosure includes the percentage by mass of each chemical used in the frac fluid.

Under the proposed rule, an operator must also provide the same
information with its completion report for the well, as part of the
completion report. The completion report for all Texas wells can also be found on the RRC’s website.

RRC’s staff’s discussion of the proposed rule estimates that 13,000
wells undergo frac treatment in Texas each year — 85% of all wells
drilled in Texas.

A supplier, service company or operator is entitled under the draft
rule to claim trade-secret protection for a chemical additive. If such
protection is claimed, the particular chemical and its concentration
need not be provided, but the operator must disclose the chemical family of the ingrediant and the properties and effects of the chemical. The
claim of trade-secret protection may be challenged by the landowner on
whose property the well is drilled or any adjacent landowner, or by any
state department or agency with jurisdiction over issues related to
health and safety. Any such challenge must be filed within 2 years after the claim of trade-secret protection was filed. If a challenge is filed (with the RRC), the RRC refers the matter to the Texas Attorney General who makes a determination, based on evidence submitted by the person
claiming trade-secret protection, of whether the identity of the
chemical is in fact a trade secret under Texas law. The AG’s
determination may be appealed to a state district court. If a
trade-secret exemption is claimed, a health professional or emergency
responder may still obtain the information but must keep it confidential except to the extent it must be disclosed to protect health and safety.

An operator who fails to disclose as required by the rule may have its operating permit revoked.

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Contact Information
John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
401 Congress Avenue, Suite 2700
Austin, Texas 78701
Phone: 512-480-5618
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