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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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The Texas Supreme Court issued three opinions last week of interest to Texas land and mineral owners: one dealing with the duties of holders of executive rights, one limiting the condemnation powers of pipelines, and one addressing whether injection well operators can be held liable for trespass if the injected substances migrate onto adjacent lands.

Leslie v. Veteran’s Land Board – The duty of the executive rights holder

The Supreme Court again considered what duty the holder of the
right to lease (“executive right”) minerals owned by another has to the
non-executive mineral interest owner. The court significantly weakened
its prior decision in In re: Bass, and increased the duties of
the holder of the executive right. The right to lease is often separated from the mineral interest. For example, if I sell a tract to a
developer, but want to keep part of the mineral interest, the developer
may object, worried that I, as a mineral interest owner, might lease my
interest and allow a company to drill wells on the property he intends
to develop for a residential subdivision. A common solution to this
problem is for me to retain a part of the mineral interest (or a part of the royalty interest) but convey to the developer the exclusive right
to lease the minerals. The developer is then protected, because no
mineral development can take place without his consent. Whenever the
right to lease is separated from the mineral or royalty interest, the
holder of the leasing right is called the holder of the “executive
right,” and the other mineral or royalty owner without any leasing right is called the owner of the “non-executive” interest.

In the Leslie case, a developer named Bluegreen
purchased 4,100 acres of land in southwest Tarrant County, outside of
Fort Worth, to develop a large residential subdivision, Mountain Lakes,
of over 1700 lots. Bluegreen acquired some of the minerals in the 4,100
acres and all of the executive rights to the minerals. Bluegreen then
imposed restrictive covenants on its development to govern what kinds of homes could be built, what uses of the property could be made, etc. One of those restrictive covenants prohibited “commercial oil drilling, oil development operations, oil refining, quarrying or mining operation.”
Later, development of the Barnett Shale formation in Tarrant County
occurred, and companies sought to lease the 4,100 acres to drill Barnett wells, but found that the restrictive covenant prohibited development.
Evidence in the case showed that “Mountain Lakes is sitting on $610
million worth of minerals that, in large part, cannot be reached from
outside the subdivision.” So the non-executive mineral owners sued,
seeking to have the restrictive covenants declared void. Their theory
was that, by imposing the restrictive covenant prohibiting mineral
development, Bluegreen had breached its duty as the holder of the
executive rights. The trial court declared the restrictive covenant
void, but the Eastland Court of Appeals upheld it. The Supreme Court
agreed with the trial court, holding that “Bluegreen breached its duty
to [the non-executive mineral owners] by filing the restrictive
covenants. The remedy, we think, should be the … cancellation of the
restrictive covenants.”

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The U.S. Environmental Protection Agency has issued proposed rules to cut down on emissions of volatile organic compounds (VOCs) and methane from well drilling and production sites. The rules were issued pursuant to a settlement of a suit by environmental groups alleging that EPA was not enforcing air emissions laws against the E&P industry.

Among other things, the proposed rules would require installation of vapor recovery units on storage tanks at wellsites and other E&P facilities to prevent emission of VOCs. The EPA has calculated that the rules would cost the industry $754 million, but that the gas and condensate captured by the vapor recovery units would be sold for $783 million. The rules would apply to oil and gas wells, natural gas processing plants, compressor stations and pipelines.  Similar emissions control requirements have been recommended by the New York Department of Environmental Protection in its study of the impact of Marcellus Shale drilling in New York.

For more information about the proposal on EPA’s website, go here.

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The New York State Department of Environmental Conservation (DEC) has been engaged in a comprehensive review of the potential environmental impacts of development of the Marcellus Shale in New York since 2008. The DEC is the regulatory agency in New York responsible for issuing drilling permits and regulating oil and gas exploration and production. The DEC had previously studied the environmental impacts of hydraulic fracturing in 1992, at which time it issued a Generic Environmental Impact Statement recommending certain safeguards in that practice. In 2009, the DEC issued for public comment a “Draft Supplemental Generic Impact Statement” analyzing the impact of hydraulic fracturing of horizontal Marcellus wells. As a result of comments received, the DEC has issued a revision of that draft report, which will be finalized later this year and again issued for public comment. During this study, New York has imposed a moratorium on issuance of any permits for horizontal wells in the Marcellus Shale.

The Marcellus extends over a huge area from West
Virginia through Pennsylvania and covers a substantial part of New York
State. Potential Marcellus reserves in New York are huge, and
exploration companies have leased huge areas in New York for
exploration. New York landowners have watched impatiently as wells have
been drilled in Pennsylvania, while environmental activists in New York
have opposed any drilling in that state.

The most recent version of the New York DEC’s study
and recommendations is several hundred pages and provides a thorough
study of the potential impacts of drilling Marcellus wells on the
environment, including impacts on groundwater, surface water, air
quality and wildlife. The report proposes many revisions to DEC’s
existing regulations concerning the construction of well pads, the
drilling and casing of horizontal wells, the handling and disposal of
frac fluids and chemicals, the disposal of returned frac water and drill cuttings, the use of best available technology to reduce emissions from equipment during drilling and completion operations, and the protection of groundwater and surface water. The report discusses the current
state of technologies for use of fluids other than fresh water for
hydraulic fracturing and for the recycling of frac water. The authors
also discuss recent incidents in Pennsylvania of groundwater and surface water contamination from drillsites and their cause. There is a
comprehensive summary of the geology of shale formations and water
resources in New York.

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WSJ Weighs In On Fracing Controversy

The Wall Street Journal gives its opinion on the dangers of hydraulic fracturing, siding with the industry: “The shale gas and oil boom is the result of U.S. business innovation and risk-taking. If we let the fear of undocumented pollution kill this boom, we will deserve our fate as a second-class industrial power.”

Powell Shale Digest Issues Report on Eagle Ford

The Digest reported on wells drilled so far in Eagle Ford fields in Texas. Enough information is now publicly available to begin to see where the play is headed, and where it’s most successful.

Powell Eagle Ford Map.jpg

The counties with highest oil and gas production are Dimmit, Karnes, Webb and La Salle. The counties with the best results per well are Karnes and DeWitt:

Powell Oil Prod.jpg

Powell Gas Prod.jpg

Baker Hughes’ oil rig count reached 1,000 for the first time since it began tracking oil and gas rigs separately in 1987. 843 oil and gas rigs are currently located in Texas. 

 

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Two recent articles by a New York Times reporter, Ian Urbina, have caused strong reactions among the industry and those following shale plays in the U.S. Urbina’s articles may be found here and here. Urbina’s basic theme is that the new reserves of natural gas attributed to shale plays are not real, but are a “Ponzi scheme” created by overestimates of reserves by companies desiring to pump up their stock prices. Urbina bases his conclusions on emails from different industry players and analysts, including the Energy Information Administration, PNC Wealth Management and IHS Drilling Data, and anonymous sources in the industry, including Chesapeake and Enron. Links to these emails are in the articles. Many of them date back to 2009. “In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves. Many of these e-mails also suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles,” says Urbina.

Urbina’s articles have provoked strong responses.

  • ExxonMobil responded with a post on its “Perspective” blog page:   
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Contact Information
John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
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Phone: 512-480-5618
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