The Texas Supreme Court has once again overturned a jury verdict in favor of royalty owners, finding “no evidence” to support the jury’s finding. The court’s opinion in the case, BP America Production Company, Atlantic Richfield Company and Vastar Resources, Inc. v. Stanley G. Marshall, Jr., et al., No. 09-0399, was issued last week. The case evidences the Court’s continued hostility to royalty owners’ claims of lease termination.
The important facts are as follows:
Researchers at the Nicholas School of the Environment at Duke University have written an article published in the Proceedings of the National Academy of Sciences titled “Methane contamination of drinking water accompanying gas-well drilling and hydraulic fracturing,” which finds “systematic evidence for methane contamination of drinking water associated with shale-gas extraction” in the Marcellus Shale in Pennsylvania and New York. The article has already elicited a strong response from the industry. To my knowledge, this is the first scientifically based study finding a correllation between the drilling of shale wells and the contamination of aquifers.
Other than the oil and gas lease itself, the division order is undoubtedly the most common legal instrument mineral owners are asked to sign. Mineral owners should know the purpose of a division order, what rights and obligations it imposes on them, and the division order’s relation to the oil and gas lease.
First, I should say that the law and practice regarding division orders varies from state to state. I practice in Texas, so what follows relates only to the use of division orders in Texas.
Historically, there has been much controversy and litigation in Texas about division orders and their effect. As a result, in 1991 the Legislature passed a statute governing the use of division orders. The statute was amended in 1995, 1997 and 1999. It is now Chapter 91, subchapter J of the Texas Natural Resources Code, commonly called the Division Order Statute. So the law applicable to division orders in Texas is the court-made law plus the division order statute.
The main purpose of a division order is to protect the payor of the proceeds of production from double liability. The company issuing the division order is requiring the royalty owner to (1) verify that the royalty owner’s decimal interest set out on the division order is correct and (2) agree that the company can make payments based on that decimal interest until notified by the royalty owner that the ownership has been changed. By the division order, the royalty owner indemnifies the payor against liability to third parties who claim to own the interest being paid to the royalty owner.
The April issue of Discover, published by Kalmbach Publishing Co., contains an article on the potential environmental effects of hydraulic fracturing in gas shales, “Fracking Nation,” by Linda Marsa. Much of the article simply repeats allegations being made by environmental groups and landowners of alleged groundwater contamination by shale wells. But the article mentions four newer topics and recent allegations being made by opponents of shale gas development:
Items of interest recently in the news:
On March 25, the Texas Railroad Commission adopted its examiners’ recommended decision finding that Range Resources was not responsible for water-well contamination in Parker County, Texas. (For my previous posts on this controversy, go here and here.) The U.S. Environmental Protection Agency, which had previously entered a cease-and-desist order against Range based on its investigation of the water well contamination, issued a statement standing by its findings: “The decision by the Texas Railroad Commission is not supported by EPA’s independent, scientific investigation, which concluded that Range Rsources Corporation and Range Production Company have contributed to the contamination of homeowners’ drinking water wells.” EPA has posted the full record of its investigation of Range on its website. EPA has filed a federal suit against Range to enforce its order. “EPA stands by the order issued to Range Resources and seeks to secure Range’s full compliance,” said EPA’s statement. Range has filed a motion in that suit to dismiss the case, based on the Railroad Commission’s findings. Railroad Commissioner Michael Williams said that “I see this as sort of a cavalier attempt by the federal government to reach its arms into our state’s jurisdictions.” Commissioner Elizabeth Jones said after the RRC hearing that Range’s operations “have not contaminated and will not contaminate” the water wells in question. Steven Lipsky, one of the water well owners who believes that Range is responsible for the contamination, said: “It’s a corrupt system. It’s kind of sad.”
Chesapeake Energy has entered into two more agreements to shed part of its acreage positions, one in Texas and one in Arkansas. Chesapeake agreed to sell all of its Fayetteville Shale leases in Arkansas to mining giant BHP Billiton for $4.75 billion cash. Chesapeake entered into an agreement with Clayton Williams Energy to transfer 75% of its 75,000 acres of leases in the Wolfbone play in Reeves County to Williams, in exchange for Williams’ agreement to drill at least 20 wells in the first year, with an option to drill 20 more earning wells every year over the next four years.
The Texas Supreme Court has reversed a decision of the Austin Court of Appeals holding that the Texas Railroad Commission must consider traffic issues in deciding whether to issue a permit for an injection well to Pioneer Exploration, Ltd. in Wise County. In its decision, the Court held that, in considering whether issuance of the permit was “in the public interest,” the RRC need not consider the adverse impact on roads and traffic caused by truck traffic to and from the injection well.
The EPA has issued its draft plan to study the impacts of hydraulic fracturing on drinking water in the U.S. Two state regulatory authorities have absolved frac’ed wells from responsibility for contaminating drinking water in Colorado and Texas. Maryland’s top einvornmental regulator urged lawmakers to impose a two-year moratorium on frac’ing, as Maryland’s legislature considers additional laws to regulate the practice. Meanwhile, the boom in shale gas drilling continues.
Recently some of my clients have received notices of class action settlements in Coll v. Abaco Operating, LLC, et al., in the U.S. District Court for the Eastern District of Texas, Marshall Division, C.A. No. 2:08-CV-345 TJW. The case reveals a little-known aspect of royalty payments: many companies never reimburse their royalty owners for refunds of severance taxes.
Most royalty owners know little about severance taxes except that they are a deduction that regularly appears on their royalty check stubs. Texas imposes a tax on the value of all oil and gas produced in the state: 7.5% for gas and 4.6% for oil. Most producing states impose similar severance taxes. Pennsylvania has been debating whether to pass a severance tax in light of its budget problems and recent development of the Marcellus Shale in that state. Texas’ severance taxes are paid into its “rainy day fund” that has been much in the news of late.
Here is the closing statement of Range Resources filed with the Texas Railroad Commission after its hearing on complaints that Range’s Barnett Shale wells in Parker County have contaminated groundwater. It provides a good summary of the events to date and the evidence produced at the hearing. Range Production Company Closing Statement.pdf
Here is a link to a summary of the Range dispute prepared by Gene Powell, Editor of the Powell Barnett Shale Newsletter.
Josh Fox’s movie Gasland has been nominated for an academy award for best documentary. Gasland, widely criticized by the oil and gas industry, alleges that hydraulic fracturing is the cause of contamination of underground water resources across the country. (See my previous post about controversy surrounding the movie here.) The nomination, and the Fox’s movie about the alleged dangers of frac’ing, have made him into a celebrity.
In response to the Oscar nomination, Energy in Depth, a website sponsored by oil and gas associations including the Independent Petroleum Association, Texas Independent Producers and Royalty Owners’ Association, the Independent Oil & Gas Association, and Colorado OIl and Gas Association, has published a letter (Energy In Depth letter.pdf) addressed to the Academy of Motion Picture Arts and Sciences. In the letter, Energy in Depth calls the film an “expression of stylized fiction” not meeting the Academy’s criteria for a documentary. The letter says that the movie misstates the law and the rules, mischaracterizes the frac’ing process, and “flat-out makes stuff up.”
Josh Fox does not take this lying down. He has published a detailed rebuttal of Energy in Depth’s letter. Josh has own his own website, www.gaslandthemovie.com, and his own facebook page about the movie and the frac’ing debate, and he was even awarded the Yoko Ono “Grant for Peace.” Clearly, he is enjoying his celebrity. Josh’s rebuttal is no small refutation. It runs to 38 pages and contains responses from his “amazing team of experts,” including Ron Bishop, PhD, lecturer in chemistry and biochemistry at SUNY Oneonta, Anthony Ingraffea, PhD, the D.C. Baum professor of engineering at Cornell,and Weston Wilson, a retired EPA engineer. Energy in Depth’s letter to the Academy is not likely to lessen Josh’s time in the limelight and may actually increase his chances of grabbing that Oscar.
