Oil and Gas Lawyer Blog

Published on: October 7, 2009

Great New Website from Energy Information Administration Explains Energy in Layman’s Terms

The U.S. Energy Information Administration has launched a new website that contains wonderful information about energy described in terms laypersons can understand. It can be found at http://tonto/eia.doe.gov/energyexplained/ . Here are some examples of information you can find there:

— A British Thermal Unit (Btu) is the quantity of heat required to raise the temperature of one pount of liquid water by 1 degree Farenheit at the temperature that water has its greatest density (approximately 39 degrees F.).

— One Btu is about the amount of energy burned by a common kitchen match. One million Btu equals about 8 gallons of gasoline. One billion Btu eqals all the electricity that 300 households consume in one month.

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Published on: September 28, 2009

Two Energy Executives Call for Disclosure of Chemicals Used in Fracturing

By John McFarland

Aubrey McClendon, CEO of Chesapeake Energy, and John Pinkerton, CEO of Range Resources, called for the industry to publicly disclose the chemicals used in hydraulic fracturing. A bill recently introduced in Congress, the FRAC Act, would require disclosure of frac chemicals. (See my prior post on the FRAC Act here.)

The safety of chemicals used in fracing wells has been questioned in areas of Pennsylvania and New York, where concerns have been raised about possible contamination of drinking water. The Pennsylvania Department of Environmental Protection recently sent a notice of violation to Cabot Oil & Gas stemming from two spills of LGC-35, a lubricant used in fracing wells. One spill was reportedly between 1,000 and 2,000 gallons, the other between 5,000 and 5,900 gallons. Halliburton has reported that LBC-35 is a potential carcinogen. The Pennsylviania DEP has ordered Cabot to halt all hydraulic fracturing in Susquehanna County until the company has satisfied the DEP that it has taken necessary safety measures. New York has imposed a moratorium on new Marcellus Shale drilling permits until it completes a study and new environmental regulations.

McClendon said that the industry needs to “demystify” fracing. “We need to disclose the chemicals that we are using and seaqrch for alternatives to the chemicals we are using.” Pinkerton said that oilfield service companies impose confidentiality agreements on producers when they contract to provide fracing operations; “It’s a little silly to be honest.” A spokesman for Schlumberger said that disclosure is limited by agreements with the firms supplying the chemicals. A spokesman for Haliburton said that the different chemical makeup of the compounds is proprietary information. “We make a significant investment in developing effective fracturing fluid systems and we are careful to protect the fruits of the company’s research and development efforts.”

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Published on: September 25, 2009

House Bill 2259 Imposes Additional Requirements on Operators of Inactive Wells

By John McFarland

Prior to the Texas Legislature’s passage of House Bill 2259, an operator could leave an inactive well unplugged indefinitely, as long as the oil and gas lease on which the well is located remains in effect, by simply filing an annual form. House Bill 2259, effective September 1, 2009, imposes additional requirements on operators desiring to delay plugging of the well.

An operator may not operate wells in Texas unless its annual Organization Report, form P-5, has been filed and accepted by the RRC. When filing the P-5, the operator must provide a form of financial assurance that it has the ability to properly plug all wells for which it is the designated operator.

The additional requirements imposed by H.B. 2259 require an operator to file certain forms each time the operator files its annual Organization Report, Form P-5, with the Texas Railroad Commission (RRC). The new forms related to inactive wells operated by the operator. An “inactive well” is a well that has had no activity for 12 consecutive months.

H.B. 2259 amends Chapters 98 and 91 of Texas Natural Resources Code. The new law provides that, if an operator has any inactive wells at the time its Organization Report is due, it must file an “Application for Extension” requesting that it not be required to plug those inactive wells. In order to be granted the extension, the operator must do each of the following four things:

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Published on: September 18, 2009

Record Gas In Storage Depresses Gas Prices

By John McFarland

Gas prices in Texas recently dipped below $2/mmbtu. Companies are shutting in wells to avoid selling at such low prices. Nevertheless, record volumes of gas are going into storage.

The chart shows the five-year monthly average of gas in storage for the last five years, and the red line shows gas in storage this year. Gas in storage for August is already well above the last five-years’ highest volume, and is sure to climb higher. We are likely to find out the true limit of how much capacity there is for gas storage in the U.S. Unless we have a very cold winter, this excess gas may continue to suppress gas prices for months to come.

Published on: September 14, 2009

Law Firms Form Coalition to Sue Companies for Reneging on Leases in Barnett Shale

By John McFarland

Three law firms in Dallas have joined to sue oil companies who backed out of leases covering lands in Arlington, Texas last fall. The three firms — Petroff & Associates, Riddle & Williams, P.C., and Mathis & Donheiser, P.C. — have so far filed two suits on behalf of two lot owners who say they had binding deals with companies to lease their property. The law firms have created a website at www.ntxleaselitigation.com, and are organizing meetings of landowners who believe they had lease deals with XTO . The interesting part of the two lawsuits filed so far is that they name as defendants not only the company that allegedly had agreed to pay for leases of the two plaintiffs’ properties, but also multiple other companies and their leasing agents who were leasing in the Barnett Shale. The suits claim that all of these companies conspired last fall to revoke their outstanding lease offers and to drive down the bonus price for leases, in violation of antitrust laws. For a story in the Fort Worth Star Telegram on the cases, see http://www.star-telegram.com/804/story/1593837.html . According to the suits, the plaintiffs were in an area of Arlington organized to negotiate leases for its landowners called the Southeast Arlington Coalition of Texas (SEACTX). SEACTX claimed that it had a deal to lease to XTO Energy for $26,517 per acre. Here are copies of the two petitions:
08-06-09BoothOriginalPetition[1].pdf and
08-31-09MylesOriginalPetition[1].pdf

Published on: September 11, 2009

Delaware Bankruptcy Court Rules Against Texas Producers (and Royalty Owners)

By John McFarland

A Delaware bankruptcy judge has ruled in the SemCrude bankruptcy that the claims of Texas producers for unpaid revenues from oil sales are subordinate to the claims of SemCrude’s bankers. As a result, the Texas producers (and perhaps their royalty owners) may lose up to $57 million.

SemCrude filed for protection under Chapter 11 of the Bankruptcy Code in July 2008. SemCrude was a large purchaser of crude oil in Texas and seven other states. At the time of the filing, the SemCrude entities owed their banks $2.55 billion. It also owed more than one thousand oil and gas producers millions of dollars for oil purchased but not paid for in June and July 2008, including $57 million owed to oil and gas producers in Texas.

The court in the SemCrude bankruptcy recently ruled that the claims of Texas Producers for the $57 million in unpaid proceeds of oil and gas sales are subordinate to the claims of SemCrude’s Banks, who hold liens on all os SemCrude’s assets, despite a Texas statute that grants the Texas Producers a lien on their production and all proceeds of sale to secure the purchaser’s obligation to pay.

The arguments made in the dispute between the Banks and the Texas Producers are complicated because they involve the interpretation of Article 9 of the Uniform Commercial Code, a code that has been the bane of many law students’ studies. The judge’s ruling will be appealed and so is not the final word on the matter, but if the ruling stands it will adversely affect the rights of royalty owners in bankruptcy proceedings of oil and gas purchasers and producers, and could greatly reduce their rights to recover payments for their royalties.

Here is a simplified summary of the judge’s ruling:

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Published on: August 19, 2009

Energy News

By John McFarland

Items from this week:

Prices: Natural gas prices continue to decline. Below is a comparison of gas NYMEX futures prices with S&P 500 for the last year:

Gas Price Chart.JPG

On August 14, futures for September delivery settled at $3.24/MMBtu, a 52-week low. Futures prices have declined about 65% from this time a year ago. The Energy Information Administration reports that gas in storage increased by 63 Bcf to 3.152 Tcf for the week ended August 7, compared to 2.65 Tcf a year ago, and well above the five-year average of 2.635 Bcf. Absent severe supply disruptions or a very cold winter, gas prices are likely to remain low for some time.

The price decline has resulted in a corresponding decline in lease and drilling activity. The chart below shows the number of oil and gas leases filed of record in Tarrant County, the center of Barnett Shale activity:

Barnett Shale Leases.JPG

This shows a decline in leasing from 18,000 leases in May, 2008, the height of the leasing frenzy, to 2,000 in July 2009.

Earthquakes: Scientists from Southern Methodist University have tentatively concluded that recent earthquakes in the vicinity of Dallas-Fort Worth Airport may have been caused by a salt water disposal well located at the southern end of the airport, operated by Chesapeake.

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Published on: August 11, 2009

Texas GLO Commissioner Jerry Patterson Weighs in on Exxon v. Emerald

By John McFarland

Jerry Patterson, Commissioner of the Texas General Land Office, has weighed in on the side of the O’Connors in their fight against ExxonMobil. The General Land Office has filed an amicus brief urging the Texas Supreme Court to reconsider its decision in Exxon v. Emerald; Commissioner Patterson issued a press release (
press release.pdf) saying that he has requested the Texas Railroad Commission to hold hearings into ExxonMobil’s “intentional sabotage of oil wells in Refugio County as well as the company’s fraudulent reports covering up the damage;” and, in response to ExxonMobil’s letter to the Railroad Commission (
Exxon-RRC letter.pdf) denying Commissioner Patterson’s allegations and arguing that no such hearing is necessary, Commissioner Patterson has written a lengthy reply (
GLO Letter to RRC.pdf), citing evidence from the case showing ExxonMobil’s false reporting of its plugging operations, and concluding that, “If these intentional false filings and improper pluggings do not result in substantial penalties by the Railforad Commission, then the oil & gas industry in Texas will be on notice that Railroad Commission’s rules and forms are optional, not mandatory.”

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Published on: July 31, 2009

The Relinquishment Act – an Interesting Chapter in Texas History

By John McFarland

I have recently been reading “The Big Rich: the Rise and Fall of the Greatest Texas Oil Fortunes,” by Bryan Burrough. It has reminded me of a fascinating chapter in the history of Texas oil and gas law that arose out of the Texas oil boom in the early years of the 20th century, and that still affects mineral titles to more than 7.4 million acres of land in Texas. It could also be seen as an early example of judicial activism in Texas.

Texas entered the Union retaining all of its public domain – all land not already sold by Spain or Mexico to private citizens. Under Spanish and Mexican laws, when the sovereign sold land it retained all mineral rights under those lands. When Texas became an independent nation, it recognized the titles of landowners who had acquired their lands by Spanish and Mexican grants, including the state’s retention of mineral rights under those lands. In its constitution of 1876, Texas set aside more than 42,500,000 acres of unsold land as “public free school land,” and provided that the sales of those lands would be set aside in a permanent fund to finance the provision of schools in Texas. That constitution also provided that the State released to the owners of lands previously sold “all mines and mineral substances” under their lands. This same provision was included as an article in the Revised Statutes of 1895. Thus, Texas decided that, unlike Spain and Mexico, it would not retain title to minerals under lands it sold for settlement and development.

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Published on: July 24, 2009

What Landowners Should Know About Groundwater Rights in Texas

By John McFarland

Until fairly recently, there has been little governmental regulation of the drilling of and production of groundwater in Texas. Texas historically followed the common-law “rule of capture,” which holds that, unless the groundwater rights have been severed from the surface, the surface owner is the owner of all groundwater he/she can produce from a well located on his/her land and has no liability to adjacent owners whose groundwater might be damaged by such production. But the rule of capture is quickly changing. Groundwater rights are now being placed under the control of Groundwater Conservation Districts, which have authority to regulate the drilling of and production from water wells within their jurisdiction. What follows is a brief summary of what is now happening – the development of a plan to regulate the production of groundwater from all of the major aquifers in Texas. Landowners should be aware of these happenings.
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