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I have recently received several inquiries about the rights of unleased mineral owners whose tract is included in the boundaries of a pooled unit. There seems to be some general miss-perception about this issue. 

A typical oil and gas pooling clause allows the lessee to combine separate tracts covered by separate oil and gas leases into a single pooled unit for purposes of exploration and production. This allows the lessee to treat the pooled unit as a single lease. Wells drilled anywhere on the pooled unit are considered to have been drilled on the leased premises covered by each separate lease in the pooled unit, and production from the pooled unit will keep the lease in force beyond its primary term, just as if the production were from each tract in the pooled unit. Production from wells on the pooled unit is allocated among the tracts in the unit, for purposes of paying royalty, on an acreage basis. If a tract in the unit comprises 25% of the total acreage in the pooled unit, then 25% of the unit production is allocated to that tract for royalty purposes, and the mineral owners in that tract receive their royalty on production from the pooled unit just as if 25% of the unit production were produced from the tract.

What happens, then, if the lessee has acquired oil and gas leases on only a portion of the minerals in a tract? Can the lessee include that tract in a pooled unit? If so, how are royalties paid to the owners of unleased minerals in that tract? Do the unleased mineral owners have the right to share in production from the pooled unit?

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A new website, Mineral Rights Forum, provides information and discussions about topics of interest to mineral owners. It is owned by Kenneth DuBose and is run by Peter Moorman.  Looks like it will be a good resource for mineral owners. It reports on a recent documentary, Split Estate, that investigates conflicts between surface owners who do not own the underlying minerals and oil and gas companies. It has been shown on Planet Green, an independent cable channel, and will be shown again in January. Here is the movie trailer. According to the Huffington Post, a representative of the Colorado Oil and Gas Commission, Kathy Hall, resigned recently after being shown in the movie saying that fracing fluid was harmless and she had had it in her mouth with no ill effects.

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In a recent Wall Stree Journal article, “America’s Natural Gas Revolution,” Daniel Yergin and Robert Ineson opine that gas produced from shale “is already changing the national energy dialogue and overall energy outlook in the U.S.–and could change the global natural gas balance.” Mr. Yergin is the author of “The Prize: the Epic Quest for Oil, Money, & Power” which won him a Pulitzer Prize.  He is now chairman of IHS CERA.  Mr. Ineson is senior director of global gas for IHS CERA.

Yergin and Ineson cite the following evidence for their thesis:

— Production of gas in the lower 48 states increased 15% from the beginning of 2007 to mid-2008 – an increase fueld mostly by shale gas discoveries, and an increase that is more than most other countries’ total gas production.

— Proven gas reserves have risen from 177 trillion cubic feet in 2000 to 245 trillion cubic feet in 2008, even though the U.S. produced nearly 165 Tcf during that time.

— “At current levels of demand, the U.S. has about 90 years of proven and potential supply — a number that is bound to go up as more and more shale gas is found.”

Most of this new gas comes from shale plays, beginning with the Barnett Shale in North Texas, and including the Haynesville (Louisiana and Texas), Fayetteville (Arkansas), Marcellus (Pennsylvania and New York), and most recently the Eagle Ford in South Texas. Shale gas is made possible by use of horizontal drilling technology and newly developed hydraulic fracturing completion techniques.

 

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President Obama has appointed Dr. Alfredo Amandariz as new Administrator of Regions 6 of the Environmental Protection Agency, encompassing Louisiana, Arkansas, New Mexico, Texas and Oklahoma. (See Dallas Morning News article) Dr. Amendariz, a professor of engineering at Southern Methodist University, raised controversy among natural gas producers in the Barnett Shale earlier this year by publishing a study of the effects of Barnett Shale drilling and production on pollution in the Dallas-Fot Worth metropolitan area.  See my earlier blog on Dr. Armendariz’s report.

In a related development, State Senator Wendy Davis, D-Fort Worth, has (for a second time) asked Lt. Governor Dewhurst to authorize a senate investigation of the environmental impacts of natural gas production in the Barnett Shale.  Preliminary results of testing conducted by the Texas Commission on Environmental Quality and a private study conducted by the Denton County town of DISH found elevated levels of benzene in the air near natural gas production facilities.  The TCEQ is conducting a third phase of air emissions tests in the area of the Barnett Shale, and expects to have a report by the end of the year. A fourth phase of the testing is scheduled for spring 2010. “We’ve had oil and gas development in Texas for a long time, but it was primarily in rurual areas,” said Tony Walker, director of TCEQ’s Dallas-Fort Worth Office. “Not it is in urban and in more populated areas. We’re studying every aspect of gas production. We will look at the drilling and frcing process, condensate tanks, compressor stations, gas lines, valves and allother possible sources of emissions.”

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The Energy Information Administration has issued rankings of states in production of oil, gas, coal, electricity generation, and energy consumption. Texas ranks prominently in most categories.

— Texas is first in total energy production, producing 10,997 trillion Btus of energy in 2006 (the most recent information available). Wyoming is second (mainly from coal production) with 10,062 trillion Btus. Texas produced 15.5% of all the energy produced in the nation.

— Texas is first in crude oil production, producing 32.77 million barrels in May 2009 (20% of the nation’s production), ahead of Alaska with 21 million barrels; and (by far) first in natural gas production, producing 6 trillion mcf in May 2009 (30% of the nation’s production), ahead of second-place Wyoming with 1.9 trillion mcf.

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America’s Natural Gas Alliance, a recently formed energy lobbying group formed by natural gas producers, has issued a press release praising the Senate’s version of a climate bill.  Without actually endorsing the bill, the Alliance commended the bill’s authors for “including provisions in their bill that will enable us to continue to engage in the process of developing language that will effectively promote natural gas as part of the climate solution.”

The Alliance was formed in March 2009, and according to its website it represents 28 of North America’s largest independent natural gas producing companies, whose members produce more than 40 percent of total U.S. natural gas supplies, about nine trillion cubic feet per year. Its members include Anadarko, Apache, Chesapeake, Devon, El Paso, Encana, Petrohawk, Pioneer, Plains, and XTO. The Alliance’s position on the Kerry-Boxer energy bill is markedly different from that of the American Petroleum Institute and the Texas Alliance of Energy Producers, long-time lobbyists for the energy industry which have come out strongly against cap-and-trade legislation. Alex Mills, President of Texas Alliance of Energy Producers, is in particular an opponent of cap-and-trade, saying that it will wreak havoc on the energy industry. Chesapeake, Devon, Encana, and XTO are also members of the Texas Alliance. Politics makes strange bedfellows.

But companies relying mainly on gas production — more than 90 percent of Chesapeake’s total production is natural gas — believe that natural gas producers can benefit from climate legislation, since natural gas is a clean-burning fuel with much lower carbon emissions per unit of energy than oil or coal. Tom Price, Senior V.P. of Chesapeake for corporate development and government relations, said that “We think Texas, Oklahoma, Louisiana, Arkansas and the states that are primarily natural gas producers will come out very favoarable to a legislation that differentiates among the low-carbon fuels.”

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The recent volatility in prices for oil and gas leases has raised issues with the time-honored custom in the industry of paying lease bonuses with drafts. Problems have arisin because companies have refused to honor the drafts or because lessors have sought to cancel the transaction after signing and delivery the lease and lessor’s deposit of the draft. When someone wants to back out of “the deal” after a lease has been exchanged for a draft, the lessor and lessee run to their lawyers to find out what legal rights and obligations have been created by the exchange. No one is happy.

As I have written previously, it is generally my advice to avoid using drafts for payment of lease bonuses. My practice is to hold my client’s original signed lease until I receive a check for the bonus from the company, then send the check to my client and the lease to the company. I find that most companies are willing to close the deal in this manner.

But most lease transactions are consummated using a draft. So, herein is an additional discussion of problems arising from use of drafts..

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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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John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
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