Articles Posted in Oil and Gas Law

An interesting case involving a Texas oil and gas lease was decided recently by the Texas Court of Appeals in El Paso. The case was Community Bank of Raymore v. Chesapeake Exploration LLC and Anadarko Petroleum Corporation. The issue was whether the lessee’s right to extract minerals found deeper than the stratum or level below the deepest producing well in a particular unit terminated when the lease’s primary term expired.

The oil and gas lease in question covered 16,000 acres, split into four blocks, located in Loving County, Texas. In Block 2 of the leased area, Chesapeake Exploration drilled 13 wells, the deepest of which was at 5,672 feet when the primary term of the lease expired on January 26, 2010. Community Bank of Raymore (“CBR”) requested that Chesapeake release its mineral rights below the depth of the deepest well, but Chesapeake refused. CBR file suit for breach of the lease.

CBR argued that the Pugh clause applied, which terminates an oil and gas lease at the end of the primary term as to any portion of the leased land which is not being produced. Chesapeake disagreed, relying on the continuous development clause, saying the Pugh clause was thus never triggered because Chesapeake developed Block 2 and paid royalties from existing wells in that block. Chesapeake said that its continued development of Block 2 was “sufficient to maintain the undeveloped, deep-lying formations beyond the primary term and satisfy the lease’s continuous development requirement.”

In October 2013, the U.S. Supreme Court granted certiorari in the case of Chamber of Commerce et al v. EPA et al. The case will decide the question of “(w)hether the EPA [Environmental Protection Agency] permissibly determined that its regulation of greenhouse gas emissions from new motor vehicles triggered permitting requirements under the Clean Air Act for stationary sources that emit greenhouse gases.”

The grant of certiorari followed Texas Attorney General Greg Abbott’s petition to the Court in April 2013, along with 11 other state attorneys general. The 11 other states involved, in addition to Texas, are Alabama, Florida, Georgia, Indiana, Louisiana, Michigan, Nebraska, North Dakota, Oklahoma, South Carolina and South Dakota. The attorneys general argued in their petition that the EPA violated the Constitution as well as the federal Clean Air Act by “concocting” its greenhouse gas regulations without Congressional authorization. Attorney General Abbot said that the regulations are threatening Texas jobs and employers and the EPA is a “runaway federal agency”. He was pleased the Obama administration would have to defend these regulations before the Supreme Court.

Organizations representing the oil and gas industry were also pleased that the Supreme Court decided to take this case. These organizations include the American Petroleum Institute and the American Petrochemical & Fuel Manufacturers. The issue doesn’t effect just the energy and manufacturing industries. Millions of other stationary sources could be affected by strict permitting requirements according to the president of the National Association of Manufacturers, who said that the regulations threaten the global competitiveness of the U.S.

A study entitled “Impacts of Delaying IDC Deductibility” was published recently by Wood Mackenzie Consulting and was commissioned by the American Petroleum Institute (API) to estimate the effects of an Obama proposal to eliminate federal tax deduction of intangible drilling costs used by the oil and gas industry and to instead require that these costs be treated as a capital expense. You can read the entire study here.

The difference between a deduction and a capital expense is huge. A deduction allows you to use the entire amount of the deduction in the year it was incurred. If these costs are treated as capital expenses, only a small portion of the total can be deducted each year over the useful life of the relevant asset. Intangible drilling costs are currently deductible like other operating costs and the deduction allows oil companies to use that saved money immediately for other projects. Intangible drilling costs include costs like wages, fuel and repairs, and accounts for 60% to 90% of costs for a given oil or gas well. Most industries deduct expenses like these in the year they were incurred. The Obama administration, however, wants to single out the energy industry for special treatment (again).

The study looks at the impact if this proposal was effective January 1, 2014. The study estimates that in the first year alone, elimination of the intangible drilling cost deduction would result in the loss of 190,000 US jobs. By 2019, the study estimates 233,000 job losses. Energy investment would be expected to drop by almost $40 billion per year between next year and 2023, for a total investment loss of $407 billion. U.S. oil production would drop by 520,000 barrels per day in the first year and 3.81 million barrels per day by 2023. There would also be 8,100 fewer wells drilled by 2019 and 9,800 fewer by 2023, contributing significantly to the drop in productivity. The study finds that some smaller companies may not be able to invest in drilling and development at all if the change were to take place.

In Texas, and in much of the rest of the country, an oil and gas lease makes use of several different kinds of pipelines. When you are the recipient of a request for a pipeline easement, the kind of pipeline to be installed in that easement makes a night and day difference in how you negotiate the easement.

I recently spoke at a National Business Institute telephone seminar about the negotiation of pipeline easements. NBI provides “on-demand” CLE for attorneys and they have many excellent seminars on a wide variety of legal topics. You can access the audio of the seminar here, or you can register to take the seminar for CLE credit here.

The word “pipeline” can mean a variety of things, because there are several different types of pipelines. First, there are flow lines, which are lines from the well to other equipment on the well site, such as a tank or a heater-treater. Flow lines are located entirely within the well site area. The authorization for these lines is generally contained within the oil and gas lease itself. These lines are not regulated by either federal or state agencies.

In 2008, the Texas Supreme Court heard a class action case against Phillips Petroleum Co. The case was Bowden v. Phillips Petroleum Co., in which the Plaintiffs alleged that Phillips had underpaid their oil and gas royalties. The Supreme Court remanded part of the case back to the trial court.

When the case was remanded, the representative of the class, Royce Yarbrough, amended the complaint against Phillips to allege that the company breached their implied covenant to market and that this is what contributed to the underpayment of royalties to the royalty owners. Phillips argued that to add a new claim on behalf of the class required a new class certification motion and hearing. The trial court disagreed and Phillips Petroleum appealed. The Texas Supreme Court considered this issue in Phillips Petroleum Co v. Yarbrough, et al.

The Supreme Court actually reviewed several issues, including res judicata issues from the Bowden case and whether they had jurisdiction over the interlocutory appeal on the decision by the trial court regarding the implied covenant to market. But the most interesting issue for oil and gas lawyers in Texas concerns the substantive issue of implied covenants to market vis-a-vis express covenants to market.

Recently the Supreme Court of Texas issued a decision that is important for Texas surface owners and mineral owners and the Texas oil and gas attorneys who represent them. The case is Homer Merriman v. XTO Energy Inc. I discussed the background of the Supreme Court decision previously, and you can access that article here.

Background:

As you may recall, Homer Merriman bought a piece of land in 1996, but he bought only the surface rights, and the deed clearly reserved the minerals. XTO Energy Inc. had previously leased the mineral rights. Mr. Merriman used the land for his cattle business and used the particular tract in question to sort his cattle, with stock panels and electrical fences which he testified were not permanent fixtures. In 2007, XTO wanted to drill a well on this tract, and offered Mr. Merriman $10,000 in compensation for this use, but he refused and the case went to court.

Texas royalty owners should get to know the website, FracFocus. This website provides a list of chemicals and other ingredients in fluids used by oil and gas well operators for hydraulic fracturing of wells both in Texas and across the country. The intent of the website is to allow the public to access this information and to provide objective and accurate data about hydraulic fracturing. FracFocus is managed by the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission.

Twelve states currently require operators to report their data on FracFocus and eight more states are about to require reporting. The website currently has more than 45,000 records from more than 400 companies.

A new version of the website went online on June 1, 2013 that promises to be even easier to use according to witnesses who testified before the U.S. Senate Energy and Natural Resources Committee during their first natural gas forum. Some of the changes in the new version of the website include the display of data in a format that is easier to aggregate and customize. In addition, the new website will allow a search by the name of a chemical, using the Chemical Abstracts Service number, and a date range.

In April 2013. representatives in the US House of Representatives announced that bipartisan legislation would be introduced in 2014 to take out corn based ethanol requirements in the federal Renewable Fuel Standard

The bill is called the Renewable Fuel Standard Reform Act. Those involved in the oil and gas industry know that the standards involving ethanol can effect the market by conferring an artificial advantage for the so called “renewable” fuels over oil and gas.

The current Renewable Fuel Standard requires 36 billion gallons of renewable fuels to be included in the domestic fuel supply by 2022, and almost all of that is from corn-based ethanol. This requirement uses a massive percentage of America’s corn supply and diverts it to fuel. In 2011, 40% of the nation’s corn went to making ethanol, which is about five billion bushels of corn. Because so much of the corn crop is used for ethanol, there is less for food and for livestock feed. The end result is a substantial increase in the price of corn and everything that has corn as an ingredient, hurting consumers and many small businesses. In addition, ethanol in fuel wrecks havoc on everything from car engines, to lawnmowers to chainsaws. No one has bothered yet to assign a cost for these damages to consumers.

The US House of Representatives Natural Resources Committee has held at least five meetings in the last two years on the problem of federal oil and gas regulations overlapping with existing state regulations. The Committee’s chairman, Representative Doc Hastings, had a common sense solution to this confusion: “There is a simple solution to prevent duplication: Don’t duplicate the states. The ‘one size fits all’ regulatory structure being pursued by the Obama administration is a waste of time and energy.” This issue is particularly significant in light of the increase in hydraulic fracturing, a process that has become increasingly politicized at the national level.

That is exactly the message of three of the witnesses at the Committee’s latest meeting. These three witnesses, all state officials, agreed that states are in a unique position to understand the geological and environmental conditions and issues within their states. The states represented by these three witnesses were Utah, Texas, and Ohio.

Utah’s Lieutenant Governor Gregory Bell told the Committee: “From Utah’s perspective, increasingly national political considerations are unduly influencing land use decisions that are more effectively addressed locally.” He went on to assert that “political jockeying” in Washington within national policy debates hurts local communities, who are better placed to decide what is best for their land. He pointed to the sequester cuts to mineral lease royalty payments, which confuses what royalties are supposed to be- they should be dedicated revenues held in trust, not subject to federal spending rules.

Due to increasingly onerous regulations, oil and gas industry associations have filed suit in federal court over the Environmental Protection Agency’s (EPA) planned regulation of greenhouse gases from power plants and vehicles. The regulations come from a 2009 EPA finding that greenhouse gases pose a public health threat- the so-called “endangerment finding”.

Last year, a three judge panel at the District of Columbia’s Circuit Court of Appeals upheld the EPA regulations. That same court denied the energy industry Petitioners a rehearing in December, so the Petitioners recently asked the US Supreme Court to review the regulations at issue.

The Petitioners’ request explains that the regulations are hurting the economy, that there are clear legal issues that need to be adequately addressed, and that the need for review was particularly acute in light of two articulate dissenting opinions at the Court of Appeals, one by Judge Brett Kavanaugh and one by Judge Janice Rogers Brown.