Articles Posted in Oil and Gas Law

Until recently, most of us in Texas and throughout the country (unless you had an oil and gas lease) struggled with high gasoline prices. However, a new study entitled, “Are the Energy States Still Energy States?” by Mark Snead, an economist and Vice President of the Federal Reserve Bank of Kansas City, provides more context to the overall interaction between the energy industry and the economy. The study suggests that thirteen energy producing states, (we’ll call this group the “Energy States”), have strong enough energy industries that higher oil and gas prices actually help, rather than hurt, their economies. Mr. Snead’s list of the thirteen Energy States are Alaska, Louisiana, Mississippi, Oklahoma, Texas, Colorado, Montana, New Mexico, Utah, Wyoming, Kansas, North Dakota and West Virginia.Texas itself is the largest single producer of both oil and gas in the country, and by itself produced 21% of crude oil and one-third of natural gas output in the U.S. in 2008. The same year, the Texas energy industry generated nearly $65 billion in oil and gas earnings, more than half of the national earnings from oil and gas.

Mr. Snead’s study shows that during the recent recession, the Energy States did better than other states that lacked a robust energy sector. Individually, all the Energy States economically outperformed both the nation as a whole and non-energy states as a group. The Energy States experienced faster job growth prior to the recession, entered the recession much later, and have posted better job growth overall since the recession. Between December 2007 and September 2009, non-energy states saw a contraction of employment by 5.7%, compared to 2.8% in Energy States. Since the start of the recession, Energy States were four of the top five states, and seven of the top ten states, in job growth. Energy States North Dakota and Alaska were the top two states in terms of job growth and had the only net job increases throughout the recession! Contrary to general expectations, the economies of the Energy States actually start to decline when gas prices go down. Lower oil and gas prices have the inverse effect on the Energy States compared with non-energy states, where high gas prices can take a severe toll on economic productivity.

Mr. Snead stated that on their own, the increased employment and income produced in the Energy States is not enough to offset the economic effect of high gas prices, but that if the country as a whole increased energy conservation and production efforts, it could make a significant difference. He pointed to two obvious benefits to Americans-more jobs and more money focused on domestic resources instead of foreign oil and gas.

Finally a piece of good news and an intelligent decision has come from the Environmental Protection Agency (EPA)! It has taken them more than a year, but in the end even the EPA had to accept scientific fact. Recently, the EPA vacated an emergency order from December 2010 prohibiting Fort Worth-based Range Resources from pumping natural gas from two wells in Parker County, Texas.

In the EPA’s original 2010 order, it accused Range (without any evidence, mind you) of contaminating drinking water in Parker County with methane gas, allegedly caused by hydraulic fracturing in the Barnett Shale. The Texas Railroad Commission, the oldest regulatory body in the State of Texas, invited the EPA and the owners of the affected wells to a January 2011 hearing on the issue. Neither the EPA nor the supposedly affected well owners showed up. (No doubt they did not want to be confused by the facts or by real science). The hearing proceeded as scheduled, however, with scientific experts in the oil and gas field testifying. These experts can determine the geochemical gas fingerprint of a substance like methane that identifies where the gas originates.

The scientific evidence conclusively showed that the methane found in the drinking water was from a shallower Strawn gas field and not from fracing in the Barnett Shale by Range Resources. The sample did not match the fingerprint of Barnett Shale gas, which is more than 5,000 feet below the surface. Range Resources staff also testified that their gas wells were mechanically sound and that there were no leaks. After considering the evidence, the Railroad Commission found that Range Resources’ drilling had not caused the contamination in the water wells. Despite this decision and the solid scientific evidence behind it, the EPA stood by its 751 page Emergency Order and continued with its case against Range. The conflict ended up in federal court. It took another 14 months of grasping at straws and stalling for the EPA to admit they never had a valid case. While it is frustrating that the legal fight had to drag on at all, I guess those of us in the oil and gas industry should at least be glad that the EPA finally admitted its error, rather than continuing to waste more taxpayer money and time on pointless litigation.

Earlier this month, a study by the New York-based World Economic Forum (WEF) found that the energy industry was responsible for 9% of all new job growth in the United States in 2011. In the US, the oil and gas industry grew at 4.5% last year, compared to a 1.7% total GDP growth nationwide. The WEF Report, entitled “Energy for Economic Growth”, was released on March 7, 2012 in Houston, Texas during the IHS-Cambridge Energy Research Associates Energy Week, and states that the US oil and gas industry directly created 37,000 jobs and indirectly created 111,000 jobs in 2011 alone. Those numbers indicate that the energy sector has trended towards creating more growth indirectly than via direct job creation, highlighting the ripple effect that industry growth has on the job market as a whole.Roberto Bocca, senior energy industries director at WEF, has been quoted as saying that “we always suspected that energy had a vital role to play in the economic recovery, but we were still surprised when the data uncovered the magnitude of the sector’s multiplier effects.” The report concludes that the energy industry is by its nature capital intensive and therefore contributes significantly to the economy as a whole. In addition, energy sector jobs in general require highly trained and skilled workers and those workers are paid good salaries. Per worker earnings for the industry are twice as high as average earnings in Germany, Norway, the UK, and the US, and four times the average in Mexico and South Korea. Because of these higher earnings, industry workers have more disposable income to spend than the average worker and therefore help the economy by spending in other areas. Also important for the “multiplier effect” is the industry’s extensive supply chain to keep the sector running. The oil and gas industry has a greater impact on the economy than even the financial, telecommunications, software, and non-residential construction sectors.

The WEF Report also looked at the role of energy prices and how they affect economies. The Report pointed out that lower energy costs reduced prices across the board, thus making products more affordable to consumers. Lower energy costs also increase the discretionary spending of consumers and businesses. The study showed that lower natural gas prices will result in a 1.3% increase in US GDP in 2013, one million more jobs in 2014, and, by 2017, a 3% increase in industrial production output than without the anticipated shale gas development.

This Report was good news for the rest of the world as well, because it also predicted that the global energy sector would help pull the world economy back from the recent recession. The report highlights some countries-China, India, and South Korea-that have focused on renewable energy sources as growth sectors for their economies. Other developed countries are focusing on this renewable sector, as well, to achieve sustainability goals. The Report pointed out, however, that these new technologies have higher costs and so creates trade-offs that should be considered. In any case, HIS-CERA Chairman and Pulitzer Prize-winning author Daniel Yergin said, “The energy sector has the potential to be a tremendous economic catalyst and a source of innovation in its own right, while it simultaneously produces the very lifeblood that drives the broader economy.”

In a suit with implications for Texas gasoline consumers, the American Petroleum Institute filed a petition for review in the US Court of Appeals for the District of Columbia last week against the Environmental Protection Agency over what it deems unachievable bio-fuels use requirements. These latest requirements are in the 2012 Renewable Fuel Standard. It seems that once again the government is trying to use the EPA as a cudgel to beat the oil and gas industry, and the API is having none of it.

The Clean Air Act requires that the EPA determine the required amount of cellulosic bio-fuels used in gasoline each year, depending on the volume available. This year, the EPA mandates that refiners and importers of gas and diesel use 8.65 million gallons of cellulosic bio-fuels, but in reality, there is an almost complete dearth of that type of fuel commercially available. Bob Greco, API’s director of downstream and industry operations, has been quoted as saying that the “EPA’s standard is divorced from reality and forces refiners to purchase credits for cellulosic fuels that do not exist. EPA’s unrealistic mandate is effectively a tax on manufacturers of gasoline that could ultimately burden consumers.” He went on to call it a “regulatory absurdity.”

The API has historically a realistic and workable Renewable Fuel Standard and wants the EPA to base its assessments on at least two months of actual cellulosic bio-fuel production in the current year when deciding upon the following year’s requirements. Instead, what the EPA does is rely on the promises of cellulosic bio-fuel production companies of how much they can produce, even though those promises have been, and continue to be, of questionable validity.

Recently both the U S House of Representatives and the Senate passed by unanimous vote new federal pipeline legislation. The legislation would both reauthorize and strengthen existing pipelines safety programs through 2015, improve enforcement of existing laws, address National Transportation Safety Board recommendations, and fill in any gaps in the law if necessary.This was the most recent of the pipeline safety acts passed by Congress. The very first statute that regulated pipeline safety, the Natural Gas Pipeline Safety Act, was passed in 1968 and amended in 1976. Congress added language about liquid pipelines to the statute in the Pipeline Safety Act of 1979. The Acts that followed were the Pipeline Safety Reauthorization Act of 1988, the Pipeline Safety Act of 1992, the Accountable Pipeline Safety and Partnership Act of 1996, and the Pipeline Safety Improvement Act of 2002. Congress also created the Office of Pipeline Safety (part of the Department of Transportation) in 1968 for the purpose of overseeing and implementing pipeline safety regulations. However, the Office of Pipeline Safety has been accused of weak enforcement and ineffective rules.

The latest pipeline safety legislation was passed partly in response to disasters such as the 2010 PG&E pipeline explosion in San Bruno, California, that killed eight people, and an accident in July when an Exxon Mobil pipeline dumped an estimated 1,000 barrels into the Yellowstone River. Some of the specific features of the legislation include doubling the maximum fine for safety violations to $2 million, increasing the number of pipeline inspectors, and requiring automatic shutoff valves on new or replaced pipelines wherever “economically, technically and operationally feasible.” Oil and gas companies would be required to meet maximum pressure standards when testing all pipelines, including old ones.

Members of the oil and gas industry endorsed the legislation. Donald F. Santa, president of the Interstate Natural Gas Association of America, stated that improvements in integrity management, incident notification, public education, and pipeline safety research and development would result in “a safer, more reliable pipeline system nationwide.” Likewise, Dave McCurdy, the president of the American Gas Association, said that he looked forward to the bill finally reaching President Obama’s desk, where it would inevitably be signed.

Despite having many obvious benefits, the legislation contained some compromises that left some people wanting. Some critics complained that the legislation did not provide for enough safety inspectors (it authorizes the hiring of 10 federal inspectors). Others, like Congresswoman Jackie Speier, who represents San Bruno, felt that the language on automatic and remote shutoff valves was still too weak.
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Hydraulic fracturing has often been criticized for its possible effect on groundwater, but the early results of a study by the Energy Institute at The University of Texas at Austin indicates that the concern is largely unfounded. Early results of the study, entitled “Separating Fact from Fiction in Shale Gas Development” shows that the process alone does not contaminate drinking water. Instead, what the study pointed out was that fracturing sites might have a higher rate of surface problems that could occur with any type of drilling.The purpose of hydraulic fracturing is to wrest natural gas and oil from shale and sand formations, which tend to be dense and difficult to penetrate. The hydraulic fracturing approach uses a combination of sand and chemicals, mixed with millions of gallons of water, to break up and keep open the shale formations, resulting in hydrocarbons being released. Although most of the fracturing fluid is water, a tiny percentage is made up of chemicals, several of which could potentially be dangerous. There have been reports of surface spills killing livestock and polluting drinking water. The EPA has blown that tiny percentage out of proportion, claiming that fracking fluid in general is harmful and should be phased out by the oil and gas industry.

Yet the University of Texas results show that hydraulic fracturing has been getting an undeserved bad reputation. According to Chip Groat, the University of Texas geologist leading the study, what actually happens is that shale drilling causes more problems on the surface than drilling without fracking. These problems include spills of drilling and fracking fluids and leaks from wastewater pits. There have also been problems with surface casing (a steel pipe at the top of a well meant to isolate the flow of hydrocarbons from aquifers) as well as the cement jobs that hold the casing in place, but these are problems common to any type of drilling project, not just fracking. Chip Groat’s position is that no evidence links these problems to incidents of groundwater contamination.

In Texas, hydraulic fracturing is a common practice of the oil and gas industry. Prior to the study, the Railroad Commission of Texas, the state’s oil and gas regulator, reported at least 311 complaints about the possibility of contaminated drinking water from the beginning of 2006 to the end of September this year. However, one of the commissioners stressed that no complaint had ever been linked to an improper well cement casing.

Last fall, the Texas Railroad Commission held a hearing to consider a new rule for disclosure of hydraulic fracturing chemicals. At the hearing, Chemistry Professor Andrew Barron from Rice University claimed that the rule would serve to demystify the chemicals used and help assure the public that the chemicals were not overly dangerous.The new rule will be codified as 16 Texas Administrative Code section 3.29 and would implement House Bill 3328. House Bill 3328 has already been passed by the Texas state legislature and signed by Governor Perry. Section 3.29(c) lists disclosure requirements for suppliers, service companies, and operators who are involved with hydraulic fracturing. Under the Rule, not later than 30 days after the completion of a hydraulic fracturing treatment, suppliers and service companies must provide the well operator with the names of each chemical substance that was purposely added to the hydraulic fracturing fluid. In particular, any chemical ingredient that requires a Material Safety Data Sheet must be listed.

The rule defines “chemical ingredient” as “a discrete chemical constituent with its own specific name or identity.” An additive is “any chemical substance or combination of substances” contained in a hydraulic fracturing fluid that is purposely added to the base fluid for a specific reason whether or not that reason is to create fractures in a formation.

Under the rule, operators of wells have the responsibility of submitting information to a hydraulic fracturing chemical disclosure online registry. The data that must be given includes the operator’s name, the date of the treatment, the well’s location, the well’s API number, the amount of water used in the treatment, each chemical treatment used, and several other important pieces of information. Operators must also submit a well completion report for each well that received a hydraulic fracturing treatment to the Railroad Commission. Certain chemical ingredients are exempt from being listed under Section 3.29(d), such as ingredients not disclosed by their manufacturer, or ingredients not intentionally added to the hydraulic fracturing treatment. Ingredients that are trade secrets would also be protected from disclosure.

Contrary to the Obama administration’s expectations, it sounds as though states are doing a fine job regulating the oil and gas industry, according to members of a shale gas subcommittee in the U.S. Senate. In the Shale Gas Subcommittee 90-day Report subcommittee members reported to the Senate Committee on Energy and Natural Resources during a hearing last fall. The subcommittee was formed to make recommendations about the safety and environmental performance of shale gas production.The Report made 20 recommendations, including:

1. Improve public information about shale gas operations.

2. Improve communication between state and federal regulators. The subcommittee recommended continued yearly support to STRONGER (the State Review of Oil and Natural Gas Environmental Regulation) and to the Ground Water Protection Council for expansion of a data management system that determines risk, along with similar programs.

3. Improve air quality. The subcommittee had recommendations for reducing general pollutants, ozone precursors, and methane quickly.

4. Protect water quality. The subcommittee recommended a water management system based on “consistent measurement and public disclosure of the flow and composition of water at every stage of the shale gas production process.”

5. Disclose fracturing fluid composition. The subcommittee believed that although the risk was remote that fluid from deep shale reservoirs fractures could leak into drinking water, any chemicals in fracturing fluids should be made available to the public.

6. Manage short-term and cumulative impacts on communities, land use, wildlife, and ecologies.
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Any good Texas oil and gas attorney must be fully versed in the Texas Statute of Frauds. The Statute of Frauds is an old concept, requiring that certain contracts have to be in writing and signed to be valid. The Statute of Frauds dates back to at least seventeenth century England, and was exported to the United States as part of common law. It now exists in the Texas Uniform Commercial Code and in the Texas Business and Commerce Code. The Texas Statute of Frauds requires that all conveyances of real property and transfers of mineral interests (including oil and gas leases) be in a writing, signed by both parties.For an agreement to comply with the Statute of Frauds, it has to include all of the essential elements of the agreement. Basic elements include the time of performance and a description of the property. This may sound fairly straight forward, but time and again, disputes have arisen over oil and gas agreements and conveyances that failed to accurately describe the interest being conveyed — or in which the conveyance was not in writing at all.

For example, in Quigley v. Bennett (2007), geologist Robert Bennett charged Michael Quigley, an oil and gas operator, with fraudulently inducing him to perform services related to an oil and gas lease. Bennett claimed that he was entitled to an overriding royalty interest that Quigley had conveyed to him orally in return for certain services that Bennett performed. The Texas Supreme Court disagreed. Because Bennett and Quigley never put the conveyance in writing, Bennett had no interest. He therefore was not entitled to the $1 million award that the jury had given him.

More recently, in Preston Exploration Co. v. Chesapeake Energy Co. (2010), the Court reviewed a disagreement over the legal descriptions in Purchase and Sale Agreements for oil leases. Preston argued that the Purchase and Sale Agreements and exhibits complied with the Statute of Frauds because the description identified the property being conveyed with “reasonable certainty.” However, the District Court of the Southern District of Texas found that since neither the Agreements nor the exhibits included specific information about the location of the leases, they failed to comply with the Statute of Frauds.

The oil and gas industry is under attack not only in Texas, but nationally. Several months ago, a new study by Louisiana State University Professor Joseph Manson, An Economic Analysis of Dual Capacity and Section 199 Proposals for the U.S. Oil and Gas Industry, was released. Professor Manson’s study found that tax changes proposed by the Obama administration would actually increase the deficit.One of Obama’s proposals would prohibit oil and gas companies from using the manufacturer’s deduction created by Section 199 of the American Job Creation Act of 2004. The other proposal would create limits on foreign tax credits used by U.S. dual-capacity taxpayers. The Obama administration claims that these changes would lower the deficit and has included them in every annual budget proposal. Instead, Professor Manson demonstrates that these proposals would result in a loss of $53.5 billion a year in tax revenue.

Section 199 allows taxpayers who produce or manufacture in the United States to deduct a certain percentage of domestic production activity from their taxable income each year. The dual-capacity taxpayer rules prevent U.S. firms operating in foreign countries from being doubly taxed. Professor Manson’s study, sponsored by the American Energy Alliance, took a detailed look at the effect that the loss of these credits would have on the oil and gas industry. Professor Manson concluded that there would be a loss of 155,000 lost jobs, a loss of $68 billion in wages, and a loss of $83.5 billion in reduced tax revenues. Not only that, beware the unintended consequences: as more people are laid off, more people will request unemployment benefits, food stamps and other forms of assistance.

Professor Manson made his calculations using the Modern Regional Input-Output Modeling System II, developed by Nobel Economic Laureate Wassily Leontief, which supposes that when a company has to pay $1 more in taxes, it must take it out of other sources, such as workers’ pay. As a result, Professor Manson notes: “[A] tax on just a small number of firms can be felt throughout the economy.” He found that job losses go beyond those strictly related to oil and gas production: construction, retail, food services, and even arts and entertainment would feel the pain. Not only would there be significant job losses, but also the U.S. could suffer $341 million in lost output. The region hardest hit would be the Gulf of Mexico, where the local community has already suffered extensively following the Deepwater Horizon tragedy.