Articles Posted in Oil and Gas Law

Texas oil and gas attorneys and mineral owners may see more leasing activity in 2010 in the Eagle Ford Shale, a field in southern Texas that oil and gas companies have known about for some time, but that is just now being explored. The field is named after the city of Eagle Ford, Texas, hometown of Bonnie Parker of “Bonnie and Clyde” notoriety. (The city of Eagle Ford was incorporated into the City of Dallas in 1956).

Several oil and gas operators, beginning with Petrohawk Energy Corporation, and including many of the larger companies (Anadarko Petroleum Corporation, XTO Energy Inc., Chesapeake Energy Corporation and several others), are quietly signing up leases and drilling exploratory wells. The “word on the street” is that the cost of drilling a gas well in the Eagle Ford Shale may be substantially less than in the Barnett Shale or the Haynesville Shale, although drilling in the heavy clay present in portions of the Eagle Ford shale presents its own challenges.

The Eagle Ford Shale underlies large portions of Texas, but it doesn’t always contain gas. Currently, leasing appears to be limited to Colorado, Dewitt and Karnes Counties. Other counties that may see leasing activity include Bee, Dimmit, Goliad, LaSalle, Lavaca, Live Oak, McMullen, and Webb Counties. An increase in the price of gas (which, given the large amount of current reserves, probably won’t happen for a while) would certainly accelerate activity in this play.

As a Texas oil and gas attorney, I have observed that it has been a slow year so far for leasing and drilling activity. But some experts are predicting a change on the horizon for 2010. An article this morning by Jamaal O’Neal in the Longview-Journal.com quotes Professor Ken Morgan, Texas Christian University geology professor and director of the TCU Energy Institute, as saying that higher oil and gas prices may be ahead for 2010. The article quotes research by Baker Hughes that natural gas, which was selling for $10.00 per thousand cubic feet or more in mid 2008, is currently selling for as low as $3.60 per thousand cubic feet. A barrel of crude oil that sells for about $69.00 currently, was bringing $150.00 a barrel during the summer of 2008. Professor Morgan opines that the large amount of natural gas reserves, as well as the world-wide recession, has kept prices for oil and gas low.

Basic economics dictates that when prices are low, oil and gas companies are reluctant to expend the large sums necessary to drill new wells. They are not going to make the investment if they can’t get a return. As the world economy recovers, demand for oil and gas will increase, the price of oil and gas will increase and the drilling of new wells will once again generate sufficient returns to support the cost of drilling. Once oil and gas companies begin to drill again, mineral owners will begin to get calls from landmen working for the oil and gas companies, seeking new leases. I may be a bit optimistic, but I see leasing and drilling activity in Texas picking up by March and April 2010.

As a Texas oil and gas attorney for many years, I have seen many booms come and go. During a “boom” period, prices for oil and gas increase. The increase in prices encourages exploration of new sources of oil and gas and development of existing sources. Mineral owners tend to see much more leasing activity during boom periods, and oil and gas companies are much more amenable to entering into leases that are fair to both mineral owner and operator. Conversely, when prices of oil and gas are low, exploration and development sags, leasing activity falls off and when a mineral owner is offered a lease, it is usually a very one-sided lease that favors the oil and gas operator and is very unfair to the mineral owner.We are just coming off a very down period for oil and gas exploration and development in many areas of Texas. I have counseled many mineral owners over the years during these down periods who were offered leases that were, frankly, onerous. In most cases, my client decided to decline the oil and gas company’s offer, and await a better offer. So far, each of these owners was ultimately offered a better deal, a fairer lease, and a lease with better compensation for their minerals because they waited.

As in life, there are no guarantees in the oilpatch. For example, there is no guarantee that you will be offered another lease, although it is certainly likely that you will. There are some cases in which even a poor lease might be better than no lease at all, especially if you are faced with a situation where your minerals may be drained without compensation if you don’t execute a lease. It is also important to realize that even in boom markets, you don’t always get everything you want in a lease. It is always a matter of give and take. Frankly, only someone experienced in this area can give you the input to help you make an informed judgment about whether to lease or not, and if you do lease, on what terms.

Any Texas oil and gas attorney who has practiced for any length of time has been through the cycle many times: oil prices go up, and leasing and drilling activity increases. Oil and gas prices decline, and many oil and gas companies pull back on their leasing and drilling efforts. The past year has seen an especially extreme example of this cycle. Last summer, according to WTRG Economics, the price the operator received for oil in some areas of Texas reached $150.00 per barrel or more. According to the Energy Information Administration (a division of the Department of Energy), gas was going for $8.00 per mcf at the wellhead in some places. Leasing was going on at a frantic, almost giddy, pace and substantial primary term payments and royalty percentages were the norm. Then prices declined sharply, to less than $30.00 per barrel of oil and $3.00 per mcf for gas at the wellhead in many areas of Texas. Most operators pulled way back, some walking away from signed leases and others signing leases only at substantially reduced bonus and royalty levels.

Now the price of oil and gas is increasing, and phoenix-like, the Texas energy industry begins to rise from the ashes. This time, there are some dark clouds on the horizon, coming in from our nation’s capitol, that do not bode well for the energy industry. President Obama, while proclaiming that he wants to achieve independence from foreign oil sources, is considering two things that would cripple our domestic oil and gas industry. Specifically, he wants to eliminate intangible drilling costs and depletion allowance as deductions for oil and gas operators on their federal income tax. He wrongly calls these “subsidies”, in an attempt to gain support for this policy.The deduction for intangible drilling costs allows oil and gas companies to deduct the cost of exploring for oil and gas from later oil and gas income. These costs include such things as seismic tests, surveys, engineering fees, wages, etc. The intangible drilling cost deduction encourages oil and gas companies to explore for new energy sources. The depletion allowance allows oil and gas companies to deduct a portion of the value of their mineral deposits as those deposits are used up, just as the owner of a machine used to produce goods is allowed to depreciate his machine.

It took decades for the domestic energy industry to recover from the ill-conceived, poorly timed and wrongly executed policies of Jimmy Carter. President Carter’s policies drove many smaller companies out of business, and encouraged other producers and refiners to move outside of the United States. When we experience those times of high gasoline prices in the United States, it is primarily Carter that we have to thank. Unfortunately, we now seem to have another President headed down this same irresponsible path.The announced policies of Obama are bad policy policy for at least four reasons: 1) most energy production in this country comes from small, independent companies, not “big guys” like Exxon or Mobil, and these small companies are going to be hurt badly by this policy; 2) these policies will result in much higher prices at the pump for consumers, who are having a hard enough time already; 3) Carter’s policies drove the “big guys” overseas, and now Obama’s policy would diminish the remaining independents; and 4) the higher energy prices will contribute in a big way to inflation. Is this really the way to achieve energy independence? I think not!

Part of what I do for clients as a Texas oil and gas attorney is to calculate oil and gas royalties so that they can be sure they are being paid correctly. I thought it might be useful to you to explain how an ownership percentage and royalty are calculated.

1. First, we take your percentage of mineral ownership in the land in question, and we multiply that by the number of surface acres in your entire tract. The resulting number is your net mineral acres. For example, if two relatives together own a one-half interest in a forty acre tract, or ½ times 40, they have twenty net mineral acres.      2. Secondly, if the land is located in a pooling unit, (sometimes also called a pro-ration unit), we multiple the total number of acres in the tract by a pro-ration fraction. The reason for this is that each royalty owner in a pooling unit is only entitled to their proportionate share of the oil or gas produced by the entire pooling unit. A pooling unit is an area around a well that is set by the Texas Railroad Commission,  and is intended to approximate the area drained by a producing well. Pooling units can range in size from 80 to 640 acres or more. For example, for a forty acre tract that is located in a 320 acre pooling unit, that forty acre tract is entitled to 40/320, or 0.12500, of the minerals (whether oil or gas or both) produced by that 320 acre unit.

3. Third, we multiply that result by the royalty fraction in the oil and gas lease you signed.

As oil and gas lawyers in Texas are well aware, there is a lot of pipeline construction going on in Texas as well as in other parts of the United States. I had a fascinating conversation not long ago with Victoria Myers, Senior Editor for The Progressive Farmer Magazine. If you have not looked at this publication before, it is really an excellent resource for folks who make a living from farming, as well as those “gentlemen (gentlewomen?) farmers out there. (You know who you are!) Since I am a Nebraska farm girl myself (Thayer County, to be precise), I find it especially interesting.

Victoria is the author of an article in an upcoming issue of Progressive Farmer regarding pipeline easements and rights-of-way. My discussion with her has caused me to update my list of issues involved in these kind of agreements by adding a few from her list. Here is the updated list:1. Is the easement limited to a specific area, or is it a blanket easement over your entire property?

2. Is the pipeline going to be buried to an appropriate depth, in light of your future use of that property, what the pipeline will carry and the anticipated size of the pipeline?

As a Texas oil and gas attorney, one of the things I do often, and really enjoy, is assisting people in locating oil and gas royalties due to them from old oil and gas leases signed by their ancestors. In a previous blog here, I discussed how these royalties get lost. Today I’d like to discuss how I go about determining whether you may have oil and gas royalties due to you and your family.

First, I will need to know the Texas county in which you believe your relative or ancestor owned property or minerals. In addition, if you have any written documentation regarding this ownership, I ask you to provide me with copies. Any documentation, such as an old deed, an old oil and gas lease, a will, an old tax statement, a plat, a survey, a copy of the county appraisal district map showing the land, a stub from an old royalty check, or even just an address, can be very helpful. It is certainly possible to research all counties in Texas, but since there are 254 counties in Texas, the expense would be substantial.Next, I research the status of your relative’s ownership of the real property that may be subject to an oil and gas lease or leases. Even if you already have a legal description of the property, it is essential to make sure that your relative has not, unknown to you, conveyed or transferred the property in question to a third party, or perhaps lost the property due to delinquent taxes. If we proceed without the precise legal description of each parcel of real property, or if the legal description is inaccurate or incomplete, or if your relative has sold or lost the property or the mineral interest, the time and expense involved in further work will be wasted.

Once we have completed the real estate research, I identify any oil and gas wells that have been or are located on your relative’s property. In addition, I determine whether your relative’s lease was part of a pooling or production unit. I obtain copies of the pooling documents so that I can calculate your relative’s ownership percentage and royalty.

As a Texas oil and gas attorney, I negotiate a large number of oil and gas pipeline easements and rights-of-way throughout Texas, as well as easements for other types of utility lines. While the landowner and I may not get everything we want in the negotiated agreement, it is almost always more fair than the agreement the pipeline company originally offered.

I also get a couple calls a month from someone who signed an oil and gas pipeline easement or right-of-way without consulting an attorney before they signed. Usually, they are seeing activity by the pipeline company that disturbs them and they want to know if the agreement they signed “lets them to do that?” The answer most of the time is “Yes”. Their next question almost always is: “Can I cancel this agreement or get out of it somehow?” The answer to that question is usually “No”.I am intrigued by why people would sign such a long term, complex, agreement, without legal advice. I have been cataloging the reasons I hear, out of curiosity. Here are some of the reasons I have heard thus far, and my parenthetical response.

1. “The landman was just so nice”. (Yes, he was nice. It is his job to be nice. If he wasn’t nice, he would have been fired a long time ago. Besides, have you ever been taken advantage of by someone who wasn’t nice?)

As Texas oil and gas attorneys know, each year, probably hundreds of thousands, maybe even millions, of dollars in oil and gas royalties from wells produced in Texas are lost to their rightful owners through a process called escheat. Specifically, when oil and gas companies cannot find the correct owner of mineral royalties, they are required to turn this money over to the Texas Comptroller.

How this happens is not difficult to understand. Let’s say Mom and Dad bought 100 acres in Texas many years ago. They got a deed to the land and the deed was filed in the deed records of the county where the land is located. They purchased both the surface and the minerals. A while later, they sign an oil and gas lease, and shortly after that, they began getting royalty checks. They don’t tell their children about the royalties, or maybe they do and the children forget about them. Many years later, Mom and Dad die, leaving five children. Maybe Mom and Dad died without leaving a will, or maybe they both had wills, but none of the children, for whatever reason, decided to have the wills probated. The five children just assume they each now own a one-fifth share of Mom and Dad’s land, or 20 acres each.Three factors now come into play that result in royalties to Mom and Dad being overlooked by the children. First, most oil and gas companies have certain minimum amounts of royalties that must accrue before they will send a check. If an individual mineral owner has a small share of the royalties on a well, checks may be sent out every few months, or even once a year. Secondly, all wells are shut down from time to time, for repairs or perhaps while a new gas pipeline contract is being negotiated. During this time royalty checks may not be sent out. One of the children or a grandchild may collect Mom and Dad’s mail for a time after Mom and Dad die. At some point, they stop doing so, or perhaps the Post Office forwarding order expires and is not renewed. When royalty checks resume, they are returned to the oil or gas company as undeliverable. At that point, Mom and Dad’s royalty account is put in suspense, or on hold. After a certain amount of time, the oil or gas company is required by the Texas Property Code to turn all accrued royalties over to the Texas Comptroller.

A third factor that contributes to royalties being overlooked by heirs is that the well that produces royalties for Mom and Dad may not be on the family land. In fact, the well may be a considerable distance away from the family land. The reason is that most oil or gas wells are required by law to be part of a pooling unit. The pooling unit may be as small as eighty acres, in the case of an oil well, or it may be several hundred acres in size, in the case of a gas well. When the well is a distance from the family land, it may not occur to the heirs that the family land is actually part of that well’s pooling unit.

As a Texas oil and gas attorney, I have occasion to review and negotiate many oil and gas leases in Texas for clients all over the United States (hopefully before the lease has been signed). However, having an attorney review a pipeline easement is every bit as important. Here are just a few of the critical questions that a pipeline easement should address:1. Is the easement limited to a specific area, or is it a blanket easement over your entire property?

2. Is the pipeline going to be buried to an appropriate depth, in light of your future use of that property, what the pipeline will carry and the anticipated size of the pipeline?

3. Does the easement obligate the pipeline company to refill to the original contour of the land and maintain that contour as the fill packs down?