Articles Posted in Oil and Gas News

In rereading a news release issued by the United States Attorney for the Eastern District of Kentucky, I was struck again by how much money is taken in by oil and gas scam artists. The news release recounted that a California man named John G. Westine, Jr. was convicted of 26 counts of mail fraud and a count each of conspiracy to launder funds and securities fraud.

This scam had all the usual hallmarks of a fraud. First, he targeted people in a state other than where he resided. This makes it harder for defrauded investors to track him down. Secondly, he guaranteed returns to his investors. Nobody in the oil and gas industry who is legitimate will ever guarantee returns. Third, Westine created a number of bogus oil companies who “owned” a number of producing oil wells. He offered people shares in these oil wells and guaranteed royalties to the investors. He scammed 200 people out of more than $3 million!

Of course, the investors funds didn’t go to purchase shares in oil wells. Instead, Westine and his half-brother were living the high life in California. The U.S. Postal Inspectors, who initiated the investigation into this scam, seized four of his vehicles in the Los Angeles area. One was a Mercedes Benz and the other three were Bentleys.

Good news for royalty owners in the Delaware Basin in West Texas. The Delaware Basin is a geologic formation that is well known for holding large oil fields. Guadalupe Mountains National Park in Texas and Carlsbad Caverns National Park in New Mexico are located within the Delaware Basin. The Delaware Basin is actually part of the much larger Permian Basin of West Texas.

The Delaware Basin in West Texas

Anadarko Petroleum Corporation had previously announced that they would probably cut the number of working oil rigs in this area from 6 to 4 rigs. However, in July, Anadarko announced that because they have made their operations more efficient and lowered drilling costs, they’re going to keep all six drilling rigs working.

Earlier this week, the Securities and Exchange Commission (SEC) sued Chris Faulkner, his company, Breitling Energy Corporation and several other parties for defrauding investors. The complaint filed by the SEC can be reviewed here. The SEC Complaint alleges that the Defendants intentionally and repeatedly misled purchasers of working interests regarding Faulkner’s  experience in the oil and gas industry, the nature of the investment, and the estimated cost to drill and complete the intended wells.

A working interest, unlike a royalty interest, is a type of mineral interest that bears a proportionate share of all exploration, drilling and completion expenses. Thus, an accurate estimate of the potential costs is critical information for an investor considering the purchase of a working interest. If costs are inflated over actual costs and the operator pockets the difference, obviously that’s a problem.

Whether Faulkner and the other Defendants are adjudged guilty of these allegation remains to be seen, of course. However, these kinds of claims emphasize the need to have an experienced oil and gas attorney examine and evaluate any potential oil and gas investment before you invest. An experienced oil and gas attorney will review your goals for the investment, discuss the suitability of the investment with you, review and analyze all offering circulars, contracts and other documents, and possibly most important, conduct due diligence background research on the company with whom you are investing.

Brent crude oil closed below $30 on Friday, January 15, 2016. This is the first time Brent crude has traded below $30 in over twelve years. Oil prices have plunged recently despite reports of Mideast instability, that terrorist groups have attacked storage facilities in two major Libyan ports and the threat of spreading hostilities in Iraq, Iran, Bahrain and other countries in the Persian Gulf.

The price decrease is primarily the result of supply and demand. Typically oil prices go up when the global economy is strong and world demand for oil and gas is rising. In response, response suppliers increase production and deplete stored reserves to take advantage of the increased price. When the global economy is stagnant or struggling, energy demand decreases and producers typically decrease production in line with the falling demand and also increase reserves or stockpiles. Not so this go round. In order to maintain cash flow, many oil companies are currently producing all they can.

Falling Demand

Earthquakes are caused by a sudden release of energy in the earth’s crust when two sections of the crust slip past each other.The size of an earthquake is determined by the Richter magnitude scale, which ranges from 0-10. Earthquakes are sometimes classified as:

● Micro Earthquakes. Earthquakes that register less than 2.0 on the Richter scale are called micro earthquakes and are typically not felt at the surface. Micro earthquakes are so frequent that it is estimated that they may be continually occurring or that there are several million that occur each year.

● Minor Earthquakes: Earthquakes that register 2.1 to 2.9 on the Richter scale are called minor earthquakes and occur over one million times per year. Minor earthquakes can be felt slightly by some people, but cause no damage to buildings.

Last year was a tough year for oil and gas companies. Houston based Schlumberger announced that it was laying off 9,000 workers. Range Resources cut its 2015 capital budget to $870 million. Other oil producers have cut rig production in response to the price declines. Concho Resources, a major producer in the Permian basin, recently cut its 2015 production by a third. Pioneer Natural Resources converted its derivative contracts to a fixed-price swap, to shield itself from the declining market. “Demand for rigs is falling off the cliff” said Joseph Triepke, a financial analyst and managing director of Oilpro. Finally, we have seen a number of oil and gas companies filing bankruptcy, as they find themselves unable to meet their lender’s demands for additional collateral in response to the shrinking value of the borrower’s reserves.

Its a frightening time for employees too. While the oil industry has added about 150,000 jobs over the last three years, the current pace of layoffs may outstrip the hiring. Each drilling rig represents about 100 jobs, from field hands to maintenance workers. The current rig count is down substantially. Oil companies are cutting exploration at exponential rates. Mr. Triepke surmised that this may mean that the three biggest  land rig companies- Helmerich & Payne, Nabors Industries and Patterson-UTI Energy – are “likely to cut approximately 15,000 jobs out of the 50,000 people they currently employ.”

Local economies may be devastated. Take the extreme example of Sweetwater, Texas. Two years ago Sweetwater was to herald a new age of industry due to the nearby Cline Shale.

Currently, there is  a coordinated effort underway by a number of organizations to study and identify a possible connection between hydraulic fracturing (fracing) and a recent increase in seismic activity.

Some scientists have observed an increase in seismic activity in the central and eastern regions of the United States, as shown in the graphic below. Scientists with the U.S. Geological Survey have been documenting the number of earthquakes of Richter Scale 3.0 or larger and have noted an increase in the number of earthquakes. There have been more than 100 earthquakes a year on average in the last four years, up from 20 a year between 1970 to 2000. California in particular has experienced an increase in seismic activity. After a relatively quiet period of seismic activity in the Los Angeles area, the last five months have been marked by five earthquakes measured larger than 4.0. That hasn’t occurred since 1994, the year of the destructive Northridge earthquake that produced 53 such temblors. In the two decades subsequent to the Northridge earthquake, there were some years that passed without a single quake of 4.0 or greater.

One of these organizations exploring a potential link between fracing and seismic activity is the U.S. Energy Association. Their main focus is on determining the quality and availability of information. With so much misinformation in the media, it is easy for mistaken assumptions to be published just to score a political point.

Kinder Morgan, based in Houston, Texas, is in the process of obtaining commitments from oil and gas companies who want to use its Utica Marcellus Texas Pipeline (“UMTP”) project. This pipeline will transport natural gas and mixed natural gas liquids produced from the Utica and Marcellus shale areas to delivery points along the Texas Gulf Coast. In February 2015, Kinder Morgan filed for abandonment of a Tennessee Gas Pipeline pipeline with the Federal Energy Regulation Commission (“FERC”).

As part of this pipeline project,  964 miles of natural gas pipeline in the  Tennessee Gas Pipeline will be abandoned and converted and approximately 200 miles of new pipeline from Louisiana to Texas will be constructed. The new pipeline is expected to be completed by the 4th quarter of 2018. The new pipeline will have a maximum design capacity of 430,000 barrels per day.

It appears from the Kinder Morgan maps that this new pipeline will travel through Newton, Polk, Liberty and possibly Chambers Counties in Texas. Landowners in these counties should be aware that the may be getting an easement request from landmen for Kinder Morgan, and when they do, they should contact my office. To make sure you get the best easement terms and compensation, you really need an experienced Texas oil and gas pipeline attorney representing you.