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A rather depressing milestone was announced this week. The number of oil well drilling rigs in the United States has reached its lowest count since records began to be kept in the 1940s.

Drilling rig counts have been by Baker Hughes, Inc. for many decades and are announced weekly. The count for the week ending March 11, 2016 was 480 drilling rigs. One commentator stated that there was not a consistent series of rig counts before 1948, but thought that to find a lower count, we would have to go back to the 1860s. The declining rig count is just one more effect of the fall in oil prices from $100 per barrel and more during the summer of 2014 to current levels of nearly $30 per barrel.

Drilling_the_Bakken_formation_in_the_Williston_BasinThe numbers hide the human cost behind the numbers. Each drilling rig has its own crew of very specialized workers. In many cases, the crews have worked together for many years. Watching an experienced crew operate a drilling rig is like watching a very special kind of ballet. I’ve seen some drilling crews in which very little verbal communication is exchanged. Instead, each member of the crew seems to know just when to do their part without instruction from the crew chief.

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Over the years I have negotiated many leases for mineral owners in the Texas Permian basin and the Eagle Ford Shale. Historically, production in these two areas has set records. These two shale plays, together with the Bakken, the Haynesville, the Marcellus, the Niobrara and the Utica represent 95% of all United States well and gas production increases from 2011 through 2013. The adjacent map shows the location of these areas.

dpmapv4l-wtitleHowever, the United States Energy Information Administration (the “EIA”), in its most recent Drilling Productivity Report, projects a substantial decline in production for the Permian basin and the Eagle Ford Shale. Specifically, the EIA predicts a 58,000 barrel per day decline in April 2016 for the Eagle Ford and a 4000 barrel per day decline in the Permian basin wells.Apr 2015 EIA DPR Permian
Aor 2015 EIA DPR Eagle FordThis decrease in production, together with the substantial decline in oil and gas prices over the last year, hits mineral and royalty owners hard. Many mineral and royalty owners are retired and their royalty income supplements Social Security payments. In many cases, they won’t have any source of substitute income.

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The National Society of Professional Surveyors (NSPS) and the American Land Title Association (ALTA) recently issued new minimum standards for surveys that you can access here. The NSPS and ALTA each officially adopted these new standards in 2015, and they become effective on February 23, 2016.

Some notable changes include:

● The American Congress on Surveying and Mapping (ACSM) is now to be known as the National Society of Professional Surveyors.

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The Foreign Investment in Real Property Tax Act was amended recently, with changes going into effect on February 17, 2016. Previously, when a foreign person or entity sold real property in the United States, the buyer was required to withhold 10% of the gross sales price. Beginning February 17, 2016, the amount required to be withheld increases to 15%. Under 26 CFR 1.1461 and 26 CFR 1.1445-6, if a buyer is required to withhold the tax from the seller and fails to do so, the buyer becomes responsible for the tax and any interest that accrues between the time the tax was due and when the buyer actually pays the tax. However, if the buyer obtains a withholding certificate from the Internal Revenue Service (IRS) that eliminates the withholding requirement and the seller fails to pay the tax, the buyer is not responsible for the tax. Either the buyer or the seller can apply for a withholding certificate.

Under the new requirements (that can be accessed here):

● If the sales price of the real property is less than $300,000 and the buyer intends to use the property as a residence, then no withholding is required.

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I tell all my Texas clients (and anyone else who will listen) never to sell their mineral interests. There are a number of reasons why:

1. About 99.9% of the companies who claim to buy mineral interests are scams. What often happens is that they send you a solicitation letter which makes an incredibly high monetary offer for your mineral interests. They ask you to sign a deed, which is either enclosed with the letter or that they send you if you contact them, and request that you send the signed deed back to them. Next they file the deed in the deed records. After the deed is filed in the county deed records, they contact you and say that they discovered certain ambiguous “problems” with your title to your minerals, or the market for mineral interests has changed, or some other nonsense. They then tell you they will pay you, not what they offered in the letter, but a tiny fraction of what they offered. If you don’t take it, you are stuck with the deed filed in the deed records that shows you sold your mineral interest to them. In many cases, I’ve had to sue the company on a client’s behalf to force the company to cancel the deed. Even if the company cannot be found or has gone out of business, you will still probably have to file a lawsuit to get a court order cancelling the filed deed. Given the expense of litigation, this can be a huge burden.

One way to tell if a company is a legitimate concern or not is to tell them that you might be interested in selling your minerals but your requirements are: 1) they need to send you a written contract of sale with a specific price and an earnest money deposit which, if acceptable to you, you will sign and take with the earnest money to a title company; 2) the deed will be prepared by your attorney; 3) the transaction will be closed in a title company; and 4) they will be required to deposit the balance of the purchase price in good funds with the title company before they receive the deed. Most of these companies will tell you that is an unnecessary expense, or “they don’t do it that way”. This is a huge red flag. However, in my experience, even some of the scam artists will agree to this, but once you have paid your attorney to draft the deed and it’s time for them to put the purchase price in escrow, they will disappear or pull out.

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Texas royalty owners have sure taken a licking this year. Unfortunately, it’s probably going to get worse before it gets better.

Moody’s Investor’s Service recently lowered its estimates for future average 2015 prices of Brent crude to $55 per barrel, and of West Texas Intermediate (WTI) crude to $50 per barrel. The new 2016 estimates are $57 per barrel for Brent and $52 per barrel for WTI. Meanwhile, the futures markets for September 2015 delivery settled at $43.87/bbl on the New York Market this week.

There are many factors that affect the price of oil. Some of the factors that are in play right now probably include weak global economic growth resulting in weak demand, the increase in the size of oil inventories, the prospect of Iranian oil coming to market in the near future and the increased production by oil companies. In fact, it’s ironic that oil companies are producing more and more oil in large part because the price is so low. They produce and sell more oil at a lower price in order to realize the same income that they received when oil prices were higher.

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A recent oil and gas pipeline rupture demonstrates how important it is to have an experienced pipeline attorney review the document to make sure your land is protected to the full extent of the law. In this case, a 24-inch crude oil pipeline owned by Plains All American Pipeline LP (PAA) ruptured on May 19, 2015 in Santa Barbara, California. The pipeline experienced an 82% wall thickness loss at the rupture site. An evaluation released on June 3, 2015 by the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA) indicated that there was a 6-inch opening running the length of the relevant section of pipeline. Both near the rupture and in other sections of the pipeline, corrosion had reduced the thickness of the pipe to 0.0625 inch. The PHMSA says they have not not yet been able to determine the cause of failure, although it certainly sounds as though the thinning of the pipeline was the culprit.

Conflicting Reports

The results released by PHMSA conflict with a report released by PAA which stated that there was only a 45% wall thickness loss in the area of the pipe rupture. PHMSA ordered PAA to perform another study on the pipeline and the rupture area, and to repair the damaged portion of the pipeline. PHMSA had previously ordered an indefinite shutdown of the pipeline.

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As of November 4, 2014 Denton, Texas was the first Texas city to ban fracing inside city limits with a ballot initiative that passed with almost 59 percent of the vote. The next day, the state’s energy lobby, Texas Oil and Gas Association, filed an injunction in response. The Texas General Land Office also separately filed suit to prevent Denton from enacting the ordinance. Arguments in both suits were based on the fact that well completion techniques, which include fracing and disposal, are preempted by the state regulation and that the ban cannot be enforced by a city. Opponents of the ban have also argued that the ban constitutes an unlawful taking of mineral rights. It is unclear if the courts would find the fracing ban to be an unconstitutional taking of property in violation of the Texas Constitution because it is not a ban on gas well drilling, only a ban on one type of gas recovery technique used during production.  More recently, the Texas legislature has prepared legislation that would actually ban all local regulation of oil and gas drilling, and not just fracing.

Implied Preemption in Texas

In Texas there is no doctrine of implied preemption under state law. This means that in order for a city or municipal regulation to be preempted by state law the Texas State Legislature must “with unmistakable clarity” dictate that state law controls. In January 2014, the state of Texas adopted new rules in the Texas Administrative Code relating to hydraulic fracturing in Texas. The new rules do not specifically preempt municipalities from adopting additional regulations.

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My readers know that I am generally supportive of oil and gas companies, although in my practice, I represent only Texas land, mineral and royalty owners. Smart development of Texas mineral resources has significant benefits for Texans and the country through cheaper fuel, energy independence, and economic growth. But this week, a proposed House bill in the Texas legislature that is undoubtedly sponsored by an oil company really makes me see red!

The bill that has angered me, and many other Texas residents, is House Bill 1496, now in the Land and Resources Management Committee. The bill would amend the Texas Government Code, Title 10 Subtitle A Sections 2007.002 and 2007.003. This portion of the Government Code regulates the taking of private property by government action, such as in the case of eminent domain for a public purpose (think of a county condemning property for a new road). The proposed amendment provides that ordinances or regulations by cities or counties that attempt to regulate oil and gas drilling and production within the city limits or county limits will be considered a government taking of a private property right.

iStock_000004865268XSmall.jpg On first blush, you may ask, why is that a problem? Consider this: There may be cities or counties within Texas that, from time to time, create restrictions so severe that all oil and gas drilling and production activity is effectively prohibited. However, most of the regulations I am aware of are eminently reasonable. For example, many city or county regulations prohibit oil wells and compressors in residential areas or next to schools. There are good reasons for this. The noise and smell of an actively pumping oil well with an above ground pump, or the noise and smell of a compressor used on a gas well (especially one without a hospital muffler), are substantial. No one could sleep or have any peace near these activities. Secondly, no matter how high the fencing around pumps and other oilfield equipment, they are going to be an attractive nuisance for kids and teenagers and serious injuries or death may result. Thirdly, the location of these activities near homes is going to result in a substantial decrease in the value of those properties. Finally, local cities and counties who have drilling and production activity in residential areas forced upon them are going to find that the diminished value of those homes is going to decrease their tax revenues at a time when they are already struggling.

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In what may be unsettling news for Houston, Devon Energy Corporation is closing its Houston, Texas office and shifting operations to Oklahoma City, where it has its corporate headquarters. The Houston office has been in charge of operations in Texas, Louisiana, Ohio and Michigan.

There were an estimated 500 employees working at the Houston office. Some of those employees will be transferred to Oklahoma City, the rest will be offered severance packages. The process of layoffs and transfers is expected to be completed and the newly consolidated operations up and running by the end of the first quarter of 2013. According to paperwork filed with the Texas Workforce Commission, Devon planned to cut 53 positions the first two weeks of January 2013 and then continue layoffs through the end of March, 2013.

200px-Houston_Texas_CBD.jpgDevon stated it expects this move to save $80 million per year from administrative and personnel expenses. Conversely, the cost of the restructuring and reorganization will cost Devon $125 million. The company has had some problems recently, as Devon posted a net loss of $179 million in the quarter that ended on September 30, 2012. Most of that loss was due to $1.1 billion non-cash impairment charge. Devon indicated that this move will allow it to be more flexible and to quickly move its workforce to wherever it is most needed at any given time. Devon officials also expect the consolidation to increase efficiency by promoting increased sharing of best practices within the home office.

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