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On May 12, 2016, the United States Environmental Protection Agency (EPA) issued its final Methane Rule,  mandating new limits on methane gas emissions, volatile organic compounds (VOCs) emissions and other by-products such as benzene associated with oil and natural gas production wells and storage tanks. The new EPA rule is meant to apply to new as well as existing, reconstructed and modified oil and gas wells and even those wells producing fewer than 12 b/d of oil. Methane is a major component of natural gas. The stated goal of the new rule is to reduce methane and other toxic gas emissions by 40% to 45% of 2012 levels by the year 2025.

Unfortunately, but not unexpectedly, the EPA’s Methane Rule is a one-size fits all scheme that is meant to be adopted across the board by oil and gas producers in all states. When the EPA announced its final rule on this matter, many groups were openly and adamantly critical of the new rule. Many in the oil and natural gas industry voiced concern about the financial stress that the new rule would put on producers. For instance, the rule is especially burdensome for stripper and marginal well operators, and given the low price of oil and gas these days, there are many more marginal well operators these days.

Fifteen States Object to the EPA’s New Rule And File A Lawsuit

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In 1994 Roland Oil Co. acquired the North Charlotte Field Unit Lease in Atascosa County, Texas. The Lease contained 31 wells, with the oldest wells drilled sometime in the 1950s. The Lease contained both active and inactive wells. Rule 14 of the Texas Railroad Commission requires that “dry or inactive wells” be plugged within one year of the termination of drilling operations. Delinquent inactive wells are required to be plugged “immediately unless the well is restored to active operation.” Rule 14 also requires structural testing of inactive wells that are more than twenty five years old prior to plugging and abandonment operations. If an operator fails to meet these requirements, the Railroad Commission can prohibit an operator from producing from any wells under the lease.

In 2005, Roland requested an extension of time to complete the required testing on some of the inactive wells on the Lease. The Railroad Commission determined that Roland had been delinquent on the required testing since 1994, denied the request, and also issued an order barring Roland from producing from any well on the Lease. Roland halted production from May 2005 to August 2006 to conduct repairs and to complete the testing required by the Railroad Commission. The Railroad Commission lifted the order barring production in August 2006.

Meanwhile, in June 2006, a mineral owner under the Lease notified the Railroad Commission that the lease had terminated for lack of production. In response, Roland claimed the Lease had not terminated for two reasons: First, the Lease contained a provision stating that the term of the Lease is “for the time that oil and gas are produced in paying quantities and as long thereafter as Unit Operations are conducted without a cessation of more than ninety consecutive days.” Roland argued that repairs and testing activities during the period of non-production met the definition of Unit Operations under the Lease. Secondly, Roland argued that the Railroad Commission order preventing production constituted “force majeure” which kept the Unit Lease alive despite lack of production.

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In September 2016, Oklahoma experienced a 5.6-magnitude earthquake near the town of Pawnee. The quake was the first in a series that started on the morning of Saturday September 3, 2016. While no one was severely hurt or killed during the earthquake, somey buildings suffered moderate to severe damage. The quake was the second largest in Oklahoma history and was felt as far away as Chicago and Austin, Texas. After the 5.6 magnitude earthquake struck in the morning, several smaller earthquakes occurred weighing in at magnitudes of 3.6, 3.4 and 2.9, according to an article in The New York Times.

One prominent theory for the cause of these quakes in  states such as Oklahoma and Texas is that these earthquakes are the result of high pressure injection of wastewater from fracing into wastewater disposal wells. The theory is that wastewater is injected into the ground under such high pressure that the wastewater is able to percolate between the rocks in the ground and can act as a lubricant allowing stressed fault lines to slip. The sudden release of pressure from slipping fault lines then causes earthquakes, or so the theory goes.

The Oklahoma Corporation Commission, which is the Oklahoma agency that regulates oil and gas production activities within that state, ordered more than three dozen wastewater disposal wells within five hundred square miles around where the earthquake occurred to be shut down, even though the United States Geological Survey (USGS) could not attribute the earthquakes to wastewater injection well activity in the area.

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In an earlier blog post, we discussed the Texas fracing case that was headed to the Texas Supreme Court for further review. On April 24, 2015, the Texas Supreme Court issued its opinion in In Re Steven Lipsky, and determined that the Texas Citizens Participation Act does not require that courts apply a heightened standard of proof to claims requiring clear and specific evidence.

Background

The Lipskys claimed they could set their drinking water on fire due to the nearby fracing activities of Range Resources. The Lipskys filed suit against Range for contamination of their water well and Range filed a counter-suit against the Lipskys and another party, Alisa Rich, alleging defamation, business disparagement, and civil conspiracy. The Lipskys and Rich filed a special motion under the Texas Citizens Participation Act to dismiss Range’s counter-suit.

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There has been an ongoing debate about whether hydraulic fracturing activities for producing oil and gas have an impact on drinking water supplies near and around the fracing site. Recently, the United States Environmental Protection Agency’s (EPA) Science Advisory Board (SAB) raised a number of questions concerning the EPA’s June 2015 draft report on the potential impacts of hydraulic fracing on drinking water supplies.

The SAB prepared a 180-page peer-review report that you can read here addressing the EPA’s 2015 draft report. The SAB found a number of aspects of the EPA’s draft report to be critically deficient. Below is an overview of some of the the SAB’s report’s findings. In particular, the SAB noted that:

  • The EPA’s conclusions drawn about the widespread and systemic impacts that fracing has on the quality of drinking water resources were not quantitatively supported and lacked evidence.
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Recently, Ryan Sitton, who is both an engineer and one of the Texas Railroad Commission‘s Commissioners, spoke out about the false news reports concerning the Texas oil and gas industry in a commentary in the Wilson County News. Below, I reprint a pertinent portion of his comments:

Headlines proclaiming that oil and gas drilling are directly linked to earthquakes in North Texas are dominating energy news this week. You may have even read a few:

  • EPA: North Texas Earthquakes Likely Linked to Oil and Gas Drilling
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In what is good news for royalty owners and mineral owners in the Permian Basin in Texas, the Energy Information Administration (“EIA”) recently issued a Drilling Productivity Report that projects that output from the Permian Basin will increase by almost 3000 barrels of oil per day.

The Permian Basin

The Permian Basin

The Permian Basin is located in West Texas and southeastern New Mexico and includes Andrews, Borden, Ector, Loving, Midland, Pecos, Ward and Winkler Counties. The increase in production is probably the result of not only new wells, but also greater efficiency in drilling operations.

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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.

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As the Texas Supreme Court noted recently, it is the responsibility of mineral owners to review their deeds carefully to ensure that the rights and reservations in the deed are what they intend and that there are no mistakes. Specifically, in Cosgrove v. Cade, the Court held that “Plainly obvious and material omissions in an unambiguous deed charge the parties to the deed with irrebuttable notice (of any errors) for statute of limitations purposes”. As a result, the “discovery rule” does not apply to a suit to reform the deed according to both Texas common law and the Texas recording statute.

In 2006, the Cades sold two acres of land to Barbara Cosgrove. The real estate contract provided for the reservation of all of the mineral rights to the Cades. However, the deed conveyed the land in fee simple, meaning all the land and rights incidental to ownership of the land, including mineral rights, were conveyed to the buyer. At closing of the transaction, the parties signed a document in which they agreed to correct or adjust any errors or omissions in any documents.

In 2010 the Cades realized that the deed conveyed their mineral rights to Ms. Cosgrove. The Cades filed a lawsuit to reform the deed and for breach of contract.

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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

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.

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