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The Texas Supreme Court recently addressed how a bequest in a will of a double fractional oil and gas interest should be interpreted in Hysaw v. Bretton et al  in an opinion entered on January 29, 2016. A double fraction occurs when an instrument expresses a royalty interest as the product of two fractions, such as “1/4 of the usual 1/8 royalty”. The problem with using a double fraction in a deed or a will is that it is not often clear whether the instrument has created a fixed or “fractional royalty”, or a floating “fraction of” royalty in situations where the lease provides for a royalty different than 1/8. Back in the day, royalties were almost always 1/8. However, these days royalties are usually not 1/8: they can range from 10% to 30% or more. So the question becomes whether the testator or grantor meant for the beneficiary or grantee to get 1/4 times 1/8, i.e., 1/32, no matter what the actual royalty is or whether the term “the usual 1/8” was meant as a stand-in figure to represent whatever the actual royalty is. For even a moderately producing oil or gas well, this difference can represent a lot of money over the life of the well. The dispute in this case was between the children’s heirs, some claiming the will intended a fractional interest of 1/32 royalty and others claiming that the will intended a floating fraction of 1/3 of whatever the royalty was.

Ethel Hysaw executed a will in 1947, dividing her three tracts among her three children. The fee simple distribution was as follows:

● Inez received 600 acres from a 1065 acre tract,

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Occasionally, a Texas landowner will own a piece of property that lacks access, or sufficient access, to a public road. Usually, the first thing the landowner should do is to negotiate with an adjoining landowner to see if the adjoining landowner will agree to an easement of some kind. However, on some occasions, the landowner finds themselves at the mercy of difficult or recalcitrant adjoining landowners or is simply unable to reach an agreement with adjoining landowners and is unable to obtain any kind of access easement. In that situation, one of the only options is to file suit and request that a court declare an “easement by necessity”.

In the case of the Staley Family Partnership Ltd. v. Stiles, the Texas Supreme Court reiterated an important requirement for this kind of easement.

This case involved three tracts of land that were originally part of a single land grant in Collin County, Texas from the State of Texas to Thompson Helms in 1853. In 1866, the land was separated into three portions by a Texas probate court:

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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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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

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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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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.

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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.

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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.

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