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On May 18, 2015, the Texas Governor Greg Abbott signed HB 40 into law. The law is effective September 1, 2015. This new law effectively prohibits local city and county governments and subdivisions from regulating surface oil and gas activity in their jurisdictions. The law provides that all such regulation is now preempted by the state of Texas. The new law does have an exception, but it is so narrow as to be effectively useless.

This is not a good day for Texas property owners.  I foresee the law of unintended consequences coming into play here. Specifically, as oil and gas activities encroach on residential areas, the market value of those properties will decline, and may decline substantially. That means appraisal districts will have to reappraise these properties at a lower level. That in turn results in lower tax revenues. Texas counties are already pinched financially. Will Texas counties simply increase the tax rate to make up for the lost revenues? Texas property owners already bear huge tax burdens from county and school taxes. Many counties spent like drunken sailors when taxes were buoyed by taxation of oil and gas production during times of high oil and gas prices. Now they have huge overhead and new programs that they cannot pay for. What happens next will depend on how much oil and gas activity occurs in residential areas where it was previously prohibited and what impact that has on local taxes. To be announced.

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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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The United States Court of Appeals for the Fifth Circuit recently decided the case of Breton Energy, L.L.C., et al. v. Mariner Energy Resources, Inc., et al which concerned claims of waste and drainage against Defendants who were operators of a neighboring mineral lease. The issue was whether the Plaintiffs sufficiently plead a claim for relief against each Defendant. The Fifth Circuit concluded that the claims of drainage against all Defendants should be dismissed, and the claims of waste should be dismissed as to all but one Defendant, IP Petroleum Co. (“IP”).

The Facts
Conn Energy, Inc. (“Conn”) owned a mineral lease named West Cameron 171 (“WC 171”) in the Gulf of Mexico. In 2009, Conn had an agreement with Breton Energy, LLC (“Breton”), allowing Breton to explore WC 171 for hydrocarbons. Conn and Breton sued the owners and operators of a neighboring lease called West Cameron 172 (“WC 172”). It was significant in this case that the WC 171 and the WC 172 shared a hydrocarbon reservoir: the K-1 sands. The other Defendants were other lease owners and operators or predecessors or successors to the current operators.

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Another piece of scientific evidence has been published that suggests that the negative press over hydraulic fracturing may be unwarranted. As most of you are aware, there have been many accusations reported in the media that fracing allowed methane to enter and contaminate water wells. While methane is not particularly toxic, it is smelly, explosive and thus potentially dangerous. A new study that you can read here was published last fall in the Proceedings of the National Academy of Sciences. That study concluded that contaminated groundwater in Texas and Pennsylvania is not due to fracing but is primarily the result of problems with pipes and seals at natural gas wells, and particularly with annulus cement, production casing, and failure of the water wells themselves.

The study authors chose research areas in the Marcellus Shale and the Barnett Shale where the most complaints of water contamination were reported. The study addressed two questions: (i) are elevated levels of hydrocarbon gases in drinking-water aquifers near gas wells natural or anthropogenic (i.e., resulting from the influence of human beings); and (ii) if fugitive gas contamination exists, what mechanisms cause it? The study was conducted by analyzing chemicals, like methane, in groundwater using noble gas and hydrocarbon tracers. This process allowed the researchers to determine if gas wells were contaminating the water, if so, which wells and also to determine which part of the drilling process or equipment was to blame. The proportions of elements such as methane, helium, neon, and argon in the groundwater demonstrated that these elements originated from leaky pipes and bad seals. If the contamination had come from fracing, the water would have exhibited different proportions of these elements.

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Previously I have discussed the revised Texas Railroad Commission (RRC) Rule 3.70 regarding permits for pipelines. You can access my previous blogs here and here. The RRC approved that new rule on December 3. 2014, and it went into effect on March 1, 2015. You can access the text of the new rule here.

There were many comments and suggestions made during the Public Comment period required by Texas law for any new administrative rule. The RRC included a few of these suggestions in the revised rule. However, there were a number of important comments and requests that were neither significantly addressed nor included in the revised rule. These include:

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Earlier this week, the Texas Senate State Affairs Committee approved the draft of a new statute entitled the Texas Real Property Transfer on Death Act (Senate Bill 462). You can review a draft of the bill here. This bill would create a procedure for a non-testamentary transfer of real property. In this case, non-testamentary means that it passes outside of someone’s will and avoids the entire probate process.

We don’t yet know if the bill will end up as a statute. If it does, it will go into effect on September 1, 2015. The potential statute contains a number of traps for the unwary. For example, the specialized deed authorized by the bill applies only to a person who owns real property as a joint tenant with right of survivorship. As currently written, the bill does not apply to an owner who is a tenant in common or an owner of community property with or without a right of survivorship. As currently written, Section 114.055 of the bill has some very specific requirements that must be complied with if this specialized deed is to be effective. It will also be important to be aware of the conditions that will revoke the deed, described in Section 114.057 of the bill. Interestingly, a contrary provision in a will does not revoke or supersede a transfer on death deed.

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An interesting case that involved easements was recently decided by the Texas Supreme Court. The case is David Hamrick, et al. v. Tom Ward and Betsy Ward and the issue presented to the Court was whether an implied easement of necessity by prior use continues after the necessity has ended. There are two basic types of easements. Express easements, that are created by an agreement (usually written) and implied easements, that arise by operation of the law due to certain specific facts. In Texas, implied easements are split further into a number of subcategories, including easements of necessity and easements by prior use.

grass-landscape-with-road-1440659-m.jpgThe Facts
In 1936 O.J. Bourgeois owned certain property in Harris County, Texas. Mr. Bourgeois gave two acres of the land to his grandson. While the grandson owned this land, a dirt road was built across Mr. Bourgeois’ remaining property to allow the grandson access to the public road. Subsequent owners of the grandson’s property also used the dirt road for access. Eighty years later, Tom and Betsy Ward were the owners of the grandson’s land and still used the dirt road. The Wards put gravel on the road so they could use it for construction of a new house on their property. The Hamricks owned the land that the dirt road crosses, formerly the property of Mr. Bourgeois. The Hamricks filed a lawsuit asking for a temporary injunction preventing the Wards from using this road. The temporary injunction was granted in April 2006. So as not to delay construction of their new house, the Wards built a new driveway to access the main road. In the suit, the Wards requested a declaratory judgment that they had an implied easement for the dirt road. The trial court granted the Wards motion for summary judgment and the Court of Appeals agreed and held that the Wards had a prior use easement across the Hamricks land.

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Parsley Energy Inc., based in Midland, Texas, has been buying undeveloped and productive land in Reagan County.

Parsley Energy is an independent oil and natural gas company founded in 2008 with operations in the Permian Basin. The company develops unconventional oil and gas reserves. It has grown exponentially in the past few years, from a start up with two people to a company that operates several hundred wells and produces more than 12,000 barrels of oil equivalent per day. The company owns more than 97,371 surface acres in the Midland basin and 121,211 surface acres in the Permian. They have horizontal and vertical wells in the core of the Midland basin and expect to continue to grow and produce good rates of return on investments. This appears to be borne out by their latest $252 million purchase in Reagan County, which breaks down into $26,000 per net acre with $60,000 per flowing barrel of oil equivalent. They have added more than 16,000 net acres and 456 net horizontal drilling locations, including these newly announced locations in Reagan County, since their initial public offering in May 2014.

As Parsley Energy develops its assets in Reagan County, they will be requesting leases from mineral owners. This means mineral owners in Reagan County need to consult with an oil and gas lawyer before signing any leases. Signing leases without consulting a lawyer can lead to financial losses and stress. See my previous posts on this issue here and here. It’s not worth the risk yo your land or your finances not to get input from an oil and gas attorney.

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Steve Lipsky and his wife Shyla became famous as Texas landowners who claimed they could set their water on fire–and they alleged this was due to methane contamination from nearby hydraulic fracturing. The couple sued Range Resources who operated a well near their house in Weatherford, Texas. The Lipskys claimed they noticed problems with their water after Range drilled two natural gas wells near their house in 2009.

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The Environmental Protection Agency, without any scientific basis whatsoever, concluded that Range had caused or contributed to the water contamination. The Railroad Commission of Texas did actual did scientific testing and determined that the methane came from a shallower rock formation than the one drilled, and allowed production at the wells to continue. Many people do not realize that methane occurs naturally in many water deposits, but is not drawn into the water pump until the water level falls below a certain level. With lots of fanfare, the EPA sued Range Resources in federal court for the alleged contamination. That suit was later quietly dismissed in its entirety.

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The number of U.S. refineries and petrochemical production plants that have been subjected to United Steelworkers strikes has now reached eleven locations in California, Kentucky, Texas and Washington. It’s hard to imagine a more outrageous case of bad timing. Let’s see: oil and gas are at their lowest prices in years, the oil industry is hog tied by out-of-date export restrictions that prevent many sales to non-U.S. buyers, and the true unemployment rate (hint: it’s not the number the U.S. Labor Department puts out) is depressingly high, about 12.6%. Yet, the United Steelworkers are striking. Go figure.

Part of my growing up years were spent in Detroit, Michigan, where it was not uncommon for violence to be used by the United Auto Workers to force folks to join the union. The father of a girl I went to high school with was murdered because his employees resisted unionizing his small trucking company: His car blew up in the driveway of their home when he got in and turned on the ignition to go to work. No doubt his employees got the message.

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