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The United States Fifth Circuit Court of Appeals recently published their decision in  Holt Texas, Limited and Transamerican Underground, Limited v. Stephen J. Zayler, a case which concerned a bankrupt oil and gas company. Holt Texas, Ltd. (“Holt”) and Transamerica Underground Limited (“TAUG”) who were subcontractors of the now bankrupt T.S.C. Seiber (“Seiber”) appealed the District Court’s judgment which in turn affirmed a Bankruptcy Court order. The District Court held that funds of an interpleader action filed by Encana Corporation (“EnCana”) were not property of Encana but property of the bankrupt company Seiber. On appeal, Holt and TAUG challenged the District and Bankruptcy Courts’ conclusions that first, the Texas Construction Trust Funds Act (“CTFA”) did not apply to these funds, and secondly, that Appellants did not have valid, perfected mineral liens on these funds under Chapter 56 of the Texas Property Code. The Fifth Circuit Court of Appeals vacated the District Court’s judgment and remand for further proceedings.

Background: In 2008 Encana engaged Seiber to build a natural gas pipeline in Robertson County, Texas. Holt and TAUG were the subcontractors; Holt provided heavy machinery and TAUG installed over two thousand feet of pipe. The agreement between Encana’s and Seiber specified that if a subcontractor was not paid by Seiber, Encana would be able to withhold all remaining sums and make no further payment to Seiber. In August 2009 TAUG notified Encana that it had not been paid recently, and would seek payment of the $96,3000 that TAUG claimed it was owed. In September 2009 Encana filed an interpleader in federal district court, paid $345,000.00 into that court’s registry and sought a declaration shielding it from any further liability for the unpaid amounts owed by Seiber. In October 2009 Seiber filed a voluntary petition for bankruptcy relief under Chapter 11 of the Bankruptcy Code, which was quickly converted to a Chapter 7 petition. TAUG then filed an Affidavit Claiming Mineral Lien against Encana’s property in November 2009. Holt filed its Affidavit Claiming Mineral Lien in March 2010. Encana was discharged from the interpleader in April 2012 and a discharge order was entered. The remaining parties filed competing motions for summary judgment: Holt and TAUG argued that two sets of Texas statutes (the Construction Trust Funds Act and the Texas mechanics lien statutes) that are intended to protect subcontractors require that the interpleader funds be awarded to them. The Bankruptcy Court held that neither law applied and that the interpleader funds were part of the bankruptcy estate of Seiber. Holt and TAUG appealed to the District Court, which affirmed the ruling of the Bankruptcy Court. Holt and TAUG then appealed to the Fifth Circuit.

Arguments: The Fifth Circuit discussed whether the interpled funds were property of the bankruptcy estate of Seiber or not. The opinion discussed that this question turns on who had legal possession of the funds after deposit into the registry of the court but before any action was taken by the court as to those funds. Chapter 56 of the Texas Property Code provides mineral subcontractors with a statutory lien “to secure payment for labor or services related to the mineral activities.” Tex. Prop. Code. §56.002. Chapter 162 of the Texas Property Code states that “Construction payments are trust funds under this chapter of the payments are made to a contractor or subcontractor … under a construction contract for the improvement of specific real property in this state.” Tex. Prop. Code §162.001(a). Section 162 protects subcontractors without requiring notice or other action by the subcontractor, such as sending a notice or filing an affidavit.

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Recently the Fifth U.S. Court of Appeals issued an interesting decision in the case of Warren et al. v. Chesapeake. This very important case for Texas mineral owners is based on a lawsuit against Chesapeake Exploration for what the Plaintiffs claimed was the wrongful deduction of post-production costs from the Plaintiffs’ gas royalty payments.

The Facts

The Warren case involves three oil and gas leases in Texas. Charles and Robert Warren entered into leases with FSOC Gas Co. Ltd. Those leases were then assigned to Chesapeake, who used an affiliate, Chesapeake Operating, to drill and operate the wells. Chesapeake deducted post-production costs from the royalty payments to the Warrens as well as from royalties to Abdul and Joan Javeed who joined the case as plaintiffs later. Chesapeake claimed that the leases authorized the deductions. The Plaintiffs asserted that Chesapeake breached the leases because the deductions did not comply with the lease provisions on calculating royalties. The complaint also included class action allegations on behalf of other royalty owners with similar leases with Chesapeake Exploration.

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New oil and gas pipelines are being constructed in Texas at an almost frantic pace. Just this week, Lone Star NGL LLC announced that it has received the go-ahead from its board to lay a new natural gas liquids pipeline from the Permian basin in West Texas to Mont Belvieu, Texas near the Gulf of Mexico. Lone Star is a joint venture formed by Energy Transfer Partners LP and Regency Energy Partners LP. Both companies have headquarters in Dallas, Texas.

The new pipeline will extend for 533 miles and will be both 24 inches and 30 inches in diameter. The exact route has not been announced but possible routes will probably be from the Permian basin area shown on the map in green and the Gulf of Mexico. As you can see from the map, this new line has the potential to impact many Texas counties and also to effect many Texas landowners.permianbasincounties.jpg

Pipeline easements are complex documents. A landowner may have to live with the easement the sign for the rest of their life time and for the duration of their descendants’ lifetimes as well. There are many things a landowner can require in a pipeline easement or right-of-way that the pipeline company is simply not going to offer you. You have to know how to ask for them and how to negotiate for them.

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After three years of meetings and study, the American Petroleum Institute issued a new set of guidelines for community interaction by oil and gas operators involved with unconventional oil and gas exploration. The document is called “Community Engagement Guidelines” and outlines recommendations for oil and gas development consistent with the concerns and priorities of the community where the development is taking place.

API’s Standards Director David Miller said that “(i)t’s a first-of-its-kind industry standard for community engagement. These guidelines will provide a road map for oil and gas operators seeking to build lasting, successful relationships with local residents in areas of the country where energy development opportunities are open for the first time, thanks to advances in horizontal drilling and hydraulic fracturing.”

The industry is trying to be a “good neighbor” and use responsible practices, learn from past experiences, mitigate potential impacts and work towards long term sustainability, according to Mr. Miller. He said “(e)ach community is different, and the standards are not designed to be exhaustive, but rather to serve as a reference for developing a plan-of-action that matches the needs and concerns of a broad range of stakeholders-from rural farmers to indigenous tribes.”

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There is a threat to oil and gas companies that seems to have been under the radar so far, and that threat is hackers. It is a problem that can effect oil and gas companies and also energy investment firms. Nicole Perlroth at the New York Times published an article earlier this year on the issue of Russian hackers that you can read here. The author indicates that Russian hackers have been “systematically targeting” hundreds of different oil and gas companies and investment firms in the West.

disc-smashed-by-hammer-1-1418171-m.jpg Ms. Perlroth quotes researchers in the cyber security field who say the motive for these Russian cyber attacks is industrial espionage, given Russia’s important domestic oil and gas industry. She refers to research by a number of computer security companies: CrowdStrike, Symantec and F-Secure, regarding the severity of the problem.

The damage so far pales compared to the potential damage. As the oil and gas industry turns more and more to digital solutions for exploration, drilling and production, they become increasingly vulnerable.

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As readers of this blog know, we have been following the case of Marcia Fuller French, et al. v. Occidental Permian Ltd., which is an important Texas case involving gas royalties. You can read our previous blog post here. The case was heard by the Supreme Court of Texas on February 5, 2014 and the The Texas Supreme Court has issued its decision.

As you may recall, Martha Fuller French and the other Plaintiffs were royalty owners and lessors on two oil and gas leases in Scurry County and Kent County, Texas. One lease is referred to in the decision as the “Fuller Lease”, which was executed in 1948, and the other lease is referred to as the “Cogdell Lease”, which was leased 1949.

In 2001, Occidental Permian began injecting wells on these leases with carbon dioxide to boost oil production. As a result, the natural gas produced from these leases contained about 85% carbon dioxide. Occidental then treated the gas to remove the carbon dioxide and sold the remaining gas, sending the carbon dioxide back to be reused at the well. Occidental paid Ms. French and the others royalties on the gas after it was treated and then deducted treatment costs from the royalties.

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The price of crude oil has been continuing to fall over the last few days. By some benchmarks, crude oil prices in Texas and globally are near to a four year low. For example, West Texas Intermediate (“WTI”) was recently reported at $81.84 per barrel, well below the $100 to $120 per barrel evident more recently. In fact the WTI price closed down 4.77% recently, which is a substantial decrease. The current Brent Crude Oil price of $85.04 represents a decrease of $3.85 or 4.53%.

What is happening here? For many years in the past, conflict in the Middle East caused prices to increase. Currently, due certainly to the advances of ISIS but also because of other factors, the Middle East is in great turmoil, yet prices are sliding. Probably the general and economic malaise in this country has a lot to do with the slide in oil prices. Although the federal government minions feed us sound bites about how the economy is doing better, people out here in flyover country know better. Recently, President Obama touted the decreased unemployment rate. What he does not say, however, is that so many people who want to work have left the workforce that the resulting unemployment rate looks artificially better. Not only is the poor economic condition of our country a factor, the incredible threat of an Ebola epidemic, with its potentially catastrophic personal and economic consequences, is also playing a part.

Lower crude oil prices mean that gasoline is cheaper at the pump. However, there are some major negative impacts. For one thing, if the price of oil stays down below a certain level, oil exploration and production will decrease. Oil wells that can make a profit when oil is $100 per barrel may be losing money when oil is $85 per barrel and those wells may be plugged. Additionally, most of the oil and gas exploration in this country is done by small, independent oil and gas companies. When the price of oil declines, the smaller companies, with smaller capital reserves than the large oil companies, can no longer afford exploration activities. Taken together, both these reasons result in a decrease in domestic production of oil which results in larger imports from unstable countries in the Middle East

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The Real Estate Center at Texas A & M University has recently made available an educational video entitled “Inside Fracking” that explains the process of fracing oil and gas wells. (I still believe the correct spelling is “fracing”). You can access the video here. If you are wondering just what fracing is and why it is used, this video offers some clear explanations.

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It’s good news for Texas mineral and royalty owners that oil and gas production in Texas is increasing, due in large part to the spike in natural gas production from shale reservoirs. It’s also good news that plants that use that gas are being built.

For example, ExxonMobil Corporation is expanding its capacities on the Gulf of Mexico coast after EPA’s finalization of their permit on May 14, 2014. In Baytown, Texas, Exxon has begun work on a multibillion dollar expansion of their refining and petrochemical infrastructure to process shale-derived natural gas into plastics and other products. They plan to construct something called an ethane cracker, which is a facility in which complex organic molecules such as kerogens or heavy hydrocarbons are broken down into simpler molecules such as light hydrocarbons. The cracker will be able to process 1.5 million tons of gas per year and make ethylene stocks available for downstream chemical processing. The downstream facilities include an Exxon plastic plant in Mont Belvieu, Texas which processes 650,000 tons per year in two high performance polyethylene facilities. Ethylene is processed into polyethylene, which is a basic plastic that is used to make bags, bottles and other products.

In Mont Belvieu, Mitsubishi Heavy Industries is going to build the two polyethylene facilities. The Baytown olefins plant has also awarded contracts to Linde Engineering North America Inc. and Bechtel Oil, Gas & Chemicals Inc. to build olefin recovery units. Mitsui Engineering & Shipbuilding Co. Ltd. and Huertey Petrochem SA are building the olefin furnaces.

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An interesting case was in the news recently and oil and gas attorneys have been following it with interest. The case is Lisa Parr, et al. vs. Aruba Petroleum, Inc., et al.; County Court at Law No. 5, Dallas County, Texas; Cause Number: CC-11-01650.

The Background

The Parrs have a 40 acre ranch in Decatur, Texas which is about 60 miles northwest of Dallas, Texas. The ranch sits on the Barnett Shale. Robert and Lisa Parr and their 11 year old daughter Emma alleged that they started having health problems in 2008, including migraine headaches, dizziness and nausea. By 2009, Lisa Parr said: “(m)y central nervous system was messed up. I couldn’t hear, and my vision was messed up. My entire body would shake inside. I was vomiting white foam in the mornings.” She claimed that her husband and daughter had nosebleeds, vision problems, nausea, rashes and blood pressure issues.

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