Texas Oil and Gas Attorney Blog

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.”

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.

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.

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

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.

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.

Another oil and gas company is expanding its operations in Texas. Paradigm Oil and Gas Inc. is adding 50 new wells to its Texas operations through new leases from Magnum Oilfield Services, Bitter Creek Petroleum and Blackjack Services. The deal includes cash and stock, with Paradigm keeping between 70% to 95&% interest in the wells. Paradigm will be the operator of the wells. Some of the new leases are the Miller, Adobe, Somerset, WH Summers, Hall, Don & Ruby Roberts, Cole, Colley and Brinkmayer A. A full list and details of the transaction will be released later. These leases are in Tyler County, Liberty County, Bexar County, Atascosa County, Kaufman County and Callahan County, Texas.

Paradigm is an expanding oil and gas producer, and currently has 30 leases with nearly 300 wells. Recently, Paradigm announced that its April 2014 oil shipments produced record returns. The CEO of Paradigm, Vince Vellardita, told reporters that “(w)e shipped two loads in April from leases in Texas and Louisiana totaling nearly 309 barrels. Those wells have since produced another 466 barrels which are ready for pick up. This oil production and (these)shipments send a clear message to shareholders that we are delivering on our promise to generate revenue and achieve sustained profitability.” Many of the new Paradigm leases are between Dallas, Texas and Houston, Texas and others cover almost 4,000 acres in the Permian Basin and the Eagle Ford shale. Of the 50 new wells, 20 are producing revenue oil and gas already. A Paradigm operations division worker said it was another example of Paradigm’s “due diligence” in going after low-risk, high return properties that are very lucrative for the company.

Let’s hope that Paradigm’s efforts will result in increased royalties for Texas mineral owners whose leases will now be operated by Paradigm.

The rapid pace of construction of new oil and gas pipelines to transport current energy production in Texas and North America continues. In fact, there has been an explosion of pipeline development in Texas. According to a recent study the industry needs to invest $200 billion nationally in capital for pipelines, storage and other facilities to meet demands from shale oil and gas by 2035. One example is River Rock Energy LLC, based in San Antonio, Texas, that has committed $125 million to fund logistics and infrastructure for the oil and gas industry, including the development of pipelines, railways and storage. The money comes from the private equity firm EnCap Flatrock Midstream. Wood Mackenzie, an energy research firm, expects about $23 billion in investment in the Eagle Ford shale alone, which is less than the $28 billion last year. The difference according to Wood Mackenzie is due to increased efficiency.

Recently, Koch Industries Inc., headed by the well-known conservative political donors Charles Koch and David Koch, announced that its subsidiary Koch Pipeline Co. LP plans to build a 24 mile, 16 inch pipeline in San Patricio County, Texas that is expected to be in service by the second quarter of 2014. Koch Pipeline has not released information on the cost of this new project.

Koch Pipeline is based in Wichita, Kansas and already has about 4,000 miles of pipelines in six states including Texas, Wisconsin, Minnesota, Missouri, Iowa and Illinois. Koch’s pipelines transport a number of products, such as crude oil, refined products, ethanol, natural gas, and chemicals. The new pipeline will have a capacity of 200,000 barrels per day of crude oil and will expand Koch’s South Texas crude oil pipeline system. Their South Texas infrastructure already has 540 miles of pipeline to move crude oil to Corpus Christi’s Flint Hills Resources refinery, which is also affiliated with Koch Industries. The refinery processes locally produced crude oil from the Eagle Ford shale and has a capacity of approximately 300,000 barrels of crude oil per day, producing a variety of petroleum products. From the refinery, Koch has pipelines that move crude oil to San Antonio, Dallas, and other markets in Texas.

The oil and gas industry both nationwide and in Texas has provided a steady stream of good economic news. Wells are being drilled and pipelines are being built and investment in infrastructure (particularly in areas with shale gas) and in technological improvements is increasing. For quite a while it seemed that an older workforce dominated the industry. That has been changing.

Businessweek recently discussed how a growing number of young people, the so-called “Millennials“, are getting involved in the oil industry. Today about 71% of the oil industry’s workforce is over 50 years old, but the industry is now undergoing what the Independent Petroleum Association of America is calling the “great crew change”.

This change has resulted in part from the excitement of the new drilling technology in the U.S. A new generation of wildcatters, landmen, engineers, investors, entrepreneurs and aspiring oil barons are coming of age and creating even more opportunities. One such new entrepreneur is 27 year old Mark Hiduke, who calls himself a Texas oilman. His company, PetroCore LLC is based in Dallas and is just a few months old. As of May, 2013 he obtained $100 million from a local private-equity firm this month. The company plans to purchase underdeveloped land and drill shale wells. He told Businessweek that the opportunities were arising from new energy technology and that the shale boom had created many opportunities to “jump in and be given enormous responsibility”.