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In October 2013, the American Petroleum Institute and the American Fuel & Petrochemical Manufacturers (AFPM) submitted information to the Environmental Protection Agency (EPA) asking the EPA to lower the 2013 cellulosic biofuel quota because oil refiners would be forced to buy millions of dollars in unnecessary “credits” for cellulosic biofuel because the actual biofuel was unavailable.

In a very helpful (and surprising) turn, on January 23, 2014, the EPA announced that it would reconsider the 2013 quote due to this new information. The EPA determined the information was relevant and met statutory requirement for granting a reconsideration.

The government has hoped that cellulosic biofuel would replace ethanol, which has caused complaints over driving up prices of corn and the damage to engines. However, costs in producing cellulosic biofuels have delayed production, and so production hasn’t kept pace with government quotas. AFPM President Charles Drevna pointed out that the 2013 quota for cellulosic biofuels was six million gallons, which is absurd when only one million gallons were produced. Since they obviously cannot buy biofuel that doesn’t exist, EPA requires oil refiners to buy “credits” instead. API estimated that buying these credits would cost oil refiners $2.2 million in 2013. Mr. Drevna explained that in March 2013 the EPA set the 2012 quota at zero. In reality, these credits are a penalty for not complying with a law that is impossible to comply with!

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Areas of Texas and the western states where much of the U.S. oil and gas potential is located have been hit by drought in recent years, causing worries about water supplies and the use of water in hydraulic fracturing. Fracing takes a lot of water! But Apache Corporation has created a system to frac in the Wolfcamp shale in west Texas without using fresh water. This is an important shale area: just a few months ago Scott Sheffield, the CEO of Pioneer Natural Resources Co., said: “The Wolfcamp could possibly become the largest oil and gas discovery in the world.”

This new approach couldn’t come at a better time, since Texas has been in a drought since 2010 and in November 2013 Texas voters approved Proposition 6, which allocates $2 billion from the Economic Stabilization Fund to the new Texas Water Implementation Fund.

Apache is working with a closed loop system that only uses brackish and recycled water in the Barnhart project area in Irion County. This water is taken from the Santa Rosa Formation in the Dockum Aquifer and treated to remove substances that could damage pipelines and pumping equipment. The treated water is then stored in retention ponds and then can be pumped directly into drilling sites in the area. There is a significant amount of water that returns to the surface after fracing. The U.S. Environmental Protection Agency estimates between 10% to 70% of the injected water, depending on the geologic formation, is returned to the surface. Reusing water that is produced and recovered from fracing conserves fresh water for drinking and agricultural use, and it also saves Apache money since they don’t have to haul water in and out. That in turn reduces wear on local roads, and eliminates the need for a used water disposal facility. Greg Hicks, Apache’s production engineer manager, said: “It’s a win-win situation for the environment and us.”

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As I’ve discussed before, oil and gas drilling and production benefits Texas mineral owners, but also has a positive impact on the economy as a whole, especially in energy producing states like Texas. There are countless examples in recent years verifying that impact. For example, recently the Manhattan Institute published a report written by Mark P. Mills, a Senior Fellow and founder and CEO of Digital Power Group, entitled, “Where the Jobs Are: Small Businesses Unleash Energy Employment Boom”.

This report indicates that the energy boom, fueled by oil and gas drilling and production, is creating jobs at a faster rate than the economy overall and producing enough wealth by itself to stop a slide back into recession. The report notes that more than 400,000 jobs have been created in the oil and gas sector since 2003. Another two million indirect jobs have been created as well, in transportation, construction and information services in the new shale boom. Oil and gas jobs have grown by 40% since the recession. Other related sectors, like chemical production, manufacturing, steel production, and textiles have also been revitalized due to lower energy costs. In states with oil and gas resources, job creation has greatly outpaced the national average.

While this information is great news, the Manhattan Institute report highlights two key features of the growth that have not been publicized much so far. First, the new jobs are in diverse geographic areas. Sixteen different states have 150,000 or more direct oil and gas jobs. In addition, most of the new jobs aren’t for large oil companies or big multinationals but rather for small businesses. The average oil and gas industry employer has less than 15 employees. These small and medium size oil and gas companies are helping increase jobs not only in direct oil production, but across the economy. These jobs in oil and gas and related industries are also mostly middle-class jobs, not part time or low wage work. Another important point is that this growth reduces the U.S. trade deficit, which is a drag on the economy. Oil and gas produced domestically means less foreign oil and gas is imported, which lowers our trade deficit.

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In my law practice, I represent only Texas royalty owners, mineral owners and surface owners, and I do not ever represent oil companies. It is important for both my clients and I to have access to accurate facts, and not emotional arguments, when trying to make the best decisions for a client’s property. For that reason, I do pay attention to what oil companies have to say about their operations. From time to time, we might actually learn something!

Clean Fracing Conference

Clearing, the process of hydraulic fracturing, or “fracing” as it is usually called, has been in the media quite a bit. A panel of public relations experts at the Petroleum Connection’s Clean Fracing Conference in Houston, Texas recently argued that the oil and gas industry needs to change the conversation on fracing. For those of us who have been working in this industry, this seems like an obvious statement, but one that badly needs attention. Up until now, critics have been allowed to define the conversation. This debate is particularly important for Texas mineral owners as well as operators since Texas is home to at least three major shale plays that make use of fracing for most wells.

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A decision from the United States Tax Court in December 2013 has interesting implications for Texas oil and gas leases and Texas mineral owners. In Dudek v. Commissioner, the Tax Court examined the characterization of lease bonus and whether bonus is eligible for depletion allowance.

The Dudek decision dealt with three main issues: 1) whether the bonus payment received by the taxpayer pursuant to an oil and gas lease is taxable as ordinary income or as a capital gain; 2) whether the taxpayer is entitled to a depletion deduction; and 3) whether the taxpayer is liable for an accuracy-related penalty under section 6662(a) for a substantial understatement of income tax.

Michael Dudek, the taxpayer and the petitioner in this case, is a certified public accountant and an attorney licensed to practice law in Pennsylvania. In 1996 and 1998, Dudek and his wife, Brenda, bought a total of 353 acres of land. The Dudeks leased the oil and gas rights to EOG Resources Inc., receiving a 16% royalty and a bonus of over $883,000. As many of you know, bonus is consideration for the primary term of the lease and is not contingent on any extraction or production of oil or gas. The Dudeks reported the lease bonus as a long term capital gain on their income tax return.

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Plains All American Pipeline LP, based in Houston, Texas, is planning to expand its pipeline system in the Permian Basin over the next four years. Parts of that expansion will happen in Texas. These projects bring more money and jobs and exemplify how our oil and gas industry continues to thrive. A healthy oil and gas sector means more royalties paid to Texas mineral owners.

The first of the four projects will be to add pumps to Plains existing 20″ Basin pipeline from Jal, New Mexico, to Wink, Texas. This will increase the pipeline’s capacity by 100,000 barrels per day. This first project will also include building a 40 mile long 12″ pipeline from Monahans to Crane, Texas, which will supply the Longhorn pipeline and the Cactus pipeline.

The second project is to build 62 mile, 16″ and 20″ pipelines with a 200,000 barrels per day capacity. This pipeline will go from the South Midland basin in Central Reagan and Central Upton counties in Texas to McCarney.

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The Texas Supreme Court will hear a new case involving royalties on natural gas. Those involved with oil and gas law in Texas will be paying attention, as the case will probably be important. The case is is Occidental Permian Ltd. v. Marcia Fuller French et al, and it is one of the first cases to deal with allocation of the cost of removing carbon dioxide from produced gas following tertiary recovery of that gas with CO2. The appeal was heard by the Eastland Court of Appeals of Texas in October 2012.

The Facts

The Plaintiffs in the trial court, Ms. French and others, were the lessors on two different oil and gas leases in Scurry County and Kent County, Texas. Occidental Permian began injecting wells on these leases with carbon dioxide (CO2) in 2001 in order to boost oil production. As a result, the well produced natural gas that was about 85% CO2. Occidental had the gas treated off site to remove the carbon dioxide and sold the resulting gas. The extracted CO2 was sent back to the well to be reinjected. Occidental paid royalties on the gas after it was treated, and also deducted the treatment costs from the Plaintiffs’ royalties.

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A case is winding its way through the courts could be especially important in light of the large number of new oil and gas pipelines being constructed in Texas today. The case was heard by theTexas Court of Appeals in Tyler last year and is currently being heard by the Texas Supreme Court.

The case, Enbridge Pipelines (East Texas) LP v. Gilbert Wheeler, Inc., concerns landowners seeking property damages for the pipeline company’s violation of a pipeline right of way easement agreement. There are two main issues. The first issue is whether the cost to restore the property is the proper measure of damages for the breach of contract alleged by the landowners. The second issue is whether the Court of Appeals erred by holding that the landowners waived their claims by failing to submit a jury question on the nature of the property injury.

Factual Background

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The Texas Court of Appeals in Beaumont, Texas recently decided a very interesting the case that has huge implications for Texas land and mineral owners: Environmental Processing Systems LC v. FPL Farming Ltd. The Texas Supreme Court recently heard oral argument on this case.

The Facts

As many Texas mineral owners are aware, salt water is often produced by an oil well in conjunction with the oil. Generally, this salt water is required by law to be collected and taken to saltwater injection wells that are licensed by the Texas Railroad Commission. The salt water is then injected back into the subsurface, where it came from. But one cannot always control where the saltwater goes after it is injected.

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A new partnership has been formed in the energy industry that may benefit shale oil and gas drilling in Texas: the American Shale and Manufacturing Partnership. The member organizations include manufacturing, labor, environmental, academic, and business organizations. It was launched November 19, 2014 at the National Press Club in Washington, DC. The goal of the new group is a renaissance in American manufacturing, and to remind policymakers that hindering the development of shale oil and gas could hamper an already fragile economic recover in the United States.

Charles T. Drevna, president of the American Fuel and Petrochemical Manufacturers, a member of the new partnership, said: “The dream of bringing manufacturing back to the United States is very real, but it requires our government developing policies that encourage growth instead of putting regulatory barriers in the way.” Matthew Sanfilippo, senior executive director of research initiatives at Carnegie Mellon University’s College of Engineering, noted that new technologies and domestic energy options like shale gas can transform American manufacturing.

Shale gas has created 2.1 million American jobs already, and it is expected to create another 1.25 million in the next ten years. Tax revenue from the industry is also expected to total $2.5 trillion by 2035 according to the US Chamber of Commerce’s Institute for 21st Century Energy. These statistics demonstrate why shale gas is so critical for manufacturing, especially due to job creation. “It is critical that the opportunities created by gas are compounded to deliver a reconstruction of our manufacturing base that will produce good community-building jobs, reduce trade deficits, and enhance our nation’s competitiveness and security,” said Walter Wise from the International Association of Bridge, Structural, Ornamental and Reinforcing Iron Workers.

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