Texas Oil and Gas Attorney Blog

A few recent cases involving Chesapeake Energy Corporation backing away from potential oil and gas leases are raising alarms. Obviously a contract is only as good as its enforceability. It goes without saying that landowners need to be diligent so that they are not taken advantage of by large oil companies. Many complex legal issues are involved in contract disputes, and experienced legal help is always crucial. For example, in one case from earlier this year, Kantner v Chesapeake Energy Corp., a Texas Court of Appeals found that individual landowners lacked standing to bring a breach of contract claim when the contract was between Chesapeake and a landowners committee.

In this particular case, the plaintiffs were owners of property in Deer Creek Estates in Crowley, Texas. In 2007 and 2008, a Deer Creek Estates Residents Oil and Gas Lease Committee was formed to negotiate oil and gas leases with Chesapeake. The Committee and Chesapeake negotiated and agreed to two documents, a Supplemental Agreement Regarding Gas Leases and a “form lease.” However, the Committee did not have the authority to bind any of the landowners to the terms of either document. The form lease actually stated that none of the landowners were required to sign it, allowing each landowner the right to negotiate his or her own lease.

Because of its own financial issues, Chesapeake decided not to proceed with leases in Deer Creek Estates, and the landowners sued for specific performance of what they claim was a contract negotiated between their Committee and Chesapeake. The documents negotiated by the Committee provided for a $27,000 per net mineral acre signing bonus, a 25.25% royalty, and a three year term with no renewal option. The signing bonus was to be paid by a thirty day bank draft at signing.

The United States Geological Survey (USGS) released a new estimate last week on the US’s oil and gas reserves. The new estimate for 2012 is part of the Reserve-Growth Assessment Project. It found 32 billion barrels of crude oil, 291 trillion cubic feet of natural gas, and 10 billion barrels of natural gas liquids as potential undiscovered US reserves. The USGS estimate stated that these amounts represent about 10% of the overall US oil and gas endowment and do not include reserve growth estimates for federal offshore areas.

Most reserve growth results from the delineation of new reservoirs, field extensions, improved technology that enhances efficiency, and recalculation of reserves due to shifting economic and operating conditions. For this estimate, fifty-five large oil fields and thirty-five large gas fields significantly contributed to the reserve growth. Within the fifty-five oil fields, sixty-eight individual conventional accumulations (i.e. reservoirs or groups of reservoirs) were identified and assessed. In the gas fields, two accumulations were individually assessed. The sixty-eight individually assessed oil accumulations accounted for seventy percent of the potential reserve growth in the United States. The other thirty percent is from smaller accumulations estimated by the regression methods.

The estimate noted that no attempt was made to gauge economically recoverable resources, so resources such as shale gas, tight gas, tight oil, and tar sands were not included in the USGS’s study. The USGS used detailed analysis of geology and engineering practices, which departs from the methods of previous reserve growth estimates which relied entirely on statistical extrapolations of growth trends. The USGS used both public and commercial geologic information and field production data.

The Denbury case was one of the most important developments in Texas oil and gas law in the past year, and this blog reviewed the March, 2012 Texas Supreme Court ruling here. In summary, the Denbury case involves a landowner who objected to a private energy company’s use of the eminent domain statute to appropriate his land for a gas pipeline. The Court found for the landowner.

The decision in March not only denied Denbury Green Pipeline‘s motion for a rehearing, but also clarified the Court’s original opinion (see my post here) in several respects. The Court added that “private” means a pipeline that is limited in its use to wells, stations, plants, and refineries of the owner. The Court went on to say that a “common carrier” means that the company is transporting gas for hire and therefore implies more customers for the gas than just the owner of the pipeline. The Court upheld its view from the prior ruling that the Denbury pipeline was for private use only.

In August, the latest decision by the Texas Supreme Court ruling in Denbury was issued, written by Justice Wainwright with Justice Johnson concurring. The two justices joined the main decision issued in March and reaffirmed that simply checking a box on a Texas Railroad Commission form is not sufficient to make a company a “common carrier” under the law. However, they issued this separate opinion to distinguish their views on the scope of the Court’s holding.

A new report by IHS Inc., a global information and analysis company, states that Eagle Ford in South Texas is a contender for the best tight oil play in the US. This is based on strong drilling results, a large prospective area and the magnitude of the resource potential.

At the moment the number one position is held by the Bakken formation, located in North Dakota, Montana, and Saskatchewan. Bakken has been number one because it opened up development of unconventional resources using high-tech drilling methods and hydraulic fracturing. Andrew Byrne, the director of equity research at IHS and the author of this study, said “The results from the Bakken were so strong that it set the standard by which all others will be measured. It was the one play that incited the industry into pursuing these opportunities.” But now that title is shifting to Eagle Ford.

The study looked at 27 tight oil plays and assessed the emerging and mature tight oil plays in North America which have the largest impact on investment patterns and North American oil and gas supplies. The study is intended to help clients estimate the resource potential and recoverable hydrocarbons of each play. It’s also meant to help clients understand performance metrics and future supply potential and establish metrics to compare the performance and value of each play. The study enables clients to determine play strategies, determine potential partners and merger and acquisition strategies, and also to develop analogs for global tight oil potential.

A report of the US Energy Information Administration issued within the past few months indicates that horizontal drilling and hydraulic fracturing in shale have helped US and Texas oil and gas reserves grow at a record pace in 2010. This was the biggest single year increase since the organization began publishing oil and gas reserve estimates in 1977. These figures identify how much oil or natural gas can be produced with reasonable certainty, given current economics and existing technology.

The EIA Report stated that domestic crude and condensate proved reserves rose by 2.9 billion barrels, from 22.3 billion barrels in 2009 to 25.2 billion barrels in 2010, which is an increase of 12.8%. The wet natural gas proved reserves rose by 33.8 trillion cubic feet, from 283.9 trillion cubic feet in 2009 to 317.6 trillion cubic feet in 2010, an increase of 11.9%.

EIA Administrator Adam Sieminski told the US House Energy and Commerce Subcommittee last week that the increasing ratio of oil to gas prices in the US had led oil producers to focus on liquid-rich areas in 2010. The trend has continued for 18 months after that. In other words, higher oil and gas prices make drilling more profitable and increase production.

A Houston company, Crimson Exploration Inc., has provided an update on its successful operations in east Texas, including Woodbine, Eagle Ford and other programs. This is important information for the growth of the oil and gas industry in Texas, a crucial component to economic growth and energy independence.

Crimson has 18,500 acres in the Woodbine section that cover three areas the company refers to as Force, Iola-Grimes, and Chalktown. In these areas, the company has been developing the Woodbine, and production tests have confirmed the oil potential in all three areas. Crimson has identified 115 potential drilling locations. Assuming the average output is an ultimate recovery of 400,000 BOE (barrell of of oil equivalent) per location, with 90% oil and natural gas liquids, total net potential exceeds 34 million BOE. That is five times the average for Crimson in 2011.In the Force area, in Madison County, 50 wells have completed since January 2009 using modern horizontal drilling and fracture simulation completion techniques. These wells have had initial rates of 600 b/d of oil. The first two producing Crimson wells initially averaged over 900 b/d of oil, and the area is considered substantially derisked. In Crimson’s first horizontal Woodbine well in this area, the well produced 128,000 barrels in its first four months.

Crimson has 5,100 net acres in the Chalktown area in Madison County as well. It is testing the Lewisville sand, a lower Woodbine objective that has produced vertical wells in the area. One of the wells there is producing extraneous water, possibly from a natural fracture. The company is working to shut off the source of the water to better test the oil potential.

Another study, entitled “Review of EPA Hydraulic Fracturing Study Plan“, is questioning the validity of the Environmental Protection Agency’s (EPA) data on hydraulic fracturing (“fracing”) and drinking water. The impact of fracing on drinking water has been a hot political topic for a while now, and more and more scientific studies are showing that the EPA’s data is either overblown or just plain wrong.

The Battelle Memorial Institute, a non-profit science and technology research and development organization, released a study recently concluding that the EPA did not define important quality requirements in its study process. The EPA used its discretionary authority to broaden its study significantly beyond what Congress requested in fiscal year 2010, which was originally only to include fracing and drinking water. Instead the EPA reached beyond, encompassing numerous peripheral elements related to oil and gas exploration and production activity, including various upstream and downstream stages of the water life cycle, site preparation and development, and standard oil and gas production and other industrial activities. The Battelle study stated that a broader study increases complexity and risk. Battelle warned that ambitious schedules, driven by various 2012 reporting goals, could make data collection and analysis less robust and thus scientific conclusions less sound. It also noted that site data collected during 2006 to 2010 could become obsolete by the time the EPA issues its final report in 2014.

The Battelle study was commissioned by the American Petroleum Institute (API) and America’s Natural Gas Alliance (ANGA) due to concerns about the direction of the EPA study. Stephanie Meadows, API upstream policy senior advisor, said, “Battelle’s analysis of the plan for EPA’s study reinforces many of our previously stated concerns about the study and raises new ones. It finds deficiencies in the rigor, funding, focus and stakeholder inclusiveness of the plan.” She told reporters that API and ANGA intend for Battelle’s report to help EPA produce “the most scientifically sound study possible” and hopes that this study can encourage the EPA to make sure their final report is done right.

The pace of oil and gas pipeline construction in Texas has increased enormously. As a Texas pipeline attorney, I regularly get calls from folks who ask me why they should go to the expense of having an attorney review their pipeline easement before they sign it. Here are the reasons why I believe that consulting an attorney is important:

1. The law in Texas regarding compensation for pipelines has been evolving. There is now greater recognition of what are called “remainder damages”, that is, compensation for the effect that installation of the pipeline and any surface equipment has on the market value of the rest of your property. Only by having a Texas pipeline attorney review the application of the current law to your specific situation will you know if you are entitled to these additional damages.

2. It is important to know whether the pipeline for the easement you’re being offered is a “common carrier” or not. A common carrier pipeline is a pipeline that carries oil or gas for third parties for hire. The law now requires that the pipeline company proves that they are a common carrier. If they are a common carrier, and can prove it, they will have the power of eminent domain (also called condemnation) if you cannot agree on easement terms with them. If they are not a common carrier, they cannot use condemnation and your bargaining position with them is much different.

Before the election, the House of Representatives passed sweeping energy legislation, including HR 4480, in an attempt to facilitate the development of the oil and gas industry. The bill passed by 248 to 163 and its sponsor, Representative Cory Gardner of Colorado, urged the Senate to take up this bill promptly, for the good of the American economy.

Included in the package of seven bills the House passed, all directed at oil and gas development in the Western US and on federal lands, there are provisions requiring the Secretary of Energy to have a plan for leasing federal land, directing the Secretary of the Interior to offer previously unavailable land as at least 25% of the annually nominated total, and requiring analysis of impacts of certain Environmental Protection Agency (EPA) rules on gas, diesel, and natural gas prices. Other included bills would require the Secretaries of the Interior and Agriculture to have a new federal onshore energy production strategy every four years to guide leasing plans, the Secretary of the Interior to hold at least one lease or sale per year in the National Petroleum Reserve-Alaska, and allow the Secretary of the Interior to hold oil and gas lease sales online.

Republican members of the House pointed out that while gas prices may be going down a bit, they are still double what they were in January 2009. The bills are intended to alleviate the devastating impact of government regulations on job creation and gas prices for the American consumer. Democrats and some radical environmentalist allies, of course, see it differently and have been complaining about the bill’s theoretical and speculative environmental impact. The Democrats also tried to attach amendments to the various bills to preserve major regulatory provisions, fully fund the Commodities Futures Trading Commission, and require federal oil and gas lessees to more diligently develop their holdings. These amendments were voted down.

There is now even more evidence that the Environmental Protection Agency (EPA) is using politics, and not science, in opposing hydraulic fracturing and the oil and gas industry. A recent survey and report entitled “Characterizing Pivotal Sources of Methane Emissions from Unconventional Natural Gas Production“, done by the American Petroleum Institute and America’s Natural Gas Alliance (ANGA) reached a few interesting conclusions, especially for those of us skeptical of the EPA’s stance on hydraulic fracturing. The survey found that the methane emissions levels from fracing in the US were 50% lower than the EPA estimated in its 2011 emissions inventory. Between 2010 and 2011, this new study found the natural gas industry emitted 4.4 million tons of methane gas, compared to the EPA’s estimate of 8.7 million tons. This is an important distinction because methane can be a potent pollutant.

There is little to dispute in this extensive and thorough new survey and report, which studied 91,000 wells operated by more than 20 companies over a vast geographical area. It represents nearly one-fifth of all US oil wells (18.8 % to be precise). The survey examined ten times more dates than those used in the EPA’s study on methane emissions. This survey and report show even more drastic differences in numbers in specific areas. For example, venting of methane into the air during liquid unloading was 86% less and emissions from well workovers were 72% less than indicated in the EPA report.

Howard Feldman, API’s regulatory and scientific affairs director, mentioned earlier this month that, “The industry is voluntarily reducing its environmental footprint and not waiting for regulatory mandates or incentives to continue to make progress. The technology and equipment used to reduce emissions were created by the industry, and companies are already implementing those technologies in locations where it is most effective. By January of 2015, all wells are required to include reduced emissions completions, which will further ensure emission reductions.” Mr. Feldmen said there are no plans to challenge the EPA’s emission standards in court, and added he hopes the agency will look at the industry report’s findings and reassess its regulations.