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I’ll bet that most Texas oil and gas attorneys (and, I’m sure, everyone in the oil and gas business) often hear the myth repeated that someday there will be a peak in oil production, followed by a rapid decline which will cause the collapse of human civilization as we know it. This myth predicts that someday, possibly someday soon, (although that date keeps getting pushed back when it turns out to be wrong) the world will simply run out of oil. Please understand this myth for what it is-unnecessary fear mongering by those with either a political purpose or who are ignorant of the oil production process.

Daniel Yergin , an expert energy researcher and the Pulitzer Prize winning author of “The Prize”, excerpts from his new book, “The Quest: Energy, Security and the Remaking of the Modern World”, in a recent Wall Street Journal interview. He describes the ways in which the purveyors of this “oil peak” myth are systematically wrong. For example, the myth drastically oversimplifies the complex nature of oil production. It is based on the concept that the world has X amount of oil, and when we use X amount, there will be none left. While in an absolute sense that may be true, oil production is not nearly as simple as that. This country has a long history of feverish predictions that we are running out of oil, going back as far as the 1880s. The actual prospect of running out of oil remains as distant today as it did then.

From 2007 to 2009, for every barrel of oil produced in the world, 1.6 barrels of new reserves were found. In addition, energy technology, including green energy, has advanced to the point where we use oil in a much more efficient way than in the past. As a result, each barrel of oil goes further. But the “oil peak” myth still holds our collective national attention for some reason. Mr. Yergin attributes this in large part to a man by the name of Marion King Hubbert, who studied geology in the first half of the 20th century. The “oil peak” is often referred to as “Hubbert’s Peak.” In 1956, Hubbert theorized that oil production would peak between 1965 and 1970. When production did decline after 1970 and the oil embargo rocked America soon after, his theory seemed vindicated. He also claimed that the generation of children born in 1965 would see oil reserves wiped out in their lifetimes. But what Mr. Hubbert did not count on was the huge increase in newly discovered oil and gas reserves found and produced in the U.S. By 2010, US oil production was three and a half times higher than Mr. Hubbert predicted it would be.

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The EPA has once again overestimated the amount of pollution that comes from an oil and gas source — with potentially grave consequences for the industry. This time, the EPA has overestimated the amount of methane gas that comes from shale gas wells. A new report from the IHS Cambridge Energy Research Associates has found that the EPA’s estimates were based on too small a sample of wells, and on a method that did not conform to industry practices.

Because methane is highly flammable, those who drill new shale gas wells make every effort to minimize the emissions. This includes several methods for capturing and relieving gas, such as installing a blowout preventer at the surface.The report found that rather than base its methane emissions estimates on gas that escaped to the surface, the EPA based them on what was captured. The report noted that if methane emissions were really as high as the EPA supposed, there would be extremely hazardous conditions at the well site. It would be be “unwise” for the EPA to use its methane estimates for the basis of new policy. Furthermore, EPA proposals for more regulation of hydraulically fractured gas wells are already part of industry standards.

How did this come about? The EPA based its 2010 revised estimates on too small a sample — specifically, two workshop presentations based on just four projects in Wyoming, New Mexico, Texas, and Oklahoma. The presentations described the amounts of methane captured during “green completions” of natural gas wells. Green completions are meant to capture as much methane as possible before it reaches the surface while the well is completed. Therefore, it seems absurd to use it as a basis for estimating methane gas emissions. Yet for some reason, the EPA assumed that the wells that captured this amount methane were an exception, and that every other well must release the methane into the atmosphere because their states do not specifically regulate gas emission. In fact, IHS CERA director Surya Rajan stated that it is “common industry practice… to capture gas for sale as soon as it is technically feasible.”

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As is no doubt true of most Texas oil and gas attorneys, I’m always interested in reading about new developments in the oil and gas industry, although they often seem to attract more than their share of political wrangling. Of course, energy independence is a hot-button issue these days (see our recent post on the topic). Unfortunately, political posturing often gets in the way of common sense solutions to this pressing problem.

I was reminded of how politics is the enemy of practicality when I read an interview with Harold Hamm, CEO of Continental Resources in the Wall Street Journal recently. Continental Resources is the 14th largest oil company in the United States. Mr. Hamm is the man who discovered the Bakken oil fields in Montana and North Dakota, which he claims holds 24 billion barrels of oil, and that has already helped make America the world’s third largest oil producer. Mr. Hamm believes that energy independence is within our grasp.

New technological advances are helping the industry grow by leaps and bounds. Horizontal drilling allows economical access to oil reserves that would not have been possible in the past. It has done for oil production what fracing has done for natural gas. Mr. Hamm believes that America’s oil production and reserves will triple in the next five years, which will have a broad impact on the economy. There are 10 million royalty owners today who are earning money from the oil located beneath their land. These royalty owners are not the millionaire Wall Street investors that Obama is so fond of bashing, these are just folks, like you and me, using those royalties to pay help pay bills and to save for retirement.

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There is a new arrow in the quiver of Texas September 1, 2011. Oil and gas companies can still acquire easements across private property to build pipelines. If the pipeline is a private pipeline, the pipeline company must obtain the voluntary agreement of the property owner. If the pipeline is going to be a common carrier, and the pipeline company and property owner cannot agree on easement terms, the company can commence condemnation, or “

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I was interested to read recently about a new crude oil pipeline to be built by Enterprise Products Partners LP and Enbridge Inc. All new projects like this have the potential to create jobs, maximize local productivity, and ensure that our state’s natural resources are utilized in safe, secure, and productive ways. This latest proposal is unique in that most of the largest new pipelines are designed to carry gas. This line would instead bring oil to the Gulf Coast from the Cushing, Oklahoma storage hub. According to the latest report on the project in the Oil & Gas Journal , under the current plan, a 800,000 barrel-a-day crude oil pipeline would be designed, built and operated to bring oil from Cushing to Enterprise’ Texas Gulf Coast refining complex. This would be the largest pipeline connecting the Oklahoma oil storage hub with Gulf Coast refiners.

If the proposal continues as planned, the 36-in. OD Wrangler Pipeline will begin at the Enbridge Cushing terminal and then extend 500 miles south along pipeline corridors ending in southeast Harris County at Enterprise’s ECHO oil storage terminal. All told, the new crude oil pipeline would provide access to refineries in Texas City, Baytown, and along the Houston Ship Channel. The pipeline is set to accommodate a variety of grades and oil sources. In addition to the main pipeline, the joint project plans also include the creation of an 85 mile line to the Beaumont/Port Arthur refining center. On top of that, additional storage necessary for the operations of the new pipeline will be built and housed at Enterprise’s ECHO site in Harris County, Texas.

The two companies announced a binding open commitment for available capacity on the new pipeline which ran from October 3rd and ended last Wednesday. Depending on the timing of required regulatory approvals and commitments from interested shippers, the companies hope to design, build, and begin operating the new line in less than two years. Under the current proposal, the line would enter service in mid-2013.

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As a Texas oil and gas attorney, I have followed with great interest the tumultuous relationship that seems to perpetually exist between Texas and its landowners on one hand, and the United States Environmental Protection Agency (EPA) on the other. Unfortunately, some misguided policymakers are under the mistaken notion that the EPA is working to protect the environment, and that the efforts of Texas and other states to fight those federal regulations are misguided. That oversimplification could not be further from the truth.

As Texas Comptroller Susan Combs explained in a recent editorial published in the Star Telegram, Texans are committed to the well-being of their air, land, and water. If legitimate steps need to be taken to protect the long-term well-being of our resources, Texans have and will continue to be the first to step up and take action. Unfortunately, many of the EPA’s latest regulations and requirements passed in the name of environmental protection actually protect next to nothing, and have no scientific basis whatsoever, yet come with very significant detrimental consequences for Texas residents.As Combs notes, “private landowners are the best stewards of their own property.” She goes on to say that the EPA continues to ignore the knowledge and reasonableness of our private property owners when making arbitrary decisions that have effects on their land and lives. Even more troubling, at times the Agency seems to specifically target Texas in ways that defy common sense and scientific reality. For example, Combs discussed the EPA’s new “cross-states” air pollution rule. The new regulation will disproportionately affects Texans. The measure targets nitrogen oxide and sulfur dioxide. Texas plants produce roughly eleven percent of the sulfur dioxide targeted by the regulation, yet, inexplicably, Texas is being ordered to absorb a quarter of the reductions-more than double its actual share.

Anyone who understands the energy industry in our state understands the significant impacts the regulation will have. The state’s largest power generator, Luminant, explained that the rule will eliminate 500 Texas jobs as two generating units are being idled and three ignite mine operations halted. In addition, the Electric Reliability Council of Texas reported that the rule may increase electricity rates for consumers, because the state’s generation capacity will be reduced in the peak load months of summer.

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When a Texas mineral owner asks me to review or negotiate an oil and gas lease offer they have received, one of the first things I do is to determine who the proposed operator, or lessee, will be. Many people do not realize how important it is to know just who you are leasing to. If you do not investigate the proposed lessee before you sign, you may be throwing away the royalties you could have received had you leased to a competent oil and gas company.

First, I determine whether the potential lessee is a licensed oil and gas operator. I strongly urge my clients not to sign a lease with a middleman. Instead, I insist that the actual oil company who will be operating the lease be disclosed so we can do a background check on them. There can be many potential problems if you sign a lease with a middleman. These include, (but are certainly not limited to), the following problems:1) The company who contacted you may be a broker or a “lease hound”, that is, a person or company who tries to sign up leases cheaply and then sell them to a real oil company for a huge markup. I prefer to see my client be paid that markup, rather than the middleman.

2) They may be an agent for a “boiler-room” operation, who make their money by selling interests in a lease or “drilling program” as an investment. They make their money on the sale of these interests, and could care less about drilling a good well, or treating your minerals or the surface of the property competently. In some cases, they don’t care if a well is drilled or not, because they have already made their money.

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I spend a significant amount of time as a Texas oil and gas attorney assisting landowners with negotiation of easements and rights-of-way for oil or gas pipelines. As my client and I work through the negotiation process, it is vital to understand the various options available to the pipeline company if we are unable to reach an agreement. While we always try to reach a fair agreement, knowing what the other party can do if a deal is not reached is a key part of crafting an appropriate strategy so that you, as a landowner, can get the most value out of the agreement. Earlier this year, the Texas Supreme Court handed down a landmark decision which may affect the options available to pipeline companies when they negotiate with landowners. The case, Texas Rice Land Partners, Ltd. and Mike Latta v. Denbury Green Pipeline-Texas, addressed issues regarding when a pipeline company is a common carrier and therefore, when the eminent domain power is available to pipeline companies.The Texas Natural Resources Code allows “common carrier” pipelines to wield the eminent domain power only if they are going to transport gas “to or for the public for hire.” Of course, this statute reflects the constitutional requirement that property cannot be taken from an owner if it will be used merely for private purposes. In Denbury, the Texas Supreme Court provided further clarification on what a pipeline must do to qualify as a common carrier so that they can utilize the eminent domain power. In the past, it was assumed by most involved parties, including Texas oil and gas attorneys, that the issuance of a common carrier permit by the Texas Railroad Commission was sufficient to satisfy the requirement. In other words, if a pipeline company received the permit, then they could utilize the eminent domain power if they could not negotiate a right of way with the landowner. The Denbury case changes that.

In this case, Denbury Green received a T-4 permit from the Texas Railroad Commission to construct and operate a CO2 pipeline at the Texas-Louisiana boarder and extending to the Hastings Field in Brazoria and Galveston counties. As part of the permit application, the company checked a box which indicated that the pipeline would be used as a common carrier, instead of as a private line. After receiving the permit, Denbury Green visited part of the proposed location where the pipeline would be put. However, the owners of the land in question, Texas Rice Land Partners, refused to give the company access. Denbury Green and the Texas Rice Land Partners had previously negotiated on the company’s use of the land, but they had not reached agreement. Denbury Green sued to have access to the site to survey in preparation for condemning the pipeline easement.

The case eventually made its way up to the Texas Supreme Court. Denbury Green argued that it should be deemed a common carrier with the power of eminent domain because the permit issued by the Railroad Commissions deemed it as such. However, the Supreme Court rejected that argument. They noted that “the T-4 permit alone did not conclusively establish Denbury Green’s status as a common carrier and confer the power of eminent domain.” Instead, the Court stated that whether or not a pipeline company is deemed a common-carrier is a judicial question. The Railroad Commission’s granting of a permit is an administrative tool based upon the self-reporting of the company involved. Such a process is not subject to the adversarial testing present in the judiciary to determine if the company will actually use the pipeline for public purposes.

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When the federal government began giving billions of dollars to the banking industry through the Troubled Asset Relief Program (TARP), we discovered that many financial institutions had gotten themselves into their dire situations by making or investing in high-risk home loans. Subsequent to that discovery, there was a push to reform residential lending practices.One piece of legislation aimed at curbing such high-risk lending for homes is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In part, this law gives federal bank regulators the authority to set mortgage lending standards to attempt to prevent the lending mistakes of the past. Using this authority, the newly empowered regulators have created a new Qualified Residential Mortgage (QRM) standard and proposed guidelines to govern it. This standard is meant to increase the number of loans that are of high credit quality and have a low likelihood of default.

According to the Community Associations Institute, as proposed, these QRM loans require that a person be able to provide a 20 percent down payment (or more), pay full closing costs out-of-pocket, provide full income documentation, and be current on all existing debt payments. Additionally, applicants are subject to strict debt-to-income ratio limitations, must not have been more than 60 days delinquent on a debt obligation for two years, have had neither property repossessed nor been party to a bankruptcy proceeding, foreclosure, short-sale, or deed in lieu of foreclosure within the last three years, and have never been subject to a Federal or state judgment for collection of any unpaid debt. QRM loans are also only available as first-lien mortgages for a purchaser’s primary residence or second-liens for refinancing existing loans. Finally, adjustable rate mortgages are only to be adjusted only twice per year, and those adjustments cannot exceed six percent during the life of the loan.

The new guidelines impose much stricter standards than previous lending practices. For example, previously closing costs (which can be several thousands of dollars) could be financed. The 20 percent down payment requirement is perhaps the greatest change, as it doubles the 10 percent down payments that were routinely made by first time home buyers in previous years. What is so onerous about saving up the amount needed for closing costs and down payment, like we all used to? In addition, if buyers have more invested in their home purchase, they are less likely to just walk the loan, as so many have done.

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It is incumbent upon a Texas oil and gas lawyer to keep abreast of all relevant decisions from appellate courts and the state’s highest court. Proper advocacy demands that attorneys understand changes in the law and be able to incorporate those changes in their legal representation. Lawyers must have an awareness of all the legal tools at their disposal so they can provide zealous advocacy and competent representation for a client, whether in a dispute, guiding a landowner through the negotiation process for a lease, preparing a mineral deed or a number of other tasks.

There remain many areas of Texas oil and gas law with questions that are unanswered, and our courts are frequently providing guidance on those issues. For example, the Texas Supreme Court recently handed down a decision in Lesley v. Texas Veterans Land Board that provided further clarification on the rights and responsibilities that executive rights holders owe to mineral owners.

A mineral estate is basically a bundle of various property rights. One of those rights is known as the “executive right”, which is the ability to enter into an oil and gas lease. This is distinct from other rights of mineral ownership, such as the right to collect royalties, bonus or delay rentals pursuant to an oil and gas lease. More often than not a single owner will possess all of these rights, meaning they can choose to lease and will receive payment for royalties due under that lease. However, these rights can be split between one or more persons or entities. When those rights are split, the holder of the executive right owes a duty of “utmost fair dealing” to other owners of a mineral interest.

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