Texas Oil and Gas Attorney Blog

As a Texas oil and gas attorney, I regularly get calls from folks who, long after they have signed an oil and gas lease, are upset with an oil and gas company for something the company is doing or not doing. In most cases, once we review the oil and gas lease, it becomes obvious that they have already given permission for the oil company to do what they are doing in the language of the lease they signed.

I customarily ask these folks why they did not have an attorney look at the lease before they signed it. I have been making a list of the reasons they give. Here are the reasons I hear most often, and my response to each one:

1. “The landman told me that the lease was just a standard form”. Watch my lips on this one: there is no such thing as a standard oil and gas lease. The landman may have meant that the lease they offered was standard for that particular landman, or for the particular oil company the landman was representing. However, there is simply no such thing these days as a standard, industry-wide form.

As a Texas oil and gas attorney, I have viewed the “global warming” debate with growing alarm. When the United Nations International Panel on Climate Change (“IPCC”) initially issued its fourth report, I was concerned because the IPCC is made up primarily of politicians, not scientists. Next, I read the report thoroughly and then did my own research. My independent research led me to the conclusion that the IPCC’s findings were in large part: 1) based on no research at all; 2) were based on non-peer-reviewed research; or 3) illogical, tenuous or unjustified extrapolations from unrelated research. Despite these problems with the report, large numbers of people wanted to join the IPCC and Al Gore in proclaiming that global warming was caused by manmade greenhouse gases. It is even more alarming at how many people continue to chant this mantra, even after the flawed science (or lack of science) behind the IPCC’s report has been revealed.Recent news has demonstrated to an even greater degree just how ill-conceived, biased and misguided the IPCC’s report was. Notwithstanding the evidence of how flawed the IPCC’s report is, the EPA, at the direction of the Obama Administration, has sought to treat greenhouse gases as toxic, and to regulate them.

Major industries in Texas, including agriculture and oil and gas production, unquestionably produce some carbon dioxide. The idea of regulating the greenhouse gases, and in particular, the CO2, produced by these industries as a toxic substance is irresponsible, however. Not only is this kind of regulation misguided and politically motivated, the economic costs of regulation could be staggering, especially in this recession. Why would the federal government want to beat on us when we’re down??

It is especially heartening to see the Texas Governor, Rick Perry, take on the EPA by bringing suit to stop EPA from regulating greenhouse gases in Texas. Many of us are cheering for him!

Texas oil and gas attorneys and mineral owners may see more leasing activity in 2010 in the Eagle Ford Shale, a field in southern Texas that oil and gas companies have known about for some time, but that is just now being explored. The field is named after the city of Eagle Ford, Texas, hometown of Bonnie Parker of “Bonnie and Clyde” notoriety. (The city of Eagle Ford was incorporated into the City of Dallas in 1956).

Several oil and gas operators, beginning with Petrohawk Energy Corporation, and including many of the larger companies (Anadarko Petroleum Corporation, XTO Energy Inc., Chesapeake Energy Corporation and several others), are quietly signing up leases and drilling exploratory wells. The “word on the street” is that the cost of drilling a gas well in the Eagle Ford Shale may be substantially less than in the Barnett Shale or the Haynesville Shale, although drilling in the heavy clay present in portions of the Eagle Ford shale presents its own challenges.

The Eagle Ford Shale underlies large portions of Texas, but it doesn’t always contain gas. Currently, leasing appears to be limited to Colorado, Dewitt and Karnes Counties. Other counties that may see leasing activity include Bee, Dimmit, Goliad, LaSalle, Lavaca, Live Oak, McMullen, and Webb Counties. An increase in the price of gas (which, given the large amount of current reserves, probably won’t happen for a while) would certainly accelerate activity in this play.

As a Texas oil and gas attorney, I have observed that it has been a slow year so far for leasing and drilling activity. But some experts are predicting a change on the horizon for 2010. An article this morning by Jamaal O’Neal in the Longview-Journal.com quotes Professor Ken Morgan, Texas Christian University geology professor and director of the TCU Energy Institute, as saying that higher oil and gas prices may be ahead for 2010. The article quotes research by Baker Hughes that natural gas, which was selling for $10.00 per thousand cubic feet or more in mid 2008, is currently selling for as low as $3.60 per thousand cubic feet. A barrel of crude oil that sells for about $69.00 currently, was bringing $150.00 a barrel during the summer of 2008. Professor Morgan opines that the large amount of natural gas reserves, as well as the world-wide recession, has kept prices for oil and gas low.

Basic economics dictates that when prices are low, oil and gas companies are reluctant to expend the large sums necessary to drill new wells. They are not going to make the investment if they can’t get a return. As the world economy recovers, demand for oil and gas will increase, the price of oil and gas will increase and the drilling of new wells will once again generate sufficient returns to support the cost of drilling. Once oil and gas companies begin to drill again, mineral owners will begin to get calls from landmen working for the oil and gas companies, seeking new leases. I may be a bit optimistic, but I see leasing and drilling activity in Texas picking up by March and April 2010.

As a Texas oil and gas attorney for many years, I have seen many booms come and go. During a “boom” period, prices for oil and gas increase. The increase in prices encourages exploration of new sources of oil and gas and development of existing sources. Mineral owners tend to see much more leasing activity during boom periods, and oil and gas companies are much more amenable to entering into leases that are fair to both mineral owner and operator. Conversely, when prices of oil and gas are low, exploration and development sags, leasing activity falls off and when a mineral owner is offered a lease, it is usually a very one-sided lease that favors the oil and gas operator and is very unfair to the mineral owner.We are just coming off a very down period for oil and gas exploration and development in many areas of Texas. I have counseled many mineral owners over the years during these down periods who were offered leases that were, frankly, onerous. In most cases, my client decided to decline the oil and gas company’s offer, and await a better offer. So far, each of these owners was ultimately offered a better deal, a fairer lease, and a lease with better compensation for their minerals because they waited.

As in life, there are no guarantees in the oilpatch. For example, there is no guarantee that you will be offered another lease, although it is certainly likely that you will. There are some cases in which even a poor lease might be better than no lease at all, especially if you are faced with a situation where your minerals may be drained without compensation if you don’t execute a lease. It is also important to realize that even in boom markets, you don’t always get everything you want in a lease. It is always a matter of give and take. Frankly, only someone experienced in this area can give you the input to help you make an informed judgment about whether to lease or not, and if you do lease, on what terms.

Any Texas oil and gas attorney who has practiced for any length of time has been through the cycle many times: oil prices go up, and leasing and drilling activity increases. Oil and gas prices decline, and many oil and gas companies pull back on their leasing and drilling efforts. The past year has seen an especially extreme example of this cycle. Last summer, according to WTRG Economics, the price the operator received for oil in some areas of Texas reached $150.00 per barrel or more. According to the Energy Information Administration (a division of the Department of Energy), gas was going for $8.00 per mcf at the wellhead in some places. Leasing was going on at a frantic, almost giddy, pace and substantial primary term payments and royalty percentages were the norm. Then prices declined sharply, to less than $30.00 per barrel of oil and $3.00 per mcf for gas at the wellhead in many areas of Texas. Most operators pulled way back, some walking away from signed leases and others signing leases only at substantially reduced bonus and royalty levels.

Now the price of oil and gas is increasing, and phoenix-like, the Texas energy industry begins to rise from the ashes. This time, there are some dark clouds on the horizon, coming in from our nation’s capitol, that do not bode well for the energy industry. President Obama, while proclaiming that he wants to achieve independence from foreign oil sources, is considering two things that would cripple our domestic oil and gas industry. Specifically, he wants to eliminate intangible drilling costs and depletion allowance as deductions for oil and gas operators on their federal income tax. He wrongly calls these “subsidies”, in an attempt to gain support for this policy.The deduction for intangible drilling costs allows oil and gas companies to deduct the cost of exploring for oil and gas from later oil and gas income. These costs include such things as seismic tests, surveys, engineering fees, wages, etc. The intangible drilling cost deduction encourages oil and gas companies to explore for new energy sources. The depletion allowance allows oil and gas companies to deduct a portion of the value of their mineral deposits as those deposits are used up, just as the owner of a machine used to produce goods is allowed to depreciate his machine.

It took decades for the domestic energy industry to recover from the ill-conceived, poorly timed and wrongly executed policies of Jimmy Carter. President Carter’s policies drove many smaller companies out of business, and encouraged other producers and refiners to move outside of the United States. When we experience those times of high gasoline prices in the United States, it is primarily Carter that we have to thank. Unfortunately, we now seem to have another President headed down this same irresponsible path.The announced policies of Obama are bad policy policy for at least four reasons: 1) most energy production in this country comes from small, independent companies, not “big guys” like Exxon or Mobil, and these small companies are going to be hurt badly by this policy; 2) these policies will result in much higher prices at the pump for consumers, who are having a hard enough time already; 3) Carter’s policies drove the “big guys” overseas, and now Obama’s policy would diminish the remaining independents; and 4) the higher energy prices will contribute in a big way to inflation. Is this really the way to achieve energy independence? I think not!

Part of what I do for clients as a Texas oil and gas attorney is to calculate oil and gas royalties so that they can be sure they are being paid correctly. I thought it might be useful to you to explain how an ownership percentage and royalty are calculated.

1. First, we take your percentage of mineral ownership in the land in question, and we multiply that by the number of surface acres in your entire tract. The resulting number is your net mineral acres. For example, if two relatives together own a one-half interest in a forty acre tract, or ½ times 40, they have twenty net mineral acres.      2. Secondly, if the land is located in a pooling unit, (sometimes also called a pro-ration unit), we multiple the total number of acres in the tract by a pro-ration fraction. The reason for this is that each royalty owner in a pooling unit is only entitled to their proportionate share of the oil or gas produced by the entire pooling unit. A pooling unit is an area around a well that is set by the Texas Railroad Commission,  and is intended to approximate the area drained by a producing well. Pooling units can range in size from 80 to 640 acres or more. For example, for a forty acre tract that is located in a 320 acre pooling unit, that forty acre tract is entitled to 40/320, or 0.12500, of the minerals (whether oil or gas or both) produced by that 320 acre unit.

3. Third, we multiply that result by the royalty fraction in the oil and gas lease you signed.

As oil and gas lawyers in Texas are well aware, there is a lot of pipeline construction going on in Texas as well as in other parts of the United States. I had a fascinating conversation not long ago with Victoria Myers, Senior Editor for The Progressive Farmer Magazine. If you have not looked at this publication before, it is really an excellent resource for folks who make a living from farming, as well as those “gentlemen (gentlewomen?) farmers out there. (You know who you are!) Since I am a Nebraska farm girl myself (Thayer County, to be precise), I find it especially interesting.

Victoria is the author of an article in an upcoming issue of Progressive Farmer regarding pipeline easements and rights-of-way. My discussion with her has caused me to update my list of issues involved in these kind of agreements by adding a few from her list. Here is the updated list:1. Is the easement limited to a specific area, or is it a blanket easement over your entire property?

2. Is the pipeline going to be buried to an appropriate depth, in light of your future use of that property, what the pipeline will carry and the anticipated size of the pipeline?