Texas Oil and Gas Attorney Blog

This week we continue our examination of ethanol as an alternative energy source. As a Texas oil and gas attorney, I am particularly interested in the impact that a shift from fossil fuels to alternatives would have on our economy and on our society. It is an unavoidable fact that we are a fossil fuel-based society; any shift from fossil fuels to alternative energy sources will have costs associated with them. While we don’t know what all those costs will be, our experience with ethanol shows that the costs-at least in the early stages of development-can at best limit, and at worst outweigh, any benefits gained from the use of alternative fuels.

What are some of the costs of using ethanol as an alternative energy source? After looking at the issue, I believe there are three primary costs:

• The cost to us as taxpayers • The cost to us as consumers • The cost to our environment
These costs are well documented in study after study, but you never hear about them in the media. The media and the public seem to have bought the idea of limitless and cost-free benefits accruing to our society. There are some benefits, as other studies have shown. But if we don’t look at the costs, how can we decide if the benefits are worthwhile?

What are the costs to us as taxpayers? In order to encourage ethanol production, Congress has approved generous subsidies to farmers and refiners. Since 1978, the Volumetric Ethanol Excise Tax Credit (VEETC) has provided refiners with an incentive to blend corn ethanol with gasoline. According to the the Government Accountability Office, in 2008 the government gave a total of $4 billion dollars in subsidies for corn-based ethanol; in 2009 the figure jumped to $6 billion dollars. Ethanol production in that year replaced a mere 2% of the U.S. gasoline supply. The average cost to the taxpayer was the equivalent of $82 a barrel, or $1.95 a gallon on top of the gasoline price. According to the Congressional Budget Office, the cost of replacing one gallon of conventional gasoline was $1.78 per gallon for corn ethanol in 2009. In addition to the tax credit, there is the Renewable Fuels Standard (RFS) which currently requires 36 billion gallons of renewable fuel (primarily ethanol) to be blended with gasoline by 2022 as well as a tariff on the importation of ethanol which functions much the same way a tax would, by increasing the cost of imports to consumers.
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As a Texas oil and gas attorney, I have spent 33 years observing the Texas Railroad Commission, the agency in Texas that regulates oil and gas drilling, production and pipelines (among other things). In my experience, the Railroad Commission is tough and efficient. I have never seen them act as a rubber stamp for the oil and gas industry. Each time I have assisted a client with a complaint to the Railroad Commission, I have been pleased with their grasp of the situation and their sensitivity to consumers. In my experience (and even though I don’t always agree with them), they do a good job.

The demonstrable competency of the Railroad Commission is one reason that the most recent intrusion by the federal government into Texas’ affairs is especially disturbing. I am speaking, of course, of the emergency order issued on December 7, 2010 by the Environmental Protection Agency (the “EPA”) to Range Production Company, forcing a cessation of it’s activities in Parker and Hood Counties, Texas. This latest arrogance by the feds is unconscionable. In support of my statement, (and lest you think I am being extreme here), please consider the following:

Item One: The EPA order shuts down legitimate business operations, puts people out of work, and interrupts the production of a clean and environmentally sound fuel. So, you might assume the EPA had some evidence for what they are doing. You would be wrong.The EPA has apparently viewed the “documentary” (and I am using that term very loosely) called “Gasland” and taken it for fact. Certainly, many homeowners who live near wells have watched it, and probably thought it was factual. The truth is that most of what is depicted in this film is patently false. For example, in at least two scenes, homeowners in Colorado are shown lighting their tap water on fire, presumably due to contamination from gas well drilling, fracking or production.The truth is that these occurrences were thoroughly investigated by the Colorado Oil and Gas Conservation Commission (the “COGCC”). The result of the investigation? There was methane in the water from naturally occurring methane deposits. The drilling of, fracking for and production of gas from wells in the vicinity had nothing, I repeat, NOTHING, to do with it. You can read a summary of the COGCC’s report here.
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When discussing the issues involved in national energy and environmental policy, the subject of alternative energy frequently comes up. As a Texas oil and gas attorney, I follow these discussions with great interest. The outcomes of our decisions about alternative energy sources will eventually effect anyone even tangentially connected with the oil and gas industry in this country. That’s why a balanced evaluation of the proposed alternatives to fossil fuels is so important. In this first of several blogs about alternative energy, we’ll be looking at one of the most widely used today-ethanol.

Ethanol, or grain alcohol, has been around as a fuel for well over a century. Henry Ford’s first vehicle, the Quadricycle, was designed to run on pure ethanol; later, his Model-T could run on pure ethanol, gasoline, or a mixture of both. In fact, Ford continued to be an advocate for ethanol as a motor fuel well into the 1920s, long after cheap and plentiful gasoline became the fuel of choice. The low price of gasoline until the 1970s dampened the further use of ethanol (save for a brief time during World War II). This changed with the gasoline price shocks of the 1970s. Interest in ethanol revived, spurred by government subsidies targeting the development of synthetic fuels. When gasoline prices plummeted in the 1980s, research into the commercial production of synthetic fuels stopped to a great extent. Interest in ethanol, however, remained.

The interest in ethanol, at least through the 1990s and early 2000s, was not as a replacement for gasoline but as a fuel additive for environmental reasons. The Clean Air Act of 1990 and the Alternative Motor Fuels Acts mandated the use of oxygenates to reduce carbon emissions from automobiles. The two most widely used oxygenates were MTBE (methyl tert-butyl ether) and ethanol. By the early 2000s, however, the EPA mandated the phasing out of MTBEs because of fears of groundwater contamination. Today, ethanol is the most widely used gasoline additive, with most areas requiring a blend of 10% ethanol and 90% gasoline.With the rising price of gasoline worldwide, along with fears of man-made climate change, the possibility of ethanol partially-or fully-replacing fossil fuels for motor vehicles has gained great currency. From 2007 to 2008, ethanol’s share in global gasoline-type fuel used increased from 3.7% to 5.4%; in 2009 world production reached 19.5 billion gallons. The world leaders in ethanol production are Brazil and the United States, with a combined 80% share. (See Executive Summary: “Assessing Biofuels” UNEP 2009). Ethanol can be produced from a wide variety of grains and other feedstock such as corn (the predominate source in the United States) and sugar cane (the predominate source in Brazil), along with sugar beets, sorghum, switchgrass, wheat, cotton, and even the waste left over from harvesting (referred to as cellulose waste). While the production of ethanol from these other sources is in the research stage, commercial production of ethanol in the United States from corn is commonplace.

Although I am primarily a Texas oil and gas attorney, I am interested in all energy sources, and I am especially interested in the ongoing national discussion about what are called alternative energy sources. One of the hottest topics in the world of energy is the discussion of alternatives to fossil fuels. While the definition of “alternative energy” has changed over time, the discussions today center on energy sources other than oil, gas and coal, and include such energy sources as solar, wind, biomass, hydrogen, and geothermal energy. These discussions are presumably driven by concerns over America’s dependence on imported oil and the effects of allegedly manmade climate change. Often, advocates of alternative energy sources make extravagant claims when touting their alleged benefits when compared to fossil fuels. One alternative energy website says that alternative energy sources “have no undesired consequences”; in fact, some people claim that alternative energy sources “are renewable and are ‘free’ energy sources.” The move from traditional to alternative energy sources is not only touted as the solution to a whole host of environmental problems, but the Obama administration says the “green jobs” resulting from this shift are a key to economic recovery and the basis of a strong middle class.

Alternative energy sources seem to offer the world a future environment free of the deleterious effects of obtaining and burning fossil fuels and an economy growing rapidly and unfettered on the back of unlimited and free (e.g. no cost) energy and a green jobs revolution. It sounds almost too good to be true.

The question is: is it? Is alternative energy a “no cost” solution to all our environmental, energy, and economic problems? Well, as Robert Heinlein popularized in his classic science fiction novel, The Moon is a Harsh Mistress, TANSTAAFL (“there ain’t no such thing as a free lunch.”). Everything comes with a cost-even in the Brave New World of alternative energy. These costs seem to get lost in the hype.
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As the price of oil creeps back up, the pace of oil and gas leasing has picked up as well. As a Texas oil and gas attorney, I regularly get calls from folks who ask me why they should go to the expense of having an attorney review their oil and gas lease. Here are the reasons I hear for not consulting an attorney, and my response to each, explaining why consulting an attorney is important:

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.

2. “The lease did not look that complicated”. If you are not an oil and gas lawyer, do you really know what the terms in that lease mean? Do you know when words in the lease have one meaning in ordinary use and another meaning in the oil and gas industry? Even more important: do you know what’s missing?

As a Texas oil and gas lawyer, I have followed with interest the proposals to add new regulations for onshore, as well as offshore, drilling in the wake of the Gulf of Mexico oil spill. Several initiatives to tighten federal regulation of offshore drilling are making their way through the halls of Congress. These bills are perhaps inevitable, considering the magnitude of the spill, the confused federal and BP response to the spill and the adverse public reaction to both the spill and the subsequent mitigation and clean up efforts. At the same time, however, environmental groups and some in Congress are using the push for new offshore drilling regulations to call for tighter federal rules for onshore oil and gas drilling. These new regulations are designed to make it more difficult for oil and gas companies to start drilling in the first place, and to more closely monitor their post-drilling operations for alleged threats to public health and the environment.

It’s perhaps a little too simplistic to blame the BP spill for the new regulatory push onshore. Given the Obama administration’s stated goals of favoring alternative energy and the environment over the pro-drilling energy policies of the Bush administration, perhaps new regulations were inevitable. But the debate appears to have taken on greater urgency in some quarters. As Kevin Book of Clear View Energy Partners says (referring to shale drilling), “the perception of risk has changed, and the reason for it can be summed up in one word-Macondo.”

The first signal of new regulations to come surfaced in May, when Interior Secretary Ken Salazar announced tighter regulations for oil and gas drilling on public lands. These new rules make it much more difficult for oil and gas companies to obtain drilling approval, and drilling on certain public lands would require a period of public comment. While environmental groups praised the regulations as reversing the allegedly destructive Bush administration drilling policies, the Independent Petroleum Association of the Mountain States (now the Western Energy Alliance) stated in a press release that the new rules would “delay the development of clean, domestic natural gas on Western federal lands.”The desire for tighter regulations focused Congress’ attention on two bills introduced over a year ago. One, the Consolidated Land, Energy, and Aquatic Resources Act (the CLEAR Act), passed the House on July 30, 2010 and went to the Senate. Among other things, the bill requires oil and gas companies engaged in drilling on federal lands to adopt “best management practices” designed to minimize threats to health and the environment; requires public disclosure of the chemicals used in drilling or hydraulic fracturing (often referred to as “fracing” in the oil industry or “fracking” by the media); and repeals 2005 legislation allowing companies to drill on public lands without a full environmental review process. Another bill, the Fracturing Responsibility and Awareness of Chemicals Act (the FRAC Act), originally introduced last summer, specifically targets the practice of hydraulic fracturing by removing the exemption of the practice from regulation by the EPA under the Safe Drinking Water Act. This bill and a companion bill introduced at the same time in the Senate have never come up for a vote. Similar language was stripped from the CLEAR Act, but the Clean Energy Jobs and Oil Company Accountability Act, introduced in the the Senate by Majority Leader Harry Reid (D-Nev.) would require companies to make their fracing formulas public on the Internet.

As a Texas oil and gas attorney, I have had occasion from time to time to observe the environmental, administrative and legal ramifications of an onshore oil spill, usually caused by vandalism or malfunctioning equipment. Along with everyone else in the world, I am horrified as the tragedy in the Gulf of Mexico unfolds, and along with everyone along the Gulf, I am intensely frustrated that the spill has not been stopped yet.Something else, besides the damage to persons, property and the environment, concerns me. Specifically, there is a lynch mob mentality about BP that has this country in its grip. They have been tried and found guilty in the court of public opinion, and the tar and feathers await.

I am not going to defend BP. They have a long history of regulatory problems. Moreover, from what we know so far, it appears that a couple of very stupid and very negligent decisions by BP may have caused this disaster. However, as John Adams famously said in the Novanglus Essay No. 7, we are “a government of laws, not of men.” We also live under state and federal constitutions that promise that we are innocent until proven guilty. Nothing about the cause of this spill or who is responsible has been proven yet. We would be better served by focussing our attention on stopping the spill at this point, rather than flogging BP.

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!