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As oil prices have declined to unprecedented lows, consumers may feel glad for lower gasoline prices at the pump. However, the piper always has to be paid, and nowhere more so than in Texas.

As I discussed in a previous post, oil companies have been hit by a number of negative factors, some of their own making.  First, our country was experiencing a substantial oversupply of oil going into the current situation. Many oil companies continued to produce, despite the oversupply, because increased production resulted in higher stock prices which in turn resulted in higher bonus for officers of the oil company. To this extent, some oil companies have brought this situation upon themselves. Secondly, the production war between Russia and Saudi Arabia exacerbated the oversupply and helped drive the price of oil down. Third, as the price of oil declined, the value of individual oil company’s reservoirs declined. In the cases where reserves were used as collateral for loans, the bank would then require either repayment of at least a portion of the loan or new collateral for the loan. Oil companies that cannot comply default and/or file bankruptcy. Fourth, the covid 19 virus creates staffing issues for oil companies, both in their offices and in the field. Fifth, shelter in place orders have resulted in drastically reduced demand for oil and gas. Finally, all of these factors make lenders and investors very nervous and so new money for exploration, production and pipelines is becoming more scarce.

Not surprisingly, all of this has resulted in oil company bankruptcies. So far, since January 2020, several oil companies have filed for bankruptcy protection: Bridgemark Corporation, Southland Royalty Company LLC, Dalf Energy LLC, Sheridan Holding Company I LLC (who are actually an investment fund), Echo Energy Partners I LLC, Whiting Petroleum Company, Victerra Energy LLC, Gavilan Resources LLC, Ultra Petroleum and Sklar Exploration Company LLC. Other companies, including Chesapeake Energy Corporation and Denbury Resources, are reportedly preparing bankruptcy filings. There been some predictions that hundreds of oil companies will file bankruptcy by the end of 2021.

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The Texas rule against perpetuities (the “Rule”) was something all lawyers learned about in law school, but it seemed at the time like a concept we would not run into very often in real life law practice. Unfortunately, it comes up regularly in connection with Texas oil and gas leases and related interests.

In Texas, the Rule states that a property interest must vest within 21 years after the death of some life or lives in being at the time of the conveyance of that property interest. If it does not, then the interest is a perpetuity. Perpetuities are prohibited by Texas Constitution Article 1, section 26 as restraints on free alienation of property. A conveyance that violates the Rule is void.

In Tommy Yowell v. Granite Operating Company et al, the Texas Supreme Court had occasion to review a claim that an overriding royalty interest (ORRI) violated the Rule. As many of you know, an ORRI is a share of either oil and gas production or revenue from that production that is carved out of a lessee’s interest under an oil and gas lease. In most cases, when the oil and gas lease to which the ORRI is attached terminates, the ORRI terminates as well. In this case, the ORRI contained a provision that purported to cover any extension or renewal of the existing lease as well as any new leases. When the operator of a new lease stopped paying royalties to Yowells, they sued.

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The Texas 14th Court of Appeals recently interpreted a pipeline easement and that interpretation may have application for many other pipeline easements in existence in Texas. The case is Texas Land & Cattle II, Ltd. v ExxonMobil Pipeline Company.

Texas Land & Cattle (TLC) owned real property in Harris County, Texas. ExxonMobil owned a pipeline easement across this property. ExxonMobil was the successor in interest to Humble Oil Company who originally obtained the easement. The easement granted the right to operate a pipeline for the “transportation of oil or gas”. The easement did not define oil or gas.

ExxonMobil had transported gasoline and diesel through this pipeline since 1995. TLC sued ExxonMobil on the grounds that transporting gasoline and diesel was not allowed by the easement. TLC believed the terms “oil and gas” included only crude oil or crude oil petroleum, but not any refined products. ExxonMobil claimed that the plain and ordinary meaning of the terms “oil and gas” as used in an easement have always included refined products like gasoline and diesel. The trial court denied the motion for summary judgment filed by TLC and granted the relief sought by ExxonMobil.

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The Texas School Land Board announced new policies in response to the covid pandemic. These policies apply to Texas Permanent School Fund (PSF) lands that are subject to the Texas Relinquishment Act, Texas Natural Resources Code 52.171 through 52.190. According to the General Land Office (GLO) website: “The policies delegates the Land Commissioner the authority to grant up to a six-month extension on all drilling commitments, when it’s deemed to be in the state’s best interest, made by lessees of permanent school fund property during 2020, and a 90-day tolling on calculations for enforcing lease terminations for halting of production or failure to produce in paying quantities. Additional actions include adopting a policy addressing a waiver of penalties and interest on late royalty payments submitted from April 1, 2020 through June 30, 2020 in light of the current oil and gas crisis facing the nation.”

Owners of school lands who observe operators on their property who are not drilling or who have producing wells on their property that have ceased production, need to be aware that the cessation of drilling or production may not be a default under the lease, at least until the grace period imposed by the GLO has expired. Keep in mind that, given the other pressures the oil industry is suffering from at the moment, it would not be surprising to see these waivers extended.

 

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The oil and gas industry has always been cyclical. Always has been and no doubt always will be. $20 per barrel oil is not new. Just during my career, there have been three substantial downturns in oil prices prior to the one we are experiencing today. These happened in approximately 1970, the mid-1980s, in the late 1990s. Each downturn was followed by a tremendous uptick in prices.

Keep in mind that the current issues facing the oil industry are not from a single cause. In a sense, the industry is facing a multiple whammy. First, our country was experiencing a substantial oversupply of oil going into the current situation. Many oil companies continued to produce, despite the oversupply, because increased production resulted in higher stock prices which in turn resulted in higher bonus for officers of the oil company. To this extent, some oil companies have brought this situation upon themselves. Secondly, the production war between Russia and Saudi Arabia exacerbated the oversupply and helped drive the price of oil down. Third, as the price of oil declined, the value of individual oil company’s reservoirs declined. In the cases where reserves were used as collateral for loans, the bank would then require either repayment of at least a portion of the loan or new collateral for the loan. Oil companies that cannot comply default and/or file bankruptcy. Fourth, the covid 19 virus creates staffing issues for oil companies, both in their offices and in the field. Fifth, shelter in place orders have resulted in drastically reduced demand for oil and gas. Finally, all of these factors make lenders and investors very nervous and so new money for exploration, production and pipelines is becoming more scarce.

There has been a lot of discussion in the industry about the appropriate response to these factors. Some have suggested the imposition of tariffs on imported oil. Others have suggested direct federal assistance to oil companies. Unfortunately, there is no consensus in the industry on what solution might help, or even as to whether any solution is called for. The smaller independent companies appear to prefer some kind of federal assistance. On the other hand, it appears that many of the large oil companies, who are better equipped to weather the storm, would prefer to let the downturn play out and then gobble up the smaller independent oil companies who can no longer stay in business. There are others who fear that government assistance now means government overregulation in the future. Anyone who remembers the draconian and impossibly complex oil allocation and pricing regulations of the Carter Administration knows just how uneconomic and illogical government regulation can be.

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I’d like to pass on an open letter to President Trump from Kirk Edwards, an Odessa based independent oil & gas producer. This was published March 24, 2020 in OA Online.

It  certainly contains some food for thought.  I do not, and have never, represented an oil company. However, it is important to look at these issues in an unbiased way, free of an ideological lens.  Therefore, please remember: oil company profits pay salaries for hundreds of thousands of workers, not just the top officers,  as well as royalties to millions of royalty owners and dividends to millions of shareholders, the majority of whom are just individuals.

“The recent actions by Saudi Arabia to flood the world oil markets at extremely low prices is bringing the American oil and gas industry to a screeching halt. Ironically, some 1,000,000, that’s right, one million barrels per day of oil is being imported into the United States right now from Saudi Arabia. The largest refinery in Texas, and 5th largest in the world, located in Port Arthur, Texas is now owned by Saudi Arabia. Shell sold control of the refinery to the Saudi’s in 2017. Today, 650,000 plus barrels of the 1,000,000 barrels per day imported from Saudi Arabia goes into their 100% Saudi owned Motiva refinery in Port Arthur Texas. https://en.wikipedia.org/wiki/Motiva_Enterprises None of the gasoline produced from this refinery is made from American oil – it is 100% Saudi derived. Saudi Arabia sells this gasoline mainly through its Shell and some through its “76” branded Motiva supplied service stations in South Texas and all across the Gulf and East coasts.

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The Texas Supreme Court decided a case recently involving an assignment of an overriding royalty interest (ORRI) in minerals located in Wheeler County, Texas. That case is Piranha Partners et al v. Joe Neuhoff et al.

In 1975, Neuhoff Oil & Gas purchased an undivided two-thirds interest in a mineral lease known as the Puryear Lease. The lease was between the Puryears (and others) as lessors and Marie Lister as the lessee. The lease covered all of the minerals under a tract of land referred to as Section 28. A few years later, Neuhoff Oil sold and assigned its two-thirds interest, but reserved for itself a 3.75% ORRI on all production under the Puryear Lease. An ORRI is an interest that is created out of the working interest (the oil company’s or operator’s interest) in the lease. It is a fractional, undivided interest with the right to participate or receive proceeds from the sale of oil and/or gas. It is not an interest in the minerals, but an interest in the proceeds or revenue from the oil & gas minerals sold. The interest is limited to a specific tract of land and is bound by the term of the existing lease. If the underlying lease expires, the ORRI expires.

Only one well was completed on the property, the Puryear B #1-28. At some point, Neuhoff Oil & Gas sold its ORRI to Piranha Partners. A bit later, Neuhoff Oil & Gas went out of business and assigned its assets to individual members of the Neuhoff family.

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Many Texas landowners have old electric line easements on their property with companies that are no longer in business, such as the old Texas Electric Co. AEP Texas, Inc. and/or Southwestern Electric Power Company (“SWEPCO”) now own many of these easements. These easements are often incredibly vague, especially regarding what can be done with the easement in the future and as to how wide the easement is.

A recent Texas Supreme Court case dealt with one of these easements. In Southwestern Electric Power Company v. Lynch, the Court considered a 1949 easement over lands in northeast Texas that did not contain a fixed width for the easement. The initial easement contained a wooden pole transmission line.

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The original easements authorize SWEPCO “to erect towers, poles and anchors along” a set course on a right-of-way that crossed several privately owned properties. In addition, these easements granted SWEPCO the right to ingress and egress over the encumbered properties “for the purpose of constructing, reconstructing, inspecting, patrolling, hanging new wires on, maintaining and removing said line and appurtenances.” The width of the easement was not specified, however, SWEPCO historically utilized 30 feet as its easement.

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The Commissioners of the Texas Railroad Commission recently voted unanimously to amend Rule 3.40, which has to do with the assignment of acreage to pooling and proration units. The current rule provides that “… acreage assigned to a well for drilling and development, or for allocation of allowable, shall not be assigned to any other well or wells completed or projected to be completed in the same field; such duplicate assignment of acreage is not acceptable”.  According to the Commission’s press release:

The rule restricted exploration in unconventional fracture treated (UFT) fields when oil and gas mineral ownership is divided at different depths below the surface. A UFT field is a field in which horizontal drilling and hydraulic fracturing must be used to recover oil and gas. To take advantage of technological advances that can tap into once inaccessible hydrocarbon resources in UFT fields, Commissioners voted to allow assignment of acreage to multiple wells in these fields. This rule revision will further protect mineral owner interest and allow access to additional resources.

The amendment to Rule 3.40 will probably result in increased drilling and production in fields where there is multiple ownership at different depths below the surface of the property. That means there will be increased royalties for mineral interest owners.The amended rule goes into effect on March 3, 2020

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A well operated by Chesapeake Energy Corporation experienced a fiery blowout on Thursday, January 30, 2020.  The well, the Daniel H 1 H, is located in Burleson County, Texas near Deanville. The well is in an area where Chesapeake is drilling long lateral well bores to develop Eagle Ford shale deposits. Two of Chesapeake’s subcontractors, C.C. Forbes and Eagle Pressure Control, were operating a service rig to install new hardware on the well at the time of the accident. Unfortunately, three employees of these subcontractors were killed by the fire. News reports indicated that Boots & Coots, a well control company now owned by Halliburton, was hired to get the well under control and put the fire out.

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KBTX Photo

The U.S. Chemical Safety Board  (CSB) is sending a team to the well to investigate the accident. The CSB is an independent federal agency charged with investigating industrial chemical accidents. Headquartered in Washington, DC, the agency’s board members are appointed by the President and confirmed by the Senate. According to the CSB website: “The CSB conducts root cause investigations of chemical accidents at fixed industrial facilities. Root causes are usually deficiencies in safety management systems, but can be any factor that would have prevented the accident if that factor had not occurred. Other accident causes often involve equipment failures, human errors, unforeseen chemical reactions or other hazards. The agency does not issue fines or citations, but does make recommendations to plants, regulatory agencies such as the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA), industry organizations, and labor groups. Congress designed the CSB to be non-regulatory and independent of other agencies so that its investigations might, where appropriate, review the effectiveness of regulations and regulatory enforcement.”
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