Oil and gas price volatility is as much a part of the energy business as drill bits. Few predicted that the current down-cycle would be as long or as deep as it is proving to be. While global events could turn and prices improve, lower prices seem to be a reality for now. Lower prices impact the finances of everyone in the energy industry. Insolvencies, business failures, and members voluntary liquidation are inevitable in this environment; and when they occur, they affect everyone, at all levels, and in all aspects of the industry, that is why companies such as the Cibik & Cataldo Law Firm are sought after to help deal with this issue. Though industry participants can’t change the price of oil, they can protect their interests in other ways. In times like this, fortune favors the prepared. So if oil companies are ready for lower prices and possible financial struggles, they’ll be better prepared if they know what their options are, such as debt relief vs bankruptcy as examples.
Forecasting a Rise in Lease Termination and Royalty Litigation Amidst Prolonged Oil Slump
Originally appearing in the Energy Expert Analysis Section of Law360.
Law360, New York (September 25, 2015) — Over the last five years, American shale production has more than tripled. Since last October, however, the oil and gas industry has trudged through a long and pronounced slump in crude oil prices in what has been termed the “Oil Bust of 2015.” Oil prices dropped below $40 a barrel last month for the first time in over six years, and major relief from this slump may be distant as EIA recently announced that it expects crude to average $59 per barrel in 2016.
This low-price environment has been unfavorable for most royalty owners, as low oil prices generally lead to proportionately low royalty payments. It has also lead to a slow-down in additional drilling and development activity as many oil and gas companies slashed budgets for 2015 and 2016. Drilling contractors have stored hundreds of rigs, and oil and gas companies have drastically reduced their workforces. A strong indicator of this slow-down can be found in the Texas Railroad Commission drilling statistics, showing 964 permits issued last month in Texas, compared with 2,440 in August of 2014. Read More »
N.D. SUPREME COURT ON DUTY OWED BY FIELD LANDMEN AND COMPENSATION FOR LEASE ACQUISITION
On September 21, 2015, the North Dakota Supreme Court issued its opinion in Border Res., LLC v. Irish Oil & Gas, Inc., — N.W.2d —-, 2015 WL 5519421, 2015 ND 238 (N.D. 2015), where it reviewed two primary issues:
(1) whether a field land services company owed a fiduciary duty to an oil and gas company, and whether such duty was breached, when the land services company acquired leases within the “review area” and did not offer those leases to the oil and gas company, and
(2) whether the price to be paid to the land services company for other leases sold by the oil and gas company in a package transaction was the “blended price” of the overall transaction, or an allocated value of the specific leases acquired by the land services company.
This case is likely of interest to in-house and field landmen, as it provides additional guidance as to the nature and scope of the relationship between an oil and gas company and field landmen. Additionally, it provides insight into the extent the AAPL standards of ethics and conduct bind landmen, and the importance of clearly addressing parties’ relationship and payment structure in service agreements.
Texas Supreme Court to Determine Whether Accommodation Doctrine Applies to Severed Groundwater Estate
The Texas Supreme Court recently granted Coyote Lake Ranch’s petition to review an opinion by the Amarillo Court of Appeals in Lubbock v. Coyote Lake Ranch, holding that the “Accommodation Doctrine” does not apply to the relationship between a surface owner and the owner of a severed groundwater estate. In the context of a severed mineral estate, the Accommodation Doctrine requires that the owner of a severed mineral estate accommodate pre-existing surface uses in certain circumstances.
By granting Coyote Lake Ranch’s petition to review, the Texas Supreme Court will have the opportunity to address whether this doctrine also applies to a severed groundwater estate. The decision in this case could potentially answer an important question regarding conflicts between groundwater production activities and existing surface uses. With the oil and gas industry dealing with sub-$50 oil prices, and the public’s increasing awareness of the importance of water, the Supreme Court’s holding in this case will have significant implications to the development of groundwater in Texas. As Texas A&M University School of Law professor Gabriel Eckstein told Law 360, this case “has big implications, some of which we can’t even imagine yet.”
Schlumberger to Buy Cameron – What does this Mean for A&D?
The world’s largest oilfield service company, Schlumberger Ltd., and one of the largest providers of oilfield equipment, Cameron International Corp., announced today in a joint press release that the parties have executed an Agreement and Plan of Merger under which Schlumberger will buy Cameron in an all-stock deal valued at $14.8 billion.
The parties held a teleconference this morning, as announced in their 8K filing. Under the Merger Agreement, Schlumberger Holdings will acquire Cameron in a transaction in which Rain Merger Sub LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Schlumberger Holdings, will merge with and into Cameron, with Cameron as the surviving entity, and with Schlumberger Holdings acquiring all of the stock of Cameron. Read More »
Texas Court: Lessee May Not Exclude Other Lessees from Constructing Surface Facilities Or Drilling Through Mineral Estate
The San Antonio Court of Appeals, in Lightning Oil Co. v. Anadarko E&P Onshore, LLC, [1] Opinion not yet published, San Antonio Court of Appeals (4th Dist.), August 19, 2014. held that a Texas oil and gas lease does not inherently convey a right for the lessee to control the “subterranean structures” from which hydrocarbons may be produced. As a result, the court held that the mineral lessee of a severed mineral estate did not have the right to exclude third-parties from constructing surface facilities on the surface overlying the lessee’s mineral estate and/or exclude third-parties from drilling wells through (but was not producing from) the lessee’s mineral estate. The Lightning court identified the “central question” as being the nature of Lightning Oil Co.’s (“Lightning”) interest as a mineral lessee. After reviewing cases from its own court and the Texas Supreme Court, among others, the Lightning court concluded that the surface estate owner, not the mineral estate owner, controls the earth beneath the surface estate. Read More »
Footnotes
Case Law Update: ConocoPhillips Must Release 15K Acres
Texas Case Law Update: On August 5, 2015, the San Antonio Court of Appeals released its opinion in ConocoPhillips Company v. Vaquillas Unproven Minerals, Ltd., [1] No. 04-15-00066-CV (San Antonio – August 5, 2015). affirming the trial court’s order declaring ConocoPhillips breached two oil and gas leases in Webb County by failing to release all acreage in excess of 40 acres for each producing and shut-in natural gas well capable of producing in paying quantities. As a result, ConocoPhillips was ordered to release an additional 15,351 acres. The issue on appeal was whether the retained acreage clauses allowed ConocoPhillips to retain 40 acres per gas well or 640 acres per gas well.
This case illustrates how appellate courts can interpret acreage perpetuation and release language in a lease in conjunction with regulatory rules. As such, this case underscores the importance of lease language that references regulatory rules, which may provide for spacing or proration units of a greater or smaller size than the default acreage provided within the lease.
Footnotes
Anderson v. Dominion – JOA AMI, Pref Right, Contract Area and Term
In Anderson Energy Corp. v. Dominion Oklahoma Texas Exploration & Prod., Inc., [1] 04-14-00170-CV, 2015 WL 3956212 (Tex. App.—San Antonio June 30, 2015, no. pet. h.) the San Antonio Court of Appeals answered the following questions involving a 1977 AAPL JOA, with a printed Pref Right, and a typewritten AMI:
- Whether the AMI and Pref Right clauses covered interests acquired after execution of the JOA, based largely on the extent of the “Contract Area;”
- The Term of the JOA where the parties failed to select one of the printed options;
- Whether the above claims were precluded by the Statute of Frauds; and
- Whether the affirmative defenses of waiver or laches precluded the plaintiff’s claims described above.
Footnotes
William Sciscoe v. Enbridge Gathering
On June 1, 2015 the Amarillo Court of Appeals issued an opinion [1] William Scisco, et al v. Enbridge Gathering (North Texas), LP, et al 2015 WL 3463490 (Tex. App.—Amarillo June 1, 2015, no. pet. h.) concerning whether a landowner may have a cause of action for nuisance or trespass against a company conducting regulated oil and gas operations in the vicinity. In reversing the trial court’s summary judgment in favor of the defendant-companies, the Amarillo court held that a cause of action for trespass is available when particles migrate from regulated operations onto neighboring property and that liability for nuisance will not be avoided by mere regulatory compliance.
The plaintiffs, including the City of DISH and several residents of the City (collectively, “DISH”) filed suit against several companies who owned or performed operations collateral to the “Ponder Compression Station.” The Ponder Compression Station began operations in February 2005 and the neighboring landowners began to complain about excessive noise and offensive odors emanating from the operations. However, DISH claimed that they did not learn the true alleged danger of the airborne particles until the release of an environmental report prepared in 2009. Shortly thereafter, the TCEQ and the Texas Department of State Health Services performed investigations into the air quality and the effects on the surrounding community, both finding that exposure levels were no higher in DISH than in the general population.
DISH filed suit seeking compensation for past injuries, primarily for the diminution in value of the respective properties. No pecuniary relief was sought for personal injuries or medical expenses, nor did DISH seek injunctive relief. The trial court granted summary judgment in favor of the Defendants, but the judgment was reversed in part on appeal.
The Amarillo court rejected the Defendants’ contention that migrating particles could never, as a matter of law, be the basis for a trespass claim. However, while the Amarillo court found that the migrating particles could constitute a trespass, the court made clear that the plaintiff must still prove the remaining elements of the claim. DISH’s nuisance claim was analyzed in conjunction with Defendants’ arguments that a nuisance claim was preempted by local, state, and federal regulations. However, the Amarillo court concluded that regulatory compliance will not insulate a party from liability because “[r]egulatory compliance or licensure is not a license to damage the property interest of others.” The court did find, however, that DISH’s demand for damages in an amount equal to $1,000 per day that operations continued, was more similar to a penalty than compensation for an injury. The court concluded that such a “penalty” would amount to a psuedo-regulatory scheme which is preempted.
The Amarillo court’s opinion can be found here.
Footnotes
TX Supreme Court: Chesapeake May Not Deduct Post-production Costs from Overriding Royalty
In a 5-4 decision, the Texas Supreme Court issued its opinion in Chesapeake Exploration, L.L.C. v. Hyder, 14-0302, 2015 WL 3653446 (Tex. June 12, 2015), holding that Chesapeake is prohibited from deducting postproduction costs from an “overriding royalty interest” described in a lease. The Majority noted that while overriding royalty interests are generally subject to post production costs, the language used in the lease creating the Hyder overriding royalty shifted the burden of paying these postproduction costs to Chesapeake, alone.
