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Dallas Texas Oil and Gas Attorney - PDF

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					Oil and Gas Disputes – From a
  Trial Lawyer’s Perspective


             Greg W. Curry
       1722 Routh Street, Suite 1500
           Dallas, Texas 75201
               214.969.1252
          greg.curry@tklaw.com
General Litigation Issues



                            2
          General Litigation Issues
● Hire local counsel and any needed experts early on
● Consider self help:
  ► Lis pendens
  ► TRO / injunction
  ► Estoppel letter
● Develop discovery plan early
● Preserve everything
● Identify witnesses early


                                                       3
Joint Ownership Issues



                         4
               Joint Ownership Issues
● Many JOAs (including 1989 form) have a
  preferential right to purchase provision.

● Strike it.

● Sales are taking place

● Most litigated area involving JOA, other than lack of
  performance or poor performance


                                                          5
           Joint Ownership Issues
● Preferential Rights Defined

  ► A right of first refusal, also known as a preemptive or
     preferential right, empowers its holder with a
     preferential right to purchase the subject property on
     the same terms offered by or to a bona fide
     purchaser. Tenneco Inc. v. Enterprise Products Co.,
     925 S.W.2d 640, 644 (Tex. 1996).




                                                              6
    The Unequivocal Acceptance Rule
● In Hutcherson v. Cronin, the court stated:
  “The acceptance of an option, to be effectual, must be
   unqualified, absolute, unconditional, unequivocal,
   unambiguous, positive, without reservation, and according
   to the terms or conditions of the option. Substantial
   compliance with the terms of the option is held not sufficient
   to constitute an acceptance; to be effectual, the acceptance
   must be identical with the offer, or, at least, there must be no
   substantial variation between them. An acceptance of an
   option must be such a compliance with the conditions as to
   bind both parties, and if it fails to do so, it binds neither.”

   Hutcherson v. Cronin, 426 S.W.2d 638, 641 (Tex. Civ. App.—Tyler
   1968, no writ).
                                                                      7
Texas Law on Exercise of a Preferential Right
● The Fifth Circuit Court of Appeals stated in West
  Texas Transmission, L.P. v. Enron Corp., 907 F.2d
  1554, 1563 (5th Cir. 1990):
  “The owner of the property subject to a right of first
   refusal remains the master of the conditions under
   which he will relinquish his interest, as long as those
   conditions are commercially reasonable, imposed in
   good faith, and not specifically designed to defeat
   preemptive right . . . .”



                                                             8
Texas Law on Exercise of a Preferential Right
● The terms and conditions of the exercise of a preferential
  right were at issue in Texas State Optical, Inc. v. Wiggins, 882
  S.W.2d 8 (Tex. App.—Houston [1st Dist.] 1994, no writ), where
  the court of appeals acknowledged that the relevant “PRP”
  had matured into an option and that the exercise of an option,
  like acceptance of any other offer, must be positive,
  unequivocal, and not change or qualify the terms of the offer.
  However, the court cited West Texas Transmission in noting
  that there is an exception where a seller imposes a term in
  bad faith to defeat an option, in which case the option holder
  may validly exercise the option while at the same time
  rejecting the bad faith term.
                                                                     9
Texas Law on Exercise of a Preferential Right
● Probably covers both operating and non-operating
  interests




                                                     10
            Other Areas of Dispute
● Payment of joint interest billings
  ► Audit
  ► Suspend rights
  ► Foreclosure
  ► Drill a partner out
● Performance by operator
  ► Gross negligence standard
  ► Does not protect from contractual issues




                                               11
Liability for Hydraulic
      Fracturing



                          12
Coastal Oil & Gas Corp. v. Garza Energy Trust

● One year ago, the Texas Supreme Court decided
  the case of Coastal Oil & Gas Corp. v. Garza Energy
  Trust. 51 Tex. Sup. Ct. J. 1258, 2008 WL 3991029
  (Tex. Aug. 29, 2008).




                                                    13
Coastal Oil & Gas Corp. v. Garza Energy Trust
                 Primary Issue:

 Whether subsurface hydraulic fracturing of a
 natural gas well that extends into another’s
 property is a trespass for which the value of gas
 drained as a result may be recovered as damages?




                                                     14
Coastal Oil & Gas Corp. v. Garza Energy Trust

                    No,

       But does that solve all of the
          operator’s problems?

                    No.


                                                15
Coastal Oil & Gas Corp. v. Garza Energy Trust
● Coastal was the lessee of a 748-acre tract owned by the Garza
  Energy Trust.

● They are also the owner/operators of an adjacent 163-acre
  tract.

● Coastal drilled a well as close to the Garza tract as allowed by
  the RRC and used hydraulic fracturing to enable production
  on their well.

● Fracturing is used in the majority of new wells drilled in
  Texas.


                                                                     16
Coastal Oil & Gas Corp. v. Garza Energy Trust
● Garza sued Coastal for:

  ► Breach of the implied covenant to develop Garza’s
     tract;

  ► Trespass, alleging that the fracing invaded beneath
     their tract causing substantial drainage;

  ► Breach of the implied covenant to protect against
     drainage; and

  ► Bad-faith pooling.

                                                          17
Coastal Oil & Gas Corp. v. Garza Energy Trust
● At trial, Garza won on all counts and the jury
  awarded over $15 M in total damages. The trial
  court reduced some of the damages.

● The court of appeals reversed and remanded the
  attorney’s fee award, but affirmed in all other
  respects.




                                                    18
Coastal Oil & Gas Corp. v. Garza Energy Trust
● The Texas Supreme Court, Justice Hecht delivering
  the opinion:

  ► Reversed the award of damages for drainage
     resulting from the trespass (fracing)

  ► Remanded the issues of breach of the implied
     covenant to develop and bad-faith pooling




                                                      19
Coastal Oil & Gas Corp. v. Garza Energy Trust
● While not deciding the broader issue of whether
  fracing in and of itself is a trespass, the Court held
  that the rule of capture disallowed any damages
  where the only claim of injury was that the fracing
  allowed gas to flow from one tract to another.




                                                           20
Coastal Oil & Gas Corp. v. Garza Energy Trust
● The rule of capture gives a mineral rights owner
  title to the oil and gas produced from a well, even if
  the oil and gas flowed to the well from another
  owner’s tract.
● Given this rule, the Court said that “the gas [Garza]
  claims to have lost simply does not belong to
  [Garza].” Id. at *5.
● Accordingly, because there were no other claims of
  injury, Garza had no recoverable damages.

                                                           21
Coastal Oil & Gas Corp. v. Garza Energy Trust
● Garza argued that the rule of capture should not
  apply to fracing, comparing the practice to slant-
  well drilling.

● The Court rejected this argument, contrasting the
  fact that slant-well drilling took minerals in place
  while fracing only allowed minerals to drain.




                                                         22
Coastal Oil & Gas Corp. v. Garza Energy Trust
● The Court gave four reasons for not changing the
  rule of capture:

  1. The law already gives a drained owner full recourse;

  2. Doing so would usurp the power of the RRC;

  3. Determining the value of the drained minerals is not a
     decision best left to litigation; and

  4. Nobody in the industry wants it to change.


                                                            23
Coastal Oil & Gas Corp. v. Garza Energy Trust
● The law already gives a drained owner full recourse

  ► An owner who claims that her minerals are being
     drained can:

     ■ Drill an offset well;

     ■ Sue the lessee for violation of the implied covenant to
       protect against drainage;

     ■ Offer to pool; or

     ■ Apply for forced pooling if the offer to pool is denied.

                                                                  24
Coastal Oil & Gas Corp. v. Garza Energy Trust
● Changing the rule would usurp the power of the
  RRC

  ► The rule of capture allows the commission to protect
     correlative rights – by governing spacing, density
     and allowables of well – while also preventing waste
     and conserving natural resources.

  ► Changing the rule would give a right to specific
     minerals and would limit the Commission’s power to
     regulate production.

                                                            25
Coastal Oil & Gas Corp. v. Garza Energy Trust
● Determining the value of the drained minerals is not
  a decision best left to litigation
  ► Given the subsurface nature of the litigation, the
     facts are almost impossible to determine.
  ► Courts would also have to take into account the
     social policies, industry operation, and greater good
     of permitting fracing.
  ► While these factors could be considered, changing
     the rule would disrupt one of the foundational
     principles of the industry.

                                                             26
Coastal Oil & Gas Corp. v. Garza Energy Trust
● Nobody in the industry wants it to change

  ► The Court received amicus curiae briefs from
     regulators, landowners, royalty owners, operators,
     and hydraulic fracturing service providers all
     opposing liability for hydraulic fracturing.




                                                          27
Coastal Oil & Gas Corp. v. Garza Energy Trust
● What does this all mean?

  ► The Court left unanswered the larger question of
     whether fracing in and of itself is a trespass.

  ► Still liable for negligence even if it was during
     fracing.




                                                        28
Liability for Horizontal
         Drilling



                           29
      Liability for Horizontal Drilling
● Need permission to use the surface of adjoining
  tract for horizontal drilling

● Do you need permission of mineral lessor on lands
  which you will pass through?

  ► Unanswered question




                                                      30
       Liability for Horizontal Drilling
● Currently cases go both ways

● Garza has language that supports both positions

● But what is the harm?

● But will a court stop a knowing and intentional tort
  if asked to do so?




                                                         31
Lease Termination Issues



                           32
          Lease Termination Issues
“In areas like Panola and Harrison, I don’t see how
 there is anything left to lease. Those counties have
 been leased up for years because of the Cotton
 Valley and Travis Peak formations.”

   Walter Priddy, Geologist – Henderson, TX. Haynesville
   Shale Generates Attention, Marshall News Messenger,
   August 19, 2008.




                                                           33
         Lease Termination Issues
● The typical habendum clause extends an oil and
  gas lease, after it begins producing, so long as
  there is continued production.
● Courts have interpreted “production” in these
  provisions to mean “production in paying
  quantities.”
● So what do courts consider PPQ?




                                                     34
        Lease Termination and PPQ
● The Texas standard for PPQ was established in
  Clifton v. Koontz. 325 S.W.2d 684 (Tex. 1959).

● This test also serves as the basis for the Louisiana
  Mineral Code’s definition of PPQ, so there is
  overlap between the states. La. Rev. Stat. Ann.
  § 31:124.

● Under the test in both states, the lessor carries the
  burden to show that there has been no PPQ.

                                                          35
                PPQ in Texas – Part 1
                        Production
                 Less: Operating Expenses
                 Less: Marketing Expenses

                       Profit to Lessee?

● Measured over a reasonable period of time.
● If there is a profit, then the well is PPQ and there is no need to
  go to part 2.
● Expert intensive
                                                                       36
                   PPQ in Texas – Part 1
●   Note that this calculation does not include drilling and equipment
    costs.
●   It does include:
    ►   Taxes
    ►   Overhead charges
    ►   Labor
    ►   Repairs
    ►   Depreciation on salvable equipment
    ►   Other out-of-pocket lifting expenses

    Evans v. Gulf Oil Corp., 840 S.W.2d 500 (Tex. App.–Corpus Christi 1992, writ
    denied) (considering production over two separate periods, one 15 months
    and the other 18 months).
                                                                                   37
             PPQ in Texas – Part 2
● If there is no profit, then the court asks whether a
  reasonably prudent operator would continue to
  operate with an expectation of profit, and not just
  for speculation.

  ► If so, the lease continues.

  ► If not, the lease terminates.

● Again, this is measured over a reasonable period of
  time.


                                                         38
             PPQ in Texas – Part 2
● In determining whether a reasonably prudent
  operator would continue with the well, a court will
  consider all relevant circumstances, including:
  ► Ability to market the minerals (including pipeline
     availability and general market conditions)
  ► Relative profitability of other wells in the area
  ► Operating and marketing costs of the lease
  ► Net profit
  ► Lease provisions
  ► Period of time that the well has been marginally
     producing
                                                         39
        Lease Termination and PPQ
● Cessation-of-Production Clauses
  ► Difference between total physical cessation of
     production and cessation of production in paying
     quantities

  ► If there is total physical cessation of production,
     then the cessation-of-production clause controls.

  ► If there is only a cessation of production in paying
     quantities, then the Clifton v. Koontz standard
     controls.


                                                           40
       The Economy Strikes the Patch
● One Haynesville operator has at least 30 cases where it pulled
  out of contracts because of changed market conditions.

● Generally, bad economics are not a defense.

● Creative lawyering is being utilized:
   ► Statute of Frauds
   ► No title
   ► Estoppel
   ► Etc., etc., etc.


                                                                   41
Surface Owner Issues



                       42
             Surface Owner Issues
● “Clean, freshwater, is the lifeblood of rural Texas.”
  Douglas Beveridge, Vice President, King Ranch Minerals

● Water will be a concern in the Haynesville

● Water will be needed for fracturing process

● Texas (and Louisiana) are already concerned about
  water shortages

● Controlling the fracturing process to keep water table
  safe

                                                           43
44
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48
Mineral Owner’s Right to Use the Surface
● Primarily an issue when the mineral rights are severed
  from the surface . . . but has become more of an issue in
  historical areas and where the oil fields are meeting the
  city.
  ► Hostile surface owners—“get off my land . . . what part of my
     double barrel shotgun do you not understand?”
     ■ Play nice, negotiate compromise, surface damage agreement . . .
     ■ Never take matters into your own hands
     ■ Injunctive relief and possibly damages related to
       delay/interference . . .

  ► Same rights to access surface exist even if minerals and
     surface are not severed, subject to terms of the lease
                                                                    49
Mineral Owner’s Right to Use the Surface
● Scope of mineral owner’s right to use surface

  ► Where mineral estate is severed from surface, mineral
     estate dominant

  ► Legal privilege and enforceable right to use and have
     priority over servient estate to extent reasonably necessary
     to explore, develop, and transport minerals

     ■ When conflict of use arises, and no reasonable alternative,
       mineral estate’s right to use surface trumps

     ■ In Texas, mineral owner not required to pay surface damages
       provided use is not excessive, negligent, or in violation of
       lease- - -but as a practical matter most oil companies do so.
                                                                       50
Mineral Owner’s Right to Use the Surface
● Scope of mineral owner’s right cont’d . . .

   ► Many surface owners may not know that mineral owner
      may be entitled to damages and injunctive relief for
      improper interference

   ► Right to use surface includes right to construct roads,
      tanks, pits, flow lines, utilize surface water, conduct
      seismic, etc., as reasonably necessary to explore,
      develop, and transport minerals and giving due regard to
      rights of surface owner

   ► Rights may also be expressly defined by lease language
      (often overlooked or forgotten until too late)
                                                                 51
Mineral Owner’s Right to Use the Surface
● Limitations to right to use surface
   ► May use only amount of surface as “reasonably
      necessary” to explore, develop, and transport minerals
      giving “due regard” for the rights of the surface owner
   ► “Accommodation Doctrine”: Are there reasonable
      alternative means to producing minerals which will permit
      surface owner to continue existing use of surface?
      ■   must substantially impair existing surface use
      ■   and reasonable alternative must be available

   ► Despite implied doctrine, express terms of lease or
      mineral reservation may trump
                                                                  52
Mineral Owner’s Right to Use the Surface
● Limitations to use surface cont’d
  ►   Whether “reasonably necessary” is fact question; surface owner
      has burden of proof to show surface use not reasonably
      necessary
      ■   e.g., mineral owner may be required to directionally drill, even if
          increased costs, if directional drilling is viable economic alternative
  ►   Surface use generally limited to exploration, development, and
      transport of minerals underlying lease/mineral estate
      ■   must secure easement or right of way to transport off-lease or off-
          premise production or to access lease or premise to explore
          adjacent acreage (unless pooled)
  ►   Surface use must comply with terms of lease and with applicable
      statutes, rules, and regulations
      ■   e.g., drilling permits, statutory notice requirements, etc.
                                                                                    53
 Mineral Owner’s Right to Use the Surface
● Surface damages
  ► Custom becomes the perceived law of the land. Many surface
     owners believe they are entitled to surface damages as a
     matter of law.
     ■   However, absent express lease language to the contrary or
         statute, mineral owner/lessee generally only exposed to
         damages to the surface that are considered not reasonably
         necessary to explore and develop minerals
     ■   Existence of drill site, roads, pits, even noise, etc… that are
         reasonably necessary, for example, and with due regard to the
         rights of the surface owner do not give rise to surface damages
         per se
     ■   Injury to livestock within reasonably necessary area to conduct
         operations does not give rise to surface damages, unless injury
         the result of intentional acts or gross negligence
     ■   However, what is reasonably necessary is often debated          54
Mineral Owner’s Right to Use the Surface
● Surface damages cont’d

  ► Exposure to damages for operations outside the
     reasonably necessary area used to explore and
     develop minerals

     ■ pollution is not “reasonably necessary.” Lessee
       cannot negligently damage surface

     ■ violations of RRC rules may result in negligence per se
       finding


                                                                 55
Mineral Owner’s Right to Use the Surface
● Surface damages cont’d

  ► Don’t forget the lease! Lease language may contain
     express provisions concerning surface damages:
     ■ liable for damages, for example, to agricultural crops
       or structures regardless if operator is acting
       reasonably or within a justified area necessary for
       exploration and production

     ■ lease may also cap or waive surface damages

     ■ express provisions concerning fencing operations or
       restoration of the surface

                                                                56
Mineral Owner’s Right to Use the Surface
● Surface damages cont’d
  ► Surface owner may seek breach of contract damages
     (e.g., breach of lease provisions), decreased market
     value, interference with peace and enjoyment of
     surface (“nuisance” damages), physical damage to
     land, loss of crops or livestock, etc… predicated on
     excessive or unreasonable use of surface
  ► If not covered by the lease (and not required by state
     statute), most operators will attempt to negotiate a
     surface damage agreement upfront
  ► In Texas, notice to landowner from tax roll is necessary
     for registry of existing wells
                                                               57

				
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