Texas Supreme Court to Hear Case on “Capability of Production” Under Shut-In Clause

On Sept. 2, the Texas Supreme Court granted review in a case that may clarify when a shut-in well’s capacity for production in paying quantities is determined.  In BP America Production Company v. Red Deer Resources, LLC, No. 15-0569, the court will be reviewing a ruling from the 7th Court of Appeals (Amarillo) that upheld a judgment terminating a lease on the grounds that it was incapable of production when the last well on the premises was shut-in.

At issue is a 2,113 acre lease taken in 1962 which BP had owned and operated since 2000.  By 2009, just one gas well out of the 10 wells drilled on the lease was producing, but only sporadically and at much lower rates than prior months.  Red Deer Resources, LLC (Red Deer) had been monitoring production from the well, and recognized that the lease was in danger of lapsing due to its inability to produce in paying quantities.  In 2011, Red Deer obtained from the then owners of the minerals top leases that would be enforceable upon the expiration of the BP lease, with plans to drill wells into previously untapped formations.  BP had considered developing other formations under the leased premises as production slowed, but BP employees later testified at trial that the “threat of litigation” from Red Deer prevented them from obtaining a partner for the proposed operations. Continue Reading

Departments of Energy and Interior Announce New Collaborative Strategy to Grow the Offshore Wind Industry

On Sept. 9, the U.S. Department of Energy and the U.S. Department of the Interior jointly announced their collaborative plan, the National Offshore Wind Strategy: Facilitating the Development of the Offshore Wind Industry in the United States, which was put in place in an effort to build upon their joint offshore wind strategy published in 2011 and to continue the expansion and growth of the offshore wind industry in the United States. The Departments stated in their announcement on Friday that this plan “could help enable 86 gigawatts of offshore wind in the United States by 2050,” which, as the plan highlights, could have extensive benefits to the country, including the reduction in greenhouse gas emissions by 1.8 percent; a savings of approximately $2 billion in avoided mortality, morbidity and economic damages associated with air pollution; and a 5 percent reduction in annual water consumption. Continue Reading

Department of Transportation Clarifies Regulations Regarding Abandoned Pipelines

On Aug. 16, the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) issued Advisory Bulletin ADB-2016-05 to owners and operators of pipelines used for the transportation of hazardous liquids, carbon dioxide and gas, clarifying that owners and operators of these pipelines must comply with all safety regulations, even if their pipelines are inactive, decommissioned or idle.

Due to several pipeline leaks involving inactive or idle pipelines over the past few years, Congress had concluded that it was important for PHMSA to clarify the applicability of regulations to pipelines that have been changed in status from active to abandoned and the PHMSA’s stance on idle pipelines. Continue Reading

Three Reasons BOEM’s Updated Financial Assurance and Risk Management Requirements Are Unenforceable

Part One

The Interior Department’s Bureau of Ocean Energy Management (BOEM) has finally issued its promised Notice to Lessees (NTL) No. 2016-N01, “Requiring Additional Security,” which supersedes NTL No. 2008-N07, “Supplemental Bond Procedures.” The new NTL, with multiple linked attachments, becomes effective Sept. 12, 2016. The new NTL largely concerns a lessee’s ability to carry out its obligation to decommission wells, platforms and pipelines on oil and gas leases in all regions of the Outer Continental Shelf (OCS). Lessees are already assessing how these new requirements will impact their OCS operations.

In many respects, the new NTL mirrors the Proposed Guidance advertised by the BOEM on Sept. 22, 2015.[1] Despite inviting comment from stakeholders, the final guidelines fail to take into account several of the fundamental concerns expressed in comments submitted by companies and trade groups directly affected by the financial assurance requirements. As a result, the new NTL is subject to challenge on at least three bases. Continue Reading

Cabot Oil & Gas Continues to Fight $4.24 Million Federal Court Jury Verdict on Landowners’ Nuisance and Negligence Claims

After a recent round of post-trial motion briefing in Ely v. Cabot Oil & Gas Corp., Case No. 3:09-cv-02284-MCC (M.D. Pa.), it appears one of the most heavily publicized landowner lawsuits against an exploration and development company in recent memory may still be far from over.

This protracted legal battle originally began in 2009, when 44 landowners asserted Cabot Oil & Gas Corp.’s (Cabot) drilling activities contaminated the water supply to their homes in Dimock Township, located in northeastern Pennsylvania’s Susquehanna County.

The plaintiffs raised numerous claims, including allegations of nuisance, negligence, breach of contract, lost royalties, fraudulent inducement, medical monitoring and personal injuries.

The case was mired in publicity and controversy from the start, both in and out of the courtroom, particularly due to some of the original plaintiffs’ inclusion in the notorious anti-fracking film “Gasland.” It was also a study in instability, featuring frequent attorney migrations and the magistrate’s public denouncement of the plaintiffs’ attorney’s brazen pretrial “evidence dump,” two and a half years after the close of discovery and on the “eve of trial.” Doc. 685. Continue Reading

Texas Railroad Commission Sunset

The Texas Sunset Act was passed in 1977 to address the escalation of government budgets and the perception that government bureaucracy was not accountable. The Act applies to 130 agencies and other governmental entities. The Texas Sunset Advisory Commission, along with the State Auditor’s Office, the Legislative Budget Board, and the Governor’s Office of Budget and Planning, is charged with monitoring state agency performance. The Sunset Advisory Commission consists of five state representatives, five state senators and two public members.

The Texas Railroad Commission was created more than 125 years ago to regulate the rates and operations of railroads. The Railroad Commission later assumed responsibility for regulating oil and gas production and pipelines. The agency’s name is now a misnomer, as the commission no longer oversees railroad operations in the State.

The first three railroad commissioners were appointed by Gov. Hogg in 1891: John H. Reagan, Judge W.P. McLean and L.L. Foster. In 1984, the Texas Constitution was amended to provide for elective six-year overlapping terms for railroad commissioners who are elected statewide.

The Railroad Commission, in its third Sunset review since 2010, submitted a self-evaluation report in September 2015. In April 2016, the Sunset Commission staff released a full report on the sunset of the agency. A public hearing is set for Aug. 22, 2016, to take testimony on the staff report and the agency overall. Continue Reading

Independent Oil and Gas Producers Defeat Federal Hydraulic Fracturing Rule

oil fracking rig 519054087Wyoming U.S. District Court Declares Bureau of Land Management’s Hydraulic Fracturing Rule Unlawful

On June 21, 2016, United States District Judge Scott Skavdahl granted BakerHostetler’s petition for review of final agency action and declared the Bureau of Land Management’s (BLM’s) hydraulic fracturing rule unlawful. The court’s judgment sets aside BLM’s hydraulic fracturing rule, and America’s independent oil and gas producers can continue their proven business of responsible oil and gas development on federal and Indian lands without the cloud of one more unnecessary regulatory burden.

BLM issued the rule in March 2015, attempting to exert jurisdiction over hydraulic fracturing on federal and Indian lands.

Minutes after BLM issued the hydraulic fracturing rule, BakerHostetler’s team filed a legal challenge on behalf of the Independent Petroleum Association of America (IPAA) and the Western Energy Alliance (the Alliance) in the United States District Court for the District of Wyoming. IPAA and the Alliance began what became a much larger lawsuit, which eventually included challenges from four states – Wyoming, North Dakota, Colorado and Utah (the States) – and the Ute Indian Tribe (the Tribe). Continue Reading

The Continued Attempt to End Shale Development in Colorado – This Time Through the Voter Initiative

An attempt to put restrictions on shale development, so as to effectively end it, is nothing new in Colorado. Just this year, several Democrats attempted to push a bill through the Colorado House of Representatives that would have given local governments specific authority to regulate the siting of oil and gas facilities. The Colorado House voted down that bill. But that has not stopped other efforts to end new shale development activities in the state. There are currently three voter initiatives in the signature-gathering stage that could have substantial impacts on Colorado’s oil and gas development – Initiative #78, Initiative #63 and Initiative #75. Continue Reading

Oil and Gas: Managing Personnel Reductions and Asset Sales Under Increasing Government Audit and Enforcement Scrutiny

As oil enters the ninth month of sub-$50 per barrel prices – and natural gas languishes below $3 per MMBtu – the oil and gas industry confronts a challenging time of transition. Layoffs have already happened (or are imminently looming) for some exploration and production companies. Non-core assets have been sold or are on the chopping block. And some companies are staring down credit events and potential bankruptcy. Adding to the doom and gloom, the federal government has recently increased its audit and enforcement efforts to aggressively collect federal oil and gas royalties due and heavily penalize companies for both minor and major infractions.

The government’s increasing enforcement coinciding with companies’ reduction in overhead costs creates a messy collision. On the one hand, the government’s expansion of its audit review and scrutiny over more producing areas has resulted in more frequent compliance orders and penalty assessments. On the other hand, the commodity-price environment has forced (or may soon force) companies to cut staff to the bone – accounting and compliance departments included. The result is that many companies find themselves struggling to adequately and accurately respond to government audits and inquiries without essential personnel, particularly personnel knowledgeable about old assets and assets sold during the downturn.

Although there is no easy answer, there are ways to soften the transition into a low-price operating environment. Early due diligence and preparatory work between internal staff and outside counsel can help ensure that a reduction in force or a non-core asset sale goes smoothly without exposing the company to unnecessary audit and enforcement risk. Continue Reading

Midstream Gathering Agreements Targeted by Recent Oil & Gas Bankruptcies

Continuing low oil and natural gas commodity prices have led to bargain prices at the pump, but also high tension in many boardrooms. This strain on the industry has resulted in many exploration and production, or “E&P,” companies seeking relief from high debt and reduced revenue in bankruptcy. In recent cases, those E&P companies have sought to reject their midstream gathering agreements, which they deem onerous and unprofitable. E&P companies Sabine Oil and Gas Corp. and Magnum Hunter Resources Corp. have been getting quite a bit of attention for their attempts to do just that, presenting potential road maps for how other such companies may choose to proceed during their reorganizations.

The ability to reject an executory contract or unexpired lease is a powerful reorganizational tool given to a bankrupt company by the Bankruptcy Code. With limited exception, under 11 U.S.C. § 365, debtors can reject such executory contracts over the objection of their counterparty. One such limited exception – that contracts creating covenants, which run with the title to real property, cannot be rejected under § 365 – has taken center stage in recent attempts by E&P debtors to reject midstream gathering agreements.

For the unacquainted, a midstream gathering agreement is a contract that governs the midstream company’s service of delivering oil or natural gas from the wellhead to market. Whether it does so using a pipeline, truck or crude oil transported by rail, these contracts can be extremely costly, largely because they are so vital to the business model of a continuing E&P venture. Continue Reading

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