Transcript Drafting Arbitration Provisions

Oil and Gas Update
Greg W. Curry
214.969.1252
[email protected]
Navigant Unconventional Oil and Gas Litigation
Trends Report
Source: Navigant Consulting,
http://www.navigant.com/~/media/WWW/Site/Insights/Energy/NavigantUnconventionalOilGasStudy_Oct13.ashx
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Source: Navigant Consulting,
http://www.navigant.com/~/media/WWW/Site/Insights/Energy/NavigantUnconventionalOilGasStudy_Oct13.ashx
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Source: Navigant Consulting, http://www.navigant.com/~/media/WWW/Site/Insights/Energy/NavigantUnconventionalOilGasStudy_Oct13.ashx
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Horizontal Drilling and
Hydraulic Fracturing
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Surface Owner Issues
• “Clean, freshwater, is the lifeblood of rural Texas.” Douglas
Beveridge, Vice President, King Ranch Minerals
• Water will be needed for fracturing process
› University of Texas study concludes on a per barrel basis no
significant difference
• Texas, Oklahoma, and Louisiana are already concerned about
water shortages
• Controlling the fracturing process to keep water table safe
› National Academy of Sciences study found that pollution was
either natural or from poor fracking jobs or failed cement jobs
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Mineral Owner’s Right to Use the Surface
• Primarily (but not always) 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
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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
is 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
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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)
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Mineral Owner’s Right to Use the Surface
• Limitations on right to use surface estate
› 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
› Despite implied doctrine of accommodation, express
terms of lease or mineral reservation may trump
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Mineral Owner’s Right to Use the Surface
• Limitations on use surface cont’d
› Surface use generally limited to exploration,
development, and transport of minerals underlying
mineral estate
− Must secure easement or right of way to transport offlease 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
− Drilling permits, statutory notice requirements, etc.
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Mineral Owner’s Right to Use the Surface
• Surface damages
› Many surface owners believe they are entitled to surface
damages as a matter of law.
− But absent express lease language or statute, mineral
owner/lessee generally only exposed to surface damages
that are not reasonably necessary to explore/develop
minerals
− Existence of drill site, roads, pits, noise, etc. that are
reasonably necessary and with due regard to the rights of
the surface owner do not give rise to surface damages per
se
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Mineral Owner’s Right to Use the Surface
• Surface damages cont’d
› Potential liability 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
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Mineral Owner’s Right to Use the Surface
• Surface damages cont’d
› Don’t forget the lease!
› Express provisions concerning surface damages:
− E.g., Liability for damages to agricultural crops or
structures even if operator is acting reasonably or within a
justified area necessary for exploration and production
− Lease may cap or waive surface damages
− Provisions concerning fencing operations or restoration of
the surface
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Mineral Owner’s Right to Use the Surface
• Surface damages cont’d
› Surface owner may seek breach of contract damages
(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. based 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
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Coastal Oil & Gas Corp. v. Garza Energy Trust,
268 S.W.3d 1 (Tex. 2008)
Almost six years ago, the Texas Supreme Court decided
Coastal Oil & Gas Corp. v. Garza Energy Trust
Primary Issue:
Does subsurface hydraulic fracturing of a natural
gas well that extends onto another’s property
amount to a trespass for which the value of gas
drained may be recovered as damages?
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Coastal Oil & Gas Corp. v. Garza Energy Trust,
268 S.W.3d 1 (Tex. 2008)
No.
But does that solve all of the
operator’s problems?
No.
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Coastal Oil & Gas Corp. v. Garza Energy Trust,
268 S.W.3d 1 (Tex. 2008)
• Garza sued Coastal for:
› Breach of the implied covenant to develop Garza’s tract;
› Trespass, alleging that the fracking invaded beneath their
tract causing substantial drainage;
› Breach of the implied covenant to protect against
drainage; and
› Bad-faith pooling.
At trial, Garza won on all counts and the jury awarded over
$15M in total damages.
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Coastal Oil & Gas Corp. v. Garza Energy Trust,
268 S.W.3d 1 (Tex. 2008)
Texas Supreme Court:
The rule of capture disallows any damages where the
only claim of injury is that the fracking allows gas to
flow from one tract to another.
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Coastal Oil & Gas Corp. v. Garza Energy Trust,
268 S.W.3d 1 (Tex. 2008)
• 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.
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Recent Developments:
FPL Farming Ltd. v. Environmental Processing Sys.,
No. 12-095 (Tex. filed Jan. 18, 2013)
• EPS obtained permits from the Texas Commission on
Environmental Equality (TCEQ) to operate 2 deep
wastewater injection wells on a tract next to land
owned by FPL in Liberty County
• FPL sued EPS for tort damages and a permanent
injunction for physical trespass based on alleged
subsurface migration onto its property that
contaminated its water supply
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Recent Developments:
FPL Farming Ltd. v. Environmental Processing Sys.,
No. 12-095 (Tex. filed Jan. 18, 2013)
Beaumont Court of
Appeals:
Trial court:
Jury found that EPS
did not trespass.
FPL appeals.
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Affirmed; FPL could
not recover in tort
for trespass
damages because
the wells were
authorized by the
TCEQ permits that
EPS obtained to
operate the wells
Texas Supreme
Court:
Reversed,
remanded. EPS’
permits from the
TCEQ did not shield
it from trespass
liability.
Recent Developments:
FPL Farming Ltd. v. Environmental Processing Sys.,
No. 12-095 (Tex. filed Jan. 18, 2013)
• The Texas Supreme Court clarified that Garza “did not
hold that agency authorization or permission resulted
in blanket immunity from trespass liability.” 351 S.W.3d
306, 313 (Tex. 2011).
• “The rule of capture, and administrative deference to
agency interpretations, was critical to our holding in
Garza.” Id. at 314.
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Recent Developments:
FPL Farming Ltd. v. Environmental Processing Sys.,
No. 12-095 (Tex. filed Jan. 18, 2013)
On remand, Beaumont Court
of Appeals:
Wastewater migration in
deep, subsurface formations
may constitute a trespass.
EPS appeals.
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Texas Supreme Court:
Decision pending.
Recent Developments:
Merriman v. XTO Energy, Inc.,
407 S.W.3d 244 (Tex. 2013)
• Merriman owned the surface estate of a 40-acre tract
in Limestone County upon which Merriman’s home,
barn, and corrals were located
• Once a year, Merriman brought his cattle to the tract in
a “roundup”
• XTO, the lessee of the tract’s mineral estate, proposed
drilling a gas well on the tract, but Merriman opposed
• XTO began to construct the well anyway
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Recent Developments:
Merriman v. XTO Energy, Inc.,
407 S.W.3d 244 (Tex. 2013)
Primary issue
Did XTO exceed its rights in the mineral estate by failing
to accommodate Merriman’s annual “roundup”?
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Recent Developments:
Merriman v. XTO Energy, Inc.,
407 S.W.3d 244 (Tex. 2013)
NO.
“Evidence that the mineral lessee’s operations result in
inconvenience and some unquantified amount of
additional expense to the surface owner does not rise to
the level of evidence that the surface owner has no
reasonable alternative method to maintain the existing
use.” Id. at 252.
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Recent Developments:
Merriman v. XTO Energy, Inc.,
407 S.W.3d 244 (Tex. 2013)
• The surface owner must prove:
› The lessee’s use completely precludes or substantially
impairs the existing use;
› There is no reasonable alternative method available to
the surface owner by which the existing use can be
continued; and
› There are alternative reasonable, customary, and
industry-accepted methods available to the lessee which
will allow recovery of the minerals and also allow the
surface owner to continue the existing use.
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Recent Developments:
Wheeler v. Enbridge Pipelines, L.P.,
No. 13-0234, 2014 WL 4252273 (Tex. Aug. 29, 2014)
Primary Issue
What is the proper measure of damages when a
landowner sues for destruction of trees?
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Recent Developments:
Wheeler v. Enbridge Pipelines, L.P.,
No. 13-0234, 2014 WL 4252273 (Tex. Aug. 29, 2014)
Texas Supreme Court held:
In determining the proper measure of damages to real
property, the distinction between permanent and
temporary injury applies whether the claim sounds in
contract or tort.
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Recent Developments:
Wheeler v. Enbridge Pipelines, L.P.,
No. 13-0234, 2014 WL 4252273 (Tex. Aug. 29, 2014)
• Permanent injury:
› Cannot be repaired, restored, or fixed
OR
› Even if it can be repaired, restored, or fixed, the damage is
substantially certain to recur
• Temporary injury:
› Can be repaired, restored, or fixed
AND
› Any anticipated recurrence would be only occasional,
irregular, intermittent, and not reasonably predictable
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Recent Developments:
Wheeler v. Enbridge Pipelines, L.P.,
No. 13-0234, 2014 WL 4252273 (Tex. Aug. 29, 2014)
• Courts must adequately compensate landowner
• Reinforced (and arguably recognized for the first time)
the economic feasibility exception in temporary
damage cases
› Cost of restoration > diminution in property’s fair market
value
• Recognized right to recover intrinsic value of damaged
property even if there is little or no diminution in the
property’s fair market value
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Recent Developments:
Key Operating & Equip., Inc. v. Hegar,
435 S.W.3d 794 (Tex. 2014)
When parts of two mineral leases have been
pooled but production is from only one lease,
the mineral lessee has the right to use a road
across the surface of the lease without
production in order to access the producing
lease.
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Recent Developments:
Lipsky v. Range Resources Corp.
• In 2011, Lipsky sued Range, claiming that 2 horizontal wells near
his home polluted his private water supply with methane gas
• EPA issued an Emergency Order stating Range’s drilling activities
had introduced gases into Lipsky’s water well. EPA later dropped
out of the fight.
• RRC entered final order concluding that Range had not polluted
the water well.
• Range filed a counterclaim for conspiracy, defamation, and
business disparagement after Lipsky’s video of methane-fueled
flames shooting from a hose hooked to his well was uploaded to
YouTube
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Recent Developments:
Lipsky v. Range Resources Corp.
• Fort Worth Court of Appeals:
› Held that Lipsky’s actions were based upon or related to
Free Speech
› Range met its burden to maintain its claims against
Lipsky, but ordered that the conspiracy claim should be
dismissed
• Both parties sought Texas Supreme Court’s review oral argument is set for December 2014
› Godwin Lewis will be arguing for the landowner (Lipsky)
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Parr v. Aruba Petroleum, Inc.,
Dallas County Court at Law 1
• The Parrs sued Aruba in 2011, claiming spills and
emissions from Aruba’s fracking operations
contaminated their 40-acre ranch in Decatur, TX and
made them sick.
• Dallas jury awarded the Parrs $3 million
› $275,000 for drop in property value, $2.4 million for past
physical suffering and mental anguish, and $250,000 for
future harm
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Crowder et al. v. Chesapeake Operating Inc.,
No. 2011-008169-3, Tarrant County Court at Law
• Nuisance case where jury rendered $20,000 verdict
against Chesapeake
› Temporary nuisance = offensive odors and noise
› Drilling operations in a field behind the plaintiffs’ houses
where Chesapeake had drilled 13 wells
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Allocation Wells in Texas
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What is an “allocation well”?
An allocation well is a horizontal well that traverses the
boundary between two or more leases that have not
been pooled and for which no agreement exists among
the royalty owners as to how production will be shared.
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What’s the problem?
An operator may drill an allocation well without pooling
authority or in contravention of restrictive pooling
provisions that make pooling difficult or overly
burdensome.
• Without a pooling provision or other agreement, how
is production allocated to determine royalties?
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Case Study:
Browning Oil Co. v. Luecke,
38 S.W.3d 625 (Tex. App.—Austin 2000, pet. denied)
• Lessee was bound by restrictive pooling provisions in
lease.
• Unable to secure a lease amendment, the lessee filed a
pooling instrument purporting to designate a pooled
unit that didn’t comply with lease and drilled a
horizontal well across the unit.
• The lessors sued, claiming lessee breached the pooling
provision.
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Case Study:
Browning Oil Co. v. Luecke,
38 S.W.3d 625 (Tex. App.—Austin 2000, pet. denied)
• The Lessors claimed that because their tracts weren’t
validly pooled, they were entitled to royalty on all
production resulting from the two purported pooled
units.
• The Lessees argued that royalties should be allocated
to the Lessors based on the share of production from
the wells that could be attributed to their tracts.
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Case Study:
Browning Oil Co. v. Luecke,
38 S.W.3d 625 (Tex. App.—Austin 2000, pet. denied)
Under Luecke, a lessee may allocate production on
an unpooled basis, provided it can establish with
reasonable probability what production originates
from the segment(s) of the drainhole within the
unpooled lease.
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Case Study:
Browning Oil Co. v. Luecke,
38 S.W.3d 625 (Tex. App.—Austin 2000, pet. denied)
Potential methods of measuring production under
Luecke’s “reasonable probability” standard:
1. Length of the lateral
2. Take-point basis
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Case Study:
Browning Oil Co. v. Luecke,
38 S.W.3d 625 (Tex. App.—Austin 2000, pet. denied)
• Lessee has an implied duty to manage/administer a
lease, which includes accounting to the lessor as a
reasonably prudent operator
• Under Luecke, an operator drilling an allocation well
has a duty to establish with reasonable probability
what production is attributable to a lease.
› Narrowly tailor production allocation to lease
› Consider geological and engineering conditions
surrounding well
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Joint Ownership Issues
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Recent Developments:
Reeder v. Wood County Energy, LLC,
395 S.W.3d 789 (Tex. 2012)
Primary Issue:
Does an exculpatory clause in a JOA extend to all
alleged breaches of the JOA or is it limited to claims
that the operator breached its duty in operating the
well?
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Reeder v. Wood County Energy, LLC
It depends.
1977 and 1982 Model
Form JOA:
Operator “shall conduct
all such operations in a
good and workmanlike
manner . . . .”
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1989 Model Form
JOA:
Operator “shall
conduct its activities …
under this agreement
as a reasonable
prudent operator, in a
good and workmanlike
manner . . . .”
Reeder v. Wood County Energy, LLC
1977 and 1982 Model Form JOA:
Operator “shall conduct all such
operations in a good and
workmanlike manner . . . .”
1989 Model Form JOA:
Operator “shall conduct its
activities under this agreement
as a reasonable prudent
operator, in a good and
workmanlike manner . . . .”
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Clause only applies to
claims that operator
breached its duty in
operations, not to
claims that it otherwise
breached JOA.”
Clause applies to both
claims that operator
failed to act as
reasonably prudent
operator AND claims
that it breached JOA.
Reeder v. Wood County Energy, LLC
“all such operations” vs. “its activities”
According to the Texas Supreme Court:
“The modifier “such” references operations under the
JOA, while the deletion of that word and use of the term “its
activities” includes actions under the JOA that are not limited
to operations. The modification implicates a broader scope of
conduct following the language of the contract. The agreed
standard exempts the operator from liability for its activities
unless its liability-causing conduct is due to gross negligence
or willful misconduct.”
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Reeder v. Wood County Energy, LLC
So what does this mean?
A JOA with an exculpatory clause with the phrase “its
activities” gives broader protection to operators!
Example:
JOA contains exculpatory clause that states that operator
“shall conduct its activities . . . in a good and workmanlike
manner.” Operator breaches the JOA by failing to
maintain production in paying quantities. Workinginterest holders sue operator for breach. Operator is not
liable unless its breach is due to gross negligence or
willful misconduct.
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Zachry Construction Corp. v. Port of Houston,
No. 12-0772, 2014 WL 4472616 (Tex. Aug. 29, 2014)
• Texas Supreme Court:
› Confirms that contractual waivers for future gross negligence
are void
› States a contractual provisions exempting a party from tort
liability for harm caused intentionally or recklessly is
unenforceable – but the same may be said of contract liability
› Calls into question on public policy grounds contractual
waivers that seek to insulate a party from future, deliberate,
wrongful conduct
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Other Areas of Dispute
• Preferential rights
• Payment of joint interest billings
› Audit
› Suspend rights
› Foreclosure
› Drill a partner out
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Recent Developments:
Forest Oil Corp. v. El Rucio Land & Cattle Co., Inc.,
No. 01-13-00040-CV, 2014 WL 3709477 (Tex. App.—Houston [1st
Dist.] July 24, 2014, no pet.)
Primary Issue:
Are claims based on environmental contamination
and surface damage caused by oilfield operations
proper subjects of arbitration? Or are such claims
within the exclusive jurisdiction of the Texas Railroad
Commission?
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Forest Oil Corp. v. El Rucio Land & Cattle Co., Inc.
Such claims are not within the exclusive
jurisdiction of the RRC, and therefore can
properly be subject to arbitration.
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Forest Oil Corp. v. El Rucio Land & Cattle Co., Inc.
• Forest Oil operated a plant and drilled and produced gas on a
ranch in Hidalgo County
• The ranch-owners sued Forest Oil for environmental damage
caused by Forest Oil’s operations
• Forest Oil moved to compel arbitration based on an earlier,
unrelated settlement agreement
• The trial court sent the case to arbitration where 2 of 3
arbitrators found in favor of the ranch-owners
• The trial court refused to vacate the arbitration award, so Forest
Oil appealed, arguing that the trial court erred in refusing to
vacate because the RRC had exclusive, or alternatively primary,
jurisdiction over the dispute
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Forest Oil Corp. v. El Rucio Land & Cattle Co., Inc.
• The Houston [1st Dist.] Court of Appeals held:
› The RRC did not have exclusive jurisdiction over the
dispute because the Legislature did not intend for the
RRC’s regulatory scheme to abrogate a landowner’s right
to obtain common-law relief for injuries caused to his
property for environmental contamination.
› The doctrine of primary jurisdiction did not apply
because the ranch-owners’ common-law claims and
declaratory relief did not require the RRC’s expertise or a
uniform interpretation of its rules or regulations.
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Cases on the Horizon and
Other Hot Topics
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Cases Pending in the Texas Supreme Court…
• Steadfast Financial, LLC v. Bradshaw, No. 13-0199
› Duty to non-participating royalty owner
› Argued Oct. 15, 2014
• Hooks v. Samson Lone Star, L.P., No. 12-0920
› $21 million judgment against Samson for fraudulent
conduct reversed by court of appeals on various grounds,
including limitations
› Argued Sept. 17, 2014
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Cases Pending in the Texas Supreme Court…
• Phillips v. Carlton Energy Group, LLC, No. 12-0255
› Lost market value damages in case involving breach of
agreement to explore coal-bed methane in Bulgaria.
› Argued Sept. 11, 2013
• In re Deepwater Horizon, No. 13-0670
› Certified question from Fifth Circuit regarding liabilityinsurance coverage for the Deepwater Horizon drilling-rig
disaster
› Argued Sept. 16, 2014
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Other Hot Topics Continued…
• Gas flaring cases
• Earthquakes
• Royalty owner cases
• Lease termination and fighting old documents
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Thank you
Greg W. Curry
[email protected]
214.969.1252
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