Charles Sartain of Gray Reed, writing in the firm’s Energy & the Law blog, discusses an energy lease that featured some dueling provisions that resulted in a lawsuit in a Texas court.

The case of HJSA No. 3 LP v. Sundown Energy LP concerned a mineral estate under 30,450 acres in Ward County, Texas. “HJSA claimed that the lease had terminated as to certain portions of the property because Sundown had on five separate occasions over 14 years allowed more than 120 days to elapse between completion or abandonment of operations on one well and commencement of drilling operations on the next well, thereby failing to maintain the lease as to areas not HBP.”

The article covers the arguments and shows how the court decided in the end that Sundown was required to spud a well to comply with a paragraph of the agreement.

Read the article.

Charles Sartain, writing in Gray Reed’s Energy & the Law blog, tells the story of Town of Flower Mound v. Eagle Ridge Operating LLC, in which an operator’s injunction against enforcement of a local ordinance was dissolved.

EagleRidge operates gas wells in the Flower Mound. A town ordinance prohibits work on gas wells (other than drilling) at times other than between 7 a.m. and 7 a.m. Monday through Friday and certain times on Saturday.

A court of appeals dissolved an injunction against the town, holding the trial court had no subject matter jurisdiction over the dispute because the ordinance is penal in nature, Sartain explains. (A violation is considered “unlawful” and is punishable by fine.)

Read the article.

By Shane Randolph and Jeff Nicholson
Opportune LLP

With over $370 trillion of global financial contracts referencing LIBOR (London Inter-bank Offered Rate), many oil and gas companies are curious about how the phase-out of LIBOR by 2021 could impact their organization. Many companies are beginning to ask how this transition will impact their organization and what steps can be taken now. The following is a discussion of:

• why LIBOR is being phased out;
• the transition plan for the phase-out;
• items companies should consider; and
• the steps that can be taken now.

Why is LIBOR Being Phased Out?
LIBOR has been the default local and international benchmark interest rate for a diverse range of financial products for decades. The rate is based on various banks’ proprietary observations rather than robust market transactions. This has left the rate vulnerable to manipulation and major rate-fixing scandals came to light starting in 2007. As a result, the U.K.’s Financial Conduct Authority (FCA) decided that it will no longer compel banks to submit LIBOR estimates by the end of 2021.

What is the Transition Plan?
As a response to the issue in the U.S., the U.S. Federal Reserve Board (the “Fed”) convened the Alternative Reference Rates Committee (ARRC) in 2014 to establish a viable alternative to the U.S. dollar LIBOR. The ARRC determined in 2017 that the overnight indexed swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR), a broad treasury repurchase agreement financing rate used when banks borrow or loan treasuries overnight, would be its preferred alternative reference rate. Accordingly, the Fed began publishing the SOFR daily rate on April 3, 2018 to prepare for its use as a benchmark rate.

The current transition timeline proposed by AARC has SOFR being the primary replacement for LIBOR in the U.S. by the end of 2021. The table below shows the ARRC’s anticipated completion dates and milestones to be achieved by those dates.

There are concerns about utilizing SOFR as a benchmark rate, and it will take time for enough liquidity to develop in the SOFR market to alleviate concerns regarding its viability as a benchmark. One issue is that SOFR is a spot rate from the median of overnight transactions, and it is likely to vary materially from day-to-day. Another issue is that SOFR has only a one-day tenor, whereas LIBOR has many different tenors.

What Should Companies Consider?
Companies should inventory all agreements that reference LIBOR. Also, when executing new agreements, management should carefully consider language addressing alternative or fallback rates if LIBOR is unable to be determined. If contracts are not amended to include alternative rates or fallback provisions in the absence of LIBOR before the relevant LIBOR index is discontinued, it could cause settlement issues or render contracts invalid.

From an accounting and financial reporting standpoint, the impact could be substantial. The primary areas affected include hedge accounting and accounting for debt modifications. In addition, discount rates for impairment testing, lease accounting, asset retirement obligations and fair value estimates will need to be assessed. Fortunately, both the U.S. and international accounting regulatory bodies, FASB and IASB, appear to be aligned and will provide significant relief for the transition, particularly in the areas of hedge accounting and debt modifications. As of now, the actions by the FASB and IASB are tentative proposals, but additional guidance should be provided by the end of 2019.

What Steps Can Be Taken Now?
At this stage in the process, companies should increase organizational awareness, carefully monitor the execution of new agreements referencing LIBOR and create an inventory of existing agreements and valuation models.

Increasing organizational awareness will be key for the transition away from LIBOR. While some may be aware of the impending LIBOR replacement, there may be a lack of appreciation of how broadly the event will impact the organization beyond hedging and debt activities. Increasing awareness throughout the organization will also assist in monitoring the execution of new agreements referencing LIBOR.

In summary, the replacement of LIBOR will have a significant impact globally. Oil and gas companies are encouraged to consider the impact to their organization and take steps to assess existing agreements and carefully monitor the execution of new agreements.

As a Managing Director at Opportune, Shane Randolph assists companies and financial institutions throughout North America, South America, Europe and Asia-Pacific in their understanding of what is possible as they deal with the challenges of implementing risk management programs and highly technical accounting pronouncements. He oversees the risk management, derivatives, stock-based compensation and complex securities service offerings of Opportune. He assists clients with the entire risk management life cycle, including strategy, execution, compliance, valuation and hedge accounting. He has undergraduate and graduate degrees in accounting from Oklahoma State University. He also is a member of the American Institute of Certified Public Accountants and maintains a Series 3 Securities License.

Jeff Nicholson is a Senior Consultant in the complex securities, hedging and stock-based compensation practice of Opportune LLP. He holds a Bachelor’s degree in Business Administration and Management from the University of Colorado, Boulder and a Graduate degree in Finance from the University of Colorado, Denver.

Charles Sartain of Gray Reed & McGraw summarizes in a blog post the takeaways from a recent presentation two of the firm’s lawyers made recently on the use, control and ownership of water in oil and gas operations.

“Groundwater is privately owned by the owner of the surface estate,” he explains. “As with oil and gas, it is subject to the rule of capture. Landowners’ requests that the rule be modified in favor of the ‘rule of reasonable use’ have been rejected by the Texas Supreme Court.”

The post discusses the questions around ownership of produced water in the oil patch.

Read the article.

Texas businessman Mas Duncan lost the nearly $6 million that he invested in a docket of claims against BP after the Deepwater Horizon spill. The money, as Reuters’ Alison Frankel explains, evaporated into an allegedly fraudulent scheme to manufacture tens of thousands of plaintiffs.

“Then when Duncan and his litigation finance company, Duncan Litigation Investments, tried to recoup the lost millions by suing the plaintiffs’ firms that allegedly benefited from his investment, he ran into timeliness problems,” according to the Reuters report.

Now DLI has filed a complaint blaming Duncan’s own former lawyers at Baker Donelson Bearman Caldwell & Berkowitz for failing to procure a tolling agreement that would have extended the statute of limitations on Duncan’s claims against the plaintiffs’ firm.

Read the Reuters article.

The expiration of an oil and gas lease’s primary term does not necessarily release all non-producing lands, writes J. Mark Robinette.

“This can be so even when the lease contains a Pugh Clause. Typically, most leases contain savings provisions that extend the lease beyond the primary term when the lessee ‘continuously prosecutes’ drilling operations,” he explains.

In a post on his website, he provides a sample of this saving provision from the Producer’s 88 lease form.

Read the article.

Lawyers with Houston-based Heard Law Firm achieved a settlement for an offshore pipeline technician who was blown into the air, suffering back injuries and burns in an explosion on an oil and gas production platform in the Gulf of Mexico.

Donald Champion, who lives near Lake Charles, Louisiana, was working on the Garden Banks Gas Pipeline owned by Enbridge Offshore LLC more than 100 miles south of New Orleans. In November 2017, an explosion caused by equipment failure knocked him through the air into a stack of pipe, injuring his back and leaving him with serious burns to his face, arms and hands.

In addition to the treatment for his burns, Champion underwent back surgery and may require more operations in the future.

See details and a video.

Thompson & Knight LLP advised the Conflicts Committee of American Midstream Partners, LP in its merger with an affiliate of ArcLight Energy Partners Fund V, L.P.

The partnership has announced the closing of the transactions contemplated by that certain Agreement and Plan of Merger, dated March 17, 2019, by and among the partnership, American Midstream GP, LLC, and affiliates of ArcLight, pursuant to which an affiliate of ArcLight has taken the Partnership private by acquiring all of the outstanding common units of the partnership not already held by affiliates of ArcLight, at a price of $5.25 per common unit.

The firm’s cross-practice deal team was led by the corporate team of Alan P. Baden, Jeremiah M. Mayfield, and Stephen W. Grant Jr., with assistance from J. Dean Hinderliter, Dasha K. Hodge, Timothy J. Johnston, Catharine A. Hansard, Tonya Maksimenko, and Nicolas Adrian McTyre.

A suspended lawyer who was found in contempt of court for stonewalling Chevron’s efforts to collect a money judgment against him has been ordered to pay $3.4 million in attorney fees to the oil company, reports the ABA Journal.

A federal judge ordered New York lawyer Steven Donziger to pay the attorney fees for “intransigence” that blocked Chevron’s “considerable efforts” to get at the facts.

The Journal‘s Debra Cassens Weiss writes that Donziger told the publication that $3.4 million is the highest sanction in the history of New York courts. And it’s not his total liability—court fees, attorney fees and fines add up to about $10 million.

Read the ABA Journal article.

The Houston Chronicle reports that a Houston oil executive was sentenced to state prison for defrauding investors who thought they were paying for the drilling and testing of wells — but instead paid the executive’s mortgage.

Daniel Walsh, a Galveston oilman, was sentenced to 18 years in state prison on Friday in Wichita County, according to the Chronicle‘s Erin Douglas.

The former CEO of Houston-based Western Capital Inc. had pleaded  guilty to money laundering Wednesday after raising money for the drilling and testing of oil wells in Galveston between 2007 and 2009, but spent the money on his personal expenses instead.

Read the article.

The Supreme Court of Texas delivered a reminder that when drafting contracts, you should say what you mean and mean what you say, and reliance on oral representations directly contrary to the terms of a written agreement between sophisticated parties is not justifiable, reports Carrington Coleman Sloman & Blumenthal’s Sua Sponte blog.

Derrick Ward explains that the case considered a farmout contract between Barrow-Shaver Resources Company and Carrizo Oil & Gas for Barrow-Shaver to build a well on a lease held by Carrizo in exchange for an interest in the mineral rights. When Barrow-Shaver raised  concerns about the consent-to-assign provision and sought to add language that would prohibit Carrizo from withholding consent unreasonably, Carrizo’s representative allegedly offered assurances that Carrizo would work cooperatively if the assignment became an issue.

When it became an issue, litigation resulted. The court ultimately concluded the consent-to-assign provision “unambiguously allowed Carrizo to refuse its consent for any reason,” Carrizo’s refusal to consent to the assignment could not constitute a breach of contract as a matter of law.

Read the article.

The Energy Law Blog of Liskow & Lewis discusses a recent U.S. Supreme Court ruling that could have far-reaching implications concerning wage-and-hour laws for workers on oil and gas platforms located in open water on the Outer Continental Shelf.

Authors Jackie E. Hickman and Thomas J.McGoey II explain the background of the case:

“The plaintiffs in Parker Drilling Management Services, Ltd. v. Newton, were offshore rig workers who filed a class action asserting that their employer violated California’s minimum wage and overtime laws by failing to pay them for stand-by time while they were on the drilling platform. Both parties agreed that the platforms were governed by the Outer Continental Shelf Lands Act (“OCSLA”), but they disagreed regarding whether the California’s wage-and-hour laws were incorporated into OCSLA and therefore applicable to workers on the platform.”

The Supreme Court found that federal law is exclusive and state law only applies where there “is a gap in federal law’s coverage.”

Read the article.

A week after the West Virginia Supreme Court unanimously upheld the property rights of landowners battling one natural gas giant, the same court tossed out a challenge filed by another group of landowners against a different natural gas company, reports Ken Ward Jr. of the Charleston Gazette-Mail.

The article, published on the website of the ABA Journal, is the product of a partnership with the Gazette-Mail, a member of the ProPublica Local Reporting Network.

The court on Monday upheld a lower court ruling that threw out a collection of lawsuits alleging dust, traffic and noise from gas operations were creating a nuisance for nearby landowners.

“In the property rights case last week, the justices set a clear legal standard that natural gas companies can’t trespass on a person’s land, without permission, to tap into gas reserves from neighboring tracts,” writes Ward. “In Monday’s case, the justices didn’t articulate a new legal precedent.”

Read the ABA Journal article.

The Texas Supreme Court has denied motion for rehearing of its opinion in a case that addresses deductibility of oil and gas post-production costs in the context of an overriding royalty, writes John McFarland for the Oil and Gas Lawyer Blog.

Burlington Resources Oil & Gas Company v. Texas Crude Energy may, however, have implications for post-production-cost deductions in oil and gas royalty clauses, according to the post on the website of Graves, Dougherty, Hearon & Moody.

The dispute involved alleged breaches of a development agreement between the parties, including the deduction of post-production costs from Texas Crude’s overriding royalties.

The trial court ruled that post-production costs in the case were not deductible. But the Texas Supreme Court “reversed and remanded, holding that the language of the overriding royalty assignments permits deduction of (some?) post-production costs,” explains McFarland.

Read the article.

Stephen Cooney of Gray Reed, in a post on the firm’s website, provides some analysis of the state of groundwater law in Texas and discusses some of the effects of a Texas Supreme Court case that should now be a concern to land purchasers in every transaction.

In Coyote Lake Ranch, LLC v. City of Lubbock, the court found  that a severed groundwater right would be worthless if the groundwater owner could not enter upon the land in order to extract the groundwater

Under the law now, a petroleum development company can set up a pad, build roads, lay pipeline and start drilling for water, even though the holder of the mineral rights waived the right to come on the property to drill for oil and gas.

Read the article.

A Thompson & Knight trial team earned a unanimous verdict for BP America Production Company in a retrial of a 12-year-old lease termination dispute brought by Laddex, Ltd., an Amarillo-based oil company. Absent further appeals, this verdict could be the final chapter in over a decade of contentious lease termination litigation, according to a release from the law firm.

The release tells the history of the litigation:

In 2013, BP took two lease termination disputes to trial within one month of each other: Laddex v. BP America and Red Deer Resources v. BP America. In each case, the plaintiffs sought termination of large BP leases in the Texas Panhandle. Both cases involved the hot Texas litigation topic of “production in paying quantities,” a doctrine that allows a typical oil and gas lease to continue after its primary term only if the well or wells on that lease produce enough oil and gas to turn a profit.

Laddex was originally tried in June 2013. In that trial, the jury found that the lease failed to turn a profit from August 2005 to October 2006 and further found that a reasonable operator would not continue to operate the Mahler D-2 well for the purpose of making a profit. The effect of these answers was the termination of BP’s lease.

Red Deer went to trial one month later. In that case, the jury found that the well had produced in paying quantities at all relevant times, but that it was not capable of producing in paying quantities at the time it was shut-in on June 12, 2012.

Both cases eventually found their way to the Texas Supreme Court. In Red Deer, the court determined in its 2017 opinion that the only material question asked of the jury was whether the lease produced in paying quantities—and BP prevailed on that question. The result was a reversal and judgment rendered in favor of BP. In Laddex, also in 2017, the Texas Supreme Court ruled that the jury charge in the 2013 trial erroneously instructed the jury to limit its analysis only to a specific 15-month period and held that the length of the time period to be considered for determining profitability was for the jury to decide. The court therefore remanded the case for a new trial.

The focus of Laddex is whether the Mahler D-2 well produced enough oil and gas to maintain BP’s almost 50-year-old lease. In order for the 1971 lease to remain valid, it needed to produce oil and gas in profitable quantities. Laddex’s suit claimed that the Mahler D-2 failed to turn a profit for over a year starting in the summer of 2005, and therefore the lease terminated on its own terms. It was undisputed that the well experienced a significant slowdown for about 15 months, but BP maintained that the lease was still profitable during that time. The well recovered to more normal levels of production in November 2006 and continues to produce near those levels to this day.

BP hired Thompson & Knight for the retrial, which began on April 15, 2019, and concluded mid-day on April 23. The jury ruled unanimously for BP.

The Thompson & Knight retrial team in Laddex v. BP was led by Rob Vartabedian, with support from Alix Allison, Rich Phillips, Conrad Hester, and Connor Bourland. Thompson & Knight’s Rob Vartabedian and Conrad Hester assisted with all aspects of Red Deer, from trial to the Texas Supreme Court. M. Coy Connelly, BP America managing counsel, supervised the successful litigation efforts in both the Laddex and Red Deer suits.

Several reported cases in recent years have involved title to minerals underlying roadways, points out Austin Brister for the McGinnis Lochridge Oil and Gas Law Digest.

“In urban oil and gas plays such as the Barnett Shale, horizontal drilling has ‘paved the way’ for oil and gas operators to drill through and produce minerals underlying highways, streets, and roadways,” he explains. “Even in rural areas across Texas, numerous horizontal wells have been drilled underneath roads and highways.”

The article discusses the case of Green v. Chesapeake in the Fort Worth Court of Appeals as it relates to the the strip-and-gore doctrine.

Read the article.

A recent Texas ruling illustrates the problems that can arise when parties to a joint operating agreement elect to have a non-owner serve as the operator, points out Austin Brister in the McGinnis Lochridge Oil and Gas Law Digest.

The court was called on to determine whether an elected unit operator is permitted to delegate operatorship duties to a contract operator, and whether that contract operator can be liable to nonoperators for breach of any duties imposed on the operator under that unit operating agreement.

PBJV was designated as unit operator, but then PBJV entered into a contract with Apache to perform a number of duties.

The court concluded that Apache was merely delegated duties, based on its observations that PBJV never actually named or designated Apache as the “Unit Operator,” but instead entered into a “Contract Services Agreement” and power of attorney with Apache under which PBJV contractually delegated certain operator duties to Apache.

Read the article.

When  you prepare, review and/or sign settlement agreements you sometimes pay less attention than you should to the details of those “standard” releases, writes Charles Sartain in Gray Reed’s Energy & the Law blog.

He explains that Acme Energy Services, d/b/a Big Dog Drilling v. Staley et al. provide the lesson: Beware the boilerplate; before signing, consider what you actually are trying to accomplish.

“Lake Hills contracted to provide materials and services on oil and gas leases owned by Heritage. Big Dog and other subcontractors provided work and materials and invoiced Lake Hills,” Sartain explains. “Heritage stopped paying Lake Hills and Lake Hills stopped paying the subs, who then recorded statutory mineral property liens against Heritage, its leases, and the well. Each subcontractor sued Heritage to foreclose and for personal liability.”

He lists the five rules the court considered in the case and discusses the ruling.

Read the article.

The Supreme Court of Pennsylvania has agreed to hear a case to consider whether the rule of capture applies to hydraulic fracking, reports The Hydraulic Fracking Blog of Norton Rose Fulbright.

The case involves landowners’ trespass and conversion claims against an energy company based on hydraulic fracking activities. The plaintiffs  compared the energy company’s fracking activity to slant drilling, claiming that the proppants of hydraulic fracturing “serve the same purpose as a drill bit invading the land.”

Read the article.