Gray Reed partner Charles Sartain takes a look back at some of 2019’s malefactors in the energy business in a post in the firm’s Energy & the Law blog.

“To our bad guys, 2019 was a year flush with hope and opportunity; it ended with recidivism, more misery from Venezuela, a charlatan, an Okie who pulled a multi-million dollar fast-one on Chesapeake and, as in years past, a peek into the darker side of the human condition,” he writes.

The post describes six cases of fraud, conspiracy, money laundering, and outright theft.

Read the article.

Two Gray Reed lawyers give their take on a recent Texas appellate court’s ruling in Mesa v. Deep Energy, an opinion that will have profound impacts on mineral liens and contractual provisions purporting to waive mineral liens.

Writing on the firm’s website, Ethan Wood and Joe Virene describe the case in which Mesa sued Deep Operating for failing to pay fully for work Mesa performed on three wells. Deep Operating’s parent company claimed that Mesa contractually waived its right to assert liens against Deep Operating’s wells and waived its right to seek payment on the contract from any entity other than Deep Operating, which at that point was in bankruptcy.

“Relying on a 2012 case out of the Dallas Court of Appeals and a 2015 decision from the Texas Supreme Court, the Houston Court concluded that when a party to a contract agrees to seek payment or damages only from one source to the exclusion of all others, that party has effectively waived its rights to such payment or damages from other parties,” the authors write.

Read the article.

Schiff Hardin’s Environmental Group took a look prospects for renewable energy in 2020 and determined that development is expected to continue through 2020 and beyond.

Authors of the post in the Energy & Environmental Law Adviser blog are Alex Garel-Frantzen, Amy Antoniolli and Brett Cooper.

They discuss three key issues facing the industry for the coming year: waning federal government incentives; siting renewable energy projects at such locations as retired power plants and landfills can lower costs; and local communities can be slow to get on board with renewable energy initiatives.

See the article.

The Oil and Gas Lawyer Blog of Graves Dougherty Hearon & Moody takes a look at a recently published issue brief titled “Reducing Oilfield Methane Emissions Can Create New US Gas Export Opportunities.”

Rice University’s Baker Institute for Public Policy published the brief by Gabriel Collins.

Collins argues that instead of flaring gas, it should be liquefied and sold in the international market.

Read the article.

John B. McFarland, writing in the Graves Dougherty Hearon & Moody Oil and Gas Lawyer Blog, updates a legal fight over whether a producer can continue to flare gas from its wells.

The dispute, between Williams MLP Operating and Exco Operating Co., has moved to district court in Travis County in Austin.

McFarland describes the background of the case, which involves the purchase of wells, a gathering system and gathering contract, bankruptcy, and a potential net loss of $146 million if the permit to flare gas is not granted.

Read the article.

A Texas court of appeals ruled that “oil or gas” is not limited to “crude petroleum,” but includes refined petroleum products gasoline and diesel, according to Charles Sartain, writing in Gray Reed’s Energy & the Law.

The case involves a pipeline easement that allows a production company to transport oil or gas across the plaintiff’s property. The property owner contended that “oil and gas” referred to crude petroleum, but not refined products.

The court researched definitions of “oil” and “gas” and found that refined petroleum products “fell within the commonly accepted meaning of the terms oil or gas at the easement’s approximate date.”

Read the article.

The 2019 Texas legislature enacted a new Property Code Section 5.152 to protect mineral and royalty owners from a certain species of fraudulent transactions perpetrated on trusting and/or naïve and/or out of state mineral owners, reports Charles Sartain in Gray Reed’s Energy & the Law blog.

The change is meant to address a scam in which someone “fronting for a company with a name similar to a reputable operator, would approach the owner with an oil and gas ‘lease’ of minerals or royalty that were already subject to an existing lease. Except that the lease was actually the sale of the mineral or royalty interest at a bargain price.”

The article lists the changes addressed by the new section.

Read the article.

A post on Gray Reed’s Energy & the Law blog discusses the question: Under Louisiana law, does the operator’s bad faith preclude recovery for the non-operator’s breach of a joint operating agreement if the operator caused the non-operator to breach the JOA but did not itself breach?

Charles Sartain summarizes the background of Apache Deepwater, LLC v. W&T Offshore, Inc., a conflict between parties to a joint operating agreement for operations on offshore deepwater wells.

The case was complicated by conflicting provisions in the JOA.

Read the article.

Image by William Munoz

Former secretary of state Rex Tillerson is again at the center of the climate change debate, as the former Exxon Mobil CEO prepares to take the witness stand regarding allegations his former company deceived shareholders about the financial risks posed by climate change, reports the Houston Chronicle.

Tillerson is scheduled to make an appearance at the New York Supreme Court Wednesday to answer questions about missing emails and varying carbon pricing schemes amid a growing wave of climate change litigation against the oil industry, according to the Chronicle‘s James Osborne.

The New York attorney general wants to answer the question of whether Exxon defrauded investors when it used one carbon price to estimate the potential taxes or fees the company might have to pay on greenhouse gas emissions from oil drilling projects and another in the economic modeling it presented to investors regarding future oil and gas demand.

Read the Houston Chronicle article.

Two recent court of appeals cases address the enforceability of liquidated damages clauses, writes John McFarland in the Graves, Dougherty, Hearon & Moody Oil and Gas Lawyer Blog.

“A liquidated damages clause is a provision in a contract specifying a dollar amount (‘liquidated damages’) to be paid by a party if the party breaches the contract. Such clauses are common in all types of contracts, particularly in the oil and gas industry,” McFarland explains.

In his post, he discusses some recent cases that address the issue.

Read the article.

Haynes and Boone reports that there has been an uptick in the number of North American oil and gas producer bankruptcies so far this year, with 33 filings as of the end of September. And 27 of those files have come since the beginning of May.

The firm’s Oil Patch Bankruptcy Monitor reports:

“Since our August 12 report, an additional 7 producers have filed bankruptcy with an aggregate amount of total debt in excess of $2.0 billion. This increase in year-over-year filings indicates that the reverberations of the 2015 oil price crash continue to be heard in the industry.”

Read the article.

Reuters reports that the Trump administration’s effort to cut red tape and speed up major energy projects has backfired in the case of the three biggest U.S. pipelines now planned or under construction.

Reuters reporters Scott DiSavino and Stephanie Kelly explain:

“The Republican administration tried to accelerate permits for two multi-billion-dollar natural gas lines and jumpstart the long-stalled Keystone XL crude oil pipeline that would start in Canada. Judges halted construction on all three over the past two years, ruling that the administration granted permits without conducting adequate studies or providing enough alternatives to protect endangered species or national forests.”

Read the Reuters article.

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.

A looming legal brawl over a new Federal Energy Regulatory Commission order will trigger a fresh round of judicial scrutiny focused on the line between state and federal authority in wholesale power markets, reports E&E News.

“Power producers and state regulators last month sued in the U.S. Court of Appeals for the District of Columbia Circuit over Order No. 841, a FERC directive that opens the door for batteries and other energy storage technologies to participate in wholesale electricity markets — even if they are behind a retail meter,” according to E&E News’ Pamela King.

She quoted Ari Peskoe, director of Harvard Law School’s Electricity Law Initiative: “This is a big deal because potentially we’ll see whether FERC has the authority to invite distribution-level resources into the market.”

Read the article.

In a much-awaited and pivotal decision in the PG&E chapter 11 proceeding, the U.S. Bankruptcy Court for the Northern District of California held that it not only has exclusive jurisdiction over the rejection of wholesale power-purchase agreements, but that the Federal Energy Regulatory Commission has no such jurisdiction and any determinations by FERC to the contrary would be void, according to Holland & Hart.

“While the decision might not be surprising to most bankruptcy practitioners, the proposition that FERC has no jurisdiction over the breach or modification of a power-purchase agreement is not only shocking to energy practitioners, but contrary to well-established authority in the energy arena,” the firm said on its website.

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.

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.

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.