FERC released its final EIS for the Driftwood LNG Project (Project) on January 18, 2019. The Project involves (1) the construction and operation of an LNG Facility and its five appurtenant LNG plant facilities to liquefy natural gas, with other support facilities (like LNG storage tanks and carrier loading facilities) and (2) the construction of about 96 miles of pipeline with various compressor and meter stations along the way. This Project would affect several parishes in Louisiana – Evangeline, Acadia, Jefferson Davis and Calcasieu Parishes. The LNG Facility will produce up to 27.6 million tons, annually, of LNG for export. FERC found that the Project would have “significant” adverse environmental impacts, which could be reduced to less than significant levels with the implementation of Driftwood’s impact avoidance, mitigation and minimization measures. FERC staff made additional recommendations to further reduce and mitigate impacts, but the Commission has not made a final decision on the Project. The full article on the EIS statement is available here.
In August 2017, we wrote about an opinion from the Louisiana Court of Appeal, Second Circuit in the matter of Gloria’s Ranch, L.L.C. v. Tauren Exploration, Inc. The Louisiana Supreme Court recently issued a highly anticipated opinion in the matter Gloria’s Ranch, L.L.C. v. Tauren Exploration, Inc., overturning the Louisiana Court of Appeal, Second Circuit’s ruling that a lender could be held solidarily liable with mineral lessees for breach of certain obligations under a mineral lease.
In 2004, the lessor, Gloria’s Ranch, L.L.C., granted a mineral lease to Tauren Exploration, Inc. Tauren later assigned portions of its interest in the lease to Cubic Energy, Inc., and to EXCO USA Asset, Inc. Tauren and Cubic then executed separate credit agreements with Wells Fargo Energy Capital, Inc. As security for Cubic’s credit agreement with Wells Fargo, Cubic mortgaged its interest in mineral leases with various lessors, including Gloria’s Ranch, and assigned as collateral the profits earned from the leases.
Later, Tauren and EXCO negotiated a purchase agreement whereby EXCO purchased Tauren’s 51 percent interest in the lease as to certain depths (the “deep rights”). Cubic then conveyed to Tauren an overriding royalty interest in Cubic’s interest in the deep rights. Tauren simultaneously made a cash payment to Wells Fargo, assigned it ten percent net profits interest in the “shallow rights,” and assigned it the overriding royalty interest in the deep rights it received from Cubic. In exchange, Wells Fargo cancelled the Tauren mortgage.
In 2010, Gloria’s Ranch sent written demand to Tauren, Cubic, EXCO, and Wells Fargo requesting a recordable act evidencing the expiration of the lease. When the recipients failed to reply, Gloria’s Ranch filed suit against the four parties for failure to furnish a recordable act evidencing expiration and release of the lease, claiming that the lease expired for not producing in paying quantities and seeking damages.
Following a bench trial, the district court held the three litigating defendants – Tauren, Cubic, and Wells Fargo – solidarily liable, meaning the plaintiff could obtain the entirety of the damages owed to it from any one of the defendants, finding that the lease expired due to lack of production in paying quantities and that the defendants failed to furnish a recordable act evidencing the release. The Second Circuit Court of Appeal affirmed.
On writ application to the Louisiana Supreme Court, Wells Fargo argued that it should not be held solidarily liable with the other defendants because, as a mortgagee/creditor, it is not responsible for the obligations of a mineral lessee, the owner of the mineral right. Gloria’s Ranch, however, argued that, because Wells Fargo was an assignee of the lease, had a “bundle of rights” by virtue of the credit agreement and mortgage giving it control over operations, had an overriding royalty interest, and had a net profits interest, that it became liable for breach of the mineral lease obligations. Thus, Gloria’s Ranch argued that Wells Fargo was solidarily liable with the other defendants.
Both the Second Circuit and the Supreme Court rejected the argument the lease assignment transferred ownership. The Supreme Court held that Wells Fargo could not be considered an “owner” of the lease by virtue of the “assignment” contained in the mortgage, as it was not a true “assignment,” which must assign the assignor’s entire interest in the property. Because the mortgage did not transfer Cubic’s working interest in the land to Wells Fargo, no assignment occurred.
The Second Circuit, on the other hand, accepted the theory, finding that Wells Fargo’s “bundle of rights” over Cubic’s oil and gas operations – such as the credit agreement’s language providing Wells Fargo the right to approve the location and depth of the wells – rose to the level of ownership and, thus, the Second Circuit held Wells Fargo solidarily liable.
But the Supreme Court expressly disagreed with the Second Circuit as to the “control theory.” The Supreme Court found that Wells Fargo did not become an “owner” by virtue of the “control” exercised via the “bundle of rights.” Noting that the Louisiana Mineral Code specifically applies to mineral law and is supplementary to the Louisiana Civil Code, the Supreme Court held that the Louisiana Mineral Code governs the creation of ownership and transfer of mineral rights, not the Civil Code. The Court noted that the Louisiana Mineral Code does not address or sanction ownership via the “control of rights” theory, citing to articles 127 and 128 of the Mineral Code on assignment and sublease as support. Moreover, the Court noted that the Louisiana Mineral Code distinguishes ownership from security rights in articles 203 and 204. Based on the provisions of the Louisiana Mineral Code, which specifically provide for security instruments, the Court found that the credit agreement and mortgage did not convey ownership in the mineral lease simply because Wells Fargo asserted some control over the collateral described in the security instruments.
Continuing, the Court noted that none of the provisions of the mortgage or credit agreement conveyed to Wells Fargo the right to explore for and produce minerals on the property – the primary right granted in a mineral lease and the “stamp of ownership.” By contrast, the Court opined that the rights that Wells Fargo enjoyed were broadly security interests and derivative rights related to safeguarding of the collateral – the mineral lease.
Lastly, the Court found no merit in the argument that Wells Fargo’s overriding royalty interest and net profits interest from Tauren’s interest in the lease conveyed ownership. Calling the rights “merely passive, derivative rights” given in exchange for cancellation for Tauren’s mortgage, the Court opined that these rights also did not convey any right of ownership typical of a mineral owner set forth in Louisiana Mineral Code article 81, namely the right to conduct operations to explore for and/or produce minerals.
Finding that the lower courts improperly held Wells Fargo liable as an “owner” under Louisiana Mineral Code article 207 and “lessee” under Mineral Code article 140, the Louisiana Supreme Court reversed the judgment as to Wells Fargo.
The Bureau of Safety and Environmental Enforcement (BSEE) recently announced proposed revisions to its Oil and Gas and Sulfur Operations in the Outer Continental Shelf – Blowout Preventer Systems and Well Control Rule. The proposed revisions will amend regulations concerning well design, well control, casing, cementing, real-time monitoring, and subsea containment in the post-Macondo world. The proposed Rule addresses some of the industry’s comments that did not make it into the Rule when it was amended in 2016. The deadline for interested parties to comment on the proposed Rule is July 10, 2018.
Some of the key changes include:
1. Clarifying rig movement reporting requirements;
2. Removing smaller lift boats from the types of vessels requiring well shut-in when they approach within 500 feet;
3. Revising the control station and pod testing schedules; and
4. Removing many of the prescriptive real-time monitoring requirements to move towards a more performance-based approach.
You can access the proposed Rule from the Federal Register here.
A peer-reviewed study from Penn State University’s Earth and Environmental Systems Institute has found that the heavy drilling in the Marcellus Shale in Bradford County, Pennsylvania has not negatively impacted groundwater. Bradford County has 1,400 new gas wells. The study analyzed groundwater samples collected near 1,385 of those wells and compared them to samples collected by the Pennsylvania Department of Environmental Protection before the Marcellus development in the 1990s.
The data led the researchers to the overall conclusion that the groundwater had either improved or experienced no change. They did find, however, slightly elevated methane levels in some of the samples – near seven out of the 1,385 wells tested. The majority of the elevated methane samples were near mapped faults and anticlines (ridge-shaped folds of stratified rock in which the strata slope downward from the crest). According to the researchers, this indicates natural methane migration, as opposed to methane contamination from biogenic or thermogenic sources.
The report credits any improvement in groundwater to the Clean Air Act, decreases in coal mining and steel manufacturing in the region, and the conversion of power plants from coal to natural gas.
The Louisiana Court of Appeal for the Third Circuit, in Rainbow Gun Club, Inc., et al. v. Denbury Resources, Inc., et al., recently affirmed a trial court ruling that imposed liability on SKH Energy Partnership, LP (SKH), a former lessee of mineral interests, for a one-fourth share of more than $10 million in damages. In this case, more than 170 mineral lessors, as well as royalty owners, sued SKH, as well as Denbury Resources, Inc., Denbury Onshore, LLC, and Specter Exploration, Inc., for damages arising from the Denbury defendants’ imprudent operations in the drilling of a well. SKH had assigned its interest in the mineral leases and, in 2003, Denbury Resources, Inc., as the operator, spud a well that produced dry gas for a few years until being plugged and abandoned in 2008. Plaintiffs alleged that, during the drilling of the well, drill pipe had become stuck in the original hole. As a result, plaintiffs claimed that “extraneous water invasion” resulted in a total loss of the gas reservoir and asserted damages based on negligence and breach of obligations under the various mineral leases.
Denbury Resources, Inc., Denbury Onshore, LLC, and Specter Exploration, Inc., settled prior to trial, and several other defendants were dismissed on summary judgment, leaving only SKH to proceed to trial. After trial, the court awarded more than $2.5 million in damages against SKH, holding it responsible under the mineral leases even though it had assigned its interests. Both the trial and appellate courts noted that Section 31:129 of the Louisiana Revised Statutes does not relieve an assignor of its obligations under a mineral lease unless the lessor expressly discharges him in writing. Therefore, as no evidence established the existence of such a discharge, the appellate court affirmed the decision holding SKH solidarily liable for the breach of the obligation to act as a prudent operator.
The appellate court also addressed an argument by SKH that it should not be held liable for a one-fourth share of damages because of the other defendants’ settlements. Under this argument, SKH contended that, because the other three defendants held a 100 percent interest in the leases at the time of the imprudent operations and SKH did not commit any acts of negligence, SKH could not be held liable to the plaintiffs for any damages. Nevertheless, in reviewing this argument, the appellate court relied on Louisiana Civil Code provisions holding that the payment of a debt by one obligor benefits the other obligors only in the amount of the paying obligor’s portion. So, as only three of the four obligors in this instance had settled, the court held SKH to be responsible for a one-fourth share of the obligation.
This decision highlights the potential for lessors to argue continued liability of a mineral lessee under the Louisiana Mineral Code after assigning a mineral lease where the lessor does not expressly discharge such lessee from future obligations and liabilities. If the lessor does not provide such a discharge in writing, the lessor could attempt to argue that a prior lessee who assigns or subleases a mineral interest is liable for the actions and breaches of its assignee or sublessee.
A major obstacle facing oil and gas companies is locating, recruiting, and retaining global talent in light of the heightened attention and scrutiny on United States immigration practices. International companies must enhance their recruitment strategies and begin working on the sponsorship process for foreign nationals as far in advance as possible to set realistic timeframes for onboarding. Organizations must take into account the current trend of heighted enforcement activities, complex immigration regulations, cumbersome immigration practices, and the potential for administrative delays in visa issuance.
Today, even with major companies engaging in a lower level of recruitment than in years past, energy companies may find it difficult to hire a sufficient number of workers to fill a wide variety of positions ranging from highly skilled labor to high level managers and executives. Because of these issues, a need exists for employers to engage in strategic planning and creative hiring in order to ensure their labor needs are met. Addressing critical labor shortages within the oil and gas industry is vital to shape an effective recruitment and retention strategy for your organization.
Consider Alternate Visa Options
Most global organizations are familiar with the H-1B visa, the most commonly used visa option for professional workers. Unfortunately, due to the high demand for H-1B visas and the annual numerical limitation, it has become increasingly difficult for companies to meet their hiring needs simply through use of this particular visa option.
The E visa often allows companies to manage global mobility and meet hiring needs. The E-1 and E-2 categories are comprised of treaty traders and treaty investors entitled to be in the United States under a bilateral treaty of commerce and navigation between the United States and the country of which the investor/trader is a citizen or national. In essence, these visa options allow for foreign organizations that maintain subsidiaries in the United States, of which the foreign organization owns more than 50 percent, to sponsor essential workers, specialized skills workers, and professional employees in the United States.
The L-1 visa is another viable option that allows a foreign business to transfer a manager, executive or worker with specialized knowledge to a related entity based in the United States. There must be a qualifying corporate relationship between the United States and foreign entity, and the worker must have been employed abroad with the foreign entity for at least one year within the last three years prior to transferring to the United States. More companies have started to use the L-1 visa category as an alternative means of employing foreign workers in the United States when the annual H-1B visa cap is exhausted; however, United States Citizenship and Immigration Services has increasingly narrowed its interpretation and application of the L-1 regulations to deny approvable L-1 petitions. Employers wanting to use this visa option should work carefully to craft solid visa petitions to ensure global talent transfer.
Finally, the B-1 in lieu of H-1B visa is an often overlooked option for international talent transfers to the United States on a short-term basis. The B-1 visa category traditionally permits foreign individuals to enter the United States for temporary, business-related activities. B-1 business visitors may not engage in productive work while in the United States. A hybrid visa called the “B-1 in lieu of H-1B” recognizes that in some situations, an individual who would otherwise qualify for an H-1B may more appropriately be classified as a B-1 visa applicant when the applicant is coming to the United States temporarily to perform professional duties related to their overseas employment, will not enter the United States labor market, and will remain on their overseas payroll. This visa option, although highly scrutinized at the time visa applications are made overseas, is an option to consider for employers who require the short-term transfer of foreign employees to the United States.
For oil and gas industry companies, the next few years will require innovative approaches to solve immigration issues and ensure that hiring needs can be met through foreign talent acquisition. There is no one-size-fits-all approach, and employers must be proactive in beginning the immigration sponsorship process early, anticipating the various challenges and delays in visa processing, and developing internal plans and programs necessary to recruit and retain foreign talent.