Like most subjects, understanding oil and gas law is often a matter of knowing the terminology – WI, RI, ORRI, NPRI. These terms are often used in a confusing way and the definitions sometimes overlap. So I’m going to try to clear things up.
It all starts with the mineral estate. In Texas, the mineral estate can be separated (“severed”) from the surface estate. This can be done either by a conveyance or a reservation. I grant Blackacre to John Doe, reserving the mineral estate; or I convey the mineral estate in Blackacre to John Doe. The mineral estate is considered an ownership interest in land, just like the surface estate. It carries with it certain rights – the right to explore for and extract the minerals under the land. To make that right effective, the owner of the mineral estate must have the right to use the surface estate – to go on the land and drill wells. So the mineral estate is called the “dominant estate,” because the surface estate is subject to the rights of the owner of the mineral estate to use the land to extract minerals.
The mineral owner may grant an oil and gas lease to an exploration company to drill wells on the land. In Texas, an oil and gas lease is a conveyance to the lessee of the mineral estate for the term of the lease, reserving a royalty interest. An oil and gas lease severs the mineral estate into two interests – the lessee’s interest, often called the “working interest,” and the reserved royalty interest. When the lease expires, those two estates merge back together into the mineral estate.
Tiffany Dowell, author of the Texas Agriculture Law Blog, has a great post providing resources for landowners faced with a pipeline wanting to cross their land. You can view it here. She also has a good checklist for landowners negotiating pipeline easements, which you can download here. And you can listen to her interview with eminent domain lawyer Zach Brady here.
Last month the Environmental Defense Fund released an analysis of NOAA satellite data estimating volumes of gas flared in the Permian Basin in 2017. Its findings: operators report half of the amount of gas actually flared.
104 Bcf of gas is enough to serve all needs of Texas’ seven largest cities – $322 million worth of gas. The State also does not collect severance tax on that gas.
Operators must obtain permits to flare gas and report volumes flared. The RRC has not denied any permits. Between 2016 and May 2018, the RRC issued more than 6,300 flaring permits in the Permian. Between 2008 and 2010, the RRC issued fewer than 600 flaring permits for all of the state.
EDF’s analysis also compared the top 15 oil producers in the Permian (click on image to enlarge):
Last October S&P Global Market Intelligence issued an analysis of flaring in the Permian Basin and the Eagle Ford. It also relied on satellite data and a NOAA algorithm that estimates flared volumes. Its analysis concluded that in 2017 Texas operators flared 163 Bcf of gas, about 2.6% of the state’s natural gas production. NOAA data indicates that Operators may have flared nearly 1 Tcf of gas from 2012 to 2017. The analysis also remarked on the difference between reported volumes of flared gas in Texas – 1.6% of production in 2017 – and NOAA estimates of 2.6%. (S&P Global’s report online has a cool graphic showing rates of flaring over time on a map of Texas.)
In contrast, S&P Global found closer agreement between NOAA and state data in North Dakota, where the Bakken production occurs – but still under-reporting of flared volumes. North Dakota regulators have sought to reduce flaring and fine violators, planning to require producers who exceed allowed flaring levels of 15% of production to shut in their wells until pipeline infrastructure can be built to market the gas.
EDF’s report also analyzed flared gas on state-owned University Lands, more than 2 million acres in the Permian. University Lands collects royalties on flared gas. EDF concluded that UL has a lower rate of flaring on its wells – 2.75% – than the overall Permian average of 4.4%. A higher degree of lease management and the requirement to pay royalties on the gas flared likely correlated to better performance.
Both EDF and S&P Global concluded that state regulators should incorporate NOAA satellite data into their regulatory oversight to identify violators. EDF also recommended that operators be required to pay state severance tax on flared gas. EDF’s other recommendations included requiring best flaring technologies, eliminating the duration of flaring permits, and encouraging technologies that capture the gas onsite.
Yesterday the three commissioners of the Texas Railroad Commissioners, Ryan Sitton, Christi Craddick and Wayne Christian, appeared before the Texas Senate Natural Resources and Economic Development Committee and were questioned about these reports that methane emissions were “much higher than the EPA predicted in West Texas.” All said they did not believe those reports. Sitton said he thought the volumes reported to the RRC are “very close to accurate.” Craddick said she was “not sure if [the reports] are accurate or not.” Collin Leyden of EDF commented that the commissioners “seem to dismiss the reports on the grounds they believe that the data they have is correct. I did not hear any sort of technical analysis of the satellite data indicating they had found any sort of flaws or errors.”
The cover story in The Economist this week is titled “Crude awakening – The truth about Big Oil and climate change.” It comes in the wake of the introduction by a group of new Democratic Congress members of a proposed “Green New Deal” to tackle climate change.
When I began my career some forty years ago the effect of carbon emissions on the earth’s climate was not a matter of concern. The focus was on cleaning up our water and air – under the Clean Water Act and the Clean Air Act. And those acts have had a big impact on our environment. Although burning fossil fuels contributed to air pollution and pollution from fossil fuels has been greatly reduced, the emissions regulated and reduced did not include carbon dioxide, which was not considered harmful to the environment. Remember catalytic converters? They have greatly reduced emissions of harmful chemicals, but not CO2.
The world has now come to the realization that climate change is real. A poll by Yale University late last year found that 73% of Americans agree. Extreme climate events in recent years have contributed to that change of opinion.
Yet the world’s dependence on fossil fuels is not receding. World demand for oil continues to grow by about 1-2% a year. CO2 emissions in the US, the second-largest polluter on the planet, are now rising again. ExxonMobil says that global oil and gas demand will increase by 13% by 2030. It intends to spend more than $200 billion over the next seven years to develop its reserves.
My career has been built on representing mineral owners in transactions designed to extract oil and gas from the earth. The success of the US in developing its oil and gas resources is, I believe, in large part due to the fact that most mineral rights in the US are in private hands and the extraction industry is led by private enterprise rather than government-owned industry.
Yet the fact that the oil and gas industry in the U.S. is in private hands also hinders our ability to deal with climate change. Investors want returns. The International Panel on Climate Change, an intergovernmental climate-science body, says that oil and gas production must fall by about 20% by 2030 and about 55% by 2050 to limit the earth’s temperature rise to less than 1.5 degrees centigrade above its pre-industrial level. According to The Economist, “It would be rash to rely on brilliant innovations to save the day. Global investment in renewables, at $300bn a year, is dwarfed by what is being committed to fossil fuels. Even in the car industry, where scores of electric models are being launched, around 85% of vehicles are still expected to use internal-combustion engines in 2030.”
The Economist advocates a carbon tax:
The key will be to show centrist voters that cutting emissions is practical and will not leave them much worse off. Although the Democrats’ emerging Green New Deal raises awareness, it almost certainly fails this test as it is based on a massive expansion of government spending and central planning …. The best policy, in America and beyond, is to tax carbon emissions, which ExxonMobil backs. …. Work will be needed on designing policies that can command popular support by giving the cash raised back to the public in the form of offsetting tax cuts. The fossil-fuel industry would get smaller, government would not get bigger and businesses would be free to adapt as they see fit–including, even, ExxonMobil.
Weaning ourselves from fossil fuels will not be easy. Carbon is the building-block of the world’s industry, our society, our culture. It makes possible the freedoms and comforts we enjoy in transportation, communication, technology, leisure, entertainment, food production, medicine, and many other modern advances. It permeates the modern world, and our appetite for it is insatiable. But if we are smart, I believe we can limit CO2 emissions and still enjoy the benefits of carbon.
Solving global warming will require a renewal of faith that government can solve problems. The deadlock in our federal government does not bode well for that prospect. We would do well to remember that our federal government had a big hand in cleaning up our water and air. Climate change is a world problem and solving it will require cooperation among the governments of the world. The US has historically been a leader in climate science and research. It should reclaim that leadership.
Chevron, which owns substantial fee minerals in the Permian, saw its profits jump 19 percent in the fourth quarter, increasing its oil production 71 percent in the Permian to 310,000 bbls/day. Chevron’s completions in 2018:
In its DR State Wise Unit in Culberson County, Chevron has completed or is drilling seven two-mile laterals.
Tiffany Dowell, author of the Texas Agriculture Law Blog at Texas A&M, gave me permission to re-publish her excellent article on what landowners should consider when a pipeline company asks permission to survey. Here is her article. The only thing I would add is that the landowner should find out the tentative proposed route, and if it is not acceptable, try to negotiate an alternate route before the surveyors begin their work.
Thanks to Tiffany. You might want to subscribe to her blog.
Question: If a company with eminent domain power has contacted me about obtaining an easement across my property and now wants access to survey, can I keep them off of my land?
In Texas, courts have held that by granting condemning entities the right to condemn land, this includes the right to enter onto the property to conduct surveys to select lands to be acquired. Of course, this means that surveys may be conducted prior to the property actually being condemned. “Ancillary to the power of eminent domain is the authority to enter upon the land to make a preliminary survey.” I.P. Farms v. Exxon Pipeline Co., 646 S.W.2d 544 (Tex. Ct. App. – Houston (1st Dist.) 1982). Courts have issued injunctions against landowners attempting to interfere with this right.
There is a line of court cases that limit this right to visual inspections and lineal surveys only, refusing to allow more invasive procedures like core drilling or subsurface soil testing. See Coastal Marine Serv. v. City of Port Neches, 11 S.W.3d 509 (Tex. Ct. App. – Beaumont 2000).
Additionally, while the company does have the right to enter and survey, landowners may seek a “Right of Entry Permit,” which is essentially a contractual agreement with the company, limiting their rights and imposing other protections for the landowner while the company is on the property.
Common terms in a Right of Entry Permit include:
Requiring a set amount of notice prior to entering the property pursuant to the Permit,
Requiring access at a mutually agreeable time for company and landowner,
Limiting the right of entry to only the property that is to be affected by the project,
Limits the allowed entry to the purpose of conducting surveys,
Prohibits cutting, removing, or relocating any fences,
Requirement to restore land to original condition prior to survey,
Requires all equipment and tools to be removed by a certain date,
Require the company to promptly repair or remediate any damage caused while on the property,
Provide an indemnification provision in favor of the landowner,
Require the landowner be provided all non-privileged information gathered such as surveys, reports, maps, and photographs from the company at no charge, and
I always advise landowners facing potential condemnation to consult with an attorney to ensure that their rights are protected and to ensure they get the best deal–both money and easement terms–possible.
Oil has been a commodity different from all others in world politics since it became the principal source of energy in the early 20th century. And it will remain so as long as the world is dependent on hydrocarbons for its energy needs. Toprani’s article reminds us how oil supply, demand and price affect our relations with other nations as well as our environment and our personal lives.
Morningstar has published a report analyzing oil pipeline and refining capacities along the Texas Gulf Coast – “Pipeline Plans Suggest Tsunami of Crude Exports – Midstream companies looking to double Gulf Coast shipments.” pipeline-plans-suggest-tsunami-of-crude-exports-FINAL If all planned pipelines are built and run to capacity, new lines “would carry as much as 7.7 mmb/d of new crude to the Gulf Coast, the majority of which would be light shale crude looking for a home in the export market.”
The result: a fourfold increase in crude exports to more than 8 mmb/d after 2021. Morningstar concludes:
Fortunately, current production forecasts don’t match the volume of pipeline projects, and crude growth over the next three years is likely to be closer to 3 mmb/d. The mismatch suggests an infrastructure overbuild is underway in the short term, and we expect consolidation of many of these projects before they’re built. Yet the history of shale expansion has taught us that the most optimistic forecasts frequently appear in the rearview mirror.
Last April the Texas Supreme Court issued its opinion in Endeavor Energy Resources, L.P. et al. v. Discovery Operating, Inc., et al., No. 16-0155, construing a retained acreage clause in an oil and gas lease. I commented that the opinion commented in dicta that, even if a lease allows the lessee to retain “tolerance acreage” as allowed by applicable field rules, the operator must “verify that additional acreage is actually necessary or required to achieve the maximum allowable,” quoting from a 2015 CLE paper by Phillip C. Mani. On rehearing, the Court revised the language I quoted, so that it now reads as follows (click to enlarge):
So the court watered down its language somewhat. The issue nevertheless remains an open one.