National Association of Division Order Analysts January / February / March 2020
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NADOA N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s G R O W T H T H R O U G H E D U C T I O N
Volume MMXX • No 1
www.NADOA.org
Contents Feature
NADOA 2019 Officers President Luanne Johnson, CDOA
Articles
1st Vice President Lewis Box, CDOA 2nd Vice Presiden t Michele Lawton Treasurer Jennifer Kegans
In This In the Pipeline Kinder Morgan Pipeline............................................... 7 Pennsylvania Third Circuit Court of Appeals.............. 7 Legislative Update – Colorado SB19-181. ..................... 8 Boulder County moratorium extended......................... 11 Legal Update Texas Supreme Court-Post Production Costs.............. 12 Wyoming – New Application for Permit to Drill Rule. ................... 13 Unclaimed Property - Overlooked Aspects.................... 14 President’s Corner. .................................................1 Decimal Points.......................................................2 Division Order $al.................................................2 Membership Recognition Award Nominations........3 Certification...........................................................4 New Members.......................................................15 Counterpart Connection.......................................16 Interaction – Spring NAPE...................................23 2020 Institute.......................................................24 2020 NADOA Board/Committee Chairs...............31 Calendar of Events. ..............................................32 Issue
Corresponding Secretary Michelle Harris, CDOA Recording Secretary Vicki Danielson, CDOA
The NADOA News Magazine is a quarterly publication of the National Association of Division
Order Analysts PO Box 44009 Denver CO 80201
Subscription: By membership to NADOA, at $75.00 per year. News Magazine Editor Rona L. Erickson, CDOA Kaiser-Francis Oil Company Ronae@KFOC.net 918.491.4319 Associate Editors April Luedecke, CDOA aprilluedecke@yahoo.com Cheryl Hampton champton@limerockresources.com
Graphic Design Paul Beach
On the Cover: Downtown Shreveport Skyline and Texas Street Bridge
All rights reserved. No part of this publication may be reproduced/copied without written permission. Editorial disclaimer: The contents of this newsletter are intended for member use only and any other use without permission from the NADOA Board of Directors is strictly prohibited.Articles published herein represent the view of the authors; publication neither implies approval of the opinions expressed nor accuracy of the facts stated and NADOA accepts no liability for misprints.
President’s
Corner
Luanne M Johnson, CDOA, CPLTA 2020 NADOA President
Wow! It is hard to believe another decade is upon us. This last decade had many changes in our industry and we can only image what the next decade will bring.
We’ve had our first board meeting for the year in January. During this meeting Jason Lucas, our Past President, informed us that he would not be able to continue to work on the NADOA board this year. So, as a board we voted to bring in Liz Fajen to sit in his spot as board advisor. We think Liz is someone we can all learn from and who will help us grow as a board. We hate to see Jason go, but we are excited to see what Liz will bring to the board. We hope that you will be able to attend Institute September 23 – 25 in Shreveport, Louisiana! We feel this will be affordable and educational for everyone. Our Institute committee started working last year on getting some great speakers for our Institute and we look forward to getting that schedule out to you soon. The committee members also met recently and have begun planning. This Institute is one you will not want to miss with the great education and the networking events we are planning. Our hotel rate is just $139 per night and we will be running an early bird special for registration again this year; if you register before May 31 the registration fee will be just $525 for members. After that date the price will go up to $600. So, you will want to register soon!
I look forward to being your President this year!
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NADOA
Decimal Points
If you have a suggestion for someone to act as a Regional Reporter to help NADOA keep abreast of current legislation and legal issues for your region, please submit the name or the name of the firm.
April Luedecke, CDOA Associate Editor Rona Erickson, CDOA Editor 2020 NADOA Article Deadlines Cheryl Hampton Associate Editor
Regional Reporters
Second Quarter. .........................May 15 Special Institute Edition. .............July 10 Third Quarter. .......................August 21 Fourth Quarter................. November 13
ABADOA
Steptoe & Johnson PLLC dan.swiger@steptoe-johnson.com Donna King, CDOA donna.king@flywheelenergy.com
CAPDOA
DADOA
OPEN
DALWORTH Lewis Box, CDOA
lbox@comstockresources.com
Advertise With NADOA Need a way to get your name out to the Division Order departments in our industry? Look no further than the 2020 NADOA Newsmagazine! We offer great advertising rates in our newsmagazine that goes out 5 times a year. Even if you missed getting in this issue, you can still advertise in the following issues. Our online newsmagazine goes to all members of NADOA, which includes analysts, supervisors and managers from companies all across the United States. Don’t miss out on a great opportunity to get your company name front and center in the industry! Contact Cheryl Hampton at champton@limerockresources.com for more information.
HADOA
OPEN
MAADOA
Angie Coady, CDOA
acoady@vessoil.com
PBADOA
Nicki Scoggins
nicole.scoggins@pxd.com
SADOA
Jane Green, CDOA
jmgreen@cimarex.com
Arkansas
Jackie Clotfelter, CDOA jclotfelter@hannaoilandgas.com
North Dakota Kimberly A. Backman
kbackman@crowleyfleck.com
New Mexico
Zachary P. Oliva
zoliva@kolawllp.com
Louisiana
OPEN
Division Order $ al
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It’s time to start nominating colleagues and those who have influenced the oil and gas industry for an award that will be presented at the 2020 NADOA Institute in Shreveport, Louisiana. Please fill out the following form and return it to Michelle.Harris@chk.com by June 1, 2020. 2020 Nomination Form for NADOA Membership Recognition Awards _____ Interaction Award: Presented to the NADOA member or affiliated organization who has demonstrated leadership in the promotion of the profession to the industry and the community. _____ Education Award: Presented to the NADOA member who has achieved a level of unusual distinction in NADOA’s education activities, as demonstrated by their contribution of time and service to the betterment of Division Order professionals. _____ Ellis Rudy Memorial Lifetime Achievement Award: Presented to the NADOA member who has exemplified the Division Order profession through demonstrated leadership contributions to the industry and the profession during his/her career. _____ Russell Schetroma Memorial Speaker’s Award: Presented to an individual who has contributed to NADOA’s growth and development by speaking, educating and sharing knowledge on numerous occasions to the NADOA Membership, the Division Order profession, and/or the industry during the past year. _____ Corporate Award: Presented to the group/company that has contributed the most to NADOA’s growth and development, the Division Order profession, and/or the industry during the past year. Please detail the nominee’s involvement in NADOA, the services they have performed and/or contributions they have made (You may attach a separate sheet if necessary). I would like to nominate ___________________________________________ for the award(s) marked below:
Nominator: ____________________________________________________ (Please Print)
____________________________________________________ (Signature) ____________________________________________________ (Daytime Phone)
Send nominations to: Member Recognition Awards Committee, c/o Michelle Harris (Michelle.Harris@chk.com)
Nominations will be accepted through June 1, 2020
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2020 CERTIFICATION COMMITTEE
By: Eli Murray, CDOA NADOA Certification Chairman The Certification Committee held its first meeting of 2020, and we are excited about this coming year. The 2020 Board has approved the following members to serve you in 2020:
Chairman
Eli Murray, CDOA Sherry Werth, CDOA Darryn McGee, CDOA Yolanda “Yoli” Bazan, CDOA
emurray@dmlp.net Srw6886@rgmail.com
Dorchester Minerals, LP
Recertification Credits
Independent
Recertification Applications Applications & Publications
dmcgee@protege-energy.com
Protege Energy LLC
ybazan@hilcorp.com
Hilcorp
Review Manual/Forms
Lewis Box, CDOA
LBox@comstockresources.com bonniedidrickson@gmail.com mmckee@rangeresources.com
Comstock Resources
Testing
Bonnie Didrickson, CDOA Megan McKee, CDOA
Independent
Policies
Range Resources
As you are aware, the Certification Committee began upgrading the Self-Service system last year to improve the functionality of the site. We are working through the upgrade, and hope to have it completed by the end of this year. These changes should not affect the CDOA point submissions, but should you discover any bugs, please contact me immediately: emurray@dmlp.net. As a reminder, Recertification Credits must be added within 60 days of event attendance. Failure to timely enter the credits may result in forfeiture of those points. Employment Points may be requested during the 90 days following the anniversary of the CDOA’s individual certification year. If you have a January 1 effective date, you have from January 1 until March 31 to request employment points. If you have a July 1 effective date, you have from July 1 until September 30 to request employment points. Please do not request employment points in July if you have a January effective date and vice versa. Lastly, the Committee is revising the Certification Review Manual and CDOA Exam. These improvements include 1) removing California from the Manual and Exam, 2) augmenting Section II of the exam to comprehensively test Division Order calculations, and 3) removing/revising confusing questions. The goal is to present these proposed changes to the Board by the end of 2020 for implementation in 2021. Should you have any questions or concerns regarding such changes, please do not hesitate to contact me with your thoughts.
Thank you for the opportunity to serve you as the 2020 Certification Committee Chairman.
Congratulations to the following new CDOAS!! David Carrico Angela S. Dempsey Maryann Maimo Stanley Vargas
EX T EX Division Order Services, LLC 4865Ward Road, Suite 200 Wheat Ridge, CO 80033 303-463-8799 303-463-8808 extexllc.com Fax Division Orders, Revenue Distribution, 1099’s Dennis Pade Boyd Sanstra Chris Pennels President Vice President Vice President
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CANDIDATES FOR CERTIFICATION Publication of the following “Certified Division Order Analyst” applicant(s) fulfills the requirement as stated in the Voluntary Certification Policy, III C.2 which states: “…applicant’s name will be published in the NADOA Newsletter or other official publication of NADOA.” This allows the NADOA membership an opportunity to present objections to the certification of the applicant. Any objection to the certification of the applicant must be in writing and signed by a NADOA member or non-member who qualifies his knowledge and objection of the applicant. All such letters will be considered confidential and must be received by the NADOA Certification Committee at the following address within thirty (30) days following the last day of the month in which the Newsletter or other official publication of NADOA was published: NADOA Certification Committee P O Box 44009 Denver CO 80201 If the objection warrants denial of the certification or temporary withholding of certification, the applicant will be notified by Certified Mail. CANDIDATES FOR RECERTIFICATION
Dawn Podrazik – Midland, TX Douglas Potter – Highlands Ranch, CO Leigh Ann Price – Edmond, OK
Yolanda (Yoli) Bazan – Houston, TX Lewis Box – Frisco, TX Jacqueline (Jackie) Clotfelter – Fort Smith, AR
Scott Strahan – Houston, TX Melanie White – Houston, TX
Melanie Finnegan – Frisco, TX Erica Honeycutt – Denver, CO Anita Hulsey – Oklahoma City, OK
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In the Pipeline
Kinder Morgan Pipeline Moves Forward
Houston pipeline operator Kinder Morgan recently prevailed in a legal battle against opponents of the Permian Highway Pipeline. U.S. District Court Judge Robert Pitman, Western District of Texas, Austin Division, struck down a request by opponents of the $2 billion pipeline project on February 14, 2020. The Plaintiffs sought a temporary restraining order halting construction of the pipeline through Texas Hill Country and over the Edwards Aquifer, an underground reservoir home to several threatened and endangered species of salamander, fish and insects. In an eight page order, Pitman wrote “Plaintiffs have failed to show that the potential harm has risen to the level of irreparable harm that would justify granting the extraordinary relief of a temporary restraining order.” Kinder Morgan still faces other legal challenges. The temporary restraining order was only one facet of an endangered species lawsuit filed February 5 against the company by the cities of Austin and San Marcos, Hays and Travis counties, the Barton Springs Edwards Aquifer Conservation District and four landowners. The company, its subcontractors and the project face a separate
federal lawsuit filed by five Hill Country landowners. Kinder Morgan released a statement that the company and the Permian Highway Pipeline project are in full compliance with the Endangered Species Act. “Permian Highway Pipeline’s environmental assessments, among other things, comprehensively considered those endangered species that could potentially be affected by the project, and our construction plans have been designed to minimize impacts to those species,” the company said. Construction is ongoing on the 42 inch Permian Highway Pipeline, which will move gas from the West Texas shale play and travel approximately 400 miles across the state through the Texas Hill Country to the Katy Hub near Houston. After settling a lawsuit with the City of Kyle last year, the company is only allowed to run natural gas through the pipeline. Kinder Morgan also noted that several long-term contracts with customers will require the pipeline to move the natural gas from West Texas to the Houston area.
Source: The Houston Chronicle (2/17/2020)
“Damaged Goods” Not Enough to Sway Third Circuit Court of Appeals (Pennsylvania)
These materials reflect only the personal views of the authors and are not individualized legal advice. It is understood that each case is fact-specific, and that the appropriate solution in any case will vary. Therefore, these materials may or may not be relevant to any particular situation. Thus, the authors and their law firm cannot be bound either philosophically or as representatives of their various present and future clients to the comments expressed in these materials. The presentation of these materials does not establish any form of attorney-client relationship with the authors or their law firm. While every attempt was made to insure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed.
gas pipeline decreased the value of the property crossed by the pipeline.
THE DETAILS: In early February, the Third Circuit Court of Appeals rejected the “damaged goods” approach to valuing prop- erty crossed by a pipeline. In UGI Sunbury LLC v. A Permanent Easement For 1.7575 Acres et al. , the appeals court vacated the trial court’s property valuation that was based on an expert’s opinion that the stigma of a natural
The expert largely based his opinion on anecdotes from his past employment in an appliance shop where he noticed customers valued undamaged property more than damaged property. Under his “damaged goods” theory,
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About the Authors:
the expert opined that property under which a pipeline crosses has a lower value because people perceive it as damaged. The panel held that the expert’s methodology was incapable of testing, had not been peer reviewed, was not generally accepted, and did not provide for a rate of error. While an expert’s opinion does not have to meet all, or even most, of those factors, the fact that this expert’s opinion met none left his opinion unreliable. The panel noted that parts of the expert’s opinion com- pared the value of properties impacted by oil spills or the radiation emitted from the Three-Mile Island nuclear disaster. Those properties were figurative oranges to the apples and thus incapable of assisting the trier of fact in concluding the impact to the value of property under which a natural gas pipeline crosses. Finally, the Third Circuit held that the district court must act as “gatekeeper” and ensure that expert opinions are based on reliable science.
Brian J. Pulito, MEMBER Brian Pulito focuses his practice in the areas of eminent domain proceedings, construction litigation, midstream litigation, oil, gas and mineral law litigation, and insurance litigation.
Phone: (814) 333-4905 Email: brian.pulito@steptoe-johnson.com
Jon C. Beckman MEMBER Jon Beckman focuses his practice in the area of energy and natural resources law, specifically assisting clients with energy and environmental litigation.
Phone: (814) 333-4913 Email: jon.beckman@steptoe-johnson.com
For questions about how this decision may affect your business, contact one of the authors below.
Legislative
Update
Colorado
COLORADO SB19-181 Protect Public Welfare Oil And Gas Operations Concerning additional public welfare protections regarding the conduct of oil and gas operations, and, in connection therewith, making an appropriation.
SESSION: 2019 Regular Session SUBJECT: Natural Resources & Environment
welfare, and the environment in the regulation of the oil and gas industry by modifying the oil and gas statutes and by clarifying, reinforcing, or establishing various aspects of local governments’ regulatory authority over the surface impacts of oil and gas development. Current law specifies that local governments have so- called “House Bill 1041” powers, which are a type of land use authority over oil and gas mineral extraction areas, only if the Colorado oil and gas conservation commission (commission) has identified a specific area for designation.
BILL SUMMARY Oil and gas operations - air quality regulation - local government authority - oil and gas conservation commission - composition - authority - financial assurance requirements - pooling - appropriation. The act prioritizes the protection of public safety, health,
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Sections 1 and 2 of the act repeal that limitation.
decisions taken to minimize adverse impacts and repeals the limitation of the term “minimize adverse impacts” to wildlife resources. The 9-member commission currently includes the executive directors of the departments of natural resources and public health and environment as ex officio members, 3 members who must have substantial experience in the oil and gas industry, and one member who must have training or experience in environmental or wildlife protection. Section 8 reduces the number of industry members to one and requires one member with training or substantial experience in wildlife protection; one member with training or substantial experience in environmental protection; one member with training or substantial experience in soil conservation or reclamation or technical expertise relevant to the issues considered by the commission; one member who is an active agricultural producer or a royalty owner; and one member with training or substantial experience in public health. This version of the commission is repealed on the earlier of July 1, 2020, or the date on which 3 specific rules promulgated by the commission have become effective. On that date, section 9, which creates a professional 5-member commission (along with the 2 ex officio executive directors), becomes effective. Section 10 requires the director of the commission to hire up to 2 deputy directors. Upon receipt of a request for a technical review, the director is required to appoint technical review board members. The Act currently specifies that the commission has exclusive authority relating to the conservation of oil or gas. Section 11 clarifies that nothing in the Act alters, impairs, or negates the authority of: • The air quality control commission to regulate the air pollution associated with oil and gas operations; • The water quality control commission to regulate the discharge of water pollutants from oil and gas operations; • The state board of health to regulate the disposal of naturally occurring radioactive materials and technologically enhanced naturally occurring radioactive materials from oil and gas operations;
Section 3 directs the air quality control commission to review its rules to consider whether to adopt more stringent rules and to adopt rules to minimize emissions of methane and other hydrocarbons, volatile organic compounds, and oxides of nitrogen. Section 4 clarifies that local governments have land use authority to regulate the siting of oil and gas locations to minimize adverse impacts to public safety, health, welfare, and the environment and to regulate land use and surface impacts, including the ability to inspect oil and gas facilities; impose fines for leaks, spills, and emissions; and impose fees on operators or owners to cover the reasonably foreseeable direct and indirect costs of permitting and regulation and the costs of any monitoring and inspection program necessary to address the impacts of development and enforce local governmental requirements. Section 4 also allows a local government or oil and gas operator to request the director of the commission to convene a technical review board to evaluate the effect of the local government’s preliminary or final determination on the operator’s application. The remaining substantive sections of the act amend the “Oil and Gas Conservation Act” (Act). The legislative declaration for the Act states that it is in the public interest to “foster” the development of oil and gas resources in a manner “consistent” with the protection of public health, safety, and welfare, including protection of the environment and wildlife resources; this has been construed to impose a balancing test between fostering oil and gas development and protecting public health, safety, and welfare. Section 6 states that the public interest is to “regulate” oil and gas development to “protect” those values. Currently, the Act defines “waste” to include a diminution in the quantity of oil or gas that ultimately may be produced. Section 7 excludes from that definition the nonproduction of oil or gas as necessary to protect public health, safety, welfare, the environment, or wildlife resources. Section 7 also repeals the requirement that the commission take into consideration cost-effectiveness and technical feasibility with regard to actions and Section 5 repeals an exemption for oil and gas production from counties’ authority to regulate noise.
• The solid and hazardous waste commission to regulate the disposal of hazardous waste and exploration and
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production waste from oil and gas operations; or
technical feasibility. Section 12 requires the commission to protect and minimize adverse impacts to public health, safety, and welfare, the environment, and wildlife resources and protect against adverse environmental impacts on any air, water, soil, or biological resource resulting from oil and gas operations. Section 12 also requires the commission to adopt rules that require alternate location analyses for oil and gas facilities that are proposed to be located near populated areas and that evaluate and address the cumulative impacts of oil and gas development. Finally, section 12 directs the commission to promulgate rules to: • Ensure proper wellbore integrity of all oil and gas production wells, including the use of nondestructive testing of weld joints and requiring certification of several categories of oil and gas workers; • Allow public disclosure of flowline information and to evaluate and determine when a deactivated flowline must be inspected before being reactivated; and • Evaluate and determine when inactive, temporarily abandoned, and shut-in wells must be inspected before being put into production or used for injection. Section 13 modifies the commission’s administrative procedures, including by taking into account determinations made by administrative law judges. Current law authorizes “forced” or “statutory” pooling, a process by which “any interested person”, typically an operator who has at least one lease or royalty interest, may apply to the commission for an order to pool oil and gas resources located within a particularly identified drilling unit. After giving notice to interested parties and holding a hearing, the commission can adopt a pooling order to require an owner of oil and gas resources within the drilling unit who has not consented to the application (nonconsenting owner) to allow the operator to produce the oil and gas within the drilling unit notwithstanding the owner’s lack of consent. Section 14 requires that the owners of more than 45% of the mineral interests to be pooled must have joined in the application for a pooling order and that the application include either: Proof that the applicant has already filed an application with the affected local government to approve the siting of the proposed oil and gas facilities and of the local
• A local government to regulate land use related to oil and gas operations, including specifically the siting of an oil and gas location. Currently, an operator first gets a permit from the commission to drill one or more wells within a drilling unit, which is located within a defined area, and then notifies the applicable local government of the proposed development and seeks any necessary local government approval. Section 12 requires operators to file, with the application for a permit to drill, either: Proof that the operator has already filed an application with the affected local government to approve the siting of the proposed oil and gas location and of the local government’s disposition of the application; or proof that the affected local government does not regulate the siting of oil and gas locations. Section 12 also specifies that, until the commission has promulgated rules regarding 3 specific topics and the rules have become effective, the director may delay the final determination regarding a permit if the director, following a public comment period, determines that the permit requires additional analysis to ensure the protection of public health, safety, and welfare or the environment or requires additional local government or other state agency consultation. Pursuant to commission rule, an operator may submit a statewide blanket financial assurance of $60,000 for fewer than 100 wells or $100,000 for 100 or more wells. Section 12 directs the commission to adopt rules that require financial assurance sufficient to provide adequate coverage for all applicable requirements of the Act. Current law allows the commission to set numerous fees used to administer the Act and sets a $200 or $100 cap on the fees. Section 12 eliminates the caps and requires the commission to set a permit application fee in an amount sufficient to recover the commission’s reasonably foreseeable direct and indirect costs in conducting the analysis necessary to assure that permitted operations will be conducted in compliance with all applicable requirements of the Act. Current law gives the commission the authority to regulate oil and gas operations so as to prevent and mitigate “significant” adverse environmental impacts to the extent necessary to protect public health, safety, and welfare, taking into consideration cost-effectiveness and
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government’s disposition of the application; or proof that the affected local government does not regulate the siting of oil and gas facilities. Section 14 also specifies that the operator cannot use the surface owned by a nonconsenting owner without permission from the nonconsenting owner. Current law also sets the royalty that a nonconsenting owner is entitled to receive at 12.5% of the full royalty rate until the consenting owners have been fully reimbursed (out of the remaining 87.5% of the nonconsenting owner’s royalty) for their costs. Section 14 raises a nonconsenting owner’s royalty rate during this pay-back period from 12.5% to 13% for gas and 16% for oil and makes corresponding reductions of the portions of the nonconsenting owner’s royalty from which the consenting owners’ costs are paid. Current law requires the commission to ensure that the 2-year average of the unobligated portion of the oil and gas conservation and environmental response fund does not exceed $6 million and that there is an adequate balance in the environmental response account in the fund to address environmental response needs. Section
15 directs the commission to ensure that the unobligated portion of the fund does not exceed 50% of total appropriations from the fund for the upcoming fiscal year and that there is an adequate balance in the account to support the operations of the commission and to address environmental response needs. Section 16 specifies that for permit-specific conditions for wildlife habitat protection, the commission is required to consult with and obtain consent from a surface owner only if the permit-specific conditions directly impact the affected surface owner’s property or use of that property. Section 17 amends preemption law by specifying that both state agencies and local governments have authority to regulate oil and gas operations and establishes that local government requirements may be more protective or stricter than state requirements.
Section 18 appropriates $851,010 to the department of natural resources to implement the act.
(Note: This summary applies to this bill as enacted.)
Temporary moratorium extended by Boulder County
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A temporary moratorium on the acceptance and processing of new oil and gas development applications and seismic testing in unincorporated Boulder County is in effect until March 28, 2020. The moratorium began in 2019 and has been extended as Boulder County Commissioners work on a “multi-pronged approach”, pledging to continue to protect public health, safety, and the environment from local oil & gas development.
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Legal
Update
These materials reflect only the personal views of the authors and are not individualized legal advice. It is understood that each case is fact-specific, and that the appropriate solution in any case will vary. Therefore, these materials may or may not be relevant to any particular situation. Thus, the authors and their law firm cannot be bound either philosophically or as representatives of their various present and future clients to the comments expressed in these materials. The presentation of these materials does not establish any form of attorney-client relationship with the authors or their law firm. While every attempt was made to insure that these materials are accurate, errors or omis- sions may be contained therein, for which any liability is disclaimed.
Texas
Texas Supreme Court Addresses the Deduction of Post-Production Costs
The Texas Supreme Court addressed the deduction of post-production costs in Burlington Res. Oil & Gas Co. LP v. Tex Crude Energy, LLC, 573 S.W.3d 198 (Tex. 2019). The Texas Supreme Court, reversing the Court of Appeals, explained that Burlington, the lessee and producer, could deduct post-production costs when calculating royalty payments on the amount realized when the royalty interest is to be delivered “into the pipeline, tank, or other receptacle to which any well or wells on such lands may be connected . . . .” In 2005, Burlington and Texas Crude entered into a Prospect Development Agreement and a Joint Operating Agreement (JOA), which both applied to leases in an Area of Mutual Interest (AMI) in parts of Live Oak, Karnes, and Bee Counties. Under those agreements, Texas Crude acquired an overriding royalty interest on the leases within the AMI, which interests it then assigned to its affiliate, Amber Harvest. After several years of accepting royalty payments that reflected a deduction for the royalty holder’s share of post-production costs, Texas Crude, on behalf of itself and Amber Harvest, alleged that the agreements did not allow for Burlington to deduct post- production costs. The trial court and Court of Appeals concluded that post-production costs could not be deducted. The Texas Supreme Court explained that royalty interests share in the production, free of the cost of production. However, the general rule in Texas is that royalty interests are “usually subject to post-production costs, including
taxes . . . and transportation costs.” Id. (quoting Chesapeake Exploration, L.L.C. v. Hyder, 483 S.W.3d 870, 872 (Tex. 2016)). This charge of post-production costs is tied to the fact that a product which has been subject to post-production processing is more valuable than a product at the well. The Texas Supreme Court noted that parties are free to change the general rule by drafting their agreements to define post-production costs and their applicability as they choose. In this case, the agreements’ language provided that the royalty interests would be delivered to the assignee “into the pipelines, tanks or other receptacles with which the wells may be connected . . . .” The agreements also provided that the value from which the royalty would be paid would be the amount realized from sale of production and any products thereof. Texas Crude argued that the parties contracted to negate the principle that royalty interests bear post-production costs because “by specifying that the royalty would be paid after sale of the product based on the “amount realized from such sale,” not based on the product’s value at the well,” meant that post-production costs would not be deducted. Burlington, 573 S.W.3d at 204. The Texas Supreme Court agreed that the valuation language supported the argument that post-production costs should not be deducted. However, the Texas Supreme Court explained that the method of valuation was only a component of the inquiry. The second inquiry is where the valuation takes place. The Texas Supreme Court interpreted the provision “into the pipelines, tanks, or other receptacles” as to
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where in the production process the valuation should occur. The Texas Supreme Court explained that when an agreement specifies “at the well” as the valuation point, then the royalty interest holder must share in the post-production costs, regardless of how the royalty is calculated or the stated valuation method. 573 S.W.3d at 205. The Texas Supreme Court concluded that the use of the “into the pipelines” language was the equivalent of using the “at the well.” The Texas Supreme Court noted that commentators have recognized the equivalence About the Authors: Eli Kiefaber Eli Kiefaber is a partner with
between “at the well” and “into the pipeline” language. Additionally, the Texas Supreme Court highlighted that the joint operating agreement executed by the parties contained a provision requiring Burlington to account to Texas Crude for the “actual net proceeds” received for production, permitting the deduction of post-production costs. As a result, The Texas Supreme Court concluded that the provision allowed for the deduction of post- production costs.
Zachary Oliva Zachary Oliva is a partner with
Kiefaber & Oliva LLP. Eli focuses his practice on oil and gas matters, including acquisition and divestiture of oil and gas assets, title opinions, joint operating agreements, federal
Kiefaber & Oliva LLP. Zack focuses his practice on energy and corporate law. He regularly assists clients in the drafting of oil and gas title opinions, purchase and sale agreements and
leases, pooling and unitization issues. Eli is licensed to practice law in Texas, Oklahoma, Colorado and Ohio, is a regular speaker on issues relating to the development of unconventional shale plays and has given a variety of presentations regarding legal issues relating to oil and gas development. Eli earned his B.A from Kenyon College and his J.D., with honors, from Marquette University Law School.
contract interpretation. Additionally, he assists clients with the negotiation, drafting and review of business formations, contracts and service agreements. Zack earned his B.A. from The Ohio State University and his J.D. from Capital University Law School. He is licensed to practice in New Mexico, Ohio and Texas.
New Wyoming Oil & Gas Conservation Commission Application for Permit to Drill Rule
The Secretary of State has accepted the final APD rule amendments for Chapter 3, Section 8 and change to definitions, effective December 20, 2019. To review the rule, please visit the Secretary of State’s website. You can also find the rule at Final Version of APD Rule The Wyoming Oil and Gas Conservation Commission (WOGCC) adopted changes to the Application for Permit to Drill (APD) Rule on November 12, 2019. Following adoption of the rule, a 75 day review period began, during which the Wyoming Attorney General and Wyoming Legislature reviewed the adopted rule and provided feedback to the Governor. Governor Gordon then certified the rule and delivered it for
filing to the Wyoming Secretary of State.
The new rule was the WOGCC’s response to a deluge of APD filings and is intended to encourage actual drilling of wells when APDs are filed and eliminate APDs filed to control operatorship of a drilling and spacing unit. Creating sole operatorship of a drilling and spacing unit by limiting who may file APDs, the new rule also provides an option for another operator to drill in cases where the controlling operator fails to diligently develop the drilling and spacing unit. The new rule includes a framework for contested case proceedings and evidence to be considered by the WOGCC.
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Unclaimed
Property Overlooked Aspects of Unclaimed Property in the Midstream Oil & Gas Sector
Introduction Historically, most vertically integrated oil and gas companies managed unclaimed property through their Division Order or Land units which contributed to a focus on mineral royalties. Personnel operating in the Division Order or Land units spend a considerable amount of time researching and maintaining owner records applicable to mineral or royalty ownership, which obviously supports the reason why this has been the practice. Oil and gas companies are now recognizing the need to evaluate exposure in the midstream component of their operations. Since many companies did not account for exposure applicable to midstream operations in their unclaimed property compliance procedures there could be a risk of considerable past due unclaimed property exposure due the states. As a refresher, the midstream component of the oil and gas industry falls between upstream and downstream and involves the transportation, storage and marketing of mineral products. Similar to other industries, the midstream component has its own unique unclaimed property exposure areas including storage payments, lease agreements and easements. As these liabilities are often generated in high volume, it is likely that companies may lose contact with the owners to whom payments are due. When this occurs, and the liability remains stale for a period meeting State unclaimed property dormancy criterion, the property becomes reportable to the State in the same way as other property types. We find that midstream companies that generate liabilities applicable to pipelines and storage units often have the highest exposure in this sector. This is due to the fact that both pipelines and storage tanks often “pass through” or are housed on leased properties, respectively. The use of another party’s land is authorized through lease What is Midstream & what are the UP exposure areas?
agreements that define occupancy and payment terms. Payments due from the midstream company to the landowners often remain outstanding due to a number of reasons including, but not limited to: • Bad or Unknown Address of the owner which prevents successful delivery of the check • Checks for small dollar values which go uncashed • The owner is deceased and heirship has not been established preventing the disbursement of the check • Title or Legal Disputes which can also prevent the issuance of the checks Depending on company practice, the balances due to the owner may remain in outstanding checks, be voided and reissued multiple times, or reflected as an open liability due to another party on the general ledger. Either of the aforementioned practices could result in unclaimed property liability that can be easily overlooked. Compliance focus on Midstream The evaluation of unclaimed property compliance within an oil and gas company’s midstream component is often an issue raised under audit. Unlike royalty payments issued through revenue payable disbursement accounts, midstream liability payments are often disbursed through the accounts payable disbursements. As many companies in the oil and gas sector believe accounts payable and receivables to be immaterial areas of potential exposure, testing of these cycles can result in a significant number of transactions selected for research due to the high volume of un-remediated checks. So…What do we do? In order to mitigate the risk of noncompliance with State unclaimed property laws, it is imperative that oil and gas companies evaluate compliance holistically – meaning all property types generated by the company
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should be considered. Unclaimed Property policies and procedures applicable to the disbursement process should be evaluated to ensure transactions associated with the midstream sector are included. To help ensure a complete review, the void procedure should be evaluated to verify that it does not circumvent controls that would allow for recognition of transactions that may need to be further investigated, as well as undistributed balances resulting from questions of ownership. Midstream exposures should be recognized as potential unclaimed property and allowed to age in order to determine if it should be reported to the applicable State in the unclaimed property reporting process. Policies and procedures should also be developed to help ensure ongoing compliance into the future. Finally, companies that operate in various streams should coordinate efforts between the Land or Division Order units to help ensure consistent applications of state requirements throughout the organization.
About the Authors:
Ann Fulmer, CPA, CIA, CFE National Practice Leader Keane Consulting
Gary Joseph, MBA, CIA Senior Manager Keane Consulting
NADOA Welcomes the following NEW MEMBERS!!
Encana
Sage Natural Resources, LLC Mary Diacon
Apache Corporation Kedra Mercer
Kaylee Ward
Independent
SandRidge Energy
BPX Energy Inc
Carla Dickenson
Tami Caldwell Candace Loman
Taylor Iske
Independent
Centennial Resource Development Kim Van Putten
Audrey Myers
Southwestern Energy Kevin Taheri Dino Villarreal
Lime Rock Resources Sabrina Rud
CIMA ENERGY LP
Michelle Davila Jim Stinson
Unit Corporation
Mesa Minerals Ark La Tex LLC Narisha Syne
Angie Davis
Cimarex Energy Co. Robert Sher
Unit Petroleum Corporation Susan Shook
Occidental
Sarah Shaffer
Citizen Energy III
White Rock Oil & Gas Hannah Hollway
Nick Hilton Deena Hines
Pioneer Natural Resources Angela Cherryhomes Cynthia Corralez Repsol Oil & Gas USA, LLC Rheannon Coleman
XTO Energy
Delek US
Kelli Hudnall
Raelynne Stueart
Double K Land Services, LLC Karen Kendrick
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Counterpart
Connection
Joe Anderson Local Association Coordinator
………………………………… CAPITAL ASSOCIATION OF PROFESSIONAL DIVISION ORDER ANALYSTS (CAPDOA) Association based in the Oklahoma City, OK Area
APPALACHIAN BASIN ASSOCIATION OF DIVISION ORDER ANALYSTS (ABADOA) Association Based in the Pittsburgh, Pennsylvania Area Serving NY, OH, PA, WV (Inactive)
………………………………… ARKLATEX ASSOCIATION OF DIVISION ORDER ANALYSTS (ALTDOA) Association based in the Shreveport, LA Area (Inactive)
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