National Association of Division Order Analysts July/August/September 2016
ln Mineral Title THE PROOF lS lN THE NUMBERS
7,000 mineral title opinions in multiple shale plays 200 energy attorneys cross-trained to understand title in 22 states 1 of the largest due diligence teams nationwide More than 100 years of experience in energy law 20 attorney Division Order Title Opinion Team 2 attorneys in The Woodlands office Board Certified in Oil, Gas, and Mineral Law by the Texas Board of Legal Specialization Top-ranked in energy law by Chambers USA, The Best Lawyers in America ® , and AV rated by Martindale-Hubbell
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THIS IS AN ADVERTISEMENT
NADOA Growth Through Educat i on Na t i ona l Assoc i a t i on o f D i v i s i on Or de r Ana l ys t s www.NADOA.org Volume MMXVI • No 3 CONTENTS
NADOA 2016 Officers President Brenda Pirozzolo, CDOA 1st Vice President Sandi Rupprecht 2nd Vice President Cheryl Hampton Treasurer Chris Remmert Corresponding Secretary Michele Lawton, CDOA Recording Secretary Jean Hamby-Hinton 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 Editor Cheryl Hampton cherylhampton@yahoo.com Publisher Mercury Press, Inc. Oklahoma City, OK www.mercurypressinc.com 800.423.5984
Feature Articles
Boot Scooting Institute................................... 5 Unclaimed California.................................................. 9 Texas......................................................... 9 Colorado Anti Oil & Gas Initiatives............ 10 North Dakota Flared Gas decision............... 11 Texas Avoiding Unintended Consequences........ 12 Off-Lease Drilling Locations. .................. 14 Off-Lease Drilling Locations Update....... 16 Oklahoma Senate Bill 1577. ........................ 18 President’s Corner.......................................... 2 Webinar Update............................................. 3 New NADOA Address..................................... 3 Certification................................................... 4 Interaction. .................................................... 8 New Members................................................. 8 Counterpart Connection............................... 20 2016 Board/Committee Chairs..................... 23 Calendar of Events....................................... 24
In This Issue
On the Cover: Rainbow over Snoopy Rock Sedona Chamber of Commerce and Tourism Bureau
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 the accuracy of the facts stated and NADOA accepts no liability for misprints.
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President’s Corner
Brenda Pirozzolo, CDOA 2016 NADOA President
With summer ended and the school year ramping up, we now have time to reflect on our adventuresome 2016. For some of our 1,266 NADOA members it has meant change. Many members have been faced with job change, company downsizing and have had to reach out to fellow NADOA members to seek new growth opportunities. Being part of this great organization gives each and every member the comfort of knowing we look out for each other and genuinely care about everyone’s success. For those who had the opportunity to attend our 43rd NADOA Institute in Scottsdale I am sure you came away with the general consensus – NADOA puts on the best Institute of all the Oil and Gas organizations in the US. Betty Davidson and Lisa Buffaloe, Institute Co-chairs, outdid themselves in the preparation and execution of each task involved in putting on such a special event. I can’t thank them enough for all their hard work and endless hours spent refining each detail until ShowTime. Their Institute Committee demonstrated just how our group can pull together and put on a 5 Star event on a concentrated budget. I thank the entire Institute Committee for pushing through all challenges to make our 43th Institute be a stand-out event. The speakers were excellent and they gave us an educational opportunity not to be forgotten. I thank all our corporate sponsors for helping to make our Institute happen and our vendors for coming and sharing in the
experience. The golf tournament was a success (exactly what you would expect at a TPC Scottsdale Champions Course). I thank my company, CGI for hosting such a lovely President’s reception and appreciate their support of NADOA. We offered two Wednesday educational workshops at Institute – the CDOA review class covering Section 3 (along with the CDOA Exam the Saturday after Institute). Let’s hope we gain many more CDOAs from this review. We also hosted an Escheat Summit (a roundtable of professionals and peers discussing Unclaimed Property Audits and Compliance in several states).
Let’s gear up for last quarter, hit it hard and persevere with a positive attitude. I wanted to share some quotes we can enjoy, remember and utilize for 2016.
“The Way to Get Started Is To Quit Talking And Begin Doing.” - Walt Disney “Don’t Let Yesterday Take Up Too Much Of Today.” - Will Rogers “People Who Are Crazy Enough To Think They Can Change The World, Are The Ones Who Do.”- Rob Siltanen “Failure Will Never Overtake Me If My Determination To Succeed Is Strong Enough.”- Og Mandino “We May Encounter Many Defeats But We Must Not Be Defeated.”- Maya Angelou “Security Is Mostly A Superstition. Life Is Either A Daring Adventure Or Nothing.”- Helen Keller “The Man Who Has Confidence In Himself Gains The Confidence Of Others.”- Hasidic Proverb “The Only Limit To Our Realization Of Tomorrow Will Be Our Doubts Of Today.”- Franklin D. Roosevelt “Creativity Is Intelligence Having Fun.”- Albert Einstein
“You Are Never Too Old To Set Another Goal Or To Dream A New Dream.”- C.S. Lewis “The Future Belongs To The Competent. Get Good, Get Better, Be The Best!”- Brian Tracy
I was so glad to see so many attendees at September’s Institute this year and look forward to seeing even more of you at next year’s Institute. Let’s take advantage of our continuing education and networking opportunities. Have a great upcoming Fall Season and remember NADOA is here for YOU!
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WEBINAR UPDATE
Future Webinar dates are still being booked. Look for email announcements for the following dates: September 28, October 26 and November 9. If you regularly attend the NADOA webinars for AAPL certification points, these values will be unavailable through the end of 2016. We apologize for any inconvenience this may cause.
Stephanie D. Moore, CDOA NADOA Webinar Chair 2016
LET US HELP YOU Focus Only On The Portion Of Your Business That Generates The Greatest Return On Investment! Mail will be forwarded for one year; however, if you recently sent anything to the Lees Summit address, please check with Chris Tucker (administrator@nadoa.org) to ensure that your item was received. NADOA HAS A NEW ADDRESS! Please make note of NADOA’s new address and be sure your company has corrected all records to the following: NADOA • PO Box 44009 • Denver CO 80201
ACCOUNTING, LEASE RECORDS, DIVISION ORDER & DUE DILIGENCE
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Please contact Brandon Ward at (918)236-2663 for more information
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NADOA
Certification
CONGRATULATIONS TO THE FOLLOWING NEW CDOA s !! Jami Nicole Borden (Lesa) Deanne Cariker Kelly Marie England Kyle Thomas Fogarty Amy L. Galaviz Jennifer A. Gurgevich Carrie Lyn Hughes April Danell Luedecke Shelley Louise Nguyen Steven Douglas Selberg Rose Nguyen Shelton Jennifer S. Smith Shelby Sue Welch Melanie Renee Westbrook Debbie Gay Wortham
CANDIDATES FOR RECERTIFICATION Neoma Farrow – Tulsa, OK
Lynn H. Ramert – Fort Worth, TX Lydia A. Smith – El Dorado, AR
CANDIDATES FOR CERTIFICATION Donna Lynn Duke – Midland, TX Jennifer Lee Oden – Midland, TX
Publication of the above “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.
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Boot Scootin ’ good Time
We have been very honored to serve as Institute Co-Chairs for our outstanding 2016 President Brenda Pirozzolo. Brenda’s career in oil and gas began in 1974 and she became a NADOA member in 1976. Brenda began serving on the NADOA Institute Committee in 1993 and her service to NADOA has continued since then. Her service to NADOA includes holding many positions on the NADOA Institute Committee, her first position on the NADOA Board was as director in 2005 and she has held many positions since then as an officer or as the DALWORTH director on the board, she has served as the chair of the CDOA Certification Committee and was honored with the Interaction Award in 2012. Brenda, thank you for all your years of service to NADOA. You are an example to us all!
A big thank you to our wonderful corporate sponsors who continue to support us in the good times and the challenging times. Words cannot express our gratitude for your generous donations. What a great group of
speakers and what great topics! There was something for everyone. We appreciate all of our speakers and all the time and effort that goes into each presentation. One of the great things about the NADOA classes is that whether you’re a new NADOA member or you’re a seasoned member you always learn something new at each Institute you attend. A huge thank you to our marvelous News Magazine editor Rona Erickson for that outstanding Institute edition!
As we all know this has been a very challenging year for our Industry, our
companies, our membership and for NADOA. We are so very proud of our 2016 Institute Committee who worked countless hours to make the 2016 Institute a huge success! Due to the many hardships in our Industry this year many of our Institute committee volunteers had no company support but continued to volunteer even at their own expense. We are so privileged to have such an awesome group of NADOA volunteers and we appreciate all that each and every one of you did to contribute to the success of the NADOA 2016 Institute. Thank you for such a successful Institute. Our organization is so blessed to have such wonderful members who give so much back to NADOA. You are the BEST!!!! The beautiful Fairmont Princess Scottsdale Hotel was a perfect host for a boot scootin’ good time! We enjoyed renewing old friendships and making new friends at the awesome ice cream social. The entertaining and inspiring key note speakers kicked off our meals which were then followed by some incredible classroom speakers. Thursday night’s event at Copper Canyon was highlighted with good food, fun games and lots of boot scootin’. I think we may have some new cowboys and cowgirls in the making. What happens at Copper Canyon doesn’t always stay in Copper Canyon….so, look for some of the great pictures in the next News Magazine.
Betty Davidson || Lisa Buffaloe 2016 Institute co-Chairs
( corporate sponsors ) Betty Davidson, 2016 Institute Co-Chair
We are so thankful for our 2016 corporate sponsors and for their continued support of NADOA! We cannot express how thankful we are for each donation that we received. Thank you for helping make the 2016 Institute a success.
43rd Annual NADOA Institute Sponsors
Steptoe & Johnson PLLC
XTO Energy
ExTex Land & Administration LLC
Devon Energy Corporation
Ergon Oil Purchasing, Inc.
Chevron
Enerplus Resources
Newfield Exploration Co.
Pioneer Natural Resources USA Inc.
CGI
Legacy Royalties
CIMA Energy, Ltd
Anadarko Petroleum Corporation
SADOA
Enterprise
COG Operating LLC
FourPoint Energy LLC
DALWORTH
Russell T. Rudy Energy LLC
Stephens Production Company
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THE BOOTS HAVE BEEN SCOOTED AND THE FOLLOWING VENDORS HAVE OUR SINCERE THANKS ! CGI Technology & Solutions Inc. DrillingInfo EnergyLink by Red Dog Systems InfoAge Inc. Keane Unclaimed Property Land Information Systems Legacy Royalties NALTA P2 Energy Solutions Pam Jett Russell T Rudy Energy LLC Waterfield Energy The Vendor Committee would like to say THANK YOU to all the Vendors that participated in this year’s 43rd Annual Institute in beautiful Scottsdale, AZ!
To participate in next year’s vendor fair please contact Lewis Box – lewis_box@xtoenergy.com – (817) 885-3580
Door Prizes Corporate Thank Yous NADOA would like to thank the following companies for donating Door Prizes to this year’s Annual Institute.
Russell T. Rudy Energy LLC – 5 - $50 gift cards Stephens Production Co – 10 - $50 gift cards Cima Energy LTD – 2 - $50 gift cards Hyatt Regency Lost Pines – 2 Night Stay - Good through 6/8/2017 Hyatt Regency Lost Pines – 4 - $50 gift cards
Stephanie Moore & Cheryl Hampton, Door Prize Co-Chairs
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INTERACTION
By Julie Willis
NADOA attended the National Association of Royalty Owners (“NARO”) in Fort Worth, Texas, June 29 through July 1. NADOA’s President, Brenda Pirozzolo, along with Karen Albritton (both with CGI), volunteered their time at NADOA’s booth. NARO-Texas was a big success this year. There were a lot of vendors and time to mix, mingle and network. NADOA’s booth was visited by royalty owners, Legacy Royalties and members from NADOA. There was a great crowd and those who were able to attend had a wonderful time. The NADOA booth will have a presence at the Conference for the National Association of Lease and Title Analysts (“NALTA”) in Atlanta, Georgia September 21-23 as well as the NARO National Convention in Dallas, Texas October 6-8.
NADOA WELCOMES NEW MEMBERS
Meguire Wieger – Black Mountain Operating LLC Riley Brown – Brown Landman Services, LLC Mary Jane Gibbs – Desert Royalty Company, LLC Daniel Brooks – EP Energy E&P Company LP Sue Taylor – EXCO Resources, Inc
Haley Voyles – MAP Cathy Hammock – Statoil
Sonja Widner – Sunoco Logistics LLC Tyler Lundquist – Talisman Energy USA Tricia Booher – Titan Resources, Limited
Created by Mark Mathis, Fractured is a follow up to spOILed . Mr. Mathis was a keynote speaker at the 2012 NADOA Institute in Philadelphia. A crowd funding campaign is under way and the 92 minute movie is in the final stages of editing. A 52 minute TV broadcast length version of Fractured will also be available and a 22 minute mini-movie for luncheon audiences is planned.
info@fracturedthemovie.com
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CALIFORNIA UNCLAIMED
A Notice to Holders has been published to the State Controller’s public website (updholderoutreach@sco.ca.gov) regarding new bank account information for electronic funds transfer (EFT) payments , effective July 1, 2016 . You must contact the Controller’s EFT Help Desk to obtain new bank account information, whether remitting by Automated Clearing House (ACH) Debit, ACH Credit, FedWire or International Funds Transfer. Additionally, the Authorization Agreement for Electronic Funds Transfer (SCO EFT-1) and Registration for Remittance by Fedwire (SCO EFT-3) forms have been updated. If after reviewing the EFT updates you require further clarification, please contact the Controller’s EFT Help Desk at (916) 464-6220 or updscoeft@sco.ca.gov.
TEXAS UNCLAIMED
Our office is hard at work redesigning and rebuilding our agency website, Comptroller.Texas.Gov. The new website will launch in the coming weeks, and we want to ensure you are prepared for the transition. When the new Comptroller.Texas.Gov launches in coming weeks, you’ll be able to: • access popular features quickly at a one-stop business center on the home page. • browse seamlessly for Comptroller content, as many of the agency’s program-specific websites are being consolidated into the main site. • find what you need from any page with a powerful, enhanced search function. • use any device — tablet, phone or computer — to browse our site. With the new design, you can get in, get out and get back to business. Stay tuned to our current website and Facebook and Twitter accounts for updates on our progress. A new look. Built for you.
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NADOA
Legal Updates
COLORADO || ANTI-OIL AND GAS INITIATIVES FAIL TO MAKE THE BALLOT By: Rona Erickson, CDOA
Signatures for two proposed Colorado ballot initiatives have failed to achieve the minimum number of required signatures to make the November ballot. A 5% random sample did not project the number of valid signatures to be greater than 110% of the total number of signatures required for placement. Initiative 75 would have granted local municipalities the ability to say whether they want new wells, hydraulic fracturing and other oil and gas operations in their city, town or county limits. Initiative 78 would have amended the Colorado constitution to prohibit drilling, fracturing and other operations within 2,500 feet of any inhabited structure, waterways and other areas. The Colorado Oil and Gas Conservation Commission, presently tasked with oversight of setbacks, indicates that replacing the current 500 foot setback with a mandatory 2,500 foot buffer zone would remove 90% of the state from possible new oil and gas development. In an August 29 press release, Colorado Secretary of State Wayne Williams announced “Supporters didn’t collect enough valid voter signatures. Citizens who are trying to get an issue on the ballot must submit 98,492 voter signatures. Supporters of the two measures collected more than that for each proposal, but not enough to compensate for the number of signatures that were rejected during the random sample.”
Further, the Secretary of State reported that the petition processing team identified a petition section in Initiative 78 that contains several potentially forged signature lines. “Although the Secretary of State does not conduct signature verification when reviewing petitions, our office has referred the questionable section to the Attorney General’s office for investigation.”
J. Mark Gresham CDOA, CMM
O I L
& G A S
R O Y A L T I E S
Buying Minerals & Royalties since 1977 in Texas • Oklahoma • New Mexico and Other States
Member: NADOA • HADOA • NARO • OK-NARO • AMERICAN ROYALTY COUNCIL (ARC)
P.O. Box 662 Wharton, Texas 77488-0662 979.532.1485 JMG992@prodigy.net
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NORTH DAKOTA || SUPREME COURT REJECTS FLARED GAS ROYALTY CLASS ACTIONS By: John W. Morrison, Jr. & Uriah Price
In a split decision with important precedential value to the oil and gas industry, the North Dakota Supreme Court on May 31, 2016 affirmed the dismissal of a class action seeking the payment of royalties on flared gas in North Dakota. In Sarah Vogel v. Marathon Oil Company , 2016 ND 104, 879 N.W.2d 471, the plaintiff sought to represent a class of mineral owners seeking declaratory relief and money damages for failure to pay royalties on gas flared from the Elk USA 11-17H well, operated by Marathon Oil Company. Vogel asserted the royalties were due under Section 38-08-06.4 of the North Dakota Century Code (the “Flaring Statute”) which provides that gas may be flared for the first year of production and thereafter either wells must be connected to a gas gathering system, the gas put to some alternative beneficial use, or the well must be shut-in. The Flaring Statute authorizes the North Dakota Industrial Commission (“Commission”) to enforce the statute and provides that royalties and production taxes shall be paid on wells “operated in violation” of the statute. Vogel also sought to enforce the payment of royalties under the Environmental Law Enforcement Act (“ELEA”), codified as Chapter 32-40 of the North Dakota Century Code and sought damages for common law conversion and waste. Vogel and a number of similar actions naming other producers were commenced in the fall of 2013. All of the other actions were removed to the United States District Court for the District of North Dakota and in May, 2014, the Federal District Court dismissed the other actions without prejudice on the grounds that the plaintiffs in those actions had failed to exhaust their administrative remedies. The plaintiffs in the federal actions filed notices of appeal to the Eighth Circuit Court of Appeals but voluntarily dismissed those appeals. In March, 2015 the Mountrail County District Court, Judge Todd Cresap presiding, similarly dismissed Vogel’s claim against Marathon and Vogel appealed the dismissal to the North Dakota Supreme Court (the “Court”).
In a three-judge majority opinion, the Court first addressed the Flaring Statute and held that the Flaring Statute did not include a private right of action for damages but may only be enforced by the Commission. Addressing the ELEA, the Court held that remedies under the ELEA are cumulative and do not replace other statutory or common law remedies, that the ELEA provides a remedy only if the Commission “fails or refuses to act,” and that Vogel is required to seek administrative remedies from the Commission before seeking relief under the ELEA. Finally the majority opinion affirmed that Vogel’s claims for damages under common law theories of waste and conversion were pre-empted by the Flaring Statute and that Vogel is required to exhaust her administrative remedies before pursuing any of her claims in court. In a concurring opinion, Chief Justice VandeWalle agreed that any claim for royalties arising under the Flaring Statute must be pursued before the Commission, but expressed concern that the majority opinion could be read to give the Commission exclusive jurisdiction over claims for royalties on flared gas which might arise under lease provisions. Justice Kapsner wrote a dissenting opinion in which she asserted that a proper claim had been asserted under the ELEA, citing decisions from Michigan and Minnesota under state environmental protection acts. The majority opinion has important precedential impact for at least two reasons. First, the similar class actions removed to federal court were dismissed without prejudice, and undoubtedly would have been reinstituted if the Court had disagreed with the federal court’s decision dismissing the federal actions on similar grounds. Additionally, however, the decision will impact other claims which might be asserted under the ELEA, including actions for damages arising from oil and produced water spills.
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Note: Marathon in Vogel was represented by John Morrison and Uriah Price of Crowley Fleck PLLP. This article was first published by Crowley Fleck PLLP June 1, 2016. ABOUT THE AUTHORS: John W. Morrison, Jr. is a Partner in the Bismarck office of Crowley Fleck PLLP. He practices in the area of natural resources, public utilities and commercial law, and regularly represents clients in both litigation matters in state and federal courts and before state and federal administrative agencies, including the North Dakota Industrial Commission, the North Dakota Public Service Commission, the North Dakota Tax Department and the Bureau of Land Management. He is a member of the North Dakota Petroleum Council Hall of Fame and has been listed in Best Lawyers of America since 1995, Chambers USA – Leading Lawyers in Litigation: Energy and Natural Resources since 2004, and Great Plains Super Lawyers since 2011.
Uriah Price is an attorney in the Energy, Environment and Natural Resources Department in Crowley Fleck PLLP’s Billings office. Uriah’s practice encompasses multiple areas of energy and natural resources law, including oil and gas, energy and mineral litigation, energy and mineral transactions, regulatory and administrative affairs, Indian law and title examination. Uriah is a member and Trustee at large of the Rocky Mountain Mineral Law Foundation and previously served as an original member of the Rocky Mountain Mineral Law Foundation’s Young Professionals Committee. Uriah is licensed in Montana, North Dakota and Wyoming. ___________________________ These materials are not individualized legal advice. It is understood that each case is fact-specific and that the appropriate solution in any case will vary. The presentation of these materials does not establish any form of attorney-client relationship with the authors or Crowley Fleck PLLP. 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.
TEXAS || AVOIDING UNINTENDED CONSEQUENCES CAUSED BY RETAINED ACREAGE CLAUSES By: Eli Kiefaber and Zachary Oliva, Kiefaber & Oliva LLP
Retained acreage clauses permit the lessee to retain acreage around a producing well in the event of a forfeiture of a lease. Typically, retained acreage clauses become the subject of litigation when the lease contains a continuous drilling obligation and the lessee has ceased its drilling. The retained acreage clause permits a lessee in that situation to retain a specific portion of the acreage surrounding a producing well and requires that the lessee release all acreage not subject to the retained acreage clause. Frequently, retained acreage clauses in leases will specify the number of acres per well that an operator is entitled to retain after the continuous development program has ended. However, many oil and gas leases tie the acreage subject to the retained acreage clause to the “field rules” for a given oil and gas field, 1 which may result in the retained acreage clause operating in way that it is contrary
to the intent of the parties. Recently, Texas courts interpreted retained acreage clauses and reached differing outcomes that were not contemplated by the parties. First, in ConocoPhillips Co. v. Vaquillas Unproven Minerals , 04-15-0006-CV, Tex. App. LEXIS 8194 (August 5, 2015), the San Antonio Court of Appeals determined that the field rules governed a retained acreage clause in an oil and gas lease. The retained acreage clause provided that ConocoPhillips was entitled to retain “640 acres per gas well, except when field rules established by the governing authority provide otherwise.” Id. , at 3. Specifically, the retained acreage clause provided: “Lessee . . . agrees to . . . release . . . all portions of this lease which have not been drilled to a density of at least . . . 640 acres for each producing or shut- in gas well, except that in case any rule adopted by
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the Railroad Commission of Texas . . . for any field on this lease provides for a spacing or proration establishing different units of acreage per well, then such established different units shall be held under this lease by such production, in lieu of the . . . 640- acre units above mentioned . . . .” Id. , at 2-3. Here, the applicable field rules provided for “different” sized units than the 640 acre units contemplated by the leases. Specifically, the relevant field rule provided that no well shall be drilled closer than 467 feet to any property line, lease line or subdivision line, and no well shall be drilled closer than 1,200 feet to any well in the same reservoir on the same lease or pooled unit. Id. , at 7. Although the spacing requirement did not expressly set a number of acres per well, Statewide Rule 38, 16 Tex. Admin. Code § 3.38, requires that the standard drilling unit for a gas field with a spacing rule of 467-1200, like the one here, then the minimum acreage requirement is 40 acres per well for both oil and gas wells. Id. , at 9. ConocoPhillips’s continuous drilling program ended on June 21, 2012, and ConocoPhillips claimed 640 acres for each gas well, not the 40 acres as provided in the field rules, was retained under the retained acreage clause. Id. , at 3. The Court disagreed with ConocoPhillips and concluded that ConocoPhillips was entitled to retain only 40 acres per well, as provided by the field rules, despite 40 acres being far less than the 640 acres per well as contemplated by the lease. Id. , at 14. As a result, ConocoPhillips was required to release an additional 15,351 acres to Vaquillas that was not retained by the retained acreage clause. Id. , at 11. Second, in XOG Operating, LLC v. Chesapeake Exploration L.P. , 07-13-00439-CV, Tex. App. LEXIS 9411 (September 2, 2015), the Amarillo Court of Appeals reached a different conclusion and determined that the retained acreage clause permitted Chesapeake to retain more acreage than the parties contemplated. On June 1, 2003, Xeric Oil & Gas Corporation and Geronimo Holding Corporation assigned their interest in four oil and gas leases containing 1,625 acres to EOG Resources, Inc. Id. , at 2. The assignment provided for a primary term of two years and incorporated retained acreage clauses, which, in part, provided: “Upon expiration of … of this Assignment . . . all rights created hereunder shall terminate … and …
revert to Assignor, save and except that portion of said lease included within the proration or pooled unit of each well drilled under this Assignment . . . The term, ‘proration unit’ . . . shall mean the area within the surface boundaries of the proration unit then established or prescribed by field rules . . . for the reservoir in which each well is completed. In the absence of such field rules . . . each proration unit shall be . . . 320 acres of land . . . surroundings [sic] a well . . . .” (Emphasis omitted). Id. , at 2, 3. During the primary term, Chesapeake (EOG’s successor) drilled six gas wells, five wells in the Allison-Britt Field, and one well in the Stiles Ranch Field. Id. at 3. The assignments terminated on May 30, 2005, and all rights under the leases reverted to XOG, “save and except that portion of said lease[s] included within the proration or pooled unit of each well drilled.” Id. , at 13, 14. The field rules for the Allison-Britt Field stated that the maximum area of a “prescribed proration unit” was 320 acres. Id. , at 4. The field rules further provided that any unit containing less than 320 acres is defined as a “fractional proration unit.” Id. There were no field rules or special orders applicable to the Stiles Ranch Field, and by contractual definition, the acreage retained by a given well within that field was 320 acres. Id. , at 16. Under those rules, Chesapeake would have been permitted to designate 1,920 acres to its six wells. However, Chesapeake did not designate proration units of 320 acres for its wells, but fractional proration units, totaling 802 acres for its six wells. Chesapeake argued that the retained acreage clause permitted it to retain 320 acres for each of its wells despite that it designated fractional proration units containing less acreage. The Court agreed and explained that absent an express contractual agreement providing otherwise, a proration unit is defined as “the acreage assigned to a well for the purpose of assigning allowables and allocating production to the well” for regulatory purposes. Id. , at 11. The Court determined that the retained acreage clause was clear that the parties specifically agreed to define a proration unit as the area within the boundaries of a proration unit “established or prescribed by field rules” or, in the absence of field rules then 320 acres. Id. , at 11. Consistent with that interpretation, the Court concluded that the parties expressly agreed the
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assignee would retain that portion of the lease included in a “proration unit” for the Allison-Britt field, and a proration unit for a given well in that field was 320 acres. Id. , at 15. The Court explained that Chesapeake’s fractional proration unit filings were irrelevant because the retained acreage did not contemplate fractional proration units. Id. Thus, Chesapeake was entitled to retain 320 acres for each of its wells despite that in its P-15 filings with the Railroad Commission Chesapeake designated fewer acres in its fractional proration units. The total acreage Chesapeake was entitled to retain under the retained acreage clause exceeded the total acreage covered by the leases and Chesapeake was entitled to retain the full 1,625 acres covered by the assignments. Id. , at 16. Both the XOG and ConocoPhillips illustrate that courts are willing to apply the field rules to retained acreage clauses if the contract provides (however loosely) that the field
rules are to control. In both cases, the retained acreage clause operated to more or less acreage than contemplated by the parties because the retained acreage clause was tied to field rules. Thus, it is critical to carefully define a retained acreage clause to avoid unintended consequences that may arise when parties rely on field rules to define the acreage subject to a retained acreage clause. ___________________________ 1 Field rules are used to regulate well spacing and density provisions to promote the development in a field in such a way that the wells are not clustered together and damage the reservoir. The Texas Railroad Commission regulates “field rules” under statewide rules, county rules, and/or special rules.
TEXAS || OFF-LEASE DRILLING LOCATIONS AND CLAIMS OF SUBSURFACE TRESPASS By: Eli Kiefaber and Zachary Oliva, Kiefaber & Oliva LLP
In Lightning Oil Co. v. Anadarko E&P Onshore , No. 04- 14-00152-CV, 2014 Tex. App. LEXIS 11844 (Oct. 29, 2014), the San Antonio Court of Appeals concluded that a mineral estate owner was not entitled to injunctive relief to prevent an adjacent mineral estate owner from drilling horizontal wells crossing through the other party’s mineral estate to access the adjacent mineral estate. This case is significant for operators that drill multiple horizontal wells from a single pad location and for operators that drill horizontal wells from off-lease surface locations. The dispute in Lightning Oil arose from Anadarko E&P Onshore’s (“Anadarko”) attempt to drill horizontal wells that would enter and cross through Lightning Oil Co.’s (“Lightning”) mineral estate. Lightning owned the mineral estate to a portion of land known as Cochina East Ranch. Id. , at *2. To the south of Cochina East Ranch lies the Chaparral Wildlife Management Area (“Chaparral WMA”), a wildlife sanctuary of approximately 15,200 acres, managed by the Texas Parks and Wildlife
Department. Id. In October 2009, Anadarko obtained an oil and gas lease giving it the right to develop the mineral estate underlying the Chaparral WMA. Id. , at *2-3. However, the terms of the lease required Anadarko to “utilize off-site drilling locations ‘when prudent and feasible.’” Id. Anadarko obtained permission from the surface owner of the Cochina East Ranch by entering into a written Surface Use and Subsurface Easement Agreement allowing it to “establish drill sites for horizontal wells that [would] enter and cross through Lightning’s Mineral Estate in order to reach Anadarko’s mineral estate on the adjacent Chaparral WMA.” Id. However, Lightning opposed Anadarko’s planned drilling operations and brought suit for trespass and sought injunctive relief to prevent Anadarko from drilling the proposed wells. Id. , at *4. In Lightning Oil , the San Antonio Court of Appeals evaluated whether Lightning satisfied the requirements to obtain injunctive relief and proved that it would
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suffer an imminent and irreparable injury if Anadarko were permitted to proceed with its plan to drill through Lightning’s mineral estate. Lightning Oil , at *8. The Court reviewed the testimony of Lightning’s expert witnesses, Mr. Light and Mr. Bagnall, who raised three potential injuries that Lightning may suffer as a result of Anadarko’s plan to drill through its mineral estate. Id. , at *10. First, Mr. Bagnall discussed that production fluids could leak into the mineral estate and damage the formation Lightning sought to produce if Anadarko experienced a casing failure, thereby causing harm to Lightning. Id. , at *10-11. Yet, when Mr. Bagnall was cross-examined about the likelihood of a casing failure, he conceded that there was a “high likelihood that it probably won’t happen.” Id. , at 14. Second, Mr. Light discussed the obligation and increased cost for Lightning to drill offset wells to prevent drainage from Anadarko’s wells on the adjacent property. Id. , at *10. However, Lightning already had an obligation under its lease to drill offset wells. If Lightning failed to drill the required offset wells within the timeframe mandated by its lease, then Lightning would have to pay a compensatory royalty to the lessors. Id. , at *12. On cross-examination, Mr. Light admitted that even if Anadarko drilled its well from a different surface location and did not enter Lightning’s mineral estate, his company would have the same obligation and expenses to drill the offset wells. Id. , at *12-13. Finally, Mr. Light noted that Anadarko’s pipelines or wellbores, if placed in a specific location, could interfere with Lightning’s planned wells. Id. , at *11. Specifically, he stated, “it will probably disrupt our drilling program,” and it is “very difficult and costly” to turn and change drilling direction. Id. , at *12. Yet, when pressed on the issue, he acknowledged that he “staked the new well site and instructed Lightning’s contractors to rush the permit for the proposed well in time for the injunction hearing after he learned that Anadarko had staked its proposed well sites on the surface of the Cochina East Ranch.” Id. , at *13. Additionally, Mr. Bagnell confirmed that Lightning could drill its proposed well without any problem from the proposed Anadarko wells, but depending on how much pipeline Anadarko lays and where its located, Lightning’s drilling plans may need be altered. Id. , at *15. However, he was unable to quantify the added cost of altering the drilling plans at the time of
the testimony, and speculated that that costs may exceed $100,000.00. Id. Consequently, the Court affirmed the trial court’s order denying Lightning’s application for injunctive relief. Id. , at *16. The Court noted that the evidence showed a potential for injury to Lightning’s mineral interest in the future, and a potential for increased costs to Lightning. Id. Nevertheless, Lightning failed to show that these potential injuries were not quantifiable, and thus failed to prove that an injury was probable, imminent, and irreparable, which is necessary to obtain injunctive relief. Id. Despite the ruling in favor of Anadarko on appeal, the San Antonio Court of Appeals did not address whether Anadarko’s proposed well through Lightning’s mineral estate constitutes an actionable claim for subsurface trespass. Typically, operators obtain surface use agreements for off-lease well pads, but do not obtain agreements from owners of adjacent mineral estates. Prior to the proliferation of horizontal drilling, there were few instances involving off-lease locations and multiple severed owners of the adjacent mineral estates and courts have not had an opportunity to address subsurface trespass issues in the context of horizontal drilling. Here, under Lightning’s theory, Anadarko’s proposed well that crosses Lightning’s mineral estate, but does not produce from that mineral estate, would nonetheless constitute a subsurface trespass and Anadarko would be liable to Lightning for damages. Thus, under Lightning’s theory, Anadarko would be required to obtain permission not only from the surface owner, but also the owners of adjacent mineral estates, to drill horizontal wells from an off-lease location. However, Lightning’s subsurface trespass theory is contrary to the long-standing theory, and practice, that the surface owner is the one who can grant permission for an off-lease drilling location.
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TEXAS || OFF-LEASE DRILLING LOCATIONS AND CLAIMS OF SUBSURFACE TRESPASS (UPDATE) By: Eli Kiefaber and Zachary Oliva, Kiefaber & Oliva LLP
In Lightning Oil Co. v. Anadarko E&P Onshore LLC , No. 04-14-00903-CV, 2015 Tex. App. LEXIS 8673 (Aug. 19, 2015), the San Antonio Court of Appeals concluded that a mineral estate owner was not entitled to prevent an adjacent mineral estate owner from drilling horizontal wells crossing through the other party’s mineral estate to access the adjacent mineral estate. This decision addresses the issue of subsurface trespass, while an earlier decision, Lightning Oil Co. v. Anadarko E&P Onshore , No. 04- 14-00152-CV, 2014 Tex. App. LEXIS 11844 (Oct. 29, 2014), discussed here, denied Lightning’s application for injunctive relief. The dispute in Lightning Oil arose from Anadarko E&P Onshore’s (“Anadarko”) attempt to drill horizontal wells that would enter and cross through Lightning Oil Co.’s (“Lighting”) mineral estate. Lightning owned the mineral estate to land known as the Cutlass Lease, a severed mineral estate under a portion of Briscoe Ranch. Id. , at *2. Adjacent to the surface estate overlying the Cutlass Lease is the Chaparral Wildlife Management Area (“Chaparral WMA”). Id. , at *3. Anadarko obtained an oil and gas lease giving it the right to develop the mineral estate underlying the Chaparral WMA. Id. In a separate agreement, Anadarko entered into a written Surface Use and Subsurface Easement Agreement with the surface owner of Briscoe Ranch allowing it to place rigs on the surface estate overlying the Cutlass Lease and to drill through the earth under the Briscoe Ranch to form wells that open and bottom in the Chaparral WMA. Id. However, Lightning opposed Anadarko’s planned drilling operations and brought suit for trespass to prevent Anadarko from drilling the proposed wells that would cross within the boundaries of the Cutlass Lease. Id. Addressing Lighting’s claim of subsurface trespass, the San Antonio Court of Appeals evaluated whether Lightning satisfied the requirements to prove trespass, specifically whether Lightning proved they owned or otherwise had a legal right to exclude others from their property. Id. , at *7-8. Lighting argued that the ownership of the mineral estate includes the right to exclude others from
the subsurface estate. Id. , at *8 (citing Chevron Oil Co. v. Howell , 407 S.W.2d 525, 526 (Tex. Civ. App. – Dallas 1966, writ ref’d n.r.e.; Hastings Oil Co. v. Tex. Co. , 149 Tex. 416 (Tex. 1950); Villarreal v. Grant Geophysical, Inc. , 136 S.W.3d 265, 268 (Tex. App. – San Antonio 2004, pet. denied)). However, the facts of each case cited by Lighting were distinguished by the court. Id. , at *8-12. On the other hand, Anadarko argued that Briscoe Ranch, as the surface owner of the Cutlass Lease, owned and controlled the earth surrounding the minerals, and therefore, only Briscoe Ranch had the legal right to exclude Anadarko from drilling through the earth underneath the Cutlass Lease. Id. , at *12. To support its argument, Anadarko argued that “the conveyance of mineral rights ownership does not convey the entirety of the subsurface.” Id. , at *13 (citing Dunn-McCampbell Royalty Interest, Inc. v. Nat’l Park Serv. , 630 F.3d 431, 441 (5th Cir. 2011)). The San Antonio Court of Appeals agreed with Anadarko and concluded that the surface estate owner controls the earth beneath the surface estate. Id., at *14. The court explained: “[A]bsent the grant of a right to control the subterranean structures in which the oil and gas molecules are held, the mineral estate owner does not control ‘the mass that undergirds the surface of the [conveyed land.]’” Id. , at *13 (citing Dunn-McCampbell , 630 F.3d 431, 441). Therefore, because Anadarko obtained permission from Briscoe Ranch, Anadarko’s drilling through the Cutlass Lease did not constitute a subsurface trespass provided that Anadarko did not open or bottom its wellbores in, or otherwise produce oil or gas from, the Cutlass Lease. Id. , at *14. The long-standing theory, and practice, has been that the surface owner is the one who can grant permission for an off-lease drilling location. Therefore, typically, operators have obtained surface use agreements for off-lease well pads, but do not obtain agreements from owners of adjacent mineral estates. Lightning Oil affirms that practice and operators can continue to only obtain surface use agreements from the surface estate owner and
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do not need to obtain agreements from the owners of those adjacent mineral estates unless they plan to open or bottom out their wellbores in, or otherwise produce oil or gas from, the adjacent mineral estates. ___________________________ 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 Kiefaber & Oliva LLP 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 Kiefaber & Oliva LLP. 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.
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. Zachary Oliva is a partner with
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 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.
ABOUT THE AUTHORS: Eli Kiefaber 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 leases, pooling and
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