Predicting Litigation Trends in Oil and Gas Haynes and Boone, LLP

Transcription

1 Predicting Litigation Trends in Oil and Gas

2 Speakers Buddy Clark Don Jackson Mark Trachtenberg Lynne Liberato, moderator Paper: Chris Kulander 2013 Oil & Gas Case Law Update 2

3 Overview Oil & gas industry in Texas and US Types of disputes Key cases Final predictions 3

4 Setting the Stage: Science v. Law Whole new environment New issues and more of them Gaps between law & technology 4

5 Source: Ryder Scott: 5

6 St. Louis Federal Reserve Bank: 6

7 Source: US Chamber of Commerce, 7

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9 Texas Oil Trend Source: 9

10 Hot Texas Development Areas Eagle Ford shale region expected to reach 1 MPD in MPD peak in 2020 Permian Basin at ~1 MPD in 2013 currently largest concentration of drilling rigs in the nation 10

11 Eagle Ford Shale 2008: Petrohawk drilled first Eagle Ford wells (La Salle County) Discovery well flowed at a rate of 7.6 MCFD from a 3,200-foot lateral Located in 26 counties 11

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17 Permian Basin 17

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20 Litigation Trends Sub-surface trespass Vertical well law applied to horizontal well cases Pipeline cases Other important pending cases Every other kind of case found when there is action 20

21 Horizontal Wells and Hydraulic Fracturing How it works Disputes arising from horizontal drilling/hydraulic fracturing 21

22 Source: US Energy Dept., 22

23 Source: Peter Duncan at MicroSeismic, Inc., with permission 23

24 Visualizing the Fractures Source: Peter Duncan at MicroSeismic, Inc., with permission 24

25 Source: Peter Duncan at MicroSeismic, Inc.. with permission 25

26 Technology Meets Regulations Local regulation (inverse condemnation) Local v. state regulation (preemption) State v. federal regulation issues Water usage 26

27 Envtl. Processing Sys. v. FPL Farming, No (Argued Jan. 7, 2014) Issue: Can migration of wastewater injected via nonhazardous waste injection well support a subsurface trespass claim by adjacent landowner? Considerations: Requirement of showing of injury? Difficulty of proof Can claim be limited to Class I injection wells? Extent of landowner s subsurface property rights (including briny water deep below surface)? Implications of an affirmance to oil and gas industry? 27

28 Application of vertical well law to horizontal well cases Rule of capture rejection Pooling v. production sharing v. allocation wells 28

29 Springer Ranch, Ltd. v. Jones (San Antonio COA 12/2013) Issue: Based on terms of an agreement, are all tracts through which a horizontal well is drilled due a portion of the royalty? Is so, how is the royalty allocated among the tracts? 29

30 Springer Ranch, Ltd. v. Jones (San Antonio COA 12/2013) Contract: Allocated royalties to the owner of the surface estate on which such well or wells are situated, without reference to any production unit on which such well or wells are located. Court of Appeals: situated meant where the well was located well meant the entire length of well, not wellhead surface estate meant estate over each well segment Takeaway: A well only produces over the interval of the reservoir, so the discrete interval of production is more accurate for apportioning royalties. 30

31 Other important cases Denbury: pipelines/eminent domain power Hegar: surface access in pooled unit Merriman: accommodation doctrine French: calculation of royalty issue Lesley: scope of duty owed by executiverights holder 31

32 Texas Rice Land Partners, Ltd v. Denbury Green Pipeline-Texas, LLC 363 S.W.3d 192 (Tex. 2012) Holding: Landowner may challenge in court the eminent-domain power of a CO2 pipeline owner that has been granted common carrier permit from RRC. Common carrier status test: Does a reasonable probability exist that the pipeline will at some point after construction serve the public by transporting gas for one or more customers who will either retain ownership of their gas or sell it to parties other than the carrier? 32

33 Post-Denbury decisions Crawford v. TransCanada, 409 SW3d 908 (Texarkana 2013, pet. filed) In re Texas Rice Land Partners, 402 SW3d 334 (Beaumont 2013) Even if Denbury holding applied to crude oil pipeline, TransCanada satisfied common carrier test for Keystone pipeline. Crosstex NGL Pipeline v. Reins Road Farms-1, 404 SW3d 754 (Beaumont 2013, no pet.) Affirmed denial of pipeline owner s request for a temporary injunction barring landowner from interfering with its effort to survey the property. 33

34 Key Operating Equipment v. Hegar, No

35 Key Operating Equipment v. Hegar, No Argued February 4, 2014 Issue: Does the operator/lessee in a pooled unit have the right to use road on adjacent surface property for ingress/egress when there is no production from adjacent tract, but the tract is part of the producing pooled unit? First COA (2-1): Affirmed injunction prohibiting Key s use of Hegar s road because there was no production from the Hegar tract. 35

36 Key Operating Equipment v. Hegar, No continued Considerations for Texas Supreme Court: Is principle that production anywhere in pooled unit is production everywhere limited to duration of lease or does it extend to surface rights? If Hegar prevails, must lessee prove with geographical certainty where production is coming from in pooled acreage to establish surface rights? Impact on access to landlocked wells in pooled units? Does chain of title and timing of lease and execution of pooling authority matter? Implications for litigation between landowners and lessees? 36

37 Merriman v. XTO Energy, 407 SW3d 244 (Tex. 2013) Test for Accommodation Doctrine: Surface owner must prove: Lessee's use completely precludes or substantially impairs the existing use. No reasonable alternative method available by which the existing use can be continued. There are alternative reasonable, industry-accepted methods available to lessee that will allow mineral recovery and also allow the surface owner to continue existing use. MSJ affirmed because no evidence of second prong; inconvenience and additional expense insufficient.. 37

38 French v. Occidental Permian, No Argued February 5, 2014 Principal issues: whether the gas should be valued in its native state, before extraction, or at the wellhead commingled with CO2 whether removing, compressing and transporting CO2 should be classified as production or post-production expenses (only the latter are chargeable to royalty). Eastland Court of Appeals: Royalty based on value of gas at wellhead (with CO2) No evidence of value based on comparable sales or net back method. 38

39 French v. Occidental Permian, No (con t) Considerations: Value native gas, which could not be produced without tertiary recovery, or gas in the condition in which it emerges at wellhead, with CO2 injected by Oxy? Is removal of CO2 a production or post-production activity (not answered by COA)? Is production vs. post-production subject to a purpose test (bringing oil to surface vs. making it suitable to market), making it a fact question, as French contends? Or is it a bright line test based on timing after the gas is produced from wellhead and necessary to render gas marketable, as Oxy contends? 39

40 Lesley v. Veterans Land Board 352 SW3d 479 (Tex. 2011) Nature of duty owed by executive to nonexecutives: Utmost fair dealing / fiduciary in nature but not required to put interests of nonexecutives before his own No bright-line test for violation Refusal to lease actionable if refusal is arbitrary or motivated by self-interest to the non-executive s detriment. Violation of duty through self-dealing. 40

41 Enbridge Pipelines v. Gilbert Wheeler, Inc., No Argued February 27, 2014 Principal issues whether the cost to restore the property or diminution of market value is the proper damages measure for breach of right-of-way easement contract whether landowners waived claims by failing to submit a jury question on the nature of the property injury (temporary or permanent). 41

42 Tolling of Statute of Limitations Reasonable diligence for purpose of triggering limitations, includes a search of public records, even if complex and technical. Shell Oil Co. v. Ross, 356 S.W.3d 924 (Tex. 2011) BP Am. Prod. Co. v. Marshall, 342 S.W.3d 69 (Tex. 2011) Kerlin v. Sauceda, 982 S.W.2d 881 (Tex. 2008) HECI Exploration v. Neel, 982 S.W.2d. 881 (Tex. 1998) The latest challenge: Samson Lone Star LP v. Hooks, 389 S.W.3d 409 (Tex. App.Houston [1st COA] 2012), pet filed, No

43 Prognostications BTI Consulting Litigation Outlook % of clients expect to see jump in litigation matters Follow the Money: 43

44 Navigant s Oct Unconventional Litigation Trends Report Source: Navigant Consulting, 44

45 All sorts of cases Title, Land and Conveyance Disputes Disputes about terms of conveyance documents Boundary disputes Traditional title disputes about superior title Slander of Title 45

46 All sorts of cases Lease disputes Disputes over royalties Disputes about duration of lease (habendum, delay rentals, etc.) Implied covenants Pooling disputes Producer discrimination disputes Abandonment 46

47 All sorts of cases Tort Claims against Operators Subsurface Trespass Fraud and fraudulent inducement claims Disputes with Surface Owners Negligence Equipment failure/oilfield accidents/reservoir damage 47

48 All sorts of cases Disagreements over the meaning, performance and obligations owing under other contracts (non-lease) Joint Operating Agreement Asset Purchase and Sale Agreements Farmouts and Exploration Agreements Area of Mutual Interest Agreements Contracts for the Purchase and Sale of Oil or Natural Gas Industry Service Agreements Division Orders 48

49 All sorts of cases Disputes arising out of midstream operations Pipeline vs. Landowner disputes on easements and rights-of-way Environmental Litigation Ground & Water Contamination Air Pollution And many more 49

50 Thank you 50