17 minute read
Vertical Rules in a Horizontal World
By: Bill Keffer
We had a running back on my high-school football team that was fast and could put a move on you. But his problem was that instead of running forward downfield towards the other team’s end zone (what commentators call running “north-south”), he had a tendency to run sideline to sideline (running “eastwest”). Understandably, running really fast from sideline to sideline didn’t do much to advance the ball.
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Likewise, laying a ladder on the ground on its side isn’t nearly as useful as standing it up so you can climb to the desired height. Things that are meant to be used vertically aren’t very beneficial when they’re horizontal, nor are things that are meant to be used horizontally worth much when they’re vertical.
The oil-and-gas industry – more specifically, oil-and-gas lawyers are now confronted with a similar issue. With the advent and proliferation of horizontal wells, lawyers have to figure out which parts of the jurisprudence that has developed over the past one hundred years premised on vertical wells also applies to horizontal wells. It turns out not all concepts and principles are easily transferred or are even relevant.
Early on, in 2000, in the Texas case of Browning Oil v Luecke, the Austin court of appeals concluded that the fundamental doctrine of the rule of capture doesn’t apply to horizontal wells. With vertical wells, the rule of capture was meant to protect adjacent mineral owners from being liable for drilling vertical wells and draining oil and gas from underneath your property and to encourage you to drill your own vertical well to produce your oil and gas before it migrates away to your neighbors. Your vertical well is on your property, and your neighbors’ vertical wells are on your neighbors’ property, so the rule of capture makes sense. However, with a horizontal well that travels under multiple properties with specific take points (where the oil and gas from the formation enters the well) along the way, the principle behind the rule of capture is no longer relevant.
Luecke also pointed out the need for a different methodology to allocate royalties. In a pooled unit, royalties are allocated based on the proportionate share of acreage contributed to the pooled unit; if you contribute 100 acres to a 400-acre pooled unit, then you’re entitled to one-fourth of the lease royalty, regardless of how much oil and gas is actually produced from your property. But, where there is no pooled unit, and there is only a horizontal well crossing under and producing from several properties, then you are entitled to the percentage of production actually coming from your property.
In the 2017 case of Lightning Oil v Anadarko, the Texas supreme court decided that a mineral lessee (Anadarko) that couldn’t drill on its lease because of restrictions imposed by a wildlife refuge could drill a horizontal well from an adjacent property and required the permission only from that adjacent surface owner (Briscoe Ranch). The adjacent mineral lessee (Lightning Oil) objected to Anadarko allegedly trespassing by drilling through their (Lightning Oil’s) mineral interest to get to Anadarko’s mineral interest. The court concluded that whatever oil and gas that might be removed from Lightning Oil’s interest as a result of Anadarko drilling its well 8000 feet down and then laterally onto their property was insignificant compared to the overall value Anadarko would be able to derive from accessing its minerals in this way.
In the 2018 case of Murphy Exploration v Adams, the Texas supreme court had to decide how to interpret a provision in a lease that required the lessee (Murphy Exploration) to drill an “offset” well on the lessor’s (Adams) property, should an adjacent mineral lessee ever drill a well within a certain distance of the property line. An adjacent mineral lessee (Comstock) did that, so Murphy Exploration had to drill an offset well. Traditionally, in cases involving vertical wells and conventional formations (sandstone, limestone, and other
relatively permeable and porous rock), the idea was to drill an offset well to prevent your oil and gas from being drained by the well on the adjacent property.
However, in this case, though Murphy drilled a well, it was over 2,100 feet from the offending well – hardly close enough to prevent any potential drainage. Nevertheless, the court held that Murphy had satisfied its lease obligation by simply drilling the well, regardless of its proximity to the offending well. Because these were horizontal wells in an unconventional formation (i.e., tight shale that is neither porous nor permeable), the notion that an offset well would prevent drainage had no application.
Finally, in the ongoing (at least, legal) debate regarding the legality of allocation wells, the conceptual and practical differences between vertical and horizontal wells also manifest themselves. One school of thought considers allocation wells to be illegal efforts to pool acreage, where no pooling authority has been granted by the lessor. The other school of thought is that allocation wells are nothing more than a series of continuous horizontal wells underlying two or more leases and have nothing to do with pooling – unauthorized or otherwise.
It is curious to note that, despite this ongoing debate regarding the legality of allocation wells, there doesn’t seem to be any rush by any branch of government to resolve the matter. The state legislature has not enacted any statute that would answer the question – although you would think that it’s their job to do so. The courts have not decided any case that would shed any light on the matter – mostly because every case that has been filed so far has settled. The Railroad Commission has chosen not to issue any rules or regulations relating to allocation wells. This lack of action by all three branches of state government hasn’t seemed to slow down the number of allocation wells being drilled, which now are in the thousands. Perhaps ignoring the matter is the most productive course, after all.
We are transitioning from a vertical-well to a horizontal-well world. Technology, as usual, is out ahead of the law. It remains to be seen what other changes in the law will be made in recognition of the different dynamics present with horizontal wells.
Matt Skinner, with the Oklahoma Corporation Commission (Oklahoma’s version of our Railroad Commission), stated: “We have a well-established vertical world, and we have a new horizontal world. The issue is how can these two worlds live together.”
It’s almost like starting over. For the industry, that kind of uncertainty is scary. For lawyers, it’s a good way to make a living.
About the author: Bill Keffer is a contributing columnist to SHALE Oil &Gas Business Magazine. He teaches at the Texas Tech University School of Law and continues to consult. He also served in the Texas Legislature from 2003 to 2007.
2021 Climate Report Pairs Big Banks and Fossil Fuels
By: Nick Vaccaro
Finding themselves at the heart of the Banking on Climate Chaos 2021 Fossil Fuel Finance Report 2021, controversial conclusions were drawn on the working relationship between the banking and fossil fuel industries. With the current and intensified animosity towards both sectors, neither fared well in the published analysis.
Authored by Rainforest Action Network, BankTrack, Indigenous Environmental Network, Oilchange International, Reclaim Finance, and the Sierra Club, the report indicates 60 of the globe’s largest banks were surveyed and found to have allocated $3.8 trillion to the fossil fuel industry between 2016 and 2020. While fossil fuel financing saw a 9% decline due to the global pandemic, the year 2020 still experienced higher levels in comparison to 2016 after the Paris Agreement was enacted. Indicating the financing of fossil fuel projects is heading in the incorrect direction, meaning levels are rising, the report vantage point finds fault in this scenario.
TARGETING THE BANKS
While the oil and gas industry found itself at the center of the recent presidential race and remains first in line for scrutiny and attack, this recent report not only takes aim at the banking industry for conducting business with oil and gas companies, but it furthers the opposition with singling out specific players.
JPMorgan Chase was designated as number one, being the very worst to be in bed with oil and gas, with Citi following close behind. Wells Fargo, Bank of America, RBC and MUFG additionally were named to the list. Furthering the report’s dousing of shame, JPMorgan Chase, Citi and Bank of America were discovered to have furthered funding for some of the largest expansion companies even though they publicized support of the Paris Agreement, which the United States departed from under President Trump.
FAILURE TO LAUNCH
According to the Banking on Climate Chaos report, the Paris Agreement seems to have fallen short of its fossil fuel annihilation goal. Disappointment has been wagered that after five years since the agreement’s birth, fossilfuel funding is reportedly higher when the climate crisis argument should have resulted in more favorable results. Furthermore, with the devastating effects of the COVID-19 crisis and a 7% decline in fossil-fuel funding for 2020, the report indicated disappointing results with funding still being higher than in 2016.
Drawing conclusions, the analysis yielded both positive and negative theories. After running the gauntlet through the global pandemic, it is speculated that oil consumption may never return to prior levels. Considering the opposite end of the spectrum, however, fear is expressed in rationalizing the fact that even after the pandemic, reduction of fossil fuels is nowhere close to the desired mark by those who provided the report itself. Combatting the current route taken by fossil fuel production, the report opinion mandates an annual drop mirroring 2020 to take place over the next decade.
In order to meet goals, the report describes a more managed and regulated approach. A suggested route includes the banking industry rising up and drafting regulations and policies that result in the same declines found in 2020. Vehemently showing disdain for the financing activity in 2020, the report calls for eradication of any possible short-term profit by banks and to keep their commitment to the climate crisis argument front and center. Simply stated, the report authors are pushing for decreased funding of fossil fuel projects by the banking industry.
BIG BAD BANKS
There has never been a better example of the term, don’t bite the hand that feeds you. The authors of the report are quick to vilify the banking industry because of its business dealings with the fossil fuel industry. JPMorgan Chase took the biggest lashing, which one would think left them slighted and betrayed. While ranking number one on the report list, JPMorgan Chase conducts business on the renewable energy side as well.
According to their website, JPMorgan Chase conducted $55 billion in green-initiative transactions. Bloom Energy Corporation produced efficient generators that are responsible for both lower electricity costs and reduced emissions. This was due to the $230 million raised by the banking empire. The largest wind farm was developed by ALLETE Clean Energy and produces renewable energy for 114,000 homes, all due to financing provided by JPMorgan Chase.
According to Yahoo Finance, Wells Fargo has also contributed to the renewables sector by investing in over 500 projects as of February 2021. This was a 12% finance stake in domestic solar and wind capacity.
Citi has made a contribution of its own to green energy and reducing the carbon footprint. In the article, “Citi’s Commitment to Net Zero By 2050,” Jane Fraser, CEO, acknowledged the climate crisis. She wrote that Citi facilitated $164 billion in low carbon solution projects between 2014 and 2019. They upped the ante with a commitment of $250 billion of environmental projects by 2025.
The list remains long and distinguished. In relation to their size and financial rating, the banking industry is available on the greenenergy front.
The simple factor to consider is it takes money to make money. In investment discussions and even through the educational process of Academia, we are taught the importance of a diversified portfolio. Consider one’s personal investments. Allocating all of your capital to one investment typically does not rank high on the suggestion scale of financial planners and investment brokers.
Banking institutions are no different in their own financial survival. While the renewable energy sector is highly important and growing in worth, the banking industry cannot rely on this one basket of eggs. Pulling out of fossil fuel investments would drastically impact their own portfolios and, in the long run, decrease their ability to fund wind and solar projects as well as those of carbon storage.
The hard truth that many climate crisis crusaders want to avoid is that the fossil fuel industry is a staple of the economy, like it or not. No, it is not without problems and is far from perfect, but it is a pillar of the economy and, therefore, society. Those projects financed by the banks drive an economy that must remain strong.
Total deviation and abolishment of fossil fuel financing would leave the banking industry vulnerable and with little operating power to provide for wind and solar projects. Total reliability cannot be had by any one industry. A well-balanced and financially stable portfolio is a necessity. In this same light, fossil fuels are a large part of the banking portfolio.
LET THE BANKS BE BANKS
In a world populated with highly intelligent minds that have the gifts to make it a better place, it is largely fueled by emotion. The desire to improve and preserve life is noble and necessary. Great thinkers have paved the way in innovation in response to problems discovered. It is essential to remember that a variety of roles all contribute to the world we live in.
Capitalism and a free market are cornerstones of our society. We can dare to change the world, respond to social injustice and right wrongs, but impeding legal business is not a fit. It is not the business of the banking industry to regulate the fossil fuel industry. It should be changed through free thought and innovation. Any aspect of endangerment should be regulated through the government.
A well-suited example of this thought process involves the auto industry. When emission regulations came to pass, they were defined and regulated by the government. The auto manufacturers were tasked with engineering vehicles that met the established standards. The banking industry did not step in and refuse financing of new car purchases.
The same process should apply to fossil fuel, renewables and the climate crisis argument. Discussions amongst great thinkers, innovation in technology, and a mandate of teamwork must prevail if any success is to be had.
Ironically, the fossil-fuel industry has made great strides but never receives recognition. Instead, it is always painted with a brush of negativity and disdain. Organizations, however, like ONE Future are composed of oil and gas players who have committed resources and collaboration to lowering emissions, not due to government mandate, but for the desire to better the environment and set a standard of their own.
Carbon reduction is already a large portion of the fossil fuel industry. Storage projects are underway. While the industry does not specifically name careers in that wording, reducing the carbon footprint is a large part of industrial hygiene careers within oil and gas. The latest technology is provided on the university level for wellsite consultant positions. Efficiency is also a large part of the curriculum.
Moving ahead and discovering new ways to be both profitable and environmentally responsible are essential in the future of this planet. One cannot exist without the other, and until that notion is accepted by all, little progress will be made. A happy balance must be had. The future is bright, and no one knows for sure what it will bring. It is quite difficult to imagine a future existence without a dependence of any size on fossil fuels, but if it is to happen, it will not be overnight and all at once. So with that, an attempt to kill it off with one shot of banking finance reduction will only negatively impact the development of the green energy world so many desire. From where this writer hails, that is known as cutting off your nose to spite your face.
About the author: Nick Vaccaro is a freelance writer and photographer. Besides providing technical writing services, he is an HSE consultant in the oil and gas industry with eight years of experience. He also contributes to Louisiana Sportsman Magazine and follows and photographs American Kennel Club field and herding trials. Nick has a BA in Photojournalism from Loyola University and resides in the New Orleans area. 210-240-7188 Nick@shalemag.com.
The Last Decade – A Look Back at the Past Ten Years of Oil and Gas Policy
By: David Porter
In early January 2011, I took office as Texas’s newest Railroad Commissioner. From that vantage point, it appeared the industry’s major problem was a lack of production to meet demands for oil and gas, in large part sparked by the hostility of the Obama administration towards fossil fuels. The federal government’s hostility for oil and gas operations was expressed primarily by actions using regulatory overreach to discourage production. Much of our activity at the commission was directed at the need to maintain the primary regulation of oil and gas at the state rather than the federal level in order to thwart this threat to the oil and gas industry and the economy.
Over the past three or four years, it seems the efforts of the anti-oil-and-gas crowd have transferred away from using regulatory overreach to reduce supply to efforts demanding renewable sources of electricity and electric vehicles. This approach seems to be having more success in limiting production for its proponents than their earlier approaches. However, it has even more serious consequences for the people of the United States, including Texas. I thought it was highly ironic (considering Obama’s disdain and opposition to the oil and gas industry) that the industry was the source of the strongest economic growth during his term in office. The jobs brought about by exploration activity, the increased revenues due to the increase in production, the reduction in imports of oil into the country all strengthened the economy. This led to, in the early days of the Trump administration, the United States becoming the largest oil and gas producer in the world. Now under the Biden regime, we are in the process of throwing away that hard-won status. It saddens me to think of all the work of hundreds of thousands of people trying to find better technology and methods of drilling wells — work that led to the horizontal drilling boom. It also saddens me to think about all the billions of dollars invested in drilling wells — yes, some were not economically viable, but that is the price that is paid as part of the learning curve when developing new methods and technology.
The February blackouts show one of the consequences of reducing the usage of fossil fuels by requiring renewables. Unfortunately, I will predict that unless Texas has a mild season, there is a good chance that this summer, we will also have blackouts. My study of the electrical industry leads me to the opinion that anytime electric production by wind crosses the 10 to 12% threshold, there are potential negative long-term consequences for grid reliability. Texas is there. For additional information on this topic, I would like to direct you to David Blackmon’s writing, Texas Public Policy Foundation’s work, and John Hays’ recent article in Chronicles Magazine. Before I end this article, I want to throw out one more thought for the reader to consider. What kind of shape would the grid have been in during the February blackouts if we had at that time the amount of electric car usage predicted for 2030?
I concur with the discussion around Texas that the power infrastructure should have been better winterized and better attention paid to making sure the electric blackouts didn’t affect natural-gas infrastructure — effects that would reduce electric production. These were also conclusions after the winter of 2011 problems. I understand why (while not agreeing with) electric-power producers would not want to spend money on what much of the government, media and elite society consider a dying industry that is on the way out. Ideas have consequences, and the idea that oil and gas production needs to be phased out has negative consequences, consequences that have a real impact on our lives.
About the author: David Porter has served as a Railroad Commissioner (2011–17) and Chairman (2015–16), as well as Vice Chairman of the Interstate Oil and Gas Compact Commission (2016). Prior to service on the Commission, Porter spent 30 years in Midland, Texas, as a CPA working with oil and gas producers, service companies and royalty owners. Since leaving the Commission, Porter works as a consultant for oil and gas companies. He also serves as Chairman of the 98th Meridian Foundation, a nonprofit concerned with water, energy and land issues.
