Managing Business And Political Risk With Oil And … Business and... · Managing Business And...

Managing Business And Political Risk Associated With Oil And Gas Operations

In The Rockies

This Webcast Will Begin at Noon Eastern

Follow Steptoe & Johnson on Twitter:@Steptoe_Johnson

ALSO FIND US ON http://www.linkedin.com/companies/216795

© 2016 Steptoe & Johnson PLLC . All Rights Reserved.

Today’s Presenter

David R. LittleOf Counsel

david.little@steptoe‐johnson.com(303) 389‐4370

Introduction – Change is Constant

• Select Reasons for Today’s Increased Business Risks– Commodity price fluctuations– Shale production– Technology Changes – Longer Laterals, Greener Completions, Quieter Rigs, Methane Detection

– Increased Operating Costs• Select Reasons for Today’s Increased Political Risks– Increased Public Scrutiny in the United States– More Operations Near Homes and Places of Interest


• Goal of Presentation – Discuss New Cases and Other Recent Legal Developments in Colorado, Wyoming, North Dakota, New Mexico, and Utah Addressing:– The Business Risks You Manage– The Political Risks You Address–With a Focus on the Law of Oil and Gas


• Business Risks Discussed Today– Lease and Lease Maintenance Issues involving Shut‐In Wells and Related Issues

– Collecting Due and Owing JIBs– Royalty Payment Issues Involving Post‐Production Costs

– Statutory Pooling and Other Regulatory Updates


• Political Risks Discussed Today– Efforts in Colorado to Regulate or Ban Oil and Gas– Voter Initiatives in Colorado to Empower Local Governments and Increase Setbacks

– Colorado Efforts to Regulate Multi‐Well Pads– Federal Regulatory Updates

Lease Maintenance Issues in Colorado and Other States Involving Shut‐in Wells

• Maralex Resources, Inc. v. Chamberlain, 2014 COA 5, ¶¶ 12‐18, 320 P.3d 399, 401‐04 (Colo. App. 2014)– Fundamental purpose of an oil and gas lease is to provide for exploration, development, production and operation of the Leased Property for the mutual benefit of the lessor and the lessee

– An oil and gas lease is a legally protected interest in the mineral estate covered by the leases

– Maralex does a good job of briefly summarizing Colorado lease law and key cases


• Horob v. Zavanna, LLC, 2016 N.D. 168, _____ N.W.2d _____, 2016 WL 4440382 (N.D. Aug. 23, 2016)– Oil and gas leases are contracts.– The contract language “chosen” by the parties controls over common law doctrines.

• But what about old form leases?• DRL Note: many cases so state, but this rule is not always applied.

– Primary term v. secondary term.– Horob reaffirms prior North Dakota cases discussing “unless” clauses; “unless” clauses do not obligate the lessee to do anything, but if the lessee fails to satisfy the condition created by the unless clause, the lease will terminate.


– Horob: an “unless clause” is a clause of special limitation, and a failure to satisfy the condition created by the unless clause will result in automatic termination of the lease.

• Black Diamond Energy, Inc. v. Encana Oil and Gas (USA) Inc., 2014 WY 64, 326 P.3d 904 (Wyo. 2014)– Farmout agreement: alleged amendments by email, course of conduct and discussion

Lease Maintenance Issues in Colorado and Other States Involving Shut‐In Wells

– Owens v. Tergeson, 2015 COA 164, 363 P.3d 826 (Colo. App. 2015)

• Discusses how Colorado deeds and leases should be construed• Also discusses how warranty deeds, habendum clauses and granting clauses should be read

– Davis v. Cramer, 837 P.2d 218 (Colo. App. 1992)• Covenants implied in every lease: to drill and explore, develop after discovery in paying quantities, protect against drainage, to operate diligently and prudently and to market

• Implied duty to market includes sale of the product produced and the payment to the lessor of its share of proceeds

• Davis is Colorado’s most important lease expiration and savings case

– O’Hara v. Coltrin, 637 P.2d 398 (Colo. App. 1981)• An unless lease creates an estate upon limitation which terminates if the condition is not met


• Production in Paying Quantities—A Word from our Sponsor– Jessica E. McDonald and Zachary M. Wallen, “Defining ‘Production in Paying Quantities’: A Survey of Habendum Clause Cases Throughout the United States,” 90 N.D.L.Rev. 383 (2014).

– Energy Essentials – Summary of Selected Principles of Oil and Gas Law: Colorado, Kentucky, North Dakota, Ohio, Pennsylvania, Texas and West Virginia (2015) (published by Steptoe & Johnson PLLC, dedicated to the late Russell L. Schetroma).


• Production in Paying Quantities– Fleck v. Missouri River Royalty Corp., 2015 N.D. 287, 872 N.W.2d 329 (N.D. 2015)

• Facts: the habendum clause provided that the lease shall stay in effect for 10 years and “for so long thereafter as oil and gas is produced” from the lease; production was minimal

• Court: the term “produced,” as a matter of custom and practice, and public policy, means “production in paying quantities”

• Fleck adopts the Two‐Step Texas Test for North Dakota: (1) the lease must yield a profit over expenses for a reasonable period of time; and (2) a reasonable and prudent operator must be willing to operate the lease in this matter in good faith—i.e., in order to make a profit, not just hold the lease for speculation


• Commencement of Production– Wold v. Zavanna, LLC, 2013 WL 6858827 (D. N.D. Dec. 31, 2013) (not selected for publication, but collecting relevant North Dakota case law, case law from other states and quotes from commentators)

• Law varies from state to state. • Actual drilling may not be required to extend a lease.• Text matters, but words used in form contracts not negotiated between the parties carry less weight and need to be balanced with other public policy factors .


• Cessation of Production– Horob v. Zavanna, LLC, 2016 N.D. 168, _____ N.W.2d _____, 2016 WL 4440382 (N.D. Aug. 23, 2016)

• In the absence of an express cessation of production clause, an operator is generally allowed a reasonable time within which to bring a lease back into production.

– Fleck v. Missouri River Royalty Corp., 2015 N.D. 287, 872 N.W.2d 329 (N.D. 2015)

• The oil and gas lease must be timely restored to production in paying quantities in order to comply with a cessation of production clause.


• Pooling or Communitization– Horob v. Zavanna, LLC, 2016 N.D. 168, _____ N.W.2d _____, 2016 WL 4440382 (N.D. Aug. 23, 2016).

• Although the cessation of production clause was triggered when the well was shut‐in, the lease remained in effect due to a federal communitization agreement.

• The pooling clause in the lease authorized the operator to enter into the communitization agreement, and the communitization agreement provided that production anywhere within the communitized area would be deemed to be production on the lease. The communitization agreement remained in effect because the operator complied with the BLM’s directives.

• The underlying lease did not have a Pugh clause, so the entire lease was preserved because a part of it was within the communitized area.


• Shut‐In Royalty Clauses (Gas Wells Only?)– Valentina Williston, LLC v. Gadeco, LLC, 2016 N.D. 84, 878 N.W.2d 397 (N.D. 2016)

• Land manager tendered a shut‐in royalty payment with a cover letter which incorrectly stated that, if no wells were drilled by a particular date, certain acreage in certain sections “would terminate.”

• Court: the letter did not constitute a written contract amendment or waive the lessee’s rights; nor was it enforceable as a matter of equity.

• Key: no allegation of oral agreement.


• Pugh Clauses– Northern Oil and Gas, Inc. v. Moen, 808 F.3d 373 (8th Cir. 2015)

• In order to overcome the presumption in North Dakota that a lease is indivisible, a Pugh Clause must be direct and explicit.


• Assignment of Surface Use Agreements (and Leases?)– Pennaco Energy, Inc. v. Sorenson, 2016 WY 34, 371 P.3d 120 (Wyo. 2016)

• Pennaco assigned the SUA(s) (and leases) to another operator, who abandoned the properties.

• Court: contract rights are assigned, but duties are delegated in Wyoming; delegations of duties are not effective unless there is a novation by the surface owner/lessor.

• Court: Pennaco as assignor remained liable as there was no evidence of novation, no exculpatory clause in the SUA and the exculpatory clause in the lease was not incorporated into the SUA; text included in the SUA stating that it was intended to run with the land did not amount to the required novation.

• Court: language permitting assignment of duties might have changed the outcome.

• DRL Note: the law may be different in other states.


• Expectation Damages for Breach of Lease– Trans‐Western Petroleum, Inc. v. U.S. Gypsum Co., 2016 UT 27, ___ P.3d ___, 2016 WL 3369544 (Utah June 16, 2016)

• Expectation damages for the breach of a Utah oil and gas lease, just like the breach of any other contract under Utah law, may include both general damages and consequential damages.

• These damages are intended to put the damaged party in the position it was in prior to the injury by awarding: (1) the loss of value of the other party’s breach of contract, plus (2) any other loss, including incidental or consequential loss caused by the breach, less (3) any cost or other loss avoided by not having to perform.

Remedies Under JOAs, Farmout Agreements and Common Law for Collecting Due and Owing Funds

• JOAs—Proprietary AAPL Agreements (often used with Farmouts)– Most common forms: 1989 and 1982; the new 2015 form addresses horizontal

drilling and other issues.– Housekeeping During Slow Times

• Verify that all parties have signed the JOA; check titles (Art. IV of the 1989 form).

• Discharge Joint Account obligations (Art. V).• Amend special provisions to address horizontal drilling, delayed completions,

or other issues (Art. VI). • Art. VII Remedies—perfect liens; record JOA recording memoranda; consider

cash calls.• Art. VII Defaults—suspensions of rights, notices of default, suits for damages

(plus collection costs and fees), deemed non‐consent, advance payment requirements.

• Art. VIII—consents to surrender leases, renewals and extensions, cash calls. • COPAS Audits.

Remedies Under JOAs, Farmout Agreements and Common Law for Collecting Due and Owing Funds

• Common Law Remedies– Cotenancy—The operator must account to the other owners. It helps to structure the relationship.

• Contracts simpler than JOAs—division orders, etc.• Pooling under state statutes (helps address certain trespass, accounting and payment issues).

• Oil and gas lien and royalty payment statutes.• Setoff and recoupment. See Risa Lynn Wolf‐Smith and Elizabeth Spencer, “Protections for Oil and Gas Operators and Working Interest Owners in a Bust Cycle,” 35 Amer. Bankr. Inst. J. 26 (May 2016).

New Cases Impacting the Payment of Royalties

• Most States Have a Royalty Payment Act. E.g., Wyo. Stat. Ann. §§30‐5‐301 to 305; Morris v. CMS Oil and Gas Co., 2010 WY 37, 227 P.3d 325 (Wyo. 2010) ($100 per month penalty).

• Post‐Production Costs. David E. Pierce, Royalty Jurisprudence: A Tale of Two States, 49 Washburn L.J. 347 (2010) (Texas “science” and Colorado “art”).– Word Picture—The Big Bang Theory.

• Express lease language will displace other rules.• North Dakota: Kittleson v. Grynberg Petroleum Co., 2016 ND 44,

876 N.W.2d 443 (N.D. 2016) (reaffirming that North Dakota follows the “at the well” rule which permits a work‐back or netback approach deducting reasonable costs after extraction from the actual downstream sales price, often at the tailgate of the processing plant). North Dakota’s approach is similar to the Texas approach.

New Cases Impacting the Payment of Royalties

• Ulibarri v. Southland Royalty Co., LLC, ___ F. Supp. 3d ___, 2016 WL 3946800 (D. N.M. July 20, 2016) (court refused to certify question of whether New Mexico follows the marketable condition rule to the New Mexico Supreme Court; whether New Mexico follows the marketable condition rule is still open per an earlier supreme court decision which remanded the issue to the trial court to decide whether the marketable condition rule applies as a matter of fact or law).

• Lindauer v. Williams Production RMT Co., 2016 COA 39, ___ P.3d ___ (Colo. App. Mar. 10, 2016) (excellent analysis of prior Colorado precedent; “at the well” text is silent; the implied covenant to market obligates the lessee, and not the lessor, to place the gas in a marketable condition and to deliver it to a commercial marketplace; reasonable costs incurred after the lessee satisfies these conditions may be shared with the lessor and deducted).

• Gagnon v. Merit Energy Co., LLC, 2015 WL 9489609 (D. Colo. Dec. 30, 2015) (unpublished order denying class certification on royalty payment issues).

Statutory Pooling and COGCC Updates and How They Impact Oil and Gas Operations

• C.R.S. § 34‐60‐116—Spacing and Pooling.• Statutory pooling helps define the legal relationship between cotenants and other co‐owners. In Colorado, the pooling process requires:

– Notice of application and notice of hearing to be mailed to interested parties as defined in COGCC Rule 507.b.

– Testimony and evidence submitted pursuant to COGCC Rule 511.– Most often, approval of the application on the COGCC’s consent agenda.– The issuance of an order confirming the statutory pooling and penalties

to be imposed.• “New” COGCC Policy—Per C.R.S. § 34‐60‐108(4) and Colo. R. Civ. P. 4 with respect to mineral or working interest owners who cannot be located and served.

– Require motion authorizing service by publication.– Require explanation of efforts to locate missing persons and entities.

• COGCC applications and lawsuits have begun to question sufficiency of efforts to locate “missing” owners.

Statutory Pooling and COGCC Updates and How They Impact Oil and Gas Operations

• Other COGCC Developments.– 8/28/16 COGCC Hearing—Director Lepore announces the

COGCC is considering a rulemaking to increasing mill levies in order to generate additional revenue.

– 8/28/16 COGCC Hearing—COGCC enforcement efforts targeting untimely, insufficient, or incorrect Form 5 and 5A drilling and completion forms, especially for wells with delayed completions.

– 7/19/16 COGCC Hearing—Discussion of state efforts to reduce truck traffic and the authority of the COGCC under Rule 707 to require additional financial assurance as wells are shut‐in.

– The COGCC has begun posting Operator Guidance Documents addressing discrete permitting and operations issues.

Political Risk—Efforts by Local Governments to Regulate or Ban Oil and Gas Operations

• City of Fort Collins v. Colo. Oil & Gas Assoc., 2016 CO 28, 369 P.3d 586 (Colo. 2016) (five year moratorium on hydraulic fracturing and the storage of waste products within the city).

• City of Longmont v. Colo. Oil & Gas Assoc., 2016 CO 29, 369 P.3d 573 (Colo. 2016) (voter‐approved prohibition by home rule city barring the use of hydraulic fracturing and the storage and disposal of hydraulic fracturing waste).

• Key Colorado Supreme Court holdings:– Express or implied preemption occurs when the state legislature clearly and unequivocally

states its express or implied intent to occupy a given field due to a dominant state interest.– State preemption also occurs for home rule and statutory cities when the operational effect of

local law conflicts with the application of state law; local laws may be preempted when the operational effect of the local law materially impedes or destroys a state interest.

– The COGCC does not have exclusive authority to regulate the technical aspects of oil and gas operations.

– The operational effect of the Fort Collins and Longmont laws materially impeded and destroyed the state’s interest demonstrated interest in the efficient and responsible development of oil and gas resources using hydraulic fracturing.

– The inalienable rights provision in the Colorado Constitution did not preclude preemption of the Fort Collins and Longmont laws.

Political Risks—Efforts by Local Governments to Regulate or Ban Oil and Gas Operations

• Weld County—proposed intergovernmental agreement between the COGCC and Weld County by which both entities would share permitting forms and public feedback and confer about substantive permitting decisions.

• City of Greeley—during early 2016, approved a multi‐well pads located in an open space area within city limits with existing oil and gas operations.

• Boulder County—in light of the Fort Collins decision, the county in May 2016 terminated its “temporary” moratorium on oil and gas development in place since 2012. In its place, the county adopted a new temporary moratorium now scheduled to end on November 18, 2016.

Political Risk—The Latest on Proposed Initiatives in Colorado

• The initiative process may be used in Colorado to amend the state constitution.

• In 2016, three initiatives were proposed which would have materially impacted oil and gas operations: Initiative 63, recognizing a right to a healthy environment; Initiative 75, revamping the authority of local government to regulate oil and gas development; and Initiative 78, creating mandatory setbacks of one half mile for oil and gas development.

• Signatures were submitted to the Secretary of State for Initiative 75 (local government authority) and Initiative 78 (setbacks).

• On August 29, 2016, the Colorado Secretary of State announced that an insufficient number of valid signatures were submitted to support both Initiative 75 and 78. Proponents may file a judicial action challenging this determination on or before September 28, 2016.

• The “Raise the Bar” amendment—Initiative 96—was supported by sufficient signatures and will be on the ballot in November 2016.

Political Risk—Large Multi‐Well Pads in Colorado as a Case Study

• The COGCC adopted Large Urban Mitigation Area (“LUMA”) Facility Rules in January 2016. The rules became effective on March 16, 2016.

• LUMAs are new locations proposing (a) 8 or more new wells or (b) 4000 barrels or more of cumulative hydrocarbon storage within an urban mitigation area (22 building units or one high occupancy building within a 1000 foot radius or 11 building units or one high occupancy building within a 1000 semi‐circle).

• LUMAs must meet additional permitting and operations requirements under the 300 and 600 series of the COGCC Rules.

• State and federal environmental standards also must be satisfied. • There are pros and cons of large multi‐well pads.• Steptoe’s air, multi‐well pad and LUMA expert: Ghislaine Torres

Bruner.

Political Risk—Federal Efforts to Toughen Regulation of Hydraulic Fracturing

• March 2015—New rules issued by the BLM imposing new well casing, chemical disclosure and water and wastewater management on federal and Indian lands.

• State of Wyoming v. U.S. Dep’t of the Interior, 136 F. Supp. 3d 1317 (D. Wyo. 2015) (preliminary injunction issued; Congress intended state regulation under the Safe Drinking Water Act to completely occupy the field of underground injection regulation, including hydraulic fracturing).

• State of Wyoming v. U.S. Dep’t of the Interior, 2016 WL 3853806 (10th Cir. July 13, 2016) (appeal dismissed as moot; matter remanded with instructions to vacate the preliminary injunction).

• State of Wyoming v. U.S. Dep’t of the Interior, 2016 WL 350915 (D. Wyo. June 16, 2016) (Judge Skavdahl sets aside the final rule for the same reasons the preliminary injunction issued).

• State of Wyoming v. U.S. Dep’t of the Interior, Case No. 16‐8068, United States Court of Appeals, Tenth Circuit (appeal pending; briefs were submitted by the respondents on September 16, 2016; additional briefing will take place during the next month).

• Key Issues: Congress’ grants of broad regulatory authority to BLM over federal and Indian lands in numerous statutes and the impact of those grants given the Safe Drinking Water Act’s preference for state regulation).

Matters Relating to Federal Leases

• The Office of Natural Resources Revenue (“ONRR”)– The Department of the Interior’s mineral revenue functions

were relocated to ONRR in 2010.– ONRR has increased penalty enforcement. See Kathleen C.

Schroder and Peter J. Schaumberg, “The Office of Natural Resources Revenue: There’s a New Sheriff in Town!,” 30 Nat. Resources & Env’t 36 (Winter 2016).

• Federal lease extensions and suspensions also can be expected to be given extra attention in the present price environment. See Robert C. Mathes and Timothy R. Canon II, “Staying Alive: Navigating the Complexities of Federal Oil and Gas Lease Extensions, Terminations, Cancellations, and Suspensions,” 61 Rocky Mtn. Min. L. Inst. 28‐1 (2015).

QUESTIONS?

Thank You!

David R. LittleOf Counsel

david.little@steptoe‐johnson.com(303) 389‐4370

These materials are public information and have been prepared solely for educational purposes. 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 Steptoe & Johnson PLLC 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 Steptoe & Johnson PLLC. 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.

Material Disclaimer

Date post:	06-Sep-2018
Category:	Documents
Upload:	hathuy
View:	221 times
Download:	0 times