The Energy Law Blog

Caddo Parish Commissioners Postpone Decision on Oil and Gas Ordinances

kbbecker@liskow.com (Kelly Becker) — Fri, 10 Jul 2009 13:15:26 -0500

by Elisabeth Lorio Baer

Despite the urging of Caddo Parish property owners to pass regulating ordinances and appeals from the oil and gas industry to leave regulation to other governing bodies, Caddo Parish commissioners decided to postpone the passage of oil and gas ordinances on Thursday. The Caddo Commission has been studying the proposals since February, but has decided to postpone a final vote by the Commission until August pending further discussion with the Commission’s oil and gas committee. The parish ordinances will further regulate certain state regulations instituted by the Louisiana Office of Conservations, scheduled to go into effect in August, such as hours of operation, noise, lighting, dust and other conditions at well and pipeline sites. The Caddo Parish Commissioners are striving to develop a set of ordinances that both protect the citizens of Caddo Parish, but also keep costs down to allow the continuation of drilling by smaller oil companies that have been drilling in Caddo Parish for years without local regulation. Commissioner Doug Dominick is recommending grandfathering language in the ordinance to protect the existing oil companies drilling in the area.

For more information go to: http://www.shreveporttimes.com/article/20090710/NEWS01/907100336/1060

States Challenge Attempted Federal Power Grab in Hydraulic Fracturing Issue

kbbecker@liskow.com (Kelly Becker) — Thu, 18 Jun 2009 09:57:34 -0500

By Emma J. Hinnigan

On June 10, 2009, the Interstate Oil and Gas Compact Commission (IOGCC) reaffirmed its strong stance that the states remain best positioned to regulate the use of hydraulic fracturing for the production of oil and natural gas. The IOGCC’s response comes on the heels of two bills introduced in the House and the Senate calling for the repeal of the exemption of hydraulic fracturing from the Safe Drinking Water Act (SDWA), which would effectively give the federal government jurisdiction over the regulation of the technology. Hydraulic fracturing plays a major role in the development of unconventional oil and natural gas resources, and some claim the process contaminates underground drinking water sources. The Executive Director of the IOGCC, Carl Michael Smith, explained that states do a “superb job of protecting human health and the environment through sound regulation.” Smith warned that an “unnecessary shift to federal regulation of hydraulic fracturing could greatly inhibit the production of much-needed oil and natural gas resources when our nation’s energy security is critical.”

For more information, go to
http://www.prweb.com/releases/2009/06/prweb2522454.htm

Fifth Circuit remands case regarding lessee's breach of a settlement agreement

kbbecker@liskow.com (Kelly Becker) — Thu, 11 Jun 2009 11:57:50 -0500

By Jessica Gladney

The Fifth Circuit recently reversed the district court’s grant of partial summary judgment in Dore Energy Corp. v. Prospective Investment & Trading Co. Ltd., No. 08-30186 (5th Cir. 5/28/09). The dispute in Dore centers on the interpretation of a 2002 settlement agreement between the parties to certain mineral leases in Cameron Parish. Dore Energy Corp. filed suit in 2000 against the lessees of a 1927 mineral lease seeking to cancel underdeveloped portions of the lease. The parties reached a settlement agreement on January 28, 2002, in which the lessees agreed to release their interest in all of the mineral lease except for three specified sections of land, referred to as the “Retained Area.” The settlement agreement provided that three years after the agreement, the portions of the Retained Area that were not then in “producing units” would be released. The agreement also imposed an obligation on the parties to attempt to negotiate in good faith the size and extent of the producing units before instituting a proceeding before the Louisiana Commissioner of Conservation to settle any disputes.

On January 28th, 2005, only one of twenty-five existing wells in the Retained Area was still producing from the depth identified in its unit designated by the Commissioner of Conservation. In March 2005, Dore sent letters to the lessees demanding that they surrender the lease to all acreage other than that related to the one well producing at the unit designation depth. The lessees offered to negotiate with Dore regarding the shape and configuration around the wells, to include wells that had been recompleted into shallower zones than those specified in unit designations, but Dore instead filed suit in September 2005 seeking enforcement of the settlement agreement. The district court granted Dore partial summary judgment, finding that since only one well was producing at its unit designation depth and no voluntary units had been formed between 2002 and 2005, only one well in the Retained Area constituted a “producing unit.” The district court therefore canceled the lease on the rest of the Retained Area, effective January 28, 2005.

The Fifth Circuit determined the provision in the settlement agreement that required the parties to negotiate in good faith as to the size and extent of producing units before pursuing a determination from the Louisiana Commissioner of Conservation was not subject to the three-year time limit. Since no time limit for this provision was provided by the agreement, the obligation must be performed within a reasonable time. The Fifth Circuit remanded the case to the Western District of Louisiana for a determination as to whether the lessees breached the settlement agreement by failing to institute negotiations within a reasonable time. While recognizing that the agreement may have been breached, the court emphasized specific performance as a potential remedy and expressly stated, “The remedies available under Louisiana law and by these pleadings for such a breach do not include forfeiture.”

Fifth Circuit Reverses, Allows Texas to Intervene in Cy Pres

kbbecker@liskow.com (Kelly Becker) — Tue, 02 Jun 2009 08:52:13 -0500

By Marie Carlisle

On May 28, 2009, the Fifth Circuit decided In the Matter of: Lease Oil Antitrust Litigation, case no. 08-40230, reversing the District Court’s denial of the State of Texas’ motion to intervene in a matter concerning unclaimed settlement money from the oil antitrust action. The Fifth Circuit found that Texas met the requirements to intervene as it presented a timely motion, demonstrated an interest in the litigation which was direct and substantial and would be impaired without intervention, and that Texas’ interest was not represented by any of the existing parties. The appeal stemmed from a 1999 settlement in a class action where the Plaintiffs claimed oil companies were not paying the fair market value of oil at the well. After distribution of settlement checks to members of the class who could be located, $4,638,283 in funds remained and were owed to class members who could not be located, but whose last known addresses were in the State of Texas. The District Court decided to distribute the funds to a third party, under the doctrine of cy pres. The State of Texas was not a party to these hearings. On December 12, 2007, the district court approved the cy pres distribution but, anticipating an intervention and appeal by the State, set the funds aside rather than immediately distributing them. On January 11, 2008, Texas filed a motion to intervene and a motion to reconsider with the district court. Both motions were denied and Texas then appealed the denials to the Fifth Circuit, arguing that it should have been granted leave to intervene in the district court. The Fifth Circuit reversed the district court, finding that Texas met the requirements for intervention as of right—it filed a timely motion, presented a direct and substantial interest in the litigation which would be impaired absent intervention, and had demonstrated that its interests were not represented by the existing parties.

Louisiana Fourth Circuit Court of Appeals Affirms Denial of Class Certification in Alleged Chemical Exposure Case

kbbecker@liskow.com (Kelly Becker) — Wed, 20 May 2009 16:57:47 -0500

By Jessica Gladney

In Thomas v. Mobil Oil Corp., No. 2008-0541 (La. App. 4 Cir. 3/31/09), the Fourth Circuit affirmed the trial court’s denial of class certification against the defendants, Exxon Mobil Corporation and Chalmette Refining, L.L.C. The proposed class consisted of approximately 7,000 claimants from Algiers and St. Bernard, and the plaintiffs alleged personal injury and property damages from emissions of petrochemical facilities operated by the defendants over a fourteen-year period. The claims forms submitted did not specify dates that claimants allegedly suffered from any of the alleged damages, and the trial court concluded that the claims among the purported class members varied so greatly that the putative class representatives could not adequately represent the class. The Fourth Circuit recognized that the Louisiana Supreme Court’s holding in Ford v. Murphy Oil, U.S.A., Inc., 1996-2913 (La. 9/9/97), 703 So. 2d 542 was controlling and affirmed the trial court’s holding denying class certification. The court noted that the wide variances in geographic location, claimed exposure, and types and degree of damages claimed by the putative class members demonstrated that the claims were too individualized and the certification of the class should therefore be denied.

Local Louisiana tax assessor files suit against oil companies alleging underpayment of millions in ad valorem property taxes

kbbecker@liskow.com (Kelly Becker) — Thu, 14 May 2009 14:35:16 -0500

"Coastal Parishes v. Big Oil" is the name of the website addressing the lawsuit just filed in federal court against Burlington & LL&E, for property taxes on equipment that is in onshore coastal waters as well as offshore waters within the three mile territorial limit. This lawsuit was filed by the Terrebonne Parish assessor claiming that the "big oil" companies committed fraud on their property tax reporting forms (the "LAT" forms) by (1) using a fraudulently low "replacement-cost-new-less-depreciation" values for equipment; (2) omitting certain pieces of equipment entirely; and (3) reporting certain wells as shut-in or stripper wells when they were, in fact, producing. The attorneys say that they have assessors from other parishes on board and that this is the first of many lawsuits to come against "Big Oil."

The link below is to the website established by the attorneys for the assessors. The complaint can be found on that website. It seeks (1) back taxes for some 10 years; (2) penalties for fraud; and (3) civil RICO penalties against the individual employee responsible for the LAT forms. It also contains complaints against LIOGA and the Louisiana Tax Commission, although neither is named in the complaint.

For more information, contact Robert Angelico, Jim Exnicios, or Cheryl Kornick.

www.paytaxesoil.com.

Louisiana Legislature Considers Bill to Allow State to Pay Attorneys Using Contingency Fee Arrangement

kbbecker@liskow.com (Kelly Becker) — Fri, 08 May 2009 13:56:20 -0500

By Kelly Becker

The Louisiana legislature is currently considering House Bill 758 which would allow the Attorney General to pay up to a twenty-five percent contingency fee to outside attorneys to represent the State in litigation. Several industry groups, including the Louisiana Association of Business and Industry and the Louisiana Oil and Association, oppose the bill on the basis that it would lead to “frivolous” suits and target certain industries within the State. In the past, the State hired outside counsel to pursue claims for allegedly underpaid royalties and severance taxes and paid those outside lawyers on a contingency basis. Challenges were often raised to the contingency fee structure in those cases as violating the Louisiana Supreme Court’s decision in Meredith v. Ieyoub, 96-1110 (La. 9/9/97), 700 So. 2d 478, which held that through the terms of those contingency fee contracts, the Attorney General unconstitutionally usurped legislative authority by alienating to outside counsel State-owned property – a portion of any funds recovered in the litigation.

For more information on the proposed legislation, see www.nola.com/business/t-p/index.ssf/base/money-2

Drilling Regulations for Haynesville Shale to be Discussed

kbbecker@liskow.com (Kelly Becker) — Mon, 04 May 2009 11:21:34 -0500

By Jacob Credeur

The Caddo Parish Commission is preparing for a public hearing on May 21 where it is set to discuss proposed drilling regulations for operators in the Haynesville Shale. The commission is working on the set of ordinances in committee discussions and is seeking to acquire public input before taking action. The proposed regulations, as they currently stand, would cover everything from dust abatement, vibrations, odors, and noise to use of public water supplies and pipeline installation. Caddo Parish Attorney Charles Grubb has stated the intent of the proposed ordinances is to make certain that when drilling is done in populated areas “it is done in such a way that we don't lose quiet, peaceful possession of our property,”

For more information see: http://www.shreveporttimes.com/article/20090429/NEWS01/904290359/1060

D.C. Circuit Vacates Interior's Five-Year Leasing Program

kbbecker@liskow.com (Kelly Becker) — Tue, 28 Apr 2009 17:38:32 -0500

By Jessica Gladney

In Center for Biological Diversity v. U.S. Department of the Interior, the United States Court of Appeals for the District of Columbia Circuit issued a ruling on April 17, 2009 vacating the Department of the Interior’s statutorily-mandated five-year offshore oil and gas leasing program for the period 2007-2012. The five-year leasing program included an expansion of lease offerings in the Beaufort, Bering, and Chukchi Seas off the coast of Alaska. Suit was filed against the Department of the Interior by the Center for Biological Diversity and by Alaska native and environmental groups who challenged the leasing program on various environmental grounds. The D.C. Circuit (which has exclusive jurisdiction over a legal challenge to the five-year leasing program) rejected many of the petitioners' claims, but upheld the challenge based on a finding that "the [Leasing] Program's environmental sensitivity rankings are irrational." Accordingly, the court vacated the leasing program and remanded the program to Interior for reconsideration.

To view the entire opinion, please click here.

Texas Supreme Court Sends Parties to Arbitration in JOA Dispute

kbbecker@liskow.com (Kelly Becker) — Mon, 20 Apr 2009 15:28:59 -0500

By Natalie Barletta

The Texas Supreme Court in, In re Gulf Exploration, LLC, No. 07-0055 (Tex. Apr. 17, 2009), addresses when mandamus relief is available in connection with an order compelling arbitration. In this case, several working interest owners sued Great Western Drilling, their operator, claiming an opportunity to participate in wells drilled by Great Western. The working interest owners moved to compel arbitration pursuant to the terms of the arbitration clause contained in their joint operating agreements. The trial court granted the motion to compel and Great Western sought mandamus relief in the court of appeals. The appellate court held that the trial court “clearly and indisputably” abused its discretion and conditionally granted mandamus relief.
The primary issues before the Supreme Court were: (1) whether the appellate court had jurisdiction to review the trial court’s order compelling arbitration; and, if so, (2) whether the appellate court erred in vacating the trial court’s order on the ground that the claims were outside the scope of the arbitration clause. The court stated the general rule that there can be no immediate appeal of an order compelling arbitration if the order merely stays the underlying litigation. However, an appeal may be taken if the underlying case is dismissed. Here, the trial court merely stayed the case pending arbitration; therefore, there was no final judgment from which to appeal.
The court continued, however, stating that even though an order is not reviewable by interlocutory appeal, mandamus review is not necessarily precluded. The party seeking mandamus relief must show that it has no other adequate remedy by appeal. The adequacy of an appeal is determined on a case-by-case basis by balancing the benefits and detriments of arbitration. Because both federal and state arbitration acts exclude immediate review of an order compelling arbitration, the balance tilts “strongly against mandamus review.” In this case, the court found that there were no counterbalancing legislative mandates indicating that the legislature weighed in on one side of the balance. The court did not reach the issue of whether the claims fell outside the arbitration clause, but even assuming that the claims were not within the arbitration clause, Great Western failed to show that its appellate remedy following arbitration is inadequate. The court directed the appellate court to vacate its judgment, reinstating the trial court’s order compelling arbitration.

A premises owner can still be a statutory employer in Texas, at least for now

rltheriot@liskow.com (Robert Theriot) — Mon, 06 Apr 2009 17:48:18 -0500

By Andrew Wooley:

The Supreme Court of Texas issued a decision on rehearing in Entergy Gulf States, Inc. v. Summers April 3, 2009. The court’s original unanimous decision in August 2007 that a Texas premises owner can be a statutory employer for workers’ compensation purposes produced a great deal of political heat and a flurry of amicus briefs; so much so that the court departed from its normal practice and entertained oral argument on the motion for rehearing.

On rehearing, three justices joined in the opinion of the court; three justices concurred in different parts of the court’s opinion (two of them writing separate concurring opinions), and three justices dissented from the court’s decision and opinion. The court’s holding, however, did not change.

In this workers’ compensation case, we decide whether a premises owner that contracts for the performance of work on its premises, and provides workers’ compensation insurance to the contractor’s employees pursuant to that contract, is entitled to the benefit of the exclusive remedy defense generally afforded only to employers by the Texas Workers’ Compensation Act. . . . We hold that the exclusive remedy defense for qualifying general contractors is, likewise, available to premises owners who meet the Act’s definition of “general contractor,” and who also provide workers’ compensation insurance to lower-tier subcontractors’ employees. Because we conclude that Entergy Gulf States, Inc. meets the definition of “general contractor” under the Act, and . . . otherwise qualifies under the Act . . . it is entitled to the exclusive remedy defense against the negligence claims brought by . . . John Summers [a subcontractor’s employee]. We reverse the court of appeals’ judgment and render judgment for Entergy.

The opinion of the court and the concurring and dissenting opinions are available on the court’s web site at http://www.supreme.courts.state.tx.us/historical/040309.asp. They are also available on Westlaw at 2009 WL 884906.

A bill has been introduced in the Texas legislature to “fix” the court’s decision in Entergy, however, so premises owners are well advised to monitor the progress of Texas Senate Bill No. 2063 (http://www.legis.state.tx.us/tlodocs/81R/billtext/pdf/SB02063I.pdf) before deciding whether to revise their insurance programs and forms of agreement with maintenance, construction, and other contractors in light of the decision in Entergy.

Haynesville Shale Scores Big Despite Low Gas Prices

kbbecker@liskow.com (Kelly Becker) — Tue, 31 Mar 2009 11:51:16 -0500

By Jacob Credeur

A recent article in the Shreveport Times indicates that payouts from the Haynesville Shale formation are leaving even the biggest players surprised. Even though Petrohawk Energy, Chesapeake, and other producers are scaling back production activity nationally because of reduced demand for natural gas, many producers are ramping up their activities in North Louisiana. The early reports from wells there indicate production levels up to ten times higher than wells in other productive gas fields. According to the Louisiana Department of Natural Resources, Petrohawk had the top producing well in the state for the month of December with roughly 713.4 million cubic feet of production. With numbers like those it is no surprise that some companies are placing in excess of 50% of their 2009 budget into the shale play.
While some of the numbers and production being reported out of the Haynesville Shale are staggering, many in the industry warn that development will remain slow without an upturn in the markets and increase demand for natural gas.
For more on the article, see http://www.shreveporttimes.com/article/20090317/NEWS01/903170315

Texas Supreme Court Decides Miesch Case

rltheriot@liskow.com (Robert Theriot) — Mon, 30 Mar 2009 10:10:30 -0500

By Everard Marseglia:

Last Friday, the Supreme Court of Texas issued decisions in two companion cases, No. 05-1076; Exxon Corp., et al. v. Emerald Oil & Gas Co., et al. (“Miesch”), and No. 05-0729; Exxon Corp., et al. v. Emerald Oil & Gas Co. (“Emerald”). Butch Marseglia, counsel in Liskow & Lewis’s Houston office, submitted a brief for the Texas Oil & Gas Association (“TxOGA”) as amicus curiae.

In Emerald, the Court held that Section 85.321 of the Texas Natural Resources Code creates a private cause of action, but it does not extend to a subsequent lessee against a prior lessee for damages to the subsequent lessee’s interest. Because the plaintiff Emerald owned no interest in the mineral leases when the prior lessee allegedly damaged the interest, the plaintiff lacked standing to assert the cause of action the Court recognizes under section 85.321. The Court also held that Emerald also lacked standing to bring a claim against its prior lessee based on negligence per se.

In Miesch, the Court held that statutory and common law waste, negligence per se, negligent misrepresentation, and tortious interference claims against the former lessee were time-barred. The Court also held that no evidence supported the lessors’; claim for breach of development claims under the oil and gas lease. Finally, the court affirmed the court of appeals’ judgment, for different reasons, reversing the trial court’s directed verdict with respect to fraud claims based on allegedly misrepresentation in Railroad Commission plugging reports filed by the former lessee, and remanded that claim to the trial court for further proceedings.

Click here for a link to the Miesch decision.

Click here for a link to the Emerald decision.

Demand Falls for Offshore Leases; Economy, Policy Shifts Reflected in Bids

kbbecker@liskow.com (Kelly Becker) — Mon, 23 Mar 2009 10:41:18 -0500

By Katie Cambre

As reported in the Louisiana Mid-Continent Oil & Gas Association Daily News Summary, a federal auction of drilling tracts in the central Gulf of Mexico drew far fewer bids at much lower prices than during past auctions, and analysts attributed the decline to a poor economy and new energy policies proposed by President Barack Obama.

The lean sale directly affects Louisiana, which shares with Alabama, Mississippi, and Texas revenue from an area of the Gulf, which accounted for 5.8 million acres included in the auction.

Still, analysts and federal officials called the sale a success, pointing to fierce competition for several different areas.

For further information, see http://www.nola.com/business/t-p/index.ssf?/base/money-2/1237441027220440.xml&coll=1

Texas Court of Appeals Affirms Lease Termination and Rejects Summary Judgment on Adverse Possession Claim

kbbecker@liskow.com (Kelly Becker) — Mon, 16 Mar 2009 11:06:59 -0500

By Marie Carlisle

In Sun-Key Oil Co., Inc. v. Ernest Cannon & Moncrief Minerals P’ship, L.P., the Eleventh Court of Appeals in Eastland affirmed the District Court’s judgment granting summary judgment in favor of a lessor’s lease termination claim based on cessation of production and denying Sun-Key Oil Company’s motion for summary judgment on its affirmative defense of adverse possession stating that Sun-Key had failed to present detailed evidence establishing its use of the property and the elements of its adverse possession claims. The Court of Appeals referenced the Texas Supreme Court’s decision in Natural Gas Pipeline Co. of Am. V. Pool, 941 S.W.2d 910 (Tex. 1997), in stating the standard for summary judgment evidence regarding issues related to adverse possession.

Both Ernest Cannon and Moncrief Minerals Partnership held undivided mineral interests in a lease which, at the time this suit was filed, was operated by Sun-Key. In December of 2004, Cannon filed a declaratory action asking the court to find that the lease on the property had terminated due to the cessation of production. Moncrief intervened, asserting similar allegations as Cannon, also seeking a declaration that the lease had terminated.

The District Court granted Moncrief’s motion for partial summary judgment, denied both Sun-Key’s motions for summary judgment, and declared that the lease had terminated as to the lands at issue in this suit. Sun-Key appealed these decisions. As an initial matter, the Court of Appeals affirmed the District Court’s decision granting partial summary judgment in favor of Montcrief that the lease terminated due to lack of production during a two-year period from 1995-1997 because Sun-Key failed to oppose this motion and present evidence in support of its affirmative defenses, including res judicata and collateral estoppel.

As to Sun-Key’s motion for partial summary judgment based on its affirmative defense of adverse possession, the Court of Appeals noted that the only evidence Sun-Key provided to support the motion was an affidavit of its President which provided evidence which was conclusory in nature. The Court of Appeals distinguished the statements in the Sun-Key affidavit from the evidence which the Supreme Court found to have been sufficient to establish an open, notorious, and hostile use of the property at issue in Pool, supra. The Court of Appeals found that the record “lacks the type of evidence” presented in Pool and noted that the affidavit merely provided statements which were “conclusory in nature and were not supported by factual detail.” Further, the Court of Appeals found that Sun-Key failed to provide detailed evidence establishing the nature of their use of the property and the elements of their adverse possession claims.

U.S. Treasury Secretary Attacks Tax Breaks for Oil & Gas Companies

kbbecker@liskow.com (Kelly Becker) — Fri, 13 Mar 2009 11:38:25 -0500

By Emma Hinnigan

U.S. oil and natural gas producing companies should not receive federal subsidies in the form of tax breaks because their businesses contribute to global warming, U.S. Secretary Timothy Geithner said when speaking to Congress on March 4, 2009. Geithner explained, “we don’t believe it makes sense to significantly subsidize the production and use of sources of energy that are dramatically going to add to our climate change. We don’t think that’s good economic policy and we think changing those incentives is good for the country.” The Secretary’s comments, made when speaking to the Senate Finance Committee on the proposed budget, reinforced the Obama administration’s stance that new U.S. energy policy will focus on promoting renewable energy sources and rely less on traditional fossil fuels. The proposed budget would levy an excise tax on oil and gas produced in the Gulf of Mexico, which is expected to raise $5.3 billion from 2011 to 2019. However, the tax will only affect companies currently using a loophole to avoid paying royalties on the energy supplies they drill. Those already paying royalties would get a tax credit. Senator John Cornyn of Texas criticized the proposed tax, saying it will hurt independent energy companies who provide a large share of U.S. oil and gas supplies.
For more information, go to
http://uk.reuters.com/article/oilRpt/idUKN0454844120090304

Interior Considers Appeal of Kerr-McGee Decision

jrjohanson@liskow.com (Jason Johanson) — Thu, 12 Mar 2009 15:47:44 -0500

By Jason Johanson

On Friday, March 6, 2009, Interior Secretary Ken Salazar stated that the agency is considering an appeal to the United States Supreme Court of the decision in Kerr-McGee Oil & Gas Corp. v. U.S. Department of the Interior, __ F.3d __, 2009 WL57883 (5th Cir. Jan. 12, 2009), in which the Fifth Circuit held that Interior had violated Section 304 of the Deep Water Royalty Relief Act by imposing "price threshold" requirements that reduce a lessee's royalty suspension volume below statutory minimums. Secretary Salazar also discussed Interior's comprehensive review of the agency's royalty management program, which may lead to an overhaul of the organizational structure of the Minerals Management Service. For more, please click here.

Location Matters in Purchasing Real Property

kbbecker@liskow.com (Kelly Becker) — Mon, 02 Mar 2009 13:26:36 -0500

By Natalie Barletta

In Retamco Operating, Inc. v. Republic Drilling Co., the Texas Supreme Court holds that Republic Drilling, a California company, established minimum contacts with Texas by acting as the transferee of certain oil and gas interests. Retamco Operating sued Paradigm Oil in a Texas district court over unpaid oil and gas royalties. The trial court entered a $16 million default judgment against Paradigm. While the litigation was pending, however, Paradigm assigned to Republic certain oil and gas interests located in Texas. Retamco sued Republic for violating the Uniform Fraudulent Transfer Act (UFTA), arguing that the transfers from Paradigm were fraudulent and led to Paradigm’s insolvency and subsequent inability to satisfy the judgment. Republic filed a special appearance, arguing that it was not subject to personal jurisdiction in Texas. The Supreme Court held that Republic established minimum contacts with Texas when it purposefully availed itself of the privileges of conducting business in Texas and because Republic’s alleged liability arose from those contacts.

Specifically, the court reasoned that Republic knew that the real property it acquired was located in Texas and it purposefully took assignment of the property. Republic established a continuing relationship with the State of Texas by acquiring real property in the state, thus, if Republic sought to enforce its rights to the interests acquired, it would have to do so in Texas. Further, Republic reaped benefits from the property by selling some of the property and by receiving approximately $1.2 million in revenues.

Additionally, the court found that the oil and gas interests were assets for purposes of the UFTA. Without an asset, there can be no fraudulent transfer under the UFTA; therefore, the tort occurred at least in part in Texas because the asset is located in Texas, it was received from a Texas resident, and the transfer allegedly occurred to defraud a Texas resident. Finally, the court found that Texas courts have an interest in resolving controversies involving real property located within its borders and that California had little interest in resolving a Texas real property dispute. Thus, the fairness factors weighed heavily in favor of Retamco, and the exercise of jurisdiction “[did] not offend traditional notions of fair play and substantial justice.”

Elections to Participate in Proposed Operations are Non-Revocable

kbbecker@liskow.com (Kelly Becker) — Mon, 02 Mar 2009 13:23:30 -0500

By Kevin Connolly

On an issue of apparent national first impression, the Houston Court of Appeals, in XTO Energy Inc. v. Smith Production Inc., 14-07-0069-CV, 2009 WL 442003 at *1 (Tex. App.—Houston [14th] 2009, no pet. h.), held that once a party to a Joint Operating Agreement (“JOA”) timely and properly provides notice to a proposing party as to whether it elects to participate in the cost of a proposed operation, then that party may not change its election, even if it seeks to do so within the thirty day election period and regardless of whether the other parties have materially changed their positions in reliance on the initial selection. The Court reached this holding based on the wording of the applicable JOAs, which were both based on the American Association of Petroleum Landmen Model Form Operating Agreement 610-1982.

In XTO Energy, Smith Production Inc. (“Smith”) was the operator of the Bloomberg oil and gas lease, whose operations were governed by two JOAs. As required by the JOAs, Smith provided written notice to the Non-Operating Interest Owners of its proposal to drill four additional wells on the lease. The Non-Operating Interest Owners then had thirty days after receipt of Smith’s notice within which to notify Smith whether they would elect to participate in the cost of the proposed operations. After analyzing geological data and other information, Chevron, one of the Non-Operating Interest Owners, decided that it did not wish to participate and accordingly notified Smith of its intent not to participate. Shortly after receiving Chevron’s election, Smith advised the other Non-Operating Interest Owners, whom had all elected to participate, of the total interest of the parties approving the operations. Each of the electing Non-operating Interest Owners then agreed to carry their proportionate share of Chevron’s interests as required by the JOAs. Shortly thereafter, and within the thirty day election period, Chevron sent Smith a letter electing to participate in the cost of the additional operations and revoking its prior notifications to the contrary. Smith, however, refused to accept Chevron’s revocation of its prior election not to participate, and as such, treated Chevron as a “Non-Consenting Party” as defined by the JOAs. Several months later, Chevron sold its interest in the lease to XTO Energy Inc. (“XTO”).
XTO, as successor in interest to Chevron’s interest in the lease, filed suit against Smith for breach of contract and specific performance. XTO alleged that Smith breached the JOAs by not accepting Chevron’s notification purporting to change its elections. Specifically, XTO argued that Chevron had the right to change its elections within thirty days of receiving Smith’s notices proposing the four wells, provided the other parties had not materially changed their positions in reliance on the initial elections. Therefore, XTO believed that its interest should not have been subject to the Non-Consent Provision and its resulting penalties. Smith, however, moved for summary judgment on the basis that the unambiguous language of the JOAs does not allow a party to change its election after it has notified the proposing party of its election. The trial court granted Smith’s motion and ordered that XTO take nothing on its claims against Smith.
On appeal, the Houston Court of Appeals noted that the Court’s primary concern when construing the language of a contract is to ascertain and give effect to the intentions of the parties as expressed in the contract. Upon review of the applicable provision of the JOAs, the Court noted that there was no contractual language expressly allowing an electing party to change its election after it had notified the proposing party. Likewise, the Court failed to find language expressly disallowing a party to change its election. However, the Court determined that allowing such a change in election would conflict with the intent of the parties as expressed in the unambiguous language of the applicable provision. The Court did so based on its interpretation that once a receiving party timely gives notice of its election by properly replying within the thirty day period, the Notice Period has expired as to that party. Consequently, a receiving party does not have thirty days to give notice of an election and to give notice of a change in a prior election. Rather, a receiving party has only thirty days to notify the proposing party of its election. When, as was the case before the Court, all receiving parties have provided their respective elections in less than thirty days after receiving notice, the Notice Period expires when the last receiving party provides its election – and not at the end of the thirty day period.
The Court then addressed XTO’s assertion that a reasonable construction of the provision provided a party with the right to change its election within thirty days after receipt of the notice, provided that the other parties had not materially changed their positions in reliance on the initial election. The Court summarily dismissed this argument because the provision contained absolutely no reference as to whether the other parties had changed their positions in reliance on another party’s election. Likewise, the Court found that the provision did not contain any reference to a party’s right or ability to change a prior election. Recognizing that the parties were free to alter or amend the language of the JOAs to address such a situation, the Court stated that it must enforce the JOAs “as written” and that the Court could not “rewrite the agreements or add to their language under the guise of interpretation.” Because allowing a receiving party to change its election was not supported by the language of the JOAs, the Court refused to add such a provision. Furthermore, the Court noted that other model form operating agreements include a provision expressly allowing a receiving party to change its election if it gives the other parties written notice at any time before actual spudding of the proposed well. For these reasons, the Court concluded that XTO’s construction of the provision was not reasonable. Consequently, the Court held that under the unambiguous language of each of the JOAs, if, after proper notice of a proposal to drill an additional well, a party to the JOA timely and properly provides notice to the proposing party as to whether it elects to participate in the cost of the proposed operation, then that party may not change its election, even if it purports to do so within thirty days after receipt of the notice and regardless of whether the other parties have materially changed their positions in reliance on the initial election.

Louisiana Third Circuit Holds Land Damages Cases Improperly Cumulated

kbbecker@liskow.com (Kelly Becker) — Fri, 20 Feb 2009 14:30:16 -0500

By Jessica Gladney

In Broussard v. Hilcorp Energy Corp., 08-233, 2008 WL 5158887 (La. App. 3 Cir. 12/10/08) the plainiffs owned five separate and incongruous tracts of land located in three sections in Vermilion Parish, Louisiana. Mineral, surface, and subsurface leases on the various properties have been granted to seven separate entities for oil and gas operations on the property. Kern Broussard first filed suit in the Civil District Court of Orleans Parish against the various entities and their successors in interest for alleged damage and concealment of damage to the property as a result of oil and gas operations. The case was then transferred to Vermillion Parish, Louisiana pursuant to exceptions filed by the defendants for improper venue. A number of exceptions were raised by the defendants in Vermillion Parish, to include the exception of improper cumulation of actions. The trial judge ultimately granted the exceptions and dismissed the plaintiffs’ action without prejudice on May 7, 2007.
On appeal, the Third Circuit held that the actions were improperly cumulated. As recognized by the court, the properties that were allegedly contaminated were on five incongruous tracts located in three separate sections, and different parties were alleged to have contributed to the contamination on each tract. Furthermore, the proof of damages, if any, would be entirely separate for each tract. These factors contributed to the court’s ultimate conclusion that the claims do not share a community of interest and the actions were improperly joined.