SCOTX Upholds Lower Decisions in Retained Acreage Disputes (Endeavor v. Discovery; XOG v. Chesapeake)

After having waited with baited breath for a few years, oil and gas professionals dealing with land, title, and leases heard from the Supreme Court of Texas (“SCOTX”) on a few anticipated disputes pertaining to “retained acreage” provisions. These provisions enable mineral owning lessors to encourage fuller development of the leased acreage and prevent lessee operators from holding an undue amount of acreage based on the production from one or a few wells.

In Endeavor Energy Resources, L.P., et al. v. Discovery Operating, Inc., et al., (No. 15-0155), SCOTX agreed with the lower court that, given the particular language of the lease’s retained acreage provision conditioning the amount of acreage retained to the assignment of acreage to a proration unit, that Endeavor’s inadvertent assignment of fewer acres than which it may have otherwise been entitled resulted in a termination as to their interest as to the leased lands not so assigned to the unit. At the urging of Discovery – as well as the numerous amici who chose to make their thoughts known to the Court – the justices determined that the idea of “assignment” used in this context is a term of art in the oil and gas industry, and can only reasonably be understood to mean the filing of a form with the Texas Railroad Commission assigning the number of acres according to that agency’s rules. While the Court agrees that the Railroad Commission does not have the power to adjudicate and determine property rights, in this situation the parties contracted in their lease such that the acres to be retained was expressly conditioned on such an assignment of acreage made with that regulatory body. Ultimately, as Chief Justice Hecht succinctly observes in the companion XOG case discussed below, Endeavor‘s holding is that a regulatory proration unit “assigned to a well” means acreage that is actually assigned by the operator, and not automatically by consequence of the applicable field rules governing the well.

Of note to the author was the discussion regarding “obtaining the maximum producing allowable,” a concept where the size of a proration unit in a given field can sometimes vary between a standard number of acres with the inclusion of up to a defined number of additional “tolerance” acres – this increase in size is tied to breadth of production. In a regulatory sense, larger units can produce more oil. In this case, Endeavor argued that because it could have assigned all of the tolerance acres available to it with the regulatory agency, that meant they could rely on language saying that the proration units were to have the “number of acres required to comply with [Commission rules governing obtaining “the maximum producing allowable for the particular well.” This reasoning did not persuade the Court; given that they assigned a number of acres per unit that was in between the standard and maximum sizes (with tolerance acreage applied), they were determined to have retained merely the lesser amount. More interestingly, toward the end of its discussion on this topic the Court briefly addressed the concept that the use of tolerance acreage – which affords the operator the ability to produce more oil from the well on that unit – in situations where the tolerance acreage is not needed nor warranted by the low production in an effort merely to squat in bad faith on more lease acreage than one would otherwise be entitled. The Court observed that “if a well is draining a certain amount of acreage, but the operator intends to claim more than the amount, the operator may open itself up to claims that it is not acting in good faith in purporting to retain a substantially greater amount of acreage.” Obviously this was not at issue here in this case, but this author believes that the Court is providing a preview of coming attractions in the next frontier of retained acreage disputes, where an operator assigns the standard acreage and also some or all of the tolerance acreage for a total greater than what it should be entitled to given lackluster production from the well in a given proration unit and purports to retain such excess acreage.

In XOG Operating, LLC v. Chesapeake Exploration LP (No. 15-0935), the Court leaves for the Endeavor decision the discussion on regulatory frameworks and lease provisions more broadly, but suffice it to say oil and gas practitioners know after reading these cases several things:

  1. “Assignment” of acreage is, in the eyes of the Court, understood to mean an operator’s assignment of acreage with the regulatory agency (here, the Texas Railroad Commission).
  2. The Court will consider any retained acreage dispute on the facts and particularly on the given language of the provision at issue, not unlike how the Court handles fixed vs. floating royalty disputes.
  3. Scrutinize any retained acreage provisions that you or your client will be subject to quite carefully, because courts will apply them as written regardless of novel factual circumstances or unwitting clerical errors.

This blog post is also available at my LinkedIn page.

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Resolution Without Reflection & Implementation = Writing Without Drafting

If you’re reading this, then congratulations – you’ve made it to 2018. Maybe it’s just me but the ten years making up 2008-2017 felt like a lifetime to me in and of itself…so much change and innovation interspersed with decline in other areas. One constant trope that pops up at the start of every new year is the New Year’s Resolution. While I obviously think that resolving to make some positive change to benefit yourself (and hopefully others also) is good, sometimes the ways that people attempt to implement that change is not likely to lead to success. In my mind, making a resolution without solid reflection and outlining a detailed implementation plan means that you will become a statistic and fail early on in trying to maintain your resolution. In addition, not planning on how to implement your resolution into your life will mean that your resolution formed after reflection will likely still not work. All three legs on the stool are necessary.

1. Reflection

Although I don’t do it as much as I probably should, many influential people that I follow and even try to emulate swear by the benefits of daily meditation as a way to hone focus and cut through the “noise” we all have in our lives. For some it may be prayer, and for others it may just be quietly practicing mindfulness regularly, but either way it makes sense why this would be a worthwhile pursuit. Meditation is a more deliberate and regular form of reflection, but I would submit that even taking stock at the end of year to assess achievements and areas for growth has great value.

In terms of your career, those of us who are ambitious probably do have longer-term goals that are broader in nature – but do you have shorter-term and intermediary goals designed to allow you to take step up after step up to get to that longer-term goal? The former could be seen as battle plans with the latter being seen as an overall map and strategy for the greater war. To further this analogy, then, a long-term goal without the underlying smaller goals is making a plan for war without considering the nuances and subtle factors comprising each unique battle.

In terms of your own personal growth, if you have the stomach for it, something that I saw last year and tried out boils down to asking those close to you to honestly and critically comment on where you might need to grow yourself (e.g., being more patient with people). The personal growth branch of the “reflection tree” is probably most important as it undoubtedly feeds into one’s ability to grow and succeed in their career. Whether it’s meditation or a more basic end-of-year reflection process, any resolutions you make will be undergirded by some sort of reflection process.

2. Resolution

This is in my mind the sexier part of the self-improvement process. Resolutions by themselves are easy because to many they are affirmative declarations to do or stop doing a thing: “I will quit smoking,” “I will get in shape,” “I will work to improve my marriage.” The resolution is really the tip of the iceberg, the visible reference point and the north star to which your compass will guide you.

An important consideration would be to make a specific resolution. “Live a healthier life” is probably not sufficiently specific to allow a person to meaningfully progress toward that goal. If I wanted to lose twenty pounds, I might make the goal something to the effect of “Lose twenty pound through diet and exercise by July 31, 2018.” Beyond that there probably is now much to say…resolutions are probably the easiest and most self-explanatory part of the process.

3. Implementation

At this point you’ve reflected and made your resolution…so this is the part where it magically happens, right?

RIGHT?

Well, no. Without some sort of underlying foundation for how to actually implement these well-intentioned resolutions formed after some form of reflection, they are prone to sputter out into nothingness. An action plan is required to really make sure the resolution comes to fruition.

Since getting in shape is a pretty common choice, I would implement this resolution by laying out smaller objectives/steps that would help me get there – for example:

a. Cardio at gym 4 days per week, at least 45 minutes per visit.

b. Make shopping list of nutritionist-approved healthy foods, do not deviate from the list while shopping.

And on and on. So the way the process would play out might go like this:

REFLECTION: “I’ve been lax in eating well and have been getting a lot of fast food lately. I feel slower and sluggish, and I’ve put on twenty pounds. I’d like to drop that weight but I know that it will take work.”

RESOLUTION: “I want to lose twenty pounds through diet and exercise by July 31, 2018.”

IMPLEMENTATION: “So my plan is to do cardio at the gym down the street four times per week for at least 45 minutes per visit. I’ll have to do research on healthier foods and make my shopping list based off of those recommendations…that way I won’t deviate when I see something tempting in the store.”

So that pretty much constitutes the process. This can be used for both personal and professional goals, though most of the time people think of them as being used for the former (thus my focus on that area). Hopefully your 2017 was enjoyable and prosperous, and may your 2018 be even more so.

This article is also available at my LinkedIn page.

Finding Value in Mistakes When the Value is Not Immediately Apparent: Adding Arrows to Your Quiver

Last week I had the unpleasant task of informing our team that, due to an inexcusable and incompetent mistake for which I was solely responsible dating back almost a year, a property that we had acquired around that time was effectively half of what we thought it was (i.e., we paid double) because of the information prepared only by me and relied upon by my superiors. There will likely be material ramifications, both in terms of excess money paid for the property, as well as my colleagues having to drop what they’re doing to try to salvage things on the asset going forward in light of my mistake. Being that I am someone who takes his work and profession quite seriously (probably too seriously, to some), it’s a pretty jarring precept to come up against: your error singlehandedly cost your colleagues and your company significant time and money.

I’ve just completed Ray Dalio’s new book Principles (which I highly recommend to anyone reading), and he spends some time in the section titled “Work Principles” discussing the value of making mistakes, and then learning from them. In his lead-in to Work Principle #3, “Create a Culture in Which It is Okay to Make Mistakes and Unacceptable Not to Learn From Them,” he writes:

  • Everyone makes mistakes. The main difference is that successful people learn from them and unsuccessful people don’t. By creating an environment in which it is okay to safely make mistakes so that people can learn from them, you’ll see rapid progress and fewer significant mistakes…[I]f you look back on yourself a year ago and aren’t shocked by how stupid you were, you haven’t learned much.

A prior manager of mine a few years ago told me something that I’d not heard before but, upon reflection, I couldn’t really disagree with – he said something to the effect of “the thing I like about you is that you rarely make the same mistake twice.” This probably makes sense for someone like me who is borderline neurotic about learning from my mistakes, and even the mistakes of others, mainly out of a fear of failure, fear of losing my job, and even the fear of having the confidence I have in myself and that others have in me partially or totally negated. I can point to specific situations in my career where I did a particular thing wrong, analyzed what caused the error, and took care to implement steps to prevent the same error going forward – the analogy I prefer is that another arrow was added to my quiver.

However, in considering the aftermath several days later of how the error I referenced at the start of this writing affected myself, my team, and the company, the most difficult part to deal with in this particular instance is that I can’t yet seem to distill a good guiding principle to take with me going forward; I can’t yet grasp what arrow has now been put into my quiver. Usually mistakes are a bit more granular in nature, so it’s easy to say “do X next time” or “don’t do X next time,” but in this instance all I’ve been able to arrive at is a general self-admonishment of “be more careful;” a hardly satisfying lesson when you do want to make each mistake count going forward. It so happens that the particular mistake I made was performing a function that I rarely perform anymore (though I did for some time beforehand), so the granular lesson is seemingly less applicable. Learning to deal with our company’s rapid growth and expansion has, at times, felt like drinking from a firehose. It’s probably safe to say we have collectively made many small errors or mistakes that cost smaller amounts of money, or maybe cause redundancy and/or duplication of efforts. But such a large mistake coupled with such a generic principle with which to take away is profoundly unsatisfying to me. Perhaps the arrow will show itself at a later point once some time has passed.

It’s gratifying to work with people who have instilled a company culture of being forthright and upfront in a professional and ethical environment. It was profoundly deflating realizing how poorly I erred (and am still working through that); but, given that our culture is one of transparency and honesty, I always knew it would be far better to head off the situation and preempt the matter as opposed to quietly sitting on it and allowing the problem to fester. This seems to be the best way to run a team with regard to “failing well” – a work environment where someone gets excoriated for any mistake will lead to mistakes being swept under the rug rather than brought out to the open, leading to more problems and pain. To the credit of my colleagues, they’ve jumped in immediately to try to find the best workable solution in light of my mistake rather than casting blame or pointing fingers, although I certainly deserve plenty of both.

And now, if you please, this crow is getting cold…

This article is also available at my LinkedIn page. 

A (hopefully) Humorous Case Study in a Certain Educational Institution’s Oil & Gas Lease, and the Complexities Therein

Being a native New Yorker I’m probably seen in these West Texas parts as a bit of a carpetbagger, but I can’t change where I’m from. With that said, in my several years living in Texas I’ve picked up on some things (among others) – Texas is the only state allowed to fly its flag at the same height as the U.S. flag; the Mexican food and barbecue is great; and, that I should not eat pizza or wings here (especially where they are called “buffalo wings,” which is anathema where I come from). One other such observation relates to a certain state educational institution that – I’m told – oft serves as the butt of various jokes, most of which call into question the general mental horsepower of those who attended and graduated from the institution in question. Now, as a resident Texan, I now humbly do my part to contribute to this lore (all names have been changed to protect the innocent):

A long time ago, in an oil producing haven far, far away, an acquisition company wanted to lease this institution’s minerals, it having obtained them from the estate of a person who, for the purposes of this tale, we will call Maggie. Maggie clearly wanted to benefit this institution for years after her passing, but what she did not realize was that decades later this institution would be utilizing one of the most onerous oil and gas leases this side of Interstate 45. Lyle Field worked for the institution and gave the company its lease form, bound by an industrial staple, and after a review that lasted several sunrises and sunsets, the company decided that it would like to propose some changes. Several fortnights later, Lyle responded and eventually an agreement was achieved. Unfortunately, when Lyle had the head honcho Tig Emmett execute the lease, Lyle did not notice Tig Em (Tig’s nickname around campus) failed to have his signature notarized before mailing it to the oil company. This was an easy fix, and a corrected version was sent back.

Weeks later, the company decided that it would like to sell its lease to a bigger company. A copy of the lease was wheeled over to the bigger company on a dolly, and it was discovered that the institution would need to consent to the sale of the lease in writing and include the information for the transfer agreement filed in the public records. However, there was a problem: another provision of the gargantuan document stated that an assignment or sale of the lease without the institution’s consent meant that the lease would automatically be null and void. What a quandary! To get the institution’s’ consent to assign necessitated a consent form which required information about the transfer and sale document, but upon executing the transfer and sale document the lease would be deemed terminated. What to do? When this conundrum was brought to Lyle’s attention, he agreed with the unusual inconsistency in the dueling provisions and a change was made. The transfer was made from the company to the bigger company, and everyone rode off into the sunset.

An unusual situation with this institution’s strange, titanic, and contradictory lease was punctuated by the fact that it was this particular institution at the center of the story, whose reputation surely proceeds itself – a rumor I’ve heard (although I cannot verify it) is that this institution was one of two to have its cut of state oil revenues from certain lands, and took 1/3 of the whole pie (to which the second institution is rumored to have appreciated this and taken the remaining 2/3). In any event, this story is offered in good fun and isn’t intended to stir the pot; but the lesson here, if there is one, is that there is probably some truth at the heart of some stereotypes…

Gig’em!

This article is also available at my LinkedIn page.

A Fledgling Attorney’s Observations: How Not to Please In-House Counsel

This writeup is also available at my LinkedIn page.

Realizing I’ve been absent from making timely write-ups in my blog but I feel that being quite busy with work in 2017 represents not only myself but many of my oil and gas cohorts, especially those with work relating to the Permian Basin in particular. Like many of you I’ve barely had enough time to clock certain legal updates, as well as keep up with colleagues and contacts. Something I observed this week gave thought to writing this particular entry since it was a bit of a new experience for me (although this will be old hat for quite a few of my readers).

When I started out in oil and gas I was running title and determining ownership of interests in various West Texas courthouses.

The Reagan County Courthouse in Big Lake, Texas, where I spent the first six months of my career cutting my teeth in land titles.

I did that for nearly three years before attaining my current position with EnCore Permian, but never have had the “pleasure” of working in a law firm. Something I’ve had to learn on the fly is the artful management of external service providers and counsel – although my cohorts Bill and Rob do a majority of the outward interfacing along those lines, I’ve had an opportunity to dip a toe myself in that realm and I’m better for it. During my field landman days I would attend conferences geared toward oil and gas attorneys (and still do), and one of the panels would be composed of in-house counsel telling an audience of mostly private practitioners, as well as associates and partners in law firms, what they did and did not like from external counsel. In recalling some of those panel discussions, and through both direct experience and vicarious observation in my current role, I’ve picked up on some things and actions that would qualify as “pet peeves” for us as we try to deal with external service providers and counsel (this list is by no means exhaustive):

  1. Estimates. An estimate is a prediction of a final result based on assumptions made that are reasonable at the time it is provided, and can relate to cost, length of time, and even the likely result of a course of action. Obviously the information undergirding those assumptions can change, sometimes materially, and that is not the fault of the one giving the estimate – however, if a material change does occur that would cause the final result to materially deviate from the estimate, it should be brought to the attention of in-house counsel immediately, in person, via phone call, or written/email correspondence (in descending order of preference). We recently dealt with a bill from external counsel that was significantly higher than the estimate, which happens from time to time, but there was no “ground softening” before receiving the bill – the bill was delivered and the firm basically told us to have a nice day. It was roughly 2.5 times higher than the estimate, and a heads-up and even a quick explanation of why that was the case would have gone a long way towards alleviating the sticker shock we felt when it came in.
  2. Failure to Provide All Information. This one is pretty self-explanatory. Decisions require an appreciation for what the constituent facts and issues are, and divining what those facts and issues are depends on having all of the underlying information with which to consider and analyze. Providing part of – but not all of – that information does not allow us to intelligently make a decision, and in many cases is no better than having no information. A less esoteric and more practical example would be submission of a title report that fails to include numerous copies of the documents – this frustrates our consideration of the facts and issues related to the asset if we don’t have a full title picture.
  3. Lack of Communication. The biggest change that I think I’ve had to make is going from knowing everything about one or two things to: i) a lot about several things, ii) a little less about a dozen other things, and iii) something about the remaining things. There’s often a feeling of anxiety knowing that you can’t realistically keep track of every nuance or detail – this is where outside personnel can really shine, yet some fail to take the opportunity. Flag unexpected but important issues; provide me with an update with useful information even though I didn’t ask for one; understand what my company does and how we operate so that your work is best tailored to our needs. It is far easier for me to log daily updates on a project from an external contractor into my Gmail subfolder that may not provide much more new info, as opposed to going two weeks without an update and wondering if I’d been forgotten about (which has happened).

Before I was metamorphosed into a legal robot, I worked various customer-oriented jobs: food service, sports memorabilia store clerk, and even a stint as a lifeguard. For most of these our first duty was to ensure customer satisfaction (although a lifeguard might attain customer satisfaction in a totally different way). I think service providers, as well as associates and partners at law firms, could do a lot of good for themselves if they view this relationship as a mutually beneficial relationship between the customer (us) and the service provider or salesperson.

What are your thoughts? Have any readers (whether in-house or external) had any negative experiences that are instructive?

TX Oil & Gas Producers Breathe Sigh of Relief – Endeavor’s Petition for Texas Supreme Court Review Denied

Nearly two years after the petition for review was filed with the Texas Supreme Court in the case of Endeavor Energy Resources, LP & Endeavor Petroleum, LLC vs. Discovery Operating, Inc. & Patriot Royalty and Land, LLC, et al., and after the filing of multiple briefs by the appellants and appellees, that body has disposed of Endeavor’s petition for review of the 11th Court of Appeals decision in favor of Discovery and Patriot – the Court also declined to review another case relating to a different retained acreage provision (XOG Operating, LLC v. Chesapeake Exploration, LP). In Endeavor, the appellate body had agreed with the lower court in its interpretation of a retained acreage clause in Endeavor’s prior oil and gas lease that tied the surface acreage to be kept after the partial lease termination occurred to the assignment of acreage as to a proration unit per the Texas Railroad Commission (“RRC”) field rules (or in this instance, the RRC’s special field rules for the Spraberry (Trend Area) Field in Districts 7C and 8).

The continuous development program obligation, and the retained acreage provision, were reflected in Provisions 17 and 18 of the Endeavor leases, respectively:

The proration units corresponding to the wells that were drilled under the auspices of the Endeavor leases were each assigned eighty acres. The special field rules for the Spraberry (Trend Area) Field provide that the regular/default number of acres a well may hold in a proration unit is eighty acres; however, such units containing sufficiently productive wells may receive up to eighty additional “tolerance” acres, for a maximum potential total of one-hundred and sixty acres. It was upon this distinction that Endeavor relied on its assertion that, even though it had only actually assigned eighty acres to each of its proration units under the leases, as a matter of right it should have been able to retain the acreage “required to comply with the applicable rules and regulations of the [RRC] for obtaining the maximum producing allowable…” (emphasis supplied). However, Provision 18 in the lease tied the surface acreage to be retained at the moment of partial lease termination to a given proration unit “assigned to a well.” The 11th Court of Appeals observed that “assigned” as used in this context is a bit of a term of art, and in this particular field assignment of acreage is achieved by the filing of a required certified form featuring a plat of the surface acreage assigned as it relates to the leased land (for reference, here is a blank Form P-16). Ultimately, the appellate court held that Endeavor was able to retain the acreage it had actually assigned to the proration units – being eighty acres – even though it perhaps may have been able to hypothetically assign more acreage if production had merited the inclusion of additional tolerance acreage.

Those of us in the industry were intrigued when the Texas Supreme Court granted review on this case which had come out in Discovery’s favor at all stages, especially given the recent multiple cases related to retained acreage provisions generally (e.g., XOG) – I know at the time I thought “wouldn’t it be great if we could have some sort of bright-line rule on this issue?” Predictably, it seems that courts are generally going to treat these on case-by-case basis, based on analysis of the actual lease provisions and the circumstances of the situation giving rise to the dispute. As a result, I would argue that the focus on drafting your client’s retained acreage provision (if you choose to try your hand at it), or scrutinizing and understanding this provision in a prepared lease that comes across your desk, is one of the most important parts of negotiating and preparing a lease, and should be of paramount concern. The consequences for failing to accurately articulate your client’s desired aims and wishes, as well as not clearly understanding the basis by which the acreage to be retained will be calculated, have the potential to be extremely punitive and result in an unintentional and avoidable loss of more lease acreage than necessary when the lease is partially terminated.

This article is also available at my LinkedIn page

You Wanted the Best, You Got the Best: Why the Permian Basin is Poised to Thrive Regardless of What OPEC Does

This post is also available at my LinkedIn page. 

The last several years in the oil industry have arguably constituted what I would refer to as catharsis – a painful but needed purification or cleansing process of sorts. Unless you have been living in a cave for a significant period of time, it has become clear that the Permian Basin is poised and primed to succeed in pricing environments ranging from $45/BBL and higher, albeit for different reasons depending on whether the going price is languishing in the $40s or ripping in the $70s and beyond.

When prices were high, activity levels in the oil patches across the United States spiked, but especially in the Permian Basin. Horizontal drilling came into vogue in the last decade or so, and operators were primed to drill in any geologically great, good, and even mediocre acreage that they could get their hands on. Hot plays went for more money (and obviously still are), so there were lease and mineral buyers fighting for acreage alongside the big boys of the industry, sowing the seeds for a highly competitive landscape.

However, even when prices are depressed, the Permian Basin is still well situated. As most of us know, our breakeven point between making and losing money on production is generally much lower than other oil fields. First, consider breakeven prices calculated based on county and play (Credit: MarketOnChart.com):

The above chart from this past September demonstrates average breakeven costs both by county and by play in the Permian, and only the most cursory glance reveals that a majority of county/play combos are at least somewhat profitable in the current climate (with the caveat that individual well economics can vary greatly in either direction for a whole host of reasons). The above Permian-centric chart is juxtaposed with the following chart demonstrating breakeven on production on a global scale (Credit: Statista):

Ultimately, a combination of lower breakeven economics in comparison with many other oil fields and plays, as well as the efficiencies forcibly realized by the 2014-15 oil pricing crash, will make the Permian Basin the place to be in oil production whether oil is languishing at $45/BBL or flying high at $100/BBL.