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.

The OPEC v. Shale Oil “Staring Contest:” Did OPEC Just Blink?

This post is also available at my LinkedIn page.

So here we are – yesterday news leaked that OPEC is finally going to cut their combined production and install a 32.5 million barrels/day ceiling. As most readers likely know, oil prices have largely languished in the sub-$50 range for nearly two years aside from a few instances of coming up for air. The pain has been real for all oil and gas companies both foreign and domestic – Houston is a shell of itself, whereas Riyadh has had to dramatically reduce its heretofore extravagant funding of various social programs. While it might potentially be a milestone moment in retrospect a few years from now, I would caution against any industry-wide metaphorical spiking of the football – at least for a little bit.

First, there’s an age-old axiom that “the devil is in the details.” Although the OPEC principals have agreed on a cut, the details as to how the cut will be borne appears not to have been agreed upon yet. This is obviously noteworthy given Iran’s petulance and refusal to agree to shouldering any part of a cut in light of getting its own production going again following lifting of U.S. sanctions.

Second, we saw what happened in mid-2015 when we as an industry thought the bottom was in and the recovery was in full swing – producers opened their spigots and met the demand increase so quickly that it deflated the commodity’s price in global trading from then on to present. There’s no reason to think that U.S. shale firms will not take this as a mandate to double-down on their drilling efforts. Even before this announcement, many companies have been starting to get more active in preparation for a perceived recovery. Where I am in the Permian Basin, activity was on a slow uptick for several months; in the past month or two, though, the uptick is more pronounced and will likely continue in earnest.

Third, demand is still just as crucial a part of the overall equation as supply. At the risk of coming off as a faux analyst, it seems to me that the most important variable is China. It seems that every quarter the numbers and predictions on forecast Chinese demand oscillates back and forth. Strong demand in China would soak up what I perceive as additional U.S. oil hitting the market in the coming months and years, and weak demand would lay the foundation for prolonged pricing around $50/barrel. For now it is a variable that nobody can predict with certainty, and we’ll have to see what happens.

Finally, last year I got up on my bully pulpit (i.e., my blog and LinkedIn page) and said that 2016 would see a flurry of M&A and §363 bankruptcy sales given the over-levered status of many companies in our industry. While there have been plenty of bankruptcies, mergers, and acquisitions, it seems that financial institutions and lenders did not come down as hard on mortgagors who were substantially drawn on the revolving credit facilities – sure, plenty of borrowing bases were reduced, as any CEO or CFO would be quick to tell you. It’s said that the ashes from the fires of bankruptcies sow the seeds for the next boom, and I don’t feel like those fires burned nearly hot or long enough – this is not to say I am at all rooting for more companies to bail out, be forced to sell assets, and layoff their workers, but it is not certain that the industry as a whole has gone through the requisite catharsis necessary to have sown those seeds. In the end, many companies were able to get by – some at an amble, some with a limp.

It’s better news than no news, or bad news – let’s all be reasonably optimistic with a dash of healthy skepticism.

Talking About Helping Young Professionals Seeking Growth ≠ Actually Helping Young Professionals Seeking Growth

Also available at my LinkedIn page.

Although my time has been preoccupied since early Spring due to studying for my attempt to pass the NYS bar exam for the “fun” of it, I am now back to thinking about the oil and gas industry and writing about my observations (for whatever they may be worth). I have seen a good number of people leaving the industry in the recent months and past year, especially those in my “young energy professional” demographic. What follows are three general observations upon which I wanted to expound.

I. Sowing the Seeds for Major Future Skills Gaps by Near-Wholesale Reliance on Retirement-Age Personnel

First, there currently is an unwillingness to spend on young talent who would merely require a little bit of investment and teaching upfront to allow them to operate at their full potential going forward – this unwillingness to train and develop the young workforce in favor of retirement-age personnel that are at the precipice of leaving the industry for good will lead to issues down the road. Companies that kick the can now will be forced to overpay for young talent when oil pricing begins to increase and the demand for the younger heavy hitters rises correspondingly. It should be stated that this is a classic collective action problem with which the industry has had to grapple with during commodity pricing volatility, but I suspect that a company that decided to wisely invest in a good core of young talent during a slower period would outperform those who had to haphazardly pluck anyone it could get its hands on after the hiring had already picked up and the heavy hitters had been snatched up.

With the current pricing downturn, I imagine many young professionals who had joined the industry and the AAPL – but who ultimately ran out of work and were forced to take work in other fields – could have become valuable members of our greater industry with only a modicum of instruction and refinement. But such is probably the natural and probable progression of our industry, which had arguably become filled beyond a reasonable capacity over the past 5-7 years.

II. Industry Recalcitrance in Meaningfully Developing Young Energy Professionals

For those of us who are dead-set on breaking into the industry, we’re going to endeavor to make an impact and will eventually break the right doors down that stand in our way. For the average young energy professional, however, there seems to be a chasm separating what the industry purports to do for the young professional and what it does in actuality. Speaking only for the general Midland/Odessa area, I can personally attest to the phenomenon that trying to get anything in the arena of education or networking off the ground for young energy professionals – and being able to sustain any momentum – is a mammoth task. As I have told many people in conversations prior, I am discouraged by the seemingly lost opportunity our industry has neglected to pursue by not trying to pass the proverbial baton from those at the top of oil and gas to my generation. The networking and education that I get requires spending quite a sum between conference fees, travel, missed work, etc., and not all young professionals are able to financially jump through the flaming hoops that I have managed to get through for the sake of professional development.

Over the next several years, a large swath of those at the top of the industry will retire, taking their knowledge and experience with them. How great it would be if we could occasionally put the experienced industry veterans in front of a group of earnest and eager-to-learn young professionals to impart their knowledge and wisdom! Although I suspect that such discussions and events do take place, in this author’s humble opinion it does not happen nearly enough.

III. My Professional Generation Will Be Defined By A Willingness to Outcompete and Outperform, and a Lack Thereof

So if you’re unsatisfied with where you are at in an industry or field that you enjoy and would like to remain in, what is one to do?

Everything and anything. 

Those who are doing the extra work – writing articles, shaking hands, talking shop, etc. – will win the long-term battle. Hone your craft. Do free spec work if possible. Invest in professional development. Lastly, appreciate that “currency” is why most people work – we all have bills to pay, things to buy, a retirement for which to save. But most people I know don’t appreciate the following concept:

“Experience is currency.” 

Speaking only for myself, I know that I am willing to work for free for a period of time under somebody who has more experience than me in the interest of improving my skills and competencies under someone who has wisdom and guidance to impart (and am willing to put my money where my mouth is – feel free to call my bluff). Many people think of currency in its truest, literal form: dollars and cents. Isn’t it better to be looked upon in your field as someone who has talent or something interesting to say because of the time and effort you’ve invested in trying to make yourself the best in your field?

Young Professionals of all industries, we are in a new and great age of professional development. The tools and knowledge are in front of you, and information is more readily available and at our fingertips now than at any time prior. The logical conclusion to all of this is that the complacent, satisfied young professional risks missing opportunities to grow their networks and increase their industry knowledge – though they would claim that missing such opportunities would not constitute detriment or harm to their careers, I would take the opposite stance.

Don’t Overlook the “Basics,” Whether You’re A Rookie or a Seasoned Pro

This post is also available at my LinkedIn page.

As soon as I walked out of the NRG Center in Houston after the last portion of my July ’13 bar exam, those in the immediate vicinity might have heard a “whoosh” noise – that was the sound of my immediately ejecting 95% of bar study material out from my head, presumably never to be needed again. It’s interesting to look back in hindsight at what I was good at, bad at, and laugh at tested material I never anticipated seeing in practice. Case in point, I remember doing my one day of bar review on something called “oil and gas law;” having gone to law school in New York, this topic was not regularly debated over water cooler discussion in the law review office (full disclosure, I am pretty sure I did not bomb by oil and gas law essay on the exam – I think?). As an alternative example, Civil Procedure was anathema to me – no matter how hard I tried, its myriad rules just did not want to stick in my mind. Obviously the basics I still remember, but the nuances and subtleties might as well have been in Swahili in my review materials. On the whole, though, I think I retained most of the broad frameworks surrounding these areas of law, which has helped me at different times subsequently.

My efforts to keep myself solid on “legal basics” in areas I don’t really deal with regularly came in handy last week, though, and reminded me of the value of having the fundamentals in your craft down even if they don’t necessarily apply to your specialty. In reviewing some courthouse records to solidify title for a particular assignment in Upton County, I saw that the materials including a case commenced about a decade ago yet still unresolved – this case was a lease royalty language dispute, and of course the file was pretty huge. Anticipating myriad exhibits and other explanatory materials, I instead found the file to be 95% pleadings and procedural motions – the “Civ Pro” part of my brain awoke and cried out, as if millions of my brain cells cried out in terror and were suddenly silenced. There were impleader and intervention motions galore, which I was able to deftly navigate, more or less; my advantage in having some clue about these Civ Pro filings worked and what they meant allowed me to dispatch with the case certainly much faster than a regular title abstractor would have been able to.

The above story is not really important, but it does give a bit of color to my overall point that, whether you are starting out or rather experienced in a certain field, having the knowledge and ability to handle the tasks/info that falls into the “basics” category will distinguish you as someone who can get the job done. For the rookie, having the basics down will demonstrate a desire to improve professionally and commit to providing good work-product; for the vet, having the basics down demonstrates a lack of complacency and a desire to make sure his or her foundation is solid enough to support the added weight and height of greater skills and development. It seems simple, and it is – but imagine a limo driver who didn’t know the local layout of streets, a carpenter who didn’t know what types of wood are better for certain work, or a quarterback who didn’t understand the core tenets of his coach’s offense. All of the “extras” that you bring to the party don’t mean nearly as much if it’s without a sound foundation consisting of the basics.