Hot Litigation Risks in Texas Oil & Gas Investments

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“‛Excellent’ Baker Botts L.L.P. ‘shines in business acumen, industry knowledge, appropriateness of advice and response times’ and . . .is highly experienced in handling disputes involving all aspects of the exploration, production, distribution, and marketing of energy products, as well as the engineering, procurement and construction of energy projects.”

The Legal 500 U.S. 2018

Baker Botts has leading experience in oil and gas litigation. Below are a few of the current issues that we are thinking about:

 

Hot Litigation Risks in Texas Oil & Gas Investments

 

Contacts

 
     
Director Liability and Related Governance Risk
Private equity companies that direct or control their oil and gas investments—through participation on the board of directors or otherwise—face unique risks. Those entities can face substantial exposure to third-party claims, including from shareholders, particularly when those investments perform poorly or go bust. It is important to consider and plan for such an occurrence—before entering into an investment and throughout its duration—and to be able to adequately defend against such claims if they arise.
 

Russell Lewis

Russell Lewis

     
Transaction Structuring Issues
In handling disputes that have arisen from private equity investments in Texas companies or companies with Texas operations, we have encountered procedural issues that have implications for how investment documents should be drafted. For example, Texas has a statute that makes the award of attorneys’ fees to the winning party in a breach of contract case mandatory, but only if the losing party is a corporation or an individual. That has implications for the type of entity that should be used as the investment vehicle. Texas gives parties great latitude to agree to waive tort claims, such as claims that a party was fraudulently induced to sign a contract, but only if the right language appears in the contract. Unlike many jurisdictions, Texas does not have an effective motion to dismiss procedure, which can make it challenging to have lawsuits dismissed quickly. Careful attention should be paid to these aspects of Texas law when drafting investment agreements.
 

Rebeca Huddle

Rebeca Huddle

     
Frac Hits
The potential for frac hits—where a newly drilled well interferes with a nearby existing well—continues to increase as more and more new wells are drilled and fracked. Frac hits are expensive to address and give rise to potentially large claims for equipment damage and lost production. This issue is particularly acute in the Permian Basin, where operators have amassed thousands of new drilling locations in areas where many wells already exist.
 

Jason Newman

Jason Newman

     
Unusual Leases
A growing number of leases in Texas contain non-standard provisions. For example, royalty clauses may provide that royalties are to be paid on flared gas or contain a non-standard formula for measuring the price of crude. Newer leases may also make a breach of the lease grounds for termination of the lease or impose fiduciary duties on the lessee. Such non-standard provisions need to be carefully evaluated.
 

Bill Kroger

Bill Kroger

     
Legal Issues Arising Out of Increasingly Long Laterals in Horizontal Wells
It is increasingly common to see horizontal wells with laterals that run across multiple leased tracts, or multiple pooled units, that are not formally pooled together under pooling clauses in the underlying leases. These long laterals give rise to various open questions about how these wells should be permitted, whether the underlying leases allow “allocation wells” in the first place, and how royalties should be calculated across the various leases. They also give rise to issues among the working interest owners over how production is to be allocated and how the operator accounts to its nonoperator working interest partners. 
 

Megan McElvy

Megan McElvy

     
Fracking Bans and Restrictions
Texas cities are updating restrictions on oil and gas operations in urban areas, which can make it more expensive to drill in these areas than in other locations. We have evaluated these restrictions and analyzed their legality for our clients. We also led the litigation that caused the City of Denton to repeal its frac’ing ban.
 

Louie Layrisson

Louie Layrisson

     
Induced Seismicity Litigation
Claims alleging that both underground disposal of well fluids and hydraulic fracturing have triggered earthquakes (aka, induced seismicity) have grown in number in recent years. These run the gamut from individual landowners bringing one-off nuisance and negligence claims against operators on their properties to the inhabitants of entire neighborhoods and towns suing for such damage. Induced seismicity incidents have garnered significant attention in the press, among environmental interest groups and at government agencies. As a result, regulators in many states including Texas have imposed additional rules and operating restrictions designed to address induced seismicity. 
 

Kim White

Kim White

     
Leases that are Subject to a Joint Exploration or Development Agreement Containing an “Area of Mutual Interest” or “AMI” Provision
AMI agreements are unique creatures. A standardized form of agreement exists, and case law construing AMI agreements is undeveloped. As a result, AMI agreements can be full of non-obvious flaws and unintended consequences. For example, depending on how the AMI is worded, by extending or amending a lease located in an AMI, a party may trigger the non-acquiring party’s right to participate in the lease, even if the non-acquiring party declined to participate in the lease originally.
 

Amy Hefley

Amy Hefley

     
Pugh Clauses and Other Provisions that Cut Down Leases
Provisions that narrow a lease to particular depths or acreage commonly appear in oil and gas leases but can vary widely in their terms. They must be studied carefully, especially in oil producing areas where deep rights are becoming increasingly valuable but may not be held by drilling shallow wells. For example, we are hearing of instances where a lease has a depth severance clause, rights to the deeper plays are owned by another operator, and the line between the two leases runs through the middle of a valuable deep play (and, thus, a dispute exists over which operator can produce from that play). 
 

Michael Bennett

Michael Bennett

     
Wage and Hour Issues
Classifying workers as independent contractors, and paying them a day rate, when they are actually employees, can lead to liability for overtime when workers work more than 40 hours in a week. Wage and hour liability extends to successor companies even in an asset sale, and it can sometimes extend to individual directors.
 

Jennifer Trulock

Jennifer Trulock

     
Trade Secret Lawsuits
Disputes over hiring employees with non-compete and non-solicitation clauses, or employees departing with their former employers’ confidential information, are always a risk in the oil and gas industry and Texas in particular. We have handled a number of these disputes and routinely advise clients on the relevant aspects of Texas employment and trade secret law, both before and after lawsuits are filed. 
 

Kevin Jacobs

Kevin Jacobs

     

Eminent Domain Issues for Pipelines
In 2017, the Texas Supreme Court held in Denbury Green Pipeline-Texas, LLC v. Texas Rice Land Partners, Ltd. that the company had authority to use eminent domain for a carbon dioxide pipeline. That decision provides a template for how pipelines can qualify as common carrier pipelines with eminent domain power and should be studied by any company looking to build a common carrier pipeline in Texas. For pipelines seeking eminent domain power as common carriers under the Texas Natural Resources Code, an issue that has arisen with increasing frequency is what products are covered by the statute as “crude petroleum.” Companies that transport natural gas liquids, ethylene, or other refined petroleum products are increasingly opposed by landowners arguing that such products are not “crude petroleum” and thus eminent domain power does not apply.

 

Jim Barkley

Jim Barkley

     
Bankruptcy-Related Issues
Although down from their peak, we continue to see a steady stream of energy-related bankruptcies. We routinely advise clients on a host of questions, including: Can a non-operator remove a bankrupt operator? Must the operator continue to comply with JOA obligations? Are preferential rights enforceable? Can plugging and abandonment liability be discharged? Are indemnity obligations honored in bankruptcy? If a bankrupt nonoperator cannot pay JIBs, what are the operator’s options? What is property of a bankruptcy estate and what is not?
 

Omar Alaniz

Omar Alaniz

     
Energy Nuisance Litigation
Property owners have filed lawsuits seeking damages allegedly caused by nearby oil and gas operations on a theory that such activities constitute a nuisance. Specifically, plaintiffs have alleged that fumes, odors, dust, noise, light, and traffic from the operations have resulted in personal injuries and property damage. We have defended against nuisance claims and also advised on steps to take to prevent such litigation.
 

Brooke McNabb

Brooke McNabb

     
Environmental Health and Safety Compliance and Enforcement Risk
As onshore oil and gas operations have expanded in the United States, so has the level of and interest in environmental regulation of them. From the so-called Noble enforcement initiative to the challenges to the DAPL pipeline, government agencies and environmental groups have targeted the energy industry for intense scrutiny. Coupled with the more classic risks of spills and other industrial accidents, the risk of major compliance and enforcement costs as well as operational and developmental delays in energy projects can be high.
 

Scott Janoe

Scott Janoe

     
Powering Oil and Gas Operations
Many oil and gas plays across the state lack sufficient electric infrastructure to quickly and economically provide power to oil and gas operations. In many instances, developers must construct their own electric distribution systems to more efficiently power their operations. Texas businesses are generally allowed to provide electric service to themselves but, without careful consideration of Texas utility law, oil and gas developers may find themselves unintentionally acting as an electric utility, thereby subjecting themselves to the jurisdiction of the Public Utility Commission of Texas. Developers must also be aware of legal issues that arise when seeking to bring power to operations that cross multiple utility or electric cooperative service territories, complicating the question of who may be allowed to provide electric service to such operations.
 

Andrea Stover

Andrea Stover

     
Disclosure Issues for Public Energy Companies
A recurring issue for public oil and gas companies arises from disclosures about well projections and well results. Well-related disclosures are a fertile ground for disputes—whether with shareholders or the government—if projections are not met. This issue should be on the radar for any investor that anticipates taking an energy company public.
 

Paul Elliott

Paul Elliott

     
Lender Liability Issues
When oil and gas investments go bust, it is not unusual in Texas for borrowers to file lender liability claims against lenders. We have defended such claims on the creditor side, and have substantial experience advising creditors on how to prevent and defend such litigation.
 

Amy Hefley

Amy Hefley

     
Continuous Operations, Drilling, and Development Clauses
Provisions allowing for the temporary cessation of operations, drilling, and/or development during the secondary term also are commonly found in oil and gas leases but with varying terms. We have seen an uptick in cases involving claims that a lease has terminated because a party failed to engage in continuous operations, drilling, or development. Such provisions should be reviewed carefully, particularly when it comes to older leases that are held by production, and properties on which a top lease exists.
 

Jason Newman

Jason Newman

Baker Botts leads the nation in energy litigation and has since the earliest days of the Texas oil and gas industry in 1901. We are handling substantial oil and gas litigation matters involving all of the major shale plays in the United States, including the Eagle Ford, Bakken, Permian, Utica, Barnett, and Marcellus plays. We have experience in all types of energy litigation disputes.