Spotlight on Oil and Gas

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For Clients and Friends of the firm, Baker Botts' Energy Litigation Team has identified some key issues and trends in the oil and gas sector that we think you should know about. Please feel free to reach out to the relevant team members if you have any questions about any of the issues and trends discussed below.

 

 

KEY ISSUE

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1.

Increasing risk for private equity energy firms. The traditional model for private equity energy firms has been to acquire acreage and other oil and gas assets in valuable plays like the Permian Basin and Eagle Ford Shale play in Texas and quickly flip them to large, often publicly-traded oil and gas producers. By avoiding significant development activity, such as drilling expensive horizontal wells, private equity firms were able to generate relatively high rates of return. More recently, private equity firms have been under pressure to concretely demonstrate the value of their assets, for example in the form of drilling numerous revenue-generating wells, before placing them on the auction block for larger producers to purchase. In turn, this has required such firms to hold on to these assets for longer periods of time, thereby exposing them to greater risks, such as from third party dealings with contractors, vendors, and even the underlying mineral rights’ owners. In a sense, we are seeing a merging of the private equity energy model toward the traditional oil and gas producer model. With that, we expect that private equity energy firms will face increased exposure to the full array of oil and gas disputes.

Meghan McElvy Photo 

Meghan Dawson McElvy

2.

Allocation disputes. Fieldwide development adds complexity to the allocation of royalties. As operators shift to longer horizontal wells across multiple leases and units, production and royalty allocation continues to present complex litigation issues. Shale development gives rise to various open questions about regulatory compliance, specialized lease provisions, and how royalties should be calculated across various leases when production is aggregated at surface processing and storage facilities. Sophisticated lessors are challenging industry standards and methods for the allocation of production and royalties.

Louis Layrisson Photo 

Louie Layrisson III

3.

Local regulation of oil and gas activities. Oil and gas producing states continue to take differing approaches to local regulation of oil and gas activities. In 2015, Texas lawmakers clarified through HB40 that local regulation of oil and gas activities is generally preempted by state regulation, subject to several narrow exceptions. In Colorado, however, the governor signed SB19-181 into law on April 16, 2019, which allows local government entities to impose broad regulation of oil and gas activities. Even in states like Texas, however, local government entities have imposed numerous ordinances that, combined, result in the regulation of oil and gas activities that HB40 was intended to preempt. In Colorado, lawmakers are working through a rulemaking to implement SB19-181, and the effect local regulation will have on oil and gas activities remains to be seen. We stay on top of this ongoing debate between oil and gas regulation at the state v. local level and advise clients as to their options under both.

Jason Newman Photo 

Jason Newman

4.

Joint Operating Agreement disputes. A Joint Operating Agreement (“JOA”) can function well when operators and non-operators get along, but when relations sour parties will need to return to the original contracting document to determine their respective rights. These agreements are often based on either the 1982 or 1989 American Association of Professional Landmen form operating agreements—which, under Texas law, offer two different standards for the conduct of operators. Under the 1989 form JOA, an operator is not liable for its acts under the JOA—including a breach of the contract—unless its conduct rises to the level of gross negligence or willful misconduct. Knowing these standards helps us advise clients in a variety of situations, from litigation disputes between operators and non-operators to issues arising between buyers and sellers in share purchase agreements.

Elizabeth Furlow 

Liz Furlow

5.

Permian Basin. Oil and gas production in the Permian Basin has exploded over the past eight years, with crude oil production up more than 800% since only a decade ago. Production in the Permian Basin could be even higher in the next couple of years. This is causing constraints in various systems, from problems with the disposal of massive increases in produced water to power shortages and pipeline constraints. During April 2019, gas prices in the Permian Basin went negative, meaning that producers were forced to pay pipelines to take their gas. We are working on these problems and potential solutions so that our clients are able to realize their goals for oil and gas production in this area.

Bill Kroger 

Bill Kroger

6.

Breach of express and implied lessee duties. It is increasingly common for landowners to assert claims for breach of duties implied by law (called implied covenants) in addition to express lease provisions. The existence of an implied covenant depends on the contractual language, and a close review of the leases and a deep understanding of oil and gas law are necessary to evaluate the existence and application of the implied covenants, since various provisions can abrogate or eliminate the implied covenants. This is important because you could be defending a claim that is not legally available.

Tina Nguyen Photo 

Tina Nguyen

7.

Crisis and Emergency Response. E&P activity involves complex operations. As a result, energy companies must be prepared to confront many types of crisis situations, ranging from environmental discharges to on site accidents. Our lawyers are experts in guiding companies through every phase of a crisis, including the initial incident response, remediation, and follow-on litigation and enforcement actions. We have a deep understanding of the regulatory landscape and assist with engaging the relevant federal, state and local agencies. We also advise clients of steps that can be taken – and processes and procedures that can be enacted – that will assist in the event an emergency situation arises.

Russell Lewis 

Russell Lewis

8.

Permitting delays. As the level of drilling increases in West Texas and elsewhere in the state, not only for oil and gas but for disposal wells also, the lead time for getting wells permitted has grown steadily longer. These longer lead times reflect a significantly increased work load at the Railroad Commission, the Commission’s budgetary and human resource limits, and increased attention to issues such as seismicity concerns. Potential delays make it more important than ever for those seeking multiple permits to have a clear strategy for submitting permits that are clean, well-supported, and backed by a thoughtful strategy for gaining timely approval.

Jim Barkley Photo 

James Barkley

9.

IP agreements for operators. Oil and gas operators own valuable intellectual property rights and need to take steps to protect them. For example, when operators enter into agreements with service providers, they need to be mindful of terms that might impact those rights. Relevant agreements might include, for example, master services agreements, non-disclosure agreements, acknowledgement agreements, and joint development agreements. We are seeing an uptick in the focus on such agreements as more oil and gas companies are relying on proprietary technology to monitor, control and optimize their drilling and production operations. I have been thinking and working in this space for our energy clients.

Michelle Jacobson Eber Photo 

Michelle Jacobson Eber

10.

Multi-party, multi-contract arbitrations. Related disputes arising in the same oil and gas project among multiple parties under different contracts can often be litigated in a single judicial proceeding. But when parties elect arbitration in their contracts, as they often do in large-scale energy projects with an international element, the ability to join or consolidate related disputes depends on the care with which the arbitration clause in each contract is drafted. This remains true despite efforts over the past decade by many leading arbitral institutions to amend their arbitral rules to promote joinder and consolidation. We are continuing to see many related disputes in the oil and gas industry that should, but cannot, be joined or consolidated. Because of the size and complexity of oil and gas projects, this industry is particularly susceptible to this inefficiency, yet has the sophistication to use arbitral clauses that can minimize it.

Jay Alexander Photo  

Jay Alexander

11.

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 Photo 

Brooke Geren McNabb

12.

Climate change litigation. There are cases pending in the Ninth and Second Circuit Courts of Appeals regarding the viability of tort claims based on global climate change. The Ninth Circuit (Case No. 18-16663) will review the dismissal of public nuisance claims asserted by the Cities of San Francisco and Oakland against several large energy companies based on global climate change. The district court (N.D. Cal.) held that the claims were governed by federal common law and were not justiciable because they would interfere with the separation of powers and foreign policy. The Second Circuit (Case No. 18-2188) will review the dismissal of the City of New York’s trespass and public and private nuisance claims against several large energy companies based on global climate change. The district court (S.D.N.Y) held that the City’s state law tort claims were governed by federal common law and that any potential federal common law claims were precluded by the Clean Air Act. The court also held that the claims were not justiciable because they would interfere with the separation of powers and foreign policy. The Ninth and Second Circuits’ decisions, and any potential review by the Supreme Court, will have a significant impact on the viability of tort claims based on climate change moving forward.

Scott Janoe Photo 

Scott Janoe

13.

Payment disputes in construction. As the industry continues to build more—wells, wind farms, solar, manufacturing facilities, and so on—we advise clients on a variety of payment disputes during the construction process. Depending on the position of our clients, this can include advising clients on preserving their lien rights or defending against payment claims from others.

Katherine Brooker Photo 

Katherine Brooker

14.

Energy bankruptcy cases. Houston continues to be the hub of energy bankruptcy cases. These cases pose challenging and complex legal issues that highlight competing objectives of federal bankruptcy law, state regulatory law, and participants in the oil and gas industry. For example, bankruptcy courts continue to grapple with the treatment of P&A obligations in chapter 11 cases. In Midlantic National Bank v. New Jersey Department of Environmental Protection, the U.S. Supreme Court held that state regulatory law designed to protect the public’s health and safety prevented a bankruptcy trustee from availing itself of the right to abandon property under the Bankruptcy Code because of the property’s P&A liability. Relatedly, the treatment and priority of decommission claims in an E&P bankruptcy and the reach of the bankruptcy discharge are important considerations for the debtor, predecessors, insurers, and stakeholders of bankruptcy estates. Caution must be taken in addressing P&A liability that may be left unresolved in an E&P bankruptcy case.

Omar Alaniz 

Omar Alaniz

15.

Administrative agency jurisdiction. In 2018, the Texas Supreme Court issued its opinion in Oncor Elec. Delivery Co. LLC v. Chaparral Energy, LLC, 546 S.W.3d 133 (Tex. 2018), clarifying the scope of exclusive administrative agency jurisdiction in the State of Texas. At issue was whether the Texas Public Utility Commission had exclusive jurisdiction to resolve issues underlying a breach of contract claim asserted by a customer against an electric utility company. The Court held that it did. In doing so, the Court rejected arguments that the agency lacked exclusive jurisdiction because it could not award the plaintiff monetary damages and the claims at issue were common-law breach of contract claims. According to the Court, the key inquiry was whether the issues underlying those claims fell within the scope of the agency’s regulatory purview. Because they did, the agency had exclusive jurisdiction to resolve those issues, with the plaintiff retaining the right to seek damages in court thereafter, consistent with the agency’s determinations. The language in Chaparral is broad and seemingly applicable in a variety of regulatory contexts. The case therefore has potentially significant implications for the proper resolution of claims asserted in the State of Texas involving regulated aspects of the energy industry.

Ben Gonsoulin  

Benjamin Gonsoulin

16.

AMI provisions. 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 Pharr Hefley Photo 

Amy Pharr Hefley

17.

Don’t get SLAPPED. In 2011, the Texas legislature enacted the Texas Citizens Participation Act (anti-SLAPP statute) which allows defendants to move to dismiss and seek mandatory fees and sanctions for a suit relating to the citizens petitioning, speaking freely, and associating freely. This Act has been construed extremely broadly and has been applied to cases far beyond traditional constitutional rights—including employment cases, non-compete cases, and misappropriation of trade secrets claims. Energy companies wishing to protect their confidential information and preserve their non-compete policies need to be thinking proactively about those policies and about the actions they now bring to enforce those rights in light of the broad application of this statute.

Kevin Jacobs Photo 

Kevin Jacobs

18.

Renewable power for oil and gas operations. Exxon Mobil Corp. recently announced a 12-year PPA for 500 MW of wind and solar power for its operations in the Permian Basin. As utility scale solar projects become more common in West Texas, close to productive oil and gas plays, other producers may consider similar agreements. Such power contracts could prove very beneficial to producers as the availability of power in Texas’ oil and gas fields continues to lag behind the need and as power prices for wind and solar continue to fall. However, to avoid unintentionally becoming a regulated utility or taking on unintended liability, producers should work closely with counsel to ensure that such arrangements are properly structured.

Andrea Stover Photo 

Andrea Moore Stover

19.

Frontier energy projects drive clarity on EPC concepts. Energy is at the forefront of a wave of increasingly ambitious engineering projects, particularly deepwater offshore work, often in harsh conditions. In frontier projects like these, owners try harder to place the risk of defects and failures onto contractors, with ever longer lists of requirements. Some obvious questions arise: Can these requirements somehow undermine each other? What is Fitness for Purpose? What is Design Life? The English courts have examined these fundamental questions recently and have given much-needed clarity to some concepts at the heart of EPCs.

 

Stuart Jordan

20.

Force majeure. We are seeing an uptick of parties asserting force majeure in an effort to shield an otherwise contractual breach. For example, does force majeure cover economic distress? The scope of force majeure can vary wildly depending on the law chosen. Clients turn to us during contract negotiations to make sure their contract language embodies their intentions and to analyze the availability of a force majeure argument after execution.

Tina Nguyen Photo 

Tina Nguyen

21.

Gulf of Mexico. A cross-practice team of Baker Botts energy litigation lawyers are studying, thinking about, and working on the legal and business risks and issues impacting new investments in the Gulf of Mexico. Due to structural changes such as new technologies, new LNG terminals, and growing exports of crude oil, oil companies are making new energy investments in the Gulf. We are working on how the risks and legal issues have changed in the past decade, so that we can better advise our clients on their investment opportunities.

Bill Kroger 

Bill Kroger

22.

Establishment of international arbitration centers in the Middle East and Central Asia. Recently there has been an increase in the number of regional arbitration centers established in the Middle East and Central Asia. For example, the Abu Dhabi Global Market Arbitration Centre in the United Arab Emirates became fully operational in 2018, while the Astana International Financial Centre in Kazakhstan and the Tashkent International Arbitration Centre in Uzbekistan have also recently opened. The appearance of these international arbitration centers in two important energy-producing regions provides additional forums and alternatives for resolution of energy disputes that current or potential investors should consider in structuring their transactions.

pitts.lucas_380x380 

Lucas Pitts

23.

Salt water disposal wells. Whether a lessee can convert an existing well into a salt water disposal well or whether a lessee can rework a non-producing well into a salt water disposal well depends on the construction and interplay of various agreements, including the lease itself, joint operating agreements, and surface use agreements. Care should be given to whether any governing agreements allow for disposal of water from off-lease lands, or whether the permitted disposal is limited to water from leased-lands only.

Laura Shoemaker 

Laura Shoemaker

24.

Preferential rights in joint operating and development agreements. Preferential rights are commonplace in joint operating agreements and development agreements. Also known as rights of first refusal, a typical preferential right provision gives parties the opportunity to acquire the interest of a selling counterparty on the same terms that the seller has negotiated with a third-party buyer. These provisions are often unique and need to be carefully evaluated when buying or selling oil and gas assets or operating companies. Common preferential right issues include: (1) whether the proposed transaction triggers any preferential rights; (2) whether the seller has complied with the notice requirements of the preferential right; (3) whether the preferential-right holder must acquire all the assets being sold as part of a package deal or may acquire only the specific assets subject to the preferential right; and (4) whether the preferential right has been validly exercised. Failure to properly account for preferential rights and the issues they raise can delay or even torpedo oil and gas transactions and can lead to expensive disputes. We have advised clients about the application and effect of preferential rights on their transactions, as well as represented clients in disputes with preferential right holders.

Cornelius Sweers Photo 

Cornelius Sweers

25.

IP protection for operators. More and more oil and gas well operators are relying on sophisticated software applications to monitor, control and optimize their drilling and production operations. It is important for operators to protect those software applications. Copyright offers one form of protection. A copyright registration will protect the lines of computer code used to write those software applications. This will enable operators to pursue anyone who illegally copies or downloads those software applications. Trade secret protection can also be a powerful form of protection so long as the operator takes adequate measures to keep the software applications within the organization. Given that the industry relies heavily on contractors, this is sometimes difficult. For this reason, strong confidentiality agreements are an important tool in protecting the propriety of these software applications. Finally, patent protection, which is generally the strongest form of IP protection, may also be worth pursuing for some of these applications, especially those where third parties with whom it is difficult to have robust confidentiality agreements will have access to the software applications. Patents protect more than just the lines of computer code used to write the software applications. They also protect the functionality of the software applications. In short, there is a range of IP protection that operators can obtain to cover these very valuable assets.

Paul Morico Photo 

Paul Morico

26.

Environmental citizen suits. There has been some increased citizen suit activity targeting oil and gas companies alleging violations of environmental laws such as the Clean Air Act and Clean Water Act. These citizen suits are primarily brought by environmental non-governmental organizations (“NGOs”). These lawsuits are unique because they typically aim to obtain pollution-reducing injunctive relief rather than monetary relief. Key issues in environmental citizen suits include procedural hurdles such as a 60-day pre-complaint notice requirement, individual NGO member standing, mootness or preclusion due to governmental actions, and permitting defenses. NGO objectives are fairly well publicized and target certain trending issues in Texas and other oil- and gas-producing states. Companies seeking to be proactive in this area have the ability to assess vulnerabilities and prepare defense strategies even before a company is targeted and the lawsuit is filed.

Kimberly Tuthill White 

Kimberly Tuthill White

27.

Adverse possession of mineral rights. Texas courts recognize that mineral estates can be acquired through adverse possession. See Natural Gas Pipeline Co. of America v. Pool, 124 S.W.3d 188 (Tex. 2003). For example, where a lease specifies that it shall remain in effect so long as gas is produced, if the well ceases production, the lease should terminate; however, if the well ceases production, but the lessees start back up with production, the lessees may obtain adverse possession of mineral interests. This adverse possession has been found by courts to exist in the form of fee simple determinable interests on the same terms and conditions as the original lease.

Margaret Wittenmyer 

Margaret Wittenmyer

28.

Risks in commodity purchase contracts. Though commodity purchase contracts are commonly based on standard forms, such as those published by the North American Energy Standards Board (“NAESB”), several areas have potential for disputes. Such disputes are particularly common in downturns or in cases of pipeline transportation constraints, such as those currently affecting the Permian Basin. Disputes we have observed or advised clients about include where the contract price is benchmarked to an index, but that index ceases to be representative of market conditions at the delivery point. Even matters seemingly as simple as the “delivery point” specified in purchase contracts can give rise to litigation, particularly when the delivery point is drafted to include both a physical location and a pooling location on a pipeline—i.e. “the X interconnect on the Tennessee pipeline into the Zone 1 Leg 500 Pool.” Because gas delivered into a pool often is more valuable because transportation is free to other points within the pool, parties may dispute the meaning of the delivery point clause and whether it requires delivery into a pool. Finally, disputes can arise over the application of force majeure clauses to transportation or pipeline constraints. If not carefully drafted, a pipeline constraint or outage may not qualify as a force majeure event, contrary to the expectations of the parties.

 Cornelius Sweers Photo

Cornelius Sweers

29.

Title defects in Asset Purchase and Sale Agreements (“PSA”). Because title defects are often defined within share purchase agreements, disputes over title defects often hinge on the specific contractual language in a particular agreement. Multiple provisions within the contract often interact with each other to determine what constitutes a title defect, what exceptions are not title defects, and how damages related to defects should be calculated. It is important to carefully review the contract as a whole in dealing with title defect disputes. We have had experience defending against a multitude of title defect claims.

 

Kristina Vu

30.

Termination of Intra-EU bilateral investment treaties. In January 2019, the Member States of the European Union agreed to terminate all Intra-EU bilateral investment treaties (“BITs”) following the March 2018 decision of the Court of Justice of the EU in Achmea v. Slovak Republic (the “Achmea Judgment”) that the investment arbitration mechanism of the Netherlands-Slovakia BIT violates EU law. At least some Member States have taken the position that the Achmea Judgment should apply to the Energy Charter Treaty as well. Those with energy investments subject to Intra-EU BITs, including non-EU investors holding investments through EU subsidiaries, should carefully review their arrangements and any applicable BITs to evaluate treaty protections available for potential claims.

Dustin Appel Photo 

Dustin Appel