Energy Report June 2009

June. 18, 2009

ENERGY REPORT

DICK LOWE HUNTER ENIS 2009 LEGENDS LUNCHEON HONOREES

Inside 4 The Lone Energy Star State Texas supplies the nation with more than just oil and natural gas

6 Hunter Enis and Dick Lowe The Texas Alliance of Energy Producers honors two veteran oil and gas men

8 Natural gas for transportation Ed Ireland argues that compressed natural gas is the only alternative fuel choice

What will tomorrow bring? When we ventured forth with the Barnett Shale Symposium in the summer of 2008, things still looked moderately positive for the energy industry. At the time, no one knew what tomorrow would bring. It wasn’t long after last summer’s meeting adjourned, however, that the U.S. economy began to unravel, oil and natural gas prices began a precipitous drop — and we all know the rest. Still, there were signs the industry could prevail. After all, the Haynesville, Marcellus and Fayetteville shales were all waiting to apply the magic formula first perfected in the Barnett Shale. Now, a year later, there are more stones — and maybe a few boulders — in the industry’s pathway. But the energy industry — up or down — requires good, solid data. And we have plenty of that to offer: How Texas offers other energy options beyond oil and natural gas A look at ongoing mineral rights debates in the courts New markets for natural gas. An analysis of the Marcellus Shale by one of the field’s top geologists. Public opinion research on urban gas drilling. Maximizing oil and gas leases. How mineral owners should handle unleased assets. You’ll find this and more between this pages. We’ll offer this and more — because who knows what tomorrow will bring Robert Francis Editor Fort Worth Business Press Energy Report

Publisher Banks Dishmon Editor Robert Francis Associate Editor Michael H. Price Managing Editor Crystal Forester

Reporters Elizabeth Bassett, Betty Dillard Aleshia Howe, John-Laurent Tronche Leslie Wimmer

Advertising Executives Mary Schlegel, Elizabeth Northern Andrea Benford, Annie Warren, Bob Collins, Ann Alexander

Lists Mary Kennan

Receptionist Maggie Calhoun

Production Brent Latimer Clayton Gardner

10 Mineral right debates continue in the courts A case in Sansom Park illustrates continuing tension between surface and mineral owners

12 Texas loses jobs as energy prices retreat Employment dropping in oil, gas industry in state

14 German euros drilling some Texas wells Overseas investors look to shale

16 Obama’s energy paradox Robert J. Samuelson tackles the president’s energy plans

19 Shale Energy Symposium Speakers Ken Morgan – TCU Energy Institute Gene Theodori – Sam Houston State University Lisa Vaughn – Shannonm Gracey, Ratliff & Miller LLP Kelly Mcbeth – Texas Energy Lobby John Taylor – PlainsCapital Bank

25 Tim Raetz Finding stability in today’s volatile oil and gas industry

26 Charts How the industry measures up

Photographers Glen E. Ellman Jon P. Uzzel

30 Legends and Legacies of Texas Oil 3509 Hulen, No. 201 • Fort Worth, TX 76107 817-336-8300 • Fax: 817-332-3038 www.fwbusinesspress.com • E-mail: [email protected] The entire content of this newspaper is copyrighted by the Fort Worth Business Press 2008, with all rights reserved. Reproduction or use, without permission, of editorial or graphic content in any manner is prohibited. The Fort Worth Business Press (USPS 004-204) is published weekly, 52 times a year, for $95 per year by Texas Community Newspapers Inc., 3509 Hulen, No. 201, Fort Worth, TX 76107. Periodical Postage Paid at Fort Worth, Texas. POSTMASTER: Send address changes to the Fort Worth Business Press, 3509 Hulen St., No. 201, Fort Worth, TX 76107.

June 18, 2009

Michael H. Price profiles Don Harrington, a Panhandle legend

MEMBER 2006

TEXAS PRESS ASSOCIATION

AWARD WINNER

Cover photo by Jon P. Uzzel Energy Report

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The Lone Energy Star Texas remains energy resource giant even in new era on the receiving end of much criticism by natural gas advocates (McClendon again with his “Coal is Filthy” campaign) who say natural gas can produce more energy with less of an environmental impact. exas was built on competition and innovation in industry. (Even the Academy Award-winning Coen brothers, no strangers to Nowhere is that more evident than in the energy industry, Texas, have hopped on that bandwagon by directing an advertisement according to industry officials. in February criticizing clean coal, though not on behalf of natural gas.) “We have as many natural resources as any state, and in addition Nuclear power once again is gaining favorability for electrical generwe are much more advanced in planning for transmission upgrades as ation, and six of 30 proposed nuclear plants are planned for Texas. opposed to other states,” said Stephen Wiley, president of Coming into the fray is wind, too, Mills said. GreenHunter Renewable Power, a subsidiary of Grapevine-based “There is lots of competition on the utilities side between natural GreenHunter Energy Inc. gas and coal,” Mills said. “Wind has come on because of tax incenTexas has as diverse an arsenal of energy resources as one can find tives that the federal and state governanywhere in the world. ments have given them, but it’s still got The Barnett Shale in North Texas is the leadproblems on the delivery side. The ing example of natural gas production for We had plenty of natural gas some wind-energy situation is very similar to unconventional gas plays in other states and other countries. Head west, and there are oil but we had no infrastructure what natural gas was in the ‘50s and ‘60s. We had plenty of natural gas, but wells that have produced for more than a cento get it to consumers. It has we had no infrastructure to get it to contury. In that same area, huge tracts of land sumers. It has taken us 40 to 50 years to now boast significant investment for wind taken us 40 to 50 years to build that infrastructure, and it’s going to farms and solar power farms. Travel southeast to find the nation’s largest biodiesel refinery build that infrastructure and take wind a long time for it to develop the infrastructure to compete on the plant located just outside of Houston. More oil it’s going to take wind a scale that’s needed for it to become a production sits off the coast in the Gulf of viable energy source.” Mexico. Return to North Texas – passing a few long time for it to develop The state of Texas also is investing in coal-fired power plants along the way – and the infrastructure to comitself to give wind energy a chance to about 40 miles southwest of Fort Worth is the gain a foothold. The state’s utility regulaComanche Peak nuclear power plant, one of pete on the scale that’s tors will spend $5 billion to build as four plants in the state. much as 2,900 miles of new power lines Do other states compete with Texas on the needed for it to become a to move electricity from West Texas to energy front? viable energy sources. Texas cities. “Not really,” said Alex Mills, president of the “We have one of the largest load cenTexas Alliance of Energy Producers, which has Alex Mills, Texas Alliance of Energy Producers ters in the United States,” Wiley said. offices in Austin, Houston and Wichita Falls. “Naturally, that guides companies to “Alaska comes pretty close on the oil side, want to do business here.” Louisiana on the natural gas side, and California once was the largest While Barnett Shale producers are betting on natural gas being used wind producer. If we’re not No. 1 in all three of those things, we’re more and more in the near future, other companies are looking even damn close to it.” beyond the next decade, including Grapevine’s GreenHunter Energy, In fact, Texas is No. 1 in natural gas, oil and wind energy producwhich specializes in wind-energy projects and biofuels. tion. (On that last note: if Texas were a country, it would rank sixth in “It’s clear, if you look at some of the proposed legislation coming the world in total wind capacity, behind Germany, the rest of the U.S., out of Washington, that renewables are going to gain a larger and Spain, China, and India, according to recently issued 2008 data and larger share of the generation being created,” Wiley said. rankings from the American Wind Energy Association.) “Right now we are serving different purposes for the areas that we In addition to competing with other states, Texas’ energy industry serve,” Wiley said. “Right now, we aren’t competing with traditional competes within itself, too. resources, but one would guess over time, as we become more cost “Everything begins with energy, so having it in your own backyard effective and more renewable resources are created, we will ultimately makes it competitive,” Mills said. “We have plenty of energy in Texas compete with the traditional resources.” for all types of consumers: residential, industrial, transportation and Ultimately, it will come down to price. utilities.” “The cost for renewables has fallen over time, and it continues to Oil is the driving force behind transportation, but natural gas propomove in that direction,” said Wiley, adding the line at which convennents – T. Boone Pickens and Chesapeake Energy Corp. CEO Aubrey tional resources are economical remains below the cost line of renewK. McClendon being two of the most vocal – want to change that by able resources. “There probably will be a time when those two lines encouraging tax incentives to fleet owners who transition to natural cross.” gas-powered vehicles. Additionally, coal-fired power plants have been

By John-Laurent Tronche

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Texas shows muscle in clean-energy economy Texas is one of the leading players in the rapidly expanding clean-energy economy, according to a study released June 10 by the Pew Charitable Trusts. Texas ranked second to California in both number of jobs and clean-energy businesses, fourth in patents and third in venture capital tied to clean-energy, according to the survey. The report says Texas has 55,646 jobs and 4,802 businesses in the clean-energy sector. The state received 414 patents tied to that sector between 1999 and 2008 and venture capital funds invested $716.9 million in the sector from 2006 to 2008. Wind energy was a big factor in the state’s rankings. According to the report, if Texas were a nation, it would rank sixth in the world for annual wind energy production, behind Germany, the U.S., Spain, China and India. Pew reported that U.S. clean-energy jobs grew by 9.1 percent between 1998 and 2007 compared with overall job growth of 3.7 percent in the same period. “The clean-energy economy is poised for explosive growth,” said Lori Grange, interim deputy director of the Pew Center on the States, in a press release. “These jobs are driving economic growth and environmental sustainability at a time when America needs both. There is a potential competitive advantage for federal and state policy leaders who act now to spur jobs, businesses and investments in the clean energy sector.” – Robert Francis For more information: www.pewtrusts.org

Mills agrees price is the ultimate factor in which energy resources become crowd favorites. “It’s good for consumers, competition is good,” he said. “Even competition between companies operating in the Barnett Shale is good, competing for leases, access to pipelines, to keep their costs down so they can be profitable in the tough times like we’re having in natural gas on the price. “We have a lot of resources available in Texas that most states don’t have,” he said. “That creates competition and an atmosphere of costs down for consumers.” ER [email protected]

June 18, 2009

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Four Sevens duo honored with Texas Alliance ‘Legends’ award By John-Laurent Tronche

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ood friends make good business partners, at least in the case of Dick Lowe and Hunter Enis. The two men behind Four Sevens Resources Co. have a long and illustrious career pursuing oil and gas plays, but big success in the Barnett Shale over the past several years has afforded them the luxury of being able to slow down after having worked solid since the 1950s. “It’s the greatest relationship,” Lowe said of his partnership with Enis. “We’ve been in business together for more than 20 years and it started with a handshake to be 50-50 partners.” During the explosive growth of the Barnett Shale over the past several years, Four Sevens thrice played its cards right with a series of deals that netted the company about $1 billion, Lowe said. In 2004, Lowe and Enis sold their Barnett Shale holdings of 26,000 acres to XTO Energy Inc. for $155 million. In the summer of 2007, the duo – along with partner Sinclair Oil Corp., out of Salt Lake City, Utah – sold 39,000 acres in the Barnett Shale for $845 million in cash to Chesapeake Energy Corp., out of Oklahoma City. Four Sevens and Sinclair Oil split the bounty 50-50. Of that total acreage, about 26,000 acres were in Johnson and Tarrant counties, while another 13,000 acres are outside the core area of the Barnett Shale. The divested assets had a gross production of 37 million cubic feet per day at the time and midstream pipeline transportation assets. “We’ve sold out twice for a total of about $1 billion,” Lowe said at the time. “I guess we must be doing something right.” Since that time, the two have been biding their time. “We haven’t been doing a whole lot,” Lowe says bluntly. “We’ve got some production in north-central Texas in a couple of wells and we’ve got a non-working interest in some things in the Barnett Shale that Denbury (Resources Inc.) is the operator of.” They might not be as active as they once were, but that doesn’t mean they haven’t kept a sharp eye out for a deal. “We’ve been looking around for a few places,” Lowe said. When asked if he has found some exciting prospects close to home, which is Fort Worth, Lowe replies laughing, “Yea, but none I want talk about. “I’m looking for something geographically desirable,” he adds. “I

don’t want to do something way out there. I don’t want Hunter and I to have to travel. We’re looking for something not too expensive, shallow – it’s hard to find something like that but we’re looking.” The two have a good friendship, and Lowe credits Enis for helping him get off his feet. Lowe jokes he’s been rich four times and broke three times. (“That isn’t going to happen again,” he says of going bust.) “The last time I went broke, and I mean I was really broke, I had no car, no house, no income and I had $20,000 in cash dedicated to the bankruptcy attorneys,” he said. “Hunter called me up and said, ‘Why don’t we be partners?’” “I said, ‘I’m sorry, but I don’t have anything.’” “He said ‘That’s ok, I’ve got some money. When you get some you can pay me back.’” Those honest relationships, agreement made between two honest individuals increasingly are a thing of the past,” he said. “They are increasingly rare, and that’s too bad,” he said. Another credit to their success is a resistance to bite off more than they can chew. – Dick Lowe Many companies these days load up on debt to grow by leaps and bounds, he said, but that can often lead to a difficult situation during trying times. “One of the things about this business is you have to watch how much money you borrow because the price of the product can fluctuate so much, and you don’t want to get caught with a bunch of debt in a downturn,” he said. “I can testify that.” In addition to a love for the energy industry, Lowe and Enis can trace their similarities to Texas Christian University’s football program. Lowe is a former TCU linebacker who played on national championship football teams coached by the legendary Dutch Meyer in the 1940s. Meanwhile Enis, a Polytechnic High School graduate, played as quarterback during TCU’s appearance at the Southwest Conference championship in 1958. On retirement – official retirement, that is – Lowe, 81, said it’s not likely to happen. “I feel like I’m retired now,” he said. He’s a morning person, and works out and plays golf several times a week. “I’m not working very hard. I’ll probably keep on doing this until the final curtain call.” ER

We’ve sold out twice for a total of about $1 billion. I guess we must be doing something right.

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[email protected]

Fort Worth Business Press

PHOTOS BY JON P. UZZEL

Dick Lowe, left, and Hunter Enis will receive the Fort Worth Legends Award.

Texas Alliance of Energy Producers Fort Worth Legends Award The Texas Alliance of Energy Producers implemented its Legends Merit Award program to honor members that had made a long-time contribution to the betterment of the industry, community and country.

2002 Amon G. Carter and family Kay Kimbell and family E.A. and W. A. Landreth and family W.A. “Monty” Moncrief and family Sid Richardson and family 2003 S.B. (Burk) Burnett Dixon (Dick) Thomas Harbison Charles Anthony Fischer

June 18, 2009

2004 H. E. (Eddie) Chiles Frank Darden Jr. Edgar Sperry Hill James Houston Hill, George Pat Hill 2005 B. J. Kellenberger Arch Rowan Charles Rowan

2007 Bob R. Simpson 2008 Ben Fortson Marvin Gearhart 2009 Hunter Enis Dick Lowe

2006 William L. Adams Charles W. Seely

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Clear choice for alternative fuel vehicles: Natural gas petroleum fuels. Natural gas is mostly methane, which has only one carbon he Texas Legislature has mandated that more atom and four hydrogen atoms. Gasoline has eight carbon atoms and 18 state vehicles be powered by alternative fuels. The hydrogen atoms; diesel, 14 carbon atoms and 30 hydrogen atoms. bill emphasizes compressed natural gas as the And natural-gas vehicles (NGVs) make little if any noise and therefore preferred alternative. reduce noise pollution, the participants learned. In fact, the decibel level of This condition is spelled out in a legislative analysis of NGVs is 80 to 90 percent lower than that of their diesel counterparts. (If House Bill 432, where compressed natural gas (CNG) is you’ve ever been behind a Fort Worth city bus, you might have wondered if cited as the first option, followed by liquefied natural the engine is even running.) Finally, life-cycle costs are lower for NGVs than for gas. Only at the bottom of the list is there a brief mengasoline and diesel vehicles. Not only does fuel cost less, but maintenance tion about electricity for plug-in hybrids. costs less, as well. The bill will amend the state code to require agencies ED IRELAND Like all alternative-fuel vehicles, CNG vehicles are more expensive than regto purchase or lease vehicles only if they use these alterBarnett Shale Energy ular cars and trucks. Fortunately, numerous federal and state tax credits and natives: “compressed natural gas, liquefied natural gas Education Council subsidies pay the entire premium, in most cases. Representatives from the (propane), liquefied petroleum gas, methanol or North Central Texas Council of Governments methanol/gasoline blends of 85 percent or greater, shared news about these funding options at the ethanol or ethanol/gasoline blends of 85 percent (E85) TCU conference. Several federal programs, to Natural gas generates or greater, biodiesel or biodiesel/diesel blends of 20 help offset the initial purchase price of CNG percent or greater, or electricity, including electricity to less NOx, soot, and vehicles, are administered by the Department of power a plug-in hybrid motor vehicle.” Energy, the Federal Highway Administration and In response to the bill’s passage, the Barnett Shale greenhouse gases than the Department of Agriculture. The Internal Energy Education Council and the Energy Institute of Revenue Service even offers a 50-cents-per-galTexas Christian University presented “Green Fleets: other petroleum fuels. lon tax deduction for CNG, as well as a 50-perThe Future Is Now,” a conference focused on naturalcent tax credit for up to $50,000 to cover the gas vehicles. The June 17 meeting had co-hosts in the cost of installing CNG fueling equipment. City of Fort Worth, the Fort Worth Chamber of The Texas General Land Office, the Texas Railroad Commission and the Commerce and the North Central Texas Council of Governments. In attenTexas Emissions Reduction Program also offer various grants and other incendance were fleet operators, transportation directors and business leaders from tives to encourage the use of CNG vehicles. across the region. The bottom line is that there is a compelling case for operating fleets that Participants learned that fleet vehicles lend themselves perfectly to CNG run on CNG. Natural gas is plentiful, readily available and clean-burning. And because they return at the end of each day to a central fueling station. subsidies are available to cover much of the cost of the switch. The situation is Another asset is the regional advantage: Fleets in North Texas travel atop of good for our region’s economy and good for the environment – and that is a one of the largest deposits of natural gas in the United States – the Barnett winning proposition for us all. ER Shale. Another compelling argument from the conference is that natural gas is Ed Ireland is executive director of the Barnett Shale Energy Education Council. For the cleanest-burning alternative fuel. Because of its chemical makeup, natural more information: www.bseec.org. gas generates less nitrogen oxides, soot and greenhouse gases than other

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Natural gas vehicle facts

• There are over 120,000 natural gas vehicles on U.S. roads today and over 10 million worldwide. • There are over 1,100 NGV fueling stations in the U.S. – over half are available for public use. • Natural gas costs, on average, one-third less than conventional gasoline at the pump. • Over 50 different manufacturers produce 150 models of light, medium and heavy-duty vehicles and engines. • Roughly 22 percent of all new transit bus orders are for natural gas. • Natural gas is sold in GGEs or gasoline gallon equivalents. A GGE has the same energy content (124,800 BTUs) as a gallon of gasoline. Source: Natural Gas Vehicles for America (www.ngvc.org)

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Fort Worth Business Press

Surface owners prevail in Sansom Park case Case marks rare court victory over mineral rights in Texas Five days later, however, Western Production filed a gas drilling permit with the well located on Northside’s land; the permit was rejected due to the gas company’s misrepresentation of the well’s location, the court case pitting the developer of a once-planned community in suit alleged, because Western Production officials knew the well couldSansom Park against a local natural gas exploration and producn’t comply with city and Railroad Commission of Texas setback requiretion company resulted in punitive damages of about $4.8 million ments. awarded to the developer and represents one of the few instances in “Western showed up and I just really got an uncomfortable feeling which surface rights have been given greater importance than mineral with the way they were trying to do business,” said Cottongame, who rights. had invested $1.2 million in the project by this time. “I have confidence In the case, Northside Land & Development LLC sued Western we tried everything in good faith to bargain with them and they did not Production Co. in August 2007 for interfering in a 274-home, masterwant to listen.” planned community the developer had been assembling since early Northside sued Western Production in 2005. Western Production leased the mineral August 2007, claiming tortuous interference. rights under the 44-acre property and intendThree months later, Western Production ed to drill on Northside’s land but could not Invoking the accommodasold the Sansom Park leases to Chesapeake move forward with a drilling permit due to the Corp. in November 2007. well’s proximity to other properties, a violation tion doctrine is the best way Energy Chesapeake Energy bought the undeveloped of the 500-foot setback in Sansom Park’s drilling ordinance. Negotiations between the surface owners can protect acres and more land, totaling about 2,000 acres, for an undisclosed amount; however, two parties to allow for the community’s cretheir rights in a dispute with a court briefing estimates the transaction at ation as well as the realization of minerals more than $40 million. failed, leading to the dispute’s appearance in a party seeking subsurface “My guys worked two and a half years the 153rd District Court. use, some attorneys said. with the city to get this project off the Generally speaking, mineral rights trump ground. The city council unanimously surface rights in Texas, according to several approved our deal,” said Hugh G. Connor II, area energy attorneys. In other words, an a partner with Kelly Hart & Hallman LLP in the firm’s Fort Worth office, exploration and production company’s rights supersede those of the who represented Northside in the suit. “And at the last minute Western property owner whose home or land may sit above the oil or natural came in and filed the application for a drill permit even though they gas below ground. knew they couldn’t comply with the various rules and regulations. In this case, however, the jury found May 5 that Western Production “We say they did it solely so they could stop the city from signing our purposefully interfered with Northside’s planned community and awardagreement and it worked,” he said. “After that, they continued to ed the company and its owner, Wes Cottongame, about $4.8 million in interfere by still filing amended drilling permits that still violated our past lost profits, future lost profits and disgorgement, or repayment of rules, all the way up until they flipped their leases to Chesapeake.” money gained in ill-gotten manners. A representative at Western Production said the individual who could speak to the matter wouldn’t be available to comment until after the The facts Business Press’ production deadline. Cottongame, a former Haltom City community development coordiWestern Production was represented by Shayne Moses, an attorney nator, said his Northside Land & Development acquired the land in with Moses, Palmer & Howell LLP, a Fort Worth law firm whose clients January 2005 and immediately set out to create a 274-home, masteralso include Quicksilver Resources Inc. and Anadarko Petroleum Co. planned community with room for a strip center as well. Sansom Park Calls to Moses were not returned. was supportive of the deal, he said, as was Fort Worth City Council member Sal Espino, whose District 2 is adjacent to Sansom Park. The impacts Sansom Park is in the northwest section of Tarrant County. The Northside master-planned community now is on an indefinite “This probably would have been another good housing stock for resihold, Cottongame said. He wants to pursue the project but insists it’s dents to look at,” said Espino, adding he worked out an agreement not that simple, due to city council changes and, separately, a pipeline between Fort Worth, Sansom Park and Tarrant County to improve nearcondemnation that removed about 60 possible homes, he said. by McCandless Street for the development. “It was profitable at 274 homes and I don’t know if it would profWestern Production leased the minerals to the property in June 2006 itable with less lots,” Cottongame said. and was told by Sansom Park officials that the city did not want oil and Connor said this case represents a victory for the little guys. gas development at the expense of the planned residential develop“The big point is that typically oil and gas companies can get away ment, according to court documents. The Sansom Park City Council with things because you’re typically talking about a small landowner unanimously approved the Northside development June 7, 2007; a who doesn’t have the resources to fight back,” Connor said. “My Western Production representative present at that meeting raised no clients did fight back and ultimately prevailed and convinced the jury objection.

By John-Laurent Tronche

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Fort Worth Business Press

Drilling activity in the Barnett Shale Drilling permits issues for Newark, East Field (Barnett Shale)

4,145 3,643

2,503

1,629 1,112

2004

2005

2006

2007

2008 Source: Railroad Commission of Texas

Railroad Commission of Texas on surface vs. mineral rights

Leases by county in the Barnett Shale

From Oil & Gas Exploration and Surface Ownership:

Bosque – 30

Hood – 548

The general rules regarding free use of the surface to benefit the mineral estate may be changed by the specific terms of the mineral lease covering the property or of the deed that severed the mineral estate from the surface estate. In addition, many cities have municipal ordinances restricting oil and gas activities on property within city jurisdiction. The rights of the lessee may also be limited by the “accommodation doctrine.” This legal doctrine applies in limited circumstances to require the lessee to modify its operations to accommodate an existing surface use when reasonable alternatives are available. In specific circumstances in counties in or near large metropolitan areas developers can impose restrictions on drilling and operations sites by creation of a qualified subdivision as provided by Chapter 92 of the Texas Natural Resources Code.

Cooke – 20

Jack – 154

Comanche – 5

Johnson – 2,013

Dallas – 8

Montague – 3

Denton – 2,447

Palo Pinto – 50

Eastland – 12

Parker – 951

Ellis – 22

Somerville – 57

Erath – 124

Tarrant – 1,925

Hamilton – 5

Wise – 2,003

Hill – 150

Source: The Perryman Group

For more information: www.rrc.state.tx.us/about/faqs/SurfaceOwnerInfo.pdf

that what the oil and gas company did was wrong.” Despite mineral rights’ importance in Texas, oil and gas companies still must make concessions to surface owners, according to the Accommodation Doctrine, first expressed in the 1971 Texas Supreme Court case Getty Oil Co. v. Jones. The accommodation doctrine seeks to determine whether the mineral lessee’s proposed use of the surface is unreasonable. Invoking the accommodation doctrine is the best way surface ownJune 18, 2009

ers can protect their rights in a dispute with a party seeking subsurface use, some attorneys said. Chesapeake Energy’s Julie Wilson said it was too early gauge the court decision’s impact on the company’s drilling efforts. The company is “exploring all options in the area,” said Wilson, vice president for corporate development in the Barnett Shale. ER [email protected]

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Crude rallies, but natural gas weak Texas loses jobs as energy industry in retreat By Karr Ingham

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rilling activity in Texas continued declining steadily through April, reflecting weak natural gas markets and defying a crude oil price rally. Employment in the state’s exploration and production (E&P) industry has dropped to its lowest ebb since January 2008, according to the latest Texas Petro Index (TPI). “The Texas oil and gas industry remains in cost-cutting mode, idling rigs, reducing capital spending, and laying off employees as economic contraction continues,” said Karr Ingham, the economist who created the TPI for the Texas Alliance of Energy Producers. “The oil-price recovery that has occurred since the first of the year is benefitting producers in some regions of the state. “But make no mistake about it. Texas is a natural gas state, in terms of the primary E&P focus, with 80 percent of the rigs still actively drilling for natural gas. As long as natural gas prices remain at current levels, producers in a lot of Texas gas plays will be unable to turn a profit on new gas wells. “If wellhead prices would double from the current range of $3 to $4 per thousand cubic feet ($/Mcf), gas producers across Texas would be able to recover their finding and development costs. “Sustained gas prices of $6/Mcf or more would drive a turnaround of gas-related E&P activity in the state.” A composite index based upon a comprehensive group of upstream economic indicators, the Texas Petro Index in April dropped more than 5 percent to 249, marking the sixth consecutive monthly decline since the indicator of the Texas oil and gas industry’s health peaked in September and October 2008 at 285.4. Among leading March indicators: • Natural gas prices in Texas during April averaged $3.28/Mcf, 63.4 percent less than the same month of 2008. As a result of low prices, the value of Texas gas production during April was $1.9 billion, down from $5.5 billion in April 2008, despite a volumetric decline of only 2.6 percent. • The Baker Hughes count of active drilling rigs in Texas dipped to monthly average of 393 in April, nearly 500 fewer rigs than the April 2008 monthly average. • The number of Texans employed in the state’s oil and gas industry declined to 219,500 during April, according to the Texas Workforce Commission, from 240,000 in December last year, effectively wiping out job growth last year since 219,500 Texans were working in the industry in January 2008 ER Karr Ingham is an economist with the Texas Alliance of Energy Producers. The Texas Petro Index is a service of the Texas Alliance of Energy Producers, an association of independent oil and gas producers.

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Barnett Shale-bred technology making leap overseas Foreign investment becoming big player in U.S. shale plays By John-Laurent Tronche

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cent of Chesapeake’s 67.5 percent share of drilling and completion expenditures until the $2.125 billion obligation has been funded,” according to the Nov. 11 statement. While Chesapeake Energy has yet to comment on the possibility of overseas exploration, a StatoilHydro executive said during a May interview with Bloomberg that the two companies had identified 14 different unconventional natural gas projects worldwide and currently were whittling down their selections. The companies were looking at plays in Hungary, Poland, India, Australia and China. It appears the question isn’t whether Europeans will experience the same explosion of natural gas development that North Texas’ Barnett Shale ignited in the U.S., but rather when they will experience it.

ust as domestic energy producers invested in Middle Eastern oil and gas plays over the past several decades, it appears European energy companies currently see benefits in acquiring stakes in U.S.-based shale plays for application back home. Over the past several months, at least four European energy companies – from Britain, France, Italy and Norway – have bought stakes in domestic shale plays producing oil and gas. Most recently, Rome-based energy giant Eni purchased a portion of Quicksilver Resources Inc.’s leasehold interests in north Fort Worth for $280 million. Per the agreement, Fort Worth-based Quicksilver Resources sold Eni 27.5 percent of its 270,000 acres surrounding its Alliance properties in north Fort German euros run through some Texan oil, gas wells Worth. The Barnett Shale turned the average homeowner into a partner in Eni said the deal gives it a good foothold in the U.S., and the comnatural gas wells across North Texas, and one Fort Worth company is pany will gain “experience to support the exploration of high potential giving that same opportunity to invest in wells to people more than unconventional gas opportunities worldwide,” according to a state5,000 miles away. ment. TEXXOL Inc. and its German equivalent The Eni-Quicksilver Resources deal is just TEXXOL Mineralöl Ag pair German one of many that illustrate European interest in investors with Texan oil and gas assets U.S. shales. Over the past year several other Over the past several through an investment system whereby energy companies with roots across the someone with as little as 50 euros a Atlantic have invested in domestic producers. months, at least four month, or about $70, can secure a stake In March, Paris-based Total purchased a 50European energy companies in properties they might never see, percent interest in American Shale Oil LLC to according to the companies’ two chief cooperate on a western Colorado shale oil – from Britain, France, Italy executives. lease that, over time, could be expanded to “The nice thing is by these installmore than 5,000 acres of federal land, accordand Norway – have bought ments we have two advantages: first to ing to the deal. stakes in domestic shale the investors, usually they can participate Similarly, during the past several years, Netherlands-based Royal Dutch Shell quietly plays producing oil and gas. with that amount and it’s only possible because we have computerization. has been working on shale oil developments in Without computers it wouldn’t be possinorthwest Colorado and Wyoming, not far ble,” said Sönke Harrsen, president and CEO of the German arm, from Total and AMSO. which is based outside of Hamburg, Germany. “And the other thing is Above all others, however, Chesapeake Energy Corp. has been instrumental in helping Europeans gain insight into U.S. technology for it has a great advantage to the investors because they are participating now in a commodity that is not usually available to them.” application elsewhere. In other words, middle-class investors have the opportunity to invest In July 2008, the Houston-based arm of BP Plc, based in London, in an industry that is likely out of financial reach if they were to act purchased Chesapeake Energy’s interest in Oklahoma’s Woodford alone. Strength in numbers is the key, however, and currently the comShale – about 90,000 acres producing about 50 million cubic feet of natural gas per day – for $1.75 billion. In September 2008, BP America panies own stakes in more than 150 oil and gas wells in more than 20 locations across the state and into southern Oklahoma. Other compaInc. agreed to purchase a 25-percent interest in Chesapeake Energy’s nies act as the operators on the wells. Fayetteville Shale assets in Arkansas for $1.9 billion. As a result, the Harrsen, who previously worked for German oil company DEMINEX companies would cooperate on the Oklahoma City-based energy proamong other energy firms, met Kevin Grubbs in the late 1980s, when ducer’s 540,000 acres of lease producing about 180 MMcfe per day, the latter was working as an accountant for the Ray Richey & with BP owning about 135,000 acres of the total. Company Inc., a startup oil and gas exploration company. Throughout Chesapeake Energy followed up with a third transaction – the that decade, Harrsen had been securing German investors for domeslargest, to date – for its Marcellus Shale holdings. tic gas wells in west central Texas and north Texas and investing that Norwegian state-controlled energy company StatoilHydro would pay money with Grubbs’ employer, but eventually the two agreed “to just $3.375 billion for a 32.5-percent stake in the former’s 1.8 million net roll those partnerships up into a corporation because it was just too acres of Marcellus Shale assets, according to a November 2008 agreehard to do all the individual tax returns for all those Germans,” said ment. StatoilHydro paid $1.25 billion in cash at closing, and the Grubbs, who was named president of the new company, IEP Inc., in remaining $2.125 billion over the next three years “by funding 75 per-

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PHOTO BY GLEN E. ELLMAN

Sönke Harrson, president and CEO of TEXXOL Mineralöl AG, and Kevin Grubbs, president and CEO of TEXXOL Inc., allow German investors a chance to own shares in oil and gas wells across Texas.

1993. “[Barnett Shale pioneer Mitchell Energy & Development Corp.] was really big and Ray Richey & Co. was really small and we were just going around picking up the leases Mitchell let fall through the cracks,” Grubbs said of their investment strategy at the time. The two kept in touch, and Grubbs continued to serve as an adviser when needed. In 1999, Harrsen acquired ownership in TEXXOL Mineralöl Ag. Grubbs continued to advise Harrsen and company until he went to work full-time for TEXXOL in January of this year. How it works TEXXOL is financed by German investors known as “silent partners,” Harrsen said, who participate in one of two ways: monthly installments with a minimum of 50 euros for up to 15 years or with a single payment with a minimum of 1,000 euros. In the same way that President Barack Obama raised more than $235 million during his presidential campaign by attracting a large number of donations in small amounts, such as $5, $10 or $20, Harrsen raises funds by attracting the small- to mid-sized donors in addition to the large donations. Currently, Harrsen has about 2,000 accounts of these smaller-sized donors, each of which contributes at least 50 euros per month with a minimum commitment of eight years.

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Additionally, TEXXOL has 50 partners who have invested at least $20,000; the largest investment received has been $150,000, Harrsen said. “There are basically two categories: middle-income and high-income,” Harrsen said. At the end of 2008, total capital subscriptions amounted to more that $32 million, Harrsen said. The system works because of Harrsen’s relationship with Grubbs, they said. “In this respect we are the only company in Germany offering this. I don’t know why but nobody is competing with us up to now. It might be because the advantage from our side is knowing Kevin for such a long time – and a lot of other people but Kevin is the key – we have solid connections over here,” Harrsen said. “Other companies arrive at the airport and say, ‘We have a lot of money, please let us find someone who invests it.’” Grubbs adds, “Sönke and I have been friends a long time,” he said. “I’ve been a CPA for a long time and it was just very easy to do. It was easy to go to work for my client.” And it works. Since 2002, the company has doubled its investment, and all the original investors still remain. “Even for standards over here, it’s not bad,” Harrsen said. “Track record we can show.” ER [email protected]

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Obama’s policies push domestic oil and gas industry aside generates electricity. Expanding wind and solar won't displace much oil; onsidering the brutal recession, you'd someday, electric cars may change this. expect the Obama administration to be For now, reducing oil imports requires using less or producing more. obsessed with creating jobs. And so it is, Obama has attended to the first with higher fuel-efficiency standards say the president and his supporters. The trouble for vehicles. But his administration is undermining the second. At the is that there's one glaring exception to their Department of Interior, which oversees public lands and the OCS, claims: the oil and natural gas industries. The Secretary Ken Salazar has taken steps that dampen development: canadministration is biased against them – a bias that celled 77 leases in Utah, because they were too close to national parks; makes no sense on either economic or energy extended a comment period for OCS exploration to evaluate possible grounds. Almost everyone loves to hate the environmental effects; and signaled more caution toward shale for similar world's Exxons, but promoting domestic drilling is ROBERT J. reasons. SAMUELSON simply common sense. Any one of these alone might seem a reasonable review of inherited Contrary to popular wisdom, the United States Guest Column policies, and it's true that Salazar has maintained a regular schedule of oil still has huge oil and natural gas resources. The and gas leases Still, the anti-oil bias seems unmistakable. outer continental shelf (OCS), including parts that have been off-limits to Conceivably, Salazar may reinstate administratively many restrictions drilling since the early 1980s, may contain much natural gas and 86 bilon OCS drilling that Congress lifted last year. Meanwhile, he's promoting lion barrels of oil, about four times today's "proven" U.S. reserves. The wind and solar by announcing new procedures for locating them on pubU.S. Geological Survey recently estimated that the Bakken Formation in lic lands, including the OCS. "We are," he says, "setting the Department North Dakota and Montana may hold 3.65 billion barrels, more than 20 on a new path" – emphasizing renewables. times a 1995 estimate. And there's upward of It may disappoint. In 2007, wind and 2 trillion barrels of oil shale, concentrated in solar generated less than 1 percent of U.S. Colorado. If only 800 billion barrels were Almost everyone loves to electricity. Even a tenfold expansion will leave recoverable, that's triple Saudi Arabia's proven reserves. hate the world's Exxons, but their contribution small. By contrast, oil and natural gas now provide two-thirds of None of these sources, of course, will quickly provide oil or natural gas. Projects can promoting domestic drilling Americans' energy. They will dominate consumption for decades. Any added oil produced take 10 to 15 years. The OCS estimates are here will mostly reduce imports; extra natural is simply common sense. just that. Oil and gas must still be located – a gas will mostly displace coal in electricity gencostly and chancy process. Extracting oil from eration. Neither threatens any anti-global shale (in effect, a rock) requires heating the warming program that Congress might adopt. shale and poses major environmental problems. Its economic viability Encouraging more U.S. production also aids economic recovery, remains uncertain. But any added oil could ultimately diminish dependbecause the promise of "green jobs" is wildly exaggerated. Consider. In ence on imports, now almost 60 percent of U.S. consumption, while 2008, the oil and gas industries employed 1.8 million people. Jobs in the exploration and development would immediately boost high-wage jobs solar and wind industries are reckoned (by their trade associations) to be (geologists, petroleum engineers, roustabouts). 35,000 and 85,000, respectively. Now do the arithmetic: A 5 percent rise Though straightforward, this logic mostly eludes the Obama adminisin oil jobs (90,000) approaches a doubling for wind and solar (120,000). tration, which is fixated on "green jobs" and wind and solar Modest movements, up or down, in oil will swamp "green" jobs. energy. Improved production techniques (example: drilling in deeper waters) Championing "clean" fuels has become a political set piece. On Earth have increased America's recoverable oil and natural gas. The resistance Day (April 22), the president visited an Iowa factory that builds towers for to tapping these resources is mostly political. To many environmentalists, wind turbines. "We can remain the world's leading importer of oil, or we expanding fossil fuel production is a cardinal sin. The Obama administracan become the world's leading exporter of clean energy," he said. tion often echoes this reflexive hostility. The resulting policies aim more to The president is lauded as a great educator; in this case, he provided satisfy popular prejudice -- through photo ops and sound bites – than much miseducation. He implied that there's a choice between national needs. ER promoting renewables and relying on oil. Actually, the two are mostly disconnected. Samuelson’s column is published by the Washington Post Writers Group. Wind and solar mainly produce electricity. Most of our oil goes for transportation (cars, trucks, planes); almost none – about 1.5 percent --

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SYMPOSIUM SPEAKER

Shale success means new markets needed for natural gas

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ow quickly things can change in this industry. Just last summer, shale gas exploration was running at full speed led by the success of the Barnett Shale and the promise of yet more great opportunities in the Haynesville, the Fayetteville KEN MORGAN and the even larger TCU Energy Institute Marcellus Shale play. But even a year ago, many were starting to wonder if the frantic pace of drilling, production and elevated prices could be maintained, given that overproduction inevitably leads to lower prices. Independent U.S. exploration and production companies lead the world in developing new technologies for shale gas extraction. As a matter of fact, they are all so good at finding and supplying this resource that the Department of Energy reports gas storage has continued to climb to a new five-year high of 2.2 trillion cubic feet (tcf) as of May 2009. With a mild spring in the U.S. and ample supplies, natural gas prices continue to struggle to stay near $4 per million btu (MMbtu). Along with the stalled economy and lower industry demand, the pace of drilling has slowed and the U.S. rig count is about half of what it was last year. Throw in the darkening political clouds boiling up in Washington, D.C., associated with cap and trade, drilling incentive reductions and proposed tax increases, the outlook can look a bit unsure and gloomy for the domestic oil and gas business. One thing we know for sure … thanks to Mitchell Energy, Devon Energy and a host of other local independents, we now have the ability to develop lots and lots of domestic natural gas. But with the likelihood of chronic oversupplies, fluctuating prices and uncertain government actions, the question remains as to how to maintain stability for the approximately 5,000 independent operators that currently supply 82 percent of U.S. yearly natural gas production (source: www.ipaa.org). Thanks to these companies, we are now a nation with a vast amount of newly discovered natural gas that makes up only about 24 percent of our nation’s energy use. It appears that the much anticipated and needed recovery in the natural gas business will only emerge when demand

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for natural gas goes up. Clearly, a more aggressive approach is needed to develop expanded markets for all this abundant natural gas. The challenge is for independent producers to venture into the business of helping to stimulate potentially large markets for their natural gas. More demand needed Some anticipated growth in demand will eventually come from the development of a more diversified electrical “smart grid,” especially if natural gas is used instead of coal at generating stations. Natural gas will almost certainly be the domestic “backup and base fuel” for all the proposed wind and solar initiatives over the next few years. Things will also get better as the economy improves and industrial demand recovers from the drop off at the end of 2008. All of this will help, but another potential growth area for natural gas could and should be in transportation uses.

The challenge is for independent producers to venture into the business of helping to stimulate potentially large markets for their natural gas. Clearly, a more aggressive approach is needed to develop expanded markets for all this abundant natural gas. Currently, natural gas makes up a very small percentage of transportation uses in the U.S. (mostly buses), yet the technology exists for all types of vehicle conversion to “cleaner burning” compressed natural gas (CNG). In a recent study of CNG versus diesel fuel use in United Parcel Service (UPS) delivery trucks, their CNG trucks produced 75 percent lower carbon monoxide (CO) emissions, 49 percent lower nitrogen oxides (NOx) emissions, and 95 percent lower particulate matter emissions than diesel trucks of similar age. (Source: www.ctts.nrel.gov/heavy_vehicle/pdfs/31227.pdf)

Similar results are reported when NGVs are compared to gasoline emissions. Carbon monoxide is reduced by 70 percent, nitrogen oxides by 87 percent and carbon dioxide by 20 percent (source: www.ngvc.org/mktplace/fact.html). So what can we do locally? Well, let’s see, we have the Barnett Shale right here beneath us, local companies know how to tap into this abundant and clean-burning resource, and an equivalent gallon of natural gas is cheaper by 30 to 50 percent than either diesel or gasoline. All of this abundant domestic natural gas also comes at a time when the public is rethinking what Detroit (and other manufacturers) should be offering for public and private transportation. Some questions to ponder: Wouldn’t it be great to have a dozen or more different low emission natural gas cars and trucks to choose from at dealerships? How about developing “refueling locations” at the many scattered compressor stations throughout the Metroplex? Our city buses have already successfullyswitched to natural gas, so what about area wide fleet vehicle conversion as a next step? To help stimulate the transportation use of natural gas in the Metroplex, the TCU Energy Institute has teamed up with the Barnett Shale Energy Education Council (BSEEC) to organize a Natural Gas Vehicle Symposium “Green Fleets: The Future is Now” (www.energyinstitute.tcu.edu or www.bseec.com). This is the first in a series of “Creating New Markets” symposia that will focus on “fleet owners” in the Metroplex as we become more educated on the possibility of following the city’s lead of converting all of their buses over to natural gas. As hoped, the local energy companies are stepping forward by providing the leadership and financial commitment needed to host this timely symposium. This is an important major step to help promote the education and development of this potential growth market for one of our most abundant and clean fuel resources … natural gas. ER Ken Morgan is director of the TCU Energy Institute.

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The paradox of public opinion on the energy industry

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very year, numerous national and international polling entities produce extensive macro-level survey results on perceptual issues associated with the oil and gas industry. These findings are then widely disseminated through the mass media. One example that I often use when discussing perceptual issues with energy-industry personnel is the Gallup Organization’s poll on the images of various business and industry sectors in the United States. For the past eight years, Gallup has polled Americans on GENE L. THEODORI their views of more than 20 sectors of business and Sam Houston industry. The survey asks respondents to rate each State University business and industry sector in the United States on a five-point scale ranging from “very positive” to “very negative.” Between 2001 and 2008, the industries ranking near the top and bottom of the list have remained fairly consistent. Either the computer industry or the restaurant industry has topped the list as the most favorably viewed sector each year. (The computer industry rated most favorably in 2001, 2002, 2003, 2004 and 2008. The restaurant industry rated most favorably in 2005, 2006 and 2007.) Can you guess which industry has constantly ranked as the least favorably viewed industry? If you guessed the oil and gas industry, then you are spot-on. In 2001, the year of Gallup’s initial such poll, slightly more than half the respondents (54 percent) viewed the oil and gas industry in a negative manner (“somewhat negative” or “very negative”). One year later, that percentage dropped to 44, and in 2003 it dropped to 43. From 2004 through 2008, however, the slightly improving pattern reversed itself. The percentages of respondents who rated the oil and gas industry negatively in 2004, 2005, and 2006 were 58, 62, and 77, respectively. In 2007, this figure dropped to 67 percent. According to the most recent Gallup data (August 2008), approximately three of every four respondents (76 percent) regarded the oil and gas industry in a negative light. This perception is interesting and, to some extent, predictable – but I wonder how beneficial such data are to the oil and gas industry in its decision-making processes. Several of my students and colleagues and I have engaged in a recent series of research projects that may not only be of interest but also of value to energy producers, as well as to state and federal regulatory agencies, environmental organizations, private landowners and the general population. Two topics of substantial interest are the popular perceptions of the industry, and of potentially problematic issues associated with natural gas development.

Recent and current studies In three Barnett Shale counties – Johnson County and Wise County, in 2006; and Tarrant County, in 2009 – we asked members of the general population to give their impressions of the energy industry. By-and-large, we found that the public has a mixed view. Overall, almost nine in ten individuals (88 percent) said they believe that natural gas operators must adopt and use more environmentally-friendly drilling practices. Roughly three of every four individuals (77 percent) said that natural gas companies will do only what is required by law. That same 77 percent agreed that not enough information concerning the development of natural gas is being made available to the general public. Approximately two of every three individuals (67 percent) said they believe that natural gas operators are drilling and producing too close to homes and businesses, while 65 percent said that too little attention is being paid to the social costs of natural gas development. Sixty-three percent agreed that natural gas operators in their local areas are too politically powerful. Fifty-five percent said that, even when carefully controlled, natural gas development is likely to upset the quality of life in a local area. And 50 percent agreed that the natural gas companies have no compassion for the natural environment. At the same time, however, 61 percent agreed that the benefits of natural gas development for their local areas are greater than the costs. Moreover, 75 20

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percent agreed that, in the long run, the people in their local areas will be better off if their natural gas resources are developed. Furthermore, when asked about potentially problematic issues associated with natural gas development, respondents viewed social and environmental issues as “getting worse” as a result of development. Such issues included the amount of freshwater used, depletion of aquifers, noise pollution, air pollution, environmental quality and disagreements among local residents, among other concerns. Conversely, economic and service-related issues such as local police protection, medical and health-care services, quality of local schools, fire protection services, and availability of good jobs were all viewed as “getting better” because of the development of natural gas.

ing and costly. Finally, the energy industry must recognize that it cannot change its negative (mis)perceptions alone. Oil and natural gas producers and service companies must develop working partnerships with universities, governmental and regulatory agencies, environmental organizations and other stakeholders if they are to gain the trust of the general public. In short, my take-away message is this: Oil and natural gas producers and service companies must initiate the process that will build trust, promote their environmentally-friendly measures, and reme-

dy the misconceptions the public holds toward their industry. By doing so, the companies will likely see fewer objections to increased development. And a substantial amount of new gas resources from unconventional reservoirs can then be realized. ER Gene L. Theodori is associate professor and director at the Center for Rural Studies: Research & Outreach in the Department of Sociology at Sam Houston State University in Huntsville. He can be reached at [email protected].

A paradox Herein lies the paradox: On the one hand, the general public distrusts the intrusion of the gas industry and dislikes certain problematic issues perceived to accompany it. On the other hand, the majority of citizens appreciate and welcome the economic and service-related benefits that accompany the industry. So what can industry do to change the negative (mis)perceptions? A paramount concern involves the funding and promotion of informational and educational programs at the local level. Take, for example, the popular notion that natural gas operators must adopt and use more environmentally friendly drilling practices. Almost nine in 10 individuals in our study agreed with that statement. The reality is that an increasing number of industry operators are striving to satisfy energy demands while safeguarding the natural environment. These operators are producing hydrocarbons, using an environmentally-friendly approach to energy development, which includes advances in areas such as these: rig technology (smaller and lighterweight drilling rigs); drilling technology (directional, multilateral, extended-reach drilling and pad drilling); waste management (reduction, reuse and safe disposal of drilling wastes); low-impact access and transport (artificial or temporary road technologies to eliminate or reduce negative ecosystem impacts); and pollution control (reduced rig noise and air emissions). The fact that the majority of the public does not know about these environmentallyfriendly measures indicates that the industry must do a better job of promoting its accomplishments. Second, energy operators must make a more concerted effort to communicate openly with the public and enhance involvement at the community level. Residents need to be informed about local energy developments. Open communication – including full and honest disclosure about the potentially positive aspects and negative consequences of energy development – is likely to reduce the chances of rumors and inaccuracies about current activities and proposed developments. Moreover, efforts to find ways to work with and give back to communities will contribute to the connection between local residents and the energy industry and, in turn, may decrease community dissatisfaction and increase support of industry operations. As I often say, such efforts will surely mean investments in time and money; failure to do so, however, may prove to be even more time-consumJune 18, 2009

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SYMPOSIUM SPEAKER

Use of pooling act changes as drilling goes urban

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ith the widespread leasing in the Barnett Shale, many now understand that small tracts of land are usually “pooled” – that is, they are grouped together to form a drilling and production unit for a well. In Texas, pooling is usually established LISA VAUGHN by voluntary agreement. Shannon Gracey However, to protect smaller Ratliff & Miller LLP landowners who might be unfairly excluded from leasing pools, the Texas Legislature enacted the Mineral Interest Pooling Act (“MIPA”), which authorizes the Railroad Commission of Texas to force interests into a pool in certain circumstances. Economic reasons to pool To exploit their mineral interests, most small landowners will need to pool because their land is too small or houses are too close together to support drilling. Operators also need to pool because it allows them to hold many leases by drilling a single well, and allows the well to be placed far from where the reservoir will actually be tapped in order to comply with various spacing and municipal regulations. Pooling also allows operators to insulate themselves against potentially expensive applications to obtain exceptions to RRC rules governing well placement, or having to defend against expensive lawsuits alleging underground horizontal drilling trespassed their land or breached other operator duties. Economic reasons notwithstanding, however, sometimes interest owners simply cannot reach an agreement on pooling. Economic operation of the MIPA Although MIPA was originally designed to benefit small tract owners, it has proved too expensive to efficiently protect those interests and the majority of MIPA applications are simply abandoned. However, MIPA contains no boundaries on the size of the applicant’s interest and so – to the surprise of many – is easily accessible to operators or large interest owners. Although there are numerous technical requirements of a MIPA application, the most significant restriction is that a party can apply only after “fair and reasonable” offers to voluntarily pool are rejected. The MIPA statute provides that an offer to pool “on the same yardstick basis” as those owners that are already included within the pool is “fair and reasonable.” That yardstick basis must take into account what are called “reasonable risk penalties.” A “risk penalty” is essentially a surcharge on later occurring profits if a party does not pay his proportionate share of the costs before the outcome of the well is known. In the Barnett Shale, because “dry holes” are nearly unheard of, any22

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Accepting Finley’s arguments, the RRC found that forcing all leased and unleased parties into the proposed pool would benefit them all and so ordered the forced pooling. thing more than a nominal risk penalty will surely put the offer outside the “fair and reasonable” standard. In addition, MIPA dictates that a pooling offer cannot be fair and reasonable if it gives the operator a right to unfair advantages, such as granting preferential rights to purchase mineral interests, charging other than reasonable overhead, or precluding disputes over operation. If the hurdle of a failed “fair and reasonable offer” is met and the RRC is persuaded to grant an application to force pool, the RRC has several options for apportioning ownership of production, distribution of royalties, and responsibility for drilling and completion costs. In all cases, however, the RRC’s mandate is to reach a fair result for all parties and prevent the drilling of unnecessary wells, prevent waste, or protect correlative rights. There are several other technical requirements, but none precludes an operator from attempting to use MIPA, although most had never considered it until recently. In late 2008, Finley Resources, Inc. became the first operator to successfully use MIPA after leasing efforts obtained leases for only 83 acres in a 96acre area near Fort Worth, and those unleased

acres were scattered in small quarter-acre lots throughout the interior of the 96-acre unit. In its application, Finley argued that if the unleased interests were not forcepooled, neither the leased nor the unleased interest owners would be able to develop their minerals and the entire project would remain dormant. Finley supported this argument by showing that the sizes and locations of the nonpooled interests precluded efficient drillpipe placement and made it too likely that underground drill pipe would unintentionally trespass one or more of the unleased interests. Accepting Finley’s arguments, the RRC found that forcing all leased and unleased parties into the proposed pool would benefit them all and so ordered the forced pooling. The RRC did not grant the involuntarily pooled owners a signing bonus, but did grant them the same royalty percentage as those who had last voluntarily joined the pool. In addition, the unleased owners were granted a percentage of the profits to be generated after gas sales, enough for Finley to recover its drilling expenses. Thus, if actual production is large enough, it is possible that the involuntarily pooled owners may eventually receive more cash than those who voluntarily joined the pool before the MIPA application; until that point happens, however, those who voluntarily joined received the most lucrative deal simply by virtue of their signing bonuses. In light of Finley’s successful use of MIPA, several operators have already filed or are planning to file similar applications. The RRC, however, has made it clear that MIPA can be used in this novel way only when it is proved to be necessary to prevent the drilling of unnecessary wells, prevent waste, or protect correlative rights. In a similar operator-filed MIPA application filed by XTO within months after Finley’s result was announced, the RRC stated that although Finley’s result is precedent for this type of use, the RRC will hold strictly to its mandates. Thus, finding that XTO’s proposed plan was not necessary to protect correlative rights, the RRC denied XTO’s application after XTO admitted its proposed well and its underground pipe would not drain the minerals under the unleased tracts. At the time of this writing, it is unclear whether that decision has become final or whether it has been appealed. Either way, Finley’s success has made it clear that MIPA has the potential to be a cost-effective method for operators to complete development in urban areas when it fails to obtain leases for all of the lots under which, or very close to which, horizontal drill pipe must pass. Thus, in the most difficult of circumstances, MIPA’s forced pooling may be an old dog that has learned a new trick. ER Lisa Vaughn is an attorney at Shannon Gracey Ratliff & Miller LLP. Fort Worth Business Press

SYMPOSIUM SPEAKER

The 81st Texas Legislature: Few bills pass, many die calendar for the maximum allowed time. In an very other year, a cerunprecedented manner, the talking allowed a tain sound that can Democratic minority House to own a Republicanbe heard in Austin. controlled House for five days and nights. You must be close to the While they managed to keep Voter ID from Capitol to pick it up, and coming to the House floor, that intentional talking usually only a trained ear did a lot of collateral damage. For five days, you can identify it. In fact, it heard the sound of bills dying. By the time the talkgoes unnoticed by most citiing had stopped, the deadline for bills to be heard zens. But it is an important in the House was barely a day away. sound. It is a critical sound. KELLY MCBETH All that talking resulted in the passage of only It greatly disappoints some Texas Energy Lobby about 1,400 of the 7,000 bills filed. Granted, some and causes others to good proposals fell short of passage. But the talkbecome jubilant. It is the sound that keeps exciting ing also did away with a lot of impractical ideas. things from happening. It is the sound that stifles change. What talking killed in the 81st It is the sound of bills dying. Voter ID – Its death brought down over 200 Legislators eagerly meet every other January to bills with it. It would have required a photo ID or begin a five-month session to bring change to our two forms of identification at the polling place. state and take something special home to their disEminent domain reform – Established a subjectricts. Sometimes, their proposals are ideas from tive standard that must be satisfied before a conconstituents. Often, the bills are the product of demnation may occur, and included new protecinterim studies, carefully crafted to strike a delicate tions for landowners. balance among industrial stakeholders. Many have Statewide smoking ban – A second-session gone through endless hours of rewriting by staff. attempt to make Texas a smoke-free workplace Some are repetitions from earlier sessions that state. failed to make a deadline. Guns on college campuses – A proposal to This session, over 7,000 bills were filed – a allow students with concealed handgun licenses to record. Can you even imagine that 7,000 things needed to be changed in our state? What does a dying bill sound like, This session, over 7,000 you ask? Mostly, it sounds like someone talking –talking too much and too bills were filed. It was long. Most bills are strangled by members who talk them to death. The a record. Can you even minute a bill gets filed, the talking imagine that 7,000 begins. Lobbyists start talking. Legislators start talking. Voters start things needed to talking. They talk about how to make it better, how to delay it, how to kill it, be changed in how to pass it. The problem is that, all our state? the time they are talking, the clock is ticking. If you are in the Capitol during a legislative session and you hear explanations and then debate for a prolonged period of time, you might be hearing a worthwhile exchange of ideas and vetting of a proposal. But you are also probably hearing the sound of some bills dying. It reminds one of a wise pastor’s proverbial admonition: “You should talk less and pray more.” The adage could easily adapt to advice for successful bill passage: “Talk less and pass more.” What greater example than our recent 81st Legislative session? Near the end, it became clear that House Democrats planned to kill the Voter ID bill by questioning whether each bill scheduled before it had been on the

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take their guns to school and store them in their dormitories. Restrictions on college tuition increases – A bipartisan effort to freeze college tuition rates. Notice requirement for drilling permits issued – Would have required the Railroad Commission to notify local elected officials each time a drilling permit is issued. CHIP expansion – Increased qualification to children who are 300 percent over the poverty level. Unemployment insurance – Would have applied $500 million in stimulus funds to unemployment benefits for the next two years. Medicaid reform – This bill would have increased the quality of and access to health care, making Medicaid more efficient and focused on preventative health. Local option transportation funding – Would have allowed counties to call a local election to raise a number of fees and taxes, including the gasoline tax, to pay for regional transportation projects. Needle exchange program – A second session in a row attempt to allow intravenous drug users access to sterile needles (which exists in nearly every other state). Electricity consumer protections – The bill created a market monitor with discipline power for bad actors in the retail market and gave companies limited ability to disconnect customers during the summer months. Construction indemnification reform – In construction contracts, this bill would make each party responsible for their own liability and would prevent the transference of that liability to another party. Agency sunset bills – The $17 billion Texas Department of Transportation sunset bill was not approved and neither was the review of the powerful Texas Department of Insurance Workers’ Compensation Division. The possibility of a special session to address these agencies is possible. There is only one master of the universe in a legislative session. It isn’t the leadership, it isn’t the prevailing political party. It is the clock. The clock is sometimes subject to manipulation. It happened once in the Senate this session when the Sergeant At Arms was asked to unplug the clock just before the midnight deadline so the Senate could continue working. In the end, the clock wins – it is the only trump to the talking. ER Kelly Mcbeth is an energy lobbyist in Austin.

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SYMPOSIUM SPEAKER

Maximizing income from oil and gas royalty payments

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ith oil and gas prices significantly lower than just a year ago, mineral owners must closely monitor their oil and gas assets in order to maximize their opportunities to earn royalty income. As a property owner, your work doesn’t end when you JOHN TAYLOR receive your bonus payment. PlainsCapital Bank You are essentially starting a business and entering a long-term relationship with the operator. Organize your oil & gas business You’ll need at least three files to keep all your oil and gas assets organized: a property file, a lease file, and a well file. The property file contains deeds and estate records which prove your ownership of the mineral assets. These documents show how you acquired ownership in the minerals and what percentage of those minerals you own. If you do not have these documents, you can ask the lessee to provide any documentation they may have. Next, set up a lease file for each lease you have signed. Develop a summary sheet showing the effective date of the lease, the operator name and contact information, the primary term, the expiration date of the lease and the number of acres included in the lease. If you have a map of the lease, include it in this file. Finally, create a well file for each well drilled. This file contains the plat and permit filed with the Railroad Commission of Texas (RRC), which shows the size and shape of the unit and which lands it encompasses, among other things. Confirm that drilling has begun The operator must begin a well within the primary term of the lease, which is usually two or three years. If the operator does not drill a well within this period, the lease lapses and reverts back to the owner, unless the lease allows for an extension. There are several ways you can monitor the operator’s progress. You can check with the operator regarding the drilling schedule and any updates. You can also check with the RRC to learn the status of wells on your property, as operators are required to report wells to the RRC. If drilling has begun on your land, the RRC will know about it. If you have an information clause in the lease, you can request the operator send you a copy of the drilling permit and other documents they file

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with the RRC. You can always drive out to the lease and look for drilling activity. Operators are required to post signs when activity begins. Be sure to write down the information on the signs such as the name of the operator, the RRC well number and the name of the well. This will help you when looking up data on the RRC site. Confirm that the entire well site is on your lease In some cases, an operator may combine or pool the acreage from two or more leases into a single well spacing unit. Pooling is more economical for the operator but it can reduce your royalties. That’s why it’s important to confirm that the entire well is on your land (provided you have enough acreage). Check with the operator to confirm the entire spacing unit is on your lease.

As a property owner, your work doesn’t end when you receive your bonus payment. You are essentially starting a business and entering a long-term relationship with the operator. If this is not the case, review the pooling provisions in your lease. If your lease requires the lessee to obtain your permission prior to pooling, then you are in a much stronger position. Essentially, your lease should not be pooled without your consent. You can also review the drilling permit or the plat filed with the RRC to determine if the entire well site is on your land. Review the division order before signing If the well is successful, division orders will be prepared and sent to you for signature. Review the division order carefully to verify the royalty amount and to determine if the division order comes from the first purchaser or the operator. Verifying the royalty amount is a simple mathematical calculation. Multiply the royalty in your lease times your ownership interest of the minerals. For example, if your lease called for a ¼ royalty, and you owned a 1/5 of the minerals under the tract, your royalty would be .25x.20=.05 or 5 percent of the total production generated by the well. If your tract is pooled, multiply your royalty by

your lease’s share in the overall unit. In the above example, if your lease was 40 percent of the well unit, your share of the royalties would be .05x .4= .02 or 2 percent. If you suspect the royalty amounts are incorrect, you need to contact either the operator or the purchaser issuing the division order. Once you have verified the royalty amount, look to see who the payor is on the division order. Typically, the payor is the first purchaser that buys the oil and gas product from your well. Occasionally, the payor is the operator. In this instance, the first purchaser pays the operator who in turn pays you. Being paid by the first purchaser is the preferred scenario. The first purchaser is typically a larger, more credit-worthy company—you don’t have to worry about slow payments or bankruptcy. If you get paid by the first purchaser, you typically receive your royalty payments 20 to 30 days sooner than if you get paid by the operator. If you are paid by the operator, the payment process is generally slower because the operator is the middle man. Once the operator receives the funds, it takes time to process and cut checks to royalty owners. Your lease may have a clause allowing you to take production in kind, which in most cases will provide the leverage to be paid by the first purchaser instead of the operator. However, in many cases, gas may still be paid by the operator as it involves more complexities, such as contracts. Finally, you need to make sure the division order complies with the Texas Natural Resources Code. In the past, some division orders have included clauses extending, ratifying or modifying the lease. You can either strike any language that contradicts the Texas Natural Resources Code (TNRC), or you can sign and attach an executed rider in which you state that you are only signing the division order to the extent it conforms to the TNRC. If you have doubts, have an attorney or knowledgeable oil and gas professional review the division order. When it comes to managing oil and gas assets, there are several opportunities for mistakes to happen and royalties to be affected. Understanding the details of your lease is imperative as is careful monitoring of the drilling process and the payment of royalties. Remember to carefully review all the documents you receive before signing them. Most importantly, keep the lines of communication open with your operator and enlist the help of professionals when you need it. ER John Taylor is PlainsCapital Bank Wealth and Investment Management Group president. Contact at 214-252-4162 or [email protected]

Fort Worth Business Press

Finding stability in today’s volatile oil and gas industry

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he volatility of the oil and gas industry over the last year has proven that such investing is not for the faint of heart. While many mineral owners have tried to go it alone without enlisting the help of financial experts, it is more important than ever to protect oil and gas assets in these challenging times.

Many of the national banks that once courted the Barnett Shale mineral owners are moving on, too. Because of the drop in prices, the banks have experienced significant drops in their oil and gas portfolios. Barnett Shale mineral owners are not as wealthy as they once were, so the national banks have re-focused their attention on other segments of the market. The good news for mineral owners is that many of the local and regional banks remain committed to their Barnett Shale clients. Mineral owners can choose to do business with a local wealth manager who has extensive knowledge of the Barnett Shale and the local oil and gas industry.

Overnight sensation Five years ago, no one expected oil and gas TIM RAETZ leases in Denton and Wise counties to go for $500 PlainsCapital Bank Stability in the midst of volatility an acre. Then, almost overnight, lease prices For mineral owners who have tried navigating the oil and gas industry jumped to $2,500 an acre and leasing activity expanded into Tarrant on their own during these turbulent times, some order and stability can County and Johnson County. Bonus payouts skyrocketed from $5,000 an come from working with a wealth management team that has experiacre to $30,000 an acre, depending on the size of the tract of land. enced oil and gas property dealings. An experienced oil and gas property Hundreds of landmen descended upon county courthouses, running manager has the time, expertise and resources to monitor closely a client’s title checks on neighborhood tracts. Neighborhood associations, municimineral holdings while at the same time positioning the client for future palities, school districts and country clubs formed gains. committees to explore ways to lease their land Mineral owners are often busy professionals for oil and gas exploration. The good news for mineral who do not have the time to manage their oil Nearly all the surface and mineral rights and gas assets. An oil and gas property manager associated with neighborhoods in Tarrant and owners is that many of the monitors pricing, production and reporting on a Johnson counties were attractive to prospective local and regional banks regular and consistent basis to ensure the client lessees. is receiving the right amount in royalties. While drilling opportunities abounded in the remain committed to their While oil and gas property managers can repBarnett Shale, the rapid expansion of oil and resent a valuable resource to mineral owners gas exploration in urban areas caused pipeline Barnett Shale clients. when they are negotiating a lease, many times issues and increased drilling costs. But oil and such managers are not brought on board until gas operators continued to lease and drill as after the deal is done. When looking for an oil and gas property manager, quickly as they could. a mineral owner should consider the experience and qualifications of the On Wall Street, energy stocks continued to rise in value. By 2008, oil individual as well as that person’s accessibility to clients and — equally and gas prices had hit all time highs of $140 per barrel and $13 per MCF. important — the overall experience of the wealth management team. The People in the industry began to ask: How long can this boom last? mineral owner also should inquire about the financial institution’s stability, its commitment to this area and its ability to process and react to oil and Everything changes gas issues in a timely manner. When the economic downturn began last fall, oil and gas prices began Last year, when oil was selling at $140 a barrel, everyone knew the to plunge on rumors of an oversupply of gas. By December 2008, oil and price was inflated and that eventually there would be a correction. I do gas leasing in the Barnett Shale had all but stopped. Oil marketers were not believe anyone anticipated the dramatic decrease we have experileft holding large contracts of undelivered oil. Leasing bonuses had enced. However, I am seeing signs that oil and gas activity is picking up. dropped dramatically, and drilling costs remained high. Operators, fearing While prices probably will not return to their previous levels, mineral ownthe worst, hoped at least to break even. ers can still profit from their holdings. How well they profit depends on Now in the second quarter of 2009, drilling costs have begun to drop their ability to preserve and protect their oil and gas assets. ER while oil and gas prices are rising. In addition, leasing activity in the Barnett Shale is growing, and bonus payouts are averaging about $2,500 Tim Raetz is senior vice president and senior oil and gas manager for per acre. PlainsCapital Bank’s Wealth Management & Trust Group. Raetz may be conHowever, drilling activity in the Barnett Shale has not returned to previtacted at 817-258-3764 or [email protected]. ous levels, and many of the major players have shifted their focus to other shale plays across the U.S. In fact, some are beginning to sell their Barnett holdings to other companies in the hopes of raising capital.

June 18, 2009

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Number of Producing Barnett Shale Wells Over Time as of Jan. 1, 2009 All Counties/Fields in the Fort Worth Basin

Historical Performance by County of Barnett Shale Producers to January 1, 2009

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Fort Worth Business Press

Number of New Vertical and Horizontal Producer Wells by Year as of Jan. 1, 2009 All Counties/Fields in the Fort Worth Basin

Charts and graphs courtesy of Powell Barnett Shale Newsletter www.barnettshalenews.com

Relevant. Reliable. Responsible. www.fwbusinesspress.com June 18, 2009

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Barnett Shale Gas Proved Reserves* and Proved Ultimate Recovery**

Barnett Shale Monthly Natural Gas Production and Total Producing Wells

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Fort Worth Business Press

Barnett Shale Monthly Liquid Production and Total Producing Wells

Barnet Shale Liquids Proved Reserves* and Proved Ultimate Recovery*

June 18, 2009

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Legends and Legacies of Texas Oil Don Harrington: A Panhandle humanitarian of nationwide influence By Michael H. Price

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hirty-five years have passed since the death of Donald De Coursey Harrington, an Amarillo-based force in the petroleum industry and its conjoinedtwin field of philanthropy – and still the name carries a news-making impact. Coupled with the arts-patron identity of his wife, Sybil Harrington, the influence persists in arenas ranging from university-based research programs to Scouting to the Metropolitan Opera of New York. Keystone dates to which their social bearing can be traced – apart from the standard birth-and-death milestones – would include Illinois-born Don Harrington’s arrival in 1926 at Amarillo in pursuit of a career amidst a regional oil-and-gas boom; his marriage in 1935 to Sybil Buckingham; and their gift in 1945 of 640 acres in Palo Duro Canyon to the Llano Estacado Council of the Boy Scouts of America. Camp Don Harrington remains a busy incubator of merit-badge projects, with its 12 permanent campsites and an array of athletic amenities. From that first step toward a legacy of grand-scale philanthropy, the Harringtons developed a history of bequests that have ranged into the hundreds of millions of dollars. In 1964, the Harringtons donated their entire collection of 19th century European art – the likes of Monet and Renoir – to the Phoenix Art Museum, along with funding for expansion, endowments and art conservation. Each spring, the Donald D. Harrington Fellows Program of the University of Texas presents a symposium at Amarillo College. In a recent article for the local newspaper, lawyer and Harrington-circle friend Wales Madden Jr. used the occasion to impart some revealing background about the founders: “The Panhandle oil boom of the 1920s attracted a variety of adventurers, harboring an entrepreneurial spirit mixed with a willingness to gamble on long odds,” wrote Madden. “Into this environment sauntered Don Harrington, a man generously endowed with the intellectual, physical and competitive qualities to succeed … Thirty years later, Don Harrington and his partners [notably, patriarchs of the influential Hagy and Marsh families] had amassed an impressive portfolio of oil-and-gas properties and had sold a portion of these for more than $100 million.” Madden recalls that, in 1984, Sybil Harrington told him: “I want to create a scholarship program that will appeal to leading academicians around the world and would be comparable with a Rhodes Scholarship.” Hence the Don Harrington Fellows Program. “Ultimately,” as Madden tells it, “it was Mrs. Harrington’s wish that the program should have no limitations on academic disciplines… Mrs. Harrington insisted that there be no publicity until after her death.” (Sybil Harrington died in 1998.) “I concluded I would make one final effort to convince Sybil that she

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should be recognized for her benefaction while she was alive… Her comments give a real insight to one of the most remarkable women the Panhandle has ever produced: Madden: “Now hold on, Sybil, don’t say, ‘No,’ until I finish.” Mrs. Harrington: “You’re finished, Willie.” Madden: “The university would like to bring you to Austin to host a dinner, reception and attendant press events.” Mrs. Harrington: “Ghastly.” Madden: “How about a trip to Austin with a scaled-down social function?” Mrs. Harrington: “Never.” Next paragraph: “We can skip everything, Sybil, other than an announcement from Austin?” Mrs. Harrington: “We can skip everything … My name will be used only as the donor – in memory of Don. Comprende vous?” “Since its inception,” adds Madden, “the Don Harrington Fellows Program has made awards to 21 faculty fellows and 68 graduate fellows from virtually all corners of the earth.” At the beginning of Don Harrington’s career in a boom-town environment, his Yale training as an engineer provided an edge in acquiring oil-and-gas leases – a coherent bigpicture grasp of an industry that had begun in lucrative chaos. Few rivals or colleagues perceived the industry in such deep-focus perspective. His development of the historic Cargray Plant – named after its home-counties of Carson and Gray – established lasting standards for petroleum production. In affiliation with Lawrence Hagy and Stanley Marsh Jr. since the late 1920s, Harrington nailed oil-and-gas rights on thousands of acres in the crucial Panhandle and Hugoton fields, along with ranching interests, while sustaining a citizen-of-the-world outlook that ranged from the Amarillo Country Club to the Brooks Club of London. Sybil Harrington, an accomplished pianist, relished the opportunity that such wealth allowed her to become a patron of the arts. The Harrington Foundation’s gifts to the Amarillo Symphony Orchestra and West Texas State University led to ever-greater bequests on an everbroadening scale. In 1979, Mrs. Harrington began a campaign of support for New York’s Metropolitan Opera, which in 1987 christened its main hall as the Sybil Harrington Auditorium. In a late-in-life interview with the Amarillo Globe-News, Lawrence Hagy remembered his business partner from the long-gone wildcatter days in emphatic terms: “Work was a way of life for Don. He worked harder and longer hours than anyone I have ever known. He never quit working until the day he died. Some of us slowed down, but not Don. What he made, he earned.” ER [email protected]

Fort Worth Business Press