U.S. Shale Plays
U.S. Shale Plays Ben H. Welmaker, Jr., Partner [email protected] +1.713.427.5011
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.
Introduction 2
US Shale Plays – Conventional and Unconventional Oil & Gas Resources – Conventional: vertical well reservoir drainage technology vs – Unconventional: exploitation of the source rock through horizontal well technology
3
4
US Shale Plays – Shale oil and gas exploration in the US: A sea change in the US energy picture: – 200 years worth of gas at current demand levels (700 yrs?)
5
Shale Gas Plays, Lower 48 States
6
Six Important Gas Shale Plays
7
Bakken Shale
8
Bakken Shale - Compared – Estimated to be as large as 3.65 billion barrels in oil reserves Compared to:
– East Texas Oil Field in East Texas (the largest and most prolific oil reservoir in the contiguous United States):
– Arctic National Wildlife Refuge in Alaska:
– 10 billion barrels of oil potential.
– 5.2 billion barrels of oil with 30,340 wells drilled since discovery on October 5, 1930. 9
US Natural Gas Prices
10
Basin Edge Oil Rims Eagle Ford
11
Basin Edge Oil Rims Barnett
12
International Shale Resources – Potential shale plays worldwide: – US – Canada – Norway – Hungary and Poland – Russia – China – Australia
– Indonesia – India – E. Africa – Brazil – Argentina – Chile – Egypt – Saudi Arabia 13
Shale Technology 14
Hydraulic Fracturing
15
16
17
Companies Active in Shale Plays – Primarily US independents: Chesapeake, XTO, EOG, PetroHawk, Anadarko, EXCO, Range, Devon, Swift, Newfield, Carrizo, Cabot, Quicksilver, Plains and El Paso. – However: – In 2008, Statoil ASA (Norway) acquired 32.5% of CHK’s interest in Marcellus Shale ($3.3 Billion); BP paid $1.75 Billion for CHK’s Woodford Shale Oklahoma assets, and $1.9 Billion for 25% interest in CHK’s Fayetteville Shale Arkansas joint venture. – In May 2009, Eni (Italian) acquired 27.5% of Quicksilver’s interest in Barnett Shale ($280 Million). – In August 2009, BG Group (British) acquired 50% interest of EXCO in Haynesville Shale (over $1 Billion). 18
Companies Active in Shale Plays – 12/14/09 - ExxonMobil purchased XTO Energy in deal reportedly valued at $41 Billion. – 12/16/09 – Sumitomo buys into Carrizo’s Barnett Shale Interest for $15.7 Million. – 1/04/10 – CHK announces joint venture with French major Total S.A. covering 25% of CHK’s Barnett Shale position ($2.25 Billion deal). – 2/16/10 – Mitsui signs $1.4 billion deal to buy 32.5% of Anadarko’s stake in the Marcellus Shale ($11,100 per acre). – 4/12/10 – Indian petrochemicals giant Reliance Industries Limited enters into joint venture with Atlas Energy covering 40% of Atlas’ Marcellus Shale Leases ($1.7 Billion deal - $14,167 per acre).
19
Companies Active in Shale Plays – 5/28/10 – Royal Dutch Shell agrees to buy East Resources Inc. for $4.7 billion, expanding its holdings of US shale gas deposits (Marcellus and Eagle Ford). – 6/24/10 – Reliance acquires 41% working interest in Pioneer led joint venture Eagle Ford Shale acreage (deal valued at $1.3 billion $11,000 per acre). – 8/5/10 – Reliance makes deal to acquire a 60% stake in Marcellus Shale acreage held by Carrizo Oil & Gas Inc. and its partner ($392 million - $6,258 per acre). – 8/31/10 – Sumitomo agrees to pay Rex Energy Corp. about $140 million for a 30 percent stake in Marcellus Shale acreage.
20
Operations In Urban Areas 21
Urban Concerns Shale Plays frequently occur in urban areas: – Use of the surface by the dominant mineral estate owner raises issues which become more acute when a homeowner’s residence may be directly impacted by drilling and production operations. – For example, the City of Fort Worth, Texas is projected to have over 1,000 Barnett Shale wells within its city limits.
22
Mineral Estate vs. Urban Surface Owners The mineral estate is the dominant estate for use of the surface for mineral exploration and development. There are limits, however, on the dominant mineral estate. They include: – the accommodation doctrine – 15-day notice in Texas to the surface owner when a drilling permit is granted
23
Mineral Estate vs. Urban Surface Owners – More sophisticated surface use provisions in oil and gas leases and surface use agreements; – On federal lands where the federal government only owns the surface, there may be an attempt to impose surface use conditions contrary to state statutory or case law; – Lawsuits by landowners based on allegations of noise and odors arising out of urban drilling.
24
State And Local Government Regulation – To drill a well in Texas, an operator must obtain a drilling permit from the Texas Railroad Commission. – An operator must also, in many cases, obtain a drilling permit from the municipality in which operations are to be conducted. For example, the city of Fort Worth also requires that an operator obtain a drilling permit.
25
State and Local Government Regulation Railroad Commission Drilling Permit: – $200-$300 non-refundable fee based on depth (16 TAC § 3.78)
Fort Worth City Ordinance Gas Well Fees: – $3,000.00 for a New Gas Well Permit
26
State and Local Government Regulation Railroad Commission Drilling Permit: – Directional Survey for directional wells. (16 TAC § 3.11(c))
Fort Worth City Ordinance: – Well name; surface owners of the pad site and their addresses; Operator name and address. – Location and description of all improvements and structures within six hundred (600) feet of the well. – Description of the water source to be used during drilling. – An original executed city-wide road maintenance agreement. 27
Limits On Government Regulation Regulatory Taking – Municipal regulations of oil and gas operations in Texas may rise to the level of a regulatory taking when they render the mineral rights valueless. Trail Enters. v. City of Houston, 2008 Tex. App. LEXIS 2575 (Tex.App.-Waco 2008, pet.filed). This is commonly referred to as inverse condemnation. – If there is a regulatory taking, the government must pay the owner just compensation. – Just compensation is measured by the market value of the property taken by the governmental unit. Tex.Prop.Code Ann. §21.042(b)(2010)
28
Limits On Government Regulation State Preemption – The State of Pennsylvania regulates oil and gas operations under the Pennsylvania Oil and Gas Act (the “Act”). – Municipalities in Pennsylvania may not regulate the same features of oil and gas operations as regulated by the Act (the technical aspects of well functioning) or the same purposes as regulated by the Act (optimizing oil and gas development, while respecting safety, property rights and the environment). 29
Shale Play Deal Structure 30
Purchase and Sale Agreements
– A deal usually involves the purchase and sale of a seller’s leasehold position in an area: – (i) all of seller’s leasehold position in the area, or – (ii) seller’s leasehold position in only the Shale Play formations (reserving formations with existing production) (see slide #3).
31
Purchase and Sale Agreements Purchase Price Calculations – The purchase price in an acquisition of undeveloped acreage is most commonly allocated on a net mineral acre basis (vs. acquisitions of producing properties: purchase price allocated among producing wells based on reserve reports). Remaining Primary Term – From Buyer perspective, the purchase and sale agreement definition of “Title Defects” should include Leases with “short” remaining primary terms. 32
Exploration Agreements – A more common transaction since the financial crisis in late 2008: joint exploration agreements and farmouts: – Only part of interest farmed out: e.g. 50%. – Buyer/farmee carries the seller/farmor for the drilling costs in one or more expensive wells to develop the shale formation. – Both parties participate 50/50 thereafter.
33
Confidentiality Agreements – Data Review – Deals almost always begin with opportunity for buyer/farmee to review confidential and proprietary information of seller/farmor. – Confidentiality Agreement is executed to prevent disclosure to third parties by the potential buyer.
34
Confidentiality Agreements – Shale Play CAs – In addition to usual CA provisions, the Shale Play CA will likely have provisions concerning: – Non-solicitation – to prevent buyer from attempting to hire seller employees. – Non-Compete Area – to prevent buyer from independently acquiring oil and gas interests in seller’s area. Prospective purchasers should be wary of large non-compete areas. 35
Issues When There Is Existing Production 36
Definition of Retained Acreage – Documents should contain detailed descriptions of the retained and conveyed depths. – When describing a geological formation, refer to (i) the top or base of the formation, (ii) use terms like “stratigraphic equivalent” or “correlative equivalent” and (iii) refer to a specific well log of a well, identifying the type of log, date, well name, location of well and well API number. 37
Production In Paying Quantities? – Leases producing in paying quantities? – For leases being acquired which are beyond their primary terms, buyer will have to determine if such leases have been maintained by production in paying quantities. In absence of lease definition, determination is made under state law.
38
Production In Paying Quantities? – What constitutes “production in paying quantities” in the shale states? – Texas: since 1959, 2-part test under Clifton v. Koontz. – Louisiana: codified test – La. Min. Code Art. 124, 125. – Oklahoma and Arkansas: purely objective; must show operating profit. – Marcellus states: limited body of law, but generally, Ohio and Pennsylvania apply a subjective test, while New York and West Virginia require a showing of profit. 39
Lease Pugh Clauses – Lease Pugh Clause: Vertical or Horizontal Severance –Example of a traditional, vertical severance Pugh clause: “Production from any well situated on lands included within a pooled unit embracing a portion of the leased premises and other lands shall serve to maintain this lease only as to that portion of the leased premises embraced in the unit.” 40
Lease Pugh Clauses – Many Pugh clauses are drafted to include both horizontal and vertical severances: “Production shall serve to maintain the lease only as to that portion of the leased premises embraced in a unit, and only from the surface to the base of the deepest producing formation in such unit.” Question: why not just sever the producing formation?
41
Other Issues in Shale Farmouts – How long does the farmee have to commence operations on the test well? – What requirements must be met for a well to satisfy the carry obligation? – When does the carry stop? – How is the location of each test well determined? 42
Other Issues in Shale Farmouts – If the farmee fails to drill as agreed, what are the consequences: option or covenant? – If the farmee drills one or more but not all of the obligation wells, what acreage does it retain? – If there is existing production, is it being reserved by the farmor? – Is the farmor reserving an ORRI? – How are the costs of lease renewals and extensions shared? 43
Other Issues in Shale Farmouts – Will there be an Area of Mutual Interest (AMI) to share newly acquired leases? If so: – How is the AMI defined? (Statute of Frauds) – How are leases lying partially within and partially outside the AMI to be handled? – Will the farmor retain any depths in the AMI leases? – If so, how are the lease bonus costs to be allocated between the shallow and deep rights? 44
Other Issues in Shale Farmouts – What is the term of the AMI? – What if the farmee already owns existing leases within the AMI? Must the farmee offer to the farmor its proportionate share of those leases?
– What form of operating agreement will govern joint operations? 45
Other Issues in Shale Farmouts – Will there be separate operating agreements for each prospect? – Is a tax partnership under US law needed to minimize the parties’ respective tax liabilities? – If the farmor retains the shallow rights, should it ask for a Logging Agreement? (provides for the Operator to use reasonable efforts to run well logs across certain designated shallow intervals in wells drilled upon the lands).
46
Pipelines/ Pooling/Surface Damages/Fracs/ Technology Transfers 47
Pipelines – Capacity Constraints – Major Shale Plays including the Barnett and the Marcellus are experiencing capacity constraints. – Consequences are premium transportation rates or shut in production. – Easement Constraints – Older pipeline easements may restrict the easement to one pipeline or gathering line. Looping a line to increase capacity or transport a different quality gas may require renegotiation of the easement. 48
Pooling Pooling in Different States – Many of the states that contain Shale Plays, such as Louisiana and Oklahoma, allow pooling of different tracts on a compulsory basis in order to meet minimum acreage requirements for economic efficiency, conservation and prevention of waste. – In Texas, although there is compulsory pooling through the Mineral Interest Pooling Act (“MIPA”), it is of limited application. While the MIPA has been used in the Barnett Shale, most units in Texas are voluntary pooled units. 49
Surface Damages Different Rule on Damages From State to State: – Texas precedent requires surface restoration awards to be reasonably related to the value of the property. – In Louisiana, a 2003 state supreme court decision (the Corbello case) established that damages for breach of a contractual standard to restore the surface do not have to be related to the market value of the property and in fact can grossly exceed the market value of the property. Moreover, the successful plaintiff does not even have to use the awarded damages to restore the surface. 50
Hydraulic Fracturing – Subsurface Trespass: In Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008), the Supreme Court of Texas held that an adjacent mineral owner does not have a cause of action for subsurface trespass caused by hydraulic fracturing because of the rule of capture. – Environmental: Concern for shallow water formations from frac water.
51
Proprietary Technology – One characteristic of shale plays is the continued development of more sophisticated horizontal drilling, hydraulic fracturing, and completion techniques. – Where the operator has technology which is patented, patentable, proprietary, or subject to restrictions as to disclosure under agreements with third parties, the operating agreement should specify that such technology will not be revealed to the Non-Operators.
52
Conclusion 53
Shale Play Opportunities – There are many areas of opportunity for shale exploration and production. – in the US and other countries – The increase in the indigenous supply of hydrocarbons in places such as the US and Europe has the possibility of significant geopolitical consequences. 54
有難うございました Ben H. Welmaker, Jr. Partner Baker & McKenzie LLP 711 Louisiana, Suite 3400 Houston, TX 77002 Tel: +1 713 427 5011 Cell: +1 832 566 0600 Fax: +1 713 427 5099 Home: +1 713 668 4887
[email protected]
55
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.
Introduction 2
US Shale Plays – Conventional and Unconventional Oil & Gas Resources – Conventional: vertical well reservoir drainage technology vs – Unconventional: exploitation of the source rock through horizontal well technology
3
4
US Shale Plays – Shale oil and gas exploration in the US: A sea change in the US energy picture: – 200 years worth of gas at current demand levels (700 yrs?)
5
Shale Gas Plays, Lower 48 States
6
Six Important Gas Shale Plays
7
Bakken Shale
8
Bakken Shale - Compared – Estimated to be as large as 3.65 billion barrels in oil reserves Compared to:
– East Texas Oil Field in East Texas (the largest and most prolific oil reservoir in the contiguous United States):
– Arctic National Wildlife Refuge in Alaska:
– 10 billion barrels of oil potential.
– 5.2 billion barrels of oil with 30,340 wells drilled since discovery on October 5, 1930. 9
US Natural Gas Prices
10
Basin Edge Oil Rims Eagle Ford
11
Basin Edge Oil Rims Barnett
12
International Shale Resources – Potential shale plays worldwide: – US – Canada – Norway – Hungary and Poland – Russia – China – Australia
– Indonesia – India – E. Africa – Brazil – Argentina – Chile – Egypt – Saudi Arabia 13
Shale Technology 14
Hydraulic Fracturing
15
16
17
Companies Active in Shale Plays – Primarily US independents: Chesapeake, XTO, EOG, PetroHawk, Anadarko, EXCO, Range, Devon, Swift, Newfield, Carrizo, Cabot, Quicksilver, Plains and El Paso. – However: – In 2008, Statoil ASA (Norway) acquired 32.5% of CHK’s interest in Marcellus Shale ($3.3 Billion); BP paid $1.75 Billion for CHK’s Woodford Shale Oklahoma assets, and $1.9 Billion for 25% interest in CHK’s Fayetteville Shale Arkansas joint venture. – In May 2009, Eni (Italian) acquired 27.5% of Quicksilver’s interest in Barnett Shale ($280 Million). – In August 2009, BG Group (British) acquired 50% interest of EXCO in Haynesville Shale (over $1 Billion). 18
Companies Active in Shale Plays – 12/14/09 - ExxonMobil purchased XTO Energy in deal reportedly valued at $41 Billion. – 12/16/09 – Sumitomo buys into Carrizo’s Barnett Shale Interest for $15.7 Million. – 1/04/10 – CHK announces joint venture with French major Total S.A. covering 25% of CHK’s Barnett Shale position ($2.25 Billion deal). – 2/16/10 – Mitsui signs $1.4 billion deal to buy 32.5% of Anadarko’s stake in the Marcellus Shale ($11,100 per acre). – 4/12/10 – Indian petrochemicals giant Reliance Industries Limited enters into joint venture with Atlas Energy covering 40% of Atlas’ Marcellus Shale Leases ($1.7 Billion deal - $14,167 per acre).
19
Companies Active in Shale Plays – 5/28/10 – Royal Dutch Shell agrees to buy East Resources Inc. for $4.7 billion, expanding its holdings of US shale gas deposits (Marcellus and Eagle Ford). – 6/24/10 – Reliance acquires 41% working interest in Pioneer led joint venture Eagle Ford Shale acreage (deal valued at $1.3 billion $11,000 per acre). – 8/5/10 – Reliance makes deal to acquire a 60% stake in Marcellus Shale acreage held by Carrizo Oil & Gas Inc. and its partner ($392 million - $6,258 per acre). – 8/31/10 – Sumitomo agrees to pay Rex Energy Corp. about $140 million for a 30 percent stake in Marcellus Shale acreage.
20
Operations In Urban Areas 21
Urban Concerns Shale Plays frequently occur in urban areas: – Use of the surface by the dominant mineral estate owner raises issues which become more acute when a homeowner’s residence may be directly impacted by drilling and production operations. – For example, the City of Fort Worth, Texas is projected to have over 1,000 Barnett Shale wells within its city limits.
22
Mineral Estate vs. Urban Surface Owners The mineral estate is the dominant estate for use of the surface for mineral exploration and development. There are limits, however, on the dominant mineral estate. They include: – the accommodation doctrine – 15-day notice in Texas to the surface owner when a drilling permit is granted
23
Mineral Estate vs. Urban Surface Owners – More sophisticated surface use provisions in oil and gas leases and surface use agreements; – On federal lands where the federal government only owns the surface, there may be an attempt to impose surface use conditions contrary to state statutory or case law; – Lawsuits by landowners based on allegations of noise and odors arising out of urban drilling.
24
State And Local Government Regulation – To drill a well in Texas, an operator must obtain a drilling permit from the Texas Railroad Commission. – An operator must also, in many cases, obtain a drilling permit from the municipality in which operations are to be conducted. For example, the city of Fort Worth also requires that an operator obtain a drilling permit.
25
State and Local Government Regulation Railroad Commission Drilling Permit: – $200-$300 non-refundable fee based on depth (16 TAC § 3.78)
Fort Worth City Ordinance Gas Well Fees: – $3,000.00 for a New Gas Well Permit
26
State and Local Government Regulation Railroad Commission Drilling Permit: – Directional Survey for directional wells. (16 TAC § 3.11(c))
Fort Worth City Ordinance: – Well name; surface owners of the pad site and their addresses; Operator name and address. – Location and description of all improvements and structures within six hundred (600) feet of the well. – Description of the water source to be used during drilling. – An original executed city-wide road maintenance agreement. 27
Limits On Government Regulation Regulatory Taking – Municipal regulations of oil and gas operations in Texas may rise to the level of a regulatory taking when they render the mineral rights valueless. Trail Enters. v. City of Houston, 2008 Tex. App. LEXIS 2575 (Tex.App.-Waco 2008, pet.filed). This is commonly referred to as inverse condemnation. – If there is a regulatory taking, the government must pay the owner just compensation. – Just compensation is measured by the market value of the property taken by the governmental unit. Tex.Prop.Code Ann. §21.042(b)(2010)
28
Limits On Government Regulation State Preemption – The State of Pennsylvania regulates oil and gas operations under the Pennsylvania Oil and Gas Act (the “Act”). – Municipalities in Pennsylvania may not regulate the same features of oil and gas operations as regulated by the Act (the technical aspects of well functioning) or the same purposes as regulated by the Act (optimizing oil and gas development, while respecting safety, property rights and the environment). 29
Shale Play Deal Structure 30
Purchase and Sale Agreements
– A deal usually involves the purchase and sale of a seller’s leasehold position in an area: – (i) all of seller’s leasehold position in the area, or – (ii) seller’s leasehold position in only the Shale Play formations (reserving formations with existing production) (see slide #3).
31
Purchase and Sale Agreements Purchase Price Calculations – The purchase price in an acquisition of undeveloped acreage is most commonly allocated on a net mineral acre basis (vs. acquisitions of producing properties: purchase price allocated among producing wells based on reserve reports). Remaining Primary Term – From Buyer perspective, the purchase and sale agreement definition of “Title Defects” should include Leases with “short” remaining primary terms. 32
Exploration Agreements – A more common transaction since the financial crisis in late 2008: joint exploration agreements and farmouts: – Only part of interest farmed out: e.g. 50%. – Buyer/farmee carries the seller/farmor for the drilling costs in one or more expensive wells to develop the shale formation. – Both parties participate 50/50 thereafter.
33
Confidentiality Agreements – Data Review – Deals almost always begin with opportunity for buyer/farmee to review confidential and proprietary information of seller/farmor. – Confidentiality Agreement is executed to prevent disclosure to third parties by the potential buyer.
34
Confidentiality Agreements – Shale Play CAs – In addition to usual CA provisions, the Shale Play CA will likely have provisions concerning: – Non-solicitation – to prevent buyer from attempting to hire seller employees. – Non-Compete Area – to prevent buyer from independently acquiring oil and gas interests in seller’s area. Prospective purchasers should be wary of large non-compete areas. 35
Issues When There Is Existing Production 36
Definition of Retained Acreage – Documents should contain detailed descriptions of the retained and conveyed depths. – When describing a geological formation, refer to (i) the top or base of the formation, (ii) use terms like “stratigraphic equivalent” or “correlative equivalent” and (iii) refer to a specific well log of a well, identifying the type of log, date, well name, location of well and well API number. 37
Production In Paying Quantities? – Leases producing in paying quantities? – For leases being acquired which are beyond their primary terms, buyer will have to determine if such leases have been maintained by production in paying quantities. In absence of lease definition, determination is made under state law.
38
Production In Paying Quantities? – What constitutes “production in paying quantities” in the shale states? – Texas: since 1959, 2-part test under Clifton v. Koontz. – Louisiana: codified test – La. Min. Code Art. 124, 125. – Oklahoma and Arkansas: purely objective; must show operating profit. – Marcellus states: limited body of law, but generally, Ohio and Pennsylvania apply a subjective test, while New York and West Virginia require a showing of profit. 39
Lease Pugh Clauses – Lease Pugh Clause: Vertical or Horizontal Severance –Example of a traditional, vertical severance Pugh clause: “Production from any well situated on lands included within a pooled unit embracing a portion of the leased premises and other lands shall serve to maintain this lease only as to that portion of the leased premises embraced in the unit.” 40
Lease Pugh Clauses – Many Pugh clauses are drafted to include both horizontal and vertical severances: “Production shall serve to maintain the lease only as to that portion of the leased premises embraced in a unit, and only from the surface to the base of the deepest producing formation in such unit.” Question: why not just sever the producing formation?
41
Other Issues in Shale Farmouts – How long does the farmee have to commence operations on the test well? – What requirements must be met for a well to satisfy the carry obligation? – When does the carry stop? – How is the location of each test well determined? 42
Other Issues in Shale Farmouts – If the farmee fails to drill as agreed, what are the consequences: option or covenant? – If the farmee drills one or more but not all of the obligation wells, what acreage does it retain? – If there is existing production, is it being reserved by the farmor? – Is the farmor reserving an ORRI? – How are the costs of lease renewals and extensions shared? 43
Other Issues in Shale Farmouts – Will there be an Area of Mutual Interest (AMI) to share newly acquired leases? If so: – How is the AMI defined? (Statute of Frauds) – How are leases lying partially within and partially outside the AMI to be handled? – Will the farmor retain any depths in the AMI leases? – If so, how are the lease bonus costs to be allocated between the shallow and deep rights? 44
Other Issues in Shale Farmouts – What is the term of the AMI? – What if the farmee already owns existing leases within the AMI? Must the farmee offer to the farmor its proportionate share of those leases?
– What form of operating agreement will govern joint operations? 45
Other Issues in Shale Farmouts – Will there be separate operating agreements for each prospect? – Is a tax partnership under US law needed to minimize the parties’ respective tax liabilities? – If the farmor retains the shallow rights, should it ask for a Logging Agreement? (provides for the Operator to use reasonable efforts to run well logs across certain designated shallow intervals in wells drilled upon the lands).
46
Pipelines/ Pooling/Surface Damages/Fracs/ Technology Transfers 47
Pipelines – Capacity Constraints – Major Shale Plays including the Barnett and the Marcellus are experiencing capacity constraints. – Consequences are premium transportation rates or shut in production. – Easement Constraints – Older pipeline easements may restrict the easement to one pipeline or gathering line. Looping a line to increase capacity or transport a different quality gas may require renegotiation of the easement. 48
Pooling Pooling in Different States – Many of the states that contain Shale Plays, such as Louisiana and Oklahoma, allow pooling of different tracts on a compulsory basis in order to meet minimum acreage requirements for economic efficiency, conservation and prevention of waste. – In Texas, although there is compulsory pooling through the Mineral Interest Pooling Act (“MIPA”), it is of limited application. While the MIPA has been used in the Barnett Shale, most units in Texas are voluntary pooled units. 49
Surface Damages Different Rule on Damages From State to State: – Texas precedent requires surface restoration awards to be reasonably related to the value of the property. – In Louisiana, a 2003 state supreme court decision (the Corbello case) established that damages for breach of a contractual standard to restore the surface do not have to be related to the market value of the property and in fact can grossly exceed the market value of the property. Moreover, the successful plaintiff does not even have to use the awarded damages to restore the surface. 50
Hydraulic Fracturing – Subsurface Trespass: In Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008), the Supreme Court of Texas held that an adjacent mineral owner does not have a cause of action for subsurface trespass caused by hydraulic fracturing because of the rule of capture. – Environmental: Concern for shallow water formations from frac water.
51
Proprietary Technology – One characteristic of shale plays is the continued development of more sophisticated horizontal drilling, hydraulic fracturing, and completion techniques. – Where the operator has technology which is patented, patentable, proprietary, or subject to restrictions as to disclosure under agreements with third parties, the operating agreement should specify that such technology will not be revealed to the Non-Operators.
52
Conclusion 53
Shale Play Opportunities – There are many areas of opportunity for shale exploration and production. – in the US and other countries – The increase in the indigenous supply of hydrocarbons in places such as the US and Europe has the possibility of significant geopolitical consequences. 54
有難うございました Ben H. Welmaker, Jr. Partner Baker & McKenzie LLP 711 Louisiana, Suite 3400 Houston, TX 77002 Tel: +1 713 427 5011 Cell: +1 832 566 0600 Fax: +1 713 427 5099 Home: +1 713 668 4887
[email protected]
55
