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February 17, 2016

Supreme Court Stays EPA's Clean Power Plan

On February 9, 2016, the U.S. Supreme Court issued a stay on the implementation of the Clean Power Plan, the Environmental Protection Agency’s (EPA’s) new regulation designed to cut U.S. carbon emissions from power plants. The court said the plan could not move forward until all legal challenges had been heard. On January 21, 2016, the Court of Appeals for the D.C. Circuit denied the plaintiffs their request for a stay in implementing the regulations and has issued a briefing schedule for the parties. This is the first time the Supreme Court has ever issued a stay on regulations before an initial review by a federal appeals court.

Issued in August 2015, the plan is designed to cut U.S. carbon emissions by 32 percent by 2030 and was part of the U.S. pledge at the United Nations climate negotiations held in Paris in December 2015. Shortly after the EPA announced the Clean Power Plan, a group of states and industry groups, led by West Virginia, the nation’s leading coal producer, filed a lawsuit to halt the implementation of the plan, arguing it exceeded the EPA’s mandate under the Clean Air Act and violated states’ rights to regulate electrical power.

The stay was issued along party lines, with the five conservative-leaning justices voting for the stay and the liberal-leaning justices voting against it. However, four days after the high court issued its stay, Justice Antonin Scalia passed away. Because the Court issued its stay prior to Justice Scalia’s death, it remains in place. However, there is now a 4–4 tie among the justices as to whether the EPA has the powers it proposes to exercise under the Clean Power Plan. The Court is expected to remain at just eight justices for quite some time, due to an impending standoff between President Obama and the Senate over Justice Scalia’s replacement. If that is the case, then the ultimate decision on the legality of the Clean Power Plan may lie with the D.C. Circuit for the time being, due to Supreme Court rules on ties. In the event of a tie, the Court upholds the decision of the lower court, but that decision does not apply outside the circuit and does not create precedent.

There is also the possibility that the regulation will not be implemented if a Republican wins the presidential election in November. Republicans have come out against the regulations, and the lawsuit in question was initiated by mostly Republican state attorneys general. A new Republican president could introduce legislation blocking the regulations. The legal challenges against the regulations will likely not be decided before President Obama leaves office. The Court’s stay, the legal challenges against the regulation, and the upcoming presidential election could affect the United States’ ability to carry out the agreements it made at the Paris climate talks in December 2015.

In the meantime, the D.C. Circuit granted the parties an expedited briefing schedule and set oral arguments on those briefs for June 2, 2016.

Keywords: Clean Power Plan, carbon emissions, Supreme Court, EPA

Courtney Scobie, Ajamie LLP, Houston, TX


February 15, 2016

NY Supreme Court Upholds Decision Voiding Fracking Water Sale Agreement

On December 31, 2015, the New York State Supreme Court, Appellate Division, Fourth Judicial Department, issued an opinion upholding a lower court decision voiding determinations by the Village of Painted Post that authorized a water sale agreement with SWEPI LP, a subsidiary of Shell Oil Co., as well as a lease agreement between Painted Post Development, LLC (PPD) and Wellsboro and Corning Railroad, LLC, for failing to comply with the environmental review requirements of the State Environmental Quality Review Act (SEQRA). Sierra Club v. Vill. of Painted Post, 134 A.D.3d 1475, 23 N.Y.S.3d 506 (N.Y. App. Div. 2015).

The village’s board of trustees, in February of 2012, adopted a resolution to enter into a surplus water sale agreement with SWEPI for approximately 314,000,000 gallons of water taken from the municipal water supply in increments of up to one million gallons per day, with an option to increase the amount by an additional 500,000 gallons per day. The village determined that the water sale agreement was a Type II action, which is exempt from review under SEQRA.

The village also adopted a resolution authorizing a lease agreement between PPD and Wellsboro and Corning Railroad for the construction of a water trans-loading facility on 11.8 acres of land where the water would be withdrawn, loaded, and transported to Pennsylvania; there, the water would be used at drilling sites for high-volume hydraulic fracturing (fracking). The village determined that lease agreement was a Type I action under SEQRA, which required an environmental review, but issued a negative declaration finding that the lease would not result in any significant adverse impact on the environment.

The Sierra Club, other environmental organizations, and a resident brought suit against the village, PPD, SWEPI, and Wellsboro and Corning Railroad in June of 2012 challenging the resolutions authorizing the water sale and lease agreements.

The court struck down the village’s water sale agreement as arbitrary and capricious and further held that it had improperly segmented the SEQRA review of the lease from the water agreement.

Because the water agreement called for the sale of only one million gallons per day of water, the agreement was not specifically a Type I or Type II action. Type I actions include projects or actions that would use ground or surface water in excess of two million gallons per day. On the other hand, Type II actions include the purchase or sale of furnishings, equipment, or supplies, including surplus government property other than land, radioactive material, pesticides, herbicides, or other hazardous material. The court rejected the notion that the sale was a Type II action dealing with surplus government property “inasmuch as water constitutes a natural resource, not property.”

The court noted that Type I actions, under applicable state regulations, include “unlisted actions,” or those not previously defined as a Type I or Type II. Another regulatory provision states that Type I actions could include any “unlisted action” that exceeds 25 percent of any threshold in that section for use of a natural resource, occurring wholly or partially within or contiguous to any publicly owned park, recreation area, or designated open space. Because the Department of Environmental Conservation had imposed a threshold clarifying the use of the amount of a natural resource (such as water or land) as a Type I action, the court found that the state agency implicitly determined that an annexation of less than the threshold constitutes an “unlisted action.” As a result, the court concluded that the water agreement was either an “unlisted action” or a Type I action, both of which required SEQRA review.

The court further concluded that, because segmentation or the division of environmental review for different sections or stages of a project is generally disfavored, the village should not have segmented the SEQRA review of the lease from the water agreement. Thus, the court upheld the lower court’s ruling that the village’s resolutions should be annulled and that a consolidated SEQRA review of both agreements was required.

Keywords: energy litigation, hydraulic fracturing, fracking, water agreement, New York Supreme Court Appellate Division

Meghan Carter, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, New Orleans, LA


February 2, 2016

TransCanada Takes Two Separate Legal Actions after Keystone XL Rejection

In response to President Obama’s rejection of the Keystone XL pipeline, TransCanada has filed a lawsuit against the U.S. government, and signaled its intent to petition for arbitration against the State Department under Chapter 11 of the North American Free Trade Agreement (NAFTA).

The lawsuit was filed in federal court in Houston against Secretary of State John Kerry, Attorney General Loretta Lynch, Homeland Security Secretary Jeh Johnson, and Interior Secretary Sally Jewell. TransCanada claims that the executive branch violated the Constitution by rejecting the pipeline, and seeks various declarations that the executive branch’s decision prohibiting TransCanada from extending the pipeline into Canada is without legal effect. It also seeks an injunction preventing the executive branch from enforcing President Obama’s decision. TransCanada argues that the Constitution grants Congress the exclusive power to regulate domestic and international commerce and President Obama violated the Constitution by unilaterally rejecting the pipeline despite Congress’s expression of support for it. TransCanada also argues that the president’s rejection of the pipeline exceeded prior exercises of executive authority over cross-border commercial facilities and that he acted without statutory authority. The complaint also chastises President Obama for rejecting the pipeline so he can have more credibility negotiating international climate-change agreements on behalf of the U.S., calling it a “novel assertion of power” that is potentially boundless in scope.

The proposed arbitration would be brought to recoup TransCanada’s expenses related to the pipeline. Although TransCanada has not formally filed its NAFTA arbitration, it has informed the State Department that it intends to do so. The arbitration would be brought under Chapter 11 of NAFTA, the investment provisions that govern the treatment of the member states, including granting each party most-favored-nation treatment. It would seek to recoup TransCanada’s investment in the Keystone XL pipeline before the Obama administration rejected the application. Federal regulation requires companies who receive permits to build oil and gas pipelines to complete their projects within five years of application approval. TransCanada claims that due to this regulation, it had to complete a significant amount of preparatory work on the pipeline while waiting for the application to be approved due to how time-consuming the construction of a pipeline is. TransCanada argues that the government unjustifiably delayed processing the pipeline’s application for a presidential permit, that its rejection of the application was unjustified, and that it discriminated against the pipeline. TransCanada says that the executive branch had previously concluded that the pipeline did not significantly increase carbon emissions and that the government had approved permits for other pipelines during the same time period, yet still rejected Keystone XL. TransCanada seeks over $15 billion in damages in the arbitration.

Keywords: energy litigation, Keystone XL, TransCanada, North American Free Trade Agreement, NAFTA

Courtney Scobie, Ajamie LLP, Houston, TX


February 2, 2016

Ohio Supreme Court Holds Lease Not Perpetual, Not Subject to Implied Covenants

On January 21, 2016, the Ohio Supreme Court issued an opinion in consolidated actions, including a class action, addressing the interpretation of nearly identical oil and gas leases. This opinion impacts several cases currently pending in Ohio appellate courts.

In State ex rel. Claugus Family Farm, L.P. v. Seventh District Court of Appeals, Nos. 2014-0423 & 2014-1933 [], the Court held that Beck Energy’s Form G&T (83) lease, which required Beck to commence a well on the leased premises within a certain time or pay a delay rental, was not void as against public policy. The Court concluded that the lease was not perpetual as argued by the landowners in the class action because, as set forth in the primary term, it could not be extended beyond 10 years without development of oil and gas.

In addition, the Court held that the lease was not subject to an implied covenant of reasonable development. The Court relied not only on the primary term that required that development commence within 10 years but also on specific language in the lease that disclaimed any implied covenants.

Finally, the Court denied a writ to an absent and unnamed plaintiff in the class action, Claugus Family Farm, that challenged the Seventh District’s order tolling the leases pending appeal. The Court held that Claugus Family Farm had an adequate remedy by moving to intervene and also that the Seventh District did not patently and unambiguously lack jurisdiction to issue the order.

Keywords: energy litigation, oil and gas lease, delay rental, implied covenant, Ohio Supreme Court, primary term

Lyle Brown, Karen Kahle, and Amy Smith, Steptoe & Johnson PLLC


November 17, 2015

Obama Administration Rejects Keystone XL Pipeline

The Obama administration announced on November 6 that it has denied the presidential permit for the Keystone XL pipeline. The proposed pipeline would have connected the Hardisty, Alberta, oil terminal with the oil terminal in Steele City, Nebraska, facilitating the delivery of crude oil extracted from Canada’s tar sands to refineries in Illinois and Texas. However, the administration concluded that the pipeline was not in the national interest, stating that the negative environmental impact outweighed the economic benefit the pipeline would provide. In its statement on the rejection, the administration said the State Department’s findings showed the project would have a negligible impact on energy security, would not lead to lower gas prices for American consumers, and would have only a marginal impact on the long-term economy. It went on to note that studies show the project would have possible negative effects on local communities, water supplies, and cultural heritage sites, and would transport particularly dirty sources of fuel. The administration also noted the country’s duty to be a leader on acting against climate change, commenting that the United States could not ask other countries to make tough choices to address climate change if the U.S. is not willing to make them.

TransCanada, who runs the Keystone Pipeline System, said it plans to reapply to build the pipeline and is confident the pipeline would eventually be built. It called the decision a “disappointing choice” and said it would cost thousands of jobs in the U.S. and Canada and lead to increased oil imports from countries like Saudi Arabia and Venezuela. Congressional Republicans and Republican presidential candidates also criticized the administration’s decision, saying it would harm the country’s economy and cost jobs. Newly elected Canadian prime minister Justin Trudeau also expressed disappointment that the pipeline would not be built. However, while on the campaign trail, Trudeau pledged not to allow the construction of an alternative pipeline from Alberta to the Pacific Ocean, the plan touted by Stephen Harper’s government in the event the U.S. rejected Keystone XL.

The regulatory approval process for Keystone XL had a long and rather tortured history. TransCanada proposed the pipeline in 2008, but the U.S. Environmental Protection Agency and State Department studied the issue for several years. The Republican-controlled Congress tried to force the Obama administration to act on the permit request on multiple occasions, but the administration vetoed those efforts, saying the State Department needed more time to study the issue and that the permitting process was solely the province of the executive branch. The pipeline also faced court challenges in Nebraska from farmers who refused to grant easements for the pipeline and claimed that laws enacted by the Nebraska legislature to facilitate the pipeline’s construction violated the state constitution. The proposed pipeline’s impact on climate change was always at the forefront of the controversy surrounding the project. Many environmental concerns related to the pipeline also focused on its Nebraska location, due to some of the proposed routes for the pipeline winding through the environmentally sensitive Sand Hills area and over the Ogallala aquifer, a major source of drinking and irrigation water for much of the Midwest. TransCanada responded to this by rerouting the pipeline through less sensitive locations. Rerouting the pipeline could not resolve the concerns about climate change, though.

Keywords: energy litigation, Keystone XL Pipeline, TransCanada, Nebraska, climate change

Courtney Scobie, Ajamie LLP, Houston, TX


November 17, 2015

Former BP Engineer Pleads Guilty in Deepwater Horizon Obstruction Case

Former BP engineer Kurt Mix, who served on the BP team trying to stop the oil spill that resulted from the Deepwater Horizon explosion, pleaded guilty on November 6 to intentionally causing damage to a protected computer without authorization. Mix was originally charged by the Justice Department with felony obstruction of justice after being accused of deleting text messages in October 2010 during the aftermath of the oil spill, but pleaded to a lesser misdemeanor charge and avoided prison time. Mix will serve six months’ probation and pay no fine.

Mix has been fighting the obstruction charges for years. During a 2013 trial, he was acquitted of one obstruction charged but found guilty of another. However, the verdict was later thrown out and Mix was granted a new trial after juror misconduct was uncovered. Mix has maintained his innocence throughout the process. Mix held that the deleted text messages were personal in nature and had almost nothing to do with the oil spill. Mix claims that he acknowledged that the texts were deleted and that he provided thousands of documents and emails to investigators about his team’s efforts to plug the well. Mix also states that he worked with a forensic investigator to recover the deleted text messages and turned them over to the Justice Department well before he was indicted.

Trials are still pending for Robert Kaluza and Donald Vidrine, the two BP well-site leaders who were aboard the Deepwater Horizon when it exploded. Both are charged with 11 counts of manslaughter for ignoring pressure warnings just before the explosion. David Rainey, a former BP vice president, was acquitted of obstruction charges in June related to testimony he gave to Congress concerning the spill. In 2012, BP settled its own criminal charges related to the spill, agreeing to pay over $4 billion in fines.

Keywords: energy litigation, Deepwater Horizon, BP, Justice Department, obstruction of justice

Courtney Scobie, Ajamie LLP, Houston, TX


October 28, 2015

Texas and West Virginia Sue Obama Administration over New Clean Air Regulations

Texas and West Virginia have filed a lawsuit on behalf of 24 states against the Obama administration over new regulations from the Environmental Protection Agency (EPA) that aim to reduce carbon emissions from power plants. The lawsuit claims that by enacting Rule 111(d), or the Clean Power Plan, the EPA and the administration are exceeding their legal authority under the Clean Air Act. The regulation aims to reduce power-plant carbon emissions by 32 percent by 2030 compared to 2005 standards. The regulation sets specific emissions goals for each state and provides states with multiple options on how to meet those goals. The lawsuit claims these standards will radically restructure the way electricity is produced and consumed throughout the country, resulting in dramatically higher electricity bills and less reliable service. In its press release about the lawsuit, the Texas Attorney General’s Office cites a report by the Electric Reliability Council of Texas that claims the new rules will result in a 16 percent increase in the cost of electricity by 2030, not including new transmission lines and other costs needed to comply with the regulations.

The petition for review is pending in the U.S. Court of Appeals for the D.C. Circuit and asks the court to overturn the law. The parties have also filed a motion for stay and seek expedited review of their petition for review. Texas and West Virginia previously tried to sue to block the law, but the court dismissed the suit on ripeness grounds because the regulation was merely a proposal at that point and had not gone into effect. The final regulation was published in the Federal Register on Friday, October 23, 2015, and the lawsuit was filed that same day. Joining Texas and West Virginia in the suit are Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana, Michigan, Missouri, Montana, Nebraska, New Jersey, North Carolina, Ohio, South Carolina, South Dakota, Utah, Wisconsin and Wyoming. New York and other states with more liberal governments are expected to file amicus briefs in support of the new EPA regulations.

Keywords: energy litigation, Clean Power Plan, Clean Air Act, carbon emissions, Texas, West Virginia

Courtney Scobie, Ajamie LLP, Houston, TX


October 15, 2015

EPA Proposes New Methane Regulations

The Environmental Protection Agency (EPA) on August 18, 2015, proposed new regulations aimed at reducing methane emissions from oil and gas operations. These proposed regulations are part of President Obama’s Climate Action Plan to cut methane emissions from the oil and gas industry by 40 to 45 percent from 2012 levels by 2025, and are intended to complement voluntary efforts like the EPA’s Methane Challenge Program.

The proposed regulations would require that operators:

  • capture natural gas from the completion of hydraulically fractured oil wells using “green completions”;
  • limit emissions from new and modified pneumatic pumps;
  • limit emissions from several types of equipment used at natural-gas-transmission compressor stations, including compressors and pneumatic controllers; and
  • find and repair leaks.

These proposed regulations would apply mostly to new and modified―but not existing―equipment, processes, and activities. And the proposed regulations for oil wells are the same as those issued by the EPA in 2012 for hydraulically fractured natural-gas wells.

The EPA will take comment and hold public hearings on the proposed regulations for 60 days after they are published in the Federal Registry.

Keywords: energy litigation, methane, Environmental Protection Agency, EPA, hydraulic fracturing, fracking, oil and gas, Climate Action Plan, Methane Challenge Program

Jack Edwards, Ajamie LLP, Houston, TX


September 30, 2015

Pipeline Company Wins $32.9 Million Judgment in Contract Case

On September 16, 2015, following a jury trial, a federal judge in Minnesota entered a $32,902,183 judgment in favor of the plaintiff, an interstate pipeline company, for the defendants’ breach of contract in the case of Great Lakes Gas Transmission Limited Partnership v. Essar Steel Minnesota LLC et al. The defendants had previously moved to dismiss for lack of jurisdiction, but the court denied the motion. Although the court found that diversity jurisdiction was lacking, it concluded that it had original and exclusive jurisdiction because the plaintiff’s requested relief (damages stemming from the defendants’ breach of contract) necessarily depended on the resolution of a substantial question of federal law.

Plaintiff Great Lakes Gas Transmission Limited Partnership is a regulated interstate natural-gas pipeline. Great Lakes’ partners are two Delaware corporations and a Delaware limited partnership. Great Lakes’ Delaware limited partnership partner comprises two more partners: another Delaware corporation and a publicly traded Delaware master limited partnership.

In 2006, Great Lakes entered into a contract with Minnesota Steel Industries. The contract was effective from July 1, 2009 to March 31, 2024, and obligated Great Lakes to deliver up to 55,000 dekatherms of natural gas per day to Essar for steal manufacturing. In exchange, Essar agreed to pay Great Lakes the “maximum reservation rates and charges on a monthly basis, pursuant to the applicable rate schedule reflected in Plaintiff’s gas tariff (the ‘Tariff’) on file with the Federal Energy Regulatory Commission.” The contract specifically stated that it “shall incorporate and in all respects be subject to the ‘General Terms and Conditions’ and the applicable Rate Schedule . . . set forth in [Great Lakes’] FERC Gas Tariff.” Defendant Essar Steel Minnesota LLC bought Minnesota Steel in 2007 and assumed liability for the contract.

In October 2009, three months after the contract began, Great Lakes brought suit claiming breach of contract and anticipatory repudiation and three other causes of action in an attempt to hold Essar’s foreign entities liable. Initially, Great Lakes asserted that the district court had subject-matter jurisdiction pursuant to 28 U.S.C. § 1332(a)(1) and (a)(2), as the amount in controversy exceeded $75,000 and all parties were diverse.

In the fall 2014, on the eve of trial on the appropriate discount rate to apply to Great Lakes’ damages, the defendants notified the court that they believed it lacked subject-matter jurisdiction because not all parties were diverse. Specifically, the defendants discovered that Great Lakes’ Delaware master limited partnership partner had hundreds, or maybe even thousands, of public unitholders. The defendants argued that if any one unitholder was a Minnesota citizen, complete diversity would be destroyed.

The defendants moved to dismiss, and the court agreed that diversity jurisdiction was lacking because Great Lakes could not show that its limited partner (the publicly traded Delaware master limited partnership) was completely diverse from the defendants. The court found that master limited partnerships should be treated as limited partnerships for purposes of diversity. This required Great Lakes to determine the citizenship of all its general and limited partners, including those limited partners who owned “common units” in the publicly traded Delaware master limited partnership, which it failed to do.

Nevertheless, the court denied the defendants’ motion to dismiss, and concluded that it had jurisdiction within a “small and special category” of “federal question” jurisdiction jurisprudence. Even though the court found that federal law did not create Great Lakes’ causes of action, either explicitly or implicitly, Great Lakes’ relief depended on the resolution of a substantial and disputed question of federal law—specifically, interpretation of the tariff incorporated into the parties’ agreement. The court found that federal tariffs are considered federal law, analogous to federal regulations. Without analyzing by the applicability of the tariff’s “Limitation of Liability,” “Force Majeure,” and “Remedies” clauses to the parties’ contract, the court could not determine whether the defendants had breached the contract. Thus, construing “the meaning of these three Tariff provisions was essential to determining whether [Great Lakes] was entitled to relief for [breach of contract]” and imbued the court with original jurisdiction under 28 U.S.C. § 1331 and § 1337, and exclusive jurisdiction under section 717u of the Natural Gas Act.

In light of the court's findings, for a natural-gas business entity to seek relief in federal court on breach-of-contract claim, it must determine whether its owners, partners, members, and in the case of a master limited partnership, every unitholder, is totally diverse from every defendant before filing. If that cannot be achieved, or the task is too labor-intensive, the business entity must analyze the contract at issue and determine whether its terms incorporate tariff rates, or any other question of federal law, that could provide the court with subject-matter jurisdiction.  

Keywords: energy litigation, pipeline, contract, federal question jurisdiction, federal jurisdiction, tariff, Federal Energy Regulatory Commission, FERC

Ryan Van Steenis, Ajamie LLP, Houston, TX


July 27, 2015

TX High Court Rules for Producer in Natural-Gas-Compression Case

On June 12, 2015, the Texas Supreme Court ruled for the producer of natural gas in the compression-cost case of Kachina Pipeline Co., Inc. v. Michael D. Lillis. It focused on the contract language in finding that a pipeline operator could not deduct compression costs from its payments to the producer, and was not entitled to a five-year extension of their agreement.

Kachina Pipeline Co., a natural-gas transporter, owns and operates a natural-gas gathering system and pipeline.  It entered into gas-purchase agreements in 2001 and 2005 with Michael Lillis, a natural-gas producer, to purchase his gas and transport it for resale. To successfully deliver gas, a producer must have sufficient pressure to overcome the working pressure in the gathering system. As such, the 2005 agreement provided that “neither party hereto shall be obligated to compress any gas” and, “[i]f Buyer installs compression to effect delivery of Seller’s gas, Buyer will deduct from proceeds payable to Seller hereunder a value equal to Buyer’s actual costs to install, repair, maintain and operate compression plus 20% of such costs to cover management, overhead and administration.”

At the time of the 2005 agreement, Kachina had a compression station, the Barker station, in place, but added compression equipment in 2007 to enhance operations. The agreement was set to expire on May 2010, when it would then continue month-to-month, but also provided that “Upon termination or cancellation of agreement, prior to Seller selling gas to a third party,” Kachina had the option to “continue the purchase of gas under the terms of agreement with such adjustments in the price hereunder as may be required to yield the same economic benefit to Seller, as would be derived from the proposed third party offer.” 

In 2008, Lillis entered into a separate purchase agreement and constructed his own pipeline. Around that time, he objected to the compression fees that Kachina had been deducting. Lillis then sued for (1) breach of contract for deducting the costs of compression, and (2) fraud alleging that Kachina had represented that it would release him from the 2005 agreement. Kachina counterclaimed for breach of contract, claiming that Lillis failed to notify it of the third-party offer, and sought a declaratory judgment that Kachina had exercised its option to extend the agreement for another five-year term.

The trial court granted summary judgment for Kachina, declaring that the 2005 agreement allowed Kachina to deduct the compression costs, and gave Kachina the option to extend the agreement for another five years. The court of appeals reversed, holding that the agreement prohibited the deductions and the five-year extension.

The Texas Supreme Court found that the 2005 agreement allowed Kachina to deduct only the costs of compression installed during the term of the agreement if required to overcome the working pressure in Kachina’s system. The compression-cost language (1) did not apply to pre-existing compression or any compression; (2) provided “only compression installed for the purpose of overcoming Kachina’s working pressure is installed to ‘effect delivery’”; and (3) applied only to delivery and not re-delivery. The Barker compression station and the compression added in 2007 were completed to increase the amount of gas gathered and transported, not to address underpressurization, and therefore the 2005 agreement prohibited the deductions.

Importantly, the court disagreed with the court of appeals that compression occurring on Kachina’s side of delivery point cannot “effect delivery.” The 2005 agreement allowed for a decrease in the working pressure to effect delivery, but did not address the compression’s location.

The court did reject Kachina’s argument that Lillis acquiesced to the marketing fees because Kachina had been deducting compression costs since at least 2003. The earlier deductions took place under the 2001 contract and not the current agreement and the language in the two contracts was different. “Both Lillis’s acquiescence and his testimony are evidence of subjective intent that we cannot consider to contradict the provision’s unambiguous legal meaning.”

Finally, the court found that the option right was not a right to a five-year extension, but only the right to continue to purchase gas under the agreement’s terms on a month-to-month basis. The agreement’s provision allowed adjustments for price based on a third-party offer, not other terms such as a five-year extension.

In line with its previous decisions, the Texas Supreme Court focused on the express terms of the contract. As such, natural-gas transporters and producers should carefully draft their gas-purchase agreements to ensure that the contract language protects their interests.

Keywords: energy litigation, Texas Supreme Court, gas purchase agreements, natural gas, compression fees, Kachina, Lillis

Christina A. Denmark, Steptoe & Johnson PLLC, Houston, TX


June 15, 2015

Texas Outlaws Local Fracking Bans

The Texas legislature recently wrapped up its 84th session, and the oil and gas industry won a major victory during the session—the passage and signing of a bill that effectively nullifies Denton’s recent fracking ban and forbids other municipalities from enacting similar regulations. On May 18, Governor Greg Abbott signed into law House Bill 40, which preempts local regulations of a wide variety of oil and gas drilling activities.

Energy companies and industry groups supported the bill while environmentalists and several local officials and municipal organizations opposed it. Energy groups felt that the bill was necessary to prevent inconsistent oil and gas regulations throughout the state. Opponents of the bill claim that the law will erode the authority of cities to regulate local health and safety. They also claim that the definition of “oil and gas operations” is too broad and will cause confusion as to what local governments can regulate.

The Texas House modified the bill somewhat to address some criticisms from the Texas Municipal League. Legislators added language listing areas that cities could still regulate, such as fire and emergency response, traffic, light, and noise, as long as the rules are “commercially reasonable.” The bill also allows cities to enact setbacks between drilling sites and certain buildings. The bill also contains a safe-harbor provision, which protects cities from legal challenges if their ordinances have not triggered litigation in the past five years.

The law is a direct response to the city of Denton’s recently passed fracking ban and immediately went into effect, as it was passed by more than a two-thirds majority in both chambers. Shortly after the bill was passed, Vantage Energy notified the city that it intended to resume its fracking operations within the city limits and has since done so. City officials have not challenged the new law in court, but the city council has demurred on completely removing the regulation from the city’s ordinances to give city officials and activists more time to research the city’s ability to modify the regulation to incorporate the new law’s restrictions.

Keywords: energy litigation, Texas, fracking, Texas Denton, preemption, municipal regulations, Abbott, Vantage Energy

Courtney Scobie, Ajamie LLP, Houston, TX


March 18, 2015

Nebraska Legislator Proposes Repeal of Eminent Domain Law

State senator Ernie Chambers of Omaha has introduced a bill that would repeal the eminent domain law that Nebraska passed in 2012 to facilitate the building of the Keystone XL pipeline. Legislative Bill 473 would repeal the Major Oil Pipeline Siting Act, which granted the governor and the Department of Environmental Quality the power to approve the routing of pipelines through Nebraska. This law allowed TransCanada, the builder of Keystone XL, to bypass the Public Service Commission, which reviews most pipeline proposals. The Department of Environmental Quality is overseen by the governor. Former Governor Dave Heineman, a Republican, had been an outspoken supporter of the Keystone XL pipeline while in office. He approved Keystone’s siting within Nebraska in 2012 shortly after this law passed.

Sen. Chambers said that Nebraska landowners did not ask him to introduce this bill. He did so because he wanted to give them a voice in future pipeline projects. LB 473 would not apply retroactively, so it would no impact on the development of Keystone XL.

In January, the Nebraska Supreme Court upheld the pipeline siting law but only by default. Four members of the court concluded that the law was unconstitutional and violated fundamental limits on government power. But the Nebraska constitution requires a supermajority to strike down legislation on constitutional grounds. The court needed five votes to formally uphold or strike down the law, but it had only four, so the legislation had to stand by default. The other three judges on the panel felt that the plaintiffs did not have standing to sue and refused to issue a ruling on the merits. The court’s decision paved the way for the U.S. Congress to pass legislation authorizing the Keystone XL pipeline. President Obama recently vetoed that legislation. He is waiting on a State Department report before making a decision on the pipeline.

The Nebraska legislature held a hearing on the proposed bill on March 11, 2015, which drew dozens of landowners to the state capitol both in support and in protest of the bill. The current legislative session ends June 5, 2015.

Keywords: energy litigation, Nebraska, eminent domain, Keystone XL, TransCanada

Courtney Scobie, Ajamie LLP, Houston, TX


March 16, 2015

Texas Legislature Considering Blocking Cities from Banning Fracking

Texas lawmakers have introduced several bills during the state’s current legislative session that would make it difficult, if not impossible, for municipalities to pass outright bans on hydraulic fracturing, or fracking. The bills were drafted and introduced in response to the city of Denton passing a ban on fracking within the city limits during the November 2014 elections.

Before the legislative session began, state representative Phil King of Weatherford, a small city located over the Barnett Shale, filed two bills that would limit such municipal regulations. House Bill (HB) 539 requires cities to determine how much money certain drilling regulations would cost the state, the local school districts, and other government entities in terms of lost royalties, tax revenues, and fees. Such an assessment would be required before the city votes on a drilling regulation. If a drilling regulation went into effect, then the city would have to reimburse those entities for the revenue shortfalls caused by the regulation.

King also introduced HB 540, which would require all referenda and initiative petitions to go before the Texas attorney general for review before being placed on a city ballot. The attorney general would determine whether the proposal violated the state or federal constitution and whether it would result in a government taking of minerals requiring compensation. Litigation currently pending against the city of Denton over its fracking ban alleges that the ban both violates the Texas constitution and constitutes a government taking.

On March 11, 2015, state representative Drew Darby of San Angelo, located in the heart of the Eagle Ford Shale, introduced HB 40, by far the toughest bill on municipal regulation of fracking. This bill would grant all authority for regulating the oil and gas industry and their activities to the Texas Railroad Commission and make clear that state law preempts any regulation by cities and counties related to oil and gas. The bill does allow cities to regulate surface activities, through noise, light, traffic, and setback ordinances, but only as long as they are commercially reasonable and do not prohibit drilling operations. The bill is not retroactive, so it would not overturn the Denton fracking ban. A companion bill, Senate Bill (SB) 1165, was filed by state senator Troy Fraser of Horseshoe Bay, who also serves as chairman of the Senate Natural Resources and Economic Development Committee.

Darby also introduced HB 2855, which would force cities who want to adopt drilling ordinances to go to the Railroad Commission for review of the ordinance. Decisions by the commission on such ordinances could not be appealed.

The current legislative session ends June 1, 2015. Barring a special session, action on these bills should take place before then.

Keywords: energy litigation, Texas, fracking, Texas Railroad Commission, Denton, preemption, municipal regulations

Courtney Scobie, Ajamie LLP, Houston, TX


March 12, 2015

PA Environmental Regulators Propose New Drilling Rules

On March 9, 2015, the Pennsylvania Department of Environmental Protection released a revised rulemaking proposal that would toughen drilling regulations for shale-gas producers. The proposed regulations apply to both conventional and nonconventional wells, and include expanding the review process for proposed drilling sites near schools, playgrounds, and wetlands; requiring operators to demonstrate that streams and wetlands would be protected if the edge of a well pad is within 100 feet of the resource; requiring centralized wastewater impoundments to be permitted through more appropriate residual waste regulations; creating standards for noise control and mitigation; and requiring electronic filing of notices and reports.

The proposed regulations on impoundment of wastewater were the main area of concern for the department and were likely prompted by large fines the department has levied against operators in the region. In 2014, the department levied fines of over $4 million each against Fort Worth-based Range Resources and Pittsburgh-based EQT Corp. due to leaks from impoundment pools that the companies were maintaining. As part of its settlement with the state, Range agreed to upgrade its impoundments with liners and leak-detection equipment on par with what landfill operators must use. This is the standard the department would like to employ for all producers. Additionally, an impoundment would need to be shut down in three years or comply with these tougher standards. Finally, if a gas well pollutes nearby water supplies, the new rules would require that the operator restore the water quality to a higher level.

This new round of proposals will be subject to a 30-day comment period beginning April 4, 2015. The department initially released its proposed drilling regulations for public comment in December 2013 and received over 24,000 comments. However, state lawmakers asked the department to further revise the rules to write separate rules for traditional, shallow oil and gas operations and for deeper, unconventional extraction methods, leading to these revised rules.

Keywords: energy litigation, Pennsylvania, Pennsylvania Department of Environmental Protection, DEP, shale gas, fracking, wastewater impoundment

Courtney Scobie, Ajamie LLP, Houston, TX


March 10, 2015

Obama Vetoes Keystone XL Pipeline Bill; Senate Fails to Override

Fracking supporters scored a victory on February 17, 2015, when the Ohio Supreme Court ruled that a city ordinance aimed at limiting fracking operations cannot be used to circumvent the state's authority over oil and gas drilling. Specifically, the court held in State ex rel. Morrison v. Beck Energy Corp., No. 2015-Ohio-485, that because the state had granted a permit to a drilling company under a state regulatory scheme governing oil and gas operations, the municipality could not pass ordinances setting forth additional restrictions.

The case arises out of a dispute over a permit that Beck Energy Corp. obtained from the state of Ohio to drill an oil and gas well within the Munroe Falls city limits. Beck Energy obtained its permit pursuant to an Ohio statute that (1) provided uniform statewide regulation of oil and gas production; (2) gave a state agency the sole and exclusive authority to regulate the permitting, location, and spacing of oil and gas wells; and (3) required parties seeking to drill a new well to obtain a state permit. Soon after Beck Energy began drilling, however, Munroe Falls filed a lawsuit seeking an injunction to prohibit the drilling. The city argued that Beck Energy violated city ordinances requiring the company to meet certain conditions before it began drilling.

The trial court granted the city’s request for injunctive relief and prohibited Beck Energy from drilling until it complied with the city’s ordinances. The court of appeals reversed, holding that the state statute governing drilling operations prohibited the city from enforcing its ordinances. Munroe Falls sought relief from the Ohio Supreme Court.

The main issue before the Ohio Supreme Court was whether the state’s Home Rule Amendment allowed Munroe Falls to enforce its own permitting scheme on top of the state’s permitting system. The Ohio constitution’s Home Rule Amendment gives local municipalities the broadest possible powers of self-government in connection with all matters that are strictly local and do not infringe on matters that are of a statewide nature. But the amendment provides that a municipal ordinance must yield to a state law if (1) the municipality’s ordinance represents an exercise of police power, rather than of local self-government; (2) the statute is a general law; and (3) the ordinance conflicts with the state statute.

After analyzing these three factors, the Ohio Supreme Court concluded that Munroe Falls’ ordinances had to yield to the state statute. The city did not dispute—and the court agreed—that its ordinances amounted to an exercise of police power. Likewise, the court determined that the Ohio statute constituted a general law, as the law operated uniformly throughout the state.

The court then considered whether the city’s ordinances and the state statute conflicted. The court noted that a municipal-licensing ordinance conflicts with a state-licensing scheme if it restricts an activity that the state license permits. In this case, the court found that Munroe Falls’ ordinances conflicted with the state statute governing drilling in two ways. First, the ordinances prohibited what the state statute allowed: state-licensed drilling within the city’s limits. Second, the court held that the ordinances conflicted with the state statute because the state legislature intended to preempt local regulation on the subject. Thus, the court ruled that the state statute and the Home Rule Amendment did not allow for the double licensing requirements in Munroe Falls’ ordinances.

While this case will have a direct impact on drilling operations in Ohio, it also may impact the ability of local municipalities throughout the country to place restrictions on oil and gas drilling operations. The case supports the notion that state legislatures can prohibit municipalities from placing additional restrictions on drilling by creating a state regulatory scheme governing such operations. State legislatures therefore may pass legislation aimed at circumventing local restrictions on drilling operations. Additionally, energy companies likely will rely on this decision to argue that courts should strike down restrictions that municipalities have already put in place. The effectiveness of these arguments likely will depend on the current statutory scheme in each specific state.

Keywords: energy litigation, fracking, Ohio, preemption, Home Rule Amendment, Munroe Falls, Beck Energy Corporation

Courtney Scobie, Ajamie LLP, Houston, TX


March 2, 2015

Ohio Supreme Court Prohibits Municipality from Restricting Fracking

Fracking supporters scored a victory on February 17, 2015, when the Ohio Supreme Court ruled that a city ordinance aimed at limiting fracking operations cannot be used to circumvent the state's authority over oil and gas drilling. Specifically, the court held in State ex rel. Morrison v. Beck Energy Corp., No. 2015-Ohio-485, that because the state had granted a permit to a drilling company under a state regulatory scheme governing oil and gas operations, the municipality could not pass ordinances setting forth additional restrictions.

The case arises out of a dispute over a permit that Beck Energy Corp. obtained from the state of Ohio to drill an oil and gas well within the Munroe Falls city limits. Beck Energy obtained its permit pursuant to an Ohio statute that (1) provided uniform statewide regulation of oil and gas production; (2) gave a state agency the sole and exclusive authority to regulate the permitting, location, and spacing of oil and gas wells; and (3) required parties seeking to drill a new well to obtain a state permit. Soon after Beck Energy began drilling, however, Munroe Falls filed a lawsuit seeking an injunction to prohibit the drilling. The city argued that Beck Energy violated city ordinances requiring the company to meet certain conditions before it began drilling.

The trial court granted the city’s request for injunctive relief and prohibited Beck Energy from drilling until it complied with the city’s ordinances. The court of appeals reversed, holding that the state statute governing drilling operations prohibited the city from enforcing its ordinances. Munroe Falls sought relief from the Ohio Supreme Court.

The main issue before the Ohio Supreme Court was whether the state’s Home Rule Amendment allowed Munroe Falls to enforce its own permitting scheme on top of the state’s permitting system. The Ohio constitution’s Home Rule Amendment gives local municipalities the broadest possible powers of self-government in connection with all matters that are strictly local and do not infringe on matters that are of a statewide nature. But the amendment provides that a municipal ordinance must yield to a state law if (1) the municipality’s ordinance represents an exercise of police power, rather than of local self-government; (2) the statute is a general law; and (3) the ordinance conflicts with the state statute.

After analyzing these three factors, the Ohio Supreme Court concluded that Munroe Falls’ ordinances had to yield to the state statute. The city did not dispute—and the court agreed—that its ordinances amounted to an exercise of police power. Likewise, the court determined that the Ohio statute constituted a general law, as the law operated uniformly throughout the state.

The court then considered whether the city’s ordinances and the state statute conflicted. The court noted that a municipal-licensing ordinance conflicts with a state-licensing scheme if it restricts an activity that the state license permits. In this case, the court found that Munroe Falls’ ordinances conflicted with the state statute governing drilling in two ways. First, the ordinances prohibited what the state statute allowed: state-licensed drilling within the city’s limits. Second, the court held that the ordinances conflicted with the state statute because the state legislature intended to preempt local regulation on the subject. Thus, the court ruled that the state statute and the Home Rule Amendment did not allow for the double licensing requirements in Munroe Falls’ ordinances.

While this case will have a direct impact on drilling operations in Ohio, it also may impact the ability of local municipalities throughout the country to place restrictions on oil and gas drilling operations. The case supports the notion that state legislatures can prohibit municipalities from placing additional restrictions on drilling by creating a state regulatory scheme governing such operations. State legislatures therefore may pass legislation aimed at circumventing local restrictions on drilling operations. Additionally, energy companies likely will rely on this decision to argue that courts should strike down restrictions that municipalities have already put in place. The effectiveness of these arguments likely will depend on the current statutory scheme in each specific state.

Keywords: energy litigation, fracking, Ohio, preemption, Home Rule Amendment, Munroe Falls, Beck Energy Corporation

Noah Nadler, Haynes and Boone LLP, Dallas, TX


March 2, 2015

TX High Court Declines to Address Trespass Issue in Wastewater Migration Case

On February 6, 2015, the Texas Supreme Court issued a decision in Environmental Processing Systems, L.C. v. FPL Farming Ltd. Although landowners and energy companies were hoping for a definitive answer on subsurface trespass, the court sidestepped the issue.

FPL Farming Ltd. owned surface and non-mineral subsurface rights to land, which it used for rice farming. Environmental Processing Systems, L.C. leased a small, adjacent property where it operated a wastewater disposal facility, pursuant to a permit from the Texas Natural Resource Conservation Commission (now known as Texas Commission on Environmental Quality (TCEQ)). FPL sued for injunctive relief alleging, among other things, trespass, and alleged EPS trespassed when wastewater migrated onto its property. The jury rendered a defense verdict finding in favor of EPS.

Through a series of appeals, this case came before the court on the narrow issue of whether the jury instruction properly included lack of consent as an element of a trespass cause of action that a plaintiff must prove. The Supreme Court found the jury charge provided the well-established definition of trespass, including lack of consent or authorization as an element of the cause of action. The court reversed the Court of Appeals for the Ninth District and reinstated the trial court’s judgment that FPL take nothing.

Importantly, the court expressly declined to rule on “whether Texas law recognizes a trespass cause of action for deep subsurface water migration.” Therefore, we can expect additional lawsuits from future plaintiffs claiming neighboring wastewater injections constitute trespass.

Keywords: energy litigation, trespass, consent, surface rights, subsurface rights subsurface trespass, subsurface water migration, wastewater disposal, wastewater injections, Texas Commission on Environmental Quality, TCEQ

Christina A. Denmark, Steptoe & Johnson PLLC, Houston, TX


March 2, 2015

TX High Court Decision a Cautionary Tale for Oil and Gas Operators

On January 30, 2015, the Texas Supreme Court issued its first major decision of the year impacting the oil and gas industry. The court found in Hooks v. Samson Lone Star Limited Partnershipthat (1) the fraudulent-concealment tolling doctrine tolled the statute of limitations allowing a mineral owner to bring a breach-of-contract claim based on an oil and gas operator’s misrepresentation in a publicly filed document; and (2) the oil and gas operator breached the most-favored-nations clause by paying higher royalties on a nearby lease.

Charles G. Hooks and other plaintiffs sued Samson Lone Star Limited Partnership, now known as Samson Lone Star, LLC, in 2007 for breach of contract, failure to pay royalties, fraud, fraudulent inducement, and statutory fraud for misrepresenting a well’s bottom-hole location, which resulted in Hooks not being paid royalties based on an “offset obligation” clause in the lease. Samson asked Hooks to amend the subject lease in 2001 to pool into a unit associated with a new well that fell within the protected zone identified in the lease. Samson, however, provided Hooks with a plat created by its landman that incorrectly placed the well’s bottom hole outside of the protected zone. This incorrect plat was also filed with the Texas Railroad Commission.

Samson argued the fraudulent-concealment tolling doctrine should not apply, therefore barring Hooks’s claim under the statute of limitations because a person acting with reasonable diligence would have discovered the true location of the well’s bottom hole in 2000 or 2001 based on older Railroad Commission records containing (1) a directional survey with an attached plat correctly placing the bottom hole’s location; and (2) plans that revealed that Samson originally intended the well to bottom within the boundary. At trial, a jury found for Hooks and awarded more than $20 million in damages. The appellate court reversed, finding that the claim was not timely brought.

The Texas Supreme Court reversed and found that Hooks acted with reasonable diligence. Although reasonable diligence would require one to examine readily available information in the public record, the most recent Railroad Commission filing falsely conveyed that the well had been completed outside the protected zone. The court found that Hooks did not need to double-check the more recent filings against earlier filings because “fraud vitiates whatever it touches.”

The court also found that Samson breached the most-favored-nations clause when it paid a higher royalty to the State of Texas. Samson argued that it paid 25 percent royalties to both parties, but was the result of an increase in the state’s “unit royalty interest” (used to induce the state to allow pooling), which resulted in an increase in the state’s allocation of production from the unit. Under the recent decision in Key Operating & Equip., Inc. v. Hegar, 435 S.W.3d 794, 798–99 (Tex 2014), production anywhere on a pooled unit is treated as production on every single tract. Therefore, the state’s grant of a royalty to the state on production from the unit meant that Samson increased the state’s 25 percent royalty on production from its tract.

In sum, oil and gas operators should now be even more careful to ensure that their regulatory filings are correct and consistent. Even though this decision is narrow, it is possible that there will be an increase of mineral-rights owners bringing suit arguing that any inaccuracy taints the public records with fraud. This is also an important reminder for oil-and-gas operators to carefully negotiate lease terms and to think proactively about the impact of including terms in a lease.

Keywords: energy litigation, fraudulent concealment, tolling, most favored nations clause, Texas Railroad commission, offset obligation, reasonable diligence

Christina A. Denmark, Steptoe & Johnson PLLC, Houston, TX


February 25, 2015

Interior Department Proposes Drilling off Atlantic Coast

The Obama administration on January 27, 2015, unveiled an Outer Continental Shelf Oil and Gas Leasing Draft Proposed Program to sell offshore drilling leases in Atlantic and Arctic waters, garnering criticism from industry supporters and environmentalists alike. The current plan governing leasing of federal land expires in August 2017, and the new plan by the Interior Department’s Bureau of Ocean Energy Management (BOEM) would cover the 2017–22 timeframe.

The BOEM’s draft leasing program would offer sales for drilling leases off the shores of certain Atlantic states, an activity not seen since about 1984. The broadly outlined program would offer 14 sales of offshore drilling leases: 10 in the Gulf of Mexico, three off the coast of Alaska, and one off the coasts of Virginia, North Carolina, South Carolina, and Georgia. The possible Alaska and Atlantic auctions would likely be scheduled near the end of the 2017–22 timeframe to allow companies to properly research the new territory prior to committing operational resources.

The draft program makes certain environmental considerations, protecting the northeastern part of Florida’s coast. It also designates 9.8 million acres of the Beaufort and Chukchi seas in Alaska as off-limits to future oil and gas leaning, to create a 25-mile coastal buffer in the Chukchi Sea to protect the Chuckchi Ahann Shoal area, which is home to a high concentration of marine life. Four of the five Arctic areas affected by Obama’s announcement were already excluded from leasing under the government’s current leasing plan.

The program is subject to a number of public-approval hearings, but does not require congressional approval.

Keywords: energy litigation, drilling, Atlantic coast, Alaska, Interior Department, Bureau of Ocean Energy Management, BOEM

Kristen W. McDanald, Beirne, Maynard & Parsons, L.L.P., Houston, TX


February 6, 2015

Federal Court Rules Local Fracking Ban Unconstitutional

A federal district court recently ruled that a county ordinance banning hydraulic fracturing (fracking) and drilling violates both New Mexico state law and the U.S. Constitution. On January 19, 2015, the U.S. District Court for the District of New Mexico issued a 114-page opinion overturning a ban on fracking and drilling in Mora County, a rural area northeast of Santa Fe. After county voters passed the ordinance in 2013, SWEPI LP, a subsidiary of Royal Dutch Shell PLC, filed suit in 2014 challenging the legality of the measure.

Judge James Browning ruled, at the outset, that the ordinance violated the Supremacy Clause of the U.S. Constitution by attempting to discard protected rights of corporations. In this regard, the ordinance expressly provided that oil and gas companies “shall not have the rights of 'persons' afforded by the United States and New Mexico Constitutions,” including due process and First Amendment rights. “The Defendants' argument that corporations should not be granted constitutional rights, or that corporate rights should be subservient to people's rights, are arguments that are best made before the Supreme Court—the only court that can overrule Supreme Court precedent—rather than a district court,” Judge Browning held.

Judge Browning also found that the ordinance is “doubly invalidated” insofar as it violates rights guaranteed by the First Amendment. His decision held that the ordinance is substantially overly broad and could thus be invalidated on its face.

Several other localities throughout the country, notably, have similar “community bills of rights” that purport to restrict the rights of corporations.

Lastly, Judge Browning concluded that the ordinance conflicts with New Mexico state law and is invalid under principles of conflict preemption. “Moreover, the Ordinance's ban conflicts with state law by creating waste and not recognizing correlative property rights, which the [state] Oil and Gas Act prohibits," the judge ruled.

Judge Browning’s decision is the first major federal-court consideration of local drilling bans. If challenged, the 10th U.S. Circuit Court of Appeals will hear the appeal.

State courts in New York and Pennsylvania have affirmed some local-government control over oil and gas development, while courts in Colorado have rejected local prohibitions. The Ohio Supreme Court is still considering the issue.

Tyler L. Weidlich, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, New Orleans, LA


January 28, 2015

Three Shell Affiliates Fined by EPA for Violating Clean Air Act

Three affiliates of Shell Oil Co., the American subsidiary of Royal Dutch Shell, have agreed to pay a $900,000 civil penalty to the Environmental Protection Agency (EPA) for violations of the Clean Air Act (CAA). Motiva Enterprises LLC, Equilon Enterprises LLC (doing business as Shell Oil Products US), and Deer Park Refining Limited Partnership were subject to an EPA enforcement action for alleged CAA violations that included distributing gasoline with elevated levels of ethanol; violations of gasoline volatility and sulfur standards; violations of diesel sulfur standards; and several recordkeeping, reporting, sampling, and testing violations. With the payment of the civil penalty, the affiliates have settled and resolved the enforcement action. The violations were identified by various sources, including the EPA itself, its partner organizations, consumer complaints, and Shell’s own self-reporting.

In its enforcement action, the EPA alleged the following specific violations of the CAA:

  • Shell distributed approximately 700,000 gallons of gasoline from its Motiva-operated terminal in Sewaren, New Jersey, that contained elevated levels of ethanol. The Reformulated Gasoline Survey Association, a consortium of refiners, blenders, importers, and distributors of cleaner-burning fuel, identified the problem after surveying Shell retail stations in Irvington, New Jersey, and Staten Island, New York. It reported the violations to the EPA.
  • Shell sold over 4.2 million gallons of gasoline that exceeded the Reid Vapor Pressure level, a fuel standard for gasoline that helps control ground-level ozone during the summer months. Higher-volatility gasoline results in increased emissions of volatile organic chemicals, which contributes to the formation of ground level ozone.
  • Shell sold mislabeled diesel fuel at two gas stations in northern Virginia. EPA inspectors discovered that Shell was selling gasoline labeled as ultra-low sulfur diesel fuel when its sulfur content was actually at the levels for low sulfur fuel diesel. The inspections came about in part because of a consumer complaint made directly to the EPA.
  • Shell failed to follow various protocols for sampling, testing, reporting, and recordkeeping requirements that help ensure compliance with federal fuel standards. Shell self-reported these violations.

The EPA under the Obama administration has been fairly aggressive in regulating fuel emission standards to reduce ozone levels and pollution. The Obama administration has issued multiple proposals for increased fuel efficiency standards for motor vehicles, and in November 2014, the EPA proposed strengthening the National Ambient Air Quality Standards (NAAQS) for ground-level ozone.

You can read more about Shell’s settlement on the EPA’s website.

Keywords: energy litigation, Environmental Protection Agency, EPA, Clean Air Act, CAA, Shell Oil

Courtney Scobie, Ajamie LLP, Houston, TX


December 23, 2014

West Virginia Opens Ohio River to Fracking

West Virginia has announced that it is allowing companies to seek permits to drill beneath the Ohio River as a move to increase state revenue. Indeed, an area of approximately 12 miles beneath the Ohio River near southwestern Ohio has already been awarded to oil and gas companies with requests outstanding for an additional 9 miles. The initial revenues to the state could be as high as $9,000 an acre with subsequent royalties around 20 percent.

Governor Earl Tomblin, in an attempt to assuage environmental concerns, emphasized that West Virginia’s regulatory bodies, including the West Virginia Department of Environmental Protection and the Division of Natural Resources, will oversee the drilling and production operations. Not surprisingly, environmental activists are not satisfied with the governor’s assurances and have expressed concern that hydraulic fracturing will pollute the Ohio River. As the largest tributary of the Mississippi River, the Ohio River is the source of drinking water for over three million people across numerous states. The Ohio River Valley Water Sanitation Commission, an agency that monitors the water quality on the Ohio River, has not yet taken a position on the proposed operations.

One particular reason environmentalists and West Virginians are expressing concern and distrust of the government's plan is the chemical spill in January 2014 that left roughly 300,000 people in southern West Virginia without clean drinking water for days. And, while West Virginia is only permitting companies to hydraulically fracture on that state’s side of the Ohio River, citizens of Ohio are concerned they could potentially suffer environmental consequences without the economic benefits from the oil and gas operations. The dispute reflects not only the general controversy that surrounds hydraulic fracturing but also the homegrown problems a state like West Virginia faces in regards to the development of its minerals.

Keywords: energy litigation, hydraulic fracturing, fracking, West Virginia, Ohio, Ohio River

Patrick Willis, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, New Orleans, LA


December 22, 2014

New York to Ban Fracking

New York is the latest state to take a closer look at fracking and whether it is worth the risks to continue the drilling technique. On December 17, 2014, after conducting environmental and health reviews, New York’s environmental commissioner Joe Martens and acting health commissioner Howard Zucker recommended a ban on hydraulic fracturing of natural gas in the state. The 184-page report issued by New York’s Department of Health cites significant uncertainties with respect to adverse health issues and doubtful economic benefits in support of the ban.

Specifically, the report concluded that there were seven main potential impacts associated with fracking that supported a ban: (1) air impacts that could affect respiratory health; (2) climate-change impacts; (3) drinking-water impacts; (4) soil and water contamination; (5) surface-water contamination; (6) earthquakes; and (7) community impacts from “boom-town” economic effects. The report also cited data that linked fracking to low birth weight, some congenital birth defects, and various health complaints, including skin, eye, and throat irritations, headaches, abdominal pain, difficulty breathing, and anxiety and stress. In short, the report determined that there was insufficient long-term data to adequately address the concerns about fracking.

Governor Andrew Cuomo deferred to this recommendation and announced last week that fracking would be banned in New York. Vermont became the first state to ban fracking in 2012, and was the only state to issue an across-the-board ban until New York’s announcement. The official ban in New York will likely take effect in early 2015. It follows over six years of a lengthy moratorium on fracking that began with an official moratorium imposed by then-Governor David Paterson and the legislature. After the first official moratorium ended, the environmental and health reviews began, imposing a de-facto moratorium that was reinforced by subsequent legislative votes in favor of three subsequent moratoriums continuing through the present time.

New York sits on top of part of the Marcellus Shale. The U.S. Geological Survey has predicted that the Marcellus Shale holds enough reserves to maintain the country’s current energy needs for more than three years.

Although Governor Cuomo predicted that New York may face lawsuits from interested industry members, many oil and gas companies have already given up leases in New York. Likewise, landowners who hoped to sell drilling leases could sue the state. But because most drillers have already left the state, it would be difficult to prove that their rights were restricted by the ban.

Keywords: energy litigation, hydraulic fracturing, fracking, fracking ban, New York, Vermont

Kara Stauffer Philbin, Fernelius Alvarez PLLC, Houston, TX


December 12, 2014

Review of Deepwater Horizon Settlement Rejected by Supreme Court

After over a year of fighting, BP suffered a significant blow on December 8 when the U.S. Supreme Court denied its request for review of its 2012 settlement stemming from the 2010 Deepwater Horizon spill.

BP had agreed to one of the largest class-action settlements in U.S. history in 2012, allowing those who claimed harm from the tragic oil spill to join in a class-action settlement to recover economic losses. But after believing claims were illegitimately paid, BP sought review of the settlement. Specifically, BP challenged the scope of who could join in the multibillion dollar settlement, claiming the administration of the settlement fund was paying money to claimants who could not tie their financial harm to the spill. BP claimed that about $600 million was paid to claimants not living in the Gulf Coast area and engaged in businesses with no logical connection to the spill.

After both a federal district court in New Orleans and the Fifth Circuit upheld the settlement, BP petitioned the Supreme Court in August 2014 seeking to change the settlement terms to require claimants to show their damages were caused by BP's actions. BP argued that upholding approval of the settlement would result in expanding the potential for "sprawling, disjointed classes" that in turn would endanger the willingness of defendants to enter into settlement agreements. According to Stephen Herman and James Roy, co-lead attorneys representing claimants, the denial equates to a ruling "that BP must stand by its word and honor its contract." BP, on the other hand, remains concerned that unjustified awards were given to claimants who suffered no injury, and promises to"continue to advocate for the investigation of suspicious or implausible claims" in hopes that "further exploitation" would be prevented.

While some analysts predict that BP may further challenge the settlement and the practices of the claims' administration office, it is more likely that these issues will be limited to less substantial matters, such as accounting guidelines. BP will also need to focus on the final phase of the civil trial relating to the Deepwater Horizon spill, which will determine fines for BP and its drilling partners. Based on U.S. District Judge Carl Barbier's ruling that BP was "grossly negligent," BP faces up to $18 billion in fines.

The spill claims office began issuing payments on July 31, 2012, and has continued to review, process, and pay claims according to the settlement agreement during BP's appeals. According to published statistics, over 291,000 claims have been submitted through December 10, 2014. Over half of these claims have been for business or individual economic loss (52.6 percent). The settlement program has paid out over $4.3 billion, with $1.1 billion going toward the Seafood Compensation Program. The rejection of BP's appeal means that the claims office can now establish a final date to file a claim.

Keywords: energy litigation, BP, Deepwater Horizon, oil spill, Gulf Coast, economic loss

Kara Stauffer Philbin, Fernelius Alvarez PLLC, Houston, TX


November 17, 2014

Denton Votes to Ban Fracking, Faces Litigation Almost Immediately

Denton, a small north Texas city sitting on the edge of the Barnett Shale, recently passed a ballot measure banning hydraulic fracturing (fracking) within the city limits. On November 5, 2014, the day after the measure passed, the city was hit with two different lawsuits.

Jerry Patterson, Texas’s outgoing land commissioner, and the Texas General Land Office (GLO), filed suit in Travis County, seeking a declaratory judgment that state law preempts Denton’s ban and that the ban is inapplicable to state-owned lands. The GLO also seeks a permanent injunction prohibiting Denton from enforcing the ban. The suit claims that only the Texas Railroad Commission (TRC) has the authority to ban fracking and that Denton’s ban infringes on the GLO’s responsibility to manage oil and gas leases for the benefit of Texas public schools.

The Texas Oil and Gas Association (TXOGA) filed suit in Denton County, also seeking a declaratory judgment that state law preempts the ban, and seeking an injunction prohibiting enforcement of the ban. TXOGA is a statewide trade association that represents the interests of various oil and gas companies doing business in Texas. TXOGA claims that it has standing to sue over the ban because it is seeking a declaration that the ban is unconstitutional and unenforceable, relief that applies to all entities subject to the ordinance. So, according to the TXOGA, it is unnecessary for individual members to participate in the suit. TXOGA also seeks an expedited briefing schedule, as it has no plans to conduct discovery and instead will file a motion for summary judgment imminently.

The ban was passed with 59 percent of Denton voters approving the measure. It passed despite opponents out-fundraising the ban’s supporters by nearly a 10–1 margin. However, litigation against the ban was expected. During the campaign, opponents warned repeatedly that several entities would likely sue the city for interfering with state law. Denton is a home rule city with the authority to pass health and safety regulations, but the GLO, TXOGA, and others opposed to the ban claimed that drilling regulations must come from the state legislature and statewide agencies such as the TRC and the Texas Commission on Environmental Quality.

The TRC has expressed disappointment over the ban, citing how beneficial fracking has been to the nation’s economy and claiming that the ban was based on flawed science. Indeed, Christi Craddick, the chair of the TRC, says that the TRC will continue to issue permits for drilling in Denton. Thus, while the ban enjoys widespread support in Denton, its future is uncertain, given the various challenges it faces both in the courts and at state agencies.

Keywords: energy litigation, Denton, Texas, hydraulic fracturing, fracking, Texas Land Commissioner, Texas General Land Office, Texas Railroad Commission, preemption, home rule

Courtney Scobie, Ajamie LLP, Houston, TX


October 17, 2014

Denton Could Become First Texas City to Ban Fracking

Residents of the city of Denton, Texas, will vote on a ballot initiative in November 2014 that aims to ban hydraulic fracturing (fracking) within the city limits. If the initiative passes, Denton would become the first city in Texas to ban fracking. A ban would also likely spur a flurry of litigation by oil and gas developers and legislative action at the state level to overturn the ban.

Denton is a city of about 120,000 residents located about 40 miles north of Dallas. A bedroom community for people working in the Dallas-Fort Worth Metroplex, Denton sits on the edge of the gas-rich Barnett Shale, one of the country’s largest natural-gas reserves, and has over 270 natural-gas wells. This geology has made the Denton area popular for fracking in recent years.

The ballot initiative comes after a long battle between residents and drilling companies over natural-gas wells in Denton, with the city government struggling to address their competing interests. The city commissioned a task force in 2011 to consider potential fracking regulations. The city council later passed an ordinance in January 2013 that increased the required setback between a drilling site and homes, schools, parks, and hospitals from 1,000 feet to 1,200 feet. In October 2013, the city filed a lawsuit in state court against EagleRidge Energy, a Dallas-based drilling company, for drilling two wells without permission and drilling too close to a housing development. The city withdrew the lawsuit after the court refused to grant an injunction against EagleRidge. A group of Denton-area residents then filed a separate lawsuit against EagleRidge, claiming the operations were a public nuisance. Both Denton and the residents later entered standstill agreements with EagleRidge. While the standstill agreements have expired, the city has imposed a general moratorium on fracking. In September 2014, shortly after the city extended the moratorium to January 20, 2015, a group of royalty owners sued the City of Denton over the moratorium. Meanwhile, the initiative to ban fracking wound up on the November ballot after the city council voted down a similar proposed ordinance in July 2014. Should Denton voters pass the ban, the law would go into effect on January 21, 2015.

There is considerable legal uncertainty surrounding the ballot initiative and efforts to regulate fracking in Texas generally. The energy industry is important to Texas’s economy, and state law calls for mineral resources to be “fully and effectively exploited.” But the Texas Railroad Commission has the authority to regulate the oil and gas industry and can pass regulations it deems necessary. The state has a long history of regulating the drilling industry, including well integrity, pipeline safety, and air and water impact. Meanwhile, local governments such as  Denton generally have the authority to regulate health and safety matters, and the state has allowed city governments to regulate mineral exploration and development. Thus, Texas cities have ordinances and permitting systems related to noise and well location. Denton’s proposed fracking may push the limits on its authority to regulate health and safety issues related to mineral exploration.

Some people blame the city of Denton for allowing real-estate developers to build too close to existing well permits. Texas law protects drilling permits, making it difficult to regulate fracking. State law also sets no requirements for how far wells must be from homes. Moreover, in many drilling areas around the state, different people may own the surface land and rights to the minerals beneath it. Mineral rights take priority over surface rights, and state law grandfathers in existing well permits.

Because Texas law favors mineral rights, if the ban passes, many observers predict numerous lawsuits against the city by mineral owners, drilling companies with well permits, and the state itself, seeking lost income. The Texas legislature may be the only governing body in the state that can regulate fracking. Tom Phillips, the former chief justice of the Texas Supreme Court, advised the Texas Oil and Gas Association over the proposed fracking ban. He says in the event of such litigation, courts will likely favor the energy industry by ruling either that the ban unconstitutionally supersedes state law or that it makes gas beneath the city too difficult to tap and amounts to a taking. Phillips told the Denton City Council during its July debate that only the state legislature has the authority to impose such a ban.

The fate of the ballot initiative is uncertain. There is a vocal grassroots movement within Denton to ban fracking. The anti-fracking groups who lobbied the city to pass an ordinance banning fracking were able to obtain more than three times the number of signatures required to have their initiative put on the November ballot. But Denton County is heavily Republican, and the Texas Republican Party is pro-fracking and opposes the measure. The Denton Chamber of Commerce is campaigning against the ban, citing the potential for lost revenue for the University of North Texas and Denton public schools. Pro-fracking groups cite the economic benefits of fracking. Denton sits on the edge of the Barnett Shale, which an economic study says accounts for $11.8 billion in business activity and tax receipts, and is responsible for more than 107,000 permanent jobs. But many Denton residents worry about quality-of-life issues from fracking. The Denton Drilling Awareness Group, which spearheaded the ballot initiative, has cited increased traffic, noise pollution, air pollution, groundwater contamination, and earthquakes during its anti-fracking campaign. Whatever happens on November 4, the fight over fracking in Denton is likely far from over.

Keywords: energy litigation, fracking, Denton, Texas, Barnett Shale

Courtney Scobie, Ajamie LLP, Houston, TX


October 15, 2014

Ohio Court Sides with Mineral-Rights Holders in DMA Case

On August 28, 2014, the Seventh Judicial District of the Ohio Court of Appeals upheld a trial court’s verdict in favor of mineral-estate holders who had been the subject of a declaratory-judgment action under the Ohio Dormant Minerals Act (DMA). In Eisenbarth v. Reusser, the court of appeals concluded that an oil and gas lease is a savings event under the DMA and that the DMA has a fixed look-back period for determining when a savings event took place.

The Ohio legislature first enacted the DMA in 1989 to encourage energy development, either by locating mineral owners or by declaring mineral interests abandoned so that an interested party can develop them. Ohio’s position in the Utica Shale region and the increased interest in hydraulic fracturing there will likely contribute to mineral-estate owners invoking this law more frequently. Ohio revised the law in 2006 to strengthen its notice requirements to dormant mineral-interest holders. Under the law, a mineral interest held by a person other than the surface owner of the land will be deemed abandoned unless (a) the mineral interest deals with coal; (b) the mineral interest is held by the government; or (c) a savings event occurred within the last 20 years. See Eisenbarth v. Reusser, No. 13 MO 10, 2014 Ohio App. LEXIS 3720, *6 (Ohio App. Aug. 28, 2014), citing R.C. § 5301.56(B)(1). The law identifies the following savings events: (i) the mineral interest has been the subject of a title transaction that has been filed or recorded in the recorder’s office; (ii) there has been actual production or withdrawal by the holder; (iii) the holder used the mineral interest for underground gas storage; (iv) a mining permit has been issued to the holder; (v) a claim to preserve the mineral interest has been filed; or (vi) a separately listed tax parcel number has been created. See id. at *7, citing R.C. § 5301.56(B)(1)(c)(i)–(vi).

Eisenbarth v. Reusser involved a family dispute over mineral rights on two tracts of land in Monroe County, a rural county near the West Virginia border that lies within the Utica Shale region. Two groups of cousins each held a property interest in the two tracts of land. By a series of property transactions originating from their grandfather, the Eisenbarth group held the right to lease the minerals on the two tracts of land while the Reusser group held half of the mineral estate. The parents of the Eisenbarth children, who previously held the group’s interest, had signed various oil and gas leases, the last one recorded in 1974. In 2008, the Eisenbarths signed an oil and gas lease. In 2009, they published a notice of abandonment of the Reussers’ one-half mineral interest, to which the Reussers responded with a claim to preserve. In 2012, the Eisenbarths signed an oil and gas lease with another company.

The Eisenbarths then filed a suit within a suit, seeking a declaration that the Reussers’ mineral interest was abandoned under the DMA. The Reussers counterclaimed with a suit to quiet title to their one-half mineral interest. The parties filed cross motions for summary judgment. The trial court sided with the Reussers, concluding that their mineral interest had not been abandoned because there was an oil and gas lease over all the minerals on the tract that had been recorded in 1974. The trial court deemed this a savings event under the DMA, stating that an oil and gas lease conveys a determinable fee interest in the minerals that is subject to reverter in the event there is no production or the lease expires.

The Eisenbarths claimed on appeal that a lease was merely a contract and not a title transaction. The Reussers argued that a lease can affect title to an interest in land and that the title-transaction definition under Ohio law was enacted to prevent termination unless it was in compliance with the DMA. See id. at *9–11. Ohio law defines a “title transaction” as “any transaction affecting title to any interest in land, including title by will or descent, title by tax deed, or by trustee’s, assignee’s, guardian’s, executor’s, administrator’s, or sheriff’s deed, or decree of any court, as well as warranty deed, quit claim deed, or mortgage.” See id. at *8–9, quoting R.C. § 5301.47.

The question of whether an oil and gas lease is a title transaction has never been considered by an Ohio appeals court. But shortly before this appeal, a federal court in Ohio certified this question to the Ohio Supreme Court. The Seventh District appeals court considered staying its decision until the Supreme Court issued its decision but decided to proceed on the issue.

The court of appeals agreed with the trial court that the 1974 oil and gas lease was a savings event because an oil and gas lease is a “title transaction” under Ohio law. The Eisenbarths argued that they are unable to convey the Reussers’ actual title to the mineral right because a surface owner cannot defeat title to the mineral rights by signing an oil and gas lease. The court pointed out, though, that the Eisenbarths (the surface owners) owned half the mineral estate, had the right to sign oil and gas leases covering all the mineral rights, and that no party was attempting to defeat title or convey more rights than the Eisenbarths were permitted to transfer.

The court also said that an oil and gas lease is a transaction that affects title to an interest in land because it stays with the real property if the title is transferred during the lease terms. A lease follows both the surface owner and the mineral owner. It is an encumbrance on the land and would have to be removed if one were to provide title “free and clear of liens and encumbrances.” The court was unmoved by the fact that the Eisenbarths had signed the leases in question and thus performed the savings event for the Reussers. The Eisenbarths had the executive right to sign oil and gas leases over the entire mineral estate, so any lease they signed affected the entire estate and its minerals.

The Eisenbarths also argued that the trial court incorrectly concluded that the oil and gas interest was not abandoned under the 1989 DMA. The 1989 DMA provided a 20-year look-back period for determining abandonment by requiring a title transaction “within the preceding twenty years.” The Eisenbarths argued that the 1989 DMA was in effect from 1989 to 2006, when it was amended, and thus the look-back period should be a rolling period. That is, the look-back period could begin at any date between March 22, 1989, to June 30, 2006, the dates of enactment of the two versions of the DMA. The Reussers argued that a plain reading of the statute established that the look-back period was fixed at 20 years from the date that the 1989 DMA was enacted with an allowance for the three-year grace period built in the statute. Thus, the oil and gas lease recorded in 1974 occurred within the 20-year look-back period.

The appeals court again sided with the Reussers. It noted that their interpretation of the look-back period was consistent with another appellate court’s decision. It also conceded that this provision of the law was ambiguous and that the Eisenbarths’ arguments in favor of a rolling look-back period were reasonable. But the court implied that a rolling look-back period could leave estate owners with fewer protections against abandonment and that “forfeitures are abhorred in the law.” It surmised that the legislature adopted a “dead letter law” because it was trying to eliminate or refresh state mineral claims in the original look-back period and planned to reenact a new version of the law within 20 years (which it did, in 2006). The 1974 lease was a title transaction performed within the 20-year period under the 1989 DMA, so the Reussers had not abandoned their interest.

Keywords: energy litigation, Ohio, Ohio Dormant Minerals Act, savings event, title transaction, Utica shale, hydraulic fracturing, fracking, mineral estate, surface owner

Courtney Scobie, Ajamie LLP, Houston, TX


August 20, 2014

Colorado Judge Strikes Down Local Fracking Ban

A Colorado judge on August 7, 2014, ruled that a five-year moratorium on hydraulic fracturing passed by Fort Collins voters was impliedly preempted by the Colorado Oil and Gas Conservation Act.

The Colorado Oil and Gas Conservation Act vests the Oil and Gas Conservation Commission with the authority to regulate the production of oil and gas within the state. The Colorado Supreme Court has held that a local government may enact land-use restrictions on oil and gas operations as long as they do not impermissibly conflict with this act. Thus, where a regulation imposes technical conditions on drilling or pumping and no such condition is imposed by state law or regulation, these regulations could conflict with the act.

While the court found that the Colorado Oil and Gas Conservation Act did not explicitly prohibit local regulation of oil and gas drilling, the Fort Collins fracking ban was impliedly preempted because it “substantially impedes the state’s significant interest in oil and gas development and production.” Although the ordinance was limited in time (five years) and scope (hydraulic fracturing), this did not negate the impact on the state’s interest in oil and gas production and development. Even if the ordinance was not impliedly preempted, the court found that it would be conflict-preempted as the ordinance “forbids what the state statute authorizes.”

This is the second time within the past month that a Colorado state judge has found a city’s fracking ban preempted by the Colorado Oil and Gas Conservation Act. In July 2014, a Colorado judge threw out the city of Longmont’s voter-approved ban on hydraulic fracturing for similar reasons.

The case is Colorado Oil & Gas Association v. City of Fort Collins, Case No. 13CV31385, in the Larimer County District Court, Colorado.

Keywords: energy litigation, Colorado, Fort Collins, fracking, preemption, Colorado Oil and Gas Conservation Act, Colorado Oil and Gas Conservation Commission

Stephanie N. Murphy, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, New Orleans, LA


August 7, 2014

Fate of Kurdish Crude Oil Remains Undecided

A load of Kurdish crude oil continues to anchor in international waters in the Gulf of Mexico while embroiled in a legal battle over its ownership and delivery.

The United Kalavryta arrived off the Texas coast on July 26, expecting to offload its cargo of one million barrels of crude oil into smaller vessels for transport to the Houston Ship Channel. The Kurdish Regional Government (KRG) applied for and received clearance from the U.S. Coast Guard to unload the crude oil onto smaller vessels. But the Iraqi government claimed the oil had been smuggled out of the country and warned maritime companies that any efforts to assist with the offloading would be considered “wrongful possession” of Iraq’s crude oil. Shortly thereafter, U.S. Magistrate Judge Nancy Johnson ordered federal marshals to seize the oil if it was removed from the Kalavryta. The marshals were later instructed to stand down based on a decision that the Kalavryta was outside U.S. jurisdiction. If the tanker or the oil entered U.S. territory, further action would be reconsidered. But last week the company hired to transfer the crude oil to smaller vessels, AET Inc., was released from its contract by a federal judge. Other offloading companies have similarly steered clear of the cargo, which is also the subject of a dispute pending in the Iraqi Supreme Federal Court.

While Iraq considers the crude oil to be stolen property, the KRG claims it was “legally produced, shipped, exported and sold in accordance with the rights of the Kurdistan region as set forth in the Iraqi constitution.” The crude oil originated from Kurdish oil fields and was transported to a Turkish port via a newly opened pipeline that bypasses Iraq’s state oil company. Iraq claims that all oil sales outside its control are illegal. But the KRG controls many of the oil facilities in the Kurdish north of Iraq. The Kurds’ efforts to sell their own oil to gain revenue independent of Baghdad are seen as another sign of their desire to have their own country. The crude oil is valued at approximately $100 million.

The KRG on Monday filed a motion asking Judge Johnson to vacate her order to seize the disputed cargo and allow it to be delivered in Texas. Claiming that the court lacked authority to sign the order to begin with, the KRG has stated it plans to deliver the oil in the near future.

Keywords: energy litigation, Kurdish Regional Government, KRG, Kurdish crude oil, Iraq, United Kalavryta, offloading

Kara Stauffer Philbin, Fernelius Alvarez PLLC, Houston, TX


July 25, 2014

TX Supreme Court: CO2 Removal Is Postproduction Cost

The Texas Supreme Court recently decided whether certain expenses related to enhanced oil-recovery efforts are production costs or postproduction costs when calculating a royalty.

In French v. Occidental Permian Ltd., No. 12-1002 (June 27, 2014), the court examined the royalty interests under two oil and gas leases in the Cogdell Field, which is located in Kent and Scurry Counties in West Texas. The royalty owners contended that the production process did not end at the wellhead, but rather continued until the extraction of natural gas liquids (NGLs) at a nearby Kinder-Morgan processing plant. Production included the costs of transporting the casinghead gas to processing facilities, removing the CO2, and transporting the extracted CO2 back to the wells for reinjection into the reservoir. The royalty owners claimed these costs were merely incidental to the removal of the CO2, so they should be excluded from the royalty computation. The trial court agreed and awarded over $10 million in underpaid royalties. Although the court of appeals reversed, it focused on the royalty owners’ damage calculations, and did not consider whether Occidental Permian’s (Oxy) cost of removing non-native CO2 from the casinghead gas was a production or postproduction expense.

Read the full case note.

Keywords: energy litigation, Oxy, Cogdell Field, postproduction costs, production costs, CO2 flooding, secondary recovery

Kara Stauffer Philbin, Fernelius Alvarez PLLC, Houston, TX


July 10, 2014

NY High Court Says Municipalities May Ban Fracking

New York’s top court recently ruled that municipalities may ban fracking as part of their “home rule” authority to regulate land use. In a 5–2 decision, the court of appeals on June 30, 2014, ruled that state law did not preempt two local zoning ordinances that banned fracking.

Parts of New York sit atop the Marcellus Shale, which contains rich natural-gas reserves accessible by fracking. Although New York currently has a moratorium on fracking, several towns have sought to ban the practice. The town of Dryden in 2011 adopted a zoning ordinance that prohibited all oil and gas exploration, extraction, and storage activities, and the town of Middlefield in 2011 adopted a similar zoning ordinance that prohibited all oil, gas, and solution mining and drilling.

Read the full case note.

Keywords: energy litigation, New York, fracking, Middlefield, Dryden, Oil, Gas and Solution Mining Law, OGSML, home rule, Municipal Home Rule Law, preemption, Environmental Conservation Law

Jack Edwards, Ajamie LLP, Houston, TX


June 26, 2014

SCOTUS Upholds in Part EPA's Ability to Regulate GHG Emissions

On June 23, 2014, the Supreme Court handed the (EPA) a partial victory in Utility Air Regulatory Group v. EPA, 2014 U.S. LEXIS 4377 (June 23, 2014), on the EPA’s ability to regulate greenhouse-gas (GHG) emissions under the Clean Air Act. Although Justice Scalia, who entered the 7–2 opinion of the Court, stated that the EPA was receiving “almost everything it wanted,” his decision rebuked the EPA, stating in dicta “[a]n agency may not rewrite clear statutory terms to suit its own sense of how the statute should operate.”

Read the full case note.

Keywords: energy litigation, EPA, greenhouse gas, emissions, Clean Air Act, Prevention of Serious Deterioration, PSD, Title V, Title II, Best Available Control Technology, BACT

Kristen W. McDanald, Beirne, Maynard & Parsons, L.L.P., Houston, TX


June 24, 2014

North Carolina Moves Closer to Issuing Fracking Permits

North Carolina moved one step closer to issuing fracking permits when Governor Pat McCrory signed the Energy Modernization Act on June 4, 2014. This new law builds upon a 2012 law that authorized fracking regulations to be developed in the Tar Heel State but prohibited fracking permits from being issued. Fracking regulations are now expected to be adopted later this year, and the new law allows fracking permits to be issued two months after the regulations are adopted, likely sometime in 2015.

The 2012 law created the North Carolina Mining & Energy Commission of the Department of Environment & Natural Resources, and gave this Commission the power to regulate fracking. The Commission earlier this year issued draft fracking regulations, and scheduled three Public Comment Meetings on these draft regulations for August 2014. The original deadline for the Commission to adopt regulations was October 1, 2014, but the new law extends this deadline to January 1, 2015. And while the 2012 law placed a moratorium on fracking permits, the new law allows fracking permits to be issued 61 days after the regulations are adopted.

The new law elaborates on the protection of confidential information, including trade secrets, related to fracking. The 2012 law required the disclosure of all chemicals and constituents in fracking fluids, with an exception for trade secrets. The new law continues to protect confidential information, but provides that it may be disclosed to the Division of Emergency Management of the Department of Public Safety, a treating healthcare provider who determines that the information is necessary for treatment, and a fire chief who determines that the information is necessary to address an emergency. A person who knowingly and willfully discloses confidential information to a person not authorized to receive it shall be guilty of a Class 1 misdemeanor and subject to a civil action for damages and an injunction by the owner of the confidential information. The Commission shall determine whether information constitutes “confidential information” under G.S. 132-1.2, and the Commission’s decision may be appealed to a Business Court Judge under G.S. 7A-45.3.

The new law also prohibits local governments from banning fracking. The operator of a proposed fracking operation may petition the Commission to review a local ordinance. The Commission must hold a public hearing in the affected locality within 60 days, and determine in writing within 60 days of the hearing the extent to which the local ordinance is preempted. The Commission’s decision may be appealed to a superior court under G.S. 150B-43 through 150B-52.

Finally, the new law prohibits the disposal of fracking fluid and other waste using subsurface injection wells; decreases the distance for presumptive liability for water contamination from 5,000 feet to a one-half mile radius of a wellhead; splits the Mining & Energy Commission into the Oil & Gas Commission, which will regulate fracking, and the Mining Commission, which will regulate mining; and directs the Department of Commerce to study the desirability and feasibility of siting, constructing, and operating a liquefied-natural-gas export terminal in North Carolina.

Keywords: energy litigation, fracking, North Carolina, Mining & Energy Commission, Oil & Gas Commission, trade secrets, confidential information, preemption, fracking fluid, subsurface injection well, liquefied natural gas, LNG, export terminal

Jack Edwards, Ajamie LLP, Houston, TX


June 24, 2014

DOT Issues Emergency Order to Trains Carrying Bakken Crude Oil

The U.S. Department of Transportation (DOT) issued an emergency order on May 7, 2014, to all railroad carriers that transport at least 1,000,000 gallons of crude oil from the Bakken Shale in North Dakota. The order requires that these railroad carriers, within 30 days, notify the State Emergency Response Commission (SERC) in each state in which they operate about the expected movement of their trains in the state.

Specifically, the notification must:

(a)                    provide an estimate of the number of trains that are expected to travel each week through each county in the state;
(b)                    identify and describe the crude oil expected to be transported;
(c)                    provide all emergency-response information required by 49 CFR part 172, subpart G related to hazardous materials;
(d)                   identify the routes over which the material will be transported; and
(e)                    identify at least one point of contact at the railroad related to the transport of crude oil.

This emergency order comes after the DOT determined that “[t]he number and type of petroleum crude oil railroad accidents . . . that have occurred during the last year is startling, and the quantity of petroleum crude oil spilled as a result of those accidents is voluminous in comparison to past precedents.” These accidents include a derailment in Lynchburg, Virginia, on April 30, 2014; a derailment near Casselton, North Dakota, on December 30, 2013; a derailment near Aliceville, Alabama, on November 8, 2013; and a “catastrophic” accident involving a U.S. railroad company in Lac-Mégantic, Quebec, Canada, on July 6, 2013.

“The safety of our nation’s railroad system, and the people who live along rail corridors is of paramount concern,” said Transportation Secretary Anthony Foxx. “All options are on the table when it comes to improving the safe transportation of crude oil, and today’s actions, the latest in a series that make up an expansive strategy, will ensure that communities are more informed and that companies are using the strongest possible tank cars.”

Keywords: energy litigation, DOT, emergency order, Bakken Shale, North Dakota, State Emergency Response Commission, SERC

Jack Edwards, Ajamie LLP, Houston, TX


June 24, 2014

Virginia Creates Rail-Safety Task Force Following Oil Spill

Virginia Governor Terry McAuliffe has created the commonwealth’s Rail Safety & Security Task Force following a train derailment and oil spill in downtown Lynchburg, Virginia, on April 30, 2014. At least 30,000 gallons of crude oil burned or spilled into the James River when a CSX freight train carrying crude oil from the Bakken Shale in North Dakota to a refinery in Yorktown, Virginia, went off the track. Seventeen cars derailed and three landed in the James River, but nobody was hurt.

The task force will be cochaired by secretary of public safety & homeland security Brian J. Moran and secretary of transportation Aubrey Lane, and will include representatives from the Virginia Department of Rail & Public Transportation, the Department of Environmental Quality, the Department of Emergency Management, the Department of Fire Programs, the State Corporation Commission, the Department of Transportation, and the state police. After seeking input from industry stakeholders, local governments, and members of the public, the task force will issue a report of recommended state and federal actions to both prevent railroad accidents and prepare communities for the possibility of a future incident.

“This task force is an important step toward ensuring that Virginia is doing everything it can to keep our railroads and the communities around them safe, and that we are prepared to respond to incidents like the derailment and fire in Lynchburg earlier this month,” said Governor McAuliffe. “I have asked Secretaries Moran and Layne to bring our public safety, transportation and environmental protection agencies together to investigate what happened in Lynchburg and make recommendations of how Virginia can work with the federal government to keep our communities and our natural resources as safe as possible.”

Keywords: energy litigation, Virginia, train derailment, oil spill, Rail Safety & Security Task Force, Bakken Shale, James River

Jack Edwards, Ajamie LLP, Houston, TX


May 8, 2014

Energy Future Holdings Files for Bankruptcy

Energy Future Holdings (EFH), the largest power company in Texas, filed for Chapter 11 bankruptcy in Delaware on April 29, 2014, as part of an agreement with its creditors to restructure its debts. EFH was created in 2007 when TXU Inc. went private and entered into a $45 billion leveraged buyout with KKR, TPG Capital, and Goldman Sachs. TXU and the financial companies involved in the buyout wanted to take advantage of rising natural-gas prices, but the combination of the 2008 financial crisis and the fracking boom in Texas and other states caused natural-gas prices to plummet, making the company unable to pay the billions of dollars in debt created during the buyout.

EFH expects to break up its various subsidiaries as part of the bankruptcy process. According to EFH’s bankruptcy petition, senior creditors would gain ownership of the subsidiary that includes Luminant Generation and TXU Energy. That subsidiary, Texas Competitive Electric Holdings, would abandon $23 billion in debt as part of the exchange. Energy Future Intermediate Holding Company LLC, the subsidiary that owns Oncor Electric Delivery, will remain a part of EFH. Oncor is the regulated utility that operates most of the power lines in North Texas. While EFH owns 80 percent of Oncor, it is not part of the bankruptcy because regulators required it to be isolated from the 2007 buyout transaction and given separate management.

The company will operate during bankruptcy and plans to exit bankruptcy in under a year. The bankruptcy is not expected to disrupt the operations of Luminant, Texas’s largest power generator, or TXU, Texas’s largest energy retailer. Both the Public Utility Commission of Texas and the Electric Reliability Council of Texas said they had anticipated the bankruptcy and are monitoring the situation to ensure there are no disruptions to customer service.

The case is style In re: Energy Future Holdings Corp, Case No. 14-10979, U.S. Bankruptcy Court, District of Delaware.

Keywords: energy litigation, Energy Future Holdings, TXU Inc., Chapter 11, bankruptcy, Public Utility Commission of Texas, PUCT, Electric Reliability Council of Texas, ERCOT

Courtney Scobie, Ajamie LLP, Houston, TX


May 1, 2014

Supreme Court Upholds EPA's Transport Rule

In 2012, the D.C. Circuit decided in EME Homer City General LP v. Environmental Protection Agency [EPA], et al., 696 F.3d 7 (Fed. Cir. Aug. 21, 2012) that the EPA’s Transport Rule was unconstitutional. Review of this decision was accepted by the U.S. Supreme Court, and oral argument was held on December 10, 2013. The Supreme Court, led by Justice Ginsburg, reversed the D.C. Circuit on April 29, 2014.

To recap, the Transport Rule was initiated by the EPA to place standards, considering cost, on states “transporting” pollution emissions to downwind states. Under the rule, each upwind state gets a “budget” for the total amount of pollution the state can produce each year. While the EPA touts the Transport Rule to be a practical solution to a recognized issue faced by states under the Clean Air Act, industry and states’ rights supporters argued the rule limits states the opportunity to create their own state implementation plan (SIP).

Read the full case note.

Keywords: energy litigation, EPA, Transport Rule, Clean Air Act, Federal Implementation Plans, air quality, air pollution

Kristen W. McDanald, Beirne, Maynard & Parsons, L.L.P., Houston, TX


April 28, 2014

Texas Family Awarded $2.95 Million in Fracking Nuisance Case

Although likely just the first round in their court battle, on April 22, 2014, a Texas family claimed to have won the “first fracking verdict in U.S. history.” In Parr v. Aruba Petroleum, Inc., Cause No. 11-1650 (Dallas Co. Ct. at Law No. 5, 2011), a Dallas jury agreed with Robert and Lisa Parr that Aruba Petroleum “intentionally created a private nuisance” and awarded $2.95 million in damages, including $2 million for past physical pain and suffering, $250,000 for future physical pain and suffering, $400,000 for past mental anguish, and $275,000 for loss of market value on their property.

The lawsuit was filed in 2011 against nine defendants, including Aruba Petroleum, alleging that cumulative environmental contamination and polluting events caused the Parr family and their property to be exposed to hazardous gases, chemicals, and wastes, which damaged their health and caused emotional harm, injury to their livestock, diminution in property value, and constructive eviction, among other injuries. The Parrs claimed they were subjected to this contamination and pollution beginning in 2008 when over 50 gas wells appeared within a two-mile radius of their ranch in the Barnett Shale, many of which employed fracking operations. Aruba Petroleum allegedly operated 22 of these wells.

Various health complaints with unexplained symptoms, such as rashes, nausea, memory problems, and nosebleeds were complained of by the family. Eventually, doctors confirmed the presence of several neurotoxins in their blood that matched chemicals used in natural gas production. The Parr family claimed they were forced to move away from their ranch for months, and must now use air and water purifiers to continue to live there.

Environmentalists see this as a “game-changing verdict” given the recent expansion in drilling operations and associated fracking methods across the United States.

The plaintiffs sought over $9 million in damages. No exemplary damages were awarded. An attorney for Aruba Petroleum indicated it plans to appeal the verdict.

Keywords: energy litigation, fracking, Barnett Shale, Parr , Aruba Petroleum

Kara Stauffer Philbin, Fernelius Alvarez, PLLC, Houston, TX


April 24, 2014

Obama Administration Delays Decision on Keystone XL Pipeline

The Obama Administration announced on April 18, 2014, that it was giving eight federal agencies more time to study the impact of the Keystone XL Pipeline. Comments from federal agencies were originally due in mid-May, but a Nebraska court recently rejected a state law that allowed the pipeline to run through the state. The administration cited this decision and the uncertainty it created as the reason for the delay.

The State Department, which will have the final vote on whether the pipeline is approved, said agencies needed to study the various impacts of a route change, given the Nebraska court decision. State officials have appealed that decision, but the Nebraska Supreme Court will not weigh in on the law until at least the end of the year. This effectively delays a decision by the administration until after the November midterm elections.

As currently planned, the 1,179-mile pipeline would travel from the tar sands of Alberta through Montana and South Dakota to a hub in Nebraska, where it would connect with existing pipelines to carry more than 800,000 barrels of crude oil a day to refineries in Texas. The southern leg of the pipeline, running between Cushing, Oklahoma, and the Texas gulf coast, became operational in January 2014.

Keywords: energy litigation, Keystone XL Pipeline, Nebraska

Courtney Scobie, Ajamie LLP, Houston, TX


April 24, 2014

Ohio Regulators to Tighten Fracking Restrictions Due to Seismic Activity

The Ohio Department of Natural Resources (ODNR) recently announced that it is tightening permits for fracking in areas with a history of seismic activity. Recent seismic activity in Mahoning County, Ohio, which is found in the Utica and Marcellus shale formations, prompted the new regulation. Under the new regulation, new permits issued by the ODNR for fracking within three miles of a known fault or area of seismic activity greater than a 2.0 magnitude would require drilling companies to install sensitive seismic monitors. If the monitors detect a seismic event in excess of 1.0 magnitude, then activities would pause while the state investigates the cause of the seismic event. Well-completion operations will be suspended if the investigation reveals a probable connection to the fracking. The ODNR will develop new criteria and permit conditions for new applications in light of this policy change, and will review previously issued permits for areas that have not been drilled.

Previous studies on fracking and seismic activity had only linked the disposal of fracking wastewater to earthquakes, not the fracking itself. The U.S. Geological Survey has noted a dramatic increase in seismic activity over the last few years, but it has stopped short of blaming fracking for this uptick. The agency recently said that fracking has rarely caused any felt earthquakes and noted that the wastewater-disposal process is generally the culprit. It encouraged further study of the issue.

Ohio is the first state to impose new regulations on fracking due to seismic concerns. Oklahoma previously linked fracking to the uptick in earthquakes over the last few years, including a 5.6 magnitude earthquake in 2011, but has yet to change its fracking regulations due to seismic activity.

Keywords: energy litigation, fracking, shale, earthquakes, seismic activity, Ohio, Ohio Department of Natural Resources, ODNR, U.S. Geological Survey, USGS

Courtney Scobie, Ajamie LLP, Houston, TX


April 18, 2014

Galveston Oil Spill Generates Class-Action Lawsuit

On March 22, 2014, a cargo ship called the Summer Wind collided with a barge in Galveston Bay, Texas. The collision breached one of the barge’s oil tanks, causing 168,000 gallons of heavy fuel oil to spill into the bay and drift into the Gulf of Mexico. The oil has washed up on beaches from Galveston Island to Matagorda County, Texas. Cleanup efforts began immediately, and while the situation seems to be under control, local businesses have been affected by the spill and cleanup operations.

In particular, charter fishing boats, bait shops, and related businesses appear to be among the hardest hit by the spill. While larger ships were allowed to resume their operations soon after the spill, smaller vessels were kept out of commission for a longer period. Oil-collection booms and associated “safety zones” established by the Coast Guard prohibited smaller boats from entering Galveston Bay as a precaution to protect responders working to collect the spilled oil. Many businesses tied to Galveston Bay suffered from the closure.

Several affected businesses have already sued the owners of the vessels, including Kirby Inland Marine LP, which owns the barge, and Cleopatra Shipping Agency Ltd., which owns the Summer Wind. Just two days after the spill occurred, several plaintiffs filed a proposed class-action lawsuit in the Southern District of Texas. The complaint defines the class as “[a]ll Texas residents who claim economic losses, or damages to their occupations, businesses, and/or property damages as a result of the oil spill,” and asserts negligence and gross-negligence claims under general maritime law, a claim under the federal Oil Pollution Act, and state-law claims for nuisance and trespass. The plaintiffs seek a wide range of damages, including:

  • loss of livelihood, which depends directly upon fish and other seafood;
  • loss of income resulting from customers being unable to use Galveston Bay and other areas for recreational purposes;
  • damage to property and loss of use of property; and
  • diminution of value including stigma damages.

The complaint also asserts that some plaintiffs have been forced to evacuate their homes as a result of the spill.

On April 4, 2014, U.S. Magistrate Judge John Froeschner ordered the seizure of the Summer Wind to preserve the ship’s assets in light of the pending class action. The amount of litigation that stems from this spill may depend largely on the spill’s long-term effects to Galveston Bay and the gulf. Experts currently disagree about the nature and extent of any long-term damage.

The case is 3G Fishing Charters, LLC, et al. v. Kirby Inland Marine, LP, et al., Case No. 3:14-cv-00107 (S.D. Tex. 2014).

Keywords: energy litigation, oil spill, Galveston Bay, Gulf of Mexico, class action

Brian E. Waters, Beirne, Maynard & Parsons, L.L.P., Houston, TX


April 9, 2014

Federal Court Upholds Offshore Lease Sales in Gulf of Mexico

The U.S. District Court for the District of Columbia recently dismissed a lawsuit brought by environmentalists challenging the federal government’s decision to lease areas in the Gulf of Mexico affected by 2010’s Deepwater Horizon oil spill. Judge Rudolph Contreras, in Oceana et al. v. Bureau of Ocean Energy Management et al., No. 1:12-cv-00981, rejected the suit brought by Oceana, Inc., Defenders of Wildlife, the Center for Biological Diversity, and the Natural Resources Defense Council, finding that the Bureau of Ocean Energy Management (BOEM) complied with the National Environmental Policy Act (NEPA) and the Endangered Species Act (ESA) and properly issued an environmental-impact statement and biological opinion.

The environmental groups argued that the government’s delay in preparing a biological opinion almost three years after the start of consultation on the effects of the Deepwater Horizon spill and related leasing activities is an unreasonable delay of a mandatory duty in violation of the Administrative Procedure Act. The court, however, accepted BOEM’s explanation that an environmental-impact statement reasonably could not have been prepared, relying on the significant amount of time taken to collect viable scientific information after the Exxon Valdez oil spill in 1989.

“BOEM repeatedly stated that the essential unavailable research may take years to complete,” the opinion stated, “and that it was not within BOEM’s ability to obtain the information within the time frame contemplated by the [supplemental environmental impact statement].” The court also ruled that BOEM properly considered and evaluated the impacts of the leases based on theoretical approaches and the risks of deepwater drilling.

The environmental groups further argued that “BOEM did not comply with the ESA’s requirement to insure against the jeopardy of endangered species by approving the lease sales without the benefit of a biological opinion assessing important new information.” Yet Judge Contreras held that BOEM did not need to complete the consultation because the lease sales did not “constitute an irreversible or irretrievable commitment of resources” and thus a complete consultation was not required under section 7(d) of the ESA.

Keywords: Bureau of Ocean Energy Management, BOEM, National Environmental Policy Act, NAPA, Endangered Species Act, ESA, environmental impact statement, EIS, Deepwater Horizon, Gulf of Mexico, lease sale, federal leasing

Tyler L. Weidlich, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, New Orleans, LA


April 7, 2014

EPA, DOJ, and Anadarko Settle Superfund Litigation

The Environmental Protection Agency (EPA), Department of Justice (DOJ), and Anadarko Petroleum Corp. recently announced the settlement of a fraudulent-conveyance lawsuit over Kerr-McGee Corp.’s Superfund sites. The DOJ and EPA accused Kerr-McGee and Anadarko of fraudulently conveying the assets of Kerr-McGee’s chemicals business in an effort to avoid paying for the cleanup of hundreds of Superfund sites. Between 2002 and 2005, Kerr-McGee transferred its more profitable oil and gas assets to a new entity. Anadarko acquired these assets only months after the transfer in 2005. In 2006, Kerr-McGee transferred its assets associated with the Superfund sites to another company called Tronox Inc., which then became financially overwhelmed by the cleanup responsibilities and filed for bankruptcy in 2009.

The settlement calls for Anadarko to pay $5.1 billion into a litigation trust to be distributed to environmental and tort beneficiaries. Coupled with the $270 million in recoveries from the related Tronox bankruptcy settlement, these settlements constitute the largest recovery for the cleanup of environmental contamination in history. Anadarko reached the settlement with the government following a month-long trial in the Bankruptcy Court for the Southern District of New York where the court held Kerr-McGee and related Anadarko subsidiaries liable for fraudulent conveyance. The parties agreed to the settlement before the court reached its decision on damages. The settlement will cover more than 2,700 Superfund sites around the country and approximately 50 uranium mines near the Navajo Nation in Arizona and New Mexico.

Keywords: Environmental Protection Agency, EPA, Department of Justice, DOJ, Anadarko, Kerr-McGee, Tronox, Superfund, fraudulent conveyance

Courtney Scobie, Ajamie LLP, Houston, TX


April 1, 2014

EPA Provides Guidance for Diesel-Fuel Fracturing Operations

Congress amended the Safe Drinking Water Act (SDWA) in 2005 to exempt all non-diesel hydraulic-fracturing operations from the requirement to obtain an underground-injection-control (UIC) permit. On February 11, 2014, the Environmental Protection Agency (EPA) released revised UIC program permitting guidance for wells that use diesel fuels during fracturing operations.

The EPA’s guidance (1) explains that an operator of a diesel-fuel fracturing operation must obtain a UIC Class II permit before injection; (2) clarifies the agency’s interpretation of “diesel fuels” as used by the SDWA for permitting purposes; and (3) sets out UIC class program permit requirements for operators and guidance to the EPA’s permit writers to consider in implementing permit requirements.

According to the EPA’s guidance, there are five chemical abstract service registry numbers (CASRN) that fall under the statutory term “diesel fuels” and are permissible for hydraulic fracturing under the UIC program: 68334-30-5 (automotive diesel oil); 68476-34-6 (diesel fuel no. 2); 68476-30-2 (fuel oil no. 2); 68476-31-3 (fuel oil no. 4); and 8008-20-6 (kerosene). While other diesel fuels are sometimes used in oil and gas production applications, the use of diesel fuels in other non-injection applications is not subject to UIC Class II permitting requirements.

Despite the EPA guidance giving in-depth guidance to permit writers, the EPA is clear that “[d]ecisions about permitting HF operations that use diesel fuels will be made on a case-by-case basis, considering the facts and circumstances of the specific injection activity and applicable statutes, regulations and case law.”

Although the permitting process is discretionary and determined on a case-by-case basis, if an operator is looking for information on the technicalities and methods of the permitting process, the EPA guidance has substantial utility. The vast majority of permitting guidance provided by the EPA consists of conforming the process of diesel-fuel hydraulic-fracturing permitting to the process already in place. The guidance consistently refers permitters and operators to existing requirements found in 40 CFR parts 124 and 144–47.

Even though the majority of guidance points to existing requirements (specifically, 40 CFR parts 124 and 144–47), specific guidance is given to permitters on recognizing and dealing with certain diesel-fuel fracturing operations. Important diesel-fuel-specific information found in the guidance includes the following:

  • Any well injecting diesel fuels is considered a “new injection well” under CFR regardless of original or prior use.
  • Encouraging permit writers to consider issuing area permits for diesel fuel hydraulic-fracturing operations.
  • When establishing permit duration and dealing with well cessation, permitters should: (1) set a short duration for the permit that concludes after injection ceases and a non-endangerment demonstration is made; (2) manage the well as temporarily abandoned during periods of production (e.g., when no injection is occurring); and (3) for area permits, ensure that all wells are in compliance with all UIC area permit requirements prior to releasing any from such requirements.
  • Permit writers may authorize an already constructed well for Class II injection if the owner or operator can demonstrate that injection will not result in movement of fluids into a underground source of drinking water; the demonstration may include logs and internal and external mechanical integrity tests.
  • EPA UIC program directors should modify monitoring and reporting protocols, consistent with authorized discretion under 40 CFR 144.52(a)(9), so that the permit writer has adequate information to determine the fracturing operation’s safety.

In sum, the revised guidance does not provide a great divergence from previous policy. On the contrary, the overall theme of the revised guidance is to reinforce the requirements already in place for UIC Class II wells and permitting, with a gentle nudge to permitters and program directors to take vague and discretion-based precautions in light of diesel-fuel injections.

Keywords: energy litigation, Safe Drinking Water Act, SDWA, EPA, diesel fuel, hydraulic fracturing, fracking, underground injection control, UIC, Class II permit

Brandan Montminy, Beirne, Maynard & Parsons, L.L.P., Houston, TX


March 11, 2014

TX Jury Makes Landmark Verdict that Pipeline Cos. Were Partners

A Texas jury recently found that Energy Transfer Partners (ETP) and Enterprise Products Partners had formed a partnership to market and pursue a pipeline project to transport crude oil. This landmark verdict provides guidance as to what constitutes a partnership under Texas law.

In 2010, Dallas-based ETP and Houston-based Enterprise Products Partners began discussions about forming a joint venture to construct a pipeline from Cushing, Oklahoma, to Houston, Texas. Enterprise signed a nonbinding agreement with ETP in the spring of 2011 related to the pipeline.

Energy Transfer Partners claimed that, over the following few months, the two companies jointly made operational decisions, met with potential customers, and marketed the partnership, called Double E Pipeline, and even signed a deal with Chesapeake Energy in August 2011 to ship oil on the installation.

But, less than a month after the Chesapeake deal, Enterprise announced that it was terminating the business relationship. Enterprise then allegedly started a similar venture with Enbridge Inc. of Calgary, Alberta.

ETP sued Enterprise and Enbridge, and claimed that it had created a business partnership with Enterprise to construct the pipeline, but that Enterprise had conspired with Enbridge to cut Energy Transfer out of the deal. Enterprise claimed that no partnership had been finalized, pointing to language in an April 2011 letter that stated that no obligations would exist until the companies received approval from their respective boards.

After a four-week trial, the jury found that ETP and Enterprise had formed a partnership over the pipeline. The jury awarded Energy Transfer Partners $319 million in actual damages for Enterprise’s violation of the partnership agreement by cutting ties with ETP to pursue a more financially viable deal. The jury, however, did not find that Enbridge was part of a conspiracy to breach Enterprise’s duty of loyalty to ETP.

This landmark verdict creates precedent as to what constitutes a partnership under Texas law, and will affect energy businesses in how they pursue joint ventures and team up with each other for projects.

Enterprise, however, plans to fight this verdict, so this case warrants attention. Enterprise “believes that the decision sets a dangerous precedent that jeopardizes current and future business relationships in the state of Texas. Businesses, large and small, need certainty, particularly when they are exploring potential projects. They need the ability to negotiate their relationships and put the terms in writing. If the legal system will not honor the terms of those agreements, the resulting uncertainty will be bad for everyone because nobody will know what their rights are until they get a judge and a jury to tell them, perhaps years after the fact.”

The case is Energy Transfer Partners LP v. Enterprise Products Partners LP, Cause No. 11-cv-12667, in the District Court of Dallas County, Texas.

Keywords: energy litigation, Texas, partnership, joint venture, pipeline

Jon Paul Hoelscher, Coats Rose Yale Ryman & Lee, PC, Houston, TX


March 7, 2014

CO First to Regulate Methane Emissions from Oil and Gas Operations

Colorado last week passed landmark rules aimed at reducing air pollution from oil and gas operations. The new Oil and Gas Emission Rules were adopted by the state’s Air Quality Control Commission after four days of hearings, and require oil and gas companies to capture or control 95 percent of emissions of both volatile organic compounds (VOC) and methane from their operations. The new rules also require companies to routinely inspect well sites for leaks, and apply to the lifecycle of oil and gas development (from drilling to production to maintenance). While other states regulate VOC emissions, no other state currently regulates methane emissions.

The new regulations, which were proposed by Governor John Hickenlooper on November 18, 2013, are the result of collaboration by the Environmental Defense Fund and three of Colorado’s largest oil and gas producers: Anadarko Petroleum Corp., Encana Corp., and Noble Energy.

“This is a huge breakthrough for cleaner air and a safer climate. Getting to this point took serious resolve and a willingness to find common ground,” said Fred Krupp, president of the Environmental Defense Fund. “Governor Hickenlooper deserves enormous credit for his vision and leadership, and so do the members of the AQCC, the companies that helped forge this proposal, and the many other voices in the community that have spoken up in support of these rules. We are proud to have played an integral role in the process. Colorado’s new air rules are an example of the kind of progress that’s possible when businesses and environmentalists work together to find solutions. They are also a sign that momentum is building as policymakers recognize the crucial importance of addressing methane emissions.”

The new rules will become effective once published by the Colorado secretary of state.

Keywords: energy litigation, Colorado, Air Quality Control Commission, Department of Public Health and Environment, air pollution, methane, volatile organic compounds, VOC

Jack Edwards, Ajamie LLP, Houston, TX


February 7, 2014

Ninth Circuit Puts Brakes on Alaskan Coastal Drilling

The Ninth Circuit Court of Appeals recently issued its opinion in Native Village of Point Hope v Jewell, No. 12-35287, ___ F.3d ___ (9th Cir. Jan. 22, 2014), a case that for several years has embroiled environmental groups, the federal government, and the oil-and-gas industry in a legal fight over the expansion of mineral production off the Alaskan coast. Finding that the federal government acted arbitrarily and capriciously in offering up large portions of the Chukchi Sea in a lease sale in 2008, the court reversed the district court’s grant of summary judgment in the government’s favor and remanded the case for further consideration. This ruling has effectively halted oil-and-gas exploration in the area.

Located near the southern tip of the Arctic Ocean between Alaska and Russia, the Chukchi Sea is believed to hold large untapped deposits of oil and may provide the next frontier in Alaskan coastal drilling. The sea is also home to a variety of endangered or threatened animals as well as other ecological resources. In 2008, the federal government opened up a large portion of the sea to potential oil-and-gas development in Lease Sale 193, a transaction worth $2.6 billion. Since then, however, the industry has faced stiff resistance from environmental groups and ensuing litigation.

The Jewell decision centers on a challenge to the environmental impact statement (EIS) prepared by the Bureau of Ocean Energy Management (BOEM) in connection with Lease 193. The plaintiffs, including a number of environmental groups, challenged the EIS on two grounds: (1) that the BOEM failed to consider potentially affected animal populations; and (2) that the BOEM used an unjustifiably low estimate of the economically recoverable amount of oil from the leases in its analysis. While the Ninth Circuit disagreed with the plaintiffs on the first ground, the court sided with them on the second ground, ruling that the BOEM’s estimate of one billion barrels of recoverable production from the leases was untenable. In choosing one billion barrels, the agency had considered only estimated production from the first oil field opened, not the full economic impact of the leases. It also based its selection of one billion barrels—an admittedly low estimate—in part on its reasoning that commercial oil development in the area would be difficult and, therefore, unlikely.

The Ninth Circuit found the BOEM’s selection of one billion barrels arbitrary and capricious for three reasons. First, the court found that the BOEM did not justify its low estimate of economically recoverable oil, and rejected the agency’s reliance on the conclusion that commercial oil development was unlikely. As the BOEM had found that development was reasonably foreseeable, the court ruled that the agency was required to considerer the full cumulative impact of production if it occurred. Second, the court found that the BOEM incorrectly assumed stable oil prices and, therefore, ignored the fact that recoverable production would vary substantially depending on the price of oil. Third, the court ruled that the BOEM’s consideration of only production from the first oil field was both contrary to its historical practice and unjustifiable.

The Jewell decision and the risk of similar litigation are causing the industry to reconsider exploration or production plans in the Chukchi Sea. At least one company, Shell Oil, has since announced that it will not proceed with exploration there in 2014.

Keywords: energy litigation, Chukchi Sea, Alaska, Lease 193, Bureau of Ocean Energy Management, BOEM, environmental impact statement, EIS, Jewell, Native Village of Point Hope, Ninth Circuit, Alaskan coastal drilling

Laura Carlisle, Baker Donelson Bearman Caldwell & Berkowitz, LP, New Orleans, LA


February 6, 2014

When Cows Die: The Running of Prescription in Legacy Suits

In Broussard v. Chevron, U.S.A., 2:11-CV-01446, 2014 WL 60265 (W.D. La. Jan. 6, 2014), the court held that a plaintiff’s tort claims, which related to alleged property contamination resulting from oil-and-gas operations between 1965 and 1976, had prescribed a year after the plaintiff’s father (the former property owner) discovered the deaths of several heads of cattle in 1976.

Tort claims in Louisiana are subject to a one-year prescriptive period (i.e., statute of limitations). Under the doctrine of contra non valentem, prescription does not begin to accrue until the cause of action is known or should be known by the plaintiff. Citing a recent Louisiana Supreme Court opinion, the Broussard court noted that the knowledge necessary to commence the running of prescription is the “acquisition of sufficient information, which, if pursued, will lead to the true condition of things,” with the ultimate issue being “the reasonableness of the plaintiff’s action or inaction in light of his education, intelligence, and the nature of the defendant’s conduct.”

Applying these principles, the court ruled that the one-year prescriptive period for the plaintiff’s tort claims had run:

[Plaintiffs’ father] possessed a working knowledge of farming and the raising of livestock. He was competent enough to deal with the oil companies in settling claims for livestock lost resulting from the defendant’s activities on his property. He had sufficient information—or rather, lack of information as to the causes of death of at least some of his calves—as to put him on reasonable notice that further inquiry was needed. Such further inquiry within the prescriptive period would likely have revealed the presence of any contaminants. As such, the court finds that the plaintiffs’ request for the application of contra non valentem is inappropriate to these facts.

Landowners in the wake of Broussard, therefore,are well advised to thoroughly and promptly investigate the unexpected death of animals or vegetation discovered during or following oil-and-gas operations on or near their property.

Keywords: energy litigation, legacy suits, prescription, statute of limitations, contra non valentem, contamination, constructive knowledge, death of livestock

Joseph A. Atiyeh, Baker Donelson Bearman Caldwell & Berkowitz, LP, New Orleans, LA


December 3, 2013

Trader Has No CAA Duty to Correct Transfer of Invalid RINs

In Cargill, Inc. v. International Exchange Services, LLC, No. 12-cv-7042-HB (S.D.N.Y. Jan. 8, 2013), Judge Baer granted a motion to dismiss in part and held that (1) a pure trader of renewable identification numbers (RINs) has no regulatory duty under the Clean Air Act (CAA) to correct the transfer of invalid RINs, and (2) RINs separated from renewable fuel and sold in the market are not “goods” within the meaning of New York’s Uniform Commercial Code (UCC). Under these holdings, buyers who purchase renewable-fuel credits on the market have a limited recourse if those credits later turn out to be invalid, and buyers may not have access to a federal forum if the remaining remedies sound only in state law.

Renewable-fuel credits are a fairly recent innovation. As a result of amendments to the CAA in 2005 and 2007, the Environmental Protection Agency (EPA) was required to implement regulations “to ensure that gasoline sold or introduced into commerce in the United States  . . . contains the applicable volume of renewable fuel.” Under those regulations, obligated parties—such as refiners and importers of gasoline—must show they have introduced a certain volume of renewable fuel into the domestic market each year. This is called a party’s renewable volume obligation.

Read the full case note.

Keywords: energy litigation, renewable identification numbers, RINs, renewable volume obligation, EPA, Clean Air Act, CAA, Uniform Commercial Code, UCC

Mike Stewart, Haynes and Boone, LLP, Houston, TX


December 3, 2013

Service-of-Suit Clause: Establishing Jurisdiction in Convenient Forum

Lloyd’s of London syndicates underwrite many policies in the energy industry, including general-liability policies, marine-liability policies, and on-shore and off-shore property policies. The unique nature of many policies and of Lloyd’s of London can make filing a coverage suit and establishing jurisdiction over the policy underwriters a challenge. Fortunately, many policies contain a service-of-suit clause that can be used to establish jurisdiction in a forum that is convenient for the policyholder.

Most Lloyd’s policies contain a service-of-suit clause. Though the wording varies, most modern service-of-suit clauses provide as follows:

It is agreed that in the event of the failure of the Insurers hereon to pay any amount claimed to be due, the Insurers, at the request of the Insured, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this clause constitutes or should be understood to constitute waiver of Insurers’ rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case in the United States.

It is further agreed that . . . in any suit instituted against any one of them upon this contract, Insurers will abide by the final decision of such Court or any Appellate Court in the event of an appeal. . . .

This clause generally operates as a consent-to-jurisdiction provision, and should defeat an argument that a U.S. court does not have personal jurisdiction over the Lloyd’s underwriters or that a U.S.-based insured must file suit in England.

Courts have interpreted service-of-suit clauses to limit the underwriters’ forum-selection choices. Arguably, the underwriters’ agreement to both “submit to the jurisdiction of any court of competent jurisdiction within the United States” requested by the insured and “abide by the final decision of such Court” in any suit arising from the policy should prevent the underwriters from maintaining a separate action in a forum other than the forum the insured selects. Though the service-of-suit clause states that it does not waive the underwriters’ right to file suit under the policy, it would be impossible for the underwriters to both comply with their agreement to “abide by” a judgment rendered by a court in “any suit instituted against any one of them” and maintain an action in a separate court that will render a separate judgment that they will also have to abide by.

Several courts have held that a service-of-suit clause substantially identical to the one quoted above prevents the underwriter from maintaining a separate action in a forum other than the forum selected by the insured. For example, in American International Specialty Lines Insurance Co. v. Triton Energy Ltd., 52 S.W.3d 337 (Tex. App.—Dallas 2001, pet. dism’d w.o.j.), the court issued an anti-suit injunction enjoining the underwriters from proceeding with a parallel declaratory judgment action based on the service-of-suit clause. The court reasoned that the underwriters’ promise to “abide by the final decision of” the court in which the insured filed suit would be “meaningless” if it did not require the insurer to litigate its claims in the suit brought by the insured. See also London Mkt. Insurers v. Am. Home Assur. Co., 95 S.W.3d 702, 710–11 (Tex. App.—Corpus Christi 2003, no pet.) (upholding an anti-suit injunction based on the service-of-suit clause). At a time when insurers regularly resort to preemptive declaratory-judgment actions, the service-of-suit clause can be an effective tool to encourage Lloyd’s underwriters to litigate disputes in a forum that is more convenient for the insured.

Courts have also found that the service-of-suit clause prevents the underwriters from removing a lawsuit to federal court where the clause does not specifically reserve a removal right. See, e.g., City of Rose City v. Nutmeg Ins. Co., 931 F.2d 13, 15-16 (5th Cir. 1991) (“[W]hile the [Service of Suit] provision does not specifically mention the right of a defendant to remove an action from state to federal court, the language of the clause makes clear that the policyholder shall enjoy the right to choose the forum in which any dispute will be heard.”); Ins. Co. of the State of Pa. v. TIG Ins. Co., 933 F. Supp. 2d 510, 511–12 (S.D.N.Y. March 11, 2013) (holding that a reinsurer waived its right to remove a suit by including service-of-suit clauses in some reinsurance contracts at issue, even though other contracts at issue did not contain such clauses).

Though policies with service-of-suit clauses are common in the energy industry, many policyholders are unaware that they can provide much more than a mechanism for effecting service of process. Therefore, before initiating a suit under any insurance policy, energy-industry policyholders would be wise to determine whether their policy includes a service-of-suit clause and carefully review the clause to determine the policyholder’s and the underwriters’ forum-selection options.

Keywords: energy litigation, insurance, service-of-suit clause, consent-to-jurisdiction provision, forum selection, Lloyd's of London

Britton Douglas, Haynes and Boone, LLP, Dallas, Texas


December 3, 2013

9th Cir. Creates Standing Challenges for Climate-Change Litigation

A recent Ninth Circuit decision has landed a potential blow to private-citizen groups seeking to bring greenhouse-gas-emission claims under the Clean Air Act (CAA)—as the court held that two environmental groups lacked standing under Article III to bring the claims. In Washington Environmental Council v. Bellon, No. 12-35323 (9th Cir. Oct. 17, 2013),the district court had ruled that certain state and local agencies violated the CAA by failing to issue emission standards for oil refineries in Washington state. The Ninth Circuit reversed, finding that the environmental groups lacked standing because they did meet the causation and redressability requirements. One judge requested a vote for rehearing and additional briefing was filed in late November on the request for rehearing. If the holding stands, however, this case could be a potential roadblock for groups seeking to bring CAA claims related to greenhouse-gas emissions (as well as other similar claims).

In 2011, the Washington Environmental Council and Sierra Club of Washington brought suit in the Western District of Washington against the directors of several state and regional agencies, alleging that the directors failed to follow the CAA and enact regulations to monitor state oil refineries. Specifically, the environmental groups asked the court to require the agencies to implement regulations mandating that oil refineries producing greenhouse gases use reasonably available technology to control air pollution. The district court ruled for the environmental groups and ordered that the agencies determine the regulation standards to be used by the oil refineries.

Read the full case note.

Keywords: energy litigation, standing, causality, redressability, Clean Air Act, CAA, EPA, Ninth Circuit, greenhouse gas, environmental groups, oil refineries, Washington state

Laurel Brewer, Haynes and Boone, LLP, Dallas, TX


November 26, 2013

Master Limited Partnership Parity Act Picks Up More Support

Bipartisan support continues to grow in Congress for the Master Limited Partnerships Parity (MLP) Act, which would decrease the cost of domestic renewable-energy projects by allowing them to be structured as master limited partnerships. In November 2013, two additional senators, Mary Landrieu (D-LA) and Susan Collins (R-ME), expressed support for the bill that would allow renewable-energy projects to obtain the same MLP treatment that oil, coal, and gas projects currently receive—thereby leveling the playing field for renewable-energy projects to compete for funding with traditional energy projects.

Originally introduced in Congress on June 7, 2012, the bill failed to move forward during that session. Senator Chris Coons (D-DE) reintroduced the bill on April 24, 2013, and it has begun to pick up significant bipartisan support. The MLP Act would amend the Internal Revenue Code to allow clean-energy projects to take advantage of the master-limited-partnership business structure. The MLP Act would expand the permitted use of master limited partnerships to certain clean-energy technologies, such as wind, solar, and hydropower.

Master limited partnerships are taxed as a partnership (i.e., taxes are paid on the shareholder level). A master limited partnership, however, can trade its ownership interests on the market like corporate stock. The fundraising availability combined with pass-through taxation at the corporate level results in a lower cost of capital for a company organized as a master limited partnership. This business structure therefore combines the tax advantages of partnerships with the funding advantages of corporations—a structure that is enticing for investors.

In addition to receiving congressional support, numerous businesses, trade associations, environmentalists, and investment groups have expressed support for the MLP Act. But there also are doubters in the energy community. One concern is that this bill will allow big energy corporations to further take advantage of a tax loophole and skip out on taxes for renewable projects. Another concern is that the MLP Act will result in the centralized, corporate control of the renewable-energy industry—while taking away opportunities from smaller investors and local governments. Others support the bill, but are skeptical about its actual effectiveness in raising additional capital for renewable-energy projects.

Given the need to increase domestic energy production, it appears that congressional support for the MLP Act is gaining steam. Investors and companies contemplating renewable-energy projects therefore should continue to monitor the bill’s status and evaluate whether a master limited partnership would be beneficial for their proposed project(s).

Keywords: energy litigation, Master Limited Partnerships Parity Act, master limited partnership, renewable energy, Landrieu, Collins, Coons, Internal Revenue Code, tax law

Noah Nadler, Haynes and Boone, LLP, Dallas, TX


September 11, 2013

Fifth Circuit Vacates Own Decision in Transocean Insurance Case

In a rare turn of events, the Fifth Circuit has vacated its own decision granting BP access to Transocean’s entire $750 million insurance stack and has certified the issue to the Texas Supreme Court to decide. In re Horizon, No. 12-30230, 2013 U.S. App. LEXIS 18087 (5th Cir. Aug. 29, 2013). This decision highlights the traditional difficulty courts have in dealing with common but poorly understood additional-insured provisions.

In its original decision issued in March 2013, the Fifth Circuit reversed the district court’s ruling that BP was not entitled to coverage under Transocean’s policies. The Fifth Circuit reasoned that the provisions in the Transocean policies making BP an additional insured did not incorporate the limitations on the scope of coverage, if any, contained in the underlying drilling contract between Transocean and BP. Ranger Ins., Ltd v. BP P.L.C., 710 F.3d 338 (5th Cir. Mar. 1, 2013). As a result, the court held that BP was entitled to full coverage for the Gulf oil spill under Transocean’s $750 million insurance stack. A more in-depth discussion of the original decision and the core cases underlying that decision is available here.

On August 29, 2013, however, the Fifth Circuit panel unanimously vacated its March holding. In doing so, the court reexamined its interpretation of the Texas Supreme Court’s seminal decision in Evanston Ins. Co. v. ATOFINA Petrochems., Inc., 256 S.W.3d 660 (Tex. 2008), on which it had relied heavily in its original decision. It noted that both parties “proffer different applications of [the ATOFINA case] holding to the facts of the case at issue,” and said that “uncertainty regarding the outcome under ATOFINA ultimately triggered this certification.”

In particular, the court pointed to distinctions advanced by Transocean between the contract at issue in ATOFINA and the drilling contract between Transocean and BP. Unlike the ATOFINA contract, the drilling contract, at least under Transocean’s interpretation, required that BP be made an additional insured only for liabilities Transocean itself expressly assumed. This arguably tied the additional-insured requirement to Transocean’s contractual indemnity obligations. Transocean also argued that the additional-insured provision in the policy was different than in ATOFINA, in that it applied only to an “Insured Contract”; a reference to Transocean’s limited indemnity obligation.

In light of these distinctions,the court felt it was unclear under Texas law whether the insurance policies alone should determine the scope of BP’s coverage, or if the insurance policies and drilling contract should be interpreted together to resolve the scope-of-coverage issue. In the latter event, the court felt it was also unclear whether any ambiguities in the underlying drilling contract, like ambiguities in an insurance policy, should be construed in favor of coverage. The court certified both questions to the Texas Supreme Court.

While the outcome of the future Texas Supreme Court opinion remains to be seen, one thing seems certain: the ruling will have far-reaching effects on insurance law and businesses, including those in the transportation and oil-and-gas industries. This is a case everyone in business should follow closely. In the meantime, businesses should be careful to make sure that their insurance policies and contractual additional-insured provisions track each other closely.

Keywords: energy litigation, Gulf oil spill, BP, Transocean, insurance, additional insured, Fifth Circuit, Texas Supreme Court, certification

Jack G. Carnegie and Kelsey Sproull, Strasburger & Price, LLP, Houston, TX


August 6, 2013

Trade Secrets or Public-Health Information?

As fracking expands across the nation, many are wondering how to regulate it. One area of consistent concern involves the chemicals and additives used in fracking, and whether to require their disclosure or protect them as trade secrets. The issue is sometimes characterized as a battle between what is good for the public and what is good for the oil and gas industry. Recent cooperation between public-health advocates and industry representatives, however, shows that this characterization has been overstated.

Some, such as Ohio Citizen Action, a grassroots environmental group, have claimed that the oil and gas industry is withholding disclosure of the chemicals used in the fracking process, and as a result, is endangering the lives of the public if an accident were to occur. In response, legislation has popped up around the country requiring oil and gas companies to disclose exactly what chemicals and additives they use in fracking.

These new bills and laws requiring gas companies to disclose their fracking chemicals must strike a balance between the public’s need to protect their health, and the oil and gas industry’s need to protect its intellectual property. If chemical-disclosure laws fail to strike the right balance, they will likely lead to increased litigation by businesses seeking to enforce their trade secrets.

In some states though, this balance is struck through collaborative efforts across different interest groups. In Ohio, for example, the Ohio State Medical Association (OSMA) recently wrote a letter to the Ohio Senate clarifying its position on the level of fracking-chemical disclosure currently required by state law. The letter explains that during the OSMA’s 2013 annual meeting, the members considered a 70-line resolution, but instead approved a 5-line resolution that is already supported by Ohio law. “We believe this existing law affords a physician the right-to-know in a confidential manner when necessary what fracking chemicals are present” (emphasis in original). The OSMA also stated that increased transparency of fracking chemicals is not a legislative priority.

In another example of collaboration across interest groups, Colorado oil and gas regulators gave Colorado’s physicians wide latitude to obtain trade-secret information on fracking chemicals for the purpose of treating patients and public health. The Colorado Medical Society (CMS) was concerned that a confidentiality pledge would keep them from sharing information necessary to treat patients. The Colorado Oil and Gas Conservation Commission, however, assured the CMS that doctors would be permitted to share information on the chemicals with patients, other medical professionals, and public-health agencies. “In other words, the commission has given the most expansive possible interpretation to the rules.”

The Michigan legislature is also debating the issue of striking the appropriate balance between public-health concerns and intellectual-property concerns. Two separate house bills have been introduced requiring the disclosure of fracking chemicals. A primary difference between the two bills is how far each goes in requiring disclosure. One bill, HB 4061, is described as “one of the strongest pieces of chemical disclosure legislation in the country” and would require full disclosure of all fracking chemicals and additives to the public before drilling begins. The other bill, HB 4070, requires disclosure of additives but would allow only physicians access to the chemical information if a medical emergency exits.

“I tried to balance the public's rights with arguments on the other side that this is intellectual property and trade secrets,” said Rep. Jeff Irwin, D-Ann Arbor, an introducer of HB 4061. However, even supporters of the bill believe that trade-secret information would still have to be disclosed to state agencies under Irwin’s bill. These bills are still in House committee but are worth watching to see if they are amended to allow greater protection of trade secrets.

Keywords: energy litigation, fracking, trade secrets, health, Ohio, Colorado, Michigan

Travis Oliver IV, Law Offices of Travis Oliver IV, Monroe, LA, and Eve M. Ellinger, Ice Miller LLP, Columbus, OH


August 6, 2013

Implied Covenants Do Not Include Implied Duty to Drill

The Superior Court of Pennsylvania recently rejected a landowner’s attempt to invalidate a lease on the basis that the oil and gas company had violated its implied covenant to drill and develop the Marcellus Shale formation. See Caldwell v. Kriebel Res. Co., LLC, 2013 Pa. Super. LEXIS 1642, 13 (Pa. Super. Ct. June 21, 2013). Oil and gas leases have historically been bound by certain implied covenants; however, the new shale plays are creating unique implied-covenant issues. See Keith Hall, The Application of Oil & Gas Implied Covenants in Shale Plays: Old Meets New, Energy and Mineral Law Foundation. One such unique issue is whether there is an implied duty to drill and develop the deep shale formations when the current lease contemplates shallow, traditional gas formations.

In Caldwell, the plaintiffs-lessees sought to invalidate a 2001 lease encumbering their property. The agreement between the lessees and the oil and gas company was for an initial 24-month term that would be extended “so long as oil or gas was being produced.” The plaintiffs conceded that gas was being produced, but they contended that the lease should still be invalidated because the company was only producing gas from shallow wells and not from the Marcellus Shale formation. Additionally, the plaintiffs sought to invalidate the lease on the basis that the company has an implied duty to produce gas in “paying quantities.”

The Superior Court rejected each of these arguments and affirmed the trial court’s dismissal of the plaintiff’s complaint. With this implied duty to drill and develop the Marcellus Shale, the plaintiffs requested a holding that would require oil and gas companies “to develop all economically exploitable strata or hold that the duty to develop is attached to each strata of the natural gas.” In response, the defendant oil and gas company stressed that this holding would imply a new duty into nearly every oil and gas lease in the state.

In rejecting the implied duty to drill and develop, the court held that Pennsylvania law does not authorize the court to imply a duty into the contract where the express language of the contract precludes it. Id. at 9 (citing Jacobs v. CNG Transmission Corp., 565 Pa. 228 (Pa. 2001)). The language the court found dispositive stated: “[n]o inference or covenant shall be implied as to either party hereto since the full contractual obligations and covenants of each party is [are] herein fully and expressly set forth.”

The court also rejected the plaintiff’s duty to produce gas in the “paying quantities” argument, because the “paying quantities” standard is met “if a well consistently pays a profit, however small, over operating expenses.” Id. at 11 (quoting T.W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261, 267 (Pa. 2012)). Here, the court held that the defendants met this standard, and that the lease did not even contain the term “paying quantities.”

This case is a good sign for oil and gas companies in Pennsylvania as it shows both that existing leases will not necessarily be defeated due to the non-development of Marcellus or other shale formations, and that implied duties can be severely limited by contract. Accordingly, oil and gas companies will want to review their lease agreements and consider a provision that limits the implied duties that can be read into the agreement.

Keywords: energy litigation, fracking, implied covenant to drill, Marcellus Shale, Pennsylvania

Travis Oliver IV, Law Offices of Travis Oliver IV, Monroe, LA, and Eve M. Ellinger, Ice Miller LLP, Columbus, OH


August 1, 2013

Fifth Circuit Remands ORRI Dispute Due to Lease Ambiguity

The U.S. Fifth Circuit Court of Appeals, in a narrow 2–1 decision, recently affirmed the remand of a suit brought by Total E&P USA, Inc. and Statoil Gulf of Mexico, L.L.C. against Kerr-McGee Oil & Gas Corp. and others over $3.5 million in outstanding overriding royalties, finding that the assignment contracts at issue were ambiguous. The majority declined to rehear the case, and instead issued a new opinion that replaced an earlier March 15, 2013, opinion and overturned the district court’s grant of summary judgment in favor of Total and Statoil.

At issue in Total E&P USA Inc. v. Kerr-McGee Oil and Gas Corp was a 1998 federal lease affecting property on the Outer Continental Shelf (OCS) adjacent to Louisiana. No. 11-30038, 2013 WL 3104943 (5th Cir. June 20, 2013). In 1999 and 2001, Kerr-McGee and seven individuals known as the “Belcher Group” received overriding royalty interests (ORRI) by way of certain assignment contracts. Total and Statoil, together with Chevron USA, Inc., owned working interests in the federal mineral lease when production was obtained in 2009.

Read the full case note.

Keywords: energy litigation, royalties, Outer Continental Shelf, OCS, overriding royalty interests, ORRI, calculate and pay

Tyler L. Weidlich, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, New Orleans, LA


July 30, 2013

Fortuitously Fracking the Amish

As the oil and gas boom of western Pennsylvania and eastern Ohio continues to expand, some are wondering what this means for the region’s Amish communities. The Amish, who typically spurn technology for a simpler agrarian lifestyle, are now finding themselves as parties to high-dollar leasing contracts with oil and gas companies.

A recent article in the New Republic accuses the oil and gas companies of taking advantage of the Amish’s religious beliefs, which in many cases prevent them from filing lawsuits. The article, however, comes on the heels of other articles touting the positive impact of this new source of money as a way to subsidize a lifestyle that has long been financially unsustainable.

Eastern Ohio and western Pennsylvania are home to both large concentrations of Amish families and the Marcellus and Utica Shales. In this region, gas companies have rapidly snapped up the mineral rights underneath Amish land by entering into lease arrangements from between $10 and $6,000 per acre.

The New Republic article tells the tale of Lloyd Miller, who was offered $10 per acre by an agent of Kenoil Inc. for the right to drill on Miller’s farm. Miller believed, based upon his conversations with the agent, that this was a fair price; however, soon after Miller signed, he learned that some of his neighbors received $1,000 per acre in addition to five-figure signing bonuses.

Unlike many non-Amish Americans, Miller will not be heading to the courthouse. The Amish interpret the Bible to prohibit the use of courts to solve disputes; instead they prefer to work it out amongst themselves. This is where the gas companies draw the ire of New Republic reporter Molly Redden: "At stake are geysers of money. And in the thousands of cases in which the landowner is of the Amish faith, their business partner would never dream of taking them to court should things go awry. This, obviously, has enticed some companies to take advantage of Amish farmers."

Some, however, have questioned whether Miller’s price wasn’t indeed fair. According to one blogger, "Kenoil would have been looking to develop a Clinton or Rose Run well on this farmer’s property, a piece of property that is currently not even in the sights of Utica Shale developers. In 2010, the going rate of leases were not reflective of what they are today in eastern Ohio. In 2010, 10–25 dollars an acre was the going rate for leases."

Other media outlets are telling a different tale—one of newfound fortune and prosperity for a community that has long been struggling. Prior to the New Republic, the Pittsburgh Post-Gazette ran an article on the shale boom’s impact on the local Amish communities. It featured the Mullets, the Amish family who are infamously known for their involvement in a beard-cutting incident that brought federal hate-crime charges against Amish family leaders. The arrests of nearly all the men in the family made it extremely difficult for them to survive. Sam Mullet made $40,000 a year, had a struggling house-framing business and had outstanding mortgages on his 700 acres of land totaling $240,000. Mullet had been approached by gas companies several times before with offers around $1,000 per acre, which he rejected. When he finally did sign, Mullet was one of the last in the county to do so and received a whopping $5,300 per acre, royalties of 18 percent, and a $3.5-million signing bonus, which arrived while he was in jail on the hate-crime charges.

With the money, Mullet was able to pay off his mortgages as well as three others held by his sons. He also bought back a family member’s house that had been foreclosed upon. The Mullets have continued to use the money to pay legal bills, attend court proceedings, and stay connected with the family while they are in jail.

Blessing or curse, the gas companies and the money they bring with them are likely to stay. Perhaps the best solution for both sides was expressed by one Amish community lawyer: "You can fight a tiger if you pull its teeth"—meaning that a strongly negotiated contract is the best way to protect your interests.

Keywords: energy litigation, preemption, drilling, Ohio

Travis Oliver IV, Law Offices of Travis Oliver IV, Monroe, LA, and Eve M. Ellinger, Ice Miller LLP, Columbus, OH


July 30, 2013

Ohio Supreme Court Grants Appeal in Oil and Gas Preemption Case

The Ohio Supreme Court has agreed to hear the appeal of the City of Munroe Falls, Ohio, after the Ninth District Court of Appeals ruled that the city could not enforce its local drilling ordinances due to state preemption. See State ex rel. Morrison v. Beck Energy Corp., 2013-Ohio-356 at ¶ 63 (9th Dist. Ct. App. 2013) (No. 2593); cert granted State ex rel. Morrison v. Beck Energy Corp., 2013 Ohio 2512 (Ohio, June 19, 2013) (No. 13-0465). This case has wide-ranging implications for the oil and gas industry in Ohio as it determines whether localities can regulate drilling activities.

In Morrison, Beck Energy Corp. obtained a permit from the Ohio Department of Natural Resources (ODNR) to drill on property located in city limits, but Beck did not obtain the drilling permits required by the city’s ordinances. The city’s ordinances required Beck to obtain a city drilling permit, a zoning certificate, a right-of-way construction permit, post a performance bond, and attend a public hearing.

When Beck began drilling, the city issued a stop-work order and filed a lawsuit seeking an injunction. The trial court obliged and ordered Beck to cease operations until it complied with all applicable ordinances.

In reversing the trial court, the Ninth District court of appeals held that the city's ordinances were preempted by the state’s comprehensive regulatory scheme, which grants sole authority to regulate the oil and gas industry to the ODNR. Further, the city’s ordinances were not saved under the “home rule” doctrine because the ordinances directly conflicted with the state’s oil and gas regulatory scheme.

Under the home-rule doctrine, which is derived from the Ohio Constitution, municipalities are given “authority to exercise all powers of local self-government.” There is a three-step process to determine if the home-rule doctrine applies: (1) whether the ordinance is an exercise of local self-government; (2) whether the ordinance is an exercise of police power; and (3) whether the ordinance conflicts with the state statute.

In Morrison, the dispositive issue was whether the ordinances conflicted with the state statute. The test for such a conflict is “whether the ordinance prohibits that which the statute permits, or vice versa.” The appeals court held that the ordinances relating to permitting, zoning, and bonding were all preempted because the ordinances could prohibit activity that the state statute permits. However, the appeals court held that the city could enforce its public hearing and right-of-way ordinances, as long as they are not enforced in a way that discriminated or unfairly impeded oil and gas activities.

In a briefing to the Ohio Supreme Court, the city contends that a better balance needs to be struck between municipalities’ interests in reducing nuisances and protecting the health and welfare of their citizens, and the state’s interest in uniform regulation of the oil and gas industry. Brief of Appellants at 1, State ex rel. Morrison v. Beck Energy Corp., 2013 Ohio 2512 (Ohio, June 19, 2013) (No. 13-0465). Beck, on the other hand, argues that this policy choice has already been made by the general assembly when it determined that oil and gas activities required statewide regulation. Brief of Appellees at 1, State ex rel. Morrison v. Beck Energy Corp., 2013 Ohio 2512 (Ohio, June 19, 2013) (No. 13-0465).

At stake in Morrison is the level of regulation that the oil and gas industry will be subject to in Ohio. A victory for the city would mean increased costs for energy companies, who would be forced to obtain approval for drilling operations from both the state and municipalities. Complying with these sometimes duplicative and inconsistent regulations, says Beck, could be time-consuming, costly, and a hindrance to further oil and gas development. The city, on the other hand, says that a victory for Beck would mean that city governments could be powerless to stop what they see as inefficient use of their land. Others worry that any court reasoning that attempts to strike a “balance” between state and city regulation could be stretched by municipalities who creatively draft ordinances to fit that reasoning. Therefore, a "spilt the baby" ruling could have just as great of an impact on the energy companies as would a victory for municipalities. This issue now lies in the hands of Ohio's all-Republican Supreme Court.

Keywords: energy litigation, preemption, drilling, Ohio

Travis Oliver IV, Law Offices of Travis Oliver IV, Monroe, LA, and Eve M. Ellinger, Ice Miller LLP, Columbus, OH


July 10, 2013

TX High Court Rules for Energy Co. in Accommodation-Doctrine Case

The Texas Supreme Court recently applied the accommodation doctrine in the context of a no-evidence motion for summary judgment. In Merriman v. XTO Energy, Inc., No. 11-0494 (Texas June 21, 2013), plaintiff Homer Merriman owned the surface estate of a 40-acre tract of land, which he used in a cattle operation, and leased several other tracts of land that he also used in the cattle operation. Defendant XTO Energy, Inc. was the lessee of the mineral estate of the 40 acres, and wished to drill a gas well on the land. Merriman opposed the well and filed suit, claiming that the well would interfere with his cattle operation.

Under Texas law, the mineral estate has the right to go on the surface of the land to extract minerals, and also has incidental rights including the right to use as much of the surface as is reasonably necessary to obtain the minerals. If the mineral owner has only one method to obtain the minerals, then it may use that method even if it precludes or substantially impairs an existing use of the surface estate. But, under the accommodation doctrine, if the mineral estate has more than one method to obtain the minerals, and if one of these methods allows the surface estate to continue using the surface while another method does not, then the mineral owner must use the method that allows the surface estate to continue using the surface.

Read the full case note.

Keywords: energy litigation, accommodation doctrine, mineral estate, surface estate, summary judgment, Texas Supreme Court

Jack Edwards, Ajamie LLP, Houston, TX


April 12, 2013

California Drilling Barred for Failure to Consider Fracing Impact

The Obama administration recently suffered a setback when a federal judge in California ruled it violated national environmental law by not first conducting a full environmental-impact study before issuing oil and gas leases in the Monterey Formation. The decision by Judge Paul Grewal was issued on March 31, 2013, and requires the parties to either submit a joint plan of action or prepare to argue their cases before any drilling can go forward.

The Monterey Formation in central and southern California is estimated to contain more than 15 billion barrels of oil, or 64 percent of the total U.S. shale-oil reserves. The Interior Department’s Bureau of Land Management leased two tracts of approximately 2,500 acres for oil and gas development in 2011. Environmental groups, concerned that fracing could contaminate local water supplies and pollute the air, urged the court to rescind the leases and force a more thorough environmental review.

While Judge Grewal declined to cancel the leases, he held that the bureau’s analysis was flawed because it “did not adequately consider the developmental impact of hydraulic fracturing techniques . . . in combination with technologies such as horizontal drilling.”

Environmental groups such as the Center for Biological Diversity and the Sierra Club are touting this decision as a milestone in forcing greater scrutiny of fracing. Oil companies, on the other hand, are viewing the ruling as a delay, maintaining that the court ruled against the bureau’s process and not fracing specifically. Regardless, Judge Grewal’s decision and the case’s eventual outcome could have larger implications for a more recent lease of 18,000 acres in the same region, which according to environmental groups, was approved under the same “flawed analysis.”

The case is Center for Biological Diversity v. Bureau of Land Management, No. 11-cv-06174, U.S. District Court, Northern District of California, San Jose Division.

Keywords: energy litigation, fracing, California, Interior Department, Bureau of Land Management, Grewal, Monterey Formation

Kara Stauffer Philbin, Fernelius Alvarez, PLLC, Houston, TX


April 11, 2013

DOI Contempt Order on Second Post-Macondo Drilling Ban Reversed

On April 9, 2013, the Fifth Circuit released an opinion in Hornbeck Offshore Services v. Kenneth Salazar, No. 11-30936, reversing a contempt ruling against the Department of the Interior (DOI). Following the 2010 Deepwater Horizon explosion and oil spill, the DOI issued a moratorium, prohibiting all new and existing oil and gas drilling operations on the Outer Continental Shelf for six months. The district court enjoined enforcement of this moratorium. The DOI withdrew its original moratorium order, known as the "May Directive," and replaced it with the "July Directive," which continued the suspension of drilling and was the same in scope and substance as the May Directive, albeit with a more thorough explanation of reasons for the moratorium.

Hornbeck Offshore Services, a company that wanted to resume drilling operations and the original plaintiff in the injunction suit, argued that by replacing the May Directive with the July Directive, the DOI had chosen to disobey the district court's order enjoining the moratorium. The district court agreed, concluding that the "plaintiffs have established the government's civil contempt of its preliminary injunction order" by clear and convincing evidence. The Fifth Circuit, however, reversed. The Fifth Circuit noted that the injunction was not as clear and broad as Hornbeck claimed, and instead that the DOI's actions were technically not contemptuous of the injunction "as drafted and reasonably interpreted." The court noted, however, that "Our decision is a narrow one."

Lauren E. Godshall, Curry & Friend PLC, New Orleans, LA


April 2, 2013

Texas Supreme Court Resolves Risk Allocation vs. Due Diligence

Recently, the Texas Supreme Court harmonized the contractual risk-allocation provisions and the due-diligence requirements found in a contract for pipeline replacement and construction.

El Paso Field Services, L.P. purchased a propane pipeline and then made plans to remove the old pipeline and construct a new pipeline. El Paso invited several contractors to bid on a project to replace a section of the pipeline. In doing so, El Paso hired a third-party consultant to survey and map the pipeline route and issue “alignment sheets” that included locations of “foreign crossings” that included other pipelines, utilities, roads, and other natural and man-made intersections. These alignment sheets were provided to interested contractors in the bid package to assist the contractors in cost and time estimating. Eventually, the contractors completed a contract and offered their respective bids for the project. Subsequently, El Paso awarded MasTec North America, Inc. the bid.

Read the full case note.

Jon Paul Hoelscher, Coats Rose, Houston, TX


April 1, 2013

UTenn Leads Way on Fracking on University Property

As the debate over fracking continues, the Tennessee State Building Commission voted unanimously on March 15, 2013, to allow the University of Tennessee to move forward with soliciting bids for its hydraulic-fracturing (fracking) plan. The university’s plan allows a private gas company to lease the mineral rights to more than 8,000 acres of university land for the purpose of drilling for natural gas. Environmentalists oppose the plan because they fear that fracking could harm the wildlife and land in the university forest area.

In response to the environmental criticism, the university stressed both the financial and educational benefits of its fracking plan. While the university is unable to place a financial value of the natural gas on the land, it has proposed leasing the land for an initial amount of $300,000 and an additional $300,000 per year, plus 15 percent of all royalties for any natural gas sold. The terms of the lease will be for five years with the option of three five-year renewals—or as long as there is profitable gas production on the land.

The monies raised from leasing the land’s mineral rights will provide significant educational benefits. The successful bidder will lease the mineral rights to a portion of the land, but the university will retain the rights to study the impact fracking has on the area’s wildlife, air quality, and geology. Through its research, the university will monitor the fracking to ensure that safe drilling procedures are used and to make recommendations for minimizing any damage from fracking in the future.

According to university officials, other educational institutions including Vanderbilt University and Virginia Tech are interested in getting involved in the university’s fracking program.

Keywords: energy litigation, fracking, Tennessee

Eve M. Ellinger, Ice Miller LLP, Columbus, OH, and Travis Oliver IV, Law Offices of Travis Oliver IV, Monroe, LA


February 19, 2013

Judge Accepts BP's $4 Billion Criminal Settlement

On January 29, 2013, a federal judge in New Orleans approved a plea deal between BP and the U.S. Justice Department, which finalized BP’s criminal liability for the 2010 Gulf of Mexico oil spill. Under the agreement, BP will pay $4 billion in fines—the largest criminal resolution in U.S. history—and plead guilty to 14 counts of criminal acts, including felony manslaughter and obstruction of Congress. Had Judge Sarah S. Vance not accepted the plea, the oil giant would have faced a long and costly trial.

While the guilty plea brings BP’s criminal liability to a close, the company still faces the federal government’s civil claims, claims by Gulf Coast residents and businesses, and federal environmental penalties that could total into the tens of billions. If the penalties fall under the Clean Water Act and the Natural Resource Damage Assessment process, BP’s fines could be quadrupled, especially if BP is found to be grossly negligent.

Company attorneys and government officials are now working toward settling civil claims related to the spill, for which the company’s negligence is a key issue. Attorney General Eric H. Holder has publicly stated that the Justice Department is committed to establishing that BP was grossly negligent. BP, however, contends that the accident was in part due to the fault of two of its contractors: Transocean, the rig owner and operator, and Halliburton, the cement contractor on the well. A civil trial to resolve the remaining civil charges is scheduled for February 25, 2013, in New Orleans.

The fallout also continues for BP’s partners. Transocean agreed this month to plead guilty to a misdemeanor charge of violating the Clean Water Act and will pay $1.4 billion in penalties. Halliburton could face criminal charges, but has not reached any deals with the U.S. government. Four current and former BP employees face criminal charges as well and are preparing for trial.

Keywords: energy litigation, BP, Deepwater Horizon, settlement, criminal

Kim Mai, Haynes and Boone, LLP, Houston, TX


February 1, 2013

Oil Companies Denied Indemnification in WWII Remediation Costs

The U.S. Court of Federal Claims, in Shell Oil Co. v. United States, recently ruled that several well-known oil companies were not entitled to indemnification from the United States in connection with $92 million in remediation costs incurred at a site contaminated with aviation fuel during World War II. Nos. 06–141, 06–1411, 2013 WL 163804 (Fed. Cl. Jan. 14, 2013). In 1942 and 1943, the plaintiffs entered into contracts to manufacture vast quantities of “avgas” to help fuel the nation’s fleet of military aircraft. The manufacturing process, however, generated benzol waste that was disposed of on property now designated as the McColl Superfund site in Fullerton, California. The avgas contracts were terminated at the end of World War II, and the hazardous waste began oozing from the ground decades later.

Read the full case note.

Keywords: energy litigation indemnification, remediation, avgas, CERCLA, Anti-Deficiency Act

Tyler L. Weidlich, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, New Orleans, LA


January 31, 2013

"Billions" Paid to Landowners in Natural-Gas Royalties

A recent estimate by the National Association of Royalty Owners (NARO) approximates that some $21 billion in royalties were paid to landowners by oil and gas companies in 2010. In Pennsylvania alone, natural-gas royalty payments to landowners could exceed $1.2 billion for 2012 according to an estimate by the Associated Press in a recent article. The same article quotes one local farmer, in particular, who was living paycheck to paycheck prior to shale-gas development on his property.

Underlying the litigation and regulation surrounding fracking, is the fact that per the AP article, as a direct result of the deemed controversial fracking and horizontal drilling, billions of dollars are being paid to private landowners, farmers, and individuals. That says nothing of the benefits to the oil and gas producing states in terms of job creation and infrastructure investment, amounting to a 2.8 percent increase in GDP in North Dakota in 2011 and “tens of billions” invested in Pennsylvania in recent years.

As a result of this increased development, NARO, a landowner and royalty-owner organization that began in an effort to curb federal taxes on oil and gas production, has seen a marked rise in membership over the past five years. Given the annual increases in year-over-year production of natural gas and oil, a trend that is projected to continue long into the future, the annual royalties paid to landowners are expected to only increase. A result that would likely further grow the memberships of royalty-owners associations, several of which are generally in favor of further oil and gas development and, in the case of NARO, “the right to freely own and develop” resources.

At a time when the safety and consequences of fracking are constantly called into question, with firmly entrenched arguments on both sides of the debate, the billions paid to landowners and individuals represent one of the few uncontested effects of fracking and shale oil and gas development, an effect that is projected to have an upward trend for years to come.

Keywords: energy litigation, landowners, royalties, development, fracing, fracking

Austin Elam, Haynes and Boone, LLP, Houston, TX


January 24, 2013

Texas Appeals Court Allows "Pass Through" Indemnity

A Texas Court of Appeals recently addressed the enforceability of an indemnity agreement in the context of a master services agreement (MSA) with an oilfield services contractor. Under Texas law, indemnity provisions are valid and enforceable if they satisfy two fair-notice requirements: (1) the express-negligence doctrine; and (2) the conspicuousness requirement. Indemnity provisions related to a well or a mine are further subject to the Texas Oilfield Anti-Indemnity Act (Chapter 127 of the Texas Civil Practice and Remedies Code) if they purport to indemnify an indemnitee for the indemnitee’s negligence.

In Tutle & Tutle Trucking v. EOG Resources, Inc., 2012 WL 5695585 (Tex. App-Waco Nov. 15, 2012, no pet. h.), EOG Resources, Inc. hired Tutle & Tutle Trucking, Inc. as a contractor under an MSA. A Tutle employee was injured by the alleged negligence of Frac Source, another contractor hired under a similar MSA with EOG. The injured employee sued Tutle and Frac Source but did not sue EOG. Frac Source demanded that EOG defend and indemnify it from the employee's claim pursuant to the EOG-Frac Source MSA, and EOG demanded that Tutle defend and indemnify EOG pursuant to the EOG-Tutle MSA.

Read the full case note.

Keywords: energy litigation, indemnity, pass through, fair notice, express negligence, conspicuousness, Texas Oilfield Anti-Indemnity Act

Paul Russell, Haynes and Boone, LLP, Houston, TX


January 23, 2013

Texas Court Requires Precise UCC Filing

As investment in the domestic oil and gas exploration and development industry continues at a rapid pace, it is especially important to ensure that creditors have completed all necessary steps to secure their loans. A recent Texas case—CNH Capital America LLC v. Progreso Materials Ltd., 2012 WL 5305697 (S.D. Tex. Oct. 25, 2012)— emphasizes the importance of filing under the correct debtor name with respect to personal property, equipment, fixtures, and as-extracted collateral (i.e., hydrocarbons out of the ground).

CNH Capital involved the financing of two pieces of equipment, an Ahern asphalt plant and a Kawasaki wheel loader. The plaintiff, CNH Capital America, LLC, financed the purchase of both pieces of equipment and alleged that the original buyers were Hugo Martinez and Progreso Materials, Ltd.. CNH further claimed that Progreso and Martinez had granted a security interest, which CNH had properly perfected.

Read the full case note.

Keywords: energy litigation, UCC, financing statement, creditor

Kim Mai, Boone, LLP, Houston, TX


January 16, 2013

D.C. Circuit Reigns in the EPA

A divided three-judge panel of the D.C. Circuit Court decided in August 2012 the controversial decision of EME Homer City General LP v. Environmental Protection Agency, et al., 696 F.3d 7 (Fed. Cir. Aug. 21, 2012). Without weighing in on the merits of the Environmental Protection Agency’s (EPA) Transport Rule (which regulates pollutant emissions of upwind states), Judge Kavanaugh, who wrote the opinion for the court, found that the Transport Rule exceeded the EPA’s authority. EME, 696 F.3d at 11–12. Judge Griffith joined Judge Kavanaugh in the opinion, while Judge Rogers dissented.

Congress took on the challenge of addressing air quality in the United States by implementing a federalism-based system of air pollution control under the Clean Air Act. Id. at 11. The system takes a balanced approach, allowing the EPA and states to work together to deal with the complex regulatory challenge. Congress directed that the EPA can set air-quality standards for pollutants, and that the states have the primary responsibility for determining how to meet those standards by regulating emission sources within the state.

Read the full case note.

Keywords: energy litigation, EPA, Transport Rule, Clean Air Act, Federal Implementation Plans, air quality, air pollution

Kristen W. McDanald, Beirne, Maynard & Parsons, L.L.P. Houston, TX


January 3, 2013

EPA Releases Update on Ongoing Fracking Study

In December 2012, the EPA released an update on its ongoing study of hydraulic fracturing, or “fracking.” The study, commissioned by Congress in 2010, is looking at fracking’s impact on drinking water. It will not look at the effects of injecting wastewater deep underground, which some critics claim causes small earthquakes and threatens water supplies. The study so far has examined samples from five sites in Colorado, North Dakota, Pennsylvania, and Texas. The studies in North Dakota, Pennsylvania, and Texas are in shale plays and were chosen because they had experienced well blowouts that leaked fracking fluids or because area homeowners had complained about the decline in the quality of the drinking water.

The update on the study does not offer conclusions as of yet but instead outlines the issues to be explored. The study will look at the impact of the following:

  • large-volume water withdrawals from ground and surface waters on drinking-water resources
  • surface spills on or near well pads of hydraulic-fracturing fluids on drinking-water resources
  • injection and fracturing process on drinking-water resources
  • surface spills on or near well pads of flowback and produced water on drinking-water resources
  • inadequate treatment of hydraulic-fracturing wastewaters on drinking-water resources

The EPA also announced several changes to the study’s research plan since the publication of the initial study plan. It now plans to use and analyze data gathered in FracFocus, a new national registry of chemicals used in fracking that was jointly commissioned by the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission in 2011. The original study plan also identified DeSoto Parish, Louisiana, within the Haynesville Shale, as a site for case study. Due to scheduling conflicts, though, this site will no longer be a party of the study. The EPA will also no longer conduct high-throughput screening assays of certain chemicals used in fracking or detected in flowback and produced water, per the recommendations of the EPA’s Science Advisory Board. Finally, because the Department of Energy is already studying the interactions between fracking and various rock formations, the EPA has decided not to look at this issue. Thus the study will no longer look at (1) how fracking fluids might change the fate and transport of substances in the subsurface through geochemical interactions and (2) the chemical, physical, and toxicological properties of substances in the subsurface that may be released by fracking.

The EPA does not expect the study to be completed until 2014.

Courtney Scobie, Ajamie LLP, Houston, TX


January 2, 2013

EPA Administrator Jackson Stepping Down in January

Lisa Jackson, the administrator of the Environmental Protection Agency (EPA) since 2009, will be stepping down in January following President Obama’s State of the Union address. She did not give any reason for her pending resignation other than to spend more time with her family and to seek new opportunities. President Obama has not nominated a new administrator yet, but her deputy administrator, Robert Perciasepe, has been mentioned as a possible successor.

Jackson’s most significant action as EPA administrator has been drafting new clean air regulations, including the country’s first regulations on greenhouse gases in response to climate change concerns. She faced significant criticism from industry and congressional Republicans for attempting to impose greenhouse-gas regulations. She and the White House were unable to win congressional support for broad-based climate-change legislation, which led to the EPA drafting its own regulations. Those regulations were upheld by the D.C. Circuit in June 2012. Jackson also oversaw new regulations governing mercury emissions from industrial sites and negotiated stricter fuel-efficiency standards with the automobile industry.

Jackson’s successor will oversee the implementation of a number of greenhouse-gas-emissions regulations that have yet to be implemented, including performance standards for existing power plants and refineries, final rules for cooling water used by power plants, and rules for disposal of ash from coal-fired generating plants. The next EPA administrator will also likely work on issues related to hydraulic fracturing, or fracking, including the completion of a long-term study on fracking’s effects on drinking water.

Courtney Scobie, Ajamie LLP, Houston, TX


January 2, 2013

DOJ and SEC Jointly Release New Guide to the FCPA

In November 2012, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) jointly released A Resource Guide to the U.S. Foreign Corrupt Practices Act, which provides a detailed analysis of the Foreign Corrupt Practices Act (FCPA) and provides guidance on the DOJ’s and SEC’s approach to enforcement of the act. Much of the guide is a synthesis of previous decisions and releases from the DOJ and the SEC. The guide summarizes the major provisions of the FCPA and other anti-corruption laws, including the anti-bribery and accounting provisions of the FCPA; provides information on the various consequences an individual or a company can face for an FCPA violation; and describes the various resolutions the SEC or the DOJ may reach when investigating a possible FCPA violation.

The longest chapter in the guide, “Guiding Principles of Enforcement,” discusses what both the DOJ and SEC review when considering investigating a possible FCPA violation or bringing FCPA charges. Like the rest of the guide, this chapter is synthesis of previous pronouncements by the DOJ and SEC, including U.S. Attorney’s Manual, the U.S. Sentencing Guidelines, and the SEC’s Seaboard Report on enforcement proceeding against companies. The chapter also reiterates that both the DOJ and the SEC look favorably at individuals and companies who voluntarily report violations and who cooperate with the authorities.

“Guiding Principles of Enforcement” also includes a detailed description of what the government considers an effective corporate-compliance program. According to the guide, the three basic questions the DOJ or the SEC asks when considering whether a company has an effective compliance programs are whether the program is well designed, whether the program is applied in good faith, and if it works. The presence of the following elements indicates an effective FCPA compliance program:

  • There is commitment from senior management and a clearly articulated policy against corruption.
  • The program applies to and is available to all employees.
  • The program addresses foreign corruption.
  • The program is well-supervised.
  • The program has risk-assessment techniques.
  • The company offers its employees training and advice regarding the program.
  • The program has incentives and disciplinary measures for all employees.
  • The program calls for thorough due diligence when dealing with third party agents, including knowledge of their business and reputation and an evaluation of the need for using a third-party agent in a foreign country.
  • The program allows employees to confidentially report violations.
  • The program includes internal investigations.
  • The program allows for periodic testing and review of its policies.

The guide was co-written by the Criminal Division of the DOJ and the Enforcement Division of the SEC.

Courtney Scobie, Ajamie LLP, Houston, TX


January 2, 2013

Final Approval Given to Partial Settlement in Deepwater Horizon Suit

On December 21, 2012, the Eastern District of Louisiana, the court overseeing the multi-district litigation concerning the April 2010 Deepwater Horizon explosion, gave its final approval to a partial settlement between BP and thousands of plaintiffs affected by the ensuing oil spill. The settlement covers property damages and economic losses suffered by people and businesses along the Gulf Coast who suffered real property damages and business losses. BP estimates that the settlement is worth $7.8 billion. However, there is no cap on potential settlement claims other than the $2.3 billion settlement for seafood-related claims for commercial fishermen.

Judge Carl Barbier gave his initial approval in May 2012, which prompted numerous plaintiffs to opt out of the settlement to pursue their claims individually. Many of the objections to the agreement were filed by people or businesses excluded from the agreement or from fishermen who contend they will not be compensated enough for their lost catches. Judge Barbier has not ruled yet on a medical settlement that BP has already reached with the plaintiffs.

The settlement agreement contains a number of reservations and exclusions. It reserves the plaintiffs’ claims against Transocean, the owner of the Deepwater Horizon rig, and Halliburton, the manufacturer of the cement casings on BP’s Macondo well. The agreement excludes the claims of financial institutions, financial funds and vehicles, casinos, insurance entities, the oil and gas industry, real-estate developers, private plaintiffs in parts of Florida and Texas, and residents and businesses claiming harm from the Obama administration’s moratorium on deep-water drilling prompted by the spill. The agreement reserves those claims, along with any claims for bodily loss and derivative claims for BP shareholders. The agreement also does not apply to the federal government’s claims against BP or those of the states of Louisiana and Alabama. The court retained jurisdiction over any matters and disputes arising out of the settlement agreement.

Judge Barbier’s 125-page opinion provides a description of the settlement agreement, including who is eligible, the claims covered, the geographic area and time period covered by the settlement, how the settlement amounts are calculated, the mechanics of filing a claim under the settlement, and an analysis of the fairness of the settlement. Judge Barbier analyzed the settlement under Rule 23 governing class actions. He concluded the plaintiff class satisfied the certification requirements under Rule 23(a); that common factual and legal issues predominated over individuals ones; that a class action was the best way to adjudicate the controversies presented in this matter; and that the settlement was “fair, reasonable, and adequate” under Rule 23(e). Judge Barbier noted that the amount of time the parties spent crafting the settlement, the relatively low number of potential plaintiffs opting out of the settlement, and the fact that litigation would take years to resolve all favored approval of the settlement.

A bench trial is set for late February to determine liability and apportion fault among BP, Transocean, and Halliburton.

Courtney Scobie, Ajamie LLP, Houston, TX


December 26, 2012

NSR Program Approval; Historic CAA Settlement

The calendar year may be wrapping up, but the Environmental Protection Agency’s (EPA) Region 6 is staying busy. On December 18, 2012, the agency issued a press release detailing its proposal to approve Arkansas’ program for permitting new facilities that will emit significant amounts of greenhouse gases. If approved, the state’s program would replace a federal plan that had been in place since January 2011. Final approval would provide Arkansas with authority to issue New Source Review (NSR) Prevention of Significant Deterioration (PSD) permits governing greenhouse-gas emissions and establish appropriate emissions levels for new or heavily modified sources of greenhouse-gas emissions. The press release noted that, “While the EPA believes states are best positioned to regulate GHGs, the agency has been the GHG permitting authority in Arkansas since the state did not have such a program in place,” and that “[t]he State of Arkansas and EPA worked together to develop the state’s permitting program as a replacement for the federal plan.” The EPA’s proposed approval will be published in the Federal Register in seven to 10 days and will be available for public comment for 30 days.

Also, in Region 6, the EPA and Louisiana Generating, an electric-generating company owned by NRG Energy, Inc., entered into a consent decree with regard to the Big Cajun II coal-fired power plant in New Roads, Louisiana, which will result in the elimination of over 27,300 tons of harmful emissions per year. The settlement, field on November 21, 2012, will require Louisiana Generating to spend approximately $250 million to reduce air pollution, pay a civil fine of $3.5 million, and spend $10.5 million on environmental-mitigation projects. Half of the civil penalty—$1.75 million—will be allocated to the state of Louisiana. The settlement arises out of a 2009 lawsuit in which the Justice Department sued NRG Energy, alleging that the Big Cajun II power plant had operated since 1997 without any update to its air-pollution controls.

Louisiana Generating will reduce its emissions through a combination of new pollution controls, natural-gas conversion, and annual emission caps at all three units at the Big Cajun II plant. Emissions of sulfur dioxide will be reduced by approximately 20,000 tons, and nitrogen oxides by about 3,300 tons. Also, $10.5 million will be spent on various environmental-mitigation projects, including installing solar panels at local schools and government buildings, forestry and wetlands restoration, and funding the installation of charging stations for electric vehicles in the South Louisiana area.

The settlement marks the federal government’s 24th settlement under its national enforcement initiative to reduce emissions from coal-fired power plants under the Clean Air Act’s (CAA) New Source Review requirements, and, according to the EPA’s press release, is the largest CAA settlement in Louisiana history.

Keywords: energy litigation, EPA, NRG, Louisiana Generating, greenhouse gas, Clean Air Act, Big Cajun II

Lauren E. Godshall, Curry & Friend PLC, New Orleans, LA


November 16, 2012

BP to Pay Largest Criminal Penalty in U.S. History

The April 20, 2010 explosion of the Deepwater Horizon rig owned by BP Exploration and Production Inc. is making record numbers. Not only did the explosion cause what has been dubbed “the worst off shore spill in U.S. history” and kill 11 people, but BP has now agreed to pay the largest criminal penalty in U.S history to settle claims brought by the U.S. Department of Justice: $4 billion.

On November 15, 2012, Attorney General Eric Holder announced that BP will pay the $4 billion in criminal fines and penalties to settle 11 criminal counts of felony manslaughter, one count of felony obstruction of justice, and misdemeanor violations of the Clean Water and Migratory Bird Treaty Acts. This $4 billion penalty beats the record formerly held by Pfizer Inc., which paid a $1.3 billion fine in 2009 to settle claims of marketing fraud related to its Bextra pain medication. 

BP also agreed as part of its guilty plea to retain a process-safety and risk-management monitor and an independent auditor, who will oversee BP’s process safety, risk management, and drilling-equipment maintenance with respect to deepwater drilling in the Gulf of Mexico. BP will also be required to retain an ethics monitor to improve BP’s code of conduct for the purpose of seeking to ensure BP’s future candor with the U.S. government.

BP is not done with actions related to the Deepwater Horizon explosion. The U.S. government and more than 100,000 private plaintiffs will continue to pursue civil actions against BP and other defendants to recover civil penalties under the Clean Water Act and hold defendants liable for natural-resource damages under the Oil Pollution Act. A trial on liability matters is scheduled to begin in February 2013, during which the United States will seek to establish that the spill was caused by BP’s gross negligence. BP estimates that the civil actions will cost more than $7.8 billion to resolve.

BP’s last major settlement was with the U.S. Department of Justice in 2007, when it paid about $373 million to resolve three separate matters: a 2005 Texas refinery explosion, an Alaska oil pipeline leak, and fraud for conspiring to monopolize the U.S. propane market.

Outstanding issues remain as to how the projected $4 billion in settlement funds will be split amongst the areas of the gulf coast affected by the spill. And how Transocean Ltd., owner of the Deepwater Horizon vessel, and Halliburton Co., which provided cementing work on the well, will settle the separate liability charges that have been brought against them.

Keywords: energy litigation, BP, Deepwater Horizon, oil spill, Department of Justice

Kristen W. McDanald, Beirne, Maynard & Parsons, L.L.P. Houston, TX


November 1, 2012

Texas Court to Rule on Seizure of Private Land for XL Pipeline

The issue of whether TransCanada may take immediate possession of privately owned land while the property owner challenges the taking was submitted to the Texas Ninth Circuit Court of Appeals on October 30, 2012. The case, In re TransCanada Keystone Pipeline, LP, Case No. 09-12-00496-CV, is one of many pending suits by TransCanada against East Texas landowners.

The issue is whether TransCanada can take private property as a “common carrier” under Texas statute. Under the current rules, administered by the Texas Railroad Commission, pipeline operators seeking access to private land through eminent domain must show that they are a “common carrier,” which means that they transport natural resources in the public’s interest. To become a common carrier, though, all a pipeline company must do is tell the commission that it is one; the process involves little more than filling out a one-page form.

In March of this year, however, the Texas Supreme Court cast doubt on how pipeline companies acquire right of way. In Texas Rice Land Partners ltd. v. Denbury Green Pipeline-Texas, LLC, 363 S.W.3d 192 (Tex. 2012), the court held that pipeline companies must prove that they are common carriers before taking possession. Despite the Supreme Court’s pro-landowner ruling, however, lower courts have yet to apply that decision to prohibit TransCanada from taking immediate possession pending litigation. In the past few months, courts in Lamar and Jefferson Counties have allowed TransCanada to take possession of easements across private lands while its condemnation suits are pending. The Ninth Circuit’s decision will be the first appellate court ruling on this issue since Denbury, and will likely shape the course of litigation in condemnation lawsuits concerning the XL Pipeline.

Keywords: energy litigation, TransCanada, common carrier

Ryan T. Kinder, Coats Rose Yale Ryman & Lee, PC, Houston, TX


November 1, 2012

ExxonMobil's $65 Billion Alaskan LNG Project Approved

The U.S. Army Corps of Engineers recently approved ExxonMobil’s plans to fill in more than 200 acres of wetlands to proceed with its natural-gas extraction and export project on Alaska’s northern border.

The approval process provides Exxon with a permit to begin developing Point Thomson, thought to be the second-largest natural-gas field in Alaska. The reserve is estimated to contain eight trillion cubic feet of gas and hundreds of millions of barrels of condensate and oil. It is located 60 miles east of Prudhoe Bay and is part of the North Slope. According to Exxon, the North Slope is thought to hold more than 35 trillion cubic feet of discovered natural gas.

The permit approval comes after an in-depth three-year review by the Army Corps that included exploration and consideration of five alternatives for the project. The considerations were time-consuming because the plans included both coastal and inland infrastructure. Exxon plans to fill in approximately 267 acres of wetlands on the navigable waters of the North Slope that lead out to the Beaufort Sea. The Army Corps believes this plan will be the “least environmentally damaging practicable alternative.” The permit contains several conditions to minimize adverse impacts to the environment, including payment of a mitigation fee to the Army Corps’ conservation fund.

This construction will ultimately serve the Alaska Pipeline Project, which is a joint venture between Exxon and TransCanada Corp. The Alaska Pipeline will provide a commercial avenue to the vast resources of the North Slope. These projects will create a significant impact on local Alaskan economies and will likely create numerous legal issues related to the construction and maintenance of these facilities.

Keywords: energy litigation ExxonMobil, Alaska, North Slope, natural gas, LNG

Jon Paul Hoelscher, Coats Rose Yale Ryman & Lee, PC, Houston, TX


November 1, 2012

Legislation Seeks to Quash Tax Benefits for Oil Spill Penalty Payments

U.S. Representative Jo Bonner (R-Alabama) recently introduced a bill that would bar BP PLC from getting a tax break for payments made in connection with the 2010 Deepwater Horizon oil spill. Bonner pointed to media reports that suggest that the U.S. Department of Justice (DOJ) and BP were close to striking a multibillion-dollar settlement to resolve Clean Water Act (CWA) claims related to the spill. Bonner's bill, H.R. 6579, seeks to amend the IRS code to "deny any deduction for compensatory payments made to any person or governmental entity on account of the April 20, 2010, explosion on and sinking of the mobile offshore drilling unit Deepwater Horizon."

Lawmakers are also concerned that any settlement agreement might allow BP to pay a large portion of penalties under the Oil Pollution Act instead of the Restore Act. The Restore Act stipulates that 80 percent of fines levied against a company under the CWA would go toward economic and environmental restoration of the areas affected by the violations. In this case, if BP were fined under the CWA, 80 percent of the fines would go to the five Gulf Coast states affected by the spill. By allowing the DOJ and BP to stipulate how the fines are levied, there is concern that BP might be allowed to pay a large portion of its fines under the Oil Pollution Act, which is not governed by the Restore Act. If BP were to pay its fines under the Oil Pollution Act rather than the Clean Water Act, less money from the fines might ultimately find its way to the five states most affected.

Keywords: energy litigation, BP, Deepwater Horizon, oil spill

Jon Paul Hoelscher, Coats Rose Yale Ryman & Lee, PC, Houston, TX


October 26, 2012

Utah Joins List of States Requiring Disclosure of Fracking Fluids

Utah’s Oil, Gas and Mining Board unanimously voted to approve a new rule that requires companies to identify and report the type and amount of chemicals used in hydraulic fracturing (fracking) at any Utah oil and gas well. The board will now require companies to report this data to FracFocus, which is managed by the Ground Water Protection Council and Interstate Oil and Gas Compact Commission and is funded by the U.S. Department of Energy. The mandatory reporting will take effect November 1, 2012. Companies will have 60 days from completion of a fracking job to report the information and disclose it to the public.

Utah joins seven other states, including Colorado, Louisiana, Montana, North Dakota, Oklahoma, Pennsylvania, and Texas, using FracFocus to meet state disclosure rules.

Fracking involves the injection of fluids, often composed of sand, water, and other chemicals, into a well to fracture shale rock formations. This allows new cracks to open in the formation and makes once inaccessible oil and gas accessible. Fracking has been used for years, but has become a fixture in unconventional oil and gas plays throughout the world over the last decade.

Landowners and environmental groups blame fracking for contaminating groundwater and causing earthquakes. Hollywood has also made movies about the practice and its alleged environmental effects.

The Bureau of Land Management and U.S. Environmental Protection Agency are conducting studies of fracking in an effort to potentially create federal regulations for fracking. Many state agencies feel that, due to the differences in environment and geology among the states, regulations related to fracking should be left to each individual state’s prudence.

Keywords: energy litigation, fracking, FracFocus, Utah

Jon Paul Hoelscher, Coats Rose Yale Ryman & Lee, PC, Houston, TX


August 31, 2012

New Mex. High Court Favors Oil/Gas Companies in Royalty Dispute

The New Mexico Supreme Court recently ruled in favor of ConocoPhillips Co. and Burlington Resources Oil & Gas Co. in a dispute over the calculation of royalties owed for production on state land.

The lawsuit addressed the interpretation of royalty clauses contained in statutory lease forms established by the state in 1931 and 1947. Both lease forms specified that royalties were to be calculated as a percentage of “net proceeds” resulting from the sale of oil and gas. However, the commissioner for the State Land Office took the position that the state leases prohibit lessees from deducting post-production costs necessary to prepare oil and gas for the market in calculating royalties. The improper deductions for post-production costs, according to the commissioner, resulted in ConocoPhillips underpaying royalties by approximately $18.9 million and Burlington Resources underpaying by approximately $5.6 million.

ConocoPhillips and Burlington Resources filed suit seeking a declaration that the State Land Office’s assessments constituted a deprivation of due process, an unconstitutional impairment of contract, and breach of contract. They also claimed that the commissioner had exceeded his constitutional and statutory powers and had usurped the state legislature by seeking royalty payments pursuant to calculations not authorized by law. The commissioner, in turn, counterclaimed for breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of the implied covenant to market.

The New Mexico Supreme Court addressed four interlocutory rulings granting summary judgment in favor of ConocoPhillips and Burlington Resources. In the first order, the district court granted summary judgment regarding the interpretation of three lease provisions, finding that (1) the “net proceeds” language in the leases allowed the lessees to deduct post-production costs incurred in selling oil and gas, (2) field and plant fuel are post-production costs under the “free use” clauses and are not subject to royalty payments, and (3) the lessees are required to pay royalties on drip condensate only to the extent they derive profits from such use. In the second order, the district court interpreted the “maximum price” clause in the 1947 lease to require royalties based on the maximum market price in the field or area if “such action is necessary to the successful operations of the lands for oil or gas purposes.” In the third order, the district court ruled that the cost of post-production services provided by the lessees’ affiliate companies is deductible to the extent it is “reasonable.” Finally, in the fourth order, the district court dismissed the commissioner’s claim for breach of the implied covenant to market on grounds that the lessees are permitted to net costs associated with marketing oil and gas because their royalty obligation is premised on “net proceeds.”

The district court certified the rulings for interlocutory appeal, and the court of appeals then certified the appeal to the New Mexico Supreme Court as a matter of “substantial public interest.” The New Mexico Supreme Court accepted the certification and affirmed all four district court rulings.

The case is ConocoPhillips Co. and Burlington Resources Oil & Gas Company, L.P. v. Patrick H. Lyons, Commissioner of Public Lands of the State of New Mexico, No. 32,624 (Aug. 24, 2012).

Keywords: energy litigation, ConocoPhillips, Burlington Resources, Commissioner of Public Lands, New Mexico

Tyler L. Weidlich, Baker Donelson Bearman Caldwell and Berkowitz, PC, New Orleans, LA


August 30, 2012

TX Court Dismisses Oil/Gas Interlocutory Appeal, Allows Mandamus

The Texas Second Court of Appeals, in Lipsky v. Range Production Co., No. 02-12-00098-CV, recently dismissed a contamination lawsuit against Range Resources Corp. in which various landowners alleged that the company’s operations in the Barnett Shale contaminated a water well. The landowners claimed that Range Resources’ operations had contaminated the well to the extent that it was flammable and, in fact, circulated a video to the media showing flames shooting from the well.

The plaintiffs also filed related complaints with the state’s railroad commission and the U.S. Environmental Protection Agency (EPA). In response, the EPA issued an emergency order to require Range Resources to immediately deliver potable water to local residents, and filed an administrative action against the company to clean up the contamination. However, the EPA eventually withdrew the action.

Range Resources, in turn, counterclaimed for defamation and business disparagement, alleging that the plaintiffs’ complaint to the EPA regarding gas contamination was a fabrication and also that the plaintiffs ignited a gas vent on fire (not well water) in the video circulated to the media. The plaintiffs then moved to dismiss the counterclaim under the state’s anti-strategic-lawsuits-against-public-participation statute. The motion was denied by the trial court, and the plaintiffs appealed the decision.

The court of appeals dismissed the plaintiffs’ appeal for lack of jurisdiction. Citing the recent decision of Jennings v. Wallbuilder Presentations, Inc., No. 02-12-00047-CV, 2012 WL 3500715 (Tex. App.-Fort Worth Aug. 16, 2012), the court held that “we do not possess jurisdiction over an interlocutory appeal from a trial court’s timely-signed order denying a motion to dismiss under section 27.003 of the civil practice and remedies code.” Nevertheless, the court allowed the plaintiffs to challenge the trial court’s ruling via a mandamus proceeding, which is a procedural tool that authorizes a court of appeal to hear a case over which it otherwise could not exercise jurisdiction. The court then granted the parties a couple of weeks to file briefs in the mandamus action.

Keywords: energy litigation, EPA, Range Resources, Barnett Shale

Tyler L. Weidlich, Baker Donelson Bearman Caldwell and Berkowitz, PC, New Orleans, LA


August 20, 2012

6th Cir. Vacates EPA's Final Determination of "Adjacent" Facilities

The Sixth Circuit recently released its decision in Summit Petroleum Corp. v. EPA, Nos. 09-4348 and 10-4572 (August 7, 2012), in which it remanded the case to the Environmental Protection Agency (EPA) to determine whether a sweetening plant and certain sour-gas wells operated by Summit Petroleum Corporation are sufficiently physically proximate to be considered “adjacent” within meaning of Title V of the Clear Air Act. If the facilities are deemed adjacent, they constitute a “major source” of air pollution and would require a Title V operating permit.

Taken separately, the plant and the wells do not emit enough nitrous oxides and sulfur dioxides for either to constitute a major source. However, multiple pollutant-emitting activities can be aggregated together as a single stationary source if they meet three criteria: (1) they are under common control; (2) they are located on one or more contiguous or adjacent properties; and (3) they belong to the same major industrial grouping. Summit did not dispute application of the first and third criteria. However, Summit disputed that the wells and the plant were located on adjacent properties because the wells are located over 43 square miles at varying distances from the plant, and Summit also stressed that it does not own the property between individual well sites or between the plant and the wells.

The EPA, after over four years of review, issued a final determination that the plant and the wells were adjacent, focusing on the functional relationship between the two activities. The agency argued that the term “adjacent” was ambiguous, and therefore, its determination was entitled to deference from the court.

The court agreed with Summit that the EPA’s “determination that the physical requirement of adjacency can be established through mere functional relatedness is unreasonable and contrary to the plain meaning of the term ‘adjacent.’” In doing so, the court looked to the dictionary meaning of “adjacent” and found that two entities are adjacent when they are “close to; lying near . . . [n]ext to, adjoining.” As the amicus brief in the case highlighted, the EPA’s interpretation of the term “adjacent” focusing on functional relatedness would lead to absurd consequences in the oil and gas industry where nearly every facility is connected by pipeline.

Keywords: energy litigation, EPA, Sixth Circuit, Adjacent

Sarah Casey, Baker Donelson Bearman Caldwell & Berkowitz, PC, New Orleans, LA


August 20, 2012

Louisiana Amends Risk Fee Statute to Shift Royalty Obligation

On June 6, 2012, the governor of Louisiana signed Act 743 amending two sections of the Conservation Code, including Louisiana Revised Statute Section 30:10, commonly referred to as the Louisiana Risk Fee Statute. Among other things, Act 743 adds several provisions addressing the obligation of a drilling owner to pay royalties (and overriding royalties) owed by non-participating interest owners to others.

The Louisiana Risk Fee Statute seeks to allocate the risk of drilling certain wells as between "drilling" owners and "non-drilling" owners. Under the Risk Fee Statute, when a non-drilling owner has been sent a risk-fee notice by a drilling owner and has elected not to participate in the risk and expense of drilling, the drilling owner may recoup the costs to be borne by the non-drilling owner from the non-drilling owner's share of unit production, plus a risk fee of 200 percent of such tracts’ allocated share of the cost of drilling, testing, and completing the well.

The Risk Fee Statute, in its current form and as reenacted, provides that notwithstanding the risk-fee provision, "the royalty owner and overriding royalty owner shall receive that portion of production due to them under the terms of the contract creating the royalty." Both state and federal Louisiana courts have previously interpreted this provision to mean that the nonparticipating owner, as the contracting party, is responsible for paying the royalties (and overriding royalties) owed to its royalty interests, even though the nonparticipating owner is not receiving any part of production revenues. Act 743 effectively overrules that jurisprudence, at least in part.

The new statute provides that during the recovery period—the period of time during which the drilling owner withholds from production the actual reasonable expenditures incurred in drilling, testing, completing, equipping, and operating the well—the drilling owner must pay the royalty to the nonparticipating owner, and the risk fee is not assessed against those amounts. The drilling owner's obligation is determined, as a basic matter, by the terms of the contract or agreement between the nonparticipating owner and the royalty interest(s) as "reflected of record at the time of the well proposal." The drilling owner's royalty payment obligation ceases once it recovers the actual well costs and risk charge.

In addition to requiring the drilling owner to foot the royalty bill during the recovery period, the reenacted and amended Risk Fee Statute affords certain judicial remedies to an aggrieved royalty interest(s) for nonpayment. Most significantly, the new statute recognizes a cause of action for damages on behalf of a nonparticipating owner against a non-paying drilling owner. Subject to certain notice requirements and a time period for corrective measures to be taken by the drilling owner, a drilling owner who fails to make payment of the royalties or state a reasonable cause for its failure may be liable to the nonparticipating owner for double the amount of royalties due, interest on that sum from the date due, and a reasonable attorney fee "regardless of the cause for the original failure to pay royalties."

Given that the legislature did not provide a specific effective date for Act 743, by law, the default effective date was August 1, 2012. It is unclear whether the Act will apply retroactively. However, the Act does not expressly provide for retroactive application and because the changes are substantive and may affect vested rights, Act 743 should apply only to wells drilled after August 1, 2012.

Keywords: energy litigation, Act 743, risk fee, royalty, shift

Laurie D. Clark, Baker Donelson Bearman Caldwell ∓ Berkowitz, PC, New Orleans, LA


August 20, 2012

The Constitutionality of Pennsylvania's Act 13

On July 26, 2012, major provisions of Pennsylvania’s recently enacted Act 13 were declared unconstitutional in Robinson Township., et al., v. Commonwealth, et al., Case No. 284 M.D. 2012. Act 13 repealed the previous Pennsylvania Oil and Gas Act, replacing it with a statutory framework intended to regulate oil and gas operations in Pennsylvania. Among other things, Act 13 provides for the assessment and distribution of impact fees, eminent-domain rights, enhanced environmental-protection provisions, and statewide uniformity in local ordinances that impact oil and natural-gas operations. The passage of Act 13 was criticized by many as disempowering local government and limiting private property rights.

Just over a month after its February 14, 2012, enactment, various townships, individuals, and an environmental association filed a petition for review seeking injunctive relief and challenging the constitutionality of Act 13 on 12 counts. Counts I–III alleged that section 3304 of Act 13 violated substantive due process under both the U.S. and Pennsylvania Constitutions. Count VIII alleged that Act 13 lacked sufficient guidance to the Pennsylvania Department of Environmental Protection (DEP) when delegating it authority to determine when a waiver from the setback requirements established by section 3215(b) could be granted.

Read the full case note.

Keywords: energy litigation, Act 13, Pennsylvania Oil and Gas Act, police power, zoning, setback requirements, non-delegation doctrine, Robinson Township v. Commonwealth

Kara Stauffer Philbin, Fernelius Alvarez PLLC, Houston, TX


August 1, 2012

Colorado Sues City of Longmont to Challenge Drilling Ordinance

The Colorado Oil and Gas Conservation Commission sued the city of Longmont. In the lawsuit, the commission asserts that portions of the city’s local ordinance banning drilling are preempted by the Colorado Oil and Gas Conservation Act and implementing regulations.

In December 2011, Longmont enacted a moratorium on accepting applications for oil and gas well permits. Although set to expire in April, Longmont extended the moratorium through June. Members of the commission met with Longmont representatives to discuss preemption of the moratorium by state regulation, and how to address Longmont’s concerns through the existing regulatory program. Efforts to coordinate local and state regulation were unsuccessful.

In July, Longmont passed the ordinance at issue over the commission’s objection. The commission filed the lawsuit, asking the court to declare portions of the ordinance invalid because they are preempted by state regulation.

Colorado Oil and Gas Conservation Commission v. City of Longmont, in the District Court, Boulder County, Colorado.

Keywords: energy litigation, Colorado, ordinance, drilling ban, Longmont, preempt

Liz Klingensmith, Haynes and Boone, LLP, Houston, TX


August 1, 2012

Penn. Appellate Court Returns Fracking Control to Municipalities

A Pennsylvania appellate court struck down a portion of recently enacted Act 13 and returned power to municipalities to control drilling operations through zoning regulation.

Act 13 triggered widespread changes to the booming natural-gas industry in the Marcellus Shale in Pennsylvania. The act created a per-well annual fee, set forth what aspects of the industry were subject to municipal regulation, and changed scores of regulations. Under a short fuse, municipalities quickly updated local rules to comply with Act 13.

Act 13 allowed drilling in all zoning districts, even residential areas, within certain limits. The appellate court determined that the law cannot require municipalities to allow drilling in areas where local zoning regulations would prohibit drilling. The ongoing dissonance between state regulation and local ordinances creates a hotbed of regulatory uncertainty for operators.

Proponents of local zoning control argue that Act 13 unconstitutionally usurps power from local municipalities to protect the health and safety of their residents through zoning regulations that would prohibit drilling.

Proponents of Act 13 argue that the law is necessary to create a uniform and consistent set of rules to regulate the growing natural-gas industry, and that without it Pennsylvania risks losing the chance to promote and grow a key economic driver to its fullest potential.

Pennsylvania officials seek expedited review of the opinion by the Pennsylvania Supreme Court during the court’s October session in Pittsburgh.

Robinson Township, et al. v. Commonwealth of Pennsylvania, No. 284 M.D. 2012, in the Commonwealth Court of Pennsylvania, Opinion dated Jul 26, 2012.

Keywords: energy litigation, fracking, Pennsylvania, municipality, zoning, Act 312

Liz Klingensmith, Haynes and Boone, LLP, Houston, TX


July 30, 2012

Court of Appeals Overturns Royalty Judgment Against El Paso

The Thirteenth Court of Appeals of Texas overturned the trial court’s grant of summary judgment in favor of an alleged mineral owner against El Paso Corp. The court of appeals determined that neither side conclusively negated as a matter of law that the alleged mineral owner held superior title from a common source as to the disputed mineral acreage. Because questions remained unanswered by the fact finder, the court of appeals concluded that the trial court erred in its ruling.

The dispute between El Paso Corp. and the alleged mineral owner began in 2006 when the alleged mineral owner sued El Paso and claimed that he owned minerals contained in lands from which El Paso was producing oil and gas. The alleged mineral-interest owner sought an accounting from El Paso, and payment of oil and gas proceeds from December 2, 2002.

The parties filed competing motions for summary judgment. The alleged mineral-interest owner presented summary judgment evidence that purportedly established him as record-title holder of the minerals. El Paso presented summary judgment evidence that title examinations revealed that other parties held competing title.

The trial court granted summary judgment in favor of the alleged mineral-interest owner, ordered El Paso to pay past royalties, and terminated El Paso’s mineral lease on the property because El Paso had refused to pay royalties to the alleged mineral-interest owner.

The court of appeals determined that the competing summary-judgment evidence raised questions unanswered by the fact finder, and concluded that the trial court erred in its ruling.

The case is El Paso Production Oil & Gas USA LP n/k/a El Paso E&P Co. LP v. Sellers, No.13-10-00439-CV, in the Thirteenth Court of Appeals for the State of Texas.

Keywords: energy litigation, El Paso, royalty, Sellers, summary judgment

Liz Klingensmith, Haynes and Boone, LLP, Houston, TX


July 3, 2012

North Carolina Passes Fracking Legislation, Overrides Veto

The North Carolina legislature on July 2, 2012, overrode the governor’s veto to pass the state’s first fracking legislation. Senate Bill 820 was originally passed by the Republican legislature on June 21, but vetoed by Governor Beverly Perdue, a Democrat, on July 1. She said she supported fracking, but that the legislation contained insufficient environmental safeguards. Aided by an accidental vote in the House of Representatives, however, the Senate and House were able to muster the required three-fifths majorities to override her veto.

Senate Bill 820 creates the North Carolina Mining & Energy Commission of the Department of Environment & Natural Resources, and gives this commission the power to regulate fracking. It prohibits certain chemicals and constituents, including diesel fuel, in fracking fluids; requires the disclosure of all chemicals and constituents in fracking fluids, with an exception for trade secrets; requires the implementation of water and wastewater management plans; requires measures to mitigate impacts on infrastructure; requires safety devices and protocols; and requires notice, recordkeeping, and reporting. It also establishes a presumption that any water contamination within 5,000 feet of a wellhead is the responsibility of the well operator. This presumption can be rebutted by evidence that the contamination predated the drilling activity, based on a pre-drilling water test; that the operator was denied access to conduct a pre-drilling water test; or that the contamination was caused by something other than the drilling activity.

The new Mining & Energy Commission will consist of 15 members, including two members of a nongovernmental conservation interest, two representatives of the mining industry, two local elected officials, a representative of a publicly traded natural-gas company, a geologist, an engineer, and an attorney. Once the commission is formed, it will develop fracking regulations consistent with this legislation. The first drilling permits are not expected to be issued until 2014, at the earliest.

According to a recent U.S. Geological Survey, North Carolina contains 1.7 trillion cubic feet of natural gas in the Deep River Basin in Lee, Chatham, and Moore Counties in central North Carolina. USGS Releases Unconventional Gas Estimates for Five East Coast Basins, June 20, 2012. Based on 2010 consumption rates in North Carolina, that is a 5.6 year supply of natural gas.

Keywords: energy litigation, fracking, North Carolina

Jack Edwards, Ajamie LLP, Houston, TX


July 3, 2012

Fracking Unlikely to Cause Earthquakes, Says NRC Study

Fracking is unlikely to cause earthquakes, according to a recent study by the National Research Council (NRC). Induced Seismicity Potential in Energy Technologies, National Research Council, June 15, 2012. The study was commissioned by the U.S. Department of Energy (DOE), after Sen. Jeff Bingaman (D-NM) requested in 2010 that the DOE use the NRC to study the potential for seismicity induced by energy development.

Hydraulic fracturing (fracking) involves the injection of fluids into underground shale formations to release trapped natural gas, and wastewater from fracking operations is sometimes disposed of using underground injection wells. Both types of injection have led to concerns that fracking can cause earthquakes.

The NRC study found that fracking “as presently implemented . . . does not pose a high risk for inducing felt seismic events.” Out of the approximately 35,000 fracking wells that exist in the United States, only one case of “felt seismicity” (in Oklahoma in 2011) has been reported where fracking is suspected, but not confirmed, as the cause of the seismicity. And globally only one case of “felt induced seismicity” (in Blackpool, England, in 2011) has been confirmed as caused by fracking. The study noted that these low numbers were likely due to “the short duration of injection of fluids and the limited fluid volumes used in a small spatial area.”

In contrast, the study found that the disposal of wastewater into underground injection wells “does pose some risk for induced seismicity, but very few events have been documented over the past several decades relative to the large number of disposal wells in operation.” This may be because most “disposal wells typically involve injection at relatively low pressures into large porous aquifers that have high natural permeability, and are specifically targeted to accommodate large volumes of fluid.” Factors that determine the probability of a seismic event include the volume of fluid injected, the injection rate, the injection pressure, and the proximity to existing faults and fractures. Where seismicity is detected, “[r]educing injection volumes, rates, and pressures have been successful in decreasing rates of seismicity associated with waste water injection.” The study cautioned that the “long-term effects of a significant increase in the number of waste water disposal wells for induced seismicity are unknown,” and that “[f]urther research is required.”

Keywords: energy litigation, fracking, earthquakes, National Research Council, Department of Energy

Jack Edwards, Ajamie LLP, Houston, TX


July 2, 2012

Fracking Activities Could Pose Heightened Risks to Employers

In recent years, the fracking boom in the United States has led to hundreds of thousands of new jobs in the energy industry. According to a recent report commissioned by America’s Natural Gas Alliance, fracking and other unconventional natural-gas production techniques may create as many as 1.5 million jobs in the United States by 2035.

But along with an increase in a company’s employee pool comes heightened responsibilities for employers in the fracking industry. Not the least of these obligations are those imposed by the Occupational Safety and Health Association (OSHA), the country’s primary federal agency charged with the enforcement of safety and health legislation.

Last month, OSHA, along with the National Institute for Occupational Safety and Health (NIOSH), issued a hazard alert about fracking worker safety, stating that employers must ensure that their workers are properly protected from overexposure to silica in fracking operations. The hazard alert was spurred by a letter from the AFL-CIO, the U.S.’s largest federation of unions, to OSHA, calling for action to protect workers from silica exposure during fracking. Citing a recent field study by NIOSH ascertaining that 79 percent of exposed silica samples exceeded the NIOSH Recommended Exposure Limits, the letter urged OSHA to make a new silica standard and to expand its field work in the fracking industry to include medical surveillance of workers.

The OSHA alert reminds employers that they are “responsible for providing safe and healthy working conditions for their workers,” and cautions that “Employers must determine which jobs expose workers to silica and take actions to control overexposures and protect workers.” According to OSHA, “a combination of engineering controls, work practice, protective equipment, and product substitution where feasible, along with worker training, is needed to protect workers who are exposed to silica during hydraulic fracturing operations.” The alert lists a number of specific practices that employers can implement in their efforts to achieve the goal of worker safety in fracking operations.

The alert is significant to employers, in that it could increase the potential for OSHA investigations of fracking operations, particularly in the event of a report of harm to an employee for silica exposure. The alert also increases the risk that an employee injury could result in a willful violation of the Occupational Safety and Health Act, which carries significant penalties of up to $70,000 per violation. Employers are well advised to take all appropriate safety precautions against potential silica exposure to their employees.

Keywords: energy litigation, fracking, OSHA, NIOSH, silica

Kelley Edwards, Littler Mendelson P.C., Houston, Texas


June 28, 2012

Ohio Passes Fracking Legislation

Ohio recently passed fracking legislation that will go into effect in September 2012. Ohio is home to both the Marcellus and Utica shales and has experienced a natural-gas boom in recent years thanks to fracking. The legislation, which is contained in Senate Bill 315, seeks to modernize existing law by addressing the unique concerns of fracking.

To improve transparency, the legislation requires the disclosure of all chemicals used in fracking operations, with an exception for trade secrets. The disclosure must occur within 60 days after the completion of drilling operations, either on a well-completion report submitted to the Ohio Department of Natural Resources (DNR) or on the chemical-disclosure registry maintained by the groundwater protection council and the interstate oil and gas compact commission (i.e., fracfocus.org). Well owners, however, are not required to report chemicals that occur incidentally or in trace amounts, and may also withhold from disclosure information that is a trade secret.

A trade-secret designation may be challenged by a property owner, adjacent property owner, or any person or state agency with an interest that may be adversely affected by filing a civil action in the Court of Common Pleas of Franklin County. In such an action, the court shall conduct an in camera review to determine whether the claimed information is a trade secret. A trade secret is nevertheless still required to be disclosed to: (1) the DNR, if necessary to respond to a spill, release, or investigation; or (2) a medical professional, if necessary to assist in the diagnosis or treatment of an individual who is affected by an incident associated with fracking operations. In such a case, the DNR or medical professional must otherwise maintain the confidentiality of the trade secret.

The legislation also seeks to protect water quality and minimize the effects on local roads. Well operators are required to conduct pre-drilling testing of water wells within 1,500 feet of a proposed fracking operation, and disclose the results in the permit application. This applies to wells in both urban and rural areas. The permit application must identify the proposed source of groundwater and surface water that will be used, state whether the water will be withdrawn from either the Lake Erie watershed or the Ohio River watershed, provide an estimate of the volume of recycled water to be used, and provide an estimate of the rate and volume of water withdrawal. The permit application must also contain either a copy of an agreement for maintenance and safe use of the roads and highways that will be used for access to and egress from the well site entered into on reasonable terms with the applicable local government, or an affidavit stating that the operator attempted in good faith to enter into such a road-use-management agreement but that no agreement could be reached.

During the life of the well, the well owner must maintain liability insurance for fracking operations of at least $5 million for bodily injury and property damage, and a “reasonable” level of coverage for environmental damage.

Violators of these provisions may be fined as much as $20,000 per day.

Senate Bill 315, which was passed by the Ohio legislature in May 2012, was signed into law by Gov. Kasich on June 11, 2012, and is set to become effective 90 days later.

Keywords: energy litigation, fracking, regulation, Ohio

Jack Edwards, Ajamie LLP, Houston, TX


June 28, 2012

Houston Appeals Court Overturns Oil and Gas Royalty Verdict

On May 31, 2012, the First Court of Appeals in Houston issued an opinion in an oil and gas royalty dispute that amounted to an almost total reversal of the trial court’s multi-million-dollar verdict. The underlying lawsuit concerned three oil and gas leases in Jefferson and Hardin Counties, Texas. Charles Hooks and his estate sued operator Samson Lone Star for breach of contract, fraud, fraudulent inducement, and several other causes of action related to the three leases. While the trial court sided with Hooks on nearly all of his causes of action, the appeals court concluded that most his actions were untimely and brought well past the statute of limitations. Moreover, on one of the claims, the court found that Hooks ratified Samson’s actions by accepting royalty checks from Samson, thus estopping him from claiming breach of contract. The court’s ruling reiterated the more stringent discovery rule followed by Texas courts in resolving royalty disputes.

Read the full case note.

Keywords: energy litigation, Samson, Hooks, Houston, royalty, limitations, unpooled

Courtney Scobie, Ajamie LLP, Houston, TX


June 1, 2012

California Seeks to Enact New Rules Regulating Fracking

The debate on fracking is heating up in California. The state currently does not regulate fracking differently from other extraction techniques. If Governor Jerry Brown gets his way, however, that soon may change. Governor Brown has asked the state legislature to increase the budget and size of the state’s oil-and-gas agency—the Division of Oil, Gas and Geothermal Resources—which is a division of the California Department of Conservation. The legislature preliminarily granted this request on May 9, 2012. Governor Brown hopes that the division’s increased resources will help it draft new fracking-specific regulations by 2014.

The California Department of Conservation hopes to enact fracking-specific regulations even sooner. It is currently holding a series of public workshops on fracking, and it hopes to have a draft of any new regulations by fall 2012. While the Department of Conservation’s regulations are merely in their infancy, when completed, they are expected to be some of the toughest in the country. Many expect that the state will impose stringent well-integrity standards and require disclosure of all chemicals used in the fracking process. The Department of Conservation is also commissioning an independent study to look at the effects of fracking on drinking water. The results of that study are expected to influence the draft regulations.

Keywords: litigation, energy litigation, California, hydraulic fracturing, fracking

Robert Carlton, Haynes and Boone, LLP, Houston, TX


May 25, 2012

Lone Pine Order Leads to Dismissal of Fracking Case

A case in Colorado state court against Antero Resources Corp., Calfrac Well Services, Ltd., and Frontier Drilling LLC has been dismissed after the plaintiffs failed to satisfy a Lone Pine order.

The case, filed by William and Beth Strudley in March 2011, alleges property damage and personal injuries arising out of the defendants’ use of hydraulic fracturing. According to the complaint, the defendants operated wells located within approximately one mile of the plaintiffs’ property. The plaintiffs alleged that the defendants’ operations caused their water and air supply to become contaminated with an array of chemicals, causing the plaintiffs to eventually abandon their home. The plaintiffs also aver that their exposure to fracking chemicals caused them to suffer health problems, such as nosebleeds and congestion, and also caused them to fear future illnesses. The plaintiffs asserted claims for negligence, negligence per se, nuisance, trespass, strict liability, and medical-monitoring trust funds.

During case-management proceedings, the judge issued a Lone Pine order instructing the plaintiffs to detail their alleged injuries and damages and show minimal evidence of causation. In response, the plaintiffs submitted their medical records, maps, photographs, analyses of water and air samples, and expert testimony. After reviewing the materials, the court held that the plaintiffs failed to establish the prima facie elements of their claims, and dismissed all of the plaintiffs’ claims with prejudice. Although the records submitted showed evidence that certain compounds existed in the air and water around the plaintiffs’ home, there was not sufficient data showing a causal connection between the plaintiffs’ alleged injuries and the defendants’ drilling activities.

According to counsel for Antero, the case provides an example for how Lone Pine orders can be used by defendants in fracking-related toxic-tort cases to streamline discovery and shift the burden to the plaintiff early in the case. Plaintiffs’ counsel plans to appeal the decision, calling the ruling an erroneous use of a Lone Pine order.

Keywords: litigation, energy litigation, Lone Pine, hydraulic fracturing, fracking, Colorado

Megan Bibb, Haynes and Boone, LLP, Houston, TX


May 15, 2012

Sackett Ruling Will Probably Not Impact CERCLA Enforcement

On March 21, 2012, the U.S. Supreme Court issued a unanimous decision in Sackett v. EPA (No. 10-1062). Although Sackett holds that the recipient of a compliance order from the Environmental Protection Agency (EPA) pursuant to the Clean Water Act (CWA) may seek pre-enforcement judicial review to challenge the EPA’s authority, many wonder whether the decision will also affect the EPA’s authority under other similar statutes, namely, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The short answer is that Sackett probably will not have an immediate impact on compliance orders issued pursuant the CERCLA, but the case demonstrates the Supreme Court’s growing frustration toward the EPA’s tactics and keeps the door open for future constitutional challenges.

The EPA issues approximately 3,000 compliance orders each year pursuant to environmental laws like the CWA and CERCLA. Prior to Sackett, five courts of appeals had held that the CWA precluded pre-enforcement review of compliance orders, and that such preclusion did not violate due process. Going forward, however, entities or individuals who receive compliance orders pursuant to the CWA may challenge the EPA’s authority by invoking the Administrative Procedures Act (APA). Notably, in reaching its decision, the Court observed that nothing in the CWA precludes pre-enforcement judicial review. However, the Court’s opinion did not address the potential due-process issues raised by the litigants.

By basing its ruling on statutory interpretation rather than on constitutional grounds, the Supreme Court limited Sackett’s potential impact on other environmental statutes. Unlike the CWA, CERCLA does expressly preclude pre-enforcement judicial review. This glaring difference between the texts of the CWA and CERCLA will likely be enough to prevent Sackett’s application to pre-enforcement judicial challenges brought in response to CERCLA compliance orders.

Whether or not CERCLA’s express preclusion is constitutional will have to be a question for another day, and Sackett in no way forecloses on the possibility of future constitutional challenges. To date, CERCLA orders have withstood constitutional challenges in some circuits. For example, in 2010 the D.C. Circuit in General Electric v. Jackson focused its analysis on General Electric’soptions in the face of a section 106 order. General Electric could either comply with the EPA’s order and sue for reimbursement of costs, or refuse compliance and wait for the EPA to sue.

However, during Sackett oral arguments, Justice Alito expressed incredulity that a government agency could have such unchecked authority in the United States. This sentiment was reiterated in his concurring opinion, wherein he stated that it is “unthinkable” that private-property owners in our nation can be denied access to the courts while potential fines quickly exceed millions of dollars. It is possible that future litigants will be emboldened by Justice Alito’s language to bring constitutional challenges to CERCLA’s provisions, which may lead to a future Supreme Court decision that will finally settle the constitutionality of CERCLA’s ban on pre-enforcement judicial review.

Keywords: litigation, energy litigation, CERCLA, CWA, EPA

Megan Bibb, Haynes and Boone, LLP, Houston, TX


May 10, 2012

Interior Department Proposes Fracking Regulations

The Department of the Interior’s Bureau of Land Management (BLM) on Friday issued proposed regulations for the hydraulic fracturing—also called fracking—of oil and natural gas on federal and Indian lands. The proposed regulations largely follow the recommendations of the influential report issued last year by the Department of Energy’s Shale Gas Production Subcommittee. See Government Studies May Determine the Future of Fracking Regulation, Nov. 21, 2011. In a press release, Secretary Salazar stated that “it is critical that the public have full confidence that the right safety and environmental protections are in place. The proposed rule will modernize our management of well stimulation activities—including hydraulic fracturing—to make sure that fracturing operations conducted on public and Indian lands follow common-sense industry best practices.” Interior Releases Draft Rule Requiring Public Disclosure of Chemicals Used in Hydraulic Fracturing on Public and Indian Lands, May 4, 2012.

The BLM’s proposed regulations would (1) require the public disclosure of all chemicals used in fracking fluids, with an exception for trade secrets; (2) strengthen regulations related to well-bore integrity; and (3) address issues related to flowback water. In a change from the BLM’s original position, the chemicals in fracking fluids would not need to be disclosed until after drilling begins. The disclosed information is expected to be posted on a public website, possibly the FracFocus.org website already used by several states. To protect trade secrets and confidential business information, an operator could apply for an exemption from public disclosure, but the operator would be required to identify specific information and explain why it should not be publicly disclosed. If the BLM disagrees, it would be required to give the operator 10-business-days’ notice before releasing the information to the public.

The proposed regulations also seek to ensure well-bore integrity and ensure the safe handling of the water used in fracking. Before fracking occurs, operators would be required to submit cement-bond logs, perform mechanical-integrity testing, and submit a geological report on the rock surrounding the well. They would also be required to disclose specific information about the water source to be used, the type of materials (proppants) to be injected into the fractures to keep them open, the range of anticipated pressures to be used, and the estimated total volume of fluid to be used; describe the proposed handling of recovered fluids, including the estimated volume of fluid to be recovered, the proposed methods of managing the recovered fluids, and the proposed disposal method; and ensure that the facilities needed to process or contain the flowback water are available on location. Finally, operators would be required to certify in writing that they have complied with all federal, tribal, state, and local laws, including permit and notice requirements, related to fracking.

After fracking occurs, operators would be required to certify that the well-bore integrity was maintained throughout the operation, and submit a report and explanation if the actual operations deviated from the approved plan. They would also be required to report the actual volume of fluid used, the actual pressures reached, the actual fluids handled, and the volume of fluid recovered during flowback. Recovered fluids would be required to be stored in tanks or lined pits.

The proposed regulations would apply to 700 million acres of federal land and 56 million acres of Indian land. The current regulations, which are more than 30 years old, were not written to address modern fracking. Once the proposed regulations are published in the Federal Register, which is expected to occur soon, a 60-day public-comment period will begin, during which the public, governments, industry, and other stakeholders are invited to provide input. The regulations are expected to be finalized by the end of 2012.

Jack Edwards, Ajamie LLP, Houston, TX


May 10, 2012

Petroleum-Engineering Firm Could Be Liable for Reserve Estimates

In its 2012 decision in Highland Capital Management v. Ryder Scott Co. and Chesapeake Energy Corp., the Court of Appeals for the First District of Houston reversed a summary judgment for the defendants and held that a petroleum-engineering firm could be liable under the Texas Securities Act (TSA) for providing estimates of oil-and-gas reserves to be included in an oil and gas exploration company’s Securities Exchange Commission (SEC) filings. Under this holding, the providing of “false” estimates of the oil and gas reserves or estimates prepared “with reckless disregard for the truth” could result in liability for aiding both the sellers as well as the issuers of interests in securities. Furthermore, the court held that the engineering firm’s alleged failure to follow SEC guidelines for estimating oil and gas reserves could satisfy the intent required to be an aider and abettor under the TSA.

Read the full case note.

Donald D. Jackson and Mini Kapoor, Haynes and Boone, LLP, Houston, TX


December 15, 2011

New Chemical Disclosure Requirements Finalized

On December 13, 2011, the Texas Railroad Commission formally adopted its proposed regulations requiring disclosure of chemicals used in fracturing treatments, applicable to all wells for which the Commission issues an initial drilling permit on or after the regulations effective date, February 1, 2012. The regulations also require disclosure of other information about the fracturing treatment, including the date of treatment, volume of water and base fluid used, and other well-identifying information.

Enacted pursuant to HB 3328, these regulations will require submission of applicable fracking materials to the Commission through an online chemical disclosure registry FracFocus on or before the date a well operator submits its well completion report. The operator must identify the source of each additive used in the fracturing fluid, each chemical ingredient provided by the operator that is subject to federal disclosure requirements, and all ingredients intentionally added by the operator. Additionally, the operator must disclose to the Commission, either on FracFocus or in a separate document, the Chemical Abstracts Service (CAS) number for each chemical intentionally included in the fracturing treatment. The operator does not have to disclose chemicals not intentionally added, naturally occurring, or contained in an additive and undisclosed by the manufacturer, supplier, or service company.

The regulation also contains an exemption for disclosure of chemicals whose identity is a trade secret. An operator claims this exemption by reporting to the Commission the chemical family of the ingredient, stating that the identity and/or concentration of the ingredient are entitled to trade-secret protection, and disclosing the properties and effects of the unidentified chemical or chemicals. A landowner or adjacent landowner of the property where the wellhead is located may challenge this designation, as may the government, within 24 months of the operator’s well completion record.

Keywords: Texas, disclosure, fracking, public comment, regulation, Texas Railroad Commission

Ben Allen and Liz Klingensmith, Haynes and Boone, LLP, Houston, TX


November 16, 2011

Pennsylvania Court Leaves Door Open to a New Definition of "Minerals" in Marcellus Shale

In September, the Superior Court of Pennsylvania issued a Jekyll-and-Hyde opinion that highlights both a potential legal landmine and the possibility for an industry-friendly body of law in Pennsylvania for Marcellus shale natural gas producers. Specifically, the decision will impact producers who are operating on land where the surface and mineral estates were severed prior to the discovery of recoverable Marcellus shale gas. In Butler v. Powers, the court acknowledged that use of the term “minerals” in mineral deeds does not normally include hydrocarbons, including Marcellus shale natural gas, unless intended otherwise. The court cited two prior Pennsylvania Supreme Court cases, Dunham v. Kirkpatrick, 101 Pa. 36 (1882) and Highland v. Commonwealth, 161 A.2d 390 (1960), which state that when a deed grants or reserves minerals without specific mention of natural gas or petroleum, a rebuttable presumption arises that such deed intended to exclude such substances. The trial court in Butler relied on the same Pennsylvania cases in dismissing the appellants’ suit seeking a declaratory judgment that a deed reserving minerals and petroleum oils included Marcellus shale natural gas. In short, absent clear and convincing evidence to the contrary, if the operative grant or reservation of the mineral estate does not specifically mention natural gas, the producers may be drilling for gas that belongs to someone else.


Fortunately for Marcellus shale producers in Pennsylvania, the Butler court left open the possibility that Marcellus shale gas may not be subject to the Dunham and Kirkpatrick rules due to its unique properties. First, unlike natural gas produced out of traditional vertical wells, which is “ferae naturae” and flows freely in subterranean pore space, Marcellus shale natural gas is trapped within the shale formation and requires hydraulic fracturing (fracking) for extraction and production.


Second, the court recognized that this distinction in flow and extraction may be legally significant due to similarities to the extraction of coalbed gas. In U.S. Steel v. Hoge, the Pennsylvania Supreme Court held that gas present within coal seams belongs to the owner of such coal. Furthermore, the extraction of coalbed gas is similar to that of shale gas, because coal seams must be fracked to produce the gas trapped within the coal. If this analysis is applied to Marcellus shale gas, the owner of the shale itself will also own the natural gas trapped therein.


Unfortunately, even if Pennsylvania applies the Hoge rule to Marcellus shale natural gas, there is still significant risk to producers, because it is not clear whether the term “mineral” includes Marcellus shale. If not, exploration and production companies may have spent billions of dollars to produce natural gas that belongs to the owner of the surface estate.

Keywords: Marcellus, shale, natural gas, fracking, Superior Court of Pennsylvania

Austin Frost, Haynes and Boone, LLP, Houston, TX


November 14, 2011

State Department Probe May Delay Obama Administration's Keystone XL Decision

The State Department has launched an investigation into the ongoing Keystone XL pipeline permitting process. TransCanada’s proposed pipeline would transport oil extracted from Canadian tar sands in Alberta, Canada, to American Gulf Coast refineries. Specifically, the State Department inspector general will address allegations that the department allowed TransCanada to pick Cardno Entrix, which recently has had extensive business dealings with TransCanada, to perform the project’s environmental assessment. Critics say the State Department should have forced TransCanada to pick a more neutral company to perform the assessment. Additionally, the inspector general will address allegations that a State Department employee improperly supported TransCanada’s top lobbyist. Finally, the investigation will consider allegations that TransCanada hired Paul Elliott, who was a campaign advisor to Secretary of State Clinton during her bid for the presidency, to lobby for the project, thereby creating a conflict of interest.

Originally, the Obama administration was to decide if the pipeline could go forward by the end of this year; however, the investigation will likely delay that decision. Depending on the investigation’s findings, the State Department could initiate a new environmental impact study or a new study of the pipeline’s route. Such studies could delay the ultimate permitting decision by up to two years. President Obama, responding to numerous complaints from environmental groups and lawmakers from districts along the pipeline route, now says that he himself will make the ultimate decision on whether to grant the project a permit. He has not given a timetable for his decision.

Keywords: Keystone XL, Obama administration, TransCanada

Robert Carlton, Haynes and Boone, LLP, Houston, TX


November 3, 2011

Interior Department to Release New Regulations for Hydraulic Fracturing

Over the coming months, the Department of the Interior will release new regulations pertaining to hydraulic fracturing on federal lands, affecting natural gas production on 700 million acres of public land. On October 31, Deputy Interior Secretary David Hayes, speaking before the Energy Department Advisory Board’s Shale Gas Subcommittee meeting, indicated the new regulations will focus on three areas. First, mirroring many state requirements, the regulations will require operators to disclose the chemicals they use during the fracturing process. To assuage industry fears, however, the regulations will contain provisions to protect trade secrets. Second, the regulations will extend well bore integrity standards to the hydraulic fracturing stage of well development. Finally, the regulations will increase oversight of water used and produced at the well site. Specifically, Hayes indicated the new regulations may change water management requirements to include flowback fluid during hydraulic fracturing, in addition to water produced during the development process. This would mean that companies would need to detail their plans for disposing of and recycling flowback water. Hayes also noted that the drafters are working to ensure that the measures do not duplicate state regulatory efforts. With this aim in mind, one of the ideas the drafters are considering is a certificate program, whereby operators must certify that they are in compliance with local and state standards pertaining to water management.

According to Hayes, the new regulations will be influenced by the recommendations of the Department of Energy’s Shale Gas Subcommittee. The subcommittee released a 90 day report on August 18, 2011, in which it detailed potential avenues for improving the safety and reducing the environmental impact of shale gas production. Among the recommendations contained in the report, the subcommittee focused on making shale gas production operations, including fracturing formulas, more accessible to the public. It focused on potential measures to reduce the environmental and safety risks of shale gas operations. The subcommittee also proposed the creation of a Shale Gas Industry Operation Organization to come up with and continually improve a best operating practices regime. Finally, it focused on potential research and development opportunities to improve safety and environmental performance. These recommendations will be further solidified in the subcommittee’s 180 day report, set to be released on November 18; however, these themes, as they stand, will pervade the Department of Intereior’s new regulations.

Keywords: fracturing, regulations, federal, interior, public lands, Hayes

Liz Klingensmith and Robert Carlton, Haynes and Boone, LLP, Houston, TX


October 25, 2011

Texas Fracturing Regulations—New Chemical Disclosure Requirements

On September 9, 2011, the Texas Railroad Commission proposed regulations requiring disclosure of chemicals used in fracturing treatments. The regulations also require disclosure of other information about the fracturing treatment, including the date of treatment, volume of water and base fluid used, and other well-identifying information. They will apply to wells for which the Commission issued an initial drilling permit on or after the regulations’ effective date.

These regulations, proposed pursuant to enacted HB 3328, require submission of a Chemical Disclosure Registry to the Commission on or before the date a well operator submits its well completion report. This registry must identify the source of each additive used in the fracturing fluid, each chemical ingredient provided by the operator that is subject to federal disclosure requirements, and all ingredients intentionally added by the operator. Additionally, the operator must disclose to the Commission, either in the registry or in a separate document, the Chemical Abstracts Service (CAS) number for each chemical intentionally included in the fracturing treatment. The operator does not have to disclose chemicals not intentionally added, naturally occurring, or contained in an additive and undisclosed by the manufacturer, supplier, or service company.

The regulation contains an exemption for disclosure of chemicals where the identity is a trade secret. An operator claims this exemption by reporting to the Commission the chemical family of the ingredient, stating that the identity and/or concentration of the ingredient are entitled to trade-secret protection and disclosure of the properties and effects of the unidentified chemical or chemicals. A landowner or adjacent landowner of the property where the well-head is located may challenge this designation, as may the government, within 24 months of the operator’s well completion record.

The public comment period for the regulations closed October 11, 2011, and these regulations will probably take effect by early 2012.

Keywords: Texas, disclosure, fracking, public comment, regulation, Texas Railroad Commission

Ben Allen and Liz Klingensmith, Haynes and Boone, LLP, Houston, TX


October 5, 2011

TRAIN May Stay New EPA Regulation of Power Plant Emissions

On September 22, 2011, the U.S. House of Representatives passed by vote of 249–169 H.R. 2401, Transparency in Regulatory Analysis of Impacts on the Nation (TRAIN). TRAIN proposes to delay, pending further committee review, the implementation of select recently proposed EPA regulations aimed at reducing airborne emissions. Specifically, TRAIN focuses upon new EPA rules directed toward regulating both emissions from individual power plants and aggregate emissions from power plants in certain states that are found to harm a neighboring state’s air quality.

TRAIN would stay the effective date of these new EPA regulations until a committee composed of a broad section of U.S. departments, including the secretary of agriculture, secretary of commerce, secretary of energy, chairman of the Federal Energy Regulatory Commission (FERC), and others is able to analyze the impact of the new EPA regulations upon industry and consumers. Such analysis would include “(1) estimates of the impacts of the such rules and actions on the global economic competitiveness of the United States, electricity prices, fuel prices, employment, and the reliability and adequacy of bulk power supply in the United States; and (2) a discussion and an assessment of the cumulative impact on consumers, small businesses, regional economies, state, local, and tribal governments, local and industry-specific labor markets, and agriculture.” TRAIN Summary as of 6/24/2011. The committee lacks authority to reject or accept the proposed regulations; any findings by the committee would merely carry persuasive authority.

Proponents of TRAIN argue these new EPA regulations have not been studied with any eye towards their economic impact on consumers and the power industry. Opponents, however, view the bill as a tactic to stall, perhaps indefinitely, the implementation of much needed air quality regulations. Casting doubt upon TRAIN’s future, the White House has already reported that “presidential advisors would recommend that [President Obama] veto the bill.”

At a minimum, with respect to the EPA’s newly proposed regulations, uncertainty abounds regarding precisely what light will appear at the end of the tunnel.

Keywords: EPA, regulation, emission, TRAIN, power plants

Austin Elam, Haynes and Boone, LLP, Houston, TX


September 14, 2011

Feds Charge Pelican with Clean Air Act Violations

Federal prosecutors charged Pelican Refining Co., LLC (PRC) with two counts of Clean Air Act (CAA) violations and one count of obstruction of justice. PRC, headquartered in Houston, owns a 30,000 BPD refinery located in Lake Charles, Louisiana, where the charges were filed on September 6, 2011. The charges follow this July’s guilty plea of the company’s former vice president and general manager to two counts of related CAA violations. According to the plea agreement’s factual summation, many of PRC’s environmental compliance problems were attributable in part to “insufficient income from the facility’s operation.” The refinery had no environmental budget, environmental department, or  environmental manager. Operators allegedly relit the refinery’s intermittently-working flare with a flare gun purchased at Wal-Mart.

The Bill of Information alleges that PRC loaded crude oil into a tank with a failed floating roof, which allowed benzene and related aromatic compounds to escape into the atmosphere in violation of PRC’s Title V permit. These aromatic compounds are classified as toxic air pollutants and are known, probable, or suspected carcinogens. The charges also allege that PRC operated the refinery without a vapor recovery system at its barge loading dock, without a proper hydrogen sulfide scrubbing system, and without a properly functioning flare, all in violation of its permit. As to the obstruction of justice count, prosecutors accuse PRC of knowingly making false entries and false statements in CAA-related documents filed with the Louisiana Department of Environmental Quality.

Keywords: Clean Air Act, Pelican, compliance, benzene

Pierre Grosdidier, Haynes and Boone, LLP, Houston, TX


September 12, 2011

Texas: Shell Settles Air Emission Reporting Dispute with Harris County

Harris County attorney Vince Ryan announced on Tuesday that Shell Chemical, L.P., has agreed to pay $500,000 to Harris County to settle a dispute arising from allegations that it failed to notify the county of petrochemical emissions. Shell’s Deer Park refinery, located in Harris County, emitted reportable amounts of petrochemicals between April 2008 and March 2010, but only notified state authorities of the emissions.

The Texas Commission on Environmental Quality promulgates emissions reporting requirements for businesses, which are compiled by the Secretary of State in the Texas Administrative Code and available on the Texas Register's website. Although Shell initially argued that these regulations only required Shell to notify the statewide commission when it released reportable amounts of emissions, part of Shell’s settlement includes an acknowledgement that it is also required to notify the county of reportable emissions events.  

An environmental attorney for Harris County indicated that the county also plans to pursue other companies that fail to notify the county of reportable emissions events. 

Ben Allen, Haynes and Boone, LLP, Houston, TX


June 24, 2011

Texas Signs Fracking Disclosure Bill Into Law

On June 17, 2011, Texas Governor Rick Perry signed the Disclosure of Composition of Hydraulic Fracturing Fluids Act  H.B. 3328 into law. This legislation is the first in the nation to require public disclosure of the chemical composition of fracking fluids. The law requires disclosure of the type and rate of concentration of base fluids, additives, and chemical constituents used in fracking. Companies subject to the disclosure requirements can protect proprietary chemical formulas by seeking formal approval from the Texas Railroad Commission. Upon approval, such formulas will be protected from disclosure unless disclosure becomes necessary for medical treatment. Disclosed information will be posted on fracfocus.org, a public website. The law takes effect on September 1, 2011.

Keywords: fracking, disclosure, fracfocus, frac act

Liz Klingensmith and Caroline Musa, Haynes and Boone, LLP, Houston, TX


May 5, 2011

BP Files Claim Against Cameron International in Deepwater Horizon Litigation

Multi-district litigation over the Deepwater Horizon blowout remains pending against BP Plc before United Stated District Judge Cal Barbier in the United States District Court for the Eastern District of Louisiana. BP blames the spill on the failure of a Cameron International Corp. manufactured blowout preventer. On April 20, 2010, the deadline for parties to file claims against one another, BP initiated a cross-claim against Cameron. That claim seeks contribution for the damages that the federal government might levy against BP. According to BP, the blowout preventer failed to meet design and manufacturing specifications. BP also alleges that Cameron acted negligently in the maintenance and repair of the equipment. Cameron has already filed cross-claims against numerous of the defendants in the case.

In March 2011, NASA contractor Det Norske Veritas issued a report as part of the federal investigation into the Deepwater Horizon incident, finding that the blowout was the result of a design flaw and not any misuse or mismanagement.

The blowout preventer did not work during the April 20, 2010, Deepwater Horizon blowout and is blamed for the three-month oil spill, the largest marine spill in the history of the petroleum industry. The federal panel investigating the cause of the rig explosion and spill, the U.S. Coast Guard-Bureau of Ocean Energy Management Regulation and Enforcement, is expected to file its final report on the incident in July 2011.

Corey F. Wehmeyer, Cox Smith Matthews Incorporated, San Antonio


April 5, 2011

House Bill Could Make Impairment of Mineral Estates a Compensable Regulatory Taking

Texas Representative James L. Keffer has introduced new legislation that would require cities to compensate mineral owners when city regulations diminish the value of mineral estates. House Bill 3105, called “Regulatory Takings/Oil and Gas,” would make a city regulation that “damages, destroys, impairs, or prohibits development of a mineral interest” equivalent to a regulatory taking and subject to the Private Real Property Rights Preservation Act. Once subject to the Act, this would:

    (1) waive sovereign immunity to suit and liability for a regulatory taking;

    (2) authorize a private real property owner to bring suit to determine whether the governmental action of a city results in a taking;

    (3) require a city to prepare a "takings impact assessment" prior to imposing certain   regulations; and

    (4) require a city to post 30-days notice of the adoption of most regulations prior to adoption.

The House Energy Committee is holding a hearing to consider HB3105 on Wednesday, April 6.

Keywords: regulatory takings, legislation, mineral estate, mineral interest, city regulation

Megan Bibb and Liz Klingensmith, Haynes and Boone, LLP, Houston, TX


March 18, 2011

Senate Bill Seeks Required Disclosure of Chemicals in Fracking Fluid

Democratic Pennsylvania Senator Robert Casey reintroduced the Fracturing Responsibility and Awareness of Chemicals (FRAC) Act in Senate Bill S. 587 on March 15, 2011. The proposed legislation would repeal hydraulic fracturing's exemption under the federal Safe Drinking Water Act (SDWA). Under the Bush Administration, the Energy Policy Act of 2005 amended SDWA to preclude the EPA from regulating hydraulic fracturing. If enacted, SDWA's definition of "underground injection" would be made to include fluids used in the hydraulic fracturing process. Additionally, the law would require disclosure of the chemical additives in fracking fluid. Proprietary chemical formulas would not be subject to disclosure unless use of the formula is necessary for medical treatment. Disclosure of the chemical additives would be made publicly available online and to regulatory agencies. Companion legislation (H.R. 1084) was also introduced in the House of Representatives.

Keywords: S. 587, FRAC Act, fracking, Casey, disclosure

Liz Klingensmith, Haynes and Boone, LLP, Houston, TX


March 18, 2011

Fifth Circuit Nixes Court-Ordered Deadline to Act on Drilling Permits

On March 15, the Fifth Circuit temporarily stayed a court-imposed deadline that would have required federal off-shore regulators to act on certain drilling permits in the Gulf of Mexico. The Fifth Circuit’s order came just four days before the March 19 deadline imposed by Judge Martin Feldman of the U.S. District Court for the Eastern District of Louisiana.

The Fifth Circuit’s order does not explain its reasons for staying the deadline. In requesting the stay, the administration argued that the permits at issue had yet to meet permitting requirements and that mandating immediate action would disrupt the efficient review of permit applications. Furthermore, forcing the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), the agency tasked with processing off-shore drilling permits, to take action on the handful of drilling permits at issue in the case would come at the expense of other permits that were closer to approval.

The permits at issue had been pending for four to nine months. Prior to the Deepwater Horizon oil spill, such permits were processed in approximately two weeks. In his February 17 order requiring action on the drilling permits, Judge Feldman found that, while some delays might be justified, “[d]elays of four months and more in the permitting process . . . are unreasonable, unacceptable, and unjustified by the evidence before the Court.” Judge Feldman also noted that, although there was currently no drilling moratorium in effect, “it appears that the government has considered no applications for any activities falling within the scope of the moratorium.” On February 28, BOEMRE issued its first deepwater drilling permit since the Deepwater Horizon oil spill.

Judge Feldman previously drew attention when, three months after the explosions on the Deepwater Horizon, he temporarily enjoined the Interior Department from enforcing a six-month drilling moratorium.

Keywords: moratorium, drilling permits, off shore, BOEMRE, Deepwater Horizon, drilling

Wolf McGavran, Haynes and Boone, LLP, Houston, TX


March 18, 2011

Devon, Dallas Energy Billionaire Liable for Fraud Verdict

A Houston jury found Dallas energy billionaire Trevor Rees-Jones and Oklahoma City-based Devon Energy Corporation liable for fraud arising from the 2006 sale of Chief Holdings, LLC, a Barnett Shale oil and gas developer. D. Bobbit Noel Jr., former minority partner in Chief Holdings, alleged that Rees-Jones committed fraud and breached his fiduciary duties when he bought out Noel’s share of Chief Holdings for $6.5 million in 2004. After purchasing Noel’s 5.76 percent share, Rees-Jones sold Chief Holdings to Devon in 2006 for over $2 billion.

The jury found Rees-Jones received $369,042,890 in profits from selling Chief Holdings and awarded Noel over $116 million in damages, the amount Noel’s minority share currently would be worth. Craig Haynes, attorney for Rees-Jones, maintains that Noel signed a release of all claims against Rees-Jones and said much of the jury’s damage calculation was based on unrecoverable “consequential damages.” Haynes said the accurate damage amount is $8 million, which was the value of Noel’s share when Rees-Jones sold Chief Holdings to Devon. Rees-Jones and Devon plan to appeal the verdict.

Keywords: Rees-Jones, Devon, Bobbit, Chief Holdings, verdict, fraud, billionaire

Jason Huebinger, Haynes and Boone, LLP, Houston, TX


March 15, 2011

Proposed Legislation Would Repeal Tax Break for Costly Natural Gas Production

Texas Democrat Representative Lon Burnam from Fort Worth introduced revenue-raising legislation, which includes a repeal of the tax break for high-cost natural gas production. If passed, the legislation would raise an estimated $2.8 billion. Representative Burnam contends that such legislation is necessary to alleviate the impact of major state budget cuts, which are required as a result of the multibillion-dollar deficit.

At this point, it appears unlikely that the legislation would pass because Republicans outnumber Democrats 101 to 49. Republican leaders—including Governor Rick Perry—have already ruled out new or increased taxes as a response to the deficit; however, Representative Burnam insists that legislators from both sides of the aisle are examining the possibility of raising taxes due to the severity of the proposed services cuts.

Despite the deficit, critics of the legislation maintain that eliminating the tax incentive would do more harm than good because it would ultimately weaken one of the strongest industries in Texas’ economy. According to James LeBas, a fiscal consultant for the Texas Oil and Gas Association, oil and gas development as been “one of the few growing segments” of the state’s economy, and “a lot of states are ready to take away our rigs and our jobs.” Industry officials posit that the 22-year-old exemption generates $4 of economic growth for every dollar invested and creates about 40,000 jobs each year. The exemption is also credited with incentivizing the development and use of costly gas extraction techniques, which have resulted in the production of hard-to-reach natural gas. Although Representative Burnam recognizes the successfulness of the exemption in promoting natural gas production, he argues that it is no longer necessary.

Keywords: tax-break, legislation, Fort Worth, natural gas, Burnam, Perry

Megan Bibb, Haynes and Boone, LLP, Houston


March 15, 2011

BP Seeks Additional Testing on Failed Blowout Preventer

Multi-district litigation remains pending against BP PLC before District Judge Cal Barbier in the U.S. District Court for the Eastern District of Louisiana. On March 8, 2011, BP filed papers in the case, seeking access to the failed blowout preventer for additional testing. The blowout preventer did not work during the April 20, 2010, Deepwater Horizon blowout and is blamed for the three-month oil spill, the largest marine spill in the history of the petroleum industry. A joint investigation team has been supervising the testing of the blowout preventer, which began at a New Orleans NASA facility in November. Testing was halted on March 4, 2011. The initial testing, aimed at determining the cause of the blowout preventer failure, was performed by NASA contractor Det Norske Veritas. Veritas is expected to submit findings by March 20. The joint investigation team believes Veritas performed the necessary tests and that official testing is complete. However, the team invited BP to ask the court to allow its own testing.

BP’s filing seeks an order permitting access to the blowout preventer to perform additional testing that is says Veritas refused to do. BP also seeks court assistance in ordering the cooperation of Cameron, the company that manufactured the blowout preventer, and Transocean, the company responsible for maintaining it.

The federal panel investigating the cause of the rig explosion and spill, the U.S. Coast Guard-Bureau of Ocean Energy Management Regulation and Enforcement, is expected to make a preliminary statement by mid-April and file its final report on the incident in July 2011.

Keywords: BP, blowout preventer, testing, Veritas, DNV

Corey F. Wehmeyer, Cox Smith Matthews Incorporated, San Antonio


March 1, 2011

Ensco Offshore Co., et al. v. Salazar: Court Grants Preliminary Injunction

In Ensco Offshore Co., et al. v. Salazar, Ensco, a provider of offshore oil drilling services, sued the federal government, seeking a preliminary injunction regarding five specific drilling permits in which Ensco holds a contractual stake. The lawsuit was filed in the Eastern District of Louisiana and assigned to United States District Judge Martin L. C. Feldman. Ensco’s motion for preliminary injunction asked the court to require the government to act on Ensco’s five permit applications, which had been pending for four to nine months.

On January 13, 2011, the court denied without prejudice Ensco’s motion for preliminary injunction and ordered supplemental briefing. On February 17, 2011, the court issued an order granting Ensco’s motion for preliminary injunction. In its order, the court ordered the Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE), which is a division of the U.S. Department of the Interior, to act on Ensco’s five pending applications within 30 days of the order and to simultaneously report to the court its compliance.

After the Deepwater Horizon explosion and catastrophic oil spill that followed, the Secretary of the Interior twice imposed a blanket moratorium on deepwater drilling in the Gulf of Mexico. For the five months during which the bans were in place, no permits were issued for deepwater drilling. Even after the secretary formally lifted the second moratorium on October 12, 2010, permits for deepwater drilling activities were not processed. The order in Ensco provides a blueprint for other energy companies to seek court relief from indefinite government delay on drilling permits.

Keywords: BOEMRE, Ensco, offshore, Feldman, injunction, moratorium

Andrew L. Edelman, Kristen W. Kelly, and Darin L. Brooks, Beirne, Maynard, & Parsons, LLP, Houston, Texas


December 20, 2010

Court Upholds Dismissal of Fraud Claim for Manipulation of Natural Gas Prices

In Rio Grande, the plaintiffs alleged that the defendants—including energy traders and operators of pipelines and other infrastructure—monopolized natural gas trading through the use of a price index for deliveries to the Houston Ship Channel. The index at issue is published monthly in publications such as Platts Inside FERC’s Gas Market Report. Specifically, the plaintiffs alleged that the defendants exploited their market position by making “bidweek” (usually the last five days of a preceding month) sales at artificially low prices, which resulted in suppressing the index to the benefit of the defendants and the detriment of the plaintiffs and other sellers bound by index linked contracts. Plaintiffs’ original complaint asserted claims under the Sherman Act for predatory pricing, unlawful monopolization, and restraint of trade. The district court found that the plaintiffs failed to allege any predatory behavior and facts showing the extent of defendants’ market power and failed to do more than simply assert collusive behavior. The court dismissed the plaintiffs’ claims pursuant to Rule 12(b)(6) and granted plaintiffs 30 days to amend.

Plaintiffs’ amended complaint aimed to cure its Sherman Act monopolization claim and asserted an additional claim of common law fraud. This time, the plaintiffs alleged that the defendants “knowingly, intentionally and recklessly misrepresented and omitted facts by reporting trade data . . . to Platts that: (i) intentionally misstated the true market value of gas sold at the Houston Ship Channel; and (ii) failed to disclose that the gas prices that they reported did not represent, and were not intended to represent, the true market forces of supply and demand.” Plaintiffs did not allege that the defendants misreported their sales but that the data they supplied was misleading because of market manipulation.

The district court denied plaintiffs’ motion to amend its complaint for futility, holding that the amended complaint still failed to state a claim under Rule 12(b)6. The court held that the truthful reporting of sales did not constitute a misrepresentation, and plaintiffs failed to plead facts illustrating the defendants’ intent to induce reliance by failing to disclose any market manipulation. Plaintiffs appealed, challenging the dismissal of the fraud claim only.

Matthew A. Moeller, Plauche Maselli Parkerson, New Orleans, LA


December 6, 2010

New York Temporarily Bans Fracking

On November 29, 2010, the New York State Assembly voted 93 to 43 on bill number 11443-B to temporarily ban the issuance of new drilling permits for wells that utilize fracking in "low permeability natural gas reservoirs, such as the Marcellus and Utica shale formations." New York's temporary ban represents the first such legislative action against fracking of its kind, and it is anticipated that New York Governor David Paterson will sign the bill into law within the 10-day period required by New York law. Upon approval by the governor, the bill will take effect immediately. However, the bill automatically expires on May 15, 2011, providing some consolation to gas producers who are anxious about a changing regulatory environment. Additionally, the bill does not affect the renewal of drilling permits for existing wells that utilize fracking.

The ban comes in the midst of an ongoing two-year study of fracking by the Environmental Protection Agency (EPA) in which the EPA is attempting to assess fracking's potential impact on drinking water, human health, and the environment. As part of that study, the EPA recently completed a round of public hearings and received responses from eight fracking companies to voluntary requests for information. The temporary ban references ongoing investigations in New York as well, stating that the "purpose of such suspension shall be to afford the states and its residents the opportunity to continue the review and analysis of the effects of hydraulic fracturing on water and air quality, environmental safety, and public health."

Keywords: hydraulic fracturing, fracking, New York

Michael Raab, Haynes and Boone, LLP, Houston, TX


November 12, 2010

A "Crude" Opinion for Plaintiffs' Lawyers in Ecuadorian Lawsuit Against Chevron

In a 54-page opinion issued on November 4, 2010, Judge Lewis Kaplan denied plaintiffs’ motion to quash Chevron Corporation’s subpoena directing plaintiffs’ attorney advisor, Steven Donziger, to produce documents and to testify.

Plaintiffs brought the underlying lawsuit in Ecuador seeking to recover $113 billion against Chevron for alleged environmental pollution. In response, Chevron sought discovery in the United States to show that it has been denied due process due to plaintiffs’ fraud and improper collusion with the Ecuadorian government—which also has financial and political interests in a successful plaintiffs’ outcome. The discovery sought focuses, in part, on Chevron’s attempt to show that the "global assessment" of a supposedly neutral independent damages expert and the evidence submitted in Ecuador have been fraudulent.

At the center of the controversy is Donziger, a New York attorney and Harvard Law School graduate who "has been extremely active in support of the [plaintiffs]." Donziger efforts include lobbying the Ecuadorian and United States governments, raising money to support litigation efforts, organizing a media campaign, and soliciting and interacting with celebrity supporters. Donziger’s role in the litigation was captured on film in Crude, a documentary of the Ecuadorian lawsuit against Chevron. The publicly released version of Crude focused in large part on Donziger’s words and activities and depicted plaintiffs’ in a negative light.

Crude’s release prompted Chevron to seek production of outtakes that did not appear in the documentary’s final cut. The court held in a prior opinion that Chevron was entitled to the footage sought in discovery. Now, more than 85 percent of the outtakes have been produced and show disturbing misconduct by Donziger and plaintiffs’ counsel.

Based primarily on his review of the outtakes from Crude, Judge Kaplan found that there is substantial evidence to support Chevron’s fraud claims, because (1) the court-appointed damages expert was chosen as a result of Plaintiffs’ ex parte contacts with the Ecuadorian courts; (2) plaintiffs’ consultants wrote at least part of the court-appointed expert’s damages report; and (3) the court-appointed expert presented “the global assessment” report as his independent work.

Judge Kaplan rejected Donziger’s claims that Chevron’s subpoena violated the attorney-client privilege and the work product doctrine because Donziger is not licensed to practice law in Ecuador and he acted primarily in capacities as lobbyist, public relations consultant, media representative, and political organizer—not as an attorney. Judge Kaplan ordered Donziger to comply with Chevron’s subpoena. However, his order left open the possibility that privilege claims could be asserted during the deposition in response to specific questions and for the production of certain documents. The court appointed a special master to preside at the deposition to deal with any claims of privilege and instructed Donziger to follow the federal and local rules to assert his privilege claims on a document-by-document basis. Based on the these instructions, the court said it would resolve whatever privilege claims Donziger asserted.  

Keywords: Chevron, Donziger, Crude, Ecuador

Heidi Thomas Bundren, Haynes and Boone, LLP


October 21, 2010

No Violation of Clean Air Act with Compliance to State Implementation Plan

The U.S. Court of Appeals for the Seventh Circuit reversed a jury’s finding that Duke Energy’s predecessor, Cinergy Corp., violated the Clean Air Act by making modifications to a coal-fired energy plant in Indiana that increased annual pollution without a federal permit. Cinergy was purchased by Duke Energy in 2006. United States v. Cinergy Corp., 09-3344, 09-3350, 09-3351 (7th Cir. Oct. 12, 2010).

In the U.S. District Court for the Southern District of Indiana, Cinergy argued that the plant modifications did not require a permit because they did not increase the hourly rate of emissions for nitrogen oxide and sulfur dioxide, even if they increased the plant’s annual emissions of those pollutants. Cinergy asserted that when the plants were modified, this hourly emissions rate interpretation was included in Indiana’s state implementation plan (SIP) for the Clean Air Act, which the Environmental Protection Agency (EPA) approved. EPA acknowledged that it approved the plan but also noted that Indiana had agreed to update its definitions to conform to the annual-based emissions standard subsequently adopted by EPA. Based on its compliance with the SIP hourly emissions standard, Cinergy argued that it did not need a permit for the plant modifications.

U.S. District Judge Larry McKinney rejected this interpretation and held that without the required permit, Cinergy was liable for increased pollution caused by the modifications. The case went to a jury, which found that modifications undertaken between 1989 and 1992 were likely to increase the plant’s annual emissions of sulfur dioxide and nitrogen oxide, and, therefore, the company should have sought a permit for these modifications. The district court ordered Cinergy to retire certain coal-fired boiler generating units by September 2009.

However, a three-judge panel of the Seventh Circuit reversed the jury verdict and ruled that the modifications complied with Indiana’s SIP, which was approved by EPA in 1982, and that SIP was in effect when Cinergy began the modifications on the plants in 1989. Therefore, the plant did not need a permit for the modifications that increased the annual emissions of sulfur dioxide. The court stated that said the Agency "should have disapproved" Indiana’s SIP but chose to approve the SIP instead. Writing for the panel, Circuit Judge Richard Posner stated that "[t]he Clean Air Act does not authorize the imposition of sanctions for conduct that complies with a State Implementation Plan that the EPA has approved. . . . The blunder was unfortunate, but the agency must live with it." The court also reversed Cinergy’s liability for nitrogen oxide emissions because it was based on EPA expert witness testimony that should not have been admitted at trial.

Keywords: Clean Air Act, Cinergy, State Implementation Plan, SIP, EPA

Linda Tsang, Beveridge & Diamond PC, Washington, D.C.


October 15, 2010

Stuxnet Malware Targets Energy Infrastucture SCADA Systems

A sophisticated computer worm has been discovered that was designed to specifically attack certain Supervisory Control and Data Acquisition (SCADA) systems called “Stuxnet.” SCADA systems are designed to coordinate industrial processes such power generation and infrastructure such as oil and gas pipelines and power and water distribution.

The Stuxnet worm has been reported as being configured to attack a very particular SCADA configuration, indicating it may have been created to target a specific facility or facilities. It was designed to infect the Programmable Logic Control (PLC) component and inject particular blocks of data that are used to manage critical processes that operate at high speeds or under high pressure. Given the complexity of the worm, experts have opined that it was likely created by a well-funded private group or government.

The worm was discovered on infected computers in Iran. Experts have speculated that it was designed to disable certain nuclear facilities in Iran. A study of the spread of Stuxnet by U.S. technology company Symantec shows that it has spread to several other countries, including the United States. The European Union’s cybersecurity agency, ENISA (European Network and Information Security Agency) has described Stuxnet as a “new class and dimension of malware” that represents a “paradigm shift.” The United States’ Department of Homeland Security has issued a handful of advisories about Stutnex since last July through ICS-CERT (Industrial Control System-Cyber Emergency Response Team), but some critics complain the United States’ response has been insufficient.

Sean Farrell, Haynes and Boone LLP, San Antonio, Texas


October 15, 2010

FERC Issues Revised Statement on Penalty Guidelines

On September 17, 2010, the Federal Energy Regulatory Commission (FERC or Commission) issued a Revised Policy Statement on Penalty Guidelines to address comments FERC received in response to its previously-released Policy Statement on Penalty Guidelines. The modified Penalty Guidelines are attached to the Revised Policy Statement.

The Revised Statement on Penalty Guidelines (Revised Statement) bases penalties on factors consistent with FERC's policy statements on enforcement and assigns specific weightings to each factor. The Penalty Guidelines are still generally modeled on the United States Sentencing Guidelines, but there are differences between the new Revised Statement and the Sentencing Guidelines. A key difference is that the revised Penalty Guidelines do not restrict FERC's discretion to make individual assessments based on the facts specific to a given case or to close investigations or self-reports without sanctions.

The Revised Statement will apply to violations of Reliability Standards only in FERC Part 1b investigations and enforcement actions, and do not apply to reviews of the North American Electric Reliability Corporation's (NERC's) Notices of Penalty. The Revised Statement on Penalty Guidelines reduces the base violation level for reliability violations from 16 to 6 (FERC penalties are assigned a violation level that is adjusted based on various factors to determine the base penalty amount unless it is exceeded by the pecuniary gain to the offender or the pecuniary loss caused by the violation) and increases the risk of increased penalties based on the risk of and degree of potential harm for reliability violations.

The Revised Statement further clarifies that it will use the quantity of load lost (in MWh) as a result of a market participant's violation of a NERC Reliability Standard as one measure of the seriousness of the violation, but acknowledges that in some circumstances load shedding may be necessary to comply with the Reliability Standards, and would not result in a penalty. The Revised Statement modifies the Penalty Guidelines provision on "compliance credits," which reduces a base violation level in recognition of effective compliance programs such that it allows for partial compliance credit for effective but imperfect compliance programs and eliminates compliance credit when certain personnel participated in, condoned, or were willfully ignorant of a violation. The Revised Statement also allows for unbundling penalty mitigation credits for self-reports, cooperation, avoidance of trial-type hearings, and acceptance of responsibility.

Sean Farrell, Haynes and Boone LLP, San Antonio, Texas


Algae Used to Scrub CO2 from Coal Plant

IRecently, European energy company Vattenfall installed a greenhouse next to a small coal plant in Senftenberg, Germany, with the hopes of cultivating algae that will consume the coal plant’s carbon dioxide (CO2) emissions. The project is still in its early stages, and it is unclear what impact other gases in coal plant emissions may have on the algae’s ability to grow. Vattenfall intends to continue the experiment until October 2011, and will publish its initial results.

Algae absorbs CO2 as part of its life cycle, and is also capable of absorbing SOx and NOx, two compounds that cause acid rain. The algae produced with CO2 can be used as an ingredient in animal feed, to produce industrial grease, or as a biofuel feedstock.

Vattenfall’s use of algae to clean coal plant emissions is not the first of its kind. Different groups have been trying to develop techniques for using algae to “sponge up” the CO2 in industrial exhaust. In 2006, the New York State Energy Research Authority and NRG Energy began testing of a system using algae to consume a power plant’s CO2 emissions. In 2007, two Australian firms, Linc Energy and Bio Clean Coal initiated a similar effort. In 2008, a project at the Massachusetts Institute of Technology found that diverting CO2 through water populated by algae reduced emissions by as much as 82 percent. In 2009, researchers at Indiana University announced they were studying the effects of algae on carbon dioxide from coal plants. Also in 2009, Arizona Public Service (the largest electricity provider in the state) secured $70.5 million in stimulus funds to expand their effort to create biofuel from algae grown using CO2 from a coal plant.

Sean Farrell, Haynes and Boone LLP, San Antonio, Texas


Casing Failure in Four Wells Found to Be a Single Occurrence for Insurance Coverage Purposes

In 2006, Maverick Tube Corporation (Maverick) manufactured defective well casing, which was sold to Dominion Exploration and Production Co. (Dominion) through 11 separate sales. The well casing failed in four separate wells, forcing Dominion to plug and abandon the wells and drill replacement wells. After settling the matter with Dominion, Maverick filed a claim with its insurance carrier, Westchester Surplus Lines Insurance Company (Westchester). Westchester denied coverage and filed a declaratory judgment action seeking a ruling that Dominion's claims did not involve an "occurrence" under the relevant policies. The Fifth Circuit Court of Appeals reversed the lower court's decision and found that the casing failure did constitute an "occurrence" under Maverick's insurance policies. On remand, Westchester argued that the 11 separate sales of defective casing were separate occurrences each subject to Maverick's self-insured retention. Maverick contended that the failures constituted one occurrence, stemming from the defective manufacturing of the casing. On June 28, 2010, the United States District Court for the Southern District of Texas, with Justice Lee Rosenthal sitting, held that the four well failures constituted one occurrence under Maverick's insurance policies. Westchester Surplus L. Ins. Co. v. Maverick Tube Corp., No. H-07-540, 2010 WL 26335623 (S.D. Tex. 6-28-2010).

In July and August 2006, Maverick sold more than 1,300 pieces of a specific type of casing to its distributor to be shipped to Dominion for use and operation in multiple gas wells. There were 11 separate sales of this casing to Dominion. During a two-week period in September 2006, Dominion experienced failure in four separate gas wells, all containing the particular casing manufactured by Maverick. In November 2006, Dominion sent a demand to Maverick asserting that the casing failure fell within Maverick's published warranty policy. After an investigation, Maverick concluded that the failure was due to a manufacturing defect at Maverick's Columbia processing facility and settled with Dominion. Maverick then filed a claim with Westchester, seeking reimbursement of the settlement amount less its self-insured retention and original cost of the casing. Westchester denied Maverick's claim, concluding that Dominion appeared to have a valid breach of contract and warranty claim but no valid negligence claim that would be considered an occurrence under the policy.

Matthew McGowen, Patton Boggs LLP, Dallas, Texas


Fifth Circuit Denies Appeal for Injunctive Relief for Constructing Compressor Stations

The United States Court of Appeal for the Fifth Circuit recently denied Texas Mid Stream Gas Services, LLC's (TMGS) appeal for injunctive relief regarding its plans to construct a natural gas pipeline and compression station in Grand Prairie, Texas. Texas Midstream Gas Services, LLC. v. City of Grand Prairie, et al., No. 08-1120, 2010 WL 2168643 (5th Cir. 6/01/10). TMGS announced its plans in 2007. Concerned by the possibility of a compressor station within the city limits, the Grand Prairie City Council amended Section 10 of the Unified Development Code on July 1, 2008, to cover natural gas compressor stations. Section 10 required that the station comply with setback rules, have an eight-foot security fence, enclose equipment and structures within a building, confirm to certain aesthetic standards, and have paved means of vehicular access.

TMGS filed suit against Grand Prairie and certain city officials for declaratory and injunctive relief regarding Section 10. TMGS argued that the requirement impinged on its state conferred eminent domain powers. However, the district court held that the setback requirement was lawful. TMGS filed an interlocutory appeal, challenging the district court's failure to enjoin the setback


Supreme Court Approves Massachusetts Wind Project

The Hoosac Wind Project in western Massachusetts has been tied up in lengthy litigation, an event not uncommon for wind projects in Massachusetts. But on July 6, 2010, the Massachusetts Supreme Judicial Court issued a ruling that would finally allow the project to begin. And newly passed legislation may provide a streamlined framework for approval of future wind projects in Massachusetts.

In 2003, New England Wind LLC proposed the Hoosac Wind project, a 20-turbine, 30-megawatt, project on a ridge in Berkshire County, Massachusetts. The anticipated cost of the project was approximately $100 million, and proponents of the project claimed that it would be able to power more than 10,000 homes. But the project was met with resistance by several citizen groups, who filed a lawsuit based on wetland regulation to block the project. Both the Superior Court and the Supreme Judicial Court upheld the Massachusetts Department of Environmental Protection's decision to allow the project, but the permitting and appeal process delayed the project for more than six years.

Lengthy litigation, which has affected approximately one-third of the proposed Massachusetts wind projects, is likely a major motivating factor behind the bills recently passed by the Massachusetts legislature. On July 14, 2010, the Massachusetts House of Representatives passed the Wind Energy Siting Reform Act. The bill allows creation of wind energy permitting boards to determine if wind projects should be authorized, removing the permitting power from the municipal bodies, such as planning and zoning boards, which currently have that power. The bill also eliminates some appeals that are allowed under current law. The Senate passed a similar bill earlier this year, and now the legislators must complete a compromised version. Supporters of this legislation claim that it will help the environment by making wind projects more feasible while opponents believe that it will consolidate too much power with the state and override local control and the people's traditional right of appeal.

Matthew McGowen, Patton Boggs LLP, Dallas, Texas


Outer Continental Shelf Oil and Gas Development Plan

On March 31, 2010, President Obama announced that his administration would allow new offshore drilling on selected portions of the Outer Continental Shelf (OCS). Congressional and presidential moratoria prevented offshore oil and gas development on much of the OCS since 1981. In 2008, President Bush lifted the executive order banning offshore drilling, and Congress let its moratorium expire. President Obama announced that he will not reinstate a ban covering the Atlantic Coast south of New Jersey or the Chukchi and Beaufort Seas north of Alaska. The Obama administration stated that its strategy is to expand oil and gas production on the OCS while protecting fisheries, tourism, and places off our coast that are too special to drill.

The president's plan will ban oil and gas exploration off of the Atlantic Coast from New Jersey north and the Pacific Coast from the Mexican border to the Canadian border. Exploration on portions of the eastern Gulf of Mexico and Florida coast will also be banned as will exploration of Alaska's Bristol Bay. Despite the president's announcement that he will not reinstate the ban on offshore drilling in the Chukchi and Beaufort Seas, the president's plan cancels several lease sales that had been planned under the Bush administration. Further, many of the areas not banned under the president's plan will not be open for exploration and development until after the government conducts detailed studies regarding geology and the impact of drilling on the environment and military activities.

On April 1, 2010, in response to President Obama's announcement, Rep. Edward Markey (D-Mass.) announced that he plans to reintroduce legislation that will penalize companies that let leased oil drilling rights lay dormant. It has been reported that Rep. Markey's proposed legislation would place an escalating fee on drilling rigs not being used by companies to incentivize companies to drill the offshore areas they already have leased before acquiring new leases.

Sean Farrell, San Antonio, Texas


FERC Order Signals Approval of Lower Penalties in Reliability Standards Violations

On November 13, 2009, the Federal Energy Regulatory Commission (FERC) issued its Order on Omnibus Notice of Penalty Filing (the Omnibus Order). The Omnibus Order addressed 564 penalties proposed by the North American Electric Reliability Corporation (NERC). NERC filed the 564 penalties with FERC in NERC's capacity as the Electric Reliability Organization certified by FERC in 2007 to create and enforce mandatory federal reliability standards pursuant to the 2005 Energy Policy Act.

The 564 penalties applied to 140 different entities nationwide, but 541 of the 564 penalties were proposed at zero dollars ($0). The remaining 23 proposed penalties totaled $91,000, and were assessed against eight entities registered with NERC.

The Omnibus Order noted that NERC had asserted that the violations were discovered before FERC set forth its expectation for the development of records in Notices of Penalty.[3] NERC had conceded that the available records did not meet FERC's later-imposed standards but that no significant reliability benefit would be gained by pursuing the development of a more complete record. NERC averred that the possible violations had all been addressed by mitigation plans and did not pose a substantial risk to the Bulk Power System. NERC asked FERC to close these older and relatively minor cases to allow it and the regional entities[4] to concentrate on more significant violations.

Sean Farrell, San Antonio, Texas


DARPA Discovers Method to Derive Oil from Algae for $2 per Gallon

The Defense Advanced Research Projects Agency (DARPA), the U.S. governmental agency that created the Internet and stealth fighters, has successfully developed a method to extract oil from algal ponds at a cost of $2 per gallon. [See Dr. Richard Van Atta, “Fifty Years of Innovation and Discovery” and Suzanne Goldenberg, “Algae to Solve the Pentagon’s Jet Fuel Problem,” Guardian.co.uk, Feb. 13, 2010.] This is a significant achievement given that a year ago, it was reported that DARPA was able to produce oil from algae at a cost of $6-7 per gallon. [See William Matthews, “From Algae to JP-8: Pentagon’s DARPA Funds Efforts to Make a Green Jet Fuel,” DefenseNews, Jan. 5, 2009 and Michael Hoven, “DARPA:  Biofuel from Algae Could Cost Only $1 Per Gallon,” heatingoil.com, Feb. 15, 2010.]

DAPRA has been investigating the potential use of algae as a fuel-stock in its Biofuels: Cellulosic and Algal Feedstocks Program, which seeks to enable the efficient and economical production of military-grade jet fuel (JP-8) from agricultural and aquacultural products that are oil rich but not competitive with food supplies. [DARPA Military Biofuels Factsheet (Apr. 2009).] Algae meets these requirements and has other potential benefits such as its consumption of carbon dioxide as part of its growth process, and its ability to reproduce quickly in brackish or even polluted water. Algae oil has been successfully used as a fuel-stock for conventional jets. [See Katie Howell, “Is Algae the Biofuel of the Future?” ScientificAmerican.com, Apr. 28, 2009] DARPA's effort is in response to a congressional directive to the Department of Defense to reduce its reliance on foreign oil imports. Secretary of Defense Robert Gates has observed that the Department of Defense spent $12.6 billion on fuel in 2007, and estimated that it is "probably the largest single user of petroleum products in the world."

DARPA's ultimate goal is to facilitate mass-production of JP-8 at a cost of less than $3 per gallon at a production rate of 50 million gallons per year. DARPA's recent oil-extraction was achieved as part of phase one of the program, which seeks to demonstrate algae triglyceride production (a precursor to JP-8) at a projected cost of $2 per gallon. In the next phase, DARPA's contractors (General Atomics and Science Applications International Corp.) will attempt to demonstrate production of algae triglyceride at $1 per gallon and develop and demonstrate an affordable process for converting the algae triglyceride into biofuel.

Sean Farrell, San Antonio, Texas


Council on Environmental Quality Proposes Modernization of National Environmental Policy Act

On February 18, 2010, the White House Council on Environmental Quality (CEQ) proposed steps to "modernize and reinvigorate" the National Environmental Policy Act (NEPA). NEPA, enacted in 1970, mandates that federal agencies consider the environmental impacts of their proposed actions and requires that the benefits and risks associated with proposed actions be assessed and publicly disclosed. Specifically, CEQ issued draft guidance for public comment on (a) when and how Federal agencies must consider greenhouse gas emissions and climate change in their proposed actions; (b) clarifying appropriateness of "Findings of No Significant Impact" and specifying when there is a need to monitor environmental mitigation commitments; (c) clarifying use of categorical exclusions; and (d) enhanced public tools for reporting on NEPA activities. These measures are designed to assist federal agencies to meet the goals of NEPA, enhance the quality of public involvement in governmental decisions relating to the environment, increase transparency, and ease implementation. The draft guidance is significant in that it will affect permitting an infrastructure by influencing the conditions under which federal agencies issue permits and approvals.

The most anticipated item is the draft guidance on consideration of the effects of climate change and greenhouse gas emissions. This is intended to help explain how federal government agencies should analyze the environmental effects of greenhouse gas when they describe the environmental effects of a proposed agency action. CEQ proposes that the NEPA process should incorporate consideration of both the impact of an agency action on the environment, greenhouse gas emissions, and climate change. Specifically, the guidance recommends that federal agencies consider climate change when the proposed action would lead to the release of 25,000 or more tons of greenhouse gases. The guidance affirms the requirements of Section 102 of NEPA and the CEQ Regulation for Implementing the Procedural Provisions of NEPA, 40 C.F.R. parts 1500-1508, and their applicability to greenhouse gas and climate change impacts.

The public comment period is 45 days for the revised draft guidance clarifying the use of categorical exclusion and is 90 days for the draft guidance on consideration of greenhouse gases as well as the draft guidance clarifying appropriateness of "Findings of No Significant Impact" and specifying when there is a need to monitor environmental mitigation commitments.

Kristen W. Kelly and Darin L. Brooks Beirne, Houston, Texas


Settlement Reached on Wind Farm Project Affecting Endangered Indiana Bats

On January 26, 2010, the U.S. District Court for the District of Maryland approved a settlement agreement between Beech Ridge Energy LLC (Beech Ridge), an affiliate of Invenergy LLC, and certain environmental groups, which allows the Beech Ridge Wind Energy project, a wind farm project, in Greenbrier County, West Virginia, to move forward on a smaller scale.

In June 2009, environmental group Animal Welfare Institute and Mountain Communities for Responsible Energy (MCRE) sought a preliminary injunction to halt the wind farm project while the court determined whether the project was harmful to the Indiana bat, an endangered species under the Endangered Species Act (ESA). In December 2009, the U.S. District Court for the District of Maryland ruled that the wind farm project would imminently harm, kill, or wound the endangered Indiana bats during the spring, summer, and fall, in violation of the ESA. This was the first federal court ruling in the country to find a wind power project in violation of federal environmental law. The court ordered Beech Ridge to temporarily halt construction of the project. Beech Ridge appealed.

In reaching a settlement with the environmental groups, Beech Ridge has reduced the number of wind turbines from 122 turbines to 100 turbines and has agreed to an extended construction timeline. Under the settlement agreement, Beech Ridge may immediately construct 67 turbines (enough to create 100 megawatts of power) but must restrict the wind harvest to certain seasons when the Indiana bats are hibernating and times of day when the bats are not active. Pending the receipt of an incidental take permit from the U.S. Fish and Wildlife Service, Beech Ridge will be allowed to construct an additional 33 turbines and operate the facility at all hours year round. The first 67 turbines should be operational before the end of the year.

The Animal Welfare Institute, MCRE, and local residents have agreed not to challenge the project again in state or federal court, and Beech Ridge has dropped its appeal.

Linda Tsang, Washington D.C.


API Files Suit to Enjoin Enforcement of Renewable Fuels Blending Act of 2009

The American Petroleum Institute (API) filed suit on December 18, 2009, in the U.S. District Court for the Middle District of Tennessee (Am. Petroleum Inst. v. Givens, 3:09-cv-01195 (M.D. Tenn. Dec. 18, 2009)), seeking an injunction blocking enforcement of the Tennessee Renewable Fuels Blending Act of 2009 (the Act). TENN. CODE ANN. 47-25-2001 et seq.

The Act was signed into law by Governor Bredesen on June 25, 2009, and went into effect on January 1, 2010. The Act requires refiners and other petroleum fuel producers and suppliers in the state to make and sell unblended gasoline and diesel to wholesalers. In addition, the unblended fuel must be suitable for blending with biofuels. The Act also prevents contracts between a wholesaler and a refiner or fuel supplier from restricting the wholesaler's ability to blend petroleum products with ethanol or biodiesel. According to a fiscal analysis conducted by the Tennessee legislature, in 2008 major oil company suppliers began preventing Tennessee businesses from blending ethanol and instead sold only pre-blended products, effectively shifting income and profits away from certain Tennessee petroleum wholesalers to out-of-state suppliers.

In its lawsuit, the API claims that the Act is preempted by the federal Renewable Fuel Standard (RFS), the Lanham Act, and the Petroleum Marketing Practices Act. The RFS allows refiners to choose whether and how to blend gasoline or diesel with renewable fuels. The Lanham Act grants trademark holders the right to exclude others from using their trademark. The Petroleum Marketing Practices Act contains a preemption provision that voids any state law that narrows the grounds for termination or nonrenewal of a petroleum marketing franchise agreement.

The API also argues that the Act violates the Commerce Clause of the U.S. Constitution because it "discriminates against, and impermissibly burdens interstate commerce by favoring local distributors and retailers at the expense of out-of-state refiners."

Linda Tsang, Washington D.C.


Massachusetts Seeks to Make Solar Power Economically Feasible with Ambitious Solar Power Initiative

Massachusetts is placing a high priority on making solar power a viable alternative to non-renewable energy. Governor Deval Patrick's solar power initiative provides the people and businesses strong incentives to become solar power operators. These incentives include subsidies, rebates, and, in the near future, an option to sell surplus solar-generated energy. The initiative aspires to see 250 megawatts of solar-generating capacity in place by 2017.

On December 14, 2007, Governor Patrick introduced Commonwealth Solar, a program earmarking $68 million in rebates for the installation of solar panels. The program appeared more ambitious than initially contemplated, spending all of the funding in the first 22 months instead of the slated three to four years. Commonwealth Solar exceeded expectations from a developmental standpoint, however. The initiative funded 208 commercial solar projects, creating 10.3 megawatts worth of solar capacity, and will subsidize over 12,000 solar projects by the time all the applications are processed.

Liz Klingensmith and Ben Allen, Houston, TX


Department of Energy Announces $3.4 Billion in Grants to Develop Nation's "Smart Grid"

On October 27, 2009, the U.S. Department of Energy announced the recipients of $3.4 billion in federal grants for smart-grid projects throughout the nation. The grants, funded under the 2009 Stimulus Act, will be matched by industry investment for a total public-private investment of $8.1 billion. The funds will support approximately 100 projects in 45 different states and are intended to "spur the nation's transition to a smarter, stronger, more efficient, and reliable electric system." Press Release, The White House Office of the Press Secretary, President Obama Announces $3.4 Billion Investment to Spur Transition to Smart Energy Grid (Oct. 27, 2009).

While the overarching goal of the grants is to modernize the country's energy distribution systems, there are a variety of projects that fall under the category of smart-grid projects. These include the installation of digital thermostats, digital in-home energy management displays, and advanced transformers and load management devices. However, the most common type of project is the installation of approximately 18 million electrical meters, known as smart meters, which have the ability to identify electricity consumption in more detail and transmit this information electronically back to the utility.

Kris Kavanaugh, Birmingham, Alabama


FTC Issues Final Rule Prohibiting Petroleum Market Manipulation

In a 2-1 vote on August 6, 2009, the Federal Trade Commission (FTC) issued a final rule aimed at prohibiting fraudulent and deceitful manipulations in petroleum markets. 6 C.F.R. § 317 (2009) The rule covers the wholesale purchase and sale of crude oil, gasoline, and petroleum distillates, and prohibits persons from directly or indirectly (1) knowingly engaging in acts that would operate as a fraud or deceit upon any other person (including making untrue statements of material facts), or (2) intentionally failing to state a material fact that under the circumstances would render the person's statement misleading (provided the omission distorts or is likely to distort market condition). Examples of targeted conduct include false public announcements of planned pricing decisions and false statistical reporting. New FTC Rule Prohibits Petroleum Market Manipulation, Federal Trade Commission.

Violations of the rule carry stiff civil penalties of up to $1 million per violation, per day, in addition to any other relief available to the Commission under the FTC Act. This stands in contrast to the $11,000 per violation penalty under the FTC Act for other forms of unfair or deceptive acts. Following announcement of the rule's issuance, Chairman Jon Leibowitz promised: "We will police the oil markets-and if we find companies that are manipulating the markets, we will go after them."[3]

Corey F. Wehmeyer, San Antonio, Texas


The American Clean Energy and Security Act of 2009

ACES was narrowly approved on June 29, 2009, in the House Representatives by a vote of 219 to 212, and if the voting pattern in the House is any predictor, odds are in favor of another highly contested battle in the Senate. The text of ACES is organized in four parts: clean energy, energy efficiency, global warming, and transitioning.

Proponents of ACES say that the clean energy part of the act promotes renewable sources of energy and carbon capture and sequestration technologies, low-carbon transportation fuels, clean electric vehicles, and the smart grid and electricity transmission. Energy efficiency is designed to influence all sectors of the economy, including buildings, appliances, transportation, and industry. Global warming places limits on the emissions of heat-trapping pollutants. ACES advocates say that the transitioning part of ACES protects U.S. consumers and industry and promotes green jobs during the transition to a clean energy economy.

Benjamin L. Bosell, San Antonio, Texas


Interior Secretary Cancels Utah Oil and Gas Leases after Judge Grants TRO in Favor of Environmental Groups

On February 4, 2009, U.S. Department of the Interior Secretary Ken Salazar canceled the sale of oil and gas leases on 77 parcels of federal land in Utah, following U.S. District Judge for the District of Columbia Ricardo M. Urbina's issuance of a temporary restraining order (TRO), which postponed the final sale transactions and paved the way for Interior to withdraw them. The TRO was issued in the context of pending litigation brought by several environmental groups (Plaintiffs) against Interior's Assistant Secretary for Lands and Minerals Management and the Deputy State Director of the Bureau of Land Management's Utah Office (BLM) (collectively Interior Defendants), as well as Utah state entities and purchasers of the leases which later intervened in the suit (Producers). Southern Utah Wilderness Alliance, et al. v. Stephen Allred, et al., No. 1:08-CV-02187-RMU (D. D.C. filed Dec. 17, 2008).

The Plaintiffs' Complaint seeks declaratory and injunctive relief, citing concerns about oil and gas development on the federal lands harming air and water quality and natural quiet in several alleged wilderness areas, including the Arches National Park, Canyonlands National Park, Desolation Canyon and Dinosaur National Monument and alleges the BLM failed to follow proper procedures in identifying lands appropriate for oil and gas development in violation of the Federal Land Policy and Management Act (FLPMA), the National Environmental Policy Act ("NEPA"), the National Historic Preservation Act (NHPA) and Interior Secretary Order No. 3226, which requires the consideration of climate change in administrative decisions (the lawsuit). The leases, worth an estimated $6 million, were sold this past December by the BLM during its quarterly oil and gas lease sale (required under the Mineral Leasing Act, as amended by the Federal Onshore Oil and Gas Leasing Reform Act of 1987). 30 U.S.C. 226(b)(1)(A) (2008). In rejecting the sale of the contested parcels, Salazar acknowledged the need to develop the nation's oil and gas supplies in a responsible way, though the move was criticized by some as limiting economic development of the West.


Obama-Biden Comprehensive New Energy for America Plan and the "Green Dream Team"

As Barack Obama was sworn in as the 44th US President on January 20, his administration announced the Obama-Biden Comprehensive New Energy For America plan. The plan is aimed at the primary objectives of (1) ending our dependence on foreign oil, (2) addressing global climate change, (3) investing in alternative and renewable energy, and (4) creating millions of new jobs. These objectives are all intertwined, with the common denominator being our nation's reliance on fossil fuels for energy.

Paul Dickerson and Rochelle Seade, Haynes and Boone, LLP