Sunday, July 11, 2010

Dispute has industry, mineral owners nervous

One name above all others strikes fear into the hearts of Texas oil and gas operators: Garza, or more specifically, the Supreme Court of Texas case No. 05-0466, Coastal Oil & Gas Corp. and Coastal Oil & Gas USA LP v. Garza Energy Trust, et al.

The lawsuit stems from a 2005 Hidalgo County dispute in which Garza Energy Trust was granted $14 million for the court's findings that the trust had been the victim of subsurface trespass due to hydraulic fracturing.

Hydraulic fracturing is a process in which a sand-water mixture is pumped down the well-bore, thousands of feet down to crack and split the shale, providing access to the natural gas stored within the formation. Without hydraulic fracturing, little gas can be retrieved.

The problem is, however, that fracture stimulation isn't a precise science, and doesn't always crack the shale in equal portions. In some ways, cracking the shale evenly could be thought of as trying to hammer a dinner plate into equal pieces - it's not easy.

"You may plan a fracture that will go 1,000 feet, and it might go 2,000 feet or 400 feet," said John S. Lowe, a professor of energy law at Southern Methodist University's Dedman School of Law.

In the Garza case, the 332nd District Court of Hidalgo County determined in 2005 that Garza had been the victim of subsurface trespass when Mission Resources Inc. (later acquired by Coastal) fractured the rock below and, in doing so, crossed over into property belonging to Garza.

In an appeal to the Texas Appellate Court of Corpus Christi, the pro-Garza ruling was upheld, prompting a second appeal that has made its way to the top of the judicial dog pile, the state's Supreme Court in June 2005, where it has remained for several years awaiting a decision. Industry officials say a decision could come at any time.

No matter which way it goes, that forthcoming decision could have far-reaching repercussions.

Trouble down below

The issue at hand is a difficult one to address, said John Holden, a partner at Dallas-based Jackson Walker LLP.

The burden of proof lies in the hands of both Garza and Coastal. Garza must prove Coastal knowingly trespassed whereas Coastal must prove the opposite, or show that Garza sustained no damages in the process.

But knowing what has happened thousands of feet below isn't easy.

"How do you prove any fracing was correct or incorrect in an area that is not precise to begin with?" asked Holden, who has practiced natural resources and energy law for more than 30 years. "Either side has to prove what's going down below, and that's hard for both sides."

Lowe agrees the case is a tricky nut to crack.

"It's possible to ascertain [the trespass]," Lowe said. "You can bring the scientific evidence, the scientific testing to see whether or not a trespass has occurred but I'm not sure you can rely on it 100 percent."

In short, the situation presents a Catch-22 dilemma in which no ruling would present a clear winner.

Should the court rule in favor of Coastal, reversing the two lower courts' decisions, then it deviates from standard, above-ground trespassing cases, Lowe said. But if the Supreme Court again rules in favor of Garza, then post-decision drilling will become significantly more conservative.

"The next guy who plans a frac job in Fort Worth is going to be told by his bosses, "You better be damn careful that you do not cross over the property line," Lowe said. "So how do you do that? Well, you just hold back. So that means you're less likely - maybe - to efficiently fracture, and then society pays because we will leave more oil and gas in the ground."

Big oil and gas weighs in

In July 2005, Chesapeake Energy Corp.'s Raymond Roush, senior attorney, sent a letter to the state's Supreme Court on behalf of some of the oil and gas industry's heaviest hitters to express deep concern "over the potentially devastating impact" a ruling in favor of Garza could have.

"The effect on the economy of the state of Texas if the decision in this case is left to stand will be devastating," Roush wrote in the statement, "and the impact on the nation's developed reserves of oil and gas put into question at a time when the United States of America needs more than ever to be as energy self-sufficient as it can."

Writing for the Independent Producers Amicus Group, Roush predicts nothing short of Judgment Day for the industry should the ruling stand.

"The decision of the trial court and the Thirteenth District Court of Appeals … must not be allowed to stand," Roush said. "The decision is wrong, and portends nothing short of chaos and disaster for oil and gas operators in the state of Texas but conceivably in every other oil and gas producing state as well."

The Railroad Commission of Texas' Victor Carrillo doesn't share Roush's dire prediction, but does believe the effect could have a chilling effect on a hot industry - one whose record levels haven't been seen since 1985.

"Some folks say it would end exploration of the Barnett Shale," said Carrillo, commissioner of the organization that oversees all drilling statewide. "I don't go quite that far but it would certainly slow things down. We would see fewer wells drilled and ultimately a decrease in oil and gas production for the state."

Like Lowe, Carrillo said a pro-Garza ruling could put increased restrictions on hydraulic fracturing, which is the most-popular method of breaking the shale for the retrieval of natural gas.

"Without the ability to fracture those wells, the Barnett Shale trend would not be economic," Carrillo said. "You have to fracture the wells to economically drill and produce the minerals."

Waiting impatiently

Despite the oil and gas industry's malaise, Lowe said above-ground precedent could supercede its grim predictions of a lawsuit-heavy future.

"There's no reason not to be consistent and to apply the ordinary rules of trespass just like we would to you and me," Lowe said. "If the facts show there was bad dealing by a company or that there was substantial damage, then hammer them."

The other side of the coin involves the argument that "if there was property beneath you, and you aren't using it then I can go in and use it," he said.

Ultimately, the Supreme Court's decision is anything but predictable.

"As so often the law is, you have reasonable positions on both sides," Lowe said. "This is a very hard case for the Texas Supreme Court to decide."

Carrillo puts it simply.

"Yea," he said. "It's a big, big case."



1 comment:

  1. Pennsylvania DEP fines Talisman for drilling fluid spill

    August 4, 2010
    Source: Pennsylvania Department of Environmental Protection

    The Department of Environmental Protection has fined Talisman Energy USA Inc., of Horseheads, N.Y., $15,506 for a spill of used natural gas drilling fluids last November at its Klein gas well pad in Armenia Township, Bradford County that polluted a small, unnamed waterway.

    The spill involved hydraulic fracturing flowback fluid, which is the substance that returns to the surface after a company injects the pressurized fluid underground to fracture, or “frack,” a geologic formation and extract natural gas.

    “DEP’s investigation in late November 2009 determined that Talisman spilled between 4,200 to 6,300 gallons of fracking flowback fluids when a pump failed and sand collected in a valve,” said DEP North-Central Oil and Gas Program Manager Jennifer Means.

    The fluids flowed off the well pad and toward a wetland, and a small amount ultimately discharged to an unnamed tributary to Webier Creek, which drains into the upper reaches of the Tioga River, a cold water fishery.
    Talisman successfully completed DEP’s Act 2 process for spill cleanup activities.
    The fine will be deposited into the fund that supports DEP’s oil and gas permitting and enforcement programs.



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