The Texas and Oklahoma Webcast Series Melissa Munson & Matt Schlensker April 15, 2020
These materials are public information and have been prepared solely for educational purposes. These materials reflect only the personal views of the authors and are not individualized legal advice. It is understood that each case is fact-specific, and that the appropriate solution in any case will vary. Therefore, these materials may or may not be relevant to any particular situation. Thus, the authors and Steptoe & Johnson PLLC cannot be bound either philosophically or as representatives of their various present and future clients to the comments expressed in these materials. The presentation of these materials does not establish any form of attorney-client relationship with the authors or Steptoe & Johnson PLLC. While every attempt was made to ensure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed.
• What is gas flaring? • What is the current climate • Why flare gas? toward gas flaring? • Who regulates gas • How do lease provisions flaring? treat flaring? Image from Generon website
Image from the EIA Image from the Energy in Depth
• 16 T.A.C. § 3.32 (Statewide Rule 32) • All gas […] shall be utilized for purposes and uses authorized by law • Rule 32 allows flaring while drilling and up to 10 days after a well’s completion • Rule 32 allows requests for exceptions
• Reasons for exceptions to Rule 32 – Where pipeline connections are not available – Gas plant shutdowns – Repairing a compressor or gas line or well – Where pipelines have reached capacity
• Exceptions (“Flare Permits”) – Good for 45 days, up to a total of 180 days – May be indefinitely approved administratively if less than 50 mcf/day – Exceptions for more than 180 days may only be granted through a final order after hearing signed by the Commission
Image from Texas Railroad Commission website
• O.A.C. § 165:10-3-15 – Venting and flaring • Permit Not Required – To blow down producing well not >72 hours if: • Needed for efficient operation or unexpected issues • Will not damage producing formation • Operator complies with H2S requirement
• Permit Not Required – To Vent or Flare up to 50 mcf/day if: • Not economically feasible to market • Properly equipped / operated to prevent hazard to people • If H2S content exceeds 100 ppm, gas must be flared and notice must be provided to Conservation District
– Permit Required • To Vent or Flare volumes > 50 mcf/day • Conservation Division may administratively grant permit if: – Operator applies – Permit lists location and maximum daily volume to be vented/flared – Not economically feasible to market – Properly equipped/operated to prevent hazard to people
• Exception to Permit Requirement – Temporary Exception for Initial Flowback • Applies to newly completed or recompleted wells • Period not to exceed 21 days commencing 1 st day gas flow exceeds 50 mcf/d • Must give at least 48 hour prior notice to Conservation Office or Inspector • Not economically feasible to market • Properly equipped / operated to prevent hazard to people
• Exception to Permit Requirement – Temporary Exception After Initial Flowback • Applies to newly completed or recompleted wells subsequent to the initial 21 day initial flowback period • Allows an additional period not to exceed 45 days if: – Gas flared < or = to average rate of 300 mcf/d; and » No takeaway structure exists » Exploration well or gas is not pipeline quality – Gas with H2S >100 ppm must be flared – Equipped/operated to prevent hazard to people
• Permitting – Conservation Division • Apply using Form 1022 – OCC • May apply to Commission for an order if permit denied by Conservation Division • Application and Notice under O.A.C. § 165:5-7
• Exco sought an exception to Rule 32 • Williams protested Exco’s application • RRC approved Exco’s request to flare by a 2-1 vote • Commissioners considered the economic costs and benefits • In November, Williams filed a lawsuit against the RRC
• The EDF published an open letter to the RRC and TCEQ questioning the “blank check” • Reports published indicated gas volumes flared were underreported by up to 50% • 2020 is an election year for 1 of the 3 Commissioner positions • In February, Commissioner Sitton released first report on natural gas flaring in Texas
Image from the Energy in Depth
• What could make a claim for royalties from flaring of gas a viable claim? • In Texas, operators flaring natural gas with regulatory approval are not immune to claims from private parties for breach of contract or tort
• In Texas, casinghead gas is a “component part” or “constituent element” of oil • Royalty clauses typically require payment of royalty for oil and gas “produced and saved” • Modern leases provide for royalty for gas, including casinghead gas, that is produced, utilized, saved, or sold
Texas courts require the operator to act in a reasonably prudent manner • (to act in a non-wasteful manner) Does flaring *commercially profitable* natural gas in order to produce • oil violate the implied covenant? If a jury makes that factual determination, operator would be subject to • damages for gross royalty that should have been paid on flared gas For additional discussion – Professor Bret Wells at UHLC – “Please Give • Us One More Oil Boom – I Promise Not to Screw It Up This Time: The Broken Promise of Casinghead Gas Flaring in the Eagle Ford Shale” (note: this was published when oil was $100+ per barrel and gas was $4.00 per mcf)
• The RRC extended certain deadlines under Rule 32: – Operators notify district office as soon as reasonably possible after release of gas begins – Can be after initial 24 hours but no later than 7 days from beginning of release – Requests for exceptions to be filed by the 14 th day following the first 24 hours of release – Notification and requests for exceptions can be made by email (rather than telephone or fax)
• On March 30 th , a day when WTI settled just above $20, Pioneer and Parsley requested a hearing regarding production cuts • For consideration: – Is waste occurring? – If so, is that waste due to production in excess of market demand? – If so, can it be reduced by the RRC through prorating production? • The RRC held an open meeting on Tuesday, April 14, 2020 to hear comments on reasonable market demand for oil via virtual conference
Text of Rule 32: https://tinyurl.com/qnrtuj4 • Williams’ Petition: https://tinyurl.com/rq3tcwt • Commissioner Sitton’s Flaring Report: https://tinyurl.com/r68w8zr • Commissioner Christian’s Comments on Flaring: https://tinyurl.com/udvlvjd • COVID-19 Rule 32 Extensions: https://tinyurl.com/ufu83dr • Production Curtailment Petition: https://tinyurl.com/vwx5xqx • Professor Bret Wells’ paper on Gas Flaring: https://tinyurl.com/tc4sp2q • RRC Production Cut Meeting: https://tinyurl.com/qm8let6 • Production Cut Comments: https://tinyurl.com/ufu83dr •
• Curative Game Plan and Affidavits of Heirship (TX and OK Series) – Wednesday, April 22 nd • The Administration of Land Administration – Thursday, April 23 rd – Email Andrew.Fulton@Steptoe-johnson.com for an invite
melissa.munson@steptoe-johnson.com 281-203-5765 matt.schlensker@steptoe-johnson.com 281-203-5776
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