Monthly Archives: June 2016

Stone Re-opens Mary Field

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Last September Stone Energy shut-in their Mary field here in West Virginia, citing low gas prices.  Today we hear that Stone has cut a deal to begin flowing gas to Williams pipelines from the Mary field.

This is an indication of two things: prices have risen far enough that production in the Marcellus region in profitable, and at least one company thinks that gas prices are going to remain high for a while.

Production was never completely shut-in in the Mary filed.  They’re producing about 45MMcfe per day right now.  Production is expected to increase to somewhere over 60 MMcfe per day in July and to over 100 MMcfe per day in August, so more than double in the next 60 days.

Some of our clients are going to be very happy about this news.  Better royalty checks!  Look for them in a mailbox near you.

Pipeline Safety: Pipeline Coatings

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Texas Eastern Pipeline Inspection Section

The pipeline that blew up in Westmoreland county, PA back at the end of April is going to be partially dug up and fully inspected along a 263 mile stretch, shown above.  Thanks to Great Southern Press for putting the map together.

The article by Anya Litvak over at PowerSource goes into some detail about pipeline coatings and what probably went wrong on the Westmoreland County, PA pipeline.  It’s an excellent article and well worth the read.

If you don’t have the five or ten minutes it will take to read it, just make sure that if you have a Texas Eastern pipeline across your property that was built in the 1970s or 1980s that you have Spectra Energy come out and inspect you section of the pipeline.

 

Consol Energy’s Plans

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A lot of our clients were working on deals with Consol Energy when they stopped operations here in West Virginia.  Now there are rumblings that Consol will start operations back up in the next six months.  The only caveat is that those operations are likely to be focused on the Utica, which is in the northern part of the state, and most of our clients who lost out on deals with Consol had property in the Lewis, Upshur, and Barbour county area.  So, it’s good news and bad news.

We’re keeping an eye out for everyone that was negatively affected when prices took a downturn in 2014 and 2015.  Things are looking up, but they haven’t improved immensely yet.

Really Old Wells and Horizontal Fracking

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Bloomberg has an interesting article about old wells in Pennsylvania and how they can affect or be affected by a horizontally fracked well.

West Virginia has the same problem.

The first thing to know about old wells in West Virginia is that we don’t know where they all are.  West Virginia didn’t start assigning API numbers to wells until 1929, at least forty years after oil and gas development really boomed in West Virginia, and at least seventy years after the first oil wells were drilled.  That means there are a lot of well locations out there that are unknown.  How many?

A quick Google search turned up some great photos that can help us get an idea.  The following were taken from a web site about the Kanawha and West Virginia Railroad.  There are many more on other sites.

The photo below was taken in 1913 on Blue Creek in West Virginia.  You can plainly see at least six wells, and possibly another six or seven.  When you look at the larger photo it’s possible that some of what looks like oil derricks are actually just ageing or smudges on the photo.Blue Creek, WV Oil Wells

 

 

This photo of oil wells in West Virginia was taken at another location on Blue Creek, possibly about the same time as the one above.  There are clearly ten oil wells.Oil Derricks on Blue Creek near One Mile Fork

 

 

 

 

 

None of those wells would have had API numbers, and their locations were never recorded by anybody.  Nobody thought they would be important.  They are the kinds of wells that we are concerned with, and they exist all over West Virginia.

Many of these old wells were not properly plugged when they were abandoned.  Someone might have thrown old lumber or trees down the hole, filled it with dirt, and called it a day.  Others might have gotten a little better treatment with some cannon balls or scrap metal thrown in for good measure.  Very few were plugged with cement, and many were just left open.

This can be a real problem when a horizontal well is drilled nearby.  Some of the old wells were drilled down thousands of feet, a few even into the formations that we are fracking today.  When we frack, the pressure can push fluids into the old wells, either directly by way of the induced fractures or through existing faults in the rock.  It’s called well communication in the industry.

It could lead to contamination of a water well, or fracking fluids on the surface, or natural gas spewing into the air.  Nobody wants that.  Even the companies doing the fracking don’t want that as it lowers the amount of pressure in their well, leading to fewer, shorter, and smaller fractures and lower production.

So what can be done about it?  It’s hard to do much about it.  Many of these old wells don’t show above the surface, so getting eyes in the field isn’t going to help.  A metal detector will find a lot of them, but some of these old wells were lined with wood.  Even the wells the were lined with metal often had the casing pulled out for use on another well.  It’s a real problem, and there isn’t an obvious and good solution.

The reason we’re writing about it is to point out to people one way that their water wells can be contaminated with fracking fluid.  If you think you have a water well that’s been ruined by fracking you can get help.  It’s going to be an uphill battle proving that fracking did it, but it can be done.

Call the office at 304-473-1403 and find out what you can do.

 

The State of Oil and Gas: June 2016

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The DUCs are back in the news.  Not that they ever left.  Oil companies are starting to bring their Drilled but UnCompleted wells online.  The reason they are bringing them online is that oil prices have stayed above $40/bbl for about a month.  The money invested in those wells is sunk cost at this point, and it won’t take as much to complete them as it will to drill new wells, so it’s cheap product for the companies that own them.  Wood Mackenzie’s Alex Beeker thinks that the number of DUCs will drop by 400 next month.  Considering that there were about 1700 in March, that’s a big drop.

Two more natural gas fired power plants are being planned in Pennsylvania.  Link is to Marcellus Drilling News, where we get a lot of our oil and gas news.

Eclipse Resources drilled a well with a lateral of 18,500 feet.  That’s 3.5 miles!  That’s a long well.  They drilled it in 18 days!  That’s fast.

Tim Maverick with Seeking Alpha thinks that Mexico’s demand for natural gas is what’s going to keep the U.S. natural gas industry alive.

A study has shown what natural gas has done for the manufacturing industry in the United States.  We always knew that itw as a good thing, but now we have actual numbers.

The United States is still the worlds largest producer of petroleum and natural gas hydrocarbons according to the US EIA.  Anyone wondering why we have an oversupply of either only needs to take a quick look at the first chart in the article.  Go USA!  OK, so we actually kind of shot ourselves in the foot.  Not just kind of, but dead on from point blank range.  But if you’re one for tradition it should make you feel good to know that the oil and gas industry has been doing exactly this since its inception.  Produce as much as you can while the demand and price are high.  Overproduce while the price drops.  Get out of the market or go bankrupt when the price drops so low you can’t make money.  Everybody left continue to produce until the market stabilizes.  When prices start to climb get back in the game and start producing again.  Lather, rinse, repeat.

In the same vein of thought, gas storage numbers were greater last week than they were last year for the same week.  However, they were below the five year average.  The article suggests that the slightly lower numbers are because of restrictions on production more than anything.  That makes sense.  We have fewer rigs running than at any time since we started keeping track of that, and production is actually starting to drop off across the US.  I expect production to continue to drop off for the rest of the summer and fall.  If prices rise above $2.50/MCF we might see more rigs fired up, but we might not.  It’s possible we could hit storage limits this fall and if we do producers won’t have much incentive to drill new wells.

This article at The Week, a British site, suggests that breaking through the $50/bbl price will be a boost psychologically to the price of oil.  Now that it has done that, people actually think that it will stay up there for a while.  The article includes a pretty good overview discussion of the price of oil and the economy, and is worth a few minutes to read.

OPEC met again, and didn’t accomplish much.  What they did accomplish was to agree to a new secretary general, Sanusi Barkindo of Nigeria.  Previously, the secretary general was Abdulla al-Badri.  Saudi Arabia and Iran had pushed hard for their own replacement candidates over the last few years, resulting in al-Badri being automatically extended.  It’s interesting that the new secretary general is from Nigeria, a country that is having serious troubles with civil war and rebels blowing up the country’s pipelines.  OPEC also was able to agree to admit a new member, the country of Gabon.

Now that prices are at $50/bbl and kind of seem to be stable around that number, everyone is wondering whether shale drilling is going to pick back up.  This article over at oilprice.com doesn’t have answers, but analyzes the current situation well.

Natural gas prices have hit and exceeded, but not stayed consistently above, $2.50/MCF.

Here’s someone who thinks that $50/bbl oil isn’t going to last.  He starts out talking about stock market factors which, to my mind, aren’t as important as production/demand.  But then he gets into the oversupply, pointing out that there are a whole bunch of tankers sitting offshore full of oil just waiting for the price of oil to go a little higher.  Seems like a bad move to me, but that’s not my line of business.  Regardless, those tankers are going to have to unload at some point, and they hold a good chunk of the 1 billion to 3 billion extra barrels of oil that have been floating around for a while (no pun intended).  I’ve personally been mystified by the increase in oil prices.  I haven’t seen what I thought was enough of a cut in production to warrant the significant increase in price.  I wouldn’t be surprised if the price of oil did take a dive for a while.  I’ll be more confident that oil prices are going to stay up when American frackers start setting idled rigs back up.

RBN Energy is doing a two-part series about LNG and its effect on the natural gas market.  Since most of what we produce here in West Virginia is natural gas and RBN Energy does very well-researched work, this is highly recommended reading.

A Tennessee man, Pat Riley, has coordinated a coast-to-coast road rally to show off the possibility of CNG.  Apparently you can travel coast-to-coast on CNG because there are enough fueling stations to do so.

OilPrice.com points out that when oil and gas prices start to rise (which they have been recently) it might be hard for oil and gas companies to find the skilled workers they need to start production back up in a timely manner.  We’ve mentioned this possible problem in previous State of Oil and Gas posts.  If that’s the case, we may be in for a roller coaster ride of oil and gas prices in coming years.

This article at oilpro.com says that DUCs won’t get completed in large numbers until oil hits $100/bbl because the companies won’t be able to finance the fracking of the DUCs.  We might be staring down the beginning of really high oil prices.  In oil and gas, worldwide supply and demand are the main factors, but financing and money drives everything else.

The Saudi strategy of producing enough oil for anyone that wants to buy from them makes it harder for alternative energy sources to get funding.

How Big is an Oil Tanker?

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This isn’t quite on on point for this web site, but it’s pretty interesting anyways.  I am a bit of an oil and gas geek.  The technology and the industry are fascinating.  It’s one of the reasons I choose to do oil and gas law.  I don’t work for the industry.  I work exclusively for mineral and surface owners.  But I still find the industry as a whole to be awesome in the real sense of the word.

This is an older video, produced in 2013, but the dimensions of a VLCC (Very Large Crude Carrier) haven’t changed.  Watching it will give you an idea of the scale of the industry.

Then this very short video shows the VLCC activity for August 2011.  It demonstrates that we use a lot of oil.  The amount is mind boggling.

Get Everything in Writing!

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DocumentOne thing we hear all the time is that the company promised X but never did it.  Now the mineral owner wants the company to do X, but the company is refusing.

It’s a really unfortunate situation.  In general we all want to be able to trust people.  Were supposed to be able to trust people.  Everything works better when you can trust people.  Society and civilization work best when you can trust people.  But you can’t trust a company.

It’s not that the people running the company are bad or good or indifferent.  A company is made up of people who also want, are supposed to, and work better when trust can be given and received.

It’s that a company functions based off policies and procedures, not people.  The people come and go.  The policies and procedures stay.  The only way a company works over the long term is because of what is written down.

So a company can only go by what was written because that’s the nature of a company.

Even if that weren’t the case, the written paperwork is going to be the best evidence of what happened.  Some of the paperwork we’re working on today is going to be in existence long after we’re all dead.  We’ve seen a lease that was signed in 1892 that is still in effect today.  You can’t rely on people when the people aren’t there any more.  You won’t be able to show up in court and have your say 120 years from now.

You have to get it in writing.

Courts have recognized that this is the case and have said that if it isn’t written down it didn’t happen.  The following quote from a West Virginia Supreme Court case says exactly that.

In Iafolla v. Douglas Pocahontas Coal Corporation, the Court restated the well established rule that, “A written contract merges all negotiations and representations which occurred before its execution, and in the absence of fraud, mistake, or material misrepresentations extrinsic evidence cannot be used to alter or interpret language in a written contract which is otherwise plain and unambiguous on its face.”

Notice that the Court said it was a “well established” rule.  This case was from the 1970s.  The line of cases it quotes will go back to English common law, probably the 1600s or 1700s.  It doesn’t get much better “well established” than this.

So, the Court says that a “written contract merges all negotiations and representation”.  In other words, the Court assumes that what you talked about is what you wrote down.

However, you’ll notice that the sentence didn’t end there.  The Court continued on and gave some exceptions to the rule.  It did it in a roundabout kind of way, but it did it.  It said, “. . . in the absence of fraud, mistake, or material misrepresentation extrinsic evidence cannot be used to alter . . . a written contract . . . “.

With that language, the Court said that fraud, mistake, and material misrepresentations can throw into doubt whether the written paperwork is valid.

The trouble is, it’s hard to prove any of those things.  You need good witnesses or … wait for it … written documents.  In the modern world you could even use recordings of conversations (assuming that the other party knows they’re being recorded to follow the most strict rule we know of).  Emails would work, of course.

In a he-said-she-said situation it’s going to be awfully hard to convince a court that the paperwork with your signature on it is something other than what you intended to sign.

That’s why we recommend that you communicate with the landman or other company representatives by email as much as possible.  Even when you talk with them on the phone, send them an email summarizing the conversation.

Get it in writing!  If it’s not written down it didn’t happen.

How They Decide Pipeline Size

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RBN Energy wrote a nice little article about how the companies determine the size of the pipe they are going to need to put in your ground.  You might not think you care anything about the thought process of the company, but in reality the more you know the more likely you are to make good decisions when negotiating with them.  Knowledge is power.  Don’t let them have all the power.

Here’s the article.

The Pennsylvania Cracker Plant is Official

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Shell announced today that it has decided to build the cracker plant in Beaver County, PA.  It’s long been expected as there has been a lot of preparatory work and a lot of land purchasing and deal making going on in the area.  Shell has already spent millions of dollars on the project, making people (including yours truly) think that it was a sure thing.  As this article points out, however, it’s not unheard of for a large company like Shell to spend hundreds of millions of dollars on a project before determining that the project is not going to work.  Learn something new every day…

Now, let’s get one in West Virginia.

Understanding West Virginia Oil and Gas Law: Who Owns What?

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huh_450One thing that people often don’t understand about mineral ownership is how the oil and gas company can sign a lease with one family member and not have to sign a lease with another.  Isn’t the oil and gas owned by both/all of you?  When my siblings sign, does that mean the oil and gas company doesn’t have to sign with me?  Can I still negotiate with the company if my siblings have signed?

It’s confusing to a lot of people.  It took me a while to wrap my head around it, too.  But I understand it now, and so can you.  Here’s how it works.

Usually you will inherit the oil and gas underneath one tract of land here in the great state of West Virginia.  (Sometimes there are more, but let’s keep it simple for now.)

Let’s set up a simple scenario to work with.  Mom owned a 30 acre tract of oil and gas rights.  She had three children.  When she passed away the 30 acre tract passed down to the children.

Most people think that since there are three children who own an interest in the tract, then you can divide the tract into three equal parts of 10 acres each and give one part to each child.  The 10 acres that are at the top of the hill go to the first child, the 10 acres that are in the “holler” (this is West Virginia after all, the valley is a holler) go to the second child, and the 10 acres that are in between go to the third child.

That’s not how it works, though.

The children own the oil and gas that’s below the 30 acre tract together.  Each child has an interest in each molecule of gas.  Each molecule of gas has three owners.

So you can’t draw lines on the map to make 10 acre tracts and give each child one.  (There is a way of doing this, called a partition suit, but it’s not necessary to get into right now.)

Since each molecule of gas has three owners, no molecule of gas can be removed from the property or sold without the permission of every person that has some ownership of that molecule of gas.

Since there are three separate owners, the oil and gas company has to deal with each owner.  The company has to get a separate contract with each owner.

The example that seems to help most people understand all of this the best is that of an old-fashioned encyclopedia.  You can buy and sell the books separately.  You can pay different prices for each book.  You can buy one this month, another next month, and a third the month after that.

But you don’t have the entire encyclopedia until you’ve bought them all.  This is important in West Virginia, because under West Virginia law the oil and gas company can’t do anything with the oil and gas until it owns all the “books”.  The company can’t drill, produce, and sell the oil and gas until all the owners have agreed to do so.

Knowing that, here are the answers to the questions above.

Yes, the oil and gas is owned by all of you.  However, none of you own or control in any way your siblings’ interests.

Yes, the oil and gas company has to sign a lease with you even when your siblings have already signed agreements.  West Virginia law requires this.

Yes, you can still negotiate with the oil and gas company even though all your siblings have agreed to something different.  We regularly get more money and better royalties for the siblings who decide to negotiate with the oil and gas company.

If you own oil and gas in West Virginia and need help understanding things, give the office a call at 304-473-1403.