PIPELINE the newsletter of Panhandle Producers & Royalty Owners Association • February 2016
Looking forward into 2016 The Board and Staff of PPROA understand our members and their difficulties. Our industry, yet again, has had a rough 2015 and we have every reason to believe that 2016 could be just as difficult. We believe things will bottom out. No US drilling collapse has lasted more than 2 years in the oil and gas industry even during the 1980s. Uncertainty will fade. Markets will tighten and rebalance in 2016 setting the stage for growth. You’re asking “What’s this got to do with me?” In 2016 we are offering even more member benefits than ever before! Because you ARE important to us and we know these hardships will soon pass, we want to offer you some special renewal options during the month of January 2016. The opportunity to have your membership bank drafted monthly or Charged monthly to your debit or credit card
And there is more & it is BIG….. Beginning in 2016 PPROA will offer members access to insurance programs that are designed specifically for the oil and gas industry. The programs include property, general liability, business auto, and pollution from BITCO (formerly Bituminous) Insurance Company. Excess liability and control of well insurance along with Excess CCC, oilfield property, real property, oilfield equipment and rig physical damage will be available from the Brit Syndicate. Health insurance is available through the Lone Star Energy Employee Benefit Trust and the insured must have an energy related business and requires a minimum of two unrelated employees. Also included is worker compensation through Texas Mutual Insurance Company. Discounted rates are given based on schedule credits and loss ratios and PPROA members have the potential to participate in very successful dividend* programs. Don’t want to lose your agent? No need – they can be an appointed** agent with this program! We at PPROA are not only here as an industry advocate representing your interests both at the state and federal levels of government but to assure energy policies will be those in which our members can survive, grow and prosper. We have also been working hard to increase member benefits. We hope you will continue your 2016 membership and the new added values. Contact our office for additional information! *Dividends are not guaranteed and past dividends are not a guarantee of future dividends. **Appointments are not guaranteed but agents can come to One Star Insurance Solutions, LLC to obtain quotes for qualifying entities. Looking forward into 2016 .......................... 1 President’s letter......................................... 2 New member benefits ................................ 2 Winter association’s meeting ..................... 3
Benefits of building Keystone pipeline ........ 4 Give me a break ......................................... 8 Casenote................................................... 10 Petroleum directory................................... 13
Locations & Permits ................................. 14 Markets ..................................................... 15 Monthly stats ............................................ 16
As I sit down to write, my mind keeps wandering beyond the challenges of surviving the current brutal downturn of the Oil & Gas Industry and the many in our area who are suffering because of it - to what this could mean for the future of our communities, our states, and even our country. It is no secret that the Obama Administration is no friend to, or fan of, our industry. They have engaged in regulatory overreach and policies that have very negatively impacted the ability to operate in this country, which of course, has hit the small, independent producers the hardest. The current Administration, and others before, have failed to adopt a national PPROA President energy policy that would free us from dependence on foreign oil, particularly from unfriendly Stacey Ladd countries. The American Oil & Gas Industry is currently UNDER ATTACK from OPEC, particularly Saudi Arabia, in order to regain the 11% market share which they lost during the U.S. shale boom. It seems to me that we are losing a HUGE opportunity to discontinue our practice of buying oil from countries who want to harm us, build up stockpiles of oil, and issue permits for refineries, all of which would obviously help support industry and jobs in the US while at the same time looking out for national security interests. My concern is that potentially, many American producers and service companies could be out of business by the time the price recovers, that the current glut may disappear very quickly causing prices to skyrocket and then the U.S. could be more dependent on foreign oil than ever before. Of course, there is no political will or public outcry to plan ahead and tackle this problem while oil and gas prices are low. Start asking our elected officials and those running for office how they will tackle this challenge. Use your voice, use your vote. Until next month,
New Member Benefits As you can see from our front page letter, PPROA has expanded our member benefits through a joint venture with the Texas Alliance of Energy Producers. We were formerly aligned with the Texas Oil & Gas Association’s Worker Compensation Insurance Program but after much negotiation with both groups we were able to better serve our members with additional services through the Texas Alliance group. Now you have available health & life, property, general liability, business auto and much more in addition to large savings and dividend program! Please call with any questions!
However, there is so much more we are working on for you in “perks”! Amarillo Club Membership Special - *Save over $250 on Club membership*
Membership fee of $375, reduced from $500! - Tax to be added to these costs. The $100 application fee is waived for PPROA members! Value - $420
Coming soon! Discounted corporate gym memberships and more!
Winter Association’s Meeting I just returned from the TXOGA winter meeting. This is a meeting between the larger oil companies and the peer oil and gas associations to discuss and prepare for issues our industry currently and will face especially in the 2017 Texas legislature. Downturns and pricing do not prevent or relieve our need to stay “on top” of the necessity to protect our industry. There is always some diversity when it comes to the differences between “big oil” and the “independents” but in the end we both serve the same industry and the same communities. The following are key issues facing our industry going forward: Key Emerging Legal Issues 2016 Key Issues
Local Government Regulation Post HB 40. After successful passage of HB 40 limiting regulation of oil and gas activities by local governments, look for local governments to test just how far they can go to regulate and limit oil and gas activity. Allocation Wells. Issues regarding allocation wells remain after unsuccessful efforts to pass allocation well legislation. Opponents of allocation wells continue to argue that allocation wells cannot be drilled without express approval from all lessors. Current litigation regarding allocation wells has been settled, but new disputes are likely to arise. Oil & Gas Lease Agreements or Litigation. There are myriad of issues that arise regarding oil and gas lease terms. Significant issues to watch include royalties (pricing, deducts, measurement), lease termination (production in paying quantities, savings clauses and shut-in royalties). Subsurface Trespass. This includes two general forms (1) incidental intrusion (such as hydraulic fracturing or migration of injected fluids), or (2) intrusion by a wellbore that crosses property lines. Any harm labeled as “trespass” poses significant legal concerns. Surface Use. Surface issues have been leveraged as a key point to burden or prevent mineral development, particularly in areas of intense mineral development. The superior right of the mineral estate to make reasonable use of the surface is under constant attack by surface owners, who typically acquire their land with the minerals severed. Water 2016 Key Issues Saltwater Disposal Wells (SWDs). Groundwater Conservation Districts (GCDs) continue to protest SDWs at the RRC. The GCDs question the RRC expertise and ability to protect groundwater from contamination. The GCDs believe they should have standing at the RRC regarding permitting of SDWs. Groundwater Contamination. Federal agencies and academia continue to study the impact of hydraulic fracturing on water resources with environment groups and liberal media citing any finding or non-finding as unfavorable. Winter cont’d p. 12
The Benefits of Building the Keystone XL Pipeline 1. Building pipelines creates jobs for hardworking American families Directly connecting the world’s third largest oil reserves with the world’s most sophisticated refining hub would bring about strong economic benefits including jobs, increased tax revenues and energy security. The Keystone XL Pipeline is projected to create approximately 9,000 well-paying jobs for American men and women as well as thousands of spin off jobs in communities along the pipelines route. Building the Keystone XL Pipeline through Nebraska, South Dakota and Montana is expected to create millions of hours of labor. These hours represent real jobs, and are critical to helping American families qualify for health insurance, retirement benefits and improve the quality of their lives. Construction jobs expected to be created by Keystone XL in each state: Montana: approximately 4,000 jobs; Nebraska: approximately 2,700 jobs; South Dakota: approximately 3500 jobs. 2. Economic Benefits and Taxes paid by TransCanada means a boost for local communities Keystone XL will contribute more than $3 billion towards U.S. GDP. Investments made in the form of taxes and other contributions will help communities big and small afford infrastructure improvements, such as roads, bridges, schools and local programs. Once the pipeline is in operation, neighboring communities will continue to benefit from the surplus tax revenues accumulated during construction, the spending associated with ongoing operations and maintenance, as well as property taxes levied on the pipeline. Property tax revenue expected to be created by Keystone XL in each state: Nebraska: approximately $20 million; South Dakota: approximately $23 million; Montana: approximately $67 million. 3. Support for U.S. manufacturing Low energy prices are a benefit to everyone especially U.S. manufacturers. The International Energy Association recommends that countries should look to use “indigenous sources” of energy to improve efficiency and reduce transportation costs. Efficient and competitive markets can minimize the cost of energy to an economy. Lower gas and electricity prices in the United States, relative to Europe, equated to estimated savings of close to $130 billion for the entire US manufacturing industry. 4. Keystone XL will play a significant role in America’s energy future and security Energy security is about safe, reliable access to diverse and abundant energy resources. Keystone XL connects the largest most sophisticated refining hub in the Gulf Coast with the third largest oil reserves on the planet and the second largest oil-producing region in the United States. Safe, secure access to domestic crude oil is key to ensuring long-term energy security. 5. Keystone XL will support energy independence By creating a link between booming domestic U.S. production and growing supplies of Canadian oil and the U.S. Gulf Coast, Keystone XL will be critical in helping the United States decrease its dependence on oil from less-friendly, less stable regimes in a safe and environmentally responsible manner. It’s about making sure that oil production is connected to the right markets with the right infrastructure at the right time. It’s also about having the choice of how those resources will be procured, used and distributed. The Keystone XL is not only about transporting Canadian oil, which would displace higher-priced Venezuelan crude oil. Keystone XL will safely transport growing oil production from North Dakota and Montana, as well as provide market access for crude at Cushing, Okla. This will contribute to maintaining stable energy prices and boosting the competitiveness of U.S. Gulf Coast refiners. Keystone cont’d on P. 6
6 Keystone cont’d from P. 4
6. Environmentally Responsible The State Department’s Final SEIS and four previous environmental impact statements written over the past five years, containing more than 17,000 pages of scientific research, all reached a similar conclusion: Keystone XL would have minimal impact on the environment. Multiple scientific studies have also shown that Keystone XL and the development of the oil sands will not put the global climate in jeopardy. 7. Safety It has been well-established that pipelines are, by far, the safest mode of transportation for crude oil and natural gas. A recent Fraser Institute study shows that pipeline workers are less likely to be injured on the job and pipelines have fewer incidents per mile than trains and trucks. The State Department environmental impact reports have concluded that Keystone XL would have a degree of safety greater than any other crude oil pipeline in operation in the U.S. The pipeline has agreed to 59 additional special safety conditions that go above and beyond federal regulations. Crude oil needs to move from wells to the refineries. We have the responsibility to do that in the safest and most efficient way possible, no compromises. ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ News Clips ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ IPAA joins lawsuit on EPA's ozone standard. On December 23, 2015, IPAA joined a coalition of industry groups in litigation over the EPA's new ozone standard, arguing that it is too strict and threatens economic growth. Leading the suit are the U.S. Chamber of Commerce and the National Association of Manufacturers, claiming the new standard could be "the most expensive regulation" ever. "The EPA has set an unattainable mandate that will slow America's economic growth and threatens U.S. jobs," said IPAA Executive Vice President Lee Fuller "Make no mistake, lowering the ozone standard is not going to provide new health benefits, according to the EPA's own analysis. Those who are calling for a lower standard are ignoring the EPA's own analysis, which concludes that the most populated 'nonattainment' areas of the country will fail to meet the new standard. As a result of setting this new standard, citizens and businesses operating in these communities across the country will be subject to burdensome, costly, and unnecessary additional regulatory requirements for no significant health benefits." Oil & natural gas are critical to the U.S. economy. Last month the American Petroleum Institute (API) released its annual report, the State of American Energy. IPAA President and CEO Barry Russell, Executive Vice President Lee Fuller, and Director of Public Affairs and Communications Neal Kirby represented independent producers at the API event. The report focuses on the regional contributions to the U.S. energy industry, priority issues for those regions in terms of energy development, and how choices at the federal level impact the lives of families across the country. The report also highlights how oil and natural uniquely impacts many aspects of American life. Whether it's providing millions of well-paying jobs, saving consumers thousands of dollars each year on their energy bills, producing the building blocks for products we use every day, or developing innovations that has reduced air emissions to historic lows, the oil and natural gas industry is a vital part of the U.S. economy. The report reminds us that we must be cognizant of policy challenges facing the industry to ensure these benefits will continue for future generations of Americans. TransCanada files $15 billion lawsuit over Keystone XL denial. January13, 2016, Calling the Obama administration’s decision to deny a permit to construct the Keystone LX pipeline “arbitrary and unjustified,” TransCanada Corp. last week filed a lawsuit in U.S. Federal Court, as well as a claim of violation of the North American Free Trade Agreement (NAFTA). “TransCanada followed every federal and state process over a protracted seven-year review period and Keystone XL passed every economic, environmental and geopolitical test,” said Mark Cooper, a TransCanada spokesperson. Early last year, President Barack Obama vetoed a bipartisan bill passed by Congress approving the 1,179-milelong pipeline that would have transported Canadian and Bakken crude to Gulf Coast refineries. Following a seven-year review process, Obama announced in November that he would deny a presidential permit for construction of the pipeline.
Well the holidays are over for another year. I’ll bet you have all your presents put away or returned by this time. But wait, you haven’t even seen all your presents yet. What am I talking about? The tax breaks that Congress passed prior to leaving Washington back in December. These presents will become apparent with the preparation of your 2015 tax return. All of these tax breaks had expired at the end of 2014 and Congress on December 18, 2015 extended them retroactively back to January 1, 2015. So let’s see some of the presents you will discover when you file your 2015 return. American Opportunity College Credit This is the key tax credit that helps families pay for college, providing up to $2,500 a year for each qualifying student for up to four years. In 2018, however, the credit was scheduled to revert to the old Hope credit, at about $2,000 a year and only for just the first two years of college.
Deduction of State Sales Tax For several years, taxpayers have been given the choice of deducting either the state income tax or the state sales taxes they pay. The chance to deduct state sales taxes, though, expired at the end of 2014. This option has now been revived retroactively for 2015 and made permanent. The IRS has tables to estimate how much sales tax folks with different incomes pay in different states. To the table amounts you can add sales tax paid on big-ticket items, such as cars or boats. Whenever the sales tax write-off is bigger than the income tax deduction, take it. Tax-Free Donations From Your IRA
Tax Breaks for Business Equipment For many years, Congress has sweetened tax breaks designed to encourage businesses to invest in capital equipment. Until the end of 2014, for example, the Section 179 “expensing” deduction allowed firms to write off 100% of the cost of up to $500,000 in qualifying assets in the year of the purchase, rather than gradually deducting the cost over many years. Another break, called 50% bonus depreciation, let firms write off 50% of the cost of such purchases right away, with regular depreciation deductions taking care of the rest over a set number of years. Bonus depreciation expired altogether at the end of 2014, and the expensing limit fell to $25,000. The new law revives the $500,000 expensing cap for 2015 and makes it permanent (it phases out after $2 million in assets are purchased in a single year), and the law extends bonus depreciation retroactively for 2015. The 50% bonus applies for property purchased in 2016 and 2017, too; the bonus drops to 40% in 2018 and 30% in 2019. So when you have completed your 2015 tax return be sure to call your Congressman or Senator and thank them for the Christmas present. Of course, it is your money that you are getting back, so is it really a present? Tax thought for the month: “There is a belief among some elected officials that if it moves, tax it. But often times, when you tax it, it won’t move.” ~Paul Cellucci
Mike Connor, Managing Partner, Connor McMillon Mitchell Sheenum
CASENOTE Warren v. Chesapeake Exploration, L.L.C. held that the royalty clause of an oil and gas lease permitted deduction of post-production costs incurred by lessee in delivering marketable natural gas from the mouth of the well to the actual point of sale. Charles Warren and Robert Warren (“Lessor”) sued various Chesapeake entities (“Lessee”) for deducting post-production costs from the royalty otherwise payable under an oil and gas lease. The relationship among the Chesapeake entities was not an issue in the case. The pre-printed lease royalty clause required that royalty be paid based on “. . . the amount realized by Lessee, computed at the mouth of the well . . . .” The lease also had an addendum that provided: Notwithstanding anything to the contrary, herein contained, all royalty paid to Lessor shall be free of all costs and expenses related to the exploration, production and marketing of oil and gas production from the lease including, but not limited to, costs of compression, dehydration, treatment and transportation. Lessor will, however, bear a proportionate part of all those expenses imposed upon Lessee by its gas sale contract to the extent incurred subsequent to those that are obligations of Lessee. It is expressly agreed that the provisions of this Exhibit shall super[s]ede any portion of the printed form of this lease which is inconsistent herewith, and all other printed provisions of this Lease, to which this is attached, are in all other things subrogated to the express and implied terms and conditions of this Addendum. “The phrase ‘amount realized by Lessee computed at the mouth of the well’ means that the royalty is based on net proceeds, and the physical point to be used as the basis for calculating net proceeds is the mouth of the well.” This applies “to all gas sold by the lessee, regardless of whether the gas is sold at the mouth of the well, off the leased premises, or at some point in between.” The issue in the case was the effect of the addendum.
The court held that the addendum was not inconsistent with the printed royalty provision. Although the addendum stated that the royalty payable would be free of post-production costs, it did not change the point at which all royalty is computed, which is the mouth of the well. If the parties intended for Lessor to receive the royalty fraction of the proceeds of sales, regardless of where the sales occurred, they could have deleted “computed at the mouth of the well” from the pre-printed lease or in the addendum said “regardless of the location of the sale.” Lessor acknowledged that the first sentence of the addendum addressing post-production costs is functionally equivalent to the “no deductions” clause in Heritage Resources, Inc. v. NationsBank and that it does not accomplish the result they desired. Lessor contended that the second sentence of the addendum saying that “Lessor will, however, bear a proportionate part of all those expenses imposed upon Lessee by its gas sale contract to the extent incurred subsequent to those that are obligations of Lessee,” established that there are two sets of obligations: (1) those borne solely by Chesapeake, and (2) shared obligations.
Although, the court conceded the second sentence was confusing, it held that “[u]nder the royalty clause in the pre-printed lease, the lessee bears the expenses of producing and selling the gas at the mouth of the well. Its obligation with respect to royalty is to pay the amount of proceeds computed at the mouth of the well, which means proceeds net of reasonable post-production costs incurred beyond the mouth of the well.” The court concluded that “[t]o the extent that a gas sale contract requires the lessee to bear the cost of delivering marketable gas to a sales point other than the mouth of the well, the second sentence [of the addendum] expressly provides that the lessor will bear a proportionate part of all those expenses.” This case is one of several that have construed post-production cost issues primarily under the precedent established in Heritage Resources, Inc. v. NationsBank. The lessor generally loses because the royalty clause fixes the point for computing the royalty at the well, which means net proceeds at the well, and thus there are effectively deductions for post-production costs incurred downstream. Jeff McCarn may be contacted at (806) 345-6340 or email@example.com
12 Winter contâ€™d from p. 3
Texas Water Development Board Brackish Groundwater Mapping Project (HB 30, 84 th Legislature). HB30 by Larson set aggressive deadlines for the mapping of brackish aquifers by the Texas Water Development Board (TWDB). Desired Future Conditions. Under the groundwater management plan, each GCD must work with other districts in its groundwater management are to determine desired future conditions (DFC) of its aquifers such as water levels, water quality, spring flows or volumes , at a specified time in the future as defined by GCDs within certain areas as part of a joint planning process 2017 State Water Plan. Review of the TWDB Regional Plans to ensure that oil and gas water usage is correctly reflected and provide input to the TWDB prior to the State Water Plan adoption. Work with the TWDB to supply projections for the 2011 Water Plan. EVP Letter continued: Environmental 2016 Key Issues Ozone National Ambient Air Quality Standard (NAAQS). Dec 2015 EPA lowered the ozone NAAQS to 70 ppb effectively increasing nonattainment areas. Advocacy as TCEQ develops strategy and plan for designation and implementation of new standard. Designation will be based on 2014-2016 data. National trades litigating. New Source Performance Standard (NSPS) OOOO and related rulemaking. Extensive comments, prepared by Katten Law, have been submitted on NSPS OOOO 1.5 focused on aggregation (source determination), direct regulation of methane and control technique guidelines, expressing concern that the new rule applies to existing sources. Waters of the U.S. (WOTUS) EPA finalized rule which was stayed by the 6th Circuit in 2015. Expansion of waters under the new rule had potential of creating broader federal nexus. Induced Seismicity. Continue advocacy and support of association developments. National Park Service (NPS) proposed rule for oil and gas activities. Comments were submitted in Dec 2015 for proposed revision to the rule regulating oil and gas activities within the boundaries of the Nation Park System. The proposed rule governs the exercise of non-federal oil and gas rights in NPS units and currently applies to 12 NPS units in Texas. NPS indicates that an additional 30 units could be affected based on the presences of split estates, exploration and production occurring on adjacent or nearby lands, imposing restrictions on leaseholder rights on adjacent lands. Final ruling expected mid-2016. EPA SSM SIP. Associations to provide input to TCEQ rule changes in response to the EPAâ€™s finalization of the mandates for the removal of affirmative defenses for emissions from the Texas Administrative Code. TSCA (Toxic Substance Control Act) . Pertains to the modernization of the TSCA to strengthen the chemical management system in U. S. RCRA citizen suits. Monitor the emergence of RCRA citizen over storm water discharges (CWA) and salt water disposal wells (SWDA). Environmental enforcement . Includes increased upstream focus by EPA national enforcement initiative (NEI) RMP focus from Region 6 and environmental justice and community technology as factors in enforcement and litigation. Emission Reduction Credits (ERC) . Expansion of emission bank and trading program to Area and Mobile Sources. Advocacy with TCEQ and EPA Region 6 and other trades to develop an approvable ERC program for area sources. Challenges are source permanence, ability to quantify, and surplus to the SIP status.
COMING SOON: The 2016-2018 Panhandle Petroleum Directory Make sure you send in your directory listing information. Contact the office for last minute advertising opportunities.
Active Drilling Locations By County - PPROA Service Area Texas Panhandle/western OK, SW KS - 1/8/16 RigData, Inc. Hemphill—cont’d Nomac Nomac Nomac Unit Unit Ochiltree Cactus Potter Unit Roberts Unit
OKLAHOMA Beckham Nomac
Ellis Roger Mills TEXAS Hardeman Hemphill
Le Norman Le Norman Le Norman BP America BP America BP America Apache BP America
Data provided by RigData.com
Drilling Permits By County - Dist. 10 12/15/15 – 1/14/16 DrillingInfo.com
Gray Jade Hansford Amarillo Exp Enterra Strat Land Hartley Continental Hemphill BP America Le Norman 9,000 Le Norman Le Norman Unit Hutchinson Pantera PG-M
Brecheisen 12/22/2015 9,750 Steele 1/5/2016 7,059 Thormodsgaard 1/6/2016 6,900 Howard
1/4/2016 10,904 Flowers 12/15/2015
Walker Flowers Shaller
12/29/2015 12,000 1/11/2016 9,000 12/22/2015 12,300
12/17/2015 2,610 12/16/2015 3,400
Operator Hutchinson—cont’d PG-M Moore Adams Adams Adams Adams Ochiltree Mewbourne Remnant Oldham Arrow Sherman Pantera Wheeler J-Brex Sanguine
Thompson Thompson Thompson Thompson
1/12/2016 1/14/2016 1/14/2016 1/14/2016
1/6/2016 8,000 12/15/2015 11,384
1/13/2016 3,000 1/5/2016 15,073
2,600 2,600 2,600 2,600
16 PRSRT STD U.S. POSTAGE
3131 Bell St., Suite 209 Amarillo, TX 79106 (806) 352-5637 firstname.lastname@example.org
Permit No. 664 Amarillo, TX
Published ten times a year by the Panhandle Producers & Royalty Owners Association OFFICERS President Stacey Ladd WBD Oil & Gas, Inc. Past President Greg Graham Kismet Properties, Inc. Vice Presidents Todd Lovett Mewbourne Oil Company Thomas G. Ladd Laddex, Ltd. Secretary Doug Saunders Taylor/Herring Co. Treasurer Jeffery A. McCarn Brown & Fortunato, PC EXECUTIVE COMMITTEE Bill Aikman Tascosa Land Resources Preston Boyd Valero Energy Corporation D. Clay Holcomb F.G. Dragons, LLC Juanita M. Malecha Pantera Energy Company Jason Manning Manning Land, LLC Scott Peeples Fortay, Inc. Leon Roberts CRL Pump & Supply, Inc. Currie Smith ACS-ODS Oil & Gas Patrick Weir Underwood Law Firm STAFF Judy Stark - Executive V.P. Cynthia Johnson - Office Manager
RRC District 10 Production Data January 2015â€”December 2015 County CARSON
GW Gas (MCF)
HEMPHILL HUTCHINSON LIPSCOMB MOORE OCHILTREE