Source: http://oilandgasupdate.typepad.com/
Timestamp: 2017-01-23 00:14:43
Document Index: 459155324

Matched Legal Cases: ['§ 151', '§ 151', '§ 151', '§ 151', '§250', '§250', '§13']

The AAPL officially released its Form 610 – 2015 Model Form Operating Agreement (the “2015 JOA”) to the public last month via its proprietary online Contract Center. Intended to be a comprehensive update to address the realities of horizontal drilling, the 2015 JOA contains new and revised: definitions, well proposal and elections provisions, expanded forms of notice (i.e., email), among numerous other changes. Nevertheless, many of the form revisions contained in the new 2015 JOA will appear familiar to domestic industry participants who have negotiated an operating agreement in recent years. This is because most of the changes to the 2015 JOA echo the revisions and additions that had become market in shale-play operating agreements utilized in the Barnett, Haynesville, Eagle Ford, and Marcellus shales.
An important departure from the horizontally-oriented revisions contained in the 2015 JOA is the form’s overhauled approach to the operator’s rights and duties in Article V. These changes were prompted less by horizontal drilling practices than by state court rulings interpreting the applicability of the model form’s exculpatory clause. In particular, Article V.A. of the 2015 JOA provides that an operator shall have no liability to the non-operators “for losses sustained or liabilities incurred in connection with authorized or approved operations under this agreement except as may result from gross negligence or willful misconduct.” The addition of the italicized phrase is a direct response to the Texas Supreme Court’s ruling in Reeder v. Wood County,[1] which held that the exculpatory clause should be applied broadly to relieve an operator of liability (even for breach of the operating agreement), except in cases where the operator’s conduct was grossly negligent or willfully bad. Arguably, the revision to this provision in the 2015 JOA is an expression of the spirit, if not the letter, of the reasonable operator protections contained in the AAPL’s previous model form operating agreements. That is, the reasonably prudent operator is authorized to execute its duties without the unwarranted second-guessing of its non-operators, but that authority (and protection from liability) is not unlimited.
Additional operator-related concepts include provisions for the engagement of a non-owning or contract operator pursuant to a discrete agreement (Art. V.A.). The obligations of the non-owning operator will be according to the terms of the 2015 JOA, unless otherwise set forth in the separate contract operator agreement. Further, the removal of a non-owning operator may be effected by majority ownership vote, without the requirement that good cause be shown (Art. V.B.5). And, in the case of an operator who owns an interest in the Contract Area, Article V.B.2 of the 2015 JOA allows the parties to select a minimum ownership percentage; if an operator’s ownership interest falls below this minimum threshold, such operator will be deemed to have resigned its operatorship. The 2015 JOA contains additional operator-related revisions, the potential effects of which merit further analysis. We encourage the owners of working interests in oil and gas assets to seek competent legal counsel prior to executing a new 2015 JOA or any other form of operating agreement.
[1] 395 S.W.3d 789 (Tex. 2013)
Richard Hemingway and David Cias
Posted by Thompson & Knight LLP on December 21, 2016 | Permalink
| | | October 31, 2016
Oil and gas drillers across Texas had their hopes of a multi-million dollar tax break dashed this summer, as the Texas Supreme Court held in Southwest Royalties, Inc. v. Hegar,[1] that downhole equipment such as casing and tubing was not exempt from state sales taxes. However, the court left the door open for future tax disputes involving more advanced extraction equipment and may offer opportunities for exploration, production, and processing companies seeking tax benefits under Texas law.
Midland-based Southwest Royalties filed its initial suit in 2009, seeking a refund for sales taxes paid on the casing, tubing, and pumps used by its oil and gas exploration division. The company cited Texas Tax Code § 151.318, which provides a tax exemption for equipment “used or consumed” in “the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale.”[2] Southwest Royalties sought refunds of less than $500,000, but a win for the company could have forced the Comptroller to issue billions of dollars in refunds industry-wide.[3]
The dispute centered largely on the meaning of “processing” in Texas Tax Code § 151.318. The court concluded that “processing” included any equipment used to “modify or change the characteristics of tangible personal property,” including hydrocarbons.[4] The key question analyzed by the court was whether the casing, tubing, and pumps used by Southwest Royalties caused any physical or chemical change to minerals after they were extracted. While minerals undergo various phase changes during extraction, the court concluded that these phase changes were the result of natural shifts in pressure and temperature that occurred during the extraction process. Although equipment plays a vital role in transporting hydrocarbons to the surface, it is only a “conduit” by which the minerals moved from the reservoir and thus fails to qualify as processing under the exemption.[5] The ruling is not all bad news for the industry, however. The Texas Supreme Court rejected the Comptroller’s attempt to categorically exclude all extraction and processing equipment from sales tax exemptions, and the court’s detailed analysis of drilling operations offers a road-map for future, case-by-case disputes involving tax exemptions for other types of oilfield equipment. Thus, for example, oilfield extraction or production equipment that "processes" (i.e., changes the physical characteristics of) hydrocarbons now is potentially subject to the exemption in Texas Tax Code § 151.318. As a result, exploration and production companies looking to reduce their tax bill may find relief in this summer’s decision. Thompson & Knight LLP
Conrad Hester & Brett Rector
[1] No. 14-0743, 2016 WL 3382151 (Tex. June 17, 2016). The Texas Supreme Court issued a revised opinion on October 21, 2016, clarifying that in most cases “artificial means” are needed to move oil & gas from its reservoir into the wellbore. The revised opinion can be found here.
[2] Tex. Tax Code § 151.318(a)(2), (5), (10). [3] Jim Malewitz, Texas Budget Spared in Court Ruling on Drilling Tax Case, Texas Tribune, June 17, 2016.
[4] Southwest Royalties, 2016 WL 3382151, at *5–6.
[5] Id. Posted by Thompson & Knight LLP on October 31, 2016 | Permalink
Plugging and Abandonment (P&A) obligations are the decommissioning obligations to plug unproductive wells, remove facilities from the site, and otherwise decommission the site as required by statutes and regulations to protect the public health and safety. In Texas, Section 89.011 of the Texas Natural Resources Code creates this obligation which is enforced by the Texas Railroad Commission, particularly Statewide Rule 14. In Louisiana, the Department of Natural Resources requires such decommissioning.
Lessees are primarily responsible for these P&A obligations. Where the lessee is unable to meet these obligations, regulatory agencies have the authority to hold predecessors-in-interest and co-lessees liable.[1] This may occur, regardless of any indemnification or other agreements between the lessee and co-lessees. Simply put, if the party responsible is unable to pay, the responsibility falls to a party who can.
The bankruptcy filing of a lessee or otherwise obligated party, may mean another non-debtor party becomes responsible for the P&A costs. Typically, the goal of bankruptcy is to give an honest but unfortunate debtor a fresh start. This is usually accomplished by the Court approving the debtor’s rejection of certain burdensome contracts, discharge certain debts, and/or abandonment of certain property. Sometimes these actions may conflict with the goal of environmental regulations, which aims to protect the public health, safety, and welfare.[2] The result of this conflict often leaves the co-lessees or predecessors-in-interest to the debtor-lessee holding the proverbial bag. Co-lessees could suddenly find themselves obligated to either make payments to the applicable regulatory body in the tens of millions of dollars for the decommissioning of wells, or carry out the decommissioning at its own expense and then seek reimbursement from the debtor. P&A costs can range widely and, in some cases, rise quickly. In the ATP Oil & Gas Corporation bankruptcy case, the impact resulted in a $100 million liability for the predecessor-in-title from a decade prior, Anadarko, because the Debtor could not pay the $100 million P&A liability.[3] In another case, as a result of hurricane damages, costs rose from $5 million to $200 million.[4]
The determination of the time of accrual of the P&A obligations is significant as to the ability of the responsible party to recover any of the amounts paid from the debtor’s estate. Courts differ in how they determine the time of accrual of the obligations. Some courts focus on when the obligation was paid: whether pre- or post-petition, while others primarily focus on when the liability accrued: typically when the well was first drilled. A determination that a P&A obligation paid by a co-lessee arose pre-petition is just another unsecured claim, which may receive pennies on the dollar or be discharged entirely. On the other hand, if deemed a post-petition claim, the P&A obligations are considered administrative expense claims and receive priority status. However, this too does not ensure that a co-lessee will be reimbursed for its payment, but it puts the co-lessee in a significantly better position. In the ATP case discussed above, Anadarko was required to bear $100 million in P&A costs but eventually only recovered about 1% of those costs even though the obligation was deemed an administrative expense claim.
In July 2016, the Bureau of Ocean Energy Management issued a Notice to Lessees that it intends to require companies to post supplemental surety bonds or other collateral to insure 100% of future P&A costs for outer continental shelf oil and gas properties. This changes the previous arrangement where companies that show financial strength are exempt from posting a surety requirement. It greatly increases the cost of doing business for oil and gas producers in the off-shore drilling business, but it also could potentially address some of the concerns and risks for predecessors and co-lessees raised in this article. It remains to be seen how this new regulation will impact the landscape.
[1] 30 C.F.R §250.1701; LSA-R.S. 30.93.
[2] See, e.g., 30 C.F.R. §250.17 (providing that operator conducting oil and gas operations in the Outer Continental Shelf must “protect health, safety, property and the environment” through compliance with various general safety requirements). [3] See In re ATP Oil & Gas Corp., 2013 WL 3157567 (Bankr. S.D. Tex. June 19, 2013). [4] See Mariner Energy, Inc. Devon Energy Production Co., 690 F.Supp. 2d 558 (S.D. Tex. 2010).
Ayo Shittu, Steven Levitt, and Conrad Hester *Photo courtesy of emagic.
Posted by Thompson & Knight LLP on September 29, 2016 | Permalink
| | | August 01, 2016
A bona fide purchaser is a party who has acquired apparent legal title to property in good faith, for reasonably equivalent value and without notice of any outstanding claim in or interest to that property.[1] Whether a party is a bona fide purchaser is fact-dependent and oftentimes hinges on whether the party had requisite notice of the outstanding claim.[2]
In Texas, notice can come in three forms: actual notice, constructive notice or inquiry notice.[3] An instrument properly filed for record imparts constructive notice on third parties.[4] However, a purchaser is charged with notice of the contents of any instrument which forms an essential link in that person’s chain of title, whether recorded or not.[5]
It is crucial that parties to real property contracts ensure conveyances and interests in real property are promptly recorded, most importantly to ensure that third parties with competing claims over the property do not have the advantage of bona fide purchaser status. Texas law affords substantial protections to bona fide purchasers, but these protections are cut off when third parties are put on constructive notice by a recorded instrument in the chain of title. The rule does not just apply to conveyances; covenants running with the land, such as those typically found in joint development agreements, area of mutual interest agreements, and other similar agreements, should be recorded to ensure that the party that succeeds to the ownership of the underlying properties cannot claim bona fide purchaser status.[6] In Texas, the common law bona fide purchaser doctrine is codified in Texas Recording Act, found in Section 13.001 of the Texas Property Code. The Texas Recording Act provides that an unrecorded conveyance or an interest in real property is void as to a subsequent purchaser or creditor without notice.[7] This means that in Texas, a bona fide purchaser will prevail over the holder of an unrecorded conveyance or an interest in real property. Consider the following example:
Fraudulent Oil leases its interest in the Eagle Ford Shale to Sloppy Oil on January 1.
Sloppy Oil waits to record the lease, filing it on March 30.
In the interim, Fraudulent Oil leases its interest in the Eagle Ford Shale again, this time to Innocent Oil on February 1. Innocent Oil has no notice of the earlier lease and pays fair market value for its lease.
Innocent Oil records the lease on April 1.
So who wins under Texas law? Here, as a bona fide purchaser, Innocent Oil will prevail over Sloppy Oil and take the lease, even though Sloppy Oil signed and recorded its lease first. Of course, Sloppy Oil could have easily prevented this situation from occurring. If Sloppy Oil would have promptly recorded its lease before February 1 (that is, before Innocent Oil signed its lease), Sloppy Oil would prevail over Innocent Oil because Innocent Oil had constructive notice of the earlier lease. In that event, Innocent Oil would no longer qualify as a bona fide purchaser. Public records remain one of the easiest ways to provide constructive notice to third parties of corresponding interests in real property. Under Texas law, parties should take great care to promptly record instruments properly evidencing all conveyances, covenants running with the land and other interests in real property, or else risk losing their claim to a bona fide purchaser.
[1] Madison v. Gordon, 39 S.W.3d 604, 606 (Tex. 2001) (per curiam).
[2] Id. at 606–07.
[3] Hexter v. Pratt, 10 S.W.2d 692, 693 (Tex. Comm'n App. 1928, judgm’t affirmed).
[4] Id. at 694.
[5] Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 908 (Tex. 1982).
[6] See, e.g., id. at 908­­–11.
[7] Tex. Prop. Code Ann. §13.001(a) (West 2010).
Conrad Hester & Kelli Sims
Contributions by Summer Associate Alexander Bohn
Posted by Thompson & Knight LLP on August 01, 2016 | Permalink
Denbury, Round Two
In April, the Texas Supreme Court granted a petition for review in the condemnation case Denbury Green Pipeline-Texas, LLC v. Texas Rice Land Partners, Ltd. The petition for review can be accessed here. Denbury is a pipeline company running a carbon dioxide pipeline from southeast of Baton Rouge to the Hastings Field, south of Houston. Texas Rice Land Partners is a Texas cattle ranch and rice farm that was initially enjoined from interfering with Denbury’s construction of the pipeline across ranch property. The Beaumont Court of Appeals reversed the trial court’s summary judgment ruling in favor of Denbury that Denbury was a common carrier with eminent domain rights under the Texas Natural Resources Code. Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC, 457 S.W.3d 115, 120 (Tex. App.—Beaumont 2015, pet. granted).
The appeal has drawn a number of amicus curiae briefs covering a wide assortment of legal points from various industry players, ranging from midstream companies briefing statutory construction issues to the Texas Oil & Gas Association’s argument that the burdens placed by the Beaumont Court on eminent domain threaten the basic structure of John Locke’s philosophical concepts that underpin property rights. This is the second time that this now seven-and-a-half-year-old dispute is before the Texas Supreme Court. The first time (Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC, 363 S.W.3d 192 (Tex. 2012)), the Court held that to condemn property as a common carrier, the condemnor had the burden to establish a reasonable probability that the carbon dioxide pipeline at issue would be used to transport carbon dioxide for customers other than the pipeline owner.
The primary issues the Texas Supreme Court faces this go-round are: (1) whether the test for common-carrier status is objective or subjective (i.e., based on the intent of the pipeline's owner); (2) whether evidence of the reasonable probability is limited to the time the owner planned to build the pipeline or can also include evidence of contracts signed after the pipeline is constructed; and (3) whether public use must be "substantial" for the pipeline to be a common carrier. The Texas Supreme Court’s decision on these key issues stands to significantly impact the midstream industry for years to come.
Conrad Hester & Chris Dachniwsky
Posted by Thompson & Knight LLP on June 27, 2016 | Permalink
• Production- Limited authority treats this as completion. Generally, completion has a broader meaning referring to finishing the required work on the well, regardless of whether it actually produces.• Preparation for Production- The Texas Supreme Court has held that completion occurs when a hole is “bored in the ground, and if oil or gas in paying quantities is encountered, the casing must be perforated or otherwise prepared for production.” Preparation likely includes acidizing, perfing, fracking, or similar procedures.• Reaching Total Depth on a Dry Hole- If no hydrocarbons are found, some Texas cases state that reaching total depth may be all that is required for the well to be completed. Texas case law is not clear if the well is a dry hole if it is actually capable of producing, just not economically.• Abandoning a Dry Hole- Several appeals courts have held that abandonment of a dry hole constitutes completion. Whether plugging, desertion, or desertion with intent to desert a dry hole is the operative event for abandonment is still an open question under Texas case law.
PRIORITY AND ENFORCEMENT OF A MECHANICS’ AND MATERIALMEN’S LIEN
To understand the value of obtaining a mechanics’ and materialmen’s lien, a service provider needs to understand both the priority of its lien and its ability to recover the debt.
Priority. If a mineral property owner has a previously recorded deed of trust that encumbers its property, a service provider may feel like a subsequently recorded mechanics’ and materialmen’s lien (“M&M Lien”) may not be of much benefit. The Texas M&M Lien statute, however, may give the service provider some surprising relief.
The key to the priority of a M&M Lien is the date of inception of the debt. So long as a service provider follows the formalities for attaching a lien, its M&M Lien will relate back to the date the debt first arose. The M&M Lien would, therefore, have priority over a deed of trust that is recorded prior to the filing of the M&M Lien affidavit but after the date of inception of the debt secured by the M&M Lien. It follows that an M&M Lien is inferior to any lien on the mineral interests that is perfected before the inception of the work or furnishing of materials that gave rise to the M&M Lien. If a mineral interest that is subject to an M&M Lien is sold, the M&M Lien will have priority over the interests of the purchaser so long as the M&M Lien relates to debt with an inception date before the sale of the mineral interest. That is the case even if the purchaser did not have actual or constructive notice of the M&M Lien at the time of the purchase.
If there are multiple properly attached M&M Liens on materials, land or leasehold, the M&M Liens are of equal priority. Neither the date of inception of an M&M Lien or the date on which a claimant's affidavit was filed of record will give priority to a holder of an M&M Lien over any other M&M Lien claimant. M&M Lien claimants must share the proceeds from the affected property on a pro rata basis.
Benefits Without Foreclosure. An M&M Lien may provide some advantages to a service provider even absent judicial action. If a mineral property owner wants to sell property that is subject to the M&M Lien, the purchaser will likely raise the M&M Lien as a title defect and require the seller to pay the debt. A properly attached M&M Lien will elevate a claimant’s status to that of a secured creditor if the mineral property owner either files bankruptcy or has an involuntary proceeding filed against it. Credit facilities often prohibit a debtor from having M&M Liens on its property. A debtor, therefore, may be forced to pay the debt secured by an M&M Lien to prevent a default under its credit facility.
Foreclosure. If a service provider wants to enforce an M&M Lien, it must do so through a judicial foreclosure. The enforcement of an M&M Lien is governed by Chapter 53 of the Texas Property Code. A suit must be brought within two years from the date the M&M Lien affidavit was filed or one year from the date the materials or services were last furnished by the service provider under the same contract, whichever date is later.
There is no “self-help” remedy available for M&M Liens. An M&M Lien can be foreclosed only by a court judgment foreclosing the lien and ordering a sale of the property. A suit to foreclose on a fee or leasehold interest in minerals must be brought in the district court in the county where the property is located. A suit to foreclose on only personal property may be brought in a county court so long as the value of the property on which the lien is fixed is within the jurisdictional limit of the court.
The owner of the property on which foreclosure of an M&M Lien is sought and each other person that has an interest in the property that will be affected by the foreclosure must be made parties to the suit. A prior lienholder does not have to be named as a party in the suit.
The petition for foreclosure should:
describe the property on which the M&M Liens is sought to be foreclosed,
state the name of the owner of the property being foreclosed upon,
disclose the names of the contracting parties,
describe the labor or materials furnished, and
allege the taking of the necessary steps to attach the M&M Lien.
If foreclosure is sought only on personal property, the pleading must also set forth the value of the property.
Conclusion. In a perfect world, everyone would pay their debts when due. In the real world, however, there will always be those who are unable or unwilling to pay. The Texas oil and gas mechanics’ and materialmen’s lien statute provides a valuable tool for service providers. The keys are for a service provider (i) to timely file an affidavit in a form that satisfies the statutory requirements and (ii) if payment is not received, to timely take action to exercise the remedies afforded by the M&M Lien.
Posted by Thompson & Knight LLP on January 18, 2016 | Permalink
Securing a Mechanic's and Materialman's Lien in Texas
To secure a mechanic’s and materialman’s oil and gas lien in Texas, the service or material provider must file an affidavit with the county clerk in the county in which the property is located. Timeliness of the filing and the completeness of the affidavit are key.
Timeliness. The affidavit must be filed no later than six months after the date the indebtedness accrued. For purposes of the lien statute, indebtedness accrues:
for labor performed by the day or week – at the end of the week in which the labor was performed.
for materials or services – on the last date the materials or services were furnished.
All materials or services furnished for a single leasehold interest, land or well are deemed to be furnished under a single contract unless more than six months lapse between furnishing of materials or services.
A failure to file an affidavit within the required six month period makes a mechanic’s and materialman’s lien unenforceable. A prudent service or materials provider should be diligent in keeping records as to the dates on which materials or services were first provided and the dates on which the services were completed or the last materials provided.
If a mineral subcontractor wants to secure a mechanic’s and materialman’s lien, before filing an affidavit with the county, the mineral subcontractor must send written notice to the mineral property owner. The notice must be sent at least ten days before filing the affidavit. The notice to the mineral property owner must include:
the name of the person indebted to the subcontractor;
the amount of the debt; and
a description of the land, leasehold, pipeline or right-of-way involved.
Upon receipt of a notice from a subcontractor, the mineral property owner can withhold further payment to the contractor until the subcontractor receives payment for the amounts due.
A mineral property owner is not liable for more than the amount the owner agreed to pay in its contract with the mineral contractor, regardless of the amount claimed by mineral subcontractors. So, if a mineral property owner has already paid the contractor the full contracted for amount, a mineral subcontractor cannot obtain a mechanic’s and materialman’s lien. Completeness. An affidavit must include:
a jurat (the notary must certify that the contents of the affidavit are sworn to and affirmed by the signatory to the affidavit);
the name of the mineral property owner;
the name and address of the lien claimant;
the dates on which the services or materials were furnished;
a description of the land, leasehold, pipeline or right-of-way for which services or materials were furnished (the description does not have to satisfy the statute of frauds); and
an itemized list of the amount claim.
An affidavit filed by a subcontractor must also include the name of the person for whom the labor or materials were furnished and a statement that the subcontractor timely delivered written notice to the mineral property owner.
A properly completed affidavit gives enough information about the amount claimed so that the mineral property owner and other lien creditors can determine the correctness of the claim. So, just specifying an aggregate amount owed is generally insufficient. The itemization must include enough detail to determine which lease or well the service or materials affected and should also include the dates on which the services or materials were provided.
Posted by Thompson & Knight LLP on January 04, 2016 | Permalink
| | | December 16, 2015
Property Subject to an Oil and Gas Mechanics and Materialmen's Lien
The last blog post discussed the initial considerations in determining whether an oil and gas service or material provider is entitled to a Texas statutory lien (an “M&M Lien”) to secure amounts owed to the provider. The key is whether the provider performed labor or provided materials in a mineral activity either directly or indirectly to a mineral property owner.
If the initial hurdles are satisfied, then the question is what property will be subject to the lien. Not surprisingly, the M&M Lien attaches to all materials, machinery and supplies that a provider furnished or handled. The M&M Lien also attaches to each of the following for which the lien claimant provided services or materials:
oil or gas well or water well;
oil or gas pipeline and its right-of-way.
An M&M Lien that attaches to a leasehold estate covers not only the well on which the claimant provided services or materials but also all other wells located on the leasehold in which the mineral property owner owns an interest. For example, if there are six producing wells on a lease, the mineral property owner drills a seventh well on the lease and fails to pay the drilling contractor, all seven wells will be subject to the contractor’s M&M Lien.
An M&M Lien does not attach to property for which a service provider did not provide services or materials. As an example, Mr. Jones, who is a mineral property owner contracts with Mr. White, a drilling contractor, to drill three wells located on three separate tracts of land that are not operated as a unit. Mr. Jones pays Mr. White for services performed for two of the wells but not the third. Mr. White will be able to secure an M&M Lien only on the well for which he has not been paid and the tract of land on which such well is located. Even though Mr. White’s contract with Mr. Pink covered all three tracts of land, because they are separate tracts not operated as a unit, Mr. White cannot claim an M&M Lien on the two tracts for which he has received payment.
An M&M Lien attaches only to the interests of mineral property owners who are parties to the contract. So, if Mr. Pink is an operator who holds only a one percent working interest in the well drilled by Mr. White, Mr. White can secure an M&M Lien only on Mr. Pink’s one percent interest.
A service provider’s claim for payment for services or materials provided before a mineral property owner assigns all or a portion of its interests to a third party may burden the assignee’s interest. For example, assume that Mr. Pink owns 100% of a leasehold at the time Mr. Pink and Mr. White enter into a contract for drilling on the lease. After Mr. White performs the services, Mr. Pink assigns twenty-five percent of his interest in the lease to Mr. Green. Mr. White then files to secure an M&M Lien on the well and the lease. Mr. White would not be obligated to give notice of the lien to Mr. Green because he had contracted with Mr. Pink before the assignment, and Mr. Green’s interest would be subject to the lien.
The Texas statutory lien does not attach to proceeds of oil and gas production. Courts have generally been unwilling to expand the coverage of the lien to property not listed or described in the statute. Nevertheless, in 1997, an appellate court upheld an appointment of a receiver to take possession of the proceeds from production prior to the foreclosure of the M&M Lien. The court held the action necessary to protect the lienholder because production was diminishing the lienholder’s collateral. The court did not address the previous line of cases holding that M&M lien claimants were not entitled to proceeds of production.
To be able to take advantage of the protection afforded by the Texas statutory M&M Lien, a service provider must properly secure the lien. The next blog post will set forth the necessary steps.
Posted by Thompson & Knight LLP on December 16, 2015 | Permalink
| | | November 29, 2015
Protecting Oil and Gas Service Providers
Some legal topics are cyclical in nature. The topics lay dormant until an economic change makes them relevant. One of the most cyclical topics is the Texas statutory oil and gas lien available to service and material providers. When oil prices hovered around $100 per barrel, providers to the energy industry were not overly concerned about protecting their rights to payment. After the oil price collapse and continued doldrums, the topic of oil and gas mechanic's and materialmen's liens has once again become relevant. Over the next few blog posts, we will discuss (i) who is entitled to a mechanic's and materialmen's lien ("M&M Liens"), (ii) what property may be subject to an M&M Lien, (iii) how an M&M lien is secured, and (iv) how a lienholder enforces an M&M Lien. To understand M&M Liens, one must first understand who is entitled to utilize the statutory protection.
Chapter 56 of the Texas Property Code provides statutory liens for persons who provide services or materials in the drilling, operation or maintenance of a well. One of the key definitions is that of a "mineral property owner." Section 56.001(3) of the Texas Property Code defines a "mineral property owner" as someone who is an owner of:
oil, gas or other mineral leasehold;
oil and gas pipeline; or
oil or gas pipeline right of way.
Only persons who have provided services or materials, either directly or indirectly, to a mineral property owner can claim an M&M Lien.
A provider who contracts directly with a mineral property owner for the provision of services or materials in mineral activities constitutes a "mineral contractor" under the M&M Lien statute. A "mineral subcontractor," on the other hand, is anyone who:
furnishes materials or performs labor used in mineral activities under a contract with a mineral contractor or another subcontractor, or
performs labor in mineral activities as an artisan or day laborer employed by a subcontractor.
Whether a person is a contractor or subcontractor depends on the person's relationship with the mineral property owner at the time of contracting. The classification of a provider as a contractor or subcontractor is important because the necessary steps to secure an M&M Lien vary depending on the relationship between the provider and the mineral property owner.
The services or materials provided to a mineral property owner must constitute "mineral activities" Section 56.001(1) of the Texas Property Code defines "mineral activities" as:
digging, drilling, torpedoing, operating, completing, maintaining or repairing
an oil, gas or water well, an oil and gas pipeline or a mine or quarry. In general, any activity that helps facilitate the potential production of oil and gas will constitute a "mineral activity."
Even though the definition is broad, courts have found that the following activities do not constitute mineral activities:
dismantling and removing an underground pipeline;
creation of business plans for a pipeline;
preparation of gas contracts; and
costs for repairs to rental equipment, unless the mineral owner caused the damage.
It is not a requirement that the services provided include physical labor on the mineral property. Courts have found a range of services to be essential to the production of oil and gas and, therefore, entitled to an M&M Lien. Examples of such services are:
catering services to an offshore rig;
plumbing work incorporated into the living quarters of an offshore platform; and
rentals of equipment or casing.
To recap, the initial step in analyzing whether or not an M&M Lien can be secured is to determine whether the services or materials were provided to a mineral property owner in a mineral activity. The next blog post will discuss what property may be subject to an M&M Lien.
Posted by Thompson & Knight LLP on November 29, 2015 | Permalink