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AAPL Southwest Land Institute

Posted on: April 23rd, 2014
by David Ganje

 

Institute Covers:

  • Executive Rights vs Nonexecutive Rights: The Increasing Duty of the Nonexecutive Mineral Owner
  • Production of Horizontal Wellbores & Pertinent Case Law
  • Legal Update: Recent Developments in Non-Regulatory Oil & Gas Law
  • Ethics
  • Dormant/Abandoned Mineral Rights
  • The Klotzman Complaint: Allocating Well Permitting
  • Joint Operating Agreements: Recent Developments and Horizontal Modifications

 

Institute Information:

The day begins with on-site registration and a breakfast spread at 7:30 am, and presentations will begin at 8:30 am. The program includes a buffet lunch.

 

Materials Provided:

  • Seminar Guide

 

Course Agenda

Monday, April 28th

 

  • 8:00 am – Registration/Continental breakfast
  • 8:30  – Opening Remarks (Christopher Halaszynski, AAPL)
  • 8:40  – “Executive vs Nonexecutive Rights: The Increasing Duty of the Nonexecutive Mineral Owner” (Lane Brown, Freeman Mills PC)
  • 9:40  – “Production of Horizontal Wellbores & Pertinent Case Law” (Kimberly Puckett, Brashier, Crosby, PLLC)
  • 10:40 – BREAK
  • 11:00 – “Legal Update: Recent Developments/Non-Regulatory Oil & Gas Law” (Jonathan Baughman, McGinnis, Lochridge & Kilgore LLP)
  • Noon – BUFFET LUNCH
  • 12:45 pm – “Ethics” (Rob Shultz, Independent Landman)
  • 1:30 – BREAK
  • 1:45 – “Dormant/Abandoned Mineral Rights” (David Ganje, Attorney at Law)
  • 2:45 – “The Klotzman Complaint: Allocation Well Permitting” (David Gross, Attorney at Law)
  • 3:45 – BREAK
  • 4:00 – “Joint Operating Agreements: Recent Developments and Horizontal Modifications” (Paul Westbrook, Harris, Finley & Bogle, PC
  • 5:00 – ADJOURN

*Note: Schedule subject to change

The Utility and Controversy of Disposal Wells

Posted on: March 24th, 2014
by David Ganje

                        The Utility and Controversy of Disposal Wells

Greater attention, rightfully, is now paid in the oil patch to our first natural resource: water. From all fronts affected, parties are more aware of the proper stewardship of water.  This stewardship does not come without controversy. That famous Geo-hydro geologist Mark Twain was correct:  Whiskey is for drinking, water is for fighting. The North Dakota State Water Commission projects the amount of water needed for developing a Bakken Formation well for natural gas production at approximately three acre feet. The required water must come from a freshwater source. With the oil patch growth through 2019, Bakken wells could require as much as 51,000 acre feet (a.f.) of water. The general uses of water in the oil patch include well drilling and completion, well production, the so called use of maintenance water which requires fresh water sources, and after-production. I will focus this article on the management and disposal of used water in the ‘after production phase’ which water is often referred to as produced water or saltwater. The other important aspects of water uses, as well as tribal regulations and water law, will be left for another discussion.

During hydraulic fracturing – commonly known as fracking – water mixed with industrial chemicals and proppants (a mix of sand or ceramic particles) are forced into the well system to release oil and gas. The waste water from the process is the so called produced water or salt water. Produced water is the largest volume by-product from an oil and gas well.  Along with the chemicals used during the drilling produced water is highly saline, usually 10 times that of ocean water. Its improper use or disposal would damage soil productivity or pollute near-surface water aquifers used for irrigation and drinking water. North Dakota statutes specifically prohibit this remaining produced water from polluting any freshwater supply in the state. Disposal wells are the most common final method for removal of unusable produced water or saltwater.  North Dakota currently has 470 active saltwater disposal wells.  The well process involves injecting the produced saltwater and associated wastes into naturally occurring subsurface formations called confining geologic zones.  As technology advances the industry has other non-well options for produced water management. Such technology includes obtaining fracking water from saline groundwater sources, or from municipal waste water. A fresh water source such as an aquifer must be allowed to replenish itself (recharge), so the careful stewardship and use of water in the oil patch continually relevant. Let us look at the current practice of disposal well procedures and issues.

Upon returning to the surface there are two common methods of handling produced water:

  1. Re-injection into the oil-producing formation for enhancing oil and gas production
  2. Injection into an underground formation that naturally contains saltine water. This second method is also known as Salt Water Disposal (SWD) which are also called disposal wells.

SWD is considered the most economic final disposal method. The U.S. Environmental Protection Agency classify these wells as class II wells used to inject fluids associated with oil and natural gas production operations.

Under the guidelines of the Underground Injection Control Program established by the federal Drinking Water Safe Act, North Dakota has imposed regulations:

(a)              for pits and ponds containing saltwater liquids and brines produced by the hydraulic fracturing operations

(b)              Governing the process of underground injection wells.  A technical permit application is required for these SWD wells.

A disposal well must go through an application and approval process.  This is also called the siting of a well.  The information the state studies from an application is comprehensive and involves detailed geologic data.  A disposal well must also complete a mechanical integrity test before it becomes properly permitted and can operate. Information and data which must be submitted, and reviewed, before the state would approve an SWD well permit application include:

  1. Geologic name of lowest known fresh water zone
  2. A plat depicting the area and detailed description of the location, well name, and operator of all wells in the area of review. The area wide plat must include: nearby injection wells, producing wells, plugged wells, abandoned wells, drilling wells, dry holes, and water wells. The plat must also show seismic faults, if known or suspected
  3. Testing and recording the original bottom-hole injection of the well
  4. A description of the proposed injection program
  5. A quantitative analysis from the two nearest fresh water wells
  6. A written notice to all landowners within the area of review who must be notified of the proposed injection well.
  7. This notice informs the landowners that comments or objections may be submitted
  8. Schematic drawings of the well bore and surface facility construction.

The controversy surrounding salt water disposal wells concern spills, potential leaks and earthquakes. Spills occur. These events are saltwater surface spills not related to the disposal well or to the well integrity of a properly permitted well. Spills happen because of human error and bad equipment.   As with all Bakken oil and gas production procedures, it can be said: most in the industry do it right, but some just do it.  Saltwater spills occur on the surface, and are often a mechanical malfunction or error in human judgment. The risk of a spill from a saltwater disposal well is not from a properly permitted well itself.  When a spill occurs it is usually during the act of storing or delivering wastewater to the disposal well. Consider for example that there are 470 active operating disposal wells in North Dakota, but more than 2100 saltwater pipelines, and it is easier to understand that the ‘getting to the well’ is where problems arise. New rules have recently been promulgated by the Industrial Commission for ‘underground gathering pipelines’.  These regulations will address the construction and deconstruction [shutdown] of saltwater service pipelines.

Do disposal wells contaminate water wells and aquifers? The question is more properly stated:  Do disposal wells fail or leak? Thousands of disposal wells have been permitted in the U.S.  In 2012 a company called Halek Operating ND LLC was fined civilly and charged criminally by the Industrial Commission for illegal action and operating a disposal well after having been ordered to shut-in the well. In that case, among other things, the administrative law judge also found that the company had operated the disposal well without first completing a mechanical integrity test on the well. The state found no damage to aquifers from the illegal activity.  I know of no failures or leaks from properly permitted disposal wells located in North Dakota and South Dakota in my lifetime. And information from both states’ regulatory agencies report that such events have not occurred.

Do disposal wells cause earthquakes? Thousands of disposal wells have been permitted in the U.S. The state of Arkansas is in a region of the continent that has recognized natural earthquake activity. Because the Arkansas Oil and Gas Commission thought that disposal wells may have been causing or aggravating earthquakes in the state it ordered a study. After the study was completed in 2011 the state regulatory authority established a moratorium on new and on operating disposal wells in an area that resulted in the closure of 4 of the state’s 700 disposal wells. Natural earthquakes are more likely to occur of course in earthquake-prone geology. A region prone to natural earthquakes is more likely to be the place where a quake caused or affected by a disposal well might occur. The Bakken and Williston basin are not known as  geologically earthquake-prone areas of the continent, and the state permitting process does not authorize active disposal wells near a fault line. I know of no earthquakes caused by properly permitted disposal wells in North Dakota and South Dakota in my lifetime. And information from both states’ regulatory agencies report that such events have not occurred.

 

David Ganje of Ganje Law Offices practices natural resources, environmental and commercial law.     The website:  lexenergy.net           The contents of this article are intended for general information purposes only and are not intended as legal advice.

Waste Water Injection Well

Posted on: March 8th, 2014
by David Ganje

Will Texas Send Another Trend To The Bakken?

 

             Texas often leads the way in American oil and gas law.  Currently, the Texas Supreme Court is wrestling with a wastewater injection well case that may send precedential shockwaves across the nation. North Dakota (ND) maintains approximately 470 disposal wells.  Oral argument on the Texas case was held in January. This is the second time the Texas Supreme Court has been asked to review the same case.  FPL Farming Ltd. v. Envtl. Processing Sys., L.C. involves a landowner bringing a trespass claim concerning a wastewater injection well used to dispose of non oil and gas waste.  The landowner alleges the well is causing the migration of the injected wastewater into the landowner’s property some 8,000 feet below the surface. The landowner also claims that migrating wastewater is damaging the quality of the aquifer. The wastewater well was dug about 400 feet from the landowner’s property. 

 

     Will this second bite at the Texas apple by the Texas Supreme Court affect the Bakken?  I have some comments about such a possible outcome:  1.While not argued actively in the Texas court appeal briefs, the court record in that case shows a settlement payment made to, as well as a signed pre-well settlement agreement by, the landowner. A pre-well settlement was reached based on an objection filed by the landowner at the prior well permit application hearing.  2. ND has an established set of oil and gas regulations and water law that actively manages groundwater. ND law asserts public ownership of much of ND’s water resources including aquifers. By contrast Texas grants more private rights of ownership to subsurface water.  3. ND follows the heaven to hell ownership principal of land in which everything above and everything below the surface is owned by the surface owner. This rule of law is however not absolute. ND has addressed  the concept of subsurface trespass in a hydrofracking context in the Farrar case.  In that case the ND Court determined that state public policy in favor of the development of natural resources trumped a claim for trespass filed by a nonconsenting mineral rights holder.  4. The alleged harm to the landowner’s aquifer in the Texas case is based upon conjectural extrapolations, and is not in the nature of ‘hard evidence’ as we say on the street. At oral argument one of the judges stated, “I’m having a hard time wrapping my head around the issue of how much would be owed and when it would be owed.”

     While ND courts have in the past looked at Texas oil and gas precedent, my comments suggest that ND may not be as eager to follow any new precedent coming out of the FPL case.

 

 

David Ganje of Ganje Law Offices practices natural resources, environmental and commercial law in North Dakota and South Dakota. Web:  lexenergy.net

David Ganje to Speak at Annual Meeting of American Association of Professional Landmen

Posted on: February 28th, 2014
by David Ganje

 

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AAPL’s 60th Annual Meeting
Education Events

Wednesday June 25th

Wednesday Seminars
(Separate registration required for Seminar Events)

Seminar 1 – 8:15 – 11:30 am
Ethics
Gary Lepine with Concord Professional Development Inc.

Seminar Luncheon -11:45 am – 1: 15 pm
Global Impact of NA Unconventional Plays
Chris Theal with Kottenay Capital Management Corp.

Seminar 2 – 1:15 – 4:45 pm
LNG 101: A detailed look at the North American and Global LNG Landscape
Tom Valentine with Norton Rose Fulbright

 

 

AAPL’s 60th Annual Meeting
Education Events

 

Wednesday June 25th

Wednesday Seminars
(Separate registration required for Seminar Events)

Seminar 1 – 8:15 – 11:30 am
Ethics
Gary Lepine with Concord Professional Development Inc.

Seminar Luncheon -11:45 am – 1: 15 pm
Global Impact of NA Unconventional Plays
Chris Theal with Kottenay Capital Management Corp.

Seminar 2 – 1:15 – 4:45 pm
LNG 101: A detailed look at the North American and Global LNG Landscape
Tom Valentine with Norton Rose Fulbright

Thursday June 26th

Education Sessions
1:00 – 5:00 pm

 

1) Klotzman Complaint with David Gross

 

2) Surface Issues with Celia Flowers

 

3) Design for Horizontal Wells with Brian Teller

 

4) Dormant/Abandoned Mineral Rights with David Ganje – Attorney at law

Contracts for Deed in the Sale of Real Property & Mineral Interests

Posted on: February 27th, 2014
by David Ganje

USE OF INSTALLMENT SALE CONTRACTS KNOWN AS CONTRACTS FOR DEED IN THE SALE OF REAL PROPERTY AND MINERAL INTERESTS

 

Real property is frequently transferred via contracts which allow for the payment of the purchase price to be executed in a series of installments. These types of contracts are called installment contracts or contracts for deed. Often, the vendor maintains legal title until the entirety of the purchase price has been satisfied, although it need not be created in this manner. Installment contracts usually contain forfeiture clauses that enable the vendor to terminate the contract, recover the property, and retain all installments paid when the purchaser defaults.  This process may be used for real property and mineral interests.

Anatomy of an Installment Land Contract

a.       Prepayment clause – permits vendee to make payments on the principal in advance of their due date (although SD 43-26-9 now appears to permit pre-payment unless there express language stating otherwise)

b.      Shift to mortgage and deed – requires vendor to convey legal title and vendee to execute mortgage after a certain percentage of the price is paid

c.       Furnishing of Abstract – requires vendor to furnish an abstract showing marketable title at some definite date early in the life of the contract

d.      Payments tied to farm income – recognizes the fluctuation of farm income, out of which the vendee might meet his contract payments; installments may be a percentage of crops and livestock sales

e.       Grace Period – grace period to pay installments after the due date without a breach of contract

f.       Boiler plate provisions of an installment contract

a.       “Time is of the essence of this contract”’ – prevents relief against a default by making time of the essence

b.      “Prompt payment of all installments on due dates is a condition precedent of the duty of the vendor to convey title”

c.       Acceleration clause – the basis of the installment vendor’s action for specific performance and strict foreclosure when the vendor is demanding the entire unpaid purchase price be paid or else vendee’s rights be foreclosed

d.      Forfeiture or liquidated damages clause

e.       In the event of default, “vendor shall have right to re-enter and take possession of the premises without hindrance or delay”

South Dakota Law and Installment Land Contracts

1.      Assignment of Installment Contract

Unless there is specific language in the land installment contract restricting or not permitting the assignment of the contract interest, either party may assign his or her interest to a third party.

2.      Forfeiture and Liquidated Damages Provisions

Whether a forfeiture provision in a contract is an enforceable liquidated damage provision or an unenforceable penalty – pursuant to SDCL 53-9-5 – is a question of law to be determined “based on consideration of the document as a whole, the situation of the parties, the subject matter of the contract, the circumstances surrounding the execution, and other factors.” Prentice v. Classen, 355 N.W.2d 352-55 (S.D. 1984).

Forfeiture provisions will be upheld if: (1) at the time the contract was made, the damages in the event of breach were incapable or very difficult of accurate estimation, (2) there was a reasonable endeavor by the parties to fix compensation, and (3) the amount stipulated bears a reasonable relation to probable damages and is not disproportionate to any damages reasonably to be anticipated. Id.

A court may decline to enforce a forfeiture clause if the defaulting vendee established by clear and convincing evidence that a substantial disparity exists between the payments made on the contract, together with the improvements made to the property, and the loss of rents and other detriment suffered by the vendors due to the loss of use and possession of the property. Id.

3.      Prepayment Privilege is Implied in Real Estate Contracts

Pursuant to SDCL 43-26-9, any contract made in this state for the purchase and sale of realty shall be interpreted as including an agreement that the vendee shall have the right to tender, and the vendor shall have the duty to accept, prepayment of the balance of the contract price with accrued interest at any time without penalty to the vendee, unless the contract expressly provides otherwise.

General Practice Tips [Powell on Real Property]

1.      Recording the contract

Because installment contract purchasers are typically poorly advised, they often fail to record their purchase contracts. They act unwisely in failing to do so, for the lack of recordation can expose a purchaser to unnecessary risks. Under state recording acts, an installment purchaser is unprotected against a subsequent taker of the property who acquires an interest without notice of the installment land contract.

Counsel for the installment purchaser should have the contract recorded in order to provide notice to third parties and so protect the purchaser’s interest in the contract and the land. In addition to protecting the purchaser’s interest against third parties, recording the installment contract may also give the purchaser protections in the event of vendor’s or purchaser’s bankruptcy.

A vendor is more likely to succeed in clearing his title if he records a quitclaim deed or release that the purchaser has signed after the contract has been executed. Under established mortgage law, a mortgagor can relinquish his redemption rights if he does so in a separate, subsequent transaction for adequate consideration. Courts will analyze these transactions closely to make sure that there has been no overreaching or other unfair conduct by the mortgagee, but the deeds are commonly employed and accepted as valid. By analogy, an installment purchaser should be able to relinquish his redemption rights or otherwise grant a valid release or quitclaim deed at a time when he is in default. The vendor might fairly and lawfully seek an executed quitclaim deed in exchange, for example, for a waiver of default or some favorable restructuring of the purchase terms. If a transaction of this type is substantively fair to the purchaser at the time it is made, the release or quitclaim deed should be valid and should serve to clear the vendor’s title. At the least, it seems likely that a court would uphold a release or quitclaim deed executed by a purchaser who had already lost his rights through abandonment or forfeiture. In such a case, the release or quitclaim deed would not cut off the purchaser’s redemption rights, since the purchaser would have lost them already.

2.      Right of Possession

The purchaser and vendor are free to agree on when the purchaser shall take possession of the property. In the typical earnest money contract, possession passes at the time of closing when the purchaser has paid the full purchase price and title has transferred. In the typical installment land contract, on the other hand, possession passes when the contract is signed, although the parties are free to agree otherwise.

Because of the uncertainty in the law on the issue of possession after the installment contract is signed, a well drafted agreement should specifically memorialize the parties’ understanding on this issue. Similarly, the agreement should indicate which party is obligated to pay real estate taxes and whether the purchaser must pay interest on the installment debt.

3.      Purchasers Use of the Property

As a general rule, a purchaser who has lawful possession of property can use it as he sees fit so long as he does not adversely affect the vendor’s security interest. Stated otherwise, the purchaser can use the property subject only to an obligation to avoid waste, both permissive and affirmative.

Vendor’s counsel might include in the installment contract specific provisions barring the purchaser from destroying and damaging the property or allowing it to deteriorate, much in the way that standard mortgages do. In the event a vendor desires restraints on the purchaser’s ability to alter the property greater than those provided by the case law, vendor should put these expressly in the contract. Vendor may also specify that destruction of the property breaches the contract, enabling the vendor to assert the contract remedies.

4.      Destruction of the Property

The installment contract can resolve many of ambiguities associated with the risk of loss by specifically allocating risk of loss to a particular party and by stating how insurance proceeds are to be applied in the event of a loss, much in the way that mortgages often provide for the use of such proceeds.

5.      Purchaser’s Ability to Assign

Generally, a purchaser is free to transfer his rights under an installment land contract without the prior consent of the vendor. The transfer can be in the form of an assignment of the original purchase contract or in the form of a resale under a new purchase agreement.

Therefore, careful drafting may eliminate ambiguity as to the parties’ intent on the right to assign. However, the parties’ agreement, no matter how clear, may be trumped by a judicial decision based on public policy grounds that finds that certain restrictions on transfer are unenforceable.

6.      Pre-payment

A vendor who wants to avoid prepayment or to delay it for some specified period should insert an express clause to that effect into the contract.

7.      Forfeiture and other remedies

When specifying a right to forfeiture in a contract, vendor’s counsel should make sure that there is no implication that other remedies are unavailable, perhaps by stating that forfeiture is available in addition to other remedies at law or in equity or by expressly specifying those other remedies. Many vendors may profit from suing for contract breach, specific performance or recission instead of forfeiture.

A vendor who wants to regain property has, depending upon the jurisdiction, four remedies from which to choose: (1) forfeiture; (2) rescission; (3) strict foreclosure; and (4) contract termination followed by a suit for contract damages. A vendor who does not want to regain the property can either seek a foreclosure by sale or bring an action for specific performance or full payment of the purchase price.

When the vendor does not want to recover the property, the best remedy for the vendor may be to sue for specific performance and to ask the court, if the price is not paid within a reasonable period of time, to order the sale of the property. If the purchaser performs, the vendor receives the full amount that he is due. If the purchaser does not perform, the property is sold, and the money goes first to the vendor. To date, courts have viewed this remedy as distinctly different from a request for foreclosure. Thus, they have allowed the vendor, after the property is sold, to recover a deficiency judgment, even if a state anti-deficiency law would bar a deficiency after a mortgage foreclosure. If anti-deficiency laws are not a problem in the jurisdiction, a vendor could as easily bring an action for foreclosure by sale, particularly if formal, relatively expedited procedures are available to process foreclosure requests.