CHAPTER 14 LEGAL ETHICS AND MINERAL ROYALTY INTERESTS

• Jurisdiction: United States

Federal and Indian Oil & Gas Royalty Valuation and Management
(Oct 2018)
CHAPTER 14
LEGAL ETHICS AND MINERAL ROYALTY INTERESTS
Barclay Nicholson
Partner
Norton Rose Fulbright
Houston, TX

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BARCLAY R. NICHOLSON is a partner with Norton Rose Fulbright in Houston, Texas. He focuses his practice on energy and commercial disputes. He has significant experience in handling energy-related litigation and has represented some of the world's major oil and gas producing and refining companies as well as some of the nation's biggest drilling and E&P companies. Within the area of energy litigation, Barclay is known for his legal expertise related to hydraulic fracturing. He has authored numerous articles and given speeches both across the nation and internationally on all aspects of unconventional oil and gas plays. Barclay is the author of the "Analysis of Litigation Involving Shale & Hydraulic Fracturing", which details all of the litigation across the country involving shale plays. Barclay is the editor and author of the ABA's Book, "The Shale Energy Revolution: A Lawyer's Guide." He is also the editor and author of the Shale Gas Handbook and serves as the editor of www.frackingblog.com, a blog devoted to pressing legal issues in hydraulic fracturing. Barclay has assisted clients in all of North America's major shale plays. Internationally, Barclay has been chosen to assist the US State Department Bureau of Energy and the US Department of Commerce, through its Commercial Law Development Program, in advising the Countries of China, India, Iceland, Vietnam, Colombia, Chile, and Afghanistan on their unconventional and shale oil and gas resources and the regulatory and legal matters associated with those resources. He holds a B.A. degree from the University of Texas and a J.D. from the University of Houston. Barclay is currently chair of the Houston Bar Association's Litigation Section, which has more than 1,200 members.

Introduction

The practice of law involves seeing and avoiding ethical pitfalls when representing clients. And while general ethic rules govern each state's bar, specific practice areas present their own unique challenges and applications of these rules; the oil and gas field is no different. For lawyers practicing in this industry, or any specialized industry, it is important to keep apprised of the ways in which generally-applicable ethical rules apply to the legal practice in that field.

At the outset, it is important to emphasize that the ethical rules governing oil and gas law are no different than other areas. But these generic rules render unique--and sometimes unintuitive--results in the oil and gas field. This article will summarize the lawyer's obligations under various sections of the Model Rules of Professional Conduct, and analyze how some of these rules apply when lawyers represent or advise oil and gas clients. In particular, this article will examine how rules concerning confidentiality and the interests of organizational clients apply to lawyers representing industry clients that have royalty and reporting obligations under the Office of Natural Resources Revenue. This article will also analyze how conflicts of interest can manifest when contingency fees involve the transfer of mineral or royalty interests. These examples help illustrate that while ethical rules normally govern the practice of law generally, the specifics of industry practice areas can create tension with the application of those rules.

Confidentiality

A lawyer's ethical duty to maintain his or her client's confidence remains one of the most important professional considerations for every lawyer. Confidentiality is of particular importance for oil and gas attorneys, given that industry clients have often spent significant time and effort to explore potential resources, develop acquisition and divestiture strategies, and otherwise possess highly valuable proprietary information that they trust their attorneys to keep confident. Rule 1.6 governs confidentiality of information, and provides:

(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).

(b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:

(1) to prevent reasonably certain death or substantial bodily harm;

(2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer's services;

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(3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services;

(4) to secure legal advice about the lawyer's compliance with these Rules;

(5) to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer's representation of the client;

(6) to comply with other law or a court order; or

(7) to detect and resolve conflicts of interest arising from the lawyer's change of employment or from changes in the composition or ownership of a firm, but only if the revealed information would not compromise the attorney-client privilege or otherwise prejudice the client.

(c) A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client. ¹

Model Rule 1.6 makes clear that a client's confidential information can only be disclosed under limited circumstances. As the comments to Rule 1.6 emphasize, the purpose of client-confidentiality protection is to ensure open and candid conversations between attorneys and clients. Importantly, unlike related evidentiary privileges, the confidentiality rules protect client information that the attorney learns from any source during the course of the representation.²

Given that oil and gas clients often entrust their attorneys with particularly sensitive propriety information, attorneys that advise or represent oil and gas clients should pay particular attention to their obligations and responsibilities under these rules. Increasing use of data rooms and file-sharing resources have placed an increase burden on lawyers to understand the security measures of these technology platforms so that client information is not inadvertently disclosed.³ While the confidentiality rules have numerous unique applications to oil and gas clients, this section focuses on the lawyer's role as advisor to the client on matters of government regulation--specifically, advising clients on royalty reporting requirements to the federal government for federal oil and gas leases.

Confidentiality Application: Royalty Reporting to the ONRR

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Confidentiality dilemmas can arise for lawyers that represent or advise clients who may have reporting obligations for federal mineral leases. The Office of Natural Resources Revenue ("ONRR") promulgates regulatory requirements for reporting royalty payments for oil and gas leases on federal lands.⁴ Oil and gas operators drilling on federal leases are required to regularly report revenues and royalty payments to the ONRR.⁵ It is no secret, however, that the ONRR's regulatory reporting regime has become a complex web of rules that can be extremely difficult to navigate. Accordingly, industry clients trust lawyers to advise on their ONRR royalty reporting requirements. With respect to these requirements, attorneys help advise oil and gas clients on their reporting obligations, assist with audits and investigations, and counsel clients on potential enforcement actions. This advisory...