CHAPTER 2 APPLICATION OF LEGAL PRINCIPLES TO EOR OPERATIONS
| Jurisdiction | United States |
(May 2015)
APPLICATION OF LEGAL PRINCIPLES TO EOR OPERATIONS
Partner
Matt Davis **
Porter Hedges LLP
Houston, Texas
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JEFF WEEMS is a partner in the litigation practice group of Porter Hedges LLP in Houston, Texas. After years of working on oil rigs and as a landman, he has practiced energy law for over 24 years, concentrating on litigation. Mr. Weems is on the Council of the Oil, Gas and Energy Resources Law Section of the State Bar of Texas. He was Co-Chair of the Oil and Gas Section of the Rocky Mountain Mineral Law Foundation's 60th Annual Institute held in July 2014 in Vail, Colorado. He is a member of the American Petroleum Institute-Houston, Texas Independent Producers and Royalty Owners, and the American Association of Professional Landman (AAPL). In addition to his membership in AAPL, Mr. Weems is on the AAPL Task Force assigned to rewrite the AAPL Model Form Operating Agreement. Mr. Weems also has been selected for inclusion in Texas Super Lawyers in Energy Law. He is a frequent speaker at seminars and events, and in 2010 was a candidate for Texas Railroad Commissioner. Mr. Weems represents energy service companies, midstream companies, and royalty owners in a variety of energy-related disputes. Mr. Weems is admitted and licensed in Texas and Arkansas.
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Table of Contents
I. Introduction
II. What is Enhanced Oil Recovery?
III. Overview
IV. Trespass
a. The Public Policy Gang
b. Old School Tort States
c. EOR Applications
V. Nuisance
VI. Co-Tenancy
VII. Implied Covenants
a. Reasonable Development
b. Use of Reasonable Care and Diligence
c. EOR Applicability and Analysis
VIII. Surface Use Issues
IX. Conclusion
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I. INTRODUCTION
Most lawyers remember the first year of law school - with a mixture of nostalgia and vague unease. We dutifully filed into first-year property class and were rewarded with a trip in the way-back time machine, back to days of trover, assumpsuit and rules against perpetuities. As the class progressed, these ancient tenets gave way to more modern iterations such as trespass, nuisance, and implied covenants. More than once, we were told by those wise and seasoned second and third year students to grin and bear it, that we would not need to remember or worry about that "old stuff once we completed the exam. For many, that might be true. Not for us. We are attorneys who deal with one of the most nuanced of the subcategories of property law - oil and gas law. Real property law principles, old and new, are critical to our practices and we use them every day.
The basics of real property law underpin much of oil and gas law. Why are you forbidden from drilling a well into the subsurface of the land of another? Trespass. Why must you account for the proceeds of production from a well you drill on land in which there are other owners? Co-tenancy. The list goes on. Further, as much as many think that the principles and basics of real property law are established and immutable, they are not, especially when you consider their application to a newer, emergent area of the oil and gas industry.
One of those newer areas in the oil and gas industry is tertiary, or enhanced, oil recovery. Touted by many as the best hope of filling a perceived energy gap until other forms of energy are commercialized on a broad scale, enhanced recovery offers a sound, important piece of our nation's energy policy.
This article surveys several common law legal issues familiar to those who practice in the energy industry and analyzes them in the context of when an operator or group of industry participants has made the decision to embark on enhanced oil recovery (EOR) operations. First, we will briefly describe EOR operations to provide general background and to note certain facts that will bear on the legal principles discussed later. Then we will examine subsurface trespass and nuisance in the EOR arena, paying special attention to their application in field-wide activities. Next, we will address concepts of co-tenancy and how they relate to EOR activities. After that, we will discuss the application of implied covenants to these activities. Finally, we will look at particular surface issues brought to bear in the EOR context.
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II. WHAT IS ENHANCED OIL RECOVERY?
Production of oil has been around for over a century. Many of the giant fields whose primary product is oil were discovered in the 1900's. Although prolific in their heyday, most have been in decline for decades. This decline is a result of the removal of two of the primary drivers of such production: volume and pressure. For nearly a century, engineers have worked toward solving the riddle of how to get more of this known oil out of the ground, thus enhancing and extending the life of reservoirs.
In the middle of the last century, operators began investigating methods of stimulating production from aging reservoirs. Realizing the need to economize their efforts, operators looked to secure large acreage blocks in order to conduct operations that would cover a wide area. Often, legislatures helped in this process. For example, in 1949, after great debate, the Texas Legislature passed the Voluntary Unitization Statute which allowed, under certain conditions, operators to unitize their acreage for secondary recovery activities.1 Other states also adopted mandatory or forced pooling statutes in response to this need.2 Among other things, these statutes afforded operators some protection from anti-trust and other actions from those affected by these operations.3 As will be discussed later, in some instances these statutes supplanted common law remedies for those not unitized or otherwise affected by the enhanced recovery operations.4 The common rationale for the elimination of certain common law rights in connection with such legislation is that the regulatory agency approving such activities was charged with protecting the correlative rights of all affected by the unitization and the proposed activities, thus the protections of common law remedies was unnecessary.
The waterflood operations commenced in the mid-20 century, however, proved to have a limited shelf-life. Despite the decline in production rates, most engineers realized that most of the oil had not been drained.5 In light of this decline and the rapid development of the science surrounding oil and gas production, operators began to propose and implement tertiary programs to increase reservoir performance. The first tertiary recovery operation in Texas was commenced in 1972 in the Sacroc Field in Scurry County. The array of options for tertiary recovery is beyond the scope of this paper, but some of these methods are chemical flooding, gas
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injection and thermal introduction. These methods differ from secondary recovery because they do not so much seek to push the hydrocarbons from their location in the reservoir to the well bore as much as physically or chemically alter the state of the hydrocarbons in order to allow them to flow more freely.6
The benefits of tertiary recovery are enormous. It is reported that over 1.2 billion barrels of tertiary oil have been recovered in the Permian Basin as of 2012 via CO2 injection.7 This production was provided by means of nearly 10,000 production wells and 8000 CO2 wells.8 Another benefit noted by many is the ability to sequester carbon dioxide into these older fields, effectively killing two birds with one stone.9 In 2012, the United States was considered the world leader in EOR projects, by which time there were 200 projects producing over 760,00010 barrels daily, or over fourteen percent (14%) of total United States production, from this . method.11 Oil production from projects enhanced by CO2 alone is projected to increase to 638,000 barrels per day by 2020 from 300,000 barrels per day in 2014.12 The greatly increased recovery is a factor that will be important in the following discussion.
These outstanding benefits, however, are not cheap. Although the science and understanding of tertiary recovery operations has made vast strides in the last decades, the size and scope of these operations are huge. The expenses alone act as a huge barrier to entry for many in the marketplace. For example, in 2014, Occidental Petroleum anticipated spending over seven hundred million dollars ($700,000,000) in the Hobbs, New Mexico area alone over the next years for CO2 floods and expansions.13 Just as the value of the added production is important in following analysis, so too is the expense of these projects.
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III. OVERVIEW
"It is hazardous, therefore, to engage in a secondary recovery program in the absence of unitization, (voluntary or compulsory) of all premises which may be adversely affected by injection of fluids." (emphasis added)14
Most of the topics discussed below, whether trespass, nuisance or implied covenants, relate to the basic legal doctrine of correlative rights. Correlative rights are generally described as where a common reservoir underlies several surface tracts, each owner of a separate tract has a right to produce oil and gas through operations on its own property, understanding that such activities may affect the entire reservoir.15 Because these rights may affect others, there are duties that arise relating to those rights.16 Thus, when we discuss the application of the law of trespass and nuisance to EOR operations, we really are discussing the correlative rights of those not in the unit of the EOR project whose ability to produce oil and gas under their tract may be affected by the EOR project. Similarly, the following discussion of implied covenants necessarily relates to particular lessors' ability to protect their rights to receive the benefits of production of oil and gas that may underlay their land.
Of course, the...
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