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Archive for the ‘Bakken Development’ Category

Workouts and Turnarounds before Bankruptcies – 2016

Posted on: August 24th, 2016
by David Ganje

Current bankruptcies are not foreign to the oil patch when the inevitable economic cycles in oil and gas show bankruptcy numbers increasing in the Bakken. There have been two significant prior economic down-cycles in my career that have caused a spike in bankruptcy filings. When I taught bankruptcy law I used a medical analogy: I told the young scholars that bankruptcy filing is akin to surgery, and surgery should always be treated as the last option. In the medical field, a reasonable first option is an antibiotic. Here, the antibiotic is a ‘workout’ or a ‘turnaround,’ each of which are bankruptcy alternatives. These alternatives have value and should be attempted by both creditors and debtors as a viable option, not just a throwaway line. I have successfully represented debtors and creditors in turnarounds and workouts. Resolving “stressed-business” issues out of court makes sense when the option is there.

Financial restructuring and workouts involve working closely with a business’s creditors to create, or ‘workout,’ a plan (often a written contract) to restructure business debts while allowing the business to remain viable. This process allows the business entity to negotiate its debts in a way that retains profitability without involving the court system. This is not as difficult as it might sound – creditors often share the same objective of returning a financially stressed business to good financial health in order to ensure their debts are paid.

A ‘turnaround’ is a separate process from a workout. It may also use the availability of restructuring and workouts, but a turnaround has several other components. A turnaround will generally restructure operational aspects of the business. This may be the solution when the problem lies deeper in the company than lack of cash flow. Where a creditor will not restructure the debts owed to it, a turnaround will be utilized to find alternative financing or new ownership. Another possibility in a turnaround is the sale of ownership or a portion of ownership, which can provide liquidity at the expense of a change of control of the business.

If the company’s goal is to continue in business, particularly under current ownership, then a creditor or a lender workout should be considered. If new ownership, or a sale of the business in whole or in part, is an acceptable outcome so long as the business is preserved as a going concern, a turnaround can be considered as well.

The process of financial restructuring and negotiating a workout with business creditors is something that should be considered to avoid the expenses and bureaucracy related to a bankruptcy proceeding. The chapter 11 bankruptcy reorganization process is expensive and time consuming. The goal of business turnarounds or financial restructuring is to provide a cost effective approach by way of a ‘non judicial/non bankruptcy’ business reorganization, to restructure business debts.
Courtship and finances have something closely in common: timing is everything. When a business is in a stressed situation, neither the business nor its creditors should go in stand-by mode. Negotiations should begin immediately. In both the workout and turnaround, all parties must agree to the terms; both are matters of serious negotiation to be done with all deliberate speed. Bankruptcy proceedings are not the only way to save a business – sometimes a well-prescribed antibiotic can halt the damage and let the healing begin.

Nuisance as a legal concept is not foreign to the oil patch

Posted on: August 12th, 2016
by David Ganje

Nuisance as a legal concept is not foreign to the oil patch as well as farm country in North Dakota. Producers and property owners should be cognizant of a possible nuisance claim concerning production and development issues. Nuisance is an interference with one’s right to own, possess, or enjoy their land. The law maintains two kinds of nuisances: private and public nuisances. A public nuisance is one that affects the community, neighborhood, or a considerable number of people in an area. A private nuisance is one that affects an individual or group of people from enjoying a right not common to the public.

In a recent decision by Texas Supreme Court, a landowner was found to have grounds to bring a civil claim for nuisance against an owner and operator of a natural gas company. The landowner sold small piece of land adjoining their ranch to the natural gas company. The gas company then built a gas compressor station. Shortly after construction, the landowner complained of loud noise and vibrations coming from the gas compressor station. Even though the natural gas company built walls and took steps to muffle the noise, the landowners brought a lawsuit for nuisance against the gas company.

The Supreme Court of Texas found that even though the landowners had legal sufficiency to make their claim, they did not have enough evidence for the court to rule in their favor. The court mentioned that although the landowners claimed that there was other technology available that could further reduce the noise, the landowners did not provide such evidence. Furthermore, no evidence was presented showing that the gas company operated its equipment negligently, that the efforts the gas company did make to reduce the noise took too long, or that enclosing the generator in a building would actually reduce the noise. So, if you think you have a nuisance on your hands, make sure you have more than enough evidence to support your claims before you do battle.

Although that grain elevator that sits next to your land may be kicking up a lot of dust and creating a racket, there may not be much you could do about it. North Dakota protects its agricultural operations from claims of nuisance once they have been in operation for more than one year. The state defines agricultural operations as the “science and art of producing plants and animals useful to people, by a corporation or a limited liability company.”

The one weakness to the agricultural defence is if the operation is run “negligently.” For example, let’s say a self-employed farmer had issues keeping his hogs to stay in their pens. Over a six-month period, there were 20 reports of his hogs leaving their pens. One incident included a hog that wandered onto the highway and was hit by a car causing several hundred dollars in damage. The court determined that the farmer willfully maintained a public nuisance. As Supreme Court Justice Sutherland once said, “A nuisance may be merely a right thing in the wrong place — like a pig in the parlor instead of the barnyard.”

Once a nuisance is identified, there are a few actions that can be taken to resolve the nuisance. The injured party can bring a civil action. The civil action may result in a court order to stop the actions creating the nuisance or an order to take actions to lessen the nuisance. The injured party may also recover monetary damages.

Have you ever seen those turbines spinning peacefully in the distance as you drive by? Well, they may not be so peaceful if you live next to one. A family bought land adjoining a wind turbine and moved a mobile home onto the lot. After two years of living there, the family complained that the wind turbine was a private nuisance because it created loud noise, violated residential covenants, and supposedly threw chunks of ice into their yard. However, the court determined that the wind generator was not a nuisance. No other neighbors complained about the noise, the noise did not violate any noise ordinances, the wind generator was engineered specifically so that it would not throw ice from its blades, and the developer and residents of the subdivision had abandon the supposed covenants.

An interesting intricacy to North Dakota’s nuisance law has to do with how the state interprets the “coming to the nuisance” doctrine. In some states the doctrine prevents a person from bringing a case against a public or private nuisance if that person moved to an area where a nuisance already existed. In other states, such as North Dakota, it does not prevent the person from bringing a nuisance action but it does serve as a factor for consideration. North Dakota will also consider “what role the alleged nuisance activity has with the general business activities of the community and state,” and whether the activity is aligned with the state’s economic goals. Additionally, North Dakota considers whether the activity is regulated by the government or not. Although these factors can make a case for nuisance uncertain, if you are moving to a nuisance, you have heavy burden of proof to overcome.

North Dakota follows a strict statutory application, but when it comes to determining whether or not a nuisance interfered with your right to possess, use, or enjoy your land, a jury of your peers (including your neighbors) make that determination. So, if you have an issue with one of your neighbors, try to work it out peacefully first. You never know when you may need their help to tackle a nuisance.

Leaky Laws – Oil Spill Liability in North Dakota

Posted on: May 17th, 2016
by David Ganje

Pipelines, even privately owned, are a publically regulated transportation and operating system. The question is not whether pipelines are “essential to our society.”  Pipelines are already integral to the country: the US had over 1,700,000 miles of oil and gas pipelines in 2014, and North Dakota had 8,080 miles of pipelines in 2011. When a pipeline leak occurs, it only deflects from the problem at hand to discuss a pipeline’s place in modern society. The media puts its attention on the statements of politicians after a pipeline leak has occurred.  Such media attention does address the question of how to manage the risk.  Operating systems will malfunction. The process for legally authorizing operating systems should not. To paraphrase Norman Vincent Peale, the problem with most publically regulated systems is that they would rather be ruined by praise than saved by criticism.

In 2013, a pipeline operated by Tesoro Logistics began leaking thousands of barrels of oil into wheat fields. By the time the leak was caught and stopped, over 840,000 gallons of crude oil spilled into North Dakota. Tesoro Logistics originally estimated that the cleanup would take around $4 million. Two years later, the costs have passed $40 million and continue to rise. Oil spills are not going away – as more pipelines are built, spills are only increasing. The relevant question should be how regulated pipeline leaks will be cleaned up, and who will pay for them.

Under both Federal and state laws, the party responsible for a leak is the one responsible for cleanup. Usually a company like Tesoro Logistics prefers to take care of the cleanup itself. Not only does this help soothe public relations problems resulting from a leak, but it helps the operator control the costs. While North Dakota’s Department of Health is supervising the cleanup, Tesoro Logistics manages the contractors for the cleanup. But a pipeline operator causing a spill may not always be willing or able to clean up a spill. The liable operator could be bankrupt, dissolved, or perhaps not have the money. In these cases, clean up cannot wait for years of court cases or bureaucratic lethargy. The money for a cleanup needs to be there, ready to be used.

The state tells us that ‘them what operates a car must financially assure the public against the risk of its operation.’ Thus, the state has mandatory car insurance. North Dakota can require operators to provide financial assurances of their ability to clean up a spill, but the state can only require such insurance after a spill has already happened. The North Dakota Department of Health “may require insurance coverage or other financial assurance for any additional environmental monitoring or remediation that may become necessary on the property…and must require such…when the projected cost of an active monitoring or remediation program exceeds five hundred thousand dollars.” This requirement applies only to “real property contaminated by regulated substance or other pollution or contamination.” In other words, the state can only require financial assurances for land that has already been contaminated. What about money to help before a spill occurs?

North Dakota also maintains the Petroleum Release Compensation Fund. Unfortunately, this fund is not there to help landowners damaged by oil spills – the PRCF is a fund designed to “reimburse an eligible owner or operator for ninety percent of the costs of corrective action.” In other words, the PRCF is a fund to pay back the operators for money they pay cleaning up their mistakes. The PRCF is funded by oil companies, not taxpayers. And landowners can recover from the fund, but only if very specific requirements are met: the pipeline must have complied with all state and federal rules, the Dept. of Health was notified properly, the operator must have already begun paying the costs of corrective action, and the operator must be cooperating fully. Why these requirements? Because the PRCF is not designed to protect landowners and reimburse them for damages – the PRCF is designed to help companies defray expenses. The only reason the PRCF includes the capability to pay landowners for damages is so the pipeline operator won’t have to do it themselves. The PRCF does help encourage companies to come clean and take responsibility for leaks, knowing that they will be paid back from the fund. But the fund does not solve the problem of providing ongoing financial assurance, also referred to commonly as insurance.

The best fund available to aid the state’s immediate spill response is the Hazardous Chemicals Preparedness and Response Fund (HCPPF). This fund is created through an annual fee paid by facilities housing hazardous materials ($25 per hazardous material housed, with a $475 cap) in the state, as well as other appropriations by the legislature. These fees are distributed between the North Dakota Department of Emergency Services and the many Local Emergency Planning Committees, and pay for training, equipment, and disaster relief. This kind of fund is a good start, and ensures that North Dakota has equipment and trained professionals in disaster relief ready to move when a spill is detected. But the limitations on fundraising for the HCPPF means that if a leak like Tesoro Logistic’s occurs, the HCPPF will not be sufficient to manage the cleanup effort – at least, not without taxpayer monies coming from the state to fill the gaps. And landowners should not be forced to pay for oil spills.

This is not to say that North Dakota would be alone in a crisis. Both the Coast Guard and the EPA have trust funds in place to help states and the federal government. But the Coast Guard’s fund only applies to spills into navigable waters, and cannot apply to cleaning up spills on land. Meanwhile, the EPA’s Leaking Underground Storage Tank Fund is funded with a tax on motor fuel – a tax paid by private citizens, not the companies causing the damages in the first place.

A better solution is required to ensure that those who cause the damages pay for it. Waiting until after a spill happens to look for money to fix it cannot be how pipelines are managed. This is especially troublesome when so many spills go undetected for months, like the 3 million gallons of fracking brine that leaked into the Blacktail Creek in 2015; the pipeline had been leaking for over three months before it was detected. The very same pipeline leaked another seven thousand gallons of brine this January. Pipeline spills are not going away. North Dakota reported approximately 1,400 hazardous material release incidents in 2014 alone. Financial assurances for spills must be required before the damage happens, in amounts sufficient to cover the hundreds of spills that happen every year. The legislature needs to create a modern statute addressing financial assurances for pipeline leaks.

David Ganje practices law in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. His website is Lexenergy.net

In North Dakota you can talk to the dead

Posted on: January 27th, 2016
by David Ganje

In North Dakota one can give legal notice by mail to a deceased individual, even though he long ago went to that great oil patch in the sky. It is something out of a Charles Dicken’s novel. You can communicate and give notice to the dead. A landowner seeking to claim mineral interests may recover the deceased’s mineral interests by giving notice by US mail to an address long ago abandoned — and legally so, according to the Dormant Mineral Act.

The North Dakota Supreme Court, in ruling on the Dormant Mineral Act, stated that “…no reasonable inquiry was required where the surface owner mailed the notice of lapse to the mineral interest owners’ address which was of record in 2007, even though the mineral interest owners had died in 1980 and 1999, respectively.” When an individual who owned mineral interests in North Dakota dies, they and their heirs may be out of luck if death never kept up the “current address” in the county recorder’s office.

The Supreme Court in an important recent case called Capps also stated, “…the address of record need not be the mineral interest owner’s correct address for the mailing of the notice of lapse to satisfy the statutory requirement.” In other words, a landowner may serve a notice to recover mineral interests by US mail when mailed to the deceased’s last address in the records and thereby obtain minerals formerly owned by the deceased.

Both the legislature and the courts are attempting to make it easier for surface owners to clear title and reclaim lost mineral rights. The Supreme Court in Capps held that “this Court made it clear that when the mineral interest owners of record are deceased, the notice must still be mailed to the address of the deceased owners of record.” In my practice I have done this. The postman must think I am nuts. This rule derives from the intent to encourage mineral development and extraction.

The Court ruled that the surface owner was not required to conduct a reasonable inquiry into an actual address of a mineral owner even when the owner knew they were deceased. The Court determined that it was immaterial whether the surface owner had actual knowledge of the death of the party notified by mail the party who was the record owner of the mineral interests and the person to whom the statutory notices had been mailed. The Court stated that any heirs of the deceased would have received notice if the deceased had recorded notice of their current addresses. The Court also held that the constitutional safeguards of due process and adequate notice do not apply to the non-litigation Dormant Mineral Act used by the landowners in the Capps case.

The Capps case illustrates the growing body of law that makes it easier to develop and reclaim mineral rights.

David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. View the original article at the Bismarck Tribune – Brakken Breakout

Minneapolis Star Tribune – N.D. oil sinks to $20 per barrel

Posted on: January 16th, 2016
by David Ganje

N.D. oil sinks to $20 per barrel with more bankruptcies expected as drilling activity declines - Photo by JIM GEHRZ

N.D. oil sinks to $20 per barrel with more bankruptcies expected as drilling activity declines

More bankruptcies are expected as drilling declines due to low prices.
By David Shaffer Star Tribune

Oil industry experts have been making dire predictions of $20 per barrel oil. In North Dakota, they’re now reality, prompting warnings of more bankruptcies and less drilling in 2016.

Although the U.S. domestic crude oil benchmark is higher — $29.64 per barrel — Bakken producers must sell at a discount because of the region’s limited oil pipelines and the higher cost of alternate shipping methods.

On Friday, North Dakota light sweet crude dropped to $20 per barrel at the wellhead, the lowest price since 2002, the state Department of Mineral Resources said. That’s one-fifth of what North Dakota producers got in early 2012, when the Bakken oil boom was at its peak.

Now, just 49 drilling rigs are operating in the state, less than a quarter of the number at the peak.

The department’s director, Lynn Helms, said the state’s oil industry is “running on empty” and quoted a verse from Jackson Browne’s song of that name during his monthly “Director’s Cut” conference call.

“We are down in the bottom of the bottom of the tank in terms of cash flow and capital,” Helms said of the state’s oil producers, two of which are in bankruptcy.
Helms said he expects another company to file bankruptcy shortly, and four or five more failures could be down the road. He didn’t name the companies.

“We have looked at … production, wells and situations and tentatively think there are four or five more [companies] at these oil prices that are going to run to the end of their financial rope by the end of 2016,” said Helms.

Seven of the 10 largest North Dakota oil producers reported losses in the third quarter, including the top three, Whiting Petroleum, Continental Resources and Hess Corp.

Two smaller producers, Samson Resources of Tulsa, Okla., and American Eagle Energy, filed for bankruptcy reorganization last year.

Despite the grim outlook, North Dakota reported a 0.4 percent increase in oil production for November, to nearly 1.18 million barrels per day. Natural gas production also rose slightly. The state’s peak oil production was more than 1.2 million barrels per day in December 2014.

But Helms said that at current crude oil prices, the number of drilling rigs could drop to 30 in 2016.

At that rate, North Dakota would barely stay above 1 million barrels per day at the end of 2016, and eventually would fall below that level, he added.

Oil prices also are affecting how much crude is shipped on oil trains, many of which pass through Minnesota on their way to East Coast refineries. About 41 percent of the state’s oil moved on trains in November, down from 47 percent in October, said Justin Kringstad, director of the North Dakota Pipeline Authority, which tracks crude oil shipping.

Most of North Dakota oil now is being shipped to market via pipelines, a reversal of earlier trends that favored rail. The economics of oil trains hinge partly on the price of oil on U.S. coasts being several dollars higher than the midcontinent price. Thanks to that price difference, refiners have been willing to pay the extra cost of shipping Bakken oil by rail.

But Kringstad said the differential “has essentially been eliminated,” a change driven partly by the revival of U.S. oil exports. “We expect that differential to be negligible for the near term,” he said, making the economics of crude-by-rail more challenging.

Helms said one of the state’s largest producers believes oil prices will recover later in 2016, a reference to recent comments by Harold Hamm, chief executive of Continental Resources. Hamm told the Wall Street Journal this week that he expects crude oil to double in price by the end of the year because supplies won’t keep up with demand.

If the gloomier outlook holds true, and more North Dakota producers file for bankruptcy, it could affect royalty recipients and vendors beyond the state’s borders, said David Ganje, a Rapid City, S.D., attorney who practices natural resources law in North Dakota and South Dakota.

“It is a very diverse industry and 48 percent of the royalty owners live out of state,” added Ganje, who said he has represented royalty recipients in Minnesota, Wisconsin and other states.

Although royalty holders have legal protections, he said, bankruptcy cases can slow down payments on oil and gas leases. Often, the oil producer in bankruptcy tries to retain the leases, reorganize and keep operating, he added. Sometimes the leases are sold, which can benefit royalty recipients if the new owner is better capitalized, he said.