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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.

Bankruptcy in the Bakken

Posted on: January 11th, 2016
by David Ganje

Bankruptcy in the Bakken

Oil and gas production is a result of two basic factors: economics and technology. Economics means the costs of production and distribution. The price of oil is an essential element of the economics of production. One economic risk is bankruptcy. A bankruptcy filing, however, is not the same as a “funeral.” People believe what they want to believe. When I taught bankruptcy law, one of the harder things to get across to the students was the fact that a bankruptcy filing is not automatically “the end.” Nevertheless, several of the law students still came into the class carrying that attitude. One should keep in mind that even if a liquidation bankruptcy case is filed, production in the final analysis often continues. The particular chapter of the bankruptcy code filing, North Dakota property law, as well as state and federal regulations all affect a bankruptcy case. There are as many facets to a bankruptcy case as there are facets on a movie star’s wedding ring, however, in this article I will discuss basically the impact of a bankruptcy filing on the typical lessor and royalty holder.

First let us review a couple of things to watch for concerning a possible bankruptcy filing. If you are the lessor or royalty holder and think a producer may be a bankruptcy candidate, there are steps that can be taken. Your attorney can access the so-called watch list as well as access public records for delisted public companies. And a slow, or no, payment of royalties is also a red flag. But do not panic if a bankruptcy filing occurs. The royalty holder should put his energy into keeping good paperwork and records. This will make a bankruptcy experience tolerable.

Property rights created by an oil and gas lease are treated differently in the various states. In North Dakota, the oil and gas lease gives the lessor a real property interest with real property rights. According to the 1986 North Dakota Supreme Court case Nantt v. Puckett Energy Company, “[o]il and gas leases are interests in real property” and have been considered such since 1951. Although an oil and gas lease is not a lease in a landlord and tenant sense, in North Dakota, an operating lease is treated under bankruptcy law as an “unexpired lease.” In Van Sickles v. Hallmark & Associates, a 2013 case, the North Dakota Supreme Court decided that an oil and gas lease in a bankruptcy case must comply with the requirements set forth in section 365 of the bankruptcy code.

Many operators who file bankruptcy are in arrears on royalty payments. A new law goes into effect at the end of February in North Dakota that allows a royalty holder to file a security lien when the royalty has not been paid when due. The royalty owner must file the lien with the state and record the lien in the county where the well is located within 90 days of production to have a lien. With good records and timely filing and recording, mineral interest owners can gain a secured position in a bankruptcy proceeding. This greatly increases a royalty holder’s chances of a full recovery because secured creditors are paid before unsecured creditors.

In bankruptcy, the debtor must either assume or reject an unexpired lease of the debtor. A debtor may not accept only the favorable parts of an executory contract. If the lease is assumed and not in default, the royalty holder can rest easy, because an oil and gas lease must be assumed in full. The royalty owner will continue to reap the benefits of the contract. If the lease is in default, the debtor must cure the default in order to keep the lease. Therefore, if a bankrupt debtor is delinquent on royalty payments, the debtor must pay the back royalties if they want to assume the lease. Either way, the royalty owner gets paid, at least eventually. However, the bankruptcy court must approve any assumption of a lease. In this circumstances, the court will look to whether the lease is a valuable asset to the debtor and whether its preservation is sufficiently important. A royalty holder or lessor may also request that the court order the debtor to decide whether to assume or reject the lease within a specified period of time. A bankruptcy court can rule that preventing further delay with respect to assumption or rejection is in the best interest of all the parties.

Following a bankruptcy, a royalty holder or lessor may find themselves with the new option of leasing to a different producer. If a debtor elects to reject an oil and gas lease, the lease is no longer valid and the mineral interest is again available on the open market. Another way this could happen is if a producer is in default of the lease agreement. The North Dakota legislature states in N.D.C.C. Sec. 47-16-39.1 that the obligation to pay royalties is “of the essence” in an oil and gas lease and that breach of the obligation “may constitute grounds for cancellation of the lease.” If a mineral owner shows a bankruptcy court that equity requires it, the court may cancel the contract and the mineral owner may then lease to another party. In addition to the statute, some lease agreements contain a provision allowing a landowner to terminate the lease under certain conditions. This avoids the equity power of the court in favor of contract language regarding cancellation. If the terms of the lease are breached in this way, a landowner may be able to terminate the existing lease and sign a lease with another producer.

Pipeline Easements in New York

Posted on: January 8th, 2016
by David Ganje

Pipeline Easements in New York

As natural gas exploration and production has increased, so too has the need to overhaul and expand the natural gas transportation system. Currently, there plans are under way pipe-in shale natural gas being extracted in neighboring Pennsylvania.

In late-November, Kinder-Morgan, the Northeast Energy Direct (“NED”) Pipeline operator, filed a certificate application with the Federal Energy Regulatory Commission (“FERC”) in int’s effort to begin construction at the beginning of 2017, and make the pipeline operational by the end of 2018. While Kinder Morgan says most of the pipeline would be co-located with existing utility lines, many of these corridors would need to be widened, resulting in impacts to private property.

In the case of the NED, scores of privately-owned parcels will have to be crossed along the pipelines route through New York State. In order to facilitate construction of the pipeline, the operators behind the NED and Constitution Pipelines will negotiate easements with the owners of these parcels.

The relationship between public utilities and negotiated easements is nothing new. Easements may be granted to private businesses, such as a public utility company, to cross a land parcel in order to provide common services such as sewer access or electricity. Natural gas pipeline easements present a different situation. Setting aside for the moment the issue of whether the pipelines are a good thing economically and environmentally for the state, affected landowners should tread carefully.

Unlike a public utility easement, a natural gas pipeline moves product for profit across land rather than providing a direct benefit to the land. At peak capacity, millions of dollars worth of natural gas will be moving through these pipelines every day. Are affected landowners receiving fair compensation?

Traditionally in these situations, landowners receive “market value” of the land affected by an easement, which often includes money for reduction in agriculture output or other productive use of the land.

While this system makes sense under the common public utility easement paradigm, how does this process apply when the landowner’s property is the “transportation vehicle” for a commodity? How does one calculate “fair market value” when millions of dollars worth of product are flowing across privately-held land? Is a one-time payment for an easement fair compensation?

The term eminent domain should raise a red flag with any landowner along a pipeline’s proposed route. Eminent domain means “forced taking” though litigation. Under the doctrine of eminent domain, private property may be seized so long as the seizure is for a public purpose, and fair compensation is provided.

The concept of “public purpose” is liberally construed under the law. So, a seizure of property for a pipeline could be for a public purpose even when the direct benefactor is a private company. “Fair compensation” typically means that the taking party must provide market rate for the seized or affected land. In such cases, the focus is on production loss to the landowner rather than benefit provided to the operator.

Forty-two states have enacted new legislation or passed ballot measures since 2006 concerning problems with eminent domain as a taking of private property. Compensation to landowners in eminent domain proceedings has been notoriously small in amount. However, five states have recently enacted legislation increasing the compensation amount.

So, if the easements are coming, for what terms should New York landowners be on the lookout?

When landowners are approached about an easement they are presented with a standard agreement. These agreements will not refer to any individualized needs or considerations. But they do contain many important legal terms.

Some examples of common terms:

-“Temporary periods” are often mentioned. How long is temporary?

-Many agreements give an operator the right to conduct several activities (reconstructing, modifying etc.) at any time. However, the Landowner does not retain the right to renegotiate the type of access allowed. These activities could cause future disturbances to the Landowner’s use and enjoyment of their land. Is the landowner left without any recourse?

-Some agreements allow for the installation of “any appurtenant facilities.” What are these appurtenant facilities? Are they going to impact the Landowner’s use and enjoyment of the land?

While Landowners may feel pressure to sign, that does not mean that they must be left with a bad deal. Any proposed agreement should be reviewed with the help of experienced advisor’s. A landowner should always carefully consider the circumstances of his land and, importantly the future of his land.

Author: David Ganje. David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in New York.

South Dakota’s Achilles Heel – Surface Water Drainage

Posted on: December 15th, 2015
by David Ganje

South Dakota’s Achilles Heel

South Dakota’s surface water drainage governance is an absolute mess. You can’t put a fence around field drainage but you sure can create angry neighbors by field drainage. The state has authorized study commission after study commission, and created agency upon agency to address water management: Conservancy Districts, Water Development Districts, Water Project Districts and Water User Districts. The first state Supreme Court case dealing with a dispute over surface drainage occurred in 1910. And law disputes keep on coming. Many years ago when I was a kid, Ka Squire of Aberdeen took my dad and me up in his plane in a wet year and showed us the amazing picture below— overflowing sloughs, potholes, creeks and streams. I looked down at water everywhere and asked him, where does this water go? “On the neighbor’s property,” he said. So it is today in any wet year. Nothing has changed. The state still provides no functional, practical surface water management.

Prior to 1985, water drainage law slowly adapted through a series of court cases. In 1985, the Legislature codified drainage standards in the hopes of creating guidelines for landowners and counties to follow. Under the little-used 1985 law, counties are given wide discretion in how to apply the law. In a failed effort, the 1985 law gives each county the option of managing local drainage issues and/or adopting a county-wide drainage plan. Yet the truth is most counties have not developed drainage plans or drainage management rules. Modern technology and topographic data would have allowed counties to write comprehensive drainage plans and then create good drainage ordinances. But such was not to be the case.

The current attempt to fix this long-standing problem passed this year. Based on yet another authorized study started in 2012, the legislature this year passed Senate Bill 2. Senate Bill 2 created a task force to define boundaries for nine new Water Districts, establish procedures and protocols, and get pilot projects operational.

Originally, Senate Bill 2 provided the proposed new elected Water Districts with the ability to tax, create drainage plans and approve drainage projects. Such substantial terms did not make it in the final version of Senate Bill 2. So, “What is the point?” Special interests and lobbyists obviously got ahold of this bill and gutted it. Without the ability to create comprehensive plans, approve drainage projects, including installation of tile drainage systems, how will new Water Districts solve current disputes or fix drainage problems? Why continue to lollygag around? Drainage has been a problem in the state for over 100 years.

Establishing individual Water Districts is not unique to South Dakota. Other states with delicate water-use issues have utilized such a system for many years. The experiences of neighboring states of North Dakota and Minnesota provide an interesting contrast to the current problems in South Dakota.

North Dakota in particular has an especially comprehensive regulatory scheme in place. For example, its rules require that a person secure a drain permit before draining a pond, slough or lake which has a watershed area comprising eighty acres or more. North Dakota also prohibits the granting of a permit to drain water until an investigation discloses that the quantity of water which will be drained will not flood or adversely affect downstream lands. North Dakota has specifically addressed the issue of tile drainage. The state allows tiling of up to 80 acres without permit, and places burden on water district or downstream landowners to demonstrate State-wide significance or adverse effects.

North Dakota has uniformly codified requirements to be considered in evaluating whether to grant a drainage project permit, such as the volume of water to be drained, the impact of the flow on the watercourse, potential adverse effects, the project’s impact on flooding problems in the project watershed, and more. In North Dakota, it is clear that drain permits may only be issued if the Water Board’s investigation reveals the water flowing through such drain structure will not flood or adversely affect lands of downstream landowners.

Creating both a real, authorized, local governing body as well as drainage guidelines are necessary to fix drainage problems. There are plenty of modern court cases showing that drainage conflicts continue. A new drainage roadmap has been in order since the failed 1985 law was put in place. The conditions followed in North Dakota serve as a model. Yet, that is not to say that South Dakota should simply copy the plan followed by its northern neighbors. However, the comprehensive and uniform nature of North Dakota’s scheme – specific, clear guidelines with permitting power vested in Water Districts – is needed.

Senate Bill 2 lacks teeth. It has been 30 years since the prior failed 1985 law was passed. Too much time and too many studies have been taken. The new Water Districts should be given authority to write water plans, write water ordinances, grant or deny permits and function as a real agency, or not exist at all.

Holding Oil & Gas Leases Past Primary Term

Posted on: December 13th, 2015
by David Ganje

This page has moved to ‘Canceling’ An Oil And Gas Lease