10.15.20 - Presentation - 10th Annual Hydraulic Fracturing … · 2020. 10. 15. · &rqilghqwldo 3ursulhwdu\ 9lqvrq (onlqv //3 yhodz frp g iudfnlqj yhodz frp 8 6 3urgxfwlrq 7uhqgv-xo\

Tenth Annual Hydraulic Fracturing SymposiumThursday, October 15, 2020

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Confidential & Proprietary ©2020 Vinson & Elkins LLP velaw.com │ fracking.velaw.com 2

I. Opening Remarks

− Larry Nettles, Vinson & Elkins, Environmental and Natural Resources

II. Hydraulic Fracturing and the Election

− Corinne Snow, Vinson & Elkins, Environmental and Natural Resources

III. Environmental Enforcement and Regulatory Update

− Patrick Traylor, Vinson & Elkins, Environmental and Natural Resources

IV. Litigation Update

− Nick Shum, Vinson & Elkins, Energy and Commercial Litigation

V. Labor, Employment and Safety

− Chris Bacon, Vinson & Elkins, Employment, Labor and OSHA

VI. Transactional Update

− John B. Connally, Vinson & Elkins, Energy Transactions and Projects

VII. Q&A

Today’s Agenda


July 2010 – July 2020

U.S. Production Trends

0

2

4

6

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10

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14

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

CR

UD

E O

IL P

RO

DU

CT

ION

(M

MB

D)

U.S. Crude Oil (MMbd) Source: U.S. EIA


July 2010 – June 2020

Global Production Trends

0

2

4

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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Russia Saudi Arabia United States

CR

UD

E O

IL P

RO

DU

CT

ION

(M

MB

D)

Source: U.S. EIA

2010


OPEC + Production Reductions

Rebalancing the Market


2021 Projections

Rebalancing the Market


Election 2020


President Donald Trump

Election 2020


Election 2020


• A President cannot ban hydraulic fracturing, or end oil and gas leases onfederal lands by executive order alone.

• President Obama’s attempted six-month moratorium on pending, current,or approved offshore drilling in 2010 was tossed by a federal district courtas an unjustified “blanket, generic, indeed punitive, moratorium.”

• Any effort to ban hydraulic fracturing at the federal level would have toovercome a robust administrative record of prior determinations relating tohydraulic fracturing. For example:

− EPA 2016 final report regarding impacts to water resources deleted the draftreport’s conclusion of no “widespread, systemic impacts,” but still containsfavorable findings regarding the ability to reduce the frequency or severity ofpotential impacts in almost all cases.

− 2015 BLM rule preamble includes a detailed response to comments seeking aban on hydraulic fracturing, stating “A ban or moratorium would not satisfy theBLM’s multiple-use responsibilities under the FLPMA when regulations canadequately reduce the risks associated with hydraulic fracturing operations.”

The Limits of Executive Power

Election 2020

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Hydraulic Fracturing and the Election


How Do Elections Impact Federal Regulations?

Campaign Promise

Executive order

Proposed RulePublic

Comment

Final Rule

Court challenges


• Bureau of Land Management (BLM) regulates oil and gas activities on federal and tribal lands

• 245 million acres and 700 million subsurface acres

• 9% of natural gas production, 5% of natural gas liquids production, and 5% of oil production

• Obama Era Hydraulic Fracturing Rule (never in effect)

• Trump Era “Roll-Back” Rule (currently in effect)

• Challenged in federal court in California (upheld)

• Decision appealed to appellate court

Hydraulic Fracturing on Federal Land: Case Study for the Election


• No immediate changes to regulations

• Keep an eye on courts

• Federal government has limited authority on state and private land

More in-depth look: https://www.velaw.com/insights/what-will-the-election-mean-for-hydraulic-fracturing/

Election Impacts: What to Expect


Environmental Enforcement and Regulatory Update


• Overview of federal environmental enforcement

• Overview of EPA audit and self-disclosure policies

• Thoughts on the impact of the upcoming election on enforcement

Environmental Enforcement Update


• The upstream sector is covered by the EPA’s National Compliance Initiative focused on Creating Cleaner Air for Communities by Reducing Excess Emissions of Harmful Pollutants

• Settlements in this administration show continued focus on reducing VOC emissions from tank batteries

− PDC Energy (CO)

− K.P. Kauffman (CO)

− HighPoint (CO)

− Gulfport (OH)

− Previous settlements (Noble Energy (CO) and Slawson (ND))

• Ongoing investigations show continued focus on VOCs from tank batteries

Federal Environmental Enforcement


• New owner audit program (March 2019)

− Provided additional flexibility for companies that have acquired upstream assets

− Notify the EPA of intent to conduct an audit nine months after closing

− Six months (plus extensions) to correct violations of tank battery VOC controls

− Complete civil penalty mitigation

• Existing owner audit program (December 19, 2019)

− Provided significant flexibility to owners of existing assets

− Notify the EPA of intent to conduct an audit by December 18, 2020

− Six months (plus extensions) to correct violations of tank battery VOC controls

− Complete civil penalty mitigation

• Recent audit memoranda of understanding with states

− WY (2018), ND (2019), UT (2020)

Audit and self-disclosures are highly favored


• In a second Trump term:

− Continued enforcement in partnership with some states

− Continued enforcement where states are not acting in the face of what the EPA believes are clear violations

− Continued deferral to states that are taking some action, though perhaps not as vigorously as the EPA would perhaps prefer

• In a Biden administration:

− Same approach as Trump for the first two bullets, above

− Likely less deference to states that are not taking an aggressive enough stance toward VOC reductions at tank batteries

• These cases are not easy to develop, so the number of cases will likely not be high, but once EPA gets a company in its sights, the case is very painful

Thoughts on election impact


• Navigable Waters Protection Rule (the WOTUS replacement)

• Uinta and Ouray Reservation federal implementation plan proposal

• Produced water studies and very early planning

• OOOO/OOOOa technical and policy final rules

− Policy rule shift to not regulating methane

− Technical rule changes to alternative means of emission limitations for fugitive monitoring and a revised applicability approach to calculating the 6 ton per year regulatory threshold

Environmental Regulatory Update


Litigation Update


• Trespass and the Rule of Capture

− Pennsylvania Supreme Court’s Briggs decision

• Royalty Developments

− “Market value at the well” language superseded by addendum

• Purchase and Sale Agreement Disputes

− Binding agreement by email?

• Joint Venture Disputes

− Operatorship and development decisions

Litigation Update


• Protects producer from liability for draining migrating oil and gas from across lease lines

Rule of Capture


• Pennsylvania intermediate court of appeals said:

− Rule of Capture does not protect operators fracing wells because the fractures may propagate across lease lines

• Hydraulic fracturing was “forced extraction” of gas in trapped areas

• Conflicted with Texas Supreme Court’s Coastal Oil v. Garza Energy Trust decision

Briggs v. Southwestern Energy

Property Line


• Held: the Rule of Capture applies to hydraulic fracturing

− Rule of Capture protects producers from liability for minerals extracted by fracking, so long as there has been no physical trespass

• The Court left open the possibility of liability where plaintiffs can prove actual physical invasion

− Inconsistent pleadings

− Insufficient record

− Expert evidence

• Declined to hold that fracking-related subsurface invasions are not per se trespasses

Pennsylvania Supreme Court’s Decision


• Under Texas law, royalty clause that specifies “market value at the well” valuation point permits lessee to deduct post-production cost from royalty, even if no-deduct clause in same lease (Heritage Resources)

• BlueStone Natural Resources II LLC v. Randle et al., 601 S.W.3d 848 (Tex. App.—Fort Worth, 2019)

− Lease addendum language – “Lessee agrees to compute and pay royalties on the gross value received”

− Lease addendum contained superseding clause

− Court found that “gross value received” conflicted with “at the well” language in pre-printed lease form such that addendum controlled

• But addendum did not specify point of valuation, so “at the well” valuation should have remained operative? Is there really a conflict?

Royalty Litigation Update


• BlueStone decision seems inconsistent with general trend that once an “at the well” valuation point is set in a lease, later no-deduct language is surplusage (Heritage Resources, Burlington)

• BlueStone also currently conflicts with GLO v. Sandridge Energy decision (El Paso Court of Appeals)

• Conflict between “at the well” and “gross value received”?

• Oral Arguments heard in September (via Zoom)

• Bottom line – Specific lease language matters

Texas Supreme Court Reviewing BlueStone


• Variety of disputes can arise once PSA signed and after Closing

− Breach of representations/warranties

− Post-Closing purchase price adjustments (including title and environmental defect issues)

− Indemnity disputes

• But did the Parties reach a binding deal in the first place?

− Can result in significant, costly litigation

− Can email exchange constitute a definitive agreement?

Purchase and Sale Agreement Disputes


• Court held that email exchange between parties in a $230 million oil and gas deal did not constitute a final sale agreement

− Chalker Energy Partners III, LLC v. Le Norman Operating Partners, 595 S.W.3d 668 (Tex. 2020)

• Binding agreements can be reached over email (or series of emails)

• In Chalker, however, Confidentiality Agreement signed prior to bidding process created a condition precedent for an enforceable contract that the email exchange did not satisfy

• Key takeaways:

− Specific attention must be paid to what email agreements will and will not accomplish

− Parties have the right to define the sale process (winning bid v. executed agreement)

Texas Supreme Court’s Chalker Energy Decision


• When expectations are not met, disputes have been known to follow

• Joint Operating Agreements and Joint Development Agreements

• Operatorship and the right to dictate development decisions

Joint Venture Disputes


• Parties entered into Joint Development Agreement (“JDA”) in connection with joint purchase of $2.3 billion of Anadarko’s operated Eagle Ford shale assets

• JDA created Operating Committee framework with yearly Budget and Work Plans to be approved by Operating Committee

− Completion designs were key component of Approved Budget and Work Plan

• In 2018, Sanchez, as operator, deviated from approved Budget and Work Plans by completing wells the way that they wanted

• Gavilan claimed Sanchez was in Default under JDA

Gavilan Resources v. Sanchez Energy


• After six-day virtual trial, the Court found Sanchez in Default by materially deviating from approved Budget and Work Plans

• Some key issues litigated:

− Reasonably Prudent Operator defense

− Materiality of completion designs

− Course of performance

Sanchez in Default under JDA


Labor, Employment and Safety


1. The Risks of Employee Exposure

2. The Risks of Legal Liability

3. The Risks of OSHA penalties

4. Reporting Obligations

COVID-19 Concerns for the Fracking Industry


1. Conduct hazard assessments. (COVID-19 exposure should be a part of the JSA process)

2. Develop protocols

− www.osha.gov/SLTC/covid-19/oil-gas.html

− Engineering Controls

− Administrative Controls

− Safe Work Practices

3. OSHA’s guidelines

4. Waivers?

What should employers do?


Transactional Update


• Setting the Stage

• Upstream deal activity summary

• Restructurings

• What types of deals are we seeing?

Tenth Annual Hydraulic Fracturing Symposium

Agenda


Setting the Stage

World Liquid Fuels Production and Consumption


Setting the Stage

Surplus Crude Oil Production Capacity


Setting the Stage

Crude Oil and Natural Gas Production

Source: U.S. Energy Information Administration, Drilling Productivity Report, September 2020


Setting the Stage

Crude Oil Front-Month Futures Prices


Setting the Stage

Natural Gas Prices and Year-Over-Year Change in Inventory


Upstream Deal Activity Summary

Upstream M&A Deal Value and Count, August 2019 – August 2020

Figure 1: Upstream M&A Deal Value and Count, August 2019 – August 2020

Source: GlobalData, Upstream M&A Deals Review – August 2020



Upstream Oil & Gas Deal Share and Value, YTD 2020

Figure 3: Upstream Oil and Gas Deal Share and Value by Terrain, YTD 2020

Source: GlobalData, Monthly Upstream M&A Deals Review – August 2020

Figure 2: Upstream Oil and Gas Regional Deal Share and Value, YTD 2020



Upstream Oil and Gas North America Deal Value and Count, August 2019 – August 2020


Figure 4: Upstream Oil and Gas North America Deal Value and Count, August 2019 – August 2020



Upstream Oil and Gas North America Top 10 Buyers, March 2020 –August 2020

Figure 5: Upstream Oil and Gas North America Top 10 Buyers, March 2020–August 2020




Upstream Oil and Gas North America Top 10 Sellers, March 2020 –August 2020


Figure 6: Upstream Oil and Gas North America Top 10 Sellers, March 2020–August 2020



M&A in Gulf of Mexico, Number of Deals

Source: GlobalData, M&A Activity in US – August 2020

Figure 8: M&A in Gulf of Mexico, Number of Deals, Q3 2019 – YTD Q3 2020


Restructurings

North American Upstream Bankruptcy Debt

Source: Haynes & Boone Oil Patch Bankruptcy Tracker and Mercer Capital Research


Restructurings

2015 – 2020 Cumulative North American E&P Bankruptcy Filings

Source: Haynes & Boone Oil Patch Bankruptcy Monitor


Restructurings

2015 – 2020 E&P Secured and Unsecured Debt by Fil ing Location



Restructurings

List of North American Oil and Gas Producer Bankruptcies*January – August 2020



• Corporate

• Restructuring context

• Minerals

• Royalties

• VPPs

Tenth Annual Hydraulic Fracturing Symposium

What types of deals are we seeing?


Questions?

Larry NettlesPartner – Environmental & Natural Resources

Houston

+1.713.758.4586

[email protected]

Corinne SnowCounsel – Environmental & Natural ResourcesNew York

+1.212.237.0157

[email protected]

John B. Connally IVPartner – Energy Transactions & ProjectsHouston+1.713.758.3316

[email protected]

Nick Shum

Partner – Energy Litigation

Houston+1.713.758.2109

[email protected]

Chris Bacon

Counsel – Labor & Employment

Houston

+1.713.758.1148

[email protected]

Patrick TraylorPartner – Environmental & Natural Resources

Washington D.C. & Houston

+1.202.639.6734

[email protected]

Thank You

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10.15.20 - Presentation - 10th Annual Hydraulic Fracturing … · 2020. 10. 15. · &rqilghqwldo 3ursulhwdu\ 9lqvrq (onlqv //3 yhodz frp g iudfnlqj yhodz frp 8 6 3urgxfwlrq 7uhqgv-xo\