The Dewatering Hole

Our (World Gas Conference) forum is taking place at a crucial point—a period in which we are searching for ways to overcome the consequences of the global financial crisis and industrial recession. In this context, the topic of gas-supply security being addressed by our session is particularly vital.

It should be noted that, in recent years, the issue of energy security, including security of gas supply, has been a focus of debate at the highest levels and has become a priority item on the agenda of international conferences, meetings of political leaders and even military alliances. Today’s forum is a good opportunity for us to discuss this subject within this assembly of top professionals and highlight strategies that gas market players are pursuing for the sake of increased energy security worldwide, without wasting our time dispelling ideological and political prejudices.

The term “investments for higher security of supply” will be construed broadly—not only as necessary capital injections, but also as a system of actions and initiatives on a global scale.

According to the United Nations, by 2030 the world population will grow by nearly one fourth—up to 8.3 billion people. Simultaneously, there will be an increase in energy consumption per capita, to be contributed primarily by the most populated countries—China, India, Brazil and Indonesia. These countries are experiencing a rapid process of industrialization, urbanization and automobile use. Energy consumption will be growing on the back of limited opportunities for boosting oil output, narrow bounds for developing the nuclear energy sector and an extremely low contribution from new, alternative non-hydrocarbon energy.

All this offers excellent prospects for the gas industry.

Most estimates are fairly consistent that in the foreseeable future mankind won’t be able to do without fossil fuels. Natural gas will be the most eco-friendly hydrocarbon that will be used on a broader basis, including for power-generation purposes and as a vehicle fuel. If the 20th century was our “oil century,” then the 21st century stands to be our “natural gas century.”

Coordination of activities among major gas exporters is not enough. Further integration of efforts made by natural gas market stakeholders is needed. Despite the obvious benefits of natural gas compared to other fuels, one should not think that the role of gas in the global energy balance is guaranteed. We believe that all of us who are interested in developing the natural gas industry, namely the International Gas Union, should be more active in shaping the world energy-development model. So far, the main goal pushed forward by some politicians amount to nothing more than just a decrease in hydrocarbons consumption.

Meanwhile, millions of our consumers will be at the mercy of a costly model of future energy consumption, a model that they will have to pay for. At the same time, calculations prove that a high demand for an environmentally friendly economy may be reached without prejudice to hydrocarbon energy, but owing to it. Thus, replacement of nearly half of the existing coal-fired power-generating facilities in Europe with up-to-date gas-fired combined-cycle power stations will cut CO2 emissions in the same amount and will cost only one third of the price of that of wind power generation.

Natural gas is the most reliable energy source in terms of energy security during peak load periods when compared to any other source of energy, including nuclear, solar, wind and hydro energy. Nobody can guarantee maintaining peak loads with energy produced from renewable sources.

When determining the balance between environmental and energy interests, it is important for us to convey to the public that it is necessary to be aware of all factors. For example, a potential reduction in CO2 emissions stipulated by vehicle conversion from oil products to natural gas is not so tangible, if compared to the power industry. Using natural gas in engines will relieve us not only from toxic gasoline and diesel-engine exhaust, but also from using fertile land for producing biodiesel fuel in lieu of food. Gas may and should be used in vehicle engines in a compressed form or as a synthetic engine fuel. Thus, natural gas will make another contribution to sustainable development.

Another essential issue we have to face together, particularly within the International Gas Union, is forming the global gas balance as a basic principle for long-term planning across the entire gas industry.

–Alexey B. Miller

Click for Miller’s full presentation to the 24th World Gas Conference, Oct. 6, 2009, Buenos Aires: AlexeyMiller.Gazprom.Speech.10.6.09

When developments occur that surprise us, it is often because our assumptions about the present, not to mention the future, have turned out wrong. The consequences can be very severe for companies, governments and societies as the current economic crisis demonstrates. If one assumed the U.S. government would always step in to save large financial institutions, then the failure of Lehman Brothers in September 2008 was a big surprise—as were the events that pushed Lehman to the wall in the first place. If one believed the price of oil could not stay above $50 for a year or more—a common belief not long ago—then the price trend of 2005–08 was a shock, as were the wild gyrations that followed. Such beliefs point to a disconnect between how we assume the world works and how it actually works.

No course of action will lead to the gift of perfect clairvoyance about the future. The development of scenarios is a disciplined process, however, that forces us to question the present to understand the different ways the future could unfold and to prepare. Through the creativity, dialogue, investigation and analysis that are part of the scenario process, one can, as Daniel Yergin, IHS CERA chairman, once put it, “peer around the corners of the future and think through and plan for discontinuities before they occur.”

The scenario process helps companies to be early, flexible and adaptive, and to be prepared for abrupt changes in the business environment. It provides a methodology for “thinking the unthinkable”—especially important when the “unthinkable” has a habit of becoming a reality. For instance, several years ago IHS CERA’s “Global Fissures” scenario laid out the dynamics of a deep world recession at a time when recessions were supposedly a thing of the past.

Scenarios provide a way to get beyond the “conventional wisdom” of the moment, to test company doctrine and to put aside prestige and position to ask fundamental questions. A means for tackling real issues and questions that companies face both next year and in 10 years is what the scenario process offers.

But what exactly is the scenario process and how are scenarios developed? First, let’s be clear about what they are not. Scenarios are not simply the fantastic musings of imaginative, feet-on-the-desk free thinkers. Nor are they the exclusive domain of calculations cranked out of a computer. It is not one or the other.

Instead, scenarios, at their best, marry expansive, qualitative thinking about the future with the rigor and feedback of quantitative modeling. Each scenario—a scenario exercise typically creates two to four scenarios—tells a “story,” a logical story, about the future that includes important trends and events, describes the key players and their actions, and explains the dynamics of the system or the set of questions under study.

The aim is not to predict a precise order of events and outcomes, but rather to enable development of robust strategies that will stand up no matter what happens. Scenarios make us explicitly identify and question our assumptions about the future. Inquisitive and disciplined thinking is at the heart of the scenario process—and a key source of insight and value.

The scenario process can address very large questions, such as the future global balance of power, or it can focus on specifics, such as the demand for automobiles in a single country or region of a country. But regardless of the scope of analysis, a vital aspect of the scenario process is that it encourages exploration of linkages among different forces.

For example, how will efforts to develop a global framework to manage greenhouse gas (GHG) emissions affect trade policy, nuclear proliferation or the commercialization of a large-scale electric-vehicle fleet? On the surface, some issues may not seem to influence one another but, in reality, they often do—or will in the future. Geopolitics, markets, technology and the world of business do not evolve in isolation from one another. The scenario process recognizes this reality.

–James Burkhard

Click for Burkhard’s full report, including:

–Scenarios: Expanding Analysis-Testing Assumptions

–Brainstorming the “Big Questions” and Developing Scenario-Building Blocks

–The Next Step: Develop the Scenarios

–The Role of “Shoe Leather”—And Engaging “the Great Women and Men of the World”

–Using the Scenarios

–To Understand the Future, We Need to Question the Present

About the author: James Burkhard is managing director of IHS CERA’s global oil group. He was the project director of “Dawn of a New Age: Global Energy Scenarios for Strategic Decision Making—The Energy Future to 2030,” a comprehensive study by IHS CERA that encompassed the oil, gas and electricity sectors. He is also the co-author of IHS CERA’s World Oil Watch, which analyzes short- to medium-term developments in the oil market. He was on the U.S. National Petroleum Council committee that provided recommendations on U.S. oil and gas policy to the U.S. energy secretary. He can be contacted at 303-736-3000 and jburkhard@cera.com.

The Treasury Department has released its draft OTC derivatives regulation bill, “The Improvements to Regulation of Over-the-Counter Derivatives Act.” The actual language of the 115-page proposal follows quite closely what Geithner has been floating for several months—a clearing mandate for standardized derivatives, attempts to force OTC derivatives trading onto execution facilities, differential margin and capital requirements for cleared and non-cleared products.

My initial reactions:

First, there’s a whole lot of delegatin’ goin’ on. A good part of the bill sets out the haziest general objectives, and then directs the CFTC, SEC and “the Prudential Regulator” (either the Fed, the Office of the Comptroller of the Currency or the FDIC, depending on a bank’s charter status) to come up with specific rules on what constitutes a standardized derivative, capital and margin requirements, position limits and so on.

There is an aggressive timeline for most of these rules: 180 days. Given the depth and breadth of the issues, and their contentious nature, and the needs to coordinate among disparate agencies, this will be very difficult to do at all, and extremely difficult to do well.

Second, the Treasury has finessed the jurisdictional issues by giving multiple regulators authority over OTC derivatives markets, with the injunction that everybody share and play well together. Many of the provisions require that the CFTC and SEC issue rules jointly with the proviso that, if they cannot, the Treasury will prescribe them.

Given the delegation-heavy aspect of the proposal, there are few specifics to analyze. But there are some aspects of the proposed bill that are spelled out with sufficient detail that deserve comment.

I’ve beaten the clearing mandate horse repeatedly before, so I won’t do more than repeat my previous conclusion that the mandate approach is wrong-headed, and ignores crucial economic issues. The proposal does not require clearing when “one of the counterparties to the swap— (1) is not a swap dealer or major swap participant and (2) does not meet the eligibility requirements of any derivatives-clearing organization that clears the swap.” This would seem to permit an end user (e.g., a gas producer) to enter into a swap with a dealer without triggering the clearing mandate.

This is a desirable feature and would permit end-users to enter swaps without having to clear them; this could be especially important for end users concerned about the cash flow and liquidity risks associated with daily mark-to-market. However, there are some peculiarities as to what constitutes a swap dealer or major swap participant that confuses and creates ambiguity in the application of this exemption from the clearing requirement.

It is a travesty to call this the “Improvements to Regulation” act. All of the substantive element—the clearing mandate, the trading mandate, the setting of capital and margin requirements by relatively uninformed regulators subject to influence and pressure, the position limits—have no solid economic justification.

Indeed, the stronger justifications cut the other way in virtually every case. Moreover, the ambiguities in the definition of key terms that determine the reach of the mandates are a recipe for trouble later on. The delegation of virtually all implementation details to regulators, the rapid timeframe for the formulation of specific rules, the need for coordination across regulators and the lack of anything more than the haziest guidance will create immense implementation problems and lead to enormous influence activities.

All in all, therefore, this would be better titled “The (Further) Bollixing of the Regulation of Over-the-Counter Derivatives Act.”

–Craig Pirrong

About the author: A recognized energy-markets expert, Craig Pirrong is director of the University of Houston’s Global Energy Management Institute and a professor of the university’s carbon-trading course—the first of its kind in the U.S. The institute is part of the university’s C.T. Bauer College of Business. Pirrong joined the university in 2003. He previously was the Watson Family professor of commodity and financial-risk management and an associate professor of finance at Oklahoma State University, and was on the faculty of the University of Michigan Business School, the graduate school of business of the University of Chicago and the Olin School of Business of Washington University in St. Louis. He holds a Ph.D. in business economics from the University of Chicago. The full version of Pirrong’s commentary on OTC derivatives—including details on the peculiarities as to what constitutes a swap dealer or major swap participant that confuses and creates ambiguity in the application of this exemption from the clearing requirement—and on more energy subjects is available at his blog www.streetwiseprofessor.com. He can be reached at cpirrong@gmail.com.

Natural gas is the cleanest fossil fuel—it produces less than half as much carbon pollution as coal. Recent technology advancements make affordable the development of unconventional natural gas resources. This creates an unprecedented opportunity to use gas as a bridge fuel to a 21st-century energy economy that relies on efficiency, renewable sources and low-carbon fossil fuels such as natural gas.

Despite the potential energy, economic and security benefits of natural gas, the recently House-passed American Clean Energy and Security Act (HR 2454) does not include enough opportunities to expand its use. The Center for American Progress and the Energy Future Coalition therefore propose a number of policies that would increase the use of natural gas and low-carbon energy sources while providing additional protection for our climate and communities.

Electricity

–Establish incentives to retire aging, inefficient, dirty, coal-fired power plants and replace them with renewable and low-carbon electricity.

–Create a renewables integration credit to offset specific costs associated with producing high levels of renewable energy and to reward going beyond the renewable electricity standard.

–Establish a dedicated incentive for development and deployment of “dispatchable” renewable energy to build markets for electricity storage technology.
–Require that the carbon price and other costs are included when determining the dispatch order for moving electricity onto the grid to prioritize natural gas and other clean electricity.

–Expand carbon-capture and -storage provisions to include other permanent storage technologies in addition to geologic sequestration. Ensure that carbon-capture and -storage research and deployment efforts include retrofitting existing coal- and gas-fired power plants.

–Remove regulatory barriers to recycling waste heat and power.

Transportation

–Expand the market for natural gas as a heavy-duty transportation fuel by increasing incentives for gas-powered buses and heavy trucks.

–Create incentives for communities to develop rapid-transit systems that employ buses fueled by natural gas.

Clean natural gas development

–Conduct a comprehensive analysis of the impact of natural gas production on air, water, land and global warming. Include a compilation of best practices and recommendations for new state safeguards.

–Support public-disclosure requirements on the release of toxic chemicals used during the production of natural gas.

–Expand the Natural Gas STAR program in which natural gas producers voluntarily capture and resell methane—a potent greenhouse gas—instead of releasing it into the atmosphere. Current participants make money on these methane sales. Medium and large emitters must undertake this practice.

Research

–Conduct research on more efficient turbines, storage of renewable electricity and other technologies that would generate no- or low-carbon energy.

–John Podesta and Timothy E. Wirth

About the authors: John Podesta is president and chief executive officer of the Center for American Progress. He can be reached at semmerling@americanprogress.org and 202-344-0404. Tim Wirth is president of the U.N. Foundation. He can be reached at janthony@unfoundation.org and 202-277-2103. Click for their 11-page report podestawirthnaturalgasmemo09, “Natural Gas: The Bridge Fuel To The 21st Century.” Click for the press release podestawirthpressrelease09. Click for a map shalegasmapoilandgasinvestoraugust09 of U.S. shale gas. 

During the previous 12 months, many in the oil and gas industry have been faced with challenges. Tenuous economic realities, coupled with a dramatic fluctuation of commodity prices, have left the A&D market wondering which way is up. As we look for our own way to add stability to our ventures, a common theme quickly emerges: How can I do more work for less money? How can I stretch my return on investment?

Our industry, providing the fuel required to grow and heal America’s steadfast industrial leadership, is no stranger to the need for judicious use of our resources. We strive to make the most out of all our efforts: seismic to peer into the Earth, ingenious drilling technology to extend the reach of each well, and the use of modern technology to amass and focus the ever-increasing flow of data from our production.

Compelled by the situation our country faces, we must capitalize on what we do best: innovate and perform. Innovation, as it always has, will provide new tools and technologies. Our performance, using this advanced technology, will maximize the reward of our investments and national assets.

Federal minerals. The U.S. government has a long history of involvement and management of the myriad resources belonging to our country. Tracing a heritage back to the Land Ordinance of 1785 and the Northwest Ordinance of 1787, the U.S. government has served a critical role in the management and allocation for production of tracts of public lands and mineral rights. The authority to utilize, where appropriate, resources garnered from the land acquisitions of the 19th century, was first defined by Congress in the late 19th century, placing the utilization of public land assets under the control of the executive branch. The Mineral Leasing Act of 1920 followed, allowing leasing, exploration and production of certain resources, including oil and natural gas on public lands.

Further advancing our country’s effort to better manage our natural resources, the Bureau of Land Management was formed within the Department of the Interior in 1946. During the next 30 years, the BLM worked under many conflicting and ambiguous legislative directives until Congress enacted the Federal Land Policy and Management Act of 1976.

This legislation resolved the BLM to the management of more than 700 million acres of subsurface mineral assets, found primarily in the western continental U.S. and Alaska. A small fraction of these assets have been leased for oil and gas exploration by the government to U.S. citizens over the years at a significant value. In 2007, for instance, the BLM’s onshore mineral-leasing activities generated an estimated $4.5 billion.

Online bidding. Our individual efforts toward careful use of resources are each a link in the nationwide stretch to do more with less and get the most from our assets. The BLM, in an effort to overcome the same challenges we face in the private sector, is investigating technology to get the most return for the BLM’s oil and gas leasing program. Congress, as a part of the 2008 Consolidated Appropriations Act, directed that the BLM pilot an Internet lease auction for the federal oil and gas leasing program to evaluate its performance in relation to the traditional oral auction noted by the original legislation from the 1980s.

EnergyNet.com Inc. was awarded the contract to develop and host the Oil and Gas Lease Internet Auction Pilot as a result of a public solicitation for an appropriate contractor.

The BLM, a central and fundamental agency in our national organization, is no stranger to the changing requirements of our time. As we each tighten our belt and look for ways to make more from less, the BLM is leading the effort to find ways to use our American innovation and appetite for technology to reach out further to the leasing public and to develop an enhanced, online leasing system for potential use in the future.

Challenges and the need for relentless development have been the impetus of American growth for more than 200 years. As we delve further into an information-based age, the need for online services, both private and public, increases day by day and year by year.

Each Congress, each administration, each company and each individual—we all have a role to fill in today’s competitive environment. We must take inspiration from our progress, our technology, and our information resources by looking for efficacy and transparency and, like the BLM, we each can make the most of the tremendous resources America has to offer.

–Bill Britain

About the author: Bill Britain is co-founder, president and chief executive of EnergyNet Inc. the continuous online oil and gas property marketplace. He received his bachelor’s in engineering from the U.S. Military Academy at West Point in 1972 and served in the U.S. Army for five years, receiving the Meritorious Service Medal and retiring from his commission as Captain of the Infantry in 1977. He co-founded J-Brex, an E&P company in 1987, a Midcontinent operator. He can be reached at Bill.Britain@energynet.com and 806-351-2953.

It is critical that the U.S. Securities and Exchange Commission begin clarifying new reserves-reporting rules for companies filing year-end disclosures. One hope is that this happens much sooner than later; if it doesn’t, we are all going to be in a little bit of a bind in the latter part of the year.

While the rules themselves are understandable, the finer points are not. The SEC’s 160-page “Modernization of Oil and Gas Reporting” allows average oil and gas prices to be used to calculate economic limits on reserves and estimated future production.

The SEC will also permit the reporting of unproved reserves and non-traditional reserves, such as mined bitumen, if the end product is petroleum.

The SEC will allow the use of modern technology to justify levels of certainty for categorizing reserves if these technologies produce consistent, repeatable results. The changes are fairly straightforward, maybe, as you’re looking at it from 10,000 feet. It’s not a question of if we can do it. The real question is whether we can do it in the manner that the SEC intended to be compliant. Until we get feedback from the SEC, we won’t know its intent.

Ryder Scott has formulated interpretive positions on some of the more complex issues and submitted questions to the SEC for clarification but, at this time, the agency has not responded.

The SEC is under a tremendous strain right now with all of the industry throwing questions at it. We understand that it wants to formulate a good set of answers and it will supposedly post those answers on its website and give us instructions.

One issue involves the use of technology to justify reserves bookings. The SEC wants reliable technology to have a repeatable, consistent track record and widespread use in a given area. The SEC did not adopt a bright-line 90% test for that technology as proposed in the concept document.

So what does that mean to the SEC? Does that now mean that three out of five is okay? Seven out of 10? We don’t know what threshold they will set for this until there are some rulings in regard to that.

Ultimately, the SEC will have to deal with each one of the issues on a case-by-case basis.

–Don Roesle

About the author: Don Roesle is chief executive officer of reservoir-analysis firm Ryder Scott, and has been with the firm since 1975. A registered professional engineer, he received his master’s in petroleum engineering from the University of Texas in 1973. He is a co-author of “Evolution to principles-based reserves reporting: New SEC rules require strategic direction,” published by PricewaterhouseCoopers. Roesle can be contacted at 713-651-9191 and don_roesle@ryderscott.com. Click here for a full report on Ryder Scott’s May 2009 annual reserves conference: The Ryder Scott Newsletter, June-Aug, 2009 ryderscottnewsletterjune-aug09.

Well, now we know. To no surprise, the biggest government boondoggle in modern times was narrowly passed in the U.S. House of Representatives, thanks to some good old-fashioned horse trading. By seven votes, the Waxman-Markey climate-change legislation squeaked out, and no doubt Rep. Henry Waxman, D-Calif., is breathing a sigh of relief.

Turns out that one hold-out, Rep. Marcy Kaptur, D-Ohio, drives a hard bargain. Thanks to her middle-of-the-night deal making—and that of a host of others–HR2454 is on its way to the Senate. If it comes out intact, along with paying the de facto taxes imposed by the “cap and trade” scheme, taxpayers also get the privilege of funding, to the tune of $3.5 billion, Kaptur’s new federal authority to make taxpayer-financed loans for economic development and renewable energy projects in Ohio.

Let’s hope her new “power authority” at least requires a down payment on the money that it loans, a standard of practice that other quasi-government financial agencies like Fannie Mae and Freddie Mac overlooked. I wonder what the taxpayers’ rate of return on our $3-5 billion investment will be?

In the wee hours of the night, when Americans were tossing and turning, thanks to worries about how they are going to pay their bills at the end of the month, common sense was horse-traded away. A 310-page amendment, no doubt to entice hold-outs to vote “aye,” was attached to the bill that is supposedly going to ensure that, for the first time in 4 billion years, the Earth’s climate will not change.

In Texas everybody knows that if you don’t like the weather just wait a day, because it will be totally different tomorrow. I hope before any climate-change bill is signed into law we can get Texas’ weather just the way we want it, for good.

One energy success story is clean-burning natural gas. Technology developed by visionaries, not inside-the-Beltway, so-called experts, has paved the way for responsible production of this clean burning fuel.

Drilling for natural gas found in places once deemed unreachable is now common place across the country. In fact, America is so rich in natural gas that, with the sound management of the fields that is occurring today, our country could produce almost as much clean energy as we consume—if we wanted to. That is the definition of energy independence to me.

–Elizabeth Ames Jones

About the author: Elizabeth Ames Jones is a member of the Texas Railroad Commission. She can be contacted at commissioner.elizabethjones@rrc.state.tx.us and 877-228-5740.

The recent emergence of resource plays, such as the Haynesville and Eagle Ford shales, that overlap mature, producing fields has prompted challenges from lessors as to the continued validity of oil and gas leases that are beyond their primary term, but are held by production from the older fields.

Lessees faced with these challenges will welcome the June 23, 2009, decision by the Amarillo (Texas) Court of Appeals in Cambridge Prod., Inc. v. Geodyne Nominee Corp., holding that the acceptance of royalties by certain lessors established quasi-estoppel as a matter of law. While Texas courts have previously applied the quasi-estoppel doctrine in other oil and gas contexts, this is the first Texas case to apply the doctrine to bar a lease termination claim in the context of acceptance of royalties.

The equitable doctrine of quasi-estoppel precludes a party from accepting the benefits of a transaction and then taking a subsequent inconsistent position to avoid corresponding obligations. Thus, if a lessor accepts royalty payments over a period of time, and subsequently claims that the pertinent oil and gas lease terminated during that period of time, there is now authority in Texas that the lessor may be estopped to claim such lease termination.

In Cambridge, Geodyne Nominee Corp. drilled a well in Section 39, which produced from subsurface depths of 14,364 to 14,372 feet. Geodyne subsequently filed a unit designation erroneously unitizing sections 33 and 39 from subsurface depths of 14,634 to 14,929 feet. The well drilled in Section 39 was the only well within the unit boundaries. The Section 33 lessors accepted their pooled share of royalties from the well for many years even though, in the absence of a valid unit, they would not have been entitled to any share in such production.

Several years later, Cambridge Production Inc. obtained top leases from the Section 33 lessors, and claimed that the previous leases covering Section 33 had terminated because there was no production either from Section 33 or from the applicable depths referenced in the unit designation. Geodyne’s dispositive defense centered on the doctrine of quasi-estoppel.

The court applied quasi-estoppel against Cambridge, since its rights were derived from the Section 33 lessors. Because those lessors had accepted the benefit of royalties for several years, and would not otherwise have received any royalty, the court held that they could not assert a right inconsistent with their acceptance of such royalties. The court distinguished quasi-estoppel from equitable estoppel.

“While equitable estoppel requires proof of a false statement or detrimental reliance, quasi estoppel requires no such showing,” the appellate court ruled. “Rather, it precludes a party from accepting the benefits of a transaction and then taking a subsequent position inconsistent with one in which he acquiesced or from which he accepted a benefit.”

Notes of caution To date, a petition for review in the Cambridge case has not been filed with the Texas Supreme Court; however, the time for filing has not yet expired.

In 1994, the Corpus Christi Court of Appeals held in Atkinson Gas Co. v. Albrecht that quasi-estoppel was not available to defeat the lessor’s claim of lease termination. In that case, the lessor, in a single instance, accepted a royalty payment, a portion to which he was not entitled because it covered a period of nonproduction. A key distinction between that case and Cambridge, however, was that, prior to the acceptance of the royalty payment, the lessor had consistently and continuously maintained the position that he considered the lease to have terminated due to cessation of production.

The court held that quasi-estoppel requires that the position or conduct that is the basis for the estoppel (acceptance of royalty) must occur before the assertion of the position sought to be estopped (claim of lease termination). Because the lessor had claimed lease termination prior to his acceptance of the royalty payments, quasi-estoppel did not apply.

Additionally, in Cambridge, the lessors accepted royalties from production on other lands (albeit pooled with their land) as opposed to production from their leased acreage. While the Cambridge court did not make reference to this distinction, a lessor under a drill-site lease might attempt to distinguish Cambridge on these facts—the theory being that the drill-site lessor would be entitled to all of the production if the lease has terminated, and that the acceptance of a portion of such production is not inconsistent with the position that he is entitled to all of the production.

While there is no Texas authority to support this argument, courts in other emerging-resource-play states, such as Louisiana and Pennsylvania, have held that the mere acceptance of royalties from production on the lessor’s acreage will not have the effect of depriving the lessor of the benefit of forfeiture provisions included within an oil and gas lease.

Conclusion The Cambridge case serves as favorable authority for lessees facing a lease-termination claim in Texas, where there has been a long period of acceptance of royalties by the lessor after the alleged lease termination occurred. Cambridge provides lessees with a precedent to assert quasi-estoppel as a defense to the lease-termination claim in such a situation. However, if a lessor first asserts that a lease has terminated and later accepts royalties, a prior Texas case holds that quasi-estoppel will not defeat the claim of lease termination.

As noted above, the time for filing a petition for review of Cambridge with the Texas Supreme Court has not yet expired.

–Michael J. Byrd, Louis J. Davis and Cody R. Carper

About the authors: Michael J. Byrd and Louis J. Davis are partners with law firm Baker & McKenzie LLP in its Houston office, and Cody R. Carper is an associate. Each focuses on oil and gas law. Byrd additionally focuses on acquisition finance. Byrd can be reached at 713-427-5021, michael.byrd@bakernet.com; Davis, 713-427-5031, louis.davis@bakernet.com; and Carper, 713-427-5029, cody.carper@bakernet.com.

The level of energy M&A in 2009 closely resembles the rest of the general market—a continuous flow of deals waning to the occasional trickle. Prospects for future transactions are difficult to foresee, as credit and equity markets are unstable and risk-averse at the present. Yet, for those managements committed to inorganic growth as an element of their portfolio-expansion strategy, the present economic malaise provides a useful moment to take stock of changing market perspectives and expectations.

Today’s markets unquestionably move at a faster pace and with greater fluidity than those of prior eras. Part of this phenomenon simply reflects living in a world of instantaneous information made possible by technology leverage and reach. Partly, it recognizes that money conveys liquidity and can move overnight to the next option. Managements undertaking transactions need to recognize the velocity with which decisions are made about where to maintain investment and the impatience with which investors often view M&A results.

In transactions, investors demand deal performance from the managements in which they invest. This means that managements do not have the luxury of time in transaction completion and results realization; in fact, mega-transactions are now closing 20% faster than in the past.

A premium now exists on readiness to perform and ability to satisfy expectations. One way managements position themselves to accomplish these outcomes is to think in temporal stages over how to execute transaction completion and integration over the near- and long term—i.e., from closure to steady state. It is convenient to think about transaction completion in three stages: Day 1, Day 100 and day 1,000. Other timeframes may be relevant, but these milestones frame the essential nuances and requirements associated with most any transaction.

– Day 1, which coincides with the day after legal close, carries with it the requirement for readiness, i.e., operating as a single entity. Usually it is not possible not to be fully prepared for seamless operation at the close of a transaction; circumstances simply do not allow adequate time for seamless operational preparation, e.g., systems integration, staffing decisions, process redesign, etc. However, the two companies do need to be able to effectively operate immediately after the close and ensure that the most visible of market interfaces—e.g., financial reporting, customer contact and payroll capability—are unimpaired.

– Similarly, after the first 100 days, the byword for measurement is progress, i.e., expected results are being achieved. By this time, those actions reflecting key structural, operational and market decisions should be well under way and, in some cases, completed. At this stage of the integration life-cycle, the platforms and path for the future should be established. More importantly, “the Street” is expecting to begin to hear about outcomes, i.e., the progress made and level of benefits being captured. At this stage, the market looks to validate the confidence in management that expectations will be achieved. In a sense, this is the first milestone of “impatience” to be satisfied.

– By 1,000 days, many observers have forgotten the rationale and promises from the transaction; they are simply measuring performance success. Since the research suggests that most transactions fail, stockholders have generally voted with their feet by this time—i.e., they have either fled the stock or remain invested. At this juncture, it is clear whether strategic outcomes have been created, financial outcomes have been delivered and market outcomes have been achieved.

Dealing with the increasing velocity and impatience in the market requires that CEOs and their teams recognize the risks associated with underperformance. The market speaks directly to its view of management performance: It either retains confidence in its execution capability or it moves on to the next investment option. In today’s fickle investment world, managements do not get a reprieve against meeting market expectations and shareholder commitments: Successful merger execution is an expectation, not an aspiration.

–Tom Flaherty

About the author: Thomas J. (Tom) Flaherty III is a Dallas-based senior partner with Booz & Co.,  which recently published the book Merge Ahead: Mastering the Five Enduring Trends of Artful M&A by Booz & Co.’s Gerald Adolph and Justin Pettit, and has been involved in many power and gas mergers in the U.S., including crossborder transactions involving companies in the U.K., Canada, Australia and New Zealand. Flaherty can be contacted at tom.flaherty@booz.com. For the audio of his comments, click MergerCast.

The United States is at an historic turning point for its energy policies. However, many Americans lack a full understanding of the oil and natural gas industry and likely have misguided or misinformed perceptions. The discussion seems to have shifted more to an “either-or” notion of fossil fuels versus forms of renewable energy. Little talk has centered on how both can coexist in developing America’s energy policies of the future. The reality is that both broad forms of energy will be needed to power our economy and society in the years to come.

To encourage a constructive public-policy debate that leads to a new, fact-based comprehensive energy policy, we must actively address some of the misperceptions about the oil and gas industry. Simply, we must tell our story, or someone else will.

One of the biggest misconceptions out there is that the oil and gas industry profits more than any other industry. 

Facts tell a different story. As a percentage of net income to sales, the oil and gas industry actually ranks seventh behind such industries as drug, Manufacturing, Tobacco and Beverage. While some are touting that executives from “Big Oil” are the only ones who stand to gain from industry profits, it simply isn’t true. According to EnergyTomorrow.org, only 1.5% of industry-wide shares are owned by corporate management. The rest are owned by tens of millions of Americans, many of whom are in the middle class. 

In particular, a recent study by economists Robert J. Shapiro and Nam D. Phan found that 43% of oil- and natural-gas-company shares are owned by mutual funds and 27% of shares are owned by more than 2,600 pension funds representing, among others, retired soldiers, teachers, and police and fire-fighters.

Another misconception is that the oil and gas industry doesn’t pay its fair share of taxes. Again, facts say this isn’t true.

A significant portion of revenue earned by U.S. oil and natural gas companies goes to payment of taxes. U.S. oil and natural gas companies pay considerably more in taxes than does the average manufacturing company. According to the U.S. Energy Information Administration (EIA), the industry’s 2007 income-tax expenses (as a share of net income before income taxes) averaged 40.4%, compared with 26.7% for all U.S. manufacturing companies.

In addition, Congress has enacted tax laws during the past few years that are expected to cost the industry around $10 billion in additional taxes. This figure is dwarfed, however, by the Obama administration’s proposed FY2010 budget, which includes new taxes and fees on the oil and natural gas industry that could potentially total more than $400 billion during the next 10 years.

–Helen L. Leeke

About the author: Helen L. Leeke is vice president, market development, for Bolo, as well as liasing with marketing for WellPoint Systems. She previously was involved with acquisition-integration, system-implementation, business-process re-engineering, corporate reporting and internal-decision-support strategy for Marathon Oil Co. and Central Resources Inc. She can be reached at 713-850-1812, Ext. 401, and Helen.Leeke@wellpointsystems.com.