Author Archives: John

What the Frack?

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It was 1976, the bicentennial birthday of the United States of America. It was also the year Jimmy Carter and I were elected to public office. It wasn’t his first election, but it was mine. He beat a Republican. I beat a Democrat. In 1981, Ronald Reagan’s first year as president, I got a Christmas card from the White House. When I was sworn in, I’d never heard of fracking, or hydraulic fracturing; nor had anyone else outside the oil patch. By the time I left office four years later I was familiar with it. My public office (County Attorney) was, officially, only a part-time position with a part-time salary. So, 1976 was also the year I launched my private practice of law. As County Attorney, I prosecuted robbers, rapists, arsonists, drug dealers, drunk drivers and other perpetrators of offenses against the peace and dignity of the State of Kansas. As a general practitioner of civil law, I helped husbands and wives sever the bonds of matrimony, helped entrepreneurs launch their corporations, partnerships and limited liability companies, wrote contracts to further trade and commerce by individuals and companies, helped newlyweds buy their first homes, and helped farmers buy and sell quarter-sections of land.

Strangely, the private practice of civil law wasn’t where I first encountered an oil and gas lease. A number of people in a number of states who claimed they’d been ripped off in an oil investment scheme had been calling the police and sheriff’s offices which had no idea what to do so they advised these folks to call the County Attorney. I actually had my own investigator, and we proceeded to educate ourselves about oil and gas leases and how wells got drilled and, before long, I was prosecuting “white collar crime” in the form of a promoter who was selling 1/32 fractional interests in a drilling program; sold 35 of them, as I recall. Looked to me like a violation of the Kansas Securities Act. It wasn’t long before I heard from the Kansas Securities Commissioner whose toes I had unknowingly stepped on. “Violations of the Kansas Securities Act are prosecuted by the Kansas Securities Commissioner,” I was informed. Well, um, I thought I was the “chief law enforcement officer” in my county. I offered to show them several official opinions released by the Kansas Attorney General that said so. They went back to Topeka and I promised to keep them informed as the case proceeded. It proceeded to a conviction (the perp pleaded guilty, or maybe no contest – I don’t remember for sure now), following which he filed an ethics complaint against me for violating his constitutional rights. Somehow in my Constitutional Law class at law school I missed the one that says “shall not be deprived of the right to defraud fellow citizens”. The complaint was deemed without merit and dismissed by the Disciplinary Administrator. Now that I’m older and wiser, though, I understand better why that class was referred to as “Con Law”. Defrauding the citizenry does seem to be a protected right of certain institutions such as the Congress, the White House, IRS, EPA, and certain large corporations, particularly, cable media and telecommunications, and insurance. Health insurance is an especially nefarious industry, moreso than ever thanks to Obamacare. But, I digress.

Interesting, you might say, but what does it have to do with fracking? Patience, my friends; good things come to those who wait.

The case was front page news in the local paper which was read by, among others, a farmer who’d been approached by a company from Oklahoma that wanted to lease his farm and drill oil wells on it. He phoned me in my capacity as a private attorney, not public prosecutor. Representatives of the company were coming up in a couple days to visit him at home and get his signature on an oil lease. Could I be there and look it over for him? I was obliged to inform him that I’d never actually represented anybody in oil lease negotiations and probably every other lawyer in town had much more experience than I did. “I understand,” he said, “but I still want you.” So, I went to his house at the appointed time, met him and the Oklahoma fellows, and we hammered out my first oil and gas lease.

My new client’s house had been the area’s elementary school for many years. He’d bought it and converted it to a home. Interestingly, the house where I grew up, in St. Louis County, Missouri (no oil wells there!), had previously been a school which my parents bought a couple years before I was born and converted it to a home. Even more interesting, I later discovered that for several years circa 1907 (before my father was born) my grandfather was the Baptist minister in the city I moved to and made my home in 1976. When I moved there, I didn’t even know he’d ever lived in Kansas!

What a coincidence, you might say, but what about fracking? Bear with me, I’m getting there, but this just popped into my head (really, just this moment as I typed the comma after “bear with me”): a scene in a bar where a guy goes up to a gal and his pick-up line is, “Bare with me.”

Okay, we’re getting close to fracking. A week later, the guys from Oklahoma called and asked if they could hire me as their attorney. They were planning to lease a lot more land in the area and would like to have me working for them. I was obliged to inform them that I’d only handled one oil lease negotiation and probably every other lawyer in town had much more experience than I did. “We understand,” they said, “but we still want you.” Thus were planted the seeds of what would become a legal career focused almost exclusively on oil, gas and mineral law. As for fracking, I soon got acquainted with how it worked and had been working, for several decades before I knew what it was, without causing, contributing to, or otherwise suggesting any relationship with, earthquakes.

Wait, you might say, is that it? Well, for now it is. If anyone is really interested, let me know and I’ll consider a fracking supplement.

 

Ten Acres or What?

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Although KCC regulations require 10 acres for a drilling unit and 330 feet between a well and a lease line, in Eastern Kansas we’ve been drilling on 2.5 acre spacing for decades. This was based on another KCC regulation that specified in this part of the state a well only had to be 165 feet from the lease line. If that’s the “radius” from the well bore, the diameter would be 330 feet and, if a square, 330′ x 330′ makes 2.5 acres. However, the same regulation did not go on to say that, although a well only had to be 165 feet from the line, wells could be drilled on 2.5 acre spacing. Now, suddenly, the KCC is starting to require operators to apply for “well location exceptions” if they want to drill  on less than 10 acre spacing. The trouble is, Eastern Kansas is stripper well country and if you can only drill one well per 10 acres, you may not get enough oil to make “paying quantities” which is required to keep the lease alive (held by production). Even if an operator can get paying quantities, with production being cut 75%, who’s going to want to develop and operate in these parts? This suits a lot people fine because they don’t want oil wells around these parts, anyway. They aren’t thinking, of course, about all the tax revenues the counties get from that unwanted oil. Maybe without all those pumps clogging up the surface there’ll be more development of housing and commercial buildings that will generate more real estate taxes to make up for the loss of oil taxes. One thing seems certain, the landscape is in flux, and the future of oil in Eastern Kansas is uncertain.

Only Real Men Need Apply

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Over the years I saw quite a range of private placement memoranda, prepared to coax money out of investors to drill oil and/or gas wells. They ran the gamut from thick slick magazine quality presentations with full color photos, graphs, diagrams and reports by petroleum engineers and geologists (that only petroleum engineers and geologists could understand) to things that looked like school reports written by 6th graders using a typewriter for the first time. It never ceased to amaze me that presumably well educated men wrote checks for thousands of dollars payable to somebody they’d never met in order to get in on oil well drilling programs that were grossly inflated as to cost and unlikely to yield a return on investment regardless of how good the wells turned out if they ever were, in fact, drilled. Even the 6th grade quality memorandum could attract enough money to fund the proposed program whose unstated goal, I sometimes suspected, was really a two-week spree in Vegas for the promoter and a few good buddies followed by a “sorry, dry hole” letter to investors.

I had a theory that it didn’t really matter to many investors if they ever saw a return; they just wanted to be able to tell their golfing buddies about their oil wells in Montana (or wherever). Regardless of whatever else they contained, most private placement memoranda had at least a couple of pages in capital letters “warning” about the high risk of putting money into drilling wells. Rather than serving to emphasize the need to think carefully and think twice before investing, it seemed that the warnings served to emphasize that “Only Real Men Need Apply”. There never seemed to be a shortage of potential investors who, in their own minds, were “real men” or, perhaps, who were easily persuaded that “real men have oil wells”. Over the years, I received several calls from women whose story began, “My husband invested in this oil well venture…”

It also never ceased to amaze me how such promoters avoided jail. Many of them probably gave little, if any, thought to federal and state securities (“blue sky”) laws. The ones who did probably assumed their “private” drilling programs were exempt from securities laws and regulations. Many programs probably were exempt from registration by reason of the Uniform Limited Offering Exemption (ULOE), though not from the “notice filing” required under ULOE. Exemption from registration did not mean exemption from the general fraud (“bad boy”) provisions of blue sky laws. Those provisions make it unlawful to misrepresent the facts (i.e., dozens of highly successful wells have been drilled all around our lease), as well as unlawful to not disclose important facts (i.e., nothing but dry holes have been drilled all around our lease). State securities regulators would periodically crack down on “oil well scams” and find a particularly egregious case to prosecute and “make an example”. And, yet, well educated men still write checks for thousands of dollars to somebody they’ve never met to get in on oil well drilling programs.

Speaking of petroleum engineer and geologist’s reports, after reading quite a few, one begins to wonder if they all use the same template and just fill in different names for the state, county and target formation. A humorous take on such reports can be seen here.