Report: Legal Challenges of Shale Gas Production

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A report issued by energy law firm Steptoe & Johnson titled, “Below The Surface: The Legal Challenges of Shale Gas Production.” The report is based on interviews with 96 energy services buyers at 56 companies (mostly drillers). The survey found that the biggest legal issue faced by drillers is real estate.

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Report: Legal Challenges of Shale Gas Production

  1. 1. ELOWTHESURFACE TheLegalChallengesofShaleGasProduction
  2. 2. Why this groundbreaking study? Today, just a handful of resource plays, mainly shales with an abundance of crude oil and liquids targets, account for a substantial share of all spending for land drilling and development in the U.S. It’s a substantial opportunity that comes with opportunity costs, including legal costs. As a player in the field, Steptoe & Johnson set out to map the legal issues, trends and, yes, expenses below the surface of shale production. Let’s dig in. $54 billion was invested in seven resource plays in 2012. Why this groundbreaking study? OTHER Shales where participants are active Haynesville Shale Mississippi Lime/Mississippian Niobrara Shale Barnett Shale Woodford Shale Fayetteville Shale New Albany Shale, IL Basin Cline Shale, Permian Basin Permian Basin Wolfcamp, Permian Basin Monterey Shale Tuscaloosa Marine Shale Utica Point Pleasant Arkoma Basin Brown Dense Formation Codell Formation Huron Shale Kreyenhagen Formation Lower Smackover Brown Dense Formation Oriskany Formation Pearsall Shale Piceance Basin Pinedale Four shales account for most activity among respondents depth of involvement Marcellus Shale Utica Shale Eagle Ford Shale Bakken Shale Other Shales 33% 76% 81% 27% 53% Acquiring Land/Leases Drilling Land Reclamation Processing Seeking Permits Drilling Rig Producing Gas Other Pipeline Answers do not total 100% as respondents named all the shales where they are involved. Listed from most to fewest Most activity is land acquisition and leasing, followed by a full pipeline of activities BREADTH of involvement 50250 45% 33% 33% 32% 26% 20% 18% 18% 11% Answers do not total 100% as respondents named all the activities in which they are involved.
  3. 3. Participant profiles and demographics How we did the study. The Brand Research Company conducted a total of 101 interviews from January through March 2013 with 96 legal service buyers at 56 companies doing business in U.S. shales, and 5 industry experts. The list of potential respondents included Steptoe & Johnson clients and others who are not clients of the firm. Participant profiles and demographics In addition to the requirement that companies be involved in some aspect of gas and oil extraction from U.S. shales, the respondents were required to be significantly involved in the selection of outside counsel for matters connected with their companies’ involvement in shales. Respondents are mostly landmen, in-house counsel and executives with an average of 15.3 years selecting outside counsel for their companies. Their companies have annual revenues ranging from less than $50 million to more than $1 billion. Who participated? Producers AB Resources Aera Energy, LLC Anadarko Petroleum Corporation Anderson & Associates Mineral Land Service ANH Refractories Company Antero Resources Antero Resources Appalachian Corporation Atlas Energy Ben Energy Berkley Oil Bluescape Resources Booth Energy Broad Street Energy Cabot Oil & Gas Corporation Caiman Energy, LLC Chesapeake Energy Corporation Chevron Appalachia, LLC CNX Land Resources, Inc. Cohort/JW Operating ConocoPhillips Company CONSOL Energy, Inc. Devon Energy Corporation List of RESPONDENTS’ COMPANIES Dominion Eastland Energy Group, Inc. Energy Corporation of America EQT Corporation Graves & Company Grenadier Energy Partners Gulfport Energy Corporation KC Cooper Lake Region Oil Murex Petroleum Corporation Murray Energy Corporation Newfield Exploration NiSource Northeast Natural Energy, LLC Noble Energy PDC Mountaineer Percheron Providence Energy Group, Inc. Providence Resources, LLC Range Resources Range Resources Appalachia Reliance Holding USA, Inc. Reserve Energy Rex Energy Seneca Resources Corporation Shell Oil Company Sierra Buckeye, LLC Southwestern Energy Production Co. Statoil Stone Energy Corporation Sylvan Energy Talisman Energy USA, Inc. Texas Keystone Tioga Resources, LLC Vitruvian Exploration, LLC Whitmar Exploration Co. Worthington Energy Consultants WPX Energy XTO Energy, Inc. Industry Experts Bexar County Economic Development University of Texas Center for Community and Business Research Columbus Business First Daily News Independent Research Scientist with U.S. Shale Expertise Companys’ Annual Revenue 100 50 25 0 75 $50 – $99 million $500 – $999 million $100 – $499 million Less than $50 million $1 billion + RESPONDENTS’ industry SECTORS Oil and Gas 100 50 75 25 0 Midstream 14% Pipeline 9% Support for Oil & Gas Operations 6% Drilling 23% Other 5% Energy 29% Production 32%83% Several repondents identify themselves with multiple sectors. 30% 1% 13% 10% 47%
  4. 4. Top legal issues in the field Every opportunity has its legal challenges. A range of legal challenges confront decision-makers in their shale activities. No surprise there. But the areas in which they have the highest volume of challenges are title and real estate, transactions, litigation, regulatory and environmental–in that order. When asked which matters require the most help from outside counsel, litigation is first, followed by title and real estate, and then private financing and related securities. Presumably, this reflects subject matter expertise not always found in-house. Top legal issues in the field decision-makers face these challenges sometimes or often use outside counsel more than half the time for 45% 39% 26% 42% Government Relations Private Financing & Related Securities Labor & Employment Other 100 50 25 100 50 75 25 0 100 50 75 25 0 100 50 75 25 0 85% Title & Real Estate 74% Transactions 90% Litigation 60% Regulatory 61% Environmental 52% Government Relations 76% Private Financing & Related Securities 46% Labor & Employment 94% 77% 72% 70% 60% Title & Real Estate Transactions Litigation Regulatory Environmental 75 0
  5. 5. The volume of disputes 50% 93% of shale developers say disputes arise quarterly or more frequently of shale developer disputes will either increase in frequency or remain at the same high volume in the next twelve months It’s not just shale gas or oil production that keeps shale developers busy. Half reported facing a steady flow of lawsuits at least quarterly, some as often as monthly or even weekly. And the pace looks to remain steady. Nearly all of those working in U.S. shales expect the number of legal disputes to increase or remain the same in the coming year. Methods of defense vary, but practical settlements appear to make the most business sense. The volume of disputes As activity deepens, so does the volume of disputes. Pre-Trial Settlement Mediation Other Litigation/Trial Arbitration 100 50 75 25 0 DISPOSITION OF LEGAL DISPUTES 74% Settled 26% Went to Court Faced with various suits, clients use multiple defense methods. METHODS OF DEFENSE USED AGAINST LAWSUITS 65% 46% 42% 67% 10%
  6. 6. The nature of disputes Not surprisingly, decision-makers most often cited lawsuits arising from acquisition and use of land as four of the top five reasons for disputes. Moreover, lawsuits related to mineral title and contracts are the most frequently encountered and perhaps expected by producers. Environmental lawsuits are the most concerning to shale developers. This concern is likely related to unpredictability, cost, complexity and public relations. The nature of disputes Lawsuits mostly driven by fights over rights. Real Estate Regulatory Mineral Title Personal Injury Contracts Class Action Labor & Employment Business Torts Toxic Torts Other Environmental MOST NUMEROUS LEGAL DISPUTES IN PAST YEAR 1005025 75 73% 57% 35% 27% 19% 12% 9% 8% 6% 3% 14% 0 100 50 75 25 • Environmental Issues • Property Damage • Payment of Gas Royalties • Regulatory Disputes • Employment Disputes • Premises Liability • Zoning Disputes • Labor Disputes • Insurance Disputes • Deliberate Intent THE TOP 5 REASONS FOR LAWSUITS 60% LandownerDisputes 55% TitleIssues 51% ContractIssues 51% LeaseDisputes 42% PropertyRights Other Reasons Regulatory Class Action Environmental Real Estate Mineral Title Personal Injury Labor & Employment Business Torts Product Liability Other Contracts DISPUTES OF MOST CONCERN 56% 52% 30% 26% 23% 19% 10% 6% 2% 2% 12% Toxic Torts 7% 0 1005025 75
  7. 7. For those whose litigation spend is their largest budget item, the average annual spend rises to $8.6 million. This amounts to two and a half times the average for title and real estate when it is the largest spend. On average, shale developers spend $3.4M annually for litigation in the shales. Half of shale developers report that their largest spend on legal services related to U.S. shales is for title and real estate. Litigation was named by a third of the shale players and transactions by most of the rest. While litigation is not the largest spend among all shale developers, when it is reported as largest, it is dramatically larger. This may explain the earlier cited prevalence of settlements. Drilling down on legal costs IS LITIGATION the LARGEST SPEND FOR LEGAL SERVICES RELATED TO THE U.S. SHALES? USE ALTERNATIVE FEE ARRANGEMENTS? 34% 66% Yes No 13% 13% Yes 59% 28% No Not Sure Drilling down on legal costs 50 25 Title, real estate and litigation top the budget charts. Litigation Transactions Environmental Private Finance/ Securities 35% 14% 1% 2% Title & Real Estate 48% 0 LARGEST SPENDS
  8. 8. Naturally resourceful counsel 200 attorneys and 200 paralegals serving only the energy industry 220 in-house land professionals 12th largest energy practice in the country– Energy Law 360 Largest team of oil and gas lawyers in the East 30 former in-house energy attorneys who know the industry Vigorous efforts to shape energy law for the future Scalable, time-sensitive land and title solutions to meet client needs Robust in-house abstracting resources Nationwide title services Top rated by Best Lawyers in America® & Chambers USA in Oil, Gas & Energy Law Strategic locations in U.S. shale plays, including Marcellus and Utica Serving energy and natural resource clients since the firm’s founding 100 years ago About Steptoe & Johnson Depth of Energy Experience DEpth and breadth Colorado Kentucky Ohio Pennsyl- vania Te x a s W e s t Virginia Mineral Title Opinions • More than 7,000 mineral title opinions in 2012 • Uniform quality, opinion formats and approaches to title analysis and reporting all major basins Environmental & Regulatory • In-house FERC and public utility experience Litigation • Experienced team of mineral title litigators who know the courts and the industry • 75 seasoned litigators • 60% individually recognized as leaders in their field by The Best Lawyers in America® Deals • $6.2B in recent transactions Emergency Response Team • Trained multi-disciplinary Emergency Response Team • Provides instantaneous support to in-house emergency response teams Government Relations • Government relations team experienced in shaping eastern oil and gas legislation • Strategic relationships provide clients with connections Colorado | Kentucky | Ohio | Pennsylvania | Texas | West Virginia Recognized strengths in Energy, Litigation, Transactional, and Labor & Employment Law 285 14 40Attorneys Offices in 6 states Practice Areas

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