A state lawmaker plans to reintroduce a bill in next year’s legislative session designed to protect oil and gas drillers with invalidated leases snarled in foreclosure.
Rep. Jim Keffer, chairman of the House Energy Resources Committee, saw his previous bill to address the widespread problem in the Barnett Shale vetoed by Gov. Rick Perry, who praised parts of the measure but said it needed to be narrowed to deal only with urban drilling.
Drilling on land where the lease has been extinguished became an issue again last week when a Fort Worth attorney filed a proposed class-action lawsuit against Chesapeake Energy, alleging that it continued to extract gas from land that had gone through foreclosure. The suit seeks $100 million in damages.
The lawsuit says up to 5,000 landowners with Chesapeake leases in Tarrant and Johnson counties alone may have been cheated out of royalty payments because of this little-known aspect of the law.
“There is a gray area of what can be done and should be done,” said Keffer, R-Eastland. “The oil and gas drillers say they need to continue the lease, but then we have the other issue of foreclosure” where ownership is up in the air.
According to the lawsuit filed by attorney Dan McDonald, when lenders properly foreclose on mortgages, it invalidates the leases signed by the previous owners. When the land is sold at foreclosure — or seized by the bank — the lease needs to be renegotiated.
When lease problems are not addressed, the energy company essentially trespasses on the property if it continues to extract gas and other minerals, according to the lawsuit, filed in Johnson County.
McDonald said Chesapeake was aware of the problem and, besides renegotiating leases with a few landowners, opted not to address it. He said other drillers have a better track record in dealing with disputed leases.
“They knew it was a problem after the financial crisis,” McDonald said. “All of a sudden, you had all these drillers where their leases had been extinguished by these foreclosures.”
Keffer said the idea for the bill came from banking institutions as well as the oil and gas industry after the downturn put so many properties in foreclosure.
An analysis of the bill by the House Research Organization cited concern by “knowledgeable parties” that wells would not be developed because the entity that typically takes over a property is a bank or federal agency with little interest in leasing to the operators.
Under Keffer’s previous bill, that problem would have been addressed by amending the Texas Property Code to establish that an oil and gas lease would continue through foreclosure and that the royalties would go to the property buyer.
Perry’s office, in a June 2013 veto statement, said that while the bill would benefit parties to leases in urban environments like the Barnett Shale, it was less suited to leases in rural areas, particularly where a foreclosure would block the drillers’ right to use the surface property.
His office also took exception to a provision that would subject a driller to lawsuits for what it described as “reasonable and minimal damage to the land” through lawful production. Perry’s office said that “could have a serious chilling effect” on oil and gas production statewide.
The governor’s office did not respond to requests for comment from the Star-Telegram. Keffer said he tried to meet with Perry’s staff but couldn’t get a better explanation of its concerns. He said he thought the bill was narrow enough and “a pretty good solution.”
“We’ll try it again and see if we can come up with a better conclusion this time,” Keffer said. “I’m not sure how much slimmer we can make it.”
McDonald said Chesapeake and other drillers could have protected themselves initially from losing their leases in foreclosure by filing a subordination agreement that would have allowed the original lease to survive and be automatically transferred to the new owner.
“But everyone was going so fast — they were going at light speed to lease acres — and what bit people is that they didn’t anticipate the worst-case scenario that involved tens of thousands of foreclosures,” McDonald said. “We had a nightmare situation.”
McDonald, who learned of the problem while his firm was researching leases for a different lawsuit against Chesapeake over royalties, said he plans to look at how other energy companies handled the situation.
“It can be fixed. All you have to do [if you’re a driller] is have the land department figure out what has been foreclosed and send the landman over to the new owner and say, ‘I have to write you a check and negotiate a new lease’ just like they would do if it was a brand-new project,” McDonald said.