May 28, 2015 Articles

What Does the Plummet in Oil Prices Mean for Litigators?

New hotbeds of litigation may emerge from "Oilpocalypse"

By Nicole Ruble Metcalf

Gone are the days of $100 oil. Presently, prices are settling in anywhere from $45 to around $50 per barrel, depending on the price index consulted, with field prices in some areas even lower. Industry experts are making predictions all across the board as to where prices are headed in the coming week, months, and years, with some saying as low as $20 per barrel, and some optimists (some may call them delusional) predicting a spike as high as $200 per barrel. What these wide-ranging predictions are telling the market is that no one really knows what the future holds and that uncertainty has led to a wave of change and adjustment. With the coming of “Oilpocalypse,” the inevitable reports of mergers, acquisitions, bankruptcies, asset sales, and layoffs are beginning to accumulate. Halliburton is reportedly selling off its billion-dollar drilling business units to sustain its acquisition of Baker Hughes, and it is anticipated that the price fetched will be much less with oil prices holding steady where they are. Forbes recently reported that over 75,000 layoffs have occurred in the oil and gas industry and that the numbers are expected to continue to climb.

This comes as no surprise given that the rig count continues to drop. Indeed, Business Insider just reported that the U.S. rig oil count is now at the lowest it has been since December of 2010. Exploration and production companies are now being forced to revisit their projections and production plans and are engaged in a delicate dance between maintaining drilling obligations while keeping costs manageable. For example, EOG Resources announced just a few months ago that it plans to delay completions and characterized the move as the “right business decision.”

Brooding underneath all of this uncertainty and consequent decision making is the litigator’s best friend—conflict. As royalty payments dwindle in size, angry mineral and royalty interest owners will likely take a harder look at oil and gas operators’ actions and accounting records. Mineral owners will also be closely monitoring whether oil and gas operators are fulfilling their lease obligations, such as whether there is production in paying quantities to hold leases and whether continuous drilling obligations are being met. Opportunistic companies (some might use more pejorative terms) may scour public data to find situations where leases appear to have expired and go to mineral owners with offers to undertake the cost of seeking to oust the existing lessee in exchange for an opportunity to step in under a new lease, earning a new bonus payment for the mineral owner.

With much of the oil and gas industry funded by private capital investments and through partnerships, questions are likely to be raised by investors as to whether their oil partners are breaching fiduciary duties to keep companies afloat, and the f word (that being “fraud,” of course) is likely to be thrown around when projections are not met. Service providers, who are typically the first to take the hardest hit when rigs are laid down and new well development delayed from price declines, may also be scouring their contracts to determine whether operators are in breach of their service agreements. This can be particularly problematic when operators have entered into long-term contracts that are locked in at high daily rates that are no longer sustainable in market conditions such as these.

In addition, environmentalists and community activists may take this opportunity to turn up the heat on the oil industry while it is already weakened by economic pressures to push their agendas, creating opportunities for litigators to represent clients on both sides of the issue. The City of Denton, Texas, passed an ordinance banning fracking (the process of injecting a fluid mixture, typically composed of water and proppants, at high pressures into rock formations to release and extract oil or gas) within the city limits. The Texas General Land Office and the Texas Oil and Gas Association are now battling the ordinance in the Travis County courts. New York and Colorado have experienced the same outbreak of litigation arising from their fracking bans, and Maryland may soon be added to the list. Maryland’s House of Delegates just recently passed legislation that would prohibit fracking in that state until October of 2017. Add to this list the private citizen lawsuits that could arise to enforce fracking bans against renegade operators.

With the anticipated onset of oil and gas bankruptcy filings, litigators could also find themselves presented with opportunities to represent clients in preference actions. And, as layoffs seep into the executive levels, bitter endings could lead to misappropriation of trade secret claims if and when those executives seek to start up new companies.

In sum, cheaper prices at the pump may not be the only thing that the trial bar enjoys from falling oil prices as new hotbeds of litigation emerge from the current economic climate.

Keywords: litigation, trial practice, oil prices, lease obligations, fracking bans, breach of service agreement, bankruptcy, preference action, misappropriation of trade secrets


Copyright © 2015, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).