Report: Suits reduce drilling activity

03 11, 2012 by The Advocate

Over the past eight years, Louisiana missed out on more than 30,000 oil and gas jobs and support positions because of what are known as “legacy lawsuits” over environmental damage caused years or even decades earlier by drillers and producers, according to an LSU study.

Such lawsuits typically involve a company being sued for environmental damage caused years earlier by other, previous well operators.

“Legacy lawsuits are strongly and negatively correlated with Louisiana drilling activity,” the LSU Center for Energy Studies report says. “Increases in legacy lawsuits are correlated with reductions in conventional Louisiana oil and gas drilling.”

Some 1,200 wells were not drilled because of oil and gas companies’ fear of being hit with legacy lawsuits, the study says, resulting in a loss of $6.8 billion that would have been spent to drill those wells. Workers didn’t collect $1.5 billion in wages. And the state didn’t collect the mineral royalties the wells would have generated, the report says.

There are a lot of factors that affect conventional, or vertically drilled, well costs, said David Dismukes, the center’s associate director and author of the study.

For example, wells in Louisiana must be drilled 2,000 feet or so deeper than in any other state in the Lower 48, which adds to costs, Dismukes said. Regulations also can affect costs.

Dismukes’ model accounts for those factors and a number of others, including tax policies, oil and gas prices and reserves.

The model estimates that for each legacy lawsuit 0.8 percent fewer wells were drilled in Louisiana. So if seven lawsuits were filed in a year, drilling activity would be 5.6 percent lower.

In years where there were lots of legacy lawsuits filed, drilling activity was reduced by as much as 25 percent, Dismukes said.

The lawsuits mushroomed after a 2003 state Supreme Court ruling, which said cleanup costs weren’t limited to the value of the polluted property. The case began in 1992, when landowners sued Shell Oil Co. and other firms over the pollution on 320 acres of property in southwest Louisiana. Shell and the other defendants said the property was worth around $108,000. A Lake Charles jury awarded $33 million to the landowners. By the time the Supreme Court ruled, the judgment had grown to $80 million, with legal interest and attorneys’ fees.

Seven legacy lawsuits were filed in 2003, according to the state Department of Natural Resources.

By 2011, 271 lawsuits had been filed, naming more than 1,500 defendants, said Don Briggs, president of the Louisiana Oil and Gas Association. There’s no way to sue that many companies for that amount of money — Exxon was hit with a $4 billion judgment in one case — without it affecting where those companies want to drill and put their money, he said.

“In no other state in the United States do they have lawsuits like this — no other producing state,” Briggs said.

Briggs described the lawsuits as “court-sanctioned extortion.”

This year, for the third time in nine years, the energy industry will attempt a fix through the state Legislature. The proposed change to Act 312 allows an oil company to say it’s responsible for the regulatory cleanup without admitting it’s responsible for any private claims.

“In other words, if the cows don’t give milk or the trees don’t grow or any private claims you may have like that, that is separate and you (the landowners) pursue those separately,” Briggs said.

Mary Lee Orr, executive director of the Louisiana Environmental Action Network, said the law shouldn’t be changed.

“This is really the only deterrent that we have left,” Orr said.

With all the use of water and chemicals in hydraulic fracturing going on, it’s scary to think the only thing holding the oil and gas companies accountable is the oil and gas companies, Orr said. The results of the energy industry’s self-monitoring have not been good.

Yet the industry constantly tries to reduce its responsibility in pollution issues, Orr said. This approach harms everyone in Louisiana, including the industry, she said.

“It seems to me that there’s been a legacy of the oil and gas industry trying to get out of being responsible for the destruction they’ve made to our environment,” Orr said.

Stuart Smith, a New Orleans plaintiff attorney who has argued the lawsuits for 23 years, said the oil and gas industry is doing a good job at spinning the issue.

The industry came up with the “legacy lawsuit” label and now says its smaller members are being harmed by the lawsuits, Smith said.

The truth is that the pollution comes from oil and gas operations that have taken place for decades and are still continuing, he said.

In the late 1980s, the major oil and gas companies decided to sell their domestic onshore operations for economic reasons, Smith said.

Independents could operate the properties more efficiently.

In every one of the sales, the seller disclosed the environmental issues involved, and the buyer agreed to clean the property, Smith said. But when it came time to do the cleanup, the new owners didn’t want to spend that money.

Now the industry wants to get the state Legislature to pass a law that further reduces cleanup costs, Smith said.

Briggs said plaintiff attorneys don’t want the law changed because they’re making “millions upon millions of dollars” through the lawsuits.

Mike Stag, a partner with Smith, said the state Department of Natural Resources isn’t making the oil companies clean the properties, and the oil companies aren’t doing it voluntarily.

The only way landowners can get something done is to file a lawsuit, Stag said.

Stag discounted the LSU study and Dismukes as “bought and paid for” by the oil and gas industry.

“Where’s the economic analysis of the cost of the pollution or the damages to the people who own the property and are left holding the bag?” Stag said.

The study doesn’t mention the people injured or poisoned or the cost to taxpayers who, decades from now, will still be paying for cleaning these polluted sites, Stag said.

Dismukes said the study wasn’t funded by anybody.

The Center for Energy Studies did the work internally, updating a 2005 study commissioned by the state departments of Natural Resources and Economic Development, Dismukes said. That study looked at the economic impacts of lower drilling activity.

One of the things the original study mentioned was legacy lawsuits, Dismukes said.

At the time, the study only had two years of lawsuits to consider.

Natural Resources tracks those lawsuits, and when that data was entered into the model, the impact on drilling really stood out, Dismukes said.

Dismukes said he doesn’t have an agenda.

“The numbers say what the numbers say,” Dismukes said. “I’m not necessarily saying anything pro or con about legacy lawsuits and their merits or demerits. The only thing I’m saying is there is a statistical relationship between those cases being filed and the decrease in drilling activity.”

The reduction in conventional wells was greater in north Louisiana than south Louisiana, the study shows. Over the eight-year period, 952 fewer conventional wells were drilled in north Louisiana, while 377 fewer wells were drilled in south Louisiana.

Conventionally drilled wells tend to be ignored because people focus on all of the unconventional, or horizontal wells, drilled in the Haynesville Shale in northwest Louisiana, Dismukes said. Although the state has benefited from all the Haynesville wells, those gains have not offset the rapid declines in production from conventional leases statewide, the study says.

That decline will not reverse itself without new drilling activity, which is unlikely until the uncertainties created by legacy lawsuits are addressed.

In fact, the study says, Louisiana probably faces rapidly falling mineral revenues for three reasons:

Energy companies’ preference for unconventional plays that produce oil as well as natural gas.
Louisiana’s rapidly contracting resource base.
Legacy-induced reductions in new conventional drilling activity.

Dismukes said Louisiana is also missing out on opportunities for conventional drilling sparked by activity in shale plays.

In Texas’ Permian Basin, both conventional and unconventional wells are being drilled, Dismukes said. When the industry began drilling horizontally in shales, people took a second look at conventional opportunities.

But that’s not happening in Louisiana, Dismukes said.

From 2000 through 2007, natural gas prices increased 230 percent and crude prices rose 242 percent. The number of drilling rigs nationwide rose by 126 percent.

“The notable exception,” the study says, is south Louisiana, where drilling stagnated during the same period.