VOLUME 1 - Legal Challenges
VOLUME 2 - Transaction Challenges
The first edition of our Below the Surface shale gas research focused on legal challenges and
costs in U.S. shales, particularly disputes and litigation. This follow-up study expands the field
of respondents, takes a harder look at transactions and deals, and offers words of wisdom
from major players in the shale plays.
Less than half of the respondents’ companies are working in the shales below. As
many as 16% expect to increase their presence in an area on the next slide.
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 PLLC set out to map the legal issues, trends and, yes, expenses below the
surface of shale production. Let’s dig in.
Answers do not total 100% as respondents
named all the shales where they are involved.
Answers do not total 100% as respondents named all the shales where they are involved.
New Albany Shale, IL
Cline Shale, Permian
Utica Point Pleasant
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 PLLC clients and others
who are not clients of the firm.
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.
A total of 176 individuals completed the online survey from February through May 2014. They
represent 119 energy companies of varying sizes doing business in U.S. shales. Respondents are
mostly landmen, in-house counsel, and executives with an average of just over 11 years working
with outside counsel or legal issues in the field.
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.
Nearly all of those working in U.S. shales engage outside counsel for title and real
estate transactions; more than half do so often. Two-thirds engage outside counsel
for regulatory transactions and more than half use outside counsel for environmental
and governmental regulation needs.
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.
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.
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.
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.
Dealmaking headaches are most often caused by title and real estate,
regulatory, environmental, and government challenges. Respondents are most
concerned about lack of clear or current title law, poor records, and increasing
or changing regulations. These pressures show no sign of waning: 97% say the
volume of challenges will be the same or increase in the foreseeable future.
Respondents offer specific guidance for newcomers with six categories of advice
dominating the lessons learned. These areas range from “know what you’re
getting into” to “attract competent employees and partners.” Also, respondents
say good communication is key.
When asked for their thoughts, respondents were forthright about their own
experiences and lessons learned. Several of those comments are shared below.
One favorite among other gems: “Understand what you know and don’t know
about shale and gas development.”