But Will Women Still Be Able to Drive?

My friend BJ Kraemer at  MCFA passed along this article from blog post from Walter Mead’s blog at the American Interest discussing the prospects that:

“So dramatic are America’s [oil and natural gas] finds, analysts talk of the US turning into the world’s new Saudi Arabia by 2020”

Mead’s post concludes that the recent shale oil and gas finds in North America and the abundance of energy contained in those finds will reshape geopolitics in the 21st Century returning America to its mid-twentieth century zenith of power.  Obviously, Mead’s conclusions are some of the most bullish by far as to the potential for shale oil and gas plays.  However, the statistics in the post are what bolsters my belief – and the beliefs of others – that the future in this country is not green – but brown.

Still skeptical?  Then, consider, according to the post, the  following:

• “A GAO report released last May (pdf link can be found here) estimates that up to the equivalent of 3 trillion barrels of shale oil may lie in just one of the major potential US energy production sites. If half of this oil is recoverable, US reserves in this one deposit are roughly equal to the known reserves of the rest of the world combined.”
• “our natural gas reserves are so large that the US is likely to become a major exporter, and US domestic supplies for hydrocarbon fuels of all types appear to be safe and secure for the foreseeable future. North America as a whole has the potential to be a major exporter of fossil fuels for decades and even generations to come.”
• Since 2008, fracking alone has created nearly 600,000 new jobs in the United States.

Naturally, there continue to be brown energy haters, who believe American will not or should not maximize the potential of its oil and natural gas reserves.  Indeed, a recent article on the investment web page Seeking Alpha that is making its rounds concludes that America only has a few years of proven natural gas left and calls for a short on basically every E&P company’s stock.  Never mind that it was written, not by a geologist, but by a self described “IT professional” who apparently lacks any qualifications (which I define as those sufficient to survive a Daubert motion in federal court)  to make the conclusion reached in the article (although he apparently found of cowboy hats).

The reality is that a preponderance of all reliable evidence shows that there exists a strong probability that the conclusions in Mead’s article are correct.  American oil and natural gas has the potential to reshape the economy like no other industry.  Even the most optimistic studies on the potential for green jobs do not even come close to the job creation estimates in oil and natural gas.  Moreover, even after the largest investment in green jobs in our nation’s history, job growth in “brown” jobs has outpaced green job growth in the last four years almost exponentially.

The impact of oil and natural gas to the construction industry specifically are obviously profound and contractors not already positioning themselves in this niche should figure out how they can operate in this industry fast.  So, I say let’s go all in with oil and natural gas.  I have no problem with America becoming the new Saudi Arabia by 2020, so long as, unlike Saudi Arabia, we still permit woman to drive.

A Look at Drilling Contracts Under Pennsylvania Law

You may have heard that there is a bit of natural gas drilling going on in Pennsylvania.  Thus far, the legal issues have dealt with environmental regulations, zoning, leasing, and rights of way.  The players involved in those matters have generally been landowners, government agencies, and the natural gas companies (the well operators).  The Courts have seen few – if any –  “intra-industry” disputes, that is disputes between drillers (and other trades) and operators or drillers and other trades.

Because litigation is like death and taxes, it is only a matter of time before a significant intra-industry dispute finds it way to a Pennsylvania court (as I will explain there is a reason the dispute will be resolved in Pennsylvania and not another jurisdiction).  According  to the International Association of Drilling Contractors, the IADC Daywork Drilling Contract is the most utilized contract form by operators  and drillers.  Because much of the case law interpreting the IADC contract’s terms comes from traditional oil and gas jurisdictions like Louisiana and Texas it is worth reviewing certain provision of a Standard IADC Daywork Drilling contract under Pennsylvania law.

1.  Payment Terms

Under paragraph 5.2 of the Daywork Contract,  the length of time an operator has to pay an invoice is left blank and, therefore, left to negotiation between the parties.  Here, we have the first instance where the Daywork Contract intersects with the Pennsylvania Contractor and Subcontractor Payment Act, 73 P.S. 501, et. seq. (the “Payment Act”), which broadly applies to any agreement to perform work on any real property within the Commonwealth.  Under Section 505 of the Payment Act, if the agreement is silent on when payment is due, payment must be made within twenty days of receiving an invoice.  Therefore, if no time frame is inserted into the Daywork Contract, under the Payment Act twenty days will be the default period for payment.  Drillers should consider this when negotiating their Daywork Contracts and be waryof agreeing to a payment period greater than statutorily prescribed.

Interestingly, the Daywork Contract contains a provision quite similar to Sections 506 and 511 of the Payment Act, whereby an Operator can withhold payment for a disputed item by giving the Driller notice of the disputed item within fifteen days of receiving the invoice, with timely payment of any undisputed portion of the invoice being made.  Under Section 511 of the Act, a contractor can likewise withhold payment to a subcontractor for disputed items, however, it must do so within seven, rather than 15, days.  Therefore, Drillers should consider changing the standard 15 day period to 7 to be consistent with Pennsylvania law.

Finally, paragraph 5.3 of the Daywork Contract states that invoices not paid by the prescribed due date shall bear a certain rate of interest.  Here, the parties to a Daywork Contract should be aware of the stringent penalties of the Payment Act.  Under the Payment Act, unpaid invoices shall bear interest at 1% per month.  Moreover, if litigation is commenced to recover payment, a Court may assess an additional 1% penalty per month on outstanding amounts.  Finally, if litigation is commenced to recover payment, there is a mandatory award of attorneys fees to the substantially prevailing part.

2. Liens

The Contract states that the Driller will not allow liens from “third parties” to be filed against the “lease, well, or other property” of the Operator.  Following the 2007 Amendments to Pennsylvania’s Mechanics Lien Law, lien waivers – except those given in exchange for payment – were declared void as a matter of public policy.  To the extent this clause is intended to act as an indemnification clause for lien claims, then it would pass muster.  However, to the extent it is intended to act as a waiver of any lien rights of third parties, it would not.  Finally, it is interesting that the clause relates only to third party claims, thus allowing a Driller itself to file a lien, notwithstanding any prohibition under Pennsylvania Law.

3.  Venue

The Contract contains a choice of law clause which permits the parties to stipulate to enforcement of the contract under a the law of a certain jurisdiction.  Under the Payment Act, “[m]aking a contract subject to the laws of another state requiring that any litigation, arbitration or other dispute resolution process on the contract occur in another state, shall be unenforceable.”   As will be discussed below, this impacts the indemnification provision of the Contract the most.

4.    Indemnification

Last but certainly not least are the Contract’s indemnification provisions.  The Contract’s indemnification provisions are more comprehensive than a typical construction contract.  State law dictates whether an indemnification provision of a contract is enforceable and because Pennsylvania law will apply because of the Act, it is important to know how Pennsylvania law views the various indemnification provisions of the Contract.

Generally, the Contract contains a  “broad form” indemnification provisions that state that each party agrees to indemnify the other for all claims, demands, and causes of action arising from the actions of the others employees, subcontractors, or agents.  The right to indemnification is “without regard to  . . . the negligence of any party or parties.”  Presumably, this is a lawyer’s way of saying “including the indemintee’s own negligence.”

Additionally, the Contract contains indemnification provisions related to pollution or contamination.  Under those indemnification provisions, the Driller indemnifies the Operator for any claims arising from pollution or contamination that originates above the surface.  Conversely, the Operator agrees to indemnify the Driller for any claims arising from pollution or contamination originating elsewhere.  However, the environmental indemnification provision is silent on whether the indemnity is triggered even if the pollution is caused by the other party’s negligence.

Pennsylvania Courts hold that an indemnification provision will not be construed to require indemnification for an indemnitee’s own negligence unless this intention is stated explicitly in clear, precise, and unequivocal terms and distinguish between indemnity clauses that specifically refer to liability arising from a party’s own negligence and those that call for indemnity for “all liability” or “all loss.”  If an indemnity clause does not expressly mention liability arising from the indemnitee’s own negligence, the clause will not cover that situation despite broad, all inclusive language that might suggest otherwise.

While the language of the Contract’s general indemnity provision may be sufficient under Pennsylvania law to trigger indemnification of the other party even when the other party is negligent, the parties should not risk it.  The parties would be better off amending the Contract’s general indemnification language to simply say “including the indemnitee’s own negligence.”  Otherwise, the parties are inviting litigation over the interpretation of contractual language novel to Pennsylvania courts.  Furthermore,  the parties should decide whether the environmental indemnification provisions will include indemnification for the other party’s negligence and, if so, include it in the Contract.  Otherwise, the unsuspecting indemnitee may be left without indemnification.

It is only a matter of time to we see our first Pennsylvania case litigating these issues.  Hopefully, you are prepared.

How Natural Gas Could Benefit Southeastern Pennsylvania The Most

Forbes Energy Blog has a guest post from Navigant on why exporting liquefied natural gas (LNG) is a good idea for America.  Exporting LNG is also a must for Pennsylvania in maximizing the economic benefits of the Marcellus beyond just the drilling regions.

Southeastern Pennsylvania already has the rough infrastructure to make it a LNG export hub with the existing crude oil refineries along the Delaware River.  Moreover, the Delaware is naturally capable of handling the tankers necessary to transport the LNG.

The good news for the construction industry is if a concerted effort to convert petroleum refineries to LNG refineries were to become a reality billions would need to be invested.  That is also the bad news because with natural gas prices currently very low the investment currently does not make economic sense.  However, as the article points out there are signs that may change and the benefits of exporting LNG may soon be too big to ignore.

The conversion of the petroleum refineries along the Delaware to LNG refineries is something that political leaders in Southeastern Pennsylvania have raised from time to time.  Now is the time they should get serious about it.

Pipe Dream

Are you a pipe fitting contractor or excavator looking for more work?  Are you a material supply house looking for a swift selling product?  Then you better get to know gas-line pipe.  ENR reports that the discovery of natural gas formations present a tremendous opportunity for pipe line builders.  Meeting the demands of the natural gas market:

“will require the annual construction of nearly 2,000 miles of pipeline in the lower 48 states and the Gulf of Mexico, roughly a 17% increase over current capacity. Additionally, an average of 1,300 miles of oil and natural-gas-liquid (NGL) pipeline will need to be constructed annually. The study predicts more than $250 billion of investment in the new lines.”