Protecting Oil and Gas Service Providers

    Some legal topics are cyclical in nature.  The topics lay dormant until an economic change makes them relevant.  One of the most cyclical topics is the Texas statutory oil and gas lien available to service and material providers.  When oil prices hovered around $100 per barrel, providers to the energy industry were not overly concerned about protecting their rights to payment.  After the oil price collapse and continued doldrums, the topic of oil and gas mechanic’s and materialmen’s liens has once again become relevant.     Over the next few blog posts, we will discuss (i) who is entitled to a mechanic’s and materialmen’s lien (“M&M Liens”), (ii) what property may be subject to an M&M Lien, (iii) how an M&M lien is secured, and (iv) how a lienholder enforces an M&M Lien.  To understand M&M Liens, one must first understand who is entitled to utilize the statutory protection.    Chapter 56 of the Texas Property Code provides statutory liens for persons who provide services or materials in the drilling, operation or maintenance of a well.  One of the key definitions is that of a “mineral property owner.”  Section 56.001(3) of the Texas Property Code defines a “mineral property owner” as someone who is an owner of:land;oil, gas or other mineral leasehold;oil and gas pipeline; oroil or gas pipeline right of way.Only persons who have provided services or materials, either directly or indirectly, to a mineral property owner can claim an M&M Lien.    A provider who contracts directly with a mineral property owner for the provision of services or materials in mineral activities constitutes a “mineral contractor” under the M&M Lien statute.  A “mineral subcontractor,” on the other hand, is anyone who:furnishes materials or performs labor used in mineral activities under a contract with a mineral contractor or another subcontractor, orperforms labor in mineral activities as an artisan or day laborer employed by a subcontractor.Whether a person is a contractor or subcontractor depends on the person’s relationship with the mineral property owner at the time of contracting.  The classification of a provider as a contractor or subcontractor is important because the necessary steps to secure an M&M Lien vary depending on the relationship between the provider and the mineral property owner.    The services or materials provided to a mineral property owner must constitute “mineral activities”  Section 56.001(1) of the Texas Property Code defines “mineral activities” as:digging, drilling, torpedoing, operating, completing, maintaining or repairingan oil, gas or water well, an oil and gas pipeline or a mine or quarry. In general, any activity that helps facilitate the potential production of oil and gas will constitute a “mineral activity.”    Even though the definition is broad, courts have found that the following activities do not constitute mineral activities:dismantling and removing an underground pipeline;creation of business plans for a pipeline;preparation of gas contracts; andcosts for repairs to rental equipment, unless the mineral owner caused the damage.It is not a requirement that the services provided include physical labor on the mineral property.  Courts have found a range of services to be essential to the production of oil and gas and, therefore, entitled to an M&M Lien.  Examples of such services are:catering services to an offshore rig;plumbing work incorporated into the living quarters of an offshore platform; andrentals of equipment or casing.    To recap, the initial step in analyzing whether or not an M&M Lien can be secured is to determine whether the services or materials were provided to a mineral property owner in a mineral activity.  The next blog post will discuss what property may be subject to an M&M Lien. Debra J. VillarrealThompson & Knight LLP