Welcome to “At the Well Weekly,” a blog designed for busy folks in the oil and gas industry. If you haven’t read a thing during the week, our hope is that you can breeze through the update and be up to speed on the basics such as current rig counts, commodity prices, and case law updates on legal issues of interest in Appalachia and elsewhere. Since this is our first installment, our summary includes relevant developments since the beginning of the new year. As you’ll see, rig counts are down, commodity prices remain underwhelming, and the courts throughout the country have been fairly busy deciding lease disputes, zoning disputes, and arbitration issues. Texas’ high court issued a couple of much anticipated decisions regarding overriding royalties and post-production costs and conveyances of royalty interests. Meanwhile, regulators in Pennsylvania are poised to adopt sweeping new rules for exploration and production in the Keystone State, along with new rules for methane emissions from well sites and related facilities. The Sunshine State took additional steps to regulate hydraulic fracturing activities in Florida. Here’s your update for this week:
The Rig Count
- The national rig count is down from last week to 571. (Source: BakerHughes).
- The rig count in the Marcellus is down from last week to 31. (Source: BakerHughes).
- The rig count in the Utica is down from last week to 13. (Source: BakerHughes).
- Natural gas spot prices at the Henry Hub are down from last week at $2.06/MMBtu as of 2/4/2016. (Source: EIA).
- In the Marcellus and Utica region, spot prices are flat and still below the Henry Hub benchmark as of 2/4/2016. At Dominion South in northwest Pennsylvania, spot prices are down at $1.35/MMBtu. On Transco’s Leidy Line in northern Pennsylvania, prices are down at $1.22/MMBtu. At Tennessee Pipeline’s Zone 4 Marcellus trading point, prices were down at $1.19/MMBtu. (Source: EIA).
- Oil prices are up from last week at $33.62/bbl as of 2/3/2016. (Source: EIA).
Developments in Appalachia
- PA Courts OK Pre-Enforcement Challenges to Regulatory Decisions. In a pair of decisions, two appellate courts in Pennsylvania (the Pennsylvania Supreme Court and Commonwealth Court) recently concluded that, in certain circumstances, oil and gas operators need not exhaust administrative remedies before challenging pending enforcement actions that pose significant risk of penalties, opening the door for the regulated community to seek declaratory judgments about their rights in court before engaging in what may be futile administrative proceedings. EQT Production Company v. Commonwealth, Department of Environmental Protection, — A.3d —-, No. 15 MAP 2015 (Pa., December 29, 2015); Pennsylvania Independent Oil and Gas Association v. Commonwealth, Department of Environmental Protection, 321 M.D. 2015 (Pa. Cmwlth. 2015) (unreported).
- PA Commonwealth Court OK’s Compressor Station Project Over Zoning Objections. The Commonwealth Court of Pennsylvania upheld zoning approvals for a compressor station in over the objections of local residents, citing lack of evidence demonstrating that the compressor site posed a danger to the health, safety, and welfare of the community and reasoning that general concerns about a project are not enough to deny requests for zoning approvals. Kretschmann Farm, LLC v. Township of New Sewickley, — A.3d —-, 360 C.D. 2015 (Pa. Cmwlth. 2016).
- EQB Approves New Environmental Regulations for Oil and Gas Industry in PA. Pennsylvania’s Department of Environmental Protection sent a final proposed rulemaking to the Environmental Quality Board for consideration. The controversial proposed rules, met with opposition from both the industry and environmental groups, are expected to take effect this quarter after the Environmental Quality Board approved the regulations on February 3, 2016. The measures will go to Pennsylvania’s Independent Regulatory Review Commission for final approval before they take effect. Click here for links to the proposed rules and additional information.
- Oil and Gas Well Permit Approval Meets Article I, § 27 Environmental Test. The Commonwealth Court upheld a drilling permit issued by the Pennsylvania DEP over allegations that issuing the permit would violate Pennsylvania’s so-called “environmental rights” amendment, applying a decades-old test that the Pennsylvania Supreme Court recently called into question in the non-binding plurality opinion of the infamous Robinson Township decision. Brockway Borough Municipal Authority v. Commonwealth, Department of Environmental Protection, — A.3d —-, 789 C.D. 2015 (Pa. Cmwlth., January 7, 2016).
- Courts, Not Arbitrator, Decide Class Action Arbitrability in PA Oil and Gas Dispute, Third Circuit Rules. In a long-awaited decision, the Court of Appeals for the Third Circuit has ruled that the courts decide if a dispute is subject to class action arbitration unless an arbitration clause “clearly and unmistakably” provides for class action arbitration. Chesapeake Appalachia, L.L.C. v. Scout Petroleum II, LP, — F.3d —-, No. 15-1275 (3d Cir., January 5, 2016).
- PA Governor Announces Controversial Plan for Methane Reductions at Natural Gas Well Sites and Related Facilities. In an aggressive move, the Governor of Pennsylvania unveiled a four-point plan to reduce methane emissions at natural gas well sites and related facilities, which includes proposals for new regulations and requirements for additional emission control technologies. To review the plan and related materials, click here.
- Lessor Can’t Terminate Oil and Gas Lease for Lack of Production in Paying Quantities, PA Superior Court Rules. In an unreported opinion, the Pennsylvania Superior Court denied a landowner’s bid to terminate an oil and gas lease for lack of production in paying quantities since 1970, reasoning that the landowner had the burden of proving that lack of production and her only evidence – a claim that she had not received royalties before 2006 – was insufficient to create a genuine issue of fact for trial. Novosel v. Seneca Resources, No. 1704 WDA 2015, 2016 WL 237954 (Pa. Super., January 20, 2016).
- Supreme Court of Ohio Denies Landowners’ Bid to Bust Oil and Gas Lease. The Ohio Supreme Court upheld leases with the usual habendum clauses that provide for a fixed primary term and a secondary term of indefinite duration, denying claims that the leases can be extended indefinitely by paying delay rentals. The court also upheld the leases despite claims that the lessee breached the implied development covenant, concluding that the express language of the lease disclaimed any implied covenants. State ex rel. Claugus Family Farm, L.P. v. Seventh Dist. Ct. of Appeals, Nos. 2014–0423, 2014–1933, — N.E.3d —-, 2016 WL 259363, 2016 -Ohio- 178 (Ohio, January 21, 2016).
- Sixth Circuit Affirms Denial of Surface Owner’s Claim that Oil and Gas Rights Merged with Surface Estate under Ohio’s Dormant Minerals Act. In the wake of the Ohio Supreme Court’s decision in Chesapeake Exploration, L.L.C. et al., v. Buell et al., No. 2014–0067, 2015 WL 6742183 (Ohio Nov. 5, 2015), the Sixth Circuit concluded that oil and gas rights did not merge with the landowner’s severed a surface estate under the Ohio Dormant Minerals Act because, as the Ohio Supreme Court clarified, a lease of oil and gas is a “title transaction” that cuts off the 20-year statutory dormancy period and the owner of the severed oil and gas in this case had leased those interests within that 20-year period. McLaughlin v. CNX Gas Company, — Fed. Appx. —-, No. 14-3102, 2016 WL 278985 (6th Cir., January 25, 2016).
- Ohio Court of Appeals Denies Bid to Enforce an Implied Covenant of Development in Oil and Gas Leases. Rejecting a lessor’s claim that its lessee breached the implied development covenant for failing to drill more than one well per unit, the Ohio Court of Appeals concluded that the application of the implied covenant would contradict the express language of the lease that required only one well per unit. Drillers Place Ltd. v. Mormack Industries, Inc., No. 13-CA-00056, 2016 WL 228842, 2016 -Ohio- 167 (Ohio Ct. App., January 19, 2016).
- Federal Court in WV Laterals Dispute over Meaning of Flat Rate Royalty Statute to WV Supreme Court. A federal court in West Virginia certified a question to the state’s high court and deferred its ruling on a dispute over the meaning of the state’s “flat rate statute” – a statute that requires lessees to guarantee a 1/8 royalty “at the wellhead” before obtaining drilling permits – citing questions about the meaning of “at the wellhead” as used in the statute. Leggett v. EQT Production Company, No. 13-0004, 2016 WL 297714 (N.D. W. Va., January 22, 2016).
Developments Beyond Appalachia
- Oil and Gas Royalty Class Members Denied Certification in Colorado. The federal district court in Colorado denied a motion to certify a royalty class action in which the class members alleged breach of the royalty clause and breach of the implied marketing covenant, citing differences in the royalty clauses of class member leases and the uncertainty of the implied covenant’s applicability. Gagnon v. Merit Energy Company, — F. Supp. 2d —-, No. 14-cv-832-WJM-KLM, 2015 WL 9489609 (D. Colo., Dec. 30, 2015).
- Kansas Court Sides with Seismic Operator. Reversing a sizable jury verdict, the Kansas Court of Appeals concluded that there was insufficient evidence that a seismic company performed its operations in a negligent manner, citing the company’s evidence that it engaged in operations consistent with industry standards. Alford Ranches LLC v. TGC Industries, Inc., No. No. 112,375, 2015 WL 9591354 (Kan. Ct. App., Dec. 31, 2015) (unreported).
- Landowners Can’t Stop Operator from Disconnecting Farm Taps in Oklahoma. In Oklahoma, a federal court denied landowner’s bid for a preliminary injunction to prevent an oil and gas operator from disconnecting farm taps as part of a company wide program to decommission low pressure farm tap lines but directed the company to assist the landowners in locating and connecting to an alternative source of energy if the company shuts down the line pending a final resolution of the case. Lee v. ConocoPhillips Co., — F. Supp. 2d —-, No. CIV-14-1391-D, 2016 WL 67803 (W.D. Okla., January 5, 2016).
- No “Local Controversy Exception” to Federal Jurisdiction under the Class Action Fairness Act in Oil and Gas Dispute in Texas. Declining a request to remand a class action to state court, the Fifth Circuit Court of Appeals concluded that the so-called “local controversy exception” under the Class Action Fairness Act did not prevent federal courts from maintaining jurisdiction over a class action involving claims that class members purchased properties free and clear of the defendants’ oil and gas leases. Arbuckle Mountain Ranch of Texas, Inc. v. Chesapeake Energy Corp., — F.3d —-, No. 15-10955, 2016 WL 98128 (5th Cir., January 7, 2016)
- Louisiana’s Statutory Prohibition on “No-Term” Leases Does Not Apply to Mineral Leases. In a case of first impression, the Court of Appeals in Louisiana held that a statutory provision in the Civil Code that limits leases to a term of 99 years does not apply to a typical oil and gas lease providing for a fixed primary term and a secondary term that lasts “as much thereafter” as oil or gas is found or produced on the leased premises, reasoning that the statute contradicts both the Louisiana Mineral Code and the longstanding use in the industry of “so long thereafter” habendum clauses. Regions Bank v. Questar Exploration & Production Corp., — So.3d —-, No. 50,211–CA, 2016 WL 154852, 50,211 (La. Ct. App., January 13, 2016).
- Florida House Passes Frac Legislation. A controversial bill that would establish regulations for hydraulic fracturing operations in Florida passed in the House in a vote mostly along party lines without proposed amendments that would allow local governments to restrict the activity by local governments. The bill as passed imposes restrictions on regulation of oil and gas activities at the local level. For a copy of the House bill, click here.
- JOA Doesn’t Create Partnership, Louisiana Appellate Court Rules. Citing Louisiana’s statute governing joint operating agreements and a lack of evidence in the record, Louisiana’s appellate court denied a non-operator’s bid to recover payments from the joint account, stating (among other things) that the JOA did not create a partnership and the operator owed the non-operator no fiduciary duties. MP31 Investments v. Harvest Operating, LLC, — So. 3d. —-, No. 2015 CA 0766, 2016 WL 299114 (La. Ct. App. January 22, 2016).
- In Montana, Surface Owners are not Required to Exhaust Administrative Remedies before Seeking Relief under the Surface Owner Statute. After a landowner denied a lessee’s contractor access to the surface to install power lines for operation of the well, the lessee sued to invoke the rights granted under the lease to use the surface area of the leased premises. The landowner counterclaimed, alleging damages for surface spills on the property. Evaluating the Montana Surface Owner’s Damage and Disruption Compensation Act, the Montana Supreme Court rejected the lessee’s claim that a landowner could not countersue for damages without first exhausting administrative remedies, reasoning that the act did not preclude surface owners from pursuing other available remedies. Interstate Explorations, LLC v. Morgen Farm and Ranch, Inc., — P.3d —-, No. 2016 MT 20, 2016 WL 324610 (Mont. January 26, 2016).
- Texas Supreme Court holds that Overriding Royalty is Free of Postproduction Costs. Rejecting a reargument petition from the lessee, the Texas Supreme Court concluded in a controversial decision that a “cost-free” overriding royalty of “5% of gross production obtained” means the override is free of postproduction costs, rejecting the lessee’s bid to calculate the override based on a weighted gas sales price received at the downstream sales point minus gathering, transportation, and marketing costs. Chesapeake Exploration, L.L.C. v. Hyder, — S.W.3d —-, No. 14-0302, 2016 WL 352231 (Tex. January 29, 2016).
- “Double Fraction” Issue in Oil and Gas Royalty Conveyance Resolved by Texas High Court. Reaffirming its “commitment to a holistic approach aimed at ascertaining intent from all words and all parts of the conveying instrument,” the Texas Supreme Court tackled a tricky issue that involved a testatrix’s conveyance to her three children equally of (1) a 1/3 of 1/8 royalty and (2) a conditional grant of 1/3 of any remaining royalty in the event the testatrix sold any royalty interests during her lifetime. In this “double fraction” situation, the question is always whether the fraction must be multiplied and fixed without regard to the royalty negotiated in any future mineral lease (a fixed “fractional” royalty) or whether the reference to “1/8” was intended as a synonym for the landowner’s usual royalty, meaning the interest conveyed varies depending on the royalty actually obtained in a future mineral lease (a floating “fraction of” royalty). In this case, the Texas high court concluded it was the latter, reasoning that the reference to a “one-eighth royalty” was merely a shorthand for the entire royalty interest a lessor could retain under a mineral lease and concluding that the will devised a 1/3 fraction of royalty equally to the three heirs, not a fixed 1/24 fractional royalty. Hysaw v. Dawkins, — S.W.3d —-, No. 14-0984, 2016 WL 352229 (Tex. Jan. 29, 2016).
- In JOA Dispute, Texas Appellate Court Affirms 600% Recoupment Charge Before Payout for Costs of Reworking Operations. In a dispute over costs for reworking operations charged to a non-consenting party under a JOA, the Texas Court of Appeals upheld a carried interest charge of 600% of the costs of reworking operations, concluding that the applicable JOA unambiguously imposed that charge for reworking a dry hold in a subsequent operation. TEPCO, L.L.C. v. Reef Expl., L.P., — S.W.3d —-, No. 14-14-00370-CV, 2016, WL 354616 (Tex. App., Jan. 28, 2016).
- What Does “Natural Gas” Mean in a Texas Eminent Domain Case? In a condemnation proceeding, a landowner questioned whether a pipeline utility’s condemnation of an easement for a pipeline for “natural gas and its constituent elements” exceeded the condemnation rights in the Texas Utilities Code. The court of appeals noted that “constituent elements” is essentially redundant and did not expand the utility’s rights to move substances through the pipe other than natural gas. The court also held that the condemned easement could be assigned but to another utility that uses the pipeline for the public use (but not to a private party for private use). Allen v. Enbridge G & P (East Texas) L.P., — S.W.3d —-, No. 12–14–00034–CV, 2016 WL 364003 (Tex. App., Jan. 29, 2016).
- Landowner can Seek Differential in Crop Production On and Off Easement As Damages. Interpreting an easement agreement that (like many other contracts in the oil and gas industry) offer reimbursement to the landowner/grantor for crop damage, the Iowa Court of Appeals concluded that the phrase “damages to crops” is broad enough to cover the differential in crop production on and off the easement property as the easement’s grantor contended. Tiemessen v. Alliance Pipeline (Iowa) L.P., No. 14-1727, 2016 WL 351471 (Iowa Ct. App., Jan. 27, 2016).
- By Default Rule in TX, a Pre-Existing NPRI Burdens the Entire Co-Owned Mineral Estate. A grantor conveyed 5/8ths of a mineral estate “subject to” a pre-existing 1/4 NPRI and reserved 3/8ths of the mineral estate. Rejecting the grantor’s claim that the owner of the 5/8ths interest bore 100% of the NPRI, the court of appeals concluded that, absent deed language to the contrary, both of the mineral estate owners owe the 1/4 NPRI in proportion to their share of the mineral estate. Wenske v. Ealy, — S.W.3d —-, No. 13-15-00012, 2016 WL 363735 (Tex. App., Jan. 29, 2016).
- In Louisiana, Plaintiff Can’t Recover in Excess of Statutory “Remediation Costs” for Oil and Gas Contamination Absent a Contract Provision. A federal court in Louisiana denied a plaintiffs’ bid to recover costs of “additional remediation” in excess of the costs determined by the state’s environmental agency for the most feasible plan to clean up contamination from oil and gas activities under Act 312, citing the lack of an express contract term that allows recovery of those costs in excess of the statutory amount. Moore v. Denbury Onshore, LLC, — F. Supp. 2d —-, No. 3:14CV913, 2016 WL 393549, at *7 (W.D. La., Feb. 1, 2016).
- Paying Quantities Case Kicked Back to Trial Court in Louisiana. In this paying quantities case, the lessors tried to bust a Louisiana lease after they discovered a three-year period more than 20 years ago during which a well’s expenses exceeded its revenue by about $50,000. Siding with the plaintiffs, the trial court rejected the lessee’s claim that the well actually turned an average profit of $70 per month during that three-year period if the court excluded certain “extraordinary” expenses for compression and workover operations from the “profit over operating costs” equation for paying quantities. The Court of Appeals of Louisiana didn’t express any problems with the plaintiffs “cherry-picking” a three-year period during the early 90s during which the well allegedly suffered losses, but the lessee gets another shot at demonstrating the well’s profitability during that period given the evidence of its extraordinary expenses and other circumstances the trial court eschewed. Middleton v. EP Energy E&P Co., L.P., — So.3d —-, No. 50,300–CA, 2016 WL 413583 (La. Ct. App., Feb. 3, 2016).
Questions about this week’s update? Email [email protected] or call (717) 703-5907.