Oil & Gas Update for 2/26/2016 – Lease Busting Attempts in PA, PADEP Eyes Well Site Restoration, & Another Royalty Ruckus in the Bakken

Rig counts in the Marcellus and Utica remained flat while the national rig count experienced another drastic drop.  Natural gas spot prices in Appalachia took another hit this week while oil prices based on the Brent Crude and West Texas Intermediate benchmarks fluctuated before posting an increase from last week. In Pennsylvania, the Superior Court rejects another lease-busting attempt while the Department of Environmental Protection eyes well operators’ efforts at restoring well sites after drilling.  Elsewhere, the North Dakota Supreme Court issued its latest decision on royalties and postproduction costs, the Mississippi Court of Appeals concludes that “grantee” really meant “grantor” in a mineral deed reserving oil and gas rights, and a lessee of oil and gas rights owned by the Crow Tribe is on the hook for a bonus payment despite its belief that the parties never had a deal.  Here’s your weekly update: 

The Rig Count  oil
  • The national rig count is down another 5% from last week to 514.  (Source: BakerHughes).
  • The rig count in the Marcellus is unchanged at 29.  (Source: BakerHughes).
  • The rig count in the Utica is unchanged from last week at 13.  (Source: BakerHughes).
 Commodity Prices oil-prices
  • Natural gas spot prices at the Henry Hub are down from last week at $1.79/MMBtu as of 2/25/2016.  (Source: EIA).
  • In the Marcellus and Utica region, spot prices are below the Henry Hub benchmark as of 2/25/2016 and trending downward.  At Dominion South in northwest Pennsylvania, spot prices are down at $1.36/MMBtu. On Transco’s Leidy Line in northern Pennsylvania, prices remained flat at $1.32/MMBtu and NYMEX prices are down at $1.778/MMBtu as of 2/25/2016.  (Source: EIA).
  • Oil prices are up from last week at $36/bbl as of 2/26/2016.  (Source: WSJ).
Developments in Appalachia mountains
  • PADEP Following Up on Well Site Restoration Efforts.  In the aftermath of DEP’s June 2015 request for information asking well operators for the status of well site restoration activities, the DEP has recently issued a number of notices of violations to operators of well sites that haven’t been restored within statutory and regulatory time frames.  A DEP spokesperson reports that the agency doesn’t anticipate assessing civil penalties for the violations, citing no threat of environmental harm (sites are constructed in accordance with stringent erosion and sedimentation/post-construction storm water controls), but well operators can expect increased inquiries from the agency for delays in site restoration activities. Click here for a news report on DEP’s latest actions.
  • In PA Oil and Gas Lease Dispute, No Forfeiture for Failure to Pay Flat Rate Royalties.  In an unpublished opinion, the Pennsylvania Superior Court denied another landowner bid to bust a long-standing lease for failure to pay flat-rate royalties, concluding that the lessee maintained the lease pursuant the terms of the Habendum clause and that the lease did not authorize forfeiture for untimely payments.  Smith v. T.W. Phillips Gas Supply Corp., Docket No. 375 WDA 2015, 2016 WL 689054 (Pa. Super. Ct., Feb. 19, 2016).
  • PA Governor Wolf Diagnosed with Prostate Cancer.  Amidst budget battles and other disputes, Governor Wolf announced that he has a treatable form of prostate cancer. He issued a statement assuring Pennsylvanians that while he’ll be undergoing treatment over the next weeks and months, he has no expectation of relenting in his public service: “In consultation with my doctors, I have a planned treatment schedule that will begin in the coming weeks. Those treatments will last the next several months, but they will present no impairment to my ability to perform my duties as governor.”  A copy of the Governor’s press release is linked here.
Developments Beyond Appalachia us-map
  • Lessee Can’t Dodge $800K Payment for Oil and Gas Lease on Indian LandsThe federal district court in Montana denied a lessee’s bid to dodge a bonus and annual rental payment (plus interest) north of $800,000.  Citing unconditional language in the letter from the Regional Director of the Bureau of Indian Affairs approving the lease, the court rejected the lessee’s claim that several “concerns” in the lease approval letter constituted only “conditional” approval.  Elk Petroleum, Inc. v. Rocky Mountain Regional Director, Bureau of Indian Affairs, — F. Supp. 2d —-, Docket No. 14-30-BLG-SPW, 2016 WL 676362 (D. Mont., February 18, 2016).
  • North Dakota Supreme Court Concludes that “No Deductions” Royalty Clause Trumps the State’s “At the Well” Rule in Oil and Gas Royalty Dispute.  Royalty disputes are common, particularly ones that question whether the lessor and lessee may share in certain “postproduction” costs incurred downstream of the wellhead to treat and market oil or natural gas.  Most states are “at the well” states.  The courts in these states say that a lease calling for royalties calculated “at the well” means the royalty owner bears its proportionate share of postproduction costs, calculated by taking the proceeds from the sale minus the parties’ share of the costs and paying royalty on that net amount (this is known as the net-back or work-back method to determine the wellhead value).  A minority of states are “marketable product” states.  The courts in these states say that a lessee has an implied marketing duty and should incur all postproduction costs incurred to make the oil or gas “marketable” such that the lessor doesn’t share in all postproduction costs.  But what happens in an “at the well” state when the lease includes a “no deductions” clause? Citing the plain language of the lease, the North Dakota Supreme Court concluded that although North Dakota is an “at the well” state, the “no deductions” clause in the lease at issue (providing that there “shall be no deductions from the value of Lessor’s royalty of any required processing, cost of dehydration, compression, transportation, or other matter to market such gas”) trumped the language in the lease that made royalties payable based on the market value “at the well” and declined the lessee’s bid to share the costs of treating sour, unmarketable wellhead gas with the royalty owner. Kittleson v. Grynberg Petroleum Co., — N.W.2d —-, 2016 ND 44, 2016 WL 690632 (N.D., February 22, 2016).
  • “Grantee” Means “Grantor” in Mississippi Mineral Deed Reserving Oil and Gas Rights (Yes, You Read that Right).  The Mississippi Court of Appeals upheld the reformation of a mineral deed stating that “[t]he Grantee herein retains all mineral rights on said land and property” based on proof beyond a reasonable doubt as required by Mississippi law that the parties made a drafting mistake and intended that the “grantor” reserve the mineral rights, citing evidence that the lawyer admittedly made a drafting error, noting that the grantor acted like he owned the oil and gas rights by leasing them right after making the reservation, and further noting that grantees can’t really reserve anything in a conveyance so there must’ve been a mistake. Ward v. Harrell, — So. 3d. —-, No. 2015-CA-00101-COA, 2016 WL 703099 (Miss. Ct. App., Feb. 23, 2016).

Questions about this week’s update?  Email [email protected] or call (717) 703-5907.

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At the Well Weekly
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.
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