Oil & Gas Update for 3/4/2016 – Industry Concerns Swell in Anticipation of Imminent Bankruptcy Decision, Texas High Court Resolves Production Payment Dispute, and the Shocking Death of Aubrey McClendon

The national rig count dropped another 12 units this week while the combined rig counts in the Marcellus and Utica dropped by one.  Natural gas spot prices tumbled to historic lows while oil prices based on the Brent Crude and West Texas Intermediate benchmarks remained relatively steady before posting another modest increase from last week. In Appalachia, a federal magistrate judges rebuffs a request to revisit a controversial ruling on whether plaintiffs can use a statutory presumption of liability in a regulatory scheme to supplant the usual burden of proof in civil court.  Meanwhile, a federal court in Ohio rejects a claim that a subsequent agreement modified subsurface rights in the granting clause of an oil and gas lease.  Elsewhere, the industry eyes an imminent decision from a bankruptcy judge regarding a debtor’s ability to reject gathering agreements; the Texas Supreme Court issues its closely-watched decision on production payments; and Duhig makes a relatively rare appearance in a royalty dispute.  Finally, Aubrey McClendon’s tragic death in a car crash within 24 hours of the DOJ’s indictment for antitrust violations shocks the shale gas world.  Here’s your week in review:

The Rig Count  oil
  • The national rig count is down another 12 units from last week to 502.  (Source: BakerHughes).
  • The rig count in the Marcellus is unchanged at 29.  (Source: BakerHughes).
  • The rig count in the Utica is down from last week at 12.  (Source: BakerHughes).
 Commodity Prices oil-prices
  • Natural gas spot prices at the Henry Hub are down from last week at $1.59/MMBtu as of 3/4/2016.  (Source: EIA).
  • In the Marcellus and Utica region, spot prices are below the Henry Hub benchmark as of 3/4/2016 and continue trending downward.  At Dominion South in northwest Pennsylvania, spot prices are down at $1.02/MMBtu as of 3/4/2016. On Transco’s Leidy Line in northern Pennsylvania, prices are down at $1.02/MMBtu and NYMEX prices are down at $1.678/MMBtu as of 3/4/2016.  (Source: EIA).
  • Oil prices are up from last week at $37.30/bbl as of 3/4/2016.  (Source: WSJ).
Developments in Appalachia mountains
  • Federal Magistrate Judge Won’t Reconsider Ruling that PA Oil and Gas Act Presumption of Pollution Can Apply in Civil Tort Cases.  In a long-standing dispute over allegations that natural gas wells affected private water supplies in Pennsylvania, a federal magistrate judge denied a well operator’s request to rethink a ruling that allows plaintiffs to seize on a statutory presumption of liability found in the Pennsylvania Oil and Gas Act to state a private tort claim.  That statute provides that a well operator is presumptively liable for problems with private water supplies within a certain distance from an oil or gas well and sets up a system whereby the Pennsylvania Department of Environmental Protection may investigate complaints and order administrative/regulatory relief to restore water quality, but it doesn’t say plaintiffs in civil actions can use that statutory presumption to supplant what would otherwise be the plaintiff’s burden of proof in civil court to allege and prove harm.  Endorsing the use by plaintiffs of a statutory presumption to circumvent pleading requirements and essentially shift the burden to defendants to disprove their liability raises a number of constitutional and other concerns. The case is Ely v. Cabot Oil & Gas Corp., Docket No. 09-2284 (M.D. of Pa., order entered February 29, 2016).
  • In Ohio, Subsequent Subsurface Easement Doesn’t Modify Granting Clause in Oil and Gas Lease.  A federal district judge in Ohio denied a landowner’s bid to restrict a lessee from drilling laterals from the leased premises to produce gas from an adjacent unit, concluding that the lease granted the lessee the rights “in and under” the leased premises and to “transport oil and gas from other lands,” including the right to drill wellbores through the subsurface of the leased premises to produce gas from the neighboring units operated by the lessee.  The court rejected the lessor’s claim that a subsequent subsurface easement changed the rights in the original lease because the parties never expressed their intention to do so. Eclipse Resources – Ohio, LLC v. Madzia, —- F. Supp. 3d —-, No. 2:15-CV-177, 2016 WL 814958 (S.D. Ohio Mar. 2, 2016).
  • Third Circuit’s “Who Decides” Rule for Class Arbitrability of Oil and Gas Lease Disputes Enforced in PA Royalty Dispute.  In the wake of the Third Circuit’s decision in Scout Petroleum, potential class arbitration plaintiffs are seeing their arbitrations dismissed and sent to court to decide class arbitrability.  The Middle District of Pennsylvania issued its latest decision following the Third Circuit’s holding that courts, not arbitrators, decide questions of class arbitrability absent clear and unmistakable evidence otherwise.  Chesapeake Appalachia, L.L.C. v. Brown, —, F. Supp. 3d. —-, No. CV 3:14-0833, 2016 WL 815571 (M.D. Pa., Mar. 2, 2016).
Developments Beyond Appalachia us-map
  • Aubrey McClendon’s Sudden Death Shocks the Shale Gas World. Aubrey McClendon died in a car crash last Wednesday, just 24 hours after the U.S. Department of Justice indicted him under antitrust laws based on allegations of rigging bids for oil and gas leases.  Regarded by many as a pioneer of unconventional shale gas exploration, the former CEO of Chesapeake and part owner of the Oklahoma City Thunder started American Energy Partners after his departure from one of the larges unconventional gas producers in the nation.  Before his death, McClendon issued a statement vowing to prove his innocence in the wake of the DOJ’s indictment.    
  • Industry Watches Closely as Bankruptcy Court in Southern District of New York Considers Debtor’s Attempt to Reject Gathering Agreement.  A bankruptcy judge is poised to rule on whether Sabine Oil & Gas Corporation can reject gathering agreements and enter into alternative agreements with others to provide similar services at different rates as part of the company’s bankruptcy plan.  Under bankruptcy laws, debtors can “reject” certain types of contracts if they qualify as unexpired leases or executory contracts and the debtor can show that rejection will benefit the estate.  Contracts that involve conveyances of real property or that “run with the land” based on state law cannot be rejected in bankruptcy.  A ruling in Sabine’s favor may have widespread implications for the industry that transcend this now closely-watched decision, causing operators of midstream gathering facilities and others in the industry to seek counsel and determine what to do in increasingly common bankruptcy situations.  The judge is scheduled to rule on March 8, 2016.  The case is In re Sabine Oil & Gas Corporation, Docket No. 15-11835 (S.D. N.Y.). 
  • No “Production Payments” on Expired Oil and Gas Leases, TX Supreme Court Holds.  In a closely watched case, the Texas Supreme Court concluded that a production payment carved out of the working interest and reserved in the assignment of four oil and gas leases should be reduced when two of those leases in the lease package expire, reasoning that production payments are similar to overriding royalty payments because they live and die with the lease and that there need not be any express adjustment clause in the assignment to authorize the reduction.  Apache Deepwater, LLC v. McDaniel Partners, Ltd., — S.W.3d —-, No. 14-0546, 2016 WL 766731 (Tex., Feb. 26, 2016).
  • District Court in OK Denies Another Royalty Class Action Certification.  A federal court in Oklahoma denied a request from plaintiffs to certify a royalty class action challenging the lessee’s methods of sharing post-production costs with royalty owners and claiming breaches of implied marketing duties.  The court concluded (among other things) that the lessee’s complex and varying methods of calculating and paying royalties based on a wide range of leases that contained different types of royalty clauses rendered the claims incapable of resolution on a class-wide basis.  McKnight v. Linn Operating, Inc., No. CIV-10-30-R, 2016 WL 756541 (W.D. Okla. Feb. 25, 2016).
  • Federal Claims Court Denies Government’s Bid to Dismiss Indian Heirs’ Challenge to BIA’s Grant of Oil and Gas Leases.  The Federal Court of Claims rejected a motion to dismiss the complaint of five Indian heirs claiming that the U.S. Government breached fiduciary duties owed to them pursuant to various federal laws governing Indian lands, concluding that the heirs stated various claims that the oil and gas leases granted by BIA violated several federal regulations and the Takings Clause.  Fredericks v. United States, — Fed. Cl. —-, No. 14-296L, 2016 WL 736058, at *1 (Fed. Cl. Feb. 24, 2016).
  • Frac Bill in Florida Dead on Arrival.  A controversial bill that would establish regulations for hydraulic fracturing operations in Florida died in committee and ended the debate, at least for this legislative session, on whether and how to impose additional regulations on the activity.  For a news report, click here.
  • In the Niobrara, Colorado Supreme Court to Weigh Retroactive Tax Assessment of Oil and Gas Lease Value.  The Colorado Supreme Court agreed to review the question of whether a tax bill amended a state statute to allow retroactive assessment of property taxes on the value of oil and gas leaseholds omitted as a result of underreporting the sales price of oil and gas.  The Colorado Court of Appeals said yes and concluded that that the bill amended the statute such that it “now permits retroactive assessment of property taxes on the value of oil and gas leaseholds omitted due to underreporting of the selling price of oil and gas or the quantity sold therefrom.”  The decision of the court of appeals on review may be viewed here.  The Colorado Supreme Court will decide whether the court was right or wrong.  See Kinder Morgan CO2 Co., L.P. v. Montezuma Cty. Bd. of Commissioners, No. 15SC595, 2016 WL 768449 (Colo., Feb. 29, 2016).
  • Grantee Prevails in TX Mineral Dispute. The Court of Appeals of Texas concluded that a mineral deed conveying an “undivided one-half mineral interest” along with typical language describing the right to one-half of the royalty interest pursuant to an existing oil and gas lease vested that half of the mineral estate in the grantee despite claims that the mineral deed merely confirmed the grantee’s right to the other one-half interest of mineral estate the grantee already owned as heir to community property under Tex. Fam. Code Ann. § 3.003(a).  Consol. Prop. Interests, LLC v. Payne, — S.W.3d —-, No. 12-15-00105-CV, 2016 WL 786939 (Tex. App., Feb. 29, 2016).
  • “Duhig” Rule Makes Appearance in TX Royalty Dispute. Applying the Duhig Rule to a dispute over royalty interests, the Court of Appeals of Texas concluded that the grantor conveyed title to the property to the grantee along with a one-half royalty interest and would be estopped from claiming the other one-half royalty interest previously reserved to a third party but not referenced in the grant.  Spartan Texas Six Capital Partners, Ltd. v. Perryman, — S.W.3d —-, No. 14-14-00873-CV, 2016 WL 796073 (Tex. App., Mar. 1, 2016).
  • Voluntary Conservation Agreements Sufficient to Protect Lizard in Prime Areas  for Oil and Gas Development in the Permian Basin. The D.C. Circuit recently concluded that the U.S. Fish and Wildlife Service did not violate the law when it removed the dunes sagebrush lizard from consideration for endangered species protection, concluding that the FWS did not act arbitrarily or capriciously when in the exercise of its judgment it decided that voluntary conservation agreements between Texas and New Mexico officials and oil and gas companies sufficiently protected the lizard.  “The evaluation of the adequacy of the Texas plan involves the Service’s judgment based on its expertise and experience. Appellants have failed to demonstrate that the Service was arbitrary and capricious in exercising that judgment to rely on the Texas plan.” Defs. of Wildlife & Ctr. for Biological Diversity v. Jewell, — F.3d —-, No. 14-5284, 2016 WL 790900 (D.C. Cir. Mar. 1, 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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