Oil & Gas Update for 3/11/2016 – PA’s High Court Revisits Robinson Township, Bankruptcy Court Deals Blow to Gathering Agreement, and the EPA Targets Emissions from Existing Oil and Gas Wells.

The national rig count dropped another 22 units since last week while the Marcellus rig count is up 2 units and the Utica rig count is down one.  Natural gas spot prices are ugly and continue to fall – particularly in the Marcellus where spot prices plunged below a dollar last Friday – while oil prices based on the Brent Crude and West Texas Intermediate benchmarks showed signs of life. In other news, the Pennsylvania Supreme Court revisits its infamous plurality decision in Robinson Township regarding the proper evaluation of claims under the “Environmental Rights” amendment to the Pennsylvania constitution while a bankruptcy judge sends shockwaves through the midstream industry with a ruling that E&P debtors in bankruptcy may “reject” gathering agreements.  Elsewhere, the Environmental Protection Agency’s latest move to cut methane emissions targets existing oil and gas wells; the Colorado Court of Appeals decides a dispute over the proper allocation of post-production costs that enhance the market value of natural gas; and BP dodges a claim for economic damages brought by businesses that can’t operate in the Gulf following the federal government’s moratorium in the wake of the Deepwater Horizon spill.  Here’s your week in review:

The Rig Count  oil
  • The national rig count is down another 22 units from last week to 480.  (Source: BakerHughes).
  • The rig count in the Marcellus is up at 31.  (Source: BakerHughes).
  • The rig count in the Utica is down from last week at 11.  (Source: BakerHughes).
 Commodity Prices oil-prices
  • Natural gas spot prices at the Henry Hub are down from last week at $1.57/MMBtu as of 3/11/2016.  (Source: EIA).
  • In the Marcellus and Utica region, spot prices are below the Henry Hub benchmark as of 3/11/2016 and continue trending downward.  At Dominion South in northwest Pennsylvania, spot prices are down at $0.87/MMBtu as of 3/11/2016. On Transco’s Leidy Line in northern Pennsylvania, prices are down at $0.85/MMBtu as of 3/11/2016.  (Source: EIA).
  • Oil prices are up from last week at $40.61/bbl as of 3/11/2016.  (Source: WSJ).
Developments in Appalachia mountains
  • Robinson Township Revisited.  In Pennsylvania, the state’s highest appellate court – comprised of three new members and down one justice from seven to six – heard argument in Pennsylvania Environmental Defense Foundation v. Commonwealth of Pennsylvania, Docket No. 10 MAP 2015, a case in which the court is poised to revisit the now infamous Robinson Township plurality opinion that questioned a decades-old test for evaluating claims under Pennsylvania’s so-called “environmental rights” amendment and replaced it with what some view as an amorphous and unworkable framework. This time, three new members will have a fresh look along with two justices currently on the bench who dissented in Robinson Township and one justice that joined the plurality the first time around. 
  • PUC’s Local Ordinance Oversight under Oil and Gas Act Back in PA Supreme Court.  The Supreme Court of Pennsylvania also heard oral argument in Robinson Township v. Commonwealth of Pennsylvania, Docket Nos. 104 and 105 MAP 2015, a case involving challenges to the authority of the Pennsylvania Public Utility Commission under the state’s revised Oil and Gas Act (commonly known as “Act 13”) to review the validity of local ordinances that attempt to regulate oil and gas activities.  The question is whether that provision can be severed from other provisions that the Supreme Court previously struck down as unconstitutional. 
  • Jury Renders Verdict Against Well Operator in Northeastern PA Contamination Dispute.  After a two-week trial, a federal jury awarded plaintiffs a multi-million dollar verdict against a well operator in a case in which the plaintiffs’ embattled lawyer has been sanctioned and chastised by the court for her questionable behavior.  In the end, the verdict slip said the plaintiffs proved by a preponderance of the evidence that the operator was negligent in drilling the wells, created a nuisance, and caused harm to the properties of the plaintiffs, including their private water supplies.  The $4.24 million verdict includes damages for so-called inconvenience and discomfort.  The well operator plans to file for post-trial relief and issued a statement strongly criticizing the verdict as one which disregards scientific evidence.  The case is Ely v. Cabot Oil & Gas Corp., Docket No. 09-2284 (M.D. of Pa., Verdict Entered March 10, 2016).
  • PA Auditor General Poised to Review PUC’s Administration of Gas Well Impact Fee. In a statement issued March 9, 2016, Pennsylvania’s Auditor General announced that he plans to audit the Public Utility Commission’s management of impact fees collected from unconventional gas well operators and disbursed to local government units to fund a variety of local initiatives and reimburse them for the costs of impacts brought about by drilling activities, stating that the time is right to review the PUC’s efforts after several years into the life of impact fees in PA.  The Auditor General’s press release may be accessed here
Developments Beyond Appalachia us-map
  • Midstream Industry Cringes as Bankruptcy Court Green Lights Rejection of Gathering AgreementIn a much anticipated decision, a bankruptcy judge issued an opinion in which she concluded that Sabine Oil & Gas Corporation can reject gathering agreements and enter into alternative agreements with others to provide similar services at different rates in the exercise of the debtor’s business judgment.  In a non-binding portion of the opinion, the judge stated that the particular gathering agreements do not contain “covenants that run with the land” under Texas law and therefore can be rejected in bankruptcy.  That portion of the decision is essentially advisory as the court can’t finally settle that issue for the parties in the context of a motion to reject, but the judge has signaled how the bankruptcy court intends to interpret these agreements.  Many say the ruling in Sabine’s favor has widespread implications for the industry that transcend this case, notwithstanding the non-binding nature of the opinion, 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 case is In re Sabine Oil & Gas Corporation, — B.R. —–, Docket No. 15-11835 (SCC), 2016 WL 890299 (S.D.N.Y., March 8, 2016).
  • Feds Plan More Methane Emission Rules for Existing Oil and Gas Wells.  As part of the President’s aggressive moves to reduce methane emissions, the Environmental Protection Agency announced a plan to pass new rules restricting emission from existing oil and gas wells.  As part of the process, the EPA plans to issue an Information Collection Request to companies operating existing oil and gas well as part of the EPA’s “comprehensive regulations” to reduce methane emissions. The regulations may have a particularly significant impact on conventional operators of more traditional and long-producing vertical wells as well as the unconventional industry, all at a time when increased regulatory costs will no doubt contribute to the economic challenges production companies face in an already distressed market.  The EPA’s blog post about the announcement can be found here
  • Nothing Ambiguous About TX Assignment of Oil and Gas Leases.  An appeals court in Texas found no ambiguity in an assignment of leases that contained conveyances and reservations despite a claim that those disparities created an ambiguity that favored the assignor’s retention of certain rights in the leases.  Burlington Res. Oil & Gas Co., LP v. Petromax Operating Co., — S.W.3d —-, Docket No. 06-15-00044-CV, 2016 WL 908228 (Tex. App., Mar. 10, 2016).
  • In Colorado, Royalty Owners can Share Post-Production Costs Incurred Downstream of the First Commercial Market.  In a minority of states, courts construe royalty clauses as requiring a lessee to bear all costs downstream of the wellhead that are incurred to make the oil or gas “marketable” or take the oil and gas to the first commercial market.  In these “marketable product” states, disputes often arise as to how far downstream of the well the producer must go before it can thereafter share the costs of additional enhancements that increase the value of the product and get a higher sales prices.  In a case of first impression in Colorado, the court of appeals concluded that a lessee deduct the lessor’s share of post-production costs that are incurred to transport natural gas to markets beyond the first commercial market without demonstrating that those costs actually “enhance” the value of that gas or that actually result in higher royalty revenues increase.  Lindauer v. Williams Prod. RMT Co., — P.3d —-, Docket No. 2016 COA 39, 2016 WL 908452 (Colo. Ct. App., March 10, 2016).
  • Ninth Circuit Moots Appeal in Arctic Battle Between Greenpeace and Shell.  In the seemingly never-ending clash between Greenpeace and Shell that culminated in an injunction and contempt orders against the environmental organization for its “Stop Shell” campaign, the Court of Appeals for the Ninth Circuit concluded that an appeal by Greenpeace is moot since the previous injunction order in question expired and Shell has since ceased operations in the Chukchi Sea, but the production giant can still proceed with its claim for damages against Greenpeace for interfering with operations.  Shell Offshore Inc. v. Greenpeace, Inc., — F.3d —-, Docket No. 15-35392, 2016 WL 851824 (9th Cir. Mar. 4, 2016).
  • No Federal Question Jurisdiction in Dispute over JOA Covering Federal Leases in California.  A federal court in California dismissed a JOA dispute for lack of subject matter jurisdiction, concluding that a dispute over the parties’ agreements do not implicate federal law merely because the JOA relates to leases issued pursuant to the federal Mineral Leasing ActInviron Techs., Inc. v. W. States Int’l, Inc., Docket No. 115CV01643DADJLT, 2016 WL 861397 (E.D. Cal., Mar. 7, 2016); Riverwood Energy, LLC v. W. States Int’l, Inc., Docket No. 115CV01736DADJLT, 2016 WL 864290 (E.D. Cal., Mar. 7, 2016).
  • California Appeals Court Upholds Injunction Against Landowner for Interfering with Oil and Gas Operations Over Claims that the Underlying Lease is a Bust.  Despite a surface owner’s claims that the owner of the severed mineral estate was a dissolved corporation that couldn’t legally lease oil and gas rights, the California Court of Appeals upheld an injunction against the surface owner after attempts to interfere with operations and found no problem with the underlying lease.  C.R. Barnett, Inc. v. Brody, Docket No. 2D CIV. B261700, 2016 WL 878950 (Cal. Ct. App., Mar. 8, 2016).
  • Citing Improperly Excluded Scientific Evidence, New Mexico Supreme Court Sends Oil and Gas Contamination Case Back for Trial. Passing on the opportunity to adopt the federal Joiner rule for expert testimony – one that lets a judge reject expert testimony where the “analytical gap” between the underlying evidence and the expert’s conclusions is “too great” to be reliable – the New Mexico Supreme Court concluded that the trial court’s application of that evidentiary rule in a well contamination case resulted in the exclusion of relevant causation evidence and sent the case back to the trial court for further proceedings.  Conception & Rosario Acosta v. Shell W. Expl. & Prod., Inc., — P.3d —-, Docket No. S-1-SC-33884, 2016 WL 852511 (N.M., Mar. 3, 2016).
  • Montana Supreme Court Dumps Expert Opinion on Interpretation of Royalty Reservation in Deed.  The Montana Supreme Court nixed an expert opinion after finding that the expert’s testimony about the way the parties structured their sentences in a royalty reservation amounted to a legal interpretation reserved for the courts, not witnesses.  Wicklund v. Sundheim, — P.3d —-, Docket No. 2016 MT 62, 2016 WL 901095 (Mont., March 10, 2016).
  • Federal Judge in Louisiana Grants Motion to Dismiss Claims against BP in Connection with Macondo Well Blowout in the Gulf.  A federal court in Louisiana dismissed a claim against BP brought by companies engaged in business in the Gulf, claiming that the moratorium on activities in the Gulf imposed after the Macondo incident caused economic harm to the plaintiffs by preventing them from engaging in their business. The court reasoned that while BP is a “responsible party” under the Oil Pollution Act for the Deepwater spill, BP is not responsible for economic losses that resulted from the moratorium on offshore drilling imposed by the federal government in the wake of the Macondo blowout.  The court reasoned that the moratorium doesn’t make BP liable as a responsible party for economic losses that don’t result from the discharge or substantial threat of discharge of oil from the Macondo well itself.  In Re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on Apr. 20, 2010, Nos. 13-706, 13-810, 13-1143, 13-1185, 13-1386, 13-2006 (OPA Test Cases), Docket No. MDL 2179, 2016 WL 915257 (E.D. La., Mar. 10, 2016).
  • Preemption Prevails in Louisiana Dispute Over Regulation of Oil and Gas. The Court of Appeals for the First Circuit in Louisiana rejected a municipality’s bid to regulate oil and gas activities through zoning efforts.  Citing the pervasiveness of state legislation, concerns about uniformity, and the dangers of conflicting regulatory regimes, the appellate court concluded that constitutional and statutory provisions giving the state the power to regulate the activity trump general zoning authority conferred to local government agencies. St. Tammany Government v. Welsh, — S.W.3d —-, Docket No. 2015 CA 1152 (La. Ct. App., March 9, 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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