Oil & Gas Update for 3/18/2016 – PA Royalty Legislation Back in the Mix, POTUS Picks Garland to Fill SCOTUS Slot, and FERC Denies LNG Project Approval for Lack of “Need”

The national rig count took another hit, dropping another 4 units since last week, while the Marcellus and Utica rig counts remained relatively flat.  Natural gas spot prices rebounded slightly after dipping below a dollar last week while oil prices based on the Brent Crude and West Texas Intermediate benchmarks continue to hold at around $40/bbl. In other news, things are relatively quiet.  In Pennsylvania, a controversial bill on royalty payments and post-production costs takes center stage at an informational hearing held by the House Environmental Resources and Energy Committee.  Elsewhere, POTUS picks his SCOTUS nominee, an appellate court in Texas revamps a big verdict while declining a bid to apply covenants in one lease to all leases in a unit, and the FERC denies a bid to approve an LNG project.  Here’s your week in review:

The Rig Count  oil
  • The national rig count is down another 4 units from last week to 476.  (Source: BakerHughes).
  • The rig count in the Marcellus is flat at 31.  (Source: BakerHughes).
  • The rig count in the Utica is down from last week at 10.  (Source: BakerHughes).
 Commodity Prices oil-prices
  • Natural gas spot prices at the Henry Hub are up from last week at $1.74/MMBtu as of 3/18/2016.  (Source: EIA).
  • In the Marcellus and Utica region, spot prices are up slightly but still well below the Henry Hub benchmark as of 3/18/2016.  At Dominion South in northwest Pennsylvania, spot prices are up at $1.10/MMBtu as of 3/18/2016. On Transco’s Leidy Line in northern Pennsylvania, prices are up at $1.08/MMBtu as of 3/18/2016.  (Source: EIA).
  • Oil prices are up from last week at $41.20/bbl as of 3/18/2016.  (Source: WSJ).
Developments in Appalachia mountains
  • PA Royalty Legislation Back in the Mix.  Amidst all the budget wrangling that consumes the legislative agenda and at a time when falling commodities prices pose significant challenges for the oil and gas industry, the House Environmental Resources and Energy Committee found time to hold an information hearing regarding House Bill 1391, a controversial piece of legislation that might prohibit natural gas companies form sharing post-production costs with their landowners.  Under the current “Minimum Royalty Act” as interpreted by the Pennsylvania Supreme Court, the parties to an oil and gas lease may share post-production costs (such as gathering, treatment, and transportation costs) as long as the landowner is guaranteed a royalty of at least one-eighth of the value of the gas at the well.  Beyond that minimum, it’s a contract issue for the parties to determine whether and to what extent they will share those costs.  House Bill 1391 would set the minimum royalty at “the total price received by the operator for the production in an arm’s-length transaction. No deductions of any costs shall result in a royalty payment less than the one-eighth” of that price.  The bill purports to apply to all existing and future leases. HB 1391 is one of several legislative measures proposed over the past several years that seeks to place the burden of paying for all the costs downstream of the well on producers instead of letting the parties agree that landowners will bear their proportionate share of those costs.  Many have questioned such measures as ones that unconstitutionally infringe on the obligations of existing leases and that unduly interject government into the private affairs of contracting parties whose disagreements may be hashed out in court rather than the legislature.  A copy of the bill in its current form can be accessed here.
  • PA Landowner Can’t Block P&A Operation. The Superior Court of Pennsylvania upheld a permanent injunction against a landowner that tried to stop a plugging/abandonment operation based on speculative claims that it might affect water supplies on the property, concluding that the well operator is the owner of the well and its fixtures with the right and regulatory obligation to plug an abandoned well.  EQT Prod. Co. & Equitrans, L.P. v. Teska, No. 16 WDA 2015, 2016 WL 1063954 (Pa. Super. Ct., Mar. 17, 2016) (unpublished).
Developments Beyond Appalachia us-map
  • POTUS Picks Garland for SCOTUS Vacancy.  President Obama nominated Merrick Garland to fill Justice Scalia’s seat on the United States Supreme Court amidst claims from the GOP that they will not consider (let alone vote on) any nominee advanced by the President.  Currently the chief judge of the U.S. Court of Appeals for the District of Columbia and described as a moderate who is respected by both parties, Garland delivered an emotional speech thanking the President for the nomination.  The transcript of the remarks may be viewed here.
  • Wyoming Well Operator Still on the Hook for Damages after Assignment of Surface Use Agreement.  Drawing on assignment principles applicable to oil and gas leases, the Wyoming Supreme Court ruled that the lessee of a severed mineral estate who contracted with the surface owner for surface damages remained liable after it assigned that agreement to its successor, reasoning that the surface use agreement did not contain any “exculpatory language” that would sever liability for the assignee’s breach of covenants even if they run with the land.  Pennaco Energy, Inc. v. Sorenson, — P.3d —-, 2016 WY 34, 2016 WL 933068 (Wyo., Mar. 11, 2016).
  • FERC Denies Bid for LNG Project Approvals.  The FERC denied an application from Jordon Cove Energy Project for approval to construct and operate an LNG facility in Oregon along with a request by Pacific Connector Gas Pipeline for authority under Section 7 of the Natural Gas Act to construct associated pipelines, finding no “need” for the approvals because (1) PCGP didn’t have any contracts for service in place that would justify a certificate of public convenience that would give PCGP eminent domain authority (despite commitments by the pipeline operator that it wouldn’t exercise that authority until after approval of the LNG project); (3) the DOE’s general endorsement of LNG is insufficient to establish a “need” under the Natural Gas Act; and (3) without any known transportation source of natural gas other than the unapproved PCGP pipelines, the Jordan Cove facility would be unable to liquefy and export LNG. In re Jordan Cove Energy Project, 154 FERC ¶ 61,190 (March 11, 2016).
  • TX Court Reduces Multi-Million Dollar Verdict, Declines to Hold that Offset Obligation Extends to Entire Drilling Unit Based on Pooling Clause.  In a case that highlighted a $2 million reduction to a multi-million dollar verdict for lack of evidentiary support, the Texas Court of Appeals also denied a claim that a certain offset obligation in the landowner’s particular lease (requiring that wells be a certain distance from property lines) applied to all other properties in a unit that didn’t contain that setback provision, reasoning that a pooling provision doesn’t make all the lease covenants in one lease applicable to every lease in a unit.  Samson Lone Star Ltd. P’ship v. Hooks, — S.W.3d —-, Docket No. 01-09-00328-CV, 2016 WL 1019217 (Tex. App., Mar. 15, 2016).
  • Co-Tenants of Working Interests in TX Leases are Indispensable in Partition Action.  The Texas Court of Appeals concluded that a non-party owner of a 4.125% interest in leases subject to a partition action is a cotenant with the parties fighting over partition of that interest and therefore indispensable to the action.  Long v. Miken Oil, Inc., — S.W.3d —-, No. 12-14-00250-CV, 2016 WL 1039443 (Tex. App., Mar. 16, 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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