Oil and Gas Update for 4/1/2016 – Estoppel by Deed Prevails in PA Oil and Gas Lease Dispute, TX Appeals Court Addresses Novel Pooled Royalty Issue, and OSHA’s New Silica Regs Make Headlines

The Henry Hub spot price trended upward (very slightly) last week while oil prices based on the Brent Crude and West Texas Intermediate benchmarks declined amidst more dramatic slides in the rig count. In Appalachia, the Pennsylvania Supreme Court issued a much anticipated decision on estoppel by deed while the Third Circuit weighed in on a quirky cotenancy/accounting claim.  Elsewhere, OSHA issued new silica exposure rules, an appeals court in Texas weighed in on whether all of a grantor’s pooled royalty interests are appurtenant to one of several parcels conveyed by a general warranty deed, and the courts in other oil and gas producing regions stayed busy deciding a variety of oil and gas lease and ownership disputes.  Here’s your week in review:

The Rig Count  oil
  • The national rig count is down another 12 units from last week to 450. (Source: BakerHughes).
  • The rig count in the Marcellus is down at 29.  (Source: BakerHughes).
  • The rig count in the Utica is flat at 10.  (Source: BakerHughes).
 Commodity Prices oil-prices
  • Natural gas spot prices at the Henry Hub are up from last week at $1.84/MMBtu as of 4/1/2016.  (Source: EIA).
  • In the Marcellus and Utica region, spot prices are down slightly and still well below the Henry Hub benchmark as of 4/1/2016.  At Dominion South in northwest Pennsylvania, spot prices are down at $1.14/MMBtu as of 4/1/2016. On Transco’s Leidy Line in northern Pennsylvania, prices are down at $1.13/MMBtu as of 4/1/2016.  (Source: EIA).
  • Oil prices are down from last week at $38.67/bbl as of 4/1/2016.  (Source: WSJ).
Developments in Appalachia mountains
  • PA Supreme Court Rules on Estoppel by Deed Issue in Oil and Gas Lease Dispute.  The Pennsylvania Supreme Court issued a much anticipated ruling on whether a lessee’s bonus payment (accepted by the lessor) for only half of the acreage then-owned by the lessors meant that the lessee only had rights to half of the leased acreage.  The court first held that the lessee properly issued a reduced payment pursuant to its proportionate reduction clause and therefore the parties didn’t modify the acreage covered by the lease.  The court also concluded that the doctrine of “estoppel by deed” barred the lessors from denying that the lease covered all the acreage they owned, finding that the lessors conveyed and warranted title to the entire leased premises (not just half of it) at the time they executed the lease and they should be estopped from denying the validity of that original conveyance given that they later confirmed their title to the entire leased premises.  Shedden v. Anadarko E. & P. Co., L.P., — A.3d —-, No. 103 MAP 2014, 2016 WL 1228867 (Pa. Mar. 29, 2016).

  • Federal Judge Rules that UIC Well Operator has Standing to Challenge Local Ordinance Banning Injection Wells. A federal judge denied a township’s bid to dismiss a suit for lack of standing brought by a UIC well operator in response to the township’s ordinance prohibiting the practice within the township’s borders, concluding that the local ordinance deprived the UIC well operator of its constitutionally protected right as a “person” to engage in the activity pursuant to a permit lawfully issued by the U.S. EPA. Seneca Resources Corporation v. Highland Township, No. 15-60 Erie (W.D. of Pa., March 29, 2016).

  • Third Circuit Denies Oil and Gas Lessors’ Cotenant Status, Accounting Bid.  The Third Circuit Court of Appeals denied a claim by oil and gas lessors that they didn’t lease their oil and gas rights to the lessee and therefore were entitled to an accounting for revenues on production as opposed to a royalty interest, rejecting the lessors’ curious argument that the lease only covered their oil and gas rights if the lessee produced them from drilling operations on adjacent property.  McWreath v. Range Res. – Appalachia, LLC, — F.3d —, No. 15-1371, 2016 WL 1212429 (3d Cir., Mar. 29, 2016).
Developments Beyond Appalachia us-map
  • OSHA Seeks to Curb Silica Dust Exposure with New Regs.  On March 25, 2016, OSHA issued a new rule seeking to curb silica exposure by reducing the permissible exposure limit (“PEL”) for respirable crystalline silica to 50 micrograms per cubic meter of air, averaged over an 8-hour shift.  The rule further requires that employers (a) institute water or ventilation controls, (b) provide respirators, (c) limit employee access to high exposure areas, (d) develop a written exposure control plan, (e) offer medical examinations to highly exposed workers, and (f) train employees on risks associated with exposure.  The ramp-up period for compliance varies based on the industry.  For the hydraulic fracturing sector, the compliance deadline is June 23, 2018 (except that compliance with engineering controls would be due June 23, 2021).  The OSHA press release with a link to the final rule may be accessed here.

  • FERC Rejects Enviros Request to Stay Pipeline Project Approval.  The FERC denied a bid by the Georgia chapter of the Sierra Club to stay a gas pipeline project that spans from Alabama to Florida, concluding that the Sierra Club’s general concerns of environmental harm don’t suffice to stop the project.

  • Colorado Court Rejects Claim for Lost Opportunity Damages in AMI Tussle.  A federal court in Colorado foreclosed debate on a request to present lost opportunity damages to a jury in a dispute over an AMI agreement, concluding that the AMI agreement gave the plaintiff a right to overriding royalties but disclaimed any right to acquire working interests in the AMI such that the plaintiff couldn’t present evidence of lost opportunities to acquire working interests that it had no right to acquire. Spring Creek Exploration & Production Co., LLC v. Hess Bakken Investment II, LLC, — F. Supp. 3d —-, No. 14-CV-00134-PAB-KMT, 2016 WL 1170105 (D. Colo., Mar. 24, 2016).

  • Rule Against Perpetuities Rears its Ugly Head in TX Lease Dispute.  The Texas Court of Appeals issued a lengthy decision resolving disputes over the continued validity of three mineral leases, concluding in part that one of those leases did not violate the rule against perpetuities since it contained language expressing an intent to convey a present right to future possession of a mineral estate.  Allegiance Expl., LLC v. Davis, — S.W.3d —-, No. 02-13-00349-CV, 2016 WL 1164331 (Tex. App., Mar. 24, 2016).

  • No Production Payments from Unit Operator for Late Well Reports under Louisiana Statute. A federal court in Louisiana denied a non-operator’s claim to recover production payments and other relief based on the unit operator’s alleged failure to provide the non-operator with well reports within statutory deadlines, concluding that the non-operator held leases for lands within the unit and the statute’s penalty provisions for late well reports only inured to the benefit of owners of unleased oil and gas interests.  TDX Energy, LLC v. Chesapeake Operating, Inc., — F. Supp. 3d —-, No. CV 13-1242, 2016 WL 1179206 (W.D. La., Mar. 24, 2016).

  • Lessor of Mineral Interests not Indispensable in Dispute over Lease’s Compliance with NEPA.  In a dispute between a surface owner and the U.S. government over whether the BIA’s approval of a lease between a production company and the Osage Minerals Council complied with NEPA requirements, a federal court in Oklahoma denied a motion by the Council to dismiss the case for failure to join it as an indispensable party, concluding that the case could proceed without risking the Council’s rights since the lease at issue wouldn’t be subject to outright cancellation if the surface owner prevailed.  Hayes v. Chaparral Energy, LLC, — F. Supp. 3d —-, No. 14-CV-495-GKF-PJC, 2016 WL 1175238, at *10 (N.D. Okla., Mar. 23, 2016).

  • Oil and Gas Lease with Municipality in Michigan Survives Opposition.  The Court of Appeals of Michigan denied a claim by an opposition group claiming that the city had no right to lease the subsurface of city-owned parks or cemeteries to an oil and gas company, concluding that the city charter prohibited the outright “sale” of public parks but not the lease of subsurface interests. Don’t Drill Hills, Inc. v. City of Rochester Hills, — N.W.3d —-, No. 324717, 2016 WL 1178263 (Mich. Ct. App., Mar. 24, 2016).

  • Federal Court in TX Denies Joinder Attempt in Oil and Gas Royalty Dispute.  The Southern District of Texas concluded that the plaintiffs waited too long before joining a non-diverse party, raising the inference that the plaintiff intended to join the non-diverse defendant after removal for solely to defeat federal diversity jurisdiction notwithstanding the court’s assumption that the plaintiffs may have had a valid claim against the non-diverse defendant.  Wells v. Chesapeake Energy Corp., — F. Supp. 3d —-, No. CA H-15-1856, 2016 WL 1182247 (S.D. Tex., Mar. 28, 2016).

  • TX’s Hysaw Holistic Approach to Double Fraction Issue Clears Up Dispute Over Royalty Interest Reservation. On the heels of the Hysaw holistic approach to interpreting deeds in Texas with a double fraction problem (see our previous report here), the Court of Appeals of Texas recently concluded that a deed reserved a floating “fraction of” royalty interest (one-half of 15/16ths royalty interests paid on any oil or gas produced from the property at issue) rather than a “fractional” royalty interest (one half of all the oil gas produced).  Dragon v. Harrell, — S.W.3d —-, No. 04-14-00711-CV, 2016 WL 1238165 (Tex. App. Mar. 30, 2016).

  • Question over Transfer of Fee Title vs. Servitude in Louisiana Delays Award of Production Revenues.  The Louisiana Court of Appeals remanded a dispute over mineral rights claimed by the property owner and its lessee from which a third party generated revenues on production in excess of one-half million, citing conflicting evidence over whether the parties to the original grant conveyed fee simple title or a mere servitude under state law. Keystone Energy Co., LLC v. Denbury Onshore, LLC, — S.W.3d —-, 2015-999 (La. App., March 30, 2016).

  • In TX, Pooled Royalty Interests Aren’t Necessarily Appurtenant to Property Conveyed by Warranty Deed.  In a case of first impression, the Texas Court of Appeals rejected a buyer’s claim that he should be entitled to all of the seller’s royalty interests in several properties co-owned by the seller and his siblings, concluding that the sibling’s undivided royalty interest held in other tracts in the pool did not pass with that sibling’s conveyance of his tract through a general warranty deed. Aery v. Hoskins, Inc., — S.W.3d —-, No. 04-14-00807-CV, 2016 WL 1237985 (Tex. App. Mar. 30, 2016).

Questions about this week’s update?  Email gbibikos@cozen.com 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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