Oil and Gas Update for 5/6/2016 – Preemption Abound: Colorado Supreme Court Nixes Local Attempts to Regulate Frac Ops, Texas High Court Nixes H-Town’s Attempt to Regulate Air Quality, and Bankruptcy Judge Confirms Prior Ruling on Rejection of Gathering Agreements.

After a week “off the lease,” we are back at the well. Since our last report, oil prices based on the Brent Crude and West Texas Intermediate benchmarks closed in on $50/bbl at the end of April before dropping last week, while the Henry Hub’s romance with spot prices around $2 has as many ups and downs as a Hollywood marriage. The national rig count took another hit as did the rig count in the Marcellus despite a steady count in the Utica. In Appalachia, the Pennsylvania Governor appointed a new PUC commissioner while a federal judge in the Keystone State says a slowdown in drilling that allegedly shattered a landowner’s dreams of riches doesn’t lead to recovery. Elsewhere, the Colorado Supreme Court issued its much anticipated decisions striking down attempts by local governments to ban frac operations.  Not to be outdone, the highest court in the Lone Star State struck down portions of a Houston ordinance aimed at air quality regulation.  Finally, the judge in the Sabine bankruptcy confirmed her prior non-binding ruling on rejection of gathering agreements. Here’s your (two-week) review:

The Rig Count  oil
  • The national rig count is down 16 units from last week to 435. (Source: BakerHughes).
  • The rig count in the Marcellus is down at 26.  (Source: BakerHughes).
  • The rig count in the Utica is flat at 11.  (Source: BakerHughes).
 Commodity Prices oil-prices
  • Natural gas spot prices at the Henry Hub are down at $1.99/MMBtu as of 5/6/2016.  (Source: EIA).
  • In the Marcellus and Utica region, spot prices are up but still trail the Henry Hub benchmark as of 5/6/2016. At Dominion South in northwest Pennsylvania, spot prices are up at $1.42/MMBtu as of 5/6/2016. On Transco’s Leidy Line in northern Pennsylvania, spot prices are up at $1.41/MMBtu as of 5/6/2016.  (Source: EIA).
  • Oil prices are down from last week at $45.37/bbl as of 5/6/2016.  (Source: WSJ).
Developments in Appalachia mountains
  • Update on Chapter 78: House Committee Passes Resolution to Nix DEP’s Oil & Gas Regs. A standing committee of the Pennsylvania House, already having expressed their displeasure with PADEP’s controversial oil and gas regulations recently approved by the Independent Regulatory Review Commission, passed a resolution last week to formally disapprove of the regulations. However, that resolution must pass both houses and be approved by the Governor before the regulations can be nixed.
  • PA Governor Taps Sweet for PUC Pick.  Governor Tom Wolf nominated David Sweet to sit on the state’s Public Utility Commission. Sweet served in Governor Wolf’s administration as special advisor after a long career in private practice and a stint in the Pennsylvania General Assembly in the 70s and 80s. He’ll replace Pat Witmer at the Commission.  A copy of the press release may be accessed here.
  • Pipeline Explosion in Marcellus Region Caused by Corrosion, Officials Think. PHMSA officials are focused on possible corrosion at the weld of a segment of pipeline that exploded in Westmoreland County, PA on April 29, 2016, injuring one person, damaging nearby homes and a gas storage well, and forcing the operator to cut gas flows in the region. Although the investigation is ongoing, PHMSA officials believe corrosion may be a contributing factor. For a news report on the investigation, click here.
  • Landowner’s “Shattered Dreams” of Riches Insufficient to Trump the Parties’ Oil and Gas Agreements, Federal Court in PA Says. In an opinion that began like this – “The renowned eighteenth-century English poet Alexander Pope once wrote, ‘Blessed is the man who expects nothing, for he shall never be disappointed.’” – a federal judge for the Middle District of Pennsylvania denied a landowner’s claim for breach of an oil and gas lease for transporting off-lease gas through the leased premises, concluding that a side agreement for a pipeline right of way to transport that off-lease gas (for which the lessee paid additional consideration) essentially trumped a “domestic-gas-only” provision in an addendum to the lease. The court noted the economic challenges facing the industry and the lessee’s business decision to slow down drilling operations and rejected the idea that the landowner’s “shattered dreams” of reaping benefits of more natural gas production trumped the express terms of the parties’ agreements.  Camp Ne’Er Too Late, LP v. Swepi, LP, — F. Supp. 3d —-, No. 4:14-CV-01715, 2016 WL 2594186 (M.D. Pa., May 5, 2016).
  • No Stay of Ohio Inverse Condemnation Fight. A federal judge in Ohio denied a pipeline operator’s bid to stay an inverse condemnation and Natural Gas Act suit pending the outcome of a related dispute, citing multiple differences between the parties, their claims, and the location of the properties and concluding that those differences justified the decision to overlook the usual “first to file” rule for staying actions in the Sixth Circuit. Batz v. Columbia Gas Transmission, — F. Supp. —-, No. 14-CV-505, 2016 WL 2341856 (N.D. Ohio, May 4, 2016).
  • “Minerals” Includes “Gas” in Virginia. In the latest case involving the meaning of the term “minerals” in conveyances, the Supreme Court of Virginia concluded that the term “minerals” used in two severance deeds executed in 1886 and 1887 conveyed the natural gas and coal bed methane underlying the grantor’s property, citing the state’s decision in Warren v. Clinchfield Coal Corp., 166 Va. 524, 186 S.E.2d 20 (1936), in which the court held that the term “minerals” includes “gas” as a matter of law and rejecting claims that “minerals” is ambiguous such that extrinsic evidence would have shown that the grantors in the century-old deeds did not intend to convey the gas. Dye v. CNX Gas Co., LLC, — S.E.2d —-, No. 150282, 2016 WL 1593717 (Va., Apr. 21, 2016).
Developments Beyond Appalachia us-map
  • Colorado Supreme Court Says Local Frac Bans/Regs are Preempted by State Law. In a pair of much-anticipated decisions, the Colorado Supreme Court concluded that state law preempted a five-year moratorium on hydraulic fracturing activities and local bans on the storage and disposal of frac water as enacted by two cities in the state. City of Longmont v. Colo. Oil & Gas Ass’n, — P.3d —-, No. 2016 CO 29 (Colo., May 2, 2016); City of Ft. Collins v. Colo. Oil & Gas Ass’n, — P.3d —-, 2016 CO 28 (Colo., May 2, 2016).
  • TX Supremes Shut Down Provisions of Air Quality Ordinance.The Texas Supreme Court struck down a local ordinance enacted by the City of Houston purporting to regulate certain aspects of air quality, concluding that the state’s Clean Air Act preempts Houston’s regulatory initiative to criminalize violations of the ordinance and impose other registration requirements but blessed the rest of the ordinance to the extent it was consistent with rules of the Texas Commission on Environmental Quality.  BCCA Appeal Group, Inc. v. City of Houston, — S.W.3d —, No. 13-0768, 2016 WL 1719182 (Tex., Apr. 29, 2016).
  • Capex for Natural Gas Transportation and Processing Deductible in Colorado. The Colorado Supreme Court held that the state’s severance tax – which authorizes a tax deduction for “any transportation, manufacturing, and processing costs” from oil and gas revenues – also authorizes a deduction for the “cost of capital” associated with natural gas transportation and processing facilities, reasoning that the cost of capital is the amount of money that an investor could have earned on a different investment of similar risk and rejecting the intermediate appellate court’s conclusion that the costs of capital aren’t actual costs. BP America Co. v. Colorado Dep’t of Revenue, — P.3d —-, No. 13SC996, 2016 WL 1639829, (Colo., April 25, 2016)
  • No Duty to Repair Degraded Road Used for Gas Ops in Wrongful Death Suit, TX Appeals Court Rules. An appellate court in Texas held that plaintiffs in a wrongful death action could not prevail against a natural gas company that allegedly used and degraded a public road, concluding that (a) the use of a road over time does not itself give rise to a legal duty even if the road becomes degraded and potentially dangerous; (b) the roadway in question was a public roadway used by the public including the plaintiffs and decedent; and (c) unless there’s an exception, the government is responsible for use, control, and maintenance of public roads. Vasquez v. Legend Nat. Gas III, LP, — S.W.3d —-, No. 04-14-00899-CV, 2016 WL 1729390 (Tex. App., Apr. 29, 2016).
  • Payment of Oil and Gas Royalty Balance Forecloses Non-Payment Suit. In one of those “why are we here?” cases, a Texas appellate court concluded that a lessee paid the balance of royalties owed to its lessor, and the lessor’s acknowledgment of those payments (including statutory interest under the Texas Mineral Code for late payments) foreclosed her cause of action for breach of contract following a suspension in payment after the lessor’s father had passed away and the parties sorted out the proper payee. Garcia v. Genesis Crude Oil, L.P., — S.W.3d —-, No. 13-14-00727-CV, 2016 WL 1732436 (Tex. App., Apr. 28, 2016).
  • Fed Circuit Holds that Settlement Bars Class Action Claims against DOI for Breach of Fiduciary Duty in Approving Oil and Gas Leases on Indian Lands. The Federal Circuit Court shut down a class action alleging breach of fiduciary duties in approving oil and gas leases on Indian lands, concluding that (a) a prior settlement backed by Congress foreclosed that claim; (b) the government did not have any further duties to disclose information regarding the administration of those leases in connection with the settlement; and (c) Congress’s approval of the settlement didn’t result in a legislative taking. Ramona Two Shields v. United States, No. 2015-5069, 2016 WL 1658434 (Fed. Cir. Apr. 27, 2016).
  • TX Court Addresses Difference between “Exception” and “Reservation” in Mineral Deed. After outlining the oft-overlooked differences between an “exception” and a “reservation,” a court of appeals in Texas did what most other courts do and concluded the differences don’t matter, particularly in this case in which the court held that the grantor unambiguously reserved the oil and gas estate by using the language “less, save and except herefrom all oil, gas and other minerals …” under the heading “reservations from and exceptions to conveyance and warranty.” Goss v. Addax Minerals Fund, LP, — S.W.3d —-, No. 07-14-00167-CV, 2016 WL 1612918 (Tex. App., Apr. 21, 2016).
  • Texas Appeals Court Confronts Nettlesome “Mineral Interest vs. Royalty Interest” Question. Citing the usual hallmarks of phrases that suggest when a grantor intends to convey (or reserve) a mineral interest or a royalty interest, the Texas Court of Appeals interpreted a conveyance of “one-fifth of the whole and entire royalty interest … in and to all of the oil, gas and other minerals” as conveying one-fifth of any royalty interest arising from production on the property and not an interest in one-fifth of a one-eighth royalty interest. Kardell v. Acker, — S.W.3d —-, No. 04-15-00534-CV, 2016 WL 2584815 (Tex. App., May 4, 2016).
  • Landman’s Letter Stating Incorrect Expiration Date Didn’t Modify North Dakota Oil and Gas Lease. In a lease expiration case, the North Dakota Supreme Court denied a bid by a top lessee to bust the bottom lease based on a landman’s letter summarizing the lease’s requirements and noting an incorrect expiration date, concluding that the letter didn’t operate as a lease modification and the landman’s representations in the letter didn’t qualify for promissory estoppel or as a surrender of the lessee’s rights. Valentina Williston, LLC v. Gadeco, LLC, No. 2016 ND 84, — N.W.2d —-, 2016 WL 1593409 (N.D., Apr. 21, 2016).
  • Lack of Diligence in Discovery Dooms Lease Expiration Claim in Colorado. A federal court in Colorado denied a lease expiration claim brought by a company that drilled eight horizontal wells on properties leased by another lessee, concluding that the lessee produced evidence that it engaged in re-working operations sufficient to keep the lease alive under the operations clause and finding that the second lessee failed to come forward on summary judgment with evidence disputing those facts.  Synergy Resources Corp. v. Briller, Inc., — F. Supp. 3d —-, No. 15-CV-01337-RBJ, 2016 WL 2594856 (D. Colo., May 5, 2016).
  • Bankruptcy Judge Confirms Prior Ruling on Rejection of Gathering Agreements. A bankruptcy judge in New York shook up the oil and gas industry with a ruling that debtors could reject certain gathering agreements in bankruptcy, but she noted that her ruling would be non-binding in the context of a motion to reject. The debtors then initiated an adversary proceeding seeking a declaratory judgment that the covenants contained in the gathering agreements do not run with the land and are therefore subject to rejection.  The gathering companies then moved for judgment on the pleadings on the debtor’s request for declaratory judgment. Consistent with her prior, non-binding ruling, the judge concluded that the gathering agreements do not run with the land either as real covenants or as equitable servitudes under Texas law and are therefore subject to rejection in bankruptcy. In re Sabine Oil & Gas Corp., — B.R. —-, No. 15-11835 (SCC), 2016 WL 2603203 (S.D.N.Y., May 3, 2016).

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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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