Oil and Gas Update for 10/7/2016 – PA Supremes Strike Oil and Gas Act Provisions … Again … while TX Court Weighs in on Royalties and Post-Production Costs

Since our last report, natural gas spot prices in the Marcellus region tumbled dramatically to historic lows, remaining below $1 as of Friday. The Henry Hub dipped below $3 while oil prices increased slightly after another drop amidst a rig count that continues to rise. In Appalachia, the Pennsylvania Supreme Court dealt several more blows to the revised Oil and Gas Act, striking additional provisions and telling the legislature to go back to the drawing board to correct certain unconstitutional “special laws.” Elsewhere, the Texas Court of Appeals issued the latest opinion on post-production cost sharing between royalty owners and production companies. Here’s a roundup of the past two weeks:

The Rig Count  oil
  • The national rig count is up at 524. (Source: BakerHughes).
  • The rig count in the Marcellus is up at 32. (Source: BakerHughes).
  • The rig count in the Utica is flat at 15. (Source: BakerHughes).
 Commodity Prices oil-prices
  • Natural gas spot prices at the Henry Hub are down at $2.86/MMBtu as of 10/7/2016. (Source: EIA).
  • In the Marcellus and Utica region, spot prices are down as of 10/7/2016. At Dominion South in northwest Pennsylvania, spot prices are down at $0.93/MMBtu. On Transco’s Leidy Line in northern Pennsylvania, spot prices are down at $0.84/MMBtu. (Source: EIA).
  • Oil prices are down at $ $51.93/bbl as of 10/7/2016. (Source: WSJ).
Developments in Appalachia mountains
  • Robinson Township Strikes Again. The Pennsylvania Supreme Court struck additional provisions of the state’s Oil and Gas Act, a 2012 enactment that created an “impact fee” to compensate municipalities for the impact of oil and gas activities within their borders while attempting to create uniform local development standards and modern statewide environmental regulation of oil and gas development. The Supreme Court’s controversial plurality opinion in the first Robinson Township case invalidated state preemption standards and other provisions and remanded the case to Commonwealth Court for further review. On appeal from the Commonwealth Court’s decision, the Supreme Court held that provisions in the act involving statewide preemption and review of local ordinances that went to far could not be severed from the unconstitutional preemption provisions the court previously invalidated. The high court also held that provisions designed to assure that DEP notify public water suppliers of any environmental spills constituted “special legislation” because those provisions did not also require DEP to notify private water well owners, though the court stayed its mandate to give the legislature more time to cure the defect in this provision. Finally, the Court struck down provisions designed to give shippers and storage operators eminent domain rights as allegedly granting condemnation authority to private companies for private, not public purposes. Robinson Twp. v. Commonwealth, — A.3d —, No. 104 MAP 2014, 2016 WL 5597310 (Pa., Sept. 28, 2016).
  • Four Takeaways from Robinson Township. Time will tell whether the court’s latest decision in the Robinson Township case will have much of an impact on the day-to-day operation of the industry, but the four key takeaways seem to be that (1) the court declined an invitation to revisit the first Robinson Township plurality opinion that many in the industry and legal circles classified as a confusing and standard-less approach to cases alleging violations of the so-called “Environmental Rights Amendment” in the Pennsylvania Constitution; (2) although the “old” preemption system still applies when local governments attempt to regulate oil and gas development through zoning, there probably will not be any total statewide preemption; (3) there may be a push for regulating private water wells, a potentially difficult task that the legislature has so far avoided; and (4) the court’s decision signals how the new justices may approach cases involving oil and gas development in the state in the future.
  • PIOGA gets to Pursue Relief Despite Dead Ordinance. A federal judge in Pennsylvania denied a municipality’s bid to dismiss as moot certain claims of the Pennsylvania Independent Oil and Gas Association (PIOGA) for declaratory and equitable relief following previous court rulings that pushed the municipality to repeal an ordinance that violated state law, holding that PIOGA’s constitutional and related claims remained viable despite the repeal. General Energy Co., LLC v. Grant Township, — F. Supp. 3d —, No. 14-209, 2016 WL 5724437 (W.D. Pa., Sept. 30, 2016).
  • PA Judge Declines Invite to Engage in Preemption Analysis of Embattled Local Ordinance Following Robinson Township. The same federal judge presiding over PIOGA’s complaint against Grant Township declined the industry group’s invitation to engage in a preemption analysis of the township’s embattled ordinance, citing Robinson Township to conclude that the courts had invalidated provisions that sought to totally preempt local regulation of oil and gas development. General Energy Co., LLC v. Grant Township, — F. Supp. 3d —, No. 14-209, 2016 WL 5661727 (W.D. Pa., Sept. 30, 2016).
  • OH Federal Judge Says Royalty Class Stated Royalty Claim for Improper Post-Production Costs. Despite the still unsettled issue of whether the courts in Ohio follow the “at the well” rule or the “marketable product” rule for calculating royalties and post-production cost sharing, an Ohio federal judge concluded that royalty owners stated a plausible claim for relief that their lessee shorted them on royalty payments by taking improper post-production cost deductions. Henceroth v. Chesapeake Exploration, L.L.C., — F. Supp. 3d. —, No. 15-2591, 2016 WL 5661609 (N.D. Ohio, Sept. 29, 2016).
  • Sixth Circuit Denies Late Bid to Seek Damages Following Failed Challenge to OH Oil and Gas Lease. Following a trial confirming the validity of an oil and gas lease, the Sixth Circuit Court of Appeals upheld the trial court’s denial of the lessee’s bid to amend the lawsuit to claim breach of contract and slander of title against the lessor and others, holding that the lessee lacked good cause to amend the lawsuit and others in the case would be prejudiced by the late amendment. Carizzo (Utica) LLC v. City of Girard, — F.3d —, No. 16-3210, 2016 WL 5389299 (6th Cir., Sept. 26, 2016).
  • OH Federal Judge Says Landowners Can’t Compel Class Arbitration Absent Express Provision. Following a national trend, an Ohio federal court held that royalty owners could not compel class arbitration when their lease doesn’t expressly provide for it. Henceroth v. Chesapeake Exploration, L.L.C., — F. Supp. 3d —, No. 16-150, 2016 WL 5661611 (N.D. Ohio Sept. 29, 2016); Hope v. Chesapeake Energy Corporation, — F. Supp. 3d —, No. 15-02275, 2016 WL 5661607 (N.D. Ohio, Sept. 29, 2016).
  • WV Federal Judge Denies Bid to Dismiss Breach of Contract Case Based on Short Bonus Payments. A federal judge in West Virginia denied a bid to dismiss a breach of contract case against an oil and gas lessee after the lessee tendered a partial bonus payment, rejecting the lessee’s claim that it had “sole discretion” to reduce the bonus payment if the lessor had less than completely clear title. Reynolds v. Ascent Resources – Marcellus, — F. Supp. 3d —, No. 16-77, 2016 WL 5680335 (N.D.W. Va., Sept. 30, 2016).
Developments Beyond Appalachia us-map
  • TX Appellate Court Says Oil and Gas Lease Gives Landowners Right to Royalties on Used Gas Without Deductions for Downstream Marketing Costs. A court of appeals in Texas concluded that the royalty clause in an oil and gas lease precluded the lessee from dodging royalties on gas used for fuel on the leased premises and did not authorize post-production cost sharing with royalty owners for compressor and marketing costs that the lessee did not incur downstream of a central facility as required by the lease. Highmount Exploration & Production LLC v. Harrison Interests, Ltd., — S.W.3d —, No. 14-15-00058-CV, 2016 WL 5853302 (Tex. App., Oct. 6, 2016).
  • Fifth Circuit Confirms Dismissal of Suit Alleging BP Overvalued Stock before Deepwater Horizon Event. The Fifth Circuit invoked the “presumption of prudence” standard for employee stock option plans to deny a bid by stakeholders that BP’s stock was overvalued before the Deepwater Horizon explosion because BP insiders had knowledge about possible safety risks, concluding that the complaint didn’t demonstrate whether a prudent fiduciary could have concluded that (1) disclosure of alleged safety risks to the public before the event or (2) freezing trades of BP stock (both of which would likely lower the stock price) would do more harm to BP stock than good. Whitley v. BP, P.L.C., — F.3d —, No. 15-20282, 2016 WL 5387678 (5th Cir., Sept. 26, 2016).
  • Montana Supreme Court OK’s Challenge to Oil and Gas Well Permit but Says State did not Violate Due Process Rights of Local Groups Opposed to Fracking. The Montana Supreme Court disagreed with a trial court’s ruling that the challenge to the well permit application of an oil and gas production company brought by a group opposed to hydraulic fracturing before the state’s conservation board wasn’t “ripe” for review but denied the claim that the state board denied the group its right to participate, noting that the board allowed the group to present evidence about its concerns for well stimulation activities at the well site. Carbon County Resource Council v. Montana Board of Oil and Gas Conservation, — P.3d —, DA 15-0613, 2016 WL 5390399, 2016 MT 240 (Mont., Sept. 27, 2016).
  • Bankruptcy Court Says Purchase of Working Interests is Transfer of Real Property Interests for Purposes of TX Fraud Statute. A bankruptcy court in Texas held that a working interest in oil and gas is a real property interest for purposes of stating a cognizable claim for statutory fraud in a real estate transaction pursuant to Tex. Bus. & Comm. Code § 27.01. In re: Primera Energy, — B.R. —, No. 15-51396-CAG, 2016 WL 5485120 (Bankr. W.D. Tex., Sept. 29, 2016).
  • Kansas Appellate Court Says Kids Can’t Recover Oil and Gas Lease Proceeds as Third Party Beneficiaries. A court of appeals in Kansas concluded that a contract in which a seller sold his property to another while reserving the right to live on the property for life and agreed to split proceeds from mineral development with the buyer didn’t create a third-party beneficiary contract that inured to the benefit of the seller’s kids who sued to recover proceeds from mineral leases on the property executed by the buyer, reasoning that the kids lacked standing as third-party beneficiaries because (a) the agreement said the seller “may” (but was not required to) leave his mineral rights to his children and (b) he never did. Cline v. Peterson, — P.3d —, No. 113,851, 2016 WL 5867234 (Kan. Ct. App., Oct. 7, 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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