Oil and Gas Update for Week Ending 5/26/2017 – PA Production Up, Drilling Down; TX Surface Owner’s Ability to Authorize Horizontal Drilling Through Severed Mineral Estate; Fifth Circuit Interprets Risk Penalty Provisions in LA Forced Pooling Statue.

Natural gas spot prices dropped since our last report despite rising oil prices and more rigs nationally and regionally.  In Pennsylvania, the PADEP issued its annual report for oil and gas operations indicating an increase in production despite the fewest well permits and wells drilled since 2008.  In other news, PADEP Secretary McDonnell can drop the “Acting” label from his title following a unanimous state senate vote to confirm his permanent appointment as the agency’s leader.  At the federal level, the D.C. Circuit hit the pause button on legal challenges to Obama-era rules targeting methane emissions from new oil and gas sources following the Trump Administration’s vow to review the rule as part of a planned overhaul of federal regulatory regimes while the U.S. Senate skipped the opportunity under the obscure Congressional Review Act to rollback a similar measure for operations on federal and Indian lands.  In the courts, the Texas Supreme Court held that a surface owner can authorize a horizontal well through the underlying mineral estate to reach minerals under adjacent lands while the Fifth Circuit interpreted the notice and risk-penalty provisions of Louisiana’s forced pooling statute.  Here’s your week in review:

The Rig Count  oil
  • The national rig count is up at 908. (Source: BakerHughes).
  • The rig count in the Marcellus is up at 45. (Source: BakerHughes).
  • The rig count in the Utica is up at 25. (Source: BakerHughes).
Commodity Prices oil-prices
  • The Henry Hub natural gas spot price is down at $3.11/MMBtu as of 5/26/2017. (Source: EIA).
  • In the Marcellus and Utica region, spot prices are down as of 5/26/2017. At Dominion South in northwest Pennsylvania, spot prices are down at $2.66/MMBtu. On Transco’s Leidy Line in northern Pennsylvania, spot prices are down at $2.53/MMBtu.  (Source: EIA).
  • Oil prices are up at $52.15/bbl as of 5/26/2017. (Source: WSJ).
Developments in Appalachia mountains
  • WV Federal Court Denies Summary Judgment Motions in Dispute over Oil and Gas Lease Bonus. A federal judge in West Virginia denied competing summary judgment motions in a case alleging that a lessee failed to make proper bonus payments after the lessee discovered a pre-existing lease on the property, concluding that the lessee didn’t establish whether the prior lessee had superior title as required by state law to state a breach of the lessor’s warranty-of-title clause.  Reynolds v. Ascent Res.-Marcellus, LLC, — F. Supp. 3d —, No. 1:16CV77, 2017 WL 1959220 (N.D.W. Va. May 11, 2017).
  • Sixth Circuit Weighs in on Parties’ Obligations after Failed PSA. The Sixth Circuit unraveled a complicated dispute regarding the rights and obligations of both buyer and seller who each breached a failed PSA for oil and gas leases and concluded that (a) seller should have delivered title by 11:59 p.m. on the date set by the PSA; (b) the seller anticipatorily breached the contract by unilaterally terminating the agreement by email sent earlier that same day; (c) the buyer took no further action after the seller’s email and therefore did not tender its own performance obligations under the PSA; (d) disagreeing with the district court, the buyer’s non-performance can only be excused if the buyer was ready to perform but the seller’s repudiation caused buyer’s non-performance; and (e) the district court should make that determination on remand.  Atlas Noble, LLC v. Krizman Enterprises,  — Fed. Appx. —, No. 15-4385, 2017 WL 2260988 (6th Cir., May 23, 2017).
  • Trump Picks PUC Commissioner/NARUC President to Fill Open FERC Slot. President Trump nominated Pennsylvania PUC Commissioner Rob Powelson to fill an open slot at FERC along with Neil Chatterjee, the senior energy policy adviser to Senate Majority Leader Mitch McConnell.  Powelson has served on the PUC for many years and currently heads the National Association of Regulatory Utility Commissioners (NARUC).  The appointments would re-establish a quorum at the agency.  A copy of the White House announcement may be accessed here.  The PUC’s press release congratulating Powelson may be accessed here.
  • FERC Staff Blocks Rover Pipeline in Ohio Amidst Drilling Fluid Spills. FERC staff stalled drilling activities as part of the $4.2 billion Rover Pipeline construction in Ohio until Energy Transfer Partners cleans up recent spills of drilling fluids associated with the project.
  • Municipality Can’t Block Oil and Gas Well with Zoning Requirements. The Commonwealth Court sided with a well operator after the City Council of the Borough of Jefferson Hills voted unanimously to disapprove an unconventional well pad site as a conditional use under the zoning ordinance, concluding that the trial court properly reversed that local decision for lack of any evidence (other than general complaints from residents) to demonstrate that the well site represented a threat to the public health, safety, or welfare of the community.  EQT Production Co. v. Borough of Jefferson Hills, — A.3d —, No. 1184 CD 2016, 2017 WL 2180678 (Pa. Cmwlth., May 18, 2017).
  • Commonwealth Court Confirms Sunoco Pipeline’s Condemnation Efforts. In two recent decisions, the Commonwealth Court dismissed challenges to the eminent domain authority of Sunoco Pipeline in connection with the pipeline company’s use of its condemnation powers to secure easements and temporary works spaces along its pipeline route for the Mariner East II Pipeline.  In Re: Condemnation by Sunoco Pipeline LP et al., — A.3d —, No. 565 CD 2016 (Pa. Cmwlth., May 24, 2017); In Re: Condemnation by Sunoco Pipeline LP, — A.3d —, No. 220 CD 2016 (Pa. Cmwlth., May 15, 2017).
  • PA Senate Confirms McDonnell as PADEP Secretary. The Pennsylvania Senate confirmed Acting Secretary Patrick McDonnell to serve as PADEP Secretary following a vibrant Q&A earlier this month with the Senate Environmental Resources and Energy Committee during which various lawmakers questioned PADEP’s recent air emission reduction initiative targeting the oil and natural gas industry.

Developments Beyond Appalachia us-map

  • Senate Votes Against Repeal of EPA Methane Regulation for Operators on Federal/Indian Lands. Senator John McCain cast a surprising vote that helped kill an initiative in the Senate under the Congressional Review Act to repeal Obama-era regulations restricting methane emissions from oil and gas operations on federal and Indian lands.  The Trump Administration reportedly will go back to consider revisions to the regulations.
  • DC. Circuit Stays EPA Methane Rule Pending Agency’s Review. The D.C. Circuit Court of Appeals issued an order staying an appeal involving EPA’s methane rule for new oil and gas well sites given the agency’s stated intent to revisit the Obama-era rule after the Trump Administration took over.
  • Kansas Federal Court Says Surface Easement Authorizes Disposal of Produced Water from Operations off the Leased Premises. A federal court in Kansas concluded that an oil and gas lessee had the right to dispose of produced water from operations off the leased premises based on a surface agreement that said lessee acquired the right to dispose of water “produced from oil and gas operations operated by or on behalf of the lessee,” reasoning that this clause had no limitation and that the parties could have limited disposal operations to on-lease operations only but never limited the agreement that way. Doce Ltd. P’ship v. Sandridge Expl. & Prod., LLC, — F. Supp. 3d —, No. 16-1045-EFM-KGG, 2017 WL 1836977 (D. Kan., May 8, 2017).
  • Fifth Circuit Weighs in on Forced Pooling in Louisiana. In a thorough opinion, the Fifth Circuit concluded in a case of first impression that a unit operator under the state’s forced pooling statute forfeits the right to demand contribution from the “owner or owners of the unleased oil and gas interests for the costs of the drilling operations of the well”  if it fails to notify owners of interests in lands for which the operator has no lease – interpreting that phrase for the first time to include owners of working interests on lands in which the unit operator has no lease (and not limited to lands for which there is no lease at all).  TDX Energy, L.L.C. v. Chesapeake Operating, Inc., — F.3d —, No. 16-30450, 2017 WL 1961008 (5th Cir., May 12, 2017).
  • Texas Appellate Court Clarifies Duty of “Utmost Good Faith” For Holders of Oil and Gas Executive Rights. An appellate court in Texas concluded that the holder of the executive right to lease – who has a duty of utmost good faith to the holders of non-participating oil and gas interests (who can’t execute leases) – breached that duty by refusing to execute a lease solely to protect the existing uses of the surface enjoyed only by the holder of the executive rights.  Texas Outfitters Limited, LLC v. Nicholson, — S.W.3d —, No. 04-16-00392-CV, 2017 WL 2124494 (Tex. App., May 17, 2017).
  • TX Supremes Resolve Tricky Question of Whether Surface Owner can Authorize Drilling Through Underlying Severed Mineral Estate. The Supreme Court of Texas concluded that the owner of a surface estate can authorize the owner of oil and gas leases on adjacent lands to drill a well horizontally through the severed mineral estate – without the consent of the severed mineral owner or lessee – in order to reach the mineral estate underlying the leased properties, reasoning that (a) an unauthorized interference with the “place” where the minerals are located constitutes a trespass as to the mineral estate only if the interference infringes on the mineral lessee’s ability to exercise its rights; (b) drilling through the subsurface underlying the severed surface estate does not impede those rights even though the operation might displace some dirt that might contain minerals; and (c) the “accommodation doctrine” applies to protect the lessee of the subsurface estate through which the wellbore travels from the surface estate to the adjacent minerals. Lightning Oil Co. v. Anadarko E&P Onshore, LLC, No. 15-0910, 2017 WL 2200343, at *1 (Tex., May 19, 2017).
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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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