Oil and Gas Update for Week Ending 6/9/2017 – WV Supremes Endorse Net-Back Method for Calculating Royalties and Post-Production Costs; TX Supremes Confirm County-Wide Mineral Grant.

Sliding oil and natural gas spot prices didn’t affect a steady rig count that climbed several more units since our last report.  In Appalachia, the West Virginia Supreme Court signaled a departure from the controversial “marketable product” rule for interpreting royalty clauses and the allocation of post-production costs, at least with respect to certain older leases subject to a state permitting statute that requires an upgrade from a flat-rate royalty clause to a production royalty clause as a condition of getting a drilling permit.  In other news, the Texas Supremes confirmed a county-wide mineral grant despite prior rulings that deeds with conflicting language conveying specific parcels along with all mineral interests within a county created an ambiguity.  Here’s a roundup of the past several weeks:

The Rig Count  oil
  • The national rig count is up at 927. (Source: BakerHughes).
  • The rig count in the Marcellus is up at 45. (Source: BakerHughes).
  • The rig count in the Utica is up at 28. (Source: BakerHughes).
Commodity Prices oil-prices
  • The Henry Hub natural gas spot price is down at $2.99/MMBtu as of 6/9/2017. (Source: EIA).
  • In the Marcellus and Utica region, spot prices are down as of 6/9/2017. At Dominion South in northwest Pennsylvania, spot prices are down at $2.00/MMBtu. On Transco’s Leidy Line in northern Pennsylvania, spot prices are down at $1.99/MMBtu.  (Source: EIA).
  • Oil prices are up at $48.15/bbl as of 6/9/2017. (Source: WSJ).
Developments in Appalachia mountains
  • WV Endorses Net-Back Calculation for Minimum Royalties Payable at the Wellhead as Required by Statute. The Supreme Court of West Virginia recently held that so-called “flat-rate” leases subject to West Virginia Code § 22-6-8 (which requires that flat rate leases be upgraded to production-based royalty leases before issuing well-drilling permits) “may be subject to pro-rata deduction or allocation of all reasonable post-production expenses actually incurred by the lessee,” and that “an oil or gas lessee may utilize the ‘net-back’ or ‘work-back’ method to calculate royalties.”  Leggett v. EQT Prod. Co., No. 16-0136, 2017 WL 2333083, at *1 (W. Va. May 26, 2017).  This is different from the way West Virginia has interpreted royalty clauses in leases that are not subject to the statute.  West Virginia is a “marketable product” state, meaning that when interpreting royalty clauses without certain specific language identified by the WV Supreme Court demonstrating that the parties intended to share in post-production costs, the lessor cannot share in those costs.  The result is that the lessee must bear all the cost of post-production to the point that the oil or natural gas is first “marketable” which may be somewhere far downstream of the wellhead (where the royalty is usually calculated under a majority of state’s court decisions).
  • Commonwealth Court Rejects DEP’s Single Source Determination for Well and Compressor Station of Affiliated Companies. The Commonwealth Court held that DEP can’t aggregate emissions from an exempt well site with the emissions from a compressor station for purposes of single source determinations for air emissions regulation, even though the well operator and separate midstream company are subsidiaries of the same parent company, without demonstrating that the parent or the affiliates exercise a certain level of control over one another.  A copy of the decision may be accessed here.
  • Despite Prior Rulings, Judge Says Enviros can Challenge Sunoco Pipeline Condemnation Powers for Mariner East II Pipeline. A judge in Pennsylvania broke from a number of appellate court rulings by concluding that environmental groups can challenge Sunoco’s eminent domain authority to condemn property along the Mariner East II Pipeline route even though the appellate courts have decided that Sunoco is a public utility cloaked with eminent domain powers.
  • WV Supreme Court OK’s Pooling of NPRI and Rejects Cross-Conveyance Theory. The Supreme Court of West Virginia held that a lessee may pool the interests of holders of non-participating royalties with other leases to form a unit without the NPRI holder’s consent when those interest holders have conveyed their oil and gas rights (along with the executive interests) in exchange for retaining a royalty.  The court also rejected the cross-conveyance theory which treats all interest holders in a unit as sharing interests in production from the unit. Gastar Expl., Inc. v. Contraguerro, No. 16-0429, 2017 WL 2418399 (W. Va., May 31, 2017).
  • EHB Assesses $1.1 Million Penalty on Well Operator for Continuing Violation of CSL Despite Commonwealth Court’s Ruling. The Environmental Hearing Board assessed a $1.14 million civil penalty against EQT under the Clean Streams Law for a discharge from a leaky impoundment.  Before this decision, EQT challenged the Department’s ability to issue a penalty for a continuing/daily violation and succeeded.  The Commonwealth Court held that there’s only one discharge that constitutes a violation of the CSL and DEP couldn’t issue a penalty for each day pollutants were present in the water. That decision is on appeal to the Supreme Court of Pennsylvania.  In the meantime, however, the EHB heard the case and issued this penalty (reduced from the original $4.2 million originally assessed by the Department).  In the opinion, the EHB stated that it wasn’t sure if it is bound by the Commonwealth Court’s prior decision but didn’t need to decide the question because the EHB only issued a penalty for daily violations from April 2012 up to September 2012 and not after.  A copy of the opinion may be accessed here.
  • Commonwealth Court Upholds Ordinance Authorizing Oil and Gas Well Drilling. The Commonwealth Court recently rejected a challenge to Middlesex Township’s 2014 ordinance authorizing oil and gas development within mixed residential and agricultural districts based on zoning provisions already authorizing similar uses in those districts such as public utility structures and facilities.  Delaware Riverkeeper Network v. Middlesex Township Zoning Hearing Board, — A.3d —, Nos. 1229 CD 2015, 1323 CD 2015 and 2609 CD 2015 (Pa. Cmwlth., June 7, 2017).
  • Ohio Appeals Court Confirms Divorce Decree Conveys Right to Half of Renegotiated Bonus Payment for Oil and Gas Lease. An appellate court in Ohio concluded that a divorce decree gave a spouse the right to receive one half of all “rents” and “royalties” including one-half of a renegotiated signing bonus following an assignment of a pre-existing lease, concluding that a bonus is the same as advance royalties and that the decree gave the spouse more than a mere non-participating royalty interest that does not necessarily carry with it the right to bonus payments for executing a lease.  Rochus v. Thompson, — N.E.3d —, No.  16 NO 0430, 2017 WL 2437284 (Ohio Ct. App., June 5, 2017).
  • Superior Court Sends Back Dispute over Non-Apportionment Clause in Oil and Gas Lease. The Superior Court of Pennsylvania concluded that certain modifications to an oil and gas lease that created a lesser-interest clause did not change the “non-apportionment” language in the lease and therefore did not authorize the lessee to apportion the plaintiff/landowner’s royalties on production from their lease to all other interest owners in proportionate shares. Hildebrand v. EQT Corp., — A.3d —,  2017 WL 2482850, No.  1046 WDA 2016 (Pa. Super., June 08, 2017).

Developments Beyond Appalachia us-map

  • Environmental Groups Urge EPA Secretary to Keep Methane Regulations. A coalition of environmental, health, faith, and labor groups urged EPA Secretary Pruitt to abandon his plans to pause the enforcement of and revise current methane regulations for new and modified oil and gas sources.  The NSPS were set to take effect June 3, 2017, but the agency has stayed enforcement (and courts have stayed legal challenges to the rules) pending EPA’s review and reconsideration following President Trump’s executive order demanding that the agency take a new look at the prior administration’s regulations.
  • TX Supreme Court Confirms Unambiguous County-Wide Mineral Grant. The Supreme Court of Texas recently concluded that a grant of “all the mineral, royalty and overriding royalty interest owned by grantor in Harrison County” unambiguously conveyed all the grantor’s mineral interests in that county and rejected the argument that the deed contained an ambiguity merely because it also identified specific parcels of property within the county.  Davis v. Mueller, — S.W.3d —, No. 16-0155 (Tex., May 27, 2017).
  • Indiana Court Tackles ROFR for Oil and Gas Lease Purchase. In a matter of first impression, a court of appeals in Indian concluded that a landowner/lessor could not circumvent a lessee’s right of first refusal to purchase the leased premises by submitting a third-party offer to the lessee in which the leased premises were bundled with other properties.  B&R Oil Co., Inc., v. Stoler, — N.E.3d —, No. 71A04-1603-PL-608, 2017 WL 2334035 (Ind. Ct. App., May 30, 2017).
  • Texas Appellate Court Confirms Contingent Remaindermen/Unleased Cotenants Must Execute Oil and Gas Lease with Life Tenant. An appellate court in Texas confirmed that contingent remaindermen must also execute an oil and gas lease executed by the life tenant and ordered that the remaindermen are unleased cotenants entitled to an accounting. ConocoPhillips v. Ramirez, — S.W.3d —, 04-15-00487-CV, 2017 WL 2457090 (Tex. App., June 7, 2017).
  • Bad Zip Code Dooms Bid to Quiet Title in ND Mineral Ownership Dispute. The Supreme Court of North Dakota concluded that plaintiffs seeking to quiet title to oil and gas interests did not comply with a state statute requiring notice to a predecessor in interest that the mineral estate had lapsed and merged with the surface owner’s estate because the plaintiffs had a bad zip code for the predecessor in interest and failed to conduct a reasonable inquiry to get the right address even though it was available to them. Huebner v. Furlinger, — N.W.2d —, 20160269, 2017 WL 2483375, 2017 ND 145 (N.D., June 8, 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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