At the Well Weekly – Oil and Gas Update for Week Ending 1/5/2018 – Ohio Supreme Court Rejects Implied Covenant of Further Exploration/Development in Oil and Gas Leases; Tenth Circuit Rejects “Marketable Product” Rule for Calculating Royalties

As we open 2018, oil prices slipped a bit after hitting a three-year high at the end of the year while natural gas spot prices got a jolt from extreme weather conditions in the northeast.  In Appalachia, the Ohio Supreme Court rejected the notion that oil and gas leases held by production from shallow formations contain an implied covenant to further explore and develop deeper strata.  In other news, the Tenth Circuit rejected the “marketable product” rule for calculating royalty clauses in New Mexico oil and gas leases.  Here’s the week in review: 

The Rig Count oil

  • The national rig count is down at 924 (Source: BakerHughes).
  • The rig count in the Marcellus is up at 48. (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 up at $6.88/MMBtu. (Source: EIA).
  • In the Marcellus and Utica region, spot prices are up. At Dominion South, the spot price is up at $5.86/MMBtu. The Transco spot price is up at $5.75/MMBtu.  (Source: EIA).
  • Oil prices are up at $ $67.53/bbl. (Source: WSJ).

Developments in Appalachia mountains      

  • Ohio Supreme Court Says No Implied Covenant of Further Exploration. The Ohio Supreme Court issued a decision on January 3, 2018, rejecting the notion that oil and gas leases contain an implied covenant of further exploration or development of deeper strata on properties already held by production from more shallow formations.  The landowners argued that their leases (held by production from other formations) included an implicit obligation on the lessee’s part to explore and produce from deeper strata, especially if a lease did not disclaim implied covenants, and the lessee should forfeit the lease for failing to explore and produce further.  The court rejected that approach, concluding that Ohio recognizes a covenant of reasonable development and that’s sufficient to protect landowners from an implied-covenant standpoint.  Alford v. Collins-McGregor Operating Co., — N.E.2d —, Slip Opinion No. 2018–Ohio–8 (Ohio, Jan. 3, 2018).
  • Federal Court in PA Parses Privileged Communications regarding Proper Post-Production Deductions in Royalty Dispute. A federal judge recently concluded that attorney-client privilege did not shield from discovery certain emails regarding proper deduction of post-production costs among business people within the lessee’s organization even if a lawyer was copied on the emails absent actual attorney-client communication and legal advice. Municipal Authority of Westmoreland County v. CNX Gas Company, LLC, — F. Supp. 3d —, No. 2:16-CV-422, 2017 WL 6539308 (W.D. Pa., Dec. 21, 2017).
  • PA Federal Court Dismisses Lawsuits Involving Oil and Gas Leases with Arbitration Clauses. A federal judge in the Middle District dismissed a number of lawsuits filed by landowners alleging improper royalty payments, RICO violations, and other related claims for failing to pursue arbitration as required by their oil and gas leases but allowed landowners whose leases contain no arbitration clause to proceed in federal court. Abrams v. Chesapeake Energy Corp., — F. Supp. 3d —, No. 4:16-CV-1343, 2017 WL 6541511 (M.D. Pa. Dec. 21, 2017).
  • Federal Judge in PA Imposes Sanctions on Lawyer and Environmental Group for Repeatedly Challenging Oil and Gas Activity Based on Discredited Theories.  A federal judge in Pennsylvania ordered sanctions against an attorney and the Community Environmental Legal Defense Fund for repeatedly filing pleadings and motions that are “clearly unreasonable” and therefore in bad faith within the meaning of 28 U.S.C. § 1927, reasoning that the repeated pleadings and motions sought to enforce a local ordinance drafted by the lawyer and the group and previously struck down by the court as unconstitutional because it purported to overturn longstanding constitutional rights of corporations and ignoring the established preemptive effect of valid federal and state permits and environmental regulation.  The court noted prior actions by the duo over the last 15 years in which the lawyer asserted the same arguments that the courts repeatedly rejected as lacking any basis in law or fact to justify setting aside well-settled legal principles. The court also referred the matter to the Pennsylvania Disciplinary Board. Pennsylvania Gen. Energy Co., LLC v. Grant Twp., — F. Supp. 3d —, No. CV 14-209-ERIE, 2018 WL 306679 (W.D. Pa., Jan. 5, 2018).

Developments beyond Appalachia us-map

  • Tenth Circuit Rejects Marketable Product Rule for Calculating Royalties in New Mexico. The Tenth Circuit recently concluded that New Mexico does not follow the “marketable product” rule for calculating royalties and therefore lessees may account for a lessor’s proportionate share of all post-production costs using the net-back method to establish the market value of natural gas at the well-head on which to pay royalties.  The court reasoned that although lessees have an implied obligation to render gas marketable for sale, the lessee is under no obligation to bear those costs alone either under the parties’ oil and gas lease or under state law.  Anderson Living Tr. v. Energen Res. Corp., — F.3d —, No. 16-2124, 2018 WL 328884 (10th Cir., Jan. 9, 2018).
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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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