Since our last report, natural gas prices dropped alongside a flat rig count and a slight increase in oil prices. In Appalachia, PADEP is poised to increase permit fees and is on the verge of finalizing methane-reduction general permits for new oil and gas sources and compressor stations while West Virginia’s legislature takes a step towards reforming rules governing a co-tenant’s ability to lease without the consent of other co-tenants. In other news, the Trump Administration’s infrastructure plan seeks to quicken approvals for pipeline projects and the New Mexico Supreme Court defined what constitutes “commencement of operations” under a JOA for purposes of meeting a deadline to recover penalties from non-consenting operators. Here’s the week in review:
Rig Counts, Oil Prices, & Spot Prices
- Rigs: National (975); Marcellus (↑56); Utica/Point Pleasant (↓22)
- Brent Crude: ↑$64.60/bbl
- West Texas Intermediate: ↑$61.63/bbl
- NYMEX: March 2018 Contract ↓$2.587/MMBtu
- Spot Prices: Henry Hub (↓$2.51/MMBtu); Dominion South (↓$1.98/MMBtu); Tenn. Zone 4 (↓$1.85/MMBtu)
Developments in Appalachia
- PADEP Well Permit Fee Increase. PADEP’s Bureau of Oil and Gas Management reportedly is operating at a deficit and to close the gap proposes a permit fee increase to a flat $12,500 per well permit application for unconventional wells with no plans to increase conventional well permit applications. The increase is expected following a rulemaking process.
- General Permits for Methane Emissions from Oil and Gas Sources. Following a series of revisions based on public and industry comment, PADEP plans to issue final general permits for oil and gas sources and compressor stations that set limits on methane emissions for various activities. PADEP reports that the permits will be available through e-permitting and the anticipated effective dates are 60 days from final publication for GP-5A (applicable to oil and gas sources) and 30 days from final publication for GP-5 (applicable to compressor stations). PADEP is also revising what’s known as “Exemption 38” that exempts certain sources from air permitting requirements, including certain specified oil and gas well activities.
- West Virginia Bill on Co-Tenants. The West Virginia House passed a co-tenancy bill by a vote of 60-40 last week, allowing oil and gas development of co-owned properties as long as 3/4 of co-tenants agree. Under the common law, co-tenants cannot enter into an oil and gas lease absent the consent of all the co-tenants (a minority view among oil and gas producing jurisdictions).
- Severance Tax in PA. The Governor of Pennsylvania is proposing a severance tax based on natural gas prices, on top of the state’s impact fee, at the following rates: (1) $0.04/mcf when prices are up to $3/mcf; (2) $0.05/mcf when prices are from $3.01/mcf to $4.99/mcf; (3) $0.06/mcf when prices are from $5.01/mcf to $5.99/mcf; and (4) $0.07/mcf when prices are $6.00/mcf or more.
- No Breach of Oil and Gas Lease for Failing to Notify Landowners of DPU. A federal court in West Virginia rejected a purported breach of contract claim against Chesapeake for failing to notify the plaintiffs that the lessee filed a unit declaration, concluding that the lease only required recording of the DPU, not direct notice to the landowner, and in any event the landowner could not demonstrate any actual harm resulting from lack of notification. Lucey v. Chesapeake Energy. et al., — F. Supp. 3d —, No. 5:17-CV-126, 2018 WL 771725 (N.D.W. Va. Feb. 7, 2018).
- Third Circuit Rejects Claim that “Dunham Rule” is Unconstitutional. The Third Circuit rejected a curious claim by a landowner that Pennsylvania’s “Dunham Rule” – a rule of deed interpretation that requires a conveyance or exception/reservation to use the words “oil and gas” if the parties intend to convey or except/reserve those interests – is unconstitutional under the federal Due Process and Takings Clauses because the landowner never explained how the rule of interpretation deprives him of property rights. Uschock v. Pennsylvania, No. 17-2692, 2018 WL 834247 (3d Cir., Feb. 13, 2018).
- No Damages for Lack of Production Under PSA that Only Requires “Spudding” of Wells. A federal court in West Virginia concluded that a well operator breached a PSA by failing to spud several wells as required by the agreement but the counterparty could not recover damages in the form of lost royalties for failing to complete the wells, concluding that royalties are only payable on production and the PSA only required spudding of wells, not production. Statoil USA Onshore Properties, Inc. v. Pine Resources, LLC, — F. Supp. 3d —, No. 2:14-CV-21169, 2018 WL 889229 (S.D.W. Va., Feb. 14, 2018).
- Oil and Gas Lessee Doesn’t Need to Seek Arbitration Before Accounting for Post-Production Costs. The West Virginia Supreme Court concluded that an oil and gas lease did not impose an obligation on a lessee to seek an arbitrator’s ruling before paying royalties that accounted for the landowner’s share of post-production costs and therefore did not waive the right to arbitrate a future dispute over post-production cost sharing. Chevron U.S.A., Inc. v. Bonar, — F. Supp. —, 16-1213, 2018 WL 871567 (W. Va., Feb. 14, 2018).
- OH Federal Court Says No Trespass Liability for FERC Certified Pipeline Operator. A federal court in Ohio concluded that a gas pipeline certificated by FERC could not be liable for trespass damages for construction and operation of facilities given its right of entry and the lack of any evidence that the operations caused actual damage to or interfered with the use of the landowner’s property. Baatz v. Columbia Gas Transmission, — F. Supp. —, No. 1:14-CV-505, 2018 WL 889209 (N.D. Ohio, Feb. 14, 2018).
Developments beyond Appalachia
- Trump’s Infrastructure Plan and Pipelines. The infrastructure plan unveiled by the President would seek to speed up Section 401 certificates for pipeline projects and authorize the interior secretary rather than Congress to approve pipelines that cross national parks.
- BLM Proposes Rollback of Venting/Flaring Rule on Public/Native Lands. The Bureau of Land Management announced a proposal to revise the 2016 final Waste Prevention Rule (also known as the venting and flaring rule). The proposed rule would eliminate duplicative regulatory requirements and re-establish long-standing requirements that the 2016 final rule sought to replace. The proposal includes a 60-day opportunity for public comment.
- What Constitutes Sufficient “Commencement of Operations” Under a JOA in New Mexico to Guarantee the Operator Payment of Non-Consent Penalties? The Supreme Court of New Mexico recently held that an operator proposing a well “commenced operations” within the JOA’s ninety-day deadline after the non-operator went “non-consent” and therefore could recover non-consent penalties of up to 400% even though the operator did not obtain a well-drilling permit within that time as long as there is evidence that the operator committed resources – whether on-site or off-site – demonstrating its present good-faith intention to diligently carry on drilling activities until completion. Enduro Operating LLC v. Echo Prod., Inc., — P.3d —, No. S-1-SC-36225, 2018 WL 897360 (N.M., Feb. 15, 2018).
- Payment Obligations under SUA Run with the Land, Fifth Circuit Holds. The Fifth Circuit Court of Appeals held that payment obligations under a surface use agreement ran with the surface of the land such that the seller forfeited its right to recover those payments upon the sale of the property covered by the SUA before the payment became due. Fort Worth 4th St. Partners, L.P. v. Chesapeake Energy Corp., — F.3d —, No. 17-10040, 2018 WL 897894 (5th Cir., Feb. 15, 2018).