At the Well Weekly – Oil and Gas Update for Week Ending 5/4/2018 – PA Superior Court Issues Controversial Decision on the Rule of Capture; WV Enacts Minimum Royalty Legislation; Texas Supremes Tackle Taxes, Rule Against Perpetuities, and Retained Acreage Provisions

After a few months off, we are back at the well for weekly updates.  The rig count surpassed 1000 units nationwide (for the first time in a long time) alongside a rise in oil prices (hovering around $70/bbl), but natural gas prices continue to underwhelm. In Appalachia, the Pennsylvania Supreme Court rejected PADEP’s continuing violation theory of imposing civil penalties for regulatory violations, the Pennsylvania Superior Court issued a controversial decision on the rule of capture and hydraulic fracturing, and the West Virginia legislature quietly enacted minimum royalty legislation while passing co-tenancy reform.  In other regions, the Texas Supreme Court remains relatively busy, interpreting retained-acreage provisions and tax statutes and deciding whether or not the rule against perpetuities applies to NPRI interests. Meanwhile, other courts grappled with ORRIs, AMI agreements, post-production costs, and top leases.  Since it’s been a while, here’s a roundup of the latest cases since our last report in February.

Rig Counts, Oil Prices, & Spot Prices oil  

  • Rigs: National (­­­­­1032); Marcellus (54); Utica/Point Pleasant (­25)
  • Brent Crude: $73.44/bbl
  • West Texas Intermediate: $68.25/bbl
  • NYMEX: June 2018 contract @ $2.754/MMBtu.
  • Spot Prices: Henry Hub ($2.73/MMBtu); Dominion South ($2.20/MMBtu); Tenn. Zone 4 ($1.64/MMBtu)
  • Sources: BakerHughes; WSJ; EIA.

Developments in Appalachia mountains       

  • Local Regulation of Mariner II East Preempted by Public Utility Code and PUC Regulations. The Commonwealth Court rejected local attempts to apply a zoning ordinance and impose restrictions on the Mariner II East Pipeline Project, concluding that state law and regulation trumps local regulation.  Delaware Riverkeeper Network v. Sunoco Pipeline L.P., — A.3d —, No. 952 CD 2017, 2018 WL 943041 952 C.D. 2017 (Pa. Cmwlth., Feb. 16, 2018).
  • Atlantic Coast Gets Win. A federal court in West Virginia ruled in favor of ACP to take immediate possession of condemned properties to complete tree felling before that activity was foreclosed in mid-March 2018 by the Migratory Bird Act. Atlantic Coast Pipeline, LLC v. 5.63 Acres et al., — F. Supp. 3d —, No. 3:18-CV-6, 2018 WL 1097051 (W.D. Va., Feb. 28, 2018).
  • PA Supremes Reject DEP’s “Continuous Violation” Theory of Pollution for Civil Penalties. The PA Supreme Court invalidated DEP’s practice of imposing ongoing penalties against alleged polluters for the continued migration of contaminants in waters of the commonwealth but deferred on whether DEP could impose continuous violations based on “soil to water” pollution.  Justices Donohue and Dougherty said in their dissent that limiting the scope of the Clean Streams Law to initial releases is inconsistent with the statute. EQT v. PADEP, — A.3d —, No. 6 MAP 217 (Pa., March 28, 2018).
  • Federal Court in PA Declines Diversity Jurisdiction in Royalty Dispute. A federal judge in Pennsylvania concluded that a lessee did not meet the “amount in controversy” for removal of a royalty dispute to federal court because the current royalty dispute amounted to $33,000 and the court rejected the lessee’s estimates of future royalty exposure as too “speculative” to meet the removal threshold. Lasher v. Statoil USA Onshore Properties Inc., No. CV 3:17-0914, 2018 WL 1524881 (M.D. Pa., Mar. 28, 2018).
  • Fourth Circuit Denies Bid to Block Approval of Atlantic Coast Pipeline. The Fourth Circuit denied a request by environmental groups to block FERC’s approval of the Atlantic Coast Pipeline project because reconsideration requests were pending and they didn’t justify an order halting the project in the meantime.  Appalachian Voices et al. v. FERC, No. 18-1114 and 18-1271 (4th Cir., March 22, 2018).
  • Commonwealth Court Rejects Conditions Imposed by Municipality on Compressor Station. The Commonwealth Court rejected conditions imposed by a municipality on a compressor station proposed by MarkWest because the use was already allowed by special exception approval, the ordinance expressly allowed facilities like MarkWest’s, and the zoning board made no finding that the compressor station would detrimentally impact the health and safety of the community.  MarkWest Liberty Midstream & Resources LLC v. Cecil Township Zoning Hearing Board, — A.3d —, No. 1809 CD 2016, (Pa. Cmwlth., March 23, 2018).
  • Ohio Federal Court Certifies Royalty Class Action. A federal judge in Ohio certified a class of royalty owners alleging claims that the lessee calculated royalties based on the wrong price. Henceroth v. Chesapeake Exploration, L.L.C., — F. Supp. 3d —, No. 4:15CV2591, 2018 WL 1453547 (N.D. Ohio, Mar. 23, 2018).
  • Commonwealth Court Says Sunoco is not Subject to Local Zoning. Following a recent ruling reaching the same conclusion, the Commonwealth Court rejected arguments on appeal that Sunoco Pipeline is subject to local zoning rules given the company’s status as a certificated public utility.  Flynn et al v. Sunoco Pipeline LP, — A.3d —, No. 942 CD 2017 (Pa. Cmwlth., March 26, 2018).
  • Federal Judge in PA Denies Application of Arbitration Clause in Oil/Gas Lease to Cover Disputes over Related Assignment.  A federal judge in PA rejected a lessee’s attempt to apply an arbitration provision in an oil and gas lease to a dispute over a related assignment, concluding that there is nothing in the agreements showing that the parties intended to arbitrate disputes over the assignment despite the arbitration clause in the lease.  Jesmar Energy, Inc. v. Range Res.-Appalachia, LLC., — F. Supp. 3d —, No. CV 17-928, 2018 WL 1471978 (W.D. Pa., Mar. 26, 2018).
  • New York Federal Court Tosses Exxon’s Claims Against NY AG Alleging Conspiracy. A federal judge in New York dismissed Exxon’s claims that the New York and Massachusetts Attorneys General conspired with environmentalists and like-minded attorneys general to suppress the company’s free speech rights on climate change, concluding that the constitutional claims were “implausible” and based on “extremely thin allegations and speculative inferences.”  Exxon Mobil Corp. v. Healey et al., — F. Supp. 3d —, No. 1:17-cv-02301 (S.D.N.Y., March 29, 2018).
  • Third Circuit Tells Citgo to Pay Most of the Freight on $100 Penalty for Spill. The Third Circuit recently concluded that Citgo should shoulder most of the burden of a spill that occurred when Citgo’s chartered vessel hit a submerged anchor and spilled 263,000 gallons of crude oil into the Delaware River, shifting a portion of the penalty to Citgo and not reducing the portion Citgo is already liable for paying. In re Petition of Frescati Shipping Co. Ltd., — F.3d —, No. 16-3470 (3d Cir., March 30, 2018).
  • PUC ALJ Says Pipeline Company Can’t Reverse Flow. An administrative law judge issued a recommended decision to deny Laurel Pipeline Co.’s request to reverse the flow on a section of its cross-state pipeline that brings petroleum products from the Philadelphia area to Western Pennsylvania, reasoning in part that the reversal of flow may boost costs for PA consumersClick here for an article.
  • Landowners in NJ Continue Battles with PennEast. Sixty-three New Jersey landowners sued PennEast in federal court arguing that the company has no right to take parts of their properties using eminent domain. Click here for more details.
  • PA Supreme Court Quashed Interlocutory Appeal by PEDF in Dispute over Use of Oil and Gas Lease Funds. The Pennsylvania Supreme Court quashed an attempt at an interlocutory appeal by PEDF challenging Commonwealth Court’s decision to pass on the question of whether payments made to the state can be used to fund DCNR’s operating costs.  Recall that following the high court’s decision and remand in PEDF on Article I, sec. 27, the environmental group questioned the state’s use of funds for DCNR’s operating costs, but the Commonwealth Court said that issue was beyond the scope of the remand.  Here’s the per curiam order quashing the new appeal.
  • PGE Settles Local Frac Ban Litigation with Township. PGE settled its dispute over a local municipality’s purported ban on hydraulic fracturing operations.  Both sides agreed that Grant Township in Western PA would pay one dollar to PGE in exchange for dropping the rest of the claims, except for attorneys’ fees.
  • Oral Argument on Stripper Wells. The Pennsylvania Supreme Court heard oral argument on appeal from Commonwealth Court’s decision in Snyder Brothers, Inc. v. PUC; — A.3d —, Nos. 1043 and 1175 CD 2015, 2017 WL 1161052 (Pa. Cmwlth., Mar. 29, 2017), in which the court held that that an unconventional well that does not produce more than 90,000 cubic feet in “any” one month in a calendar year is a “stripper well” that is not subject to an impact fee.  PUC attorneys argued to the Justices that the Commonwealth Court got it wrong because the system is open to manipulation by allowing well operators to artificially reduce production in one month to avoid paying the fee all year.
  • PADEP Secretary Defends Permit Fee Increase. Secretary McDonnell defended PADEP’s proposed increase of permit fees to $12,500 per horizontal well as a method to hire more employees to process permit applications.  Click here for his prepared remarks before the state appropriations committee.
  • Co-Tenancy Law Enacted in WV. The WV Senate voted to pass HB 4268 (23-11) that would allow 75% of co-tenants to authorize oil and gas leases and development (under existing common law, no co-tenant may lease his or her interest without the consent of all other co-tenants absent partition or other extraordinary circumstances).  The Governor signed the measure. Click here for more details.
  • WV Statute on Royalties and PPC. The WV House Judiciary Committee approved SB 360 to restrict lessors and lessees from sharing in post-production costs in West Virginia when well operators apply for a permit and must switch flat-fee royalties to production-based royalties.  SB 360 came out of committee along a split vote.  The Governor signed the bill.  Click here for the new statute.
  • EQT Sues WV Over Flat-Rate Royalty and PPC Statutes. EQT sued the state of West Virginia alleging that (a) the flat-rate royalty statute (prohibiting an applicant from getting a well permit unless the applicant converts a flat-rate royalty lease to a production-based lease) and (b) the new limitation on post-production deductions from royalty payments (effective May 31, 2018) violate the Contracts Clause (prohibiting legislation that alters obligations of pre-existing contracts).  Here’s the complaint.
  • EPA Takes Steps to Relax Methane Emission Standards. EPA amended the 2016 New Source Performance Standards rule to roll back a requirement that leaking components be repaired during unplanned or emergency shutdowns in an effort to relax enhanced methane emission standards for oil and gas sources imposed by the Obama Administration.
  • AGs Sue EPA Over Methane Reduction Regs. Fourteen states sued the EPA to force the agency to pass methane reduction regulations for existing oil and gas sources.  Click here for the complaint.
  • EHB Rejects CAC’s Request for Summary Judgment against Sunoco. The Environmental Hearing Board rejected the Clean Air Council’s request for summary judgment on whether DEP improperly allowed Sunoco Partners Marketing & Terminals LP to secure approvals for the conversion of the Marcus Hook Industrial Complex in a piecemeal fashion, which allegedly enabled the project to avoid certain regulatory thresholds. The EHB rejected the request pending further review of DEP’s actions after the parties establish a record.  Clean Air Council v. DEP, No. 2016-073 (EHB March 9, 2018).
  • NY Federal Court Denies NYDEC Bid to Reject FERC Orders. The Second Circuit confirmed FERC’s decision that NYSDEC waived its authority to issue or deny a water-quality certification for the Millennium pipeline’s because the state agency did not act within the federal Clean Water Act’s Section 401 1-year timeframe. Click here for more details. NYDEC v. FERC, — F.3d —, Nos. 17‐3770‐ag (2d Cir., March 12, 2018).
  • Third Circuit Confirms No Class Arbitration of Oil and Gas Lease Disputes. The Third Circuit re-affirmed its decision that a dispute over an oil and gas lease is subject to individual arbitration rather than class arbitration based on the express terms of the arbitration clause. Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, — F.3d —, No. 17-2037, 2018 WL 1295736 (3d Cir., Mar. 13, 2018).
  • Commonwealth Court Limits Well Owner’s Plugging Obligations. The Commonwealth Court recently concluded that the sole owner of a small oil and gas company could be held personally liable for failing to take action to plug some of the company’s abandoned wells but remanded to determine how many wells the owner could plug.  B&R Resources LLC v. DEP, — A.3d —, No. 1234 C.D. 2017 (Pa. Cmwlth., March 15, 2018).
  • WV Federal Court Lets Post-Production Cost Dispute Proceed. Despite Leggett v. EQT Prod. Co., No. 16-0136, 2017 WL 2333083, at *1 (W. Va. May 26, 2017), in which the West Virginia Supreme Court endorsed a net-back method of calculating royalties, a federal judge in West Virginia concluded that issues of fact regarding the “reasonableness” of post-proudction costs precluded a motion for summary judgment filed by the lessee.  Fout v. EQT Prod. Co., — F. Supp. 3d —, No. 1:15CV68, 2018 WL 1595870 (N.D.W. Va., Apr. 2, 2018)
  • PA Superior Court Creates Uproar After Holding that Rule of Capture does not Preclude Trespass-by-Frac Claim. In a decision that upends more than a century of settled law, the Pennsylvania Superior Court concluded that the rule of capture does not preclude an action for damages resulting from drainage allegedly caused by fractures during stimulation procedures even if the lessee conducts its business within the boundaries of the leased premises.  Numerous amici flooded the docket with statements supporting the lessee’s application for reargument to have the court en banc restore the longstanding rule of capture.  Briggs v. SWN, — A.3d —, No. 1351 MDA 2017,  2018 WL 1572729 (Pa. Super., April 2, 2018).
  • Federal Court in PA Denies SWEPI’s Attempt to Dismiss Class Action Alleging Failure to Pay Oil and Gas Lease Bonuses. A federal court in Pennsylvania denied a summary judgment motion filed by SWEPI against landowners who claimed that SWEPI owed bonus payments on oil and gas leases.  SWEPI argued that the lease, memorandum, and order for payment – all contingent on lessor’s good title – did not create a completed agreement.  The court disagreed, holding that the documents taken together created an enforceable agreement even if SWEPI retained the right to back out of the deal if the lessor had bad title.  The court also denied the landowner’s cross motion because SWEPI had evidence that some lessors had bad title and therefore could avoid paying those bonus payments.  Walney v. SWEPI LP, — F. Supp. 3d —, No. CV 13-102, 2018 WL 1899037 (W.D. Pa., Apr. 20, 2018).

Developments Beyond Appalachia us-map

  • Tenth Circuit Rejects 9-Figure Damage Claim for Drilling Contract Dispute. The Tenth Circuit dismissed breach of contract and tort claims against two operators alleging breach of agreements for drilling in the Bakken.  Spring Creek Expl. & Prod. Co., LLC v. Hess Bakken Investments II, LLC, No. — F.3d —, 17-1010, 2018 WL 989586 (10th Cir., Feb. 21, 2018).
  • Federal Court Blocks BLM Rollback of Venting/Flaring Rule. A federal judge in California blocked BLM’s attempt to rollback the venting/flaring rule for gas operations on public/Indian lands, noting that the agency didn’t give adequate justification for putting a one-year hold on the methane and waste prevention rule.  State v. Bureau of Land Management, — F. Supp. 3d —, No. 17–CV–07186–WHO, 2018 WL 1014644 (N.D. Cal., February 22, 2018).
  • Oil Majors Push Back on Climate Change Claims Filed in Court. Some of the oil majors sued by California and others for alleged damages to infrastructure caused by climate change moved to dismiss on the basis that the claims are not justiciable by the courts. California v. BP et al., 17-611 and 612 (N.D. Cal., 2018) (pending).
  • Louisiana Court Concludes that Lack of Continuous Production Triggered Pugh Clause. A Louisiana court of appeals concluded that a lessee could only retain a small portion of acreage surrounding a well based on a Pugh clause given the lack of evidence of production in paying quantities necessary to maintain more than 5 acres surrounding the well.  J & L Oil Co. v. KM Oil Co., LLC, — So.3d —-, No. 51,898, 2018 WL 107540 (La. App. 2 Cir., Feb. 28, 2018).
  • Texas Supremes Confirm Constitutionality of Tax Law for Valuation of Heavy Equipment. The Texas Supreme Court upheld the constitutionality of a statute that determines the value of heavy equipment based on a formula that local taxing authorities said results in only a fraction of the market value of the equipment for tax purposes, concluding that the legislature, not the courts, should revise the tax law if it yields unintended consequences.  EXLP Leasing, LLC v. Galveston Central Appraisal District, — S.W.3d —, No. 15-0683, 2018 WL 1122363 (Tex., March 2, 2018).
  • Federal Court in ND Concludes that ORRI does not Burden Top Lease. The federal district court in North Dakota concluded that an ORRI only burdened base leases but not any top leases given that the top leases differed in material respects and did not operate to extend the bases leases under an assignment.  Pitchblack Oil, LLC v. Hess Bakken Investments II, LLC, — F. Supp. 3d —, No. 1:16-CV-349, 2018 WL 1189879 (D.N.D., Mar. 7, 2018).
  • Federal Court in ND Concludes that Lessee may Deduct Post-Production Costs from ORRI Payments. The federal district court in North Dakota concluded that an overriding royalty expressly subject to the same calculation applicable to production royalties under the related oil and gas lease is subject to post-production costs because production royalties are also subject to those costs.  El Petron Enterprises, LLC, Plaintiff, v. Whiting Res. Corp., Defendant., — F. Supp. 3d —, No. 1:16-CV-090, 2018 WL 1322391 (D.N.D., Mar. 14, 2018).
  • Court Denies Attempt by Trump Admin. to Dismiss Suit Challenging Alaska Drilling Executive Order. A federal court in Alaska denied a motion by the Trump Administration to dismiss challenges to the President’s Executive Order authorizing additional drilling in Alaska, reasoning that sovereign immunity did not shield him from claims that he exceeded his authority under the Outer Continental Shelf Lands Act and Article II of the Constitution.  League of Conservation Voters v. Trump, — F. Supp. 3d —, No. 3:17-CV-0101-SLG, 2018 WL 1385408 (D. Alaska, Mar. 19, 2018).
  • Texas Supremes Say Rule Against Perpetuities does not Invalidate a Grantee’s Future Interest in NPRI. The Texas Supreme Court held that the ancient rule against perpetuities did not invalidate a grantee’s future interest in a non-participating royalty interest while rejecting the “two grant” theory to circumvent the rule, holding instead that where a defeasible term interest is created by reservation, leaving an executory interest that is certain to vest in an ascertainable grantee, the rule does not invalidate the grantee’s future interest. ConocoPhillips Co. v. Koopmann, — S.W.3d —, No. 16-0662, 2018 WL 1440639 (Tex., Mar. 23, 2018).
  • Texas Supreme Court Concludes that “Red Flags” Precluded Lessee’s Justifiable Reliance on Oral Representations of Lessor’s Agent Regarding Title. The Supreme Court of Texas concluded that the lessee of certain mineral interests did not justifiably rely on extra-contractual representations by the lessor’s agent during oil and gas lease negotiations given a number of “red flags” that contradicted the agent’s representations about lessor’s title.  JPMorgan Chase Bank, N.A. v. Orca Assets G.P., L.L.C., — S.W.3d —, No. 15-0712, 2018 WL 1440625 (Tex., Mar. 23, 2018).
  • Federal Court in Louisiana Concludes that ORRI is Subject to Post-Production Costs. A federal court in Louisiana concluded that a lessee could share post-production costs with the owner of an ORRI because the agreement/assignment did not expressly prohibit the ORRI owner from sharing in those costs.  Fleet Oil & Gas Corp., L.L.C. v. Chesapeake Louisiana, L.P., — F. Supp. 3d —, No. CV 15-2461, 2018 WL 1463529 (W.D. La., Mar. 22, 2018).
  • Tenth Circuit Tosses Suit Against BIA Challenging Regulatory Approvals. The Tenth Circuit Court of Appeals held that plaintiffs lacked standing to challenge under NEPA BIA’s regulatory approvals issued to oil and gas operators in Osage County, Oklahoma because the plaintiffs neither identified a particular agency action that aggrieved them nor explained how such actions were final. Donelson v. United States Through Dep’t of the Interior, — F.3d —, No. 16-5174, 2018 WL 1638825 (10th Cir., Apr. 5, 2018).
  • Texas Court of Appeals Interprets “Adjoining” in Connection with Offset Well Obligation. A court of appeals in Texas concluded that a lessee did not have any offset well obligation to spud a well and prevent drainage from nearby unit operations, concluding that the unit operations took place two tracts away from the leased premises and did not qualify as “acreage adjoining” the leased premises that would trigger the offset well obligation.  Martin v. Newfield Exploration Co., — S.W.3d —, No. 13-17-00104-CV, 2018 WL 1633574 (Tex., App. Apr. 5, 2018).
  • Tenth Circuit Holds that Company’s Failure to Acquire New Leases in AMI does not Constitute Breach. The Tenth Circuit concluded that parties to an AMI agreement had no obligation to acquire new leases within an area of mutual interest even though certain obligations attached after a party elected to acquire leases, holding that the failure by either party to acquire new leases within the AMI did not constitute a breach of contract. Spring Creek Expl. & Prod. Co., LLC v. Hess Bakken Inv., II, LLC, — F.3d —, No. 17-1010, 2018 WL 1734483 (10th Cir., Apr. 10, 2018), amended sub nom., — F.3d —, No. 17-1010, 2018 WL 1783666 (10th Cir., Apr. 13, 2018).
  • Texas Supreme Court Interprets Retained Acreage Provisions. In companion cases, the Texas Supreme Court concluded that a retained acreage clause based on “a governmental proration unit assigned to a well” refers to acreage assigned by the operator, not by field rules, whereas a retained acreage clause based on acreage “included within the proration unit for each well … prescribed by field rules” refers to acreage set by the field rules, not acreage assigned by the operator. XOG Operating, LLC v. Chesapeake Expl. Ltd. P’ship, — S.W.3d —, No. 15-0935, 2018 WL 1770506 (Tex. Apr. 13, 2018); Endeavor Energy Res., L.P. v. Discovery Operating, Inc., — S.W.3d —, No. 15-0155, 2018 WL 1770290 (Tex., Apr. 13, 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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