Oil + Gas Update - Welcome to 2020.
Happy New Year and welcome back to At the Well Weekly. As 2019 ended, the oil-to-gas ratio widened since our last report as oil prices generally climbed before plateauing while natural gas prices across indices along with rig counts both hit low points the industry hasn't seen for some time. In pipeline news, Pennsylvania regulators lifted a permit ban and green-lighted construction of the company's various projects including Revolution Pipeline after settling violations for record amounts; the Fourth Circuit vacated a key permit for an ACP compressor station; and PennEast asked FERC for more time to build the pipeline. In Appalachia and other regions, courts were been busy dealing with lease disputes and related issues, regulatory matters, climate change, and a host of other topics.
Here's a review of the past several weeks...
Rig Counts, Spot Prices + Oil Prices
Rigs: National (-781); Marcellus (+41); Utica/Point Pleasant (-10)
Brent Crude: -$64.90/bbl
West Texas Intermediate: -$59.04/bbl
NYMEX: February 2020 @ -$2.141/MMBtu.
Spot Prices: Henry Hub (-$2.08/MMBtu); Dominion South (-$1.71/MMBtu); Tenn. Zone 4 (-$1.70/MMBtu)
("+" or "-" or blank denotes increase, decrease, or flat. )
WOPL - Appalachia
In our new section, WOPL ("waiting on pipelines"), we provide the latest news on the status of various pipeline projects in Appalachia:
Adelphia Project (Greater Philadelphia Region): FERC issued an approval for the Southeastern Pennsylvania Adelphia project.
Atlantic Coast (W. Va. to Va. and NC): ACP's appeal remains pending in the Supreme Court. The Fourth Circuit vacated a permit for a compressor station (see below for more case details).
Atlantic Sunrise (Northeastern PA to SE Pennsylvania): Nothing new to report.
Constitution (Northeastern PA to NY): FERC denied New York’s request for rehearing of the agency's decision that state environmental regulators waived their authority to issue or deny a water quality certification for the pipeline.
Empire Pipeline (NY to PA): Nothing new to report.
Leidy South - Benton Loop Expansion (PA): Nothing new to report.
Mariner East (Western PA to Eastern PA): An investor of Energy Transfer claims in a new derivative lawsuit that the company through its CEO coerced PA regulators and the Governor to approve pipeline projects. The case is pending. Recently, an administrative law judge fined Sunoco for safety violations.
Mountaineer XPress (WV): Nothing new to report.
Mountain Valley Pipeline (Northern WV to Southern Va. and NC): A court in Virginia approved a $2.15 million settlement of environmental issues associated with Mountain Valley Pipeline over the objections of environmental groups.
NEXUS (Ohio to Michigan): Nothing new to report.
NFG FM100 Project (NC PA to Transco): Nothing new to report.
Northeast Supply Enhancement Project (NJ/NY): Nothing new to report.
Northern Access (NW PA to Western NY): Nothing new to report.
PennEast (PA to Central Jersey): PennEast requested a two-year extension to complete the construction of the pipeline given delays engendered by litigation and regulatory challenges.
Regional Energy Access (NE PA to PA/NJ): Nothing new to report.
Revolution Pipeline (PA): DEP and ETP reached a settlement in which ETP agreed to pay more than $30 million in civil penalties. The DEP lifted the company's permit bar and ETP projects halted by DEP may proceed.
Rover (OH, WV, PA to Michigan): Nothing new to report.
TransCanada Eastern Panhandle Project (PA to WV): Nothing new to report.
Headlines & Holdings - Appalachia
Fourth Circuit Rejects ACP’s Compressor Station Permit. The Fourth Circuit vacated a permit issued to Atlantic Coast Pipeline for a compressor station after concluding that the regulatory board failed to consider electric turbines as zero-emission alternatives and failed to assess the project’s potential for disproportionate health impacts on the predominately African American community where part of the project will be located. Friends of Buckingham v. State Air Pollution Control Bd., No. 19-1152, 2020 WL 63295 (4th Cir. Jan. 7, 2020).
Ohio Federal Court Denies Reconsideration of ORRI Dispute. A federal court in Ohio denied a bid to reconsider an order granting summary judgment in an ORRI dispute, rejecting one party’s claims that the instrument creating the override was invalid for lack of recording and rejecting another party’s claim that the ORRI doesn't apply to new wells. Talmage v. Bradley, No. 2:17-CV-544, 2020 WL 64008 (S.D. Ohio Jan. 7, 2020).
EHB Grants Minimal Fee Award to Sunoco Objector. In an appeal under the Clean Streams Law in which the appellants applied for reimbursement of $265,976.27 in attorney’s fees and costs, the Board awarded only $13,135.77, reasoning that the appellants’ limited success and refusal of a settlement offer would have provided them with the same relief that was awarded in the Board’s adjudication. Gerhart v. DEP, 2017-13-L (EHB Jan 7, 2020).
States, Industry Groups Urge SCOTUS to Restore Forest Service Permit for ACP. A number of industry groups and states filed briefs urging the U.S. Supreme Court to reverse the Fourth Circuit’s determination that the Forest Service lacks authority to grant a right of way through the Appalachian Trail.
Ohio Appellate Court Says Gas Readouts from Common Metering Can Establish a Well’s Production in Paying Quantities to Maintain O+G Lease. A court of appeals in Ohio rejected a lease-busting claim after concluding that production from a group of wells that passed through a common meter established that one or more of the wells produced in paying quantities in order to keep the lease alive. Fiogga v. AIM Energy, LLC, --- N.E.3d ---, No. 2019-Ohio-5044, 2019 WL 6713251 (Ohio Ct. App. Dec. 10, 2019).
Ohio Appellate Court Rejects Co-Tenant Claim to One-Fifth of O+G Estate Based on One-Fifth Ownership of Surface. A court of appeals in Ohio rejected claims that landowners should be entitled to one-fifth of an oil and gas estate based on their mistaken belief that they reserved the underlying oil and gas by owning the same percentage share of the surface estate. Brownfield v. J.A. Jeffers, --- N.E.3d ---, No. 2019-Ohio-5045 (Ohio Ct. App. Dec. 10, 2019).
Supreme Court Denies Cert in Section 401 Case. The U.S. Supreme Court declined to grant certiorari in Hoopa Valley Tribe v. FERC, 913 F.3d 1099 (2019), meaning that states must act on their Section 401 water quality certification authority to review interstate projects, including pipelines, in a timely fashion or they waive their rights.
ACP Gets Condemnation Win. A federal court in Virginia held that, as a natural gas company in possession of a certificate of public convenience and necessity from the FERC, ACP may condemn the property interests at issue in this litigation and is thus entitled to have default judgment granted in its favor against non-responding landowners. In re: Atlantic Coast Pipeline, LLC, --- F. Supp. 3d ---, No. 2:18-CV-00580-JAG, 2019 WL 6825417 (E.D. Va. Dec. 13, 2019).
PA Federal Court OK’s Removal of O+G Lease Dispute. A federal court in Pennsylvania held that, in an oil and gas lease dispute alleging breach, trespass, and specific performance, the value of royalties in dispute, the trespass claims, the possible reversion of working interests, the plugging costs, and the costs to drill additional wells satisfied the amount in controversy requirement of $75,000. Earnshaw v. Chesapeake Appalachia, L.L.C., --- F. Supp. 3d ---, No. 3:19-CV-1479, 2019 WL 6839305 (M.D. Pa. Dec. 16, 2019).
PA Appellate Court Exonerates Lawyer in Oil + Gas Lease Dispute. A panel of the Superior Court in Pennsylvania held that although a lawyer running title did not advise his client about a pre-existing lease burdening the property in question, that alleged failure to notify the client did not proximately cause the lessee’s refusal to lease with the plaintiffs and they therefore suffered no damages. Bastin v. Bassi, --- A.3d ---, No. 682 WDA 2019, 2019 WL 6840606 (Pa. Super. Dec. 16, 2019).
Ohio Court Confirms Tax Exemption for Frac Equipment. A court of appeals in Ohio interpreted a tax exemption for frac equipment to apply retroactively such that the state taxing authority abused his discretion for failing to abate penalties for non-payment of taxes previously assessed on the frac equipment but later cancelled by the exemption. Stingray Pressure Pumping LLC v. Tax Commissioner of Ohio, --- N.E.3d ---, No. 2019-Ohio-5198, 2019 WL 6876858 (Ohio Ct. App. Dec. 17, 2019).
Federal Court in PA Denies Proctor Claim to Washed Out O+G Rights. The Chief Judge of the Middle District of Pennsylvania held that the Game Commission, not the Proctor Heirs, held title to oil and gas rights the Proctors purported to reserve given that a 1908 tax sale merged the surface and subsurface estates and washed out title to the underlying oil and gas, rejecting claims that the tax sale was faulty and that the lands at issue were “seated” lands exempt from title washing. Commonwealth, Pa. Game Comm’n v. Thomas E. Proctor Heirs Trust, --- F. Supp. 3d ---, No. 1:12-CV-1567, 2019 WL 6893205 (M.D. Pa. Dec. 18, 2019).
Second Circuit Holds that Enviros’ Permit Challenge is Moot. The Second Circuit ended an environmental group’s challenge to a New York state water permit for Millennium Pipeline, holding that the case is moot because the construction is done and the project is now up and running. Delaware Riverkeeper Network v. New York State Department of Environmental Conservation, --- F.3d ---, No. 17-3895-AG, 2019 WL 6893718 (2d Cir. Dec. 18, 2019).
Ohio Federal Court Says Co-Lessors are not Indispensable/Necessary Parties. A federal court in Ohio concluded that co-lessors of oil and gas rights could not intervene or participate as amici late in the litigation over whether a lessee properly deducted post-production costs from royalties. Bounty Minerals, LLC v. Chesapeake Expl., LLC, --- F. Supp. 3d ---, No. 5:17CV1695, 2019 WL 7048981 (N.D. Ohio Dec. 23, 2019).
Federal Judge in PA Says DEP Well Production Report at 12(b)(6) Stage Can’t Support Dismissal of O+G Lease Busting Attempt for Lack of Production. A federal judge in Pennsylvania denied a lessee’s attempt to rely on publicly available production data demonstrating that a well timely produced natural gas in a case alleging a lease expired for lack of production, holding instead that the report is outside the pleadings and constitutes hearsay such that the judge could not rely on it to dismiss the claim. Earnshaw v. Chesapeake Appalachia, L.L.C., No. 3:19-CV-1479, 2019 WL 7172165 (M.D. Pa. Dec. 23, 2019).
Headlines & Holdings - Beyond Appalachia
Judge Sides with Exxon in Climate Change Shareholder Fraud Suit. The judge in the landmark climate change fraud suit brought by the Attorney General of NY dismissed all the claims, finding no evidence that Exxon defrauded its investors about the risks of climate change. The NY Attorney General announced that the office will not appeal.
Gathering Agreement Dedications Run with the Land. A federal court in Texas held that dedications in a gathering agreement run with the land under Oklahoma law such that the gathering agreement cannot be rejected under Section 365 of the Bankruptcy Code, one of two decisions that so hold and both of which conflict with the Sabine case in which the courts concluded that, under TX law, covenants in the gathering agreement do not run with the land. Alta Mesa v. Kingfisher, No. 19-35133 (S.D. Tex. Dec. 20, 2019).
Texas Appellate Court Holds that Spool Pipe Sales Subject to UCC Under "Dominant Factor" Test. A court of appeals in Texas concluded that the "dominant factor" in an agreement to provide spool pipes used in the oil and gas industry was for future sales of fabricated spools based on the parties' exchange of bid proposals (offers) and purchase orders (acceptance) such that the Uniform Commercial Code applied to the transaction. Summit Global Contractors, Inc. v. Enbridge Energy, L.P., --- S.W.3d ---, No. 14-18-00052-CV, 2019 WL 6713368 (Tex. App. Dec. 10, 2019).
OK Federal Court Holds that Statute Requires Payment of Royalties and Interest for Late Payment Without Demand. In a class action, a federal court in Oklahoma concluded that the state's statute imposing interest on late royalty payments required a pipeline company that bought oil from well owners had the obligation to pay them royalties plus interest at the same time without awaiting a demand from the well owners to submit interest on late payments. Cline v. Sunoco, Inc. (R&M), --- F. Supp. 3d ---, No. 6:17-CV-313-JAG, 2019 WL 6720206 (E.D. Okla. Dec. 10, 2019).
TX Appellate Court Invokes Strip-and-Gore Doctrine. A court of appeals in Texas upheld a determination on summary judgment that, under the strip-and-gore doctrine - a policy designed to determine the intent (or not) to convey small strips of adjoining land omitted from deed descriptions - the lessor's predecessor divested her interest in the disputed leased acreage such that the lessee could terminate the lease accordingly and had no obligation to pay royalties. Crawford v. XTO Energy, Inc., --- S.W.3d ---, No. 02-18-00217-CV, 2019 WL 6904298 (Tex. App. Dec. 19, 2019).
TX Supreme Court Says TCPA Inapplicable to Counterclaim Based on Lessor's False Statements to Third Parties About Lack of O+G Production. The Supreme Court of Texas concluded that a lessor's communications to third parties about the alleged expiration of an oil and gas lease for lack of production, on which some counterclaims of the lessee and the well operator were based, did not involve "matters of public concern about a good, product, or service in the marketplace" under the Texas Citizens Participation Act (TCPA) but rather involved private business communications with third parties such that the counterclaims of the lessee and well operator survived dismissal under the TCPA. Creative Oil & Gas, LLC v. Lona Hills Ranch, LLC, --- S.W.3d ---, No. 18-0656, 2019 WL 6971659 (Tex. Dec. 20, 2019).
Fifth Circuit Addresses DOI Demand to Settle Gas Delivery Imbalances by Cash Payments on Production. In an oil and gas royalty case involving "orders to pay" issued by the Department of the Interior in order to resolve volumetric gas delivery imbalances, the Fifth Circuit concluded that DOI could demand cash instead of in-kind payments for production based on the phrase “amount or value” in Outer Continental Shelf Lands Act but held that DOI's demand for cash payments to resolve shortfalls in prior deliveries of in-kind royalty payments is a new substantive rule that is unenforceable without meeting the requirements of notice-and-comment rulemaking procedures. W & T Offshore, Inc. v. Bernhardt, --- F.3d ---, No. 18-30876, 2019 WL 7042417 (5th Cir. Dec. 23, 2019).
Tex. Appellate Court Addresses Fractional v. Floating Royalty Reservation. A court of appeals in Texas construed a phrase in a deed that says “this conveyance shall not affect any interest which any grantors or their heirs or assigns have or may have to the non-participating 1/8th royalty in and under said land" as a reservation of an entire "floating" 1/8th royalty, reasoning that the rest of the deed specifically conveyed other incidents of mineral ownership except for the right to receive royalties and that the fractional descriptor of 1/8th was not used to describe a fixed-fractional share of 1/8th of production but rather as a proxy for the usual and customary royalty of the deed's era such that the grantor reserved the entire non-participatory royalty as a floating royalty (rather than a fixed fraction or fixed royalty). WTX Fund, LLC v. Brown, --- S.W.3d ---, No. 08-17-00104-CV, 2020 WL 91210 (Tex. App. Jan. 8, 2020).
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