Oil + Gas Update | Q4 2022 Roundup.
Natural gas prices are down around $2-$3/MMBtu across the board, dropping in the midst of weather and supply forecasts, and causing some operators to consider scaling back on production. The rig count is steady as oil prices remain under $90/bbl. In pipeline news, MVP is still alive and kicking despite ongoing litigation and regulatory challenges. In Appalachia, the highlights include a federal court in Pennsylvania upholding cross-unit drilling and the Fourth Circuit court upholding "market enhancement" royalty clauses. In other regions, highlights include life estates and oil/gas rights, statutory pooling, NPRI disputes, surface use, assignments, and fixed vs. floating royalties.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (771); Marcellus (37); Utica/Point Pleasant (15)
Brent Crude: $88.43/bbl
West Texas Intermediate: $81.94/bbl
NYMEX: February 2023 @ $3.311/MMBtu
Spot Prices: Henry Hub ($3.11/MMBtu); Tennessee Zone 4 ($2.58/MMBtu); Eastern Gas South ($2.43/MMBtu)
WOPL - Appalachia
Mountain Valley Pipeline. The Forest Service issued a revised EIS for the MVP project and proposed new construction guidelines. The project still faces litigation challenges. The Sierra Club, Appalachian Voices, and eight other conservation groups sued the Virginia State Water Control Board, alleging that its approval of a state water protection permit and water quality certification violated the Clean Water Act. The case was argued in the Fourth Circuit. Legislative efforts in Congress aimed at helping the project move forward have stalled.
Headlines & Holdings - Appalachia
Third Circuit Rejects Nuns’ RFRA Claim Against Pipeline Co. For the second time, the Third Circuit rejected claims (this time for money damages) brought by the Adorers of the Blood of Christ that Transco’s project violated their rights under the Religious Freedom and Restoration Act, holding that the complaint constitutes “an impermissible collateral attack” on the Natural Gas Act’s procedures for challenging FERC approvals and that the nuns did not raise any objection with FERC during “the years-long administrative proceedings which ultimately authorized the pipeline.” Adorers of the Blood of Christ United States Province v. Transcon. Gas Pipe Line Co LLC, --- F.4th ----, No. 21-2898, 2022 WL 16754137 (3d Cir. Nov. 8, 2022).
Commonwealth Court Rejects ERA Challenge to Laws Regulating ATVs and Snowmobile Trails. The Commonwealth Court of Pennsylvania rejected a facial challenge to statutes that balanced recreational activities and forest preservation, holding that the petitioners alleged no facts that the laws in question unreasonably impaired citizens’ environmental rights and reasoning that (a) the legislature presumptively investigated the issue and determined what’s best for the public; and (b) if the petitioners prevailed, the legislature’s balancing of interests would be eliminated. Pennsylvania Env't Def. Found. v. Commonwealth of Pennsylvania, --- A.3d ----, No. 447 M.D. 2021, 2022 WL 16752900 (Pa. Cmwlth. Nov. 8, 2022).
WV Says State PSC has Jurisdiction over Gathering. The WV Supreme Court upheld an ALJ’s order requiring a gathering company to allow another public utility to connect a natural gas field tap on its customers’ property to the gathering company’s line, holding that the Public Service Commission had jurisdiction because the gathering company dedicated its gathering line to serve rural consumers for decades as a “public utility” despite a statutory exemption of gathering facilities from the jurisdiction of the PSC. Equitrans v. Public Service Commission of West Virginia, --- S.E.2d ----, No. 22-0293, 2022 WL 16946494 (W. Va. Nov. 15, 2022).
WV Supremes Prevent Bid to Depose O+G Company Lawyer. The West Virginia Supreme Court granted a writ of prohibition against a judge and thereby denied an attempt to depose Antero’s in-house lawyer, holding that the attorney-client privilege applied and the so-called crime-fraud exception to the privilege did not. State ex rel. Antero Res. Corp. v. Honorable Christopher McCarthy, --- S.E.2d ----, No. 22-0400, 2022 WL 17038493 (W. Va. Nov. 17, 2022).
Sixth Circuit Sends Back Lease Expiration Case for “Paying Quantities” Analysis. The Sixth Circuit reversed a district court order holding that a lease didn’t expire after periods of no or very little production on the leased premises, concluding instead that (a) the district court must evaluate whether in fact the wells at issue failed to produce for a period of time and if so whether that prolonged inactivity was unreasonable; and (b) the lessors didn’t waive their lease-expiration claim by accepting royalty payments. Bluegrass Materials Co., LLC v. Freeman, --- F.4th ----, No. 22-5091, 2022 WL 17175573 (6th Cir. Nov. 23, 2022).
Sixth Circuit Rejects Constitutional Challenges to Pipeline Stop-Work Order. The Sixth Circuit rejected constitutional claims brought by Rover Pipeline against a county after the county’s engineer issued a stop-work order for damage to roads during pipeline operations, holding instead that the pipeline breached the contract with the county and had no constitutional basis to challenge the stop-work order. Rover Pipeline LLC v. Zwick, --- F.4th ----, No. 22-3370, 2022 WL 17336502 (6th Cir. Nov. 30, 2022).
Commonwealth Court Says Landowners Get De Facto Taking Hearing in Gas Storage Dispute. The Commonwealth Court held that plaintiffs in consolidated class actions alleging a de facto taking against a gas storage company did not waive their right to an evidentiary hearing and remanded for further proceedings Hughes v. UGI Storage Co., --- A.3d ----, No. 453 C.D. 2019, 2022 WL 17332220 (Pa. Cmwlth. Nov. 30, 2022).
Ohio Supreme Court Says O+G Lease Violates Deed Restriction. The Supreme Court of Ohio held that restrictions in a deed to prevent development as part of government grants for open space projects applied to both surface and subsurface estates such that a village violated those restrictions by leasing oil and gas rights underlying the property without the consent of the state Ohio Pub. Works Comm'n v. Barnesville, --- N.E.3d ----, No. 2020-1129, 2022 WL 17835696 (December 22, 2022).
OOR Rejects Request for DEP Records of O+G Operators. The PA Office of Open Records dismissed an appeal from DEP’s denial of a request under the PA Right to Know Law for records of companies submitted to DEP reflecting “[c]hemical data sheets, records setting forth all chemicals, fluids, and other products used in connection with the oil and gas operations on the property, including proprietary chemicals, as is required under the Environmental Rights Amendment” holding that the request was too vague and dismissing the appeal without prejudice to refile a records request that complies with the specificity requirements of the Right to Know Law. In re: Gorencel v. PADEP, No. AP 2022-2532, 2022 WL 17887308 (Pa. Off. Open Rec. December 20, 2022).
Fourth Circuit Says Lessee can Deduct some PPC from O+G Royalties under Market Enhancement Clause. The Fourth Circuit concluded that oil and gas leases with royalty clauses that are (a) silent as to post-production-cost sharing and (b) are modified with “market enhancement clauses” are both subject to the West Virginia rule articulated in Tawney that a lease must (1) “expressly provide that the lessor shall bear some part of the costs incurred between the wellhead and the point of sale”; (2) “identify with particularity the specific deductions the lessee intends to take from the lessor's royalty”; and (3) “indicate the method of calculating the amount to be deducted from the royalty for such post-production costs.” In this case, the court held that silent royalty provisions did not satisfy Tawney. However, leases modified with “market enhancement clauses” authorized deductions, stating as follows:
In sum, the Market Enhancement Clause satisfies Tawney and has a plain, unambiguous meaning: when Antero pays royalties from the sale of a particular product, it may deduct actual and reasonable costs it incurred after that product became fit for sale, as long as those costs enhanced the value of the product. Because the district court instead treated the Clause as ambiguous, we vacate that portion of the judgment and remand for further proceedings. On remand, the finder of fact will need to determine which products Antero sold during the relevant time frame, when those products became marketable, and whether Antero incurred the PRC2 and TRN3 costs before or after that point.
Corder v. Antero Res. Corp., --- F.4th ----, No. 21-1715, 2023 WL 105712 (4th Cir. Jan. 5, 2023).
Pa Cmwlth. Ct. Says Pipeline Security Info not Subject to Disclosure. The Pennsylvania Commonwealth Court held that emails between the Public Utility Commission and Energy Transfer LP are confidential security information under a state statute and that the Office of Open Records erred by concluding that the records qualified for public disclosure. Energy Transfer LP v. Rebecca Moss & Spotlight PA, --- A.3d ----, No. 1700 C.D. 2019, 2023 WL 331805 (Pa. Cmwlth. Jan. 20, 2023).
Federal Court in PA Upholds PA Statute and O+G Lease in Challenge to Cross-Unit Wells. A federal court in Pennsylvania upheld a PA statute known as Act 85, which authorizes the use of cross-unit drilling subject to reasonable allocation of production among the units traversed by a horizontal well as long as the lease does not prohibit the practice, concluding that the statute did not violate the Contracts Clause and further holding that various clauses in the lease support the use of cross-unit wells for purposes of exploring and producing oil and gas from multiple units. Warner Valley Farm, LLC v. SWN Production Company, LLC, --- F. Supp. 3d ----, No. 4:21-CV-01079, 2023 WL 373237 (M.D. Pa. Jan. 24, 2023).
Headlines & Holdings - Beyond Appalachia
Fifth Circuit Makes O+G Debtor Pay Up After Surge in NatGas Prices, Revenues. The Fifth Circuit held that the “solvent-debtor” exception in bankruptcy applied to compel an oil and gas company to pay what it promised to creditors now that it is financially capable of doing so given that natural gas prices and company revenues made the company solvent while restructuring. In re Ultra Petroleum Corp., --- F.4th ----, No. 21-20008, 2022 WL 8025329 (5th Cir. Oct. 14, 2022).
Wyo. Supreme Court Weighs in on Life Estates and O+G Rights. The Wyoming Supreme Court held that grantors who reserved life estate in minerals are not precluded from entering into mineral leases which lasted beyond their lifetimes. Orth Silo Resources, LLC v. Deselms, --- P.3d ----, Nos. S-21-0267, S-21-0291, 2022 WL 14749104 (Wyo. Oct. 26, 2022).
Tex. Court Addresses O+G Lease Assignments. A court of appeals in Texas concluded that an assignor conveyed a 1998 lease in a broad assignment of various oil and gas property interests, holding that the plain language of the assignment taken as a whole conveyed away the lease in question and a statue-of-frauds defense (i.e., that the assignment did not name the lease) did not apply. Mark S. Hogg, LLC v. Blackbeard Operating, LLC, --- S.W.3d ----, No. 08-20-00199-CV, 2022 WL 17069878 (Tex. App. Nov. 17, 2022).
N.D. Supremes Answer Certified Question on Statutory Pooling Issue. In a dispute involving the allocation of royalties on production from overlapping oil and gas spacing units, the North Dakota Supreme Court held that a percentage of production from wells in an area located on an overlapping unit should not be allocated to all properties in the underlying unit, reasoning that nothing in the state’s pooling statue compels the allocation of royalties in multiple, overlapping spacing units or provides explicit rules for allocation of production among more than one unit. Dominek v. Equinor Energy, --- N.W.2d ----, 2022 ND 211 (Nov. 23, 2022).
Tex. Court Says NPRI not Reduced by Landowner Royalty. A court of appeals in Texas concluded that a royalty interest in an oil and gas lease did not reduce the amount owed to the holder of a separate non-participating royalty interest. Hahn v. ConocoPhillips Co., --- S.W.3d ----, No. 13-21-00310-CV, 2022 WL 17351596 (Tex. App. Dec. 1, 2022).
Tex. Appellate Court Addresses Duhig, Presumed-Grant Doctrines in NPRI Spat. In a complex case to determine the extent of a non-participating royalty interest, a court of appeals in Texas interpreted several deeds and concluded that landowners owned a one-fourth NPRI, rejecting applications of the Duhig rule and the presumed-grant theory to challenge the landowner’s claim to the NPRI. David v. COG Operating, LLC, --- S.W.3d ----, No. 08-20-00205-CV, 2022 WL 17477948 (Tex. App. Dec. 6, 2022).
Arkansas Appellate Court Addresses Implied Duty to Restore Surface. An appellate court in Arkansas held that (a) an oil and gas lease includes an implied duty to restore the surface of property after operations to a condition that does not prevent or impair an existing or intended use by the surface owner; and (b) whether a lessee’s efforts to restore the property falls short in that regard is necessarily a question of fact that must be determined on a case-by-case basis. Taylor Family Ltd. P’Ship v. XTO Energy, Inc., --- S.W.3d ----, No. CV-20-704, 2022 WL 17660326 (2022).
Texas Appellate Court Says Assignment Conveyed Shallow and Deep O+G Rights. A court of appeals in Texas interpreted an assignment of all right, title, and interest in oil and gas rights as conveying all interests regardless of depth despite a reference to certain depths in the description of properties assigned, reasoning that the parties in the “subject to” clause of the assignment stated the depth references are not controlling for purpose of the grant. Citation 2022 Investment, LLC, v. Endeavor Energy Resources, LP, --- S.W.3d ----, No. 08-21-00029-CV, 2022 WL 17850986 (Tex. App. Dec. 22, 2022).
Tenth Circuit Remands ORRI Dispute in Colorado. The Tenth Circuit remanded a claim by the seller of an overriding royalty interests who claimed that a company misled her into selling one-third of her interests for lack of producing lands on the property in question, concluding that fact issues precluded summary judgment in favor of the company as to whether the seller of the ORRI had constructive notice of producing wells on the property and rejecting, for now, the company’s argument that the seller’s reliance on the company’s misrepresentations were unjustified based on the public record. Grayden v. Spring Creek Energy Partners, LLC, --- F.4th ----, No. 22-1097, 2022 WL 17972139 (10th Cir. Dec. 28, 2022).
Wyo. Supremes Say Double-Damages Provision in “Split Estate Act” Applies for Underpayment under Surface Use Agreement. The Wyoming Supreme Court held that the double-damages provision in Wyoming’s Split Estate Act, which provides for compensation to surface owners for surface use in connection with oil and gas operations, applies when an oil and gas operator underpays an installment under a surface use and damage agreement and that the surface owner’s claim for double damages otherwise was not barred by the statute of limitations or laches. EOG Resources v. JJLM Land, LLC, --- P.3d ----, No. S-22-0095, 2022 WY 162, 2022 WL 17974373 (Wyo. Dec. 28, 2022).
Texas Appellate Court Interprets Mineral Deed as Reserving “Floating” Royalty Interest. A court of appeals in Texas interpreted a 1940 deed conveying an “undivided one half (½) of the usual one-eighth (1/8) royalty” and providing further that “if, as and when production is obtained grantor, their heirs and assigns, shall receive one-half (1/2) of the usual one-eighth (1/8) royalty, or one-sixteenth (1/16) of the total production” reserved a “floating” 1/2 non-participating royalty interest, not a “fixed” 1/16 interest. Bridges v. Uhl, --- S.W.3d ----, No. 08-21-00130-CV, 2022 WL 17985705 (Tex. App. Dec. 29, 2022).
Fed. Ct. in Tex. Rejects RICO Suit Against O+G Landmen. A federal court in Texas rejected RICO claims based on allegations that landmen knowingly executed and recorded 31 bogus mineral deeds in the county records to cloud the landowner’s title, holding that the dispute “at its core, is a dispute over title”; stating that the landowners “complain about commonplace conduct pervading the Texas oil and gas industry: a company uses landmen to find and acquire mineral interests based on purported defects in recorded chains and then initiates title litigation in state court to resolve ownership”; and reasoning that “[t]o construe the facts alleged in Plaintiffs’ complaint as supporting a civil RICO claim would have the effect of chilling oil and gas litigation.” DOH Oil Co. v. Kahle, --- F. Supp. 3d ----, No. MO:22-CV-58-DC, 2023 WL 102150 (W.D. Tex. Jan. 4, 2023).
Eleventh Circuit Addresses Georgia Mineral Lapse Statute. The Eleventh Circuit addressed Georgia’s mineral lapse statute – providing that mineral interests won’t lapse and revert to the surface owner if the subsurface owner “worked” the mineral rights – and held that the mineral owner did not demonstrate on summary judgment that it drilled holes and collected core samples on the property for purposes of working or attempting to work the mineral rights P.D. Miller Farms, LLC v. BASF Catalysts, --- F.4th ----, No. 22-11375, 2023 WL 106828 (11th Cir. Jan. 5, 2023).
* * *
designed for business clients and in-house counsel.
Check out +lawyer | pilot, a consulting service designed
to help law students and lawyers become leaders in the law.
