Oil + Gas Update | Royalties, Lease-Busting Bids, and Dead Cattle Claims.
Natural gas prices held firm above $4/MMBtu to start the year off alongside climbing rig counts and oil prices. In pipeline news, MVP secured stream-crossing permits but face challenges from environmental groups. In Appalachia, courts grappled with well plugging obligations, open records disputes, lease-busting bids, and override claims. In other regions, courts addressed anti-indemnity issues, lease busting bids, royalties and post-production costs, late fees on royalty payments, recovery for cattle deaths near oil + gas operations, and state taxation of oil + gas equipment.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (604); Marcellus (33); Utica/Point Pleasant (11)
Brent Crude: $87.89/bbl
West Texas Intermediate: $85.14/bbl
NYMEX: February 2021 @ $4.031/MMBtu
Spot Prices: Henry Hub ($4.74/MMBtu); Tenn. Zone 4 ($4.26/MMBtu); Eastern Gas South (f/k/a Dominion South) ($4.35/MMBtu)
WOPL - Appalachia
Mountain Valley Pipeline. MVP secured stream-crossing permits in Virginia and West Virginia, followed swiftly by challenges from environmental groups. The company still plans for a 2022 start date.
Stonehenge Pipeline. UGI acquired Stonehenge Pipeline to move approximately 130 mcf/day along 47 miles of pipe in western Pennsylvania.
Headlines & Holdings - Appalachia
Commonwealth Court Says EHB Needs to Recalculate Penalty for Conventional O+G Well Plugging Responsibility. Following a DEP order to plug conventional wells, the Commonwealth Court held that Environmental Hearing Board must recalculate the financial responsibility of a conventional oil and gas company and its owner to determine how many more abandoned wells they should plug. DEP v. B&R Res., LLC, --- A.3d ----, No. 291 C.D. 2020, 2021 WL 5764308 (Pa. Cmwlth. Dec. 6, 2021).
PA Supremes Say PUC, not Open Records Office, Controls Disclosure of Pipeline CSI. The Pennsylvania Supreme Court held that the Public Utility Commission has exclusive authority to review requests for records of a public utility designated as confidential security information (“CSI”) under the Public Utility Confidential Security Information Disclosure Protection Act. Energy Transfer v. Friedman, --- A.3d ----, No. 24 MAP 2021, 2021 WL 6058770 (Pa. Dec. 22, 2021).
Pa. Superior Court Holds that O+G Lease Expired, Tenancy-at-Will Resulted. The Pennsylvania Superior Court concluded that an oil and gas lease would expire for lack of production from 1991 and 2016 and would result in a tenancy at will that the lessor could terminate by rejecting an annual $100 payment and filing a lawsuit, but the court remanded to determine whether production in fact actually ceased during that 25-year period. Allison v. Rice Drilling B, --- A.3d ----, No. 537 WDA 2021, 2021 WL 6140828 (Pa. Super. Dec. 30, 2021).
Del. Court Says ETE Owes Williams Breakup Fee after Failed Merger. The Delaware Court of Chancery held that although Energy Transfer had exit rights if it wished to back away from a possible merger with Williams, ETE owed Williams a multi-million breakup fee. The Williams Companies v. Energy Transfer LP, --- A.3d ----, No. 12168-VCG, 2021 WL 6136723 (Del. Ch. Dec. 29, 2021).
Ohio Federal Court Denies Validity of Unrecorded O+G Override. In a dispute over an overriding royalty interest, a federal court in Ohio concluded that an override is invalid in a county in which it is not recorded and the claimed owner did not satisfy the “actual and open possession” exception or the “enforcement between the parties thereto” exception in order to enforce the override against subsequent purchasers. Talmage v. Bradley, --- F. Supp. 3d ----, No. 2:17-CV-544, 2022 WL 92463, at *8 (S.D. Ohio Jan. 10, 2022).
Texas Federal Judge Tosses Securities Fraud Claim Against Cabot/Coterra. A federal court in Texas dismissed various claims in a securities-fraud complaint alleging that Cabot (n/k/a Coterra Energy, Inc.) minimized costs and risks to investors and concealed environmental compliance issues in Pennsylvania that led to criminal charges brought by the Attorney General of Pennsylvania years later, holding that the investors could re-file the complaint to state some claims that lacked enough of a factual basis in the current complaint. Del. County Employees Retirement System v. Cabot Oil & Gas Corp., --- F. Supp. 3d ----, No. CV H-21-2045, 2022 WL 112029 (S.D. Tex. Jan. 12, 2022).
Gulfport Dodges Securities Fraud Claims. A New York federal judge dismissed a securities-fraud class action filed by Gulfport investors alleging that the company made materially false and misleading statements about how the company accounted for oil and gas properties. Woodley v. Wood, --- F. Supp. 3d ----, No. 20 CIV. 2357 (ER), 2022 WL 103563, at *1 (S.D.N.Y. Jan. 11, 2022).
Fed. Court in Ky. Applies Notice-and-Cure Provision to Bar Lease-Busting Claim. In a lease-busting case, a federal court in Kentucky concluded that a lessor had the obligation to notify the lessee of its objection to inadequate production, as opposed to cessation of production, before filing suit and therefore barred the lessor’s claim that the lessee abandoned the lease or that it expired for lack of production in paying quantities. Bluegrass Materials Co., LLC v. Freeman, --- F. Supp. 3d ----, No. 118CV00177GNSHBB, 2022 WL 124672 (W.D. Ky. Jan. 12, 2022).
Third Circuit Permits Appeal in EQT Storage Fight. The Third Circuit will hear an appeal from EQT regarding a class of Pennsylvania landowners alleging that the company has been storing natural gas in six separate storage fields and utilizing the landowners’ pore space without compensation, holding that interlocutory appeal is appropriate in this case given the district court’s order certifying a class without a proper class definition. Laudato v. EQT Corp., --- F.4th ----, No. 21-8047, 2022 WL 176230 (3d Cir. Jan. 20, 2022).
Headlines & Holdings - Beyond Appalachia
Fifth Circuit Says Wyoming Oilfield Anti-Indemnity Act Applies. In a choice of law dispute, the Fifth Circuit held that Wyoming’s prohibition on indemnity agreements in oilfield contracts, rather than Texas’s statute that allows them in certain circumstances, governed a service agreement that included a mutual indemnity obligation and therefore prohibited indemnification for a Wyoming lawsuit filed by a Wyoming resident injured in a Wyoming oilfield operated by a Wyoming business. Cannon Oil & Gas Well Servs., Inc. v. KLX Energy Servs., L.L.C., --- F.4th ----, No. 21-20115, 2021 WL 5856796 (5th Cir. Dec. 10, 2021).
Tex. Bkrptcy. Ct. Rejects Lease-Busting Bid. In an adversary action, a bankruptcy judge rejected claims that an oil and gas lease expired and resulted in a trespass, holding that both the continuous development provision and temporary cessation clause authorized the lessee to hold certain leases by continuing to drill new wells and to restore production within 120 days in the event of a cessation of production. In re: EP Energy E&P Company, --- B.R. ----, No. 19-35647, 2021 WL 5917771 (Bankr. S.D. Tex. Dec. 14, 2021).
Fed. Ct. in Tx. Says No Royalties for Free Gas Used Off Lease. A federal court in Texas interpreting a “market value at the well” royalty clause held that the lessor in an oil and gas dispute is not entitled to royalties on gas used off lease when it is consumed in post-production services for gas that is sold. Fitzgerald v. Apache Corp.,--- F. Supp. 3d ----, No. CV H-21-1306, 2021 WL 5999262 (S.D. Tex. Dec. 20, 2021).
Tx. App. Ct. Holds that Operator Can’t Withhold Production Payments under Statute. An appellate court in Texas held that a production company couldn’t withhold production payments under the Tex. Natural Resources Code and remanded for a determination on the amount and interest on payments owed. 1776 Energy Partners v. Freeport-McMoRan Oil & Gas LLC, --- S.W.3d ----, No. 04-20-00468-CV, 2021 WL 6127930 (Tex. App. Dec. 29, 2021).
States’ Lawsuit Against Biden re: Keystone Pipeline Cancellation is Moot. A Texas federal judge tossed a suit brought by Texas, Montana and other states challenging President Biden’s authority to cancel the Keystone XL pipeline permit because the pipeline project is no more and the case is therefore moot. The State of Texas et al. v. Joseph R. Biden Jr. et al., No. 3:21-cv-00065 (S.D. Tex. Jan. 6, 2022).
Title Dispute Justified Withheld Royalties under North Dakota Statute. The Supreme Court of North Dakota concluded that a state statute compelling royalty payments does not apply when there is a dispute over title. Vic Christensen Min. Tr. v. Enerplus Res. (USA) Corp., --- N.W.2d ----, No. 20210050, 2022 WL 58255 (N.D. Jan. 6, 2022).
Fifth Circuit Denies Arbitration of Pipeline Inspectors’ FLSA Claims. The Fifth Circuit held that the client/customer of a pipeline-inspection firm cannot invoke the arbitration agreement between the firm and its employees to compel arbitration of the pipeline inspectors’ FLSA claims. Newman v. Plains All Am. Pipeline, L.P., --- F.3d ----, No. 21-50253, 2022 WL 72075 (5th Cir. Jan. 7, 2022).
Illinois Court Directs Commerce Commission to Consider Sunoco’s Pa. Compliance Issues in Dispute over Proposed Pumping Stations. An appellate court in Illinois rejected most of the objections of environmental groups to proposed pumping stations along the Dakota Access Pipeline operated by Energy Transfer/Sunoco, including the claim that “the public” means the whole world for purposes of reviewing Sunoco’s permit application, but remanded so the Commission should take into consideration Sunoco’s regulatory violations in Pennsylvania. Save Our Illinois Land v. Illinois Commerce Commission, --- N.E.3d ----, No. 4-21-0008, 2022 WL 110229 (Ill. App. Jan. 12, 2022).
Tex. Appellate Court Upholds Late Fees on Overdue O+G Royalty Payments. In a royalty dispute, a Texas appellate court concluded that a lessee owed late fees on overdue royalty payments, holding that the lease did not prohibit compounded late fees for overdue royalties. Samson Expl., LLC v. Bordages, --- S.W.3d ---, No. 09-20-00174-CV, 2022 WL 120004 (Tex. App. Jan. 13, 2022).
DC Circuit Remands DOE’s New EPCA Efficiency Rule for Commercial/Residential Boilers. The D.C. Circuit concluded that the DOE Secretary by regulation established a new standard for “commercial packaged boilers” that is more stringent than that promulgated by the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE), holding that the Secretary lacked clear and convincing evidence that the more stringent standard is economically justified, technically feasible, and would lead to significant conservation of energy and remanding for additional findings. Am. Pub. Gas Ass’n v. United States Dep’t of Energy, --- F.4th ----, No. 20-1068, 2022 WL 151923 (D.C. Cir. Jan. 18, 2022).
No Liability for Death of Cattle Wandering Around O+G Well Operations. In a case alleging damages for death to 132 head of cattle near oil and gas well operations, a court of appeals in Texas upheld a verdict for the well operator, holding that the well operator has the dominant estate in the oil and gas with rights to surface use and cannot be liable absent intentional, willful, or wanton injury to cattle on the area of oil and gas operations. Foote v. Texcel Exploration, Inc., --- S.W.3d ----, No. 11-20-00028-CV, 2022 WL 175824 (Tex. App. Jan. 20, 2022).
Kansas Appellate Court Says Mobile Well Service Rigs are not Exempt from State Taxation as Commercial/Industrial Machinery + Equipment. A court of appeals in Kansas held that a county’s classification of mobile well service rigs as taxable oil and gas property as opposed to exempt “commercial and industrial machinery and equipment” did not violate Kansas law or create an arbitrary and discriminatory tax classification that violates the rig owners’ right to equal protection. Alliance Well Service, Inc. v. Pratt County, Kansas, --- S.W.3d ----, No. 123,017, 2022 WL 186578 (Kan. Ct. App. Jan. 21, 2022).
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