Oil + Gas Update | Sixth Circuit: Royalties Payable "At the Well" are Subject to Post-Production Costs
Natural gas prices dropped slightly alongside a slight increase in rigs in the U.S. while oil prices jumped back up to about $90/bbl after dipping during the week in response to investor concerns over possible Fed interest-rate hikes. In pipeline news, the Fourth Circuit Court of Appeals vacated authorizations from U.S. agencies for the Mountain Valley Pipeline. In Appalachia court news, the Sixth Circuit addressed royalties payable on gross proceeds at the wellhead while and the Commonwealth Court denied bids based on the "Environmental Rights Amendment" to invalidate local ordinances authorizing oil and gas development in various zoning districts. In other regions, Alaska's high court denied a bid to challenge the state's policies on fossil-fuel development, a federal court in North Dakota held that royalty owners timely pursued interest on late payments under a state statute, and a court of appeals in Texas addressed how a most-favored-nations clause required increased bonus payments for oil and gas leases.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (610); Marcellus (34); Utica/Point Pleasant (11)
Brent Crude: $90.03/bbl
West Texas Intermediate: $86.82/bbl
NYMEX: February 2021 @ $4.277/MMBtu
Spot Prices: Henry Hub ($4.37/MMBtu); Tenn. Zone 4 ($4.03/MMBtu); Eastern Gas South (f/k/a Dominion South) ($4.02/MMBtu)
WOPL - Appalachia
Mountain Valley Pipeline. In a dispute over various authorizations for Mountain Valley Pipeline, the Fourth Circuit vacated decisions by the U.S. Forest Service and Bureau of Land Management and concluded that the agencies inadequately considered the actual sedimentation and erosion impacts of the pipeline; prematurely authorized the use of the conventional bore method to construct stream crossings; and failed to comply with the Forest Service’s 2012 Planning Rule. The court denied other challenges to the pre-decisional review process, alternative routes, and increased collocation.Wild Virginia v. Unite States Forest Service, --- F.4th ----, No. 21-1039, 2022 WL 215125 (4th Cir. Jan. 25, 2022).
Headlines & Holdings - Appalachia
Sixth Circuit Holds that Royalties Payable "At the Well" are Subject to Post-Production Costs. The Sixth Circuit concluded that a lease calling for royalties based on gross proceeds at the wellhead are subject to post-production costs, endorsing the net-back method for calculating wellhead value and rejecting landowner arguments that royalties should be payable on the downstream sales price without accounting for post-production costs. Zehentbauer Family Land LP v. Chesapeake Exploration, LLC, --- F.4th ----, No. 20-3469, 2022 WL 294081 (6th Cir. Feb. 1, 2022). This is the third case to so hold within the last year or so, the others being Coastal Forest Resources Co. v. Chevron U.S.A., Inc., No. 2:20-cv-1119, 2021 WL 1894596, at *2 (W.D. Pa. May 11, 2021) and Dressler Family, LP v. PennEnergy Resources, Docket No. AD-17-10357, (Butler County April 28, 2021), appeal pending in the Superior Court of PA at 635 WDA 2021.
Cmwlth. Ct. Denies Enviro Group’s ERA Challenge to O+G Ordinance. Relying on its prior decisions in Frederick and Protect PT, the Commonwealth Court concluded that an amendment to a zoning ordinance authorizing oil and gas development in certain zones did not violate Article I, sec. 27 of the Pennsylvania Constitution, holding instead that (a) the environmental group bringing the challenge never proved that the amendment “unreasonably impairs” the rights of the municipality’s citizens; (b) the municipality was not obligated to conduct a “pre-action environmental impact analysis”; (c) in enacting an unconventional oil and gas well ordinance, a municipality need only demonstrate, through the ordinance’s design or some other form of evidence, that it considered the citizens’ rights under the ERA; (d) the municipality carefully crafted the district as the place where unconventional oil and gas may be permitted by conditional use; (e) the municipality decided that it was appropriate for wells to be located in some districts but not in other districts with more dense populations or smaller lot sizes; and (f) after the PA Supreme Court issued its decision in Robinson Township, the municipality here reconvened a task force and reassessed appropriate locations for unconventional oil and gas drilling sites in an attempt to minimize the impact to the greatest extent possible on the existing population. Murrysville Watch Comm., Appellant v. Municipality of Murrysville Zoning Hearing Bd., --- A.3d ----, No. 579 C.D. 2020, 2022 WL 200112 (Pa. Cmwlth. Jan. 24, 2022).
Headlines & Holdings - Beyond Appalachia
N.D. Federal Court Holds that Claim for Interest on Late O+G Royalties not Barred by Six-Year Statute of Limitations. In a class action dispute over royalty payments, a federal court in North Dakota concluded that the state statute calling for 18% interest on late royalty payments is remedial rather than a penalty such that the state’s six-year statute of limitation applies (as opposed to a three-year statute for penalty claims). Rice v. Burlington Resources Oil & Gas Company LP, --- F. Supp. 3d ----, No. 20-CV-00431-GKF-CDL, 2022 WL 193595 (N.D. Okla. Jan. 21, 2022).
TX App. Ct. Says MFN Clause Requires Payment of Higher Lease Bonus. An appellate court in Texas concluded that a lessor was entitled to increased bonus on existing leases to match a higher bonus payment on subsequent lessees acquired by the same lessee pursuant to a most-favored-nations clause, rejecting the lessee’s clam that the MFN clause’s increased bonus obligation only applied prospectively from the date of the subsequent triggering leases.EP Energy E&P Co., LP v. Storey Minerals Ltd., --- S.W.3d ----, 04-19-00534-CV, 2022 WL 223253 (Tex. App. Jan. 26, 2022).
Alaska Supreme Court Denies Constitutional Environmental Rights Challenge. The Supreme Court in Alaska upheld an order dismissing a lawsuit filed by a number of young Alaskans alleging that the state’s policies encouraging fossil fuel resource development is contributing to climate change and adversely affecting their lives in violation of the state’s constitutional natural resources provisions, concluding that the claims for injunctive relief presented non-justiciable political questions better left to the other branches of government and that the claims for declaratory relief should, as a matter of judicial prudence, be left for actual controversies arising from specific actions by Alaska’s legislative and executive branches. Sagoonick v. Alaska, --- P.3d ----, No. S-17297, 2022 WL 262268 (Alaska Jan. 28, 2022).
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