Oil + Gas Update | PA Supremes to Decide Attorney-Fee Obligations in EHB Appeals.
Gas prices remained steady between $4 and $5 per MMBtu since our last report alongside rising oil prices and a steady rig count. In pipeline news, PennEast scrapped its plans for the phase of the pipeline project in NJ though plans for Pennsylvania are still in the mix while the Pennsylvania Attorney General announced close to 50 criminal violations against Sunoco in connection with Mariner East. In Appalachia, courts addressed the burdens in royalty disputes, JOAs, oil and gas deeds, and free gas rights while the Pennsylvania Supreme Court is poised to decide a permittee's obligation to pay attorneys' fees in DEP permit disputes before the Environmental Hearing Board. In other regions, courts grappled with number of issues involving royalties, surface use, overrides, preemption, labor/employment, and indemnity obligations.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (542); Marcellus (27); Utica/Point Pleasant (10)
Brent Crude: $86.26/bbl
West Texas Intermediate: $84.25/bbl
NYMEX: November 2021 @ $5.170/MMBtu
Spot Prices: Henry Hub ($4.79/MMBtu); Tenn. Zone 4 ($4.21/MMBtu); Eastern Gas South (f/k/a Dominion South) ($4.12/MMBtu)
WOPL - Appalachia
Mountain Valley Pipeline. EPA’s regional office submitted comments to FERC and expressed concerns with MVP’s open-cut methods and water quality plan proposals for the pipeline project. Environmental groups and the U.S. Army Corps of Engineers reached an agreement on attorneys’ fees and agreed to drop their ongoing dispute over the MVP project in the Fourth Circuit. MVP pursues Facebook for the identity of individuals behind opposition groups.
PennEast Pipeline. PennEast has dropped its plan to build the NJ portion of the pipeline project but there's still a chance the PA phase will move forward.
Mariner East. The 45th Investigating Grand Jury returned 48 criminal charges against Energy Transfer d/b/a Sunoco Pipeline over spills of drilling fluid that went unreported to state regulators during the construction of the Mariner East 2 pipeline.
Atlantic Coast Pipeline. A federal judge dismissed a Religious Freedom Restoration Act claim against the long-abandoned Atlantic Coast Pipeline project.
Headlines & Holdings - Appalachia
WV Federal Court Says EQT-Landowner Settlement Bars Royalty Claims. A federal court in West Virginia enforced a class-action settlement that resolved royalty claims and held that landowners could not sue EQT for similar claims that the settlement addressed. The Kay Company LLC v. EQT, --- F. Supp. 3d. ---, No. 1:13-CV-151 (N.D. W. Va. Sept. 14, 2021).
Federal Court in PA Says Royalty Owners have Burden to Prove Breach of Market Enhancement Clause. A federal court in Pennsylvania rejected claims by royalty owners that a lessee breached a market-enhancement-type royalty clause in the parties’ oil and gas lease – which gives lessees the ability to deduct a royalty owners’ share of post-production costs that enhance the value of gas – and rejected attempts by royalty owners to shift the burden to the lessee to prove that the costs enhance the value of gas, holding instead that a plaintiff in a breach of contract action regarding royalties has the burden of proof under Pennsylvania law. Tennant v. Range Resources – Appalachia, LLC, --- F. Supp. 3d ---, No. CV 18-1533, 2021 WL 4288365 (W.D. Pa. Sept. 21, 2021).
Federal Court in PA Says no Breach of JOA. A federal court in Pennsylvania held that a non-operator failed to satisfy timing conditions in a JOA to compel its counterparty to participate in proposed wells, holding that the JOA at issue unambiguously required the proposing party to specify a commencement date within 120 days and the counterparty did not comply. Epsilon Energy USA, Inc. v. Chesapeake Appalachia, LLC, --- F. Supp. 3d ---, No. 1:21-CV-00658, 2021 WL 4306123 (M.D. Pa. Sept. 22, 2021).
Fed. Court Certifies Class Action Involving O+G Storage. A federal court in Pennsylvania certified a class action against EQT alleging the company improperly stored gas in the subsurface underlying the plaintiffs’ properties without paying them. Asbury v. EQT, No. 18-1005 (W.D. Pa.) (pending)
SCOTUS Denies Cert. in. PA Supreme Court Case on De Facto Taking. The U.S. Supreme Court denied a request to review a Pennsylvania Supreme Court’s decision that a new highway cutting off access to a 73-acre coalfield didn’t constitute a “de facto” taking because the evidence suggested the coal companies’ ability to obtain a permit from PADEP would be too speculative to support a claim. PBS Coals, Inc. v. PennDOT, --- A.3d ---, No. 41 WAP 2019, 2021 WL 190970 (Pa. Jan. 20, 2021).
PA Supreme Court to Decide When Permittees are on the Hook for Attorneys’ Fees under Clean Streams Law. The Pennsylvania Supreme Court granted allowance of appeal in a case involving whether/when permittees are on the hook to pay attorneys’ fees when environmental groups or others challenge DEP actions.
Fed. Ct. in PA Says O+G Deed Conveyed Royalty Interest. A federal court in Pennsylvania held that an 1897 deed conveyed only a royalty interest rather than a fee simple in the oil and gas estate, rejecting the “estate misconception” theory applied in other states to interpret an otherwise unambiguous deed and concluding that the oil and gas interests reverted to the original grantor’s heirs and assigns while the separate royalty interest expired when the associated oil and gas lease expired. JJK Mineral Co. II, LLC v. Morris, --- F. Supp. 3d ---, No. 2:20-CV-2025, 2021 WL 4594675 (W.D. Pa. Oct. 6, 2021).
NY Appellate Court Says Free Gas Rights Expired When O+G Reservation Period Expired. A court of appeals in New York concluded that a grantor’s reservation of oil and gas rights for 20 years expired in 2015 such that the grantor’s estate improperly conveyed the oil, gas, and minerals, including free gas rights, in 2019. BPGS Land Holdings, LLC v. Flower, --- N.Y.S.3d ---, No. 616, 2021 WL 4702606 (N.Y. App. Div. Oct. 8, 2021).
Ohio Court Says O+G Lease Expired for Lack of Production in Paying Quantities. A court of appeals in Ohio concluded that a successor owner of property that included a well producing marginal gas bore registration and filing responsibilities given that the oil and gas lease covering the property expired long ago for lack of production in paying quantities and the leasehold interest reverted back to the current owner of the fee simple estate.Kuster v. Ohio Department of Taxation, --- N.E.3d ---, No. 2021-Ohio-3721, No. 2021 CA 00014, 2021 WL 4859583 (Ohio Ct. App. October 19, 2021).
Headlines & Holdings - Beyond Appalachia
Fed. Court in Wyo. Upholds Feds’ O+G Royalty Valuation Process. A federal court in Wyoming upheld regulations changing the way the federal government calculates oil and gas royalties on production from federal lands and concluded that the Office of Natural Resources Revenue provided a reasoned explanation for its changes. Cloud Creek Energy v. DOI, --- F. Supp. 3d ---, No. 19-121 (D. Wyo. September 8, 2021).
Highly Paid Rig Workers Entitled to OT, Fifth Circuit Holds. The en banc Fifth Circuit said a highly paid rig worker is entitled to overtime despite arguments from the companies and trade groups that such a ruling has drastic economic effects on the industry. Hewitt v. Helix Energy Solutions Group Inc., No. 19-20023 (5th Cir. Sept. 10, 2021).
TX Bankruptcy Court Says T&F Part of Price Received for Royalty Calculation. A bankruptcy court in Texas concluded that transportation and fractionation charges are part of the price received by lessee for purposes of calculating royalties. In re: Chesapeake Energy Corp., --- B.R. ---, No. 20-33233, 2021 WL 4190266 (Bankr. S.D. Tex. Sept. 14, 2021).
DE Bankruptcy Court Says Landowner Failed to Exhaust Remedies under CO Law to Press Royalty Claims. A bankruptcy court dismissed an adversary proceeding initiated by a landowner against a debtor lessee for underpaid royalties, holding that the court lacked jurisdiction because the landowners failed to press their royalty claims before the Colorado Oil and Gas Conservation Act and therefore failed to exhaust administrative remedies. In re Extraction OIl & Gas, Inc., --- B.R. ---, No. 20-11548 (CSS), 2021 WL 4262212 (Bankr. D. Del. Sept. 20, 2021).
TX Appeals Court Separately Interprets Leases Covering Separate Tracts for Purposes of Lease-Expiration Claims. A court of appeals in Texas that two leases covered separate tracts should be interpreted separately and held that one of the leases expired under a standard habendum clause for lack of operations on the tract covered by the expired lease. Tier 1 Res. Partners v. Delaware Basin Res. LLC, --- S.W.3d ---, No. 08-20-00060-CV, 2021 WL 4260793 (Tex. App. Sept. 20, 2021).
Colo. Federal Court Scraps BLM's Leasing Decisions under APA and NEPA. A federal court in Colorado upheld a challenge to BLM's oil and gas leasing decision in portions of Colorado, holding that BLM's decisions lacked the proper review under NEPA and remanded to the agency for further review. Rocky Mountain Wild v. Haaland, --- F. Supp. 3d ---, No. 18-CV-02468-MSK, 2021 WL 4438032 (D. Colo. Sept. 28, 2021).
Colo. Fed. Court Rejects Excessive Surface Use Claims. A federal court in Colorado held that a landowner failed to establish that a lessee of severed oil and gas rights materially impaired with the landowners' surface use, holding that the landowners failed to establish that the company materially impaired the use of the surface for farming operations. Bay v. Anadarko E&P Co. LP, -- F. Supp. 3d ---, No. 09-CV-02293-MSK-MJW, 2021 WL 4438031 (D. Colo. Sept. 28, 2021).
ND Supremes Says WI Burdened by Royalty Interest; Division Order Doesn't Apply. The North Dakota Supreme Court held that (a) a previously reserved one-eighth royalty burdened the current working interest without evidence demonstrating the parties meant to exclude the burden and (b) notwithstanding well operator's initial payments pursuant to a signed division order, owner of overriding royalty interest could recover from well operator for underpayments. Cont'l Res., Inc. v. Armstrong, --- N.W.3d ---, No. 20210060, 2021 WL 4465746 (N.D. Sept. 30, 2021).
TX Bankruptcy Court Says NPI not Subject to Lawyers' Fees. A bankruptcy court in Texas interpreted a net-profits-interest agreement and held that lawyers' fees are not expenses of ownership or operation of wells that may be deducted from a net-profits interest. In re: Houston Bluebonnet LLC, --- B.R. ---, No. 16-34850, 2021 WL 4562255 (Bankr. S.D. Tex. Oct. 5, 2021).
Cal. App. Court Says County Ordinance Preempted. A court of appeals in California held that California Public Resources Code explicitly provides that the state's oil and gas supervisor has the authority to decide whether to permit an oil and gas drilling operation to drill a new well or to utilize wastewater injection in its operations and therefore preempts local regulation of these aspects of oil and gas operations. Chevron U.S.A., Inc. v. County of Monterey, No. H045791, 2021 WL 4743024 (Cal. Ct. App. Oct. 12, 2021).
Ins. Co. has Duty to Defend, Indemnify Contractor under MSA. In a case involving an injury sustained by an employee of a well operator's contractor, a federal court in Texas concluded that Texas law governed the obligations of the parties under the Master Service Agreement at issue; the insurer has a duty to defend and indemnify the contractor entities if they qualify as additional insureds under the policy; if the well operator owes indemnity to the contractor in the underlying action, the amount should be capped. Nabors Drilling Tech. USA Inc. v. Deepwell Energy Servs. LLC, --- F. Supp. 3d ---, No. 4:19-CV-02854, 2021 WL 4924758 (S.D. Tex. Oct. 21, 2021).
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