Oil + Gas Update | Texas Court Tackles Post-Production Costs, Fuel Gas, and Free Gas Use.
The November NYMEX contract debuted at close to $7/MMBtu while the Henry Hub and Appalachia spot prices dipped below $5/MMBtu. Oil prices climbed back to more than $90/bbl while the rig count remained relatively flat. In pipeline news, Manchin's bid for energy project permit reforms - designed to help the Mountain Valley Pipeline project - failed in Congress but the project developers remain confident in a 2023 startup. In Appalachia, courts addressed notice-of-breach clauses in oil and gas leases; oil and gas co-tenants as indispensable parties in federal litigation; ORRIs; adverse possession; and deed interpretation. In other regions, courts addressed royalties payable "at the well" in connection with free gas use and fuel gas clauses; executory rights of life tenants; and "estoppel by deed" in ORRI disputes.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (762); Marcellus (40); Utica/Point Pleasant (10)
Brent Crude: $97.14/bbl
West Texas Intermediate: $91.99/bbl
NYMEX: November 2022 @ $6.930/MMBtu
Spot Prices: Henry Hub ($6.06/MMBtu); Tenn. Zone 4 ($5.77/MMBtu); Eastern Gas South (f/k/a Dominion South) ($5.67/MMBtu)
WOPL - Appalachia
Mountain Valley Pipeline. Democratic Senator Joe Manchin tried to insert some regulatory reform provisions in funding bills to help move MVP along, but he has abandoned, for now, his push to speed up the permitting process for energy projects. The developers of the MVP project say they are disappointed the energy permit reform bill failed but remain optimistic about pending approvals and starting operations in the second half of 2023 as currently planned.
Headlines & Holdings - Appalachia
Ohio Royalty Owners Failed to Allege Pre-Suit Notice of Breach of O+G Lease. In a class action alleging that a lessee improperly deducted post-production costs from royalty payments, a federal court in Ohio dismissed a complaint without prejudice to refile because the royalty owners failed to allege compliance with the lease’s provision requiring notice of a breach before filing suit, rejecting the royalty owners’ argument the lawsuit itself is sufficient notice and holding instead that compliance with the notice provision is a condition precedent to recovery. Kirkbride v. Antero Res. Corp., --- F. Supp. 3d ----, No. 2:22-CV-2251, 2022 WL 4329336 (S.D. Ohio Sept. 19, 2022).
Ohio Federal Court Denies Cross-Motions for Summary Judgment in ORRI Dispute. In a dispute over the payment of overriding royalty interests, a federal court in Ohio denied cross-motions for summary judgment because fact issues pervaded whether the ORRIS attached to oil and gas production on “drilling units” targeting the Utica Shale/Point Pleasant formation or whether those ORRIs are limited to more shallow formations only. Sabre Energy Corp. v. Gulfport Energy Corp., --- F. Supp. 3d ----, No. 2:19-CV-5559, 2022 WL 4376228 (S.D. Ohio Sept. 22, 2022).
PA Fed. Ct. Says O+G Cotenants are not Necessary or Indispensable Parties. A federal court in Pennsylvania denied a bid to dismiss a complaint for lack of necessary and indispensable parties, holding that fifty-percent co-owners who ratified their interest in three of the four lots subject to the oil and gas leases in question lack of a “common right” with the plaintiffs even though the plaintiffs may be liable over to the absent co-tenants for their share of production under co-tenancy principles. Sugar Bowl Ranch, LLC, v. SWN PRODUCTION COMPANY, LLC --- F. Supp. 3d ----, No. 4:22-CV-00287, 2022 WL 4472452 (M.D. Pa. Sept. 26, 2022).
Ohio Court Says O+G Lease Destroys Surface Owner’s Adverse Possession Claim. A court of appeals in Ohio rejected a surface owner’s claim of title to property by adverse possession, holding that a 1958 lease gave the lessee and its successors the right to possess the surface estate to develop the underlying oil and gas and therefore precluded a finding that the surface owner had “exclusive use” of the property for the statutory period in order to acquire title by adverse possession. Cottril v. Quarry Enterprises, LLC, --- N.E.3d ----, No. 2022 CA 00011, 2022 WL 4481613 (Ohio Ct. App. September 27, 2022).
PA Superior Court Addresses O+G Reservation vs. Exception. The Superior Court of Pennsylvania held that a deed retaining ownership of oil and gas “together with” the rights to drill and operate created no new right or interest in the grantor and therefore the oil and gas clause constituted an “exception” of oil and gas rights as opposed to reservation. Hunnell v. Krawczewicz, --- A.3d ----, No. 1367 WDA 2021, 2022 WL 4542006 (Pa. Super. Sept. 29, 2022).
Headlines & Holdings - Beyond Appalachia
Wyoming Supreme Court Addresses Executory Rights of O+G Life Tenants. In a dispute over mineral rights, the Wyoming Supreme Court held that life tenants owned 100% of their mineral interests and had executory rights to lease their estate for a period that extended beyond their life tenancy, and the lessee, in turn, leased 100% of the mineral such that it had standing to quiet title to 50% of the mineral estate subject to the lease despite claims that the lessee could only bring such actions as a mineral owner (not a lessee). North Silo Resources, LLC v. Desalms, --- P.3d. ----, Nos. S-21-0267, S-21-0291,2022 WY 116, 2022 WL 4375436 (Wyo. Sept. 22, 2022).
Tex. Appeals Court Holds that “Market Value at the Well” in Royalty Clause Authorizes Post-Production Costs. In a dispute over royalties and post-production costs, a court of appeals in Texas held that (a) the phrase “market value at the mouth of the well” in a royalty clause requires the deduction of post-production costs from royalty payments; (b) the lessee did not owe any royalties on fuel gas; and (c) the free-use clause in the lease did not alter the gas royalty provision’s requirement that the lessors bear their share of post-production costs. Enervest Operating v. Mayfield, --- S.W.3d ----, No. 04-21-00337-CV, 2022 WL 4492785 (Tex. App. Sept. 28, 2022).
Tx. App. Ct. Addresses Estoppel by Deed in ORRI Dispute. A court of appeals in Texas held that a grantor seeking to reserve an overriding royalty interest in leases was a stranger to title who could not reserve the ORRI and that the “estoppel by deed” doctrine did not prevent the assignees from denying the attempted ORRI reservation. Armour Pipe Line Co. v. Sandel Energy, Inc., --- S.W.3d ----, No. 14-20-00412-CV, 2022 WL 4542049 (Tex. App. Sept. 29, 2022).
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