Oil + Gas Update | WV Supreme Court Decisions on Royalties, Post-Production Costs Headline End of 2024.
Since our last report, gas prices increased modestly amidst cooler temperatures and generally higher demand while the rig count and oil prices remained relatively flat. In Appalachia, the West Virginia Supreme Court issued its long-awaited decisions on royalties and post-production costs while other courts grappled with title disputes, climate change, notice-and-cure provisions, dormant mineral interests, and royalty class actions. In other regions, courts addressed a debtor's oil and gas regulatory penalties in bankruptcy proceedings, double fractions in deeds, bequests of mineral interests in wills, arbitration of royalty disputes, and disputes over converting producing wells to disposal wells.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (589); Marcellus (25); Utica/Point Pleasant (9)
Brent Crude: $73.99/bbl
West Texas Intermediate: $70.70/bbl
NYMEX: January 2025 @ $3.378/MMBtu; 12-Month Strip @ $3.282/MMBtu
Spot Prices: Henry Hub @ $3.11/MMBtu; Eastern Gas South @ $2.85/MMBtu
Headlines & Holdings - Appalachia
Divided WV Supreme Court Addresses Royalties, PPC, and Wellman/Tawney. Answering certified questions from a federal court handling a royalty dispute, a divided West Virginia Supreme Court in companion cases made several rulings regarding royalties, the marketable product doctrine, NGLs, and post-production costs. Several justices authored concurring and dissenting opinions regarding the marketable product doctrine, Tawney and Wellman, and related issues. In summary:
- As for in-kind royalty provisions, the court concluded that (a) there is a duty to market implied in oil and gas leases containing in-kind royalty provisions; and (b) the rules expressed in Wellman v. Energy Resources, Inc., 210 W. Va. 200, 557 S.E.2d 254 (2001), and Estate of Tawney v. Columbia Natural Resources, L.L.C, 219 W. Va. 266, 633 S.E.2d 22 (2006), regarding deductions for post-production costs, apply to leases containing an in-kind royalty provision. Kaess v. BB Land, LLC, --- S.E.2d ----, No. 23-522, 2024 WL 4784609 (W. Va. Nov. 14, 2024).
- As for the marketable product doctrine, (a) the rules in Wellman and Tawney apply all the way to the point of sale, not just the “first available market,” when the marketing covenant applies; (b) the marketable product doctrine extends beyond gas to require a lessee to pay royalties on NGLs; and (c) absent lease language that complies with Wellman and Tawney, lessors do not share in the cost of processing, manufacturing, and transporting residue gas and NGLs to the point of sale. Romeo vs. Antero Resources Corp., --- S.E.2d ----, No. 23-589, 2024 WL 4784706 (W. Va. Nov. 14, 2024).
Pa. Super. Ct. Says Dunham Rule Applies in O+G Title Dispute. In a dispute over title to oil and gas rights, the Superior Court of Pennsylvania held that a deed excepting and reserving “minerals” including “oil and gas” along with easement and mining rights, followed by a subsequent deed from that grantor conveying only “mineral and surface rights,” vested title to the oil and gas in the grantor’s successors, holding that the grantor reserved oil and gas rights per the Dunham rule for interpreting oil and gas deeds and the subsequent conveyance conveyed only “mineral and surface rights” without affecting oil and gas for lack of using those words in the conveyance. Comerford Family LP v. Ainbinder, --- A.3d ----, No. 849 MDA 2022, 2024 WL 4785028 (Pa. Super. Ct. Nov. 14, 2024).
NY Sup. Ct. Tackles Dispute over Power Generating Station under Climate Law. An appellate court in New York applied the state’s climate change statute – authorizing government officials to deny projects based on a finding that they might adversely affect the climate – to hold that the state’s Department of Environmental Conservation had the authority to deny an air permit renewal application but erred as a matter of law in applying the climate statute. Greenidge Generation LLC v. New York State Dep’t of Env’t Conservation, --- N.Y.S.3d ----, No. 2024-5221, 2024 N.Y. Slip Op. 24292, 2024 WL 4821672 (N.Y. Sup. Ct. Nov. 14, 2024).
Commonwealth Court Upholds First Ever EHB Sanction Against Lawyer. The Commonwealth Court of Pennsylvania held that the Pennsylvania Environmental Hearing Board had the authority to issue sanctions against an attorney for egregious conduct: “In this context, although unprecedented, there is more than enough evidence that the egregious conduct ... stablished her bad faith, harassment, unwarranted delaying tactics, and outright lying to the Board and opposing counsel, not to mention highly disrespectful, unprofessional conduct in general’ such that the Board properly imposed sanctions pursuant to its regulations.” Johnson v. PADEP, --- A.3d ----, No. 781 C.D. 2022, 2024 WL 4848556 (Pa. Cmwlth. Nov. 21, 2024).
PA Fed. Ct. Says Notice/Cure Requirement Excused in O+G Royalty Row. In a case involving challenges to a lessee’s suspension of royalties to recoup overpayments from landowners, a federal court in Pennsylvania concluded that the royalty owners stated viable claims for breach of contract for underpaid royalties, holding that all but one lessor followed the notice-and-cure requirement in the leases such that one plaintiff’s failure to do so should be excused; the lessors alleged enough facts to state a claim that lessee improperly suspended royalties; the lessee can raise recoupment as an affirmative defense instead of in a 12(b)(6) motion; and the accounting claim may be raised as relief for the claim for breach. Lindsay Golf Group Ltd. v. XTO Energy, Inc., --- F. Supp. 3d ----, No. 2:24-CV-781, 2024 WL 4870541 (W.D. Pa. Nov. 22, 2024).
Ohio Ct. App. Upholds DMA Abandonment of O+G Interest Leased by SWN. In a case involving Ohio’s Dormant Mineral Act, a court of appeals in Ohio upheld a trial court decision that surface owners properly effectuated the abandonment of a dormant mineral interest that encumbered title to property leased by SWN, holding that the surface owners properly exercised reasonable diligence to identify and locate the oil/gas owners before filing an affidavit of abandonment under the statute. Moore v SWN Production Company, LLC, --- N.E.2d ----, No. 24 MO 0006, 2024 WL 4866643 (Ohio Ct. App. November 21, 2024).
Third Circuit Remands O+G Royalty Class Action. In a class action involving royalties and post-production costs, the Third Circuit Court of Appeals reversed a summary judgment order in favor of the lessee, concluding that fact issues over whether the lessee fully repaid the plaintiffs the value of post-production costs deducted from royalties precluded summary judgment and rejecting the lessee’s alternative argument that the class complaint should be dismissed for failure to follow notice-and-cure provision, holding instead that the lessee did not establish whether the failure to comply is a material breach of the lease. Brusamonti v. XTO Energy, --- F.4th ----, No. 23-2912, 2024 WL 4986940 (3d Cir. Dec. 5, 2024).
Headlines & Holdings - Beyond Appalachia
PA Bankruptcy Ct. Upholds Wyo. Commission’s Penalties against O+G Debtor. A bankruptcy court in Pennsylvania upheld pre-petition enforcement actions and penalties imposed by the Wyoming Oil and Gas Conservation Commission hours after the debtor filed for bankruptcy, including orders for sealing wells and imposing bond requirements. The court rejected the debtor’s claim that the measures violated the automatic stay and holding that the stay does not apply to the agency’s coercive measures, including the provision of a bond, to ensure the debtor’s future compliance with its rules and orders. Black Diamond Energy of Delaware v. Wyoming Oil & Gas Conservation Comm’n, --- B.R. ----, No. 22-21448-GLT, 2024 WL 4907104 (Bankr. W.D. Pa. Nov. 27, 2024).
Tex. Ct. App. Holds that Deed Reserved Floating Royalty in Double Fraction Dispute. In a dispute over the interpretation of a deed that reserved “an undivided one-fourth (1/4th) of the usual one eighth (1/8th) royalty” from a conveyance of real property, a court of appeals in Texas held that the deed conveyed a one-fourth floating interest rather than a fixed 1/32 interest, reasoning that the challenger failed to rebut the presumption that the phrase “the usual one-eighth royalty” is a shorthand for referring to the full interest owned. Boren Descendants v. Fasken Oil & Ranch, --- S.W.3d ----, No. 11-22-00365-CV, 2024 WL 4982211 (Tex. App. Dec. 5, 2024).
Ark. App. Ct. Upholds Use of Unprobated Will to Determine Mineral Interest. A court of appeals in Arkansas upheld the use of an unprobated will in an action to quiet title to mineral rights and overriding royalty interests, holding that the grantees satisfied the elements of a state statute that authorizes the use of wills as evidence in ownership disputes. Harts v. Damsky, --- S.W.3d ----, No. CV-23-247, 2024 WL 5063589 (Ark. App. 2024).
Tex. App. Ct. Sends Chevron/Anadarko Royalty Row to Arbitration. In a case involving claims that Anadarko shorted Chevron out of royalties on production from various leases, a court of appeals in Texas concluded that a farmout agreement between the parties delegated the arbitrability of such claims to an arbitrator. Anadarko Petroleum Corp. v. Chevron U.S.A. Inc., --- S.W.3d ----, No. 08-24-00059-CV, 2024 WL 5085974 (Tex. App. Dec. 11, 2024).
Tex. App. Ct. Upholds Assignment of O+G Lease and Ensuing Conversion of Wells to Disposal Wells. A court of appeals in Texas upheld summary judgment against a lessor in favor of an assignee of an oil and gas lease that converted producing wells to saltwater disposal wells, holding that the lessor failed to produce any evidence of damages other than conclusory statements that the assignment and ensuing conversion of wells to disposal wells deprived the lessor of royalties. Marston v. Blackbeard Operating, LLC, --- S.W.3d ----, No. 08-23-00166-CV, 2024 WL 5099204 (Tex. App. Dec. 12, 2024).
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