Oil + Gas Update | Courts in PA, TX Tackle "At the Well" Royalty Clauses and Post-Production Costs.
Natural gas prices climbed before futures dropped about 10% last week on reports of high supply and mild weather. Meanwhile, oil prices dropped alongside a steady rig count. In pipeline news, MVP is almost complete but faces other regulatory setbacks; PennEast is officially done; and environmental groups convinced a federal appellate court to kill all potential approvals for the long-shelved Constitution Pipeline. In Appalachia, the PA Superior Court is poised to address whether royalties payable to lessors "at the well" are subject to post-production costs; the PA Supreme Court addressed de facto takings in the gas storage context, and other courts addressed burdens of proof in royalty cases, title issues, public records, and local oil + gas ordinances. In other regions, Texas courts also addressed "at the well" royalty clauses, surface use issues, and forced-pooling.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (569); Marcellus (30); Utica/Point Pleasant (10)
Brent Crude: $69.88/bbl
West Texas Intermediate: $66.26/bbl
NYMEX: January 2021 @ $4.258/MMBtu
Spot Prices: Henry Hub ($4.23/MMBtu); Tenn. Zone 4 ($3.62/MMBtu); Eastern Gas South (f/k/a Dominion South) ($3.65/MMBtu)
WOPL - Appalachia
Mountain Valley Pipeline. MVP is close to complete, but the Virginia Air Pollution Control Board denied a key air quality permit for the project that calls the completion into question. Meanwhile, EQT sold a little less than half of its capacity on the pipeline; the Army Corps pushed back a deadline until December 30, 2021, for the state to determine water quality impacts of the pipeline project; the company settled mudslide disputes with landowners; and protesters dodged jail time for blocking activities.
Constitution Pipeline. The Second Circuit granted a motion to vacate all prior approvals issued by FERC for the defunct Constitution Pipeline. N.Y. State Dep't of Env't Conservation v. FERC, --- Fed. App. ---, No. 19-4338 (2d Cir. November 18, 2021).
PennEast. PennEast Pipeline confirmed that the member companies have stopped all further development of the $1 billion project.
Headlines & Holdings - Appalachia
PA Superior Court Poised to Decide Whether Royalties Payable "At the Well" are Subject to Post-Production Costs. In Dressler v. PennEnergy, No. 2017-10357 (Butler County), appeal pending at 635 WDA 2021 (Pa. Super.), a court of common pleas concluded that a lease with similar language (gross proceeds sold at the well) unambiguously authorizes the net-back method to calculate royalties such that lessees may deduct the lessor’s proportionate share of lessee’s costs of post-production activities before paying royalties. The appeal is pending. On appeal, the industry amici filed a brief supporting the lessee and urged the court to conclude that royalties payable to lessors "at the well" are subject to post-production costs. Click here for a copy of the as-filed brief.
OOR in PA Says DEP’s Weekly Enviro Justice Reports are Public Records. The Office of Open Records in PA granted a requester’s appeal of DEP’s order denying access to weekly reports of DEP's Office of Environmental Justice, rejecting the Department’s argument that the records reflect internal pre-decisional deliberations that protect agency records from public disclosure. In re: Mike Ewall v. PADEP, No: AP 2021-1732, 2021 WL 4943751 (Pa. Off. Open Rec. Oct. 20, 2021).
SCOTUS Set to Review EPA’s GHG Emission Rules for Power Plants. The Supreme Court granted certiorari to determine whether the D.C. Circuit properly struck down a Trump Administration rule that rolled back Obama-era GHG emissions standards for existing power plants. W. Va. v. EPA, Docket No. 20-1530 (consol.)
Ohio Appellate Court Says O+G is a Fee Simple Mineral Interest under Dormant O+G Act. A court of appeals in Ohio concluded that an 1895 conveyance granted the exclusive right for an indefinite period of time to all of the oil and gas under the property such that the interests constitute “mineral interests” under the savings provision of the state’s Dormant Mineral Act that were not abandoned or forfeited for inactivity. Roberts v. Roberts, --- N.E.3d ---, No. S-19-050, 2021-Ohio-3857, 2021 WL 5029655 (Ohio Ct. App. October 29, 2021).
Fed. Ct. in PA Denies Redo of O+G Market Enhancement Ruling. A federal court in PA denied a bid to reconsider a prior order and opinion holding that a lessee has no duty to establish a net increase in value of gas sold before deducting a lessor’s share of post-production costs, concluding instead that the lessor bears the burden to prove otherwise in a breach-of-contract case. Tennant v. Range Resources – Appalachia, LLC, --- F. Supp. 3d ---, No. CV 18-1533, 2021 WL 5040421 (W.D. Pa. Oct. 29, 2021).
NY Climate Law Kills Bid to Retrofit Power Plants. NY environmental regulators denied applications to retrofit gas fired power plants with new technology, reasoning that the authorization to revamp fossil-fuel fired power plants would undermine the goal to switch to 70% renewable electricity by 2030, 100% carbon-free electric power production by 240, and reach net-zero carbon emissions by 2050.
PA Superior Court Says Venue for O+G Lease Claims are not Restricted to Location of Leased Properties. The PA Superior Court upheld an order overruling a preliminary objection (motion to dismiss) to venue in Allegheny County for a dispute over leased properties in Butler County, holding that claims regarding the leases are in personam rather than in rem and therefore venue may lie in a county other than the one that includes the leased properties. PennEnergy Resources LLC v. Armstrong Cement & Supply Corp., --- A.3d ---, No. 13 WDA 2021, 2021 WL 5118431 (Pa. Super. Nov. 4, 2021).
WV Fed. Ct. Tosses Tort Claims for Alleged Underpaid O+G Royalties. A federal court in WV dismissed claims against a lessee for misrepresentation and conversion in connection with alleged underpaid royalties under the gist-of-the-action doctrine given that the claims sound in contract. Southern Country Farms, Inc. v. TH Exploration, LLC, --- F. Supp. 3d ---, No. 5:21-CV-84, 2021 WL 5147989 (N.D.W. Va. Nov. 4, 2021).
OH Court Says Default Against Some Defendants Doesn’t Apply to Lessee in O+G Lease-Busting Bid. An Ohio court of appeals reversed an order entering default judgment in favor of plaintiffs who invoked lease expiration against an oil and gas lessee and other lessors, concluding that the default judgment against all defendants effectively rendered the lease expired against the lessee even though it appeared to defend. Zelek v. Tomlinson, --- N.E.3d ---, No. 2021-Ohio-3973, 2021 WL 5176371 (Ohio Ct. App. Nov. 8, 2021).
WV Supremes Resolve Competing O+G Title Claims. The West Virginia Supreme Court held that the original owners of oil and gas had good title to the oil and gas versus subsequent purchasers claiming title through a tax deed, holding that the original owners timely paid property taxes such that no lien ever attached and the purported tax sale of the oil and gas rights to the subsequent purchaser was void. Orville Young, LLC v. Bonacci, --- S.E.3d --- No. 20-0030, 2021 WL 5370464 (W. Va. Nov. 18, 2021).
Fed. Court in PA Says Collateral Estoppel Bars Adelphia from Relitigating EHB Jurisdiction. The Middle District of PA precluded Adelphia from arguing that the Third Circuit, rather than the PA Environmental Hearing Board, had jurisdiction over challenges to DEP’s approval of a compressor station, holding that the Commonwealth Court’s recent decision to the contrary constituted collateral estoppel on that jurisdictional issue. Adelphia Gateway, LLC v. Pa. Env. Hearing Bd., --- F. Supp. 3d ---, No. 1:21-CV-1241, 2021 WL 5494286 (M.D. Pa. Nov. 23, 2021).
PA Supremes Say Storage Company on Hook for De Facto Taking. The Pennsylvania Supreme Court held that landowners’ constitutional rights to seek compensation for a de facto taking or “inverse condemnation” of their gas rights in a storage field is not limited by whether FERC specifically included the landowners’ properties within the certificated buffer zone, meaning an entity generally clothed with the power of eminent need not be invested with eminent domain authority over specific properties in issue to be liable for de facto takings. Hughes v. UGI Storage Co., --- A.3d ----, No. 49 MAP 2021, 2021 WL 5562689 (Pa. Nov. 29, 2021).
Commonwealth Court of PA Invalidates Local O+G Ordinance as Unconstitutional Delegation of Power. The Commonwealth Court of Pennsylvania held that a local ordinance purporting to restrict oil and gas activities to only those areas with a limited population density as determined by the U.S. Census Bureau constituted an unlawful delegation to the U.S. Census Bureau of the municipality’s legislative authority to amend it zoning ordinance by merely referencing a map which is subject to change by the federal government without further action by the municipality. The court also noted that the municipality failed to actually publish or present the Census map at any time prior to or during the adoption of the ordinance. “Together, the delegation of authority and the absent map represent the sort of arbitrary, ad hoc decision-making that limitations on delegated authority are meant to prevent. Thus, this provision is unconstitutional under article II, section 1 of the Pennsylvania Constitution.” Seneca Res. Corp., v. City of St. Mary’s Zoning Hearing Bd., --- A.3d ----, No. 136 C.D. 2020, 2021 WL 5578722 (Pa. Cmwlth. Nov. 30, 2021).
Headlines & Holdings - Beyond Appalachia
TX Railroad Commission Denies Force Pool of Streambed O+G. A court of appeals in Texas denied an applicant’s request under the Mineral Interest Pooling Act to force pool mineral interests in state-owned riverbed acreage into adjacent units with wells operated by another company, concluding that (a) the applicant failed to make a fair and reasonable offer to satisfy the threshold requirement of trying voluntary pooling before seeking an order and (b) the 10% risk charge proposed by the applicant was too low given the substantial costs of developing unconventional plays in a portion of the Eaglesville field. Ammonite Oil & Gas Corp. v. Tex. Railroad Commission, --- S.W.3d ---, No. 04-20-00465-CV, 2021 WL 4976324 (Tex. App. Oct. 27, 2021).
Mich. Fed. Court Keeps Enbridge Fight. A federal court in Michigan rejected a motion to remand Michigan’s lawsuit seeking a declaration that it properly revoked easements granted to Enbridge Pipeline, holding that the state’s claims “arise under” federal law because the scope of the property rights the state asserts necessarily turns on the interpretation of federal law. Michigan v. Enbridge Energy, Ltd. P’ship, --- F. Supp. 3d ---, No. 1:20-CV-1142, 2021 WL 5355511 (W.D. Mich. Nov. 16, 2021).
TX Appellate Court Says O+G Reservations did not Convey Surface Covenants. In a surface-use dispute, a court of appeals in Texas concluded that reservations in mineral deeds conveyed only the mineral rights and property rights appurtenant thereto but not certain surface covenants, holding instead that such reservations of the surface covenants could not be established by implication. Henry v. Smith, --- S.W.3d ---, No. 02-20-00169-CV, 2021 WL 5506865 (Tex. App. Nov. 24, 2021).
TX Court Says Royalties Payable at the Wellhead are Subject to Post-Production Costs. A Texas appellate court concluded that a royalty clause unambiguously fixed the wellhead as the valuation point for royalties such that the royalty is subject to post-production costs. Shirlaine West Properties Ltd. V. Jamestown Resources L.L.C., --- S.W.3d ---, No. 02-18-00424-CV, 2021 WL 5367849 (Tex. App. Nov. 18, 2021).
Tx. Fed. Ct. Says “Market Value at the Well” Royalty Clause Authorizes Post-Production Costs. A federal court in Texas dismissed a proposed class action and concluded that royalties that are payable based on “market value at the well” despite additional “off lease” and “free gas” provisions authorized the lessee to charge lessors their proportionate share of post-production costs. Carl v. Hilcorp Energy, --- F. Supp. 3d ----, No. 4:21-CV-02133, 2021 WL 5588036 (S.D. Tex. Nov. 30, 2021).
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