Oil + Gas Update | Cross-Unit Wells Upheld.
Natural gas prices continue to drop across the board along with dips in oil prices and the national rig count. In pipeline news, the Fourth Circuit heard oral argument on MVP's water permit, while Sen. Manchin tries to restart permit reform talks that, if successful, would help the MVP stay on track. In Appalachia, a federal court upheld a statute and lease language authorizing the use of cross-unit wells; conversion/trespass claims survive (barely) in Ohio despite the rule of caption; a federal court addressed affiliate transactions and post-production costs in a royalty class action; and an Ohio court upheld judgments for liability and bad-faith trespass damages for violating a depth severance. In other regions, courts tackled mineral vs. royalty interests, recovery for damages to surface and pore space, DOI's permit for drilling in the Mancos Shale in New Mexico, and statutory interest payments for unpaid overriding royalties.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (761); Marcellus (36); Utica/Point Pleasant (15)
Brent Crude: $84.98/bbl
West Texas Intermediate: $78.34/bbl
NYMEX: March 2023 @ $2.396/MMBtu
Spot Prices: Henry Hub ($2.42/MMBtu); Tennessee Zone 4 ($2.58/MMBtu); Eastern Gas South ($2.43/MMBtu)
WOPL - Appalachia
Mountain Valley Pipeline. Environmental groups asked the Fourth Circuit during oral arguments Tuesday to toss a key water permit for the Mountain Valley Pipeline, which would lead to even more delays for the $6.2 billion project that developers aim to resume constructing this summer Meanwhile, Senate Energy and Natural Resources Chair Joe Manchin (D-W.Va.) and House Natural Resources Chair Bruce Westerman (R-Ark.) are discussing the path forward for the stalled permitting reform effort that would help the MVP project.
Headlines & Holdings - Appalachia
Federal Court in PA Upholds PA Statute and O+G Lease in Challenge to Cross-Unit Wells. A federal court in Pennsylvania upheld a PA statute known as Act 85, which authorizes the use of cross-unit drilling subject to reasonable allocation of production among the units traversed by a horizontal well as long as the lease does not prohibit the practice, concluding that the statute did not violate the Contracts Clause and further holding that various clauses in the lease support the use of cross-unit wells for purposes of exploring and producing oil and gas from multiple units. Warner Valley Farm, LLC v. SWN Production Company, LLC, --- F. Supp. 3d ----, No. 4:21-CV-01079, 2023 WL 373237 (M.D. Pa. Jan. 24, 2023).
Ohio Court Upholds Depth Severance and Bad Faith Trespass Damages. A court of appeals in Ohio held that a lessor reserved rights to all formations below the “formation commonly known as the Utica” and should receive damages for bad-faith trespass (value of gas produced without any offset for production expenses) against a well operator producing from the Point Pleasant interval, rejecting the operator’s argument that the Point Pleasant interval is part of the formation commonly known as the Utica for purposes of the depth severance. Tera LLC v. Rice Drilling D LLC, --- N.E.3d ----, No. 21 BE 0047, 2023 WL 1117966 (Ohio Ct. App. January 18, 2023).
Fed. Ct. in PA Addresses Affiliates, Kilmer in O+G Royalty Class Action. In a royalty class action, a federal court in Pennsylvania relied on the Pennsylvania Supreme Court’s decision in Kilmer and held that royalties payable on the value of gas sales to an unaffiliated third party at the well complied with a no-deducts lease despite contentions from royalty owners that the buyer paid their lessee the net value of gas sold downstream after deducting post-production costs. Slamon v. Carizzo (Marcellus) LLC, --- F. Supp. 3d ----, No. 3:16-CV-2187, 2023 WL 1806814 (M.D. Pa. Feb. 7, 2023).
Federal Court in Ohio Says “Injectate” Trespass and Conversion Claims Survive Despite Rule of Capture. A federal court in Ohio held that, despite the rule of capture, the owner of the Point Pleasant interval below the base of the Utica Shale stated a claim for conversion based on the defendant company’s production activities in the overlying Utica shale, reasoning that the plaintiff stated enough facts that the operator of the overlying Utica formation used hydraulic fracturing to physically invade and drain the Point Pleasant and thereby converted gas to its own use. The court rejected a wellbore (slant hole) trespass claim and a related claim that merely pooling the property to produce the Marcellus and Utica, without more, is enough to constitute a trespass into the deeper Point Pleasant interval. However, the court gave the plaintiff leave to amend to state what it called an “injectate” trespass claim – i.e., one based on actually injecting proppants or fluids into the Point Pleasant. Golden Eagle Resources II, LLC v. Rice Drilling D, LLC, --- F. Supp. 3d ----, No. 2:22-CV-02374, 2023 WL 1927799 (S.D. Ohio Feb. 10, 2023).
Headlines & Holdings - Beyond Appalachia
Tex. Appellate Court Addresses Mineral vs. Royalty Interest. A court of appeals in Texas held that a 1940 deed that used a phrase similar to the shorthand “in and under” – a phrase well understood to convey a mineral interest – along with executive rights conveyed to the grantee, reserved a 1/16th non-executive mineral interest and not a 1/16th fixed royalty interest. Devon Energy Prod. Co., LP v. Enplat II, LLC, --- S.W.3d ----, No. 08-21-00217-CV, 2023 WL 362014 (Tex. App. Jan. 23, 2023).
Eighth Circuit Rejects Claim for Surface and Pore Space Damages. The Eighth Circuit rejected claims that driving trucks across surface areas pursuant to pipeline agreements in connection with oil and gas operations and alleged damage to pore space associated with those operations entitled the landowner to recovery under a South Dakota surface damages statute. Brown v. Cont’l Res., Inc., --- F.4th ----, No. 22-1230, 2023 WL 499393 (8th Cir. Jan. 27, 2023).
Tenth Circuit Sends Back O+G Permits for Mancos Shale Operations. The Tenth Circuit held that DOI failed to adequately examine climate change and air pollution impacts before approving oil and gas well permits in New Mexico’s Mancos Shale formation and barred the agency from issuing new permits based on its flawed analysis. Dine Citizens Against Ruining Our Env’t v. Haaland, No. 21-2116, 2023 WL 1430620 (10th Cir. Feb. 1, 2023).
Fed. Ct. in ND Declines Statutory Late Fee for Unpaid Overriding Royalties. Interpreting a state statute providing for an 18% interest payment to mineral owners or their assignee on unpaid royalties, a federal court in North Dakota held that the statute does not apply to unpaid overriding royalty payments, reasoning that an override is not an ownership interest in the minerals themselves but a carveout of a working interest in a lease. Sandy River Res., LLC v. Hess Bakken Invs. II, LLC, --- F. Supp. 3d ----, No. 1:22-CV-108, 2023 WL 1801958 (D.N.D. Feb. 7, 2023).
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