At the Well Weekly (v.3.26.2021)

Oil + Gas Update | PA Supreme Court Rejects Application of Consumer Protection Law to O+G Leasing Activities.

Natural gas prices dropped amidst ongoing takeaway constraints in Appalachia while rigs climbed slightly alongside relatively flat oil prices. In pipeline news, FERC held firm that Mountain Valley Pipeline can resume construction despite the absence of all required permits while Virginia regulators seek more time to conduct their water quality reviews. The Northern Access pipeline project gained new life after the Second Circuit held that New York waived its opportunity to conduct its Section 401 water quality review. In Appalachia, the Pennsylvania issued its long-awaited decision in a case in which the Attorney General challenged oil and gas leasing practices under the state consumer protection law. In other regions, courts addressed royalties and post-production costs, surface damage releases, NPRI tax obligations, and force majeure.

Here's your week in review:

Rig Counts, Spot Prices + Oil Prices

  • Rigs: National (­417); Marcellus (30); Utica/Point Pleasant (9)

  • Brent Crude: ­$64.55/bbl

  • West Texas Intermediate: ­$60.69/bbl

  • NYMEX: April 2021 @ $2.518/MMBtu

  • Spot Prices: Henry Hub ($2.45/MMBtu); Dominion South ($1.75/MMBtu); Tenn. Zone 4 ($1.68/MMBtu)

WOPL - Appalachia

  • Mountain Valley Pipeline. FERC declined to change course after approving construction activities for the Mountain Valley Pipeline despite the company’s need to acquire additional permits, saying those permits should not hold up the construction work. Two commissioners who say the other permits are prerequisites objected. Meanwhile, the Commonwealth of Virginia asked for an extension of time to conduct its water quality review for the pipeline project.

  • Northern Access Pipeline. A federal court of appeals upheld a FERC order that said NY's environmental agency waived its Clean Water Act Section 401 water quality certification by failing to act within the one-year statutory deadline (see below for more).

Headlines & Holdings - Appalachia

  • PA Supreme Court Holds that Oil + Gas Leasing Activities are not Subject to State Consumer Protection Law. The Pennsylvania Supreme Court issued its decision in Commonwealth v. Chesapeake Energy Corp. and Anadarko Petroleum Company, et al., Nos. 81 & 82 2019. In this case, the Attorney General invoked the Pennsylvania Unfair Trade Practices and Consumer Protection Law (“Consumer Protection Law” or “UTPCPL”) to challenge natural gas leasing activities of Anadarko and to pursue antitrust claims and remedies against the company based on violations of that state statute. Commonwealth Court sided with the Attorney General, and the Pennsylvania Supreme Court accepted an appeal. In a 6-1 decision, the court ruled in favor of Anadarko.

The court held that the Attorney General cannot pursue claims against Anadarko under the Consumer Protection Law to challenge Anadarko’s oil and gas leasing activities.

The court agreed that the Consumer Protection Law is designed to protect buyers in a consumer transaction based on the legislature’s more narrow definition of “trade or commerce” as argued by Anadarko and other amici.

The court concluded that Anadarko is a "buyer" in the oil and gas lease context because Anadarko as lessee acquires an estate in the oil and gas as a fee simple determinable in exchange for bonus and royalty.

The court rejected a broader definition of “trade or commerce” based on dictionary definitions and other case law as urged by the OAG and Commonwealth Court.

The court acknowledged concerns from amici “that the Commonwealth Court’s decision permits the OAG to apply the UTPCPL broadly to all business-to-business transactions and contracts.”

Given the way the court resolved the issue, it did not address those broader implications: “Because our conclusion that Anadarko was not in the position of a seller for purposes of the UTPCPL resolves this case, we do not address the broader issue of whether the UTPCPL applies to commercial business transactions.”

On the antitrust issue, given that the Consumer Protection Law does not apply to Anadarko’s oil and gas leasing activities, the Attorney General also could not state a claim for antitrust liability based on the alleged violation of the Consumer Protection Law, holding that the issue is moot.

In a lonely dissent, Justice Dougherty would have ruled in favor of the Attorney General. Justice Dougherty acknowledged that the Consumer Protection Law only applies to trade or commerce and that an oil and gas lease transaction is one in which the lessee acquires an estate in fee simple. Nevertheless, he would hold (contrary to settled principles) that production companies are engaged in “services” for the benefit of the landowner in that setting, i.e., that the landowner essentially hires the production company to develop his or her oil and gas. On that theory, Justice Dougherty would have concluded that the Attorney General stated a valid claim under the Consumer Protection Law and would have reached the antitrust issue, resolving it in a manner similar to how Commonwealth Court resolved it (by holding that a violation of the statute can serve as a basis to assert antitrust liability).

  • Ohio Federal Court Punts on ORRI Washout. A federal court in Ohio denied a bid for summary judgment in favor of a working-interest holder that argued the plaintiff’s ORRI washed out with the expiration of certain leases, holding that there remains disputed facts about whether the leases related to the property on which lessee now operates the units have expired or been replaced or substituted by other leases held by another company. Sound Energy Co. Inc. v. Ascent Resources – Utica, LLC, --- F. Supp. 3d ---, No. 2:18-CV-1771, 2021 WL 1102483 (S.D. Ohio Mar. 23, 2021).

  • Federal Court Grants Intervention to Democratic Lawmakers in GOP v. DRBC Fight. The federal court handling a lawsuit brought by the PA Senate Republican Caucus challenging the Delaware River Basin Commission's frac ban and alleging a resulting de facto taking of private property granted a bid by Democratic members of the Pennsylvania Senate to intervene in the lawsuit.

  • Second Circuit Kills NY’s Late Bid to Deny Section 401 Certification for Pipeline. The Second Circuit concluded that the one-year deadline under Section 401 of the Clean Water Act for states to certify water quality for federal projects certificated by FERC – such as interstate pipeline projects – may not be extended by the type of agreement between a state certifying agency and an applicant such that FERC properly concluded the NYDEC waived its certification authority. NYDEC v. FERC, No. 19-1610-AG, 2021 WL 1096358 (2d Cir. Mar. 23, 2021).

Headlines & Holdings - Beyond Appalachia

  • TX Appellate Court Punts on Application of Force Majeure in O+G Lease. A court of appeals in Texas held that fact disputes precluded summary judgment in favor of a lessee claiming that leases were perpetuated in their entirety by the operation of their force majeure clauses. MRC Permian Co. v. Point Energy Partners Permian LLC, --- S.W.3d ---, No. 08-19-00124-CV, 2021 WL 960927 (Tex. App. Mar. 15, 2021).

  • Federal Court in OK Dismisses O+G Royalty and PPC Deduction Claims. A federal court in Oklahoma dismissed a claim for alleged breach of royalty payment obligations, including improper deductions of post-production costs, after holding that the plaintiff alleged no facts establishing a lease or other contract with the defendant and concluding that the plaintiff could not state a claim based on a lease with another lessee. Brown v. Newfield Exploration Mid-Continent, Inc., --- F. Supp. 3d ---, No. CIV-19-600-G, 2021 WL 1026526 (W.D. Okla. Mar. 17, 2021).

  • NPRI Holder in Colo. has Standing to Challenge Retro. Tax Assessment. As a matter of first impression, a Colorado appellate court held that a nonoperating fractional interest owner who has been denied rights afforded a taxpayer under the governing statutes and guidelines — including the rights to receive notice of and to protest a retroactive assessment or to seek an abatement of a retroactively increased tax — has standing to claim a violation of those rights. CO2 Comm., Inc., v. Montezuma Cty., --- P.3d ---, No. 19CA1798 2021 COA 36, 2021 WL 1031879 (Colo. March 19, 2021).

  • Pooling Order in OK Trumps Pooling Clause. A federal court in Oklahoma rejected claims that a lessee violated the 160-acre unit limitation in its oil and gas lease by drilling a well on a 640-acre unit authorized by the state corporation commission, holding that the commission's order authorizing a larger unit superseded the pooling clause. Cory v. Cimarex Energy Co., --- F. Supp. 3d ---, No. CIV-20-706-G, 2021 WL 1108596 (W.D. Okla. Mar. 23, 2021).

  • Federal Court in South Dakota Rejects Surface Damages Claim. A federal court in South Dakota enforced a release of liability for surface damages associated with truck traffic at oil and gas well sites despite the state's surface damages statute, holding that the lessee had the right to use the surface to access well sites and the release did not limit surface damages to those associated solely with drilling or completing a well such that the truck-traffic claim failed as a matter of law. Brown v. Continental Resources, Inc., --- F. Supp. 3d ---, No. 5:18-CV-05048-KES, 2021 WL 1192615 (D.S.D. Mar. 30, 2021).

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