Oil + Gas Update | Royalty Cases Dominated Q1.
As we gear up for Spring, some of the most prolific E&P companies have slowed or stopped drilling and production efforts until natural gas prices rebound from historic lows. In pipeline news, landowners have attempted another challenge to MVP in SCOTUS, and regulators hit the company with environmental regulatory violations. Meanwhile, EQT announced a merger with Equitrans to combine upstream and midstream assets. In Appalachia, courts addressed pooling, fixed vs. floating royalties, subsurface trespass based on depth restrictions in leases, notice-and-cure provisions in oil and gas leases, arbitration of JOA disputes, severance taxes, and various other cases. In other regions, royalty disputes pervaded court dockets alongside surface use claims, fights over Winter Storm Uri, air emissions, and FERC project approvals.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (620); Marcellus (30); Utica/Point Pleasant (12)
Brent Crude: $89.25/bbl
West Texas Intermediate: $85.02/bbl
NYMEX: May 2024 @ $1.841/MMBtu; 12-Month Strip @ $2.818/MMBtu
Spot Prices: Henry Hub @ $1.86/MMBtu
Headlines & Holdings - Appalachia
Ohio Fed. Ct. Orders Discovery of Gas Well Data for Damages Analysis. In the longstanding dispute between Tera and Rice Drilling over Rice/EQT’s right to produce from the Marcellus and Utica formations, a federal court in Ohio ordered defendants to produce decline curve, PUP, and PDP analyses, holding that they are relevant to damage calculations. TERA II LLC v. Rice Drilling D, LLC, --- F. Supp. 3d ----, No. 2:19-CV-2221, 2023 WL 8645830 (S.D. Ohio Dec. 14, 2023).
WV App. Ct. Says Gas Co. can Appeal Property Tax Valuation. A court of appeals in West Virginia held that a trial court interpreted the state’s statute too narrowly to exclude a gas company from challenging a property tax that affected its rights, holding that the gas company appeared and contested the property tax valuation before the state agency and had the right to appeal the adverse determination. EQT Production Co. v. Irby, --- S.W.3d ----, No. 22-ICA-305, 2023 WL 8663543 (W. Va. Ct. App. Dec. 15, 2023).
Ohio Ct. App. Rejects Improper Pooling Claims. A court of appeals in Ohio held that Equinor did not breach an oil and gas lease by failing to include the entirety of the landowners’ leased acreage in a pooled unit (upon which production was occurring), rejecting claims that the company’s failure entitled the landowners not to a release of the un-pooled acreage but to damages for their ownership of un-pooled acreage or forfeiture of the entire lease. SJBK, LLC v. Northwood Energy Corp., --- N.E.3d ----, No. 23 MO 0010, 2023 WL 8890826 (Ohio Ct. App. December 22, 2023).
Ohio Ct. of Appeals Addresses Fixed vs. Floating Royalties. A court of appeals in Ohio held that a 1936 deed contained a fixed fractional royalty of 1/16 on one parcel of property and 1/32 on a second parcel, rejecting claims that the deed created a floating royalty interest resulting in grantors reserving only a 1/128 royalty interest. Mineral Development Inc. v. SWN Production (Ohio), LLC, --- N.E.3d ----, Nos. 23 MO 0004 and 23 MO 0005, 2023 WL 8890898 (Ohio Ct. App. December 21, 2023).
Cabot/Coterra Dodges Shareholder Suit. A federal court in Texas dismissed a shareholder derivative action against Cabot based on alleged misrepresentations about the company’s natural gas development and compliance with environmental laws and regulations. In re: Cabot Oil & Gas Corp. Derivative Litigation, --- F. Supp. 3d ----, No. CV H-21-2046, 2024 WL 23365 (S.D. Tex. Jan. 2, 2024).
Fed. Ct. in PA Says Trespass by Frac is a “Continuing Trespass” that Tolls the Statute of Limitations. A federal court in Pennsylvania held that a complaint alleging trespass by hydraulic fracturing is alleging a “continuing” trespass such that the statute of limitations does not bar the claim altogether but will reduce plaintiffs’ damages. Briggs v. SWN, --- F. Supp. 3d ----, No. 3:21-CV-520, 2024 WL 38298 (M.D. Pa. Jan. 3, 2024).
Del. Court Says CAA Preempts Claims for Damages for Out-of-State Emissions. A court of appeals in Delaware held that plaintiffs seeking damages for injuries resulting from out-of-state or global greenhouse emissions and interstate pollution are pre-empted by the Clean Air Act and beyond the limits of Delaware common law, but plaintiffs may recover for injuries caused by sources within the state’s boundaries. Delaware ex rel. Jennings v. BP America, Inc., --- A.3d ----, No. N20C-09-097 MMJ CCLD, 2024 WL 98888 (Del. Super. Ct. Jan. 9, 2024).
Sixth Circuit Kills O+G Royalty Dispute for Lack of Pre-Suit Notice. The Sixth Circuit held that a lessor alleging breach of an oil and gas lease for failure to pay royalties failed to satisfy a condition to provide at least 90-days prior written notice before filing suit. Kirkbride v. Antero Resources Corp., --- F.4th ----, No. 23-3484, 2024 WL 340782 (6th Cir. Jan. 30, 2024).
Fourth Circuit Sends Back Challenge to WV Forced Pooling Statute. In a case alleging that the West Virginia forced pooling statute results in an unlawful taking, the Fourth Circuit remanded the case for further proceedings to determine whether standing or abstention doctrines preclude the plaintiffs’ suit. Sonda v. W. Virginia Oil & Gas Conservation Comm’n, No. 22-2271, 2024 WL 349742 (4th Cir. Jan. 31, 2024).
PA Super. Ct. Says JOA Arbitration Clause Doesn’t Apply. In a case involving a PSA with a well-election provision and a standard JOA with an arbitration clause, the Superior Court of Pennsylvania concluded that the arbitration clause in the JOA did not apply because the plaintiffs did not yet elect to participate in drilling a well; the claim under the PSA did not relate to the JOA as required by the arbitration provision; and the PSA and JOA should not be read together as one transaction such that the JOA’s arbitration provision applies to disputes arising under the PSA. Kriebel Mins., Inc. v. EQT, No. 1427 WDA 2022, 2024 WL 365147 (Pa. Super. Jan. 31, 2024).
PA Super. Ct. Addresses Marital Distribution of O+G Royalties. In a case involving equitable distribution of marital assets, the Pennsylvania Supreme Court held that neither husband nor wife submitted any professional appraisals to determine the value of the oil and gas royalties and therefore upheld the trial court’s order to split royalties 50/50. Schmidt v. Schmidt, --- A.3d ----, No. 44 WDA 2023, 2024 WL 568539 (Pa. Super. Ct. Feb. 13, 2024).
PA Supremes Say Six-Year Statute Applies to Co-Tenant Accounting Claims. The Pennsylvania Supreme Court held that the statute of limitations for filing accounting claims related to oil and gas royalties is six years. KEM Res., LP v. Deer Park Lumber, Inc., --- A.3d ----, No. 10 MAP 2023, 2024 WL 696763, (Pa. Feb. 21, 2024).
WV Fed. Ct. Dismisses Claims in O+G Royalty Row. A federal court in West Virginia dismissed claims of fraudulent misrepresentation and construction fraud in connection with a dispute over oil and gas royalty payments, holding that the gist-of-the-action doctrine. Allen v. Antero Res. Corp., --- F. Supp. 3d ----, No. 1:22-CV-56, 2024 WL 778396 (N.D.W. Va. Feb. 26, 2024).
WV Fed. Ct. Upholds Arbitration Award in MEC Dispute. A federal court in West Virginia upheld an arbitrator’s award in favor of lessors in a dispute over whether a market-enhancement clause complied with West Virginia law, holding that the arbitrator followed Tawney and its progeny to decide the matter and did not have the obligation to follow a non-binding federal decision on market-enhancement clauses as the operator requested. JB Exploration I, LLC v. The Anthony Matthew Goffi Irrevocable Trust, --- F. Supp. ----, No. 1:23-CV-27, 2024 WL 776702 (N.D.W. Va. Feb. 26, 2024).
Ohio Federal Jury Says the Utica Includes the Point Pleasant. An Ohio federal jury returned a verdict in favor of Gulfport and EQT and concluded that the companies did not trespass by producing from the Point Pleasant formation beneath the Utica Shale. In this case, an oil and gas lease between the landowners and the companies granted the lessee/company the right to produce from the Marcellus and the “formation commonly known as the … Utica Shale.” The lessees produced from the Point Pleasant interval beneath the Utica. The plaintiffs sued for trespass, claiming that they reserved the rights to the Point Pleasant formation because that formation is different and deeper than the Utica. After a two-week jury trial, the jury concluded that the lessees did not trespass by producing from the Point Pleasant formation, presumably because the common understanding of the Utica Shale at the time the parties entered into the lease was that it included the Point Pleasant interval.
Third Circuit Says FERC’s PJM Auction Rule Violates Filed-Rate Doctrine. The Third Circuit granted a petition for review filed against FERC after the agency implemented a new auction rule and PJM applied it retroactively in accordance with FERC’s direction, holding that the new auction rule violated the filed-rate doctrine. PJM Power Providers Grp. v. FERC, --- F.4th ----, No. 23-1778, 2024 WL 1067481 (3d Cir. Mar. 12, 2024).
Ohio Ct. App. Says Term Royalty Conveyance Expired with O+G Lease. A court of appeals in Ohio addressed a term royalty conveyance tied to an oil and gas lease that expired by its own terms, holding that the royalty conveyance expired with the oil and gas lease and did not burden ensuing oil and gas leases for the same property unless specified conditions occurred and they did not. Bounty Minerals, LLC v. LL&B Headwater II, LP, --- N.E.3d ----, No. 23 JE 0012, 2024 WL 1112047 (Ohio Ct. App. March 14, 2024).
Ohio Fed. Ct. Denies Bid to Dismiss Trespass-to-Point-Pleasant Claims. An Ohio federal court denied a bid to dismiss a claim for trespass into the Point Pleasant formation that underlies the Utica, holding that the plaintiffs alleged enough to state a claim for both a direct and indirect trespass into that formation based on the parties’ oil and gas lease which purports to reserve all depths below the Utica. The operators have argued in this and other cases that the Point Pleasant was understood to be part of the Utica Shale at the time of the lease and is therefore part of the grant of the oil and gas lease. Honey Crest Acres, LLC v. Rice Drilling D, LLC, --- F. Supp. 3d ----, No. 2:22-CV-3943, 2024 WL 1155970 (S.D. Ohio Mar. 18, 2024).
PA Super. Ct. Orders Arbitration of Midstream Co. Dispute. The Pennsylvania Superior Court reversed a trial court’s order declining to compel arbitration of a dispute between a midstream company and one of its vendors, holding that the master services agreement contained an arbitration provision and the claims otherwise fell within the scope of the agreement. EQM Gathering Opco, LLC, --- A.3d ----, No. 603 WDA 2023, 2024 WL 1209253 (Pa. Super. Mar. 21, 2024).
W.V. Fed. Ct. Declines to Send FLSA Class Action to Arbitration. A federal court in West Virginia concluded that an oil and gas company could not arbitrate claims that it mischaracterized rig workers as independent contractors to circumvent overtime requirements under FLSA, holding instead that the workers’ arbitration agreement at issue signed is with the placement agency, not the operator, and did not name the operator as a beneficiary of the workers’ contract with the placement agency. Luna v. Tug Hill Operating, LLC, --- F. 3d ----, No. 5:23-CV-361, 2024 WL 1219722 (N.D.W. Va. Mar. 20, 2024).
Ohio Fed. Ct. Rejects Bid to Dismiss O+G Royalty Dispute. In a dispute alleging that a lessee improperly deducted post-production costs from royalties, a federal court in Ohio denied a motion to dismiss the complaint, holding that the lessor pleaded enough to state a claim and did not have to plead specific deductions or attach a royalty statement to survive a motion to dismiss. Kirkbride v. Antero Res. Corp., --- F. Supp. 3d ----, No. 2:23-CV-3212, 2024 WL 1251016 (S.D. Ohio Mar. 22, 2024).
Ohio Fed. Ct. Remands O+G Trespass, Title Dispute to State Court. In a case involving a title dispute over oil and gas interests, a federal court in Ohio rejected an attempt to remove the case to federal court, holding that the defendant’s removal was untimely. Coulson v. Gulfport Appalachia, LLC, --- F. Supp. ----, No. 2:23-CV-930, 2024 WL 1256189 (S.D. Ohio Mar. 25, 2024).
WV Fed. Ct. Addresses Severance Tax and NGLs. In a case involving oil and gas severance taxes, a federal court in West Virginia upheld the assessment and denied a request for refunds of payments by the well operator (taxpayer), holding that the tax assessment office properly taxed the operator’s gross proceeds for processed natural gas liquids and rejecting the argument that the operator should be credited for NGLs that it chose not to sell at the wellhead. CNX Gas Co., LLC v. Irby, --- F. Supp. 3d ----, No. 23-ICA-36, 2024 WL 1261813 (W. Va. Ct. App. Mar. 25, 2024).
WV Fed. Ct. Says Statute does not Create O+G Royalty Cause of Action. A federal court in West Virginia dismissed a complaint alleging a violation of a state statute giving lessor’s a right to interest on late or unpaid oil and gas royalties, holding that the statute does not create a cause of action and instead creates only a remedial interest penalty for royalty payments made after the statutorily required time periods. McCardle Family P’Ship v. Antero Res. Corp., --- F. Supp. 3d ----, No. 1:22-CV-01, 2024 WL 1287617 (N.D.W. Va. Mar. 26, 2024).
WV Fed. Ct. Addresses ORRI and Merger Doctrine. A federal court in West Virginia dismissed a bid for unpaid ORRIs and net profits interests, holding that a prior working interest owner held both interests until assigned to another company such that the plaintiff had no claim to the interests and reasoning that the merger doctrine helped inform the court’s analysis. McArdle Family P’Ship v. Antero Res. Corp., --- F. Supp. 3d ----, No. 1:22-CV-01, 2024 WL 1349200 (N.D.W. Va. Mar. 29, 2024).
Ohio Fed. Ct. Revises O+G Class to Exclude Leases with Arbitration Clauses. A federal court in Ohio revised a class of plaintiffs alleging that their lessee shorted them on royalties, splitting the class into groups with landowners having leases that include arbitration provisions and ones that did not. Eaton v. Ascent Resources-Utica, --- N.E.3d ----, No. 2:19-CV-03412, 2024 WL 1458457 (S.D. Ohio Apr. 4, 2024).
Federal Judge in WV Dismisses Challenge to Forced Pooling Statute. A federal court dismissed a challenge to West Virginia’s pooling statute, concluding that the oil and gas owners lacked standing. Sonda v. West Virginia Oil and Gas Conservation Commission, --- F. Supp. 3d ----, No. 22-124 (March 20, 2024).
Headlines & Holdings - Beyond Appalachia
Tex. App. Ct. Dismisses Claims Arising from Winter Storm Uri. A court of appeals in Texas granted mandamus relief to power generators and dismissed negligence and nuisance claims of retail power customers based on the blackouts during Winter Storm Uri. In re Luminant Generation Co. LLC, --- S.W.3d ----, No. 01-23-00097-CV, 2023 WL 8630982 (Tex. App. Dec. 14, 2023).
ND Fed. Ct. Sends O+G Royalty Dispute Back to State Court. A federal court in North Dakota held that plaintiffs didn’t fraudulently join an affiliate of Hess to destroy diversity jurisdiction in a dispute over royalties and post-production costs, holding instead that the complaint raised colorable claims against the non-diverse defendant and, consequently, the court lacked jurisdiction. Skarphol v. Amerada Hess Corp., --- F. Supp. 3d ----, No. 1:21-CV-228, 2023 WL 8663881 (D.N.D. Dec. 15, 2023).
ND Supremes Reject O+G Company’s Decision to Suspend Royalties. The North Dakota Supreme Court concluded that the state’s royalty statute (which authorizes suspension of royalties during a title dispute between/among mineral owners) did not protect the well operator from withholding payments and paying statutory interest on late payments. The court held that the well operator never sent notice to royalty owners about a title dispute before suspending payments and therefore the company had to pay 18% interest on untimely paid royalties. Powell v. Statoil Oil & Gas LP, --- N.W.2d ----, No. 20230098, 2023 WL 8658855 (N.D. December 15, 2023).
Tex. App. Ct. Grapples with Double-Fraction in O+G Deed. A court of appeals in Texas interpreted a deed granting 3/16ths of 1/8 as creating a “floating” 3/16 royalty in all future leases covering the property and not a “fixed” 3/128th royalty interest. Powder River Mineral Partners, LLC v. Cimarex Energy Co., --- S.2.3d ----, No. 08-23-00058-CV, 2023 WL 8703418 (Tex. App. Dec. 15, 2023).
OK Supremes Say O+G Royalty Dispute Time Barred. The Supreme Court of Oklahoma held that a dispute over whether a 1978 oil and gas lease or a 1973 oil and gas lease controls, which would determine whether the plaintiff receives a 3/16 or 1/8 royalty, is in the nature of a “quiet title” dispute and therefore time-barred by the state’s 15-year statute of limitations. Base ex. rel. Justice v. Devon Energy Prod. Co., L.P., --- P.W.3d ----, No. 119,366, 2024 WL 445613 (Okla. February 6, 2024).
Tex. App. Ct. Rejects Surface Use Claim. A court of appeals in Texas rejected claims that a production company breached its contract with the landowner or committed trespass based on the company’s use of the surface of the landowner’s property, holding that a production sharing agreement between the landowner and the production company granted the company an easement on the surface estate and therefore did not need further consent from the landowner to use the surface for operations. Hamilton v. ConocoPhillips Co., --- S.W.3d ----, No. 13-22-00096-CV, 2024 WL 484663 (Tex. App. Feb. 8, 2024).
Fifth Circuit Addresses Mineral Lease Conditions Under La. Law. The Fifth Circuit concluded that a mineral lease – requiring approval from local, state, or federal authorities in order to take effect – expired for failure to satisfy that condition such that the owners of the lease had no property interest in the leased tract and no corresponding standing to raise takings claims against the local government for denying local approvals. Treme v. St. John the Baptist Parish Council, --- F.4th ----, No. 23-30084, 2024 WL 655984 (5th Cir. Feb. 16, 2024).
Fifth Circuit Seeks Supremes’ Input on LNG Emissions. The Fifth Circuit certified for Texas Supreme Court review the question of whether the state’s definition of “best available control technology” encompasses air pollution control methods that the TCEQ has permitted but that are not yet in operation and specifically whether the phrase “proven to be operational” means currently in operation or capable of operation. Port Arthur Cmty. Action Network v. Texas Comm'n on Env’t Quality, --- S.W.3d ----, No. 22-60556, 2024 WL 655983 (5th Cir. Feb. 16, 2024).
Fifth Circ. Addresses CAFA’s “Local Controversy” Exception in O+G Royalty Dispute. The Fifth Circuit disagreed that an oil and gas royalty class action should be decided in state rather than federal court, holding that the lessors did not show that their “principal injuries” occurred in Texas for the “local controversy” exception to the Class Action Fairness Act. Cheapside Minerals, Ltd. v. Devon Energy Production Company, --- S.W.3d ----, No. 23-40591, 2024 WL 886951 (5th Cir. Mar. 1, 2024).
ND Supremes Say No to Takings, Royalty Claims. In a case alleging an unlawful taking against the state and a breach of contract for unpaid royalties against a lessee, a federal court in North Dakota held that (a) a title dispute between the state and the landowners is not a taking; and (b) the lessee feel within the state’s statutory safe harbor for non-payment of royalties. Whitetail Wave LLC v. XTO Energy, Inc., --- N.W.3d ----, No. 20230283, 2024 WL 1460078 (N.D. April 4, 2024).
DC Circuit Blesses FERC’s Extension to Complete Pipeline Project. In a case in which FERC approved the construction of a pipeline, the D.C. Circuit Court upheld FERC’s approval of an extension to the deadline for that project, rejecting arguments from environmental groups that FERC was too permissive in finding “good cause” to grant the extensions. Sierra Club v. FERC, --- F. Supp. 3d ----, No. 22-1233, 2024 WL 1335236 (D.C. Cir. Mar. 29, 2024).
DC Fed. Ct. Rejects BLM’s Approval of Wyoming O+G Leases based on GHG Objections. The D.C. federal court rejected BLM’s oil and gas lease sales in Wyoming, holding that the agency failed to explain the lease sale’s impact on groundwater and wildlife and how its analysis of GHG emissions influenced leasing decisions. Wilderness Society v. US DOI, --- F. Supp. 3d ----, No. 22-CV-1871 (CRC), 2024 WL 1241906 (D.D.C. Mar. 22, 2024).
DC Fed. Ct. Upholds BLM’s Approval of ND O+G Leases over GHG Objections. The D.C. federal court upheld BLM’s approval of oil and gas lease sales in North Dakota, holding that BLM reasonably exhausted available tools to analyze the lease sales’ environmental consequences and explained why it cannot predict the on-the-ground effects that this level of GHG emissions will have on the local ecosystem or global environment. Dakota Resource Council v. US DOI, --- F. Supp. ----, No. 22-CV-1853 (CRC), 2024 WL 1239698 (D.D.C. Mar. 22, 2024).
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