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At the Well Weekly (v.5.14.2021)

Oil + Gas Update | Pipeline Cyberattacks, O+G Lease Abandonment, and Royalty Clauses in PA.

The NYMEX and Henry Hub are hovering around $3/MMBtu while spot prices in Appalachia continue to lag behind. The rig count increased slightly while oil prices jumped in the wake of the cyberattack on Colonial Pipeline. In pipeline news, the Va. DEQ denied Mountain Valley's permits (again), Michigan's Governor plans to shut down Enbridge Pipeline Line 5 despite gasoline shortages across the country, and pipeline companies have renewed their cybersecurity efforts in the wake of the Colonial hack. In Appalachia, the PA Supremes rejected claims that a lessee abandoned its oil and gas lease, and a federal judge applied Kilmer beyond the statutory interpretation realm to interpret royalty clauses in PA. In other regions, a Colorado court addressed the meaning of "production" in an oil and gas lease while Texas courts tangled with top leases, JOAs, injection wells, and force majeure clauses.

Rig Counts, Spot Prices + Oil Prices

  • Rigs: National (453); Marcellus (30); Utica/Point Pleasant (10)

  • Brent Crude: $68.74/bbl

  • West Texas Intermediate: $65.36/bbl

  • NYMEX: June 2021 @ $2.969/MMBtu

  • Spot Prices: Henry Hub ($2.90/MMBtu); Dominion South ($2.19/MMBtu); Tenn. Zone 4 ($1.70/MMBtu)

WOPL - Appalachia

  • Mountain Valley Pipeline. The Va. DEQ denied MVP's permit application following a remand from the Fourth Circuit, burdening the company with more problems that will delay its target date to go online.

  • Dakota Access. The D.C. Circuit declined to stay its order affirming a decision that wiped out an Army Corps easement for the pipeline while the company pursues an appeal with the U.S. Supreme Court.

  • Enbridge. In anticipation of the Michigan Governor's order shutting down the Enbridge Pipeline, the Consumer Energy Alliance outlined the economic impact a closure would have on Pennsylvania and other affected regions.

  • Colonial Pipeline. Hackers attacked Colonial Pipeline – which brings gasoline and oil up and down the east coast – with ransomware that shut down 45% of the company’s supply operations. Gasoline prices edged up on the East Coast following the cyberattack. The pipeline is largely back online. The Biden Administration pledged to take action to disrupt the operations of the syndicate that hit Colonial Pipeline with ransomware that cost the company $5 million to restart operations.

Headlines & Holdings - Appalachia

  • Ohio Supremes Accept Appeal re: Arbitration of O+G Lease Dispute. The Supreme Court of Ohio accepted an appeal from French v. Ascent Resources – Utica, LLC, --- N.E.3d ---, 2020 WL 7587121 (Ohio Ct. App. Dec. 22, 2020), in which a court of appeals in Ohio held that although a lease creates an interest in real estate, it does not necessarily involve issues concerning title to or possession of real estate in order to qualify as an exception to mandatory arbitration in the parties’ contract.

  • PA Supremes Abandon “Abandonment” Theory of O+G Lease Expiration. The Pennsylvania Supreme Court held that lower courts erred when they held that a lessee abandoned an oil and gas lease after a prolonged period of inactivity when the oil and gas lease governs how and when the lease expires by its express terms: “Because Appellees had available to them a full and adequate remedy at law, through contract principles generally applicable to oil and gas leases, and through the specific provisions of the subject leases, we conclude it was error to provide recourse through application of the equitable doctrine of abandonment.” SLT Holdings, LLC v. Mitch-Well Energy, Inc., --- A.3d ---, No. 6 WAP 2020, 2021 WL 1676362 (Pa. Apr. 29, 2021).

  • WV Federal Judge Refuses to Enforce EQT/Royalty Owner Settlement Agreement. A West Virginia federal judge refused to dismiss a trespass claim against EQT in which royalty owners ask for $40 million in damages based on a prior settlement agreement, rejecting EQT’s argument that the trespass claim in state court litigation is a royalty claim that was released by the terms of the settlement. Kay Co. v. Equitable Prod. Co., --- F. Supp. 3d ---, No. 2:06-CV-00612, 2021 WL 1589266 (S.D.W. Va. Apr. 22, 2021).

  • JOA Parties are not Necessary or Indispensable; No Injunction for Non-Operator. A federal judge in Pennsylvania concluded that JOA parties electing or declining to participate in wells or units at issue in a JOA dispute between operator and non-operator are neither necessary nor indispensable parties that must be joined in the case. Thereafter, the judge denied a bid for a mandatory preliminary injunction that the judge said would significantly alter the current operational "status quo." Epsilon Energy USA, Inc. v. Chesapeake Appalachia, L.L.C., --- F. Supp. 3d ---, No. 1:21-CV-00658, 2021 WL 1614795 (M.D. Pa. Apr. 26, 2021); Epsilon Energy USA, Inc. v. Chesapeake Appalachia, L.L.C., --- F. Supp. 3d ---, No. 1:21-CV-00658, 2021 WL 1945699 (M.D. Pa. May 14, 2021).

  • PA Superior Court Says Trial Court Error in Royalty Distribution Warrants a Redo. The Pennsylvania Superior Court said a subsequent order that contradicted a prior order distributing royalty shares from escrow equally among competing parties did not prevent the plaintiffs from enforcing the original order, rejecting arguments that the subsequent order served as law of the case that prevented a redo. Lafferty v. Ferris, --- A.3d ---, No. 724 MDA 2020, 2021 WL 1750889 (Pa. Super. Ct. May 4, 2021).

  • WV Federal Court Says Plaintiffs can Amend Royalty Claims. A federal court in West Virginia granted a motion by royalty owners to amend their complaints to clarify that a prior settlement agreement and their claims about violations of market-enhancement royalty provisions are all part of the same agreement that the lessors can seek to enforce. Corder v. Antero Resources Corp., --- F. Supp. 3d ---, No. 1:18CV30, 2021 WL 1759852 (N.D.W. Va. May 4, 2021).

  • PA Federal Court Says Civil Rights Claims Against O+G Company Belong in Arbitration. A federal court in Pennsylvania ordered arbitration of a service company’s claims that the oil and gas company with which it contracted violated the service company’s “right to make and enforce contracts under section 1981(a) of the Civil Rights Act and for breach of contract,” holding that the claims are within the scope of arbitration under the parties' agreement. Intergrserv LLC v. EQT Production Co., --- F. Supp. 3d ---, No. CV 20-1228, 2021 WL 1816941 (W.D. Pa. May 5, 2021).

  • Federal Judge in PA Applies Kilmer to Interpret O+G Lease. A federal judge in the Western District of Pennsylvania concluded that the holdings in Kilmer v. Elexco, the Pennsylvania Supreme Court decision on statutory minimum royalties, apply broadly to interpret “at the wellhead” language in a royalty clauses, concluding that such language 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. Coastal Forest Res. Co. v. Chevron U.S.A., Inc., --- F. Supp. 3d ---, No. 2:20-CV-1119, 2021 WL 1894596 (W.D. Pa. May 11, 2021).

  • Federal Judge in WV Wants Evidence of Damages in Royalty Dispute. A federal judge in West Virginia applied the state’s unique case law and statutory provisions regarding royalties to deny a bid by a lessee for summary judgment against lessors claiming improper deduction of post-production costs, holding that the language of the parties’ various leases is not specific enough under West Virginia law to permit the lessee to allocate a portion to lessors their share of costs incurred to process natural gas and liquids but concluding that there are fact issues regarding damages the court must sort out, including whether raw gas is in marketable form before the lessee incurs value-adding costs under the parties’ lease agreements. Corder v. Antero Resources Corp., --- F. Supp. 3d ---, No. 1:18CV30, 2021 WL 1912383 (N.D.W. Va. May 12, 2021).

Headlines & Holdings - Beyond Appalachia

  • Texas Appellate Court Says Surface Owner can Pave Over Pipeline Easement. A court of appeals in Texas held that a surface owner could lay concrete on the surface over a pipeline easement strip based on the terms of the agreement and that regulatory provisions regarding health and safety do not otherwise prohibit the surface owner's activities. Energy Transfer Fuel v. 660 N. Freeway, LLC, --- S.W.3d ---, No. 02-20-00170-CV, 2021 WL 1569702 (Tex. App. Apr. 22, 2021).

  • Base Lease Prevails in Texas Top Lease Tangle. A court of appeals in Texas upheld a base lease despite claims by the top lessee that the base lease lacked a proper legal description to satisfy the statute of frauds. MEI Camp Springs, LLC v. Clear Fork, Inc., --- S.W.3d ---, No. 11-19-00048-CV, 2021 WL 1584815 (Tex. App. Apr. 23, 2021).

  • Force Majeure Clause Saves O+G Lease from Expiration. A Texas appellate court concluded that a force majeure clause saved a lease from expiring, holding that off-lease wellbore instability encountered by a rig prevented the company from spudding an additional well by the deadline. MRC Permian Co. v. Point Energy Partners Permian LLC, --- S.W.3d ---, No. 08-19-00124-CV, 2021 WL 1661193 (Tex. App. Apr. 28, 2021).

  • Debtor can Reject Gathering Agreement but Gatherer Keeps Property Interests. A bankruptcy court in Texas held that a debtor could reject its midstream gathering agreements and an associated development agreement as executory contracts but under the Supreme Court's holding in Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019), the gathering company retains its real property interests that were granted in the gathering agreements. In re: Sanchez Energy Corp. --- F. Supp. 3d ---, No. 19-34508, 2021 WL 1822708 (Bankr. S.D. Tex. May 6, 2021).

  • Fact Issues Preclude Summary Judgment in Injection Well Damages Case. The Texas Supreme Court held that fact issues remain over whether a mineral estate lessee could recover damages based on allegations that an injection well operator injected hydrogen sulfide back into the earth and injured the lessee's interests in the minerals underlying nearby properties. Regency Field Services, LLC v. Swift Energy Operating, LLC, --- S.W.3d ---, No. 9-0545, 2021 WL 1827906 (Tex. May 7, 2021).

  • Tex. Court of Appeals Defines "Willful Misconduct" in JOA. A court of appeals in Texas defined "willful misconduct" for purposes of a JOA as "deliberate mismanagement committed without regard for the consequences" and concluded that a non-operator satisfied the test with respect to one of its claims for damages against the operator. Apache Corp. v. Castex Offshore, Inc., --- S.W.3d ---, No. 14-19-00605-CV, 2021 WL 1881213 (Tex. App. May 11, 2021).

  • Colo. Appellate Court Interprets "Production" as "Capable of Production." A court of appeals in Colorado held that "production" as used in an oil and gas lease means "capable of producing oil or gas in commercial quantities" and concluded that two oil and gas leases never expired for lack of production because wells on the land subject to the leases never stopped producing. Bd. of Cty. Commissioners of Boulder Cty., Colorado v. Crestone Peak Res. Operating LLC, --- P.3d ---, No. 2021 COA 67, 2021 WL 1916380 (Colo. Ct. App. May 14, 2021).

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