At the Well Weekly (v.7.8.2022)

Oil + Gas Update | Summertime Summaries.

After some time away, we're back at the well. Since our last report, oil and natural gas prices skyrocketed before sliding in recent weeks to an average of about $4-$5/MMBtu for natural gas and just above $100/bbl for oil.

In pipeline news, Mountain Valley Pipeline meandered through various permit approval processes over the past few months and is now planning for a 2023 start date despite recently asking FERC for a four-year extension to complete the project. FERC also granted NFG an extension to complete Northern Access (from PA to NY) and Nexus Gas Transmission (Ohio to Michigan) avoided a challenge to its certificate of public convenience.

In Appalachia, courts grappled with royalties and post-production costs, bonus payments for leases, Section 401 water quality certifications, workers' comp immunity from negligence suits brought by oilfield workers, mineral v. royalty interests, and a variety of other land and regulatory issues. In other regions, courts addressed the Duhig Rule, the drainage covenant, drilling-commitment provisions, gathering companies and "public utility" status, mineral v. royalty distinctions, eminent domain, and EPA's authority to regulate emissions.

Rig Counts, Spot Prices + Oil Prices

  • Rigs: National (752); Marcellus (38); Utica/Point Pleasant (11)

  • Brent Crude: $107.00/bbl

  • West Texas Intermediate: $104.5/bbl

  • NYMEX: August 2022 @ $5.510/MMBtu

  • Spot Prices: Henry Hub ($5.63/MMBtu); Tenn. Zone 4 ($4.85/MMBtu); Eastern Gas South (f/k/a Dominion South) ($5.00/MMBtu)

WOPL - Appalachia

  • Mountain Valley Pipeline. After losing various battles in federal court and heading back to the drawing board, both FERC and state authorities defended new permit applications for MVP's project and recently asked for an extension to complete the project in the next four years even though the company plans to go online by 2023.

  • Mariner East. The Mariner East pipeline is helping boost LNG exports to Europe where demand is high as a result of the Russia-Ukraine conflict.

  • Northern Access Pipeline. FERC granted NFG more time to complete the Northern Access Pipeline from PA to NY.

  • Nexus Gas Transmission. The D.C. Circuit upheld a certificate of public convenience issued by FERC to NEXUS Gas Transmission to construct and operate a gas pipeline from Ohio to Michigan.

Headlines & Holdings - Appalachia

  • PA Superior Court Says Phrase “Gross Proceeds at the Well” in O+G Royalty Clause is Ambiguous. In a dispute over whether a lessee may deduct the lessor’s share of post-production costs from royalties under a gross-proceeds-at-the-well lease, the Pennsylvania Superior Court concluded that this type of royalty clause is ambiguous and remanded for further findings on (a) whether those words have an accepted industry meaning; (b) the intent of the original parties to the lease; (c) whether the lessee sold gas at the wellhead; (d) the parties’ course of performance; and (e) any other relevant factors. Dressler Family, LP v. PennEnergy Resources, --- A.3d ----, No. 635 WDA 2021, 2022 PA Super 77, 2022 WL 1282693 (Apr. 29, 2022).

  • Ohio Waived Section 401 Claims Against Rover Pipeline. The Supreme Court of Ohio held that the state’s complaint against Rover Pipeline for discharges into streams during construction should be dismissed because the state waived its ability to participate in the certification process when it did not respond to Rover’s Section 401 certification application within one year, remanding the case to determine which issues are related to the Section 401 certification that the state waived and which are unrelated to the Section 401 process that the state may pursue. State ex rel. Yost v. Rover Pipeline, L.L.C., --- N.E.3d ----, No. 2020-0091, 2022-Ohio-766, 2022 WL 802884 (Ohio March 17, 2022).

  • Fed. Court in PA Says Well Operator Immune from under PA Workers’ Comp. Act. A federal court in Pennsylvania held that a well operator is a statutory employer under the state’s workers’ comp statute because it engaged its subcontractor to pump fluids down a well to extract natural gas in shale rock and therefore “perform[ed] work involving the ‘removal, excavation or drilling of ... minerals' (natural gas)” as a regular part of its business and cannot be liable for injuries sustained by a subcontractor’s employee at the well site. Coleman v. Chief Oil & Gas, LLC, --- F. Supp. 3d ----, No. 4:21-CV-00090, 2022 WL 821167 (M.D. Pa. Mar. 17, 2022).

  • Ohio Supreme Court Says O+G Lease Expiration Claim is a Dispute Involving Title to Real Estate that Can’t be Subject to Arbitration. The Supreme Court of Ohio held that an action seeking a determination that an oil and gas lease has expired by its own terms is a controversy “involving the title to or the possession of real estate” such that the action is exempt from arbitration under Ohio R.C. 2711.01(B)(1), reasoning that (a) “an oil and gas lease grants the lessee a property interest in real estate that affects the title to the land and permits the lessee to physically occupy the land to the extent reasonably necessary to the production of oil and gas – i.e., the lessee acquires the right to enter the property and construct wells, buildings, telephone lines, pipelines, power lines, and roads”; and (b) “once an oil and gas lease expires under its own terms, the property interest granted under the lease reverts to the lessor by operation of law and the lessee no longer has any right to occupy the land.” French v. Ascent Res.-Utica, L.L.C., --- N.E.3d ----, No. 2021-0166, 2022-Ohio-869, 2022 WL 867842 (Ohio March 24, 2022).

  • Fed. Ct. in Ohio Says Operating Costs for “Paying Quantities” Analysis Doesn’t Include the Market Value of “Free Labor.” A federal court in Ohio addressed a dispute over whether a well-produced “in paying quantities,” the general rule being that a well must generate a profit (however small) over operating costs to keep a lease alive in the secondary term, and held that the value of “free labor” should be excluded from operating costs. Sound Energy Co., Inc. v. Ascent Resources – Utica, LLC, --- F. Supp. 3d ----, No. 2018-CV-1771, 2022 WL 912247 (S.D. Ohio Mar. 29, 2022).

  • Ohio. Bank. Ct. Says Owner of Subsurface O+G Can’t Mortgage the Surface Estate. A bankruptcy court in Ohio held that an oil/gas owner or lessee has no right to mortgage the separate surface estate, rejecting claims by the owner/lessee that the traditional surface use and easement rights attendant to the subsurface estate do not go so far as to give the subsurface owner the right to mortgage the overlying surface estate. In re: Murray Energy Holdings Co., --- B.R. ----, No. 19-56885, 2022 WL 970340 (Bankr. S.D. Ohio Mar. 31, 2022).

  • Fed. Ct. in PA Addresses Dispute over Unpaid O+G Lease Bonus. A federal court in Pennsylvania revisited a prior decision in a now-decertified class action alleging failure to pay bonus payments to prospective oil and gas lessors, rescinding the court’s prior decision in part and concluding that, in a case alleging breach for failure to pay bonus before cancellation of leases, the lessors need not prove good title in the first instance to show wrongful cancellation but that in this case the lessee’s express cancellation of the leases and related documents served as a sufficient manifestation of an intent to rescind those agreements. Walney v. SWEPI LP, --- F. Supp. 3d ----, No. CV 13-102, 2022 WL 976393 (W.D. Pa. Mar. 31, 2022).

  • PA Superior Court Says Well Operator is not Immune from under PA Workers’ Comp. Act. The Superior Court in Pennsylvania held that a well operator and its service company did not conclusively demonstrate that they are statutory employers who are immune from liability under the state’s workers’ comp statute because (a) they engaged a subcontractor to perform transportation and unloading services and not to “perform work involving the ‘removal, excavation or drilling of ... minerals' (natural gas)” as a regular part of the business; and (b) transportation and unloading of barite is not a regular aspect of the companies’ business or trade that they contractually delegated to the subcontractor for purposes of immunity. Dobransky v. EQT Corp., --- A.3d ----, No. 900 WDA 2019, 2022 PA Super 61, 2022 WL 1073768 (Apr. 11, 2022).

  • Arbitration Clause in O+G Matchmaker Contract Benefits Well Operator. A federal court in West Virginia held that an arbitration provision in a contract between an oil + gas matchmaking services company and the independent contractors who use the app to get jobs benefits the third-party well operator and therefore the FLSA class action claims brought by employees for overtime against the well operator must submit them to binding arbitration. Rogers v. Tug Hill Operating, LLC, --- F. Supp. 3d ----, No. 5:21-CV-199, 2022 WL 1096620, at *16 (N.D.W. Va. Apr. 12, 2022).

  • Kansas Supremes Reject Attempt to Re-Litigate O+G Marketing-Covenant Claims under Law-of-the-Case Doctrine. The Supreme Court of Kansas reiterated its previous holdings in Fawcett v. Oil Producers, Inc. of Kansas, 302 Kan. 350, 352 P.3d 1032 (2015) (Fawcett I) that (a) a lessee can satisfy its implied duty to market gas when gas is sold at the wellhead and (b) a lessee may share costs with royalty owners for any necessary post-sale, post-production processing and concluded in this case (Fawcett II)that the class plaintiffs’ attempt to re-litigate marketing-covenant claims fails under the law-of-the-case doctrine. Fawcett v. Oil Producers Inc. of Kansas, --- S.W.3d ----, No. 120,611, 2022 WL 1123368 (Kan. Apr. 15, 2022).

  • PA OOR Says DEP Injection Well Complaint Investigations not Subject to Disclosure under PA’s RTKL. The Pennsylvania Office of Open Records concluded that DEP’s water supply complaint investigations associated with injection wells are not public records subject to disclosure under the Commonwealth’s Right to Know Law because they constitute records of non-criminal investigations exempt from disclosure. In re: Conley, No. AP 2022-0494, 2022 WL 1289026 (Pa. Off. Open Rec. April 26, 2022).

  • Fed. Ct. in PA Says Conclusory Allegations of Intentional/Willful O+G Production Adjacent to Unleased Property Enough to Claim “Punitive Damages” in Trespass-by-Frac Case. In a case alleging trespass-by-fracture (a “Briggs” claim), a federal court in Pennsylvania accepted conclusory allegations from the plaintiff as sufficient to survive a motion to dismiss claims to recover punitive damages, holding that bare-faced allegations that the company “knowingly, willfully, unlawfully, outrageously and in complete conscious disregard of the rights and title of the Plaintiffs in said land and the natural gas thereunder” sufficed to let a jury potential find that the company acted “intentionally, solely for their own increased profit, and had a subjective appreciation of the risk of harm to Plaintiffs and their property but acted, or failed to act, in conscious disregard of the risks.” The court cautioned, however, that the plaintiff would face a difficult time actually proving those allegations, concluding instead that, at the pleading stage, the court should not dismiss but should give the plaintiff an opportunity to prove those damages. Waller v. Cabot Oil & Gas Corp., --- F. Supp. 3d ----, No. 3:21-CV-569, 2022 WL 1571001 (M.D. Pa. May 18, 2022).

  • OOR Orders Disclosure of DEP O+G Methane Flyover Records. The Office of Open Records ordered DEP to disclose records related to the agency’s “Methane Flyover Project” – specifically, “all steps or measures taken or considered in planning and preparation (including proposals) for and execution of one or more airplane flights during calendar year 2021 for the [] purpose of evaluation of methane sources located in and/or around the Commonwealth of Pennsylvania” and any subsequent reports within thirty days” – holding that those records are not exempt from public disclosure under the Right to Know Law but falling short of finding that DEP engaged in bad faith by withholding them. In re: Komoroski v. DEP, No. AP 2022-0637, 2022 WL 1618989 (Pa. Off. Open Rec. May 18, 2022).

  • Fed. Court in PA Declines to Dismiss O+G Royalty Claim for Failure to Follow Notice + Cure Provision. In a class action dispute over whether a lessee violated a post-production-cost cap before paying royalties, a federal court in Pennsylvania declined to dismiss the breach-of-contract count of the complaint for the plaintiff’s failure to follow the leases notice-and-cure provision, holding that the court could not resolve that question of fact at the 12(b)(6) stage. Rupert v. Range Resources – Appalachia, LLC, --- F. Supp. 3d ----, No. 2:21-1281, 2022 WL 1689510 (W.D. Pa. May 26, 2022).

  • W. Va. Fed. Court Interprets Phrase “in and under” as Mineral Interest Reservation. Interpreting a mineral deed, a federal court in West Virginia concluded that a conveyance of oil and gas “reserves in and under property hereby reserved,” without qualification, along with a reference to a 50-acre tract and a 250-acre tract, created a reservation of mineral rights under all of the surface property conveyed. Cofield v. Antero Resources Corp., --- F. Supp. 3d ----, No. 21-0164, 2022 WL 1715170 (W. Va. May 27, 2022).

  • New York Cites Climate Law to Block Power Plants. A New York state judge has held that state agencies can block permits for fossil-fuel-fired power plants even before formal rulemaking is in place, holding that the state’s climate change protection law calls for urgent action. Danskammer Energy, LLC v. NYDEC, --- N.Y.3d ----, 2022 N.Y. Slip Op. 22182, 2022 WL 2092580 (N.Y. Sup. Ct. June 8, 2022).

  • Ohio Court Says After-Acquired Mineral Estate is Subject to Pre-Existing Mortgage. A court of appeals in Ohio held that subsequently acquired mineral rights became subject to a pre-existing mortgage that applied to after-acquired property given that minerals in place are real property interests in Ohio and therefore properly subject to foreclosure and subsequent sheriff’s sale upon default of the mortgage. Shamrock v. Cobra Resources, LLC, --- N.E.3d ----, NOS. 2020-T-0075, 2020-T-0076, , 2022-Ohio-1998, 2022 WL 2113592 (Ohio Ct. App. June 13, 2022).

  • WV Fed. Ct. Concludes that Labor Management Relations Act Preempts Tortious Interference Claim. A federal court in West Virginia dismissed a case brought by union employees claiming that a pipeline company/contractor improperly directed their employer/subcontractor to terminate them without just cause, holding that Section 301 of the Labor Management Relations Act preempts claims for tortious interference with contract. Canfield v. Mountain Valley Pipeline, LLC, --- F. Supp. 3d ----, No. 2:21-CV-00384, 2022 WL 2111968 (S.D.W. Va. June 10, 2022).

  • WV Supreme Court Reaffirms Tawney Decision on Marketable-Product Rule. Answering a certified question from a federal court, a majority of the Supreme Court of West Virginia reaffirmed its prior decision in Estate of Tawney v. Columbia Natural Resources, LLC, 633 S.E.2d 22 (W. Va. 2006), which created a unique version of the so-called “marketable product” rule for royalty-clause interpretation, meaning that a lessee’s implied duty to market obligates the lessee to incur all costs of rendering gas marketable. The Tawney decision also added that the lessor and lessee must specifically agree, using certain language, that they will share in post-production costs or the lessee must bear 100% of them notwithstanding contrary language. The court in Kellam did not answer other certified questions on contract interpretations. The concurring opinion criticized all critics of the West-Virginia version of the marketable-product rule, and the dissenting opinion would wipe the slate clean given that Tawney engenders situations where the courts deviate from the parties’ written agreement on post-production costs. SWN Production Co., LLC v. Kellam, --- S.W.3d ----, No. No. 21-0729, 2022 WL 2128335 (W. Va. June 14, 2022).

  • D.C. Circ. Rejects Landowner Challenge to MVP Pipeline. The D.C. Circuit Court upheld an order dismissing a landowner’s challenge to a certificate of public convenience issued to Mountain Valley Pipeline that authorized construction through the landowner’s property, holding that the Natural Gas Act creates an exclusive review scheme for challenges to pipeline certificates that requires rehearing before FERC and further appeal to the D.C. Circuit, not a civil action in federal district court. Bohon v. FERC, --- F.4th ----, No. 20-5203, 2022 WL 2203482 (D.C. Cir. June 21, 2022).

  • D.C. Circ. Upholds FERC’s Approval of MVP Southgate Project. The D.C. Circuit upheld FERC’s approval of Mountain Valley Pipeline’s “Southgate Project,” rejecting claims that FERC acted arbitrarily and capriciously by approving a return on equity rate and by issuing a faulty “Environmental Impact Statement.” Sierra Club v. FERC, --- F.4th ----, No. 20-1427, 2022 WL 2310616 (D.C. Cir. June 28, 2022).

  • D.C. Circ. Upholds FERC’s Approval of NEXUS Gas Pipeline. The D.C. Circuit upheld a certificate of public convenience issued by FERC to NEXUS Gas Transmission to construct and operate a gas pipeline from Ohio to Michigan, rejecting claims that FERC did not adequately justify its reliance on agreements to transport gas ultimately bound for export to Canada as evidence of need for the pipeline. City of Oberlin, Ohio v. FERC, --- F.4th ----, No. 20-1492, 2022 WL 2566173 (D.C. Cir. July 8, 2022).

  • PA Federal Court Rejects O+G Lease-Busting Bid Based on Shut-In Payments. A federal court in Pennsylvania held that a lessee maintained its oil and gas lease by tendering shut-in payments to the lessor, concluding that the shut-in clause gave the lessee the opportunity to hold the lease by paying shut-in royalties for any wells that are “shut-in, suspended or otherwise not producing for any reason whatsoever” and rejecting arguments that the lessee never shut in the well at issue and improperly pooled leases. Salevsky v. Seneca Resources Co., LLC, --- F. Supp. 3d ----, No. 4:19-CV-02180, 2022 WL 2532172 (M.D. Pa. July 7, 2022).

  • PA Federal Court Rejects O+G Lease-Busting Bid Based on Shut-In Payments. A federal court in Pennsylvania held that a lessee maintained its oil and gas lease by tendering shut-in payments to the lessor, concluding that the shut-in clause gave the lessee the opportunity to hold the lease by paying shut-in royalties for any wells that are “shut-in, suspended or otherwise not producing for any reason whatsoever” and rejecting arguments that the lessee never shut in the well at issue and improperly pooled leases. Salevsky v. Seneca Resources Co., LLC, --- F. Supp. 3d ----, No. 4:19-CV-02180, 2022 WL 2532172 (M.D. Pa. July 7, 2022).

  • Commonwealth Court Blocks RGGI. The Commonwealth Court granted a preliminary injunction preventing PA from implementing the new RGGI regulation that would compel PA to join the regional group in an effort to reduce greenhouse gas emissions. The court stated that petitioners (coal industry parties and lawmakers) “have raised a substantial legal question as to whether the proceeds resulting from the Rulemaking’s required purchases of CO2 allowances by the Commonwealth’s covered sources, i.e., fossil fuel-fired EGUs with a nameplate capacity equal to or greater than 25 MW, constitute a tax as opposed to a regulatory fee.Section 6.3(a) of the APCA, 35 P.S. § 4006.3(a), permits the imposition of fees to cover the costs of administering any air pollution control program authorized by the statute. However, the power to levy taxes is specifically reserved to the General Assembly. PA CONST. art. II, § 1.While the General Assembly may delegate the power to tax, the delegation must be clearly conferred via statute and any such delegation appears absent from the APCA.”

Headlines & Holdings - Beyond Appalachia

  • Tex. Fed. Ct. Dismisses Shareholder Suit against Cabot/Coterra. A federal court in Texas dismissed claims advanced by shareholders of Cabot Oil & Gas Corp., n/k/a Coterra Energy, holding that the pleadings did not suffice to show that company executives and members of its Board of Directors knew about repeated violations of environmental laws, regulations, and consent orders in Appalachia but failed to address the violations and then made statements about compliance that harmed the company, but the court granted the plaintiffs leave to amend to correct the deficiencies. In re Cabot Oil & Gas Corp. Derivative Litigation --- F. Supp. 3d. ----, No. CV H-21-2046, 2022 WL 991999 (S.D. Tex. Mar. 31, 2022).

  • Tex. Bankruptcy Ct. Says Unpaid O+G Royalties are Unsecured Claims. A bankruptcy court in Texas held that a confirmed plan of reorganization classifying unpaid pre-petition oil and gas royalties as unsecured claims foreclosed any relief for the royalty owners, rejecting their claims that the debtor held those funds in trust for the benefit of royalty owners and concluding that the plan is binding. In re: Lilis Energy, Inc., --- F. Supp. 3d ----, No. 20-33274, 2022 WL 1051101 (Bankr. S.D. Tex. Apr. 7, 2022).

  • Federal Court in North Dakota Applies Duhig Rule to Overconveyance. A federal court in North Dakota applied its vers