Oil + Gas Update | Summer 2023 Roundup.
With summer winding down, natural gas prices struggled to stay around $2/MMBtu alongside a drop in the rig count while oil prices climbed to around $90/bbl. In pipeline news, the MVP project is back on track following help from Congress, though recent reports show that activists will continue their attempts to disrupt the project with vandalism and protests. In Appalachia, courts addressed royalties, post-production costs, lease expiration, overrides, jurisdictional issues, and oil and gas arbitrations. In other regions, courts grappled with royalties, post-production costs, NPRIs, shut-in royalties, bona-fide purchasers of oil and gas rights, over-conveyances, surface use issues, ownership of produced water, lease expiration, and subsurface nuisance claims.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (631); Marcellus (30); Utica/Point Pleasant (10)
Brent Crude: $90.47/bbl
West Texas Intermediate: $87.43/bbl
NYMEX: October 2023 @ $2.796/MMBtu; 12-Month Strip @ $3.345
Spot Prices: Henry Hub @ $2.49/MMBtu
WOPL - Appalachia
Mountain Valley Pipeline. The Mountain Valley Pipeline is back on track, with the Fourth Circuit begrudgingly dismissing challenges from environmental groups after Congress stripped that court of jurisdiction. The project is scheduled for completion in late 2023/early 2024. Activists reportedly continue to vandalize construction sites.
Headlines & Holdings - Appalachia
Commonwealth Court Affirms EHB’s Order Declining Jurisdiction over DEP Inaction. In a case in which landowners alleged that the PADEP erred by not taking action on a water supply complaint, the Commonwealth Court affirmed the Environmental Hearing Board’s order dismissing the appeal for lack of jurisdiction.The court held that the EHB does not have jurisdiction over PADEP’s inaction and the PADEP’s delay in investigating is not an appealable “action” for jurisdictional purposes. Glahn v. DEP, --- A.3d ----, No. 1273 C.D. 2021 (Pa. Cmwlth. July 10, 2023).
WV Fed. Ct. Upholds Pooling but Punts on PPC Claims. A federal court in West Virginia upheld a lessee’s payment of royalties on an acreage basis under a modified pooling clause despite claims from the lessor that the agreement called for something else but denied the lessee’s bid for summary judgment on the lessor’s royalty claims, holding that the West Virginia Supreme Court’s decision in Tawney (regarding post-production costs) potentially applies to in-kind royalty clauses and may prohibit post-production-cost sharing. Kaess v. Jay-Bee Oil & Gas, Inc., --- F. Supp. 3d ----, No. 1:22-CV-51, 2023 WL 4687206 (N.D.W. Va. July 21, 2023).
Ohio Court Says No Overrides on Deep Horizontal Wells. A federal court in Ohio rejected claims that lessees owed a fractional working-interest owner overriding royalties on oil and gas produced from deep horizontal wells, agreeing with the lessees’ interpretation of the assignment document that limits the override to oil and gas produced by vertical shallow wells which existed at the time of the ORRI assignment. Sabre Energy Corp. v. Gulfport Energy Corp., --- F. Supp. 3d ----, No. 2:19-CV-5559, 2023 WL 4686357 (S.D. Ohio July 21, 2023).
PA Superior Ct. Scraps O+G Arbitration Award. The Superior Court of Pennsylvania scrapped a multi-million dollar arbitration award in a dispute between joint venturers in oil and gas development, holding that the arbitrator’s decision was fundamentally unjust because it awarded damages to a non-party that did not sign the arbitration agreement and the parties expressly disclaimed any potential third-party beneficiaries of the arbitration provision. PennEnergy Res., LLC v. Winfield Res., LLC, --- A.3d ----, No. 464 WDA 2022, 2023 WL 4715191 (Pa Super. July 25, 2023).
CA3 Says No Indemnity for Oilfield Service Company’s Faulty Workmanship. The Third Circuit Court of Appeals reversed an order granting summary judgment in favor of a policy holder claiming indemnity for damages caused during well operators, holding that the policy does not indemnify the policy holder for property damage caused by its own faulty workmanship. Am. Home Assurance Co. v. Superior Well Servs., Inc., --- F.4th ----, No. 22-1498, 2023 WL 4731210 (3d Cir. July 25, 2023).
O+G Co. Can’t Arbitrate FLSA Claims. In an dispute involving overtime payments under FLSA, the Fourth Circuit reversed an order compelling arbitration, holding that a worker classified as an independent contractor had an arbitration agreement with his third-party staffing firm, and the production company for which the contractor worked wasn’t a third-party beneficiary of that agreement. Rogers v. Tug Hill Operating, LLC, --- F.4th ----, No. 22-1480, 2023 WL 5004996 (4th Cir. Aug. 7, 2023).
Federal Court in Ohio Addresses Market Enhancement Royalty Clause. In a royalty class action, a federal court in Ohio held that a lessee couldn’t deduct certain post-production cost from royalties under a market enhancement clause until after the gas is separated into residue gas and NGLs. Grissoms v. Antero Res. Corp., --- F. Supp. 3d ----, No. 2:20-CV-2028, 2023 WL 5002127 (S.D. Ohio Aug. 4, 2023).
Fourth Circ. Reluctantly Dismisses Enviros’ Appeal Challenging MVP Permits per the Fiscal Responsibility Act. A disgruntled Fourth Circuit applied Section 324 of the Fiscal Responsibility Act that helped the Mountain Valley Pipeline get its permits and removed jurisdiction from the Fourth Circuit over permit disputes. The judges complained about Congress taking away its jurisdiction but held that the court had no choice but to dismiss the appeal. Appalachian Voices v. United States Dep’t of the Interior, --- F.4th ----, No. 23-1384, 2023 WL 5163878 (4th Cir. Aug. 11, 2023).
Third Circuit Addresses Test for Donning and Doffing PPE. The Third Circuit held that the test for whether or not to pay employees for time changing into and out of protective gear under the Portal-to-Portal Act depends on “whether changing is integral and indispensable” to productive work. The court remanded for trial to focus on where employees change, whether regulations or industry custom require changing into gear at work, how specialized the gear is, and “whether it is reasonably necessary for doing the work safely and well.” Tyger v. Precision Drilling Corp., No. 22-1613, 2023 WL 5257688 (3d Cir. Aug. 16, 2023).
PA Superior Ct. Says Tenancy-at-Will did not Save O+G Lease. A court of appeals in Pennsylvania held that an oil and gas lease expired for lack of production years ago despite shut-in payments after the lease already expired, declining to find an at-will tenancy following lease expiration and, even if an at-will tenancy ensued, that tenancy expired when the successors to the first lessors entered into a subsequent lease with another lessee. Douglas Equipment, Inc. v. EQT Prod. Co., --- A.3d ----, No. 674 WDA 2022, 2023 WL 5239153 (Pa. Super. Aug. 15, 2023).
Fed. Ct. in PA Dismisses Briggs Trespass-by-Frac Case on Res Judicata Grounds. A federal court dismissed, on res judicata grounds, a trespass-by-frac case initiated by the same plaintiffs who did not prevail in the landmark PA Supreme Court case regarding trespass-by-frac and the rule of capture, holding that their claims had been decided on the merits before and they can’t bring the same ones again. Briggs v. SWN Production Company, LLC, --- F. Supp. 3d ----, No. 3:21-CV-520, 2023 WL 5310226, (M.D. Pa. Aug. 17, 2023).
Third Circuit Says JOA Parties are Necessary and Indispensable. The Third Circuit Court of Appeals held that JOA parties who are missing from a lawsuit in which a non-operator alleges that the operator wrongfully objected to the non-operator’s proposed wells should be joined as necessary and indispensable to the case, reasoning that a declaratory judgment interpreting the JOAs to authorize a single consenting party to propose the drilling of a new well would affect all the JOA parties’ interests. However, some of those missing JOA parties might destroy diversity jurisdiction if joined, so the court remanded for further findings on that issue. Epsilon Energy USA, Inc. v. Chesapeake Appalachia, LLC, --- F.4th ----, No. 22-1280, 2023 WL 5421748 (3d Cir. Aug. 23, 2023).
Ohio Ct. of App. Says O+G Lease Expired for Lack of Production in Paying Quantities. A court of appeals in Ohio held that a lessee failed to establish that oil and gas wells produced in paying quantities in order to keep its lease alive, holding that the lessee had the burden of proof on that question (as a sanction for discovery violations) and the lessee did not provide mathematical evidence to determine whether profits from the wells exceeded their operating costs. McCoy v. C.G.O. Inc., --- N.E.3d ----, No. 22 MO 0015, 2023 WL 5426413, (Ohio Ct. App. Aug. 22, 2023).
WV Fed. Ct. Asks State Supremes to Answer Implied Covenant, PPC Questions in Oil + Gas Lease Dispute. A federal court in West Virginia certified the following questions for the West Virginia Supreme Court's input: “Question 1: Is there an implied duty to market for leases containing an in-kind royalty provision? Question 2: Do the requirements for the deductions of post-production expenses from Wellman v. Energy Resources, Inc., 557 S.E.2d 254 (W. Va. 2001) and Estate of Tawney v. Columbia Natural Resources, 633 S.E.2d 22 (W. Va. 2006), apply to leases containing an in-kind royalty provision?” Kaess v. BB Land, LLC, --- F. Supp. 3d ----, No. 1:22-CV-51, 2023 WL 5515741 (N.D.W. Va. Aug. 25, 2023).
Headlines & Holdings - Beyond Appalachia
Tex. Appellate Court Interprets Deed as Creating Floating NPRI. A court of appeals in Texas overruled a trial court order interpreting a 1951 deed as conveying a fixed 1/128th royalty interest and held instead that the deed conveyed a non-participating 1/16th mineral interest with a corresponding floating 1/16th royalty interest. Johnson v. Clifton, --- S.W.3d ----, No. 08-22-00132-CV, 2023 WL 4443016 (Tex. App. July 10, 2023).
Tex. Appellate Court Interprets Deed as Creating Floating Royalty Interest. A court of appeals in Texas overruled a trial court order interpreting a 1937 deed as reserving a 1/16th fixed royalty and held instead that the deed reserved a 1/2 floating royalty interest. Permico Royalties, LLC v. Oestreich, --- S.W.3d ----, No. 08-22-00168-CV, 2023 WL 4442007 (Tex. App. July 10, 2023).
Tex. Appellate Court Interprets Deed as Creating Floating Royalty Interest. A court of appeals in Texas addressed whether grantors reserved a 1/16th fixed royalty interest or a 1/16th non-executive mineral interest when conveying a particular tract of property and held that the trial court erred when it concluded that the grantors intended to reserve a royalty interest versus a mineral interest. Devon Energy Prod. Co., LP v. Enplat II, LLC, --- S.W.3d ----, No. 08-21-00217-CV, 2023 WL 4424629 (Tex. App. July 10, 2023).
New Mexico Supreme Court Tackles BFP Status for Purchaser of Mineral Rights. The New Mexico Supreme Court held that a party who purchases property sold under a judgment that is not void on its face is entitled to bona fide purchaser status and that extrinsic evidence of lack of jurisdiction is not permitted to overcome the rights of a purchaser who properly relied upon the order of the court as “an authority emanating from a competent source.” In re: Welch, --- S.W.3d ----, No. S-1-SC-38601, 2023 WL 4523298 (N.M. July 13, 2023).
Eighth Circuit Tackles Overconveyance of O+G Interests. Applying the familiar Duhig rule of interpretation adopted in North Dakota, the Eighth Circuit concluded that a deed granting a 3/4 mineral interest resulted in an overconveyance to the grantee given the grantor only held a 1/2 mineral interest at the time of the conveyance; the grantor could only reserve a 1/4 mineral interest; his successor could not claim title to a 1/2 mineral interest; and none of this created an ambiguity in the deed sufficient to overcome application of the Duhig rule. N. Oil & Gas, Inc. v. EOG Res., Inc., --- F.4th ----, No. 22-2053, 2023 WL 4555027 (8th Cir. July 17, 2023).
Tenth Circuit Reaffirms “Material Interference” Standard for Surface Use Claims in Colorado. The Tenth Circuit upheld a prior ruling and applied it as law of the case to deny landowner claims that a well operator trespassed on their surface estate, concluding that a landowner must show that a surface use is infeasible or nearly impossible as a result of surface operations in order to prevail on a trespass claim for excessive surface use. Bay v. Anadarko E&P Onshore LLC, --- F.4th ----, No. 21-1361, 2023 WL 4571430 (10th Cir. July 18, 2023).
Tenth Circuit Upholds Dismissal of O+G Royalty Class Action. The Tenth Circuit scrapped a proposed class action involving underpaid royalties, holding that intervening decisions on when a Colorado agency has jurisdiction to decide payment disputes did not change the law such that the class plaintiffs could now bring their action in court. Boulter v. Noble Energy Inc., --- F.4th ----, No. 21-1384, 2023 WL 4717554 (10th Cir. July 25, 2023).
DC Circuit Upholds FERC Approval of Extension for Compressor Station. The D.C. Circuit upheld FERC orders granting an application for an extension of time to meet construction deadlines for a natural gas compressor station in Weymouth, Mass., holding that (a) municipalities challenging the project failed to ask for rehearing; and (b) the residents, municipalities, and environmental groups challenging the project otherwise lacked standing. Fore River Residents Against the Compressor Station v. FERC, --- F.4th ----, No. 22-1146, 2023 WL 4672259 (D.C. Cir. July 21, 2023).
Texas App. Ct. Says O+G Lessee Owns Produced Water from Frac Ops. A court of appeals in Texas held that a lessee, not the surface owner or its contractor (with which the surface owner had a produced water lease agreement), owns all the produced water from frac operations, holding that (a) produced water is “waste” under various statutes and authorities; (b) nothing in the lease suggested the lessor/surface owner reserved rights to oil and gas waste produced during drilling operations; and (c) the lessee had the right to the oil and gas product stream, including the produced water. The dissenting justice would have interpreted the granting clause in the lease as conveying oil, gas, and hydrocarbons produced from the leased property but not the water incidentally recovered from the subsurface from which oil and gas has been removed. Cactus Water Servs., LLC v. COG Operating, LLC, --- S.W.3d ----, No.08-22-00037-CV, 2023 WL 4846861 (Tex. App. July 28, 2023).
Tex. Court of Appeals Tackles Surface Use. A court of appeals in Texas rejected claims from a severed surface owner that the lessee of the mineral estate engaged in unauthorized oil and gas operations, holding that the lessee had a right to reasonable use of the property for oil and gas operations and the surface owner could not interfere with those operations. Shah v. Maple Energy Holdings, LLC, --- S.W.3d ----, No. 08-22-00198-CV, 2023 WL 4879905 (Tex. App. July 31, 2023).
N.D. Supremes Say O+G Leases Expired after Cessation of Production and No Timely Rework Ops. The Supreme Court of North Dakota held that oil and gas leases expired after production from wells ceased and the lessee failed to commence reworking operations within the time specified by the leases, thereby breathing life into the top leases owned by another lessee. Zavanna, LLC v. GADECO, LLC, --- N.W.2d ----, No. 20220265, 2023 WL 4917399 (N.D. August 2, 2023).
Cal. Supremes Scrap Local Ordinance Banning O+G Operations. The Supreme Court of California held that state law preempted a local ordinance banning new oil and gas wells throughout the county’s unincorporated areas. Chevron U.S.A. Inc. v. Cnty. of Monterey, --- P.3d ----, No. S271869, 2023 WL 4940263 (Cal. Aug. 3, 2023).
Tex. App. Court Says Non-Op’s O+G Lease Expired. A court of appeals in Texas held that an oil and gas lease in an area operated by another lessee expired at the end of the primary term for lack of production, holding that the owner didn’t enter into a formal JOA with the operator and the owner’s “participation” in production from other wells by sharing in costs and revenues wasn’t enough on its own to maintain the lease. Cromwell v. Anadarko E & P Onshore, LLC, --- S.W.3d ----, No. 08-22-00129-CV, 2023 WL 4994526 (Tex. App. Aug. 4, 2023).
Tenth Circ. Says No Evidence Dooms Subsurface Migration Nuisance Claim. The Tenth Circuit rejected claims that a gas-storage company caused a temporary nuisance when natural gas migrated from its sub-surface storage gas operations into the gas company’s leases, holding that a party may recover for temporary nuisance only if the nuisance is abatable by reasonable means without unreasonable hardship and expense, and the plaintiff failed to offer that kind of evidence. Colt Energy, Inc. v. Southern Start Central Gas Pipeline, Inc., --- F.4th ----, No. 22-3099, 2023 WL 5126892 (10th Cir. Aug. 10, 2023).
Eighth Circ. Sends Pipeline Easement Dispute to Arbitration. The Eighth Circuit held that a dispute over damage to crops and related claims all fell within a pipeline company’s easement agreement with landowners which contained an arbitration provision, reasoning that the pipeline company did not waive the arbitration provision and the scope of the agreement covered all claims for damages to crops and declaratory relief. H&T Fair Hills, Ltd. v. All. Pipeline L.P., --- F.4th ----, No. 22-1817, 2023 WL 5113793 (8th Cir. Aug. 10, 2023).
D.C. Circ. Denies Petition in TRANSCO Rate Dispute. The D.C. Circuit upheld FERC orders approving incremental rates charged by TRANSCO for its pipeline expansion efforts to a power plant in Pennsylvania, holding that the agency did not act arbitrarily and capriciously or contrary to reasoned decision making when it exercised primary jurisdiction over the power company’s rate dispute. Fairless Energy, LLC v. FERC, --- F.4th ---, No. 21-1195, 2023 WL 5156846 (D.C. Cir. Aug. 11, 2023).
Tex. Fed. Ct. Says Lessee Properly Accounted for Post-Production Costs Incurred by Third Parties. A federal court in Texas held that a lessee did not violate an oil and gas lease using a pricing formula in its third-party sales contracts that accounted for post-production costs incurred by third party buyers, but the court also said the lessee breached the lease by failing to pay royalties on volumes used as plant fuel and plant loss and paying royalties on lease-use gas volumes using residue prices instead of gross sales prices. H.L. Hawkins, Jr., Inc. v. Capitan Energy, Inc., --- F. Supp. 3d ----, No. P:22-CV-00020-DC, 2023 WL 5158051 (W.D. Tex. Aug. 10, 2023).
Tex. App. Ct. Orders Duhig Redo. A court of appeals in Texas held that an NPRI reserved by grantors presented a Duhig problem (i.e., an overconveyance of that interest) but there is no “Duhig remedy” available that would estop a claim of title to the mineral estate. Echols Minerals, LLC v. Green, --- S.W.3d ----, No. 11-21-00154-CV, 2023 WL 5280828 (Tex. App. Aug. 17, 2023).
N.D. Fed. Ct. Says O+G Royalty Interest Counts for CAFA Jurisdiction. A federal court in North Dakota held that a claim for interest on unpaid or underpaid royalties under a state statute is a principal obligation and therefore must be counted towards the amount-in-controversy requirement for federal court jurisdiction under the Class Action Fairness Act. Hystad Ceynar Min., LLC v. XTO Energy, Inc., --- F. Supp. 3d ----, No. 1:23-CV-030, 2023 WL 5444483 (D.N.D. Aug. 24, 2023).
Tenth Circuit Rejects API Challenge to DOI’s Royalty Rule Change. The Tenth Circuit held that the DOI’s ONRR did not violate the APA when it changed oil and gas royalty calculation methods for leases on federal and tribal lands during the Obama administration, holding that ONRR examined the relevant data and adequately explained why it adopted gross proceeds, index pricing, and default valuation methods for paying royalties. API v. DOI, --- F.4th ----, No. 21-8076, 2023 WL 5490353 (10th Cir. Aug. 25, 2023).
Tex. App. Ct. Says Early Shut-in Royalty did not Extend O+G Lease. A court of appeals in Texas held that a lessee making two $50 shut-in royalty payments within a month of each other during the shut-in period only extended the lease for an additional year from the date of the latest payment, not for a full two years, and a third payment tendered after the shut-in period already expired did not hold the lease, reasoning that the shut-in provision is a special limitation on the lease and the failure to pay caused the lease to expire before the lessee made the third payment. Taylor Properties v. Scout Energy Management, LLC, --- S.W.3d ----, No. 07-22-00242-CV, 2023 WL 5486220 (Tex. App. Aug. 23, 2023).
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