Oil + Gas Update | Royalty Issues Headlined a Busy Fall Docket for the Courts.
Natural gas prices hovered beteween $2 and $3 per MMBtu since our last report alongside a sluggish rig count and a modest decline in oil prices. In pipeline news, the U.S. Supreme Court rejected another bid to stop the Mountain Valley Pipeline project pending an appeal. In Appalachia, royalty issues pervaded along with other cases involving lease expiration; preemption of local oil and gas regulation; oil and gas ownership; severance taxes; and the Regional Greenhouse Gas Initiative. In other regions, courts addressed fixed vs. floating royalties; top leases and ORRI washouts; royalties; subsurface trespass; severance taxes; takings of subsurface estates; air permits for power plants; temporary cessation of production; the negotiorum gestio doctrine in Louisiana; the statute of frauds in a drilling contract dispute; and constructive trusts for unpaid oil and gas royalties.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (626); Marcellus (29); Utica/Point Pleasant (12)
Brent Crude: $75.84/bbl
West Texas Intermediate: $71.23/bbl
NYMEX: January 2024 @ $2.569/MMBtu; 12-Month Strip @ $2.746/MMBtu
Spot Prices: Henry Hub @ $2.73/MMBtu
WOPL - Appalachia
Mountain Valley Pipeline. The U.S. Supreme Court denied an emergency stay application filed be several families requesting an order preventing the pipeline from accessing their properties pending review of constitutional challenges to Congress’s decision to greenlight the project.
Headlines & Holdings - Appalachia
Ohio App. Ct. Says O+G Lease Expired because Lessee Didn’t Drill a Well. A court of appeals in Ohio held that an oil and gas lease expired because the lessee did not commence or complete any oil and gas wells in a unit including the leased premises before the primary term expired, holding that the lease required the lessee to “begin and complete the drilling of a well” in order to perpetuate the lease and that never happened. French v. Ascent Resources-Utica, LLC, --- N.E.3d ---, No. 22 JE 0024, 2023 WL 5934666 (Ohio Ct. App. September 12, 2023).
Ohio Fed. Ct. Rejects Claim that Fuel and Lost + Unaccounted for Gas are Improper Post-Production Costs. A federal court in Ohio rejected a bid by landowners to exclude evidence that the costs of fuel and lost and unaccounted for gas (“FLU”) is a proper deduction before paying royalties, holding instead that FLU is produced but not sold, is not an impermissible post-production cost charged to lessors, and is a permissible deduction because the lease only calls for royalties on gas actually sold. Grissoms LLC v. Antero Resources, --- F. Supp. 3d ----, No. 2:20-CV-2028, 2023 WL 5979262 (S.D. Ohio Sept. 14, 2023).
Fed. Ct. in W.V. Certifies Royalty Issues for WV Supremes Review. A federal court in West Virginia granted a motion to certify the following questions regarding royalties and post-production costs for review by and input from the West Virginia Supreme Court: “1) Do the requirements of 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), extend only to the ‘first available market’ as opposed to the ‘point of sale’ when the duty to market is implicated? 2) Does the first marketable product rule extend beyond gas to require a lessee to pay royalties on natural gas liquids (‘NGLs’), and if it does, do the lessors share in the cost of processing, manufacturing, and transporting the NGLs to sale?” Romeo v. Antero Resources Corp., --- S.E.3d ----, No. 1:17CV88, 2023 WL 6612491 (N.D.W. Va. Oct. 10, 2023).
WV Court Says State Statute Preempts Local Oil + Gas Regulation. A court of appeals in West Virginia held that the state’s Natural Gas Horizontal Well Control Act delegates “sole and exclusive authority” over all aspects of oil and gas permitting and the location of oil and gas exploration and production activities to the Secretary of the West Virginia DEP such that a city could not hinder the well operator’s ability to begin drilling once it got state approval, rejecting the city’s position that a municipality retains authority to require zoning approval for an oil or gas well that has already been approved under the state's permitting program. SWN Production Co., LLC v. City of Weirton, --- S.E.3d ---, No. 22-ICA-83, 2023 WL 7178284 (W. Va. Ct. App. Nov. 1, 2023).
WV App. App. Court Denies Mineral Interest Claim under Merger Doctrine. A court of appeals in West Virginia held that the merger doctrine applied to extinguish a purported severed mineral interest after the mineral owner acquired the surface and subsurface and held them simultaneously. The court also held that a subsequent conveyance did not re-sever the mineral interest. Wells v. Antero Resources Corp., --- S.E.3d ----, No. 22-ICA-281, 2023 WL 7202562 (W. Va. Ct. App. Nov. 1, 2023).
Commonwealth Court Kills RGGI. The Commonwealth Court granted summary judgment to lawmakers and held that Pennsylvania can't join RGGI (the regional carbon cap-and-trade program) without the approval of the General Assembly because the credits that power plants would need to buy are a tax, not a fee to administer the program. The DEP regulations that authorized PA to join RGGI are therefore invalid. Judge Ceisler dissented and would’ve held that there are issues of fact about whether the regulations created a tax or fee that preclude summary judgement.
WV Appellate Court Addresses Mineral v. Royalty Interest. A court of appeals in West Virginia held that a deed reserving a “one-sixteenth oil and gas mineral interest” is unambiguous and clearly reserves a one-sixteenth oil and gas mineral interest, rejecting the argument that according to the common understanding of such phrases in 1902 (the year of the conveyance) a one-sixteenth reservation really meant a one-half mineral interest. Nicholson v. Severin POA Grp., LLC, --- S.E.2d ----, No. 22-ICA-207, 2023 WL 7487311 (W. Va. Ct. App. Nov. 13, 2023).
WV Appellate Court Says O+G Co. Gets Tax Refund. A court of appeals in West Virginia concluded that an oil and gas company properly reported gross value of NGLs at the wellhead for severance tax purposes and was entitled to a deduction for transportation and transmission costs and held that the state’s Tax Commissioner applied an incorrect (higher) value for NGLs that resulted in an improper denial of a tax refund. Statoil USA Onshore Properties, Inc. v. Irby, --- S.E.2d ----, No. 22-ICA-111, 2023 WL 7638828 (W. Va. Ct. App. Nov. 15, 2023).
Commonwealth Court Rejects Bid to Dismiss ROW Dispute. The Commonwealth Court rejected bids by PennDOT to dismiss a dispute over a subsurface water pipeline that encroached on a landowner’s property, holding that the landowner did not need to challenge a related highway occupancy permit issued by PennDOT before suing in court and that the Board of Property does not have jurisdiction over this dispute because no one is claiming title to Commonwealth property. Gas House Gang, LLC v. Northeast Marcellus Aqua Midstream I, LLC, --- A.3d ----, No.716 M.D. 2019, 2023 WL 7985904 (Pa. Cmwlth. Nov. 17, 2023).
NJ Superior Ct. Upholds Approval of Permits for LNG Rail Facility on Delaware River. The New Jersey Superior Court rejected challenges by the Delaware Riverkeeper to various permits for a new LNG railway loop facility built along the Delaware River in the state, holding that the state’s DEP did not act arbitrarily, capriciously, or unreasonably in issuing those permits. In re: Delaware River Partners, --- A.3d ----, No. A-1897-21, 2023 WL 8069486 (N.J. Super. Ct. Nov. 21, 2023).
PA Superior Court Says Statute of Limitations Doesn’t Kill Claims to O+G Rights. A panel of the Superior Court held that the statute of limitations did not bar plaintiffs from seeking to quiet title in oil and gas rights sold at a tax sale because they challenged the tax deed as void ab initio on jurisdictional grounds and therefore the statute of limitations did not start running. Lodge v. Hoyt, --- A.3d ----, No. 1294 MDA 2022, 2023 WL 8234312 (Pa. Super. Nov. 28, 2023).
Third Circuit Says No Lien Against Surface Owner for Work on Subsurface Estate. The Third Circuit concluded that a contractor performing coal mining for the owner of the subsurface coal could not recover payment from the surface owner pursuant to a mechanic’s lien, reasoning that none of the work performed for the subsurface coal owner benefited the surface estate such that the contractor could recover payment from the surface owner. Anderson Excavating LLC v. Weiss World LP, --- F.4th ----, No. 22-3278, 2023 WL 8519209 (3d Cir. Dec. 8, 2023).
Ohio Ct. of App. Addresses Fixed vs. Floating O+G Royalties. A court of appeals in Ohio held that grantor’s conveyance of “one-half (1/2) part of his royalty Being 1/16 part of all the oil and gas in and under the … premises” conveyed a fixed fractional 1/16th royalty interest, not a floating interest, reasoning that (a) “the grantor conveyed ‘the one half part of his [rather than ‘any’ or ‘the’] royalty interest’”; (b( “there is no mention of a current oil and gas lease or a reference to future oil and gas leases on the property”; (c) the phrases “Being 1/16 part of all the oil and gas in and under the following described premises” is a “separate sentence in the granting clause to be given equal weight with the previous sentence.”; and (d) “the two fractions can be harmonized without stripping the 1/2 fraction of any meaning.” Crum v. Mooney, --- N.E.2d ----, No. 23 MO 0011, 2023 WL 8522658 (Ohio Ct. App. December 6, 2023).
Headlines & Holdings - Beyond Appalachia
Tex Ct. of App. Says Deed Conveyed 1/8 Fixed Royalty Interest. A court of appeals in Texas interpreted a 1923 warranty deed conveying “one-eighth of the oil and mineral rights ... conveyed as a royalty” and two subsequent declarations of interest describing the interest as “1/8 of all of the oil, gas and mineral rights ... as a free royalty interest” as conveying a fixed 1/8 royalty interest. Pacer Energy Ltd. v. Endeavor Energy Res., LP, --- S.W.3d ----, No. 11-21-00169-CV, 2023 WL 5963080 (Tex. App. Sept. 14, 2023). ).
OK Supremes Address Top-Lease, Washout, and Related Issues. In a case pitting a top-lessee against a base-lessee and a washout of overriding royalties, the Supreme Court of Oklahoma held that there remained a question of whether the base lease expired for lack of production in paying quantities and, as to an associated overriding royalty interest, that interest may be extinguished by a surrender of the working interest from which the interest arises unless the surrender is the result of fraud or breach of a fiduciary relationship. Oil Valley Petroleum v. Moore, --- P.3d ----, No. 119810, 2023 WL 6119809 (Okla. September 19, 2023).
Fed. Ct. in Ark. Denies Class Certification in O+G Royalty Dispute. A federal court in Arkansas denied a motion to certify a class of plaintiffs claiming underpaid royalties, holding that a class action is unjustified because the six or so potential class plaintiffs failed to satisfy the numerosity requirement and whether or not the lessee shorted landowners their royalties is an individualized inquiry unfit for resolution by class action. Bradley v. XTO Energy, Inc., --- F. Supp. 3d ----, No. 3:21-CV-00079-BSM, 2023 WL 6129487 (E.D. Ark. Sept. 19, 2023).
Tex. App. Ct. Remands Subsurface Trespass Claims. A court of appeals in Texas set aside a summary judgment and remanded for further proceedings to determine whether one well operator trespassed against another well operator based on subsurface saltwater migration. Iskandia Energy Operating, Inc. v. SWEPI LP, --- S.W.3d ----, No. 08-22-00103-CV, 2023 WL 7168241 (Tex. App. Oct. 31, 2023).
Wyo. Supremes Uphold State’s O+G Production Tax Determinations. The Wyoming Supreme Court held that the state properly increased the value of a well operator’s production for certain tax years by moving the point of valuation not from the custody transfer meter near the wells but downstream of that location, rejecting the operator’s contention that downstream field facilities were “processing facilities” as defined by state law, and those costs are deductible from severance and ad valorem taxes such that the proper point of measuring gas production for tax purposes should be at the custody transfer meters. Chesapeake Operating, LLC v. Wyo. Dep't of Revenue, --- P.3d ----, No. S-23-0036, 2023 WL 7318919 (Wyo. Nov. 7, 2023).
Fed. Ct. of Claims Rejects Mineral Estate Takings Claim. The Federal Court of Claims granted a motion to dismiss a takings claim brought by a mineral owner alleging that the construction of a border wall on neighboring properties interfered with the mineral estate, holding that third amended complaint did not allege anything about the government’s occupation of any space the mineral owner occupied or about how the government altogether precluded development of the mineral estate. Midas Res., Inc. v. United States, --- F. Cl. ----, No. 21-1198L, 2023 WL 7320594 (Fed. Cl. Nov. 7, 2023).
Okla. Fed. Ct. Says BIA Fell Short on NEPA Compliance for O+G Leases. A federal court in Oklahoma concluded that the U.S. Bureau of Indian Affairs fell short on NEPA compliance while issuing oil and gas leases under a “finding of no significant impact,” holding that the decision was arbitrary and capricious under the Administrative Procedure Act for lack of site-specific analyses. Hayes Family Trust v. Halland, --- F. Supp. 3d ----, No. 416CV00615JARCDL, 2023 WL 7360856 (N.D. Okla. Nov. 7, 2023).
Tex. App. Ct. Addresses Consent-to-Assign Provision in O+G Lease. A court of appeals in Texas held that an equity sale of a percentage interest in an oil and gas lease did not constitute a transfer of interest under an assignment provision that required consent from the lessor.Nortex Minerals, L.P. v. Blackbeard Operating, LLC, --- S.W.3d ----, No. 02-23-00027-CV, 2023 WL 7401052 (Tex. App. Nov. 9, 2023).
Fifth Circuit Says TCEQ Departed from Policy in NatGas Air Permit Dispute. The Fifth Circuit held that the Texas Commission on Environmental Quality acted arbitrarily and capriciously when it did not explain why it department from certain emissions limits on a new natural gas facility that it recently imposed on other similar facilities and therefore vacated the order granting the air quality permit. Port Arthur Cmty. Action Network v. Texas Comm’n on Env’t Quality, --- F.4th ----, No. 22-60556, 2023 WL 7528906 (5th Cir. Nov. 14, 2023).
Colo. Supremes Deny O+G Lease Busting Bid for Temporary Cessation of Production. The Supreme Court of Colorado held that an oil and gas lease did not expire under the cessation-of-production clause following a four-month break in production for necessary repairs to a third party's sales pipeline but declined to adopt a universal rule interpreting the term “production” as used in all oil and gas leases to mean a well “capable of production.” Boulder County Commissioners v. Crestone Peak Resources Operating LLC, --- P.3d ----, No. 21SC477, 2023 WL 8010221 (Colo. Nov. 20, 2023).
Tex. App. Ct. Upholds Damage Award for Breach of Water Supply Contract for O+G Operations. A court of appeals in Texas upheld a jury verdict in favor of a water supplier who built a pipeline and had an exclusive supply contract with a gas well operator, holding that the contract made the water supplier the sole and exclusive water provider for the gas wells, and the operator breached the agreement when it got obtained water for frac operations from other suppliers. Equinor Energy LP v. Lindale Pipeline, LLC, --- S.W.3d ----, No.01-21-00712-CV, 2023 WL 8041045 (Tex. App. Nov. 21, 2023).
Fifth Circuit Certifies Unique Question to Louisiana Supreme Court. In a case involving statutory pooling, royalty payments, and post-production costs, the Fifth Circuit agreed to certify the question of whether the negotiorum gestio doctrine - in which a third party interferes in someone’s business on their behalf but without consent – allows a unit operator to deduct transportation, marketing, and other post-production costs from revenues owed to owners (including unleased owners) within the statutory unit. The court reasoned that the Louisiana Supreme Court is better suited to resolve the question given the interplay between the state’s relatively new conservation laws and its deeply rooted negotiorum gestio doctrine. Johnson v. Chesapeake Louisiana, L.P., --- F.4th ----, No. 22-30302, 2023 WL 8183095 (5th Cir. Nov. 27, 2023).
Third Circuit Says Colo. Law Creates Constructive Trust on Unpaid Royalties. In the context of a bankruptcy, the Third Circuit held that royalty owners have a real property interest in unpaid royalties under Colorado law and imposed a constructive trust as a remedy because the debtor was unjustly enriched by wrongfully retaining royalties. In re: Ursa Operating Company, LLC, --- F.4th ----, No. 22-1729, 2023 WL 8295931 (3d Cir. Dec. 1, 2023).
N.D. Fed. Ct. Upholds County’s Mineral Interest. A federal court in North Dakota held that a county, rather than the United States, owned a 6 ¼ mineral interest underlying certain public lands, rejecting the government’s argument that the county has no right to “public domain minerals” based on certain condemnation judgments because that phrase is found nowhere in any of the judgments or declarations of takings. McKenzie County v. United States, --- F. Supp. 3d ----, No. 1:16-CV-001, 2023 WL 8259291 (D.N.D. Nov. 29, 2023).
Tenth Circuit Addresses Calculation of O+G Royalties Payable to Feds. The Tenth Circuit interpreted “monetary obligations” of oil and gas well operators on federal lands as the total sum of royalties owed to the federal government pursuant to orders to pay issued under the Federal Oil and Gas Royalty Simplification and Fairness Act, rejecting BP’s argument that each payment obligation should be evaluated and reduced if underpayments totaled less than $10,000. BP Am. Prod. Co. v. Haaland, --- F.4th ----, No. 22-8024, 2023 WL 8442710 (10th Cir. Dec. 6, 2023).
Tex. Fed. Ct. Says Statute of Frauds Renders Rig Contract Amendment Invalid. A federal court in Texas held that the state’s statute of fraud applies to render an amendment to a drilling rig contract invalid, holding that the gas well owner did not sign an amendment for a switch to a larger blow-out preventer and email exchanges purporting to authorize the switch and move forward with the project was insufficient to satisfy the signature requirement of the statute of frauds. Frontier Drilling LLC v. XTO Energy, Inc., --- F. Supp. 3d ----, No. 4:22-CV-02497, 2023 WL 8456139 (S.D. Tex. Dec. 5, 2023).
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