Oil + Gas Update | March Madness.
Natural gas prices have tumbled since our last report, with the Henry Hub dipping below $2/MMBtu for the first time in a long time. The rig count is fairly steady alongside stable oil prices. In pipeline news, MVP scored a victory on a key permit upheld by a circuit court while Transco's Regional Access expansion project faces challenges from environmental groups. In Appalachia, the courts have been busy, issuing decisions on fee-shifting in environmental permit cases, lease-busting, pooling, cross-unit wells, competing surface uses, and deep-zone trespass cases. In other news, SCOTUS issued its decision on overtime for highly paid rig workers, and other courts addressed the dreaded double-fraction problem in deed interpretation, fixed vs. floating royalties, and add-back clauses in royalty disputes.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (755); Marcellus (40); Utica/Point Pleasant (11)
Brent Crude: $79.89/bbl
West Texas Intermediate: $75.67/bbl
NYMEX: May 2023 @ $2.184/MMBtu
Spot Prices: Henry Hub ($1.95/MMBtu)
WOPL - Appalachia
Mountain Valley Pipeline. MVP sticks to a 2023 in-service target and acknowledges the difficulty the project has faced. The FWS said that the project won't affect endangered species while a U.S. Sen. from West Virginia says the fight for MVP is not over and plans to monitor the project's progress. A court of appeals upheld a state permit for the project (see below for more).
TRANSCO Regional Energy Access Expansion Project. The New Jersey Conservation Foundation, New Jersey League of Conservation Voters, Aquashicola-Pohopoco Watershed Conservancy and landowner Catherine Folio are challenging FERC's January approval of Transcontinental Gas Pipe Line Co. LLC's Regional Energy Access Expansion project and the agency's March 16 order allowing the company to start cutting down trees as part of the project's construction. The groups and the landowner lodged an emergency motion seeking a stay of both orders.
Headlines & Holdings - Appalachia
PA Supreme Court Decision on Fee-Shifting to Permittees in EHB Cases. The Pennsylvania Supreme Court addressed whether permittees should be subject to attorneys’ fees under the Clean Streams Law and, if so, the proper standard to apply when imposing fees on permittees. Currently, the Environmental Hearing Board does not shift fees to permittees unless they engaged in “bad faith,” the same standard that applies when deciding whether to shift fees to individuals/appellants challenging DEP actions. The PA Supreme Court rejected the bad-faith test applied by the EHB. The majority concluded, over a dissent by Justice Mundy, that: (1) the EHB erred in requiring a showing of bad faith by an objector in order to award fees against a permittee; and (2) by rejecting the per se bad faith approach, permittees are now returned to the same starting line as DEP for purposes of potential fee liability to an objector. The court did not set a new standard; instead, it directed the EHB to exercise virtually unbridled discretion under Section 307 of the CSL on a case-by-case basis, as “guided” by the court’s opinion and prior opinions, to decide whether, and against who, to award fees. Clean Air Council v. Dep't of Env't Prot., --- A.3d ----, No. 73 MAP 2021, 2023 WL 2145657 (Pa. Feb. 22, 2023).
Sixth Circuit Denies Lease Busting Bid Against SWN. The Sixth Circuit upheld a district court’s order rejecting claims that an oil and gas lease expired, holding that the production company validly pooled portions of the leasehold into a drilling unit and conducted operations on the drilling unit such that the lease extended beyond the expiration of the primary term, and any activity after that time was authorized under the extended lease. Scenicview Estates, LLC v. SWN Production (OHIO), LLC, --- F.4th ----, No. 22-3318, 2023 WL 1991986, (6th Cir. Feb. 14, 2023).
Kentucky App. Ct. Sends Back Pooling Issue. A court of appeals in Kentucky rejected claims for payment of all royalties on all production from a unit merely because the property in question contained all the unit wells, but the court remanded to determine whether the leased property is subject to voluntary pooling at all based on unusual lease language limiting pooling “only if necessary to conform to applicable governmental statutes and regulations.” Kelly v. Magnum Drilling of Ohio, Inc., --- S.W.3d ----, No. 2021-CA-0512-MR, 2023 WL 2192966 (Ky. Ct. App. Feb. 24, 2023).
Fed. Court Denies Reconsideration Bid in Cross-Unit Well Case. A federal court in Pennsylvania denied a bid to reconsider its decision upholding cross-unit wells in Pennsylvania under both a state statute and the leases at issue in the case, rejecting arguments that the leases at issue confined all wells to one unit (as opposed to multiple units) and reiterating that the leases at issue gave lessees the right to pool leases into “one or more units” whether or not the cross-unit well originated on a different unit than the one that included the leased property at issue. Warner Valley Farm, LLC v. SWN Production Company, LLC, --- F. Supp. 3d ----, No. 4:21-CV-01079, 2023 WL 2309770 (M.D. Pa. Mar. 1, 2023).
Third Circuit Says EHB has Jurisdiction Over NatGas Compressor Permits. The Third Circuit rejected a bid by Adelphia for a federal court determination that the PA Environmental Hearing Board lacks jurisdiction over a natural gas compressor station project, holding that the Commonwealth Court already decided the EHB has jurisdiction and Adelphia’s federal court bid impermissibly sought to relitigate that issue. Adelphia Gateway, LLC v. Pennsylvania Envt. Hearing Bd., --- F.4th ----, No. 21-3356, 2023 WL 2487270 (3d Cir. Mar. 14, 2023).
WV Fed. Ct. Says Solar Co.’s Policy Doesn’t Cover Suit for Interference with O+G Operations. A federal court in West Virginia held that a solar company didn’t have coverage to defend against a suit by an oil and gas company claiming that solar operations prevented access to oil and gas wells on the leased property, holding that the “property damage” or “bodily injury” provisions of the policy don’t apply. Scottsdale Ins. Co. v. Solwind Energy, LLC, --- F. Supp. 3d ----, No. 2:22-CV-00036, 2023 WL 2520734 (S.D.W. Va. Mar. 14, 2023).
Pa. Cmwlth. Ct. Says PUC had Duty to Consider Environment when Approving LNG Construction. The Commonwealth Court held that the PUC erred in its approval of the construction of an LNG pumping station for failing to conduct sufficient environmental review under the Environmental Rights Amendment, holding that Section 619 of the Public Utility Code trumps local zoning ordinances regarding construction of facilities of public utilities but the constitution still requires the PUC to evaluate environmental impacts, and the agency erred by expressly stating it has no obligation under the Public Utility Code to do so. Township of Marple v. Pa. Public Utility Commission, --- A.3d ----, No. 319 CD 2022 (Pa. Cmwlth. March 9, 2023).
WV Federal Court Sends O+G Royalty Row to Arbitration. A federal court in West Virginia compelled arbitration of a royalty dispute in which landowners alleged their lessee improperly paid royalties on a net price that reflected deductions for taxes and other post-production costs instead of paying based on wholesale market value of gas sold. Allen v. Cheveron U.S.A.Inc., --- F. Supp. 3d ----, No. 5:22-CV-18, 2023 WL 2603941 (N.D.W. Va. Mar. 22, 2023).
NOVs as Evidence in Zoning Cases. The Westmoreland County Court of Common Pleas rejected attempts by landowners to use NOVs as evidence to deny a zoning permit to Olympus, holding that the NOVs are inadmissible hearsay and the zoning board was correct to prevent them from entering the record. Protect PT v. Penn Township Zoning Hearing Board, No. 2759-2022 (Westmoreland C.P. March 16, 2023).
Ohio Fed. Court Denies Claim to O+G Rights. A federal court in Ohio rejected claims by surface owners that they held oil and gas rights in a 165-acre tract in Ohio, holding that none of the deed reservations included oil and gas rights and therefore had no rights to convey to the grantee claiming those interests in this case. Long Point Energy, LLC v. Gulfport Energy Corp., --- F. Supp. 3d ----, No. 2:20-CV-4644, 2023 WL 2652378 (S.D. Ohio Mar. 27, 2023).
Ohio Fed. Ct. Denies Class Certification in Deep Zone Trespass Dispute. A federal court in Ohio denied class certification for a group of Ohio property and mineral owners who claim oil and gas companies drilled into the Point Pleasant in violation of oil and natural gas leases that restricted operations to the Marcellus and Utica. J&R Passmore, LLC v. Rice Drilling D LLC, --- F. Supp. 3d ----, No. 2:18-CV-01587, 2023 WL 2667749 (S.D. Ohio Mar. 28, 2023).
Fourth Circuit Upholds MVP Permit. The Fourth Circuit upheld a Virginia water permit for the $6 billion Mountain Valley Pipeline, ruling that state regulators verified the project’s stream crossings were the least harmful option and correctly assessed its impact on water quality. Sierra Club et al. v. State Water Control Board, --- F.4th ----, No. 21-2425 (4th Cir. March 29, 2023).
PA Supreme Court Says Lack of $100M Appeal Bond Kills RGGI PI Order. A divided Pennsylvania Supreme Court held that failing to pay a $100M bond that covered the state’s financial losses following an order enjoining PA from joining the Regional Greenhouse Gas Initiative effectively dissolved the preliminary injunction. Bowfin Keycon Holdings, LLC v. PADEP, --- A.3d ----, No. 80 MAP 2022, 2023 WL 2623219 (Pa. Mar. 24, 2023).
Headlines & Holdings - Beyond Appalachia
SCOTUS Says High-Earning Employees Must be Paid on Salary for Overtime Exemption. The U.S. Supreme Court held that Helix Energy Solutions Group Inc. violated FLSA by classifying an oil rig worker as an overtime-exempt executive, reasoning that although the company paid him six figures, the company paid him on a day rate basis instead of on a salary basis and the exemption only applies to highly paid employees who are paid on salary. Helix Energy Solutions Group, Inc. v. Hewitt, 598 U.S. ----, 143 S.Ct. 677 (2023).
OK Supreme Court Addresses Cessation of Production for Lease Termination Bid. The Oklahoma Supreme Court held that a trial court erred by capping a cessation of production at three months based on a lease provision in order to support a claim that the lease expired following a dip in production, holding instead that the cessation of production should be analyzed under all the facts and circumstances in the case. Tres C, LLC v. Raker Resources, LLC, --- P.3d ----, No. 118650, 2023 OK 13, 2023 WL 1990113 (Okla. February 14, 2023).
Texas Supremes Address Double Fraction Problem in O+G Deed. The Texas Supreme Court held that a 1924 deed reserving “one-half of one-eighth” of all mineral rights reserved a 50% mineral interest, reasoning first that the use of “one-eighth” in a mineral deed presumptively means a “mineral estate” such that the grantor reserved one half of the mineral estate, and even if the court did math and reached a conclusion that the grantor reserved only a one-sixteenth minereal interest, the grantor acquired the other 7/16 interest under the presumed grant doctrine. Dyke v. Navigator Grp., --- S.W.3d ----, No. 21-0146, 2023 WL 2053175 (Tex. Feb. 17, 2023).
Tex. Appellate Court Rejects Drill-or-Pay Claim for Obligation Well. A court of appeals in Texas rejected a claim for $500,000 under a drill-or-pay clause in connection with the failure to drill an initial obligation well, holding that the lease gave the production company the right to release any lands covered by the lease and did so before any drill-or-pay obligation arose. Parsley Minerals, LLC v. Flat Kreek Resources, --- S.W.3d ----, No. 03-21-00337-CV, 2023 WL 2052315 (Tex. App. Feb. 17, 2023).
Colo. Supremes Say Non-Op Fractional Interest Owners have no Standing to Challenge Tax Increase. In this oil and gas leasehold taxation case, the Supreme Court of Colorado held that a non-operating fractional interest owner in a unitized oil and gas operation do not have standing to independently challenge a county’s retroactive property tax increase. Colorado Prop. Tax Adm'r v. CO2 Comm., Inc., --- P.3d ----2023, No. 21SC393, 2023 WL 2130715 (Colo. Feb. 21, 2023).
Tex. Appellate Court Says Nearby Well Operator Lacks Standing to Challenge Injection Well Permit Applications. A court of appeals in Texas held that the Railroad Commission was right to deny standing to a gas company operating wells near the site of proposed injection wells targeting unproductive formations, holding that although the gas company had leasehold interests and operations several miles away, the company is not an “affected person” for purposes of standing. Railroad Commission v. Apache Corp., --- S.W.3d ----, No. 07-22-00014-CV, 2023 WL 2138962 (Tex. App. Feb. 21, 2023).
Fed. Claims Court Rejects Bid against Feds. for Breach of O+G Lease. The U.S. Court of Federal Claims rejected a $5,000,000 complaint against the U.S. for breach of an oil and gas lease for a two-year period in which the company was prevented from producing and selling oil and gas, holding that the statute of limitations precluded claims and the company failed to prove breach anyway. Petro Mex, LLC v. United States, --- Fed. Cl. ----, No. 14-1024C, 2023 WL 2127749 (Fed. Cl. Feb. 20, 2023).
N.D. Supremes Address Ambiguity of “Party of the First Part” Language in Mineral Deed. The Supreme Court of North Dakota held that a deed from a husband and wife conveying property in which only the husband (not the wife) owned the minerals, and which included a reservation of minerals to the “parties of the first part,” made the reservation at issue ambiguous about whether the husband and wife expressed an intent to effect a conveyance to a stranger to the title. The court held that, as a result, the trial court correctly looked outside the four corners of the deed for extrinsic evidence to determine the parties’ intent and upheld the conclusion that the husband’s successors owned the mineral interest and the successor to the wife’s interest (her son-in-law) did not acquire the mineral interest. Nevin v. Kennedy, --- N.W.2d ----, No.220220136, 2023 ND 33, 2023 WL 2336302 (N.D. March 3, 2023).
Tex. Fed. Ct. Says Landman Co. Stated Trade Secret Claims Against Former Employees. A federal court in Texas held that a landman company stated trade secret claims against former landmen who left to pursue their own endeavors, concluding that the complaint sufficiently alleged the former landmen disclosed the company’s research on leases, confidential business plans, information learned from operators and producers in the oil and gas field, contact information for potential customers, knowledge of “mineral plays,” and title analysis in violation of non-disclosure agreements and misappropriation statutes. Pro Mineral, LLC v. Marietta, --- F. Supp. 3d ----, No. 3:21-CV-02773-E, 2023 WL 2410884 (N.D. Tex. Mar. 8, 2023).
Tex. Supremes Address Add-Back Clause in O+G Royalty Dispute. The Supreme Court of Texas interpreted a royalty clause with “add back” language and concluded that a landowner’s royalty is payable not only on gross proceeds but also on an unaffiliated buyer’s post-sale postproduction costs if the producers’ sales contracts state that the sales price has been derived by deducting such costs from published index prices downstream from the point of sale. The court reasoned: “This broad lease language unambiguously contemplates a royalty base that may exceed gross proceeds and plainly requires the producers to pay royalties on the gross proceeds of the sale plus sums identified in the producers’ sales contracts as accounting for actual or anticipated postproduction costs, even if such expenses are incurred only by the buyer after or downstream from the point of sale.” Devon Energy Prod. Co., L.P. v. Sheppard, --- S.W.3d ----, No. 20-0904, 2023 WL 2438927 (Tex. Mar. 10, 2023).
NM Fed. Court Certifies Class of Water Consultants Seeking OT for O+G Work. A federal court in New Mexico certified a class of “[a]ll water consultants working for EOG during the past 3 years who were classified as independent contractors and paid a day-rate with no overtime” and held they may sue collectively for FLSA overtime violations. Brown v. EOG Resources, Inc., --- F. Supp. 3d ----, No. 22-CV-0116 KG/GBW, 2023 WL 2499602 (D.N.M. Mar. 14, 2023).
Tex. App. Ct. Addresses Fixed v. Floating NPRI. An appellate court in Texas held that a 1945 deed reserving an “undivided 1/4th of the land owner’s usual 1/8th royalty interest (being a full 1/32nd royalty interest)” coupled with references to payments from “future leases” created a floating NPRI as opposed to a fixed royalty interest. Royalty Asset Holdings II, LP v. Bayswater Fund III-A LLC, --- S.W.3d ----, No. 08-22-00108-CV, 2023 WL 2533169 Tex. App. Mar. 15, 2023).
Colorado Supremes Hold that Conservation Commission Can’t Interpret O+G Leases. The Supreme Court of Colorado held that the state’s Oil and Gas Conservation Commission lacks jurisdiction to resolve bona fide disputes of parties over contract interpretation in the context of determining the dates due for payment of proceeds and whether circumstances justified any delays in payment, reasoning that the commission could not resolve good-faith disputes over (a) whether and when gas is marketable; (b) whether the operator’s in-kind payment without paying royalties; or (c) whether the operator could charge fees against royalties because they all involve contract interpretation. Antero Resources Corp. v. Airport Land Partners, Ltd., --- P.3d ----, No. 2023 CO 13, 21SC553, 2023 WL 2640471 (Colo. March 27, 2023).
ND Fed. Ct. Orders Biden Admin to Resume O+G Leasing. A North Dakota federal court ordered the Biden administration to resume selling oil and gas leases in the state, reprimanding the government for using myriad excuses — like a purported need for updated environmental reviews — to halt sales for most of the past two years. State of North Dakota v. United States Department of Interior, --- F. Fupp. 3d ----, No. 1:21-cv-00148 (D.N.D. March 27, 2023)
Okla. Fed. Ct. Says Unit Operator not Liable for Royalties without O+G Lease. A federal court in Oklahoma rejected a claim from royalty owners in a unit that the unit operator had an obligation to pay royalties simply by reason of its status as operator, holding that the operator is not liable for breach of contract based on a failure to comply with payment obligations imposed by lease agreements. Charles W. v. Newfield Expl. Mid-Continent, Inc., --- F. Supp. 3d ----, No. CIV-19-600-G, 2023 WL 2671392 (W.D. Okla. Mar. 28, 2023).
Eighth Circuit Says Minn. Climate Change Case Should Stay in State Court. The Court of Appeals for the Eighth Circuit held that federal common law on transboundary pollution did not completely preempt climate change claims brought by the State of Minnesota and removal on basis of federal question jurisdiction therefore was not warranted. Minnesota by Ellison v. API, --- F.4th ----, No. 21-1752, 2023 WL 2607545 (8th Cir. Mar. 23, 2023).
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