Oil + Gas Update | Tex. Supremes Tackle Deductions for Off-Lease Gas Use from Royalties.
Since our last report, gas prices rose slightly alongside steady oil prices and a declining rig count in Appalachia and across the country. In pipeline news, MVP faced some challenges but plans to start up this week. In Appalachia, courts addressed bad-faith trespass; VOC emissions for the conventional gas industry; shut-in royalties; surface rights; reversionary interests; and lease expiration. In other regions, the Texas Supreme Court weighed in on a certified question from the Fifth Circuit regarding off-lease gas use and royalty payments while other cases from around the country involved interest on unpaid royalties; forced pooling; lease expiration; damage to pore space; and fixed vs. floating royalties.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (594); Marcellus (25); Utica/Point Pleasant (10)
Brent Crude: $81.50/bbl
West Texas Intermediate: $77.95/bbl
NYMEX: July 2024 @ $2.757/MMBtu; 12-Month Strip @ $3.223/MMBtu
Spot Prices: Henry Hub @ $2.22/MMBtu
Headlines & Holdings - Appalachia
Cmwlth. Ct. Rejects Bid to Dismiss Challenge to VOC Emission Regs. In its original jurisdiction, the Commonwealth Court overruled preliminary objections to the complaint of conventional oil and gas well operators and their trade agencies challenging regulations promulgated by the Department of Environmental Protection and Department of Environmental Quality in Pennsylvania to regulate VOC emissions, holding that the industry stated claims that the agencies failed to follow statutory provisions for promulgating regulations and rejecting the government’s argument that the petitioners failed to exhaust administrative remedies. PIOGA v. DEP, --- A.3d ----, No. 574 M.D. 2022, 2024 WL 1635616 (Pa. Cmwlth Apr. 16, 2024).
WV Supremes Say Operator and Non-Op Formed Partnership for Water System Costs. The West Virginia Supreme Court held that a trial court wrongfully disassociated a non-operator from a partnership formed to construct a water system in connection with oil and gas operations, holding that the trial court exceeded its legitimate powers and committed clear error as a matter of law when it entered its order dissociating the non-operator from the water system partnership. State ex rel. Pachira Energy, LLC v. The Honorable Cindy Scott, Judge of the Cir. Ct. of Monongalia Cnty., --- S.E.2d ----, No. 23-142, 2024 WL 1638584 (W. Va. Apr. 16, 2024).
PA Senator Lacks Standing to Challenge DEP Permit. The Commonwealth Court concluded that a Pennsylvania Senator challenging a discharge permit issued by the Pennsylvania Department of Environmental Protection lacks standing to do so, holding that the senator did not establish individual harm resulting from the Department’s action on the permit. Muth v. Dep’t of Env. Prot., --- A.3d ----, No. 1346 C.D. 2022, 2024 WL 1626013 (Pa. Cmwlth. Apr. 16, 2024).
Third Circuit Upholds CASPA in Dispute between Gathering Co. and Contractor. The Third Circuit rejected EQM Gathering’s appeal from a judgment and award under the Pennsylvania Contractor and Subcontractor Payment Act (“CASPA”), rejecting EQM’s argument that the parties agreed to waive certain claims under the statute and holding that the parties cannot waive the penalty or attorney-fee provisions. C.J. Hughes Const. Co., Inc. v. EQM Gathering OPCO, LLC, --- f.4th ----, No. 22-3391, 2024 WL 1652341 (3d Cir. Apr. 17, 2024).
Cmwlth. Ct. of PA Holds that Administrative Finality Precludes Landowner Challenge to DEP Water Supply Investigation. The Commonwealth Court, in its original jurisdiction, dismissed a petition for review filed by landowners challenging the Department’s failure to perform a timely and lawful inspection of their water supplies on two properties, holding that prior EHB appeals that the landowners lost or withdrew rendered DEP’s water supply investigations final and unappealable such that the doctrine of administrative finality precludes the landowners’ attempt to challenge DEP in court. Glahn v. DEP, --- A.3d ----, No. 11 M.D. 2022, 2024 WL 1737726 (Pa. Cmwlth. Apr. 23, 2024).
Ohio Supremes Send Back Bad-Faith Trespass Case. A split Ohio Supreme Court reversed a summary judgment in favor of a plaintiff alleging bad-faith trespass into the Point Pleasant formation, holding that there are factual disputes over whether the parties intended that the “formation commonly known as the Utica Shale” includes the Point Pleasant formation or not. Tera, L.L.C. v. Rice Drilling D, L.L.C., --- N.E.2d ----, No. 2024-Ohio-1945, 2024 WL 2333654 (Ohio May 23, 2024).
PA Super. Ct. Says O+G Lease did not Expire for Failure to Pay Shut-In Royalties. The Pennsylvania Superior Court held that failure to pay shut-in royalties after shutting in wells to build a pipeline did not cause the lease to expire, holding instead that the lessee tried to get gas to market and back-paid shut-in royalties following notice. Frye v. Penn View Exploration, Inc., --- A.3d ----, No. 919 WDA 2023, 2024 WL 2317382 (Pa. Super. May 22, 2024).
Ohio Fed. Ct. Upholds O+G Co.’s Surface Rights. A federal court in Ohio upheld a prior order enjoining a landowner from blocking a severed mineral owner’s lessee from accessing the surface area to engaged in development. EOG Res., Inc. v. Lucky Management, --- F. Supp. 3d ----, No. 2:23-CV-4232, 2024 WL 2745072 (S.D. Ohio May 29, 2024).
Tenn. App. Ct. Holds that O+G Lease Expired for Lack of Oil Sales. A court of appeals in Tennessee held that an oil and gas lease expired even though a well on the leased property produced oil because the lessee failed to comply with the lease’s requirement that it make at least one oil sale within a one-year period. Jones v. Unrefined Oil Co. Inc., --- S.w.3d ----, No. E2023-00272-COA-R3-CV, 2024 WL 2797073 (Tenn. Ct. App. May 31, 2024).
WV App. Ct. Addresses Ownership of Reversionary Interest in O+G. A court of appeals in West Virginia held that a surface owner gifting a parcel of land to a county reserved the reversionary interest in an oil and gas lease such that successors of the grantor held the right of reverter, not the plaintiff who took title expressly subject to the reversionary interest. Starks v. Putnam County Commission, --- S.E.3d ----, No. 23-ICA-128, 2024 WL 2859208 (W. Va. Ct. App. June 5, 2024).
Headlines & Holdings - Beyond Appalachia
Tex. App. Ct. Says no Jurisdiction in O+G Title Dispute. A court of appeals in Texas concluded that a trial court lacked jurisdiction to decide a dispute over title to oil and gas interests in another state, invoking the well-settled principle in Texas that courts cannot quiet title to properties in other states. Bauer v Braxton Minerals III, LLC, --- S.W.3d ----, No. 02-23-00269-CV, 2024 WL 1670884 (Tex. App. Apr. 18, 2024).
N.D. Fed. Ct. Says O+G Lease Expired for Lack of Production. A federal court in North Dakota concluded that an oil and gas lease expired despite production from a well on the leased premises within a unit because the royalty owners expressly excluded the wellbore from the oil and gas lease such that any production therefrom could not be used to keep the lease alive in its secondary term. MBI Oil & Gas, LLC, v. Royalty Ints. P’ship, LP, & Grayson Mill Bakken, LLC, --- F. Supp. 3d ----, No. 1:22-CV-00187, 2024 WL 1675340 (D.N.D. Apr. 18, 2024).
Fifth Circuit Upholds Louisiana DEQ Permit for LNG Facility. The Fifth Circuit denied a bid by the Sierra Club to vacate preconstruction permits issued by the Louisiana Department of Environmental Quality to an LNG operator for its facility, holding that the agency did not act contrary to law or arbitrarily by issuing its permitting decision. Sierra Club v. Louisiana Dep’t of Env’t Quality, --- F.4th ----, No. 23-60234, 2024 WL 1853376 (5th Cir. Apr. 29, 2024).
Fed. Ct. in NM Denies Bid to Arbitration in O+G Co.’s Wage Dispute. In a dispute between an E&P company and the plaintiff over wages and overtime under FLSA, a federal court in New Mexico denied a bid by a third-party staffing agency to send the case to arbitration based on its contract with the plaintiff, finding no arbitration agreement between the E&P company and the plaintiff and holding that the staffing agency’s arbitration agreement does not apply to its client’s dispute with the plaintiff. Thus, Kimble cannot be estopped from avoiding arbitration. Kimble v., EOG Resources, Inc., --- F. Supp. 3d ----, No. 222CV00674MLGDLM, 2024 WL 1856663 (D.N.M. Apr. 29, 2024).
D.C. Circuit Upholds FERC Pipeline Project. The D.C. Circuit dismissed petitions for review filed by environmental groups challenging a certificate of public convenience and necessity authorizing natural gas companies to construct and replace pipelines, compression facilities, and meter stations along the pipeline, concluding that (a) FERC could consider the pipeline on its own and not in connection with other related natural gas projects; (b) FERC had no obligation to evaluate indirect environmental effects of the pipeline; and (c) FERC could decline the “social cost of carbon” tool for greenhouse gas emissions. Alabama Mun. Distributors Grp. v. FERC, --- F.4th ----, No. 22-1101, 2024 WL 1864820 (D.C. Cir. Apr. 30, 2024).
Montana Supremes Uphold Forced Pooling Order. The Supreme Court of Montana upheld a forced pooling order issued by the state’s conservation board, holding that (a) the statute authorizes force pooling after a well operator makes a good faith attempt to voluntarily pool a landowner’s interest into a proposed unit; (b) “good faith” does not require multiple follow-up attempts to voluntarily pool the landowner’s interest after drilling already commenced; and (c) election letters sent to the landowner explaining the required terms regarding timing, costs, and planned coverage area, constituted a “written demand” that, if refused, could support risk penalties if the landowner refuses to pay its share of the costs in response to such demand. Phoenix Cap. Grp. Holdings, LLC v. Bd. of Oil & Gas Conservation, --- P.3d ----, No. DA 23-0289, 2024 WL 1876727 (Mont. April 30, 2024).
Colo. Supremes Address O+G Ownership under Right of Way. In a dispute over title to oil and gas rights, the Colorado Supreme Court upheld the presumption that owners abutting a right of way have title to the surface and subsurface to the centerline of that right of way. Great N. Properties, LLLP v. Extraction Oil & Gas, Inc., --- P.3d ----, No. 22SC805, 2024 WL 1979403 (Colo. May 6, 2024).
Tex. App. Ct. Says Fact Issues Preclude O+G Lease Expiration Claim. A court of appeals in Texas remanded a case to determine whether an oil and gas lease expired for a total cessation of physical production or, alternatively, for cessation of production in paying quantities. Pruit v. River Lands Holding, --- S.W.3d ----, No. 03-22-00478-CV, 2024 WL 1745652 (Tex. App. Apr. 24, 2024).
Va. Ct. of App. Says Landowners had Notice of O+G Lease on Property. A court of appeals in Virginia concluded that landowners couldn’t sue their lawyer for malpractice for missing a pre-existing oil and gas lease in the record before closing on a transaction for property encumbered by that lease, noting that they failed to plead the lawyer had a duty to investigate and holding that the landowners had actual notice of the lease anyway such that they failed to establish that the lawyer’s failure to disclose proximately caused any alleged harm from the gas lease or the gas company’s plans for new drilling. Miller v. Malcolm, --- S.E.2d ----, No. 0610-23-3, 2024 WL 1724025 (Va. Ct. App. Apr. 23, 2024).
Louisiana Appeals Court says O+G Well Operator’s Equipment is a Nuisance. A court of appeals in Louisiana concluded that landowners stated a cause of action for nuisance against their mineral lessee regarding equipment located at a well site on their property and remanded for additional proceedings on their request for an injunction. Mayo v. Lagniappe Willow Lake LLC, --- S.W.3d ----, No. 2023-326, 2024 WL 1750110, (La. App. Ct. Apr. 24, 2024).
Tex. Supremes Say Royalties Payable “At the Well” are Subject to Post-Production Costs. Answering certified questions from federal courts, the Texas Supreme Court held that an oil and gas lease providing for market value royalties “at the well” on all gas “sold or used off the premises,” as well as language in mineral lease granting lessee “free use” of gas “for all operations hereunder,” did not alter royalty owners’ obligation to bear the usual share of postproduction costs. Carl v. Hilcorp Energy Co., --- S.W.3d ----, No. 24-0036, 2024 WL 2226931 (Tex. May 17, 2024).
Eighth Circuit Confirms O+G Co. on Hook for Damage to Pore Space. The Eighth Circuit upheld a verdict in favor of landowners counter-claiming against an oil and gas company to collect damages for injecting saltwater into pore space beneath their farm, holding that pore space is part of a surface owner’s land under North Dakota’s surface owner protection statute. Continental Res., Inc. v. Fisher, --- F.4th ----, No. 23-1147, 2024 WL 2500999 (8th Cir. May 24, 2024).
Tex. App. Ct. Says Conveyance Created Floating O+G Royalty. A court of appeals in Texas interpreted the conveyance of a nonparticipating royalty interest in a 1955 deed as creating a floating 1/4 royalty interest instead of a fixed 1/32 royalty interest, holding that nothing in the rest of the deed rebutted the presumption that the parties intended to create a floating royalty. Montgomery v. ES3 Mins., LLC, --- S.W.3d ----, No. 08-23-00153-CV, 2024 WL 2780419 (Tex. App. May 30, 2024).
Following Texas Supremes, Fifth Circuit Upholds Deductions for Off-Lease Gas Use from Royalties. Following the Texas Supreme Court’s recent opinion responding to certified questions, the Fifth Circuit held that an oil and gas lease required the deduction of post-production costs and the use of gas from the well for post-production operations was such a cost even when that use occurs off lease. Carl v. Hilcorp Energy Co., No. 22-20226, 2024 WL 2829245 (5th Cir. June 4, 2024).
Okla. Fed. Ct. Denies Expanded Class in O+G Royalty Dispute. A federal court in Oklahoma rejected attempts by class plaintiffs to expand the scope of a class action alleging underpaid royalties, breach of implied covenants, fraud, RICO, and related claims, concluding that (a) the plaintiffs improperly attempted to create a new class of plaintiffs holding a net-profits interest and (b) individual questions predominate over common questions for plaintiffs with oil and gas leases involving gross proceeds royalty clauses. Jeter v. Bullsey Energy, L.L.C., --- F. Supp. 3d ----, No. 12-CV-411-JDR-CDL, 2024 WL 2875042 (N.D. Okla. June 7, 2024).
Texas Supremes Say O+G Lease Calls for Simple Interest (not Compound Interest) on Unpaid Royalties. The Supreme Court of Texas interpreted an oil and gas lease that requires interest on unpaid royalties, holding that Texas law disfavors compound interest, and an agreement for interest on unpaid amounts is an agreement for simple interest absent an express, clear, and specific provision for compound interest. Samson Exploration, LLC v. Bordages, --- S.W.3d ----, No. 22-0215, 2024 WL 2869049 (Tex. June 7, 2024).
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