Oil + Gas Update | Summer Roundup 2021.
As summer winds down, natural gas prices eclipsed $4/MMBtu for the first time in more than two years and held pretty firm over the last two months until a slight drop last week. The rig count climbed slightly as E&P companies largely shifted capital away from drilling new wells to focus on production from existing holdings. In pipeline news, PennEast grabbed the headlines with its victory in the U.S. Supreme Court that puts the company on pace for a 2022 startup while other pipelines like Mariner East and Mountain Valley continue to face regulatory and litigation challenges. The courts in Appalachia did not make many headlines this summer, addressing some oil and gas issues alongside some environmental squabbles while courts in other plays tackled federal leasing disputes, ORRIs, and local natural gas bans.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (503); Marcellus (28); Utica/Point Pleasant (12)
Brent Crude: $65.18/bbl
West Texas Intermediate: $62.14/bbl
NYMEX: September 2021 @ $3.852/MMBtu
Spot Prices: Henry Hub ($3.86/MMBtu); Eastern Gas South (f/k/a Dominion South ($3.58/MMBtu); Tenn. Zone 4 ($3.55/MMBtu)
WOPL - Appalachia
PennEast. SCOTUS sided with PennEast on its condemnation authority when state property is involved (see below). Since then, environmental groups vowed to keep fighting the pipeline project. The pipeline operator plans to finish the project by 2022.
Enbridge (Mich.) The U.S. government is expanding its review for the proposed rerouting of the Enbridge Line 5 pipeline to include a formal environmental impact statement while Line 3 is set for September 2021 oil flow.
Mountain Valley Pipeline. EPA recommended that the Army Corps of Engineers deny Mountain Valley Pipeline a permit to cross several hundred streams in Virginia and West Virginia. Despite a number of challenges, the company is optimistic that its 303-mile project to move gas from Pennsylvania to West Virginia and Virginia will start up in the Summer of 2022.
Atlantic Coast Pipeline. Warren Buffett's company abandoned its purchase of the pipeline project from Dominion Energy because of uncertainty about whether the deal could get regulatory approval.
Keystone XL Pipeline. TC Energy Corp. sued for $15 billion in damages through an investor-state claim against the U.S. over President Biden’s revocation of a cross-border permit for the company’s now-canceled pipeline project. Despite the company abandoning the project, a federal judge in Montana denied a bid to dismiss a challenge to the pipeline as moot because presumably a new President could re-issue the permit in the future.
Mariner East. Energy Transfer LP said it plans to finish the final phase of Mariner East 2 in the third quarter despite calls by local officials to shut down parts of the system.
Headlines & Holdings - Appalachia
SCOTUS Sides with PennEast on Pipeline Condemnation Rights. The United States Supreme Court decided that actions brought by natural gas pipeline companies pursuant to the federal Natural Gas Act to condemn rights-of-way in which a state has an interest do not offend state sovereignty. Chief Justice Roberts authored the opinion in the 5-4 decision that garnered a mix of support from liberals and conservatives. PennEast Pipeline Co., LLC v. New Jersey, --- U.S. ---, No. 19-1039, 2021 WL 2653262 (U.S. June 29, 2021).
PA Superior Court Interprets Two Deeds to Find Grant of O+G Rights. The Superior Court held that two deeds read together, one of which granted a one-half interest in natural gas and the other referring back to the first deed, conveyed an undivided one-half interest in the gas rights despite the lack of the phrase "oil and gas" in the second conveyance as usually required by the state's "Dunham Rule." Jenkins v. P.P.&V Corp., --- A.3d ---, No. 692 WDA 2020, 2021 WL 2531153 (Pa. Super. June 21, 2021).
WV Fed. Ct. Says Enviro Group Claims Non-Justiciable. A federal judge in West Virginia says that the environmental group named "Wild Virginia" brough non-justiciable claims against the Council on Environmental Quality for adopting revised regulations implementing NEPA without undergoing a proper notice-and-comment rulemaking process. Wild Virginia v. Council on Env't Quality, --- F. Supp. 3d ---, No. 3:20CV00045, 2021 WL 2521561 (W.D. Va. June 21, 2021).
OH Court Says Lessee Produced in Paying Quantities. A court of appeals in Ohio rejected claims that an oil and gas lease expired for lack of production in paying quantities when the evidence showed no more than temporary cessation of production over the course of many years while the well in question otherwise produced gas that generated some profit. Browne v. Artex Oil Co., --- N.E.2d ---, No. 21CA000002, 2021-Ohio-2239, 2021 WL 2678800 (Ohio Ct. App. June 30, 2021).
OH Fed. Ct. Rejects Equitable Accounting Claim. A federal court in Ohio rejected a claim for equitable accounting of royalty payments on oil and gas production from "horizontal deep wells" operated by defendants for lack of pleading facts establishing fraud, fiduciary duty, and necessity. Sabre Energy Corp. v. Gulfport Energy Corp., --- F. Supp. 3d ---, No. 2:19-CV-5559, 2021 WL 2779157 (S.D. Ohio July 2, 2021).
EQT Hit with $40 Million Verdict for Drilling Deeper. A jury in WV awarded $40 million in damages against EQT for drilling past the Marcellus and Utica formations in violation of depth restrictions in the parties' oil and gas lease. EQT moved to set aside a $40 million jury verdict. Huey v. EQT, No. 21-1614 (4th Cir.) (pending).
Supreme Court of PA Invalidates Use of Bonus, Rents from State’s O+G Leases to Fill Budget Gaps. The Pennsylvania Supreme Court held that income such as bonus payments and other rental payments to the Commonwealth from its oil and gas leases with producers, in addition to royalties as determined in a previous case, also must be returned to the corpus of the trust created by the Environmental Rights Amendment in Article I, sec. 27. Pa. Environmental Defense Fund v. Commonwealth of Pennsylvania, --- A.3d ---, No. 64 MAP 2019, 2021 WL 3073335 (Pa. July 21, 2021).
PA Fed. Court Rejects Use of ERA Against Pipeline Company. A federal court in Pennsylvania dismissed a claim that a pipeline company exercising easement rights owed a landowner fiduciary environmental duties under Environmental Rights Amendment in the Pennsylvania Constitution, holding that the provision expressly names the Commonwealth as trustee of Pennsylvania's public natural resources and imposes on it a fiduciary duty to conserve and maintain the corpus of the trust but does not impose any duty on a private company to act in the best interest of landowners with respect to their personal property. Marcum v. Columbia Gas Transmission, --- F. Supp. 3d ---, No. CV 19-3873, 2021 WL 3033749 (E.D. Pa. July 19, 2021).
PA Supremes Acknowledge a Limited Form of "Enterprise Liability." The Pennsylvania Supreme Court issued a decision expressly adopting a narrow form of enterprise liability that would give judgement and other creditors the ability to hold companies or owners responsible for debts of other related companies with common ownership or control through common owners or parent companies, a form of "veil-piercing" that the court never before adopted in Pennsylvania, but expressly reserved these types of claims to egregious conduct. Mortimer v. McCool, --- A. 3d ---, No. 37 MAP 2020, 2021 WL 3073332 (Pa. July 21, 2021).
Williams Gets Injunction Against Landowners Blocking Work on Pipeline ROW. A federal judge in Pennsylvania enjoined lessors under a lease with Cabot that gave Cabot's midstream contractor (Williams) the right to lay pipeline, holding that the interference with property rights is per se irreparable harm under PA law and the lessors can't block Williams from proceeding with its work.Williams Field Services Co., LLC v. Greenwood, --- F. Supp. 3d ---, No. 3:19-CV-01545, 2021 WL 3565682 (M.D. Pa. Aug. 12, 2021).
Commonwealth Court Scraps PEDF Lawsuit Challenging DCNR’s Authority to Lease State Forest Lands for O+G Development. The Commonwealth Court of Pennsylvania dismissed a petition filed by PEDF challenging the "State Forest Plan" adopted by DCNR allowing the sale of natural gas resources, rejecting PEDF's claim that oil and gas leasing is inconsistent with DCNR's trustee responsibilities under the Environmental Rights Amendment. Pennsylvania Env't Def. Found. v. Commonwealth Dep’t of Conservation & Nat. Res., --- A.3d ---, No. 609 M.D. 2019, 2021 WL 3439573 (Pa. Cmwlth. Aug. 6, 2021).
Commonwealth Court Denies Summary Judgment Bid by Riverkeeper to Speed Up DEP Remediation Work. Commonwealth Court rejected the Delaware Riverkeeper's claims that DEP unreasonably delayed the cleanup of groundwater pollution at an industrial site, citing disputed fact issues that prevent the court from ordering the agency to move forward with its interim cleanup plans. Delaware Riverkeeper Network v. Commonwealth, --- A.3d ---, No. 525 M.D. 2017 (Pa. Cmwlth. Aug. 3 2021).
Headlines & Holdings - Beyond Appalachia
TX Appeals Court Says ORRI can be Reformed to Comply with Rule Against Perpetuities. On remand from the Texas Supreme Court, an appellate court in Texas concluded that a reserved overriding royalty interest in a mineral lease may be reformed under the state's property code to comply with the rule against perpetuities.Yowell v. Granite Operating Co., --- S.W.3d ---, No. 07-17-00112-CV, 2021 WL 2639921 (Tex. App. June 25, 2021).
Bankruptcy Court Says Lender had Duty to Inquire about Gas Purchase Agreements. A bankruptcy court said a lender had a duty to inquire about unrecorded gas purchase agreements before it could take priority over payments owed to a gathering company pursuant to those agreements. In re: Alta Mesa Res., Inc., --- B.R. ---, No. 19-35133, 2021 WL 2877430 (Bankr. S.D. Tex. July 8, 2021).
CBM Delay Rental Obligation Survives "Free and Clear" Sale in Bankruptcy. The Sixth Circuit held that a delay rental obligation in a coalbed methane lease ran with the land under Illinois law such that a debtor could not sell the lease in bankruptcy "free and clear" of the obligation, concluding that the debtor's notice of the free-and-clear sale during the prior bankruptcy did not satisfy due process. In re: HNRC Dissolution Co., --- F.4th ---, No. 20-5396, 2021 WL 2910528 (6th Cir. July 12, 2021).
Federal Court in Cal. Dismisses Challenge to Berkeley NatGas Ban. A federal court in California dismissed a challenge brought by the Cali. Restaurant Association to Berkeley’s local ban on natural gas hookups for new and renovated buildings, concluding that federal law (EPCA) applies to efficiency standards for appliances and does not preempt local public, health, and safety ordinances. The Association has appealed. California Restaurant Association v. City of Berkeley, --- F. Supp. 3d ---, No. 4:19-CV-07668-YGR, 2021 WL 2808975 (N.D. Cal. July 6, 2021).
Tenth Circuit Declines Diversity Jurisdiction Over O+G Royalty Suit Based on Speculative Amount in Controversy. The Tenth Circuit concluded that a Colorado class action suit regarding underpaid royalties belongs in state court because neither the value to the plaintiff nor the cost to the defendants add up to more than $75,000 in controversy and the claim that future litigation may result in millions in liability is too speculative to support diversity jurisdiction. Phelps Oil & Gas, LLC v. Noble Energy Inc., 5 F.4th 1122, No. 19-1376, 2021 WL 3046855 (10th Cir. July 20, 2021).
TX Appeals Court Upholds Depth Limitation in Sale of Minerals Subject to O+G Lease. A court of appeals in Texas upheld a declaration that a conveyance of mineral rights was limited to shallow depths based on the totality of transactions concerning the lease covering the properties. Posse Energy Ltd. v. Parsley Energy, LP, --- S.W.3d ---, No. 08-20-00061-CV, 2021 WL 3140054 (Tex. App. July 26, 2021).
Fifth Circuit Remands Indemnity Fight Over Independent Contractor FLSA Claims. The Fifth Circuit remanded a case to determine whether a gas company gets indemnity from claims brought by an employee of a subcontractor, holding that fact issues remain over whether the employee qualified as an independent contractor exempt from FLSA requirements or not. Sanchez Oil & Gas Corp. v. Crescent Drilling & Production, Inc., --- F.4th ---, No. 20-20304, 2021 WL 3260050 (5th Cir. July 30, 2021).
No Liability for Failing to Deliver Gas During TX 2021 Storm Under Interruptible Gas Contracts. A federal court in New York dismissed a claim that Koch Energy Services is liable for failing to deliver natural gas to the plaintiff during the February 2021 TX storm, holding that interruptible gas purchase contracts unambiguously relieve the supplier of liability for failing to deliver gas at any time for any reason. Luminant Energy Co., LLC v. Koch Energy Servs., LLC, --- F. Supp. 3d ---, No. 21CV3335 (DLC), 2021 WL 3271851 (S.D.N.Y. July 30, 2021).
New Mexico Fed. Court Dismisses APA Challenge to BLM Leases. A federal court in New Mexico dismissed an environmental group's APA challenge to BLM's approval of drilling new oil and gas wells in the Mancos Shale, holding that BLM took the requisite hard look at the impact that additional drilling activity would impose on the environment under NEPA. Dine Citizens Against Ruining Our Environment v. Bernhardt, --- F. Supp. 3d ---, No. 1:19-CV-00703-WJ-JFR, 2021 WL 3370899 (D.N.M. Aug. 3, 2021).
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