Oil + Gas Update | Back-to-School Edition.
The ebb and flow of natural gas prices continued since our last report with analysts predicting higher prices for the winter months. Meanwhile, the rig count climbed alongside relatively flat oil prices. In pipeline news, federal lawmakers cut a deal to get Mountain Valley Pipeline back on track, though recent political wrangling may stall any progress. In Appalachia, courts addressed a wide range of issues, including time limitations on accounting claims, the "Duhig" rule, royalty claims, implied covenant claims, and surface use disputes. In other regions, courts grappled with takings issues, post-production costs, and pore-space ownership.
Rig Counts, Spot Prices + Oil Prices
Rigs: National (763); Marcellus (35); Utica/Point Pleasant (12)
Brent Crude: $91.35/bbl
West Texas Intermediate: $85.11/bbl
NYMEX: October 2022 @ $9.114/MMBtu
Spot Prices: Henry Hub ($8.69/MMBtu); Tenn. Zone 4 ($8.12/MMBtu); Eastern Gas South (f/k/a Dominion South) ($8.10/MMBtu)
WOPL - Appalachia
Tennessee Gas Pipeline. In mid July, Tennessee Gas Pipeline confirmed a natural gas release and fire on a pipeline segment of its 300 system in a rural area of McKean County, Pennsylvania.
Mariner East. Energy Transfer pleaded no contest and agreed to a plea deal with the Attorney General in connection with Mariner East construction activities. Energy Transfer will pay for independent evaluations of potential water quality impacts for homeowners from the construction of the Mariner East 2 Pipeline and offer approved mechanisms for restoring or replacing the impacted private water supplies. Energy Transfer will also pay $10 million towards projects that improve the health and safety of water sources along the routes of the pipelines. The PUC reduced a $51,000 penalty imposed in June on Sunoco Pipeline LP for violations during construction of its Mariner East pipeline system through a Delaware County apartment complex. The pipeline company now faces only $3,000 in fines.
Mountain Valley Pipeline. Joe Manchin and Chuck Schumer struck a deal that would lead to MVP permit approvals and give the D.C. Circuit jurisdiction over litigation involving the pipeline project. FERC also has granted a four-year extension to complete the Mountain Valley Pipeline.The federal authorization was due to expire in October of this year, but has now been extended through October 2026. The move by Manchin triggered a backlash from environmentalists and Senator Bernie Sanders, who recently threatened to hold up a government funding bill if MVP provisions remain.
Williams. Williams and PennEnergy announced that they have entered into an agreement to support the marketing and delivery of certified, low emissions next generation natural gas. Williams is also planning the Regional Energy Access Expansion Project.
Headlines & Holdings - Appalachia
PA Superior Court Holds that Six-Year Statute of Limitations Applies to O+G Co-Tenant’s Accounting Claim. In a case involving a dispute between co-tenants of oil and gas interests, the Superior Court of Pennsylvania held that a statutory cause of action under 68 P.S. § 101 – providing for any “tenants in common, not in possession, to sue for and recover from such tenants in possession his or their proportionate part of the rental value of said real estate” – has a six-year statute of limitations, reasoning that (a) the four-year statute of limitations for actions involving breach of contract does not apply; and (b) given the lack of any other applicable provision, the state’s default six-year statute of limitations (42 Pa.C.S. § 5527(b)) applies for an accounting dispute between co-owners of real property for income received from the property. KEM Resources, LP v. Deer Park Lumber, Inc., --- A.3d ----, No. 619 MDA 2021, 2022 WL 2717774 (Pa. Super. July 13, 2022).
PA OOR Rejects Request for PGE Comms. with Gov. and DEP. The PA Office of Open Records rejected a request from an environmental group for disclosure of correspondence between the Department of Environmental Protection, the Governor’s Office, and Pennsylvania General Energy Company, LLC, holding that DEP provided access to some records, properly withheld others as pre-decisional deliberations, and confirmed that it had no other records responsive to the request. In re: Greenworks Law & Consulting, Docket No: AP 2022-0981 2022 WL 2828147 (Pa. Off. Open Rec. July 15, 2022).
Ohio Supremes Decline to Apply Duhig Rule in O+G Title Dispute. The Ohio Supreme Court held that the “Duhig” rule – which states that if both a grant and a reservation of oil and gas in a warranty deed both cannot be given full effect, then the grantor’s reservation fails – did not estop the owners of a reserved fractional interest in oil and gas from claiming title, concluding instead that the oil and gas owners had good title pursuant to the Marketable Title Act.Senterra, Ltd. v. Winland, --- N.E.3d ----, No. 2020-0197, 2022-Ohio-2521, 2022 WL 2919887 (Ohio July 26, 2022).
Third Circuit Rejects Landowner Class Action against EQT for NatGas Storage. The Third Circuit rejected a federal judge’s certification of a class of landowners who claim that EQT improperly stored natural gas beneath their homes without paying them. Laudato v. EQT Corp., --- F.4th ----, No. 22-1224, 2022 WL 3081871 (3d Cir. Aug. 3, 2022).
PA Supreme Court Rejects PEDF’s Constitutional Challenges to use of Trust Resources. The Pennsylvania Supreme Court rejected PEDF’s challenges under the Environmental Rights Amendment, Pa. Const. Art. I, sec. 27 (“ERA”), to the Governor’s use of proceeds from the state’s oil and gas leases. Among other things, PEDF challenged the Governor’s decision to use lease funds to finance DCNR’s administrative operations and to finance environmental protection initiatives outside the Marcellus Shale region in PA. The court held that (a) “the use of trust assets to fund DCNR’s operations is within the authority of the Commonwealth as trustee to incur costs in administering the Section 27 trust, absent demonstration that these administrative costs are unreasonable or that the DCNR has failed to act with prudence, loyalty, or impartiality in carrying out its fiduciary duties” and (b) “[a]bsent from [the ERA] is any regional segmentation of trust assets or beneficiaries nor a prioritization of regions deserving of conservation and maintenance efforts. Contrary to PEDF’s terminology, our charter does not create a ‘State Forest and Park trust corpus.’” Pa. Environmental Defense Foundation v. Commonwealth, --- A.3d ----, No. 65 MAP 2020, 2022 WL 3133921 (Pa. Aug. 5, 2022).
Ohio Fed. Ct. Certifies Class of O+G Royalty Owners Claiming Breach of Market Enhancement Clause. A federal court in Ohio certified a class of plaintiffs alleging that their lessee had “violat[ed] uniform oil-and-gas leases by underpaying royalties owed to Plaintiffs in connection with Defendant’s receipt of gross proceeds from the sale of marketable natural gas liquids[, or ‘NGLs’]” and “improperly reduced class members’ royalty payments by deducting the costs incurred to transform the natural gas stream taken from landowners’ wells into ‘marketable’ natural gas products … that [Defendant] could sell at various market hubs.” Grissom v. Antero Res. Corp., --- F. Supp. 3d ----, No. 2:20-CV-02028, 2022 WL 3139378 (S.D. Ohio Aug. 6, 2022).
Commonwealth Court Says No Automatic ERA Standing to Challenge O+G Development Authorized by Local Ordinances. The Commonwealth Court rejected a challenge to a local ordinance authorizing oil and gas development, holding (among other things) that objectors do not have automatic standing to challenge these local ordinances under the Environmental Rights Amendment or the PA Supreme Court’s plurality in Robinson Township.The court stated that “Robinson Township in no way announced a new rule of law that individual objectors have automatic standing to pursue the validity of a zoning ordinance in the abstract or that oil and gas development is necessarily incompatible with Pennsylvania citizens’ constitutional rights. In fact, Pennsylvania courts have, after Robinson Township was decided, held that oil and gas development is compatible with other uses in rural and agricultural districts upon an analysis and decision by the local governing body.”Lodge v. Robinson Twp. Zoning Hearing Bd., --- A.3d ----, No. 813 C.D. 2020, 2022 WL 3094370 (Pa. Cmwlth. Aug. 4, 2022).
Fed. Ct. in PA Dismisses Development Covenant Claim against SWNPC. A federal court in Pennsylvania dismissed a claim for breach of the implied covenant of development against SWNPC, holding that the implied covenant to further develop the leased premises did not apply given that SWNPC established production and absent any allegation of fraud or bad faith in the lack of further development the lessors’ claim must be dismissed. Diehl v. SWN Production Company, LLC, --- F. Supp. 3d ----, No. 3:19-CV-1303, 2022 WL 3371327 (M.D. Pa. Aug. 16, 2022).
Third Circuit Joins Other Courts of Appeal Holding that State Climate-Change Claims Belong in State Court. The Third Circuit held that the climate change case brought by Hoboken, NJ against Chevron belongs in state court, not federal court, stating as follows: “Our federal system trusts state courts to hear most cases—even big, important ones that raise federal defenses. Plaintiffs choose which claims to file, in which court, and under which law. Defendants may prefer federal court, but they may not remove their cases to federal court unless federal laws let them. Here, they do not. Oil companies ask us to hear two sweeping climate-change suits. But the plaintiffs filed those suits in state court based only on state tort law. And there is no federal hook that lets defendants remove them to federal court.” City of Hoboken v. Chevron Corp., --- F.4th ----, No. 21-2728, 2022 WL 3440653 (3d Cir. Aug. 17, 2022).
NY Federal Court Resolves Surface-Use Dispute Between O+G Lessee and Gathering Company. In a surface-use dispute between an oil and gas producer and a gathering company, a federal court in New York concluded that the gas producer had rights to use its leases to construct and operate a pipeline near and across the gathering company’s pipelines despite easements held by the gathering company to construct and operate its lines, holding that the gas producer’s leases grant surface rights that predate the gathering company’s easements. K. Petroleum, Inc. v. Lenape Gathering Corp., --- F. Supp. 3d ----, No. 22-CV-334-LJV, 2022 WL 4134237 (W.D.N.Y. Sept. 12, 2022).
Ohio Fed. Court Says Liquid Hydrocarbons are Condensate, not Oil, for O+G Royalty Purposes. In a case in which landowners challenged SWN’s payment of royalties, a federal court in Ohio held that the liquid hydrocarbons produced by the wells at issue are condensate, not oil, as a matter of Ohio law, and therefore royalties are payable based on 1/8 of the proceeds from the sale of actual gas production from the wells (as opposed to oil production) pursuant to the parties’ oil and gas lease, but the court denied the landowners any damages because they did not produce evidence that they received less than the required payment. Madzia v. SWN Production (Ohio) LLC, --- F. Supp. 3d ----, No. 2:20-CV-2608, 2022 WL 4237458 (S.D. Ohio Sept. 14, 2022).
Third Circuit Scraps Senators’ Challenge to DRBC Frac Ban for Lack of Standing. In a case in which PA senators and municipalities challenged DRBC’s ban on frac’ing in the Delaware River Basin, the Third Circuit held that the senators did not have Article III standing to challenge the ban and municipalities alleged only conjectural or hypothetical injuries that are insufficient for standing. Yaw v. Delaware River Basin Commission, --- F.4th ----, No. 21-2315, 2022 WL 4283534 (3d Cir. Sept. 16, 2022).
WV Forced Pooling Statute Upheld. A federal court in West Virginia issued an order granting a motion to dismiss a lawsuit to block Senate Bill 694, relating to pooling and unitization, holding that the plaintiffs sued the wrong government officials and did not allege harm resulting from the pooling statute.
Third Circuit Says O+G Employee Stated FLSA Anti-Retaliation Claim. In a case in which an oil and gas employee invoked anti-retaliation provisions of FLSA after the company fired him for consenting to join a class action, the Third Circuit held that, as matter of apparent first impression: (a) an employee “testifies” within the meaning of the FLSA anti-retaliation provision when the employee files a consent to join a FLSA collective action; and (b) an employee who intends to soon file a consent to join a then-pending FLSA collective action is “about to testify” within the meaning of the FLSA anti-retaliation provision. Uronis v. Cabot Oil & Gas Corp., --- F.4th ----, No. 21-1874, 2022 WL 4231203 (3d Cir. Sept. 14, 2022).
Headlines & Holdings - Beyond Appalachia
FERC Can’t Prevent Debtor’s Rejection of Regulated Pipeline Contracts. The Fifth Circuit rejected four orders issued by FERC purporting to bind a debtor to continue performing its gas transit contracts even though it rejected them during bankruptcy. Gulfport Energy Corp. v. FERC, --- F.4th ----, No. 21-60017, 2022 WL 2815475 (5th Cir. July 19, 2022).
D.C. Circ. Backs FERC's OK of Adelphia Pipeline Purchase. The D.C. Circuit upheld FERC’s approval of the Adelphia Gateway Project, relying on FERC’s statement that “the benefits that the Adelphia Gateway Project will provide to the market outweigh any adverse effects on existing shippers, other pipelines and their captive customers, and on landowners and surrounding communities” and rejected claims that FERC did not conduct a rigorous environmental review. Delaware Riverkeeper Network v. FERC, --- F.4th ----, No. 20-1206, 2022 WL 3036392 (D.C. Cir. Aug. 2, 2022).
TX Appellate Court Confirms Regulatory Taking Against Dallas for Denying O+G Company Special Use Permits. A court of appeals in Texas upheld a judgment for damages in favor of an oil and gas company for a regulatory taking of its rights to produce minerals under oil and gas leases within the City given the City’s failure to approve special use permits. City of Dallas, TX v. Trinity East Energy, LLC, --- S.W.3d ----, No. 05-20-00550-CV, 2022 WL 3030995 (Tex. App. Aug. 1, 2022).
ORRI “Free and Clear” Clause in North Dakota Doesn’t Preclude Deducts for Post-Production Costs. The Eighth Circuit held that an assignment of an overriding royalty interest calling for payment “free and clear” of costs means that the override is free of standard costs (i.e., production costs) but may be subject to deductions for post-production costs. Highline Expl., Inc. v. QEP Energy Co., --- F.4th ----, No. 21-3662, 2022 WL 3051646 (8th Cir. Aug. 3, 2022).
ND Supreme Court Says Statute Giving Companies Right to Landowner’s Pore Space is an Unconstitutional Taking. The North Dakota Supreme Court invalidated a statute as an unconstitutional taking because it purported to give companies unfettered access to a surface owner’s pore space for subsurface disposal operations without compensating surface owners and immunized companies from liability for trespass, nuisance or other torts. Northwestern Landowners Ass’n v. State, --- N.W.2d ----, No. 20210148, 2022 ND 150, 2022 WL 3096724 (N.D. August 4, 2022).
Louisiana Fed. Ct. Enjoins Biden Halt on O+G Leasing. A federal court in Louisiana enjoined President Biden’s Executive Order that “paused” oil and gas leasing on federal lands, holding that the action violated the federal APA in various respects.State of Louisiana v. Joseph R. Biden, --- F. Supp. 3d ----, No. 2:21-CV-00778, 2022 WL 3570933 (W.D. La. Aug. 18, 2022).
Wyo. Supreme Ct. Says O+G Company can Deduct Certain Fees for Tax Purposes. In a severance tax case, the Wyoming Supreme Court held that an oil and gas company could deduct some of its pipeline reservation fees from gross production revenues for taxation purposes, but only for months when it transported at least some gas on each pipeline, and also could deduct a portion of fees used to recoup pipeline construction costs, but the company could not deduct any fees for months in which it transported no gas on the pipeline. WPX Energy Rocky Mountain, LLC v. Wyoming Department of Revenue, --- P.3d ----, No. 2022 WY 104, 2022 WL 3643356 (Wyo. Aug. 24, 2022).
ND Supreme Court Revives State’s O+G Royalty Underpayment Claim. fThe North Dakota Supreme Court held that the state established a claim for underpaid royalties under N.D.C.C. § 47-16-39.1, which obligates a lessee or well operator to pay royalties to lessors, despite claims by the well operator that the state did not prove the existence of a lease between the parties.Newfield Expl. Co. v. State ex rel. N. Dakota Bd. of Univ. & Sch. Lands, --- N.W.3d ----, No. 20220022, 2022 WL 3970163 (N.D. Sept. 1, 2022).
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