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Our Shale Energy Law Blog provides timely legal and business information on issues impacting the energy industry and specifically natural gas development, as well as articles published by the attorneys of Babst Calland.

 


 

 

The 2017 Babst Calland Report Focuses on the Resurgence of the Appalachian Shale Gas Industry

On June 20, 2017, Babst Calland released its seventh annual energy industry report entitled The 2017 Babst Calland Report – Upstream, Midstream and Downstream: Resurgence of the Appalachian Shale Industry; Legal and Regulatory Perspective for Producers and Midstream OperatorsThis annual review of shale gas development activity acknowledges the continuing evolution of this industry in the face of economic, regulatory, legal and local government challenges. To request a copy of the Report, contact info@babstcalland.com.

In this Report, Babst Calland attorneys provide perspective on issues, challenges, opportunities and recent developments in the Appalachian Basin and beyond relevant to producers and operators.

In general, the oil and gas industry has rebounded during the past year through efficiency measures, consolidation and a resurgence of business opportunities related to shale gas development and its impact on upstream, midstream and downstream industries. As a result, many new opportunities and approaches to regulation, asset optimization and infrastructure are underway. Increased spending during the past year has led to a significantly higher rig count in the Appalachian Basin enabling growth in the domestic production of oil and gas as other shale plays across the country experience reductions.

The shale gas industry continues to provide the tri-state region with significant economic opportunities through employment and related revenue from the development of well sites, building of pipelines necessary to transport gas to market, and new downstream opportunities being created for manufacturing industries due to the volume of natural gas and natural gas liquids produced in the Appalachian Basin. Shell’s progress from a year ago to construct an ethane cracker plant in Beaver County, Pennsylvania represents just one example of the expanding downstream market for natural gas. Many other manufacturing firms are expected to enter the region and establish businesses drawn by the energy and raw materials associated with natural gas and natural gas liquids from the Marcellus and Utica shales.

The Report also highlights changes that have occurred during the past year in the political landscape that are expected to affect the energy industry. The Trump administration is signaling a fundamental shift in the energy policies established by the Obama administration. New executive orders and policies have been issued that promise to lead to more pipeline development, reduced federal oversight of the oil and gas industry and increased access to oil and natural gas reserves.

Joseph K. Reinhart, shareholder and co-chair of Babst Calland’s Energy and Natural Resources Group, said, “This Report provides perspective on the challenges and opportunities of a resurging shale gas industry in the Appalachian Basin, including: the divergence of federal and state policy that creates more uncertainty for industry; increased special interest opposition groups on new issues and forums despite their lack of success in the courts; and the expansion from drilling to midstream development and now to downstream manufacturing that demonstrates the emergence of a more diverse energy economy.”

The 74-page Report contains six sections, highlighted below, each addressing key challenges for oil and gas producers and midstream operators.

  • Business Issues: Adapting to the New Price Environment as natural gas producers continue to focus on reducing costs and improving efficiencies. Recently, the number of natural gas producers in the Appalachian Basin has contracted through select merger and acquisition activity. With efficiency of operations in mind, natural gas producers continue to focus on consolidating their activities geographically. The oil and gas industry faced significant financial stress over the past year, and 2016 will go down as one of the more dramatic years in the United States’ oil and gas history. In the 2016 calendar year, primarily due to low commodity prices, 70 North American oil and gas exploration and production companies filed for bankruptcy protection.
  • State and Federal Governments Remain Active in a Changing Regulatory Landscape as developments in the state environmental standards for enforcement, air, water and waste management in Pennsylvania, West Virginia and Ohio, as well as anticipated initiatives from non-governmental organizations (NGOs), will continue to have an effect on production and midstream operations. Separately, the impact of the Trump administration on various federal regulatory initiatives from the Obama era promises to be significant. President Donald Trump’s March 28, 2017 Executive Order was directed towards the development of the country’s natural resources. The order, among other things, requires agencies to review regulations that may burden the development or use of domestic energy resources.
  • Pipeline Safety Legislative and Regulatory Developments Continue to Shape the Industry through the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration’s (PHMSA) pipeline safety program. It is unlikely that there will be a dramatic shift in PHMSA’s enforcement policy in 2017. “Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2016” (PIPES Act) was signed into law last year with a provision allowing PHMSA to issue emergency orders if an unsafe condition or practice constitutes, or is causing, an imminent hazard. These emergency orders can impose industry-wide operational restrictions, prohibitions, or safety measures without a prior hearing.
  • Litigation Trends including a number of alleged nuisance claims continue to travel through West Virginia, Ohio and Pennsylvania courts. Materials discussing alleged health effects from unconventional natural gas development continue to be disseminated at a record pace by industry opposition groups. A casual review of the material could lead to the erroneous conclusion that air emissions have not been tested; this is not, however, the case. The air quality data collected by a variety of objective parties using established monitoring and testing protocols around shale development in northeastern U.S. over the last six years demonstrate that shale operations are safe.
  • Local Government Law and Regulations Continue to Spawn Debate and Legal Challenges which continue to increase throughout the Appalachian Basin. However, the industry has successfully challenged overly-restricted ordinances. In contrast to municipalities that have adopted ordinances that permit reasonable oil and gas development, some local governments continued in 2017 to test their regulatory authority by enacting strict regulations for uses ancillary to well site development. Operators impacted by these regulations likewise continued to push back on these local regulations that severely impede, if not entirely prohibit, development or operation.
  • Downstream Opportunities include exciting developments for production and midstream companies with new emerging markets for consumption of natural gas and natural gas liquids, such as power generation, export, and the petrochemical and related manufacturing industries. The U.S. petrochemical industry is undergoing tremendous growth, including the Northeast which is a prime target for more niche markets, and an opportunity to repurpose industrial assets for this regionalized growth.
As market conditions evolve for the oil and gas industry in the Appalachia Basin and throughout the United States, Babst Calland’s multidisciplinary team of energy attorneys continues to stay abreast of the many legal and regulatory challenges currently facing producers and midstream operators.

Tagged:  Gas drilling, Marcellus Shale, Natural gas, Ohio, Oil and gas, Pennsylvania, Utica Shale, West Virginia


The Pennsylvania Supreme Court Reexamines the Environmental Rights Amendment

The Pennsylvania Supreme Court has rejected the long-standing test for analyzing claims brought under Article I, Section 27 of the Pennsylvania Constitution, commonly known as the Environmental Rights Amendment (ERA). In its June 20, 2017 decision in Pennsylvania Environmental Defense Foundation (PEDF) v. Commonwealth, the Supreme Court set aside the test from Payne v. Kassab that has been used since 1973, and held that the Commonwealth’s oil and gas rights are “public natural resources” under the ERA and that any revenues derived from the sale of those resources must be held in trust and only expended to conserve and maintain public natural resources. The Supreme Court’s opinion in PEDF is an important step in the ongoing judicial re-examination of the ERA. However, the impact of the Court’s decision on environmental and land use issues beyond the relatively narrow facts of this case remains unclear. For more information, read our Administrative Watch.  

Tagged:  Act 13, DCNR, Environmental Rights Amendment, Land use, Lease Fund, Royalties


Oil and Gas Lease Did Not Terminate for Failure to Pay Minimum Rental/Royalty Payments

On June 1, 2017, the Ohio Supreme Court ruled that a provision in an oil and gas lease requiring the lessee to pay a minimum rental/royalty does not automatically invoke a termination provision in an unrelated delay rental clause and is not void as against public policy.

In Bohlen v. Anadarko E&P Onshore, L.L.C., Slip Opinion No. 2017-Ohio-4025, the Ohio Supreme Court was asked to determine whether a lessor can terminate an oil and gas lease if the lessee fails to pay minimum rental/royalty payments. In Bohlen, the oil and gas lease contained a primary term of one year along with standard secondary term language. The lease allowed the lessee to pay a delay rental for the privilege of deferring the commencement of a well. If this delay rental was not paid, then the lease would terminate. The Addendum attached to the lease stipulated that if royalty payments due to the lessor under the lease were less than $5,500, then lessee would pay any shortfall between the royalty payments and the $5,500. This minimum rental/royalty clause did not contain a termination provision. Lessee drilled two wells during the primary term of the lease but ultimately failed to pay yearly royalty amounts equal to or greater than $5,500. Lessors argued that the failure to pay a minimum rental/royalty triggered the termination clause found within the delay rental provision.

In Bohlen, the Court reasoned that the delay rental clause and the minimum annual-rental/royalty clause were two distinct clauses. Therefore, since the minimum rental/royalty clause did not contain termination language, the failure to pay the minimum royalty would not trigger the termination of the lease. It was of no consequence that the lease contained termination language in the delay rental clause since the two clauses at issue were to be read separately. Whether the lessee needed to compensate the lessor for underpayment was not at issue in the case.

Additionally, since the lease at issue contained a primary term, it did not violate public policy for being an indefinite lease.


Tagged:  Land and Leasing, Ohio, Oil and gas


Leggett v. EQT Production Company Case Rejects Tawney Reasoning, Opens Door for Further Challenges to Imposed System of Post-Production Cost Calculations in WV

On May 26, 2017, in a suit styled Leggett v EQT Production Company, the West Virginia Supreme Court of Appeals issued majority and concurring (links to PDFs) opinions finding 4-1 that the use of the language “at the wellhead” in the Flat Rate Royalty Statute allows the use of the "net back" method to calculate royalties, and that the Estate of Tawney v. Columbia Natural Resources, L.L.C. case does not apply or control.  Leggett was certified to the West Virginia Supreme Court of Appeals to determine whether the holding in Tawney, which did not allow post-production expense deductions when calculating royalty, applied when royalties are paid on old, flat rate leases converted to a 1/8 royalty by application of West Virginia’s “Flat Rate Royalty Statute.”  The statute provides that royalties are to be paid “at the wellhead.”  Tawney held that “at the wellhead” language in a lease was ambiguous, and deductions could not be taken unless expressly authorized in the lease in detail as to the type and method of calculation.  After initially deciding Tawney applied and refusing to allow deductions under the Flat Rate Royalty Statute, the Leggett majority (with a change in composition post-election) reconsidered the case and reversed itself.  The Court held that the rules of contract construction used to decide Tawney did not apply when interpreting a statute.  More importantly, the Court seems to be signaling that it is willing to reconsider and possibly reverse Tawney, which could subsequently impact royalty calculations for West Virginia production.

Tagged:  Land and Leasing, Litigation, Natural gas, Royalties, West Virginia


Revised SB 576: Co-Tenancy and Lease Integration Bill Fails in West Virginia

Senate Bill 576 (SB 576), introduced in the West Virginia Senate to address the oil and natural gas industry’s effort to efficiently develop production of natural resources, died in the last week of the regular session of the West Virginia Legislature, which concluded on April 8, 2017.

For an analysis of the original version of SB 576, click here, and for an analysis of the significantly revised version that was sent to the West Virginia House, click here. Before passing the Senate, an amendment agreed to by the industry provided for a graduated severance tax provision that increased the severance tax rate as the price of natural gas increased. Click here for the text of the amendment.

Unfortunately, a frantic last week of the regular legislative session, highlighted by contentious budget battles and House debate over a medical marijuana bill, resulted in many bills never reaching the House floor for a vote, with SB 576 being among those. Given that the Legislature needs to be called back into special session to pass a budget that is presently being negotiated, there is speculation that SB 576 may be put on the agenda for that special session. Unless that happens, however, co-tenancy and lease integration is dead in West Virginia until February 2018.

Tagged:  Oil and gas, SB 576, Severance tax, West Virginia


Trump Executive Order Withdraws Obama Administration Actions on Climate Change and Requires Review of Regulations Affecting Energy Sector

On March 28, 2017, President Donald Trump signed an Executive Order entitled “Promoting Energy Independence and Economic Growth,” with the stated policy of “promot[ing] clean and safe development” of domestic energy resources and ensuring an affordable and reliable supply of electricity, while “avoiding regulatory burdens that unnecessarily encumber energy production, constrain economic growth, and prevent job creation.”  Although the Executive Order does not itself withdraw any rules issued by the U.S. Environmental Protection Agency (EPA) or other agencies, it clearly reflects President Trump’s intent to drastically change course from the Obama administration’s stance on climate change and to seek reducing environmental regulation of, among other sources of greenhouse gases, coal-fired power plants and oil and natural gas operations.

For more information, read our Administrative Watch.

Tagged:  Air, Air quality, EPA, White House


Ohio Court Of Appeals Applies Broad Application of “Holder” Under Dormant Mineral Act

The Court of Appeals of Ohio, Seventh Appellate District, recently held that (i) heirs had standing to challenge a surface owners’ notice of abandonment under the Dormant Mineral Act (DMA), and (ii) an affidavit of preservation constitutes a valid claim to preserve mineral interests, regardless of whether the affidavit specifies a savings event.  In M&H P’ship v. Hines, 2017-Ohio-923, the appellant surface owner asserted that the heirs were not holders of the mineral interest, and therefore, had no standing to challenge the notice of abandonment.  The surface owner also asserted that the claim and affidavit filed by the heirs in response to the notice of abandonment did not identify any savings events that occurred in the 20-year period preceding the notice of abandonment, and therefore, the heirs did not properly preserve their interest.  The Court found both assertions to be meritless.

With regard to the standing issue, the Court held that the broad definition of “Holder” under the DMA includes heirs of the original record owner of the mineral.  Holder means the record holder of a mineral interest, and any person who derives the person’s rights from, or has a common source with, the record holder and whose claim does not indicate, expressly or by clear implication, that it is adverse to the interest of the record holder.  In this case, the heirs derive their rights from or have a common source with grandparents, who were the original record owner of the mineral interest.  Therefore, the court found that the definition of holder in the DMA is broad and includes the heirs.

As for the affidavit of preservation issue, the Court relied on the reasoning in Dodd v. Croskey, 2015-Ohio-2362, to hold that heirs’ affidavit of preservation constituted a valid claim to preserve their interest under the DMA.  Nothing in the DMA states that a claim to preserve must refer to a saving event that occurred within the preceding 20 years.  Additionally, the notice procedures do not require that the claim to preserve be itself filed in the 20 years preceding notice by the surface owner.  Instead, the statute plainly states that such a claim can be filed within 60 days after notice from the surface owner.  Accordingly, the plain language of the DMA allows the holder to file a claim to preserve the mineral interest or an affidavit that identifies a saving event that occurred within the 20 years preceding notice.  In this case, the heirs filed a document titled Affidavit Preserving Minerals, which identified the heirs as the current owners of the mineral interest and stated that the heirs did not intend to abandon their rights in the mineral interest, but intend to preserve their rights.  The Court held that this affidavit constituted a valid claim to preserve under the DMA and that no savings event needed to be specified therein.  

Tagged:  Land and Leasing, Litigation, Ohio


Revised SB 576: Yet Another Version of the Co-Tenancy and Lease Integration Bill Introduced in West Virginia

On March 23, 2017, a Committee Substitute for Senate Bill 576 (SB 576) was introduced to the West Virginia Senate Judiciary Committee that substantially rewrote the original version of the bill, which addressed the oil and natural gas industry’s effort to efficiently develop production of natural resources. For an analysis of the original version of SB 576, click here.

Among the significant changes in revised SB 576 are the following:
  • The percentage of cotenant mineral ownership interests needed to consent to mineral development is increased from two-thirds to three-fourths.
  • Non-consenting mineral owners are still entitled to production royalties free of post-production expenses, but they are also entitled to a bonus payment calculated as “equal to the average amount paid to such consenting cotenants calculated on net mineral acre basis.”
  • Non-consenting mineral owners may forgo receiving a production royalty payment by electing to obtain a “revenue share” in development, which allows the non-consenting mineral interest holders to essentially obtain a working interest in the production activities on the tract.
  • If any property subject to mineral development under this statute has a non-consenting mineral interest owner, the surface of that property may not be disturbed for that development without the consent of the surface owner, unless such disturbance is permitted through a prior surface use agreement or is otherwise permitted by a “valid contractual arrangement.”
  • “Joint development” is still permitted for multiple contiguous oil and gas leases, but the “operator” must pay surface owners damages available under W. Va. Code §22-6B-3, all damages permissible under common law, and $30,000 for “each well pad constructed by the operator which results in damage to that surface owner’s property.”
  • “In the absence of specific language to the contrary, the royalty for all royalty owners of acreage jointly developed . . . shall not be reduced for post-production expenses incurred by the operator.” This provision, however, is not “intended to impact royalties due for wells drilled prior to the effective date of this chapter.”
  • Consenting cotenants (or the operators) are subject to detailed reporting requirements that includes the amount of oil or natural gas produced and sale information, including price, for that oil and natural gas.
  • Detailed guidelines for the payment of royalties are added, which include a requirement that royalties must be paid once the royalties due exceed $100, payment must be made within 180 days from the date that the sale of mineral is realized, and regardless of the amount of royalty due, payment must be made at least once a year.
Babst Calland will follow SB 576 during West Virginia’s Legislative Session, which is scheduled to end on April 8, 2017.

Tagged:  Oil and gas, Royalties, West Virginia, joint development, mineral owner


OMB Declines to Approve PHMSA Proposal to Modify the National Pipeline Mapping System

On March 23, 2017, OMB concluded its review of PHMSA’s proposed expansion of the data collected under the National Pipeline Mapping System (NPMS).  OMB elected to reapprove the current information collection supporting NPMS and not the revisions proposed by PHMSA.  

In July 2014, PHMSA first issued a identifying 32 attributes the agency intended to collect from transmission operators in NPMS.  PHMSA also included a positional accuracy requirement proposing that operators submit the centerline location of each transmission pipeline with an accuracy level of +/- five feet.  In August 2015, PHMSA released a revised information collection proposal and scheduled a public workshop.  In June 2016, PHMSA released a <third revision reducing the number of requested attributes and settling on a positional accuracy requirement of +/- 50 feet for natural gas transmission operators in populated areas (Class 2, 3, 4, an HCA, identified site, or where there is one or more buildings intended for human occupancy) and +/- 100 feet for all other gas pipeline segments.  Operators of hazardous liquid pipelines would need to comply with the +/- 50 feet requirement for all pipelines.  Since PHMSA is proposing to make these changes through an information collection request (ICR), the agency sent the revised proposal to OMB for approval on June 22, 2016.  On March 23, 2017, OMB issued its decision to reapprove the previous ICR and not the revisions requested by PHMSA.  Operators will need to continue to comply with the current NPMS requirements.     Please contact Brianne Kurdock at (202) 853-3462 or bkurdock@babstcalland.com, James Curry at (202) 853-3461 or jcurry@babstcalland.com, or Keith Coyle at (202) 853-3460 or kcoyle@babstcalland.com for more information.

Tagged:  NPMS, PHMSA, Pipeline


Pennsylvania Appeals Court Affirms Trial Court’s Order To Terminate A Portion Of An Oil And Gas Lease And Eject Operator

On March 17, 2017, the Superior Court of Pennsylvania affirmed a trial court’s 2015 order that severed and terminated a portion of an oil and gas lease.  The subject lease covered 240 acres located in Venango County, Pennsylvania, which was subsequently subdivided.  Additionally, the leasehold interest was divided into depths that lie above and below the Onondaga formation and were held by different operators.  On appeal, the appellant operator argued that the trial court lacked jurisdiction over the controversy because the plaintiffs failed to join all the indispensable parties.  This action was originally brought by property owners who acquired 32 acres of the 240 acre tract. In part of affirming the trial court’s order, the Superior Court indicated that one of the major factors involved in a determination of whether a party is indispensable in a lease context is whether the lease is severable.  In this case, the court held the lease was severable based on the intent of the parties to the lease, which was determined by the language of the lease and the subsequent conduct of the successors in interest to the original lessee.  The lease specifically provided the lessee the “right to subdivide and release the premises.”  Additionally, successors in interest to the original lessee divided the leasehold interest into depths that lie above and below the Onondaga formation, which supports that the lease was severable.  The Superior Court distinguished this case from precedent set forth in Seneca Res. Corp. v. S & T Bank, 122 A.3d 374., that an operator was not required to be actively drilling undeveloped portions in order to maintain the leasehold on the bases that: (1) the leased acreage in this case consisted of a number of distinct parcels rather than one tract; (ii) the language of the subject lease provided the lessee the right to “subdivide and release” the property; and (iii) the successors in interest to the original lessee of the subject lease subdivided the leasehold into two or more formations rather than operating under the lease as a whole.  Based on these factors, the court held that the lease was severable.  Additionally, the Superior Court affirmed the trial court’s finding that the lease had expired as to the subject property because the predecessors in interest to the appellant operator failed to produce oil and gas in paying quantities on the subject property and had breached the implied obligation to explore and develop the property “with reasonable diligence.”  Accordingly, the court held that the lease was null, void, and of no force and effect pertaining to the subject property.

Tagged:  Land and Leasing, Oil and gas, Pennsylvania