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BLM Postpones Waste Prevention Rule Compliance Date

Posted in Energy, Environment

On June 15, 2017, the Bureau of Land Management (BLM) issued notice that it was postponing compliance date for certain sections of its Waste Prevention, Production Subject to Royalties, and Resource Conservation Rule, 81 Fed. Reg. 83008 (“Waste Prevention Rule”). The Waste Prevention Rule regulates the loss of natural gas through venting, flaring, and leaks during the production of oil and natural gas on Federal and Indian land, and requires operators to capture a certain percentage of gas produced, upgrade or replace pneumatic equipment, capture or combust storage tank vapors and implement leak detection and repair programs. The rule established a January 17, 2018 compliance date for these requirements. However, due to pending litigation challenging the Waste Production Rule, BLM decided that “justice requires it to postpone the compliance dates” for the following sections of the rule: 43 CFR 3179.7, 3179.9, 3179.201, 3179.202, 3179.203, and 3179.301 – 3179.305.

BLM will publish a document announcing the outcome of the review of the rule. It should be noted that BLM’s postponement of the requirements subject to the January 17, 2018 compliance date does not affect the provisions of the rule with compliance dates that have already passed, including 43 CFR 3162.3 – 1, 43 CFR subpart 3178, 43 CFR 3179.4, 3179.101 – 105, and 3179.204.

Bohlen v. Anadarko

Posted in Energy

On June 1, 2017, the Supreme Court of Ohio issued its decision in Bohlen v. Anadarko. We summarized the facts of this case in our earlier post:

The Bohlens entered into a lease with Alliance in 2006 for a one year primary term.  Paragraph 3 of the lease contained a delay rental provision:

This lease, however, shall become null and void and all rights of either party hereunder shall cease and terminate unless the Lessee shall thereafter pay a delay rental of $5,500.00 Dollars each year, payments to be made yearly, but in no event not less than yearly, for the privilege of deferring the commencement of a well.

In an addendum, the parties also provided:

In the event that during any calendar year the total royalties paid from production of the leased premises, shall be less than the annual rental of $5,500.00, Lessee shall tender to Lessor such sum that will equal to the $5,500.00 annual rental payment.

Within seven months of signing the lease, Alliance drilled two wells, one of which was a producer.  Between 2008 and 2013, Alliance paid royalties to the Bohlens, but the royalty amounts fell below the $5,500 per year required by the lease.

The Bohlens filed suit, making a twofold argument that the lease had terminated.  First, they claimed that the lease had lapsed due to Alliance’s failure to pay the entire $5,500 minimum annual royalty payment, which the Bohlens characterized as a delay rental required by Paragraph 3 of the lease (and therefore, subject to the termination provision in the delay rental clause).  Next, the Bohlens claimed that regardless of whether the lease had terminated for failure to pay the required payments, the lease allowed Alliance to make delay rental payments during the secondary term, and therefore was a perpetual lease that was void ab initio as offensive to Ohio public policy.

Affirming the court of appeals’ ruling in favor of Alliance and Anadarko, the Supreme Court held that the royalty shortfall did not trigger the automatic termination of the lease. “The plain language of the parties’ oil and gas lease requires the lessee to pay a delay rental for deferring commencement of a well, otherwise the lease terminates.” But here, “the lessee did not defer commencement of a well beyond the primary term of the lease, because at least one well was drilled within the first year,” Justice Fischer wrote. “Therefore, the lease did not terminate under the delay-rental clause.” And the requirement in the addendum that provided for the $5,500 minimum annual rental was not tied to the automatic termination language in the delay-rental clause. The Court also rejected the Bohlens’ characterization that the lease was perpetual and thus void for public policy, concluding that the lease could not be extended indefinitely through the payment of delay rentals.

[Disclosure: Vorys represented amicus curiae Ohio Oil and Gas Association in this case.]

West Virginia Supreme Court of Appeals Holds Certain Lessees May Deduct Post-Production Costs

Posted in Energy

On Friday, May 26, 2017, the West Virginia Supreme Court of Appeals released its decision in Patrick D. Leggett, et al. v. EQT Production Company, et al. and held that lessees subject to West Virginia Code § 22-6-8 may deduct post-production costs actually incurred from the lessor’s royalty.  The reasonableness of post-production expenses, however, is a question of fact. The Court’s decision is more fully explained below.

As background, West Virginia Code § 22-6-8 prohibits the “extraction, production or marketing of oil or gas under a lease . . . providing a flat well royalty or any similar provisions for compensation to the owner of the oil and gas in place, which is not inherently related to the volume of oil or gas produced or marketed * * *”  To this end, West Virginia Code § 22-6-8 (1994) prohibits the issuance of any permit to drill, deepen, fracture, or stimulate a well “where the right to develop, extract, produce or market the same is based upon such leases * * *.” Lessees may avoid this prohibition if they file an affidavit certifying that they shall “tender to the owner of the oil or gas in place not less than one eighth of the total amount paid to or received by or allowed to the owner of the working interest at the wellhead for the oil or gas so extracted, produced or marketed * * *” (emphasis added).

The plaintiffs/petitioners argued that the foregoing statutory language is ambiguous and should be interpreted to prohibit the deduction of post-production costs.  Such an interpretation, plaintiffs/petitioners contended, would be consistent with West Virginia’s common law rule. The defendants/respondents, on the other hand, argued that the statute was not ambiguous since “at the wellhead” is a very precise and definite location. In the wake of deregulation, the only method to mathematically calculate the lessor’s royalty at the wellhead is to utilize a “net-back” or “work-back” method. This method utilizes the interstate pipeline sales price and makes deduction for post-production costs.

In reaching its decision, the Court first rejected the notion that West Virginia Code § 22-6-8 must be interpreted in light of the policy-driven issues of whether West Virginia is a “marketable product” state or “at the well” state. The Court found that the issue presented is solely one of statutory interpretation.  Next, the Court applied well-established canons of statutory construction and found that the phrase “at the wellhead” as used in the statute is not ambiguous on its face. The Court noted that the phrase “at the wellhead” has a very precise and definite meaning in the oil and gas industry. That phrase, when used with reference to oil and gas royalty valuation, is understood to mean that oil and gas will be valued in its unprocessed state as it comes to the surface at the mouth of the well. As a result, the Court was persuaded that “the most logical way to ascertain the wellhead price is, in fact, to deduct the post-production costs from the ‘value-added’ downstream price in an effort to replicate the statutory wellhead value.”

The Court’s decision may be viewed here. It is important to note that oil and gas lessees not subject to West Virginia Code § 22-6-8 are not bound by this decision.

Lightning v. Anadarko

Posted in Energy

On May 19, 2017, the Supreme Court of Texas issued its long-awaited decision in Lightning v. Anadarko (see here for our earlier coverage of this case)—holding that when minerals are severed from the surface, the mineral owner’s permission is not required for a producer to drill through the surface tract in order to produce minerals from an adjacent tract.

Lightning obtained an oil and gas lease covering the severed mineral estate underlying Tract A.   Anadarko held an oil and gas lease on an adjacent tract, Tract B. To develop Tract B, Anadarko entered into an agreement with the surface owner of Tract A to place a pad site on Tract A and drill five wells, which would be drilled vertically through Tract A before “kicking-off” horizontally and completing in—and producing from—Tract B.   Lightning sued Anadarko for trespass and for tortious interference with its oil and gas lease on Tract A. The trial court found in favor of Anadarko and the appellate court affirmed.

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Sunoco’s Eminent Domain Rights for Mariner East 2

Posted in Energy, Environment

On May 15, 2017, the Commonwealth Court issued a 2 to 1 decision holding that Sunoco Pipeline has the statutory power of eminent domain in relation to the Mariner East 2 pipeline project.  The court determined that Sunoco provides a public benefit and that its pipeline is a necessary accommodation within the public’s interest.  Further, because the pipeline will provide both an intrastate and interstate service, the Pennsylvania Public Utility Commission has regulatory jurisdiction over that portion of the pipeline to be used for intrastate commerce.  The court also held that the Pennsylvania Supreme Court’s striking down of a portion of Act 13 (Pennsylvania’s beleaguered Oil and Gas Act) that permitted a corporation to take private property as unconstitutional was limited to “private, non-regulated corporations.”  Therefore, because Sunoco is a “public utility,” it is entitled to the granting of certificates of public  convenience.

Judge Cosgrove disagreed and warned that the court’s decision was headed for a reversal before the Supreme Court: “[W]e are issuing a decision on a case submitted without argument before a three judge panel (let alone en banc) which implicates one of the most important environmental decisions our Supreme Court has issued in recent times.”

The Commonwealth Court’s decision is captioned In Re: Condemnation by Sunoco Pipeline, L.P. (No. 220 C.D. 2016).

Ohio: Updated Statutory Unitization Guidelines

Posted in Energy

On May 3, 2017, the Ohio Department of Natural Resources, Division of Oil and Gas Resources Management (the Division) issued revised guidelines for statutory unitization applications. The guidance document–largely rewritten from the previous version (issued in May 2014)—contains a number of notable changes, including the following (among others):

  • Unitization applications will now be processed on a rolling basis (the prior guidelines required that applications be submitted 120 days prior to a scheduled hearing date). Upon receiving an application, the Division will perform a completeness review and notify the applicant of any deficiencies. Once the application is deemed complete and accurate, the Division will set a hearing date.
  • The application must include six separate interest exhibits, including one that lists all tracts within the unit subject to Ohio Dormant Mineral Act disputes.
  • Applications must be accompanied by the pre-filed testimony of a geologist, engineer and landman (applicants have typically included these testimonies with their applications, but their submission was not required under the previous guidelines).
  • Hearing notices can now be published in weekly or daily publications. For weekly publications, the notice must be published for four consecutive weeks, at least two weeks prior to the hearing.
  • Any revisions to an application must be submitted in two sets—a set of only the revised documents, and a full application with the revised documents incorporated. Additionally, with any revised application, “Exhibit A-2” must include an additional column explaining all changes that apply to a given tract.
  • At the hearing, the applicant must provide the Division with a PowerPoint that contains all of the information required by the guidelines, along with copies of affidavits attesting to the fact that the applicant holds a lease for all the acreage that the applicant claims to own in the application, along with an affidavit attesting that the applicant possesses the right to drill and produce from the unitized formation.

Check out the new guidelines here.

U.S. EPA to Reconsider Oil and Gas Methane Emissions Rule

Posted in Energy, Environment

On April 18, 2017, U.S. EPA issued a letter in response to petitions submitted by the American Petroleum Institute and other oil and gas industry groups requesting reconsideration of EPA’s rule regulating methane emissions from sources in the oil and natural gas sector (81 FR 35824). EPA determined that the petitions “raised at least one objection to the fugitive emissions monitoring requirements (40 CFR 60.5397a) that arose after . . . or was impracticable to raise during the comment period.” Accordingly, pursuant to Clean Air Act section 307(d)(7)(B), the EPA is convening a proceeding for reconsideration of the fugitive emissions monitoring requirement.

The rule under reconsideration would require companies to identify, monitor and repair sources of fugitive emissions at wells sites and compressor stations. During the reconsideration proceeding, EPA plans to issue a 90-day stay of the June 3, 2017 compliance date for the fugitive emissions monitoring requirements.

The Dimock Saga Continues – Judge Vacates Award

Posted in Energy

For over six years, individuals living in Dimock Township, Susquehanna County, Pennsylvania, have been asserting claims against Cabot Oil & Gas Corporation related to alleged damage to their water supplies purportedly caused by two unconventional gas wells. On March 10, 2016, a jury rendered a verdict in favor of the individuals, awarding them $4.24 million.  However, Magistrate Judge Martin Carlson quickly vacated the award, noting that weaknesses in the plaintiffs’ case and proof, coupled with serious and troubling irregularities in the testimony and presentation by the plaintiffs’ attorneys, greatly undermined faith in the jury’s verdict.  (The court delivered a stinging blow directly to the plaintiffs’ counsel, New York-based Leslie Lewis, for overzealous advocacy, which included several instances of inappropriate conduct throughout the trial.)  Further, the court held that the jury’s award bore no discernible relationship to the evidence.

Although the judge has encouraged the parties to reach a meaningful settlement, this decision sets the stage for another trial and the continuance of the Cabot Oil – Dimock saga.

For a copy of the case, captioned Ely v. Cabot Oil & Gas Corp., please contact Attorney Michael Vennum at mkvennum@vorys.com.

Ohio Court Rules Royalty Interests May Be Abandoned Under ODMA

Posted in Energy

Deciding an issue of first impression in the state, Ohio’s Seventh District Court of Appeals recently held that oil and gas royalty interests may be abandoned under the Ohio Dormant Mineral Act (ODMA). See Devitis v. Draper (Mar. 20, 2017).

In Draper, the court first looked to its prior decision, Pollock v. Mooney, which found that royalty interests are subject to extinguishment under the Ohio Marketable Title Act (OMTA), of which the ODMA is a part.  In Pollock, the court relied on broad language in the OMTA that applied the act’s provisions to “all interests, claims, or charges whatsoever.”   While noting that the language of the ODMA is different, the Draper court found that “parallels can be drawn” because the ODMA’s definition of “mineral interest” was also broad, and included the catch-all phrase “regardless of how the interest is created and of the form of the interest.” Moreover, the court found that conceptually, a royalty interest is simply one “stick” within the bundle of attributes comprising the mineral estate, and that it may be separately transferred.  Therefore, a royalty interest fell within the definition of a “mineral interest” under the ODMA.

The Draper court went on to find that the particular royalty interest at issue, while potentially subject to abandonment under the ODMA, was preserved through the timely filing of a claim of preservation.

Any Month is One Month for Strippers

Posted in Energy

In its decision of Snyder Brothers, Inc. v. Public Utility Comm’n, 1175 C.D. 2015 (Mar. 29, 2017), the Commonwealth Court was asked to determine the meaning of the term “any” as it applied to stripper wells and the payment of impact fees.  A stripper well is defined as an “unconventional gas well incapable of producing more than 90,000 cubic feet [cf] of gas per day during any calendar month. . . .”  58 Pa. Cons. Stat. § 2301 (emphasis added).  Because Pennsylvania’s Oil and Gas Act relieves owners of stripper wells from paying impact fees, the determination of the term became financially important to the Petitioner, Snyder Brothers, Inc., who claimed that several of its wells were stripper wells because they did not produce more than 90,000 cf of gas per day in at least one calendar month.  Pennsylvania’s Public Utility Commission contended that Snyder Brothers owed significant impact fees and penalties as to the purported stripper wells because the wells indeed produced more than 90,000 cf of gas per day during several months of the year.

In a 5 to 2 decision, the court held that the plain English definition of “any” is unambiguous and, thus, signifies only “one or a singular month.”  As such, when an unconventional gas well cannot produce more than 90,000 cf of gas in at least one month, it is a stripper well and not subject to impact fees.