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Court of Appeals Again Addresses the Level of Due Diligence Required under the Ohio Dormant Mineral Act

Posted in Energy

On June 1, 2020, the Seventh District Court of Appeals once again addressed the level of diligence required to identify holders of a severed mineral interest under the 2006 version of Ohio’s Dormant Mineral Act (2006 DMA). In Fonzi v. Gary D. Brown & Eclipse Res., 2020-Ohio-3631, the appellee-surface owner filed his notice of abandonment by publication after conducting a search of the public records of Monroe County, Ohio, where his property was located, as well as a brief internet search. Again emphasizing that what constitutes reasonable due diligence will depend on the facts and circumstances of each case, the Court held that the appellee-surface owner did not exercise reasonable due diligence. Consequently, it was improper for the appellee-surface owner to serve his notice of abandonment by publication.

In Fonzi, the deed containing the mineral reservation (Severance Deed) indicated that the grantors, Harry Fonzi II and Elizabeth Fonzi (the parents of the appellants), resided in Washington County, Pennsylvania. Rejecting the appellee-surface owner’s contention that the law does not require a surface owner to search public records outside of the county where the land is located, the Court found that it was “per se unreasonable” for the appellee-surface owner not to extend his search to the public records of Washington County, Pennsylvania, as the Severance Deed gave him actual knowledge that the reserving parties resided there. Had he searched the public records of Washington County, Pennsylvania, he would have easily located Harry Fonzi II’s estate records which identified the appellants-holders. The fact that the reserving parties lived in another state “[did] not relieve the [appellee-surface owner] of the burden to conduct a reasonable, diligent search.” Based on the foregoing, the Court held that the appellee-surface owner failed to comply with the notice requirements of the 2006 DMA. It is also worth noting that the Court clarified an aspect of its earlier decision in Sharp v. Miller, stating that when determining the sufficiency of a surface owner’s diligence, the focus is on the “process employed” (i.e., the search itself) and not the end-result of the search (i.e., the discovery or non-discovery of heirs).

In addition to the issue of diligence required under the 2006 DMA, the Court also addressed a matter of first impression, namely, the level of evidence required to prove that a purported heir of a holder of a severed mineral interest is, in fact, an heir. The trial court held that the appellants-holders lacked standing to bring the initial action as they had not proved they are the successors-in-interest to the reserving parties. Here, the Court found that, based on Harry Fonzi II’s estate records and an heirship-related affidavit presented at the trial court level, the appellants-holders presented sufficient evidence to demonstrate that they are the successors-in-interest to the reserving parties.

U.S. Supreme Court Stays Injunction Barring Use of Nationwide Permit 12

Posted in Energy, Environment

On July 6, 2020, the U.S. Supreme Court issued an Order partially granting a motion to stay a Montana District Court’s injunction barring the use of the Army Corps’ streamlined Nationwide Permit 12 (NWP 12) governing pipeline and other utility construction activities that impact a water of the United States regulated under the Clean Water Act. The District Court held that the Army Corps failed to engage in programmatic consultation with federal wildlife agencies before issuing NWP 12 in 2017, as required under the Endangered Species Act. After initially ordering a complete vacatur of NWP 12, the District Court narrowed its order on May 11, 2020, to an injunction prohibiting the use of NWP 12 for new pipeline projects.

The Army Corps and industry appealed the District Court’s decision to the U.S. Court of Appeals for the Ninth Circuit. The Army Corps also filed an application to the U.S. Supreme Court requesting that the Court stay the District Court’s injunction pending the outcome of the appeal in the Ninth Circuit. The Supreme Court stayed the District Court’s order, except as it applies to the Keystone XL pipeline project.

A side note regarding the appeal in the Ninth Circuit: On May 15, 2020, a coalition of 18 states, including Ohio, filed an amicus brief with the Ninth Circuit in support of the Army Corps and industry-Appellants’ case. The States argue that the District Court’s decision is flawed and, if upheld, that needed infrastructure projects will be significantly more costly and time-consuming, and potentially unfeasible.

Ohio’s New Brownfield Regulatory Reform Legislation

Posted in Environment

On June 16, 2020, Governor DeWine signed House Bill 168 into law.  The bill is designed to encourage brownfield redevelopment and reinvestment in the State of Ohio by enhancing liability protection to brownfield purchasers.

Predominantly, the bill adopts from federal law an affirmative defense, the “Bona Fide Purchase Defense,” to purchasers who conduct appropriate environmental due diligence.  The standard for environmental due diligence adopted is the “All Appropriate Inquiries” (“AAI”) standard from the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980.  The affirmative defense will be available retroactively to properties acquired after January 11, 2002 that followed the AAI standard.

In addition, the bill, which was unanimously passed out of the State Legislature in May 2020 on support of testimony by Vorys, Sater, Seymour and Pease LLP environmental partner Kristin Watt, strengthens Ohio EPA’s Voluntary Action Program (“VAP”).  Under the VAP, Ohio EPA can provide a “Covenant Not to Sue” (“CNS”) to volunteers who follow the criteria of the program.  The bill strengthens these covenants by eliminating the VAP’s “automatic CNS voidance” for the failure to strictly adhere to a CNS’s  covenants use restriction terms.  The bill prescribes that the voiding of a CNS may only come through an Order at the discretion of the Director of Ohio EPA.

The law will become effective on September 14, 2020.  Please contact David Edelstein at dmedelstein@vorys.com or Kristin Watt at klwatt@vorys.com about this bill.

U.S. EPA Proposes Rule Governing Cost Benefit Analysis for Significant CAA Regulations

Posted in Energy, Environment

On June 4, 2020, U.S. EPA proposed a rule to improve the consistency and transparency of benefit cost analyses (BCAs) for all “significant” proposed and final regulations under the Clean Air Act (CAA). The proposed rule, developed in response to comments on U.S. EPA’s June 12, 2018 Advance Notice of Proposed Rulemaking and Administrator Wheeler’s May 13, 2019 memorandum outlining certain principles for increasing consistency and transparency in U.S. EPA’s consideration of benefits and costs in the rulemaking process, would codify the procedural requirements governing the development of BCA, including risk assessments used as inputs to the BCA, for significant rulemakings conducted under the CAA, and would establish additional procedural requirements to increase transparency in the presentation of the benefits resulting from significant CAA regulations.

U.S. EPA’s proposal consists of three key elements:

1. U.S. EPA will prepare a BCA for all future “significant” proposed and final regulations under the CAA. The proposal defines a “significant regulation” as a proposed or final regulation that is determined to be a “significant regulatory action” pursuant to E.O. 12866 Section 3(f) or is otherwise designated as significant by U.S. EPA. In its proposal, U.S. EPA notes that such regulations are generally those having the largest annual impact on the economy (i.e. greater than $100 million).

2. The BCA will be developed using the best available scientific information and in accordance with best practices from the economic, engineering, physical, and biological sciences. Under U.S. EPA’s proposal, the key elements of a regulatory BCA include: 1) a statement of need; 2) an examination of regulatory options; and 3) to the extent feasible, an assessment of all benefits and costs of these regulatory options relative to the baseline (no action) scenario.

3. Procedural requirements will be followed to increase transparency in the presentation of the BCA results, while maintaining the standard practices of measuring net benefits consistent with E.O. 12866. Specifically, U.S. EPA proposes that BCA of significant CAA regulations include, at a minimum, a detailed explanation of the overall results of the BCA, how the benefits and costs were estimated, all non-monetized and non-quantified benefits and costs of the action, and the primary sources and potential effects of uncertainty. U.S. EPA also proposes to make the information that was used in the development of the BCA, including data and models, publicly available (to the extent permitted by law).

A pre-publication version of U.S. EPA’s proposed BCA rule for significant CAA regulations (40 CFR Part 83) can be viewed here. Comments must be submitted within 45 days after the proposed rule is published in the Federal Register.

U.S. EPA Finalizes Amendments to Rules Governing CWA 401 Water Quality Certification Process

Posted in Energy, Environment

On June 1, 2020, U.S. EPA finalized amendments to the rules governing the Clean Water Act (CWA) Section 401 water quality certification (WQC) process, which had not been updated since 1971. The final amendments establish a more robust framework for the WQC process which is intended, in large part, to ensure that certifying agencies take action on a certification request “within a reasonable period of time…which shall not exceed 1 year from receipt” of the request, as required under the CWA. The final amendments have implications for any project triggering the WQC requirement (e.g. construction projects requiring a CWA 404 wetland permit).

Ambiguities in the previous WQC rules often caused significant delays in the certification process. In an effort to remedy those ambiguities and provide more regulatory certainty, U.S EPA’s amendments create several new provisions in the WQC rules (40 CFR Part 121), including rules that specify when a certification is required; require a project proponent to request a pre-filing meeting with the certifying agency at least 30 days prior to submitting the certification request; enumerate specific project details and other information that must be included in a certification request; define the scope of and time frame for the certifying agency’s review of a certification request; and clarify other procedural aspects of the WQC process. The final amendments also define new terms including, “certification request,” “discharge,” “reasonable period of time,” “receipt” (of a certification request), and “water quality requirements.”

A pre-publication version of the final amendments to the CWA 401 WQC rules is available here. The amendments become effective 60 days after publication in the Federal Register.

Sixth Circuit Rules for Producer in Royalty Dispute

Posted in Energy

On May 21, 2020, the Sixth Circuit Court of Appeals ruled for a lessee in an oil and gas lease dispute, finding that the lessee properly considered post-production costs when calculating the landowners’ royalties.  See Henceroth v. Chesapeake Exploration, LLC, 6th Cir. No. 19-3942.

The lessee, Chesapeake Exploration (Chesapeake), produced oil and gas from the plaintiff-landowners’ property, which it sold at the wellhead to its affiliate, Chesapeake Marketing (Marketing).  Marketing then prepared the products for sale downstream.  This involved arranging for pipeline transportation and processing natural gas into methane and natural gas liquids.  Once downstream, Marketing sold the finished products to third parties at prices that reflected the added value of these post-production services.  Marketing paid Chesapeake based on the prices it received from these third parties, less Marketing’s post-production costs.  Chesapeake, in turn, paid the landowners on the amounts it received from Marketing.  The landowners sued Chesapeake, claiming it underpaid their royalties because the royalties were based on the amounts Chesapeake received from Marketing, rather than on the higher downstream prices that Marketing realized on its sales to third-party purchasers.

The Sixth Circuit found that Chesapeake properly paid the landowners according to the terms of their leases.  Those leases provided that Chesapeake would pay royalties on gas and oil “produced and marketed from the Leasehold.”  Thus, “the first sale price is the proper royalty base.”  Chesapeake extracted, i.e., “produced,” the raw products from the ground and immediately sold, i.e., “marketed,” the products to Marketing.  “And all of this happens at the property (‘from the Leasehold’), not downstream.”  The court disagreed with the landowners’ claim that Chesapeake did not “market” the oil and gas and that the only actual marketing occurred when the products were sold to unaffiliated third parties.  Citing a recent Ohio appeals decision involving similar leases, the court noted that the dictionary “definition of ‘market’ is ‘to expose for sale in a market’ or to ‘sell’ . . . which is what happens when [Chesapeake] sells oil and gas to [Marketing].”

Read the decision here.

 

Ohio Appellate Court Holds that Words of Inheritance are Required to Reserve Oil and Gas Interests

Posted in Energy

Recently, in Peppertree Farms v. Thonen, 2020-Ohio-3043, Ohio’s Fifth Appellate District considered whether certain ancient royalty and fee oil and gas reservations terminated upon the grantor’s death. The Court held that they did because the grantors failed to include words of inheritance in their reservation clauses. As a result, each grantor’s reserved oil and gas interest did not transfer to his heirs and assigns.

Prior to enactment of Section 8510-1 of the General Code (now R.C. 5301.02) in 1925, words of inheritance were required to convey real property in perpetuity. Failure to include words of inheritance limited the duration of the estate conveyed to the grantee’s life (or, in the case of reservations, the grantor’s life). However, Ohio courts have applied this rule differently to “exceptions” and “reservations.” If the language used in the deed constituted an “exception,” words of inheritance were not required because the grantor was deemed to be retaining a portion of his former estate. If the language used in the deed constituted a “reservation,” words of inheritance were required because the grantor was deemed to be creating a new property interest.

In Peppertree, the Court held that each of the deeds created “reservations.” Notably, it even held that the fee oil and gas reservation was a “reservation.” In so holding, the Court relied, in part, on the Ohio Supreme Court’s decision in Chesapeake Exploration, L.L.C. v. Buell, 144 Ohio St.3d 490, to find that whenever minerals are severed from the surface, two new and separate estates are created – a surface estate and a mineral estate. Thus, although the grantor had title to the oil and gas at the time he executed the subject deed, his reservation was deemed to be a “reservation” because the severance created a new oil and gas estate.

The Peppertree decision appears to be in conflict with Ohio’s Seventh Appellate District’s decision in Headley v. Ackerman, 2017-Ohio-8030, which seems to analyze this issue under a different lens. We will update this blog post in the event of an appeal to the Ohio Supreme Court.

 

 

Update Regarding Ohio Land Professional Registrations

Posted in Energy

The Ohio Department of Commerce, Division of Real Estate & Professional Licensing, recently reached out to Ohio’s “land professionals” (i.e., oil and gas landman registered with the Division) concerning renewing their registerations. Ohio law requires land professionals to renew their registrations annually on or before April 30. However, in light of House Bill 197, land professionals now have additional time to renew their registrations. House Bill 197 extends the deadline for land professionals to renew registrations to either ninety days after the emergency order ends or December 1, 2020 – whichever is sooner. Further, during this time period, a land professional’s registration will remain active even though it has not been renewed.

 

U.S. Supreme Court: Indirect Discharge Into Groundwater Covered Under Clean Water Act

Posted in Energy, Environment

On April 23, 2020, the U.S. Supreme Court, in a 6-3 decision, held that a permit is required for either “a direct discharge of pollutants from a point source into federally regulated navigable waters, or when there is the functional equivalent of a direct discharge.” County of Maui, Hawaii v. Hawaii Wildlife Fund et al., Case No. 18-260 (April 23, 2020). The decision focused on whether the Clean Water Act (CWA) regulates groundwater and thus has implications for sites with contaminated groundwater and the use of CWA citizen suits. The Court majority fashioned a 7 factor test to determine whether groundwater is regulated under the CWA. The case was on appeal from the 9th Circuit Court of Appeals.

At issue in the case was whether the County of Maui’s (Maui) unpermitted injection of wastewater into deep underground wells that then seeped into groundwater and, via groundwater transport, ultimately discharged into the Pacific Ocean, violated Section 301 of the CWA, which prohibits the discharge of any pollutant into the navigable waters of the United States. 33 U.S.C 1311(a). The Court, based on an analysis of three key terms expressly defined under the CWA – “pollutant”, “point source”, and “discharge of a pollutant”, rejected Maui’s means-of-delivery test under which a permit is required only if the point source itself (e.g. a pipe) delivers the pollutant to navigable waters. Justice Breyer, who authored the majority opinion, noted that if Maui’s interpretation were accepted, a pipe owner could “simply move the pipe back, perhaps only a few yards, so that the pollution must travel through at least some groundwater before reaching the sea.”

The Court also rejected the 9th Circuit’s analysis which held that a permit is required when the pollutants are “fairly traceable” from the point source to navigable waters. The Court held that the “fairly traceable” standard was too broad, citing the “power of modern science” to detect pollutants years after their release in minute quantities. Recognizing that the “functional equivalent” standard lacks specificity, the Court identified seven factors that may be relevant in determining whether the “functional equivalent of a direct discharge” has occurred: (1) transit time, (2) distance traveled, (3) the nature of the material through which the pollutant travels, (4) the extent to which the pollutant is diluted or chemically changed as it travels, (5) the amount of pollutant entering the navigable waters relative to the amount that leaves the point source, (6) the manner by or area in which the pollutant enters the navigable waters, and (7) the degree to which the pollution has maintained its specific identity. The Court further explained that “functional equivalent” decisions should not create serious risks of undermining state regulation of groundwater or of creating loopholes that undermine the CWA’s basic federal regulatory objectives.

The three dissenting justices (Gorsuch, Thomas and Alito), held that a permit is only required for direct discharges into navigable waters.

U.S. EPA and Army Corps Publish Final Navigable Waters Protection Rule

Posted in Energy, Environment

On April 21, 2020, U.S. EPA and the Army Corps of Engineers published the final Navigable Waters Protection Rule amending the definition of “Waters of the United States” (the “2020 WOTUS Rule”). Under the 2020 WOTUS Rule, four categories of jurisdictional WOTUS are subject to regulation under the Clean Water Act (CWA):

1. The territorial seas and traditional navigable waters,
2. Perennial and intermittent tributaries to those waters,
3. Certain lakes, ponds, and impoundments, and
4. Wetlands adjacent to jurisdictional waters

The 2020 WOTUS Rule also identifies 12 categories of water features that are excluded from the definition of WOTUS, including ephemeral features, groundwater, and several ditches. In an effort to provide clarity and maintain consistency with the express language of the Clean Water Act, the 2020 WOTUS Rule revises the definition of several key terms and includes newly defined key terms. Some of the new and revised key terms defined under the final 2020 WOTUS Rule include: “tributary”; “adjacent wetlands”; “upland”; “waste treatment system”; “perennial”; “intermittent”; and “ephemeral”.

The 2020 WOTUS Rule is effective on June 22, 2020. Once effective, the 2020 WOTUS Rule replaces the October 2019 “Step One Rule,” which repealed the 2015 WOTUS Rule and re-codified the pre-2015 rules. Litigation surrounding the 2015 WOTUS rule was plentiful and contentious. The 2020 WOTUS Rule is expected to face similar legal challenges.