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Energy & Environmental Law Blog

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Supreme Court of Ohio to Hear Landman Licensing Case

Posted in Energy

In March, we posted about Dundics v. Eric Petroleum Corp., a decision by Ohio’s Seventh District Court of Appeals ruling that landmen were required to obtain real estate broker’s licenses in order to sue for compensation for brokering deals between landowners and oil and gas companies.  Today, the Supreme Court of Ohio agreed to review the following proposition of law:

Oil and gas land professionals, who help obtain oil and gas leases mostly for sophisticated oil and gas development businesses, should not be required to be licensed real estate brokers. Ohio’s statutory licensing requirements for real estate brokers, set forth in R.C. 4735.01 et seq., were not intended to cover oil and gas land professionals, because they perform substantially different services than residential or commercial real estate agents and their activity is limited to a very small, specific area relative to real estate rights.

We will keep you posted as this case develops.

U.S. District Court Finds Ohio Would Follow the “At the Well” Rule for Post-Production Costs

Posted in Energy

In a decision released yesterday, the United States District Court for the Northern District of Ohio concluded that Ohio would adopt the “at the well” rule regarding the deduction of post-production costs, the first time the issue has been squarely addressed under Ohio law. Lutz v. Chesapeake Appalachia, L.L.C., N.D.Ohio No. 4:09-cv-2256 (Oct. 25, 2017).

By way of background, the plaintiffs (landowners/lessors) had filed a class action complaint, alleging the defendant lessee underpaid gas royalties under the terms of their oil and gas leases by allocating to the plaintiffs their share of post-production costs when calculating royalties. Three lease forms were at issue, including one that contained “at the well” royalty language:

The royalties to be paid by Lessee are: . . . (b) on gas, . . . produced from said land and sold or used off the premises . . . the market value at the well of one eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale. . . .

The lessee argued that the “at the well” language meant that a lessee could deduct post-production costs from the downstream sales price of natural gas to work back to the price of the gas “at the well” when calculating royalties. The plaintiffs, conversely, urged the court to adopt the “marketable product rule,” which provides that post-production costs—for example, costs for compression, dehydration, processing, and transportation of gas—must be borne solely by the lessee.

In April 2015, the district court certified the question of whether Ohio follows the “at the well” or the “marketable product” rule to the Supreme Court of Ohio.  Although the Supreme Court of Ohio accepted the certified question, it ultimately declined to answer it, concluding that oil and gas leases are contracts and the “the rights and remedies of the parties are controlled by the specific language of their lease agreement[.]”

Afterwards, the lessee filed a motion for partial summary judgment as to the “at the well” lease form, which the district court granted in yesterday’s decision. In its ruling, the district court determined that Ohio would apply the “at the well” rule.  Concluding that the “at the well” language in the lease was clear and unambiguous, the district court found that it referred to the “location at which the gas is valued for purposes of calculating a lessor’s royalties”—i.e., at the well.  Conversely, applying the marketable product rule, as urged by the plaintiffs, “runs the risk of giving the lessor the benefit of a bargain not made.”

Read the full decision here.

Ohio Court Holds Deed Reserving “All of the Minerals and Coal” Did Not Reserve Oil and Gas

Posted in Energy

In Sheba v. Kautz, 2017-Ohio-7699, Ohio’s Seventh District Court of Appeals held that a deed executed in 1848 reserving “all of the minerals and coal” did not reserve oil and gas. In reaching its decision, the Court applied ordinary principles of contract interpretation, and heavily relied upon the Supreme Court of Ohio’s decision in Detlor v. Holland, 57 Ohio St. 492 (1898), to conclude that the parties to the deed did not intend to reserve oil and gas because the deed predated the development of oil and gas in Ohio. The Court specifically noted that there was no indication that oil and gas were being produced in the immediate vicinity or in the general area or elsewhere when the deed was executed.

The Court’s decision can be viewed here.

10th Circuit Court of Appeals Dismisses BLM Hydraulic Fracturing Rule Litigation

Posted in Energy

Last year, we posted about litigation concerning the Bureau of Land Management’s controversial rule purporting to regulate hydraulic fracturing on federal and Indian lands.  After a federal court found that the rule exceeded the scope of the BLM’s regulatory authority, appeals were filed with 10th District Court of Appeals.  Earlier this year, the BLM announced that at the direction of the new administration, it would begin the process of rescinding the rule.  Yesterday, the Court of Appeals dismissed these appeals, concluding that in light of the BLM’s decision to rescind its rule, proceeding with the case “appears to be a very wasteful use of limited judicial resources.”  The Court of Appeals also vacated the district’s court’s decision on prudential grounds.

Federal Appeals Court Affirms Decision Striking Down Fayette County, WV Wastewater Injection Ban

Posted in Energy

On August 30, 2017, the United States Court of Appeals for the Fourth Circuit upheld a district court’s decision striking down a Fayette County, WV ordinance prohibiting wastewater injection.  EQT Production Company challenged the ordinance—which restricted “storage, treatment, injection, process or permanent disposal” of wastewater within the county, including specifically, the use of injection wells for permanent disposal—on grounds that it was preempted by the State of West Virginia’s injection well regulatory program.   Affirming the district court’s judgment in favor of EQT, the court of appeals held that “the West Virginia legislature, in enacting its complex regulatory program for injection wells, did not leave counties with the authority to nullify [injection well] permits issued by the state.”

Read the case here.

Federal Court Rejects Class Action Alleging Improper Deduction of Post-Production Costs

Posted in Energy

On August 24, 2017, the United States District Court for the Northern District of West Virginia granted summary judgment to producers in a class action lawsuit concerning the deduction of flat-rate post-production costs.

In Kinney v. CNX Gas Company, LLC, et al., the parties’ leases provided that the lessors would receive a percentage of the oil and gas produced and sold from the leased premises less:

an amount equal to $1.20 per MMBtu with respect to heating, sweetening, gathering, dehydrating, compressing, processing, manufacturing, transporting, trucking, marketing, blending, and other costs and expenses incurred by Lessee in marketing said oil and gas and all excise depletion, severance, privilege and production taxes that are now or hereafter levied, or assessed or charged on oil and gas owned by Lessor and produced from the Premises, which amount the parties are agreed will be presumed to be actually incurred and reasonable. [Emphasis is ours].

The lessors claimed that such flat-rate post-production cost deductions were prohibited under West Virginia law under the decisions of Wellman v. Energy Resources, Inc. and Estate of Tawney v. Columbia Natural Resources, LLC.

The court disagreed, noting first that although Wellman found that a West Virginia lessee has an implied duty to market oil and gas and therefore, that lessees generally cannot take post-production cost deductions, Wellman recognized an exception whereby post-production costs may be deducted where the lease expressly allows it, and the deductions taken are “actually incurred and reasonable.” And the Tawney decision clarified that lessees could take post-production cost deductions so long as certain requirements were met—i.e., (1) the lease expressly provides that the lessor will bear post-production costs; (2) the lease identifies with particularity the specific deductions taken; and (3) the lease indicates the method for calculating the amounts deducted.

Here, the court found that the requirements of Wellman and Tawney were met. The lease royalty clause satisfied the three factors in Tawney, and it stipulated that the deductions are “actually incurred and reasonable” under Wellman. The parties freely contracted for that stipulation and the court honored that language.  Additionally, the lease contained a disclaimer of implied covenants, reinforcing the notion that the parties intended to abrogate the lessee’s implied duty to market production.

Click here to read the decision.

New guidance for TSCA Nanoscale Rule

Posted in Environment

On August 14th, 2017, the U.S. EPA issued new guidance for the Toxic Substances Control Act (“TSCA”) Nanoscale Rule regulating chemical substances produced at the nanoscale (1-100 nm in at least one dimension).  The Nanoscale Rule will require all current and future manufacturers and processors to report to EPA when such nanoscale chemical substances are produced in new forms not previously reported.  Manufacturers and processors who have produced a new form of a nanoscale chemical substance at any time during the three years prior to August 14, 2017, will have to report to EPA before August 14, 2018.  The new guidance defines reportable chemicals as those “as a solid at 25° C and standard atmospheric pressure, that is manufactured or processed in a form where any particles, including aggregates or agglomerates, are in the size range of 1-100 nm in at least one dimension and that is intentionally manufactured or processed to exhibit unique or novel properties because of its size.”  The guidance further elaborates “unique and novel properties” as those “properties that vary from those associated with other forms or sizes of the same chemical substance not in the size range of 1-100 nm, and such properties are a reason that the chemical substance is manufactured or processed in that form or size.”

Further, the new guidance clarifies who is required to report, the types of information to report, and when reporting is required.  Companies required to report include both manufacturers (as well as importers) and processers of nanoscale chemical substances.   Such companies must report information that is known or “reasonably ascertainable”, as defined at 40 CFR 704.3.  EPA states that a company can begin manufacturing or processing any time after reporting under the rule.  If a company forms the intent to manufacture or process fewer than 135 days before it manufactures or processes, then that company should report under the rule as soon as possible but no later than 30 days after forming the intent.

Governor Kasich Signs Senate Bill 2 Into Law

Posted in Environment

On July 7, 2017, Governor Kasich signed Senate Bill 2 (SB 2), which addresses Ohio’s authority under several environmental regulatory programs. Notable provisions of SB 2 include:

• Expanding Ohio EPA’s authority to take actions to abate contamination at locations where hazardous waste was disposed of to include locations where solid waste and construction and demolition debris (C&DD) was disposed of;
• Establishing requirements governing processing facilities under the C&DD program, including permitting and licensing programs for processing facilities;
• Amending 401 Water Quality Certification processes and requiring Ohio EPA to adopt rules governing the certification of water quality professionals;
• Excluding blast furnace slag and steel slag from the definition of “industrial waste” and “other waste” under Ohio’s water pollution law; and
• Adding two members to the Ohio Lake Erie Commission and establishing new duties for the Commission.

The new law will take effect 90 days after it is filed with the Ohio Secretary of State.

Ohio Court Elaborates on Paying Quantities Test

Posted in Energy

On June 16, 2017, Ohio’s Seventh District Court of Appeals issued its decision in Paulus v. Beck Energy Corp. 2017-Ohio-5716, which addresses a number of issues concerning Ohio’s standard for determining whether an oil and gas lease is producing in “paying quantities,” a test that must ordinarily be met in order to continue a lease during its secondary term. The Supreme Court of Ohio first established the state’s paying quantities test nearly 40 years ago in Blausey v. Stein, finding that “paying quantities” are “quantities of oil or gas sufficient to yield a profit, even small, to the lessee over operating expenses, even though the drilling costs, or equipping costs, are not recovered, and even though the undertaking as a whole may thus result in a loss.”

In Paulus, the court ruled on several disputed issues surrounding the application of the Blausey test. Among other things, the court found:

  • Royalties paid to the lessor must be deducted either from the lessee’s gross income or included as operating expenses when determining profitability.
  • A one-time cost incurred by the lessee during the secondary term to replace a downhole pump and to rebuild the wellhead as a result of the pump replacement was in the nature of a non-recurring capital investment that is not subtracted from the lessee’s gross income.
  • Although Blausey recognized that an individual lessee’s own labor is not an operating expense when the lessee made no direct expenditure from gross receipts for his labor, the same is not true for the labor of a corporate lessee’s salaried employee. Such labor is a direct operating expense to be subtracted from the lessee’s income.
  • The determination of the “base period,” i.e., the period of time used to measure paying quantities, is made by examining the totality of the circumstances and requires consideration of the good faith of the lessee.
  • In the particular facts of Paulus, the only well on the lease, which began producing in 2007, experienced a gradual decline in production through 2014. After accounting for royalties, if the base period was measured from 2007, when the well came online, to 2014, when the complaint was filed, the well would have produced roughly $6,800 in net profit. But the court found that applying this time frame may not reasonably reflect the current state of the well, in light of a considerable and continued decline in production beginning in 2010. Between 2010 and 2014, the well experienced an approximate $550 net loss, after accounting for the expense associated with the lessee’s salaries employee. And such a loss would only continue to grow, according to available figures from several months of 2015. Additionally, there was evidence that the lessee experienced difficulty supplying household gas to the lessor’s home, and that the well may have run out of producible gas. Based on the totality of the circumstances, the court upheld the trial court’s finding that the lease had expired due to lack of paying quantities.

 

D.C. Circuit Vacates Stay of Oil and Gas Methane Emissions Rule

Posted in Energy, Environment

This post provides an important update to our April 20, 2017 post regarding U.S. EPA’s reconsideration of its rule regulating methane emissions from the oil and gas industry (“NSPS OOOOa”).

On June 5, 2017, EPA published a notice of reconsideration and partial stay of NSPS OOOOa. Specifically, EPA stayed the effectiveness of the fugitive emissions requirements, the standards for pneumatic pumps at well sites, and the professional engineer certification requirements for 90 days, effective June 2, 2017, pending EPA’s reconsideration of the final rule. Shortly after EPA published the notice, six environmental groups filed an emergency motion in the Court of Appeals for the D.C. Circuit requesting that EPA’s stay be vacated. The Court granted the motion and issued an order vacating EPA’s stay of the final rule.

In reaching its decision, the Court first determined that it had jurisdiction to hear the case. The Court held that EPA’s stay was a final agency action and, as such, is reviewable by the Court. The Court also noted that its authority to review EPA’s stay of the final rule is a logical extension of its authority to stay a final rule pursuant to CAA section 307(d)(7)(B).

The Court then turned to its review of EPA’s 90-day stay and held that the stay was unauthorized under CAA § 307(d)(7)(B). The Court explained that EPA is bound by NSPS OOOOa “until that rule is amended or revoked and may not alter [the] rule without notice and comment.” The Court equated the stay, which was issued without notice and comment, to an amendment of the final rule and, because reconsideration of NSPS OOOOa was not mandatory, the Court vacated EPA’s stay of the rule as arbitrary and capricious.

While the Court’s order reinstates the effectiveness of the stayed provisions, those same provisions may soon be stayed again. On June 16, 2017, EPA published a proposed rule that would stay the fugitive emissions requirements, pneumatic pump standards, and professional engineer certification requirements for 2 years. Comments on the proposed 2-year stay are due by July 17, 2017.