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Supreme Court of Ohio Rejects Implied Covenant to Explore Further in Oil and Gas Leases

Posted in Energy

In a January 3, 2018 decision, the Supreme Court of Ohio held that Ohio does not recognize an implied covenant to explore further as a distinct implied covenant in oil and gas leases.  See Alford v. Collins-McGregor Operating Co., Slip Opinion No. 2018-Ohio-8.

Read more about this case in our Client Alert.

PA DEP Halts Mariner East II Pipeline

Posted in Energy

Yesterday, the Pennsylvania Department of Environmental Protection halted construction of Sunoco Logistic LP’s Mariner East II pipeline, citing violations of environmental laws, reports the Pittsburgh Tribune-Review:

Sunoco violated its permits, using unauthorized drilling methods that leaked nontoxic drilling fluid into trout streams and water wells across the state, according to the DEP.

The state discovered Sunoco was using unauthorized drilling methods after learning of a drilling fluid leak into a Berks County creek in November, the DEP order states.

Over the next few weeks, the state discovered numerous other sites in Berks, Blair, Cumberland, Dauphin, Huntingdon, Perry and Washington counties where unauthorized drilling methods were being used, often resulting in drill fluid leaking into nearby bodies of water, several of which were designated trout streams, according to the DEP.

You can read the full article here.

Ohio Appellate Court Finds The Duhig Rule Persuasive

Posted in Energy

In Talbot v. Ward (2017-Ohio-9213), Ohio’s Seventh District Court of Appeals found the Duhig rule “persuasive” in interpreting a deed containing an exception for royalties, bonuses, and rentals. The Duhig rule, first enacted in Texas in 1940, bars a grantor and his successors and assigns from claiming title in a reserved fractional mineral interest when doing so would, in effect, breach the grantor’s warranty of title. Talbot is the first reported appellate decision in Ohio to ever discuss the Duhig rule.

In Talbot, E.M. Ward conveyed certain land to Dow Mellot excepting “½ of the oil and gas royalty and ½ of all rentals and bonuses.” Thereafter, Dow Mellot conveyed the same land to John and Minnie Tomolonis repeating the earlier reservation by E.M. Ward.  One of the issues on appeal was whether Dow Mellot reserved an interest in the oil and gas estate by the Mellot-Tomolonis Deed.

The appellate court held that the Mellot-Tomolonis Deed did not reserve such an interest. The deed clearly indicated that one-half of the oil and gas royalty, bonus, and rental were excepted from the grant. The deed did not, however, account for the other one-half of the oil and gas royalty, bonus, and rental. As such, by the deed’s plain language, the surface and one-half of the oil and gas royalty, bonus, and rental were conveyed to the Tomolonises.

Although the court of appeals’ holding was grounded in ordinary rules of deed construction, the appellants argued, and the appellate court agreed, that the case was similar to Duhig v. Peavy-Moore Lumber Co., 135 Tex., 503, 144 S.W.2d 878 (1940). Duhig states that if both the grant and reservation in a deed cannot be given effect, then the reservation must fail. In Talbot, the appellate court noted that the facts before it compelled the same result as Duhig requires. That is, even if Dow Mellot did reserve a one-half interest in the oil and gas royalty, bonus and royalty under the Mellot-Tomolonis Deed, that reservation failed because Dow Mellot breached his warranty of title due to earlier reservation by his predecessor, E.M. Ward.

Click here to read the decision.

Recent Ohio Oil and Gas Decisions

Posted in Energy

Over the last several weeks, Ohio courts issued a few decisions involving oil and gas issues that we wanted to briefly mention:

  • Schillo v. Chesapeake Exploration, LLC (Harrison Cty. C.P., Oct. 16, 2017) – Here, the dispute was whether the lessee properly extended an oil and gas lease through the tender of delay rental payments.  The lessee tendered the rentals by certified mail to the lessor’s known address, but the lessor apparently did not retrieve them.  Nonetheless, she claimed that the lease had expired because the lessee had failed to tender the delay rentals.  Granting summary judgment to the lessee, the common pleas court remarked that “[i]t would be moronic to allow leases to expire by simply allowing lessors to ignore tendered payment of delay rentals.”

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Eclipse Res.—Ohio, LLC v. Madzia

Posted in Energy

Last week, the United States Sixth Circuit Court of Appeals issued its decision in Eclipse Res.—Ohio, LLC v. Madzia, concerning a dispute between a landowner and a lessee regarding the latter’s drilling rights.  Among other things, the court found:

  • The lease, which conveyed to the lessee a broad grant of rights to use the landowner’s property for drilling—including the right to transport oil and gas through the property “from other lands”—authorized drilling a horizontal well through the landowner’s property from a well pad located thereon and producing from adjacent property not owned by the landowner;
  • A separate subsurface-easement agreement, which only pertained to drilling operations on the landowner’s property, did not modify the lease to restrict off-lease production, in the absence of any language in the easement evidencing an intent to modify the lease; and
  • The lessee did not breach a lease provision requiring the lessee to “comply with all applicable federal, state and local laws and regulations” by reusing an executed coal ownership affidavit when applying for permits from the Ohio Department of Natural Resources (ODNR). After the landowner refused to execute a coal ownership affidavit covering new wells that were to be drilled on adjacent lands from the landowner’s well pad, the lessee reused the landowner’s previous affidavit executed in connection with wells previously drilled on the landowner’s lands off of the same well pad. The court concluded that at the time, ODNR’s practice was to accept such affidavits. Additionally, the landowner breached the lease himself by refusing to execute a new coal ownership affidavit in contravention of a lease provision requiring the landowner to execute all documents “convenient” to carrying out the provisions of the lease.

Read the full decision here.

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.