After the recent jolt, the rig count stayed relatively flat since our last report amidst dipping oil prices and natural gas spot prices still struggling to hit $3/MMBtu again. In Appalachia, the Pennsylvania Supreme Court issued a long anticipated decision on “title washing”; the Commonwealth Court tossed a unique climate change lawsuit; lease disputes abound in the federal courts; and FERC gave a preliminary OK to a PA pipeline project. Elsewhere, a court of appeals in Texas tossed a dispute over mineral rights after the plaintiffs failed to join all stakeholders in the case before their deadline passed while courts in other states grapple with royalty and post-production cost sharing, bankruptcies and rejection under Section 365, and income tax deduction disputes involving the costs of seismic surveys and geophysical exploration. Here’s a roundup of the past several weeks:
The Rig Count
- The national rig count is flat at 463. (Source: BakerHughes).
- The rig count in the Marcellus is down at 22. (Source: BakerHughes).
- The rig count in the Utica is up at 13. (Source: BakerHughes).
- Natural gas spot prices at the Henry Hub are up at $2.80/MMBtu as of 7/29/2016. (Source: EIA).
- In the Marcellus and Utica region, spot prices are down as of 7/29/2016. At Dominion South in northwest Pennsylvania, spot prices are down at $1.36/MMBtu as of 7/29/2016. On Transco’s Leidy Line in northern Pennsylvania, spot prices are down at $1.25/MMBtu as of 7/29/2016. (Source: EIA).
- Oil prices are down at $42.46/bbl as of 7/29/2016. (Source: WSJ).
Developments in Appalachia
- PA Supremes Uphold a “Title Wash.” In a much-anticipated but narrowly applicable decision, the Supreme Court of Pennsylvania confirmed that a tax sale of “unseated” (i.e., unimproved) land after a previous reservation of an oil and gas estate, without any notice to the government of the severed oil and gas rights as required by an 1806 statute, worked to reunite the surface and the oil and gas estate such that a subsequent purchaser taking title after the tax sale owned the entire fee despite the prior reservation. Herder Spring Hunting Club v. Keller, — A.3d —-, No. 5 MAP 2015, 2016 WL 3909038, at *1 (Pa., July 19, 2016).
- PA Legislative Rollback of New DEP Oil and Gas Regs Dies in the Summer Heat. Amidst veto threats and the distractions of passing a state budget, the Pennsylvania Senate’s legislative proposal to loosen several new restrictions set by PADEP’s new oil and gas regs (S.B. 1229) died at the end of summer session without any vote from the House before the end of summer session.
- Commonwealth Court Dismisses Climate Change Lawsuit. The Commonwealth Court dismissed a complaint demanding that the Governor and various state agencies, including the PADEP and the PUC, have a mandatory duty to tackle climate change under the Environmental Rights Amendment to the Pennsylvania Constitution (Pa. Const. art. I, § 27), concluding that neither the constitution nor any statutes such as the state’s Air Pollution Control Act or the Climate Change Act impose a mandatory duty on the government to conduct studies, promulgate regulations, or issue executive orders addressing climate change in the ways the plaintiffs requested. Funk v. Wolf, — A.3d —-, No. 467 M.D. 2015, 2016 Pa. Commw. LEXIS 338 (Pa. Cmwlth., July 26, 2016).
- PA Federal Court Says Lessee on the Hook for Oil and Gas Lease Bonus. A federal judge in Pennsylvania granted summary judgment to a landowner demanding an unpaid bonus payment of $4,000 per acre under an oil and gas lease despite the lessee’s contention that the parties never had a deal or (alternatively) the order of payment gave the lessee an out pending title verification, concluding that the lessee owed the bonus payment because the lessors had good title and the lessee dishonored sight drafts for reasons unrelated to title. Masciantonio v. SWEPI LP, — F. Supp. 3d —-, No. 4:13-CV-797, 2016 WL 3856122 (M.D. Pa., July 15, 2016).
- Oil and Gas Lessees Dodge Implied Marketing Covenant Claims. In a series of decisions, a federal court in Ohio dismissed claims against a number of lessees alleging breaches of implied covenants under the parties’ oil and gas leases, concluding that the express terms of the oil and gas leased foreclosed any claims that the lessees breached the implied duty to market production in a reasonably diligent matter under Ohio law. Zehentbauer Family Land L.P. v. Chesapeake Exploration, LLC, — F. Supp. 3d —-, No. 4:15-CV-2449, 2016 WL 3903386 (N.D. Ohio, July 19, 2016); Zehentbauer Family Land L.P. v. Chesapeake Exploration, LLC, — F. Supp. 3d —-, No. 4:15-CV-2449, 2016WL 3903392 (N.D. Ohio, July 19, 2016).
- Sixth Circuit Upholds Multi-Million Award for Bad Faith Trespass in Kentucky Oil and Gas Lease Row. The Sixth Circuit upheld a $14 million award against EQT after it conducted operations on oil and gas leases that it previously transferred to Journey Acquisition, rejecting claims that the trial court improperly excluded evidence that EQT operated the properties in good faith (i.e., without knowledge that it was trespassing) and ordering that the trespass wells be transferred to Journey. Journey Acquisition-II, L.P. v. EQT Production Company, — F.3d —-, No. 15-5966, 2016 WL 3923882 (6th Cir., July 21, 2016).
- Prior WV Arbitration Award Precludes Private Nuisance Claim under Res Judicata. A federal court in West Virginia dismissed a private nuisance claim brought by non-lessors against a well operator, concluding that a prior arbitration between the lessor and the lessee involving the same property in which the non-lessors claimed interests precluded them from pursuing their nuisance action under principles of res judiciata. Dytko v. Chesapeake Appalachia, LLC,— F. Supp. 3d —-, No. 5:13CV150, 2016 WL 3983657 (N.D.W. Va., July 25, 2016).
- FERC OK’s NFG’s Pipeline Project in PA. FERC staff preliminarily approved a project sponsored by National Fuel Gas Supply Corp and others for the construction of a 100-mile pipeline from McKean County, PA to Erie County, PA stating in the draft environmental assessment that the pipeline project won’t have a significant effect on the quality of the environment.
Developments Beyond Appalachia
- Alabama Federal Court Denies Bid to Block Condemnation for Interstate Pipeline. A federal court in Alabama granted summary judgment in favor of Sabal Trail Transmission, LLC, and ok’d immediate possession of condemned property for a pipeline project despite the landowner’s claim that the pipeline operator didn’t negotiate in good faith, concluding that the pipeline operator had a valid certificate from FERC and was not required to prove good faith efforts to negotiate an easement by contract before condemning the property. Sabal Trail Transmission, LLC. v. 7.72 Acres in Lee Cty., — F. Supp. 3d —-, No. 3:16-CV-173-WKW, 2016 WL 3671419 (M.D. Ala., July 8, 2016).
- Oil Pipe Contamination Case stays in Federal Court for now under CAFA. A federal court in Louisianadenied a motion to remand a class action under the Class Action Fairness Act, concluding that the amount in controversy requirement for “mass actions” is satisfied if any plaintiff’s claim is worth $75,000 and rejecting both the “local single event” and the “local controversy” exceptions to CAFA jurisdiction. Robertson v. Chevron USA, Inc., — F. Supp. —, No. CV 15-874, 2016 WL 3667153, at *1 (E.D. La., July 11, 2016).
- TX Mineral Deed with Lease-Like Provisions Still Conveyed a Mineral Interest. An appellate court in Texas concluded that a deed with provisions regarding the exploration and production of the mineral estate and a “forever” habendum clause conveyed a one-half mineral interest and was not a mineral lease despite claims that the writing constituted an executory contract that required the grantee to perform services as part of the consideration for the transfer. Richardson v. Mills, — S.W.3d —-, No. 12-15-00170-CV, 2016 WL 3745535 (Tex. App., July 12, 2016).
- Securities Claims Based on Oil and Gas Agreements Sent to Arbitration. A federal judge in Illinois enforced an arbitration clause for any claims “arising under” the parties’ agreements given that the claims for violation of state and federal securities laws involved the parties’ JOA, drilling participation agreement, and oil and gas leases. Eastland Energy, LLC v. Sharpe Energy, LLC, — F. Supp. 3d —-, No. 15-CV-595-SMY-SCW, 2016 WL 3682620 (S.D. Ill., July 12, 2016).
- NM Federal Court Passes on Bid to Certify Royalty/Post-Production Cost Issue. A New Mexico federal court declined a lessor’s bid to certify issues about the parties’ obligations to share post-production costs, including certain state taxes and costs of transforming gas into a marketable condition, concluding that although there may be some question as to whether New Mexico is a “marketable condition” state (requiring lessees to bear the costs of turning gas into a marketable condition) it would be premature to certify the question. Ulibarri v. Southland Royalty Co., — F. Supp. 3d —-, No. CIV 16-00215 RB/WPL, 2016 WL 3946800 (D.N.M., July 20, 2016).
- Alabama Federal Court Moots Out Bankruptcy Appeal Involving Rejection of Oil and Gas Agreements in Bankruptcy. In the largest Chapter 11 bankruptcy in Alabama’s history, a federal judge held that an overriding royalty agreement and related trust agreements in connection with the exploration and production of oil and natural gas in the state constituted transfers of personal property interests under Alabama law under the “non-ownership” theory such that those leasehold interests are subject to rejection in bankruptcy under Section 365 as executory contracts but ultimately concluded that the sale of the debtor’s core assets rendered the question moot. Dominion Res. Black Warrior Trust v. Walter Energy, Inc., — F. Supp. 3d —-, No. 2:16-CV-00058-RDP, 2016 WL 3924227 (N.D. Ala., July 21, 2016).
- U.S. Tax Court Says Seismic Survey Expenses Incurred by Geophysical Exploration Companies are Tax Deductible under IRC. The United States Tax Court held that a geophysical exploration company that conducts seismic surveys and licenses the data to oil and gas production companies could deduct those expenses even though the seismic companies don’t own the oil and gas interests given that the companies incurred the expenses “in connection with the exploration for, or development of, oil or gas” under IRC § 167(h). CGG Americas, Inc. v. Commissioner of Internal Revenue, — F. Supp. —-, No. 25097-10., 2016 WL 3960834 (U.S.T.C., July 21, 2016).
- TX Court Throws Out Royalty Claims for Lack of Serving all Stakeholders in Leased Property. An appeals court in Texas tossed a long-standing dispute over mineral rights in 9,200 acres of property in Brooks County after the plaintiffs – claiming interests as heirs of the original owner of the property who reserved a one-half mineral interest in the 1800 – failed to serve all the absent interest holders within the time prescribed by the courts. Longoria v. Exxon Mobil Corporation, — S.W.3d —-, No. 04-15-00536-CV, 2016 WL 4013793 (Tex. App., July 27, 2016).At the Well Weekly – Oil and Gas Update for 7/29/2016 – PA Supremes Rule on “Title Washing” while TX Court Tosses Big-Time Dispute over Mineral Rights.