Great Britain’s recent exit from the EU sent shockwaves through the global economy, but rig counts are up and the Henry Hub closed in on $3 before dropping off Friday. Oil prices haven’t fared quiet as well since our last report, dipping well below $50/bbl before a slight rebound to close out the week. In Appalachia, the royalty legislation dealing with post-production costs made its way back into the news; the unconventional half of Chapter 78 survived a bill that killed regulations targeting the conventional industry; and courts in West Virginia and Ohio grapple with various lease disputes. Elsewhere, the Obama Administration re-upped PHMSA while courts in other plays around the country have been busy dealing with various issues ranging from tax exemptions on production equipment to disputes over royalties. Here’s a roundup of the past several weeks:

The Rig Count

  • The national rig count is up to 431. (Source: BakerHughes).
  • The rig count in the Marcellus is flat at 23. (Source: BakerHughes).
  • The rig count in the Utica is flat at 12. (Source: BakerHughes).

Commodity Prices

  • Natural gas spot prices at the Henry Hub are down at $2.75/MMBtu as of 7/8/2016. (Source: EIA).
  • In the Marcellus and Utica region, spot prices are down as of 7/8/2016. At Dominion South in northwest Pennsylvania, spot prices are down at $1.55/MMBtu as of 7/8/2016. On Transco’s Leidy Line in northern Pennsylvania, spot prices are down at $1.46/MMBtu as of 7/8/2016. (Source: EIA).

Developments in Appalachia

  • Update on Chapter 78: Unconventional Oil & Gas Regs Survive; Conventional Regs are Dead. As noted in our previous report, the legislature passed a resolution disavowing new Chapters 78 and 78a regs targeting both conventional and unconventional oil and gas development in the Commonwealth after regulatory agencies approved both chapters for promulgation. Last week, in a compromise move, Governor Tom Wolf signed legislation that allows the unconventional oil and gas regulations to take effect but kills the conventional regs, telling Pennsylvania’s DEP to go back to the drawing board to develop new regulations for the conventional industry.
  • Update on PA Royalty Legislation: PA House Committee Votes 20-7 on HB 1391. The House Environmental Resources and Energy Committee in Pennsylvania voted 20-7 in favor of HB 1391, a long-standing legislative effort that would set the minimum royalty payable to a lessor under an oil and gas lease at one-eighth of “the total price received by the operator for the production in an arm’s-length transaction. No deductions of any costs shall result in a royalty payment less than the one-eighth” of that price. Under the “Minimum Royalty Act” as interpreted by the Pennsylvania Supreme Court, the parties to an oil and gas lease may share post-production costs (such as gathering, treatment, and transportation costs) as long as the landowner is guaranteed a royalty of at least one-eighth of the value of the gas at the well. Beyond that minimum, it’s a contract issue for the parties to determine whether and to what extent they will share those costs. Industry stakeholders have long derided the measure, particularly in light of its purported applicability to existing oil and gas leases, which cuts against the state constitutional prohibitions on legislation that impairs existing agreements. A copy of the bill in its current form can be accessed here.
  • WV Federal Court Ruins Royalty Conversion Claim for Landowner under “Gist of the Action” Doctrine. A federal court in West Virginia dismissed a claim by landowners that underpaid oil and gas royalties constituted a conversion of the plaintiffs’ interest, holding instead the royalty claim is based on the parties’ oil and gas lease and the tort claim of conversion is barred by the “gist of the action” doctrine that precludes recovery in tort for contract claims. Rogers v. Southwestern Energy Company, — F. Supp. 3d —-, No. 5:16-CV-54, 2016 WL 3248437 (N.D.W. Va., June 13, 2016).
  • WV Lawyer on the Hook for Damages after Missing DPU in the Chain of Title. The Supreme Court of West Virginia held that Rubin Resources could recover damages from a lawyer that missed a pooling declaration in the chain of title indicating that CNX held a lease on the property by production, finding that Rubin relied on clear title to drill and produce a well, had to spend money settling CNX’s claims against Rubin for producing on CNX’s leasehold, and lost about $246,000 in profits after Antero backed out of a deal to buy Rubin’s deep rights because of the title defect. Rubin Resources, Inc. v. Morris, — S.E.2d —-, No. 15-0122, 2016 WL 3248090 (W. Va., June 10, 2016).
  • Ohio Court of Appeals Tosses Time-Barred Oil and Gas Lease Claims. The Court of Appeals of Ohio dismissed a landowner’s action challenging a drilling and production unit formed more than two decades ago, concluding that the eight-year statute of limitations for certain oil and gas lease claims barred the case. Ricketts v. Everflow Eastern, Inc., — N.E.3d —-, No. 14 MA 0103, 2016 WL 3570833 (Ohio Ct. App., June 29, 2016).
  • Ohio Federal Court Green Lights Amended Contract Claims Alleging Bad Well Permits issued in Coal Regions. A federal court in Ohio blessed a request to amend contract claims against a well operator in Ohio after discovery revealed a possible violation of Ohio Rev. Code 1509.8 (dealing with well permits in coal areas) that resulted in a breach of the parties’ oil and gas and related agreements. Eclipse Resources – Ohio v. Madzia, — F. Supp. 3d —-, No. 15-177, 2016 WL 3597427 (N.D. Ohio, July 5, 2016).

Developments Beyond Appalachia

  • Obama Re-ups PHMSA until 2019. President Obama signed the “PIPES Act” in late June reauthorizing PHMSA until 2019 and imposing on that agency a number of responsibilities in the way of new safety measures for pipelines and underground gas storage facilities. A copy of the PIPES Act may be accessed here.
  • Wyoming Federal Court Grants States’ Bid to Bust BLM Frac Rule on Federal Lands. A federal court in Wyoming rejected the BLM’s bid to regulate hydraulic fracturing on federal and Indian lands based on its authority under various federal statutes like the Federal Land Policy and Management Act, the Mineral Leasing Act; the Indian Mineral Leasing Act; and the Indian Mineral Development Act, concluding that BLM like any other agency must have statutory authority to regulate anything and these statutes did not bestow upon BLM any regulatory authority over hydraulic fracturing and “[t]he BLM’s effort to do so through the Fracking Rule is in excess of its statutory authority and contrary to law.” State of Wyoming v. United States Department of the Interior, — F. Supp. 3d —-, Nos. 2:15-CV-043-SWS, 2:15-CV-041-SWS (D. Wyo., June 21, 2016).
  • TX High Court Denies Tax Exemption for Oil & Gas Equipment. The Texas Supreme Court held that state law did not exempt casing, tubing, and pumps associated with the taxpayer’s oil and gas production operations from taxation, concluding that the actual physical application of materials and labor were neither necessary to nor changed the physical makeup of hydrocarbons extracted from the ground and therefore the taxpayer “did not prove that the equipment for which it sought a tax exemption was used in ‘actual manufacturing, processing, or fabricating’ of hydrocarbons within the meaning of Tax Code section 151.318(2), (5), or (10).” Southwest Royalties, Inc. v. Hegar, — S.W.3d —-, No. 14-0743 (Tex., June 17, 2016).
  • Georgia Federal Court OK’s Condemnation for Interstate Pipeline through Alabama, Georgia, and Florida. A federal court in Georgia denied a bid to block condemnation efforts by a FERC-regulated pipeline seeking easements for its interstate line that’ll traverse three states in the southern U.S., concluding that the pipeline operator has a FERC certificate that authorizes condemnation power under the Natural Gas Act, the condemned easements are necessary for the pipeline project, and the parties could not otherwise reach easement agreements by contract. Sabal Trail Transmission, LLC v. Real Estate, — F. Supp. 3d —-, No. 4:16-CV-102, 2016 WL 3248367 (M.D. Ga., June 10, 2016).
  • Texas Supremes Send Back Trade Secret Spat for New Trial Following Faulty Multi-Million Jury Verdict. The Supreme Court of Texas vacated a jury verdict upwards of $11 million against Southwestern in a trade-secret battle claiming SWN breached agreements with two researchers that gave SWN access to drilling data so the company could decide whether to partner up but then decided to drill on its own, concluding that although the record showed evidence of actual damages sustained by the researchers, the jury’s verdict lacked sufficient evidence based on comparable agreements with third parties that the researchers would be compensated in an amount matching the jury’s award. Southwestern Energy Prod. Co. v. Berry-Helfand, — S.W.3d —-, No. 13-0986, 2016 WL 3212999 (Tex., June 10, 2016).
  • Tex. Appeals Court Sends Back Dispute over Offset Well Obligations. In a dispute involving the meaning of an “offset well” as used in an oil and gas lease, the Texas Court of Appeals vacated a summary judgment against a landowner and remanded a case for trial after concluding that the commonly understood meaning of an “offset well” is one to protect against drainage and finding that the production company did not establish conclusively that the offset well at issue actually protected the plaintiffs’ property from drainage. Adams v. Murphy Expl. & Prod. Co.-USA, No. 04-15-00118-CV, 2016 WL 3342353 (Tex. App., June 15, 2016).
  • Oklahoma Supremes Confirm RAP Applies to an AMI that Conveys Future Right of Participation in Oil and Gas Wells. The Oklahoma Supreme Court decided that its constitutional rule against perpetuities may apply when a party enters into an area of mutual interest agreement that grants the other party the right to participate in all future wells on unleased property but that an LLC is not a “life in being” for purposes of the rule. Am. Nat. Res., LLC v. Eagle Rock Energy Partners, L.P., — P.3d —-, 2016 WL 3361757 (Okla., June 20, 2016).
  • Lessee Dodges Class Action in Kansas Oil and Gas Royalty Dispute over Gas in Marketable Condition. A federal court in Kansas de-certified a class action alleging that the lessee failed to pay royalties on marketable gas as required by the state’s “marketable condition” rule (requiring operators to make gas marketable at their own expense without deducting those costs from royalty payments), concluding that the question of whether lessee’s gas is in a “marketable condition” isn’t common to all members of the class because gas can be in a marketable condition at the well or at various places downstream of the well. Roderick Revocable Living Trust v. OXY USA, Inc., — F. Supp. 3d —-, No. 12-1215-EFM-GEB, 2016 WL 3423133 (D. Kan., June 22, 2016).
  • Mass. Court Says Longstanding Gas Pipeline Encroached on Easement. An appellate court in Massachusetts held that pipeline operator interfered with a plaintiff’s easement over a street when it constructed its pipeline decades ago and rejected claims that the plaintiff’s claims were late or that the easement had been extinguished. Melrose Fish & Game Club, Inc. v. Tennessee Gas Pipeline Company, LLC, — N.E.3d —-, No. 14-P-1762, 2015 WL 11023788 (Mass. Ct. App., June 20, 2016).
  • Utah High Court Weighs in on Expectation Damages for Oil & Gas Lease Breaches. In a case lateraled from the Tenth Circuit to figure out how to calculate various categories of damages when parties breach their oil and gas leases, the Utah Supreme Court concluded that (1) expectation damages for the breach of an oil and gas lease should be measured the same way as expectation damages for any other contract and may include general and consequential damages; (2) general damages should be measured based on the difference between the contract price of the lease and the market value of the lease at the time of the breach; (3) consequential damages are those reasonably foreseeable damages the parties contemplated at the time of the contract that include the value or loss of performance vs. non-performance. Trans-Western Petroleum, Inc. v. United States Gypsum Co., — P.3d —-, No. 20140453, 2016 WL 3369544 (Utah, June 16, 2016).
  • Fact Issue Forecloses Summary Judgment in Favor of Landowner in TX Lease Busting Bid. The Texas Court of Appeals held that a trial court improperly granted summary judgment in favor of a landowner in a lease expiration case alleging a break in production for more than 90 days pursuant to a cessation-of-production clause, concluding that fact issues about how long the cessation of production lasted precluded summary judgment in the landowner’s favor. Brammer Petroleum, Inc. v. Bagley Minerals, L.P., — S.W.3d —-, No. 06-15-00091-CV, 2016 WL 3212496 (Tex. App., June 8, 2016).
  • Statute of Frauds Requires a Better Map, TX Court Rules. A court of appeals in Texas concluded that the statute of frauds barred an agreement in which the parties exchanged an override for landman services, citing problems with the map attached to the ORRI agreement that didn’t identify with reasonable certainty the area covered by the parties’ deal. Hardwick v. Smith Energy Company, — S.W.3d —-, No. 15-0083, 2016 WL 3557273 (Tex. Ct. App., June 27, 2016).