Since our last report, New York real estate mogul Donald J. Trump became the President-Elect of the United States despite polls that long predicted Democratic nominee Hillary Clinton would win the election handily. In the wake of Trump’s election, oil prices dipped slightly (although not directly attributed to the election) while natural gas spot prices and rig counts held firm. In other news, courts in Appalachia remained relatively quiet while a Kansas federal court issued a pair of interesting decisions highlighting the differences between the text of royalty provisions as they relate to royalties and post-production costs versus a default “marketable condition” rule that sometimes doesn’t jive with the parties’ oil and gas leases. Here’s the week in review along with a quick note on what a Trump Administration might mean for domestic oil and gas development:
The Rig Count
- The national rig count is down at 568. (Source: BakerHughes).
- The rig count in the Marcellus is down at 35. (Source: BakerHughes).
- The rig count in the Utica is up at 16. (Source: BakerHughes).
- The Henry Hub natural gas spot price is down at $2.22/MMBtu as of 11/11/2016. (Source: EIA).
- In the Marcellus and Utica region, spot prices are up as of 11/11/2016. At Dominion South in northwest Pennsylvania, spot prices are up at $1.79/MMBtu. On Transco’s Leidy Line in northern Pennsylvania, spot prices are up at $1.71/MMBtu. (Source: EIA).
- Oil prices are down at $ $45.67/bbl as of 11/11/2016. (Source: WSJ).
Developments in Appalachia
- PA Federal Judge Sends Dispute Over Oil and Gas Rights Back to State Court. A federal court in Pennsylvania granted a landowner’s bid to remand a dispute over oil and gas rights despite claims that the plaintiffs fraudulently joined several Pennsylvania residents as defendants in order to circumvent federal diversity jurisdiction, concluding instead that the plaintiffs are seeking a declaratory judgment that they solely own the oil, gas, and mineral rights at issue and that the defendants they joined had potential interests in those rights such that their joinder could not be deemed fraudulent. DeCristo Land v. Anadarko E&P Onshore, LLC, — F. Supp. 3d —, No. 4:16-CV-1731, 2016 WL 6563680 (M.D. Pa., Nov. 4, 2016).
- Federal Judge in Tennessee Says Working Interests Reverted to the Lessor After Yearlong Break in Production. Citing a statutory habendum clause that governs the duration of oil and gas leases and reversionary rights, a federal court in Tennessee concluded that a lease expired and the working interests reverted to a landowner after a yearlong break in production on a unit that included the leased premises and rejected the lessee’s claim that the parties’ unit agreement trumped the operation of the deadlines in the statute. Lick Branch Unit, LLC v. Reed, — F. Supp. 3d —, No. 3:13-CV-203, 2016 WL 6539136 (E.D. Tenn., Nov. 3, 2016).
- Kentucky Appellate Court Cuts Off Father’s Free Gas at Son’s Request. The Court of Appeals in Kentucky concluded that a father had no more rights to free gas from a well on property he previously owned that continued to produce after the well operator went out of business and held instead that the son – who had acquired the property in question from his father – could cut off the gas rights now that the well operator went out of business and abandoned the lease. Wagner v. Wagner, — S.W.3d —, No. 2015-CA-000429-MR, 2016 WL 6543624 (Ky. Ct. App., Nov. 4, 2016).
- WV Supremes Uphold Surface Use Agreement. In a dispute over surface rights, the Supreme Court of Appeals of West Virginia concluded that a well operator maintained a surface use agreement that contained a habendum clause much like an oil and gas lease’s by engaging in continuous oil and gas “development and transmission” on the property in question and further held that the operator was within its rights under that agreement to reasonably use the property for related oil and gas activities such as storing water in a frac-pit for onsite or offsite operations, parking vehicles on the property, storing chemicals, and constructing temporary lighting and a temporary buildings. Johnson Family Trust v. Antero Resources Corporation, — S.E.3d —, 16-0070, 2016 WL 6651593 (W. Va., Nov. 10, 2016).
Developments Beyond Appalachia
- Louisiana Appellate Court Says Seller Couldn’t Reserve – and Buyer Couldn’t Convey Back – Mineral Rights Subject to Mineral Servitude. A court of appeals in Louisiana concluded that a seller of property could not reserve mineral rights burdened by a mineral servitude without violating public policy, nor could the buyer agree to convey back those mineral rights in a separate document executed the same day as the land sale agreement, reasoning that the seller could not reserve mineral rights it did not own at the time of the sale and the buyer of the property had no rights to the minerals due to the preexisting mineral servitude that burdened the estate. Sterling Timber Associates, L.L.C. v. Union Gas Operating Co., — So.3d —, 2016-433, 2016 WL 6493272 (La. App., November 2, 2016).
- In a Pair of Decisions, Kansas Federal Court Denies Claims for Breach of the “Marketable Condition” Rule. Invoking the Kansas Supreme Court’s recent decision in Fawcett v. Oil Producers, Inc. of Kansas, 352 P.3d 1032 (Kan. 2015), that outlines Kansas’ “marketable condition” rule for royalty calculations and post-production cost sharing, a federal court in Kansas denied claims made by class plaintiffs that their lessee short-changed them on royalty payments by selling gas “at the well” and paying royalties based on proceeds received from those sales (including proceeds that reflected downstream deductions by third-party buyers for treatment and marketing), reasoning that the lessee satisfied the “marketable condition” rule when it sold the gas in an acceptable raw condition at the wellhead to its third-party buyer pursuant to good-faith gas purchase agreements. Thelma Jean Lambert Living Trust v. Chevron U.S.A., Inc., — F. Supp. 3d —, No. 14-1220-JAR-TJJ, 2016 WL 6610898 (D. Kan., Nov. 9, 2016); Roco, Inc. v. EOG Res., Inc., — F. Supp. 3d —, No. 14-1065-JAR-TJJ, 2016 WL 6610896 (D. Kan., Nov. 9, 2016).
- A Quick Take on Oil and Gas Development in a Trump Administration. Now that we know who the next president will be, look for 3 things you’ll probably see from a Trump Administration:
1. Stronger Support for the Industry. It’s no surprise that President-Elect Trump is a proponent of oil and natural gas development based on points he emphasized during the campaign. The President Elect has signaled his support for domestic on-shore and off-shore development of federally controlled oil and natural gas reserves, proclaimed his support for projects like the Keystone Pipeline, and vocally opposed the Obama Administration’s Clean Power Plan, including portions of the plan that target the oil and gas industry.
2. An Industry-Centric Focus. If implemented, Trump’s “America First Energy Plan” would shift from the current Administration’s focus on the “climate-change” aspects of energy development to an industry-centric approach reportedly designed to (a) foster development of shale-gas resources plays; (b) reduce U.S. dependence on foreign oil; (c) open U.S. oil and gas reserves to more development by removing moratoria; and (d) roll back restrictions on on-shore and off-shore federal leases. Members of the environmental community have already expressed their concerns about Trump’s probable shift away from the climate change concerns and clean energy initiatives of the outgoing Administration.
3. A More Limited Federal Regulatory Role. A Trump Administration probably means a much more limited role for the federal government in the day-to-day regulation of oil and gas developers than the outgoing Administration has envisioned, and he will likely defer more to the states to regulate exploration and production activities within their borders.