Natural gas spot prices in the Marcellus thankfully rebounded amidst steadily rising rig counts while the Henry Hub and oil prices dipped significantly since our last report. In Appalachia, the Ohio Supreme Court declined to choose one default rule of royalty clause interpretation versus another, while the Pennsylvania Superior Court issued a series of decisions on disputes over oil and gas rights. In other news, the EPA published control techniques to limit VOC emissions in the oil and gas industry. Here’s a roundup of recent developments:

The Rig Count

  • The national rig count is up at 569. (Source: BakerHughes).
  • The rig count in the Marcellus is up at 36. (Source: BakerHughes).
  • The rig count in the Utica is flat at 15. (Source: BakerHughes).

Commodity Prices

  • The Henry Hub natural gas spot price is down at $2.27/MMBtu as of 11/4/2016. (Source: EIA).
  • In the Marcellus and Utica region, spot prices are up as of 11/4/2016. At Dominion South in northwest Pennsylvania, spot prices are up at $1.61/MMBtu. On Transco’s Leidy Line in northern Pennsylvania, spot prices are up at $1.55/MMBtu. (Source: EIA).
  • Oil prices are down at $ $45.58/bbl as of 11/4/2016. (Source: WSJ).

Developments in Appalachia

  • PA Superior Court Confirms Proper Reservation of Oil and Gas Rights Following Prior Tax Sale that Merged Surface and Subsurface Estates. The Superior Court of Pennsylvania concluded that a 1925 deed “excepting and reserving” oil and gas rights “as fully as” the grantor reserved them in a prior 1893 deed that preceded a tax sale merging the surface and subsurface estates based on the principles in Herder Spring Hunting Club v. Keller, — A.3d —-, No. 5 MAP 2015, 2016 WL 3909038 (Pa., July 19, 2016) properly reserved those rights based on the deed’s plain language even though a prior tax sale merged those interests . Black Wolf Rod & Gun Club, Inc. v. International Development Corp., — A.3d —, No. 1972 MDA 2015, 2016 WL 6212981 (Pa. Super., Oct. 25, 2016).
  • Res Judicata Kills Claim for Bonus Payment, PA Superior Court Holds. The Pennsylvania Superior Court affirmed an order dismissing a complaint alleging that lessees failed to pay their lessors a proper bonus, concluding that res judicata barred the new lawsuit because the lessors first filed a lawsuit that the trial court dismissed and, more than a year later, filed essentially the same lawsuit against the same parties in the same court raising the same legal theories they could have (but didn’t) raise in the prior action. Stull v. Armstrong Gas Company, LLC, — A.3d —, No. 1952 WDA 2015, 2016 WL 6198101 (Pa. Super., Oct. 24, 2016).
  • PA Commonwealth Court Affirms Dismissal of Water Well Contamination Dispute. Despite some harsh words for an oil and gas well operator in Appalachia, the Commonwealth Court of Pennsylvania affirmed an order of the PA Environmental Hearing Board rejecting landowner claims that oil and gas operations contaminated a private water supply, concluding that the landowners failed to meet their burden and failed to rebut evidence demonstrating no meaningful connection between the well operations and the naturally occurring elements in their private water supply. Kiskadden v. Pennsylvania Department of Environmental Protection, — A.3d —, No. 1167 C.D. 2015 (Pa. Cmwlth., October 26, 2016).
  • Workers’ Comp Tort Immunity Bars Negligence Action Brought by Drilling Contractor’s Employee Against Oil and Gas Well Operator. The Pennsylvania Superior Court concluded that the PA Workers’ Compensation Act barred a negligence action brought by the estate of a rig worker who died following a blowout event, concluding that the well operator qualified as a statutory employer of its drilling contractor’s employee whose estate received workers’ compensation benefits for the fatal injury and reasoning that the statute defines an employer as including a well operator that contracts for “the removal, excavation, or drilling of soil, rock, or minerals.” Doman v. Atlas Am., Inc., — A.3d —, No. 153 WDA 2016, 2016 WL 6277364 (Pa. Super., Oct. 27, 2016).
  • WV Supremes Say Reservation of the “Oil and Gas” in a Deed Didn’t Reserve the Coalbed Methane. The West Virginia Supreme Court concluded that a reservation of “oil and gas” did not include a reservation of coalbed methane, reasoning that the general consensus at the time of the conveyance was that CBM was hazardous and a nuisance such that the parties could not have intended that “gas” included the CBM. Poulos v. LBR Holdings, LLC, — S.W.3d —, No. 15-0907, 2016 WL 6407490 (W. Va., Oct. 26, 2016).
  • Ohio Supremes Punt on “At the Well” vs. “Marketable Product” Decision. In a much anticipated decision, the Ohio Supreme Court declined to decide whether the state follows the “at the well” rule of royalty clause interpretation (which says that royalties payable “at the well” means the lessor gets a wellhead royalty and shares all downstream post-production costs) or the “marketable product” rule of interpretation (which says that the lessee bears all costs incurred past the point of production at the well that are necessarily incurred to make the product “marketable”), holding instead that the parties’ oil and gas lease determines how royalties should be paid. Two justices authored dissents. Justice O’Neill endorsed the traditional “at the well” rule, opining that royalties payable “at the well” means royalties are payable on gross proceeds minus post-production costs and rejecting the “marketable product” rule because the implied covenant to market doesn’t always exist and shouldn’t form the basis for dictating how royalties should be calculated given that the lessor may receive the benefit of a bargain the parties didn’t contemplate. Justice Pfeifer endorsed the “marketable product” rule, meaning that the lessee should bear the burden of downstream expenses that are necessary to market oil or gas, reasoning that there is no market at the wellhead and the lessees are drafters of the lease in most circumstances that can control (and allegedly manipulate) those post-production costs before paying royalties. Lutz v. Chesapeake Appalachia, L.L.C., — N.E.3d —, No.2015-0545, 2016 WL 6519011 (Ohio, Nov. 2, 2016).

Developments Beyond Appalachia

  • EPA Publishes Final Control Techniques for Oil and Gas Industry VOC Emissions. The EPA published final emission control guidelines for the oil and gas industry to limit VOC emissions in non-attainment and other regions with elevated ozone concentrations, including hotbeds for oil and gas production like Texas and Pennsylvania. A copy of the 300+ page final guidelines may be viewed here.
  • OK Supremes Say Deed Filing Date Triggers Statute of Limitations for Claim to Oil and Gas Rights. The Supreme Court of Oklahoma rejected a landowner’s claim that he intended to reserve oil and gas rights some 14 years ago, holding that he was on notice that the deed did not contain any reservation of mineral interests based on the record; rejecting the argument that the statute of limitations should start to run when he actually learned that he failed to reserve the oil and gas rights long ago; and reasoning that “[i]f this were not the case, real property transactions across the state could be set aside at almost any time which could leave all real property transactions unsettled indefinitely.” Scott v. Peters, — P.3d —, No. 114,913, 2016 WL 6216169 (Okla., October 25, 2016).
  • TX Bankruptcy Court Abstains from Ruling on Debtor’s $1.5 Million Claim Against Oilfield Services Company. A bankruptcy court in Texas concluded that it lacked jurisdiction over a debtor’s state-law claim to recover a $1.5 million debt owed by an oilfield services company for products it purchased from the debtor, concluding that the state-law claims are sufficiently unrelated to the bankruptcy and could be adjudicated in state court such that the mandatory abstention doctrine applied to preclude a ruling in the bankruptcy proceedings until the state court resolved the dispute. In re: Petroleum Products & Services, Inc. v. McClinton Energy Group, LLC, — B.R. —, No. 16-31201, 2016 WL 6246819 (Bankr. S.D. Tex. Oct. 25, 2016).
  • TX Appellate Court Upholds $3 Million Mineral Lien Against Oil and Gas Well Operator. A court of appeals in Texas affirmed a cumulative $3 million judgment obtained by an oilfield services company after it perfected a lien on a mineral lease held by a well operator, concluding that the parties’ master service agreement and related agreements constituted one contract and the TX mineral lien statute did not limit the operator’s liability for the cumulative amount owed on the parties’ integrated agreement. Shell Wester E&P, Inc. v. Pel-State Bulk Plant, LLC, — S.W.3d —, No. 04-15-00750-CV, 2016 WL 6247007 (Tex. App., Oct. 26, 2016).
  • TX Supremes Say Option Contract Excluded 400-Acre Tract from Oil and Gas Lease. The Supreme Court of Texas concluded that an option contract giving a lessee the right to lease more than a thousand acres of land did not include a right to lease a 400-acre portion of the premises described in the related lease agreement, reasoning that the related oil and gas lease gave the lessee the right to develop the acreage described in the granting clause “save and except” the disputed 400 acres and rejecting the production company’s claim that it nevertheless had a right to choose which acreage it could develop under the option agreement. North Shore Energy, L.L.C. v. Harkins, — S.W.3d —, No. 14-0552, 2016 WL 6311285 (Tex., Oct. 28, 2016).