Oil prices remained essentially flat since our last report while the national rig count climbed another 15 units. Although the Henry Hub surpassed $3 again, spot prices in the Marcellus region have not fared as well, failing to rebound from the recent drop and struggling to surpass $1/MMBtu for the second straight week. In Appalachia, PADEP’s controversial “Chapter 78a” oil and gas regulations for unconventional development faced swift challenge from one of the state’s industry groups, while courts in Ohio and West Virginia grapple with oil and gas lease issues. Also, the Third Circuit declined a lessee’s bid to nix a fairly sizable jury verdict in favor of landowners who claimed that their lessee improperly deducted their share of post-production costs from royalty payments. Elsewhere, the Texas appellate courts stay busy deciding competing rights to royalty and other mineral interests. Here’s a roundup of recent developments:
The Rig Count
- The national rig count is up at 539. (Source: BakerHughes).
- The rig count in the Marcellus is up at 34. (Source: BakerHughes).
- The rig count in the Utica is flat at 15. (Source: BakerHughes).
- Natural gas spot prices at the Henry Hub are up at $3.14/MMBtu as of 10/21/2016. (Source: EIA).
- In the Marcellus and Utica region, spot prices are mixed as of 10/21/2016. At Dominion South in northwest Pennsylvania, spot prices are up at $0.97/MMBtu. On Transco’s Leidy Line in northern Pennsylvania, spot prices are down at $0.77/MMBtu. (Source: EIA).
- Oil prices are essentially flat at $ $51.46/bbl as of 10/21/2016. (Source: WSJ).
Developments in Appalachia
- MSC Challenges PA Oil and Gas Regs. The Marcellus Shale Coalition challenged PADEP’s new “Chapter 78a” oil and gas regulations for unconventional natural gas development in the Commonwealth just days after their effective date, calling out specific measures within the overhauled regs as unauthorized or unlawful and decrying PADEP’s grossly understated estimates of increased regulatory costs that flow from the new requirements. The MSC’s request for an order enjoining the regulations remains pending. A hearing on that request took place on October 25, 2016. The case is Marcellus Shale Coalition v. Commonwealth, Department of Environmental Protection, Docket No. 573 M.D. 2016.
- Third Circuit Denies Relief from PA Verdict on Royalties, Post-Production Costs. The Third Circuit Court of Appeals upheld a Pennsylvania jury’s verdict that a lessee improperly deducted post-production costs for transporting and marketing natural gas before paying royalties, holding that the jury had sufficient evidence to conclude that the lessee deducted post-production costs from royalty payments after it sold natural gas to its affiliate and that the lessee could not share those with the lessor because the lessee did not actually incur them. Pollock v. Energy Corporation of America, — F.3d —, Nos. 15-2648 and 15-2649, 2016 WL 6156313 (3d Cir., Oct. 24, 2016)
- PA Superior Court Says No Judicial Notice of Deed Provisions to Determine Oil and Gas Royalty Rights. The Superior Court of Pennsylvania sent back a dispute over the rights to certain oil and gas payments after the trial court improperly took judicial notice of a deed and its provisions, noting that although judicial notice of public records is appropriate in PA, the trial court didn’t entertain the estate’s request to challenge the judicially noticed facts. In re: Estate of Krasinski, — A.3d —, No. 1265 WDA 2015, 2016 WL 5844458 (Pa. Super., Oct. 5, 2016).
- WV Supreme Court Denies Request to Forfeit Oil and Gas Lease. The Supreme Court of Appeals of West Virginia declined to declare that a lessee forfeited its oil and gas lease for failure to pay royalties in full, reasoning that monetary relief could resolve the claims and that the lessor did not suffer material injury or irreparable harm despite the lessee’s willful and unreasonable delay in payment. Wilhelm v. Jay-Bee Production Co., — S.E.3d —, No. 15-0768, 2016 WL 5941934 (W. Va., Oct. 13, 2016).
- OH Court of Appeals Revives Bonus Payment Dispute. An Ohio appellate court revived a case brought by a seller of property against the buyer who didn’t honor a reservation of the seller’s right to certain lease bonus payments, holding that the seller alleged enough to state claims for fraud, breach of contractual good-faith obligations, and unjust enrichment and remanding the matter for discovery and trial. Kish v. Magyar, — N.E.3d —, No. 2015-A-0059, 2016 WL 6069061 (Ohio Ct. App., October 17, 2016).
- WV Federal Court Says ORRI Claim Survives Summary Judgment. A federal court in West Virginia denied an early bid by a production company to dismiss a claim to overriding royalties in a participation agreement that gave the ORRI holder an express right to participate in some leases but not others, holding that the production company’s motion was premature and the parties should finish discovery before filing cross-motions for relief based on the agreement. Decker v. Statoil USA Onshore Properties, Inc., — F. Supp. 3d —, No. 5:15CV114, 2016 WL 6078347 (N.D.W. Va., Oct. 17, 2016).
- WV Supremes Bless Consol’s Acquisition of Oil and Gas Wells. West Virginia’s high court rejected a late claim by Standard Oil to amend its complaint challenging Consol’s acquisition of various oil and gas wells in WV, concluding that the statute on the contract claim had run and it would be prejudicial to Consol if the court compelled the coal giant to defend a time-barred action. Standard Oil Co. v. Consolidation Coal Co. — S.E.3d —, No. 15-0655, 2016 WL 6078570, (W. Va. Oct. 17, 2016).
- PA Superior Court Reforms Deed to Include Reservation of Oil and Gas Rights. Relying on testimony that the seller of property meant to retain the oil, gas, and mineral rights forever and not for a period of years, the Superior Court of Pennsylvania concluded that the parties made a mutual mistake in reducing the conveyance to writing such that the trial court properly reformed a deed to reflect the parties’ actual agreement. George v. George, — A.3d —, No. 816 WDA 2015, 2016 WL 6090861 (Pa. Super., Oct. 18, 2016).
- Coal Lease is a Sale of Coal and Coalbed Methane in Place, PA Superior Court Confirms. The Pennsylvania Superior Court confirmed that a coal “lease” – despite its name – constitutes a sale of coal in place based on the language of the agreement such that the coal owner under the “lease” owns the coalbed methane based on longstanding Pennsylvania law. Birdie Associates L.P. v. CNX Gas Company, LLC, — A.3d —, No. 816 MDA 2015, 2016 WL 6090861 (Pa. Super., Oct. 20, 2016).
Developments Beyond Appalachia
- TX Appeals Court Denies Bid to Bust Oil and Gas Lease with Production-Unit/Continuous-Operations Habendum Clause. A Texas court of appeals denied a lease-busting bid brought by the owner of a reversionary interest in oil and gas, rejecting the claim that the habendum clause of a lease provided for automatic termination of individual production units as they ceased to produce, given that the lessee could maintain the lease by banking drilling credits or engaging in continuous operations if a unit stopped producing in the secondary term. Mayo Foundation v. Courson Oil & Gas, Inc., — S.W.3d —, No. 07-16-00022-CV, 2016 WL 5874962 (Tex. App., Oct. 7, 2016).
- Arkansas Federal Court Confirms Silica Lease with a Standard “Thereafter” Clause is not a Tenancy at Will. A federal court in Arkansas concluded that a lease for siliceous materials with a fixed primary term followed by a secondary term of indefinite duration (so long as the lessee continued mining or hauling on the leased premises) did not create an indefinite lease terminable at the will of the lessor. Roberts v. Unimin Corp., — F. Supp. 3d —, No. 1:15CV00071 JLH, 2016 WL 5920892 (E.D. Ark., Oct. 7, 2016).
- TX Appellate Court Confirms Deed Reserved a Fixed NPRI. In one of two “fixed vs. floating” royalty disputes addressed by the Texas courts over the past few weeks, one Texas appeals court concluded that a deed reserving “an undivided one-half (1/2) interest in and to” royalties coupled with a phrase that said “the same being equal to one-sixteenth (1/16) of the production” created a “fixed fractional” non-participating royalty interest equal to one-sixteenth (1/16) of production rather than a “fraction of” or “floating” royalty that would be based on the lessor’s reservation of royalties in a future lease. Laborde Properties, L.P. v. U.S. Shale Energy II, LLC, — S.W.3d —, No. 04-16-00168-CV, 2016 WL 5922404 (Tex. App., Oct. 12, 2016).
- TX Appellate Court Resolves Competing Claims to Oil and Gas Interests in Property Transferred by Quitclaim Deed. After outlining the differences between a deed and a quitclaim deed and the importance of the distinction for bona-fide purchaser status, a court of appeals in Texas concluded that a buyer who acquired an interest in property before the seller recorded a prior conveyance of that same property to another still couldn’t enjoy bona-fide purchaser status even though the buyer lacked notice of the earlier conveyance given that the buyer took title by quitclaim deed. Jackson v. Wildflower Prod. Co., Inc., — S.W.3d —, No. 07-15-00070-CV, 2016 WL 6024387 (Tex. App., Oct. 13, 2016).
- TX Appeals Court Says Property Owner Entitled to One-Half Floating Royalty Interest on Oil and Gas Production. In the second of two recent “fixed vs. floating” royalty disputes, a Texas court of appeals this time concluded that a deed conveying a 1/2 mineral interest that included a 1/2 royalty interest created a 1/2 floating royalty interest in any production on the land described in the deed based on the “legacy of the 1/8th royalty” and “estate misconception” doctrines. Greer v. Shook, — S.W.3d —, No. 08-15-00040-CV, 2016 WL 6092963 (Tex. App., Oct. 19, 2016).