Since our last report, natural gas spot prices dropped across the board alongside a dip in the rig count and oil prices, signaling an up-and-down start to the year despite optimism for industry growth. In Pennsylvania, the Commonwealth Court said the Pennsylvania Department of Environmental Protection can’t use a “continuing violation” theory to impose a seven-figure penalty on a well operator following a discharge to groundwater from a frac impoundment. Elsewhere in Appalachia, a West Virginia federal judge granted a request to certify a class of royalty owners in a dispute over fixed deductions from royalty payments while an appellate court in Ohio evaluated evidence to establish production “in paying quantities.” In other cases, a federal judge in Texas certified a class of royalty owners alleging breach of implied marketing duties in a dispute over improper charges for gas processing fees while the Federal Court of Claims ordered that the government owes oil companies a whopping $100 million for remediating sites that involved the production of military aviation gas during World War II. Here’s your week in review:

The Rig Count

  • The national rig count is down at 659. (Source: BakerHughes).
  • The rig count in the Marcellus is down at 39. (Source: BakerHughes).
  • The rig count in the Utica is down at 20. (Source: BakerHughes).

Commodity Prices

  • The Henry Hub natural gas spot price is down at $3.28/MMBtu as of 1/13/2017. (Source: EIA).
  • In the Marcellus and Utica region, spot prices are down as of 1/13/2017. At Dominion South in northwest Pennsylvania, spot prices are down at $2.81/MMBtu. On Transco’s Leidy Line in northern Pennsylvania, spot prices are down at $2.69/MMBtu. (Source: EIA).
  • Oil prices are down at $55.44/bbl as of 1/13/2017. (Source: WSJ).

Developments in Appalachia

  • PA Commonwealth Court Rejects PADEP’s $1.2 Million Penalty Calculation. The Commonwealth Court of Pennsylvania denied PADEP’s attempt to calculate a seven-figure penalty against a well operator for a leaky frac water impoundment, rejecting the agency’s claim that a new violation occurred every day pollutants remained in groundwater following the initial (and only) discharge and holding that a provision of the state’s Clean Streams Law “is a provision that prohibits acts or omissions resulting in the initial active discharge or entry of industrial waste into waters of the Commonwealth and is not a provision that authorizes the imposition of ongoing penalties for the continuing presence of an industrial waste in a waterway of the Commonwealth following its initial entry into the waterways of the Commonwealth.” EQT Production Company v. Department of Environmental Protection of the Commonwealth of Pennsylvania, — A.3d —, No. 485 M.D. 2014 (Pa. Cmwlth., January 11, 2017).
  • WV Federal Court Grants Royalty Owners’ Class Certification Request in Dispute Challenging Deduction of Fixed Amount for Post-Production Costs. A federal judge in West Virginia certified a class of royalty owners with leases that authorize the deduction of a fixed amount ($1.20/MMBtu) from royalty payments. The class members claim that flat-rate royalties are illegal in West Virginia despite the parties’ agreement that the fixed amount represented “actual and reasonable” post-production costs. Kinney v. CNX Gas Co. LLC, — F. Supp. 3d —, No. 5:15-CV-160 (N.D. W. Va., January 6, 2017).
  • Ohio Court OK’s Evidence of “Paying Quantities” to Prevent Lease Busting Attempt. A court of appeals in Ohio concluded that a well operator established production in “paying quantities” sufficient to keep a lease alive despite a lack of any production reports on file with Ohio’s regulators, reasoning that the landowner failed to rebut evidence that at least one well on the leased premises generated revenues from sales to third parties. Potts v. Unglaciated Industries, — N.E.3d —, No. 15 MO 0003, 2016-Ohio-8559 (Ohio Ct. App., December 30, 2016).

Developments Beyond Appalachia

  • Federal Judge in Texas Certifies Class of Royalty Owners Alleging Breach of Implied Marketing Duties. A federal judge in Texas certified a class of royalty owners alleging that their lessee breached the implied covenant to market production based on claims that the lessee marketed gas to its affiliate for 82.5% of its value (after accounting for gas production costs from the Bridgeport Gas Processing Plant) and for failing to then recoup profits from subsequent sales by the affiliate. Seeligson v. Devon Energy Prod. Co., L.P., — F. Supp. 3d —, No. 3:16-CV-00082-K, 2017 WL 68013, at *1 (N.D. Tex., Jan. 6, 2017).
  • Court Orders Federal Government to Reimburse Oil Companies $100 Million for Costs Associated with Cleaning Up Contaminated WWII-Era Aviation Gas Production Sites. The Court of Federal Claims awarded nearly $100 million in contract damages to several major oil companies engaged by the federal government during WWII to produce aviation gas, holding that the feds promised to pay any charges the companies incurred “by reason of” these aviation gas production contracts, which the court said including CERCLA costs incurred to clean up acid waste disposed at the production sites. Shell Oil Company v. United States, — F. Supp. 3d —, No. 06-141 C, 2017 WL 75856 (Fed. Cl., Jan. 6, 2017).