Shale Energy Law Blog

Late last week, a South Carolina district court reinstated the Obama administration’s 2015 Clean Water Rule (referring to it as “the 2015 WOTUS rule”) in 26 states, including Pennsylvania, Ohio, New York, Maryland, New Jersey and the New England states.  The decision overturns a move by the Trump administration earlier this year to delay the applicability date of the 2015 WOTUS rule until early 2020 and brings the Rule’s definition of “waters of the United States” (WOTUS) into effect in these states, at least for the time being.  Unless the South Carolina decision is overturned or invalidated, the reinstatement of the 2015 definition of WOTUS could have significant Clean Water Act (CWA) permitting, compliance and enforcement implications for regulated entities in these 26 states, given that the 2015 definition of WOTUS is widely regarded by industry as unreasonably expanding the types of waterbodies under U.S. EPA and U. S Army Corps of Engineers’ jurisdiction. Please read more about the decision in this Alert.

Babst Calland today released its annual energy industry report: The 2018 Babst Calland Report – Appalachian Basin Oil & Gas Industry: Forging Ahead Despite Obstacles; Legal and Regulatory Perspective for Producers and Midstream Operators.  This annual review of shale gas development activity in the Appalachian Basin acknowledges an ongoing rebound despite obstacles presented by regulatory agencies, the courts, activists, and the market. To request a copy of the Report, contact info@babstcalland.com. In this Report, Babst Calland attorneys provide perspective on issues, challenges, opportunities and recent developments in the Appalachian Basin and beyond relevant to producers and operators. According to the U.S. Energy Information Administration’s May 2018 report, the Appalachian Marcellus and Utica shale plays account for more than 40 percent of U.S. natural gas output, compared to only three percent a decade ago. Since then, the Appalachian Basin has become recognized in the U.S. and around the world as a major source of natural gas and natural gas liquids. The industry has been forging ahead amidst relatively low natural gas prices, infrastructure building, acreage rationalization and drilling plans that align with business expectations. The policy landscape continues to evolve with ever-changing federal and state environmental and safety regulations and tax structures along with a patchwork of local government requirements across the multi-state region. Joseph K. Reinhart, shareholder and co-chair of Babst Calland’s Energy and Natural Resources Group, said, “This Report provides perspective on the challenges and opportunities of a shale gas industry in the Appalachian Basin that continues to enjoy a modest rebound. While more business-friendly policies and procedures are emanating from Washington, D.C., threats of trade wars are raising concerns about the U.S. energy industry’s ability to fully capitalize on planned exports to foreign markets.” To read more: click here.

On June 7, 2018, Pennsylvania Governor Tom Wolf and Department of Environmental Protection (DEP) Secretary Patrick McDonnell announced the final issuance of air permitting documents affecting oil and gas operations in the Commonwealth.  DEP shortly thereafter released a suite of new materials to mark the latest step forward in implementing Governor Wolf’s Methane Reduction Strategy.  The new permitting documents are controversial in so far as they represent a significant departure from the status quo, requiring operators to take a fresh look at when and where an air permit may be needed. Please read more about these program changes in this alert.

A federal district court in Ohio recently upheld the constitutionality of Ohio’s forced pooling statute (R.C. § 1509.28) in Kerns v. Chesapeake Exploration, LLC, et al., N.D. Ohio No. 5:18 CV 389 (June 13, 2018). R.C. § 1509.28 establishes the procedure for owners to combine contiguous acreage and interests to efficiently and effectively develop the oil and gas resources underlying that land. Additionally, the statute grants the chief of the division of oil and gas resources management the authority to compel landowners unwilling to lease their land to join in drilling operations. The constitutional challenge in Kerns involved the same group of landowners whose writ of mandamus was rejected by the Ohio Supreme Court in January. Following their unsuccessful challenge at the Ohio Supreme Court, the landowners alleged that R.C. § 1509.28 violated their constitutional rights under the Fifth and Fourteenth Amendments by authorizing an impermissible taking of their property. In rejecting the constitutional challenge, the federal district court relied on previous decisions from the United States Supreme Court holding that the statute was a legitimate exercise of Ohio’s police powers to protect correlative rights and reduce waste. In deeming R.C. § 1509.28 constitutional, Ohio courts join the well-settled national consensus that unitization procedures do not constitute an impermissible taking of property.

In Gorsline, Court Declines to Rule on Broader Issue of Compatibility With Uses in Residential and Agricultural Zoning Districts, but Suggests that Municipalities May Permit Unconventional Natural Gas Drilling in any and all Zoning Districts The Pennsylvania Supreme Court published its long-awaited opinion in Gorsline v. Board of Supervisors of Fairfield Township on June 1, 2018.  Although the majority reversed the Commonwealth Court’s decision affirming the granting of a conditional use for an unconventional natural gas well pad, it did so in a narrow holding, finding that Inflection Energy, LLC (Inflection) did not present enough evidence before the Fairfield Township (Township) Board of Supervisors (Board) establishing that its proposed unconventional gas well pad was similar to other uses allowed in the Township’s  Residential-Agricultural Zoning District (R-A District).  Unlike most zoning ordinances, the Township’s zoning ordinance did not specifically authorize oil and gas wells.  Instead, Inflection had relied upon a “savings clause,” which allowed uses “similar to” the other uses specifically allowed in the R-A District. Despite headlines and press releases touting the Gorsline decision as a wholesale rejection of oil and gas development in residential and agricultural zoning districts, its ruling was much more limited.  In fact, language in both the Gorsline majority and dissenting opinions largely rejects the post-Robinson Township assertion of many shale gas opponents that natural gas wells must be relegated to industrial zoning districts and are fundamentally incompatible with residential or agricultural zoning districts. Please read more about the decision in this alert.

On May 25, 2018, in In re: Sabine Oil & Gas Corporation, 2018 WL 2386902 (2d. Cir. May 25, 2018), the United States Court of Appeals for the Second Circuit affirmed that a bankrupt energy and production company could reject its gas gathering agreements with a midstream company under Section 365 of the Bankruptcy Code because the gas gathering agreements did not create or involve an interest in real property.  Please read more about the decision in this alert.

On April 12, 2018, the Fourth Circuit Court of Appeals became the second federal appellate court to recognize the so-called groundwater “conduit theory” of liability under the Clean Water Act. The decision in Upstate Forever v. Kinder Morgan Energy Partners, L.P., No. 17-1640, has broad implications for many industries. Please read more about the decision in this alert.

Governor Jim Justice signed Senate Bill 360 relating to payment of royalties pursuant to flat-rate oil and gas leases on Friday, March 9, 2018. The law is effective on May 31, 2018. Previously, West Virginia law prohibited the issuance of permits for new wells or reworked wells on flat-rate leases unless the owner of the working interest agreed to pay the owner of the oil or gas a set royalty of at least one eighth of the proceeds “at the wellhead.” The Supreme Court of Appeals recently interpreted the statute as allowing the operator to deduct post-production expense when computing royalty. The bill now requires that owners of oil or gas receive not less than one eighth of the gross proceeds, free from any deductions for post-production expenses, received at the first point of sale to an unaffiliated third-party purchaser in an arm’s length transaction.

On March 6, 2018, the Wage and Hour Division of the U.S. Department of Labor (WHD) announced a new pilot program, the Payroll Audit Independent Determination (PAID) program, which is intended to encourage employers to identify and correct potentially non-compliant practices.

According to DOL’s Q&A page on the PAID program (https://www.dol.gov/whd/PAID/#4) “The PAID program provides a framework for proactive resolution of potential overtime and minimum wage violations under the FLSA. The program’s primary objectives are to resolve such claims expeditiously and without litigation, to improve employers’ compliance with overtime and minimum wage obligations, and to ensure that more employees receive the back wages they are owed—faster.”  To read more: click here.

On Friday, March 9, 2018, Governor Jim Justice signed West Virginia Senate  HB 4268, known as the “Cotenancy Modernization and Majority Protection Act” into law, effective July 1, 2018.  As discussed in our post from last week, the passage of this legislation is the culmination of years of negotiations and compromise between West Virginia elected officials, the industry, landowners and mineral owners.  The bill is designed to streamline the oil and gas leasing process and facilitate further development without unnecessary delay, by carving out an exception to the West Virginia statute governing waste between certain co-tenants (individuals that all own undivided interests in the same tract of land). Under the existing law (W. Va. Code § 37-7-2) development of oil and gas from a tract of land without the consent of all the owners, or co-tenants, of the same will result in waste, with any party committing such waste being subject to their operations being enjoined and/or treble damages.  The new law states that development of oil and gas under certain conditions will not constitute waste. The bill states that any tract held by seven or more co-tenants can be developed upon the consent of 75% of such co-tenants.  However, the proposed operator must make reasonable efforts to negotiate leases with all of the oil and gas owners before they can find protection under the proposed new law. Non-consenting co-tenants can either accept royalties equal to the highest percentage royalties paid to one of the consenting parties, proportionally reduced to their respective fractional interest, or elect to participate in the development and bear equal development and other costs with the lessee.  Unknown or unlocatable owners will be limited to receiving royalties equal to the highest percentage royalties paid to one of the consenting parties.  The statute also allows surface owners to reclaim the oil and gas title held by any unknown or unlocatable owners after seven years. The bill strikes a delicate balance between all stakeholders by protecting land and minerals owners while updating the law for the horizontal drilling era.