Shale Energy Law Blog

On November 26, 2018, Ohio’s Seventh District Court of Appeals in Sharp v. Miller, 7th Dist. Jefferson No. 17 JE 0022, 2018-Ohio-4740, affirmed the abandonment of oil and gas interests pursuant to the Dormant Mineral Act (O.R.C. §5301.56) (the “DMA”). The issues before the court were: (i) whether the surface owners’ (the Millers) service of notice by publication to the mineral owners (the Sharps) properly complied with Section (E)(1) of the DMA; and (ii) whether the oil and gas leases executed by the Millers, prior to claiming the minerals under the DMA, constituted savings events for the Sharps. The court held in favor of the Millers on both issues confirming the abandonment of the Sharps’ oil and gas interests.

The Sharps alleged that they received insufficient notice of the surface owners’ intent to abandon the minerals, claiming that a reasonable search by the Millers would have revealed the identities and addresses of the Sharps, and thus required notice to be served by certified mail instead of by publication. In rejecting the Sharps’ argument that the Millers failed to exercise reasonable due diligence, the court used the failed results of the Sharps’ own search to establish that the Millers’ search was sufficient. In line with its recent decision Shilts v. Beardmore, 7th Dist. Monroe No. 16 MO 0003, 2018-Ohio-863, the Seventh District again declined to establish an objective bright-line rule for when notice by publication is permitted or to define “reasonable due diligence.” Instead, the court will continue to apply a subjective test and look to the facts and circumstances in each individual case to determine if the surface owners conducted a reasonable search in attempting to identify the mineral interest holders. Additionally, whether a surface owner’s search was reasonable may depend on the outcome of the mineral owner’s search using alternative resources, such as searching the records of adjacent counties, search engine inquires, and searching for heirs on subscription websites like ancestry.com.

In a matter of first impression, the court rejected the argument that oil and gas leases executed by the Millers, prior to claiming the minerals under the DMA, constituted savings events for the Sharps. While the Ohio Supreme Court has held that a recorded oil and gas lease is a title transaction (Chesapeake Exploration, L.L.C. v. Buell, 144 Ohio St.3d 490, 2015-Ohio-4551, 45 N.E.3d 185, ¶66), the Seventh District noted that the Millers did not own the minerals at the time of the lease. Therefore, the mineral interest was not the “subject of” the title transaction. As such, the leases did not constitute savings events under the DMA for the Sharps and did not preclude abandonment of the Sharps’ interest under the DMA.

The Sharps have until January 10, 2019 to appeal the Seventh District’s decision to the Ohio Supreme Court.

Court Refuses to Adopt a “One Size Fits All” Approach that Would Prohibit Municipalities from Permitting Shale Drilling in Rural Residential and Agricultural Zoning Districts

On October 26, 2018, the Pennsylvania Commonwealth Court published an en banc opinion in Frederick v. Allegheny Township Zoning Hearing Board, et al., No. 2295 C.D. 2015, 2018 WL 5303462 (Pa. Cmwlth. Oct. 26, 2018) rejecting a challenge to the validity of the Allegheny Township, Westmoreland County (Township) zoning ordinance.  The Court addressed the contention of oil and gas industry opponents that an unconventional natural gas well pad can only be permitted in an industrial zoning district.  After reviewing the detailed record developed in the substantive validity challenge decided by the Township Zoning Hearing Board (Board) and addressing recent Pennsylvania Supreme Court decisions on shale gas drilling, the Court, in a 5-2 decision, rejected this “one size fits all” proposition.  It found that state law empowers municipalities to determine where well sites are appropriate and compatible with other land uses within their boundaries.

Please read more about this decision in this Alert.

The Ohio Supreme Court has ruled in Dundics v. Eric Petroleum Corporation, Slip Opinion No. 2018-Ohio-3826 (September 25, 2018), that independent landmen (third parties who negotiate oil and gas leases on behalf of E&P companies) must be licensed real estate brokers. In Dundics, an independent landman, who was hired to obtain oil and gas leases for an E&P company in exchange for compensation and a future royalty interest in the leases, sued the E&P company to recover payment on several leases. However, the company moved to dismiss the case on the basis that the landman was not a licensed real estate broker and could not bring a cause of action to recover payment under O.R.C. § 4735.21.

In affirming the Seventh Appellate District’s decision to dismiss the landman’s claims, the Court concluded that the broad definition of “real estate” in O.R.C. § 4735.01(B) applies to oil and gas leases and that an independent landman is a “real estate broker” required to have a license under O.R.C. § 4735.02. The statute defines a “real estate broker” as including “any person, partnership, association, limited liability company, limited liability partnership, or corporation… who for another… and who for a fee, commission, or other valuable consideration... does any of the following…,” which specifically includes the procuring of prospects or the negotiation of leases. See O.R.C. § 4734.01(A)(7). Although there are several exceptions from the definition of “real estate broker,” including one for attorneys, the Court found that the statute is unambiguous and there is no exception for independent landmen.

The Court did not address whether the decision applies to in-house landmen who directly negotiate oil and gas leases on behalf of their employer.  Although there is no such explicit exception in the statute, it is arguable that the definition of “real estate broker” itself exempts in-house landmen. Because the definition requires a person to be performing certain activities “for another” and an in-house landman is negotiating for his or her own company, it is possible that they may not be considered real estate brokers for purposes of the statute. The Court also did not discuss the potential liability of an unlicensed landman, who now could be exposed to both monetary and criminal penalties for practicing without a license. This may cause those in the industry to rethink their leasing practices.

The only way this decision could be overturned is if the Ohio General Assembly creates a statutory exception for landmen within the real estate licensure statute.

On August 29, 2018, the United States District Court for the Southern District of West Virginia issued a Memorandum Opinion and Order granting Mountain Valley Pipeline (MVP) summary judgment and permanently enjoining the County Commission of Fayette County, West Virginia, from using a zoning ordinance to bar construction of the Stallworth Compressor Station (CSS).  The CSS is a vital part of the 303.5-mile long, 42-inch diameter, MVP pipeline project stretching from Wetzel County, West Virginia, to Pittsylvania County, Virginia.  See Mountain Valley Pipeline v. Matthew D. Wender, et al., Case No. 2:17-cv-04377, Mem. Op. and Order (S.D. W. Va. August 29, 2018). Please read more about this decision in this Alert.

On August 23, 2018, the Commonwealth Court issued a unanimous opinion invalidating components of the new pre-permit process created in 25 Pa. Code §§ 78a.1 and 78a.15(f), and (g), pertaining to new “public resources.”  The Marcellus Shale Coalition (MSC) challenged the provisions as unlawful and unreasonable, seeking declaratory and injunctive relief.  The Marcellus Shale Coalition v. Department of Environmental Protection and Environmental Quality Board, 573 M.D. 2016. Please read more about the opinion in this Alert.

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.