Shale Energy Law Blog

On Wednesday, December 19, 2018, Governor Kasich signed SB 263 into law, which amends O.R.C. §4735 to specifically exclude oil and gas land professionals (landmen) from having to be a licensed real estate broker to negotiate oil and gas leases in Ohio. Following the Ohio Supreme Court’s decision in Dundics v. Eric Petroleum Corporation, Slip Opinion No. 2018-Ohio-3826 (September 25, 2018), independent oil and gas landmen faced civil and criminal penalties if they continued to negotiate oil and gas leases without first acquiring a real estate broker's license. With the passing of SB 263, which goes into effect on March 19, 2019, independent landmen may continue negotiating oil and gas leases without a real estate broker's license provided they follow the new disclosure requirements set forth in the amendment. The newly passed legislation specifically exempts landmen from acquiring a real estate license if the transaction involves negotiating an oil and gas lease or pipeline easement. However, the landman must first register annually with the superintendent of real estate and pay a $100 registration fee. Additionally, the landman must provide the superintendent with evidence that the landman is in good standing in a national, state, or local professional organization that has developed ethical performance standards for oil and gas land professionals. When negotiating an oil and gas lease, the landman must now provide the landowner with a disclosure form that discloses their registration information and notifies the landowner that the landman is not a licensed real estate broker. The exemption does not apply to fee simple absolute transactions involving oil and gas rights, which still require the landman to be a licensed real estate broker.

On December 13, 2018, the Ohio Supreme Court in Blackstone v. Moore, 2018-Ohio-4959, affirmed the Seventh District Court of Appeals decision preserving a severed royalty interest from extinguishment under the Marketable Title Act (the “MTA”) because of a specific reference in the surface owners’ chain of title. The MTA allows an owner to rely on a record chain of title to establish ownership and operates to extinguish interests and claims existing prior to the root of title unless an exception applies. The root of title is the most recent instrument of record at least 40 years prior to the time marketability is being determined.  In addition to actively preserving their interest from extinguishment through their own actions, an interest may be preserved, even with no action by its owner, if specifically identified in the record chain of title of the individual attempting to extinguish the interest.

The Blackstones (surface owners) claimed that the royalty interest created in 1915 owned by the Moores had been extinguished by operation of law under the MTA. However, the Blackstones’ 1969 root of title referenced the outstanding oil and gas royalty interest by its owner’s name but failed to include a volume/page reference to the instrument that created the interest. The court rejected the Blackstones argument for a bright-line rule requiring the volume and page number, as the legislature did not require this specificity in the statute. Accordingly, the court determined that the Blackstones’ 1969 root of title specifically referenced the Moores’ interest, thereby preserving the Moores’ interest from extinguishment.

Justice DeGenaro, who is leaving the court at the end of 2018, wrote a concurring opinion emphasizing the narrow scope of the holding. She opined that the MTA no longer applies to severed mineral interests following the 1989 enactment of the Dormant Mineral Act (the “DMA”). While the issue of whether the MTA applies to severed mineral interests was not before the court in Blackstone, this issue is currently before the Seventh District Court of Appeals in a separate, unrelated case. The Seventh District had previously applied both the DMA and MTA to the Moores’ severed royalty interest when Blackstone was on appeal before them.

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.