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The PIOGA Press
This article is an excerpt from The 2021 Babst Calland Report, which represents the collective legal perspectives of Babst Calland’s energy attorneys addressing the must current business and regulatory issues facing the oil and natural gas industry. The full report is available online at reports.babstcalland.com/the-2021-babst-calland-report-1.
Pennsylvania royalty cases
In two recent cases litigated by Babst Calland, courts applying Pennsylvania law reaffirmed that operators were entitled to deduct post-production costs from royalty payments based on lease language containing references to “at the wellhead” provisions. On April 28, 2021, the Court of Common Pleas of Butler County in Dressler v. PennEnergy Resources considered this issue where the lease provided that the gas royalty was to be paid based on “gas sold at the well.” The court held that phrase equated to “at the wellhead” language, which mandates using the net back method for calculating royalties―thus justifying post-production cost deductions.
A nearly identical decision was rendered by the United States District Court for the Western District of Pennsylvania less than two weeks later in Coastal Forest Resources Co. v. Chevron USA, Inc. There, the district court held that the lease’s royalty provision containing “at the wellhead” language had to be broadly interpreted to also allow for post-production cost deductions. Both cases relied on the Pennsylvania Supreme Court’s decision in Kilmer v. Elexco Land Servs., Inc., where “at the wellhead” was defined, to justify their holdings. It is likely that the two decisions will help temper further royalty litigation on the propriety of post-production deductions.
Oil and gas lease negotiations are not covered by the Pennsylvania Unfair Trade Practices and Consumer Protection Law
On March 24, 2021, the Pennsylvania Supreme Court issued its 6-1 decision in Commonwealth v. Chesapeake Energy Corp. The court considered whether the Attorney General could sue natural gas operators under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL). The Attorney General alleged, among other things, that the defendants violated the UTPCPL by engaging in deceptive practices while negotiating natural gas lease agreements with landowners. The Supreme Court reversed the Commonwealth Court’s en banc decision, which held that such transactions are subject to the UTPCPL.
The central issue in the case was whether “trade and commerce” under the UTPCPL included natural gas companies purchasing property rights when they entered into oil and gas lease agreements with landowners. The Supreme Court looked to the UTPCPL statutory definition of “trade and commerce” to determine that the “UTPCPL clearly regulates the conduct of sellers and does not provide a remedy for sellers to exercise against buyers.” Id. at 946 (emphasis added). The Supreme Court rejected the Commonwealth Court’s reliance on dictionary definitions of those terms when the legislature had specifically defined them. Id. (“Thus, the legislature chose to define trade and commerce as only acts of selling for purposes of the UTPCPL, even though the ordinary meaning of those terms signifies both buying and selling goods.”).
The court held that in the oil and gas context, the companies were in the position of a buyer, purchasing rights to the landowners’ mineral estate and the landowners were in the position of the sellers, conveying those rights. Accordingly, the court held that the UTPCPL does not apply to such transactions.
Real estate & land use
Robinson Township/ERA-based challenges to ordinances permitting oil and gas development continue to fail, but home rule charters prohibiting development open a new battlefield.
Anti-industry activists continue to rely on the Pennsylvania Supreme Court’s decision in Robinson Township v. Commonwealth in support of their challenges to the substantive validity of zoning ordinances permitting oil and gas development, on the basis that these ordinances violate substantive due process and Article I, Section 27 of the Pennsylvania Constitution, commonly known as the Environmental Rights Amendment (ERA).
As discussed in previous Reports, local zoning hearing boards, common pleas courts and the Commonwealth Court have consistently rejected these challenges, and the Supreme Court has declined to hear appeals in any of these cases. The list of unsuccessful challenges to the substantive validity of local zoning ordinances allowing oil and gas development continues to grow. Early this year, objectors voluntarily discontinued their Commonwealth Court appeal of another zoning hearing board decision rejecting similar claims.
As of this writing, two Robinson Township-based challenges to the validity of zoning ordinances permitting oil and gas development remain pending in Commonwealth Court. The first involves an appeal of a decision by the Murrysville Zoning Hearing Board in Westmoreland County, rejecting a validity challenge to that community’s ordinance. The Murrysville ordinance limits oil and gas development to an overlay district and imposes an additional setback of 750 feet from the well pad to occupied structures, the net effect of these two restrictions being to limit oil and gas development to less than 5 percent of the municipality’s land mass. As such, the ordinance is far more restrictive that any of the ordinances previously found to be valid by the Commonwealth Court. The parties have briefed and argued the case and a decision is pending.
Ironically, the second case remaining pending in Commonwealth Court involves a challenge to the Robinson Township, Washington County, zoning ordinance, the objectors there essentially arguing that the township’s ordinance authorizing oil and gas development is contrary to that very same township’s prevailing position in the Supreme Court’s Robinson Township decision. The zoning board originally dismissed the challenge on ripeness and standing grounds. After a long delay by the objectors in prosecuting their appeal, the Washington County Court of Common Pleas conducted a de novo hearing, after which it dismissed the appeal on standing grounds. The parties have briefed and argued this case before Commonwealth Court, and a decision is pending.
Despite this string of successes by municipalities, pro-development residents and natural gas operators, this has not stopped groups from going to great lengths to halt all oil and natural gas development at the local level. After the operator of a proposed underground injection well in Grant Township, Indiana County, successfully pursued a federal court challenge to the validity of a township ordinance prohibiting the deposit of waste from oil and gas operations, the township adopted a home rule charter essentially mirroring the prohibitions in the invalidated ordinance. In 2017, the Pennsylvania Department of Environmental Protection (DEP) granted the operator’s well permit and filed a petition for review with Commonwealth Court seeking declaratory relief that state laws such as the Oil and Gas Act and the Solid Waste Management Act preempt the charter’s prohibition on injection wells. The township filed counterclaims contending that these state laws violated the ERA. The Commonwealth Court denied DEP’s preliminary objections and a trial on the merits is anticipated to occur later this year.
Pennsylvania Supreme Court considers and then decides not to consider the standard of review in land use decisions
Early this year, the Pennsylvania Supreme Court agreed to hear two issues relating to the standard of review applicable to local land use decisions in a case involving the approvals of two unconventional natural gas well pads in Penn Township, Westmoreland County. Both the Court of Common Pleas of Westmoreland County and the Commonwealth Court affirmed these well pad approvals. The Supreme Court directed the parties to address the capricious disregard standard of review, which had only been applied in previous decisions when a local agency deliberately ignores relevant competent evidence. The second question was whether the Commonwealth Court properly considered the alleged cumulative impacts of developing multiple unconventional natural gas well pads within the township. The Pennsylvania State Association of Township Supervisors and the Marcellus Shale Coalition filed briefs in support of the township zoning hearing board’s approvals. After briefing and oral argument, on June 22, 2021, the Supreme Court, in a one-line order and without supporting opinion, dismissed both appeals as having been improvidently granted.
Trends in local ordinances
Since last year’s Report, Pennsylvania municipalities continue to adopt ordinances impacting oil and natural gas activities. In addition, many have begun to attempt to address issues involving renewable energy systems such as wind and solar energy operations. Although most regulations are found in zoning ordinances, others, including road weight, noise or street opening ordinances impact energy industry operations of all types.
For oil and natural gas, ordinances imposing substantially increased setbacks are an ongoing challenge. For example, Leetsdale Borough, Allegheny County, placed a proposed oil and gas zoning amendment into pending status which would subject well sites to setbacks ranging from 1,500 feet to 2,800 feet. Municipalities also are placing an increased emphasis on more stringent noise limitations. One success story is in Union Township, Washington County, where input from operators during the consideration of a new ordinance resulted in temporary development activities such as pad development, drilling and completions being exempted from the township’s new low-frequency dBC limits. Despite this victory, ordinances containing increased application requirements such as air, water, soil testing and other environmental study requirements of questionable legality continue to proliferate.
Local ordinances addressing pipelines also have become a recent trend. Uwchlan Township, Chester County, amended its subdivision and land development ordinance to require that new residential, commercial, educational and institutional uses maintain a 300-foot setback from any existing or proposed transmission pipeline rights-of-way.
In some cases, municipalities are attempting to stop certain oil and natural gas activities. In Clara Township, Potter County, the board of supervisors took the initial steps to change its form of government to a home rule charter municipality, a move promoted by anti-industry groups to block a proposed oil and gas wastewater injection well. In Allegheny County, a council member recently proposed legislation to bar the county from entering into any agreement for any industrial or commercial land uses on or below the surface of any lands the county has designated as a park. This would include natural gas extraction by conventional or unconventional means and utilization of any other extractive technologies or methods.
Numerous municipalities across Pennsylvania have considered or enacted ordinances impacting renewable energy operations. Over the last year, over 50 municipalities across 30 counties in Pennsylvania have considered land use ordinances that regulate solar energy. These are primarily municipalities located in south-central and southwestern Pennsylvania. For example, Washington Township, Franklin County, enacted an amendment to its zoning ordinance regulating the use of solar and wind power in the township which set forth permitting requirements, setbacks, and use specifications for both principal and accessory renewable energy systems.
Monitoring these proposals and enactments is necessary to anticipate upcoming restrictions and take advantage of new opportunities. The pandemic put a temporary hold on municipal activity for a couple months, but the pace of ordinance activities is generally back to pre-pandemic levels.
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Reprinted with permission from the June 2021 issue of The PIOGA Press. All rights reserved.