A Pennsylvania senate committee recently unanimously approved two bills regarding oil and gas royalty calculations. StateImpact Pennsylvania reported that Senate Bills 147 and 148 were approved by the Senate Environmental Resources and Energy Committee on Wednesday, January 21, 2015. If passed into law, SB 147 would require operators to disclose more information on royalty checks, including calculations and joint ventures between companies. The bill would also permit landowners to inspect company records, even if that right is not set forth in an oil and gas lease. SB 148 would prohibit operators from retaliating against landowners who question the calculation of their royalty payments. The bills are two of several that have been introduced in the state house and senate in the last year.
A third bill, Senate Bill 279, also passed the senate committee with unanimous approval. This bill would create the Pennsylvania Grade Crude Development Advisory Council, which would advise and assist the state Department of Environmental Protection with the differing regulations for conventional oil and gas operations and unconventional oil and gas operations. All three bills will move forward for consideration by the full senate.
The Ohio Supreme Court accepted jurisdiction over Hupp v. Beck Energy, an important Ohio case involving the interpretation of oil and gas leases. The case involves a challenge by landowners in Monroe County to a standard form oil and gas lease. The landowners argued that the leases could be maintained indefinitely without development of the oil and gas and, as a result, were void against public policy. The Monroe County trial court agreed and granted the landowner’s Motion for Summary Judgment finding the leases were void ab initio. On appeal, the Seventh District Court of Appeals reversed the trial court finding that the leases have two distinct terms – a primary term and secondary term – and were not “no term” or perpetual leases. The Seventh District also ruled that the leases’ delay rental provision did not allow the lessee to extend the lease indefinitely by the payment of delay rentals.
The Propositions of Law to be reviewed by the Ohio Supreme Court are (1) whether an oil and gas lease which can be maintained indefinitely without development is a perpetual lease that is void against public policy and (2) whether the leases are subject to an implied covenant of reasonable development notwithstanding a general disclaimer of all implied covenants.
Shale Energy Law Blog will continue to post updates to the case including the scheduling of oral argument.
As reported by The State Journal, the West Virginia Senate has passed Senate Bill 280 (“SB 280”) which, if it becomes effective, would allow the Secretary of the West Virginia Department of Environmental Protection to transfer well work permits from one business entity to another, a process that has been previously prohibited by State Code. SB 280 was ultimately pushed in favor of Southwestern Energy, a company that has invested more than $5 billion to purchase wells in West Virginia and Pennsylvania. To become effective legislation, SB 280 must first pass through West Virginia House of Representatives before ultimately needing the approval of West Virginia Governor Earl Ray Tomblin.
The Fourth District Court of Appeals held in Marshall v. Beekay Company that continuous production from shallow wells pursuant to two oil and gas leases holds the deep rights to the property. The landowners in the case claimed that an assignment of the shallow rights of the oil and gas leases split the oil and gas estate into two different pieces — shallow and deep. Although there was continuous production from the shallow wells, there was no production from the deeper oil and gas formations. The landowners argued that reservation of the deep rights created an obligation of reasonable development of the deep rights. The court disagreed holding that the assignment does not sever the lease because it granted all of the oil and gas rights under the acreage at issue for so long as oil and gas was producted in paying quantities. The court concluded that the granting clause of the lease included all oil and gas at all depths and the deep rights to the property were held by the production from the shallow wells.
The Oil & Gas Financial Journal reported on January 14, 2015 that Jeffrey A. Fisher has been named CEO of newly created American Energy Appalachia Holdings, LLC (“AEA”). AEA was recently created through the combination of American Energy Partners’ (“AEP”) affiliates, American Energy-Utica LLC and American Energy – Marcellus LLC. Fisher was previously COO of AEP and Executive Vice President of Production for Chesapeake Energy Corporation, which AEA’s Chairman of the Board, Aubrey K. McClendon co-founded. Fisher also served in a number of other engineering management positions at Chesapeake, BP and Vastar Resources. In addition to adding Fisher to the management team, AEA also named John K. Reinhart and Jeffrey A. Agosta as the COO and CFO, respectively. Similar to Fisher, Reinhart held several operational leadership positions at Chesapeake Energy in the Anadarko, Marcellus and Utica areas. Agosta previously served as CFO of Oklahoma City based Devon Energy, as well as a manager at D. R. Payne & Associates, a financial consulting firm. The executive team will oversee the management and operation of AEA’s estimated proven reserves of 1.5 trillion cubic feet equivalent of oil and gas (77% of which is gas) and the operation of seven drilling rigs in eastern Ohio and northern West Virginia.
On January 7, 2015, the Commonwealth Court of Pennsylvania entered an opinion and order in the case Pennsylvania Environmental Defense Foundation v. Commonwealth of Pennsylvania. The Pennsylvania Environmental Defense Foundation (“PEDF”) sought declaratory judgment with respect to past and future leasing of State land for oil and natural gas development as well as for the propriety of the use of monies in the Oil and Gas Lease Fund. The Court did not address the legality of leases executed by the Department of Conservation and Natural Resources (“DCNR”) in 2008 and 2010, due to the absence of indispensable parties, i.e., the lessees.
First, the Court held that neither 1602-E nor 1603-E of the Pennsylvania Fiscal Code violates Article I, Section 27, the Environmental Rights Amendment (“ERA”) of the Pennsylvania Constitution. Section 1602-E mandates that the General Assembly, rather than DCNR, appropriate all royalties paid into the Lease Fund. The Lease Fund is a depository for all rents and royalties paid from oil and gas leases on Commonwealth lands. Based upon the plain language of the Fiscal Code, which left rent revenue and bonus payments under the control of DCNR, the Court held that PEDF failed in its burden to show that the General Assembly had infringed on rights protected under the ERA or had not acted consistently with its trustee obligations under the ERA.
Section 1603-E appropriates up to $50 million in royalty monies annually to DCNR to carry out the purposes of the Lease Fund, which include conservation, recreation, dams, and flood control in state parks and forests. The Court determined whether the funding provided to DCNR for the agency to meet its duties under the ERA was adequate by applying its standard for public funding inquiries. Under this standard, the constitutional challenge was denied because PEDF presented no evidence that the funding appropriated was “so deficient that DCNR cannot conserve and maintain our State natural resources.”
Second, the Court held that the General Assembly’s transfers and appropriations from the Lease Fund for the benefit of the Commonwealth generally were not inconsistent with the Environmental Rights Amendment. The Court found that while the Environmental Rights Amendment places a duty on the Commonwealth to conserve and maintain public natural resources. It does not prohibit the use of revenues derived from public natural resources for non-conservation purposes. The Court rejected PEDF’s contention that the Lease fund is a trust fund that must be reinvested into the conservation and maintenance of the Commonwealth’s public natural resources.
Third, the Court found that DCNR has the exclusive statutory authority to determine whether to lease Commonwealth lands for oil and natural gas extraction. The Court reasoned that the Conservation and Natural Resources Act gives DCNR the authority to determine whether leasing public lands is in the best interest of the Commonwealth and, if so, to execute leases as the agency deems appropriate.
The Pennsylvania Department of Environmental Protection (DEP) has finalized revisions to the General Plan Approval and/or General Operating Permit (BAQ-GPA/GP-5 or General Permit) for Natural Gas Compression and/or Processing Facilities (known as “GP-5”). Revisions to GP-5 include removal of the 100,000 ton per year greenhouse gas applicability threshold and addition of an annual compliance certification requirement. Changes to the permit were proposed in November 2014. DEP received public input from ten commenters.
Ohio landowners are opposing the use of eminent domain in the construction of a 76 mile pipeline between Columbiana County and Monroe County. The OPEN pipeline would connect to the Texas Eastern Pipeline and was recently approved by the Federal Energy Regulatory Commission (FERC). After receiving approval for FERC, the pipeline owner began issuing eminent domain notices to landowners who did not grant easements across their property. Two landowners, Roger and Lana Barack, are teaming with an advocacy group called the Ohio 1851 Center for Constitutional Law to oppose the eminent domain proceedings. The groups claims recent federal court decisions state that Congress may not delegate its power, including the power to seize property, to purely private companies.
The Pennsylvania Department of Environmental Protection (DEP) has announced the results of its highly anticipated study on potential exposure to Technologically Enhanced Naturally Occurring Radioactive Materials (TENORM) associated with oil and gas development. Initiated in January 2013 at the direction of Governor Tom Corbett, the study included sampling of drill cuttings, flowback and produced waters, and various treatment solids, as well as radiological surveying of well sites, landfills, and other areas involved in disposal or treatment of drilling wastes. In general, the study found that “there is little potential for harm to workers or the public from radiation exposure due to oil and gas development”. However, the study report includes recommendations for future actions, including additional research and investigation.
The Pittsburgh Post-Gazette reports that Pennsylvania Governor-Elect Tom Wolf has announced the nominations of individuals to head some of the state agencies. He announced the nomination of John Quigley, who served as the Secretary of the Department of Conservation and Natural Resources under Governor Rendell, to be Secretary of the Department of Environmental Protection. The Governor-Elect also announced Cindy Dunn to serve as Secretary of the Department of Conservation and Natural Resources. The Governor-Elect expects to have a full Cabinet announced by the time he is sworn in on January 20th.
Today the U.S. Environmental Protection Agency (EPA) released a fact sheet outlining the agency’s strategy for reducing emissions of methane and ground level ozone-forming pollutants from the oil and natural gas sector. Release of the EPA strategy is part of a broad multi-agency initiative by the Obama Administration to curb emissions from the sector. In March 2014, the White House identified the reduction of methane and other emissions from the sector as a key element of President Obama’s Climate Action Plan, and directed EPA to assess how best to pursue such reductions. According to EPA’s recently-released fact sheet, emissions of methane (the primary constituent of natural gas) from the sector are “projected to increase by about 25 percent over the next decade if additional steps are not taken to reduce emissions from this rapidly growing industry.” EPA plans to use both “regulatory” and “voluntary” approaches to avoid this anticipated emissions increase.
Among other actions, EPA plans to “build on” its New Source Performance Standards (NSPS) for the sector, namely NSPS Subpart OOOO, to reduce methane emissions and further restrict emissions of volatile organic compounds (VOCs). The fact sheet indicates that EPA intends to issue a proposed rule in late summer and a final rule in 2016. EPA also plans to provide state air permitting agencies with special “guidelines” for controlling VOC emissions from existing oil and gas sources located in ozone nonattainment areas and the Ozone Transport Region, which includes Pennsylvania and New York. EPA expects to propose these Control Technique Guidelines this summer and issue final guidelines in 2016.
Judge David W. Hummel, Jr. of Marshall County, West Virginia has dismissed the second in a pair of lawsuits aimed to restrict operator Gastar Exploration, Inc.’s ability to hydraulically fracture several wells in Marshall County, West Virginia. According to the Order entered by Judge Hummel in December, on April 22, 2014 Eagle Natrium, LLC, a wholly owned subsidiary of Axiall Corporation, filed suit against Gastar seeking a preliminary injunction to keep Gastar from hydraulically fracturing wells located under Eagle’s lands in Marshall County, West Virginia, due to the threat of irreparable damage to existing salt wells and operations. Judge Hummel denied Eagle’s request for a preliminary injunction and dismissed the Case (Civil Action No. 14-C-179), noting that the issue had already been resolved by a Pennsylvania court, and that a party cannot seek relief for the same problem in multiple courts without some intervening change in circumstance.
American Energy Partners, LP (“AEP”) announced yesterday that its affiliates, American Energy-Utica, LLC (“AEU”) and American Energy – Marcellus, LLC (“AEM”) are combining in an all-stock transaction to form American Energy Appalachian Holdings, LLC (“AEA”). AEP hopes that the “attractive positions [of AEU and AEM] in each of these respective plays and their complementary nature will allow AEA to maximize returns by realizing administrative and operational efficiencies.” The transaction will result in AEA holding a position in over 300,000 net Utica and Marcellus shale acres in eastern Ohio and northern West Virginia. AEP entered the Marcellus shale play in June as part of a larger $4 billion effort to expand its holdings in West Virginia, Ohio and Texas. AEP affiliates also maintain positions in the Woodford Shale in central Oklahoma and the Permian Basin in western Texas.
As reported by The State Journal, Robert A. Fala has been appointed to serve as the director of the West Virginia Division of Natural Resources (“WVDNR”), effective January 1, 2015. Fala was appointed by WV Governor Earl Ray Tomblin and will replace Frank Jezioro, who served as director since 2005 and retired on December 31, 2014. Fala began his career with the Pennsylvania Game Commission and has recently held positions with the West Virginia Department of Environmental Protection, the U.S. Fish and Wildlife Service and the WVDNR Natural Resource Commission. The WVDNR controls bids for the leasing of state game lands, such as the Conaway Run Wildlife Management Area in Tyler County, WV, and administered the recent leasing of West Virginia’s oil and gas interests underlying the Ohio River.
StateImpact reported that the Federal Energy Regulatory Commission recently approved an addition to the interstate Transco pipeline that will transport Marcellus shale gas to New Jersey, where there is a high demand. The approval comes after several other pipeline expansions to New York and New England were recently approved. The Leidy Southeast line will total approximately 30 miles in Pennsylvania and New Jersey and is scheduled to be completed by late 2015.