The Ohio legislature has clarified that oil and gas leases create an interest in real property. Ohio’s Substitute House Bill 9 includes a provision amending Ohio’s lease recording statute (R.C. 5301.09) as follows:
In recognition that such leases and licenses create an interest in real estate, all leases, licenses, and assignments thereof, or of any interest therein, given or made concerning lands or tenements in this state, by which any right is granted to operate or to sink or drill wells thereon for natural gas and petroleum or either, or pertaining thereto, shall be filed for record and recorded in such lease record without delay, and shall not be removed until recorded.
While oil and gas leases are traditionally thought to create an interest in real property, one recent federal court case called the status of oil and gas leases into question. In Wellington Resource Group v. Beck Energy Corp., a district court for the Southern District of Ohio ruled that oil and gas leases merely constitute the right to search for oil and gas on a property and are not an interest in the real property. The amendment in House Bill 9 would appear to supersede the court’s decision and conclusively establish the status of oil and gas leases in Ohio real property law. The bill is set to go into effect on March 20, 2015.
On December 19, 2014, the U.S. Environmental Protection Agency (EPA) finalized amendments to the New Source Performance Standards (NSPS) for the oil and natural gas industry, just a few days in advance of a key regulatory deadline. Under NSPS Subpart OOOO, each well completion operation with hydraulic fracturing begun on or after January 1, 2015 must comply with so-called “green completion” or reduced emission completion requirements. In the latest revisions to Subpart OOOO, which have not yet been published in the Federal Register, EPA provides additional detail on how gas and liquids are to be handled during well completion operations. EPA also addresses a number of other issues, including storage tank standards, in response to petitions received from stakeholders since Subpart OOOO was first promulgated in 2012. Additional changes to Subpart OOOO may be forthcoming. In a fact sheet related to the revisions, EPA indicates that this rulemaking responds to just “some” of the issues raised by petitioners, and that the “agency is continuing to evaluate other issues raised in the petitions.”
On December 17, 2014, New York Governor Andrew Cuomo’s administration said it would ban hydraulic fracturing for shale gas development throughout the state. Dr. Howard Zucker, the Acting Commissioner of Health, announced that the state Department of Health (DOH) completed its long-awaited public health review report, which recommended prohibiting hydraulic fracturing in New York. Citing significant uncertainties regarding risks to public health, Dr. Zucker said “it would be reckless to proceed [with hydraulic fracturing] in New York until more authoritative research is done.” Based upon the DOH report, New York State Department of Environmental Conservation (NYSDEC) Commissioner Joe Martens announced that the NYSDEC will issue a legally-binding findings statement that will prohibit hydraulic fracturing in the state. Martens noted that “with the exclusion of sensitive natural, cultural and historic resources and the increasing number of towns that have enacted bans and moratoria, the risks substantially outweigh any potential economic benefits” of hydraulic fracturing. A copy of the DOH public health report can be found here.
The Roanoke Times reports that Mountain Valley Pipeline LLC will be hosting 14 “community open houses” in several counties throughout the region where they have proposed a 300-mile interstate natural gas pipeline. If approved by the Federal Energy Regulatory Commission (FERC), the pipeline will deliver natural gas produced from wells in Pennsylvania, West Virginia and Ohio to Pittsylvania County, Virginia. Mountain Valley spokesperson Natalie Cox stated that up to 30 representatives from Mountain Valley who are subject matter experts in their particular area of the project will be present at the open-houses. The first four open-houses are scheduled for this week and will consist of various stations focused on specific topics as opposed to formal presentations. Representatives from FERC will also be in attendance to answer questions about the proposed pipeline.
StateImpact, a reporting collaboration supported by NPR, that the Federal Energy Regulatory Commission has approved a proposed interstate pipeline that would transport Marcellus Shale natural gas from Pennsylvania to New York and New England markets. The 30-inch pipeline would cover 124 miles, connecting gas production in Susquehanna County, Pennsylvania to existing transmission lines in New York. The pipeline will be operated by subsidiaries of Williams Partners, Cabot Oil and Gas, Piedmont Natural Gas, and WGL Holdings. The Pennsylvania Department of Environmental Protection, the U.S. Army Corps of Engineers and the New York Department of Environmental Conservation must still issue final permits.
The Eleventh District Court of Appeals held that an oil and gas lease that is defectively acknowledged is still valid between the parties. In Dedor v. Reserve Energy Corp., a notary was not present when the lessors executed the oil and gas lease. Instead, the notary publicly acknowledged their signatures later. The lessors sought a declaratory judgment against the lessee that the lease was void due to the defective acknowledgement. The appeals court granted judgment in favor of the lessee citing the long-standing Ohio rule that a defectively executed instrument, when signed by the property owner, may be enforced against him as a contract to make a lease because it is his contract.
The Fifth District Court of Appeals issued a ruling addressing several issues concerning the interpretation of oil and gas leases. The lessee of several oil and gas leases created a 145-acre drilling unit utilizing a small portion of one of the leases. The lessor of the lease claimed that this violated the implied covenant of reasonable development. The court analyzed the oil and gas lease and enforced a provision that generally waived any implied covenants under the lease. The decision noted that Ohio courts have consistently enforced express provisions in leases that disclaim implied covenants. The court also held that the “reasonable prudent operator” standard applies to a claim of bad faith inclusion of the portion of the leasehold in the unit. As applied to the lessee the inclusion of the small portion of the leasehold in the unit was necessary to comply with set-back requirements imposed by the State and therefore a prudent operator would include the leasehold acreage in the unit.
The court also held that the lessors’ acceptance of royalty payments did not preclude them from asserting claims that the lessee had breached the lease in other respects.
The Pennsylvania Superior Court recently ruled that constructive notice of a title defect may toll the running of the statute of limitations and affect damages for an action in trespass and conversion to oil and gas rights in Sabella v. Appalachian Development Corp., et al., Case No. 722 WDA 2013. Sabella purchased the oil and gas underlying 66 acres of land in 1997. The owner of the surface executed a lease purporting to cover Sabella’s oil and gas interest in favor of Appalachian Development Corporation, who subsequently assigned its interest in the lease to Brian and Lisa Haner, d/b/a Pine Ridge Energy. The Haners opted not to conduct a full title search upon its acquisition, but instead conducted a bring-down title search. The Haners drilled several wells pursuant to the lease prior to receiving actual notice that their lease was producing interests actually owned by Sabella.
The Court held that the two year statute of limitations did not preclude the trespass and conversion claims, because the statute had been tolled by the discovery rule. The trespass and conversion began in 2003, approximately 7 years before Sabella filed the suit. However, Sabella met his burden of establishing that he was unaware of the trespass and that a reasonable person would not have discovered the trespass. Sabella drove down the public road along the property to look for oil and gas activity, but did not enter upon the surface of the property to determine whether activities were taking place. Despite the open oil and gas development that had occurred on the property for years, the activity was not clearly visible from any public areas or other areas in which Sabella may have been. The Court held that, in properly recording his mineral deed, Sabella could reasonably expect that anyone seeking to drill on the property would discover his interest through a title search. The Court stated that the mere recording of a deed in all instances does not relieve a party of an obligation of affirmative observation in protecting his interests. However, the specific factors showed that a reasonable person would not have discovered the trespass in this case.
The Court also ruled that because the Defendants had constructive notice of Sabella’s interest under Pennsylvania’s Constructive Notice Statute, they were precluded from asserting a good faith defense to trespass damages. The Haners were ignorant of Sabella’s interest not because of a recording error or latency, but because they willfully chose not to conduct a title search. Therefore, the Haners were found by the Court to have acted in bad faith.
A recently released report from the U.S. Energy Information Administration (“EIA”) indicates that last year Pennsylvania became the second-largest shale gas producing state, only falling behind Texas in the amount of gross withdrawals from shale gas wells. The EIA report also indicates that shale gas wells have become the largest source of total national gas production in the United States.
Southwestern Energy Company and Detroit-based DTE Energy Company have made a deal to expand DTE’s natural gas gathering system in Susquehanna County, PA by 50%. The Bluestone Gathering System delivers gas from the Marcellus shale in Pennsylvania through the Millennium Pipeline in Broome County, NY and the Tennessee Gas Pipeline in Susquehanna County. According to Nasdaq, the new agreement will increase Southwestern’s transportation capacity on the Bluestone Pipeline, which currently ships up to 0.8 Bcf per day and will increase to 1.0 Bcf per day by mid-2016. The plan for increased infrastructure is significant for Southwestern, which recently acquired 413,000 net acres and 1,500 wells in southern Pennsylvania and northern West Virginia from Chesapeake Energy Corporation and had an increase of 47% in gas production over the past year.
The Court of Common Pleas of Lycoming County, Pennsylvania recently granted the condemnation of a temporary construction easement to UGI Penn Natural Gas, Inc. (UGI). UGI is a public utility, regulated by the Pennsylvania Public Utility Commission. The term of the easement is for 1 year in order to park and store vehicles and equipment and materials related to the construction, maintenance, replacing and changing of one or more pipelines for the transportation, transmission and distribution of gas.
The issue in the case was whether a public utility’s condemnation for the construction and maintenance of a pipeline for the transportation, transmission and distribution of natural gas to a private business which operates as a power generating plant within its service area violates Pennsylvania’s Property Rights Protection Act. The court concluded that it did not. Because UGI is a public utility, regulated by the Public Utility Commission, it falls within “the limited, defined class of condemners” permitted to use the eminent domain power to provide public services in tandem with benefits to a private enterprise. 26 Pa.C.S. Sec. 204(b)(2)(i). The Court also distinguished the present case from prior cases in that UGI, as the public utility, will own the easement rather than the private enterprise.
Ohio EPA, the Ohio Division of Oil and Gas Resources Management, and the Ohio Department of Health, on November 17, 2014, jointly issued a four-page guidance letter on how Ohio regulates the landfill disposal of oil and gas production waste. The letter addresses what waste is defined as solid waste that must be disposed in landfills, classification of certain drill cuttings as not constituting regulated solid waste, and substances classified as TENORM that must be analyzed for radioactivity prior to landfill disposal. The letter can be accessed on Ohio EPA’s website at http://epa.ohio.gov/Portals/0/Drilling%20Waste%20Ltr.pdf.
On Saturday, November 15th, the Pennsylvania Department of Environmental Protection (DEP) published proposed changes to its 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”) issued in February 2013. Operators may apply for coverage under GP-5 to authorize the construction, modification, and/or operation of a natural gas compression and/or a gas processing facility.
Among other proposed changes, DEP has deleted the applicability threshold requirement for greenhouse gases in response to the United States Supreme Court’s Utility Air Regulatory Group (UARG) v. Environmental Protection Agency (EPA) decision issued on June 23, 2014. DEP also added a requirement to submit an annual compliance certification for GP-5; the annual certification would be due to DEP by March 1 each year. Public comments on the proposed revisions to GP-5 will be accepted by DEP until January 6, 2015.
According to a report published by Pennsylvania Business Daily, Reading-based UGI Utilities, Inc. recently became Pennsylvania’s first natural gas utility to connect one of its pipelines to a Utica Shale well, thereby increasing the supply of natural gas available to customers in Tioga and Potter counties. The expansion required UGI to construct a new meter and regulator station system, but it is estimated that the natural gas resources in the expanded system, which includes one Utica well and two Marcellus wells, can meet the energy needs of more than 50,000 households. According to a statement by Kelly Beaver, UGI’s Vice President of Supply, “[m]ore than 70 percent of the natural gas we deliver through our system is produced in the Marcellus Shale region. We are pleased to add volumes of lower-cost Utica Shale natural gas to our portfolio as another supply source.”
West Virginia University recently announced that it will be establishing the “Marcellus Shale Energy and Environment Laboratory,” at a site in the Morgantown Industrial Park near the WVU campus. The laboratory is being funded as part of a five-year, $11 million agreement with the U.S. Department of Energy and will be operated in conjunction with the DOE’s National Energy Technology Laboratory (that has long had a presence in Morgantown) and Charleston-based natural gas producer Northeast Natural Energy, LLC. Timothy Carr, WVU Professor of Geology, will be the Director of the new lab, which will also benefit from contributions by faculty with Ohio State University’s Subsurface Energy Resource Center. The primary goal of the new lab is to undertake a comprehensive, long-term study of the environmental and other aspects of the extraction of shale gas resources, focusing on the precise measurement of various parameters and developing best operating practices based on their research.