The Pennsylvania Superior Court recently held in Southwestern Energy Production Company, et al. v. Forest Resources, LLC, et al. that an “assignment back” clause that results in a lessor’s net royalty being less than one-eighth violates the Pennsylvania Guaranteed Minimum Royalty Act (GMRA). The GMRA requires oil and gas leases to provide a minimum one-eighth royalty. Under the terms of a lease, the lessor in Southwestern Energy was to receive the statutory minimum one-eighth royalty. The parties subsequently amended the lease, modifying the royalty provision so that the lessor retained 50% of the royalty and assigned the remaining 50% of the royalty to the lessee to pay for marketing costs. Although the court found little authority regarding the technical requirements for compliance with the GMRA, it found that the intent of the statute was to clearly protect the lessor. It reasoned that the GMRA applies to both leases and other agreements, including amendments, and that it compels a “guarantee” of at least a one-eighth royalty. Accordingly, it concluded that a lease that contains an assignment back clause that does not guarantee the statutory minimum royalty violates the GMRA.
A bill to increase the severance tax on oil and gas drilling has been proposed in the Ohio House of Representatives. House Bill 375 would increase the severance tax for horizontal shale wells to 1% for the first five years of production, and to 2% after five years, if production remains at a high level. The bill also creates an offset against horizontal severance taxes from the commercial activities tax (CAT) and the personal income tax (PIT).
Revenue from the bill is estimated to be as much as $1.7 billion over 10 years. The revenue would fund regulations, programs to cap orphan wells and income tax cuts. The tax would not apply to operators of conventional shallow wells.
The Department of the Interior has released its Statement of Regulatory Priorities, a subsection of which highlights the Bureau of Land Management (BLM)’s priorities on energy issues including hydraulic fracturing. BLM’s stated highest regulatory priorities include revising antiquated hydraulic fracturing regulations, preventing waste of produced oil and gas, and ensuring a fair return to the American taxpayer for oil shale development. BLM’s stated priorities also address solar and wind energy projects and the management of waste mine methane. The current regulatory agenda of the Department is also publicly available.
The Ohio Department of Natural Resources released its annual oil and gas summary for 2012. The summary provides a comprehensive review of oil and gas permitting, drilling and production activity across the entire state of Ohio. The report can be accessed here.
On November 26, 2013, the Pennsylvania Supreme Court declined to hear an appeal of the Superior Court’s decision in Caldwell v. Kriebel Resources Co., which held that an oil and gas lease does not contain an implied duty to develop all strata. The Superior Court opinion was previously covered here.
John Wellinghoff officially resigned his post as Chairman of the Federal Energy Regulatory Commission (FERC) on Sunday, November 24, 2013. Wellinghoff, the longest serving FERC Chairman in history, will be joining the law firm of Stoel Rives LLP. The now-departed FERC Chairman announced his intention to leave the agency in May 2013, but agreed to stay on until his replacement could be named and confirmed by the U.S. Senate. President Obama’s first choice to fill the position, former Colorado energy regulator Ron Binz, recently withdrew from consideration in the face of opposition. The White House has indicated that another current FERC Commissioner, Cheryl LaFleur, will serve as acting Chairman until a permanent replacement is confirmed.
On August 26, 2013, Hilcorp Energy Company (Hilcorp) filed a complaint and application requesting that the Pennsylvania Environmental Hearing Board (PAEHB) issue an order to establish well spacing and drilling units pursuant to the Oil and Gas Conservation Law of 1961 for a 3,267 acre reservoir of natural gas in the Utica-Point Pleasant formation beneath Mercer and Lawrence counties, known as the “Pulaski Accumulation”, since Hilcorp was unable to obtain leases from all property owners in this parcel. After conducting a prehearing conference and considering legal memoranda by the Pennsylvania Department of Environmental Protection (PADEP) and Hilcorp regarding whether the PAEHB had original jurisdiction to issue well spacing and drilling unit orders under the Oil and Gas Conservation Law, the PAEHB’s Chief Judge Renwand issued an opinion and order on November 20, 2013 dismissing Hilcorp’s well spacing and drilling unit application because the PADEP, and not the PAEHB, has original jurisdiction to issue well spacing and drilling unit orders under the Oil and Gas Conservation Law. Chief Judge Renwand’s opinion noted that the Oil and Gas Conservation Commission, the since-abolished entity established by the Oil and Gas Conservation Law to issue well spacing and drilling unit orders, “was a very specialized and technical agency” with the “power to file enforcement actions”, issue permits, hold public hearings, and conduct other regulatory type actions. According to Chief Judge Renwand, these powers, duties, and responsibilities of the former Oil and Gas Conservation Commission are analogous to the current powers, duties, and responsibilities of the PADEP and not related to the PAEHB’s role “as an independent quasi-judicial agency” that is “completely independent of the [former, now PADEP] Department of Environmental Resources.” Judge Mather wrote a concurring opinion noting that the PADEP currently has “effective and binding regulations” at 25 Pa. Code Chapter 79 that implement the Oil and Gas Conservation Law and direct the PADEP “to issue orders establishing well spacing and drilling units, in the first instance, that can then be appealed to the Board.”
On November 18, 2013, the Third Circuit affirmed a summary judgment ruling out of the Middle District of Pennsylvania in favor of Shell Western Exploration and Production, LP (Shell) in a case captioned as George W. Linder, et al. v. SWEPI, LP, a/k/a Shell Western Exploration and Production, LP; Case No. 13-1674 (3d Cir. November 19, 2013). The plaintiffs conveyed their oil and gas rights for 338 acres to Shell’s predecessor-in-interest via a lease (the Lease). The Lease had a primary term of ten years and, by its terms, would continue in effect past the primary term if productive activity continued on the leasehold. Shell’s predecessor-in-interest unitized an area of 526.94 acres, which included 137.81 acres of the plaintiffs’ 338-acre leasehold. The primary term of the Lease expired in September 2010, but the parties agreed that the Lease continued in effect because Shell continued to engage in productive activity on the leasehold. However, the plaintiffs demanded a delay rental payment for the non-unitized portion of the Lease based on the Lease’s Unitization Clause which provided: “If the total unitized Leasehold acreage is less than 50 percent of the total Leasehold acreage, Delay Rental will continue to be paid on the non-unitized acreage.” Shell agreed to pay the delay rentals for the non-unitized acreage. Both parties then changed their positions a number of times as to whether the Lease remained in effect for the 200.19 acres that were never unitized. The plaintiffs ultimately filed a lawsuit in state court seeking a declaratory judgment that the Lease expired as to the non-unitized acreage. Shell removed the case to the United States District Court for the Middle District of Pennsylvania, and moved for summary judgment in its favor. The District Court granted summary judgment finding that, as a matter of law, the Lease did not expire with respect to the non-unitized acreage.
The plaintiffs then appealed to the Third Circuit with their principal argument being that “upon the occurrence of unitization of less than 50 percent of the entire leasehold, there are as a matter of law two leasehold parcels.” The Third Circuit affirmed the ruling of the District Court holding that the plaintiffs’ position is an “untenable reading of the Lease.” In so holding, the Third Circuit relied upon the “obvious reading” of the Lease terms finding that the Lease continues in effect while operations are conducted on the leasehold, and the Lease refers to the leasehold as a single, undivided entity that is 338 acres in size. Moreover, the Third Circuit quickly dismissed the plaintiffs’ argument that the Lease’s Unitization Clause supports their interpretation. In this regard, the Third Circuit held that this language does nothing to separate the unitized and non-unitized acreages—rather, it simply obligated Shell to pay a delay rental on the non-unitized acreage. Additionally, citing to Pennsylvania case law, the Third Circuit held that Shell’s failure to timely pay the delay rental did not constitute a material breach of the Lease because a brief delay in payment where the Lease contains no “time-is-of-the-essence” provision does not amount to a material breach. Lastly, the Third Circuit held that Shell did not surrender the non-unitized acreage by initially agreeing in a letter to do so, because the Lease’s surrender clause requires the recording of a Surrender of Lease as a necessary prerequisite to the legal surrender of any rights. Accordingly, based on what it viewed as the obvious interpretation of the Lease provisions, the Third Circuit affirmed the District Court’s decision to grant summary judgment in favor of Shell.
The Pittsburgh Post-Gazette reports that Allegheny County Council rejected a proposed three-year moratorium on natural gas drilling within county parks. The measure failed 2-9, with four council members abstaining because of conflicts of interest. The bill was originally proposed by Barbara Daly Danko, D-Regent Square, in September.
On November 12, 2013, the Joint Landowners Coalition of New York announced that it has finalized a complaint which the group intends to file in New York state court over the delay in deciding the future of shale drilling in the State. The complaint, which names New York State, Governor Cuomo and the commissioners of the Department of Environmental Conservation and the Department of Health as defendants, asserts that the State’s five-year-old hydraulic fracturing moratorium is illegal and amounts to an unconstitutional “taking” of the plaintiffs’ property without just compensation. Before filing the lawsuit, however, the group is seeking funds to finance the lawsuit.
This week the U.S. House of Representatives voted to pass a trio of key energy bills. In addition to the bill that would limit federal regulation of hydraulic fracturing, the House also passed two bills that include provisions aimed at reforming federal permitting processes. By a vote of 228-192, the House passed the Federal Lands Jobs and Energy Security Act (HR 1965), which would, for example, require the Department of the Interior to decide on a federal lands drilling permit application within 60 days of receipt or the application would be deemed approved. Today, the House voted 252-165 to pass the Natural Gas Pipeline Permitting Reform Act (HR 1900), which would require the Federal Energy Regulatory Commission (FERC) to approve or deny a certificate of public convenience and necessity for a prefiled project within 12 months after receiving a complete application, and would also require other federal agencies to act on related licenses, permits or approvals within 90 days of FERC issuing an environmental impact statement. The Obama administration has reportedly threatened to veto all three bills.
The U.S. House of Representatives passed a bill prohibiting the Interior Department from enforcing regulations on hydraulic fracturing in any state that already has regulations in place. The bill recognizes the states’ authority to regulate hydraulic fracturing within their borders and was passed in reaction to recent federal regulations that have been proposed to regulate hydraulic fracturing. The House bill would not prevent the federal government from implementing baseline standards in states where none exist. However, under the legislation federal regulations would not be permitted to supersede the applicable states’ laws.
In order to fill vacancies at the Department of the Interior, President Obama recently nominated Janice Schneider as Assistant Secretary for Land and Minerals Management, a move welcomed by Secretary Sally Jewell. Currently an environment and energy lawyer in private practice in Washington, D.C., Schneider, if confirmed, will oversee all energy development activities on federal lands and supervise the Bureau of Land Management (BLM), the Bureau of Ocean Energy Management (BOEM), and the Bureau of Safety and Environmental Enforcement. Also nominated were Neil Kornze as Director of the BLM and Tommy Beaudreau as Assistant Secretary for Policy, Management, and Budget. Because Beaudreau currently serves as head of the BOEM, Secretary Jewell is expected to pick his replacement upon confirmation of his new role.
On October 24, 2013, the U.S. District Court for the Middle District of Pennsylvania denied Columbia Gas Transmission, LLC’s (Columbia) request to use the eminent domain authority provided in the Natural Gas Act to acquire new pipeline easements from certain landowners in York County, Pennsylvania. Columbia filed the request to facilitate its efforts to replace and relocate portions of an existing gas pipeline in order to comply with the Pipeline and Hazardous Materials Safety Administration’s integrity management program requirements in Subpart O of 49 C.F.R. Part 192. Although the company’s efforts obtain the necessary easements through private negotiation had proved unsuccessful, the Court concluded that Columbia had not shown that the Federal Energy Regulatory Commission’s regulations for performing activities under a blanket certificate would allow the easements to be acquired through the use of eminent domain.
The Pennsylvania Public Utility Commission (“PUC”) unanimously approved a settlement that merges Equitable Gas Co. with Peoples Natural Gas Co. and transfers certain pipeline assets from Peoples to EQT Corp., the parent company of Equitable. The PUC approved Administrative Law Judge Mark Hoyer’s Initial Decision, which found the settlement to be in the public interest. The companies filed a joint application for all of the necessary PUC approvals on March 19, 2013.