Alert: Obama-Era WOTUS Rule Back In Effect, What Happens Now?

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.

The 2018 Babst Calland Report Focuses on the Appalachian Basin Oil & Gas Industry Forging Ahead Despite Obstacles

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.

Alert: Pennsylvania DEP Finalizes Significant Changes to Air Permitting Programs for Oil and Gas Industry

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.

Federal Court Upholds Constitutionality of Ohio’s Unitization Statute

A federal district court in Ohio recently upheld the constitutionality of Ohio’s forced pooling statute (R.C. § 1509.28) in Kerns v. Chesapeake Exploration, LLC, et al., N.D. Ohio No. 5:18 CV 389 (June 13, 2018). R.C. § 1509.28 establishes the procedure for owners to combine contiguous acreage and interests to efficiently and effectively develop the oil and gas resources underlying that land. Additionally, the statute grants the chief of the division of oil and gas resources management the authority to compel landowners unwilling to lease their land to join in drilling operations. The constitutional challenge in Kerns involved the same group of landowners whose writ of mandamus was rejected by the Ohio Supreme Court in January. Following their unsuccessful challenge at the Ohio Supreme Court, the landowners alleged that R.C. § 1509.28 violated their constitutional rights under the Fifth and Fourteenth Amendments by authorizing an impermissible taking of their property. In rejecting the constitutional challenge, the federal district court relied on previous decisions from the United States Supreme Court holding that the statute was a legitimate exercise of Ohio’s police powers to protect correlative rights and reduce waste. In deeming R.C. § 1509.28 constitutional, Ohio courts join the well-settled national consensus that unitization procedures do not constitute an impermissible taking of property.

Alert: Pennsylvania Supreme Court Reverses Approval of Oil and Gas Well on Narrow Grounds

In Gorsline, Court Declines to Rule on Broader Issue of Compatibility With Uses in Residential and Agricultural Zoning Districts, but Suggests that Municipalities May Permit Unconventional Natural Gas Drilling in any and all Zoning Districts

The Pennsylvania Supreme Court published its long-awaited opinion in Gorsline v. Board of Supervisors of Fairfield Township on June 1, 2018.  Although the majority reversed the Commonwealth Court’s decision affirming the granting of a conditional use for an unconventional natural gas well pad, it did so in a narrow holding, finding that Inflection Energy, LLC (Inflection) did not present enough evidence before the Fairfield Township (Township) Board of Supervisors (Board) establishing that its proposed unconventional gas well pad was similar to other uses allowed in the Township’s  Residential-Agricultural Zoning District (R-A District).  Unlike most zoning ordinances, the Township’s zoning ordinance did not specifically authorize oil and gas wells.  Instead, Inflection had relied upon a “savings clause,” which allowed uses “similar to” the other uses specifically allowed in the R-A District.

Despite headlines and press releases touting the Gorsline decision as a wholesale rejection of oil and gas development in residential and agricultural zoning districts, its ruling was much more limited.  In fact, language in both the Gorsline majority and dissenting opinions largely rejects the post-Robinson Township assertion of many shale gas opponents that natural gas wells must be relegated to industrial zoning districts and are fundamentally incompatible with residential or agricultural zoning districts.

Please read more about the decision in this alert.

Alert: Second Circuit Affirms Gathering Agreements can be Rejected in Bankruptcy

On May 25, 2018, in In re: Sabine Oil & Gas Corporation, 2018 WL 2386902 (2d. Cir. May 25, 2018), the United States Court of Appeals for the Second Circuit affirmed that a bankrupt energy and production company could reject its gas gathering agreements with a midstream company under Section 365 of the Bankruptcy Code because the gas gathering agreements did not create or involve an interest in real property.  Please read more about the decision in this alert.

Environmental Alert: Fourth Circuit’s “Conduit Theory” Decision Extends CWA Liability for Migrating Groundwater

On April 12, 2018, the Fourth Circuit Court of Appeals became the second federal appellate court to recognize the so-called groundwater “conduit theory” of liability under the Clean Water Act. The decision in Upstate Forever v. Kinder Morgan Energy Partners, L.P., No. 17-1640, has broad implications for many industries. Please read more about the decision in this alert.

Governor Justice Signs Bill Prohibiting Deduction of Post-Production Costs from Converted Flat-Rate Leases

Governor Jim Justice signed Senate Bill 360 relating to payment of royalties pursuant to flat-rate oil and gas leases on Friday, March 9, 2018. The law is effective on May 31, 2018. Previously, West Virginia law prohibited the issuance of permits for new wells or reworked wells on flat-rate leases unless the owner of the working interest agreed to pay the owner of the oil or gas a set royalty of at least one eighth of the proceeds “at the wellhead.” The Supreme Court of Appeals recently interpreted the statute as allowing the operator to deduct post-production expense when computing royalty. The bill now requires that owners of oil or gas receive not less than one eighth of the gross proceeds, free from any deductions for post-production expenses, received at the first point of sale to an unaffiliated third-party purchaser in an arm’s length transaction.

Employment & Labor Alert: Wage Hour Division Announces PAID Program to Assist with FLSA Compliance

On March 6, 2018, the Wage and Hour Division of the U.S. Department of Labor (WHD) announced a new pilot program, the Payroll Audit Independent Determination (PAID) program, which is intended to encourage employers to identify and correct potentially non-compliant practices.

According to DOL’s Q&A page on the PAID program (https://www.dol.gov/whd/PAID/#4) “The PAID program provides a framework for proactive resolution of potential overtime and minimum wage violations under the FLSA. The program’s primary objectives are to resolve such claims expeditiously and without litigation, to improve employers’ compliance with overtime and minimum wage obligations, and to ensure that more employees receive the back wages they are owed—faster.”  To read more: click here.

Co-Tenancy Bill Signed by Governor Jim Justice

On Friday, March 9, 2018, Governor Jim Justice signed West Virginia Senate  HB 4268, known as the “Cotenancy Modernization and Majority Protection Act” into law, effective July 1, 2018.  As discussed in our post from last week, the passage of this legislation is the culmination of years of negotiations and compromise between West Virginia elected officials, the industry, landowners and mineral owners.  The bill is designed to streamline the oil and gas leasing process and facilitate further development without unnecessary delay, by carving out an exception to the West Virginia statute governing waste between certain co-tenants (individuals that all own undivided interests in the same tract of land).

Under the existing law (W. Va. Code § 37-7-2) development of oil and gas from a tract of land without the consent of all the owners, or co-tenants, of the same will result in waste, with any party committing such waste being subject to their operations being enjoined and/or treble damages.  The new law states that development of oil and gas under certain conditions will not constitute waste. The bill states that any tract held by seven or more co-tenants can be developed upon the consent of 75% of such co-tenants.  However, the proposed operator must make reasonable efforts to negotiate leases with all of the oil and gas owners before they can find protection under the proposed new law.

Non-consenting co-tenants can either accept royalties equal to the highest percentage royalties paid to one of the consenting parties, proportionally reduced to their respective fractional interest, or elect to participate in the development and bear equal development and other costs with the lessee.  Unknown or unlocatable owners will be limited to receiving royalties equal to the highest percentage royalties paid to one of the consenting parties.  The statute also allows surface owners to reclaim the oil and gas title held by any unknown or unlocatable owners after seven years.

The bill strikes a delicate balance between all stakeholders by protecting land and minerals owners while updating the law for the horizontal drilling era.

WV Senate and House Pass Co-Tenancy Bill, Awaits Governor’s Signature

Today, the West Virginia Senate passed HB 4268, popularly known as the “co-tenancy” bill.  Formally titled as the Co-tenancy Modernization and Majority Protection Act, the bill was designed to streamline the oil and gas leasing process and facilitate further development without unnecessary delay.  The bill passed the House of Delegates on February 15, 2018.

If accepted by the governor, HB 4268 would carve out an exception to the West Virginia statute governing waste between certain co-tenants (individuals that all own an undivided interests in the same tract of land).  Under the existing law (W. Va. Code § 37-7-2) development of oil and gas from a tract of land without the consent of all the owners, or co-tenants, of the same will result in waste, with any party committing such waste being subject to their operations being enjoined and/or treble damages.  The new law states that development of oil and gas under certain conditions will not constitute waste.

Upon final passage of the bill, any tract held by seven or more co-tenants can be developed upon the consent of 75% of such co-tenants.  However, the proposed operator must make reasonable efforts to negotiate leases with all of the oil and gas owners before they can find protection under the proposed new law.  Non-consenting co-tenants can either accept royalties equal to 12.5% of the oil or gas produced, proportionally reduced to their respective fractional interest, or elect to participate in the development and bear equal development and other costs with the lessee.  Unknown or unlocatable owners will be limited to receiving the 12.5% royalty.  The statute also allows surface owners to reclaim the oil and gas title held by any unknown or unlocatable owners after seven years.

Governor Justice of West Virginia said earlier this week that he would veto the co-tenancy bill if it found his desk, but has purportedly changed his mind.  The bill must obtain the concurrence of the West Virginia House of Delegates before being sent to the Governor’s desk.

Challenge to Constitutionality of Ohio’s Forced Pooling Statute Rejected on Procedural Grounds

The Ohio Supreme Court recently rejected a constitutional challenge to Ohio’s forced pooling statute in State ex rel. Kerns v. Simmers, Slip Opinion No. 2018-Ohio-256. A group of landowners (the “Landowners”) sought a writ of mandamus compelling the Chief of the Ohio Department of Natural Resources (ODNR) to commence appropriation proceedings to compensate landowners with interests included in an oil and gas drilling unit through a unitization order. The Landowners alleged that the Chief’s order issued pursuant to R.C. 1509.28 was “unlawful or unreasonable” and constituted an unconstitutional taking of their property without compensation. Under R.C. 1509.36, the Landowners appealed the Chief’s order to the Ohio Oil and Gas Commission (the “Commission”). The Commission, concluding that it lacked jurisdiction to determine the constitutionality of the order, dismissed the appeal. Instead of appealing the Commission’s decision to the Franklin County Court of Common Pleas within 30 days as permitted by R.C. 1509.37, the Landowners filed a petition for a writ of mandamus to the Ohio Supreme Court.

The Ohio Supreme Court denied the writ and dismissed the Landowners’ case, reasoning that the Landowners failed to utilize the adequate legal remedy available. To be entitled to a writ of mandamus, the Landowners needed to show (1) that they had a clear legal right to appropriation proceedings, (2) that the ODNR had a clear legal duty to commence the proceedings, and (3) that the Landowners had no plain and adequate legal remedy. Under R.C. 1509.37, the Landowners could have appealed the Commission’s decision to the Franklin County Court of Common Pleas to determine the constitutionality of the unitization statute. In denying the writ, the court determined that the Landowners had a complete, beneficial and speedy remedy at law by way of an appeal to the Franklin County Court of Common Pleas as provided in R.C. Chapter 1509 and should have pursued their appeal there. While dismissing this challenge on procedural grounds, it appears inevitable that the Ohio Supreme Court will ultimately have to determine the constitutionality of Ohio’s forced pooling statute.

Pennsylvania Superior Court Upholds “Title Washing”

In Woodhouse Hunting Club, Inc. v. Hoyt, an unpublished opinion filed February 2, 2018, the Pennsylvania Superior Court upheld the practice of “title washing” of unseated land in Pennsylvania. Prior to January 1, 1948, title washing occurred through a tax sale of unseated land from which oil, gas and/or minerals (the “subsurface estate”) had been previously severed. If the subsurface estate had not been separately assessed, the tax sale of the unseated land would extinguish the prior severance and vest the tax sale purchaser with full ownership in the surface and subsurface estates. If the oil and gas had been separately assessed, then the tax sale of the surface would have no effect on the subsurface estate. After January 1, 1948, mineral estates were no longer separately assessed from the surface in Pennsylvania and title washing could no longer occur. In 2016, the Pennsylvania Supreme Court upheld the practice of “title washing” of unseated or unimproved land in Pennsylvania. Herder Spring Hunting Club v. Keller, 143 A.3d 358 (Pa. 2016).

Prior to the Superior Court ruling, the trial court had quieted title in favor of Woodhouse Hunting Club, Inc. based upon the Club’s argument that Hoyt did not own subsurface mineral rights due to a 1902 title wash. In issuing its ruling in Hoyt, the Superior Court noted that the Herder Spring decision addressed and disposed of all of Hoyt’s issues in the case. Therefore, the Superior Court relied on the holding in Herder Spring in affirming the trial court’s decision to grant summary judgment and quiet title in favor of Woodhouse Hunting Club, Inc.

Environmental Legal Perspective: The Underground Reach of the Clean Water Act: It’s Not Just for Surface Water

Since its enactment in 1972, the federal agencies who administer the Clean Water Act (the Act), the Environmental Protection Agency (EPA) and the United States Army Corps of Engineers (the Corps), have taken the position that the definition of “waters of the United States” governed by the Act (also known as “jurisdictional waters”) does not include groundwater. Regulation of groundwater therefore falls outside the scope of the Act. To read more: click here.

Pennsylvania legislature attempts to inject new life into expired oil and gas leases

On October 30, Governor Tom Wolf signed House Bill 74, which amended the Pennsylvania Fiscal Code. The 90-page bill included Section 1610-E, entitled “Temporary Cessation of Oil and Gas Wells,” which codified certain rights of oil and gas lessors and lessees to extend leases during periods of temporary cessation of production. This article explores how traditional savings clauses found in leases and existing legal precedent may be impacted by Section 1610-E, and provides an analysis of potential challenges arising out of the application of this new law. Click here to read this article from the January issue of The PIOGA Press.