On May 20, 2016, the Middle District of Pennsylvania granted summary judgment in favor of Babst Calland’s client in Montrose Hillbillies II, LLP v. WPX Energy Keystone, LLP and Stern Marcellus Holdings, LLC , a case involving the extension of the primary term of an oil and gas lease. The plaintiff, a successor lessor, filed a quiet title action to strike the extension of an oil and gas lease where the extension payment was tendered to the prior owner of the property, rather than to the plaintiff. The plaintiff asserted that the payment was insufficient to extend the lease. The defendant lessee maintained that the primary term of the lease was properly extended pursuant to the lease terms because neither the plaintiff nor the prior lessor provided the lessee notice of the ownership change, and it was the lessor’s duty to do so under the lease. The District Court held that the defendants’ payment to the prior owner fulfilled any extension obligation under the lease, as the plaintiff admitted that the defendants were not notified of the ownership change.
The District Court rejected the plaintiff’s argument that it was not bound by the extension provision and notice of ownership change provision because such terms were not disclosed in the memorandum of oil and gas lease filed of record in place of the actual lease. The memorandum contained the basic terms of the lease but did not provide all the provisions of the agreement between the lessor and lessee. The plaintiff asserted that it was a bona fide purchaser without constructive notice of the unrecorded provisions, including the extension provision and notification requirement for ownership change, and was entitled to rely solely on the recorded memorandum of lease. The District Court held that there is a duty under Pennsylvania law for a purchaser to undertake a reasonable inquiry into the title of the property being purchased before being considered a bona fide purchaser. The Court held that due diligence by the purchaser includes both an examination of recorded documents and an inquiry of the possessor or other parties where there is reason to believe such persons may know facts related to the title of the property. Under the circumstances of the case, the Court found that the plaintiff had notice of the lease and it was reasonable for it to have requested a copy of the full lease to become aware of each of its provisions.
StateImpact Pennsylvania reports that Pennsylvania Governor Tom Wolf wants natural gas drillers to pay a 6.5% severance tax on natural gas production, which he estimates will bring in $217.8 million dollars for the 2016/2017 fiscal year, a fraction of the billion dollars he projected last year’s severance tax proposal would generate.
The newest enactment of the proposed severance tax will keep the state’s impact fee, but will offer producers a credit for those fees which would reduce their severance tax payments. That proposal was not included in last year’s unsuccessful attempt to impose a tax of 5 percent plus a separate fee of 4.7 cents per thousand cubic feet of gas each well produces. The proposal has been met with fierce opposition from industry leaders, who state that Governor Wolf is ignoring market realities of low oil and gas prices which have recently forced producers to cut capital expenditures.
Yesterday, the Pennsylvania Supreme Court issued Harrison v. Cabot Oil & Gas Corp., a significant opinion in which the Court refused to apply equitable tolling principles that other oil and gas jurisdictions have adopted. Such principles prevent oil and gas leases from expiring during the pendency of lease litigation.
The lessors in this case filed a declaratory judgment action and a fraudulent inducement claim in federal court challenging the validity of their lease, which was two years into its primary term. Out of an abundance of caution, the operator refrained from all operations during the pendency of the litigation. It then asserted a counterclaim seeking to equitably toll the lease in the event it prevailed. Though the operator successfully defeated the lessors’ claims, the District Court denied its equitable tolling claim. As a result, the lease expired while the case was being litigated.
The operator appealed to the Third Circuit, which certified the case to the Pennsylvania Supreme Court on the grounds that it was an issue “of first impression and of significant public importance, given that its resolution may affect a large number of oil-and-gas leases in Pennsylvania.”
In a unanimous decision, the Pennsylvania Supreme Court upheld the District Court’s decision not to toll the lease. In so ruling, the Court noted that its decision went against other jurisdictions that have decided this issue. The Court also noted that the operator should have addressed the issue in its lease by adding a tolling provision. The Court also held that the result may have been different if the lessors had prevented the operator from entering the property to conduct operations.
The case is significant in several respects. First, it opens the door for lessors to try to “run out the clock” on leases by filing frivolous lease litigation. Second, it imposes on operators the obligation and risk to continue operations even in the face of suits challenging the validity of their leases. Third, if a lessor files suit to challenge a lease’s validity, and simultaneously denies the operator the right to conduct operations, the operator must now consider filing for equitable relief through an injunction before seeking to toll the lease term. Lastly, it essentially requires operators to add tolling provisions to their new leases.
Ohio’s Fifth District Court of Appeals recently held that the 1989 version of Ohio’s Dormant Mineral Act applies to current disputes concerning ownership of severed mineral estates. The court in Wendt v. Dickerson followed previous rulings from the Seventh District Court of Appeals to find that the 1989 DMA is self-executing in nature and automatically vests ownership of a severed mineral estate in the surface owner after a 20-year period of non-use. The Ohio Supreme Court is expected to provide the definitive ruling on whether the 1989 or 2006 version of the DMA applies in early 2015.
On May 9, 2014, in the case of Herder Spring Hunting Club v. Keller, the Superior Court of Pennsylvania issued an opinion addressing the termination of outstanding oil and gas interests through a tax sale in Pennsylvania. The property at issue was subject to a severance of oil and gas rights in 1899, and then later sold in a 1935 tax sale to the Centre County Commissioners. The appellants argued that the 1935 unseated tax sale extinguished all prior oil and gas interests and was a “title wash” which divested all prior owners of their respective interests. The Superior Court agreed with the appellants, reversing the trial court and granting summary judgment in their favor. The Superior Court held that the appellees’ predecessors failed to follow certain procedures in place at the time of the 1935 tax sale that could have preserved their interest in the oil and gas. This case is the first appellate decision addressing the “title wash” of subsurface property rights since the development of the Marcellus Shale formation in Pennsylvania began.
The PA Environment Digest reports that the Independent Regulatory Review Commission (IRRC) approved an Environmental Quality Board regulation increasing oil and gas well fees. Additional information regarding IRRC’s approval can be found at its website. Under the current rule, fees are calculated based on wellbore length. Under the proposed rule, which was previously published in the Pennsylvania Bulletin, “unconventional nonvertical wells” and “unconventional vertical wells” will be assessed a fee of $5,000 and $4,200, respectively, regardless of total well bore length. Currently, the average permit fee is $3,200.
The Pittsburgh Business Times reports that Allegheny County has reached a deal with Range Resources and Huntley & Huntley as to leasing the oil and gas under Deer Lakes Park in Allegheny County, Pennsylvania. Allegheny County Executive Rich Fitzgerald announced the county will receive $4.7 million in bonus payments, $3 million for the Park Improvement Fund, and a 18% royalty. He also announced that operations in Deer Lake Park are prohibited by the terms of the lease. The deal must be approved by Allegheny County Council.
As reported by legal news website Law360, a Pennsylvania bill was approved by the House Environmental Resources and Energy Committee that would amend the Guaranteed Minimum Royalty Act of 1979 (GMRA) and will move to the House floor. House Bill 1684 would amend the GMRA to clarify the definition of the minimum royalty payable under an oil and gas lease. The GMRA already sets the minimum threshold at one-eighth, but does not clearly define how royalties should be calculated. House Bill 1684 would prevent operators from reducing royalty payments by the costs of production if the reductions would result in a payment of less than a one-eighth royalty. Supporters of the bill say that landowners should be protected from the possibility of unfair deductions and calculations of their royalty payments by oil and gas operators. Opponents of the bill argue that the bill violates both the state and federal constitutions by changing the terms of leases already in existence and that the bill would result in excessive litigation, which would not ultimately benefit the landowners that the bill seeks to protect.
The Pennsylvania Supreme Court on Friday, February 21, 2014, denied an Application for Reargument or Reconsideration filed by the Commonwealth of Pennsylvania regarding the Act 13 decision. The December 19, 2013 Opinion and Order of the Supreme Court will stand. However, in a dissenting statement, Justice Saylor wrote that, “I am fully in line with the position that ‘[f]undamental fairness to a co-equal branch of government, as well as adherence to this Court’s precedent and established procedure, mandates that the [Commonwealth parties] be afforded a reasonable opportunity to present evidence before any judicial proclamation is made about whether Act 13 satisfies the newly-mandated balancing test under Section 27’ of Article I of the Pennsylvania Constitution. . . . The judiciary simply does not possess the ability to divine the consequences of a legislative enactment absent a developed factual record.”
As expected, the recent increase in shale production and exploration has caused a major increase in job creation in the oil and gas industry, recent reports show. According to data released by the Energy Information Administration and the U.S. Department of Labor, over a six year period ending in 2012, industry employment jumped 40%, or approximately 162,000 jobs. By comparison, the entire private sector in America grew by just 1%, or approximately one million jobs.
The Labor Department numbers show that the job creation seen in the “extraction” and “support” subcategories of the industry have grown the most. Extraction jobs, which range from exploration through some aspects of production, grew by nearly 40%. Similarly, support jobs, which are limited to areas like excavation and well construction and maintenance, and do not include housing and manufacturing data, grew by approximately 55% between 2007 and 2012.
The growth in industry employment is necessary to sustain the nation’s rising energy production; over the same six-year period, domestic crude oil production grew 39%, while natural gas production increased by 25%.