On July 19, in Herder Spring Hunting Club v. Keller (Case No. 5 MAP 2015), the Pennsylvania Supreme Court ruled in a 5-0 decision to confirm the practice of “title washing” of unseated or unimproved 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 Herder Spring, the Court held that a 1935 tax sale for unseated land which was subject to an unassessed 1899 subsurface severance conveyed both the surface and subsurface estates. Citing prior case law, the Court reasoned that, under the prior tax sale law, taxes on unseated land were against the land itself rather than any particular owner. The law placed a duty on the owner of a severed interest to notify the taxing authorities. Tax commissioners had no duty to search the deed records to discover severances relating to unimproved lands. Therefore, if the subsurface was never separately assessed, then the property would be assessed and taxed as a whole, and a tax sale thereunder would encompass the entire estate. Additionally, the Court pointed out that owners of the mineral estate had two years to challenge the tax sale or redeem the property, but failed to do so. The Court also rejected the Appellants’ due process and estoppel by deed argument.
The Court limited its holding in Herder Spring to a very narrow subset of cases and noted that its decision would not govern: (i) tax sales for assessments of surface or mineral rights only; (ii) tax sales where severances occurred after the tax assessment; or (iii) situations in which surface owners can meet the adverse possession standard.
Justice Todd filed a concurring opinion agreeing with the majority but for its position on Appellants’ due process claim that notice by publication of the tax sale was inadequate. According to Justice Todd, such claim was waived for purposes of this appeal because it was untimely raised.
On July 15, a Judge for the U.S. District Court for the Middle District of Pennsylvania found that SWEPI LP (“SWEPI”) was obligated to pay bonuses under an oil and gas lease that it had surrendered prior to a 90 day title verification period. In Masciantonio , et al. v. SWEPI LP, the plaintiff-landowners executed oil and gas leases, with attached addenda, in favor of SWEPI for a primary term of five years. The leases stated “[i]n consideration of the bonus consideration paid, the receipt of which is hereby acknowledged,…Lessor does hereby grant…to Lessee,…the lands hereafter described for the purpose of exploring for, developing, producing and marketing oil, gas or their related substances.” The addenda included a payment provision stating that “[i]in consideration for the attached paid-up Oil and Gas Lease, Lessee hereby agrees to pay Lessor [$4,000.00] per net mineral acre. Payment shall be due within ninety (90) banking days of the Lessor presenting the Bank Draft to the financial institution of his/her/their choosing. All payment obligations are subject to title verification by Lessee.” SWEPI presented bank drafts to the plaintiffs, who presented them to their respective banks. Prior to 90 days thereafter, SWEPI decided to surrender the leases, due to a geohazard running through the leased premises and the presence of competitor leases covering neighboring lands. Upon surrender of the leases, SWEPI cancelled the bank drafts.
The plaintiffs brought suit for breach of contract, claiming that the obligation to pay the bonuses accrued immediately upon the parties executing the leases, and that the surrender did not extinguish SWEPI’s payment obligation. SWEPI countered with several arguments, all of which were rejected by the Court. First, SWEPI argued that the leases were ineffective, because the payment of the bonus was the sole consideration for the lease, without which the leases never went into effect. SWEPI also argued that the leases were subject to a condition precedent to formation and were ineffective unless and until SWEPI verified plaintiffs’ title to the property. The Court found that the language of the leases indicated that the actual consideration was the exchange of a bargained-for promise, not the immediate exchange of the value thereof. Similarly, the title verification condition operated as a condition precedent to the obligation to pay, not to the formation of the contracts. Therefore, the leases were valid and enforceable, despite the lack of bonus payment.
Next, the Court considered the two interpretations of the lease provisions presented by each party and determined that the plaintiffs’ interpretation was the more reasonable one. SWEPI argued that the contract terms allowed it to dishonor the bank drafts for any reason, or for no reason, until the expiration of the 90-day banking period. SWEPI presented language of industry standards, quoting Williams & Meyers’ Oil & Gas Law, which said that the use of a bank draft which will not become effective for a period of time subject to approval of title was often used by lessees to void a lease if they decided that conditions were no longer desirable. However, the Court found that the industry standards, including Williams & Meyers’, always provided that the precise language of the lease controlled and did not support an across-the-board provision that the use of a bank draft allows a lessee to void a lease for any reason until the expiration of a certain time period. The Court further stated that the language of the SWEPI leases consisted of an unequivocal agreement by SWEPI to pay the bonus and further provided a description of the time and manner in which it must do so. Therefore, the language did not provide SWEPI with the opportunity to avoid payment but instead bound SWEPI to pay, subject only to the condition of title verification. SWEPI was unable to present any meaningful evidence that it decided to surrender the leases due to a problem with plaintiffs’ title. On the contrary, plaintiffs presented sufficient evidence that they had good title to the leased premises. The Court further rejected the argument that the factors of geohazards and competitor activity on neighboring lands were part of the consideration of “title verification.” Those considerations were encompassed under the realm of a title “examination,” but not “title verification,” according to the plain meaning of such terms.
For those reasons, the Court held that SWEPI breached its obligation under the valid oil and gas leases and it was required to pay the bonus to the plaintiffs.
On June 23, 2016, Governor Tom Wolf signed the Pennsylvania Grade Crude Development Act (S.B. 279), which abrogates the Environmental Quality Board’s revisions to the Chapter 78 regulations concerning conventional oil and natural gas wells. The Act provides that any future EQB rulemakings concerning conventional oil and natural gas wells must be undertaken “separately and independently” of those applicable to unconventional wells and must include a regulatory analysis form submitted to the Independent Regulatory Review Commission that is restricted to the subject of conventional wells. The Act also creates the Pennsylvania Grade Crude Development Advisory Council (“PGCDAC”), which will consist of 17 members, including representatives from the Pennsylvania Independent Oil and Gas Association, Pennsylvania Grade Crude Oil Coalition, and the Pennsylvania Department of Environmental Protection. The PGCDAC is tasked with, among other items: (1) examining and making recommendations regarding certain existing technical regulations; (2) reviewing and commenting on the formulation and drafting of all technical regulations promulgated under the Oil and Gas Act; and (3) exploring the development of a regulatory scheme that provides for environmental oversight and enforcement specifically applicable to the conventional oil and natural gas industry. The Act takes effect immediately.
After first acquiring an option agreement in 2012 for a 340-acre site, and then purchasing the site in 2014, Shell Chemical Appalachia has officially announced that it will build a multi-billion dollar ethane cracker plant on the site of the former Horsehead zinc smelter in Beaver County, Pennsylvania. The site will consist of the cracker, two units that will convert ethylene into polyethylene pellets, a natural gas-fired power plant, a loading dock, and a wastewater plant. It is estimated that constructing the plant will employ approximately 6,000 workers. Thereafter, the plant will permanently employ about 600 workers. The plant is expected to consume approximately 105,000 barrels of ethane per day and Shell has reportedly secured supplier commitments from at least 10 oil and gas operators in the region. Primary construction on the site is expected to start in approximately 18 months.
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.
Pennsylvania Governor Tom Wolf announced on Friday that he accepted the resignation of John Quigley as Secretary of the Department of Environmental Protection. The Governor thanked Mr. Quigley for his service to the commonwealth and stated that, effective immediately, Patrick McDonnell will serve as Acting Secretary of the DEP. Most recently, Mr. McDonnell was the DEP’s director of policy.
On May 3, 2016, the Pennsylvania House Environmental Resources and Energy Committee (“ERE Committee”) voted 19-8 to advance a concurrent resolution that would disapprove the Chapter 78/78a regulations that were approved for promulgation by the Environmental Quality Board (“EQB”) in February of this year. The concurrent resolution states that the regulations: (1) violate Act 126 of 2014, which requires EQB to promulgate conventional and unconventional regulations separately; (2) disregard the Pennsylvania Supreme Court’s ruling in Robinson Township, which enjoined portions of Section 3215 of the Oil and Gas Act (also known as Act 13 of 2012); and (3) do not comply with the Regulatory Review Act. The House and Senate have 30 calendar days, or 10 voting session days, whichever is longer, from the date the resolution is reported out of committee to pass the concurrent resolution and present it to the Governor. If the Governor does not veto the concurrent resolution, or if his veto is overridden by the General Assembly, EQB will be barred from promulgating the regulations.
On April 27, 2016, the Pennsylvania Department of Environmental Protection (DEP) announced that it has initiated an “unprecedented expansion” of the Commonwealth’s particulate matter air monitoring network to include additional monitors in areas near natural gas development. The expansion project will include 10 additional DEP monitoring stations and has a target completion date of fall 2017.
DEP plans to implement the expansion project in three stages, with one monitoring station added to each of 10 counties. DEP completed Phase 1 earlier this year with the addition of air monitoring stations in Towanda Township, Bradford County, and Holbrook Township, Greene County. The Department expects to complete Phase 2 by the end of 2016 by adding monitoring stations in Fayette, Indiana, Lycoming, Susquehanna, and Wyoming Counties. Phase 3 has a target completion date of fall 2017 and will include air monitoring stations in Clarion, Jefferson, and McKean Counties.
The following statement is from Babst Calland environmental regulatory attorney Jean Mosites who provided testimony at yesterday’s daylong public hearing on the subject of proposed revisions to 25 Pa. Code Chapter 78 submitted by the Department of Environmental Protection.
As evidenced by the quality and quantity of thoughtful testimony given by businesses that will be impacted by these regulations, yesterday’s 3-2 vote by the Independent Regulatory Review Commission (IRRC) will not necessarily be the final word on Chapter 78. While legal and procedural concerns were discussed at the IRRC meeting yesterday in its review of the final form rule-making to revise 25 Pa. Code Chapter 78, the Commissioners were required to vote on this extensive and complicated regulatory package as a whole in an up or down vote.
In my testimony yesterday, I indicated that the DEP did not meet its obligations under the Regulatory Review Act (RRA). It failed to comply with critical provisions of the RRA at key points along this entire rulemaking process. The final form rule does not reflect either consensus or balance, is not justified by a compelling public need and will do far more harm than good for this industry and the Commonwealth, its environment and its citizens.
The rule will now be reviewed by the Attorney General as to form and legality and may be considered by the House and Senate Environmental Resources and Energy Committees for a joint resolution to bar the regulation, a resolution that would go to the Governor for signature or veto. Barring any unforeseen developments, the rule could be published as final and immediately effective in June or July 2016.
On April 21, 2016, the Independent Regulatory Review Commission (IRRC) approved the Environmental Quality Board’s Chapter 78 (conventional wells) and Chapter 78a (unconventional wells) regulations by a vote of 3-2. Vice Chairman Mizner, in making a motion to disapprove the regulation, noted that the Department of Environmental Protection did not:
- provide enough information on the cost of the regulations;
- meet its burden to show that the revisions as applied to conventional operations are necessary;
- conduct the required flexibility analysis for small businesses;
- adequately consult with the Conventional Oil and Gas Advisory Committee or the Oil and Gas Technical Advisory Board; or
- develop a consensus on the regulations with industry.
The motion to disapprove the regulation failed by a vote of 3-2, followed by the motion to approve the regulation. Commissioners voting to approve the regulation noted that consensus on the regulation was likely impossible to achieve but that the Department had acted earnestly to develop necessary regulations for an evolving industry and that current regulations are not adequate.
Both the House and Senate Environmental Resources and Energy Committees previously voted to disapprove the regulations. IRRC’s approval begins a 14-day window in which the legislative committees may report to the House or Senate a concurrent resolution barring the revisions. If a resolution adopted by the General Assembly is not vetoed, or if the Governor’s veto is overridden, the Environmental Quality Board is barred from promulgating the final regulations. The Attorney General will conduct a review of the regulation as to form and legality before the regulation may be published in the Pennsylvania Bulletin as final. Publication of the rule as final could occur in June or July of 2016, becoming effective immediately on the day of publication.
According to a report by the Charleston Gazette-Mail, TransCanada will be purchasing Columbia Pipeline Group for $13 billion. TransCanada had previously proposed the Keystone XL pipeline, and owns more than 42,000 miles of pipeline in North America. TransCanada will acquire about 15,000 miles of pipeline, as well as processing and underground storage facilities, through the purchase of Columbia.
On February 18, 2016, Pennsylvania Department of Environmental Protection (PADEP) Secretary John Quigley held a press conference to announce the release of the final Governor’s Pipeline Infrastructure Task Force (PITF) Report. Secretary Quigley stated that the final report contains only minor modifications to the draft report, but adds an executive summary and appendices. The final report includes all draft recommendations, including 11 that do not appear to have garnered majority support from the task force members in weighted voting. Appendix C to the final report assigns various government entities and/or industry with responsibility for following up on each individual recommendation.
Keith Coyle, a shareholder in Babst Calland’s new Washington, D.C. office and member of its Pipeline and HazMat Safety Practice Group, served on the Task Force.
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.
As reported by The Scranton Times-Tribune, Pennsylvania State Representative Scott Petri (R-178th Leg. Dist., Bucks County) recently introduced legislation that would allow the Turnpike Commission to grant pipeline operators the right to use its existing right-of-way for the construction of parallel gas pipelines in exchange for a transmission fee. Representative Petri asserts that passage of the bill will ultimately generate state revenue and minimize the impact of transmission line development on private property owners. Although the Turnpike Commission has not yet determined how much of the state’s 550 mile turnpike system may be suitable for parallel gas pipelines, the proposed legislation comes at a time when midstream development and operations in the Marcellus Shale are on the rise, as state officials predict that thousands of miles of new pipelines will be needed to transport gas to new markets. Representative Petri also suggests that Interstates 80 and 79, which span 311.07 miles and 182.72 miles in Pennsylvania, respectively, could provide additional opportunities for parallel gas pipelines upon federal approval.
On February 3, 2016, the Pennsylvania Environmental Quality Board (EQB) adopted significant revisions to the Commonwealth’s oil and natural gas regulations by a vote of 15 to 4. EQB’s vote formally splits current Chapter 78 (Oil and Gas Wells) into new Chapter 78 (Conventional Oil and Gas Wells) and Chapter 78a (Unconventional Wells). Most of the significant revisions in the rulemaking package address Subchapter C (Environmental Protection Performance Standards), but the final rulemaking amends other Subchapters within Chapter 78 as well. Specifically, the revisions would alter or create new obligations for permit applications and renewals, water supply replacement, predrilling surveys and reviews, erosion and sediment control, water management plans, emergency response plans, wastewater management, disposal of drill cuttings, site restoration, spills and releases, and production reporting. In addition, the rulemaking includes 25 different requirements for electronic applications, electronic notifications, and electronic submittals.
Several amendments were offered from the floor but defeated.
If the rulemaking successfully completes review at the Pennsylvania Independent Regulatory Review Commission, the appropriate legislative standing committees, and the Attorney General’s Office, the revisions will become effective upon publication in the Pennsylvania Bulletin.