Monday, July 22, 2019

Shale Law Weekly Review - July 22, 2019

Written by:
Sara Jenkins - Research Assistant
Jackie Schweichler - Staff Attorney

The following information is an update of recent local, state, national, and international legal developments relevant to shale gas.

Post-Production Costs: Court Determines Oil and Gas Company Cannot Deduct Post-Production Costs from State Royalty Payments
On July 11, 2019, the Supreme Court of North Dakota ruled that Newfield Exploration Company (Newfield) could not deduct post-production costs incurred by the company from royalties paid to the state (Newfield Exploration Co. v. State of North Dakota, No. 20190088). Newfield filed the lawsuit to determine whether the royalty payments made to the State of North Dakota were correct after an audit of the company found the royalties were being underpaid according to the lease. Newfield was making royalty payments to the state “based on the gross proceeds it had received from the sale of the gas to Oneok Rockies Midstream L.L.C.” once Oneok processed the gas into a marketable form. The state argued that basing the royalties on profits received from Oneok required the state to “share in post-production costs incurred to make the gas marketable.” The district court initially ruled in favor of Newfield, determining the lease “allows the reduction of the royalty payments to account for expenses incurred to make the natural gas marketable.” The North Dakota Supreme Court, however, reversed the district court’s decision, finding that the term “gross proceeds” used in the lease meant the “lessor’s royalty is calculated based on the total amount received for the product without deductions for making the product marketable.”

Public Lands: Environmental Groups File Lawsuit Against Bureau of Land Management for Issuing Oil and Gas Leases in Arizona 
On July 15, 2019, environmental groups filed a Complaint in the U.S. District Court for the District of Arizona against the U.S. Bureau of Land Management (BLM) for issuing oil and gas leases in Navajo and Apache Counties (Center for Biological Diversity v. Suazo). The leases include land near the Petrified National Forest and the Coconino aquifer. The Plaintiffs, including the Center for Biological Diversity, Sierra Club, and WildEarth Guardians, contend that BLM violated the National Environmental Policy Act (NEPA) by relying on an Environmental Impact Statement (EIS) from 1988. According to the Complaint, BLM found that the 1988 EIS “included an adequate analysis of the environment impacts and alternative actions” for the land in which the leases were located. The Plaintiffs disagree with this finding and assert that “BLM failed to consider the numerous foreseeable impacts of oil and gas development on environmental and cultural resources” in the area. The Plaintiffs are asking the court to reverse and set aside the leases awarded by BLM. 

Pipelines: Pennsylvania’s Natural Gas Pipeline Expansion Proposal Signed into Law
On July 10, 2019, Pennsylvania State Representative Jonathan Fritz issued a press release detailing the passage of SB 712, expanding the Pipeline Investment Program initiative. The bill, which was signed into law as Act 20 on July 1, 2019, amends the Fiscal Code to provide additional grant money for the program. According to the program’s website, the grants can be used for “acquisition, construction, and site preparation costs associated with extending natural gas pipelines.” The press release states that the distribution lines will be completed to provide natural gas to “business parks and existing manufacturing and industrial enterprises,” ultimately providing access to natural gas for Pennsylvania residents.

Production and Operation: Pennsylvania's Department of Environmental Protection Releases Annual Oil and Gas Report
On July 10, 2019, Pennsylvania's Department of Environmental Protection (DEP) released its annual Oil and Gas Report. The report begins with a summary of new developments and programs implemented in 2018, including an improved permit review process, a four-point methane emissions reduction strategy, and compliance assistance for oil and gas regulations. The report also includes various statistics including numbers on production amounts, permits issued, and various wells present in the state. Some notable numbers show Pennsylvania’s 2018 overall production of natural gas at 6.1 trillion cubic feet, which amounts to Pennsylvania’s largest volume of natural gas ever produced in a year. Report statistics also show that 917 oil and gas wells were drilled in 2018, and 90% of fluids produced by hydraulic fracturing operations were recycled and reused. The report follows up with a section on what to expect in 2019, including permit fee rulemaking, a geologic hazard mitigation plan, and continuous improvement for data management. 

LNG Exports: FERC Order Approves Construction and Operation of LNG Export Facilities in Jackson County, Mississippi 
On July 16, 2019, the Federal Energy Regulatory Commission (FERC) issued an order approving the construction and operation of new liquefied natural gas (LNG) export facilities in Jackson County, Mississippi. Gulf LNG Liquefaction Company, LLC and Gulf LNG Energy, LLC (collectively Gulf Liquefaction) filed an application to construct the new facilities under section three of the Natural Gas Act. According to the order, Gulf Liquefaction proposed the construction of two natural gas liquefaction trains, pretreatment facilities, support facilities, and two marine offloading facilities. FERC approved Gulf Liquefaction’s proposal, concluding that the facilities would be built on land currently used for the import terminal site, and the environmental impacts from construction would be “temporary or short term.” Commissioner Click filed a lone dissent, stating the order violated both the Natural Gas Act and the National Environmental Policy Act by not properly addressing the climate change implications of constructing the LNG facilities. 

Crude Oil by Rail: North Dakota, Montana Petitions U.S. Department of Transportation to Overturn Washington State Law Prohibiting Crude Oil by Rail 
On July 17, 2019, the Attorneys General for North Dakota and Montana filed an application with the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) to preempt a new Washington State law that restricts loading or unloading crude oil by rail. Senate Bill 5579, titled “An act relating to the volatility of crude oil received in the state by rail,” was signed into law on May 9, 2019 and takes effect July 28, 2019. The new law states that crude oil may not be loaded or unloaded “from a rail tank car unless the oil has a vapor pressure of less than nine pounds per square inch.” The law does not prohibit rail cars from transporting crude oil though Washington or require railcars to be stopped or checked for vapor pressure before entering the state. However, Attorney General Wayne Stenehjem, who co-filed the application, said in a statement that “Washington’s attempt to re-classify crude oil based on its vapor pressure is inconsistent with federal standards.” 

Methane Emissions: EPA Publishes New Data on Voluntary Methane Emissions Reductions 
On July 11, 2019, the U.S. Environmental Protection Agency (EPA) issued a news release highlighting new results from its Natural Gas STAR Methane Challenge Program. The news release states that oil and gas companies who participated in the program “reduced methane emissions equivalent to nearly 1 million metric tons of carbon dioxide” in 2017. Some of the data included in the news release shows company efforts to replace old pipelines including “1,400 miles of cast iron pipelines and more than 2,000 miles of unprotected steel pipelines.” Additionally, emission reduction efforts by the program’s participants “kept nearly $6 million worth of natural gas in the pipeline.” The EPA provides specific data on each oil and gas company participating in the program on their Methane Challenge Program webpage

Production and Operation: Analysis Shows Large Economic Impact of Energy Sector on Texas Business Activity and Job Creation
On July 8, 2019, the Perryman Group, a team of economic analysts, published a column detailing the large impact of the energy sector on business and job creation in Texas. The publication, Black Gold, found that the energy sector “directly or indirectly supports about one of every six Texas jobs.” The publication considered industry supply chains and consumer spending in its analysis, along with examining other industries to garner opportunities created from the energy sector’s influence. According to the column, oil and natural gas production in Texas has risen 500% since 2010, leading to reduced imports and an increase in U.S. crude oil. Additionally, the energy sector has created 1.9 million jobs and a total personal income of $120.6 billion.

From the National Oil & Gas Law Experts:
Charles Sartain, Industry Custom Does Not Supersede Contract Language, (July 16, 2019)

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