Shale Law Weekly Review - August 19, 2020

Written by:
Sara Jenkins – Research Assistant 
Jackie Schweichler – Staff Atorney
Kaela Gray – Research Assistant

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

Production and Operation: Texas Railroad Commission Proposes Amendments to Application for Exception to State Flaring Rule
On August 4, 2020, the Railroad Commission of Texas (RRC) announced they will be accepting public comments on proposed amendments to the application for exception to a state flaring rule.  The RRC proposal would amend the Statewide Rule 32 Exception Data Sheet Application for Exception to Statewide Rule 32.  According to RRC, the application is filed by operators when requesting authority to flare or vent gas.  The amendments will require thorough documentation of flaring circumstances and more information to ensure compliance with RRC regulations.  RRC will be accepting public comments through September 4, 2020. 

Public Lands: Department of Interior Issues Proposed Rule to Amend Oil and Gas Royalty Regulations for Federal Leases
On August 7, 2020, the U.S. Department of Interior Office of Natural Resources Revenue (ONRR) issued a proposed rule to amend oil and gas royalty regulations for Federal and Indian leases. (30 CFR Parts 1241 and 1206).  The proposed rule titled, ONRR 2020 Valuation Reform and Civil Penalty Rule, would amend 2016 provisions which, according to ONRR, are inconsistent with recent executive orders.  The proposed rule is expected to amend regulations for valuing royalties, valuing coal, and assessing penalties for violating statutes associated with Federal and Indian leases.  ONRR is accepting public comments on the proposed rule until 60 days after the proposed rule is published in the Federal Register. 

Methane Emissions: EPA Issues Final Amendments to Ease Compliance with Oil and Gas New Source Performance Standards
On August 13, 2020, the Environmental Protection Agency (EPA) issued two final rules amending policies and technical requirements to ease compliance burdens associated with oil and gas New Source Performance Standards (NSPS). (See 40 CFR Part 60).  The first rule titled, Oil and Natural Gas Sector: Emission Standards for New, Reconstructed, and Modified Sources Review will rescind the NSPS methane requirements applicable to transmission, storage, production, and processing.  The second rule titled, Oil and Natural Gas Sector: Emission Standards for New, Reconstructed, and Modified Sources Reconsideration includes amendments relating to fugitive emissions requirements, well site pneumatic pump standards, certification of closed vent systems, and use of an alternative means of emission limitation.  EPA also issued a fact sheet, stating that the final rules will benefit small oil and natural gas producers that make up a majority of the industry.

Pipelines: North Carolina Denies Water Quality Certification for Mountain Valley Pipeline Southgate Project 
On August 11, 2020, North Carolina's Department of Environmental Quality denied a water quality certification for the Mountain Valley Pipeline (MVP) Southgate project.  The Department’s Division of Water Resources denied the certification after reviewing supporting materials and public comments.  The Division determined that the Southgate project was dependent on the successful completion of the MVP Mainline Project.  The Division concluded that pending litigation and suspension of needed permits for the Mainline project presented a “critical risk” to achieving the purpose of the Southgate project.  The Division cited concerns that environmental impacts caused by the Southgate project’s construction would be “inconsistent with principles of minimization” while the Mainline project’s completion remains uncertain.

From the National Oil & Gas Law Experts:
Charles Sartain, When is a “Gross Proceeds” Royalty not Paid on Gross Proceeds? (August 13, 2020). 
John McFarland, Solar Energy in Texas and the Chadbourne Ranch (August 14, 2020). 
Romany Webb, EPA Rescinds Methane Standards For Oil And Gas Facilities (August 14, 2020). 

AGENCY PRESS RELEASES—STATE/FEDERAL

Pennsylvania Department of Energy Press Releases:
Wolf Administration Outlines Actions Underway in Wake of Pipeline Drilling Spill Affecting Marsh Creek State Park, Chester County (August 13, 2020). 

U.S. Department of Energy
The U.S.-Israel Energy Center Announces Funding Opportunity for Energy Infrastructure Cybersecurity Cooperation (August 14, 2020). 

U.S. Environmental Protection Agency
ICYMI: EPA Administrator Wheeler Talks New EPA Rules to Strengthen, Promote American Energy on Varney & Co. (August 14, 2020). 
What They Are Saying: Administrator Wheeler Delivers on President Trump’s Administration’s Efforts to Strengthen, Promote American Energy in Pittsburgh (August 14, 2020). 
In Pittsburgh, Administrator Wheeler Announces Final Air Regulations for Oil and Gas Removing Redundant Requirements, Streamlining Implementation, and Reducing Burdens (August 13, 2020). 

STATE ACTIONS—EXECUTIVE/LEGISLATIVE

Pennsylvania Executive Agencies—Actions and Notices: 
50 Pa.B. 4218 “Availability of the Pennsylvania Energy Development Authority Restart Grant” (August 15, 2020). 
50 Pa.B. 4220 “Wastewater Service” Pennsylvania Public Utility Commission (August 15, 2020).

Pennsylvania Legislature:
HB 2780 “An Act amending Title 58 (Oil and Gas) of the Pennsylvania Consolidated Statutes, in unconventional gas well fee, further providing for distribution of fee” Referred to Environmental Resources And Energy (Aug. 13, 2020).
SB 15 “An Act establishing the CO2 Budget Trading Program; providing for powers and duties of department; establishing the Energy Transition Fund; providing for revenue from sale of carbon allowances; establishing the Energy Transition Board; and providing for energy transition plan” Referred to Environmental Resources And Energy (Aug. 11, 2020) (Senate).
HB 2778 “An Act amending the act of November 30, 2004 (P.L.1672, No.213), known as the Alternative Energy Portfolio Standards Act, further providing for definitions and for alternative energy portfolio standards, providing for solar photovoltaic technology requirements, for contract requirements for solar photovoltaic energy system sources, for renewable energy storage report, for energy storage deployment targets and for contracts for solar photovoltaic technologies by Commonwealth agencies and further providing for portfolio requirements in other states; and making a related repeal.” Referred to Environmental Resources And Energy (Aug. 13, 2020) (House).
HB 2772 “Amending the act of October 15, 1980 (P.L. 950, No. 164), known as the Commonwealth Attorneys Act, in Office of Attorney General, further providing for criminal prosecutions” Referred to Judiciary (Aug. 13, 2020) (House). 

FEDERAL ACTIONS—EXECUTIVE/LEGISLATIVE

Federal Executive Agencies—Actions and Notices: 
National Oceanic and Atmospheric Administration
85 FR 50720 “Takes of Marine Mammals Incidental to Specified Activities: Alaska Liquefied Natural Gas Project in Cook Inlet” Rule (August 17, 2020). 
Office of Natural Resources Revenue
85 FR 48561 “Major Portion Prices and Due Date for Additional Royalty Payments on Indian Gas Production in Designated Areas Not Associated with an Index Zone; Correction” Notice (August 11, 2020). 

House Energy and Commerce Committee Actions:
No relevant actions August 10-17, 2020.

Senate Energy and Natural Resources Committee Actions: 
S.4523 “A bill to regulate large-scale emissions of methane and natural gas, and for other purposes” Read twice and referred to the Committee on Energy and Natural Resources (August 12, 2020). 

Follow us on Twitter at PSU Ag & Shale Law (@AgShaleLaw) to receive ShaleLaw HotLinks:
“Dakota Access Review May Test Trump's NEPA Overhaul,” EE News
“New Mexico Close To Adopting Oil And Gas Water Rules,” Associated Press
“Job Losses Climb in Oilfield Services,” Rigzone
“COVID Compounds Pennsylvania's Fracking Industry Problems,” CBS News
“Shale Gas Drilling Permit Fees More Than Double in Pa.,” Pittsburgh Post-Gazette
“N.M. to Update Oil, Gas Wastewater Regulations,” Associated Press
“Mariner East Spill Reaches Drinking Water In Pa.,” EE News

Connect with us on Facebook! Every week we will post the CASL Ledger which details all our publications and activities from the week.

Want to get updates, but prefer to listen? Check out the Shale Law Podcast! We can always be found on our Libsyn page, iTunes, Spotify, or Stitcher.

Shale Law Weekly Review - May 26, 2020

Written by:
Sara Jenkins – Research Assistant 
Jackie Schweichler – Staff Attorney
Kaela Gray – Research Assistant

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

Water Quality/ Pipelines: New York Denies Water Quality Permit for NESE Pipeline Project 

On May 15, 2020, the New York State Department of Environmental Conservation (Department) denied a Water Quality Certification application for the Northeast Supply Enhancement Project (Project) proposed by the Transcontinental Gas Pipe Line Company (Transco).  Transco was granted a certificate for the Project by the Federal Energy Regulatory Commission on May 3, 2019, subject to the approval of a state-issued Water Quality Certificate.  On May 17, 2019, Transco submitted its Water Quality application to the Department and the application received over 16,000 comments from the public. The Department denied the application on the basis that Transco was unable to “demonstrate the Project’s compliance with all applicable water quality standards.”  The Department further found that impacts from the Project would include resuspension of mercury and copper concentrations and disturbance of shellfish beds.  The Department also stated in a press release that the Project was unnecessary to meet the state’s energy needs.  Transco, owned by Williams, stated in a previous press release that the Project was “critical” for converting heating oil to natural gas and for keeping up with demand. 

Public Lands: U.S. Department of Interior Ends Rent Hiatus for Solar and Wind Companies, Issues Retroactive Bills

On May 18, 2020, Reuters reported that the U.S. Department of the Interior issued retroactive rent bills to solar and wind companies on public lands.  According to Reuters, the Interior Department put a hold on rent for solar and wind in 2018 to investigate company complaints that public land rent rates were too high to make them competitive with rents on private property.  The Interior Department’s Bureau of Land Management (BLM) calculates land rents for wind and solar energy development in accordance with the Federal Land Policy and Management Act (FLPMA) and 43 CFR Part 2806.  Reuters reports that although the rent bills were a surprise to the Large-scale Solar Association, some companies likely set aside funds in anticipation of retroactive rent charges.  According to BLM’s website, BLM has approved 25 solar projects and 35 wind energy projects on public lands as of March 2018. 

Oil and Gas Leasing: Bureau of Land Management Temporarily Cuts Royalty Rates for Oil and Gas Producers on Public Lands

On May 20, 2020, the Associated Press (AP) reported that the Bureau of Land Management (BLM) began temporarily reducing royalty rates for oil and gas producers on public lands.  According to AP, the reduced rates are being issued to provide relief to companies who cannot operate economically during the Covid-19 pandemic and will last a maximum of 60 days.  States with several federal oil and gas leases include Utah, Wyoming, New Mexico, North Dakota, California, Colorado, Alaska, and Montana.  BLM has included Covid-19 national emergency guidance on their website for lease suspension and royalty rate reduction.  Companies wishing to seek a reduction in royalty rates or a lease suspension under “force majeure” must fill out an application with the BLM state office and meet certain requirements.

From the National Oil & Gas Law Experts:

George Bibikos, Oil + Gas Update - Texas Supremes Address ORRIs, PA Supremes Poised to Decide O+G Lease-Busting Case, and Army Corps NWP Goes Down (May 15, 2020) 

Charles Sartain, Offer to Acquire Leases Could Not be Conditioned on a JOA (May 19, 2020)

John McFarland, Texas Supreme Court Weighs In On Application of Rule Against Perpetuities to Overriding Royalty Reservations (May 18, 2020)

Michael Gerrard, New York, New Jersey Pipeline Decisions are Hard Blow to Natural Gas and Strong Support for New York’s New Climate Law (May 18, 2020)

AGENCY PRESS RELEASES—STATE/FEDERAL

Pennsylvania Department of Energy Press Releases:

No new releases May 18–22, 2020.

U.S. Department of Energy

U.S. Department of Energy Announces $53 Million for Small Business Research and Development Grants (May 21, 2020).

Department of Energy to Resume Cleanup at Energy Technology Engineering Center (May 20, 2020).

U.S. Environmental Protection Agency

U.S. EPA Reaches $6.5 Million Settlement to Clean Up Groundwater Contamination at Southern California Superfund Site (May 21, 2020). 

U.S. EPA requires northern California steel manufacturer USS POSCO Industries to improve oil spill prevention program (May 21, 2020).

EPA Awards $1.4 Million Grant to the University of Puerto Rico to Reduce Diesel Emissions around the Port of San Juan (May 19, 2020).

EPA Provides $6 Million to Reduce Excess Ag Runoff to the Chesapeake Bay (May 18, 2020).

STATE ACTIONS—EXECUTIVE/LEGISLATIVE

Pennsylvania Executive Agencies—Actions and Notices: 

50 Pa.B. 2633, Control of VOC Emissions from Oil and Natural Gas Sources, Proposed Rulemaking (May 23, 2020). 

Pennsylvania Legislature:

The House will reconvene on Tuesday, June 1, 2020 at 1:00PM

The Senate will reconvene on Monday, May 26, 2020 at 1:00PM unless sooner recalled by the Pres. Pro Temp.

FEDERAL ACTIONS—EXECUTIVE/LEGISLATIVE

Federal Executive Agencies—Actions and Notices: 

Environmental Protection Agency

85 FR 31286 “Coal- and Oil-Fired Electric Utility Steam Generating Units—Reconsideration of Supplemental Finding and Residual Risk and Technology Review” Rule (May 22, 2020). 

85 FR 31183 “Reformulated Gasoline and Conventional Gasoline: Requirements for Refiners, Oxygenate Blenders, and Importers of Gasoline; Requirements for Parties in the Gasoline Distribution Network (Renewal)” Notice (May 22, 2020).

85 FR 29882 “South Dakota; Infrastructure Requirements for the 2015 Ozone National Ambient Air Quality Standards; Revisions to the Administrative Rules” Proposed Rule (May 19, 2020).

Federal Energy Regulatory Commission 

85 FR 30951 “Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act of 1992” Notice of Annual Change in the Producer Price Index for Finished Goods (May 21, 2020). 

85 FR 30691 “Michael Mabee Related to Critical Infrastructure Protection Reliability Standards” Complaint Notice (May 20, 2020). 

Interior Department

85 FR 30732 “Exxon Valdez Oil Spill Public Advisory Committee” Meeting Notice (May 20, 2020). 

Pipeline and Hazardous Material Safety Administration

85 FR 30673 “Vapor Pressure of Unrefined Petroleum Products and Class 3 Materials” Proposed Rule for Hazardous Materials (May 20, 2020). 

House Energy and Commerce Committee Actions:

No new actions May 19-May 22, 2020.

Senate Energy and Natural Resources Committee Actions: 

S.3816 “A bill to authorize the Secretary of Energy to carry out a program to lease underused facilities of the Strategic Petroleum Reserve, and for other purposes.” Read twice and referred to the Committee on Energy and Natural Resources (May 21, 2020).

Follow us on Twitter at PSU Ag & Shale Law (@AgShaleLaw) to receive ShaleLaw HotLinks:

“Study Shows Methane Leaks in PA May Be Higher than State Reports,” Shale Gas Reporter

“Tree Deaths in Urban Settings Are Linked to Leaks from Natural Gas Pipelines Below Streets,” Inside Climate News

“Trump Administration Cuts Royalty Rates for Oil and Gas,” AP News

“N.Y. Rejects $1B Pipeline Over Climate, Water Concerns,” EE News

“Pandemic Causes Maintenance Delays at Oil, Gas Facilities,” Reuters

“Past its Peak? Battered Oil Demand Faces Threat from Electric Vehicles,” Reuters

“Coronavirus Widens Wlimate Rift Between European and U.S. Oil Majors,” Reuters

Connect with us on Facebook! Every week we will post the CASL Ledger which details all our publications and activities from the week.

Want to get updates, but prefer to listen? Check out the Shale Law Podcast! We can always be found on our Libsyn page, iTunes, Spotify, or Stitcher.

Shale Law in the Spotlight – North Dakota Supreme Court Rules that Post-Production Costs Cannot be Deducted from Royalties Paid to State

Case Summary: Newfield Exploration Company et al. v. State of North Dakota et al., No. 2019 ND 193

Written by Chloe Marie – Research Specialist

On July 11, 2019, the Supreme Court of North Dakota concluded that post-production costs relating to the processing of gas into a marketable form could not be subtracted from royalties paid to the State of North Dakota. This article provides a comprehensive summary of this case.

Background

Newfield, an oil and gas company, entered into several natural gas leases with the State of North Dakota containing provisions that required royalties to be calculated based on gross proceeds from the sale of the gas. Newfield agreed to sell the gas produced at the wells to Oneok Rockies Midstream, LLC; however, royalty payments were to be made only after Oneok put the gas into marketable form and sold it. The manner in which Newfield actually paid royalties to the state was described by the Supreme Court in the opinion as follows: “[t]he price Oneok pays to Newfield for the gas is calculated based on 70-80% of the amount received by Oneok when Oneok sells the marketable gas. The 20-30% reduction of the price for which the marketable gas is sold account for Oneok’s cost to process the gas into a marketable form and profit.”

In June 2016, the State of North Dakota initiated an audit of Newfield and later argued that the audit revealed that Newfield did not pay enough royalties on the gas sold under the leases. More particularly, the State of North Dakota claimed that “Newfield is paying royalties based on gross proceeds reduced to account for deductions necessary to make the gas marketable and that reducing the gross payments by those deductions is contrary to the express terms of the lease.”

Subsequently, Newfield brought legal actions against the State of North Dakota seeking a Court Order declaring that the royalty payments were calculated correctly based upon the gross amount Newfield received from Oneok. After both parties moved for summary judgment, the District Court of McKenzie County, Northwest Judicial District, ruled in favor of Newfield’s motion for summary judgment agreeing that the lease “allows the reduction of the royalty payments to account for expenses incurred to make the natural gas marketable.”

The State of North Dakota appealed the District Court’s decision to the Supreme Court of North Dakota alleging that the District Court erred in its interpretation and that such method of calculation was the wrong way forward. The State argued that sharing in the post-production costs was contrary to the leases while Newfield countered that “it can pay a royalty based on a payment that has been reduced to account for the expense of making the gas marketable, as long as the expense is incurred by a third party.”

The North Dakota Supreme Court’s ruling

The State Supreme Court opined that, as a general rule, the lessor and lessee should apportion the costs of making the product marketable between them, unless otherwise specified in a contract.

Subpart (f) of the leases contained royalty provisions stating that “[a]ll royalties … shall be payable on an amount equal to the full value of all consideration for such products in whatever form or forms, which directly or indirectly compensates, credits, or benefits lessee.” The Supreme Court interpreted the language in Subpart (f) as clearly meaning that “the State’s royalty must include the value of any consideration, in whatever form, that directly or indirectly compensates, credits or benefits Newfield.”

Here, the Supreme Court observed that it was apparent that the “full value of the consideration paid to Newfield is not determined until Oneok has incurred the cost of making the gas marketable and subsequently sold the gas.” In other words, Newfield based its royalty calculation on the amount Oneok received for the marketable gas. This amount was later reduced to reflect the post-production costs incurred by Oneok. The Supreme Court found it to be unequivocal that Newfield benefitted from the post-production costs incurred by Oneok to make the gas marketable and consequently paid less in royalties to the State. As such, the court held that such method of calculation was contrary to the language of the leases.

Based upon this reasoning, the Supreme Court reversed the District Court’s judgment on July 11, 2019, ruling that “[g]ross proceeds from which the royalty payments under the leases are calculated may not be reduced by an amount that either directly or indirectly accounts for post-production costs incurred to make the gas marketable.”

References:

Newfield Exploration Company et al. v. State of North Dakota et al., No. 2019 ND 193 (N.D. 2019)

 

 This material is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.