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

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North Dakota Natural Gas Producers Sued for Royalties on Flared Gas

Royalty owners have filed ten class-action lawsuits against natural gas producers to collect unpaid royalties on the value of the gas that the producers allegedly flared from the horizontal wells over the past six years.  The royalty owners allege that 30% of the natural gas produced in North Dakota is flared, which amounts to burning $100 million of natural gas a month.  The royalty owners sued Burlington Resources Oil & Gas, Continental Resources, Crescent Point Energy, HRC Operating, Marathon Oil, Samson Resources Company, SM Energy Company, Statoil Oil & Gas LP, WPX Energy, and XTO Energy.  The plaintiff royalty owners assert that neither the leases nor North Dakota law allows for the producers to flare significant amounts of gas without compensation. The plaintiffs seek royalties on gas flared 1) after the first year of production when the company did not apply for a flaring exemption, 2) within the first year of production when the producers exceeded the maximum production limits, and 3) during the first year of production when the wells were physically connected to a gathering system.

The complaints are available on the plaintiffs' website: http://www.ndgasflaringlitigation.com/Home_Page.php

Written by: Tom Panighetti

October 23, 2013

District court partially grants class certification in royalty deduction dispute

On September 16, 2013, a magistrate judge the United States Court for the Western District of Pennsylvania vacated a report and recommendation issued on August 5, 2013, that denied landowners class certification in a dispute arising from royalty deductions by a well operator. Pollock v. Energy Corp. of America, 2013 WL 5338009 (Sept. 16, 2013). The landowner’s argued that ECA deducted royalty payments not permitted under the leases, i.e. charges for interstate pipeline services, marketing costs, and deductions for fuel use to compress extracted gas.

In vacating its earlier recommendation, the court granted the motion to certify classes in part and denied it in part. The court recommended certification of two of the three subclasses defined by the landowners.

First, the court recommended certification of all Pennsylvania lessors holding an oil and gas lease with ECA for which interstate pipeline service charges were deducted prior to March 26, 2012. The court explained that the group was sufficiently numerous because the circumstantial evidence showed more than forty person were affected; the members claims were sufficiently common because the improper deduction of interstate pipeline charges could be shown by common evidence; the claim was typical between the class members; that predominance was satisfied because the common issues could be satisfied by common proof; and that the class was the superior method for adjudicating the dispute.

Second, the court recommended certification of all Pennsylvania lessors holding an oil and gas lease with ECA for which marketing fees were deducted from royalties prior to March 26, 2012. The court explained that the group was sufficiently numerous; the claims are common and typical of the class because the arguments for commonality and typicality mirror those made for the first subclass;  and the claims for deduction of marketing fees satisfy predominance and superiority because the arguments raised by both parties mirror those for subclass one.

The court, however, recommended denying class certification of all Pennsylvania lessors holding an oil and gas lease with ECA for which ECA failed to pay a royalty on gas used as plant fuel off the leased premises. The court explained, while the class was sufficiently numerous, the proof required to prove claims was not common and the factual circumstances of each plaintiff were not typical because the proof required to satisfy the claim and the factual circumstances surrounding each plaintiff were “individual” to each member of the class.

On September, 30, 2013 the United States District Court for the Western District of Pennsylvania adopted the report and recommendation and granted class certification to the first two sub-classes, while denying it to the third. Pollock v. Energy Corp. of America, 2013 WL 5491736 (Sept. 30, 2013). The district court judge found that neither party’s objections to the magistrate’s report and recommendation were sustainable, and therefore adopted it.

Written by: Garrett Lent, Research Assistant

Agricultural Law Resource and Reference Center

October 2013

Superior court finds forfeiture clause inapplicable where royalties are not paid after the completion of a well

On September 20, 2013, the Superior Court of Pennsylvania upheld a trial court’s decision that forfeiture clauses in oil and gas leases customarily apply to failures to complete a well or make delay rental payments in the primary term. McCausland v. Wagner,  2013 WL 5296824 (Pa. Sup. Ct. September, 20 2013). In 1964, Elmer McCausland (a landowner) entered into an oil and gas lease with the Wagners (producers). The lease contained a forfeiture clause that provided that failure to make delay rental payments or complete one well on the leasehold in the primary term would render the lease null and void. Further, the clause provided that once the lease was rescinded the landowner would have no “right of action in law and equity” against the producer. In 2009, McCausland initiated the instant action alleging he had not received royalties from gas produced since November of 2005. He sought both monetary damages and a declaration that the lease was null and void. A settlement awarding McCausland $37,258.94 dollars for past royalties plus 3.5% interest was reached in 2010. The operator continued to make and the landowner continued to receive royalty payments after the settlement.

In December of 2011, McCausland filed the motion at issue to have the trial court declare the lease null and void. Wagner cross motioned for summary judgment asking the court to find the lease still in effect. The trial court granted Wagner’s motion and denied McCausland’s, and declared the lease to still be in effect.

The superior court held that the trial court did not clearly err in denying McCausland’s motion for summary judgment because the forfeiture clause only pertained to missed delay rental payments in the primary term of the lease. The court explained that Wagner’s argument to the contrary lacked merit for two reasons. First, the court stated McCausland deprived himself the right to declare forfeiture under the lease because although the facts demonstrated Wagner missed royalty payments that after the settlement McCausland accepted further payments. Second, the court reasoned where a well is completed and producing the forfeiture clause traditionally does not apply because the clause’s purpose is to guarantee development, or payment where development does not occur, in the primary term. Here, a well was completed and the lease was no longer in the primary term.  Therefore, the Superior Court upheld the order granting summary judgment for the producer, Wagner.

Written by: Garrett Lent, Research Assistant

Agricultural Law Resource and Reference Center

September 2013

Chesapeake Energy Agrees to Settle Royalty Class Action Lawsuit for $7.5 Million

Chesapeake Energy agreed to settle a class action lawsuit that alleged that Chesapeake breached its contracts with leaseholders and its implied duty to pay the proper royalty amount to leaseholders. The Plaintiffs, Pennsylvania leaseholders with leases containing "Market Enhancement Clauses," had alleged that Chesapeake improperly deducted "post-wellhead" costs from their royalty payments and that the gas was sold in an "unmarketable condition" to Chesapeake's affiliates and third parties, which breached Chesapeake's duty to sell the gas at the higher "marketable condition" rate and reduced the Plaintiff's royalty.  Chesapeake denied all of the allegations.  While U.S. District Court Judge Malachy Mannion must approve of the settlement before it takes effect, Governor Tom Corbett issued a statement on September 4, 2013, stating that he was "pleased with the proposed settlement" and that the "settlement is a significant step forward in protecting the interests of Pennsylvania landowners."

For more information on this settlement and Governor Corbett's statement, see: https://stateimpact.npr.org/pennsylvania/2013/09/03/chesapeake-energy-agrees-to-pay-7-5-million-to-settle-royalty-lawsuit/

The Plaintiff's complaint and Chesapeake's answer may be found at the U.S. District Court for the Middle District of Pennsylvania, Docket No.: 3:13-cv-02289-MEM

Tom Panighetti

September 6, 2013

Superior Court declines to establish implied covenant to explore further

On July 12, 2013, the Pennsylvania Superior Court declined to terminate an oil and gas lease based on landowners’ claims that the well operator had not satisfied an implied covenant to develop the lease, and the well had not produced “in paying quantities.” Caldwell v. Kriebel Resources Co., LLC, 2013 WL 3486851 (Pa. Super, 2013).

Kriebel Resources, the well operator, and the Caldwells, landowners, entered into an oil and gas lease in 2001 that allowed for extension of the lease so long as oil or gas was produced, and also included a delayed rental provision. The well operator only engaged in drilling and operating shallow wells, which produced gas. The landowners received royalties for this production.

The landowners argued the well operator had an implied duty to develop the lease which it violated by not exploring and drilling the Marcellus shale, and that the well was not producing in paying quantities because “all gas strata” were not being produced. At trial, the court sustained preliminary objections by the well operator and dismissed the landowner’s complaint.

On appeal, the superior court upheld the trial court’s ruling. It held when a landowner is compensated for leasing their mineral rights only by royalty, that the well operator has an implied obligation to actively extract the resource. The court stated, however, where the landowner is provided compensation for the opportunity to develop and produce oil and gas, extraction need not occur. Here, Kriebel paid royalties to the landowner, and the lease provided for delayed rental payments if production was halted during the primary term of the lease.

Further, the court declined to attach the duty to develop to each “strata” of natural gas because they were not authorized to do so in light of the facts. The landowners were provided royalties or delayed rental payments for the right to explore and produce, and there was no statute which imposed such a duty on the well operator.

Lastly, the court held that the well was producing “in paying quantities” to satisfy Jedlicka, 42 A.3d 261, because the landowners received royalty payments consistently. 

Written by: Garrett Lent, Research Assistant

Agricultural Law Resource and Reference Center

July 2013