Shale Law in the Spotlight – West Virginia Supreme Court Rules that Surface Landowners Are Not Substantially Burdened by Off-Site Horizontal Drilling Activities

Written by Chloe Marie – Research Specialist

Within the last month, the West Virginia Supreme Court has decided two cases that impact the relationship between surface owners and mineral owners in split-estate situations. In a prior article, we addressed EQT Production Co. v. Crowder, 2019 WL 2414728 (W. Va. June 5, 2019), where the court ruled on the ability of a split-estate mineral owner to use the surface estate for the development of adjacent properties. In this article, we will address Andrews v. Antero Resources Corp., 2019 WL 2494598 (W. Va. June 10, 2019), where the court ruled on the related issue of a split-estate mineral owner’s right to access the minerals through horizontal drilling from an adjacent parcel.

Case Summary: Robert L. Andrews, et al. v. Antero Resources Corporation and Hall Drilling, LLC, Docket No. 17-0126

Antero Resources Corp. (Antero) is the owner of several horizontal Marcellus shale wells located on six well pads in the Cherry Camp area of Harrison County, West Virginia. Antero holds the rights to explore for or exploit the underlying mineral estate through severance deeds dating back to the early 1900s. A 1905 deed granted the mineral owner “the right to drill, bore and operate for [oil and gas]” while a 1903 deed retained for the mineral estate owner “all the oil and gas underlying the land herein conveyed together with the privilege of operating for and marketing same.” Antero contracted with Hall Drilling, LLC, for the construction of well pads and roads, well drilling, and the operation of wells and gathering lines.

The plaintiff property owners – Robert and Deborah Andrews, Rodney Ashcroft, and Greg McWilliams – are surface owners of severed estates that are burdened by Antero’s mineral estate ownership.  Five of the six well pads owned by Antero are located within the close vicinity of the property owners’ properties, but the wells are not located on them. The property owners filed a complaint in 2013 before the Circuit Court of Harrison County (docket 13-C-434-3) arguing that “the activities of Antero and Hall in relation to their development of the Marcellus shale have caused the Property Owners to lose the use and enjoyment of their properties due to the annoyance, inconvenience, and discomfort caused by excessive heavy equipment and truck traffic, diesel fumes and other emissions from the trucks, gas, fumes and odors, vibrations, noise, lights, and dust” and therefore alleged claims for “private temporary continuing abatable nuisance and negligence” against the companies.

In November 2014, the court transferred the property owners’ claims to the Mass Litigation Panel of West Virginia as their case was assigned to the “Harrison County Cherry Camp Trial Group.” Antero and Hall filed separate motions for summary judgment following discovery, and the property owners later withdrew their negligence claims, recognizing that there was no damage to property; however, their claims for nuisance remained pending.

On October 11, 2016, the Panel granted summary judgment in favor of Antero and Hall after it found that there were no disputed issues of material fact and that Antero and Hall had the implied rights to use the property owners’ surface estates to develop the mineral estate underlying them. The Panel “declined to apply principles of nuisance law, and instead ruled on the summary judgment motions based upon Antero’s contractual and property rights” and came to the conclusion that “the activities complained of were reasonably necessary to the production of the mineral estate and did not exceed the fairly necessary use thereof or invade the rights of the surface owner[.]”

The property owners filed a motion to alter or amend the Panel judgment pursuant to W. Va. R. Civ. P. 59(e), but the Panel denied such request on January 11, 2017. Consequently, the property owners filed an appeal with the Supreme Court of Appeals of West Virginia.

According to the property owners, “a mineral owner does not have the right to extract natural gas using methods that were uncontemplated when the operative severance deeds were executed, where those uncontemplated methods are not necessary to the extraction of the minerals and substantially burden the surface.” In this regard, the property owners relied on a variety of cases where the court did not allow certain uses of surface estates utilizing advanced technology where such advances could not have been reasonably anticipated by the parties at the time the severance deeds were executed. Antero and Hall countered that the severance deeds give Antero the implied easement to use the property owners’ surface lands “to the extent reasonable and necessary to develop its mineral household.”

The Supreme Court did not accept the property owners’ interpretation of prior case law and determined that the property owners did not correctly understand the significance of these cases. The court noted that “in this line of cases, [this] Court considered various deeds that did not expressly grant the mineral owner a right to destroy the surface, and rejected methods of removing minerals that caused such destruction when they did not exist at the time of the execution of the deed and could not possibly have been within the contemplation of the parties to the severance deed.”

Interestingly, the court noted that the property owners in the case at hand likely would have anticipated a burden on the surface estate through vertical drilling, which was considered the traditional drilling practice at the time the deeds were executed. Through the use of the advanced technology – horizontal drilling – the potential burden on the surface estate actually can be minimized. The court recognized that horizontal drilling is the optimal means for developing the Marcellus shale “because it requires fewer well than vertical drilling and thereby generally minimizes the disruption to nearby surface estates.” Thus, the court agreed with the Panel’s observation that “the burden on the surface estates created by horizontal drilling that is taking place .42 mile to 1 mile away from the subject property is not materially different from the burden that would be endured from the placement of traditional vertical wells directly on Property Owners’ land, along with the construction of an associated well pad, lease road, and pipeline for each well, which is within Antero’s rights.”

Furthermore, the court explained that, in the cases relied upon by the property owners, the use of the surface by the mineral owner resulted in such destruction and loss of the surface that was entirely incompatible with any use the surface owner might have expected as a future surface use. The court also pointed out, in the case at hand, the property owners did not establish any damage or destruction to their surface estates. Consequently, the Supreme Court found that the property owners failed to prove any burdens on their surface estates of having to deal with Antero’s off-site horizontal drilling activities.

The Supreme Court then proceeded to address a two-prong test laid out in Buffalo Mining Co. v. Martin, 165 W. Va. 10, 267 S.E.2d 721 (1980), to determine the balance of rights between the surface owner and mineral owner in relation to implied uses of the surface estate. First, the proposed activity must be reasonably necessary, and second, it must not cause a substantial burden upon the surface owner.  The court held that the property owners did not satisfy the first prong because the property owners did not offer adequate evidence “to establish … what is reasonable and necessary to develop the underlying minerals, other than self-serving assertions that [Antero’s] activities … are excessive.” As to the second prong regarding the burden upon the surface owner, the court stated that “[t]he concept of what amounts to a substantial burden to a surface owner does not lend itself to a precise definition. Instead it requires an examination of uses of the surface that have either been reserved by a severance deed or otherwise implied from the circumstances presented, and further examination of how that use of the surface is impacted by the mineral owner.” In this case, the court found that the property owners did not demonstrate a substantial burden to their surface estates, mainly due to the fact that the horizontal wells were not located on their properties and caused no damages to their surface estates.

Consequently, on June 10, 2019, the West Virginia Supreme Court of Appeals affirmed the Panel’s prior decision granting summary judgment in favor of Antero and Hall.

References:

Robert L. Andrews, et al. v. Antero Resources Corporation and Hall Drilling, LLC, No. 17-0126 (W. Va. June 10, 2019)

Additional Resources:

Shale Law in the Spotlight – West Virginia Supreme Court Rules that Owner of Severed Mineral Estate Cannot Use Surface Estate to Develop Minerals from Neighboring Properties (June 26, 2019)

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

Shale Law Weekly Review - April 23, 2018

Written by:

Jacqueline Schweichler - Education Programs Coordinator

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

Landowner Royalties:  EQT Sues West Virginia for Changes to Flat-Rate Royalty Calculations

On April 12, 2018, EQT Production Company (EQT) filed a lawsuit against the West Virginia Department of Environmental Protection protesting changes to West Virginia’s minimum royalty statute, W. Va. Code § 22-6-8. A new bill amending the statute was signed into law in early March. The law now mandates that the minimum royalty must be calculated based on “gross proceeds, free from any deductions for post-production expenses, received at the first point of sale to an unaffiliated third-party purchaser in an arm’s length transaction...” EQT alleges that the statute infringes on their drilling rights under flat-rate leases and violates the Contracts Clause and the Due Process Clause of the U.S. Constitution. Additional information on the changes to West Virginia’s legislation can be found in our recent Shale Law in the Spotlight article.

LNG Exports: Cove Point Terminal Ships First Commercial Cargo

On April 16, 2018, the Dominion Energy Cove Point LNG terminal in Lusby, Maryland, shipped its first commercial cargo, according to LNG World News. The article states that the destination of the LNG is unclear and that the cargo vessel is 91 percent full. Dominion Energy received approval to commence service from the Federal Energy Regulatory Commission on March 5th and entered commercial service on April 10th. The Cove Point facility can process 750 million standard cubic feet per day of inlet feed gas from the Marcellus and Utica shale plays.

International Development: Northern Territory of Australia Will Allow Hydraulic Fracturing

On April 18, 2018, the Northern Territory Government of Australia announced that hydraulic fracturing will be permitted within the Territory based on the recommendations of the recently published, Scientific Inquiry into Hydraulic Fracturing in the Northern Territory. The report recommends against allowing hydraulic fracturing in “National Parks, Conservation Areas, Indigenous Protected Areas, towns, residential and strategic assets, and areas of high cultural, environmental or tourism value.” Chief Minister Michael Gunner stated that by following the recommendations in the inquiry, they will be able to protect the environment, cultures, and lifestyles, while residents will benefit from new job creation.

Induced Seismicity: Oklahoma Corporation Commission Orders Halt to Disposal Well Operations After Earthquakes

On April 19, 2018, the Oklahoma Corporation Commission (OCC) issued a directive to halt disposal well operations in the Hennessey area following a 3.8 earthquake. Seven other disposal wells in the Arbuckle formation have been directed to reduce daily volumes by 25 percent. In addition, eight other wells in the area have been directed to reduce volumes to “their last 60 day average.” According to the press release, disposal into the Arbuckle formation creates “the largest potential risk for induced seismicity.” Earlier this month, OCC issued disposal well reduction order after a 4.6 magnitude earthquake in Garfield County.

Water Quality: DEP Releases Oil and Gas Well Structural Soundness Data

On April 13, 2018, the Pennsylvania Department of Environmental Protection (DEP) announced the release of the first four years of well structural soundness data collected by oil and gas well operators. According to DEP, the data shows that most wells in Pennsylvania “are being operated in a manner that greatly reduces the risk for groundwater impacts." Under the Mechanical Integrity Assessment Program, oil and gas well operators are required to conduct quarterly inspections and submit data for one of the inspections each year. A comprehensive analysis of the data for 2014, Explanation and Summary of Preliminary Mechanical Integrity Assessment Dataset, suggests that less than 1 percent of operator observations indicated integrity problems that could “allow gas to move outside the well footprint."

GHG Emissions: EPA Releases Report on U.S. Greenhouse Gas Emissions

On April 12, 2018, the U.S. Environmental Protection Agency (EPA) released the report, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2016. The report estimates the total greenhouse gas emissions from the United States, including carbon dioxide, methane, nitrous oxide, and other flourine-containing halogenated concentrations. The report is prepared to meet commitments under the United Nations Framework Convention on Climate Change. According to the researchers, U.S. emissions increased by 2.4 percent from 1990 to 2016 and emissions decreased by 1.9 percent from 2015 to 2016. The researchers suggest that this decrease in emissions could be due to the substitution of natural gas for coal and warmer winter conditions which resulted in a decreased demand for heating fuel.

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"Shell sets out strategy for dealing with shift from fossil fuels" - Financial Times

"Compressed Natural Gas station opens in Allentown to serve LANTA buses" - LVB.com

"IEA Says 'Mission Accomplished' For OPEC As Oil Stocks Shrink" - Reuters

"Cove Point LNG ships first commercial cargo, Japan set for May delivery" - LNG World News

"DEP report: Natural gas data shows low number of gas migration, leak issues in 2014" - Trib Live

"EQT files lawsuit against DEP chief over WV's statute on flat-rate leases" - WV Gazette-Mail

"Regulators to consider revising natural gas flaring policy" - Bismark Tribune

"The oil bust forced more than 330 North American energy companies into bankruptcy, report says" - Houston Chron

"Five takeaways from StateImpact’s forum on gas royalties"  - State Impact PA

"Shale Boom Creates New Petrochemical Hub" - Oil Price

"Is the U.S. Shale Boom Hitting a Bottleneck?" - The Wall Street Journal

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See our Global Shale Law Compendium and this week’s article, Shale Law Governance in Pennsylvania - Regulations from 2008 to 2010

Check out this week’s Shale Law in the Spotlight: Background of Recent West Virginia Legislation Addressing the Deduction of Post-Production Costs from Oil and Gas Royalties.

Stay informed with our monthly Agricultural Law Brief located here.

Shale Law in the Spotlight: Background of Recent West Virginia Legislation Addressing the Deduction of Post-Production Costs from Oil and Gas Royalties

Written by Chloe Marie – Research Fellow

Recently, the West Virginia legislature passed a bill limiting the ability of oil and gas companies to deduct post-production costs from landowner royalty payments. This article provides a brief description of this legislation as well as the background that led to the consideration of this bill.

Senate Bill 360

On March 9, 2018, West Virginia Governor Jim Justice signed into law Senate Bill No. 360, whose purpose is to amend and reenact West Virginia Code §22-6-8, which addresses flat rate royalty leases and seeks to eliminate this type of oil and gas lease. The statute states that “continued exploitation of the natural resources of this state in exchange for such wholly inadequate compensation is unfair, oppressive, works an unjust hardship on the owners of the oil and gas in place, and unreasonably deprives the economy of the State of West Virginia of the just benefit of the natural wealth of this state.” More precisely, the statute effectively mandates the payment of a minimum royalty by prohibiting the issuance of a well permit where the oil and gas lease or contractual agreement provides for flat well royalty or any similar compensation provision, unless the permit application is accompanied by an affidavit stating that the lessor shall receive at least a one-eighth royalty.

Senate Bill 360 makes a small, but very significant, change to West Virginia Code §22-6-8, and by so doing dramatically limits the ability of oil and gas operators to deduct post-production costs from landowner royalties. The bill clarifies that the one-eighth royalty is to be calculated based upon “gross proceeds, free from any deductions for post-production expenses, received at the point of sale to an unaffiliated third-party purchaser in an arm’s length transaction for the oil or gas so extracted, produced, or marketed. . .” 

The provisions in Senate Bill 360 will become effective on May 31, 2018 and will overturn a West Virginia Supreme Court of Appeals ruling dated May 26, 2017, in Leggett v. EQT Production Co., which allowed oil and gas companies to deduct post-production costs from royalty payments made out of flat rate royalty leases.

Leggett v. EQT Production Company lawsuit

To place matters within their proper context, in December 2012, some owners of undivided oil and gas mineral interests in Doddridge County filed a lawsuit against EQT Production Company in the Circuit Court of Doddridge County, West Virginia, alleging wrongful deduction of post-production costs from their royalty payments incurred for the gathering and transport of natural gas. On January 10, 2013, this matter was removed from the Circuit Court of Doddridge County to the U.S. District Court for the Northern District of West Virginia (see Leggett et al. v. EQT Production Company et al., docket no. 1:13-cv-00004).

In their initial complaint, the plaintiffs argued that such deduction was not allowed, either pursuant to the terms of the lease agreement, West Virginia Code § 22-6-8, and/or pursuant to the contractual duty of good faith and fair dealing in all contracts as well as the fiduciary obligations of the oil and gas lessee who assumes the duty of handling the sales and accounting functions for the transaction.

On January 21, 2016, the U.S. District Court remitted to the West Virginia Supreme Court of Appeals two certified questions inquiring as to whether West Virginia law, specifically Code §22-6-8, allows a lessee to deduct post-production expenses from royalty payments made pursuant to a flat-rate royalty oil and gas lease. (see Leggett et al. v. EQT Production Company et al., docket no. 16-0136).

Initially, on November 17, 2016, the state Supreme Court of Appeals held that the language found in West Virginia Code § 22-6-8(e) means that “the royalty payment is not to be diluted by costs and losses incurred downstream from the wellhead before a marketable product is rendered.” Disagreeing with the Court’s interpretation of West Virginia Code § 22-6-8(e), EQT Production Company filed a petition for rehearing on December 19, 2016. The Supreme Court agreed to rehear the matter on January 25, 2017.

Following rehearing, the West Virginia Supreme Court of Appeals reversed its earlier interpretation and certified to the U.S. District Court on May 26, 2017, that oil and gas companies are allowed to deduct “reasonable” post-production costs in the calculation of royalty payments in the specific case of flat-rate royalty oil and gas leases governed by section 22-6-8 of the West Virginia Code. The Court also held that “the industry-recognized ‘net-back’ or ‘work-back’ method of royalty calculation is equally just to both parties and, more importantly, the closest appreciable method of effectuating what the Legislature envisioned.”

With the enactment of Senate Bill 360, however, the West Virginia legislature has clarified that, under Code §22-6-8, the minimum one-eighth royalty is to be calculated free from post-production costs.

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