RMMLF Mineral Law Newsletter
(By Joseph K. Reinhart, Sean M. McGovern and Casey Snyder)
On January 22, 2020, the Pennsylvania Supreme Court affirmed that the rule of capture, a 150-year-old legal doctrine that applies when a well drains oil and gas from a reservoir that crosses multiple properties, can be applied to hydraulic fracturing of unconventional wells. See Briggs v. Sw. Energy Prod. Co., 224 A.3d 334 (Pa. 2020). The decision reverses the April 2, 2018, ruling by the Pennsylvania Superior Court that the rule of capture did not apply to hydraulic fracturing. Briggs v. Sw. Energy Prod. Co., 184 A.3d 153 (Pa. Super. 2018); see Vol. XXXV, No. 2 (2018) of this Newsletter.
In Briggs, the plaintiffs owned property adjacent to land owned by Southwestern Energy Production Co. (Southwestern). Southwestern used hydraulic fracturing for natural gas extraction from the Marcellus Shale formation, and wells were drilled on and fluids injected only beneath its land. Briggs, 224 A.3d at 339, 343.
The court ruled that the rule of capture was applicable to hydraulic fracturing as it is to any other means of artificially stimulating the flow of oil and gas. Id. at 352. It emphasized that the application of the rule of capture did not rest on the distinction between using natural flow and hydraulic fracturing. However, the court did not answer the question of whether horizontal hydraulic fracturing could constitute a trespass by physical intrusion of properties adjacent to a well site. Id. at 350–51. The court remanded the case to the superior court to determine whether or not the plaintiffs’ claims could move forward in light of what it said were pleading deficiencies in the complaint for failing to allege a physical intrusion. Id. at 351–52.
After remand, Southwestern was granted leave in April 2020 to file a supplemental brief. See Supplemental Brief of Appellee, Briggs v. Sw. Energy Prod. Co., No. 1351 MDA 2017 (Pa. Super. Ct. filed Apr. 23, 2020). The superior court denied Southwestern’s request for oral argument and en banc review. See Order Denying Request for Oral Argument and En Banc Review Comment, Briggs, No. 1351 MDA 2017 (Pa. Super. Ct. Apr. 16, 2020).
PENNSYLVANIA MOVES FORWARD WITH RULE INCREASING UNCONVENTIONAL WELL APPLICATION FEE
On February 14, 2020, the Independent Regulatory Review Commission (IRRC), a state agency responsible for reviewing proposed regulations from most state agencies, received the Pennsylvania Department of Environmental Protection’s (PADEP) final regulation increasing the well application fee for vertical and non-vertical unconventional wells. Previously, the Pennsylvania Environmental Quality Board (EQB) voted to adopt the draft regulations as final on January 21, 2020. The final-form regulation can be viewed on the IRRC’s website at http://www.irrc.state. pa.us/regulations/RegSrchRslts.cfm?ID=3217. The IRRC was scheduled to hold a public meeting on the draft regulation on May 21, 2020, in Harrisburg, Pennsylvania. That meeting was subsequently canceled due to the ongoing COVID-19 pandemic and the May 21 agenda items have been tentatively set for the next public meeting on June 3, 2020. A copy of the May 21 agenda is available at http://www.irrc.state.pa.us/documents/uploads/meetings/05-21-2020_Agenda.pdf.
Every three years, PADEP is required to evaluate the unconventional well permit application fees and recommend regulatory amendments to the EQB to address any disparity between the cost of funding PADEP’s oil and gas program and income from the well permit application fees. See 25 Pa. Code § 78a.19(b). The fees were last amended in 2014. See Oil and Gas Well Fee Amendments, 44 Pa. Bull. 3517 (June 14, 2014). The final regulation increases well permit application fees from $5,000 for nonvertical unconventional wells and $4,200 for vertical unconventional wells to $12,500 for all unconventional well permit applications. See 25 Pa. Code § 78a.19(a) (current unconventional well permit application fees). It also removes definitions for “nonvertical unconventional well” and “vertical unconventional well” related to well permit applications, as well permit application fees will now be the same for all unconventional well permit applications. According to the preamble of the rule, PADEP determined the fee increase is necessary to maintain the administration of its Office of Oil and Gas Management by sustaining current staff level and operating costs despite recent staff reductions and the implementation of cost-saving measures. PADEP found that at the current well permit application fees, it would need to receive 5,000 nonvertical unconventional well permit applications a year to sustain the program. However, it anticipated only receiving approximately 2,000 based on recent annual totals, causing it to recommend raising the fees to $12,500.
The rulemaking must still be approved by the House and Senate environmental committees and the IRRC prior to publication. The final rulemaking will be effective upon publication in the Pennsylvania Bulletin.
PENNSYLVANIA HOUSE CONSIDERING PROPOSED CONVENTIONAL OIL AND GAS WELLS ACT
The Pennsylvania House of Representatives continues to deliberate legislation that would largely remove Pennsylvania conventional oil and gas operations from the requirements of the state’s current oil and gas law, Act 13 of 2012 (Act 13), 58 Pa. Cons. Stat. §§ 2301–3504.
On April 20, 2020, the House laid Senate Bill 790 (SB 790), titled “Conventional Oil and Gas Wells Act,” on the table for consideration but removed it the same day. Previously, in January 2020, the Pennsylvania House Environmental Resources and Energy Committee voted to report SB 790 to the House for a final vote. The Pennsylvania Senate passed SB 790 in October 2019.
Due to the differences in conventional and unconventional operations, there have been legislative efforts since Act 13’s replacement of the 1984 Oil and Gas Act (Act 223) to remove conventional operations from Act 13 jurisdiction and revert to the standards under Act 223. SB 790 would accomplish this by repealing all provisions of Act 13 as they relate to conventional wells, except the underground gas storage provisions of subchapter C. SB 709 would change several aspects of the Act 13 standards for conventional operators, including:
- the water supply replacement standard;
- the definition of public resources;
- inactive status;
- bonding requirements;
- voluntary plugging incentives;
- area of review; and
- restoration obligations.
A provision that would have permitted the use of produced water to treat roads as a dust suppressant was removed from the SB 790 version reported to and under consideration by the House.
It is unclear whether the bill will pass the House, but Governor Tom Wolf’s office has indicated that the Governor intends to veto the current version of the bill if it does pass in the state legislature.
PENNSYLVANIA SUPREME COURT ACCEPTS APPEAL OF RULING ON OIL AND GAS REVENUE TRANSFERS
Briefing continues on an Environmental Rights Amendment (ERA), Pa. Const. art. I, § 27, challenge to management of income generated from oil and gas leases on public land at the state supreme court level. The litigation stems from a 2017 opinion of the Pennsylvania Supreme Court that enumerated a new standard to determine violations of the ERA based on the text of article I, section 27 of the Pennsylvania Constitution and principles of Pennsylvania trust law. See PEDF v. Commonwealth, 161 A.3d 911 (Pa. 2017); see also Vol. XXXIV, No. 3 (2017) of this Newsletter. Using this standard, the court held that proceeds from the sale of oil and gas from the public trust remain in the trust under the ERA and may only be used to conserve and maintain public natural resources. 161 A.3d at 939.
The Pennsylvania Supreme Court agreed to review a July 29, 2019, commonwealth court ruling that rents and bonuses paid out under leases between the state and natural gas operators were not assets of the public trust established under the ERA because they were not intended as compensation for gas extracted from the ground. See PEDF v. Commonwealth, 214 A.3d 748, 773–74 (Pa. Commw. Ct. 2019). Instead, the rents and bonuses were consideration for the exploration of oil and gas on public land. Id. at 773. The court ruled that because the money did not have to be set aside exclusively for conservation and maintenance of public natural resources under the Pennsylvania Constitution, under statutory language in effect at the time the ERA was adopted one-third of the income from the rents and bonuses could be used for General Fund purposes of the commonwealth. Id. at 774.
The Pennsylvania Environmental Defense Foundation (PEDF) appealed the holding in August 2019. See Notice of Appeal, PEDF v. Commonwealth, No. 64 MAP 2019 (Pa. Aug. 12, 2019). The Pennsylvania Supreme Court agreed to review the case in December 2019, and the respective parties submitted briefs through March 2020. PEDF alleges the commonwealth court opinion ignores the 2017 opinion of the supreme court holding that revenue from oil and gas drilling on state forest land must be held in trust under the ERA and be used for conservation purposes only. See Appellant’s Brief at 43, PEDF v. Commonwealth, No. 64 MAP 2019 (Pa. Jan. 28, 2020). It argues that the bonus and rental payments are solely to find, extract, and transport the natural gas for sale, and, therefore, the payments are solely in exchange for the severance of resources from public land. Id. at 19. To date, oral argument has not been scheduled.
