As reported in December, the Pennsylvania Supreme Court on December 19, 2013 invalidated portions of Act 13, including provisions limiting local government control and provisions regarding setbacks from the waters of the Commonwealth, pursuant to Article 1, Section 27 of the Pennsylvania Constitution.
However, the Pennsylvania Office of General Counsel (OGC) today filed an Application for Reconsideration requesting that the Pennsylvania Supreme Court remand the case to the Commonwealth Court so that a hearing can be held to create a factual record because the Supreme Court’s decision relied upon broad factual findings that were not of record before any court. Second, the OGC requested that the Supreme Court remand to the Commonwealth Court the issues related to setbacks from waters of the Commonwealth.
The Pennsylvania Supreme Court has ruled that several critical provisions of Act 13, the General Assembly’s 2012 comprehensive update to the former Oil and Gas Act, are unconstitutional. In addition to invalidating a key section of Act 13 placing limits on the regulatory authority of local governments, the Court’s ruling also struck down a number of the legislation’s well location restrictions administered by the Department of Environmental Protection (DEP).
The Commonwealth Court, in a 4-3 decision, had declared the limits on the authority of local governments in Section 3304 unconstitutional on the grounds that they violated substantive due process, holding that it allowed incompatible uses in zoning districts, was inconsistent with municipal comprehensive plans, did not protect the interests of neighboring property owners, altered the character of the neighborhood, and made irrational classifications. The Supreme Court affirmed, albeit on different grounds. The majority opinion held that the limits on local governments violated Article 1, Section 27 of the Pennsylvania Constitution, commonly known as the “Environmental Rights Amendment.” The Supreme Court also invalidated Section 3303 of Act 13, which provided that “environmental acts” are of statewide concern and preempt local regulation of oil and gas operations regulated by such acts. Sections 3305 through 3309 were enjoined to the extent that they enforced any section of Act 13 found to be invalid.
Additionally, the Commonwealth Court held Section 3215(b)(4) to be null and void because it gave the DEP insufficient guidance to waive setback requirements and allowed the DEP to make legislative policy judgment. Upon review, the Supreme Court affirmed. However, the Supreme Court held that all of Section 3215(b), including the setbacks from waters of the Commonwealth, is invalid because the waiver provision was not severable from the remainder of that section. The implications of this are unclear, as the DEP and well permit applicants now have no defined setbacks from surface waters or wetlands under Act 13 or any other statute. The Supreme Court also found that Section 3215(d), which allowed the DEP to consider comments from municipalities in its permitting decisions, were invalid and that Sections 3215(c) and (d) are invalid to the extent that they enforce Sections 3215(b) and (d).
For a more in-depth analysis, see Babst Calland’s recent Administrative Watch.
The Pennsylvania Superior Court recently held in Southwestern Energy Production Company, et al. v. Forest Resources, LLC, et al. that an “assignment back” clause that results in a lessor’s net royalty being less than one-eighth violates the Pennsylvania Guaranteed Minimum Royalty Act (GMRA). The GMRA requires oil and gas leases to provide a minimum one-eighth royalty. Under the terms of a lease, the lessor in Southwestern Energy was to receive the statutory minimum one-eighth royalty. The parties subsequently amended the lease, modifying the royalty provision so that the lessor retained 50% of the royalty and assigned the remaining 50% of the royalty to the lessee to pay for marketing costs. Although the court found little authority regarding the technical requirements for compliance with the GMRA, it found that the intent of the statute was to clearly protect the lessor. It reasoned that the GMRA applies to both leases and other agreements, including amendments, and that it compels a “guarantee” of at least a one-eighth royalty. Accordingly, it concluded that a lease that contains an assignment back clause that does not guarantee the statutory minimum royalty violates the GMRA.
On November 26, 2013, the Pennsylvania Supreme Court declined to hear an appeal of the Superior Court’s decision in Caldwell v. Kriebel Resources Co., which held that an oil and gas lease does not contain an implied duty to develop all strata. The Superior Court opinion was previously covered here.
On August 26, 2013, Hilcorp Energy Company (Hilcorp) filed a complaint and application requesting that the Pennsylvania Environmental Hearing Board (PAEHB) issue an order to establish well spacing and drilling units pursuant to the Oil and Gas Conservation Law of 1961 for a 3,267 acre reservoir of natural gas in the Utica-Point Pleasant formation beneath Mercer and Lawrence counties, known as the “Pulaski Accumulation”, since Hilcorp was unable to obtain leases from all property owners in this parcel. After conducting a prehearing conference and considering legal memoranda by the Pennsylvania Department of Environmental Protection (PADEP) and Hilcorp regarding whether the PAEHB had original jurisdiction to issue well spacing and drilling unit orders under the Oil and Gas Conservation Law, the PAEHB’s Chief Judge Renwand issued an opinion and order on November 20, 2013 dismissing Hilcorp’s well spacing and drilling unit application because the PADEP, and not the PAEHB, has original jurisdiction to issue well spacing and drilling unit orders under the Oil and Gas Conservation Law. Chief Judge Renwand’s opinion noted that the Oil and Gas Conservation Commission, the since-abolished entity established by the Oil and Gas Conservation Law to issue well spacing and drilling unit orders, “was a very specialized and technical agency” with the “power to file enforcement actions”, issue permits, hold public hearings, and conduct other regulatory type actions. According to Chief Judge Renwand, these powers, duties, and responsibilities of the former Oil and Gas Conservation Commission are analogous to the current powers, duties, and responsibilities of the PADEP and not related to the PAEHB’s role “as an independent quasi-judicial agency” that is “completely independent of the [former, now PADEP] Department of Environmental Resources.” Judge Mather wrote a concurring opinion noting that the PADEP currently has “effective and binding regulations” at 25 Pa. Code Chapter 79 that implement the Oil and Gas Conservation Law and direct the PADEP “to issue orders establishing well spacing and drilling units, in the first instance, that can then be appealed to the Board.”
On November 18, 2013, the Third Circuit affirmed a summary judgment ruling out of the Middle District of Pennsylvania in favor of Shell Western Exploration and Production, LP (Shell) in a case captioned as George W. Linder, et al. v. SWEPI, LP, a/k/a Shell Western Exploration and Production, LP; Case No. 13-1674 (3d Cir. November 19, 2013). The plaintiffs conveyed their oil and gas rights for 338 acres to Shell’s predecessor-in-interest via a lease (the Lease). The Lease had a primary term of ten years and, by its terms, would continue in effect past the primary term if productive activity continued on the leasehold. Shell’s predecessor-in-interest unitized an area of 526.94 acres, which included 137.81 acres of the plaintiffs’ 338-acre leasehold. The primary term of the Lease expired in September 2010, but the parties agreed that the Lease continued in effect because Shell continued to engage in productive activity on the leasehold. However, the plaintiffs demanded a delay rental payment for the non-unitized portion of the Lease based on the Lease’s Unitization Clause which provided: “If the total unitized Leasehold acreage is less than 50 percent of the total Leasehold acreage, Delay Rental will continue to be paid on the non-unitized acreage.” Shell agreed to pay the delay rentals for the non-unitized acreage. Both parties then changed their positions a number of times as to whether the Lease remained in effect for the 200.19 acres that were never unitized. The plaintiffs ultimately filed a lawsuit in state court seeking a declaratory judgment that the Lease expired as to the non-unitized acreage. Shell removed the case to the United States District Court for the Middle District of Pennsylvania, and moved for summary judgment in its favor. The District Court granted summary judgment finding that, as a matter of law, the Lease did not expire with respect to the non-unitized acreage.
The plaintiffs then appealed to the Third Circuit with their principal argument being that “upon the occurrence of unitization of less than 50 percent of the entire leasehold, there are as a matter of law two leasehold parcels.” The Third Circuit affirmed the ruling of the District Court holding that the plaintiffs’ position is an “untenable reading of the Lease.” In so holding, the Third Circuit relied upon the “obvious reading” of the Lease terms finding that the Lease continues in effect while operations are conducted on the leasehold, and the Lease refers to the leasehold as a single, undivided entity that is 338 acres in size. Moreover, the Third Circuit quickly dismissed the plaintiffs’ argument that the Lease’s Unitization Clause supports their interpretation. In this regard, the Third Circuit held that this language does nothing to separate the unitized and non-unitized acreages—rather, it simply obligated Shell to pay a delay rental on the non-unitized acreage. Additionally, citing to Pennsylvania case law, the Third Circuit held that Shell’s failure to timely pay the delay rental did not constitute a material breach of the Lease because a brief delay in payment where the Lease contains no “time-is-of-the-essence” provision does not amount to a material breach. Lastly, the Third Circuit held that Shell did not surrender the non-unitized acreage by initially agreeing in a letter to do so, because the Lease’s surrender clause requires the recording of a Surrender of Lease as a necessary prerequisite to the legal surrender of any rights. Accordingly, based on what it viewed as the obvious interpretation of the Lease provisions, the Third Circuit affirmed the District Court’s decision to grant summary judgment in favor of Shell.
On November 12, 2013, the Joint Landowners Coalition of New York announced that it has finalized a complaint which the group intends to file in New York state court over the delay in deciding the future of shale drilling in the State. The complaint, which names New York State, Governor Cuomo and the commissioners of the Department of Environmental Conservation and the Department of Health as defendants, asserts that the State’s five-year-old hydraulic fracturing moratorium is illegal and amounts to an unconstitutional “taking” of the plaintiffs’ property without just compensation. Before filing the lawsuit, however, the group is seeking funds to finance the lawsuit.
On October 24, 2013, the U.S. District Court for the Middle District of Pennsylvania denied Columbia Gas Transmission, LLC’s (Columbia) request to use the eminent domain authority provided in the Natural Gas Act to acquire new pipeline easements from certain landowners in York County, Pennsylvania. Columbia filed the request to facilitate its efforts to replace and relocate portions of an existing gas pipeline in order to comply with the Pipeline and Hazardous Materials Safety Administration’s integrity management program requirements in Subpart O of 49 C.F.R. Part 192. Although the company’s efforts obtain the necessary easements through private negotiation had proved unsuccessful, the Court concluded that Columbia had not shown that the Federal Energy Regulatory Commission’s regulations for performing activities under a blanket certificate would allow the easements to be acquired through the use of eminent domain.
An Ohio trial court issued a key ruling on Ohio’s Dormant Mineral Act (“DMA”). The Carroll County Court of Common Pleas in Dahlgren v. Brown Farm Properties, LLC departed from a series of trial court decisions adopting the legal theories of surface owners concerning “automatic vesting” under the 1989 version of the DMA. In a 20-page opinion, the court analyzed both the 1989 version of the DMA and the 2006 version and concluded that the 2006 version applied to a mineral interest that was originally created in 1949. The surface owners argued that the 1989 version of the DMA should apply to the case and that the mineral interest was abandoned after a 20 year period. The court rejected their arguments and instead applied the 2006 version of the DMA as advocated by the holders of the severed mineral interest. The court set forth multiple reasons why the theory of automatic vesting does not comport with the purpose of the DMA and Ohio’s Marketable Title Act, which are to simplify and facilitate land title transactions. The court provided additional grounds in support of its ruling and also determined that the 2006 version of DMA provides a specific statutory procedure to follow in order to deem a severed mineral interest “abandoned” under the law. Thus, the record chain of title will clearly demonstrate the existence or abandonment of the severed mineral interest as opposed to the automatic vesting theory, which would provide no notice.
The DMA was originally enacted in 1989 and later amended in 2006. The 1989 version of the DMA provides that where a severed mineral interest has not been the subject of a title transaction (e.g. there has been no leasing activity) for a period of 20 years, the mineral interest may “merge” with the surface estate and the owners of the surface become the owners of the minerals. However, the 1989 version does not expressly define the procedures to be followed in order for the surface owners to claim ownership. The 2006 version of the DMA amended the 1989 DMA to provide specific procedures that a surface owner must follow to obtain ownership in the mineral estate. The 2006 DMA also provides the owner of the severed mineral estate a means by which he can preserve his interest by filing an affidavit of preservation. Among the unsettled issues of law is whether the 1989 version or 2006 version applies to pending lawsuits.
The Dahlgren decision is significant because it interrupts a trend of trial court decisions in which courts were adopting the automatic vesting theory of the surface owners. An additional recent appellate court decision applied the 2006 version of the DMA although the issue of which version of the DMA applied was not at issue in the case. See Dodd v. Croskey, 7th Dist. Harrison No. 12 HA 6, 2013-Ohio-4257. These two decisions could indicate a reversal of the current trend favoring application of the 1989 version of DMA and the automatic vesting theory.
On October 23rd, the Middle District of Pennsylvania dismissed Dr. Alfonso Rodriguez’s complaint challenging Act 13’s so-called “Medical Gag Act.” If, during the course of treating a patient, a health professional deems it necessary for an operator to disclose the exact mixture of hydraulic fracturing fluids, Act 13 requires the operator to disclose the information upon a verbal acknowledgement by the health professional that the information will not be used for purposes other than the health needs asserted and must be maintained confidentially.
Dr. Rodriguez is a nephrologist who allegedly treats patients who have been directly exposed to high volume hydraulic fracturing fluid. In his complaint, he alleged that Act 13 violates the First and Fourteenth Amendments of the United States Constitution, and that it requires him to violate his ethical obligations as a physician. The Court dismissed his complaint on the grounds that Dr. Rodriguez never suffered an actual injury and thus, did not have standing. The Court held that the alleged injury was “too conjectural to satisfy the injury in fact requirement of Article III standing” which requires an alleged injury to be “distinct and palpable” rather than “abstract.” In other words, Dr. Rodriguez does not have standing to sue because he has never been in a position “where he was required to agree to any sort of confidentiality agreement under the act.” His alleged injuries are hypothetical.
The United States District Court for the Western District of Pennsylvania has accepted in part the recommendations of a magistrate judge, and has granted the motion to certify two classes of plaintiffs in Pollock v. Energy Corp. of America. A third class was denied certification. In February, District Judge Joy Flowers Conti ruled on a summary judgment motion.
The plaintiffs, owners of various oil and gas interests under lease to Energy Corporation of America (ECA), brought suit for the alleged miscalculation of royalty payments by ECA. The classes, as certified, now encompass two groups: 1) “all Pennsylvania lessors holding an oil and gas lease with ECA for which interstate pipeline service charges were deducted prior to March 26, 2012;” and 2) “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 third requested class, based on the failure to pay royalties on gas used as plant fuel, was denied.
Penn State Marcellus Shale Law Blog reports that the U.S. District Court for the Western District of Pennsylvania recently granted in part and denied in part Texas Eastern Transmission, L.P.’s motion to dismiss and or strike a personal injury complaint by a neighboring land owner. In Koziel v. Texas Eastern Transmission, L.P., the land owner alleged that he suffered severe health problems related to his hearing and sleep after he heard a high pitched noise emanating from Texas Eastern’s nearby compressor station for nearly 15 minutes. He initially claimed that Texas Eastern was liable on the basis of negligence and strict liability, but conceded his strict liability claim following Texas Eastern’s motion to dismiss. As a result, the court granted Texas Eastern’s motion to dismis the strict liability claim. The court denied Texas Eastern’s motion to strike a particular paragraph of the plaintiff’s negligence claim as moot because the allegation related solely to the period of alleged action/inaction by the operator while the noise occurred, rather than any remedial or post-incident actions or inactions.
Two Ohio groups recently issued a press release regarding a lawsuit which has been filed against the Muskingum Watershed Conservancy District over its oil and gas leasing practices and its sale of water for hydraulic fracturing. The MWCD, tasked with reducing flooding, conservation and providing recreational opportunities, as earned over $78 million through its leases and water sales which the organization can use to further its conservation efforts. The lawsuit was filed in Franklin County Common Pleas Court by local property owners.
The New York Court of Appeals on September 30, 2013 set a schedule for the parties to file briefs in two cases that will likely have a substantial impact on the future of hydraulic fracturing in the state. In August of this year, the Court of Appeals granted review of two cases which upheld local natural gas drilling bans in the upstate towns of Dryden and Middlefield. The Appellants in the two cases, which include Norse Energy Corp. and an owner of several oil and gas leases, must file their initial briefs by October 28, 2013, and the towns must file their response briefs by December 16, 2013. Reply briefs from the Appellants are due by January 6, 2014. The Court of Appeals has not set a date for oral arguments.
The Court will determine whether the New York Oil, Gas, and Solution Mining Law preempts a municipality’s authority to enact a zoning ordinance that prohibits drilling within its jurisdiction. To date, more than 50 municipalities in New York have banned gas drilling.
On September 26, 2013, in the case of Thornsbury v. Cabot Oil & Gas Corporation (2013 W. Va. LEXIS 958), the Supreme Court of Appeals of West Virginia ruled that, although an oil and gas lease to Cabot affecting surface lands owned by Thornsbury contained road provisions, a subsequent 2006 right-of-way contract controlled the design and use of the well access road on the land. The Supreme Court Opinion reversed a prior decision of the McDowell County Circuit Court granting summary judgment to Cabot, further holding that genuine issues of material fact remain as to the possible breach of the 2006 contract, and remanded the case for further proceedings.