An environmental advocacy group reportedly filed a lawsuit against the New York Department of Health on September 13, 2013, seeking to force the release of documents related to the agency’s public health review of hydraulic fracturing. The Seneca Lake Pure Waters Association filed the action after the Department of Health rejected the group’s earlier request to obtain the documents under the State Freedom of Information Law. Groups on both sides of the debate on whether the state’s hydraulic fracturing moratorium should be lifted have criticized the lack of transparency in the Department of Health’s public health review. Currently the State has no timetable for completion of the public health review.
On August 14th, the United States District Court for the Middle District of Pennsylvania adopted a magistrate judge’s report and recommendation that recommended granting SWEPI, LP’s (“SWEPI”) motion to dismiss a lawsuit regarding the extension of a lease by tendering shut-in royalties. In a case titled Mesner v. Swepi, LP, a landowner filed a lawsuit in the Court of Common Pleas against SWEPI in order to terminate the oil and gas lease. SWEPI then removed the suit to the federal district court based on diversity jurisdiction, and filed a motion to dismiss arguing that it had extended the term of the lease by tendering the shut-in royalty pursuant to the terms of the oil and gas lease.
The shut-in provision of the lease provided that “[i]f during or after the primary term of this lease, all wells on the leased premises or within a unit that includes all or a part of the leased premises, are . . . otherwise not producing for any reason whatsoever for a period of twelve (12) consecutive months, . . . Lessee may maintain this lease in effect by tendering to Lessor a shut-in royalty equal to the delay rental as found elsewhere in this lease . . . Upon payment of the shut-in royalty as provided herein, this lease will continue in force during all of the time or times while such wells are shut in.” The plaintiff argued that SWEPI did not extend the lease by tendering the shut-in royalty payments because shut-in royalty provision may only be applied to “wells capable of producing gas in paying quantities” and the two wells shut-in on the leased property were not capable of producing gas in paying quantities. The plaintiff further argued that automatic termination rule should be found applicable to the lease and result in the denial of SWEPI’s motion to dismiss.
Based on the language of the shut-in provision, the court first concluded that SWEPI complied with the provision and extended the term of the lease. The court began its analysis by summarizing the rules of contract interpretation and how they apply to oil and gas leases. In doing so, the court said it must ascertain and give effect to the intent of the parties and that the lease should be given its accepted and plain meaning. Accordingly, the court concluded that the shut-in provision permits SWEPI to tender the shut-in royalty payment to the lessor when all of the wells on the property or in the unit are (1) shut-in, (2) suspended, or (3) otherwise not producing for any reason whatsoever. The court stated it was irrelevant whether the wells shut-in on the leased premises were or were not capable of production. Therefore, it held that SWEPI extended the lease pursuant to the shut-in provision when it tendered the shut-in royalty payment to the lessor. In making his argument, the plaintiff relied on case law from other jurisdictions. The court found these cases to be inapplicable to this case.
The court then held that the automatic termination rule has no affect in this case. Under the automatic termination rule, a lease will terminate if no hydrocarbons are produced in paying quantities, unless the lease contains a savings clause. Since the lease permits SWEPI to extend the term of the lease by tendering a shut-in royalty, regardless of whether the wells are capable of producing gas in paying quantities, the court held that the automatic termination rule was not applicable. Therefore, the court held that SWEPI extended the term of the lease by tendering the shut-in royalty payment.
On September 4, 2013, in the case of Whiteman v. Chesapeake Appalachia, L. L. C. (2013 U.S. App. LEXIS 18359 (4th Cir. W. va. 2013)), the United States Court of Appeals for the Fourth Circuit upheld a District Court ruling from the Northern District of West Virginia regarding claims of trespass against Chesapeake Appalachia, L. L. C. brought by the surface owners of a 101 acre parcel in Wetzel County. The Fourth Circuit Opinion, written by Judge Faber, concluded that the District Court properly granted summary judgment to Chesapeake. The Opinion specifically stated “that creating drill waste pits was reasonably necessary for recovery of natural gas and did not impose a substantial burden on the [Plaintiffs] surface property, that creation of the pits was consistent with Chesapeake’s rights under its lease, was a practice common to natural gas wells in West Virginia, and consistent with requirements of applicable rules and regulations for the protection of the environment.”
On August 29, 2013, the New York Court of Appeals announced that it has granted appeals to review two cases which upheld local natural gas drilling bans in the upstate towns of Dryden and Middlefield. The lower court decisions, both of which were issued on May 2, 2013, held that the New York Oil, Gas, and Solution Mining Law does not preempt a municipality’s authority to enact a zoning ordinance that prohibits drilling within its jurisdiction. Over the past few years, more than 50 municipalities in New York have banned gas drilling. A spokesman for the Court of Appeals told the Associated Press that the cases will likely be heard and decided in Spring 2014.
On August 13th, the United States District Court for the Middle District of Pennsylvania granted partial summary judgment in favor of Chief Exploration & Development and other defendants (Chief) in a consolidated case regarding the extension of three oil and gas leases in which the primary terms had expired. Three landowners filed lawsuits in the Court of Common Pleas against Chief in order to terminate the oil and gas leases. Chief then removed the suits to the federal district court based on diversity jurisdiction, and filed a motion for summary judgment arguing that it had extended the term of the leases pursuant to the habendum clause and unitization clause by performing various predrilling activities.
The habendum clause of the lease provided that “the lease shall remain in force for a primary term of five (5) years . . . for as long thereafter as operations are conducted on the Leasehold in search of production of oil, gas or their constituents . . .” The court recognized this provision as a ‘commence clause’. The plaintiffs argued that the habendum clause was ambiguous and that parol evidence was required to determine the intention of the parties. The plaintiffs further argued that Chief failed to commence operations prior to the expiration of the primary term and failed to proceed to the completion of a well with due diligence.
The court first concluded that the habendum clause was not ambiguous. It summarized the rules of contract interpretation and how they apply to oil and gas leases. In doing so, it stated that while it is common for commence clauses to condition a lease extension explicitly on the commencement of operations, the failure to use the word commencement or commence does not render such a clause ambiguous. It further provided that a reference to operations standing alone is generally sufficient to make the meaning of the clause distinct. Therefore, the court found that it was the intent of the parties to condition the extension of the leases on the commencement of operations and that the habendum clause was unambiguous.
The court then held that Chief adequately commenced operations in order to extend the term of the lease. It first stated that commencement of operations does not mean actual drilling of the well. It noted that lessees must be given “great leeway” in manifesting their intent to drill. The court held that the quantum or nature of the lessee’s preparatory activities do not in themselves matter much to the commencement inquiry. The material issue is, rather, whether the activity – minimal or extensive – is undertaking “in good faith, and with a determination on the lessee’s part to prosecute with due diligence the work the lessee was authorized by the lease to do.” The court held that Chief’s activities were sufficient to trigger the lease extensions. Specifically, Chief established the location of the well on a neighboring tract, conducted field surveys, staked the well location, obtained a vertical drilling permit and Erosion and Sediment Control General Permit from the Department of Environmental Protection, and finalized several necessary regulatory submissions prior to unitizing the plaintiffs’ leaseholds. After creating the unit, Chief surveyed the tract of land in which the well was to be located, placed a bulldozer on the property and began to clear lumber.
Essroc Cement Corporation, with locations scattered across the Midwest and Northeast, has filed a federal lawsuit in Pittsburgh, seeking to stop a planned pipeline from crossing property in Lawrence County. The pipeline is a joint venture operation between NiSource Inc., of Indiana, and Hilcorp Energy Co., of Texas, and is planned to travel upwards of 50 miles from Utica Shale wells in Pennsylvania and Ohio to a liquids processing plant in Ohio.
According to Essroc, the 20-inch pipeline would materially affect its ability to extract valuable coal and limestone from Essroc’s property. The company, which holds nearly 4,000 acres of subsurface rights around the North Beaver plant, is attempting to sell the property, according to the lawsuit.
The Pennsylvania Public Utility Commission (PUC) filed two applications this week with the Pennsylvania Supreme Court in cases related to Act 13. In the appeal related to the constitutionality of Act 13 the PUC filed an Application to Resubmit Case, which requests that the case be resubmitted, at minimum, on briefs to the full Supreme Court and, if the court chooses, that additional oral argument be held. The PUC stated that the Application is appropriate because the pending issues are of broad concern to the Commonwealth and its municipalities and because Section 3304 of Act 13 was declared unconstitutional by a fiercely divided Commonwealth Court. Justice Correale Stevens was recently sworn in to replace Justice Joan Orie Melvin, who resigned from the Supreme Court in May following criminal convictions. While Justice Stevens brings the Supreme Court up to seven members, the Supreme Court issued a statement that Justice Stevens would not participate in deciding any case on which he had not heard oral argument. This Application is clearly an attempt for the PUC to get the case before the full Supreme Court.
Also of note is an Application for Reconsideration filed by the PUC in an appeal related to an order of the Commonwealth Court enjoining the PUC from reviewing municipal ordinances. On October 25, 2012, Senior Judge Keith B. Quigley issued an order enjoining enforcement of Section 3305 of Act 13 because it “is a vehicle by which Section 3304 is enforced.” The PUC appealed that order to the Supreme Court. On July 25, 2013, the Supreme Court quashed the PUC’s Notice of Appeal. The PUC requests that the Supreme Court grant reconsideration of the July 25th order quashing the Notice of Appeal before the entire Supreme Court for the following reasons: the October 25, 2012 order of Judge Quigley was subject to appeal, and it was incorrect to quash the Notice of Appeal; if the Commonwealth Court’s decision is upheld, it is unclear if that decision would resolve all issues regarding Act 13 because Judge Quigley’s order enjoined enforcement of Act 13 Sections 3301-3301 and 3305, even though Section 3301-3305 were never challenged and Section 3305 was determined to be constitutional; the Supreme Court should clarify explicitly why the Notice of Appeal was quashed; the July 25th order is inconsistent with other Supreme Court decisions; and the pending case regarding the overall constitutionality of Act 13 may not dispose of all issues.
Newly-appointed Pennsylvania Supreme Court Justice Correale Stevens will not participate in ruling on the legality of Act 13 or on any other case that has gone through oral argument. With only six justices participating in the decision, the Act 13 decision could end up in a tie vote that would effectively affirm the Commonwealth Court’s July 2012 opinion.
The Superior Court of Pennsylvania upheld the trial court’s decision in Humberston v. Chevron U.S.A. to grant preliminary objections in favor of Chevron U.S.A., Inc. and Keystone Vacuum, Inc., holding that Chevron and Keysone had the right under the oil and gas lease to construct a fresh-water impoundment and to utilize hydraulic fracturing on the landowner’s property. The landowners argued that Chevron and Keystone violated the terms of the lease because hydraulic fracturing was never contemplated by the parties and the water impoundment was impermissible because it would service neighboring drilling sites.
Looking at several key provisions of the lease, the Superior Court found that the landowner’s arguments were in conflict with the clear and unambiguous language of the contract. The trial court determined that, “[t]he lease clearly provides that the lessee has the right to use as much [of] the surface as is ‘necessary or convenient’ to lessee to explore for, develop and produce oil and gas.” In addition the lease “provides that lessee, in its efforts to explore for, develop and produce oil and gas from the subject premises and from lands which adjoin the subject premises, may use ‘methods and techniques which are not restricted to current technologies.’” The Superior Court agreed that this language leaves no room for doubt that the lease permitted hydraulic fracturing and water impoundments.
The Corning Leader reports that, in response to Governor Corbett’s recent letter to the Delaware River Basin Commission, a 1,300 member landowner group has threatened to sue the DRBC. The Northern Wayne Property Owners Alliance sent a letter to the executive director of the DRBC threatening a lawsuit unless the Commission schedules a vote on regulations that would allow drilling to begin. The DRBC imposed a moratorium on Marcellus Shale drilling in 2010.
The Superior Court of Pennsylvania recently rejected an argument that an oil and gas lease contains an implied duty to develop all strata, and not simply to extract shallow gas. In Caldwell v. Kriebel Resources Co. and Range-Resources-Appalachia, LLC, the plaintiffs sought termination of an eleven-year old oil and gas lease largely because the defendants had not “initiated any drilling activities for natural gas locked in the Marcellus Shale formation” and the drilling activities to date only involved shallow gas drilling. However, the lease agreement contained a clause stating, “[n]o inference or covenant shall be implied as to either party hereto since the full contractual obligations and covenants of each party is [are] herein fully and expressly set forth.” Hence, the Court found it was not authorized to impose an implied duty on the lessee to develop the various strata in light of the language contained in the contract. The plaintiffs also argued that there is an implied duty to develop in paying quantities in “good faith” and that the trial court should not have dismissed their case without affording them an opportunity to present evidence of the defendants’ bad faith. But the Superior Court concluded the defendants had indeed produced a paying quantity, and that the “good faith” standard referred to in T.W. Phillips Gas & Oil Co. v. Jedlicka, did not expand to “all aspects of the [gas] industry that affect production of lessors’ natural gas.”
The West Virginia Supreme Court of Appeals, West Virginia’s highest court, recently overruled a point in the 1923 case of Ramage v. South Penn Oil Co. (W. Va.), which established that the term “surface” was presumptively ambiguous and always subject to interpretation. On June 13, 2013 in the case of Faith United Methodist Church & Cemetery of Terra Alta v. Morgan, the Court determined that the term “surface,” when used in an instrument of conveyance, has a “definite and certain meaning,” and “generally means the exposed area of land, improvements on the land, and any part of the underground actually used by a surface owner as an adjunct to surface use (for example, medium for the roots of growing plants, groundwater, water wells, roads, basements, basements, or footings).”
The Ohio Supreme Court accepted jurisdiction over the closely watched “home rule” case State ex rel. Morrison v. Beck Energy Corp. At issue are the state laws which give the Ohio Department of Natural Resources sole and exclusive authority to regulate oil and gas permitting, stimulation, production and completion over local ordinances to the contrary. Initially a trial court in Summit County determined that the City of Monroe Falls had the right to enforce its own application and permit requirements for oil and gas wells. The court of appeals disagreed and ruled that only ODNR had such powers. The Ohio Supreme Court is poised to make the final determination in a ruling that can be expected in the next year.
A federal district judge recently rejected a request by the New Jersey Sand Hill Band of Lenape and Cherokee Indians for an injunction to stop Kinder Morgan Inc.’s construction of a portion of the Northeast Upgrade Project, a $400 million natural gas pipeline expansion project in Pennsylvania and New Jersey. The tribe sought an injunction and temporary restraining order on the basis that the pipeline would destroy and desecrate sacred land in violation of the Native American Graves Protection and Repatriation Act and the 1778 Treaty of Fort Pitt between the Federal Government and Lenape tribe. Earlier this year, a Pennsylvania county judge granted an injunction to prevent protestors from interfering with the project.
In Minard Run Oil Co. v. U.S. Forest Service, the United States District Court for the Western District of Pennsylvania confirmed that the Forest Service did not have authority to preclude drilling by the owner of subsurface oil and gas rights while the Forest Service completed an environmental analysis of the impact on the Allegheny National Forest.
Read about this development and more in the Babst Calland Report. You may view an executive summary here, or request a full copy of the report here.