Senate Bill 576 (SB 576), introduced in the West Virginia Senate to address the oil and natural gas industry’s effort to efficiently develop production of natural resources, died in the last week of the regular session of the West Virginia Legislature, which concluded on April 8, 2017.
For an analysis of the original version of SB 576, click here, and for an analysis of the significantly revised version that was sent to the West Virginia House, click here. Before passing the Senate, an amendment agreed to by the industry provided for a graduated severance tax provision that increased the severance tax rate as the price of natural gas increased. Click here for the text of the amendment.
Unfortunately, a frantic last week of the regular legislative session, highlighted by contentious budget battles and House debate over a medical marijuana bill, resulted in many bills never reaching the House floor for a vote, with SB 576 being among those. Given that the Legislature needs to be called back into special session to pass a budget that is presently being negotiated, there is speculation that SB 576 may be put on the agenda for that special session. Unless that happens, however, co-tenancy and lease integration is dead in West Virginia until February 2018.
On March 23, 2017, a Committee Substitute for Senate Bill 576 (SB 576) was introduced to the West Virginia Senate Judiciary Committee that substantially rewrote the original version of the bill, which addressed the oil and natural gas industry’s effort to efficiently develop production of natural resources. For an analysis of the original version of SB 576, click here.
Among the significant changes in revised SB 576 are the following:
- The percentage of cotenant mineral ownership interests needed to consent to mineral development is increased from two-thirds to three-fourths.
- Non-consenting mineral owners are still entitled to production royalties free of post-production expenses, but they are also entitled to a bonus payment calculated as “equal to the average amount paid to such consenting cotenants calculated on net mineral acre basis.”
- Non-consenting mineral owners may forgo receiving a production royalty payment by electing to obtain a “revenue share” in development, which allows the non-consenting mineral interest holders to essentially obtain a working interest in the production activities on the tract.
- If any property subject to mineral development under this statute has a non-consenting mineral interest owner, the surface of that property may not be disturbed for that development without the consent of the surface owner, unless such disturbance is permitted through a prior surface use agreement or is otherwise permitted by a “valid contractual arrangement.”
- “Joint development” is still permitted for multiple contiguous oil and gas leases, but the “operator” must pay surface owners damages available under W. Va. Code §22-6B-3, all damages permissible under common law, and $30,000 for “each well pad constructed by the operator which results in damage to that surface owner’s property.”
- “In the absence of specific language to the contrary, the royalty for all royalty owners of acreage jointly developed . . . shall not be reduced for post-production expenses incurred by the operator.” This provision, however, is not “intended to impact royalties due for wells drilled prior to the effective date of this chapter.”
- Consenting cotenants (or the operators) are subject to detailed reporting requirements that includes the amount of oil or natural gas produced and sale information, including price, for that oil and natural gas.
- Detailed guidelines for the payment of royalties are added, which include a requirement that royalties must be paid once the royalties due exceed $100, payment must be made within 180 days from the date that the sale of mineral is realized, and regardless of the amount of royalty due, payment must be made at least once a year.
Babst Calland will follow SB 576 during West Virginia’s Legislative Session, which is scheduled to end on April 8, 2017.
On March 10, 2017, Senate Bill 576 (SB 576) was introduced in the West Virginia Senate to take the place of SB 244, which addressed the oil and natural gas industry’s effort to efficiently develop production of natural resources. Similar to SB 244, SB 576’s stated purpose is “to encourage the efficient and economic development of oil and gas resources[;]” however, it contains a number of provisions that differ from SB 244.
If signed into law, SB 576 would create a new code section, W. Va. Code §37B-1-1, et seq., titled the “Cotenancy and Lease Integration Act,” which, like SB 244, contains both “co-tenancy” and “lease integration” provisions.
SB 576 declares in proposed §37B-1-2 that West Virginia public policy includes both “the maximum recovery of oil and gas” and the “protect[ion] and enforce[ment of] the clear provision of contracts lawfully made.” This section also states that West Virginia public policy is to “safeguard, protect and enforce” both “the rights of surface owners” and “the correlative rights of operators and royalty owners in a pool of oil and gas to the end that each such operator and royalty owner may obtain his or her just and equitable share of production from that pool of oil and gas[.]”
Proposed section §37B-1-4 allows oil and gas production on a piece of property when “two thirds of the ownership interest in the oil and gas mineral property consent to a lawful use [i.e., production] of the mineral property[.]” By contrast, SB 244 only required that a “majority” of ownership interests agree to a “lawful use.”
In addition, SB 576 (like SB 244) states that payment of royalties will be on a pro rata basis, with payments for a mineral owner who cannot be located reserved by the producer. Unlike SB 244, however, SB 576 would specifically allow surface owners to use W. Va. § 55-12A-1, et seq. (the unknown and missing landowners statute), to lay claim to the interests of the absent or missing owners. Finally, and importantly, SB 576 would require that a mineral interest owner who opposes oil or natural gas development be paid royalties (1) “free of post-production expenses” and (2) “equal to his or her fractional share of the average royalty of his or her consenting cotenants[,]” but “in no event may the royalty be less than his or her fractional share of one-eight [12.5%].”
SB 576 adds proposed sections §37B-1-5 and -6, which would take the place of the “Joint Development” provision in SB 244. Under proposed §37B-1-5, “[w]here an operator or operators have the right to develop multiple contiguous oil and gas leases, the operator may develop these leases jointly by horizontal drilling unless the development is expressly prohibited by the terms of a lease or agreement.” Importantly, an operator may only disturb the surface of property subject to this provision if it “has a surface use agreement” with the owner(s) of the property that will be disturbed. As with SB 244, under proposed §37B-1-6, royalty payments are based upon “production [that] shall be allocated to each lease in the proportion that the net acreage of each lease bears to the total net acreage of the jointly developed tracts.” As with dissenting owners under proposed §37B-1-4, however, “[i]n the absence of specific agreement to the contrary or where deductions are authorized by statute, the royalty for all royalty owners of the jointly developed acreage who do not have leases containing express pooling and unitization clauses shall not be reduced for post-production expenses incurred by the operator.” This provision, however, is not “intended to impact royalties due for wells drilled prior to the effective date of this chapter.”
While SB 576 keeps the basic goals of SB 244 – development without the approval of all mineral interest owners and development of contiguous property through horizontal drilling – it contains a number of provisions designed to mollify the concerns of surface owner organizations and other property rights groups. The “co-tenancy” provision now requires a 2/3 majority of mineral ownership interests to permit development, and royalty payments to dissenting owners must not take post-production costs into account. The “lease integration” provisions explicitly allow horizontal drilling of contiguous tracts that are each subject to production leases (provided horizontal drilling is not expressly prohibited), but if a production lease does not explicitly permit pooling or unitization, then royalty payments to the owners under that lease cannot be deducted for post-production costs. Important to surface owners is the requirement that a surface use agreement be in place before the surface of any property is disturbed by joint development.
Babst Calland will follow SB 576 during West Virginia’s Legislative Session, which is scheduled to end on April 8, 2017.
On February 10, 2017, Senate Bill 244 (SB 244) was introduced in the West Virginia Senate to address the oil and natural gas industry’s effort to efficiently develop production of natural resources. Sponsored by, among others, Senate President Mitch Carmichael, SB 244’s stated purpose is “encouraging and facilitating the efficient and economic development of oil and gas resources” by addressing two situations common in West Virginia: (1) fractured ownership of mineral interests where less than 100% of the mineral owners can be located, and (2) development through horizontal drilling of contiguous parcels of property that are already under production leases.
SB 244 amends W. Va. Code §37-7-7 by adding subsection (b), the “Co-Tenancy” provision, which states that “a majority of the ownership interest in the mineral property” may “consent to a lawful use of the mineral property[.]” If the majority of the ownership interest agrees to the use, then the use is “permissible” and the non-agreeing ownership interest cannot claim “waste” or “trespass” on the mineral property. In addition, payment of royalties to all ownership interests will be on a pro rata basis to all owners of the mineral property, with payments for an owner who cannot be located reserved by the producer. While intended to address West Virginia’s requirement that 100% of the mineral owners agree on the terms for development of the mineral property, there is no requirement in SB 244 that the minority owners be absent or otherwise not found.
SB 244 also adds subsection (c), the “Joint Development” provision, to §37-7-7. Under this subsection, “[w]here an operator or operators have the right to develop multiple contiguous oil and gas leases separately, the operator may develop these leases jointly by horizontal drilling unless the development is expressly prohibited by the terms of a lease.” Under this language, an operator may development contiguous parcels of property using horizontal drilling unless a lease expressly prohibits such joint development activity. Notably, under this proposed subsection, the “operator’s use of any surface tract overlying the jointly developed leases shall be permissible for that joint development.” Finally, absent an agreement by all affected royalty owners, production shall be allocated to each lease “in the net proportion that the net acreage of each lease bears to the total net acreage of the jointly developed tracts.”
While Legislative leadership and Governor Justice have each articulated strong support for the oil and natural gas industry, SB 244 faces significant resistance from surface owner organizations, which dislike the simple “majority rules” aspect of the Co-Tenancy provision. Likewise, those groups also object to the Joint Development provision as it opens the surface of an affected parcel to development using horizontal drilling, even if the lease for that property was entered long before horizontal drilling became a popular technology in oil and natural gas production.
Babst Calland will follow SB 244 during West Virginia’s Legislative Session, which is scheduled to end on April 8, 2017.
The Supreme Court of Appeals of West Virginia recently emphasized that a party seeking a partition of property by allotment or by sale under W. Va. Code §37-4-3 must strictly follow the prerequisites in the statute — but only those prerequisites.
In Bowyer v. Wyckoff, 2017 W. Va. LEXIS 27 (Jan. 26, 2017) (Link to PDF of the case here), the Court addressed an effort by Wyckoff to partition the surface of property in kind or by sale. Bowyer, however, counterclaimed and sought to partition both the surface and the mineral interests either though by allotment or by sale, allegedly because he wanted to develop the shallow natural gas under the property. The circuit court granted judgment to Wyckoff, and Bowyer appealed.
The Court initially confirmed that, under W. Va. Code §37-4-3, “a party desiring to compel partition through sale is required to demonstrate that the property cannot be conveniently partitioned in kind, that the interests of one or more of the parties will be promoted by the sale, and that the interests of the other parties will not be prejudiced by the sale.” Bowyer at *8. The circuit court, however, added another, general requirement for any partition: “It is predicate to the partition of an oil and gas mineral interest that there be an inability of the mineral owners to agree on how to develop the mineral estate.” Bowyer at *6.
The Court rejected the circuit court’s attempt to add a requirement that mineral owners not agree on how to develop a mineral estate before allowing partition; however, the Court affirmed the circuit court’s decision that rejected partition by sale of the surface and mineral interests because Bowyer had not otherwise proven his entitlement to partition by sale under §37-4-3. (The Court did not address Bowyer’s attempt to partition by allotment because Bowyers failed to preserve that issue for appeal.)
Perhaps most important for parties seeking partition by either sale or allotment, however, was the circuit court’s rationale for rejecting sale by partition — a rationale affirmed by the Court:
The forced sale of oil and gas minerals precludes the owner of the benefit of lease consideration and the prospect of production proceeds, which represent the primary and perhaps the exclusive value which such ownership vests. Therefore, the public interest will not be promoted by sale.
Bowyer at *9. Under this rationale, any partition for sale or by allotment under §37-4-3 can be forestalled by a single interest holder who does not wish to sell his or her interest. In fact, this rationale undercuts the entire purpose of the partition statute, which necessarily results in a “forced” sale of a person’s property interest, whether the partition be by sale or by allotment.
For oil and natural gas producers that seek partition in order to develop mineral interests, the Court’s implicit acceptance of the notion that any “forced sale of oil and gas interests” precludes partition could significantly hamper efforts to use the partition statute to develop minerals. For questions about West Virginia’s partition statute, contact Mychal Schulz (mschulz@babstcalland.com) or Matt Casto (mcasto@babstcalland.com).
On June 10, 2016, the U.S. District Court for the Southern District of West Virginia issued a Memorandum Opinion and Order invalidating those parts of a Fayette County (W.Va.) ordinance that prohibit the use of underground injection wells for the disposal of produced water, and regulate the handling and storage of produced water at conventional oil and gas well sites. The court held that those provisions are preempted by state and federal law, and also struck down a provision that would have allowed local residents to bring enforcement actions under the ordinance. EQT Production Company v. Wender, et al. Civil Action No. 2:16cv290 (S.D.W.Va.).
On May 13, 2016, West Virginia Governor Early Ray Tomblin signed into law Senate Bill No. 702 which amends §44-8-1 of the Code of West Virginia dealing with the real estate of decedents. Under this amended law, if a decedent devises the proceeds of the sale of real estate to certain individuals, but the real property is never sold, then those individuals entitled to the proceeds would automatically acquire title to the real estate upon the closing of decedent’s estate, absent contrary testamentary intent. If the decedent’s estate is not closed, then title would vest with such individuals five years after the death of the testator. Senate Bill No. 702 provides a title examiner with greater certainty in determining current ownership of decedents’ oil and gas property and will serve to reduce title risks to oil and gas companies in leasing or acquisition activities.
According to a report by the Charleston Gazette-Mail, TransCanada will be purchasing Columbia Pipeline Group for $13 billion. TransCanada had previously proposed the Keystone XL pipeline, and owns more than 42,000 miles of pipeline in North America. TransCanada will acquire about 15,000 miles of pipeline, as well as processing and underground storage facilities, through the purchase of Columbia.
As reported by the Wheeling Intelligencer, for the fifth year out of the last six, pooling legislation has been introduced in the West Virginia House of Delegates (HB 4426). A similar measure failed to pass in 2015 after a 49-49 vote on the final day of the legislative session. HB 4426 allows drillers who own or have leased 80 percent of the acreage in a proposed unit to unitize the remaining acreage if mineral owners cannot be located or refuse to sign leases. However, unlike prior versions, the current bill would forbid companies from deducting post-production expenses from royalty checks payable to such mineral owners. Opponents of “lease integration,” as it has been called in West Virginia, maintain that drillers should not be allowed to incorporate unleased oil and gas interests into planned well units because such incorporation co-opts landowners’ rights to execute oil and gas leases affecting their separate property. HB 4426 is currently under consideration by the West Virginia House Energy Committee.
As reported by the Charleston Gazette-Mail and Natural Gas Intelligence, the West Virginia Senate recently passed SB 419, which, if enacted, would eliminate certain volumetric fees that natural gas producers pay in addition to the state’s severance tax. The tax was implemented as part of the Workers’ Compensation Debt Reduction Act of 2005 in order to generate revenue to pay state workers’ compensation debts. It imposes a 4.7 cent per Mcf fee on natural gas production and a 56 cent per ton fee on coal producers. Although the fees generated $122 million for the state in fiscal year 2015, a spokesperson from Governor Earl Ray Tomblin’s office stated that the tax was only intended to be in force until the workers’ compensation debts were paid off. These debts have just about been repaid, more than 10 years ahead of schedule, due in large part to increased production from the Marcellus Shale in recent years. SB 419 was introduced on January 28, was unanimously passed by the Senate last Thursday and is now before the House of Delegates.
According to the Washington Observer-Reporter, a formal application for the Mountain Valley Pipeline was filed with the Federal Energy Regulatory Commission (“FERC”) last week. The pipeline will extend 301 miles and connect the shale gas fields of northwestern West Virginia with Pittsylvania in western Virginia. FERC has acknowledged receipt of the pipeline application and will soon set a 30-day public comment period.
On July 9, 2015, Governor Tomblin announced the formation and appointment of members to the West Virginia Commission on Oil and Natural Gas Industry Safety. Publicized during Governor Tomblin’s State of the State address in early 2015, the Commission is charged with “reviewing current federal and state oil and natural gas workplace safety regulations and provid[ing] recommendations for improving workplace safety” according to the State Journal. The Commission is comprised of secretaries of the DEP, Dept. of Commerce, Dept. of Transportation, and Public Safety, among others, as well as members of the natural gas industry and labor representatives. The Commission is to issue its first report on or about November 16, 2015.
Marcellus.com reports that an intrastate pipeline is under construction in northern West Virginia. The Stonewall Gas Gathering pipeline will connect Doddridge and Harrison counties to the Columbia Transmission interstate pipeline that runs through Braxton County, West Virginia. Wisconsin-based Precision Pipeline has been contracted to build the pipeline, which plans to hire approximately half of the necessary employees from local areas. The pipeline will help to fill the need for new infrastructure from gas producing areas in West Virginia to other markets. Charlie Burd, executive director of the Independent Oil and Natural Gas Association of West Virginia, stated that “[c]ustomers and producers are ready and waiting for pipelines that connect gas wells to markets.”
On Saturday, March 14, 2015, the last day of the West Virginia legislative session, the Fair Pooling bill (H.B. 2688) was defeated by a tie vote in the West Virginia House of Delegates. The Fair Pooling bill, which we first discussed two weeks ago, was passed initially in the House of Delegates by a vote of 60-40. The Senate subsequently passed an amended version of the bill early on Saturday morning before sending the bill back to the House of Delegates for approval. However, by a tie vote of 49-49, the House of Delegates ultimately voted to reject the Fair Pooling bill in the final hours of the 2015 legislative session.
The West Virginia Fair Pooling bill, which we first described last week, has been approved in the West Virginia House of Delegates by a vote of 60-40. In order to become law, the bill must be approved by the State Senate before March 14, when the legislative session ends. Governor Tomblin of West Virginia must then sign the bill in order for it to become law.