PHMSA Issues New Advisory Bulletin Covering “Purged but Active” Pipelines

Today, the Pipeline and Hazardous Materials Safety Administration (PHMSA) published an Advisory Bulletin entitled  “Clarification of Terms Relating to Pipeline Operational Status.”  Section 23 of the PIPES Act required PHMSA to issue an ADB within 90 days of enactment summarizing the procedures for changing the status of a pipeline facility from “active” to “abandoned”.  Historically, PHMSA has stated that it does not recognize “idle” status for pipelines (only active or abandoned).  PHMSA’s ADB introduces the concept of “purged but active” status, arguably a new category for operational status.  The ADB states that PHMSA is considering a future rulemaking requiring operators to notify the agency of “purged but active” pipelines, but that in the meantime “owners or operators planning to defer certain activities for purged pipelines should coordinate the deferral in advance with regulators.”  PHMSA’s guidance on integrity management currently allows deferral of certain inspection activities for out-of-service pipe. 

 

Pennsylvania Supreme Court Affirms Title Washing

On July 19, in Herder Spring Hunting Club v. Keller (Case No. 5 MAP 2015), the Pennsylvania Supreme Court ruled in a 5-0 decision to confirm the practice of “title washing” of unseated or unimproved land in Pennsylvania. Prior to January 1, 1948, “title washing” occurred through a tax sale of unseated land from which oil, gas and/or minerals (the “subsurface estate”) had been previously severed. If the subsurface estate had not been separately assessed, the tax sale of the unseated land would extinguish the prior severance and vest the tax sale purchaser with full ownership in the surface and subsurface estates. If the oil and gas had been separately assessed, then the tax sale of the surface would have no effect on the subsurface estate. After January 1, 1948, mineral estates were no longer separately assessed from the surface in Pennsylvania and title washing could no longer occur.

In Herder Spring, the Court held that a 1935 tax sale for unseated land which was subject to an unassessed 1899 subsurface severance conveyed both the surface and subsurface estates. Citing prior case law, the Court reasoned that, under the prior tax sale law, taxes on unseated land were against the land itself rather than any particular owner. The law placed a duty on the owner of a severed interest to notify the taxing authorities. Tax commissioners had no duty to search the deed records to discover severances relating to unimproved lands. Therefore, if the subsurface was never separately assessed, then the property would be assessed and taxed as a whole, and a tax sale thereunder would encompass the entire estate. Additionally, the Court pointed out that owners of the mineral estate had two years to challenge the tax sale or redeem the property, but failed to do so. The Court also rejected the Appellants’ due process and estoppel by deed argument.

The Court limited its holding in Herder Spring to a very narrow subset of cases and noted that its decision would not govern: (i) tax sales for assessments of surface or mineral rights only; (ii) tax sales where severances occurred after the tax assessment; or (iii) situations in which surface owners can meet the adverse possession standard.

Justice Todd filed a concurring opinion agreeing with the majority but for its position on Appellants’ due process claim that notice by publication of the tax sale was inadequate. According to Justice Todd, such claim was waived for purposes of this appeal because it was untimely raised.

 

PA Federal Court Finds Operator Obligated to Pay Bonuses Under Surrendered Lease

On July 15, a Judge for the U.S. District Court for the Middle District of Pennsylvania found that SWEPI LP (“SWEPI”) was obligated to pay bonuses under an oil and gas lease that it had surrendered prior to a 90 day title verification period. In Masciantonio , et al. v. SWEPI LP, the plaintiff-landowners executed oil and gas leases, with attached addenda, in favor of SWEPI for a primary term of five years. The leases stated “[i]n consideration of the bonus consideration paid, the receipt of which is hereby acknowledged,…Lessor does hereby grant…to Lessee,…the lands hereafter described for the purpose of exploring for, developing, producing and marketing oil, gas or their related substances.” The addenda included a payment provision stating that “[i]in consideration for the attached paid-up Oil and Gas Lease, Lessee hereby agrees to pay Lessor [$4,000.00] per net mineral acre. Payment shall be due within ninety (90) banking days of the Lessor presenting the Bank Draft to the financial institution of his/her/their choosing. All payment obligations are subject to title verification by Lessee.” SWEPI presented bank drafts to the plaintiffs, who presented them to their respective banks. Prior to 90 days thereafter, SWEPI decided to surrender the leases, due to a geohazard running through the leased premises and the presence of competitor leases covering neighboring lands. Upon surrender of the leases, SWEPI cancelled the bank drafts.

The plaintiffs brought suit for breach of contract, claiming that the obligation to pay the bonuses accrued immediately upon the parties executing the leases, and that the surrender did not extinguish SWEPI’s payment obligation. SWEPI countered with several arguments, all of which were rejected by the Court. First, SWEPI argued that the leases were ineffective, because the payment of the bonus was the sole consideration for the lease, without which the leases never went into effect. SWEPI also argued that the leases were subject to a condition precedent to formation and were ineffective unless and until SWEPI verified plaintiffs’ title to the property. The Court found that the language of the leases indicated that the actual consideration was the exchange of a bargained-for promise, not the immediate exchange of the value thereof. Similarly, the title verification condition operated as a condition precedent to the obligation to pay, not to the formation of the contracts. Therefore, the leases were valid and enforceable, despite the lack of bonus payment.

Next, the Court considered the two interpretations of the lease provisions presented by each party and determined that the plaintiffs’ interpretation was the more reasonable one. SWEPI argued that the contract terms allowed it to dishonor the bank drafts for any reason, or for no reason, until the expiration of the 90-day banking period. SWEPI presented language of industry standards, quoting Williams & Meyers’ Oil & Gas Law, which said that the use of a bank draft which will not become effective for a period of time subject to approval of title was often used by lessees to void a lease if they decided that conditions were no longer desirable. However, the Court found that the industry standards, including Williams & Meyers’, always provided that the precise language of the lease controlled and did not support an across-the-board provision that the use of a bank draft allows a lessee to void a lease for any reason until the expiration of a certain time period. The Court further stated that the language of the SWEPI leases consisted of an unequivocal agreement by SWEPI to pay the bonus and further provided a description of the time and manner in which it must do so. Therefore, the language did not provide SWEPI with the opportunity to avoid payment but instead bound SWEPI to pay, subject only to the condition of title verification. SWEPI was unable to present any meaningful evidence that it decided to surrender the leases due to a problem with plaintiffs’ title. On the contrary, plaintiffs presented sufficient evidence that they had good title to the leased premises. The Court further rejected the argument that the factors of geohazards and competitor activity on neighboring lands were part of the consideration of “title verification.” Those considerations were encompassed under the realm of a title “examination,” but not “title verification,” according to the plain meaning of such terms.

For those reasons, the Court held that SWEPI breached its obligation under the valid oil and gas leases and it was required to pay the bonus to the plaintiffs.

Pipeline Safety Alert: Congress and the FAA Ease the Way for Use of Drones by the Energy Industry

The Federal Aviation Administration (FAA) recently issued regulations permitting the use, with certain limitations, of small unmanned aircraft systems (small drones) for non-hobby and non-recreational purposes. On July 13, 2016, Congress passed several provisions specific to drone use by the energy industry as part of the reauthorization bill for the FAA.  Babst Calland’s Pipeline and HazMat Safety team has prepared a Pipeline Safety Alert noting observations on some of the key provisions in the FAA Extension, Safety, and Security Act of 2016.

PHMSA Releases New Crude By Rail Rulemaking Proposal

On July 13, 2016, the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) released an advance copy of a rulemaking proposal that would amend the oil spill response plan requirements in 49 C.F.R. Part 130 and establish new information sharing requirements for high-hazard flammable trains in 49 C.F.R. Part 174.  The proposal would also incorporate by reference a new test method for determining the initial boiling point of crude oil and other flammable liquids to ensure consistency with the American National Standards Institute/American Petroleum Institute Recommend Practice 3000, “Classifying and Loading of Crude Oil into Rail Tank Cars,” First Edition, September 2014.  PHMSA is providing a 60-day period for submitting comments on the proposal, which runs from the date of its publication in the Federal Register.

 

PHMSA Increases Maximum Civil Penalties for Violations of Pipeline Safety Laws and Regulations

On June 30, 2016, the Pipeline and Hazardous Materials Safety Administration (PHMSA) issued an interim final rule, effective August 1, 2016, titled “Pipeline Safety:  Inflation Adjustment of Maximum Civil Penalties.”  This interim rule increases the maximum administrative civil penalties that may be issued for a violation of the pipeline safety laws and regulations from $200,000.00 per violation per day up to $205,638.00, and from $2 million for a related series of violations up to $2,056,380.00.  The interim rule also increases the maximum for the additional civil penalties applicable to violations of PHMSA’s LNG regulations from $50,000.00 to $75,123.00 and increases the maximums for violations of the pipeline safety whistle blower protection laws from $1,000.00 to $1,194.00.  PHMSA issued the rule pursuant to the “Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015” and used a multiplier of 1.02819 pursuant to guidance provided by the Office of Management and Budget in order to calculate the increase.

 

 

Pipeline Safety Alert: Reauthorization Bill Provides PHMSA with Significant New Authority

On June 22, 2016, the President signed into law the PIPES Act, reauthorizing the Pipeline and Hazardous Materials Safety Administration’s (PHMSA) federal pipeline safety program through fiscal year 2019.  Among several amendments to the Pipeline Safety Laws, the PIPES Act provides PHMSA with significant new authority to issue industry-wide emergency orders and requires PHMSA to develop underground gas storage standards.  Babst Calland’s Pipeline and HazMat Safety team has prepared a Pipeline Safety Alert noting observations on some of the key provisions in the PIPES Act.

Governor Signs the Pennsylvania Grade Crude Development Act

On June 23, 2016, Governor Tom Wolf signed the Pennsylvania Grade Crude Development Act (S.B. 279), which abrogates the Environmental Quality Board’s revisions to the Chapter 78 regulations concerning conventional oil and natural gas wells.  The Act provides that any future EQB rulemakings concerning conventional oil and natural gas wells must be undertaken “separately and independently” of those applicable to unconventional wells and must include a regulatory analysis form submitted to the Independent Regulatory Review Commission that is restricted to the subject of conventional wells.  The Act also creates the Pennsylvania Grade Crude Development Advisory Council (“PGCDAC”), which will consist of 17 members, including representatives from the Pennsylvania Independent Oil and Gas Association, Pennsylvania Grade Crude Oil Coalition, and the Pennsylvania Department of Environmental Protection.  The PGCDAC is tasked with, among other items:  (1) examining and making recommendations regarding certain existing technical regulations; (2) reviewing and commenting on the formulation and drafting of all technical regulations promulgated under the Oil and Gas Act; and (3) exploring the development of a regulatory scheme that provides for environmental oversight and enforcement specifically applicable to the conventional oil and natural gas industry.  The Act takes effect immediately.

BLM Hydraulic Fracturing Rule Struck Down by Federal Court

On June 21, 2016, the U.S. District Court for the District of Wyoming (“District Court”) set aside the U.S. Department of the Interior, Bureau of Land Management’s (“BLM’s”) “Hydraulic Fracturing on Federal and Indian Lands” rule, finding that the rule exceeded BLM’s statutory authority.  Challengers to the rule previously succeeded in obtaining a preliminary injunction in September 2015, pending a final decision on the merits of the case.  In the merits decision issued this week, the District Court held that “Congress has not delegated to the Department of Interior the authority to regulate hydraulic fracturing.”

The BLM rule would have, among other requirements, mandated that operators planning to conduct hydraulic fracturing on federal and Indian lands:  (1) submit detailed information regarding the proposed operation, including wellbore geology information and the estimated length of fracture propagation; (2) design and implement a casing and cementing program that meets certain best management practices and performance standards; (3) manage recovered fluids in rigid enclosed, covered, or netted and screened aboveground storage tanks, with very limited exceptions; and (4) disclose the chemicals to be used in hydraulic fracturing to BLM and the public, with limited exceptions for trade secrets.

BLM is expected to appeal the District Court’s decision to the U.S. Court of Appeals for the Tenth Circuit.

Issuance of PHMSA Corrosion Control Advisory Bulletin (ADB-2016-04) (PHMSA-2016-0071)

On June 15, 2016, the Pipeline and Hazardous Materials Safety Administration (PHMSA) issued an advisory bulletin to pipeline operators related to the effectiveness of coating and corrosion control measures on buried, insulated pipelines.  PHMSA’s advisory bulletin responds to a recent pipeline failure and oil spill in California.  The failure involved a buried oil pipeline coated with coal tar urethane and covered with tape wrapped foam insulation.  The pipeline was insulated because it carried high-viscosity crude that required heat in order to transport.  PHMSA found that the pipeline ruptured because of external corrosion that occurred under the pipeline’s coating system.  PHMSA also found that this corrosion was facilitated by wet dry cycling.  PHMSA’s Failure Investigation Report is here.

PHMSA indicates that corrosion under insulation (CUI) is an integrity threat that is difficult to address through conventional cathodic protection systems and can lead to accelerated corrosion and stress corrosion cracking.  PHMSA recommends that operators review their operating, maintenance, and integrity management activities to ensure that their buried, insulated pipelines have effective coating and corrosion control systems.  PHMSA recommends that operator procedures consider the need for corrosion control systems that prevent moisture buildup, coatings that avoid cathodic protection “shielding,” advanced ILI data analysis to account for CUI, ILI data analysis and excavations to accurately assess corrosion as outlined in API Standard 1163, and additional or more frequent reassessment intervals for pipelines with known susceptibility to moisture retention.

For more information please contact Jim Curry, Keith Coyle or Brianne Kurdock of our Pipeline and HazMat Safety Practice.