EIA Reports on Natural Gas Storage Capacity

The U. S. Energy Information Administration (EIA) recently released a report indicating that the overall natural gas storage capacity in the lower 48 states was relatively unchanged between November 2013 and November 2014.  The EIA measures natural gas storage capacity in November of each year, at a time when it is typical for storage withdrawals to begin exceeding storage injections.  Looking at levels by region, the report indicates that storage capacity fell slightly in the East between November 2013 and November 2014.

Pennsylvania Natural Gas Operator Prevails in Air Aggregation Case

Earlier this week, the U.S. District Court for the Middle District of Pennsylvania granted a motion for summary judgment in favor of a natural gas operator in a closely-watched case involving air aggregation issues.  In 2011, Citizens for Pennsylvania’s Future (PennFuture) filed suit alleging that Ultra Resources, Inc. (Ultra) constructed a major source of nitrogen oxides (NOx) without the appropriate New Source Review (NSR) permit.  The case involved eight compressor stations in Tioga and Potter counties for which Ultra had obtained separate authorizations from the Pennsylvania Department of Environmental Protection (DEP) to use the General Plan Approval/General Operating Permit known as “GP-5″.  PennFuture viewed the compressor stations as functionally interrelated, operating in concert with a metering station as a single facility with potential NOx emissions in excess of the NSR major source threshold, thereby subjecting Ultra to heightened permitting requirements.

In granting Ultra’s motion for summary judgment, the District Court concluded that Ultra’s compressor stations did not constitute a single facility.  The regulatory definition of a single facility requires, in relevant part, that sources be “located on one or more contiguous or adjacent properties” in order to be aggregated into a single facility.  The central issue in this case was whether Ultra’s compressor stations are on “adjacent” properties.

The District Court found that Ultra’s compressor stations are not on “adjacent” properties under either the distance-based, plain meaning approach advocated by Ultra, or the functional relationship theory put forth by PennFuture.  According to the District Court, the stipulated facts showed that the compressor stations are not “sufficiently close to, or near enough, each other to be considered adjacent.”  Also, with respect to functional relationship, the District Court found no unique facts suggesting that Ultra’s emission sources were “unusual or outside of the normal oil and gas configurations and arrangements contemplated by [DEP].”

Although the District Court concluded that “the plain meaning of ‘contiguous’ and ‘adjacent’ should control a determination of whether two or more facilities should be aggregated,” it specifically “decline[d] to hold that functional interrelatedness can never lead to, or contribute to, a finding of contiguousness or adjacency.”  Read our Administrative Watch for additional information regarding the District Court decision in Citizens for Pennsylvania’s Future v. Ultra Resources, Inc.

West Virginia Fair Pooling Bill Making Headway in Legislature

A bill, HB2688, designed to allow oil and gas operators to create oil and gas production units without the express authority of all oil and gas owners within the unit boundary, is currently pending before the West Virginia House Judiciary Committee.  The bill would require the owners of 80% of the interests in any given unit boundary to agree to pooling and unitization for horizontal wells before an operator could apply to the West Virginia Conservation Commission for a “horizontal well unit order.” Proponents say that the bill could reduce the administrative burdens against operations in the West Virginia Marcellus Shale region by allowing oil and gas operators to commence operations without locating unknown, un-locatable or abandoning oil and gas owners. Opponents fear that the bill, if passed, would be used to infringe individual landowners’ rights. The bill has already passed the West Virginia House Energy Committee.

Pennsylvania High Court Prohibits Tolling of Oil and Gas Leases During Litigation

Yesterday, the Pennsylvania Supreme Court issued Harrison v. Cabot Oil & Gas Corp., a significant opinion in which the Court refused to apply equitable tolling principles that other oil and gas jurisdictions have adopted.  Such principles prevent oil and gas leases from expiring during the pendency of lease litigation.

The lessors in this case filed a declaratory judgment action and a fraudulent inducement claim in federal court challenging the validity of their lease, which was two years into its primary term.  Out of an abundance of caution, the operator refrained from all operations during the pendency of the litigation.  It then asserted a counterclaim seeking to equitably toll the lease in the event it prevailed.  Though the operator successfully defeated the lessors’ claims, the District Court denied its equitable tolling claim.  As a result, the lease expired while the case was being litigated.

The operator appealed to the Third Circuit, which certified the case to the Pennsylvania Supreme Court on the grounds that it was an issue “of first impression and of significant public importance, given that its resolution may affect a large number of oil-and-gas leases in Pennsylvania.”

In a unanimous decision, the Pennsylvania Supreme Court upheld the District Court’s decision not to toll the lease.  In so ruling, the Court noted that its decision went against other jurisdictions that have decided this issue.  The Court also noted that the operator should have addressed the issue in its lease by adding a tolling provision.  The Court also held that the result may have been different if the lessors had prevented the operator from entering the property to conduct operations.

The case is significant in several respects. First, it opens the door for lessors to try to “run out the clock” on leases by filing frivolous lease litigation.  Second, it imposes on operators the obligation and risk to continue operations even in the face of suits challenging the validity of their leases.  Third, if a lessor files suit to challenge a lease’s validity, and simultaneously denies the operator the right to conduct operations, the operator must now consider filing for equitable relief through an injunction before seeking to toll the lease term.  Lastly, it essentially requires operators to add tolling provisions to their new leases.

Ohio Supreme Court Rejects Municipal Ordinances Regulating Oil and Gas Operations

The Ohio Supreme Court issued a ruling in favor of Beck Energy, holding that Ohio Constitution’s home rule amendment does not allow a municipality to enforce its own oil and gas permitting scheme on top of the state system. In the case, the city of Munroe Falls adopted an ordinance prohibiting the drilling of an oil and gas well until a conditional zoning certificate had been obtained. The ordinance also required payment of additional application fees and the posting of a performance bond. The Ohio General Assembly had adopted a uniform statewide regulation of all oil and gas operations in Revised Code Chapter 1509. The Court held that the Ohio Constitution vests the General Assembly with the power to to pass laws providing for the “regulation of methods of mining, weighing, measuring and marketing coal, oil, gas and all other minerals” and the comprehensive regulatory scheme created by the General Assembly does exactly that. The home rule amendment to the Ohio Constitution does not allow a municipality to discriminate against, unfairly impede, or obstruct oil and gas activities and production operations that the state has permitted under R.C. Chapter 1509.

PA Governor Wolf Proposes Gas Severance Tax

Pennsylvania Governor Tom Wolf proposed a 5% severance tax on natural gas production.  Though specific details are not yet available, Wolf recommended a tax modeled after West Virginia’s severance tax, which currently taxes gas at a rate of 5% and imposes an additional fee of 4.7 cents per 1000 cubic feet of extracted gas.  Wolf believes the proposed tax could generate $1 billion in new revenue for the state.  The bulk of this revenue would go to fund education.  Wolf said the tax would not be levied in addition to Act 13’s well fees, but rather, the well fees would be rolled into the tax.

Responding to Wolf’s tax proposal, David Spigelmyer, president of the Marcellus Shale Coalition, criticized the proposal and noted that the natural gas industry already pays significant taxes in Pennsylvania.  Spigelmyer believes the new energy tax will discourage capital investment and make Pennsylvania a less competitive market for the natural gas industry.  Spigelmyer stressed that the investments made by the energy companies act as a driving force for the Pennsylvania economy and tax base – accounting for more than $700 million in royalties paid to landowners and more than 200,000 jobs created.  Spigelmyer believes Wolf should focus on the creation of new jobs rather than new taxes.

W. Va. Permit Transfer Legislation Becomes Effective Law

As reported by the Charleston Gazette on February 4, 2015, West Virginia Governor Earl Ray Tomblin has signed legislation originally known as Senate Bill 280, which streamlines the transfer process of well work permits to eliminate a requirement that companies must re-apply for well work permits after acquiring assets from existing operations in West Virginia. The approved change was introduced and fast-tracked by both the House of Representatives and Senate in favor of Southwestern Energy Company, which bought $5 billion in assets from Chesapeake Energy Corporation in October of 2014. Please see our original blog post on S. B. 280 for further information.

Ohio Supreme Court Schedules Oral Argument in Dormant Mineral Act Cases

The Ohio Supreme Court scheduled oral argument in two significant Dormant Mineral Act (“DMA”) cases. Oral argument has been scheduled on Corban v. Chesapeake Exploration, L.L.C. for May 6, 2015. As previously reported on ShaleEnergyLawBlog, the Corban case is likely to decide whether the 1989 or 2006 version of the DMA applies to current cases.

The Court also scheduled oral arguments in Walker v. Shondrick-Nau for June 23, 2015. The Walker case is set to decide similar issues concerning application of the DMA.

West Virginia DEP to Host and Livestream Meeting to Discuss Division of Air Quality’s New General Permit for Natural Gas Activities

The West Virginia Division of Air Quality will release a new general air quality permit, the G80-A, which will regulate air quality in regard to natural gas production, compressor and dehydration facilities.  On February 5, 2014, the DEP will host a meeting to release the draft of the G80-A and cover the timeline, procedures for the official public notice for the draft permit, and subsequent public meetings.

Currently, General Permits G30-D and G35-A cover air quality relating to natural gas compressor  facilities while G70-A covers air quality relating to natural gas facilities which are designed and operated for natural gas production at a well site.  The general air quality permits currently in existence will continue, but there will be no future registrations, modifications or administrative updates to the G30-D, G35-A or G70-A permits.   After the rollout of the new general permit, registrants wishing to modify an existing registration must register under the General Permit G80-A.

The meeting will take place from 9 a. m. to 4 p. m. at the DEP’s headquarters and will also be live-streamed over the internet.

New Bids Submitted to Drill Under State Lands in West Virginia

As reported by Marcellus Drilling News and the Daily Reporter, the WV Department of Commerce, which is tasked with overseeing the state’s leasing program, opened another round of bids on Friday to lease state-owned lands for oil and gas operations.  Jay-Bee Production Company submitted a bid ranging from $5,000 to $16,300 per acre to drill underneath 303 acres in theJug Wildlife Management Area in Tyler County, and Antero Resources bid $8,100 per acrefor 283 acres in the Jug Wildlife Area.  Noble Energy also submitted a bid to drill beneath Fish Creek and adjacent lands in Marshall County, and the state is currently negotiating with Noble, Statoil USA Onshore Properties Inc. and Gastar Exploration to lease different sections of the Ohio River.