PADEP Extends Public Comment Deadline for Draft Air Permits, Revised Exemption List

On February 23, 2017, the Pennsylvania Department of Environmental Protection (PADEP) announced an extension of the public comment period regarding recently proposed draft general air permits for the oil and natural gas industry.  Comments are now due by June 5, 2017.  PADEP has proposed to issue a new general permit known as GP-5A for unconventional natural gas well site operations and remote pigging stations, as well as revise the existing general permit known as GP-5 for natural gas compression and/or processing facilities.  PADEP’s proposal would also revise the Air Quality Permit Exemptions list.  Refer to our Administrative Watch for more information.  A formal notice regarding the comment deadline extension was also published in the Pennsylvania Bulletin dated February 25, 2017.

SB 244: Co-Tenancy and Joint Development Legislation Introduced in West Virginia

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.

West Virginia Supreme Court Ruling Potentially Impacts Use of Partition Statute

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).

Pennsylvania Appeals Court Vacates Denial of Class Certification of Lessors to Oil and Gas Leases in Clearfield County

On January 17, 2017, the Superior Court of Pennsylvania vacated a trial court’s order denying class certification of two classes of lessors to oil and gas leases covering property in Clearfield County, Pennsylvania in Cardinale v. R.E. Gas Dev., 2017 PA Super 13.  The case involved two classes of plaintiffs because two similar class action complaints were consolidated.   These cases involved whether the lessees were required to tender paid-up bonuses when the lessee untimely rejected an oil and gas lease based upon title, surface or geology within a specified due diligence period.  The trial court previously rejected the class certification that would have combined these two classes because common questions of law or fact did not predominate over individual questions with respect to the breach of contract claim, stating “[t]o fully resolve the case, the finder of fact would have to analyze each individual property and the circumstances surrounding the Defendants’ refusal to pay the bonus to determine if the Defendants breached each contract, or if the Defendants simply did not approve of the surface, title or geology of each parcel of land.”

On appeal, the Superior Court indicated that the critical inquiry for the certifying court is whether the material facts and issues of law are substantially the same for all class members.  The court further provided that the existence of distinguishing individual acts is not fatal to class certification and that it is Pennsylvania’s policy to favor certification of class actions.  Because the court identified six fundamental questions that are common to all class members, it found that the trial court erroneously denied class certification.  Accordingly, the court vacated the trial court’s order and remanded so that the trial court may utilize its discretion and determine whether class certification is proper in this case, including whether the class definition is overly broad insofar as it may include individuals whose leases were rejected in a timely fashion.

U.S. Supreme Court Rejects Appeal of Ohio Dormant Mineral Act Case

On Tuesday, the Supreme Court of the United States denied certiorari in Walker v. Shondrick-Nau, Exr. (Slip Opinion No. 2016-Ohio-5793). As more fully explained in our Blog post discussing Walker, in September the Ohio Supreme Court held that, if a surface owner failed to quiet title under the 1989 version of the Ohio Dormant Mineral Act (the “ODMA”) prior to the enactment of the 2006 version of the ODMA, then the 1989 version is unavailable and the surface owner can only pursue a claim to abandon mineral interests under the 2006 version of the ODMA. Walker subsequently appealed this decision to the Supreme Court of the United States. In denying certiorari, the U. S. Supreme Court refused to hear the case meaning that the decision of the Ohio Supreme Court will stand as the law in Ohio.

Court Declares Pennsylvania DEP’s Calculation of Continuing Penalties for “Seemingly Endless” Violations Unlawful under the Clean Streams Law

On January 11, 2017, the Pennsylvania Commonwealth Court held Section 301 of the Clean Streams Law “is a provision that prohibits acts or omissions resulting in the initial active discharge or entry of industrial waste into waters of the Commonwealth and is not a provision that authorizes the imposition of ongoing penalties for the continuing presence of an industrial waste in a waterway of the Commonwealth following its initial entry into the waterways of the Commonwealth.” EQT Production Co. v. Com., Dep’t of Envtl. Prot., 485 MD 2014, slip op. at *24 (Jan. 11, 2017).

This case arose out of a release from an impoundment at a Marcellus Shale well pad site in Tioga County, Pennsylvania. It is undisputed that EQT stopped the source of the release within twelve days of reporting it on May 30, 2012 and thereafter entered the Act 2 program to achieve cleanup standards for soil and groundwater. In May 2014, the Department sought a non-negotiable penalty of $1.2 million for the release. EQT filed a complaint in Commonwealth Court in September 2014 challenging the Department’s use of a “continuing violation” theory to support this penalty calculation. Subsequently, in October 2014, the Department filed a Complaint for Civil Penalties with the Pennsylvania Environmental Hearing Board, seeking a penalty of $4.5 million for the same release. The Department’s post-hearing brief in the EHB proceeding states that a penalty of nearly $470 million is supported by the Clean Streams Law.

The Department argued in the Commonwealth Court that “the illegal activity continues so long as the leaked industrial waste exists in any water of the Commonwealth” and that “the natural flow of waste from that water into another water of the Commonwealth” constitutes a new violation. Id. at *17-18. The Court noted that adopting the Department’s theory “would result in potentially limitless continuing violations for a single unpermitted release” and “would be tantamount to punishing a polluter indefinitely.” Id. at *20-21. The Court stated that the Department’s theory was “not supported by the statutory provisions and framework or the rules of statutory construction.” Id. at *20.

By clarifying the limits of the Department’s penalty authority to the days a waste or pollutant actually enters into groundwater or surface water, this precedential decision prevents the Department from threatening unauthorized civil penalties under the Clean Streams Law to leverage settlements in any context involving the Clean Streams Law, not just in the oil and gas industry.

Pipelines are safe. They already are the safest way to transport energy – and getting safer.

In a recent op-ed published in the Post-Gazette, “Gas Pipelines Represent Prosperity” (Sept. 5 Perspectives), David Spigelmyer and James Kunz of the Marcellus Shale Coalition described the many benefits that Pennsylvanians could see from the expansion of natural-gas pipelines and related energy infrastructure in the commonwealth. That op-ed prompted a response from Art Wegweiser (Oct. 3) adding an important cautionary note about pipeline safety. The good news, according to a 2015 report from the American Gas Foundation, “Natural Gas Pipeline Safety and Reliability: An Assessment of Progress,” is that pipelines are safe — and getting safer.  Read my full article describing the AGF report and industry’s efforts to improve pipeline safety.

 

Ohio Supreme Court Addresses Post-Production Costs

In Lutz et al. v. Chesapeake Appalachia, L.L.C., Slip Opinion No. 2016-Ohio-7549, the Ohio Supreme Court declined to answer the certified question submitted by the U.S. District Court for the Northern District of Ohio as to whether Ohio follows the “at the well rule” or some version of the “marketable product” rule to calculate royalty payments made under an oil and gas lease. The “at the well rule” permits the lessee to deduct post-production costs from royalty payments made to the lessor. Conversely, the “marketable product” rule places limits on the lessee’s ability to deduct post-production costs under certain circumstances. Rather than adopting a blanket rule, the Court stated that the payment of royalties under a lease will be controlled by the specific language in the lease agreement. If an oil and gas lease is silent on the right to deduct post-production costs, it appears unlikely that Ohio courts will allow such deductions. The Court emphasized that leases should be viewed as contracts and the traditional rules for interpreting contractual terms should be used to determine the allocation of post-production costs under an oil and gas lease.

Many Drone Operators Seeking a Waiver are Missing Required Information

On October 25, the FAA released a statement notifying potential applicants seeking a waiver from the small unmanned aircraft systems (UAS) rules of common errors in the application process.  In the two months since FAA started issuing waivers from the Part 107 rules, the agency has issued over 81 authorizations for flights in Class D and E airspace and 36 waivers of Part 107 requirements.  However, the agency has also denied many waiver applications on account of incorrect or incomplete information. The agency has denied 71 waiver requests and 854 airspace applications.  UAS operators that are seeking a waiver should ensure that they include a detailed description of how they intend to meet the performance based standards issued by FAA.  See previous Babst Calland Pipeline Safety Alert. For example, applicants seeking a waiver of the nighttime operation restriction must provide the methods for which the remote pilot will maintain visual line of sight during darkness; see and avoid other aircraft, people, and ground-based structures during nighttime operations; continuously determine the position of the UAS, and increase the visibility of the UAS at a distance of 3 statute miles unless a system is in place to avoid all non-participating aircraft.  Applicants must also respond promptly to any requests from the FAA for additional information.  If the FAA does not receive a response after 30 days, the agency will deny the waiver request.

The FAA also created the Unmanned Aircraft Safety Team (UAST), a group of industry and government stakeholders.  The UAST team is charged with analyzing data to enhance safety with drone operations.  The UAST held its first meeting in mid-October.

Babst Calland is assisting energy industry clients with rule implementation and strategy involving the use of small UAS. Please contact Brianne Kurdock at (202) 853-3462 or bkurdock@babstcalland.com, James Curry at (202) 853-3461 or jcurry@babstcalland.com, or Keith Coyle at (202) 853-3460 or kcoyle@babstcalland.com for more information.

PHMSA Releases Emergency Order Interim Final Rule

On October 14, the Pipeline & Hazardous Materials Safety Administration (PHMSA) published its Interim Final Rule (IFR) entitled “Pipeline Safety: Enhanced Emergency Order Procedures” in the Federal Register.  The agency had previously issued a pre-publication version of this rule on October 4.  See Babst Calland’s Pipeline Safety Alert.  PHMSA will use these new regulations to implement its emergency order authority conferred by Congress in the “Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2016” (PIPES Act).  PHMSA may issue an emergency order to address an unsafe condition or practice, or a combination of unsafe conditions or practices that pose an imminent hazard to public health and safety or the environment.   The IFR contains administrative procedures that PHMSA must follow in determining if an imminent hazard exists, the factors that must be considered before PHMSA issues an emergency order, and the content of those orders, including a description of the persons subject to the restrictions, prohibitions, or safety measures and the standards and procedures for obtaining relief. The IFR also creates a process for administrative review of an emergency order that is largely patterned on the statutory text in 49 U.S.C. § 60117(o), including the referenced procedural rules for HazMat emergency orders in 49 C.F.R. § 109.19.

PHMSA may use this authority starting today, October 14.  Interested parties may file comments on this final rule until December 13, 2016.