understanding legal issues related to marcellus shale by ross h. pifer

Understanding Legal IssuesRelated to Marcellus Shale

Pennsylvania Association for Sustainable Agriculture

Marcellus Shale Choices: Information to Action Series

August 2011

Agricultural Law Resource and Reference CenterProfessor Ross H. Pifer

Overview of Presentation Introduction Marcellus Shale Background Statutory and Regulatory Overview Leasing Issues General Oil and Gas Law Concepts Surface Owner Issues Recent Legal Developments Legal Issues on the Horizon


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History of the Agricultural Law Center

Established through enactment of the Established through enactment of the Agricultural Law Resource and Agricultural Law Resource and Reference Center Act on January 29, Reference Center Act on January 29, 19981998 House Bill 1345 (Act 11 of 1998)House Bill 1345 (Act 11 of 1998) Codified at 3 Pa. Stat. 2201 to 2209Codified at 3 Pa. Stat. 2201 to 2209


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Act 11 of 1998 Legislative Findings

““The legal issues affecting agriculture . . . The legal issues affecting agriculture . . . are becoming increasingly complex”are becoming increasingly complex”

““At present there exists no central and At present there exists no central and effective system for compiling agricultural effective system for compiling agricultural law materials . . . and disseminating this law materials . . . and disseminating this information to affected parties . . .”information to affected parties . . .”

““The alliance between [DSL and PSU The alliance between [DSL and PSU CAS] . . . creates a unique opportunity.”CAS] . . . creates a unique opportunity.”


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Purpose of Agricultural Law Center

Section 2205Section 2205 ““to serve as a resource on agricultural law to serve as a resource on agricultural law

and related issues for farmers and and related issues for farmers and agribusinesses, attorneys, officials at all agribusinesses, attorneys, officials at all levels of government, community groups, levels of government, community groups, and the public.”and the public.”


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Dissemination of Information

PresentationsPresentations Educational ProgramsEducational Programs PublicationsPublications The Agricultural Law BriefThe Agricultural Law Brief WebsiteWebsite BlogsBlogs


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Web-based Resources

www.law.psu.edu/aglawwww.law.psu.edu/aglaw Resource AreasResource Areas

ACREACRE Right to FarmRight to Farm Clean and GreenClean and Green Agricultural Area Security LawAgricultural Area Security Law

Center Publications LibraryCenter Publications Library Agricultural Law BriefAgricultural Law Brief


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Web-based Resources

www.law.psu.edu/marcelluswww.law.psu.edu/marcellus Marcellus Shale Resource AreaMarcellus Shale Resource Area

Penn State ResourcesPenn State Resources Case LawCase Law StatutesStatutes RegulationsRegulations Legal-related linksLegal-related links


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Blogs

Agricultural LawAgricultural Law www.pennstateaglaw.comwww.pennstateaglaw.com

Marcellus ShaleMarcellus Shale www.pennstatelawmarcellusblog.comwww.pennstatelawmarcellusblog.com

Chesapeake BayChesapeake Bay www.pennstatelawbayblog.comwww.pennstatelawbayblog.com


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10

Pennsylvania Oil and Gas – The Early Years

August 27, 1859 – Drake well Nov. 3, 1878 – Haymaker well January 1883 – Natural gas

pipeline constructed to Pittsburgh


Pennsylvania Oil and Gas

Early 20th Century (1900-01)

43% of total value of natural gas extracted in United States

37% of active gas well in United States 42% of pipeline miles in United States


12

Pennsylvania Oil and Gas

Early 21st Century (2005)

16th nationally in annual natural gas production 3rd nationally in number of active natural gas

wells (11% of national total)


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Pennsylvania Oil and Gas Law

1859 to 2005 Late 1800s to Early 1900s – national leader Mid 1900s to Early 2000s – relatively small

development of oil and gas case law Early 2000s – statutory and regulatory

framework for oil and gas development based upon historic production methods


14

Marcellus Shale Development

Renz #1 (2005) – Marked Beginning of Transformation of Industry in PA Increased activity Expansion into new areas of PA Use of new techniques / technologies $$$$$$$$ Entry of international companies


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What is Marcellus Shale?

Natural gas contained with shale rock Extremely large shale formation Extraction relies upon adaptation of two

key technologies: Hydraulic fracturing Horizontal drilling


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17


Source: PickensPlan.com 18

http://media.pickensplan.com/pdf/Nat_Gas_Basins.pdf

Why Marcellus Shale?

Large size – 95,000 square miles Productivity Low break-even market price Proximity to market


19

Marcellus Wells Drilled Pennsylvania Marcellus wells

2005 – 2 2006 – 11 2007 – 34 2008 – 210 2009 – 768 2010 – 1454


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21


22

Marcellus Production Data

23

Marcellus – acreage locations

NY

PA

WV

Legend

APC / MitsuiAtlasCOGCHKChief / EnerplusCNX / CXG

East Resources

EnerVestEOGEpsilonEQTEXCOHess / NFXNFG (Seneca)PDCRangeRex / WilliamsSamsonStoneSWNTLMUPLXOM / XTO

NJ

OH

MDDE

Columbia

DauphinPerry

Huntingdon

Forest

Northumberland

Jefferson

Warren

Cameron

Bedford

Wayne

Lackawanna

Susquehanna

Pike

Potter

Allegheny

Washington

Fayette

Lebanon

LycomingClearfield

Somerset

Westmoreland

Elk

Tioga

Armstrong

Centre

Clinton

Garrett

Monongalia

McKean

Bradford

Tioga

Indiana

Sullivan

Mercer

ButlerLawrence

Greene

Wetzel

Marshall

Doddridge

DC

Adams

BerksBucks

Carbon

Clarion

Crawford

MifflinBeaver

Chester

Cumberland

Erie

Fulton

Lehigh

Luzerne

Montour

Philadelphia

Snyder

Cambria

DelawareFranklin Lancaster

Monroe

Schuylkill

Wyoming

Montgomery

Northampton

Venango

York

Juniata

Union

Chemung

Steuben

Brooke

Hancock

Harrison

Marion

Ohio

PrestonTyler

Erie

Taylor

Berkeley

Grant

Hampshire

Hardy

Jefferson

Lewis

Mineral

Morgan

Pleasants

RitchieTucker

Wirt

Wood

Barbour

Allegany

BroomeCattaraugus

Chautauqua

Chenango

Cortland

Delaware

Erie Livingston Otsego

Schoharie

Schuyler

Sullivan

Tompkins

Ulster

Wyoming Yates

Blair

Carbon

Fulton

Luzerne

MonroeMontour

SchuylkillSnyder

Union

Source: Credit Suisse, company filings, company presentations and Wall Street research.

Antero

Carrizo

REXX Drilling

Range Res. (RRC)13 Rigs (6 spudder)IPs up to 26 MMcfe / d

EQT: 30-Day Rates15.8 MMcfe / d14.3 MMcfe / d

CXG: 30-Day Rates1.6 MMcfe / d0.8 MMcfe / d

CHK: 3 rigs

ATLSDrilled 17 HorizontalsIPs: 3 - 10 MMcfe/d170+ VerticalsAvg IP: 2.2 MMcfe/d

REXX DrillingRecent well:3.3 MMcfe/d (14-day)

XCO Drilling

EOG / NFG JV:2 rigs running

NFG Drilling

UPL: 2 rigs runningIPs Avg: 7.5 MMcf / dRange: 3-4-10.4 MMcf / d

TLM: 6 rigs runningIPs: 2.3-6.0 MMcfe / d (30-day)

NFG (Seneca)3 IPs: 5–10 MMcf / d7 wells drilled

APC:3 rigs running

RRC: 2 wells13.5 MMcfe / d (7-day)

SWN Drilling

CHK: 14 rigs

Epsilon (EPS)CHK Farm-out

CHK: 8.7 MMcfe / dCHK: 8.7 MMcfe / dCHK: 8.7 MMcfe / d

COG: 5 rigs runningRecent IPs: 2.6-16.1 MMcf / d

CRZO vert activity

ECA

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Change in State Sales Tax Collections, by County Level

Marcellus Drilling Activity

July, 2007- June, 2010

Source: PA Department of Revenue ‘Statistical Supplements for the Tax Compendium

Counties by Number of Marcellus Wells Between 2007 and December, 2010

Sales tax dollars go to the state - none remains at the local level (except in a few urban counties)

Counties with more than 150 wells since 2007 include:

• Bradford (482 wells)• Tioga (387 wells)• Washington (305 wells)• Greene (179 wells)• Susquehanna (174 wells)

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Change in Rights, Royalties & Patents- State Personal Income Tax Collections, by County Level Marcellus Drilling Activity, 2007-08

Source: PA Department of Revenue ‘Statistical Supplements for the Tax Compendium, Tim Kelsey - PSU

Counties by Number of Marcellus Wells Between 2007 and 2008

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Negative Impacts from

Marcellus Activity

Strain on local infrastructure Increased demand on local services Increased housing costs Perceived decline in quality of life Environmental concerns


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28

Pennsylvania Oil and Gas Laws 58 Pa. Stat. §§ 1-701.7

Chapter 1: Oil and Gas Wells Chapter 2: Test of Illuminating Oil Chapter 5: Interstate Conservation Compact Chapter 7: Oil and Gas Conservation Law Chapter 8: Underground Storage Act Chapter 9: Pennsylvania Used Oil Recycling Act Chapter 10: Coal and Gas Resource Coordination Act

Chapter 11: Oil and Gas Act Chapter 12: Dormant Oil and Gas Act


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Pennsylvania Oil and Gas Act

Organization of Oil and Gas Act Chapter 1: Preliminary Provisions Chapter 2: General Requirements Chapter 3: Underground Gas Storage Chapter 4: Eminent Domain Chapter 5: Enforcement and Remedies Chapter 6: Miscellaneous Provisions


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OGA – Preliminary Provisions

Declaration of Purpose – Section 102 Permit optimal development . . . consistent with

protection of health, safety, environment, and property;

Protect safety of employees and facilities; Protect safety and property of those near

development; and Protect natural resources, environmental rights

and values secured by PA Constitution


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OGA – General Requirements

Section 201 – Well permits Section 202 – Permit objections Section 203 – Well registration and identification Section 205 – Well location restrictions Section 206 – Well site restoration Section 207 – Casing requirements Section 208 – Protection of water supplies Section 210 – Plugging requirements Section 212 – Well reporting requirements Section 215 – Bonding


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General Requirements

Permitting Requirements – Section 201 DEP permit is required prior to drilling. Notice must be provided to:

Surface owner; Surface landowner or water purveyors who have

water supply within 1000 feet of proposed well location; and

Owner / operator of underlying coal seams.


33


Permitting Objections – Section 202 Surface owner has right to object to

permit. Objection must be filed with DEP within 15

days of receipt of notice and plat. Objection can be based upon improper

location of well or inaccurate information in permit application.


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Well Location Restrictions – Section 205 Wells cannot be drilled:

Within 200 feet from building or water well Within 100 feet from spring, stream, body or water, or

wetland larger than one acre

Waiver from location restrictions can be granted. DEP may impose conditions to protect people, property,

and waters.


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Well Site Restoration – Section 206 Surface estate must be restored from disturbances

caused by drilling activities. Well operator must follow erosion and sediment

control plan at all times during drilling. Equipment must be removed and well site restored

within nine months of completion of activity. Time period can be extended for six months. Equipment can be stored on-site with landowner

permission.


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Ground Water Protection – Section 207 Casing is required when:

Drilling through fresh water strata; Certain coal seams;

Brines must be disposed of in compliance with Clean Streams Law.


37


Protection of Water Supplies – Section 208 Well operator must restore or replace a water

supply that is polluted or diminished. Presumption of liability

Well is presumed to have caused pollution of water supply located within 1000 feet of well.

Presumption can be rebutted by demonstrating pollution existed prior to drilling.

Presumption also is rebutted if landowner refuses permission to perform a predrill test.


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Reporting Requirements – Section 212 Completion report must be filed with 30 days

of the completion of drilling. Production Reports:

Report containing production data must be filed with DEP every six months.

Report is published on DEP Web site.


39

Oil and Gas Conservation Law

Declaration of Purpose “[F]oster, encourage, and promote the

development, production, and utilization” of Pennsylvania’s oil and gas resources;

Prevent the waste of oil and natural gas; Permit the Commonwealth to “realize and enjoy

the maximum benefit of these natural resources.”


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Image by: Robert Milici and Christopher Swezey, 2006, Assessment of Appalachian Basin Oil and Gas Resources: Devonian Shale–Middle and Upper Paleozoic Total Petroleum System. Open-File Report Series 2006-1237. United States Geological Survey.

The Oil and Gas Conservation Law does not apply to wells that do not penetrate the Onondaga horizon, meaning wells drilled into the Marcellus Shale generally are not covered by this law.Depth of Marcellus

ShaleDepth of Ondaga Horizon


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Well Spacing When a well is drilled into, or below, the

Onondaga horizon, those “directly and immediately affected by the drilling” of the well can apply to DEP for a well spacing order.


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Dormant Oil and Gas Act

Enacted July 11, 2006 Purpose

“facilitate the development of subsurface properties by reducing the problems caused by fragmented and unknown or unlocatable ownership of oil and gas interests . . .”


43

Guarantee of Minimum Royalties

58 Pa. Stat. § 33 “A lease . . . shall not be valid if such lease does

not guarantee the lessor” a one-eighth royalty.


44

State Regulatory Agencies

Department of Environmental Protection (DEP) Bureau of Oil and Gas Management

Department of Conservation and Natural Resources (DCNR)

Public Utility Commission (PUC) Department of Transportation (PennDOT) Department of Agriculture (PDA)


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Federal Regulatory Agencies

Susquehanna River Basin Commission (SRBC)

Delaware River Basin Commission (DRBC) Federal Energy Regulatory Commission

(FERC) Environmental Protection Agency (EPA)


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47

The Leasing Process

Energy company presents landowner with STANDARD lease agreement.

Landowner negotiates additional terms to be included as addenda to lease agreement.

Lease agreement will govern nearly all aspects of relationship between landowner and energy company.


48

Terms of the Lease Agreement

Parties to lease agreement Property description Length of lease agreement Payment terms Rights granted by landowner to energy

company & limitations on those rights


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Parties to the Lease Agreement

Lessor – Owner of natural gas rights

Lessee Lessee could be an independent landman, an

energy company, a drilling company, or other. Lessee will change if lease agreement is later

assigned.


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Property Description

Property will be described by one or more of the following: County and township Metes and bounds Acreage Tax assessment parcel number Neighboring properties


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Length of the Lease Agreement

Primary term Primary term is the number of years

defined in lease agreement. Lease agreement ends if production

activities do not begin by expiration of primary term.

If production activities begin, lease agreement is converted to secondary term.


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Extension of the Primary Term

Renewal at option of lessee Terms of current lease agreement will

continue.

Right of first refusal Lessee has opportunity to match contract

offers from other companies.


53

Length of the Lease Agreement

Secondary term Secondary term begins upon the initiation

of production activities. Subject to the specific provisions in lease

agreement, secondary term can extend far into the future.


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Payment Terms

Bonus Payment This is a one-time payment to landowner. It is paid at execution of lease agreement

or within a short time thereafter. The amount is negotiable.


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Delay Rental Payments These are payments to landowner at times

specified in lease agreement. The obligation to make scheduled

payments terminates when a well is drilled. The amount and number of payments is

negotiable.

Payment Terms


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Payment Terms

Royalty Payments These are paid to landowner when natural

gas is removed from the land. Pennsylvania law requires that landowner

be paid royalties of at least 1/8. Landowner can negotiate for a higher

royalty rate.


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Payment Terms

Shut-In Royalty Payments These are payments made to landowner

when a well is drilled, but gas is not yet marketed.

The amount and circumstances under which payments are made is negotiable.


58

Payment Terms

Free Natural Gas Lease agreement may provide for landowner to

receive a specified amount of extracted natural gas at no cost.

Landowner is generally responsible for transportation of gas from wellhead to residence.

Landowner can negotiate to receive a payment in lieu of free natural gas.


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Other Payment Opportunities

Storage rights Transportation of foreign gas / installation of

pipelines Well siting fee


60

Mineral Estate

Surface Estate

Rights Granted by Landowner


61

Mineral estate is severable from surface estate.

Mineral estate is dominant over surface estate.

Mineral Estate vs. Surface Estate


62

Lease agreement will specify what products within mineral estate are subject to grant. Horizontal severance clause can limit gas

development to a specific strata (Marcellus, Utica, etc.)

Mineral Estate


63

Energy company will seek broad use of surface estate.

Landowner may want to limit energy company’s use of surface estate.

Surface Estate


64

Landowner may limit use of surface estate by: Requiring that landowner approve well sites and

access roads Specifying the conditions under which the land will

be reclaimed Defining the permitted activities and structures Requiring the installation of fencing or gates

Surface Estate Limitations


65

Landowner may be able to negotiate lease agreement that does not permit use of surface estate.

Landowner may or may not receive lower payment terms in exchange for a no surface rights lease.

No Surface Rights Lease


66

Examples: Property damages Liability to third parties Increased taxes, penalties, or damages

from violation of farmland preservation-type programs

Protection Against Adverse Financial Events


67

Landowners should seek protection through: Lease terms Insurance coverage Establishment of financial reserve

Protection Against Adverse Financial Events


68

Lease agreement should address potential damage to: soils, crops, trees, buildings, roads, water, etc.

Lease agreement should provide method of valuing damages.

Landowner should consider inclusion of arbitration clause.

Property Damage Provisions


69

Indemnification Provisions

Landowner should require indemnity provision in lease agreement.

Indemnity provision should include all costs of litigation.

Indemnity provision should encompass environmental harms.


70

Participation in Clean and Green or other farmland preservation program may limit drilling activities or result in imposition of penalties.

Landowner should seek to shift all potential financial liabilities to lessee.

Farmland Preservation Provisions


71

Landowner should avoid granting storage rights in lease agreement.

The grant of storage rights can effectively extend the lease term.

The grant of storage rights should be separately negotiated for additional compensation.

Storage Rights


72

Landowner should avoid granting transportation rights (installation of pipelines) in lease agreement.

The grant of transportation rights should be separately negotiated for additional compensation.

Transportation of Foreign Gas


73

Landowner should inquire about attorney’s experience with gas leasing.

Landowner should understand the basis of all fees charged by attorney.

Landowner should receive a written fee agreement from attorney.

Considerations in Hiring an Attorney


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75

Dunham’s Rule Reservation of mineral estate may not

include reservation of right to natural gas.

Ownership of Mineral Estate


76

“Held By Production”

When a well is commenced during the primary term, the leasehold is said to be “held by production.”

So long as a leasehold is held by production, the energy company holds all rights granted through the lease agreement.

Thus, the landowner will be limited or prevented from acquiring additional lease bonus payments.


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Pooling / Unitization

Pooling – “combining . . . tracts for the purpose of sharing production and expenses.”

Unitization – “consolidating multiple tracts and interests into a single unified block to allow for orderly development and efficient operations to prevent surface, underground, and economic waste.”

John S. Lowe et al., John S. Lowe et al., Cases and Materials on Oil and Gas Cases and Materials on Oil and Gas LawLaw


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Royalties are paid on a proportional basis within drilling unit.

Example: If drilling unit is 640 acres; and landowner owns 64 acres within drilling unit; and landowner’s lease agreement provides for a royalty

rate of 15%; Then landowner will receive royalty of 1.5% of gas

extracted. The composition of a drilling unit is determined

by the energy company pursuant to lease agreement.


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Where only a portion of a leasehold is included in a drilling unit, generally all of the leasehold will be held by production.

A Pugh Clause in the lease agreement can provide for the release of portions of the leasehold that are not included within a drilling unit. Pugh Clause can release land vertically or horizontally.


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Rule of Capture

““The owner of a tract of land acquires title to The owner of a tract of land acquires title to the oil and gas which he produces from wells the oil and gas which he produces from wells drilled thereon, though it may be proved that drilled thereon, though it may be proved that part of such oil and gas migrated from part of such oil and gas migrated from adjoining lands.”adjoining lands.” Robert E. Hardwicke (1935)Robert E. Hardwicke (1935)


81

Rule of Capture is generally applicable in Pennsylvania.

The impact of the Rule of Capture may be minimized by lack of porosity and permeability in Marcellus Shale.

Rule of Capture


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83

Natural gas extraction necessarily involves some disturbance of the surface estate.

Marcellus wells vs. traditional wells Larger well pad sites

Increased use of water Multiple wells on single well pad

Fewer well pad sites Use of horizontal drilling Surface use not necessary on all parcels.

Surface Impacts Generally


84

Mineral estate is severable from surface estate.

Mineral estate is dominant over surface estate. Owner of surface estate is entitled to certain

notifications Owner of mineral estate is entitled to reasonable

use of surface estate.



85

Gas company must send permit application to owner of surface estate.

Surface owner has 15 days after receipt of application to object to grant of permit.

Objection can be based upon: Location of the well; or Inaccurate information contained in the permit

application.

Notification Requirement


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Surface owner must receive notice of request for drilling permit renewal.

Surface owner must be provided with 24 hours notice prior to commencement of drilling.

Notification Requirement


87

Surface Owner Rights

Belden & Blake v. DCNR (Pa. Apr. 29, 2009) Facts:

Belden had rights to extract oil and gas within Oil Creek State Park.

DCNR would not permit surface access without coordination agreement.

Belden filed suit, claiming implied easement to use surface estate.


88


Supreme Court Ruling: DCNR could not require Belden to execute

coordination agreement.


89


Supreme Court Reasoning: Subsurface estate is dominant over surface estate.

Chartiers Block Coal Co. v. Mellon (Pa. 1893) Subsurface owner entitled to reasonable use of surface

estate. Burden is on surface owner to challenge reasonableness

of use. Government holds no greater rights than private

landowner re: surface use.


90

What is reasonable use? How does the ability to horizontally drill affect

reasonable use?

How can surface owner enforce reasonable use? Surface use agreement Litigation – Burden is on surface owner to initiate

court proceeding.



91

Compensation for Damages to Surface Estate

Obligation of natural gas rights holder to compensate surface owner for damages is not clear. There are no statutory provisions addressing

this topic.


92

Damages for Devaluation of Surface Estate

Gates v. Exco Resources, 2010 WL 1416740 (W.D. Pa. Apr. 8, 2010)

Landowners executed lease agreement and pipeline rights of way.

Landowners sought damages for devaluation of property due to improper reclamation after installation of pipelines.


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Gates v. Exco Resources

Court opinion Court found that 20 acres was “rendered

almost unable to be used again.” Court awarded $16,000 in damages due to

diminution of property value. Court did not rely on contract as basis for

recovery. Court awarded damages despite evidence that

devalued land was typical of gas production activities.


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Overview of Presentation Introduction Marcellus Shale Background Statutory and Regulatory Overview Leasing Issues General Oil and Gas Law Concepts Surface Owner Issues Recent Legal Developments

Case Law Municipal Regulation Statutory Enactments

Legal Issues on the Horizon


95

Validity and Duration of Lease Agreement

Minimum Royalty Act litigationMinimum Royalty Act litigation Fraudulent InducementFraudulent Inducement Untimely Tender of Lease PaymentUntimely Tender of Lease Payment Failure to Obtain Management Approval of LeaseFailure to Obtain Management Approval of Lease Enforcement of Arbitration ClausesEnforcement of Arbitration Clauses Expiration of Primary TermExpiration of Primary Term Expiration of Secondary Term – “Produced in Paying Expiration of Secondary Term – “Produced in Paying

Quantities”Quantities”


96

Minimum Royalty Act Litigation

Hundreds, possibly thousands, of Hundreds, possibly thousands, of landowners sought to terminate their lease landowners sought to terminate their lease agreements in suits before state and federal agreements in suits before state and federal courts.courts.

General Issue: Did reduction of royalty to pay General Issue: Did reduction of royalty to pay for post-production costs violate for post-production costs violate Pennsylvania minimum royalty statute?Pennsylvania minimum royalty statute?


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58 P.S. § 33 – Guarantee of Minimum Royalties

A lease or other such agreement conveying the right to remove or recover oil, natural gas or gas of any other designation from lessor to lessee shall not be valid if such lease does not guarantee the lessor at least one-eighth royalty of all oil, natural gas or gas of other designations removed or recovered from the subject real property.


98

Kilmer v. Elexco Land Services

Susquehanna Co. Court of Common PleasSusquehanna Co. Court of Common Pleas March 3, 2009 – Order ruled in favor of gas March 3, 2009 – Order ruled in favor of gas

company.company. March 16, 2009 – Opinion issued.March 16, 2009 – Opinion issued.

On June 16, 2009, Supreme Court granted On June 16, 2009, Supreme Court granted Petition for Extraordinary Relief.Petition for Extraordinary Relief.


99


Issue accepted by Supreme CourtIssue accepted by Supreme Court ““Whether 58 P.S. Whether 58 P.S. § 33 precludes parties § 33 precludes parties

from contracting that post-production from contracting that post-production costs be factored into the determination of costs be factored into the determination of the amount of royalty payable under an oil the amount of royalty payable under an oil or natural gas lease.”or natural gas lease.”


100


Supreme Court opinion issued on Supreme Court opinion issued on March 24, 2010March 24, 2010 GMRA “should be read to permit the GMRA “should be read to permit the

calculation of royalties at the wellhead, as calculation of royalties at the wellhead, as provided by the net-back method used in provided by the net-back method used in the lease.”the lease.”


101

Fraudulent Inducement

Kropa v. Cabot Oil & Gas Corp., 2010 WL 2346587 (M.D. Pa. June 8, 2010). Facts:

Susquehanna County landowner paid $25 per acre lease bonus.

Allegation that landman stated that Cabot would never pay more than $25 per acre.


102

Kropa v. Cabot Oil & Gas Corp.

Cabot filed motion to dismiss claim Argued that parol evidence rule precluded

consideration of evidence outside terms of contract

Court denied motion to dismiss Parol evidence rule only applies to valid

contract. Evidence of fraud permitted to contest contract

validity.


103

Untimely Tender of Lease Bonus

Sylvester v. Southwestern Energy Production, 2009 WL 3633835 (M.D. Pa. Nov. 2, 2009).

Facts: December 2007 – ten-year lease agreement executed Payment to be made within sixty days of lease

agreement. Payment received by landowners twenty-three days

after deadline. Landowners returned check to gas company.


104

Sylvester v. Southwestern Energy

Landowners sought declaration that lease was unenforceable.

Court granted gas company’s motion to dismiss.

Delay did not constitute material breach.


105

Sylvester v. Southwestern Energy

No material breach: Landowners could receive benefit of bargain. Ninety days notice of default was to be

provided. No provision stating that time was of the

essence.


106

Breach of Contract – Failure to Accept Lease

Hollingsworth v. Range Resources, 2009 WL 3601586 (M.D. Pa. Oct. 28, 2009).

Facts: June – Hollingsworth received Dear Property

Owner letter “offering” lease bonus of $2,500 per acre.

August – Hollingsworth signs lease and returns to Range.

December – Range returns lease to Hollingsworth stamped ‘void.’


107

Hollingsworth v. Range Resources

Contract did not exist. Dear Property Owner letter did not

constitute an offer. Range did not sign lease agreement. By voiding and returning lease, Range was

rejecting Hollingsworth offer.


108

Breach of Contract – Failure to Accept Lease

Lyco Better Homes v. Range Resources – Docket No. 4:09-cv-249 (M.D. Pa. May 21, 2009).

Pigeon Creek Presbyterian Church v. Range Resources – Appalachia, 2010 WL 256580 (W.D. Pa. Jan. 19, 2010).


109

Valentino v. Range Resources – Appalachia

Facts: Lease agreement and side agreement provided for

bonus payment of $456,800. Lease not valid until approved by management.

Court opinion Documents did not define management approval Breach of contract claim was facially plausible Motion to Dismiss denied


110

Enforcement of Arbitration Clauses

Eisenberger v. Chesapeake Appalachia, LLC – 2010 WL 457139 (M.D. Pa. Feb. 4, 2010).

Husband, but not wife, signed lease. Landowners sought to revoke lease. Landowners sought declaration that lease was

invalid. Chesapeake sought to compel arbitration.


111

Eisenberger v. Chesapeake

Court ruling: Validity of lease agreement was at issue.

Distinct from GMRA claims

Since contract formation was in dispute, underlying claims would not be decided by arbitrator.


112

Extension of Primary Term

Hite v. Falcon Partners, 13 A.3d 942 (Pa. Super. Ct. Jan. 4, 2011).

“Lessee has the right to enter upon the Property to drill [for one year] . . . or as Lessee shall continue to pay Lessors two dollars per acre as delayed rentals.”

Lessors sought to terminate leases. Court affirmed grant of summary judgment to Lessors.


113

Extension of Primary Term

Lauchle v. The Keeton Group, LLC, 2010 WL 78924 (M.D. Pa. Mar. 8, 2011).

Court declined to extend primary term of leases due to lease termination litigation asserted by landowners.


114

Expiration of Secondary Term

T.W. Phillips v. Jedlicka, 964 A.2d 13 (Pa. Super. Ct. Dec. 29, 2008).

Facts: Lease was executed in 1928. Lease extended so long as “oil or gas is produced in

paying quantities.” Wells were drilled in 1929, 1986, 2004, and 2005. Jedlicka argued that lease terminated in 1959 because

lease was not profitable in that year.


115

T.W. Phillips v. Jedlicka

Superior Court opinion Court relied upon Young v. Forest Oil Co. (Pa.

1899) to apply subjective test. Court ruled that Jedlicka had failed to carry

burden of establishing lack of good faith.


116

T.W. Phillips v. Jedlicka

Issue before Supreme Court: Did the Superior Court misapply [Young v.

Forest Oil] by holding that Pennsylvania employs a purely subjective test to determine whether an oil or gas lease has produced “in paying quantities.”

Argument held on April 13, 2010.


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118

Oil and Gas Act § 602

““Except with respect to ordinances adopted Except with respect to ordinances adopted pursuant to the . . . Municipalities Planning Code, pursuant to the . . . Municipalities Planning Code, and the . . . Flood Plain Management Act, all local and the . . . Flood Plain Management Act, all local ordinances and enactments purporting to regulate ordinances and enactments purporting to regulate oil and gas well operations regulated by this act are oil and gas well operations regulated by this act are hereby superseded.hereby superseded. No ordinances or enactments No ordinances or enactments adopted pursuant to the aforementioned acts shall adopted pursuant to the aforementioned acts shall contain provisions which impose conditions, contain provisions which impose conditions, requirements or limitations on the same features of requirements or limitations on the same features of oil and gas well operations regulated by this act or oil and gas well operations regulated by this act or that accomplish the same purposes as set forth in that accomplish the same purposes as set forth in this act.” this act.”


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Oil and Gas Act § 602

““Except with respect to ordinances adopted Except with respect to ordinances adopted pursuant to the . . . Municipalities Planning Code, pursuant to the . . . Municipalities Planning Code, and the . . . Flood Plain Management Act, all local and the . . . Flood Plain Management Act, all local ordinances and enactments purporting to regulate ordinances and enactments purporting to regulate oil and gas well operations regulated by this act are oil and gas well operations regulated by this act are hereby superseded.hereby superseded. No ordinances or enactments No ordinances or enactments adopted pursuant to the aforementioned acts shall adopted pursuant to the aforementioned acts shall contain provisions which impose conditions, contain provisions which impose conditions, requirements or limitations on the same requirements or limitations on the same featuresfeatures of of oil and gas well operations regulated by this act or oil and gas well operations regulated by this act or that accomplish the same that accomplish the same purposespurposes as set forth in as set forth in this act.” this act.”


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Oil and Gas Act Preemption of Municipal Regulation

Huntley & Huntley v. Borough of Oakmont Zoning restriction was permitted in R-1 district. Example of permissible municipal regulation.

Range Resources v. Salem Township Comprehensive regulatory scheme was not permitted. Example of impermissible municipal regulation.


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Municipal Regulation

Penneco Oil Co. v. County of Fayette Commonwealth Court opinion

Issued on July 22, 2010

Facts: County zoning ordinance allowed wells only by special exception in residential, industrial, and airport zones.


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Penneco Oil Co. v. County of Fayette

Conditions for grant of special exception: Well not located in flight path Well not located within 200 feet of residence Well not located within 50 feet of property line

or right-of-way Fencing and shrubbery required Zoning Hearing Board may attach conditions to

protect public health, safety, and welfare Conditions may include increased setbacks


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Court opinion Ordinance was reflection of traditional zoning

principles rather than a comprehensive regulatory scheme.

Although there was some overlap with purposes of Oil and Gas Act, primary purpose of ordinance was to encourage compatible land use.


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Application for reargument denied on September 14, 2010.Supreme Court appeal proceeding


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Oil and Gas Act Preemption of Municipal Regulation

Range Resources – Appalachia v. Blaine Township

Attempted regulation of oil and gas operations through corporate disclosure ordinance.

Attempted regulation through other than MPC authority.


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127

Enacted Legislation

2009-2010 Legislative Session2009-2010 Legislative Session Marcellus Shale Reporting Requirements (SB 297)Marcellus Shale Reporting Requirements (SB 297) Clean and Green Amendments (SB 298)Clean and Green Amendments (SB 298) Coal Bed Methane Review Board (HB 1847)Coal Bed Methane Review Board (HB 1847)


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Reporting Requirements

Senate Bill 297 (Act. No. 15)Senate Bill 297 (Act. No. 15) Approved by Governor on March 22, 2010Approved by Governor on March 22, 2010 Marcellus production data must be Marcellus production data must be

reported to DEP every six months.reported to DEP every six months. DEP is required to publish production data DEP is required to publish production data

on website.on website.


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Clean and Green Background

Pennsylvania Farmland and Forest Land Pennsylvania Farmland and Forest Land Assessment Act of 1974Assessment Act of 1974 Eligible land is assessed at use value rather than Eligible land is assessed at use value rather than

fair market value resulting in lower property fair market value resulting in lower property taxes.taxes.

Program is active in 55 of 67 counties.Program is active in 55 of 67 counties. Counties were treating impact of natural gas Counties were treating impact of natural gas

drilling differently.drilling differently.


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Clean and Green Amendment

Senate Bill 298 (Act. No. 88)Senate Bill 298 (Act. No. 88) Approved by Governor on October 27, 2010Approved by Governor on October 27, 2010 Leasing permitted on C&G land.Leasing permitted on C&G land. Development activities permitted on C&G land.Development activities permitted on C&G land. Roll-back taxes imposed on portion of C&G land.Roll-back taxes imposed on portion of C&G land.


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What lands are subject to roll-back tax?What lands are subject to roll-back tax? Restored well site, andRestored well site, and Land incapable of being immediately used for Land incapable of being immediately used for

agricultural use, ag reserve, or forest reserveagricultural use, ag reserve, or forest reserve Roll-back taxes due when county assessor Roll-back taxes due when county assessor

receives initial production report.receives initial production report. The result of 2011 legislative amendmentThe result of 2011 legislative amendment


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What lands are specifically excluded from roll-back What lands are specifically excluded from roll-back tax?tax? PipelinesPipelines Surface owners who do not own gas rightsSurface owners who do not own gas rights


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Coal Bed Methane Review Board

House Bill 1847 (Act. No. 4)House Bill 1847 (Act. No. 4) Approved by Governor on February 1, 2010.Approved by Governor on February 1, 2010.

PurposePurpose ““To establish an alternative procedure to court To establish an alternative procedure to court

action for consideration and resolution of action for consideration and resolution of objections to the locations of certain coal bed objections to the locations of certain coal bed methane wells or roads. . .”methane wells or roads. . .”


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Three member board appointed by GovernorThree member board appointed by Governor One member from list submitted by Farm BureauOne member from list submitted by Farm Bureau One member from list submitted by industry One member from list submitted by industry

associationsassociations One member with petroleum expertise from list One member with petroleum expertise from list

submitted by Penn State Deanssubmitted by Penn State Deans


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General ProcedureGeneral Procedure NotificationNotification Filing of objectionsFiling of objections Conference convenedConference convened Attempt to reach resolutionAttempt to reach resolution Determination by BoardDetermination by Board Appeal to Court of Common PleasAppeal to Court of Common Pleas


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137

Current Legal Issues

Marcellus Shale Impact Fee (SB 1100) Compulsory pooling Local regulation of drilling operations Regulation of hydraulic fracturing Expiration of primary term


138

The Agricultural Law Resource and Reference Center

Prof. Ross Pifer, Director

Phone: (814) 865-3723

Email: [email protected]

Web: www.law.psu.edu/aglaw

Other Resources:

www.law.psu.edu/marcellus

www.pennstatelawmarcellusblog.com139

understanding legal issues related to marcellus shale by ross h. pifer

Education

agricultural law materials

gas case law

reference center act

resource areas

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pennsylvania marcellus

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