Marcellus Shale Watch

On Saturday January 21, 2012, the Pennsylvania Department of Environmental Protection will be publishing proposed terms for a new general permit to be used by oil and gas and pipeline companies for earth disturbance activities associated with oil and gas drilling and transmission projects. The Department will also be publishing a draft 17-page policy document regarding the framework within which the Department states it will exercise its administrative discretion under the proposed permit.

The proposed terms, together with the draft policy document, are subject to a 60-day public comment period, which will expire on March 20, 2012. The proposed terms, which may be amended based on public comments submitted to the Department, will ultimately result in the issuance of a new general permit under which oil and gas exploration and production companies, along with pipeline companies, can conduct earth disturbance activities.

The proposed general permit includes a major re-write of the currently existing general permit. Among other things, the proposed general permit:

• Provides for an optional expedited 14-day permit review process for projects, except those located in special protection watersheds.

• Offers an optional phased permit process for operators seeking to conduct earth disturbance activities in phases.

• Provides a process for permittees to make minor modifications to approved plans in the field based on real world conditions.

• Requires a permit application to be submitted by a licensed professional “who has attended up-to-date training provided by the Department’s Office of Oil and Gas Management” on erosion and sediment control and post construction stormwater management for oil and gas activities.

In sum, the proposed revisions would add ten pages to the currently existing general permit.

The proposed general permit, together with the proposed policy document, is available here.

No Comments »

On April 18, New York’s Attorney General Eric T. Schneiderman announced plans to sue the United States unless a full environmental review of regulations related to gas fracking proposed by the Delaware River Basin Commission (”DRBC”) is performed.  The announcement referred to the National Environmental Policy Act (”NEPA”), which applies to major federal actions affecting the environment.   

The DRBC is composed of the governors of New York, New Jersey, Pennsylvania and Delaware plus one presidential appointment.  Decisions are based on majority rule.  A threshold question raised by the possible lawsuit is whether actions by the DRBC are “federal” and thus subject to NEPA.  Thirty years ago, in Delaware Water Emergency Group v. Hansler, Judge van Artsdalen questioned whether the DRBC is a federal agency for NEPA purposes.  Noting the co-equal status of Commission members, he wrote, “That DRBC is a federal agency for purposes of NEPA is very doubtful.” 

Historically the DRBC appears to have taken the position that NEPA applies to its actions.  For that reason, it is possible that neither the DRBC nor New York will raise that issue.  Somebody should.  If the litigants are free to agree on NEPA applicability, Marcellus Shale development in the northeast portion of the formation that lies withing the DRBC’s jurisdiction could be on hold for years.  The review process is comprehensive, and one can expect a challenge to the ultimate product of that review and likely further delays. 

The threatened lawsuit even has potential ramifications for drilling activities in the area subject to the Susquehanna River Basin Commission.  SRBC voting power is like that of DRBC with one federal representative and majority rules.  Currently the SRBC seems preoccupied with Chesapeake Bay issues.  However, drilling opponents might try to argue that SRBC’s failure to regulate is itself a federal action significantly affecting the environment.  One question such a lawsuit would present is whether inaction can be considered action.  If drilling opponents in the SRBC area can establish NEPA applicability, they might halt development in north central PA dead in its tracks.

No Comments »

            In a March 8, 2011 opinion, the United States District Court for the Middle District of Pennsylvania held that a gas production company was not entitled to an equitable ruling extending the terms of leases for the same period of time that production under the leases was delayed pending resolution of challenges to the leases.  In Lauchle v. Keeton Group, LLC, — F. Supp. 2d —, 2011 WL782024 (M.D.Pa. March 8, 2011), the Plaintiffs/Lessors (landowners) had challenged the validity of gas leases that they had entered into with Defendants/Lessees (gas production companies), arguing noncompliance with the Guaranteed Minimum Royalty Act, 58 P.S. § 33 (“GMRA”).  On October 6, 2010, the District Court issued a Memorandum and Order granting Defendants’ Motion to Dismiss and upholding the leases as valid under the GMRA.  The Defendants then asked the Court to equitably extend the leases to account for the period of time during which the Plaintiffs contested the leases with the Court.

            Each lease had a primary term of five years and, if the lessees were producing oil or gas in paying quantities at the end of the five year term, the leases would automatically extend for as long as production continued.  After the Plaintiffs filed the actions to seek a determination of whether the leases were valid under the GMRA, the Defendants voluntarily ceased development and drilling on the Plaintiffs’ properties.  The Defendants argued that the declaratory judgment actions initiated by the Plaintiffs created such uncertainty about the validity of the leases that the Defendants were forced to forego operations on the Plaintiffs’ properties and were thereby deprived of the benefits of the leases’ full terms.  Plaintiffs argument was two fold: (i) the declaratory judgment actions did not prevent the Defendants from conducting drilling operations on the Plaintiffs’ properties during the pendency of those actions; and (ii) it was inequitable to require Plaintiffs to extend the leases merely because the Defendants decided to voluntarily forego operations in the face of litigation over leases that the Defendants themselves had drafted.

            The District Court, relying on the Pennsylvania Superior Court decision in Derrickheim Company v. Brown, 305 Pa. Super. 173 (Pa. Super. 1982), found that the Plaintiffs did not repudiate their leases by filing the declaratory judgment action.  The District Court further found that “oil companies … wield significant, if not exclusive, power in the drafting of oil and gas leases” and “a determination that Plaintiffs had repudiated their leases via the filing of [the declaratory judgment actions] further tips the balance of power in favor of the oil companies” and that such would “likely dissuade lessors from bringing potentially meritorious actions.”  Lauchle at *4.  The District Court further went on to say “deeming these leases to have been repudiated under the circumstances of this case is both bad law and even worse public policy, and we decline to accept [Defendants’] invitation to so penalize Plaintiffs.”  Id at *4.

No Comments »

Background

In Fiorentino v. Cabot Oil & Gas Corp., No. 09-CV-2284, 2010 WL 4595524 (M.D. Pa., Nov. 15, 2010), the United States District Court addressed a variety of issues in the first ruling to arise from a tort claim for personal injuries and property damage from Marcellus Shale Gas drilling. This case arises out of the allegations in Dimock, Pennsylvania that drilling for Marcellus Shale gas by the defendant, Cabot Oil & Gas Corp., caused property damage and personal injuries to residents. As has been highlighted both in a documentary movie and on 60 Minutes, drinking water supplies have been alleged to contain methane, natural gas and other toxins and allegedly have been released onto plaintiff’s land. Plaintiffs brought suit seeking an injunction prohibiting future natural gas operations, seeking compensatory and punitive damages, the cost of future health monitoring, attorneys’ fees and other unspecified relief.
The plaintiffs’ complaint alleged the following claims against the defendant: 1) Hazardous Sites Cleanup Act, 35 P.S. §§ 6020.101 et seq. (“HSCA”); 2) negligence; 3) private nuisance; 4) strict liability; 5) breach of contract; 6) fraudulent misrepresentation; 7) medical monitoring trust funds; and 8) gross negligence.
The defendant filed a motion to dismiss the claims brought pursuant to HSCA, strict liability, medical monitoring and gross negligence. The defendant also filed a motion to strike a number of allegations largely related to the claims they were seeking to dismiss, as well as negligence per se and attorneys’ fees. The ruling by Judge John E. Jones, related only to the motion to dismiss these claims and the motion to strike. For the most part, in his ruling, the Judge sided with the plaintiffs.
Issues

Whether the court should dismiss claims against a natural gas drilling company relating to HSCA, strict liability, medical monitoring and gross negligence.
Whether the court should strike allegations relating to punitive damages, negligence per se and attorneys’ fees.
Rulings

Defendants argued that the plaintiffs were required to file a written notice 60-days prior to commencing an action under HSCA. Such notices are required by provisions contained in HSCA. The court ruled that since the HSCA claim was brought under Sections 507 and 702 for response costs, no 60-day notice was required. Such a notice would be required, however, “in citizen suits for property damage and actual or potential bodily injury.” The court followed Judge Caldwell’s ruling in Two Rivers Terminal, L.P. v. Chevron, USA, 96 F.Supp.2d 426 (M.D. Pa. 2000).
The court noted that strict labiality does not apply in Pennsylvania in actions involving underground storage of petroleum products and operation of petroleum pipelines. The court ruled however, that “Pennsylvania courts have yet to address whether the conduct at issue sub judice, gas-well drilling, is an abnormally dangerous activity that is subject to strict liability under Pennsylvania law.” The court felt it would be improvident to “extend the reasoning to drilling activities without more thorough consideration.” Thus the court denied the motion to dismiss and suggested that the defendants could reassert the issue in a motion for summary judgment after the record had been more fully developed.
The plaintiffs had also made a claim for medical monitoring expenses, to which the defendant filed a motion to dismiss. In denying the motion, the court quoted from the Pennsylvania Supreme Court’s ruling in Redland Soccer Club, Inc. v. Dept. of the Army, 696 A.2d 137 (Pa. 1997), to lay out the criteria for a claim for medical monitoring. The court held that while the plaintiffs may not have set out their claim in the precise manner endorsed by the Pennsylvania Supreme Court, the District Court held that, viewed as a whole, the complaint had sufficiently stated a plausible common law claim for medical monitoring to allow discovery to proceed.
The court did dismiss the plaintiffs’ claim for gross negligence without any objection by the plaintiffs other than they were not abandoning their claim for punitive damages.
The court refused to strike the allegations relating to attorneys’ fees at this time, preferring to wait to see if there were circumstances where such an award would be appropriate.
Finally, the court held that the claim for negligence per se, which would establish two of the four required elements of a negligence claim (duty and breach), was appropriate to this case.
Commentary

There have been many reports of damages actions having been filed relating to a variety of alleged personal injuries and property damages claims. This is the first one to have reached the level of a reported opinion. In particular, the ruling on the HSCA claim and medical monitoring may be of great significance when reviewed by other courts.
DEP and the news media have reported a settlement of a claim by DEP and Cabot Oil & Gas, in which Cabot has agreed to pay $4.1 Million in damages for the loss of water to a number of plaintiffs. See “Dimock Residents to Share $4.1 Million, Receive Gas Mitigation Systems Under DEP-Negotiated Settlement with Cabot Oil and Gas,” DEP New Release (Dec. 16, 2010). The settlement also requires Cabot to pay for whole house methane mitigation systems for 19 affected homes. This settlement, however, relates to a separate claim brought by DEP against Cabot, not to this case. Thus, the claim for personal injuries will continue.

No Comments »

Case summary by Ross Bruch, Esquire, Saul Ewing LLP

Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d 474 (M.D. Pa., Feb. 12, 2010) (Conaboy, J.)

Summary: Due to a conflict in Pennsylvania law, the United States Court for the Middle District of Pennsylvania refused to consider a declaratory judgment to resolve a dispute between an operator and a landowner over alleged deficiencies in an oil and gas lease and in negotiations.

            In November of 2009, Cabot Oil & Gas Corporation (“Cabot”) filed a claim seeking a declaratory judgment with the United States District Court for the Middle District of Pennsylvania following an oil and gas lease dispute between Cabot and Carol Manning Jordan, a Susquehanna County, Pennsylvania landowner.  Ms. Jordan claimed her lease with Cabot was invalid because (1) the individual who notarized the documents was an agent of Cabot whose fee was contingent on the Lease being entered into, (2) Cabot’s representatives made false representations to Ms. Jordan which induced her to enter into the agreement, and (3) the lease’s bonus payment was not timely and was not in the proper amount.  Ms. Cabot conceded that the notarization was not invalid; therefore the false representation and bonus payment issues went before the court.

            Ms. Jordan claimed that Cabot stated it would not pay any more than a 1/8^th royalty to Susquehanna County landowners, that no landowner would be offered more than $500 per acre signing bonus, and that if Ms. Jordan did not enter into the lease, the gas under her property could be captured and removed via activity on neighboring properties.  Cabot assumed these arguments to be true for the purposes of argument and asserted they do not render the lease invalid for two reasons.  First, Cabot claims, any evidence of the alleged misrepresentations are barred by the parol evidence rule and the integration clause contained in the lease documents.  Second, the alleged statement regarding the “rule of “capture” would not have been misrepresentation under Pennsylvania law.

            The court declined jurisdiction over this declaratory judgment action.  In doing so, the Court refused to engage in discussions of Pennsylvania law on the parol evidence rule, the integration clause contained in the lease documents, and the rule of capture because it found the applicable law to be unclear and unsettled.  The court  held that “any decision about corporate practices and/or landowner responsibility has potential broad impact on the matters of state law presented and the state courts should make such vital determinations.”  Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d at 479.

            The court noted that federal district courts have discretion to determine when they will entertain an action under the Declaratory Judgment Act, “even when the suit otherwise satisfies subject matter jurisdiction prerequisites.”  Id. at 476.  One of the bases for denying jurisdiction is when a matter comes before the court that must be decided under state law and “when the state law involved is close or unsettled.”  At 476, quoting State Auto Ins. Co., v. Summy, 234 F.3d 131, 135 (3d Cir. 2001).  In this instance the court found that there are “important issues raised in this action [that] are matters which have not been settled under Pennsylvania law.”  Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d at 476.  The court found that “[w]hile Pennsylvania courts have extensively discussed the operation of the parol evidence rule related to such claims, their pronouncements on the matter are far from clear.”  Id.

            The court examined a number of cases dealing with fraud in the inducement and the parol evidence rule.  It found instances where the Pennsylvania Supreme Court ignored its own precedent (citing Berger v. Pittsburgh Auto Equip. Co., 387 Pa. 61, 127 A.2d 334 (1956)) and instances where Pennsylvania courts cited one Supreme Court determination discussing the parol evidence rule but not the other.  More recently, the court found that the Pennsylvania Supreme Court “provides some clarification of the apparent conflict.”  Cabot Oil & Gas Corp. v Jordan, 698 F. Supp. 2d at 477.  This clarification, however “does not resolve the question of whether claims of fraudulent inducement based on misrepresentation not related to subjects specifically addressed in the written contract are barred by the parol evidence rule.”  Id.

Many Pennsylvania and Federal courts have examined the question of the applicability of the parol evidence rule and have found a way to issue a determination.  In this instance, however, the District Court was sending a message to the courts of Pennsylvania that there is substantial conflicting state authority regarding important issues like fraud in the inducement and the parol evidence.  The court’s ruling reinforces the fact that these conflicting Pennsylvania rulings need to be clarified by the state courts and not left to the Federal courts for a resolution.

No Comments »

By Andrew T. Bockis

abockis@saul.com

717.257.7520

As many of you know, the Environmental Quality Board proposed regulations back in July that would amend the Department of Environmental Protection’s Oil and Gas regulations set forth in 25 Pa. Code Ch. 78.  A copy of the proposed regulations is available here.  As set forth in the proposals, the EQB:

-          Would update existing requirements regarding the drilling, casing, cementing, testing, monitoring, and plugging of oil and gas wells, and the protection of water supplies.

-          Would update material specifications and performance testing, and revised design, construction, operational, monitoring, plugging, water supply replacement, and gas migration reporting requirements.

-          Would significantly amend casing standards.  The proposed cementing and casing standards would bring Pennsylvania in line with the regulatory requirements of New York, West Virginia, Ohio, Texas, Oklahoma, Louisiana, Kansas and Montana.

-          Would clarify operator responsibilities to restore or replace water supplies.

According to the EQB, the main purpose of the proposed rulemaking is to minimize concerns associated with gas migration. 

The public comment period for the proposed regulations closed on August 9, 2010.  About 260 “unique” public comments were submitted, although this number doesn’t include the several hundred form letters that were submitted.  With the form letters included, DEP’s own Marcellus Shale Examiner puts the count at more than 2,000 comments.

By and large, the comments were in support of the regulations.  Although there were a number of comments from industry, the comments appeared to be focused on technical issues and requests for clarification relating to the proposed casing standards, rather than comments that the proposals are burdensome.  This shouldn’t be much of a surprise, however, as one of the purposes of the proposals was to align the Commonwealth’s regulations with that of other states’ as well as current industry standards.

Moving forward, the Independent Regulatory Review Commission has the option of weighing in with its own comments.  The Department of Environmental Protection would then issue what is known as a comment-and-response document, citing the 2,000+ public comments and its response to them.  Based on prior experience, it’s likely that IRRC’s comments, and DEP’s overall response, will be available before year’s end.

No Comments »

By Andrew T. Bockis

Saul Ewing LLP

Harrisburg

The Department of Environmental Protection is currently soliciting public comment on changes it is proposing to make to its Oil and Gas regulations.  The Department’s proposed changes can be viewed by clicking here.  According to the Department, the proposed changes are part of an effort to provide better protection for both public and private water supplies.  The changes include revisions to the rules regarding the construction of oil and gas wells, in addition to revisions regarding the drilling, casing, cementing, testing, monitoring and plugging of oil and gas wells.

The Department is allowing an opportunity for public comment on these proposed changes before it submits a package to the Environmental Quality Board, which would then have its own, more formal, public comment period.  Public comments (during this pre-EQB period) are due by March 2, 2010.

Proposed Changes

The proposed changes would add additional requirements regarding the restoration or replacement of a water supply affected by oil and gas drilling operations.  The changes include a new notice requirement, and they set forth with more specificity the terms of an “adequate” water supply restoration or replacement.

The proposed changes would also require all drilling operations within the Marcellus Shale formation to use blow-out prevention equipment.  Currently, such equipment is only required when blow-out conditions are anticipated.  The changes also include significant revisions to casing, cementing, and operating requirements.

Area of Alternative Methods

Of note, the proposed changes would also authorize the Department to designate an “area of alternative methods” regarding the drilling, operation, or plugging of wells if the Department determines that additional requirements beyond the Oil and Gas regulations are necessary.  Any proposed area of alternative methods would be subject to publication in the Pennsylvania Bulletin and to public comment.  After review of any comments, the Department would then publish a final designation of the area and required alternative methods in the Pennsylvania Bulletin. 

Although any final designation regarding an “area of alternative methods” would be published in the Pennsylvania Bulletin, this proposal may raise concerns within the regulated community that the Department is side-stepping the rulemaking authority of the Environmental Quality Board.

www.dep.state.pa.us/dep/deputate/minres/oilgas/Oil%20&%20Gas%20Documents/CHAPTER%2078%20Revisions%20January%2027%202010.pdf

No Comments »

By:  Joel R. Burcat, Esquire, Saul Ewing LLP, Harrisburg, PA

The hottest legal issue right now affecting Marcellus gas exploration is Pennsylvania’s Minimum Royalty Act litigation.  This is the subject of numerous cases that have been filed in state and Federal courts, several judicial opinions and, most importantly, one case pending before the Pennsylvania Supreme Court.  The 1/8^th minimum royalty provision has been ruled upon by a number of state and Federal Courts.  More importantly, the Pennsylvania Supreme Court has a case before it that is ripe for a determination.  When that case is decided, we believe the question of whether certain costs may be deducted from the 1/8^th minimum royalty should be resolved in Pennsylvania.  This could have a huge impact on many leases (those that provide the Lessor with the bare 1/8^th royalty) as the law seems to imply that if the Act’s provision is violated the lease is invalidated.  Many landowners and exploration companies are anxiously awaiting the ruling of the Supreme Court.

Pennsylvania’s minimum Royalty Act provision provides as follows:

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 or natural gas recovered or removed.

58 P.S. § 33.

Pennsylvania and Federal Courts have gone in a variety of directions on whether or not the provision of the Minimum Royalty Act mandates that costs cannot be deducted from the 1/8^th royalty.

Case permitting the deduction:

Kilmer v. Elexco Land Servs., Inc., No. 2008-57 (Susquehanna Co. C.P., March 3, 2009), appeal granted, No. 63 MAP 2009 (Pa.).

In Kilmer, the Susquehanna County Court of Common Pleas ruled in favor of the gas company that had deducted the post-production costs from the royalty.  The court ruled that, “58 P.S. Sec. 33 does not preclude parties from contracting that ‘post-production’ costs be factored into the determination of the amount of royalty payable under and [sic] oil or gas lease.” 

Cases not allowing any deduction:

Kropa v. Cabot Oil & Gas Corp., 609 F. Supp.2d 372 (M.D. Pa. 2009).

Gas rights lessor brought action against lessee, alleging that he was fraudulently induced to enter into an oil and gas lease, and seeking a declaratory judgment that the lease was invalid.  Lessee moved to dismiss.  The court granted the motion in part and denied it in part.

The defendant paid a bonus of $25 per acre to the plaintiff for 521 acres, amounting to a total bonus payment of $1,275.  Plaintiff claimed the defendant’s representative told him, it would “never pay any more than $25 per acre so he better take the $25 per acre.”  After learning that others received more money, plaintiff sued seeking to void the contract claiming fraudulent inducement and also sought a declaration that the royalty provision, which pays 1/8^th less certain expenses, violates Pennsylvania law.

The court examined the integration clause of the lease but also examined three writings that were all a part of the contract at the time it was signed.  One did not contain an integration clause.  The court refused to dismiss that portion of the claim dealing with the statement that plaintiff would never be offered more than $25, since that part of the claim was not covered by an integration clause.  609 F. Supp.2d at 378.  The court did dismiss that part of the claim that there was fraud regarding the statements having to do with the amount of royalty, since that was covered by an integration clause.  Id.

As to the royalty issue, the court held that “a plain reading of 58 P.S.§ 33 guarantees one-eighth royalty and does not provide for the subtraction of any costs.”  Id. at 379.  This court disagreed with the holding of the Pennsylvania Court of Common Pleas in Kilmer.

Cases leaving the door open on the validity of the deduction:

Stone v. Elexco Land Servs., Inc., 2009 U.S. Dist. LEXIS 45897 (M.D. Pa. June 1, 2009).

Plaintiff landowners sought a declaration that the oil and gas lease the parties signed was invalid under Pennsylvania law because it did not provide a minimum royalty payment as required by statute.  Id. at *4.  The lease provided for a royalty of one-eighth of the amount realized from the sale of gas produced from the well, less one-eighth of the post-production costs and one-eighth of the taxes incurred on the gas.  Id. at *6.  Plaintiff argued that because the lease called for the subtraction of costs from the royalty, it did not comply with Pennsylvania law.  Id.

The court noted that “a plain reading” of the statute supported the Plaintiff’s position because it does not provide for subtraction of any costs.

Defendants argued that reduction of costs is standard in the industry and the court noted that the question would turn on how “royalty” should be interpreted.  Plaintiffs pointed to other jurisdictions’ definitions of “royalty” and to the “First Marketable Product Doctrine,” which provides that post-production costs should not be deducted from a royalty.  Id. at *10.  The court noted that Pennsylvania recognized this theory over 100 years ago, and that it is apparently still good law.  Id. 

The court declined to dismiss the case because two schools of thought exist as to what the term “royalty” means, id. at *12, and because the court would be required to look to materials outside of the pleadings to determine “industry practice,” which the court could not do at the motion to dismiss stage of the litigation, id. at *13. 

See also, Price v. Elexco Land Servs., Inc., 2009 WL 2045135 (M.D. Pa., July 9, 2009) (same result).

Pennsylvania Supreme Court Appeal:

Kilmer v. Elexco Land Servs., Inc., No. 63 MAP 2009 (Pa.).

On June 16, 2009, the Pennsylvania Supreme Court asserted its extraordinary jurisdiction to bypass the Superior Court and take a case directly from the Court of Common Pleas of Susquehanna County explicitly on the question of whether a lease violated the Minimum Royalty Act because post-production costs were to be deducted from the royalty.  The Court identified the question before it as:

Whether 58 P.S. § 33 precludes parties from contracting that post-production costs be factored into the determination of the amount of royalty payable under an oil or natural gas lease.”

Seven amicus curiae briefs were filed.  The case was argued before the Supreme Court on September 16, 2009.  No ruling has yet been handed down by the Court.  We expect that a ruling will be issued in the next several months.

No Comments »

If you don’t already read the Fort Worth Star-Telegram you’ll benefit from this article summarizing recent comments bearing on Marcellus Shale production and related issues.  Prices are low but interest in Marcellus Shale persists.  Pipe capacity could be a problem going forward.  Speculation on the likelihood of severe tax changes in the gas production realm.  You can read the article by clicking here.

No Comments »