Marcellus Shale Watch

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.

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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.

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By George Asimos, Esq., Saul Ewing, LLP, Harriburg

Penneco Oil Company, Inc. v. County of Fayette, 2010 WL 2853639 (Pa. Cmwlth. 2010)

Background

On November 1, 2006, Fayette County adopted a Zoning Ordinance. On or about August 7, 2007, Penneco filed a complaint against Fayette County and on or about May 5, 2008, Penneco filed, by consent, an amended complaint primarily alleging that the Zoning Ordinance is preempted by the Oil & Gas Act and requesting that the trial court declare the Zoning Ordinance invalid. 

Fayette’s Zoning Ordinance allowed oil and gas wells by “special exception” in five zoning districts.  The extent of Zoning Ordinance provisions that dealt specifically with the granting of a special exception for oil and gas wells were the following:

A.         An oil or gas well shall not be located within the flight path of a runway facility of an airport.

B.        An oil or gas well shall not be located closer than two-hundred (200) feet from residential dwelling or fifty-(50) feet from any property line or right-of-way.

C.        An oil or gas well shall provide fencing and shrubbery around perimeter of the pump head and support frame.

D.        The Zoning Hearing Board may attach additional conditions pursuant to this section, in order to protect the public’s health, safety, and welfare. These conditions may include but are not limited to increased setbacks.

Penneco and its co-plaintiffs, Range Resources – Appalachia, LLC and the Independent Oil and Gas Association of Pennsylvania, argued that the Zoning Ordinance was pre-empted because:

1.        The Zoning Ordinance provided that deep mining and surface mining in Fayette County were permitted as of right in certain zoning districts while oil and gas operations in those same zoning districts were permitted only by way of special exception.

2.        The Zoning Ordinance purported to give the zoning hearing board discretion to attach additional conditions to oil and gas operations “in order to protect the public’s health, safety and welfare” and that this is clearly covered by the OGA and the provisions of the Zoning Ordinance covering oil and gas operations are preempted by the OGA.

3.         That Section 1000-1004 of the Zoning Ordinance required that an oil and gas well operator obtain costly well permits in contravention of the explicit and extensive permitting requirements of the Act.

4.         Since the grant of a special exception is by the Zoning Hearing Board, the Zoning Ordinance does not guarantee issuance of a permit even if the application complies with all requirements, that issuance is discretionary resulting in the possibility that the Zoning Hearing Board would impose conditions governed by the Act such as road bonding, requirements before drilling begins, regulation of well heads and for site restoration after drilling operations cease.

5.         That the purposes of the Act preempted the purposes of the Zoning Ordinance; that the Supreme Court has held that MPC-enabled local ordinances are preempted to the extent that they either contain provisions which impose conditions, requirements or limitations on the same features of oil and gas well operations regulated by the Act or accomplish the same purposes as set forth in the Act; and that there is an obvious overlap of the purposes of the Act and the purposes of the Zoning Ordinance; therefore, the Zoning Ordinance is preempted by the Act.

Rulings

1.  That the Fayette Zoning Ordinance did not pertain to the technical aspects of well functioning and ancillary matters, but rather to “preserving the character of residential neighborhoods, and encouraging beneficial and compatible land uses.”

2.  That “the fact that the zoning hearing board may attach additional conditions to a grant of a special exception in order to protect the public’s health, safety, and welfare or the Zoning Ordinance does not specifically guarantee issuance of a permit, does not result in the conclusion that the Zoning Ordinance provides arbitrary authority to deny permission to drill.” 

3. That the privilege of a Zoning Board to impose reasonable conditions on the grant of a special exception, “unlike the ordinance at issue in Range Resources/Salem Township, . . . does not provide Fayette County or its zoning hearing board with virtually unbridled discretion to deny permission to drill an oil and gas well even after compliance with the applicable zoning regulations.”

4.  That a zoning permit is not per se a pre-empted “well permit” simply because it is required before a well can be drilled.  Rather it is part of the orderly zoning process upheld by the Supreme Court in Huntley.

5.  That “while there may be some overlap between the goals of Fayette County’s Zoning Ordinance and the purposes set forth in the Act, the most salient objectives underlying restrictions on oil and gas drilling in certain zoning districts appears in Fayette County to be those pertaining to preserving the character of residential neighborhoods, as well as each zoning district, and encouraging beneficial and compatible land uses. As such, the limited provisions of the Zoning Ordinance governing oil and gas wells in Fayette County do not accomplish the same purposes as set forth in Section 102 of the Act. . . .”

6.  “[T]hat the provisions of the Zoning Ordinance do not reflect an attempt by Fayette County to enact a comprehensive regulatory scheme relative to the oil and gas development within the county but instead reflect traditional zoning regulations that identify which uses are permitted in different areas of the locality. The Zoning Ordinance, on its face, is clearly a zoning ordinance of general applicability like the ordinance in Huntley. Therefore, the Zoning Ordinance is not preempted by the Act.”

Commentary

A predictable outcome after Huntley, Range and Arbor and the tenor of other decisions by the Commonwealth Court; but fails to address the practical reality that municipal regulation, particularly in the realm of conditional uses and special exceptions, can be, and often is, a cause of extensive delay and cost in the exercise of property rights and that,  regardless of stated purposes and requirements, such procedures can be used to achieve ends not stated in the ordinances, and may impede the exploitation of valuable mineral rights.  This is perhaps a question for the legislature rather than the courts.

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