Federal regulators propose new rules on oil trains

After a series of accidents involving oil trains in the US and Canada, the US Department of Transportation proposed new safety standards for oil trains on July 23. The proposed standards target older tank cars, requiring companies shipping flammable liquids to replace tank cars prone to rupturing or retrofit them to meet tougher design requirements. New design requirements include thicker steel shells, better brakes and rollover protection, which would make the tank cars safer in the event of an accident.

According to the Department of Transportation, the transportation of oil by rail has increased significantly in the past several years, from 9,500 railcarloads in 2008 to 415,000 in 2013. After the July 6, 2013 derailment in Lac-Megantic, Quebec, which killed dozens of people, concerns grew about the increase in oil transportation by rail. The US proposal is similar to the standards Canadian regulators implemented after the Lac-Megantic accident.

The proposed standards would also impose speed limits of 40 mph on trains with cars that do not meet the new design standards. Newer cars would have 50 mph speed limits. In addition, the proposal includes requirements for carriers to evaluate 27 safety and security issues before selecting a transportation route and to document that liquids have been sampled and tested. The public has 60 days to comment on the proposed standards, and the new rules could go into effect by the fall of 2015.

Read more about the proposal

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group and Kathleen McNearney (katie.mcnearney@nortonrosefulbright.com or 713.651.5698).

SCOTX Case Alert: Key Operating & Equipment, Inc. v. Hegar

A recent Supreme Court of Texas case pitted pooled mineral rights against surface rights of land owners. In Key Operating & Equipment, Inc. v. Hegar, the Court held that a lessee of mineral rights could use the surface of a non-producing tract to assist in producing or retrieving minerals from an adjacent tract with which it was pooled. No. 01-10-00350-CV, 2014 WL 2789933 (Tex. Jun. 20, 2014).

Background Facts

Key Operating & Equipment, Inc. (“Key”) leased and operated a well on the 191-acre contiguous Curbo/Rosenbaum (C/R) tract from 1994 until 2000, when the well stopped producing and Key’s lease expired. Key’s owners subsequently purchased an interest in the mineral estate of the C/R tract and leased it to Key. Key then pooled minerals from the C/R tract and the adjoining Richardson tract and continued to access its well on the Richardson tract via the C/R tract.

In 2002, Will and Loree Hegar purchased 85 acres of the C/R tract through which Key’s access road passed. After several years, Key drilled an additional well on the Richardson tract, and the resulting increase in traffic on the C/R road led the Hegars to take legal action. They sought a declaratory judgment that Key had no right to access their land in order to produce minerals solely from an adjacent tract.

Relevant Law

The Court first noted that ownership of the dominant mineral estate in a tract of land carries with it an implied right to use the surface in a reasonably necessary manner to retrieve those minerals. However, the Court previously held that this right does not extend to use for the benefit of other, un-pooled tracts. Robinson v. Robbins Petroleum Corp. 501 S.W.2d 865 (Tex. 1973). In Robinson, a wellbore that had stopped producing was used to benefit waterflood units that were not a part of the original mineral lease. The Court there held that the surface owner on whose land the well was located was entitled to protection from the use of his land to benefit unrelated outside units.

However, pooling allows for mineral rights on multiple tracts to be combined in order to simplify the recovery process by avoiding potential legal complications, and the Key Court noted that pooling serves the Texas public policies of encouraging the recovery of minerals and avoiding waste. The primary legal consequence of pooling is that production or recovery activity on any part of the pooled unit is treated as if it takes place on each tract within that unit.

The Dispute and its Resolution

After resolving a procedural issue with the appeal, the Court in Key turned to the arguments. The Hegars had convinced both the trial court and First Court of Appeals in Houston that, like the landowner in Robinson, their land should not be burdened solely to access production on an adjacent tract. However, the Supreme Court of Texas rejected that argument in favor of Key’s pooling argument, reasoning that pooling precluded differentiating production by individual tract. In effect, the Court held that the C/R and Richardson tracts were to be treated as one, not only concerning recovery activity but in order to determine associated access rights.

The Court also pointed out that the Hegars did not claim the pooling was done in bad faith. That this fact merited discussion indicates that bad faith pooling may be an exception to the holding in this case. Lastly, the Court recognized Key’s implied property rights despite there being no documentation of the pooled rights in the Hegar’s chain of title. Thus, a surface title search alone may not protect surface owners from the rights of lessees like Key.

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.

Irreconcilable differences: Colorado court finds that a local hydraulic fracturing ban is preempted by the Colorado Oil and Gas Act

Hydraulic fracturing has become a hot button topic in Colorado as oil and natural gas development has increased near urban and residential areas. During the 2012 election, in response to citizen concerns, the cities of Longmont, Lafayette and Broomfield adopted some form of ban on hydraulic fracturing, despite strong warnings from the state and local industry trade groups that such bans were contrary to state law.

On July 24, 2014, the Boulder County District Court fulfilled those predictions and overturned the City of Longmont’s ban on hydraulic fracturing and storage and disposal of hydraulic fracturing waste within city limits. See Colo. Oil & Gas Assoc. v. City of Longmont, 13-cv-63 (Order Granting Motions for Summary Judgment, Boulder County Dist. Ct. July 24, 2014).

The State of Colorado’s Oil and Gas Conservation Commission (“COGCC”) and the Colorado Oil and Gas Association, as well as Top Operating Company, who has holdings in or adjoining the City of Longmont, challenged the City’s ban on the grounds that it is preempted by the Colorado Oil and Gas Act.

In its Order ruling on the parties’ motions for summary judgment, the Court sided with industry. The Court first considered Longmont’s argument that the COGCC does not regulate (or insufficiently regulates) hydraulic fracturing and, therefore, there could be no preemption. Disagreeing, the Court found ample evidence of COGCC Rules regulating hydraulic fracturing, and reminded the City that the COGCC’s role is “to provide oversight of the industry, not to micromanage it.” (Order at 9.)

Next, although the opportunity was ripe for a finding that the Oil and Gas Act impliedly preempt local regulation of hydraulic fracturing, the Court declined to base its decision on an implied preemption analysis relying instead on the “operational conflict” test announced by the Colorado Supreme Court in Board of County Comm’rs v. Bowen/Edwards Assoc., Inc., 830 P.2d 1045 (Colo. 1992) and Voss v. Lundvall Bros. Inc., 830 P.2d 1060 (Colo. 2002).

Consistent with these earlier decisions, the Court noted that oil and gas operations are a matter of mixed local and state concern. In such cases, both the state and local government may regulate an activity provided that there is no conflict between a local ordinance and a state statute. In the event of a conflict, the local rule must give way to state law. Thus courts are tasked with first determining whether the two can coexist.

Applying this principle the Court was unable to harmonize the local ban with the Oil and Gas Act’s purpose of fostering the efficient development and production of oil and gas resources in a manner that prevents waste and protects correlative rights. “Here, giving effect to the local interest, banning fracking, has virtually destroyed the state interest in production. […] The conflict in this case is an irreconcilable conflict.” (Order at 15-16.) Citing language we are sure to hear frequently as the issues of setbacks and local control head to the ballot box in Colorado, the Court acknowledged that local regulations can result in uneven production and resource waste, as well as negatively impacting royalty owners.

While the decision is good news for operators in and adjacent to the City of Longmont, the Court prohibited all hydraulic fracturing activity until further notice, anticipating the City may appeal the ruling.

This post was written by Carey Gagnon (carey.gagnon@nortonrosefulbright.com or +1 303 801 2721) from Norton Rose Fulbright's Energy Practice Group.

Pennsylvania Commonwealth Court invalidates Act 13 provisions granting the review of local ordinances

On July 17, 2014, following a December 19, 2013, remand by the Pennsylvania Supreme Court, the Commonwealth Court issued its opinion addressing challenges to several sections of Pennsylvania’s new Oil and Gas Act (known as Act 13).

The Commonwealth Court, in a split decision, held: (i) that the sections granting the Public Utility Commission (“PUC”) and Commonwealth Court jurisdiction to review local ordinances are not severable from the provisions of Act 13 found to be unconstitutional by the Supreme Court in December; (ii) that the Act did not violate equal protection by requiring the Pennsylvania Department of Environmental Protection to notify only public water supply owners of spills; (iii) that health professionals constitutionally can be prohibited from disclosing the identity and amount of hydraulic fracturing additives; and (iv) that Act 13 does not unconstitutionally grant natural gas companies eminent domain power (Two of the five judges hearing the case issued concurring and dissenting opinions).

Most notable however, is the Commonwealth Court majority’s decision regarding the provisions of Act 13 which granted the PUC and Commonwealth Court jurisdiction to review local ordinances to determine whether they complied with Act 13 and Pennsylvania’s Municipal Planning Code (“MPC”), and if not, to withhold impact fees and/or to impose attorney fees and costs.

In its opinion, the Commonwealth Court majority held that the procedural provisions of Act 13, Sections 3305 - 3309, allowing for review of contested zoning ordinances were inseparable from the sections declared unconstitutional by the Pennsylvania Supreme Court (Importantly, the concurring and dissenting judges both agreed that the provisions regarding PUC and Commonwealth Court jurisdiction were severable and should have been retained).

The majority reasoned that the review process was so intertwined with the substantive provisions which the Supreme Court found to be unconstitutional that they could not be enforced independently. Therefore, the Commonwealth Court enjoined the application and enforcement of Sections 3305 - 3009. As a result, operators and landowners objecting to local zoning ordinances must continue to start those challenges before the local zoning boards, township supervisors, or, in certain cases, the Court of Common Pleas.

This post was written by Shannon DeHont (shannon.dehont@nortonrosefulbright.com or +1 724 416 0431) and Joshua Snyder (joshua.snyder@nortonrosefulbright.com or +1 724 416 0432) from Norton Rose Fulbright's Energy Practice Group.

Third Circuit holds that Shut-In Royalty Provision maintains lease on non-producing wells

On July 17, 2014, the Third Circuit affirmed a grant of a motion to dismiss in connection with a claim that an oil and gas lease had expired (Messner v. SWEPI LP, No. 13-3813, slip op. (3d Cir. July 17, 2014)).

The lessor claimed that vertical wells drilled to the Marcellus Shale formation and then shut-in (but not fraced or producing or, allegedly, not capable of producing without further work) did not qualify for shut-in payments under the lease to perpetuate the lease beyond the primary term. SWEPI LP, the lessee, argued that based on the shut-in language of the lease (allowing shut-in payments if all wells were “shut-in, suspended or otherwise not producing for any reason whatsoever”) applied to the wells as they were “not producing” wells and, therefore, the lease was extended beyond the primary term.

Chief Magistrate Judge Martin C. Carlson of the Middle District of Pennsylvania issued a Report & Recommendation (Messner v. SWEPI LP, No. 4:13-cv-00014-MWB (M.D. Pa. July 26, 2013) (Carlson, M.J.)) adopting SWEPI’s interpretation of the lease, and the District Court adopted the Report & Recommendation in its entirety (Messner v. SWEPI LP, No. 4:13-cv-00014-MWB (M.D. Pa. Aug. 14, 2013) (Brann, J.)). The plaintiff lessor then appealed to the Third Circuit.

The Third Circuit affirmed the District Court on July 17, 2014. In reciting the facts and the decision from the court below, the Court said it was “in complete agreement with the Magistrate Judge’s careful and thorough analysis, and his well-reasoned conclusion that the complaint itself pleads facts that show that the Shut-In Royalty provision applies” (Messner v. SWEPI LP, No. 13-3813, slip op. at p. 4 (3d Cir. July 17, 2014)).

The Court went further and turned aside the appellant’s argument that the wells needed to be capable of producing in paying quantities without further work in order to trigger a shut-in royalty. “Despite Messner’s claims to the contrary, there is absolutely nothing in the language of the Shut-In Royalty provision that requires that wells in question must produce paying quantities of gas” (Id.). In the end, the Court “affirm[ed] without further elaboration” (Id. at p. 5).

SWEPI was represented by Jeremy A. Mercer and Michael P. Gaetani, in Norton Rose Fulbright’s Pittsburgh-Southpointe office.

This article was prepared by Jeremy Mercer (jeremy.mercer@nortonrosefulbright.com or +1 724 416 0440) and Michael Gaetani (michael.gaetani@nortonrosefulbright.com or +1 724 416 0429) from Norton Rose Fulbright's Energy Practice.

Alberta experiments with "play-based" regulation

The Alberta Energy Regulator ("AER") will pilot a "play-based" regulatory framework for unconventional oil and gas development in part of the Duvernay shale play in west-central Alberta this fall.

The Duvernay shale play is a large, developing shale play covering much of western and northern Alberta and eastern British Columbia. It is particularly rich in light oil and petroleum liquids such as propane and butane. Hydraulic fracturing has been key in developing the vast underground rock formation that covers an area the size of South Korea.

"Play-based" regulation involves implementing a single application and decision-making process for multiple wells, pipelines and facilities under different pieces of legislation. It will require all of the operators in the pilot area to collaborate and jointly bring a single application for a single regulatory approval which will be used for regulating all of their unconventional oil and gas activities in the pilot area.

Presently, each activity by a company, such as building a road, diverting water, drilling a well, constructing a pipeline and so forth, requires its own separate AER regulatory approval. This current approach makes it difficult to reduce the cumulative environmental impacts of the additional roads, well pads and pipelines required by each company in the area. Extracting oil and gas out of shale requires many more wells, more pipelines and much more water usage than conventional oil and gas production. Area landowners and communities are expected to benefit with play-based regulation as it is hoped that they will get a sense of the full scope of all development in the play area and have earlier input into how the play is developed on the surface.

Area operators will have to submit the single application to the AER by January 31, 2015. The pilot is scheduled to run until March 31, 2015.

The Duvernay shale play was chosen for the pilot as it is just starting to be developed and extensive drilling and production is expected over the next several years.

The AER intends to implement play-based regulation more broadly throughout Alberta in the future.

Review a copy of the AER's Play-Based Regulation Pilot Application Guide.

This post was written by Alan Harvie (alan.harvie@nortonrosefulbright.com or +1 403.267.9411) from Norton Rose Fulbright's Canadian Energy Practice Group.

New study reports that Pennsylvania fracking wells leak more than traditional counterparts

According to a study of Pennsylvania state inspection reports, newer and unconventional wells leak more often than their older and traditional counterparts. The report, published on June 30, 2014 by the Proceedings of the National Academy of Sciences, suggests that methane leaks could pose a problem for drilling across the nation.

Four scientists analyzed over 75,000 state inspections of Pennsylvania gas wells conducted since 2000. Their results found that the leak rate for hydraulically fractured wells—mainly constructed since 2006-- had an approximately 4% higher leak rate than their counterparts.

The report has drawn criticism from the energy industry, with critics claiming that the report conflates pressure with leakage. The study attempts to draw a causal relation between the two, according to spokespeople for the industry, and the existence of the former is not evidence of the latter.

Pennsylvania regulatory officials have stated that while gas leaks peaked in 2010, the leakage rates have declined since then.

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.