Enertia Software

May 2017 Industry Digest

DOI Announces Repeal Of Its 2017 Royalty Rule

WASHINGTON–The U.S. Department of Interior is proposing to repeal the Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform Rule, which became effective Jan. 1.

At the same time, DOI announces, the Office of Natural Resources Revenue published an advance notice of proposed rule making in the April 4 Federal Register seeking comments on whether revisions were needed “on the pre-existing regulations governing royalty values, including comments on whether the 2017 valuation rule should ultimately be retained or repromulgated.”

In an April 3 announcement of those actions, DOI said it identified several areas in the valuation rule that appeared not to meet the agency’s original intent to offer greater simplicity, certainty, clarity and consistency to product valuation.

“The repeal (will) provide certainty and clarity to the regulated community by continuing to require compliance with lawful, longstanding and well-known procedures,” DOI says, adding that its re-evaluation is intended to “ensure that valuation and revenue collection for the nation’s mineral resources remain free from loopholes, and that Americans receive every dollar due.”

The National Ocean Industries Association praised the action, saying the 2017 valuation rule “created a cloud of regulatory uncertainty (and) put at risk billions of dollars of federal oil and gas leases.”

NOIA criticized the royalty valuation rule for “banning the use of non-arm’s-length sales and removing royalty deductions for business-related expenses. The rule gave DOI essentially unreviewable discretion to establish royalty value on a case-by-case basis.”

“This regulatory rollback is simply good government and restores much-needed certainty for America’s independent producers,” comments the Independent Petroleum Association of America.

The first royalty reports under the new valuation rule were to be due Feb. 28, but DOI suspended those requirements while three lawsuits filed in the U.S. District Court for the District of Wyoming challenging the rule–including one by the American Petroleum Institute–were litigated (AOGR, March 2017, pg. 16). DOI signaled its intent to repeal the rule in a request for a stay filed with that court on March 23.

The royalty valuation rule’s default provisions were among its most problematic, IPAA, NOIA and API contended in joint comments on the proposed rule in 2015. Those provisions enabled ONRR to determine unilaterally the valuation and royalty due if it disliked “any lessee’s reported oil or gas valuation for any reason,” the associations worried (AOGR, June 2015, pg. 127).

A mere inadvertent paperwork error could trigger the default provision, the three associations commented, as well as a low arm’s-length price or high allowance that ONRR solely determined to be “unreasonable.”

Korea, Spain Are Guilty Of Dumping OCTG, Steel Flanges, U.S. Says

WASHINGTON–The U.S. Department of Commerce has ruled two countries have been selling oil field products in the United States below fair value.

The agency has determined the prices at which the Republic of Korea has been selling oil country tubular goods in U.S. markets falls short of fair value, and has ordered Customs and Border Protection agents to assess duties and collect cash deposits equal to the dumping margins. In a separate action, the Commerce Department says its anti-dumping investigation of finished carbon steel flanges from Spain shows exporters have been unfairly dumping those in U.S. markets.

From July 2014 to August 2015, the agency says, OCTG imports from Korea were valued at an estimated $1.1 billion, accounting for nearly 25 percent of all U.S. OCTG imports. The dumping margins, or the rate at which the imported materials were sold below fair value in the United States, were found to range from 2.76 to 24.92 percent.

According to the agency, the Korean antidumping case is the first time the DOC is exercising its authority to address market distortions in foreign merchandise production, and to calculate dumping margins that more accurately account for the unfair pricing practices of foreign exporters.

Meanwhile, the Department of Commerce has determined, Spanish exporters dumped $16.5 million of flanges in the U.S. market at prices 18.81 percent to 24.43 percent below fair value in 2016 and the U.S. International Trade Commission is investigating whether domestic flange producers have been injured. If injuries are found, the agency says cash deposits equal to the dumping margins will be collected.

Petitioners for the Spanish investigation are Boltex Manufacturing Co. LP of Texas and Weldbend Corporation of Illinois.

“We will not stand for the distortions in foreign markets being used against U.S. businesses. The Trump administration will continue to employ all of the tools provided under the law to take swift action against harmful trade practices from foreign nations attempting to take advantage of our markets, workers and businesses,” says Secretary of Commerce Wilbur Ross.

Groups File A Lawsuit To Stop Keystone XL

TUCSON, AZ.–Six environmental groups are suing the U.S. departments of State and Interior, challenging the presidential permit the Trump administration granted the Keystone XL Pipeline.

The lawsuit was filed March 30 in the U.S. District Court for the District of Montana Great Falls Division by the Center for Biological Diversity (CBD), Northern Plains Resource Council, Bold Alliance, Friends of the Earth, Natural Resources Defense Council and Sierra Club, according to an announcement from the CBD.

The groups contend the State Department relied on an out-of-date environmental impact statement to grant Keystone XL a border-crossing permit. The lawsuit calls the 2014 EIS “woefully out of date” and says it “grossly underestimated the pipeline’s impacts.” Relying on the 2014 EIS violates both the National Environmental Policy Act and the Administrative Procedure Act, the lawsuit argues.

The Independent Petroleum Association of America cites published reports that quote CBD Endangered Species Director Noah Greenwald saying, “When you go through a NEPA process that is more than three years old, you come to a decision that (the pipeline) isn’t in the national interest, then come back three years later with the same environmental analysis and say that it is somehow in the national interest just doesn’t make sense.”

On Jan. 24, President Trump signed an executive memorandum inviting TransCanada Corp. to re-submit its application for a cross-border permit for the Keystone XL (AOGR, March 2017, pg. 28). That memorandum instructed the State Department to consider its January 2014 final supplemental environmental impact statement as satisfying all applicable requirements of NEPA and the Endangered Species Act.

The State Department issued the cross-border permit on March 24 (AOGR, April 2017, pg. 28). TransCanada filed its application for a border-crossing permit in 2008, but eventually was rejected by President Obama in November 2015 because it “would undermine significantly our ability to continue leading the world in combatting climate change” (AOGR, December 2015, pg. 30). The 1,187-mile pipeline is intended to carry 800,000 barrels a day of crude oil from Hardisty, Alberta, on a route through Montana and South Dakota to a connection in Steele City, Ne., for eventual shipment to Gulf Coast refineries.

The environmental groups’ lawsuit seeks an injunction setting aside the cross-border permit and requiring the departments of State and Interior to undertake a new environmental assessment.

Published reports say another lawsuit to stop the Keystone XL Pipeline was filed March 27 by the Indigenous Environmental Network and the North Coast Rivers Alliance.

District Court Rejects Driller’s Challenge To Delaware Basin Agency

HARRISBURG, PA.–A Pennsylvania oil and natural gas company has lost its legal challenge to a drilling moratorium imposed by the Delaware River Basin Commission (DRBC). Congress approved the compact, an agreement among the United States, Pennsylvania, New York, New Jersey and Pennsylvania, in 1961 to protect the Delaware River Basin.

In a ruling issued March 23, the U.S. District Court for the Middle District of Pennsylvania rejected Wayne Land & Mineral Group LLC’s claim that the commission lacked jurisdiction or regulatory authority to require it to seek DRBC approval to build a well pad in Wayne County, Pa., a portion of which is in the Delaware River Basin.

According to media reports, Wayne planned to build an access road and well pad on the property in preparation for drilling an exploratory well. It maintains the facilities are designed to produce natural gas, not “for the conservation, utilization, control, development or management of water resources,” which the commission oversees.

Wayne’s court filing states that in addition to asserting that well pads and related facilities are projects needing commission approval before construction begins, DRBC announced it would not review applications for well pads until after it adopted governing regulations. The company asserts the inaction represents a ban on the lawful use of land.

According to the March 23 ruling, Wayne’s proposed activities within the basin constitute a “project” as defined by the Delaware River Basin Compact, and thus the company was required to submit an application to DRBC to determine whether the project was likely to have a substantial effect on the basin’s water resources.

The week before the court issued its decision, the commission acknowledged it had not issued any regulations regarding natural gas since commissioners ordered staff to develop draft regulations on shale wells at a May 2010 meeting. Those draft regulations were published in December 2010, and the commission notes nearly 69,000 comments were submitted. Revised regulations were issued in November 2011, but have not yet been adopted by the commission.

“Since 2011, the commission has neither received nor processed any applications for natural gas development projects,” the commission states. “The effect has been a de facto moratorium on unconventional shale gas drilling within the Delaware River Basin.”

Pennsylvania Court Sides With Producer About Fee Obligations

WEXFORD, PA.–Pennsylvania’s Commonwealth Court agrees with the Pennsylvania Independent Oil & Gas Association and one of its member companies that “any” means “one” in a case involving wells exempt from paying the state’s annual impact fee on unconventional wells.

For Snyder Brothers Inc., the March 29 decision means the company is not liable for the nearly $500,000 the Pennsylvania Public Utility Commission said the operator owed in impact fees, penalties and interest. PIOGA reports the Commonwealth Court decision also provides clarity going forward for producers with low-producing unconventional wells.

In a 5-2 opinion, the court reversed a June 2015 PUC order. The commission contended that Snyder Brothers failed to identify and pay impact fees for 24 vertical Marcellus Shale wells in 2011 and 21 wells in 2012. The company and PIOGA argued that Act 13’s definition of a stripper well–an “unconventional gas well incapable of producing more than 90 Mcf/d during any calendar month”–meant that the company did not have to pay the fees and charges if the well failed to reach the 90 Mcf/d threshold for any single month during the reporting period. The PUC, however, declared that the definition meant Snyder Brothers owed the fees on wells that produced more than the threshold amount of gas during at least one month of the year.

PIOGA reports that Commonwealth Court disagrees with the PUC interpretation, with the majority opinion asserting, “We conclude that the word ‘any’ in the term ‘stripper well’ unambiguously means ‘any’ or ‘one’ and not ‘all’ or ‘every.’” The opinion states that “it is the General Assembly’s duty to write the laws and the General Assembly could have easily replaced the word ‘any’ with the term ‘every’ if it so intended,” and that the court was not authorized to rewrite the statute to do so.

According to PIOGA, vertical shale wells are exempt from the impact fee if they qualify as stripper wells as early as the year in which they are spud. Horizontal wells must pay the impact fee for three years after spudding regardless of output, but can qualify as stripper wells beginning in the fourth year.

While the PUC has expressed plans to appeal the ruling to the state Supreme Court, PIOGA reports the PUC Chairman Gladys Brown and Governor Tom Wolf claim the decision will cost the state and local governments $16 million in 2017 alone in lost impact fee payments and are urging the legislature to amend Act 13 to reflect the commission’s stripper well definition.

“Commonwealth Court’s decision is in line with the legislature’s intent regarding stripper wells and the impact fee when Act 13 was approved in 2012,” opines PIOGA Communications Director Matt Benson. “Yet, with the PUC and governor sounding an alarm about lost revenue–even though it is money to which the state is not entitled–we will have to remain vigilant to any legislative attempts to ‘fix’ the law.”

U.S. Judge Overturns Celebrated Shale Gas Water Pollution Claim

PHILADELPHIA–A federal judge has rebutted claims of water-well contamination in Dimock, Pa., that served as a rallying cry for shale gas opponents and were featured in the anti-fossil-fuel documentary, Gasland.

On March 31, U.S. Magistrate Judge Martin C. Carlson in the U.S. District Court for the Middle District of Pennsylvania overturned a $4.24 million judgment against Cabot Oil & Gas Corp. that was awarded to the families of Scott Ely and Monica Marta-Ely, and Ray and Victoria Hubert.

In his ruling, Carlson calls evidence presented to support the plaintiff’s claims “spare (and) sometimes contradictory,” and says it was “frequently rebutted by other scientific testimony, and relied in some measure on tenuous inferences.”

Published reports recall that the Elys and Huberts were among more than 40 Dimock residents who sued Cabot in 2009, claiming the producer’s drilling in the Marcellus Shale had polluted their water wells. All but the two families settled with Cabot in 2012 after tests found no chemicals associated with drilling in any of their wells, the reports say.

Those reports note that testing by the U.S. Environmental Protection Agency and the Pennsylvania Department of Environmental Protection later determined that water from the private wells was safe for drinking.

Nevertheless, an eight-member jury in Scranton, Pa., found Cabot negligent in causing the plaintiffs compensable nuisance injuries, following a three-week trial in March 2016, reports say.

Judge Carlson says he “does not take lightly” his decision to overturn a unanimous jury decision and order a new trial. “Nevertheless,” he writes, “following reflection on the substantial and varied weaknesses in the plaintiffs’ case together with the myriad examples of inappropriate conduct that occurred repeatedly in the jury’s presence . . . the court is constrained to find that a new trial is not only justified, but required.”

In his 58-page memorandum opinion, Carlson says, “Weaknesses in the plaintiffs’ case and proof, coupled with serious and troubling irregularities in the testimony and presentation of the plaintiffs’ case–including repeated and regrettable missteps by counsel in the jury’s presence–combined so thoroughly to undermine faith in the verdict that it must be vacated.”

The judge also says the $4.24 million award “bore no discernible relationship to the evidence. Even was the court to find the verdict of liability should stand, the court can perceive no way in which the jury’s damages award could withstand even passing scrutiny, regardless of the applicable standard of review.”

Two Home-Rule Charters Force Pennsylvania DEP To Commonwealth Court

WEXFORD, PA.–The Pennsylvania Department of Environmental Protection has injected itself into the issue of home-rule charters (HRCs) that prohibit oil and gas activity by approving permits for Class II disposal wells in Indiana and Elk counties, Pa., and challenging the HRCs of two townships that attempt to ban those wells.

The Pennsylvania Independent Oil & Gas Association says the DEP approved the permits in late March for Pennsylvania General Energy Co. (PGE) in Indiana County and for Seneca Resources Corp. in Elk County, Pa. On the same day, PIOGA reports, DEP filed challenges in Pennsylvania Commonwealth Court to the HRCs of Grant Township in Indiana County and of Highland Township in Elk County.

PIOGA says both PGE and Seneca are converting existing natural gas wells into wastewater disposal wells. Because of public concern about seismic activity related to underground injection, the association notes, DEP applied several special conditions to the permits. Those include installing a seismometer and continuous recorder at each site, and ordering the companies to submit tectonic seismic event contingency plans that include monitoring, reporting and mitigation provisions.

Because the two townships’ HRCs contain language intended to prevent DEP from authorizing injection wells and subjecting the agency to fines if it does, PIOGA continues, DEP also filed “complaints seeking declaratory and injunctive relief,” asking the Commonwealth Court to find the injection well provisions unconstitutional.

PIOGA recalls that both Highland and Grant townships initially adopted so-called community bill-of-rights ordinances developed by the Community Environmental Legal Defense Fund that prohibited disposing of oil- and gas-related wastes. After a new board of supervisors repealed Highland Township’s ordinance, PIOGA says, voters approved a home rule charter with the same provisions in 2016, which Seneca Resources challenged in federal court in November.

Grant Township adopted its HRC three weeks after a federal judge, ruling in a lawsuit brought by PGE, threw out portions of its similar ordinance in October 2015, PIOGA says. PGE continues to pursue recovery of damages and legal fees incurred as a result of Grant Township’s ordinance.

PIOGA notes that it is a party to the Grant Township lawsuit, and is directly challenging a local government’s ability to place its home rule authority superior to state and federal laws.

Oklahoma Judge Nixes Induced Seismicity Suit

OKLAHOMA CITY–A federal judge has dismissed a lawsuit against three oil companies seeking to limit the amount of produced water they may dispose of in Class II injection wells in Oklahoma, according to a report from the Texas Alliance of Energy Producers.

In February 2017, the Sierra Club and Public Justice filed the lawsuit in the U.S. District Court for the Western District of Oklahoma in Oklahoma City, contending that “waste from (fracturing) and oil production have contributed to an alarming increase in earthquake activity” (AOGR, March 2016, pg. 16). The lawsuit demanded the companies “reduce, immediately and substantially, the amounts of production waste they are injecting,” and also sought an order to establish an independent earthquake monitoring and prediction center to analyze wastewater volumes.

However, the Alliance cites an Associated Press report saying on April 11, Judge Stephen P. Friot ruled that such decisions were best left to the Oklahoma Corporation Commission, saying the state agency was better equipped than the judiciary to determine the “highly complex and technical issue” of how much disposed wastewater was acceptable to avoid seismic activity.

The Alliance notes that the lawsuit was filed under the Resource Conservation and Recovery Act, but Judge Friot found injection wells fell under the Safe Drinking Water Act, for which the U.S. Environmental Protection Agency had delegated enforcement authority to the OCC.

DOJ Seeks To Dismiss Pacific Fracturing Suit

LOS ANGELES–The Trump administration is urging the U.S. District Court for the Central District of California to dismiss litigation challenging hydraulic fracturing offshore California, the National Ocean Industries Association reports.

The Center for Biological Diversity and Wishtoyo Foundation sued the Department of the Interior, the Bureau of Ocean Energy Management, and the Bureau of Safety and Environmental Enforcement last November for authorizing offshore well stimulation without conducting an environmental impact assessment (AOGR, January 2017, pg. 19). The groups also contended that authorizing stimulation activities without consulting wildlife agencies violated the Endangered Species Act.

California Attorney General Kamala Harris and the California Coastal Commission filed a similar lawsuit in December.

In a motion filed in April, NOIA says, Justice Department attorneys representing DOI argue that a May 2016 finding of no significant impact from well stimulation treatments such as acidizing and hydraulic fracturing cannot be challenged in court because it isn’t a final agency action.

The DOJ also contends the ESA claims have no merit because Interior has not approved any well stimulations in the Pacific Ocean since the litigation began, NOIA adds.

5th Circuit Rules For Louisiana Industry In Coastal Erosion Case

BATON ROUGE, LA.–A local flood control agency has run out of options–save for the U.S. Supreme Court–to pin the cost of coastal erosion on the oil and gas industry, the Louisiana Oil & Gas Association reports.

LOGA says the U.S. Court of Appeals for the 5th District in April refused to hear en banc the Southeast Louisiana Flood Protection Authority-East’s claims.

“We are pleased with the court’s decision. This action throws cold water on litigation against Louisiana’s oil and gas industry,” says LOGA President Don Briggs in a statement released jointly with the Louisiana Mid-Continent Oil & Gas Association.

“These frivolous lawsuits have contributed to the litigious hell-hole we now find our state in,” Briggs says.

Adds LMOGA President Chris John, “As we have said from the beginning, these claims are meritless. I am gratified to see their options at the 5th Circuit are finished.”

The lawsuit goes back to July 2013, LOGA recalls, when SLFPA-E alleged in Louisiana state court that the activities of 97 exploration and production companies damaged coastal lands and “increased the risk of flooding (because of) storm surges, and necessitated costly flood protection measures.”

The case eventually was transferred to the U.S. District Court for the Eastern District of Louisiana, which ruled against SLFPA-E. In February 2015, Judge Nannette Jolivette Brown determined the companies could not be held responsible for such damages under the federal Rivers and Harbors Act, Clean Water Act, or the Coastal Zone Management Act (AOGR, March 2015, pg. 16).

A three-judge panel of the 5th District Court of Appeals upheld Brown’s ruling in March 2017 (AOGR, April 2017, pg. 17).