2012 oil and gas law update: the latest jurisprudence...

2012 Oil and Gas Law Update:

The Latest Jurisprudence, Legislation, and

Regulation

Sam Niebrugge

Davis Graham & Stubbs LLP

Denver, Colorado

September 17, 2012

Summary

• US Supreme Court– PPL Montana, LLC v. Montana

• Pennsylvania Supreme Court– T.W. Phillips Gas & Oil Co. v. Ann Jedlicka

• Texas Supreme Court– Tawes v. Barnes

• Colorado Oil and Gas Conservation Commission– Major amendment to Rule 318A for production from

Greater Wattenberg Area in D-J Basin

• Louisiana Legislature– Legislation passed addressing legacy litigation

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• Note: Case citations available upon request

Supreme Court – PPL Montana, LLC v. MontanaFacts

• PPL Montana, LLC (“PPL”) is a power company that operates hydroelectric facilities on three rivers in Montana:

– Madison

– Missouri

– Clark Fork

• For years, PPL paid rents to United States

• In 2003 citizens and State of Montana sued claiming rivers were navigable at statehood and therefore owned by the State

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• Map from Brief of the State of Montana before the United States Supreme Court

• Annotations and Arrows by Author

Missouri River

Madison River

Clark Fork River

Great Falls of the Missouri River

Water Flow

Thompson Falls of the

Clark Fork River

Supreme Court – PPL Montana, LLC v. MontanaGreat Falls of the Missouri River

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• “The Arrival of Captain Lewis at the Great Falls of the Missouri, June 13, 1805”. Painting by Charles Fritz.

Supreme Court – PPL Montana, LLC v. Montana Trial Court Ruling

• Rules on summary judgment

• Entire length of all three rivers navigable at

statehood

• State of Montana owns riverbeds

• PPL owed Montana $41 million in rent

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Supreme Court – PPL Montana, LLC v. MontanaMontana Supreme Court

• Affirms decision of trial court

• “Navigability for title purposes is very liberally construed”

• Segment-by-segment approach has “limited applicability”

• Some stretches non-navigable, but overland short interruptions are not fatal to overall determination

• Relied on present-day use (commercial fishing guides) for Madison River

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Supreme Court – PPL Montana, LLC v. MontanaUS Supreme Court – Legal Principles

• Upon statehood, states gain title to riverbeds

of then-navigable waters

• Test: Navigability in fact

– [When rivers are] . . . used, or are susceptible of

being used, in their ordinary condition, as

highways for commerce, over which trade and

travel are or may be conducted in the customary

modes of trade and travel on water

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Supreme Court – PPL Montana, LLC v. MontanaUS Supreme Court – Holding

• Montana improperly ignored segment-by-

segment approach

• Interruptions to navigability, no matter how

short, are material

• Important to determine exact point where

navigability starts and ends

• Physical condition of river substantially

different over long stretches

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Supreme Court – PPL Montana, LLC v. Montana US Supreme Court – Holding (cont’d.)

• Court makes factual a determination that the 17-mile Great Falls reach is not navigable

• Other stretches may not be navigable, but on remand the Montana courts are to decide

• Courts cannot rely on present-day use unless it informs the historical determination

• Two-part test for present-day use:– Watercraft meaningfully similar to those in use for

trade and travel

– River’s post-statehood condition is not materially different than statehood condition

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Supreme Court – PPL Montana, LLC v. Montana Forms of Use

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Lewis and Clark Replica Canoe Kayaker on Great Falls

Picture on Left: http://vulcan.wr.usgs.gov/LivingWith/Historical/LewisClark/volcanoes_lewis_clark_october_1805.html

Picture on Right: http://voices.washingtonpost.com/capitalweathergang/2009/10/going_over_great_falls_in_a_ka.html

Pennsylvania – T.W. Phillips v. JedlickaFacts

• Jedlicka is the current lessor of a 1928 lease; T.W.Phillips Gas & Oil Co. is the lessee

• Standard habendum clause:

– “ . . . two years , and as long thereafter as oil or gas is produced in paying quantities, or operations . . . are being conducted thereon . . . .”

• Continuous production from lease, but in 1959 the lessee suffered a $40 loss

• Lessor sues to terminate lease: No production in paying quantities!

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Pennsylvania – T.W. Phillips v. JedlickaProcedural History

• Trial court and appellate court both held in favor of T.W. Phillips (lessee)

• Both courts reasoned that under the 1899 decision in Young v. Forest Oil, Pennsylvania courts must give consideration to lessee’s good faith (subjective) judgment

• Lessor argument:

– Once the objective component (profit over expenses) fails, the court should look no further

– Strict one-year period for profitability

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Pennsylvania – T.W. Phillips v. JedlickaPennsylvania Supreme Court Holding

• PA Supreme Court affirms lower courts

• Pennsylvania applies a mostly subjectiveapproach to producing in paying quantities:– [I]f a well consistently pays a profit, however small,

over operating expenses, it will be deemed to have produced in paying quantities. Where, however, production on a well has been marginal or sporadic, such that, over some period, the well’s profits do not exceed its operating expenses, a determination of whether the well has produced in paying quantities requires consideration of the operator’s good faith judgment in maintaining operation of the well.

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Texas – Tawes v. BarnesFacts

• Moose and Tawes own

working interest in Baker

lease

• Dominion owns working

interest in Barnes lease

• Moose, Tawes, and

Dominion execute 1982

Model Form JOA

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Baker Barnes

Moose

Tawes

Dominion

Lease Lease

1982 JOA

WIUA

Texas – Tawes v. BarnesFacts (cont’d.)

• Dominion is the operator; Moose proposes new wells

• Dominion goes non-consent in well operation, so Moose takes over as operator

• Dominion goes bankrupt, but Barnes claims Dominion owes additional royalties

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Baker Barnes

Moose

Tawes

Dominion

Lease Lease

1982 JOA

WIUA

Texas – Tawes v. Barnes Plaintiff Argument

• Article VI.B.2 of 1982 JOA– Requires consenting

parties to pay royalties for non-consenting parties

• Barnes sued Tawes(Dominion and Moose settle) under JOA for unpaid royalties claiming that Barnes is:– (1) A third-party

beneficiary under JOA, or

– (2) In privity of estate with Tawes under JOA

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Baker Barnes

Moose

Tawes

Dominion

Lease Lease

1982 JOA

WIUA

Texas – Tawes v. BarnesHolding – No Third Party Beneficiary

• Customary intent of a JOA does not include an express benefit to the lessor: – We deduce from the oil and gas industry’s customary purpose

for using JOAs, and from the plain language of the JOA at issue here, that neither [the non-consenting party] nor [the consenting-party operator] include [Article VI.B.2 of the JOA] with the intention of directly benefitting any lessor of a [contract area] lease.

• Article VI.B.2 obligation of consenting party to pay royalties of non-consenting party is a generalized obligation that lacks the specificity required to find a third-party beneficiary contract

• Not determinative that the JOA lacks a waiver of a third-party beneficiary

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Texas – Tawes v. Barnes Holding – No Privity of Estate

• JOA makes clear that the parties do not intend

to cross-assign their interests in the contract

area.

• The non-consenting party owns a reversionary

interest after the well’s payout; the non-

consenting party does not permanently

convey its interest.

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Colorado – Amendments to Rule 318A

Rule 318A Introduction

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D-J Basin

Piceance Basin

San Juan BasinRaton Basin


Rule 318A Introduction (GWA Area)

• For the Greater Wattenberg Area (GWA), the

rule establishes special:

– well locations and

– drilling and spacing units

• GWA:

– All of Townships 2 South to 7 North and Ranges 61

West to 69 West, 6th P.M.

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Rule 318A Introduction

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D-J Basin

Piceance Basin

San Juan BasinRaton Basin

GWA

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Greeley

Longmont

Windsor

Ft. Lupton

Plateville


Rule 318A Introduction (Drilling Windows)

• Establishes specified surface drilling locations

to drill, twin, deepen, or recomplete:

– Square with 400 foot sides, the center of which is

the center of a quarter-quarter section

– Square with 800 foot sides, the center of which is

the center of a quarter section

• Absent showing of good cause or SUA, the

surface location must be inside GWA window

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Rule 318A Introduction (Drilling Windows)

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Rule 318A Introduction (Drilling Units)

• 400 foot window – If to

spaced formation,

operator shall designate

drilling unit in accordance

with existing orders

• Example –

– Order 407-1 for Codell;

Order 407-87 for Niobrara

– Establishes 80-acre spacing

units

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Rule 318A Introduction (Drilling Units)

• 800 foot window – Whether spaced or unspaced, Operator shall:– Designate drilling unit in

accordance with existing orders when units not smaller than quarter section;

– Form a voluntary unit consisting of quarter section;

– Seek waiver for smaller unit; or

– Apply to Commission to form alternate unit

• Example – Unspaced

– Form voluntary unit

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Rule 318A Introduction (Drilling Units Cont’d)

• GWA wells to unspacedformation:– For well located more than

460 feet from quarter-quarter section boundary, the Operator shall designate a unit not smaller than the quarter-quarter section in which well is located

• Example– Unspaced

– Wellbore greater than 460’ from section line

– Operator establishes 160-acre spacing unit

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>460'

>460'

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Rule 318A Introduction (Drilling Units Cont’d)

• GWA wells to unspacedformation:• For well located less than 460

feet from quarter-quarter section boundary, the Operator shall designate a wellbore spacing unit comprised of the governmental quarter-quarter sections less than 460 feet from wellbore, regardless of section line

• Example– Unspaced

– Wellbore less than 460’ from section line

2

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1

11

<460'

<460'

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Rule 318A.e. (Boundary and Infill)

• Establishes additional bottom-hole (interior

infill) and boundary locations for production

from J-Sand, Codell, and Niobrara formations

• Operators must directionally drill from

surface-window locations

• Requires water-well sampling before first infill

well drilled in section

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August 2011 Rulemaking

• Infill wells– Eliminates subset of GWA

– Infill rules will apply across GWA

• Water well sampling now applies across GWA

• Significant changes to notice and comment procedure in GWA

• Elimination of maximum 8 wellbore completions per quarter section

• Operator must submit a waste management plan with its Form 2A

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August 2011 Rulemaking

• Creates concept of a horizontal wellbore spacing unit– Designated by Operator

– Wellbore specific

– May be of different size depending on lateral length and orientation

– Spacing unit: Quarter-quarter sections in which wellbore penetrates and any quarter-quarter sections that are less than 460-feet from wellbore regardless of section or quarter-section line

– Spacing units may overlap

• No horizontal wellbore lateral can be less than 150’ from any existing wellbore

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Examples

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Picture from industry presentation to COGCC.

Available at: http://cogcc.state.co.us/rr_docs_new/GWA2011/GwaLand-2-20110808.pdf


Examples (cont’d.)

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Niobrara Development

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Green – Planned lateral

Red – Actual lateral


Rulemaking Announced on September 12, 2012

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• New Definition for Horizontal Well:

• Set for hearing on October 1, 2012

• Additional changes to 318A as it applies to Broomfield

Louisiana – New Legacy Litigation Law

Background

• Long history of oil and gas production in Louisiana

• Corbello v. Iowa Production (La. 2003):

– Supreme Court upholds jury verdict of $33 million against Shell Oil for contamination to $108,000 property

– Did not require landowners to actually spend money in remediation

• Landowners began to file suit seeking damages far in excess of value to property

• “Legacy litigation” because lawsuits generally based on activity that may have been decades ago

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New Law

• May 2012: House Bill 618 and Senate Bill 555

• House Bill 618

– Amends Louisiana Code of Civil Procedure

– Instructs courts on how to deal with a limited admission of liability in a legacy litigation lawsuit

• Senate Bill 555

– Amends La. Rev. Stat § 30:29 (oilfield remediation statute)

– Provides a procedural mechanism for handling legacy lawsuits

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New Law (cont’d.)

• The effective outcome of these two bills allow operators/defendants to: – Admit responsibility for the regulatory damage and

pay for remediation without taking on unlimited liability;

– Receive a pre-trial public hearing to develop a remediation plan in coordination with Louisiana agencies; and

– Admit that remediation plan as evidence at trial.

• Louisiana Governor Bobby Jindal signed both bills into law on June 12, 2012

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Additional Cases

• IBLA – Anadarko Petroleum Corp.

– Anadarko owed the USA royalties for captured oil sold from the Macondo well

• Colorado – Bledsoe Land Co. LLLP v. Forest Oil Corp.

– “Completion” is not ambiguous under continuous operations clause and means a well is capable of production

• North Dakota (Federal) – United States v. Brigham Oil & Gas L.P.

– No “takes” under MBTA for accidental bird deaths at reserve pit

• Texas – Exxon Corp. v. Emerald Oil & Gas Co.

– Plugging reports submitted to TRR can form basis of intent to induce element of a fraud

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Conclusion

• Questions?

– Email me at [email protected]

– Call me at 303-892-7433

• Thanks for listening!

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