Due to increased drilling activity in the Utica shale formation, state and federal courts in Ohio and the 6th Circuit have recently issued decisions related to local drilling regulations, drilling permits, leasing, indemnity provisions, and whether a landowner can state a strict liability claim against a drilling company that survives a motion to dismiss. While separate, future blog entries will discuss in more detail Ohio’s Dormant Mineral Rights Act and strict liability claims against fracking operations, the following post summarizes some recent developments in Ohio law that are relevant to the oil and gas industry. Continue Reading
Ahead of the November 4th vote that could make it the first city in Texas to ban hydraulic fracturing, the City of Denton has been sued by a group of royalty interest owners claiming that the city’s current temporary ban violates their property rights. As previously covered by the North America Shale Blog, on May 6, 2014, the Denton, Texas, city council enacted a drilling moratorium which prohibited the acceptance, receipt, processing, or approval of applications for gas well permits within the Denton city limits.
On September 29, 2014, Charles Chandler Davis filed suit in the 431st District Court of Denton County on behalf of his company, Arsenal Minerals and Royalty, NASA Energy Corp., and his son’s trust fund, claiming damages in excess of $1 million. The City of Denton has removed the suit to the United States District Court of the Eastern District of Texas. Davis’s suit alleges claims related to mineral takings, and states that prior to filing suit, Plaintiffs sought a “takings impact assessment”, which Plaintiffs allege the City should have conducted to determine the impact of the drilling moratorium.
Beyond the suit by Davis, various energy industry representatives have stated their intention, if the hydraulic fracturing ban passes, to file similar takings suits. At the July 15, 2014, meeting where the Denton City Council voted 5-2 to reject the proposed ban and set up the November 4th vote, Tom Phillips, a former chief justice of the Texas Supreme Court who is currently representing the Texas Oil & Gas Association, stated that “some members of [the Texas Oil and Gas Association] will undoubtedly sue.” Phillips also broadcast his belief that if citizens in Denton wish to ban hydraulic fracturing they should seek to do so at the state-wide, rather than municipal, level. “If they want Texas law to ban hydraulic fracturing, they should take their cause to the Texas Legislature. That is the only governing body in the state with the authority to grant the relief they seek.” Rep. Phil King, R-Weatherford, said the most likely action the legislature would take on the issue would be to outlaw cities from passing bans. “If it passes in Denton, I feel very confident that there will be legislation—in fact, I’ll probably file it myself—to prohibit cities from total bans on fracking,” he said.
Do you think that what you say when negotiating a mineral lease does not matter once the agreement is inked and contains boilerplate language declaring it to “supersede all prior negotiations” and “be the complete agreement between the parties”? Think again. The North Dakota Supreme Court recently reminded negotiators that what you say does matter and may allow for rescission of a lease.
This issue came before the North Dakota courts when Golden Eye Resources (“GER”) sought to quiet title in certain oil and gas leases in Williams County, leases that the mineral owners claimed had been cancelled. The minerals owners contend they made it clear at the outset of negotiations that they would only lease to a company which could drill and operate the wells itself. They also contend that GER made representations to this effect during negotiations and thus, despite being approached by another potential lessee offering more favorable financial terms, the mineral owners entered into leases with GER. Continue Reading
Bakken crude producers and midstream transportation companies already experience transportation woes related to inadequate pipeline infrastructure, railroad capacity, tank car supply, rail accidents, and new regulations. But they also increasingly face a new problem: lawsuits. In September alone, the Sierra Club, one of the largest environmental organizations in the United States, filed two lawsuits challenging different aspects of crude-by-rail transportation. First, on the national level, the Sierra Club seeks to stop the transportation of crude oil in allegedly outdated and unsafe tank cars. And second, at the state level, the Sierra Club accuses a local agency of illegally permitting a rail-to-truck facility.
The first lawsuit challenges the continued use of older DOT-111 tank cars, the tank car commonly used to transport Bakken crude oil.[i] On July 15, 2014, the Sierra Club and ForestEthics, through Earth Justice (collectively “petitioners”), petitioned the United States Department of Transportation (“DOT”), asking for an “emergency order prohibiting the shipment of Bakken crude oil in unsafe tank cars” (“Rail Car Petition”).[ii] The petitioners allege that shipping crude oil in these unsafe “legacy DOT-111” tank cars poses an “imminent hazard” requiring the immediate cessation of their use.[iii] Roughly a month after receiving the Rail Car Petition, the DOT, through the Pipeline and Hazardous Materials Administration and the Federal Railroad Administration, issued a proposed rule that addresses many of these concerns.[iv] Continue Reading
The U.S. shale boom has generated a boom in a related industry: “frac sand.” Sand has become an integral component of hydraulic fracturing. Oil companies use sand as a “proppant”: after shale formations are injected with water and chemicals, the proppant keeps the newly formed cracks open to allow natural gas or crude oil to escape more easily.
Hydraulic fracturing requires a special kind of sand, which is most commonly found in Wisconsin. This so-called “frac sand” is high quality quartz, which is highly resilient and has spherical grains. It is crush-resistant, and can withstand pressures between 6,000 and 14,000 pounds per square inch. A spike in the demand for frac sand has motivated other states to start producing sand. According to most experts, the best rock units to produce frac sand are the St. Peter Sandstone, Jordan Sandstone, Oil Creek Sandstone and Hickory Sandstone. Wisconsin and Minnesota are the biggest players currently, and have a total of 164 active frac sand facilities, and another 20 that have been proposed. Continue Reading
Conducting commercial operations on tribal lands can pose significant challenges for non-Indian companies. Demonstrating sensitivity to the cultural nuances of Native American society and navigating the complex web of federal and tribal regulations applicable to Indian Country requires expertise and invariably adds time and costs to projects. Among the more difficult aspects of operating on tribal lands is managing compliance with applicable tribal preference requirements. These requirements, often expressed through a Tribal Employment Rights Ordinance (“TERO”), require commercial entities doing business in Indian Country to give preference to tribal members and member-owned businesses when making employment and contracting decisions in association with projects conducted on Indian lands.
Although TERO laws are common on Indian reservations around the country, some commentators have questioned the enforceability of TERO provisions, arguing that the preference requirements represent impermissible discrimination on the basis of national origin, a practice that Title VII of the Civil Rights Act of 1964 prohibits. On September 26, 2014, the United States Court of Appeals for the Ninth Circuit became the first federal appellate court to address the merits of this question. In EEOC v. Peabody Western Coal Co., the Ninth Circuit upheld the validity of Navajo hiring preferences in coal leases issued to private companies on the Navajo Nation’s Reservation. In reaching its result, the Ninth Circuit concluded that the Navajo hiring preference in the leases represented a political classification, rather than a classification based on national origin, and therefore did not violate Title VII. While the question remains open in other circuits, most notably in the Eighth and Tenth Circuits (where significant private mineral development is occurring on tribal lands), the decision in Peabody Western is likely to be influential in how tribes apply, and courts interpret, tribal TERO requirements in the future. Continue Reading
On September 15, 2014, the New Mexico Supreme Court entered a decision in First Baptist Church of Roswell v. Yates Petroleum Corp., a case that could call into question the validity of royalty agreements and division orders throughout New Mexico and that will have broad implications for how New Mexico operators draft and negotiate such agreements in the future. In rejecting a contractual provision that allowed an operator to withhold interest payments on monies held in suspense, the state supreme court articulated a strong state policy in favor of royalty interest holders, elevating that policy over private parties’ freedom to contract in oil and gas transactions.
The New Mexico Oil and Gas Proceeds Act ( “OGPA”), N.M. Stat. Ann. §§ 70-10-1 to -6, requires that royalty payments on oil and gas production be paid to royalty interest owners within six months after the first sale of oil and gas from the well. The Act also provides that, in instances where payments cannot be made within the six-month period because, among other reasons, there is a delay in determining who is legally entitled to receive the payments, the royalty payor shall place royalty proceeds in a suspense fund until the proper recipient of royalties is determined. Once the proper payee is determined, the Act directs that “[t]he person entitled to payment from the suspended funds shall be entitled to interest on the suspended funds from the date payment is due.”
Labor groups and members of the oil and gas industry have joined together in calling for the overhaul of recently proposed rules governing fracking in the state. The pro-fracking coalition, known as Grow-IL, argues that the revised regulations, which the Illinois Department of Natural Resources (“IDNR”) released on August 29, significantly deviate from the hydraulic fracturing law the Illinois General Assembly passed last year.
Industry representatives contend the IDNR is seeking to impose more burdensome certification and drilling standards than permitted under the state law. Mark Denzler, Vice President of the Illinois Manufactures’ Association, criticized the new rules: “We were very hopeful that the rules would simply implement the law, not expand or contract a law that was very carefully negotiated over three years.”
Among the many concerns of fracking supporters are new permitting requirements, which some fear could dissuade oil and gas developers from applying to operate within the state. For instance, the state law requires all companies to conduct water testing before obtaining a drilling permit. But according to fracking proponents, the new rules empower landowners to block a permit’s issuance simply by refusing to allow a driller to conduct such testing on their property.
Grow-IL has requested that Illinois’s Joint Committee on Administrative Rules—the legislative body charged with reviewing administrative rules promulgated by state agencies—revise the IDNR’s regulations. The group also submitted comments, highlighting more than sixty-five issues with the rules as drafted. The committee has until November 15 to approve or reject the fracking standards.
Members of the coalition believe instituting rules that encourage new fracking operations could spur job growth in the state and generate much needed tax revenue. According to Michael Carrigan, President of the Illinois AFL-CIO, “We’re not talking about just a few jobs at stake: We are projecting up to 47,000 new jobs, and those positions will fill a massive void of opportunity in Southern Illinois.”
The United States Fish & Wildlife Service (“FWS”) has announced an intention to revise the scope of the agency’s Mexican Wolf Recovery Program, significantly expanding the geographic area within southern Arizona and New Mexico that Mexican wolves will be permitted to occupy. If finalized, FWS’ proposal would open large areas of mineral-rich territory in southeastern New Mexico to wolf occupation, potentially subjecting oil and gas operators (as well as other landholders and private stakeholders) to development restrictions under the Endangered Species Act.
The Mexican wolf, also known has the Mexican Gray Wolf, was first listed as an endangered species in 1978. Since 1998, FWS has reintroduced captive-bred Mexican wolves into the wild and managed the released population under a rule that designates the domestic wolf-population as “Nonessential, Experimental.” The 1998 rule designates two principle areas for wolf-management: (i) the Blue Range Wolf Recovery Area (“BRWRA”), an area that consists of all of the Apache and Gila National Forests, stretching across the border between Arizona and New Mexico; and (ii) the Mexican Wolf Experimental Population Area (“MWEPA”), an area encompassing most of Arizona and New Mexico south of Interstate 40, where suitable wolf habitat might potentially exist. Under the 1998 rule, Mexican wolves have been released into specific sub-areas of the BRWRA and then confined to BRWRA; wolves that disperse and establish territories wholly outside out of the BRWRA have been captured and translocated back into the recovery area or taken back into captivity. Continue Reading
On September 3, Nova Scotia’s government announced that it will indefinitely ban high volume hydraulic fracturing onshore. According to Energy Minister Andrew Younger, “Nova Scotians have overwhelmingly expressed concern about allowing high volume hydraulic fracturing to be a part of onshore shale development in this province at this time.” The government will introduce legislation this fall.
Before making its decision, the government of Nova Scotia commissioned the Verschuren Centre for Sustainability in Energy and the Environment at Cape Breton University to conduct an independent study and 10-month comment period on the socio-economic impacts of hydraulic fracturing. Dr. David Wheeler, President of Cape Breton University, led the study. The nearly 400-page final report, released on August 28, 2014, recommended that “Nova Scotia should design and recognize the test of a community permission to proceed before exploration occurs for the purpose of using hydraulic fracturing in the development of unconventional gas and oil resources.”
The government also received input from Mi’kmaq communities, indigenous to Canada’s Maritime provinces, including Nova Scotia. The Mi’kmaq have aboriginal, treaty and statutory rights that the government has to consider. According to the report, “if the Mi’kmaq people possess Aboriginal title rights over portions of Nova Scotia where there is subsurface unconventional gas, unless an exceptional justification test is met, the Mi’kmaq have the right to decide whether that gas will be exploited.” The Mi’kmaq have expressed support for the ban.
Environmental groups are also pleased with the government’s announcement, but the decision to ban high volume hydraulic fracturing has drawn criticism from groups such as the Canadian Association of Petroleum Producers (“CAPP”). Dave Collyer, president and CEO of CAPP, was disappointed in the decision, stating, “the government’s decision appears to be largely based on considerations other than the technical knowledge and experience of industry regulators and experts in Canadian jurisdictions.” While noting the viability of Nova Scotia’s onshore natural gas is not yet proven, Collyer fears that the government’s decision may “preclude Nova Scotians from benefitting from the responsible development” of hydraulic fracturing.
Additional media coverage can be found at the links below: