Chapter 13 Oil and Gas Law Update - EMLF 13 Oil and Gas Law Update ... noted that the implied duty to restore the surface in all oil and gas leases also played a role in this case

Chapter 13

Oil and Gas Law UpdateBy Bradley J. Martineau1

Lambert & MartineauIndiana, Pennsylvania

Synopsis

§ 13.01. Introduction ............................................................................... 381§ 13.02. State Case Law Update — States ............................................ 381

[1] — Alabama ................................................................................ 381[a] — CERCLA Petroleum Exclusion ............................... 381

[2] — Arkansas ............................................................................... 382[a] — Declaratory Judgment – Indemnification

of Former and Original Operators ............................ 382[3] — California .............................................................................. 383

[a] — Alleged Breach of Oil and Gas JointOperating Agreement ................................................ 383

[4] — Colorado ............................................................................... 384[a] — Property Tax — Valuation of Oil Leaseholds .......... 384[b] — Board of Commissioner’s Standing

to Regulate Oil and Gas Industry ............................. 384[c] — Declaratory Relief — Extent of Oil Company’s

Proposed Future Operations ..................................... 385[d] — Lease – Covenant of Reasonable Development ...... 385[e] — Coalbed Methane Royalty Payments

and Deduction of Certain Processing Costs ............. 386[5] — District of Columbia ............................................................. 387

[a] — Royalties ................................................................... 387[b] — Coalbed Methane — Royalty Payments

Under Federal Oil and Gas Leases ........................... 388[6] — Florida. ................................................................................. 389

[a] — Eminent Domain — Quick-Take Provision ............. 389[7] — Georgia ................................................................................. 389

[a] — Oil Discharge ............................................................ 389[b] — Contract Royalty Dispute —

Statute of Limitations ................................................ 390

1 Mr. Martineau’s primary area of practice is oil and gas law.

CITE AS25 Energy & Min. L. Inst. ch. 13 (2005)

ENERGY & MINERAL LAW INSTITUTE

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[8] — Iowa .................................................................................... 391[a] — Unconstitutional Pipeline State Laws

and Regulations ..................................................... 391[9] — Illinois. .................................................................................. 391

[a] — Antitrust – Rate Charges ........................................ 391[b] — Lease Termination Due to Nonproduction ............ 392

[10] — Kansas ................................................................................ 393[a] — Royalty Interest – Breach of Contract ..................... 393[b] — Oil and Gas Lease – Habendum Clause .................. 393[c] — Breach of Agreement to Repurchase Oil

and Gas Interests ....................................................... 394[d] — Farmout Agreement – Assigning Operating

Rights and Working Interest ..................................... 395[e] — Operating Agreement ............................................... 396

[11] — Kentucky ............................................................................. 397[a] — Abandonment of Natural Gas Leases ...................... 397

[12] — Louisiana ............................................................................ 397[a] — Trespass – Expired Surface Lease ........................... 397[b] — Designation of Operator of Wells

with Working Interests .............................................. 398[c] — Reassignment Clause – Breach of Contract ............ 399[d] — Lease Expiration and Royalty Dispute .................... 400[e] — Gas Purchase Contracts – Release or

Discharge of Original Owner .................................... 400[f] — Restoration of the Surface ........................................ 401[g] — Recission of a Joint Venture Agreement ................. 402

[13] — Maryland ............................................................................ 402[a] — Implied Reservation – Access to Surface

of Property for Mining .............................................. 402[14] — Massachusetts ..................................................................... 403

[a] — Oil Contamination ................................................... 403[15] — Michigan ............................................................................. 404

[a] — Lease – Scope of Drilling Operation ....................... 404[b] — Constructing and Operating Pipeline

in Right-of-Way ........................................................ 404[c] — Right-of-Way Agreement – Injunction

to Enjoin Landowners from Obstructing .................. 405[16] — Montana .............................................................................. 406

[a] — Declaratory Judgment – Seeking to ConfirmValidity of Oil and Gas Leases ................................. 406

SYNOPSIS

379

OIL AND GAS LAW UPDATE

[b] — Coalbed Methane – Declaratory ReliefUnder Federal Laws .................................................. 407

[c] — Eminent Domain – Easement to Drilland Operate Oil Wells ............................................... 407

[17] — New Mexico ....................................................................... 408[a] — Termination of Oil and Gas Lease –

Failure to Tender Shut-In Royalties .......................... 408[b] — Natural Gas Processor’s Tax –

Removal of Carbon Dioxide ..................................... 409[c] — Gathering Line Easements –

Determination of Value ............................................. 409[d] — Release Clause – Salt Water Disposal ..................... 410

[18] — New York ............................................................................ 411[a] — Security Interest in Oil and Gas Production ............ 411[b] — Working Interest – Allocation

of Production Revenues ............................................ 411[c] — Oil Spill Act – Cleanup and Removal Costs ........... 412

[19] — Oklahoma ........................................................................... 412[a] — Joint Operating Agreement – Permissible

Number of Operators Under the Agreement ............ 412[b] — Quiet Title Action – Oil and Gas Leases ................. 413

[20] — Pennsylvania ....................................................................... 413[a] — Oil and Gas Lease – Termination Lease

Below Gas Storage Zone .......................................... 413[b] — Defective Product – Natural Gas ............................. 414[c] — Coalbed Methane – Pending Tax Case –

Taxing CBM as Real Estate ...................................... 415[21] — Texas ................................................................................... 415

[a] — Tax – Depletion Deduction ...................................... 415[b] — Nuisance Claim ........................................................ 416[c] — Drilling – Spacing and Density ................................ 417[d] — Duty to Develop Mineral Estate –

Geological Seismic Data = Trade Secrets ................ 417[e] — No Right to Review Field Rules .............................. 418[f] — Effective Date of Pooling ......................................... 419[g] — Fiduciary Duty to Cotenant – “Duty of Utmost

Good Faith” ............................................................... 419[h] — Declaratory Judgment – Termination

of Oil and Gas Lease ................................................. 420[i] — Declaratory Judgment – Gas Unit Designation ........ 421

SYNOPSIS


380

[j] — Declaratory Judgment – Operator of Oiland Gas Unit ........................................................... 422

[k] — Breach of Implied and Express CovenantsUnder Oil, Gas and Mineral Leases ....................... 422

[l] — Partition by Sale ..................................................... 423[m] — Well Producing in Paying Quantities

or Lease Terminated ................................................ 423[n] — Trespass and Negligence Action Against

Oil and Gas Lessee for Drilling Horizontal ........... 424[o] — Breach of Oil and Gas Operating Agreements ...... 425[p] — Declaratory Judgment – Alleging Cashout

Imbalance Payment Provisions AreUnenforceable for Failure to Timely Invoice ......... 425

[q] — No Trespass – Conducting Three-DimensionalSeismic Surveys Without a Permit ......................... 426

[22] — Utah. ................................................................................... 427[a] — Severance Taxes ....................................................... 427[b] — Plugging and Abandoning Wells ............................. 427

[23] — Virginia ............................................................................... 428[a] — Coalbed Methane – Surface Owners

vs. Coal Owners Claiming Rights to CBM .............. 428[24] — West Virginia ...................................................................... 428

[a] — Lease – Coalbed Methane Rights ............................ 428[b] — Tax Credit – Gas Storage ......................................... 429

[25] — Wyoming ............................................................................ 429[a] — Severance Tax – Volumetric Production

Payment Agreement .................................................. 429[b] — Oil and Gas Anti-Indemnity Statute ........................ 439[c] — Coalbed Methane – Quiet Title Action .................... 430

§ 13.03. State Case Law Update – U. S. Court of Appeals ..................... 431[1] — Fourth Circuit ....................................................................... 431

[a] — Declaratory Judgment – Breach of MasterNatural Gas Purchase Agreement ............................. 431

[b] — Gas Company Condemnation – NaturalGas Act ...................................................................... 432

[2] — Fifth Circuit .......................................................................... 432[a] — EPA Approval to Use Pre-Existing Pipeline

with No Environmental Impact Statement ............... 432[3] — Sixth Circuit ......................................................................... 433

[a] — Expedited Seven-Year Taxation DepreciationSchedule – “Gathering Pipeline” .............................. 433

SYNOPSIS

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[b] — Gas Lease Allegedly Breached byConstructing a Fence Within 30 Feet of Well .......... 434

[4] — Seventh Circuit ..................................................................... 434[a] — Antitrust Violations Under Sherman Act

by Natural Gas Suppliers .......................................... 434[5] — Eighth Circuit ....................................................................... 435

[a] — Pipeline Systems – Production Assetsor Transportation Assets for Tax Depreciation ........ 433

[6] — Ninth Circuit ......................................................................... 436[a] — Coalbed Methane – Discharge of Groundwater

Violating Clean Water Act ........................................ 436§ 13.04. Conclusion .................................................................................... 437§ 13.05. Addendum: Statutory Update .................................................... 437

§ 13.01. Introduction.This chapter was prepared so that it will serve as a quick reference tool

for the oil and gas law practitioner as to this past year’s decisions andstatutory changes. Although this chapter covers a broad spectrum of legalissues in the oil and gas field, one of the most significant movements in theindustry over the past year is the coalbed methane (CBM) issue, which isarising more and more all over the United States. After a review of thecases and statutory changes, a number of states have dealt with this issuehead-on, while others have attempted to side-step the CBM issue for now.

This chapter will first briefly summarize the significant state and federalcase law decisions over the past year. Second, the chapter will provide abrief outline of the major state and federal statutory additions andamendments that went into effect over the past year.

§ 13.02. State Case Law Update. [1] — Alabama.

[a] — CERCLA Petroleum Exclusion.In Morgan v. Exxon Corp.,2 the surface owners brought an action

against oil operators alleging that the companies willfully, wantonly,recklessly and negligently caused their real and personal property to become

§ 13.01

2 Morgan v. Exxon Corp., 869 So. 2d 446, 447 (Ala. 2003).


382

contaminated by salt water, oil and grease, heavy metals and other harmfuland hazardous substances from operations in the 1960s and early 1970s.On appeal from the trial court granting summary judgment in favor of thecompanies, the surface owners contended that the trial court erred in holdingthat their claims were barred by Alabama’s rule of repose and instead theyclaimed that rule was preempted by 42 U.S.C. Section 9658(a)(1)(2004),the Comprehensive Environmental Response, Compensation & LiabilityAct (CERCLA).3

Alabama’s rule of repose bars any claim after twenty-years has passedfrom the moment that the actions giving rise to the claim occurred.4 Whereasunder CERCLA, “‘the federal required commencement date’ (FRCD) isdefined ‘as the date the plaintiff knew (or reasonably should have known)that the personal injury or property damages referred to in subsection (a)(1)of this section were caused or contributed to by the hazardous substance orpollutant or contaminant concerned.’”5 The court explained that if theFRCD applied here, then the surface owners “must prove that the allegedlytoxic materials fall within CERCLA’s definition of actionable substances”and thus outside of the “petroleum exclusion.”6

The court affirmed the trial court’s entry of summary judgment andheld that the surface owners failed to present substantial evidence of anelement of section 9658 and thus the FCRD did not apply to their claims.7

[2] — Arkansas.[a] — Declaratory Judgment – Indemnification of

Former and Original Operators.In Chevron U.S.A. Inc. v. Murphy Exploration & Prod. Co.,8 a former

operator sought declaratory judgment that it was not required to indemnify

3 Id. at 448.4 Id.5 Id. at 449 (quoting 42 U.S.C. § 9658 (b)(4)(A) (2004)).6 Id. at 452.7 Id.8 Chevron U.S.A. Inc. v. Murphy Exploration & Prod. Co., 151 S.W.3d 306 (Ark.

2004).

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the original operator in a pending litigation brought against the currentoperator and original operator (three operators all together). In the pendinglitigation, the surface owners of a 40-acre tract were asserting claims ofpollution and contamination against the operators as a result of the storageand transportation of hazardous substances.9

As between the original, former and current operator, there were twosales agreements covering the sale and assignment of their oil and gas leaseinterests and both contained similar indemnification clauses.10 The courtnoted that the implied duty to restore the surface in all oil and gas leasesalso played a role in this case.11 The court explained that indemnificationlanguage must be unequivocal and clear and that the intention of the partiesmust be expressed in plain words.12 Ultimately, the court held that theformer operator had, in fact, assumed the risk of the environmentalconditions because of the indemnification clause and the implied duty torestore the surface.13 However, the court held that the current operatormust also indemnify the former operator for the same reasons.14

[3] — California.[a] — Alleged Breach of Oil and Gas Joint

Operating Agreement.In Armstrong Petroleum Corp. v. Tri-Valley Oil & Gas Co.,15 the court

sua sponte defined popular terminology used in oil and gas cases, such as“working interest owner,” “working interest,” “operator,” etc. In Armstrong,the court was faced with two oil and gas companies, the operator and thenonoperator, as to their respective rights and obligations under a joint

9 Id. at 306.10 Id. at 307.11 Id. at 308.12 Id.13 Id. at 309.14 Id. at 340.15 Armstrong Petroleum Corp. v. Tri-Valley Oil & Gas Co., 11 Cal. Rptr. 3d 412, 415-

16 (Cal. Ct. App. 2004).

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operating agreement that they entered into in 1994.16 The court held thatthe monthly payments and deliveries made to the nonoperator for its netrevenue interest in oil and gas production were divisible from one anotherand, therefore, the claims relating to monthly performance occurring withinfour years of the time of filing the complaint were timely.17

[4] — Colorado.[a] — Property Tax – Valuation of Oil Leaseholds.

In Petron Dev. Co. v. Washington County Bd. of Equalization,18 theoperator argued that the Assessment Board erred by valuing the oilleaseholds at the amount received for the oil at a downstream point of salewithout deducting costs of gathering, transporting, manufacturing, andprocessing the oil. The court agreed with the operator and held that underthe Colorado statute the proper valuation was at the wellhead because thevaluation was required to be based upon the “unprocessed material.”19

[b] — Board of Commissioner’s Standing toRegulate Oil and Gas Industry.

In Board of County Comm’rs of LaPlata Co. v. Colorado Oil & GasConservation Comm’n,20 the court held that the boards of countycommissioners had standing as they had statutory authority to regulate landuse and development within their respective jurisdictions. As to thesubstantive underlying issue, the court held that the ConservationCommission’s amendment of a rule preempted local government actionsbeyond those that materially impeded or destroyed the state interest.21

§ 13.02

16 Id. at 418-19.17 Id. at 415.18 Petron Dev. Co. v. Washington County Bd. of Equalization, 91 P.3d 408, 410 (Colo.

Ct. App. 2003).19 Id. at 414.20 Board of County Comm’rs of LaPlata Co. v. Colorado Oil & Gas Conservation

Comm’n, 81 P.3d 1119, 1124 (Colo. Ct. App. 2003).21 Id. at 1125.

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Consequently, the court explained that that amendment “eroded the delicatebalance between local interests and state interests” established by theColorado Supreme Court.22

[c] — Declaratory Relief – Extent of OilCompany’s Proposed Future Operations.

In Burkett v. Amoco Prod. Co.,23 the surface owners sought declaratoryrelief as to the operator’s sites for proposed gas wells. The surface ownerscontended that they had the right to select the reasonable location of theoperator’s proposed wells, roads, pipelines, and other facilities and that theoperator must utilize their selections in any application it filed for a permitto drill.24 The court explained that the operator’s right to use the surfacewas limited to what is reasonable and necessary to develop the mineralestate.25 The court refused to rule on the declaratory judgment becausethe operator had not yet obtained the permit and local approvals requiredbefore drilling could begin and thus the court held that no conflict currentlyexisted between the parties that needed to be resolved.26

[d] — Lease – Covenant of ReasonableDevelopment.

In Whitham Farms, LLC v. Longmont,27 the lessors argued that it wasnot economically prudent for the lessees to develop oil and gas reservesand therefore the lessees breached the covenant of reasonable development.The lessees agreed with the lessors that it was not economically prudent todevelop the oil and gas reserves, but the lessees argued that this did notamount to a breach of the covenant of reasonable development of oil andgas leases.28 It is important to note that a pooling agreement had been

§ 13.02

22 Id. at 1125.23 Burkett v. Amoco Prod. Co., 85 P.3d 576, 578 (Colo. Ct. App. 2003).24 Id. at 579.25 Id. at 579.26 Id.27 Whitham Farms, LLC v. Longmont, 97 P.3d 135 (Colo. Ct. App. 2003).28 Id. at 135.


386

entered into between the lessor and lessees that pooled the three leases intoone single unit.29

The court explained that if it were possible to develop known resourcesprofitably and the lessee failed to act diligently, then the lessee had breachedthe implied covenant of reasonable development.30 The court furtherexplained that the lessee’s actions or inactions must be assessed under the“prudent operator standard.”31 The court noted, however, that a lessee maynot retain a lease based upon poor potential and pure speculation.32 Thecourt held that “marginal production” from a single well was sufficient tohold the entire unit and therefore fulfilled the implied covenant of reasonabledevelopment as to the whole unitized area.33

[e] — Coalbed Methane Royalty Payments andDeduction of Certain Processing Costs.

In Parry v. Amoco Prod. Co.,34 the plaintiffs, a class of royalty ownersof the coalbed methane (CBM) rights, brought an action against Amocofor wrongfully deducting gathering, treating, and compression (GTC) costsfrom their royalty payments. The issue was whether coalbed methane wasmarketable at the well prior to GTC or only after these processes had beencompleted.35 The court explained that the implied covenant to marketobligated the lessees to incur costs necessary to render the gas marketable.36

In determining when the gas was marketable, the court considered twofactors.37

First, the court looked at the “marketable condition” of the gas or thephysical condition where the gas was acceptable to be bought and sold in

29 Id. at 140.30 Id. at *136.31 Id.32 Id. at 138.33 Id. at 140.34 Parry v. Amoco Prod. Co., 2003 WL 23306663, *1 (D. Colo. 2003).35 Id. at *1.36 Id. at *8.37 Id. at *1.

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the commercial marketplace.38 Second, the court assessed the location orcommercial marketplace where the gas was commercially saleable.39 Thecourt applied the “first marketable product rule” as a guide in analyzing themarketability of the CBM.40 Although a single sale was not conclusive,the court noted that evidence of sales tends to indicate marketability.41

The court stated that the reasonable and additional costs to improve ortransport coalbed methane must be shared proportionally.42 Ultimately,the court held that CBM is only marketable after gathering, treating, andcompression and delivery to the inlet for the interstate pipeline and thusthe GTC costs were properly deducted.43 The court also held that the rateof return on equity capital and the actual interest paid on borrowed fundswere also reasonable costs that could be deducted.44 However, the courtheld that capital improvement costs not actually incurred by Amoco werenot properly deductible.45

[5] — District of Columbia. [a] — Royalties.

In Chevron v. U.S. Dep’t of Interior,46 Chevron leased federal landsfor mineral extraction and had to pay royalties to the Department of Interioron the minerals taken from the land. When gas prices dropped below thecontract prices, Chevron entered into negotiations with the Department ofInterior and negotiated settlements on the contracts.47 Although at the time

38 Id. at *9.39 Id.40 Id.41 Id. at *12.42 Id.43 Id. at *19.44 Id. at *20.45 Id.46 Chevron v. U.S. Dep’t of Interior, 254 F. Supp. 2d 107, 109 (D. D.C. 2003).47 Id. at 110.

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388

the settlements were reached Chevron was not producing any gas, theDepartment still wanted to collect royalties on the settlements.48

Gas was later produced by Chevron and then purchased at a reducedprice.49 The court held that the buy-down settlement payment transformedinto a payment for the gas that was now being produced.50 Thus, when thegas was produced and sold to purchasers at a reduced price, the portion ofthe settlement payment attributable to obtaining the reduced price in effectbecame a royalty.51 The court held that no royalties were due on thesettlements.52

[b] — Coalbed Methane – Royalty Payments UnderFederal Oil and Gas Leases

Amoco Prod. Co. v. Baca53 involved federal oil and gas leases andwhat amount of royalties were due on the production of coalbed methane(CBM). The court held that coalbed methane was not in “marketablecondition” at the wellhead since carbon dioxide must still be removed.54

Instead, the court held that royalty payments were properly based on CBMsales at the tailgate of the conditioning and treatment plant, the first pointafter the carbon dioxide had been removed.55

In applying the marketable condition rule, the court explained that thelessees must bear the cost to place coalbed methane gas in marketablecondition.56 The court also held that the cost of transporting from thewellhead to the conditioning facility when the CMB contained more thantwo percent carbon dioxide (interstate pipeline guidelines require that order

48 Id. at 109.49 Id. at 114.50 Id.51 Id. at 115.52 Id. at 114.53 Amoco Prod. Co. v. Baca, 300 F. Supp. 2d 1, 3 (D. D.C. 2003).54 Id. at 12.55 Id.56 Id. at 13.

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for coalbed methane gas to be marketable, it must contain two percent orless carbon dioxide) was in fact a marketing cost and thus could not bededucted as a transportation cost.57

[6] — Florida.[a] — Eminent Domain – Quick-Take Provision.

In Pichowski v. Florida Gas Transmission Co.,58 the court held thatthe gas company was not entitled to the quick-take provision of Florida’seminent domain statute for public utilities. The court reasoned that the gascompany did not supply the public with natural gas (not devoted to publicuse) since it only transported natural gas to industrial customers and madeno retail sales to the public.59 Thus, the court reversed previous ordersallowing the gas company to take possession of and title to properties beforethe entry of final judgment in the eminent domain proceedings.60

[7] — Georgia.[a] — Oil Discharge.

In United States v. Jones,61 the defendants owned an oil processingfacility. Oil had pooled on the ground and some had even flowed off thesite and into a storm drain on the street.62 The court explained that thedefendants were required to comply with the Clean Water Act and The OilPollution Act.63 The Act64 allows the government or the EPA to holdresponsible parties strictly liable for discharges, and requires the responsibleparty to initiate removal operations to clean up any discharge of oil.65 If

§ 13.02

57 Id.58 Pichowski v. Florida Gas Transmission Co., 857 So. 2d 219, 222 (Fla. Dist. Ct. App.

2003).59 Id. at 222.60 Id. at 223.61 United States v. Jones, 267 F. Supp. 2d 1349, 1352 (M.D. Ga. 2003).62 Id. at 1352-53.63 Id. at 1364.64 33 U.S.C.A. §§ 2701-2720.65 Jones, 267 F. Supp. 2d at 1351.


390

the party cannot or will not clean up the discharge, the Oil Pollution Actprovides that the government can initiate the removal using funds from atrust created by the Act and then seek reimbursement.66

Under the Act, a “Facility” is “any structure, group of structures,equipment, or device . . . which is used for producing, handling, transferring,processing, or transporting oil.”67 A “Responsible Party” is “any personowning or operating the facility.”68 An “Operator” is “someone who directsthe workings of, manages, or conducts the affairs of the facility.”69

The court granted the government’s summary judgment motion on itsclaim to recover costs associated with the oil facility cleanup.70

[b] — Contract Royalty Dispute – Statute ofLimitations.

In ABF Capital Corp. v. Yancey,71 one member of an operatingpartnership became personally liable on a portion of the royalty payments,but failed to pay, thus prompting a contract suit. The partner was able toobtain summary judgment based on the four-year statute of limitations underthe Uniform Commercial Code (UCC), which applies to contracts for thesale of goods.72

On appeal, however, the court held that the six-year statute of limitationsfor contracts applied instead of the UCC statute of limitations because thecontract at issue did not obligate the buying or selling of oil or gas and nosales were contemplated by the parties.73 Instead, the court explained thatthe contract involved the conveyances of leasehold interests in the realproperty.74

66 Id. at 1351-52.67 Id. at 1353 (alteration in original).68 Id. at 1353.69 Id.70 Jones, 267 F. Supp. 2d at 1364.71 ABF Capital Corp. v. Yancey, 592 S.E.2d 492, 493 (Ga. Ct. App. 2003).72 Id. at 493.73 Id. at 496.74 Id.

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[8] — Iowa.[a] — Unconstitutional Pipeline State Laws and

Regulations.In Northern Natural Gas Co. v. Munns,75 the gas companies alleged

that the relevant state laws and regulations, Iowa Code chapter 479A and199 Iowa Administrative Code chapters 9 and 12, relating to natural gaspipelines and land restoration, violated the Supremacy Clause. The courtdetermined that Iowa Code Sections 479A.24 and 479A.27 did in fact violatethe Contract Clause because they substantially impaired the gas companies’existing contracts.76

The court held that these state laws and regulations wereunconstitutional because they encroached upon the field of interstate gaspipeline regulation and conflicted with the federal regulations.77 The courtexplained that Congress has occupied the field of interstate gas pipelineregulation, including the area of land maintenance and restorationstandards.78

[9] — Illinois.[a] — Antitrust – Rate Charges.

In Green v. Peoples Energy Corp.,79 a class action lawsuit was filedby customers of gas companies and their holding companies for allegedlyviolating the Sherman Act and Clayton Act. The gas companies charged amonthly rental fee for the gas meters, but did not disclose it as a rental feeby including it in a customer charge.80 The customers argued that charginga monthly rental fee for natural gas meters amounted to an illegal tyingarrangement.81

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75 Northern Natural Gas Co. v. Munns, 254 F. Supp. 2d 1103, 1105 (S.D. Iowa 2003).76 Id. at 1115.77 Id. at 1112.78 Id. at 1110.79 Green v. Peoples Energy Corp., 2003 WL 1712566, *1 (N.D. Ill. 2003).80 Id. at *1.81 Id. at *2.


392

The gas companies and holding companies moved to dismiss and thecourt granted the motion because the claims were barred by the filed ratedoctrine and the state action doctrine.82 The filed rate doctrine forbids acourt to revise a regulated utility or common carrier’s filed tariff, i.e., onethat has been approved by the regulating agency, while the state actiondoctrine immunizes state regulatory restraints from federal antitrustchallenges.83

[b] — Lease Termination Due to Nonproduction.In Dart v. Leavell,84 the lessors filed an action to cancel the lease due

to nonproduction under the “habendum” and “thereafter” clause in the lease.The wells had been productive from 1983 through March of 1998. However,no royalty payments were received after April of 1998.85 The eighteen-month time frame after March of 1998 was the period in question in thismatter.86

Testimony was presented at trial that the wells were not pumping afterMarch of 1998.87 In addition, photographs showing vegetation growingup around the wells in September of 1999 were put into evidence.88 Atechnician from the electric company also testified as to the minimal usageduring the time period in question.89

The lessee argued that production was slow due to depressed oilprices.90 The court explained that an oil and gas lease that is abandonedand not operated for an unreasonable length of time will cause the lease toterminate due to nonproduction unless the cessation was due to anunforeseen or uncontrollable circumstance. The court also stated, however,

82 Id.83 Id. at *2, *4.84 Dart v. Leavell, 795 N.E.2d 310, 312 (Ill. App. Ct. 2003).85 Id. at 312.86 Id.87 Id.88 Id.89 Id.90 Id. at 313.

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that a temporary cessation after the primary term in the lease will not beconsidered a cessation of production if reasonable diligence is beingexercised by the lessee to continue production under the oil and gas lease.91

Ultimately, the court here held that the lease had in fact terminated due tononproduction for an unreasonable length of time.92

[10] — Kansas.[a] — Royalty Interest – Breach of Contract.

In Kansas City Royalty Co. v. Thoroughbred Assocs.,93 the plaintiffs,the royalty interest owners, filed suit to confirm their royalty interest incertain oil and gas wells and assert claims for breach of contract, breach ofduty to deal in good faith, and unjust enrichment. A motion to dismiss wasfiled by lessee for the failure of the royalty interest owners to joinindispensable parties under Fed. R. Civ. P. Rule 19(b)—eighteen owners ofthe mineral leases, the lease owners, related to the oil and gas wells inwhich plaintiffs sought an interest.94 However, if the lease owners were tobe joined in the action, it would destroy jurisdiction in the federal court.95

The court sustained a motion to dismiss as it held the lease ownerswere indispensable parties under Rule 19(b).96

[b] — Oil and Gas Lease – Habendum Clause.In Hunthauser Holdings, LLC v. Loesch,97 the lease at issue was for

three years “and as long thereafter as oil, gas . . . or any of the productscovered by this lease is or can be produced.” The well here was precludedfrom operating due to a temporary restraining order, and the Commission

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91 Id. at 314.92 Id. at 316.93 Kansas City Royalty Co. v. Thoroughbred Assocs., 215 F.R.D. 628, 629-30 (D.

Kan. 2003).94 Id. at 630.95 Id.96 Id. at 634.97 Hunthauser Holdings, LLC v. Loesch, 2003 WL 21981969, *1 (D. Kan. 2003).


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ordered that operations be ceased for failure to comply with the relevantregulations.98

The summary judgment motion as to there being a legally permanentcessation of production that would terminate the lease was denied by thecourt.99 Applying ordinary contract law, the court found that this wouldbe interpreted to mean the lease would be extended for as long as the well“was capable” of producing in paying quantities.100

[c] — Breach of Agreement to Repurchase Oil andGas Interests.

In Murphy v. Convey,101 investors of oil and gas leases sued themarketer (both the corporation and individual shareholder) of the leasesfor breach of contract and fraud. The corporate marketer had previouslyagreed in writing to repurchase the oil and gas interests if certain noticeand demand conditions were met.102 However, when the investorsapproached the individual shareholder about selling their oil and gas interestsback, the individual shareholder stated (an alleged oral agreement) that“he” would buy out their interests and subsequently set-up a payment planto repurchase the interests.103 The individual shareholder made onepayment on the buy-back payment plan before failing to make any morepayments to the investors.104

The individual shareholder argued that he should not be heldindividually liable because there was not a valid oral agreement due to thelack of consideration and the statute of frauds.105 The investors, on theother hand, asserted that there was in fact a valid oral agreement withsufficient consideration – the forbearance of any lawsuits against the

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98 Id. at *1.99 Id. at *3.100 Id.101 Murphy v. Convey, 85 P.3d 228 (Kan. Ct. App. 2004).102 Id. at 228.103 Id.104 Id.105 Id.

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corporate marketer.106 The court held that there was a valid oral agreementand the statute of frauds did not apply because of several exceptions.107

First, the court explained that the statute of frauds will not be recognized inthe perpetration of fraud.108 Second, and most importantly, the court heldthat the statute of frauds was inapplicable to an oral partnership agreementto engage in the business of procuring oil and gas leases despite the factthat the statute of frauds applies to the oil and gas leases themselves.109

And third, the court found that there was performance on the agreementbecause of the one payment that was made.110

[d] — Farmout Agreement – Assigning OperatingRights and Working Interest.

Avien Corp. v. First Nat’l Oil, Inc.111 involved a “farmout agreement.”A farmout agreement is “a transaction where the owner of the oil and gaslease (called the farmor [or assignor]) agrees to an assignment of part of alease to one (called the farmee [or assignee]) who agrees, as consideration,to drill a well to a certain depth or condition.”112 The court was faced withtwo issues: 1) Did the farmout agreement allow multiple assignments ofvarious depth intervals within the designated wellbore after the initialcompletion of the test well? 2) Must the farmee here reassign his rights dueto nonproduction?113

As to the first issue, the court held that the express language of thefarmout agreement clearly showed that the farmee did not acquire the rightto attempt to produce from the formations after the initial completion ofthe test well.114 However, under the farmout agreement, the farmee could

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106 Id.107 Id.108 Id.109 Id.110 Id.111 Avien Corp. v. First Nat’l Oil, Inc., 79 P.3d 223, 225 (Kan. Ct. App. 2003).112 Id. at 228.113 Id. at 226, 229.114 Id. at 229.


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have performed additional testing of the other formations during the drillingof the initial well or the farmee could have drilled an option test well toproduce from other formations within 180 days of completing the initialtest well.115 Nevertheless, the farmee did not pursue either of these optionsand the court held that the farmout agreement did not give the farmee anyright beyond these two options.116

As to the second issue, the court explained that Kansas had notestablished a test for the term “in commercial quantities,” as it was used inthe farmout agreement.117 However, the court held that it should be giventhe same meaning as the term “in paying quantities” as it is frequently usedin habendum clauses.118 Ultimately, the court found that the profits fromthe well were greater than the operating expenses and therefore held thatthe well was still productive and that the farmee did not have to reassign itsrights.119

[e] — Operating Agreement.In Larson Operating Co. v. Petroleum, Inc.,120 the working interest

owner sold its interest without giving notice to the other interest holders asrequired per the operating agreement. The operating agreement herecontained a preferential rights provision giving the interest owners an optionto purchase the other owners’ interests first.121 The purchaser claimed thatthe operator lacked standing to bring suit on behalf of the interest ownersand that it was a bona fide purchaser without notice.122

The court, however, held that the oil and gas operator was a real partyin interest and, as a matter of convenience, did have standing to bring the

115 Id.116 Id.117 Id. at 230.118 Id.119 Id.120 Larson Operating Co. v. Petroleum, Inc., 84 P.3d 626, 629 (Kan. Ct. App. 2004).121 Id. at 629.122 Id. at 630.

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suit.123 Furthermore, the court held that the purchaser was not a bona fidepurchaser because it had notice of the preferential rights provision becausea document entitled “Property Information Form” provided to the purchaserprior to the sale stated that the interests were subject to the preferentialrights of the other interest owners.124

[11] — Kentucky.[a] — Abandonment of Natural Gas Leases.

In Minerals Mgmt. Group, Inc. v. Chandler,125 lessees appealed a juryverdict finding that it abandoned natural gas leases on the properties of thelessors. The lessees argued that there was insufficient evidence to supportthe verdict and that the jury had been given improper instructions.126

The court stated that abandonment involved the intentional and actualrelinquishment of the leased premises.127 The court held that the jury was,in fact, improperly instructed that the abandonment only had to be for asubstantial period of time, without a showing of intent.128 The courtexplained that the abandonment had to be accompanied by the “intent” topermanently give up a claim to the property, and thus remanded the matterfor further proceedings.129

[12] — Louisiana.[a] — Trespass – Expired Surface Lease.

In Corbello v. Iowa Prod.,130 the landowners sued an oil company fortrespass after the expiration of a surface lease for disposing salt water onthe premises and not restoring the land to its original condition. The lease

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123 Id. at 631.124 Id. at 632.125 Minerals Mgmt. Group, Inc. v. Chandler, 2003 WL 21246036, *1 (Ky. Ct. App.

2003).126 Id. at *1.127 Id.128 Id. at *2.129 Id.130 Corbello v. Iowa Prod., 850 So. 2d 686, 690-91 (La. 2003).


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expired in 1991, but in 1985 the oil company transferred its interest to athird party.131 The lease expressly prohibited the oil company fromdisposing salt water on the land and it required the oil company to restorethe land to its original condition.132

The court held that the jury’s award of $33 million to restore the propertywas the proper measure of damages as controlled by the lease itself.133

The court held, however, that the third party was not liable because the oilcompany failed to prove a “solidary relationship” with that third party.134

The court explained that an obligation, under Louisiana law, was solidaryfor the obligors when the obligor is liable for the whole performance.135

Finally, the court held that the disposal of saltwater on the property was abreach of the contract, but reversed and remanded the $16.7 million awardso that it could be recalculated using the correct rate of prejudgmentinterest.136

[b] — Designation of Operator of Wells withWorking Interests.

In Enerquest Oil & Gas, LLC v. Asprodites,137 an oil and gas companywho operated and owned a .49 percent and 6.25 percent working interest intwo wells that were not operating, contested another operator’s request foradministrative approval of an operator change for certain wells and units.After a hearing, the conservation commissioner and the assistant secretaryof state natural resources granted the requested change.138

The other operator who was designated as the new operator of recordhad a 63.53 and 87.85 percent working interests in the two wells.139 The

131 Id. at 691.132 Id.133 Id. at 696.134 Id. at 703.135 Id.136 Id. at 705, 707.137 Enerquest Oil & Gas, LLC v. Asprodites, 843 So. 2d 535, 537 (La. Ct. App. 2003).138 Id. at 538.139 Id. at 537.

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court found that it was practical to assume that the party with the greaterinterest had more incentive to rework the wells.140 The party with thelesser interest argued that the commissioner over-stepped its statutoryauthority.141 The court, however, held that the commissioner was chargedwith preventing waste and the non-operation of wells was potentiallywasteful to the other interest owners.142

[c] — Reassignment Clause – Breach of Contract.In Amoco Prod. Co. v. Texaco, Inc.,143 one of the defendants, the

subsidiary of the corporate parent defendant, argued that the doctrine ofprescription time-barred the suit brought by Amoco for an alleged breachof the reassignment clause contained in a mineral sublease. The trial courtgranted a directed verdict in favor of Amoco on the issue of liability andpierced the corporate veil against the corporate parent defendant, holdingthe parent liable for the judgment as well.144

Amoco argued that it was not notified of the expiration of the mineralleases as required by the reassignment clause in the sublease.145 Thedefendants argued that the action was time-barred by the 10-year prescriptiveperiod because the first claim arose 18 years ago and the second claimarose 13 years ago.146 The court held, however, that Amoco neither couldnor should have known of the lease cancellations prior to the 10-yearprescriptive period of time.147 The court also upheld the liability findingbecause the subsidiary defendant had stipulated that no written notice hadbeen given and that it had, in fact, breached the sublease.148 The court also

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140 Id. at 540.141 Id.142 Id. at 540.143 Amoco Prod. Co. v. Texaco, Inc., 838 So. 2d 821, 827 (La. Ct. App. 2003).144 Id. at 827.145 Id. at 826.146 Id. at 827.147 Id. at 832.148 Id. at 836.


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upheld the piercing of the corporate veil of the parent defendant companybecause the subsidiary was the agent, tool and instrumentality of theparent.149

[d] — Lease Expiration and Royalty Dispute.In O’Neal v. JLH Enterprises, Inc.150 the lessors sued the lessees

claiming that the mineral lease had expired due to nonproduction. Thelessors claimed double damages, as per Louisiana statute, on the past dueroyalties.151 The mineral lease contained a habendum clause and thereafterclause defining the term of the lease after the primary term.152

The court explained that the Louisiana statute requires that productionbe in “paying quantities.”153 Moreover, the court explained that the lesseemust show that the lease is profitable or, in other words, the productionincome must exceed the operating expenses.154 The court here held thatthe lease was still in effect because the lease was still productive.155

Although the Louisiana statute gives the courts the discretion to awarddouble damages if the lessee fails to pay royalties after being given therequired notice, the court here also held that double damages should not beawarded.156

[e] — Gas Purchase Contracts – Release orDischarge of Original Owner.

In Bradford v. Onshore Pipeline Constr. Co.,157 the mineral leaseowners brought suit for breach of contract against the purchaser and

149 Id. at 835.150 O’Neal v. JLH Enterprises, Inc., 862 So. 2d 1021, 1024 (La. Ct. App. 2003).151 Id. at 1022.152 Id. at 1027.153 Id.154 Id.155 Id. at 1030.156 Id. at 1032.157 Bradford v. Onshore Pipeline Constr. Co., 853 So. 2d 756, 759-60 (La. Ct. App.

2003).

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subsequent purchaser of gas production contracts. The mineral lease ownersclaimed that the trial judge should not have dismissed the original gaspurchaser from the lawsuit because they never released the originalpurchaser from any of its obligations under the contracts.158 The courtagreed and held that novation (a release) did not occur because there wasno evidence of a release or discharge by the mineral lease owner.159

However, the court noted that the contracts were freely assignable.160

[f] — Restoration of the Surface.In Terrebonne Parish School Bd. v. Castex Energy, Inc.,161 the

landowner brought suit against the lessee and the successor lessee of an oiland gas lease to restore the surface of the land that was leased. In turn, thesuccessor lessee filed a third-party complaint against a sub-lessee forindemnification.162

The court explained that “where an oil and gas lease lacks an expressprovision articulating the lessee’s obligation to restore the surface atcessation of the lease term, a lessee is implicitly obligated to perform thatduty.”163 Thus, the court held that the lessee and the successor lessee wereobligated to restore the property to a condition as near as practicable to itspre-leased condition, but that obligation was only to the properties thatwere subject to the lease.164 However, the court held that the purportedsub-lessee was not obligated to indemnify the successor lessee because theassignment was invalid since the successor lessee failed to get the originallessee’s approval prior to executing the assignment.165

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158 Id. at 762.159 Id. at 767.160 Id.161 Terrebonne Parish School Bd. v. Castex Energy, Inc., 87 So. 2d 522 (La. Ct. App.

2004).162 Id.163 Id. at 529.164 Id. at 539.165 Id. at 538.


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[g] — Recission of a Joint Venture Agreement.In Coffee Bay Investors, LLC v. W.O.G.C. Co.,166 an investment firm

brought an action against an oil and gas operator for rescission of its contractwith the operator and a return of its initial contribution. The investmentfirm alleged that the operator failed to deliver the assignment of 50 percentinterests in the leases at issue and this, therefore, constituted a failure ofconsideration.167

The court held, however, that the primary reason the investment firmentered into the joint venture agreement was not for the assignment of 50percent interests in the leases, but instead it was to “participate in anyproduction from the prospect.”168 Thus, the court held that the joint venturewas not invalid for a lack of cause or consideration.169

[13] — Maryland.[a] — Implied Reservation – Access to Surface of

Property for Mining.In Calvert Joint Venture #140 v. Snider,170 the grantors conveyed the

subject property to the grantees for the stated purpose of building aresidential subdivision, but the grantors reserved the oil, gas and othermineral rights in the property. Although the grantors of the property failedto expressly reserve easements over the property’s surface to access theminerals, the grantors claimed that they were entitled to an impliedreservation to access the minerals via the surface.171

Nevertheless, the court held that the grantors could not use the property’ssurface to prospect or extract any subsurface minerals, oil or gas.172 Animplied reservation to access the surface would be unreasonable since thegrantors were aware when the agreement was entered into that the grantee’s

166 Coffee Bay Investors, LLC v. W.O.G.C. Co., 878 So. 2d 665 (La. Ct. App. 2004).167 Id. at 667.168 Id. at 668.169 Id.170 Calvert Joint Venture #140 v. Snider, 816 A.2d 854, 857 (Md. 2003).171 Id. at 864.172 Id. at 882.

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planned to use the property as a residential subdivision, and the use of thesurface to conduct mining operations was incompatible with that use.173

In addition, the court explained that an implied reservation to use the surfacewhen the agreement was made was unnecessary because the grantors couldaccess the minerals via the adjacent property that they also owned.174

Finally, the court explained that the grantors owed a duty to support thesurface to the grantee.175

[14] — Massachusetts.[a] — Oil Contamination.

In Hill v. Metropolitan Dist. Comm’n,176 the plaintiff, a trustee of arealty trust, sued the defendants, the adjacent landowners—another realtytrust company and the district commission—for damages incurred as a resultof oil contamination to its property. The court found that the districtcommission was not entitled to the protection of the Massachusetts limitedliability statute because it was not the intent of the legislature to relieve allpublic employers of the strict liability they face under the oil contaminationstatute.177

The court explained that it was only when the Commonwealth hadtaken over a site for enforcement or cleanup purposes that it could receivethe benefit of the limited liability, and that was not the case here as thedistrict commission was a part owner in the property.178 The court furtherexplained that to extend the limited liability to situations as this one wouldfrustrate the purpose of the statute, which was “to compel the prompt andefficient cleanup of hazardous material and to ensure that the costs and

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173 Id.174 Id. at 883.175 Id. at 861.176 Hill v. Metropolitan Dist. Comm’n, 787 N.E.2d 526, 527 (Mass. 2003).177 Id. at 530.178 Id.


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damages were borne by the appropriate parties.”179 The state supreme courtalso affirmed the damages that were awarded.180

[15] — Michigan.[a] — Lease – Scope of Drilling Operation.

In Rorke v. Savoy Energy, LP,181 the plaintiff owned the surface rightsof a subdivided surface and the defendant owned the oil and gas rights asper a lease that was executed prior to the surface being subdivided andrecorded. The plaintiff objected to the defendant reopening a capped wellon the property claiming that the defendant did not have that right.182

However, the lease stated that the lessee could extract oil from any well onthe leased premises.183

The court explained that the express provisions of the lease controlledhere.184 The court ultimately held that there was no authority for theproposition that when the surface of the land is covered by an oil and gaslease and is later subdivided, that subdivision somehow diminishes thelessee’s right to drill.185

[b] — Constructing and Operating Pipeline inRight-of-Way.

In Mayor of Lansing v. Public Service Comm’n,186 the city appealed adecision by the Michigan Public Service Commission (MPSC), whichapproved the pipeline company’s application to construct and operate a 26-mile liquid petroleum pipeline in the right-of-way of an interstate highway.

179 Id. at 530 (quoting Taygeta Corp. v. Varion Assocs., 763 N.E.2d 1053, 1059 (Mass.

2002)).180 Id. at 536.181 Rorke v. Savoy Energy, LP, 677 N.W.2d 45, 47 (Mich. Ct. App. 2003).182 Id. at 47.183 Id. at 48.184 Id. at 49.185 Id.186 Mayor of Lansing v. Public Service Comm’n, 666 N.W.2d 298, 301 (Mich. Ct.

App. 2003).

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The MPSC held that the pipeline company had demonstrated a need for thepipeline and that it was reasonably designed and routed.187 The city onappeal, however, argued that the pipeline company had to first seek thecity’s approval before the MPSC would obtain jurisdiction to hear thematter.188

The court held that under the Michigan Comp. Laws Section 247.183,the pipeline company was not, in fact, required to seek the approval of thecity before it submitted its application to the MPSC, but the pipelinecompany was required to seek the city’s approval before it beganconstruction of the pipeline.189

[c] — Right-of-Way Agreement – Injunction toEnjoin Landowners from Obstructing.

In Panhandle Eastern Pipe Line Co. v. Musselman,190 a gas companyfiled an action against the landowners seeking to enjoin the landownersfrom obstructing the gas company’s easement on the landowner’s propertywhen the company attempted to clear a 30-foot area on either side of itseasement. The trial court granted the landowners’ summary judgmentmotion, but the appeals court reversed the judgment holding that the trialcourt erred in conclusively determining that the gas company had no rightto clear the property.191

The court explained that the right-of-way agreement expressly statedthat the purpose of the grant was to operate a gas pipeline.192 The agreementalso specifically allowed the gas company to inspect and repair the pipelineand prohibited the landowners from placing anything on or near the right-of-way that would interfere with the gas company’s maintenance of the

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187 Id. at 302.188 Id. at 301-02.189 Id. at 307.190 Panhandle Eastern Pipe Line Co. v. Musselman, 668 N.W.2d 418, 419 (Mich. Ct.

App. 2003).191 Id. at 420, 423.192 Id. at 423.


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line.193 The court thus held that the gas company had all rights incident ornecessary to conduct such acts, including the clearing of the property toensure the maintenance and inspection.194 However, on remand, it wasyet to be determined the extent of the right-of-way and the area that couldbe rightfully cleared under the grant.195

[16] — Montana.[a] — Declaratory Judgment – Seeking to Confirm

Validity of Oil and Gas Leases.In Sandtana, Inc. v. Wallin Ranch Co.,196 a successor in interest to oil

and gas leases brought a declaratory judgment action against the tenants incommon who owned the mineral interests in the lands, seeking to confirmthe validity of the leases. The underlying action arose when the landownersreleased the same lands to another party when the successor in interest tothe oil and gas leases failed to make timely rental payments.197 The trialcourt granted summary judgment in favor of the land owners and thesuccessor in interest to the oil and gas leases appealed.198

The successor in interest to the oil and gas leases argued on appeal thatthe Pugh clauses (a clause added to an oil lease to limit holding non-producing lands or depths beyond the primary term of lease) in the subjectoil and gas leases did not require the rental to be paid on or before theexpiration of the primary term of the leases in order to extend the leases asto the undeveloped sections.199 The court, however, disagreed and heldthat a well, capable of producing but shut in due to a lack of a pipeline, wasin fact a producing well.200 Thus, under the Pugh clauses in the leases, the

193 Id.194 Id.195 Id.196 Sandtana, Inc. v. Wallin Ranch Co., 80 P.3d 1224, 1225 (Mont. 2003).197 Id. at 1227.198 Id.199 Id. at 1228.200 Id. at 1231.

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rental payments had to be paid on or before the expiration of the primaryterm in order to extend the leases as to the undeveloped sections.201

Ultimately, the court found that since the successor in interest to theoil and gas leases failed to make timely rental payments, its leases hadexpired by their own terms as to all of the leased lands, except for thesection containing the producing well.202

[b] — Coalbed Methane – Declaratory Relief UnderFederal Laws.

In Northern Plains Resource Council, Inc. v. United States Bureau ofLand Mgmt.,203 an environmental organization brought an action fordeclaratory relief under the Administrative Procedures Act against theBureau of Land Management alleging violations of the NationalEnvironmental Policy Act.

The court stated that the oil and gas leases at issue, which included therights to coalbed methane, incorporated the terms of the amended ResourceManagement Plan and Environmental Impact Statement (1994 RMP/EIS).204 The court also found that the rights conferred by the leases wererestricted to the small-scale coalbed methane exploration and developmentas authorized by the 1994 RMP/EIS.205 The court held that the Bureau ofLand Management was not required to produce a new EIS prior to issuingthe oil and gas leases.206

[c] — Eminent Domain – Easement to Drill andOperate Oil Wells.

In McCabe Petroleum Corp. v. Easement & Right-of-Way AcrossTownship 12 North, Range 23 East,207 the owner of oil and gas leases

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201 Id. at 1232.202 Id.203 Northern Plains Resource Council, Inc. v. United States Bureau of Land Mgmt., 298

F. Supp. 2d 1017, 1019 (D. Mont. 2003).204 Id. at 1024.205 Id.206 Id.207 McCabe Petroleum Corp. v. Easement & Right-of-Way Across Township 12 North,

Range 23 East, 87 P.3d 479, 480 (Mont. 2004).


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brought an action against an adjacent ranch owner seeking to condemn anaccess easement and right-of-way over the ranch in order to drill and operateoil wells.

The court held, however, that under the Montana statute, Mont. CodeAnn. Section 70-30-102(33), oil wells were not “mines” to which rights-of-way for roads may be obtained via eminent domain proceedings.208 Inaddition, the court held that exploration and development of a federal oiland gas lease was not a “mine” that constitutes a “public use” to whichrights-of-way for roads may be obtained via eminent domainproceedings.209

[17] — New Mexico.[a] — Termination of Oil and Gas Lease – Failure to

Tender Shut-In Royalties.In Maralex Resources, Inc. v. Gilbreath,210 the lessees appealed the

lower court’s decision that an oil and gas lease terminated under its ownterms when the lessees failed to tender shut-in royalties to the lessors. Thecourt explained that the express language of the lease required the well tobe capable of production or else the lease terminated.211 The court agreedwith the lessees, however, that if the cessation of production was beyondthe control of the lessees, such as a problem with the pipeline, then thelease would not have terminated due to a cessation of production.212

Nevertheless, the court held found that the “force majeure clause” did notapply because the cessation of production was caused by the insufficientpressure within the well, which was not an external cause beyond the lessees’control.213

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208 Id. at 483.209 Id. See Mont. Code Ann. § 70-30-101 (2003).210 Maralex Resources, Inc. v. Gilbreath, 76 P.3d 626, 628 (N.M. 2003).211 Id. at 634.212 Id. at 636.213 Id. at 637.

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[b] — Natural Gas Processor’s Tax – Removal ofCarbon Dioxide.

In Amoco Prod. Co. v. New Mexico Taxation & Revenue Dep’t,214 theproducers argued that the removal of the carbon dioxide from the coalbedmethane gas was not “processing” as contemplated by New Mexico’sNatural Gas Processor’s Tax Act. The department of revenue argued thatthe process of removing 100 percent of the carbon dioxide gas was necessaryto make the CBM marketable.215 The court held that the removal of thecarbon dioxide from CBM in New Mexico was “processing” ascontemplated by the statute.216

[c] — Gathering Line Easements – Determination ofValue.

In El Paso Field Serv. Co. v. Montoya Sheep & Cattle Co.,217 El Pasopetitioned the district court to establish the amount of money it owed to thedefendant landowner for the purchase of two gathering line easements.Pursuant to the Gathering Line Land Acquisition Action (“Act”),218 thetrial court appointed a hearing officer who awarded the landowner a lumpsum payment of $10,191 and an annual access fee of $2,000 for the twoeasements.219 El Paso appealed the hearing officer’s decision, but the districtcourt affirmed the hearing officer’s findings.220 El Paso then appealed thedecision to the court of appeals.221

The court reversed and remanded the findings because the Act requiredthat the hearing officer make separate findings concerning both the amount

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214 Amoco Prod. Co. v. New Mexico Taxation & Revenue Dep’t, 74 P.3d 96, 97 (N.M.

Ct. App. 2003).215 Id. at 99-100.216 Id. at 100.217 El Paso Field Serv. Co. v. Montoya Sheep & Cattle Co., 77 P.3d 279, 280 (N.M. Ct.

App. 2003).218 N.M. Stat. Ann. §§ 70-30A-1 to 70-3A-7.219 El Paso Field Serv. Co. at 280.220 Id. at 280.221 Id.


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of compensation due under N.M. Stat. Ann. Sections 70-30A-5(B) and theamount of damages due under N.M. Stat. Ann. Sections 70-30A-5(C).222

The court explained that the hearing officer included elements of damagesin its determination of compensation due and that this was contrary to thestatute because it could potentially circumvent the cap imposed by N.M.Stat. Ann. Sections 70-30A-5(C).223

[d] — Release Clause – Salt Water Disposal.In McNeill v. Rice Eng’g & Operating, Inc.,224 the land owners filed

suit against an oil drilling company for damage to their land from salt waterdisposal. The issue on appeal was whether there existed a genuine issue ofmaterial fact as to the meaning of the release that was executed by thepredecessors to the parties of the suit.225 The court held that the releasewas not unambiguous on its face and the district court’s grant of summaryjudgment, which dismissed the land owners’ trespass and conversion claims,was therefore reversed.226

The court explained that reasonable minds could have attached differentmeanings to the release on its face.227 The oil drilling company felt therelease clause expressly released it from “any and all damages whatsoever”arising from “said occurrences or operations,” including the operation of asalt water disposal well.228 However, the land owners believed that therelease related only to damages to the land surface incurred during theoriginal construction of the well and did not expressly authorize salt waterdisposal.229

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222 Id. at 283.223 Id.224 McNeill v. Rice Eng’g & Operating, Inc., 70 P.3d 794, 796 (N.M. Ct. App. 2003).225 Id. at 798.226 Id. at 802.227 Id. at 805.228 Id. at 799.229 Id. at 800.

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[18] — New York.[a] — Security Interest in Oil and Gas Production.

In In re Enron Corp.,230 the debtor, Enron, was involved in the oil andgas industry. The issue was whether the debtor was a “first purchaser” asthat term was defined under Texas law and ultimately whether the creditorhad a secured claim.231 The court found that the terms of the contracts atissue were insufficient to create a security interest under Texas law, and,sua sponte, found that summary judgment in the debtor’s favor wasproper.232

[b] — Working Interest – Allocation of ProductionRevenues.

In Caflisch v. Crotty,233 the landowners challenged a decision madeby the Commissioner of the New York Department of EnvironmentalConservation. The Commissioner held that the land owners were not entitledto a 7/8 interest in the production revenue from the oil and gas leases, butinstead they were entitled to receive a 1/8 royalty payment.234 The courtheld that the Commissioner did not err and that the determination that thelandowners were entitled only to a 1/8 working interest was not arbitrary,capricious or unreasonable.235

The court explained that the Commissioner’s ruling was supported bystatutory construction, resulted in a reasonable allocation of productionrevenues, and was consistent with the prior rulings of the Commissioner.236

Specifically, the Commissioner found the court agreed that the landownerswere not “owners” under N.Y. Envtl. Conserv. Section 23-0101(11)(2004),as they did not have or qualify for a drilling permit, and they clearly werenot operators.237

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230 In re Enron Corp., 302 B.R. 455, 457 (Bankr. S.D.N.Y. 2003).231 Id. at 457.232 Id. at 462.233 Caflisch v. Crotty, 774 N.Y.S.2d 653, 654 (N.Y. App. Div. 2003).234 Id. at 654.235 Id. at 656.236 Id.237 Id.


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[c] — Oil Spill Act – Cleanup and Removal Costs.In State v. Robin Operating Corp.,238 the State brought suit under the

Oil Spill Act against the owners and lessees of property on which lesseesoperated a gas station. The State sought to recover monies expended inremediation of a petroleum spill.239 The trial court granted the State’smotion for partial summary judgment and the owners appealed.240

The court affirmed the trial court’s partial grant of summary judgmentholding that an owner of property on which lessees’ gas station caused apetroleum spill was a person who had “discharged” petroleum, and thuswas strictly liable under the Oil Spill Act for cleanup and removal costs.241

The court explained that the owner leased the property with the fullknowledge that it would be used as a gas station and the owner retainedcontrol over activities occurring on the property.242

[19] — Oklahoma.[a] — Joint Operating Agreement – Permissible

Number of Operators Under the Agreement.In Pitco Prod. Co. v. Chaparral Energy, Inc.,243 a petroleum company

and energy corporation challenged a decision by the appellate court, whichaffirmed the trial court’s ruling that a joint operating agreement with aproduction company did not preclude multiple operators who were electedby majority vote. All parties were working interest owners and had enteredinto a joint operating agreement, which designated the petroleum companyas operator of the wells.244 The petroleum company sold its interests tothe energy corporation. The energy corporation was elected operator ofone of the wells, but the production company won the status of operator ofthe other well.245

238 State v. Robin Operating Corp., 773 N.Y.S.2d 135, 136 (N.Y. App. Div. 2004).239 Id. at 136.240 Id.241 Id.242 Id.243 Pitco Prod. Co. v. Chaparral Energy, Inc., 63 P.3d 541, 543 (Okla. 2003).244 Id. at 543.245 Id.

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Although the trial court found that the agreement did not precludemultiple operators, the court vacated the lower courts’ decisions becausethe term “operator’ was not defined in the agreement.246 The court alsoexplained that pursuant to Okla. Stat. 15 Section 152 (1991), the partiesintended only one operator to control all of the wells.247

[b] — Quiet Title Action – Oil and Gas Leases.In Smith v. Marshall Oil Corp.,248 the issue was whether the oil and

gas leases expired under the terms of the habendum clauses and whetherthe ownership of the equipment left on the leased premises vested in thesurface owner. The court explained that in Oklahoma the term “produced”as it is used in the “thereafter” provision of an habendum clause means“production in paying quantities.”249 In other words, production is theprofit to the lessee over the operating expenses, excluding the drilling andequipping costs, which are rarely ever recovered.250

The court held that the lessee had voluntarily terminated the wells andwas operating at a loss, and thus, under the express terms of the leases, theleases had expired and the equipment and fixtures vested in the surfaceowners.251

[20] — Pennsylvania.[a] — Oil and Gas Lease – Termination Lease

Below Gas Storage Zone.In Jacobs v. CNG Transmission Corp.,252 the district court dealt with

cross motions for summary judgment253 relating to an oil and gas lease,

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246 Id. at 544-45.247 Id. at 547.248 Smith v. Marshall Oil Corp., 85 P.3d 830, 832 (Okla. 2004).249 Id. at 833.250 Id.251 Id. at 838.252 Jacobs v. CNG Transmission Corp., 332 F. Supp. 2d 759, W.D. Pa.253 The case was litigated over a nine (9) -year period. Summary judgment was initiallyentered in favor of the lessee-operator. On appeal, the Third Circuit Court of Appealsrequested the Supreme Court of Pennsylvania to issue an opinion on two substantive


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where the lessee-operator had utilized shallow depth (less than 2,000 feetsubsurface) formations for natural gas storage for over forty (40) years.The oil and gas lease contained a primary term of ten (10) years “and aslong thereafter as [the property] . . . is operated . . . in search or productionof oil or gas or as long as gas is being stored, held in storage, or withdrawnfrom the premises.”254 The operator had never produced oil and gas fromthe property and had never drilled any production wells.255 The lessor-property owner had requested that the lessee-operator to drill and producenatural gas from the property or to release the deeper formations from theoil and gas lease.256 The lessee-operator refused and the lessor-propertyowner filed suit.257

In a case of first impression under Pennsylvania law, the district courtheld that the oil and gas lease had terminated with respect to the formationsbelow the gas storage zone upon expiration of the primary term.258 Thedistrict court further held that the deeper formations would be “released”from the operation of the oil and gas lease as a result of abandonment.259

[b] — Defective Product – Natural Gas.In Lexington Ins. Co. v. Caleco, Inc.,260 a gas explosion occurred due

to a disconnected clothes dryer. The insurer brought a subrogation claimagainst the gas supplier, among others, alleging that the gas supplied was adefective product or good.261 The court held that the strict liability andbreach of implied warranty claims were sufficient to avoid a dismissal under

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issues. The Supreme Court of Pennsylvania accepted the certification and issued its opinionat Jacobs v. CNG Transmission Corp., 772 A.2d 445 (Pa. 2001). The Third Circuit Court

of Appeals then reversed the district court and remanded the case for decision.254 Id. at 765.255 Id. at 764.256 Id. at 765.257 Id.258 Id. at 791.259 Id.260 Lexington Ins. Co. v. Caleco, Inc., 2003 WL 21652163, *1 (E.D. Pa. 2003).261 Id. at *1.

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a Rule 12(b)(6) motion because the insurer alleged that the gas supplied bythe gas supplier was defective.262

[c] — Coalbed Methane –Taxing CBM as RealEstate.

In Greene Energy LLC v. Greene County Board of Tax AssessmentAppeals,263 Greene Energy challenged the Board’s decision to tax coalbedmethane gas as real estate. In a prior Pennsylvania Supreme Courtdecision,264 the court held that neither oil nor gas were subject to realproperty taxation because neither substance was expressly listed asproperty subject to such taxation in the General County AssessmentLaw.265 Energy argued that coalbed methane gas, which is found in andaround coal seams, has essentially the same chemical and physicalproperties as natural gas and should therefore not be subject to taxation.In addition, Energy argued that when the Assessment Law was passedcoalbed methane was considered a “nuisance,” and a substance that hadno value, which the General Assembly would have had no intention taxing.

The case was resolved by a Consent Decree which provided that theCounty would not assess CBM interests again unless the General Assemblyamends the law to provide for its taxation or the Supreme Court ofPennsylvania concludes that coalbed methane is “taxable real property.”

[21] — Texas.[a] — Tax – Depletion Deduction.

In Exxon Mobil Corp. v. United States,266 the issue was the properdepletion deduction concerning the natural gas Exxon produced and soldunder twenty long-term contracts. The court explained that percentage

262 Id. at *3.263 Greene Energy, LLC v. Greene County Board of Tax Assessment Appeals, Misc.

No. 52-2003 (Greene County, PA).264 Independent Oil and Gas Association of Pennsylvania v. Board of AssessmentAppeals of Fayette County, 814 A.2d 180, 180 (Pa. 2002).265 72 P.S. §§ 5020-101 to 5020-602.266 Exxon Mobil Corp. v. United States, 253 F. Supp. 2d 915, 917 (N.D. Tex. 2003).

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depletion has been repealed for the most part except for a few narrowexceptions—regulated natural gas and fixed contract gas.267

The court held that the contracts were not fixed because Exxon failedto prove by clear and convincing evidence that Exxon could not adjust theprice for gas under the contracts.268

[b] — Nuisance Claim.In Texas Union Pacific Resources Co. v. Cooper,269 the company

applied to drill a well to extreme depths, and the well was to be drilled only700 feet from the Cooper’s home. It was common in the area to encounterhydrogen sulphide gas (“sour gas”), which is poisonous and can cause deathto people who come in contact with it.270 Rule 36, promulgated by theTexas Railroad Commission, requires a company that might encounter sourgas in drilling a well to develop an evacuation plan for members of thegeneral public located within a certain radius of the well.271

The company developed an evacuation plan and part of that plan wasto have a safety expert visit the Cooper home and tell them the necessity ofevacuation in the event sour gas was encountered.272 Mrs. Cooper’s brother,however, told her that if she smelled rotten eggs, it was sour gas and theywould be sure to die.273 Based on her brother’s statement, the Coopers feltit was imperative that they left their home while the company drilled thewell.274

The company claims that the nuisance claim is based on fear andapprehension alone.275 The court held that since no harm was sustainedand because the fear and apprehension arose from what Mrs. Cooper had

267 Id. at 933.268 Id. at 933-34.269 Texas Union Pacific Resources Co. v. Cooper, 109 S.W.3d 557, 558 (Tex. Ct. App.2003).270 Id. at 558.271 Id. at 558-59.272 Id. at 559.273 Id.274 Id.275 Id. at 560.

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been told by her brother, there was no evidence of a viable nuisanceclaim.276

[c] — Drilling — Spacing and Density.In Seagull Energy E & P, Inc. v. Railroad Comm’n of Texas,277 the gas

company appealed from a Railroad Commission order denying it anexception to the well and density field rules. The company voluntarily choseto shut in its gas well that was only producing from one of three gas depositsunderlying its lease, and drill a second well in which it hoped would reachall three deposits, which the first well did not.278 However, when the secondwell was unable to produce gas from the deposit in which the first well hadbeen completed, the company applied for a spacing and density exceptionso that it could operate both wells at the same time.279

The court explained that the spacing rules control the distances betweenwells that are drilled into the same oil or gas accumulation at the samedepth.280 Furthermore, the court explained that when the Commissiondesignates a field, it may establish field rules for that area and those rulessupersede the general spacing requirements.281 The court held that sufficientevidence existed for the Commission denial of the company’s applicationfor a spacing and density exception to the rules.282

[d] — Duty to Develop Mineral Estate – GeologicalSeismic Data = Trade Secrets.

In In re Bass,283 the non-participating royalty interest owners suedthe mineral estate owner for a breach of the implied duty to develop themineral estate. The mineral owner never opted to lease the land for

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276 Id. at 561-62.277 Seagull Energy E & P, Inc. v. Railroad Comm’n of Texas, 99 S.W.3d 232, 235 (Tex.

Ct. App. 2003).278 Id. at 235.279 Id. at 235.280 Id.281 Id. at 236.282 Id. at 244.283 In re Bass, 113 S.W.3d 735, 737 (Tex. 2003).


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development.284 The interest owners attempted to compel discovery ofthe mineral owner’s geological seismic data to reveal if development of themineral estate would, in fact, be profitable.285 The owner argued, however,that the data was a trade secret and was therefore not subject todiscovery.286 .

After weighing six factors from the Restatement (Third) of UnfairCompetition, the court held that the geological seismic data was a tradesecret and protected by the Rules of Evidence.287 As to the implied dutyto develop or a fiduciary duty to the royalty owners, the court held that nosuch duties existed because there was no oil and gas lease.288 The courtexplained that no implied covenant to develop a mineral estate has everbeen read into a general warranty deed.289

[e] — No Right to Review Field Rules.In Railroad Comm’n of Texas v. WBD Oil & Gas Co.,290 an oil and

gas company brought an action against the commission challenging thevalidity of field rules adopted by the Commission with respect to theregulation of oil and gas production. The trial court dismissed the actionbut the court of appeals reversed holding that there was jurisdiction to bringthe declaratory judgment.291 However, on further review, the TexasSupreme Court reversed the court of appeals holding that there was noright to review the field rules under Tex. Code Ann. Section 2001.038(2004).292

284 Id. at 738.285 Id.286 Id.287 Id. at 741-42.288 Id. at 743.289 Id. at 743-44.290 Railroad Comm’n of Texas v. WBD Oil & Gas Co., 104 S.W.3d 69, 71-72 (Tex.

2003).291 Id. at 72.292 Id. at 79.

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The court explained the differences in procedure between judicial reviewof contested case decisions and of the field rules.293 The court also notedthat the field rules had been determined under contested case procedures,which allowed for notice to all interested parties as well as participation inthe hearing.294 The court concluded that the field rules were not rules of“general applicability” within the Code’s definition of rule.295

[f] — Effective Date of Pooling.In Union Gas Corp. v. Dornburg,296 a gas company contracted with

the royalty owners and others for multiple oil and gas leases that began in1999. The leases contained pooling provisions allowing for the unitizedproduction of gas in ten adjacent tracts of land.297 The designation for thepooling of the royalty owners’ well was recorded August 7, 2000.298 Thecourt found that, although production began from March 27, 2000 on thelease, there was no producing well in the pooled unit until August 7, 2000,which was evidenced by the intent of the parties that unitization be effectiveupon recordation.299

Only upon the designation being recorded did the unitization thenvalidly come into being under the terms of the lease.300

[g] — Fiduciary Duty to Cotenant – “Duty ofUtmost Good Faith.”

In Hlavinka v. Hancock,301 the non-executive mineral interest ownerssued the owners of the surface and executive rights for breach of fiduciary

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293 Id. at 74.294 Id. at 78.295 Id. at 79.296 Union Gas Corp. v. Dornburg, 2003 WL 22478716, *1 (Tex. Ct. App. 2003). This

case was one of seven related cases involving members of the subject pooling agreement.297 Id. at *1.298 Id.299 Id. at *2.300 Id.301 Hlavinka v. Hancock, 116 S.W.3d 412, 415 (Tex. Ct. App. 2003).


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duty. The court explained that “Texas courts have generally held that thestandard of ‘utmost good faith’ applies to one who exercises executive rightsto lease or develop minerals.”302 The court further explained that the dutyrequires the holder to exercise the same type of oil and gas lease as if thethird-party nonparticipating interest holder were not involved.303 The courtnoted that this duty arises out of a fiduciary-like relationship and not froma contract or deed.304

The court found that there was no self-dealing and that the executiveowners had not entered into any oil and gas leases out of which an impliedduty to develop the land could arise.305 Thus, the court held that “becausethey have not acquired any benefits for themselves pursuant to any lease,”the executive interest holders did not breach their fiduciary duty to the non-executive interest holders by failing to enter into any lease.306

[h] — Declaratory Judgment – Termination of Oiland Gas Lease.

In Cannon v. Sun-Key Oil Co.,307 the lessor sought a declaratoryjudgment terminating an oil and gas lease due to a cessation of productionin paying quantities. The trial court, based on the jury’s finding of revivor,entered judgment against the lessor on the claim for declaratoryjudgment.308 The appeal court affirmed the trial court’s judgment, but fordifferent reasons.309

302 Id. at 417.303 Id.304 Id.305 Id. at 419.306 Id. at 420.307 Cannon v. Sun-Key Oil Co., 117 S.W.3d 416, 417-18 (Tex. Ct. App. 2003). Seealso Natural Gas Pipeline Co. of America v. Pool, 124 S.W.3d 188 (Tex. 2003). Thecourt, in a declaratory judgment action concerning the termination of an oil and gaslease due to lack of production, held that the lessees obtained a fee simple determinableinterest of the mineral leases due to adverse possession after the leases allegedly

terminated due to nonproduction.308 Cannon v. Sun-Key Oil Co., 117 S.W.3d at 418.309 Id.

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The court explained that the lessee has the burden of proof when raisingthe defense of revivor concerning the issue of lease termination.310 Thecourt stated that “[u]nder the doctrine of revival, a lifeless lease is revivedby the subsequent execution of a formal document which expresslyrecognizes in clear language the validity of the lifeless lease.”311 In addition,the subsequent formal document must refer to the lease in order to reviveit.312 The court held that there was no evidence to support the finding ofrevivor.313

Nevertheless, the court found that the lessor failed to “present anyevidence that a reasonably prudent operator would have operated the wellin a different manner, would have restored production sooner, or wouldhave not have continued under the circumstances in the attempts devotedto obtaining such production.”314 Thus, the court held that the oil and gaslease did not terminate.315

[i] — Declaratory Judgment – Gas Unit Designation.In Dixon v. Amoco Prod. Co.,316 the landowners filed a declaratory

judgment action against the oil and gas lessee seeking a finding that the gasunit designation filed by the lessee was void and that they were entitled tofull royalties. The landowners argued that the description of the property inthe gas unit designation was legally insufficient and did not satisfy thestatute of frauds.317

The court explained that “[f]or a legal description of land to be sufficientunder the statute of frauds, the writing must furnish within itself or byreference to some other existing writing, the means or data by which the

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310 Id. at 419.311 Id312 Id. at 420.313 Id. at 421.314 Id. at 424.315 Id.316 Dixon v. Amoco Prod. Co., 150 S.W.3d 191 (Tex. Ct. App. 2004).317 Id.


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land to be conveyed may be identified with reasonable certainty.”318 Thecourt held that the legal description of the property included in the unitdesignation was legally sufficient to satisfy the statute of frauds.319

[j] — Declaratory Judgment — Operator of Oil andGas Unit.

In Journey Operating, L.L.C. v. Pogo Prod. Co.,320 an oil and gascompany filed a declaratory judgment against the operating companyseeking a finding that it had been elected the operator of the oil and gas unitarea under the terms of a joint operating agreement (‘JOA”). The trial courtfound in favor of the oil and gas company and the operator appealed.321

The court affirmed the trial court because the oil and gas company waselected operator of the oil and gas unit area pursuant to the terms of theJOA.322

[k] — Breach of Implied and Express CovenantsUnder Oil, Gas and Mineral Leases.323

In Grayson v. Crescendo Resources, L.P., the issue was whether thelessee breached the implied covenant to reasonably develop the lease. Thecourt explained that the duty of the lessee was to act as a reasonably prudentoperator would under the same or similar circumstances.324

318 Id.319 Id. at 192320 Journey Operating, L.L.C. v. Pogo Prod. Co., 2004 WL 258122, *1 (Tex. Ct. App.

2004).321 Grayson v. Crescendo Resources, L.P., 104 S.W.3d 736, 738 (Tex. Ct. App. 2003).322 Id. at 741.323 See also Enron Oil & Gas Co. v. Joffrion, 116 S.W.3d 215 (Tex. Ct. App. 2003)(oilcompanies sued for a breach of an implied covenant to refrain from charging post-production expenses greater than a reasonably prudent operator would have charged);Green v. Gemini Exploration Co., 2003 WL 1986859 (Tex. Ct. App. 2003)(landownersfiled suit against oil company for breach of the implied duties to protect the lease fromdrainage, to reasonably develop the lease and to administer and manage the lease); Kerr-McGee Corp. v. Helton, 133 S.W.3d 245 (Tex. 2004)(lessors sued well driller lessees for

breach of an implied covenant to protect the lease from drainage).324 Grayson v. Crescendo Resources, L.P., 104 S.W.3d at 739.

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However, the court also explained that there was not an implied covenantto explore the lease, and an obligation to drill additional wells—as thelessors asserted that the lessees should have done—depends on the specificfacts of each case.325 Ultimately, the court here held that there wasinsufficient evidence to support finding that the failure to drill additionalwells breached the implied covenant to reasonably develop the lease.326

[l] — Partition by Sale.In Dimock v. Kadane,327 tenants in common in oil and gas leases sought

a partition sale of their undivided interests in the leases. The court foundthat the original owners had impliedly agreed not to partition the interestsin the leases because the agreements indicated a desire to retain the co-tenancy status during the life of the leases.328 Consequently, the courtheld that the successors in interest to the original owners, the parties of thelawsuit, were not entitled to partition.329

[m] — Well Producing in Paying Quantities or LeaseTerminated.

In Dreher v. Cassidy Limited Partnership,330 the issue was whetherthe well under the subject oil and gas lease had ceased to produce in payingquantities. The lease contained a habendum clause extending the primaryterm as long as “oil and gas is produced from said land.”331 The courtexplained that Texas defines “produced” the same as “production in payingquantities.332

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325 Id. at 739, 741.326 Id. at 741.327 Dimock v. Kadane, 100 S.W.3d 622, 624 (Tex. Ct. App. 2003). This case was oneof four related cases involving the individual tenants in common in the subject oil and

gas leases.328 Id. at 627.329 Id. at 629.330 Dreher v. Cassidy Limited Partnership, 99 S.W.3d 267, 268 (Tex. Ct. App. 2003).331 Id. at 268.332 Id. at 269.


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The court applied a two-part test to determine if the lease had terminateddue to nonproduction in paying quantities.333 First, the court looked to seeif the lease had been unprofitable over a reasonable period of time.334

Second, the court analyzed whether a reasonably prudent operator wouldhave continued operations.335

The court found that although there was evidence that the lease wasnot profitable for an eight-month period, there was no evidence presentedthat that an eight-month period was a reasonable period of time.336 Inaddition, the court found that there was no evidence, such as experttestimony, that a reasonably prudent operator would have discontinuedoperating.337

[n] — Trespass and Negligence Action Against Oiland Gas Lessee for Drilling Horizontal Well.

In Pioneer Natural Resources USA, Inc. v. W.L. Ranch, Inc.,338 thelandowner brought a trespass, negligence and fraud action against the oiland gas lessee for drilling a horizontal well into the landowner’s property.Although the original oil and gas lease had expired before the horizontalwell was drilled, the lessee had pooled the tract in question with three othertracts prior to the expiration of the lease.339 The lease, however, containedconflicting expiration and pooling provisions.340 For example, the courtnoted that the lease stated that “[p]roduction from any well pooled with ordrilled on the 103.75 acres which will extend the primary term of thelease.”341

333 Id.334 Id.335 Id.336 Id.337 Id.338 Pioneer Natural Resources USA, Inc. v. W.L. Ranch, Inc., 127 S.W.3d 900, 903

(Tex. Ct. App. 2004).339 Id. at 903-04.340 Id. at 905.341 Id. at 906.

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The landowner had been receiving royalties, but asserted that he wasnow entitled to all of the proceeds due to the alleged trespass.342 The courtheld that the primary term of the lease was extended due to the poolingprovision and therefore there was no trespass by the lessee.343

[o] — Breach of Oil and Gas Operating Agreements.In Eland Energy, Inc. v. Seagull Energy E&P, Inc.,344 an operator

brought an action against both the assignor and assignee of working interestsfor breach of the oil and gas operating agreements. The court explainedthat in a contract action, such as this one, “[a] contract is ambiguous whenits meaning is uncertain and doubtful or is reasonably susceptible to morethan one interpretation.”345 Furthermore, the court explained that the courtscannot rewrite oil and gas operating agreements or add language.346 Instead,the courts must enforce the operating agreements as written.347

The court held that the assignor, under the unambiguous language ofthe oil and gas operating agreements, had no obligation to pay the operatora share of the operator incurred costs or expenses after the assignor’sassignment of working interests.348 However, the court held that theassignee was liable to the operator.349

[p] — Declaratory Judgment – Alleging CashoutImbalance Payment Provisions AreUnenforceable for Failure to Timely Invoice.

In Torch Energy Mktg., Inc. v. Pacific Gas & Elec. Co.,350 a naturalgas distributor brought suit against the owner of a gas pipeline concerning

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342 Id. at 910.343 Id.344 Eland Energy, Inc. v. Seagull Energy E&P, Inc., 135 S.W.3d 122, 124 (Tex. Ct.

App. 2004).345 Id. at 125.346 Id.347 Id.348 Id. at 128.349 Id. at 129.350 Torch Energy Mkgt., Inc. v. Pacific Gas & Elec. Co., 280 F. Supp. 2d 632, 633

(S.D. Tex. 2003).


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351 Id. at 634.352 Id. at 640-41.353 Id. at 641.354 Villarreal v. Grant Geophysical, Inc., 136 S.W.3d 265, 267 (Tx. Ct. App. 2004).355 Id. at 267.356 Id. at 267-68.357 Id. at 269.358 Id. at 270.

the cashout imbalance provisions in the parties’ production balancingagreement. The distributor sought declaration that the provision wasunenforceable because the owner did not timely invoice the cashoutamounts.351

The court held that even though the owner failed to timely invoice thecashout amounts, the owner was not equitably estopped from recoveringsuch amounts nor was the owner’s failure a material breach of theagreement.352 The court also explained that the owner’s course of dealingsdid not modify the agreement so as to prohibit the recovery of the cashoutamounts by the owner.353

[q] — No Trespass – Conducting Three-DimensionalSeismic Surveys Without a Permit.

In Villarreal v. Grant Geophysical, Inc.,354 the landowners broughtsuit against the surveyors for conducting three-dimensional seismic surveysfor subsurface trespass and unjust enrichment. The surveyors did not obtaina permit for the subject landowner’s land and 125 other owners, but did getpermits from 2100 surrounding surface owners for the 300 square milearea that it was surveying.355

The court found that the surveyors did not physically trespass on thelandowner’s property as the “shots” and “recover” points were conductedon the permitted lands only, and then the surveyors reconfigured the surveyto include the absent tracts of land.356 The court noted that a physicalviolation is required for a subsurface trespass in Texas or an injury to theland.357 The court held that neither was present here nor was there unjustenrichment for the data the surveyors unintentionally secured.358

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OIL AND GAS LAW UPDATE § 13.02

[22] — Utah.[a] — Severance Taxes.

In ExxonMobil Corp. v. Utah State Tax Comm’n,359 Utah’s taxcommission’s general practice in calculating severance tax due on oil hadbeen at the actual point of the sale, not at the point of removal from theground. The primary issue before the court was where production wascomplete for taxation purposes.360 The court reversed the commission’sdecision for two reasons.361 First, the statutory language of the Utah code,Utah Code Ann. Sections 59-5-101, 59-5-103 (2004), was ambiguous.362

Second, the court could not find any indication of the legislature’s intentfor the word “production.”363

The court explained that given the ambiguity in the statute, it wascompelled to construe the taxation statute liberally in favor of thetaxpayer.364 Thus, the court held that the proper location point to calculatethe severance tax was not at the point of sale, but rather in the immediatevicinity where the oil and gas was physically removed from the Earth.365

However, the court cautioned that to qualify as the point at which productionwas complete, that point has to have been one at which sales of the oil andgas actually occurred.366

[b] — Plugging and Abandoning Wells.In Road Runner Oil, Inc. v. Bd. of Oil, Gas & Mining, Dep’t of Natural

Res.,367 oil well operators sought to overturn an order of the Board of Oil,Gas and Mining that required them to permanently plug and abandon four

359 ExxonMobil Corp. v. Utah State Tax Comm’n, 86 P.3d 706, 708 (Utah 2003).360 Id. at 708.361 Id. at 712.362 Id. at 710.363 Id. at 711.364 Id. at 710.365 Id. at 711.366 Id.367 Road Runner Oil, Inc. v. Bd. of Oil, Gas & Mining, Dep’t of Natural Res., 76 P.3d

692, 693 (Utah Ct. App. 2003).


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oil wells. The operators asserted that the wells were potentially viable.368

The court explained that Utah’s code mandates that wells that have beeninactive for over five years must be plugged and abandoned absent a showingof good cause to maintain their shut-in status.369 The court found that theviability of the wells was speculative and that the wells posed a potentialhealth and safety risk to the public and thus affirmed the Board’sdecision.370

[23] — Virginia.[a] — Coalbed Methane – Surface Owners vs. Coal

Owners Claiming Rights to CBM.Harrison-Wyatt, LLC v. Ratliff371 was a case of first impression for

Virginia in the area of coalbed methane rights. The issue was when a surfaceowner conveys all of the coal in and under the land in 1889, who currentlyhas title to the CBM – the coal owner or the surface owner?372 The courtfound that the word “coal” was not ambiguous as to how it was used in thelate 19th century.373 The court explained that coal was a solid rocksubstance used as fuel.374 Consequently, the court held that CBM was adistinct mineral estate in which title did not pass to the coal owner.375

[24] — West Virginia.[a] — Lease – Coalbed Methane Rights.

In Energy Dev. Corp. v. Moss,376 the issue was whether a 1986 standardoil and gas lease conferred the right to drill the coal seams for coalbedmethane gas. The court noted that the lease was executed by the lessee and

368 Id. at 693.369 Id. at 696.370 Id. at 696-97.371 Harrison-Wyatt, LLC v. Ratliff, 593 S.E.2d 234, 235 (Va. 2004).372 Id. at 235.373 Id. at 238.374 Id.375 Id.376 Energy Dev. Corp. v. Moss, 591 S.E.2d 135, 138 (W. Va. 2003).

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that it was ambiguous as it made no explicit reference to CBM, and thusmust be construed against the lessee.377 It appeared that the courtsidestepped classifying CBM as “coal” or “gas” and instead the courtfocused on the “intent of the parties” at the time the lease was executed.378

The court held that the lease did not confer the right to drill for CBM.379

The dissent argued that the term “gas” in the lease should include CBM.380

[b] — Tax Credit – Gas Storage.In Consolidated Natural Gas Co. v. Palmer,381 the taxpayer, a gas

company, argued that income from all of its storage activities, including itsmanagement services that it performed at cost, should be included in thecalculation of its tax credit. The court explained that the West Virginia taxcredit statute, W. Va. Code Section 11-23-17(b)(2003), expressly includedgross income from the business, which was all income from gas storageactivities.382 The court held that when calculating the tax payer’s tax credit,income from storage activities must be included in the calculation, includingmanagement services provided by the tax payer even though the tax payerprovided those services at cost.383

[25] — Wyoming.[a] — Severance Tax – Volumetric Production

Payment Agreement.In EOG Res., Inc. v. Dep’t of Revenue,384 an operator of oil and gas

wells sought review of the Department of Revenue’s classification ofvolumetric production payment (“VPP”) as an arms-length sale of gas forseverance tax purposes.

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377 Id. at 144.378 Id.379 Id. at 146.380 Id. at 154.381 Consolidated Natural Gas Co. v. Palmer, 582 S.E.2d 835, 837 (W. Va. 2003).382 Id. at 839.383 Id.384 EOG Res., Inc. v. Dep’t of Revenue, 86 P.3d 1280, 1281 (Wyo. 2004).


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The court found that the transaction at issue included a series ofexchanges for terms equivalent to cash based upon index pricing of gas.385

The court held that the VPP transaction was required to be taxed as anarms-length sale as the VPP agreement between the oil and gas well operatorand an investment firm intended something more than financing, even thoughthe parties designated the transaction as a financing arrangement.386

[b] — Oil and Gas Anti-Indemnity Statute.In Union Pacific Resources Co. v. Dolenc,387 an injured employee of a

subcontractor brought suit against the contractor and the oil company torecover for the injuries he sustained in an explosion. The oil company soughtindemnification from the contractor as per the Master Service Contractentered into by the parties.388

The court held that an independent contractor performing weldingservices at a water plant on an oil field did not perform work “in connectionwith any well” drilled for the purpose of producing oil, gas, or water.389

Thus, the court held that the Wyoming anti-indemnity statute did not applyso as to void the indemnity provision in the Master Service Contract.390

Ultimately, the court found that the oil company was entitled to beindemnified by the contractor.391

[c] — Coalbed Methane – Quiet Title Action.392

In Hickman v. Groves,393 the defendant’s predecessor executed awarranty deed conveying real property in 1944 but reserving one-half (1/2)

385 Id. at 1287.386 Id. at 1286.387 Union Pacific Res. Co. v. Dolenc, 86 P.3d 1287, 1290 (Wyo. 2004).388 Id. at 1290.389 Id. at 1293.390 Id. at 1293.391 Id. at 1289.392 See also McGee v. Caballo Coal Co., 69 P.3d 908 (Wyo. 2003) involving a 1973deed where the court held, when looking to the parties’ intent, that warranty deeds thatconveyed rights to all coal or other minerals contained in or associated with the coal andwhich may be mined with the coal or produced with the coal did not grant rights to thecoalbed methane gas.393 Hickman v. Groves, 71 P.3d 256 (Wyo. 2003).

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of all the oil and commercial gravel rights. The plaintiffs brought a quiettitle action against the defendants so that it could be determined who ownedthe coalbed methane gas under the subject property.394

The court looked to the parties’ intent at the time the deed was executedin 1944.395 The court noted that no specific grant of coal or reservation ofgas was mentioned in the deed.396 Thus, the court held that genuine issuesof material fact existed and remanded the case.397

§ 13.03. State Case Law Update – U. S. Court of Appeals. [1] — Fourth Circuit.

[a] — Declaratory Judgment – Breach of MasterNatural Gas Purchase Agreement.

In Hess Energy, Inc. v. Lightning Oil Co.,398 an energy companybrought suit seeking a declaratory judgment that it had not breached a masternatural gas purchase agreement with its supplier. The district court enteredjudgment upon a jury verdict for the energy company and the supplierappealed.399

The court of appeals explained that under Virginia law, the award ofdamages that the natural gas buyer was entitled to was properly measuredby the difference between the contract price and the market price at thetime and place set for delivery – not at the time the buyer learned of therepudiation.400 Furthermore, the court held that the commodity exchangeprice was proper to represent the market price in calculating the seller’sdamages.401

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394 Id. at 256-57.395 Id. at 258.396 Id. at 259.397 Id. at 262.398 Hess Energy, Inc. v. Lightning Oil Co., 338 F.3d 357, 359 (4th Cir. 2003).399 Id. at 358.400 Id. at 363.401 Id. at 365.


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[b] — Gas Company Condemnation – Natural GasAct.

In East Tennessee Natural Gas Co. v. Sage,402 a gas company broughtcondemnation actions against landowners from whom it was unable toacquire the necessary easements after obtaining a certificate of publicconvenience and necessity authorizing its construction of an interstate gaspipeline, pursuant to the Natural Gas Act (NGA). The gas company movedfor preliminary injunctions granting it immediate possession ofeasements.403 The district court held that the company could exercise rightof eminent domain to acquire necessary easements and granted preliminaryinjunction motions, and the landowners appealed.404

The court of appeals held that once the district court determined that agas company has a substantive right to condemn property under the NGA,the court may exercise equitable power to grant remedy of immediatepossession through issuance of a preliminary injunction.405 After analyzingthe elements of a preliminary injunction, the court found that the grantingof the preliminary injunctions was not abuse of the district court’sdiscretion.406 The court also found that the gas company’s complaintssatisfied the rule requiring a condemnation complaint to include descriptionof affected property sufficient for its identification and any jurisdictionalrequirement relating to property descriptions.407

[2] — Fifth Circuit.[a] — EPA Approval to Use Pre-Existing Pipeline

with No Environmental Impact Statement.In Spiller v. White,408 an EPA decision that no environmental impact

statement (EIS) was needed in conjunction with the approval to use the

402 East Tennessee Natural Gas Co. v. Sage, 361 F.3d 808 (4th Cir. 2004).403 Id. at 820.404 Id.405 Id. at 828.406 Id. at 830.407 Id.408 Spiller v. White, 352 F.3d 235 (5th Cir. 2003).

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pre-existing pipeline was contested under the National Environmental PolicyAct. After conducting an environmental assessment, the agency issued afinding of no significant impact rather than requiring an EIS.409

In affirming the agency’s decision, the court of appeals held that“[b]ecause NEPA dictates no particular substantive result, an agencydecision not to conduct an EIS based on a FONSI is reviewable only onprocedural grounds.”410 The court held that this decision was neitherarbitrary nor capricious, and was in accordance with the authority bestowedunder the Administrative Procedures Act.411 The court explained that “[t]helaw only requires that an EA [Environmental Assessment] be a ‘rough-cut,’ ‘low budget,’ preliminary look at the environmental impact of aproposed project.”412

[3] — Sixth Circuit.[a] — Expedited Seven-Year Taxation Depreciation

Schedule – “Gathering Pipeline.”In Saginaw Bay Pipeline Co. v. United States,413 the court was faced

with whether the gas company’s underground natural gas pipeline shouldbe depreciated over seven (7) years or fifteen (15) years. The core issuewas whether the pipeline was a transmission or distribution line transmittingpure or dry gas, or whether the pipeline was just a gathering line transmittingraw gas that needed to be processed further.414 If the pipeline were classifiedas a gathering line, then it was entitled to an expedited seven-yeardepreciation schedule.415

The court held that the gas company was not a producer of gas, butinstead its pipelines constituted a gathering system used to transmit partially

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409 Id. at 236.410 Id. at 241-2.411 Id. at 242-43.412 Id. at 240 (quoting Sabine River Authority v. U.S. Dep’t of Interior, 951 F.2d 669,

677 (5th Cir. 1993).413 Saginaw Bay Pipeline Co. v. United States, 338 F.3d 600 (6th Cir. 2003).414 Id. at 601.415 Id.


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cleaned, but still “wet” gas to purification plants.416 Thus, the court foundthat the seven-year depreciation period was appropriate.417

[b] — Gas Lease Allegedly Breached ByConstructing a Fence Within 30 Feet of Well.

In Columbia Gas Transmission Corp. v. Ziegler,418 a gas companyalleged that a land owner violated its lease of a natural gas storage well byconstructing a fence within 30 feet of that well where the lease prescribedan easement of 300 feet.

The court acknowledged that the lessor violated the terms of the lease,but that this violation resulted in no tangible harm to the lessee.419 Thecourt also did not permit the lessee to recover under a slander of titletheory.420

[4] — Seventh Circuit.[a] — Antitrust Violations Under Sherman Act By

Natural Gas Suppliers.In United States Gypsum Co. v. Indiana Gas Co.,421 ProLiance, one

of two natural gas suppliers part of a joint venture agreement, was accusedof Sherman Act violations by a gas purchaser, United States Gypsum (USG).USG alleged that ProLiance’s activities permitted pipeline owners toincrease pricing to consumers associated with residual capacity.422

ProLiance’s alleged violative activity involved the purchase of excesscapacity, thus raising the price on spot-market sales.423 The district courtrefused to entertain any claims raised by the plaintiff, opining that the

416 Id. at 609.417 Id.418 Columbia Gas Transmission Corp. v. Ziegler, 2003 WL 22734806 (6th Cir. 2003).419 Id. at *3.420 Id. at *4.421 United States Gypsum Co. v. Indiana Gas Co., 350 F.3d 623 (7th Cir. 2003).422 Id. at 625.423 Id. at 625-26.

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plaintiff suffered no antitrust injury because it did not buy from ProLiance,that the suit was time-barred, and that the claims were issue precluded.424

Here, the court held that the latter two reasons the district court citedfor dismissal were entirely inappropriate, as they were affirmative defensesto which the plaintiff need not have overcome in order to continue on aRule 12(b) motion.425 In addition, the court held that while “the antitrustinjury doctrine prevents a suit by one of ProLiance’s business rivals,” itdoes not apply to consumers such as USG.426

[5] — Eighth Circuit.[a] — Pipeline Systems – Production Assets or

Transportation Assets for Tax Depreciation.In Clajon Gas Co., L.P. v. Comm’r of Internal Revenue,427 Clajon

claimed that a seven-year depreciation period applied with respect to thevaluation of its equipment. The dispute arose as to whether Clajon’s pipelinesystems were to be considered production assets or transportation assets.428

The tax court applied the fifteen-year depreciation period associated withtransportations assets rather than the seven-year period associated withproduction equipment.429

On appeal, the court held that Clajon’s equipment was to be consideredproduction equipment, subject to the seven-year depreciation period.430

The court explained that the manner in which the facilities were used wasparamount to its classification of the pipelines.431 Moreover, since thepipelines were low-pressure raw gas gathering pipelines, the courtacknowledged that they were part of the production process, and not part

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424 Id.425 Id. at 628-29.426 Id. at 627.427 Clajon Gas Co., L.P. v. Comm’r of Internal Revenue, 354 F.3d 786 (8th Cir. 2004).428 Id. at 787.429 Id. at 786-87.430 Id. at 791.431 Id. at 790-91.


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of the post-production distribution process.432 Although the fact that Clajonwas not involved in the actual production of the gas did not seem to be thatimportant to the court, the court felt that the nature and function of theequipment it operated was the important factor to be considered in itsanalysis.433

[6] — Ninth Circuit.[a] — Coalbed Methane – Discharge of

Groundwater Violating Clean Water Act.In Northern Plains Resource Council v. Fidelity Exploration & Dev.

Co.,434 Fidelity Exploration and Development Company (Fidelity)extracted coalbed methane gas for commercial purposes, but in the processof extracting the gas Fidelity was also pumping groundwater to the surfaceand discharging it into the Tongue River. The discharged water was “salty”and contained a number of chemicals identified by the EnvironmentalProtection Agency (EPA) as pollutants.435 In response to this activity,Northern Plains Resource Council (Northern Plains) filed a citizen’s suitunder the Clean Water Act (CWA) “alleging that Fidelity unlawfullydischarged pollutants into navigable waters of the United States.”436

On appeal, Northern Plains contests the district court’s grant of summaryjudgment in favor of Fidelity.437 The court held “that the unalteredgroundwater produced in association with methane gas extraction, anddischarged into the river, is a pollutant within the meaning of the CWA.”The court also held “that states cannot create exemptions to the CWA,whether or not the EPA has delegated permitting authority to the state.”438

432 Id. at 788.433 Id. at 790.434 Northern Plains Resource Council v. Fidelity Exploration & Dev. Co., 325 F.3d

1155 (9th Cir. 2003).435 Id. at 1157.436 Id.437 Id.438 Id. at 1157-58.

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§ 13.04. Conclusion.Although many of the decisions over the past year have reiterated firm

principles of law in the oil and gas industry, a few recent decisions havechartered onto new ground, especially concerning CBM ownership and thedichotomy between whether CBM is a “gas” in and of itself or an integralpart of coal. Many states have left this CBM ownership issue unanswered,but hopefully in the near future states will clarify this very hot issue eitherjudicially or legislatively.

§ 13.05. Addendum: Statutory Update.

Alaska• 2004 Alaska Laws Ch. 8 (S.B. 265) – Act relating to the schedule of

proposed oil and gas lease sales and the commissioner’s reportingand notifying the legislature.

• 2004 Alaska Laws Ch. 9 (S.B. 266) – Act approved closing certainlands within the proposed Bristol Bay (Alaska Peninsula) to oil andgas exploration licensing and shallow natural gas leasing.

• Proposed Senate Bill 312 – Would end Alaska’s over-the-counterleasing program for shallow gas exploration.

• Proposed House Bill 441 – Would raise tax rates for all fields whenoil climbs above $20 per barrel, while reducing each field’s new ratewhen prices drop below $16 per barrel. Effectively adding oil priceto tax formula.

• Title 31 – Oil and Gas and Water, Air, Energy and EnvironmentalConservation Act – added coalbed methane gas to the definition of“shallow natural gas.”

Idaho• 2004 Idaho Laws Ch. 13 (H.B. 510) – Amending an Act relating to

State Lands to provide an exception for reserving mineral lands fromsale when the surface estate is identified as having the highest andbest use for development purposes, such as for residential orcommercial purposes. Such lands must be sold as a single estatewhen the state land is identified as having the highest and best usefor residential or commercial development purposes. Such

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applications to purchase those state lands that do not identify thelands as having the potential highest or best use for residential orcommercial purposes and are approved shall be subject to areservation to the state of all mineral deposits in the land.

Kansas• 2003 Kansas Laws Ch. 147 (H.B. 2005) – Amends the state tax act.

On and after January 1, 2006, for the sales of gas delivered throughmains, lines or pipes to residential premises for noncommercial useby the occupant of such premises, and for agricultural use (includingpropane gas) the state rate shall be zero percent. Added “tax situs”definition to the act as it relates to the “location” of property for thepurpose of imposing tax. Oil and gas leases on lands in Kansas andall interests created thereby shall be considered as tangible personalproperty having an actual situs within the state.

Kentucky• Coalbed Methane Legislation – Title XXVIII – Mines and Minerals

– Chapter 349 – Coalbed Methane Development – This newstatutory chapter was enacted “to encourage and ensure the fullestpractical safe recovery of both coal and coalbed methane.” Thechapter authorizes (a) CBM permits; (b) regulates the design ofCBM wells and techniques; (c) authorizes CBM well drilling unitsand pooling interests therein; (d) establishes filed rules; and (e)provides a process to enable CBM operators and owners to proceedwith orderly development and production of CBM while judicialresolution of issues relating to CMB ownership are still pending.

Nevada• 2003 Nevada Laws Ch. 478 (A.B. 32) – Amends the Act to require

certain public utilities, alternative sellers, providers of discretionarynatural gas service to keep uniform and detailed accounts of allapplicable business transacted in Nevada and to furnish an annualreport to the Commission and affected governmental entities. Nowrequires alternative seller and provider of discretionary natural gas

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service to pay certain taxes, fees and assessments relating to thepurchase of natural gas.

New Jersey• 2003 NJ Sess. Law Serv. Ch. 148 (Senate 1948) – Amends an act

concerning underground storage tank financing. The term “eligibleowner or operator” now includes an owner or operator of a facilitylocated within certain designated areas, has a net worth of less than$3,000,000 and who demonstrates the inability to qualify for acommercial loan for all or part of the eligible project costs. Changedthe limit of the financial assistance from the fund from $1,000,000 to$2,000,000. As to a conditional hardship grant, the limit waschanged from $250,000 to $500,000.

New Mexico• 2004 New Mexico Laws Ch. 80 (S.B. 170) – An Act relating to

pipelines and creating the pipeline safety fund. Also authorizes theimposition of pipeline safety inspection fees by the public regulationcommission. Effective July 1, 2004.

• 2004 New Mexico Laws Ch. 55 (H.B. 251) – Act relating to energythat creates a fund and grants to promote research and developmentof energy conservation technologies and developing hydrogen, fuelcell, renewable energy and energy efficiency technologies.

Oklahoma• 2004 Okla. Sess. Law Serv. Ch. 23 (H.B. 2091) – Amends the Act to

recreate the Commission on Marginally Producing Oil and GasWells until July 1, 2010.

Oregon• 2003 Oregon Laws Ch. 234 (S.B. 205) – Amends the Act as to

financial assistance provided to organizations that represent broadcustomer interests from public utilities that provide natural gas.

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South Dakota• 2004 South Dakota Laws Ch. 273 (H.B. 1014) – Amends an Act

reducing the percentage of owners required to ratify an oil and gasunit from 75 percent to 60 percent.

Washington• 2004 Wash. Legis. Serv. Ch. 226 (S.S.B. 6641) – Amends an Act

relating to oil spill management to clearly adopt a zero spill strategy.In addition, amendment states that by June 30, 2006, the departmentshall adopt the necessary rules, including standards requiringdeployment of containment equipment prior to the transfer of oil, tocarry out the provisions of this Act.

West Virginia• 2004 West Virginia Laws H.B. 4166 – Amends and reenacts an Act

concerning easements and rights-of-way for mineral leases. Requiresany deed or instrument that initially grants or reserves the easementor right-of-way to describe it by metes and bounds. However, oil andgas, gas storage and mineral leases shall not be required to describethe easement, but shall just describe the land on which the easementor right-of-way will be by source of title or reference to a tax mapand parcel, recorded deed, recorded lease, plat or survey sufficient toreasonably identify and locate the property.

Wyoming• 2004 Gen. Sess. Ch. 83 (S.F. 60) – Amends an Act relating to the

Wyoming natural gas pipeline authority to expand the powers of theauthority and modifying and adding definitions to the Act.

• 2004 Gen. Sess. Ch. 82 (S.F. 61) – Act creating an enhanced andimproved oil recovery commission to provide research programs forenergy research and enhanced oil recovery among other programs.

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FederalUnited States Proposed Senate Bill 2095 – The Energy

Omnibus Bill• Permanently authorizes the Strategic Petroleum Reserve.• Production incentives for marginal wells – tax credits.• Royalty relief for deep water wells.• Incentives for ultra-deep natural gas wells.• Creates the Office of Federal Energy Permit Coordination.• Streamlines permitting in certain energy corridors.• Authorizes the Alaska Natural Gas Pipeline.

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Documents

Chapter 13 Oil and Gas Law Update - EMLF 13 Oil and Gas Law Update ... noted that the implied duty to restore the surface in all oil and gas leases also played a role in this case