Marcellus Shale Law Monitor

Update: SB 259 Signed by Governor Corbett Despite NARO Opposition

By Attorney Dale A. Tice, Marshall, Parker & Weber

In an earlier blog post I highlighted my concerns with section 2.1 of SB 259, that would allow old oil and gas leases that don’t include a pooling provision to be included in a pooled production unit that will be developed with horizontal drilling.  Absent this gift from the legislature, the oil and gas companies would have to negotiate a lease amendment with the lessor, thus providing the landowner an opportunity to negotiate more favorable lease terms.

The National Association of Royalty Owners (I serve on the legislative committee of the Pennsylvania Chapter) strongly opposed passage of SB 259 with objectionable section 2.1 included. We contacted the Governor’s office, state legislators and the media in an effort to emphasize the problems with SB 259 and the effect it would have on the impacted landowners – to no avail. Governor Corbett signed SB 259 on July 9.

I strongly encourage Pennsylvania readers of the Marcellus Shale Law Monitor to contact your state legislators and express your views regarding this legislative re-drafting of gas leases in favor of the oil and gas companies. Elected representatives need to remember that they’re working for their constituents, the landowners – not the natural gas industry who provides hard hat and boots for workers. Hopefully a surge of letters and emails from voters will gain their attention – let’s get section 2.1 of SB 259 repealed.

SB 259 from the Royalty Owner Perspective

By Attorney Dale A. Tice, Marshall, Parker & Weber

It has been my pleasure to serve on the legislative committee of the Pennsylvania Chapter of the National Association of Royalty Owners – NARO-PA. Among the bills we have been tracking are SB 259 and HB 1414. This legislation is of importance to royalty owners because it includes requirements regarding the information that must be provided to the mineral owner on a royalty check stub. NARO has provided testimony to the Pennsylvania Senate outlining the information we think should be included, such as separate production information for each well identified with an API number. NARO-PA appreciates the opportunity to provide input on these bills and the efforts of legislators on behalf of landowners.

To our surprise, we recently noted the addition of section 2.1 to both bills. This section provides as follows:

SECTION 2.1. APPORTIONMENT.

WHERE AN OPERATOR HAS THE RIGHT TO DEVELOP MULTIPLE CONTIGUOUS LEASES SEPARATELY, THE OPERATOR MAY DEVELOP THOSE LEASES JOINTLY BY HORIZONTAL DRILLING UNLESS EXPRESSLY PROHIBITED BY A LEASE. IN DETERMINING THE ROYALTY WHERE MULTIPLE CONTIGUOUS LEASES ARE DEVELOPED, IN THE ABSENCE OF AN AGREEMENT BY ALL AFFECTED ROYALTY OWNERS, THE PRODUCTION SHALL BE ALLOCATED TO EACH LEASE IN SUCH PROPORTION AS THE OPERATOR REASONABLY DETERMINES TO BE ATTRIBUTABLE TO EACH LEASE.

From the perspective of NARO-PA, this is important. As an oil and gas attorney, I have worked with a number of landowners who were in the position of having signed an old oil and gas lease years ago that only allowed pooling of formations below the Onondaga horizon – not the Marcellus shale. I am also aware of old leases that are now held by shallow gas production from vertical wells that don’t include a pooling provision. These old leases generally provide the state minimum royalty of 12.5 percent.

In order to include these leases in a Marcellus production unit the gas company has to negotiate an amendment to the lease to allowing pooling of the Marcellus formation. This negotiation provides the landowner an opportunity to negotiate a better lease with a higher royalty and increased landowner protection.

The NARO-PA position is that everything is negotiable and every time a landowner’s signature is requested there is an opportunity to negotiate. This is as it should be – the freedom to negotiate consideration and contractual terms.

My concern is that section 2.1 may be construed to allow these old leases that don’t have a pooling provision (but don’t expressly prohibit it) to be included in a pooled production unit that will be developed with horizontal drilling – without the lessor’s agreement to amend the lease to allow Marcellus pooling. If this legislation becomes law with section 2.1 included, the result may be that the legislature will have effectively eliminated the impacted landowners’ ability to negotiate landowner-friendly terms or a higher royalty into a lease amendment. This would be a terrible result from the perspective of NARO-PA.

In addition, the verbiage in the last sentence of the section providing that production shall be allocated “as the operator reasonably determines to be attributable to each lease” appears to be deliberately vague and has the potential to invite abuse.

I don’t believe this result was the intention of the state legislators who voted in favor of SB 259. Admittedly, the language in section 2.1 is somewhat confusing. The title notwithstanding, I don’t see the focus of this section as “apportionment”.

It is important to note that this issue doesn’t apply to the large majority of Marcellus landowners who have signed a modern oil and gas lease that allows pooling of all productive formations. However, it seems to me that it is the duty of NARO-PA to be an effective advocate for all Pennsylvania royalty owners, not just the majority.

 

Attorney Dale Tice Speaking at PICPA Natural Gas Conference

By Dale A. Tice, Esq., Marshall, Parker & Weber

The Pennsylvania Institute of Certified Public Accountants (PICPA) is a well-regarded professional organization providing services for CPAs. To quote from their website:

The Pennsylvania Institute of Certified Public Accountants (PICPA) is the premier statewide resource for top-class continuing professional education programs, professional networking, business-friendly advocacy, thought leadership, and a full range of services for accounting professionals. PICPA’s programs and services are a springboard for growing camaraderie, confidence, and commitment in the world of accounting.

The PICPA organization recognizes the impact that shale gas development is having on the practices of accountants in the Marcellus and Utica Shale regions of Pennsylvania. Professionals such as accountants and attorneys are required to complete continuing education credits and PICPA offers educational programs focused on issues related to natural gas development. The premier statewide conference for accountants who wish to stay up to speed in this area is the PICPA Natural Gas Conference, being held this year August 28-29 at the Penn Stater Conference Center Hotel in State College, PA.

This year’s program includes a wide variety of topics that will be of interest to professionals providing services to Marcellus landowners and the natural gas industry. Among the speakers are George Stark, Director of External Affairs at Cabot Oil & Gas, and John Felmy, Chief Economist at the American Petroleum Institute. Other knowledgeable presenters include Certified Public Accountant James Leonard and Certified Mineral Appraiser Jeffrey Kern.

I have been invited to present at the conference this year and will covering a review of significant case law and legislative developments, along with a discussion of estate planning options for natural gas royalty owners.

It’s truly a pleasure to be invited to speak at this prestigious event with such well-respected presenters.

 

Update: Pennsylvania Supreme Court Holds that Reservation of Minerals Does not Include Marcellus Shale Natural Gas

By Dale A. Tice, Esq., Marshall, Parker & Weber

The Pennsylvania Supreme Court has issued a decision in Butler v. Powers Estate, 2013 Pa. Lexis 789, and the oil and gas lawyers in the Commonwealth have issued a collective sigh of relief.

This blog has previously discussed the Butler case; the earlier post may be viewed here. The question at issue was whether a reservation of minerals in a deed included Marcellus shale natural gas. This was a question that most lawyers practicing oil and gas or real estate law would have confidently answered in the negative based on an old rule of law in Pennsylvania, Dunham’s Rule.

Dunham’s Rule

Dunham’s Rule is based on a case from 1882, Dunham & Shortt v. Kirkpatrick, 101 Pa. 36 (Pa. 1882). The rule creates a rebuttable presumption that an exception and reservation of “minerals” without any specific mention of oil or gas was not intended by the parties to include oil and gas. A series of cases from the Pennsylvania Supreme Court have confirmed that Dunham’s Rule is a well-settled rule of property law in the state with many titles – and oil and gas leases – taken based on the presumption that a reservation of minerals does not include oil and gas.

The Superior Court Decision

When the Pennsylvania Superior Court issued an opinion in Butler v. Charles Powers Estate, 2011 PA Super 198 (Pa. Super. Ct. 2011) raising the possibility that Dunham’s Rule didn’t apply to Marcellus shale natural gas, the decision naturally garnered a great deal of attention. The appellants in the case argued that shale was a mineral and “whoever owns the shale, owns the gas,” relying on U.S. Steel Corp. v. Hoge, 503 Pa. 140, 468 A.2d 1380 (1983) where the Pennsylvania Supreme Court held that the owner of coal also owns the coal-bed methane natural gas found in the coal. The Superior Court reversed and remanded the case, concluding that “the parties should have the opportunity to obtain appropriate experts on whether Marcellus shale constitutes a type of mineral such that the gas in it falls within the deed’s reservation.”

The Pennsylvania Supreme Court Decision

The Superior Court decision was appealed to the Pennsylvania Supreme Court which granted allocatur, leading to the April 24, 2013 decision reversing the Superior Court. The opinion may be viewed here. The court reviewed at length the entire line of cases in which Dunham’s Rule evolved, and reaffirmed that the rule continues to be the law in Pennsylvania and applied to the instant appeal.

Of course, Dunham’s Rule creates a rebuttable presumption; the burden is on the party arguing that the reservation includes gas or oil to prove by clear and convincing evidence that it was the intent of the parties executing the deed to include gas or oil in the reservation. Regarding the rebuttable presumption, the court stated “Critically, however, such intention may only be shown through parol evidence that indicates the intent of the parties at the time the deed was executed (italics added) — in this case, 1881.”  Practically speaking, in cases involving old deeds where the parties have long since passed the presumption will be essentially impossible to rebut.

The court also distinguished Butler from the Hoge case, noting that the deed reservation at issue in Hoge concerned coal rights and the related right of ventilation of coalbed gas which was not commercially viable at the time. The court further stated that the Hoge court “inherently made a legal distinction between coalbed gas and natural gas, despite recognizing the chemical similarities between the two, by upholding the landowners’ right to drill through the coal seam to obtain natural gas.” The court concluded that Hoge did not apply to the appeal and there was no reason to remand the case for further fact finding.

Conclusion

Butler v. Powers Estate is one of the most important appellate decisions issued in the Commonwealth since the Marcellus natural gas boom began. This Commentator is pleased to see that the Pennsylvania Supreme Court has affirmed the continuing viability of Dunham’s Rule and has not seen fit to overturn one-hundred and thirty years of Pennsylvania property law.

Is Your Five Year Lease Expiring? What’s Next?

By Attorney Dale A. Tice, Marshall, Parker & Weber

Over the last five years many landowners in the Marcellus shale region of Pennsylvania have been approached by oil and gas company landmen with gas lease offers. Marcellus leasing activity began in 2006 and 2007, but the gas leasing boom truly took off in 2008 when the cash bonus and royalty offers began to escalate. The majority of the leases that were signed at that time provided for a five year primary term, meaning that if drilling operations aren’t commenced in five years the lease will terminate. Many of those five year leases are now approaching the end of their primary term, raising a variety issues for landowners to consider.

In the hot areas where drilling activity is focused, landowners with expiring leases are now receiving lease extension offers. If the gas company feels confident that the property will be developed without delay, the extension may be for a relatively short term of one to three years. Although the current leasing environment is not as favorable for landowners as it was in 2008, a lease extension offer still creates an opportunity for the property owner to attempt to negotiate an increased cash bonus offer and possibly more beneficial lease terms. Landowners are of course not obligated to sign a lease extension; not signing will force the gas company to either allow the current lease to expire or quickly commence drilling operations to hold the lease.

If a different oil and gas company is interested in leasing property subject to a lease that will likely soon terminate, the landowner may receive a top lease offer. A top lease is a new lease signed by the landowner while the current lease is still in effect; the top lease is drafted so that it will only become effective when and if the current lease expires. Landowners who are approached with a top lease must carefully review their current lease before proceeding with the new offer – many old leases include a right of first refusal that will require the lessor to first allow the gas company holding the current lease an opportunity to match the terms of the top lease before leasing with the new company.

Other landowners with leases approaching the end of the primary term are trying to determine if their leases have been validly extended by the commencement of good-faith drilling operations on their land or property their land has been pooled with in a production unit. In the cases where an oil and gas lease does expire, the landowner may wish to obtain a release of the lease from the oil and gas company that can be placed of record to make clear that the property is not leased and would be available for a new lease offer.

An additional point to keep in mind: oil and gas companies frequently include a lease provision that will grant the company an option to extend the lease for an additional five year term under the same payment terms and conditions. If the option to extend is included, the gas company doesn’t need to obtain the landowner’s agreement to maintain the lease – the landowner may simply receive the extension payment by mail shortly before the expiration of the primary term. Lawyers who represent landowners would typically strike this provision from the lease, but property owners who did not engage a lawyer may find this provision, often buried toward the end, if they carefully review their lease.

In addition to lease extension offers, Marcellus landowners are also being asked to sign pipeline right-of-way agreements, division orders and other documents related to natural gas drilling. These are all important and complex legal documents that should always be reviewed by competent legal counsel to ensure that the landowner avoids the potential pitfalls that are present in the leasing and natural gas development process.

Marcellus Breakast Brief: Resources Mentioned

A special thank you to all of the professionals who attended this morning’s Marcellus Breakfast Brief at the Holiday Inn Downtown in Williamsport.

Below you will find the links to the information J. Paul Dibert referenced in his written material. If you have questions, please feel free to leave a comment below, call or email us at webmail@pagaslaw.net.

Also, don’t forget to check out photos from the event on our Facebook page.

1.      Inheritance Tax Bulletin 2012-01

2.      Inheritance Tax Bulletin 2011 – 02

3.      Informational Notice Inheritance Tax 2012-011

4.       Miscellaneous Bulletin 2011-02

5.       County Codes

 

Professionals – Join Us for the Marcellus Breakfast Brief

Financial Advisors, Accountants and Attorneys:  


If you are working with Pennsylvania Landowners,  please join us for:

The Marcellus Breakfast Brief 
Wednesday, October 10, 2012 

8:00 AM – 10:00 AM

Holiday Inn Downtown, 100 Pine St. Williamsport, PA 17701

Register Here

Join us for this free, educational breakfast meeting to learn about the latest legal and financial developments affecting our landowner clients.

  • Network with other colleagues  
  • Receive an update on latest case law changes

Then, settle in to hear our featured speaker, J. Paul Dibert, retired Chief of the Inheritance Tax Division of the Pennsylvania Department of Revenue.

Agenda: 

 8:00 AM – 8:15 AM:
Registration & Breakfast

 

8:15 AM – 8:45 AM:

Marcellus Case Law Update

8:45 AM – 9:00 AM: Break


9:00 AM – 10:00 AM: 
 

Navigating Marcellus Shale Inheritance Tax Issues in Pennsylvania

 

Register Today..

 

About the Topic:

Navigating Marcellus Shale Inheritance Tax Issues in Pennsylvania

Mr. Dibert will cover the following topics during his presentation:

  • The new mineral rights policy issued by the PA Department of Revenue;  
  • The policy on termination of Sole Use Trusts;
  •  Recent Commonwealth Court decisions in Leitham &  Bernecker;    
  • Review of the current time frame for returns to be processed by the Inheritance Tax Division;
  • Review of the  policy by the Board of Appeals to accept compromise offers on cases that go before the Board; and 
  • Share ways to expedite the filing of an inheritance tax return.

About J. Paul Dibert: 


Mr. Dibert graduated from Michigan Technological University in 1968. After 2 years in the Army and 9 years in private industry he joined the Pennsylvania Department of Revenue as a supervisor in the Altoona Office. In 1984 he transferred to Harrisburg and joined the inheritance tax division. He remained in that division for 28 years until his retirement in June of 2011. He was a trust valuation specialist, a Business and Trust Valuation Manager and for the final three years, Chief of the combined inheritance tax and reality transfer tax division.

 

Upon retirement and instant boredom he started a consulting business for legal practitioners, financial institutions and other professionals who have questions concerning Pennsylvania inheritance tax and related areas. The company is J. Paul Dibert Consulting. He also is a course planner and speaker for the Pennsylvania Bar Institute and has spoken at several regional probate bar associations.

 

Registration is Free. Call  1-800-401-4552 or register online 

 

 

Pennsylvania Commonwealth Court Strikes Down Act 13 Preemption of Local Zoning

By Attorney Dale A. Tice, Marshall, Parker & Associates

This blog has followed the developments as Pennsylvania legislators debated the details regarding the impact fee legislation.  When Governor Corbett signed Act 13 on February 14, 2012 most of the public attention was focused on the actual impact fee, but the new law included many additional provisions that updated the Commonwealth’s regulation of oil and gas development. Most controversial, however, was a restriction of municipalities’ authority to enact zoning ordinances that regulate where oil and gas development may occur. Act 13 provides that all local ordinances regulating oil and gas operations shall allow for reasonable development of oil and gas resources and section 3304 specifically requires that local ordinances must allow well drilling and pipeline operations as a permitted use in all zoning districts.

An earlier blog post discussing Act 13 may be found here.

The Pennsylvania Commonwealth Court has now held that section 3304 is unconstitutional. Writing for the 4-3 majority, President Judge Dan Pellegrini stated:

Because 58 Pa. C.S. §3304 requires all oil and gas operations in all zoning districts, including residential districts, as a matter of law, we hold that 58 Pa. C.S. §3304 violates substantive due process because it allows incompatible uses in zoning districts and does not protect the interests of neighboring property owners from harm, alters the character of the neighborhood, and makes irrational classifications.

The complete text of an amended version the opinion may be viewed here.

Although representatives of the seven municipalities that filed the petition for review are calling the ruling a great victory, celebrations may be premature. While the Commonwealth is enjoined from enforcing the provisions of section 3304 at this time, the reprieve may the temporary as it seems certain that the decision will be appealed to the Pennsylvania Supreme Court.

The Marcellus Shale Law Monitor will continue to follow developments in this case – check back for updates.

Pennsylvania Clarifies Valuation of Natural Gas Rights for Inheritance Tax

By Attorney Dale A. Tice, Marshall, Parker & Associates

One of the thorny issues facing estate planners working with clients in the Marcellus shale is the valuation of gas rights for tax purposes. The need for valuation can arise in a number of circumstances including federal estate and gift tax, state realty transfer tax and inheritance tax. The value of gas rights can be approximated using a variety of methods and planners may be uncertain as to the approach favored by the different taxing entities.

At least in regards to Pennsylvania Inheritance Tax, the issue has now become much clearer. On July 10 the Pennsylvania Department of Revenue issued Inheritance Tax Bulletin 2012-01 which lays out the approach to be used for valuation of natural gas rights in the Commonwealth. The Bulletin states that the taxable value is most clearly established by a bona fide sale, so that if the gas rights were sold shortly after the death of the owner the Department would accept the sale price as the value for Inheritance Tax purposes. If the gas rights have not been sold the Department will accept an appraisal or other credible evidence of value. These are the same methods that can be used to value real estate or other personal property, but they won’t always be applicable or ideal for natural gas rights; in many instances the property will not have been sold and appraisals of oil and gas rights can be expensive – a real problem for estates of modest value.

Fortunately the Department has provided taxpayers with a simple solution based on whether the interest is: (1) Leased and producing; (2) Leased and non-producing; (3) Non-leased and non-producing. For estates with gas rights that have not been sold and where there is no appraisal or other credible evidence of value, the Bulletin states as follows:

(i) For leased and producing properties, an estate shall value natural gas rights at an amount equal to any amounts received that were attributable to actual production of the natural gas interests at issue during the twelve months prior to the decedent’s date of death, multiplied by two.

(ii) For leased, non-producing properties, interests shall be reported at a value of zero unless, at the time of death, the properties were part of a contractual arrangement whereby the properties generated fixed future payments, in which case the natural gas rights shall be calculated by reducing the fixed future payments to present value as of the decedent’s date of death using established Internal Revenue Service actuarial tables as found in IRS Publication 1457 Actuarial Values Table B, Section 3 Annuity, Income, and Remainder Interests For a Term Certain.

(iii) For non-leased, non-producing properties, interests shall be reported at a value of zero.

A copy of Pennsylvania Inheritance Tax Bulletin 2012-01 may be downloaded here.

Although this policy clarification hasn’t been out for long, I feel confident in predicting that the valuation approach presented in this Bulletin will be viewed favorably by Pennsylvania landowners in the Marcellus or Utica shale.

 

PA Commonwealth Court Resolves Zoning Dispute over Compressor Station

By Attorney Dale A. Tice, Marshall, Parker & Associates

In a recent decision the Pennsylvania Commonwealth Court held that a compressor station was a permitted use under a township’s zoning ordinance. The text of the decision can be found here.

The ordinance at issue allowed as a permitted use “oil and gas production, including equipment necessary to drilling or pumping operations, but not including the construction or alteration of new or existing storage, service or repair buildings.” The operator of the well site, New Century Pipeline, argued that the compressor placed next to the well was necessary for production as the natural gas could not be moved from the well site without it. The township, however, claimed that placement of the compressor violated the ordinance because it also functioned as a stripper station, processing the gas by removing butane and propane so that the purified gas could be placed into the pipeline.

The McKean County Court of Common Pleas agreed with the township and affirmed the decision of the Bradford Township Zoning Hearing Board that use of the compressor station for gas processing was not a permitted use under the terms of the ordinance. On appeal, the Commonwealth Court reversed the ruling from the Court of Common Pleas and held that operation of the compressor was “gas production” as that term was used in the ordinance and was thus a permitted use.

This decision is significant for Pennsylvania practitioners working on zoning issues related to Marcellus development, though the well at issue was a shallow well, rather than an unconventional shale bore. At a minimum, the case may be instructional for municipal solicitors on the importance of specificity when drafting zoning regulations. However, the case must be viewed within the context of controversial Act 13, which preempts local zoning ordinances and requires that oil and gas operations (other than activities at impoundment areas and compressor stations) be allowed as a permitted use in all zoning districts. Several municipalities are challenging the validity of the preemption provision with a case now before the Commonwealth Court; the final outcome of that litigation remains to be seen.

The Marcellus Shale Law Monitor will continue to follow developments on zoning issues related to oil and gas activities – check back for updates as developments unfold.

 

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