Archive for the ‘Fracking’ Category

Pipeline Expansion Project May Proceed After Ct Upholds Validity of Easement

Monday, April 9th, 2012

With the nation is in the middle of building pipeline infrastructure to transport natural gas from fracking operations as well as Canadian oil, I suspect we will see more case like Enbridge Pipelines (Ill.) L.L.C. v. Moore, 633 F.3d 602 (7th Cir. 2011) where landowners argued that a 1939 pipeline easement had expired. Presumably, the landowners wanted to negotiate a richer deal for new easements.

In this case, the plaintiff was trying to build a 170-mile-long pipeline in Illinois as part of a larger project of pipeline construction to meet increased demand for Canadian oil. A 120-mile segment of the proposed construction route already contained a 10-inch pipeline originally constructed in 1939 and that had not been in use for many years. Enbridge wanted to replace the 10-inch pipeline with a 36-inch one.

The pipeline route had been created by easements from private property that had been granted to predecessors of Enbridge. The easement conveyed the to the original grantee “the right to lay, operate, and maintain a pipe line for the transportation of oil, gasoline and/or other fluids.” The easement also applied to the grantee’s successors and assigns “so long as such pipe lines or other structures are maintained.” The holder of the easement was also required to compensate landowners for any and all damages to crops, fences, and land resulting from the construction, operation or maintenance of the pipe lines.

The pipeline had been inactive since 1988 when Enbridge acquired the rights to the easement. After learning of the proposed pipeline upgrade, the owners whose land was subject to the easement contended that Enbridge had forfeited the easements by failing to maintain the pipeline in good working condition. The owners said that Enbridge had failed to maintain cathodic protection, valves and pumps and seams. They alleged that segments of the pipeline were missing, and that joint or seam failures had not been repaired. The plaintiffs also alleged that the interior of the pipeline had not been cleaned.

The court said that the legal meaning of abandonment was a deliberate act and did not encompass poor maintenance. While the court acknowledged that the original pipeline had not been in use for many years, the court said there was no evidence that the defendant intended to abandon the easement. Using an economic analysis (the court is after all located in Chicago), the court said the easement owner had foreseen the possibility that demand for transportation of oil by pipeline would someday justify placing the pipeline (or a replacement) into service but there was no economic justification for keeping the pipeline in “mint” operating condition until that time.

The court also found that the word “maintain” was ambiguous but did not require that the pipeline be maintained in mint condition. A rule that forfeited a person’s property right because they failed to maintain the property in good condition would cast a cloud of debilitating uncertainty over property rights, the court concluded. To hold that failure to maintain the pipeline would cause the easement to be extinguished, the court said, would engender wasteful maintenance. The court said such a requirement would also induce expenditures on maintenance intended not to enable the productive use of the property but merely to avoid forfeiture of the property right.

The court also said that a reasonable reading of the word “pipeline” in the easement was that the word did not refer to the pipe itself but to the pipeline in the sense of a route for transporting oil, just as one might speak of an “air corridor” between New York and Chicago even if no airlines were operating between those cities. The court said that maintaining the pipeline would then just mean preserving the option to use the easements for future transportation of oil, even if the existing pipeline crumbled to dust.

The defendant landowners argued that because the instrument creating the easement referred to “such pipe lines or other structures”, the phrase applied to the physical pipeline, not the easements. As a result, the dismantlement of the pipe would have terminated the easements. However, the court said even this reading would not defeat Enbridge’s claim. The court said that all that was required of the successive easement holders was to engage in minimal maintenance to put have the pipeline put back into service with additional expenditures to clear out the rust and replace broken parts.

Contrary to the landowners’ claims, the court ruled that Enbridge had engaged in considerable maintenance in 1992, 1993, and 2004. The court said there was no evidence of any missing segments, and that an Enbridge engineer who performed 27 “integrity digs” testified that the pipeline was capable of transporting liquid. His affidavit described the pipeline as being close to being as good as new and could with relative ease be placed back into active service as a crude oil line, a gas line, or a water line.  The court said this was sufficient to show that the owners maintained the pipeline within any meaning that could reasonably be assigned to the easements and had no intention of abandoning it, for if they had intended to do so they wouldn’t have spent even a penny on maintenance.



GAO Report Discusses Concerns About Pipelines Used For Fracking Operations

Sunday, April 1st, 2012

Approximately 2.5 million miles of pipelines transverse the United States carrying hazardous liquids and natural gas from producing wells to end users (residences and businesses). Many of these pipeline networks are aging while others such as natural gas gathering pipelines remain largerly unregulated. Moreover, development has encroached on many of pipelines that were formerly located in rural areas, thereby increasing the risks posed by these pipelines.

Pipeline safety has been drawing increasing scrutiny from Congress. The “Pipeline Safety Improvement Act of 2002” required PHMSA to develop its risk-based integrity management program for transmission pipelines. Under the “Pipeline Inspection, Protection, Enforcement, and Safety Act of 2006,”  PHMSA also establish minimum standards for integrity management for distribution pipeline networks. Under the rules developed by PHMSA, all distribution pipelines are considered to be in high-consequence areas because they are largely located in populated areas. As a result, distribution integrity management requirements apply to all distribution pipelines. However, the distribution pipeline rules tend to be less prescriptive than those for transmission lines due to the lower operating pressures.  Congress recently mandated that DOT review the sufficiency of existing federal and state laws and regulations to ensure the safety of hazardous liquid and gas gathering pipelines under the “Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011.”

Despite the pervasiveness of pipelines, these structures are often not flagged or discussed in due diligence. A recent report by the GAO (“Collecting Data and Sharing Information on Federally Unregulated Gathering Pipelines Could Help Enhance Safety”; discusses the need for additional information about the pipelines used to collect natural gas from fracking operations.

The GAO indicated there are three main types of pipelines: Gathering, Transmission, and Distribution Pipelines

  • Gathering pipelines- Gas gathering pipelines collect natural gas from production areas, while hazardous liquid gathering pipelines collect oil and other petroleum products. These pipelines then typically transport the products to processing facilities, which in turn refine and send the products to transmission pipelines. According to PHMSA gathering pipelines range in diameter from about 2 to 12 inches and operate at pressures that range from about 5 to 800 pounds per square inch (psi). These pipelines tend to be located in rural areas but can also be located in urban areas. PHMSA estimates there are 200,000 miles of gas gathering pipelines and 30,000 to 40,000 miles of hazardous liquid gathering pipelines. PHMSA does not regulate most gathering pipelines in theUnited States. For example, PHMSA regulates roughly 20,000 miles out of the more than 200,000 estimated miles of natural gas gathering pipelines. Similarly, PHMSA regulates only about 4,000 miles of the 30,000 to 40,000 estimated miles of hazardous liquid gathering pipelines.
  • Transmission pipelines- PHMSA has estimated there are more than 400,000 miles of gas and hazardous liquid transmission pipelines. These pipelines can carry product over hundreds of miles, to communities and large-volume users (e.g., factories). Compressor stations maintain product pressure in natural gas pipelines while pumping stations maintain product flow for hazardous liquid transmission pipelines. Transmission pipelines tend to have the largest diameters and pressures of any type of pipeline, generally ranging from 12 inches to 42 inches in diameter and operating at pressures ranging from 400 to 1440 psi.
  • Distribution pipelines- PHMSA has estimated there are roughly 2 million miles of distribution pipelines which transport natural gas from the transmission pipelines to residential, commercial, and industrial customers. These pipelines tend to be smaller, sometimes less than 1 inch in diameter, and operate at lower pressures—0.25 to 100 psi.

The Department of Transportation’s (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) has established uniform, minimum safety standards that establish specifications for the design, construction, testing, inspection, operation, and maintenance of pipelines. The PHMSA regulatory program uses a four-tier classification system based on their proximity to populated and environmentally sensitive areas. Class 1 involves offshore areas. Class 2 includes locations with 10-45 buildings intended for human occupancy that are within 220 yards of the center line of the pipeline. A class 3 location is an area with more than 46 buildings intended for human occupancy that are within 220 yards of a pipeline or an area where the pipeline lies within 100 yards of either a building or a outside area such as a playground that is occupied by 20 or more persons at least 5 days a week for 10 weeks in any 12-month period. Class 4 locations where unit buildings with four or more stories above ground are prevalent

In addition, PHMSA has developed supplemental risk-based regulatory program termed “integrity management” for hazardous liquid and natural gas transmission pipelines and natural gas distribution pipelines in “high-consequence areas” where an incident would have greater consequences for public safety or the environment. Pipeline operators are required to systematically identify and mitigate risks to pipeline segments located in high-consequence areas, which are defined differently for the three types of pipelines.

For hazardous liquid pipelines, high-consequence areas include areas of highly populated areas, other populated areas, navigable waterways, and areas unusually sensitive to environmental damage. For natural gas transmission pipelines, high-consequence areas include highly populated or frequently used areas, such as parks. Most natural gas distribution pipelines would generally be considered to be in high-consequence areas since they are typically located in highly populated areas. High-consequence areas can be in Class 1, 2, 3, or 4 locations.

States may be authorized to conduct inspections for interstate pipelines, as well as inspections and associated enforcement for intrastate pipelines. State pipeline safety offices are allowed to issue regulations supplementing or extending federal regulations, but these state regulations must be at least as stringent as the minimum federal regulations. If a state wants to issue regulations that apply to pipelines that PHMSA does not regulate, such as unregulated gathering pipelines, it must do so under its own (state) authority. According to GAO, only 3 of the 39 state agencies interviewed reported that they collect and analyze comprehensive pipeline spill and release data on federally unregulated pipelines.

According to GAO, leading causes for leaks and spills from transmission lines is corrosion while excavation is the most common cause of damage to distribution lines. Because of their relative low pressure, damaged distribution lines tend to develop slow leaks instead of explosions. However, undetected gas from slow leaks can migrate long distance along utilities and sewer lines and accumulate in homes where inadvertent ignition could lead to fire or explosion.

GAO said states identified the following risk factors for pipelines:

  • Construction quality- GAO said that state agencies reported the construction is critical to ensure the long-term integrity of the pipeline because the installation methods and materials used in pipeline construction affect the pipeline’s resistance to deterioration over time. For example, regulated pipelines may not be installed unless they have been visually inspected at the site of installation.
  • Maintenance practices-State agencies said periodic maintenance including inspecting and testing equipment is important to prevent leaks and ruptures. Unfortunately, there are no such federal requirements unregulated gathering pipelines.
  • Location-State and local safety agencies may not know or may be uncertain about the locations and mileage of unregulated pipeline infrastructure. This information is particularly useful for “Call Before You Dig” programs operated by states and localities. If unregulated gathering pipelines are unmarked and program officials do not know the location of the pipelines, businesses and citizens may damage a pipeline during excavation, which could result in fatalities, injuries, or damage to property or the environment as well as the shutting down of the pipeline for repair.
  • Pipeline integrity– As previously mentioned, the leading risks to pipeline integrity is excavation damage and corrosion. Although states reported that excavation damage to a pipeline from nearby digging activities was the leading cause of pipeline incidents, many state agencies told GAO they often did not know or had limited knowledge about the integrity of unregulated gathering pipelines, thus increasing the potential for such damage. GAO reported that corrosion was reported as the cause of about 60% of regulated gas gathering pipeline incidents from 2004 to 2010. However, there is limited information on the integrity of unregulated gathering pipelines to assess the internal and external condition of these pipelines.
  • Land Use Changes-State pipeline safety agencies also told GAO that increased urbanization that results in encroachment on existing pipeline rights-of- way is a moderate or high risk factor. For example, GAO reported stated that although a new housing or business development can change a location’s designation from Class 1 to a higher class that would then fall under PHMSA’s jurisdiction, the operator may not be aware of the development and therefore would not monitor and apply more stringent regulations along that pipeline.
  • Increased extraction of oil and gas from shale deposits– GAO said this activity accounted for 16% of the total domestic natural gas supply in 2009 and is projected to increase to approximately 47% by 2035. As a result, state and federal safety officials have identified new gathering pipelines related to shale development as a potential public safety risk since these pipelines tend to have larger diameters and operate at higher pressures that traditional transmission pipelines. Such information can be used to help reduce future incidents.

Migratory Bird Treaty Act Held Not To Apply To Reserve Pits Used in Oil and Gas Operations

Wednesday, March 14th, 2012

As North Dakota has become a leader in hydraulic fracturing, the state has also begun to generate some interesting caselaw. Though not specifically a fracking case, a recent decision discusses the liability of drillers under the Migratory Bird Treaty Act (MBTA) for birds who die because of exposure to reserve pits.

This MTBA makes it unlawful to “take” or “kill” any migratory birds. Reserve pits are excavated areas used to contain drill cuttings and drilling muds generated during drilling activities. Apparently, migratory birds may confuse reserve pits with lakes or ponds.

In United States v. Brigham Oil & Gas, L.P., 2012U.S. Dist. LEXIS 5774(D.N.D.  1/17/12), the federal government issued indictments under the MBTA to several companies after dead migratory birds were found near reserve pits associated with drilling activities. Some companies accepted plea bargains but others filed motions to dismiss, arguing that they have been engaged in lawful activities that were not directed at the migratory birds. The key issue before the court was the terms to “take” or “kill” a migratory bird applied and prohibited any activity that might proximately cause a bird death or whether it only covered conduct directed against wildlife.

Since the statute does not define the term “take”, government argued that the court should apply a broad interpretation of the words “take” and “kill” similar to the meaning used in the Endangered Species Act so that the words would encompass not only physical activity directed against a bird, but also habitat modification and other impacts that arise from lawful commercial activity.

The court said, though, that it must apply the ordinary meaning of the word. Moreover, since the MBTA was a criminal statute, the court said the law must be narrowly construed. Turning to the dictionary, the court said that when applied to wildlife, the word “take”  meant a purposeful attempt to possess wildlife through capture, not incidental or accidental taking through lawful commercial activity. In the context of the MBTA, the court ruled that “take” refers to conduct directed at birds, such as hunting and poaching, and not acts or omissions having merely the incidental or unintended effect of causing bird deaths.

The court acknowledged that some courts outside of the Eighth Circuit Court of Appeals have applied the MBTA to indirect, unintentional commercial activity. However, the court noted that the Eighth Circuit has held that such a broad interpretation “would stretch this 1918 statute far beyond the bounds of reason.”

The court said the reserve pits were not created to effect the habitat of migratory birds and had little effect on bird habitat, except to attract occasional birds which mistake the pits for a pond or lake. If the MBTA concepts of “take” or “kill” were read to prohibit any conduct that proximately resulted in the death of a migratory bird, the court reasoned, then many everyday activities would not only become unlawful but also be subject to criminal sanctions. For example, the court explained, ordinary land uses which may cause bird deaths include cutting brush and trees, and planting and harvesting crops. In addition, many ordinary activities such as driving a vehicle, owning a building with windows, or owning a cat, inevitably cause migratory bird deaths.

The court said it doubted that Congress ever intended to impose criminal liability on the acts or omissions of persons involved in lawful commercial activity that might indirectly cause the death of birds protected under the MBTA. To be consistent, the court said the government would have to criminalize driving, construction, airplane flights, farming, electricity and wind turbines and many other everyday lawful activities that kill migratory birds. Moreover, the court noted studies compiled by the U.S. Fish & Wildlife Service that suggested domestic cats were a major cause of bird mortality. It simply would not be feasible, the court said,  to prosecute all or even most of those persons or entities who technically violate the Migratory Bird Treaty Act.

As a result, the court held that the use of reserve pits in commercial oil development is legal, commercially-useful activity were outside the reach of the MBTA. Like timber harvesting, the court reasoned, oil development and production activities are not the sort of physical conduct engaged in by hunters and poachers, and such activities do not fall under the prohibitions of the MBTA

The court noted that the state rules provide that reserve pits must be reclaimed within a reasonable time but in no case later than one year after well completion. In addition, the rules governing reserve pit generally do not require the placing of screening or netting on the reserve pits if the pit is reclaimed within ninety days after completion of the operations. The court suggested that the appropriate remedy for the death of migratory birds found in or near reserve pits in the oil fields of North Dakota was for the North Dakota Industrial Commission to amend its regulations to address the perceived problem.

Two NY State Courts Uphold Zoning Ordinances Banning Fracking

Wednesday, March 7th, 2012

Two New York State trial courts have upheld town zoning ordinances that prohibit fracking operations. In Anschutz Exploration Corp. v Town of Dryden, 2012 N.Y. Misc. LEXIS 687 (Sup Ct-Tomkins Cty 2/21/12) and Cooperstown Holstein Corporation v Town of Middlefield, No. 2011-0930 (Sup. Ct-Otsego Cty. 2/24/12), the plaintiffs argued that the state Oil, Gas and Solution Mining Law (OGSML) pre-empted such ordinances. However, both courts said there was no conflict because the OGSML dealt with the “how” of oil and gas exploration while the zoning ordinances addressed the “where” such operations could be conducted.

The OGSML provides that shall supersede all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries but shall not supersede local government jurisdiction over local roads or the rights of local governments under the real property tax law. The courts pointed to similar language in the Mined Land Reclamation Law (MLRL) that the state Court of Appeals had ruled did not preempt a local zoning ordinance that prohibited gravel operations within their jurisdiction.

Both courts said that neither the plain language of the OSSML or the legislative history had any indication that the legislature had intended to abrogate the statutory and constitutional authority vested in local municipalities to regulate local land use. The Dryden court also found support that state statutes that indisputably preempt the local zoning power contained provisions that the traditional concerns of zoning were required to be considered by the agency charged with deciding whether to issue a permit under state law. In contrast, the court said, OGSML only requires that notice be provided to a municipality before drilling commences after a well permit has been granted.

These decisions were rendered by county trial courts. It is anticipated that these opinions will be appealed and will probably end up being heard by the state’s highest court- the Court of Appeals.

Court Allows Discovery To Proceed on Fracking Practices For Reserve Pits

Tuesday, February 21st, 2012

Regulators are increasingly focusing on management of the wastewater and other chemicals used in fracking operations. The recent case of Kartch v EOG, 2011 U.S. Dist. LEXIS 130711 (D.N.D 11/10/11) illustrates the legal issues that property owners and drillers are increasingly having to face when negotiating drilling leases.

In this case, the plaintiffs purchased agricultural land located in North Dakota in 2004 but the seller retained the rights to the mineral estate to the land. The seller subsequently entered into an oil and gas lease that was assigned to EOG who commenced drilling operations in 2008. The lease did not contain any provisions about the use of reserve pits. Plaintiffs then purchased additional land that contained a residence which was located only 1/2 mile from the well site.

Under North Dakota law, the mineral estate is considered the “dominant” estate and has the right to use the surface as reasonably necessary to explore, develop and transport minerals in what is known as the “accommodation doctrine”. The reasonableness of the use of the surface will be based on the specific circumstances and the surface estate owner has the burden of establishing that the mineral lessee acted unreasonably. The doctrine is not a balancing test where the harm or inconvenience of the surface right owner is weighed against those of the mineral estate. Instead, the surface owner has the burden of showing that there were reasonable alternatives available to the mineral rights holder. In addition, a North Dakota law also requires developers of mineral rights to provide a “modicum of compensation” for damages caused by the oil and gas production. Prior to commencing drilling operations, EOG offered the plaintiffs $8K to pay for anticipated damages. Plaintiffs rejected the offer and instituted the lawsuit.

The plaintiffs sought an order requiring EOG to remove a waste disposal pit known as a reserve pit that had been placed on their property or, alternatively, damages for the costs to remove the pit and restore the land. Regulations adopted by the state Industrial Commission allows the use of reserve pits to ensure adequate quantity of drilling mud and to hold well cuttings. The regulations provide that the reserve pit is to be constructed, used and reclaimed in a matter that will prevent pollution of land and surface waters. While drill cuttings may be placed in the reserve pits, the regulations prohibit disposal or dumping of other fluids, waste and debris used or recovered during well drilling and completion.

EOG used a synthetic liner when it constructed the reserve pit though it stated this was simply a precautionary measure and was not required because of the relatively impervious clay soils. When drilling was completed, EOG removed the liquid waste from the pit, and left the well cuttings and other solid wastes in place as permitted by state regulations. A tear had occurred in the liner during the use of reserve pit and  EOG excavated soil from either side of the tear as a precautionary measure under state supervision, and then covered the pit with a four foot cap and regarded the surface.

Plaintiffs argued that EOG’s use of a reserve pit and leaving waste was was per se unreasonable and that instead of using a reserve pit, EOG should have used an alternative such as a “closed loop” system to recycle of the drilling mud and capture well cuttings in tanks for later off-site disposal. At the very least, plaintiffs contended, EOG should have completely removed the wastes and the pit liner for offsite disposal prior to reclaiming the pit.

The specific motion before the court involved a dispute over the plaintiffs’ discovery request but the opinion discussed the nature of obligations of gas drillers in deciding what discovery was warranted.  The court rejected EOG’s claim that it had no obligation under common law to reclaim the pit. Moreover, the court noted that the Commission is considering amending its rules to further restrict the use of test pits. Because EOG’s use of the surface estate had to be reasonable, the court allowed some of the discovery requested by plaintiffs on industry practices on use of reserve pits, closed loop systems and the synthetic liner but deferred or denied other requests pending a decision on the merits of the case.

Claims Against Coalbed Methane Operator Allowed to Proceed

Monday, January 2nd, 2012

In a case that may have implications for fracking operations, a federal district court for the western district of Virginia allowed property damage claims to proceed against a coalbed methane operator.

In C.J. Ritter Lumber Co., Inc. v  Consolidated Coal Co., 2011 U.S. Dist. LEXIS 95131 (W.D. Va. 8/25/11), the plaintiff entered into coal leases with Island Creek Coal Company (Island) in 1961 for the Beatrice and VPI Mines. The lease provided,in part, that the lessee “shall locate all dumps for the disposal of refuse and waste material and all settlement basin and all ponds at such locations as may be approved by the Engineer of the Lesssor…..”

In 1990, plaintiff entered into a Coalbed Methane Gas Lease with Island in 1990. This lease  granted Island with rights to investigate and produce CBM including the right to lay pipeline, build tanks, erect power stations, telephone lines and other structures to facilitate the production and transportation of CBM.

In 1993, Island assigned its rights under the CBM lease to Oxy, USA who then assigned its interests to Appalachian Methane, Inc., and Appalachian Operators, Inc. These entities then assigned their rights to Buchanan Production Company who entered into a lease amendment with the plaintiff that increased the plaintiff’s royalty.  Later that year, Consol Energy Coal  (Consol) purchased a beneficial interest In Island and the CBM assets.  Buchanan subsequently merged with CNX who then succeeded Consol as the CBM operator. Deep mining operations ceased at the Beatrice Mine in 1986 and at the VMI Mine in 1998.

The plaintiff alleged that Consolidated damaged its property when it discharged billions of gallons of untreated wastewater into open spaces and voids caused by former mining operations. The plaintiff asserted the wastewater contained very high levels of suspended and dissolved solids, chlorides, sodium and other pollutants and contaminants. The plaintiff demanded that the defendats take remedial actions to preserve the remaining coal assets in the mines. The plaintiff also alleged that it had detrimentally relied on documents that had been falsely prepared by Consolidated and therefore had not acted to earlier to protect its coal assets. Consolidated countered that the mines had flooded naturally and that the plaintiff’s claims were precluded by the statute of limitations (SOL).

The plaintiff argued that their claims were preserved by the CERCLA discovery rule of 42 U.S.C. 9658. This section established a “federal commencement date” for personal injury or property damage claims caused or contributed by  hazardous substances, pollutants or contaminants. The defendants argued that this section could only be invoked if there was an underlying CERCLA claim.  Followed the reasoning of the Ninth Circuit, the magistrate issued a report recommending the court rule that the CERCLA federal commencement date applied to any action brought under state law for property damage or personal injury.

The magistrate recommended that the court deny the motions to dismiss the trespass, negligence and nuisance claims against Island, Consolidated and CNX because the plaintiff had retained ownership and control of the leased parcels. However, the magistrate found that the plaintiff had not alleged any facts to show that Consol owed any duty to the plaintiff.

On the breach of contract claim, the magistrate found that Virginia courts had recognized an implied duty to act as a reasonably prudent operator. Thus, the magistrate recommended that the court allow the breach of contract claim against Island and CNX  because the plaintiff had pled a sufficient possessory interest for purposes of a motion to dismiss.

Why Property Owners Should Consult Lawyers Before Signing Gas Leases

Friday, December 2nd, 2011

We have been sharing and commenting on articles discussing how lenders are becoming increasingly concerned about borrowers who lease their property to allow hydraulic fracturing (“fracking”). The operations permitted by the leases on what is typically rural or agricultural land include storage of hazardous substances and wastewater that likely would constitute defaults under the mortgages.

Now comes another article published by the New York Times that discusses how the bulk of the eight million oil and gas leases that have been entered nationwide often fail to adequately protect property owners from risks associated with what amounts to industrial activity on their property.

The article reports that the leases are often presented to property owners on a “take-it-or-leave-it basis” by the brokers who are retained by the energy companies. The article says that these agents, known as “landman” often try to pressure property owners to sign the leases by warning them that their neighbors have signed leases and that if the property owner does not sign the lease, the gas under its land will simply be drained by the adjoining operations.

The New York Times obtained copies of 110,000 leases used in Texas, New York, Pennsylvania, Ohio, Maryland and West Virginia. The vast majority of the leases were from Texas. Following are some of the key observations from the lease review.

  •  Most of the leases reviewed did not require periodic sampling of drinking water. As a result, it is often difficult for property owners to link contaminated groundwater with the fracking operations;
  •  Less than half of the leases required the companies to compensate landowners for contamination of groundwater. While eight states require energy companies to provide some sort of indemnification, the terms of the indemnity are to be negotiated;
  •  When companies are obligated to provide alternative drinking water for properties with contaminated groundwater, the owner often has to pay the increased electric bills resulting from the need to prevent the water from freezing during the winter;
  • Most leases do not establish “setbacks” from various structures or areas on a property but instead grant the companies broad discretion where to build roads, store chemicals and cut down trees;
  • Most leases do not contain any disclosure about the potential environmental risks associated with the drilling activity;
  • Many leases allow companies to store waste generated by the fracking operations in pits or underground. Indeed, some of the leases reviewed in the article allowed the energy companies to simply cap the waste;
  • Those leases that did require the company to remove waste often offset those costs against the royalties to be earned by the property owner;
  • Most leases contain clauses that enable companies to extend leases beyond the negotiated term which is typically three to five years in length. For example, some companies have invoked the “force majeure”  clause in New York because of the drilling moratorium that was established while the state Department of Environmental Conservation adopts fracking regulations;
  • Less than 20% of the Texas leases and virtually none of the leases in the eastern states contained the so-called “Pugh Clause” which prevents leases from being indefinitely extended;
  • Another clause that has been used to extend leases is the “preparations” for drilling provision. The article says the term is broadly construed by companies and cited to an example where an oil company sought to invoke the clause a day before a lease was to expire. The company had not yet drilled any wells but said it had engaged in “preparations” by locating a bulldozer near the  leased property and had surveying for an access road;
  • Most leases allow the rights to be freely assigned to other companies without the prior approval of the property owner, thereby preventing an owner from terminating a lease that might be assigned to a company that may not be financially stable or perhaps does not have a good environmental track record.

The state attorney generals of New York, Ohio and Pennslyvania have published advisories about leasing land for drilling. While there are a number of websites that can assist property owners with such leases, the article should be a wakeup call to landowners to retain a lawyer before signing such a lease. Without legal review, you could be committing your grandchildren to the terms of an unfavorable lease.

Ct Rules Fracking Barred by Subdivision Covenants

Tuesday, November 29th, 2011

In Weiden Lake Property Owners Association, Inc. v Jeff A. Klansky and Cabot Oil & Gas Corporation, 2011 N.Y. Misc. LEXIS 4081 (Sup Ct-Sullivan Cty 8/18/11), a New York state court ruled that a property owner was barred from leasing his property for natural gas and exploration because those activities were barred  by  restrictive covenants set forth in the subdivision plat that applied to all property owners within the subdivision.

In this case the Weiden Lake Community Property Owners Association was formed in 1999 for the purpose of overseeing and managing the subdivision and maintaining the Weiden Lake and dam. Each parcel within the community is subject to protective covenants appearing in the subdivision plat as well as in the deeds issued by the original developer.

In 2007, defendant Klansky purchased lot 25. After learning that oil and gas companies were soliciting oil and gas leases from homeowners in the Community, the POA Board passed a Resolution dated May 31, 2008 affirming that the Protective Covenants in the Weiden Lake subdivision prohibited commercial uses of the properties. The Resolution was sent to all property owners on or about June 2, 2008. In July 3008, defendant Klansky entered into a lease that granted defendant Cabot the exclusive right to “explore for, drill for, produce and market oil, gas and other hydrocarbons” from lot 25 for a period of five years. As consideration for entering into the lease, Klansky received a signing bonus of $99,255. Paragraph 13 of the lease addendum provided that Klansky made no representations as to the “permitted use(s) of the subject property and/or the legality of the use(s) contemplated in the annexed Oil and Gas Lease.”

After learning of the lease, the POA filed its action seeking summary judgment that the activities authorized by the lease were prohibited by the restrictive covenants. In particular, the plaintiff argued the lease was prohibited by the following restrictions:

  • Restrictive covenant “b” providing that the premises conveyed shall be used for single family homes, of not less than 1,000 square feet of living space; agricultural and/or recreational use only;
  • Restrictive covenant “o” providing that no commercial fishing enterprise or fee based boat launching facilities or any other commercial uses will be allowed on the premises; and
  • Restrictive covenant “t” providing that the covenants are to run with the land and shall be binding on the developer and its successors and assigns.

In response, both Klansky and Cabot argued that covenant (b) pertained solely to the requirement for one single family home per lot and that covenant (o) should be read strictly as only prohibiting commercial fishing and boating uses. Moreover, Klansky asserted that the purpose of the POA was to protect the assets of the corporation, which were the lake, and dam and that since his property was between 1 ½ to 2 miles from Weiden Lake, the activity contemplated by the lease would not impact the lake or the dam.

The court ruled that the relevant covenants restrict all parcels in the subdivision regardless of proximity to the lake or the dam. Regarding covenant (b), the court said the language unambiguously restricted the use of the parcels in the Community to single family residential, agricultural or recreational use.

Cabot had also asserted that at the time of executing the lease, it was not aware of the Resolution. However, the court said that knowledge of the Resolution was immaterial because the Resolution merely reiterated the restriction on commercial use of the property set forth in the recorded plat and referenced in the Klansky deed. In addition, the court said there was sufficient evidence that Cabot was aware that the POA considered drilling for gas to be a violation of the protective covenants prior to entering into the lease. Accordingly, the court ruled that the POA was entitled to summary judgment declaring that the uses set forth in the lease between Klansky and Cabot were prohibited by the Restrictive Covenants.

The court then turned to the cross-claims filed by the defendants. Cabot asserted two cross-claims against Klansky seeking rescission of the lease and return of the $99,255 signing bonus. On the first cross-claim, sought rescission of the lease and return of the signing bonus if he court prohibit the lease, the lease should be declared void for lack of consideration or mistake of law. However, the court said there was evidence clearly demonstrating that Cabot, a sophisticated business entity, made a calculated and knowing decision to enter into the lease, approve title and pay the signing bonus with full knowledge of the Protective Covenants and the POA’s position. Therefore, the court held that Cabot was not entitled to rescission of the lease under a mistake of law.

Cabot’s second cross-claim alleged fraud in the inducement for Klansky’s alleged failure to disclose the POA Board Resolution prior to entering into the lease. However, the court found that there was sufficient evidence that Cabot knew the POA Board considered the covenants to prohibit the commercial uses of oil and gas exploration and that the lease addendum contained the disclaimer that Klansky made no representations as to the “permitted use(s) of the subject property and/or the legality of the use(s) contemplated in the annexed Oil and Gas Lease.” Accordingly, the court denied Cabot’s cross-claims and ordered that the defendants were permanently enjoined from engaging in any of the activities contemplated by the lease.