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Q&A: Tawney discusses how case law keeps up with growing industry

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Kenneth Tawney, member, Jackson Kelly Kenneth Tawney, member, Jackson Kelly
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The oil and gas industry is not only a growing field of specialization in the legal community, but the cases that arise from it also are hot topics. 

Attorneys say more and more case law is developing in this ever-growing field and it's important to keep track of it.  

The State Journal talked with Kenneth Tawney, member of Jackson Kelly's Charleston office, about legal issues facing the industry. 

The State Journal: What are the most common lawsuits involving the oil and gas industry that you are seeing? Why are these the most common? 

Kenneth Tawney: There are numerous civil actions filed by landowners trying to get their oil and gas leases set aside or terminated. People hear that someone else was able to negotiate what they believe to be a better deal and they want the same deal — basically, more money — so they look for opportunities to have their existing lease terminated. 

The longstanding law in West Virginia has been that oil and gas operators have the right to reasonable use of the surface to explore for and develop the oil and gas. Nonetheless, we also are seeing several surface owners with no royalty ownership interest who are trying to prevent an oil and gas operator from using their property for an access road or a pipeline to a well pad. They are unhappy about the location of the facility or about it being on their land. The oil and gas operator then sues the surface owner to enforce its right to reasonable surface use or the surface owner sues the oil and gas operator for perceived damages to the surface. 

Finally, oil and gas companies and oil and gas owners are both filing partition suits to have the oil and gas interests either sold at public auction or allotted to one or more mineral owners. These lawsuits are necessary because the state has no mandatory pooling statute for horizontal shallow wells, even though there are such statutes for deep wells, coalbed methane wells and operations for secondary recovery of oil. Because the oil and gas ownership was often severed from surface ownership estate over 100 years ago, the oil and gas owners may not be locatable. In other cases, a majority of the owners may want to develop their oil and gas interests and the rest do not. There is no easy way to deal with this very serious problem until the Legislature passes legislation to provide a regulatory mechanism. A legislative solution would result in more efficient economic development of our state's natural resources, create more jobs, and provide much-needed tax revenues. 

TSJ: What legal problems in oil and gas are most easily avoided? 

KT: That's a difficult question. I would have to say that the spate of lawsuits to partition property or to obtain a lease could be easily avoided if the Legislature could enact a mandatory pooling statute for horizontal shallow wells or a cotenancy statute allowing a majority of the oil and gas interest owners to develop the property. Currently, an operator must have 100 percent of the oil and gas owners under lease. Because of the heirship problems noted earlier, there may now be hundreds of owners of the oil and gas under one tract of land, many of whom cannot even be found. One title attorney told me she calculated someone's royalty interest as being in the three millionths. Millions of dollars are spent every year by companies trying to figure it all out. A simple solution — and one that inures to the benefit of the majority of oil and gas owners, operators and the state of West Virginia — is to have a rational legislative fix to this problem. 

TSJ: What have been the surprise issues in oil and gas in the past few years, the ones few people in the legal industry expected?

KT: There are a host of new issues arising from the advent of drilling wells horizontally. The biggest surprise may be the continued opposition to hydraulic fracturing even though the technology itself has been around for decades. A few organizations continue to oppose the process on different grounds, but primarily because of their fear of water pollution, even though there is no scientific evidence that hydraulic fracturing has ever caused contamination of fresh water. Also, the states have responded by tightly regulating the disposal of water that flows back out of the well, but it is still cited as an issue by those who oppose drilling. Most opposition to hydraulic fracturing is based on emotion, not science and engineering.  The U.S. EPA and the independent Ground Water Protection Council have done extensive studies that have concluded on numerous occasions that the process is not a threat to fresh water aquifers.

Issues have also arisen, particularly in Ohio, about any connection there may be between underground disposal of these "produced waters" and small seismic events. 

Water rights issues as they relate to hydraulic fracturing have also emerged as operators endeavor to develop adequate and reliable sources of water to be used in the process.

Public disclosure of the chemicals used in the hydraulic fracturing process has been an issue in the past, although recent legislation requiring disclosure appears to have resolved this issue for the most part. All operators must now report the chemicals used to the Office of Oil and Gas, and most companies now report to an organization that posts it on a website called fracfocus.org. West Virginia also shares information with this organization, which is managed by the Groundwater Protection Council.

Issues surrounding ad valorem tax assessments for horizontal wells also arose in the past year. There was uncertainty about the quantities of gas that a horizontal well would produce and the costs of operating those wells. The industry and the taxing authorities have been working together to resolve these questions and to arrive at a fair assessment methodology.

Finally, because underground horizontal wellbores may stretch for a mile to two miles in one direction from a well pad and that far in the opposite direction, the problems surrounding the collection of enough acreage to drill such wells have been significant. For example, operators must often seek lease amendments to allow for voluntary pooling of leases with other leases in order to have a drilling unit big enough to develop. Pennsylvania recently addressed this problem by passing a statute allowing an oil and gas lease to be pooled regardless of whether there is a pooling provision in it. West Virginia would also benefit from such a law. 

TSJ: Are there any big decisions from the West Virginia Supreme Court, U.S. Supreme Court or federal circuits coming down soon? How will these affect the industry? 

KT: There are a couple of cases addressing the reasonable and allowable use of the surface that could have a significant impact on the industry. In one, a surface owner is claiming that an operator does not have the right to use the surface of his property to build a well pad from which horizontal wells will be drilled to produce gas from adjoining properties, even though the oil and gas lease contains a pooling clause. A decision adverse to the industry might have a significant crippling effect on the industry and even on the state because fewer wells might be drilled in inefficient, unfavorable locations that would result in fewer wells, a waste of the State's oil and gas resources, and lower tax revenues for the counties and the State.

Another significant case pending in federal court addresses the state's recording statutes and the circumstances under which an unrecorded severance of the oil and gas estate might prevail over a separate chain of title that was recorded. It is a significant case primarily because of the number of oil and gas leases that might be impacted, not because it will establish any new law.

The industry is also closely watching attempts to regulate certain aspects of the industry at the federal level, and, in particular, hydraulic fracturing, even though the states have historically regulated the industry at the state level. 

One decision currently pending in West Virginia involves the interpretation of a severance deed. It also raises the question of whether it is against public policy to include a provision in a deed that allows an oil and gas owner to "engage in any and all undertakings … [it] may at any time deem expedient, all without liability." The surface owner also asserts that the provision is unconscionable and unenforceable. The case also raises the important issue of whether a surface owner has the right to argue that an oil and gas lease has expired and is no longer valid. Interestingly, the case raises an issue regarding the consequences of the oil and gas operator taking (and then allegedly breaching the terms of) a right-of-way deed and then arguing that it did not need the right-of-way because of the earlier severance deed with exculpatory clause.

TSJ: What are a few decisions that have come down recently? How have they changed the industry? 

KT: In the past year, there have been only a few decisions impacting the oil and gas industry in West Virginia at the federal or state level.

Late last year the Supreme Court of Appeals of West Virginia issued a decision holding that surface owners have no right to appeal the issuance of a well work permit by the West Virginia DEP's Office of Oil and Gas, even though they have a statutory right to file comments with the Office of Oil and Gas regarding any particular application for a well work permit. A decision ruling in favor of the surface owner would have established new rights for a surface owner and could have resulted in a plethora of litigation.

One recent decision by the Supreme Court of Appeals of West Virginia defined the term "surface" for the first time after 150 years of statehood. The court laudably intended to establish uniformity and certainty in property law, but it remains to be seen whether the case will spawn new litigation over the ownership of oil and gas, or even coal and other minerals for that matter, to determine the outer boundaries of the definition.