Thirteen days after Pennsylvania Gov. Tom Corbett signed a controversial drilling bill into law, the debate over how it will affect Marcellus Shale development took a new turn when EQT Corp. filed a lawsuit against 69 landowners and a golf course in Allegheny County, PA.
But a spokeswoman for the Pittsburgh-based company said SB 259's passage (see Shale Daily,July 12) had nothing to do with its actions in Allegheny Court of Common Pleas, and that EQT's complaint is actually a countersuit the company filed after several years of "good faith" efforts to renegotiate old oil and gas leases had failed.
The company wants to drill for Marcellus Shale gas under the Bunola Storage Field, which an EQT subsidiary uses to store gas underground in Allegheny County.
According to court records, EQT filed a complaint on July 22. It alleges the defendants, some of whom formed an entity called the Monongahela Group, "has improperly refused to allow EQT to enter upon their respective surface estates to conduct operations...including but not limited to conducting reasonable and customary seismic testing, unless EQT agrees to renegotiate all of the oil and gas leases."
EQT spokeswoman Linda Robertson told NGI's Shale Daily that the lawsuit wasn't prompted by SB 259's passage.
"We have been in discussions with these landowners for quite some time, and to date have been unable to resolve several critical issues," Robertson said. "The landowner group actually filed a class action lawsuit against EQT a few weeks ago. In response, it was determined that putting the issues before a court would be the most expeditious way to reach resolution.
"There's been so much made that 'this happened because of [SB 259].' It did not. Prior to the bill, we were working with the landowners to obtain modifications. According to the bill, we no longer need to do that -- we don't need to work with them on offers. [But] we're still going to honor those offers, and we are going to continue to try to negotiate with them."
Robertson added that the leaseholders, 69 landowners and Riverview Golf Course Inc., "had already negotiated terms of their leases when they were originally signed. But we've made, and we continue to make, several good faith efforts to negotiate modifications and to date all of those offers have been refused."
Under Section 2.1 of SB 259, which addresses 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," (seeShale Daily, July 5).
The section continues, saying that "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."
Robert Burnett -- an attorney with the Pittsburgh-based firm Houston Harbaugh PC, and a member of the National Association of Royalty Owners (NARO) -- told NGI's Shale Daily that Section 2.1 shouldn't have been added to SB 259, a royalty statement disclosure bill.
"They inserted it at the eleventh hour," Burnett said. "It is not just a tool, but it's now a weapon that gas drillers will use to beat down landowners who simply want to negotiate terms."
Burnett said Section 2.1 amounted to forced pooling because operators cannot drill horizontal wells without a valid lease that contains a pooling clause.
"Gas operators over the last five years have recognized this, and the fact that these older leases in western Pennsylvania do not contain pooling clauses," Burnett said, adding that renegotiations were "an opportunity for both parties to modernize that [older] lease from 1925 or 1945.
"[But] Section 2.1 bypasses that whole process completely. It essentially rewrote every existing oil and gas lease in Pennsylvania because now you don't need a pooling clause. It gives the gas drillers free reign to develop property [from] multiple contiguous leases. There's no limitation to how many properties they can bundle together into an undesignated unit."
Burnett said operators could use Section 2.1 to build surface structures, such as compressor stations and water impoundments, if they felt it was necessary for their developments.
"I think the potential for abuse here is significant," Burnett said. "I'm not saying every driller is going to do it, but this EQT lawsuit sets the precedent of how Section 2.1 will be used not only to force pool, but also to justify any surface operation that is remotely related to horizontal drilling."
Emphasizing that he was not giving legal advice, and that he was not involved in the EQT case (EQT v. Opatkiewicz et al -- No. GD-13-013489), Burnett said an argument could be made that Section 2.1 is unconstitutional, on the grounds that it impairs contracts and therefore violates Article 1, Section 17 of the Pennsylvania Constitution.
"It's hopeful that gas drillers will not abuse Section 2.1, but the EQT lawsuit suggests that it will be used in an offensive, aggressive nature," Burnett said. "It's bad policy, it's a bad provision for landowners and royalty owners, and NARO opposes it.
"I do not believe that the well-intended members of the legislature in Harrisburg fully understood what they were voting on. They were told this law only applies to people that have leases, therefore it can't be forced pooling. Well, that's just fundamentally wrong. What they did was grant the right to engage in horizontal drilling without the need for a pooling clause. So, in a sense, they did force pool landowners because their current leases do not authorize or permit the pooling of their hydrocarbon interests."