Unconventional Oil and Gas Litigation Trends Report

Unconventional Oil and Gas Litigation Trends Report



Navigant’s Unconventional Oil and Gas Litigation Trends Report discusses U.S. litigation trends and highlights noteworthy U.S. cases affecting the unconventional oil and gas industry.

Navigant’s Unconventional Oil and Gas Litigation Trends Report discusses U.S. litigation trends and highlights noteworthy U.S. cases affecting the unconventional oil and gas industry.



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Unconventional Oil and Gas Litigation Trends Report Unconventional Oil and Gas Litigation Trends Report Document Transcript

  • Unconventional Oil and GasLitigation Trends ReportJanuary 2013
  • 2Unconventional Oil and Gas Litigation Trends Report navigant.com/shaleRecent headlines including “Shale Fracking Makes U.S. Natural Gas Increased regulatory oversight and investigations (e.g., FERC analysisSuperpower – Now What?” and “U.S. Oil Output To Overtake Saudi Arabia’s of market manipulation) is not reflected in the findings but is expected toby 2020” have elevated the importance of drilling for oil and natural gas increase and could lead to an increase in litigation. See the included “Spot-to its highest level in decades.1 According to a recent study from Harvard light on Regulatory Developments” for an example of increased regulatoryUniversity, in 2011, up to 95 percent of all wells drilled in the United States oversight.were hydraulically fractured, accounting for 43 percent of U.S. oil productionand 67 percent of U.S. natural gas production.2 Unconventional oil and gas 1. Are there notable trends in theextraction has sparked debates about balancing energy needs, regulatory overall volume of cases filed?oversight and environmental management. The recent drilling boom has put Prior to Q2 2012, the average number of unconventional oil and gas litigationmany states in which shale rock formations lie at ground zero for increased cases filed per quarter approximated 60, with the highest quarter seeinglitigation and a litany of policy changes at the federal, state and local levels. 66 cases filed (Q1 2012) and the lowest quarter seeing 49 cases filed (Q4The Unconventional Oil and Gas Litigation Trends Report discusses 2011). That consistency ended in Q2 2012 when the total number of uncon-U.S. litigation trends and highlights noteworthy U.S. cases affecting the ventional oil and gas cases increased to 89 – a nearly 50 percent increaseunconventional oil and gas industry. The goal of this report is to answer the over the average number of cases for the prior four quarters (see Figure 1).following questions: Despite the overall increase in the volume of the cases filed in Q2 2012, the1. Are there notable trends in the overall volume of cases filed? jurisdiction of the cases identified remains predominantly in state courts.2. Are there any notable geographic trends for cases filed? Throughout the period studied, two-thirds (66 percent) of all cases filed were3. Are there any notable trends in the types of cases filed? in state court. Highlights of Litigation Trends Report On February 9, 2012, an individual shareholder of a publicly-traded proppant »» Q2 2012 witnessed a near-50 percent increase in the volume of cases filed, manufacturer (a material used in hydraulic fracturing) filed a securities class in comparison to the average volume of cases filed in the previous four action matter alleging that the Company and its officers intentionally misled quarters. During the relevant period, 66 percent of all cases identified were investors by omitting material adverse information about lower demand for its filed in state court. product during its third-quarter 2011 earnings release investor call. Soon after »» While Texas consistently reports the highest number of cases filed (44 the investor conference call, the Company’s stock price rose 17 percent. The percent of all cases filed throughout the relevant period), Pennsylvania and Company later disclosed that it underestimated the logistical complications that Oklahoma had notable increases in the number of cases filed during Q2 arose when oil and gas companies migrated from dry natural gas regions to liq- 2012. uid rich regions. In response to the Company’s announcement of these logistics »» Royalty disputes consistently make up the largest portion of unconventional issues and lower demand, the stock price dropped more than 20 percent. The oil and gas litigation throughout the relevant period. Land and lease rights Company filed a Motion to Dismiss and the matter is ongoing. disputes, however, had a notable volume increase in Q2 2012. FIGURE 1: Unconventional oil andMethodology Used For gas litigation cases by quarterIdentifying U.S. UnconventionalOil and Gas Litigation Cases Federal State 60Navigant attempted to identify all cases filed in U.S. federal and state courtsrelating to unconventional oil and gas litigation. While Navigant’s list may notbe exhaustive, we believe our case data presents a comprehensive picture 38 40 42 36of the nature and volume of this specific type of litigation filed over the last 29five quarters (April 1, 2011 – June 30, 2012). Navigant utilized LexisNexis 23 24 24Courtlink, Law360, news articles and other court reporting services to identify 13relevant cases. We then reviewed and evaluated these cases for inclusion inour report. For the purposes of this study, Navigant did not include cases filed 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2in arbitrations, non-litigation agency actions or administrative proceedings.3
  • 3navigant.com/shale January 20132. Are there any notable geographic Q2 2012 saw a notable increase in the volume of disputes related to landtrends for cases filed? and lease rights and environmental/product liability issues. Land and lease rights disputes generally entail plaintiffs seeking a declaratory judgment toFigure 2 shows that Texas consistently outperformed other geographies in (1) stop defendants from drilling for oil and gas on land for which plaintiffsterms of unconventional oil and gas cases filed during the relevant period. have a valid lease, and/or (2) disallow defendants from asserting ownershipWith 44 percent of all cases filed, Texas had four times as many cases as the of mineral rights for certain lands located on various shale formations in thenext closest state. Pennsylvania, Louisiana, Ohio, and Oklahoma round- U.S. (see included Butler v. Charles Power Estate case example).out the top five states in terms of the number of unconventional oil and gascases filed. Included in “other” states are West Virginia, Arkansas and New The most common allegations in environmental/product liability cases involveYork, in which Marcellus, Fayetteville and Utica shale formations lie. A recent negligence, nuisance, personal injury, property diminution, or damage totrend, however, is the notable increase in the number of cases filed in Q2 property during drilling. One interesting item of relief sought by the plaintiffs2012 in Pennsylvania (100 percent increase over Q1 2012) and Oklahoma (a in certain environmental/product liability matters involves medical monitor-three-fold increase over Q1 2012). This increase is primarily attributable to a ing. The stated intent of medical monitoring is to detect diseases or othergrowth in oil and gas royalty disputes and disputes involving land and lease ailments, and offer early detection to ameliorate the severity of any exposure.rights (see next section for a description of each). Butler v. Charles Powers Estate is a Pennsylvania land and lease rights case that FIGURE 2: Cases by geography by quarter is seeking an answer to: “Is natural gas a mineral?” The Pennsylvania surface property of Charles Powers was sold in 1881, but the deed retained “half the minerals and petroleum oils” found on the property for his estate. The surface property is currently owned by John and Mary Butler, who are at odds with the Charles Powers estate over whether the estate’s right to half the minerals on the property includes half the Marcellus Shale gas. In 2010 the Court ruled in favor of the Butlers, concluding that use of the word “minerals” in the deed did not specifi- cally reserve ownership of the natural gas found in the Marcellus Shale formation. The case was appealed to the Superior Court which overturned the original decision and sent it back to the Court of Common Pleas for additional review. The case was appealed to the Supreme Court of Pennsylvania and arguments were held in October 2012. A final decision in this matter is pending. FIGURE 3: Cases by type of matter by quarter3. Are there any notable trendsin the types of cases filed?Figure 3 shows that royalty disputes have dominated the unconventionaloil and gas litigation landscape for the past five quarters (39 percent of allcases filed during the relevant period). Generally involving allegations ofunderpayment of oil, gas or liquid natural gas royalties, these matters accusewell operators of improperly deducting costs from the royalty base or of usingaggregation or accounting techniques to understate volumes.
  • 4Unconventional Oil and Gas Litigation Trends Report navigant.com/shale Spotlight on Regulatory Developments About Navigant’s Unconventional On November 15, 2012, the Federal Energy Regulatory Commission (FERC) Oil and Gas Services issued its “Enhanced Natural Gas Market Transparency” Notice of Inquiry (NOI) Navigant’s unconventional oil and gas offerings include advisory services in which it is “considering proposing to require all market participants engaged for strategic business decision analysis, construction risk management, in sales and wholesale of physical natural gas in interstate commerce to report economic and antitrust analyses, investment banking and restructuring advi- quarterly to the Commission every natural gas transaction within the Commis- sory services, and expert services for disputes and investigations. For more sion’s NGA jurisdiction that entails physical delivery for the next day… or for the next month…”4 The stated purpose for the proposal is: information, go to www.navigant.com/shale. “…obtaining such information would significantly increase the information ABOUT NAVIGANT available to the Commission concerning transactions in the natural gas markets thereby enhancing its ability to identify the potential for market manipulation in Navigant (NYSE: NCI) is a specialized, global expert services firm dedicated the natural gas markets, to examine more efficiently the manipulative behavior, to assisting clients in creating and protecting value in the face of critical and to assess the effects of manipulation.” business risks and opportunities.Through senior level engagement with clients, Navigant professionals combine technical expertise in Disputes and Whereas the FERC has in the past collected a great deal of pipeline capacity Investigations, Economics, Financial Advisory and Management Consult- information, transportation rate and capacity release information, and total- volume sales information, this NOI proposes more details of every transaction – ing, with business pragmatism in the highly regulated Construction, Energy, including the price charged for the gas commodity. Industry experts suggest that Financial Services and Healthcare industries to support clients in addressing this proposal by the Commission will likely be seen by the commercial elements their most critical business needs. More information about Navigant can be of the industry to be an intrusive progression of the market-enforcement function found at www.navigant.com. FERC has been building ever since the Energy Policy Act of 2005 (EPAct 2005) For more details on the information presented above, please contact: was implemented. While it is uncertain that the FERC’s NOI may or may not lead to a notice of proposed rulemaking (NOPR) and that an issued NOPR may Rob Wentland never become a final rule, these types of regulatory initiatives could continue +1.312.583.2644 through 2012-2013 across a broad spectrum of agencies. rob.wentland@navigant.com Sook Lee +1.312.583.36611 Eric Roston, “Shale Fracking Makes U.S. Natural Gas Superpower – Now What?,” Bloomberg sook.lee@navigant.com September 25, 2012. Lananh Nguyen, “U.S. Oil Output To Overtake Saudi Arabia’s by 2020,” Bloomberg November 12, 2012. Julie Carey2 Maugeri, Leonardo. “Oil: The Next Revolution” Discussion Paper 2012-10, Belfer Center for +1.202.481.7551 Science and International Affairs, Harvard Kennedy School, June 2012.3 Case data reported in prior studies may change when information regarding ongoing litigation is julie.carey@naviganteconomics.com identified or amended. Rick Smead4 141 FERC ¶ 61,124 United States of America Federal Energy Regulatory Commission [Docket No. RM13-1-000]; Notice of Inquiry, Enhanced Natural Gas Market Transparency; Issued +1.713.646.5029 November 15, 2012. rsmead@navigant.com Gordon Pickering +1.916.631.3249 gpickering@navigant.com©2013 Navigant Consulting, Inc. All rights reserved. 00001119Navigant Consulting is not a certified public accounting firm and does not provide audit, attest, or public accounting services. See www.navigant.com/licensing for a complete listing of private investigator licenses.