Frackers Feeling Shaken Up by Pennsylvania Court Decision

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By Leslie A. Pappas

Anxiety is building around a court ruling in Pennsylvania that could potentially upend long-standing oil and gas arrangements, and affect hydraulic fracturing efforts nationwide.

Natural gas driller Southwestern Energy Production Co. has asked Pennsylvania’s Superior Court to rehear the case with more judges after a two-judge panel ruled April 2 that hydraulic fracturing could create liability when fluids released from the fracking process flow onto adjoining properties.

The case, Briggs v. Southwestern Energy Production Co., in Pennsylvania’s Superior Court, has caught the attention of energy companies, oil and gas attorneys, and legal scholars nationwide, attorneys from around the country told Bloomberg Environment.

The ruling could have a chilling effect on oil and gas development because it overturns a long-standing, seemingly settled legal principle known as the “rule of capture,” they said.

According to the rule of capture, a driller on one parcel of land may extract oil and gas from underneath adjoining properties as long as the driller doesn’t physically trespass over the property line.

So far, a half-dozen energy associations, business and industry groups, a geologist, and a Texas-based professor of oil and gas law have asked to file friend of the court briefs in the case, an indication of the consequences the industry fears should the ruling stand.

Significant Impact

The ruling holds potential for a significant economic impact for companies invested in gas development, because it increases the possibility that energy companies could face trespass claims in connection with their fracking operations that they otherwise wouldn’t have been exposed to, Anthony J. Carna, chair of McGuireWoods LLP’s oil and gas practice, told Bloomberg Environment May 3.

The case also could affect litigation in states that that don’t have a well-developed body of case law governing oil and gas, Carna said.

“Many states will look to other states for precedent to reach their opinion,” Carna said. “The worry is that other states looking at this issue that are facing it for the first time may look to Briggs for precedent.”

The case involves Southwestern Energy Production Co., a subsidiary of Houston-based Southwestern Energy Co., and the Briggs family, who own a roughly 11-acre property in Susquehanna County next to two hydraulic fracturing wells that the company has operated since 2011.

The Briggs sued the driller in November 2015 for trespass and conversion, seeking punitive damages. They argued that extracting the natural gas from beneath their property through hydraulic fracturing is a trespass, because the gas would be trapped forever if it weren’t forcefully fracked out.

Fracking the Marcellus Shale to extract natural gas from beneath the Briggs’ property is “akin to opening the gate of a neighbor’s livestock pen and taking the livestock as they walk out,” they said in a a court filing April 30, arguing that the court’s April 2 ruling should stand.

Fracking Distinctions

In the April 2 opinion, the court concluded that due to distinctions between hydraulic fracturing and conventional drilling, the rule of capture “does not preclude liability for trespass” onto adjoining properties in situations where hydraulic fracturing is used.

“Unlike oil and gas originating in a common reservoir, natural gas, when trapped in a shale formation, is non-migratory in nature,” Judge John L. Musmanno wrote. For natural gas trapped in shale to flow freely, the shale must be physically fractured. “Shale gas does not merely ‘escape’ to adjoining land absent the application of an external force,” he wrote.

“Because hydrofracturing is the most economic and commonly used method of producing oil and gas across the country, and because Pennsylvania is the second-largest natural gas producing state, this Court’s decision unsettles the legal landscape for the entire industry,” Southwestern Energy told the court in its application for reargument April 16.

The ruling will have a “devastating effect” on unconventional gas exploration and “a massive, negative impact upon industry, employment and the Pennsylvania judicial system,” the Pennsylvania Chamber of Business and Industry said in a court filing.

Nationwide Influence

Eighteen percent of the nation’s natural gas comes from Pennsylvania, which is second only to Texas in gas production, said L. Poe Leggette, a partner with Baker & Hostetler LLP in Denver who co-leads the firm’s national energy industry team.

Any ruling adverse to hydraulic fracturing in Pennsylvania could shake up the entire industry and be influential in other states, he said.

Although case law in Texas is robust, the questions raised in Briggs aren’t yet settled in other states with hydraulic fracturing, such as Oklahoma, Louisiana, West Virginia, Colorado, Wyoming, and North Dakota, Leggette told Bloomberg Environment May 3.

The questions raised in the case also could influence regulators and legislators in other states with less favorable views toward gas development, which could have a chilling effect on development in those areas, said Jasper Mason, counsel at the firm’s Houston office. Mason joined Leggette to write a client alert about the opinion.

Mason said he was more worried about the fallout if the court doesn’t uphold the April 2 ruling, because legislators or regulators might then think they need to do more to protect owners of land near fracking activities.

Can of Worms

The ruling “opens a can of worms” and could have huge ramifications, Daniel Markind, a partner in real estate with a subspecialty in oil and gas development leasing at Weir & Partners LLP in Philadelphia, told Bloomberg Environment.

Gathering evidence to prove trespass would be difficult, for example. What tools would be used to measure the amount of natural gas taken underground? How far away from the drilling platform could trespass occur? Would landowners anywhere close to a well have the right to sue for trespass?

“The panel’s decision disrupts longstanding rules of law on which property owners, production companies, and many other stakeholders in Pennsylvania have relied to conduct their affairs,” the Marcellus Shale Coalition, a group representing about 200 energy producers and supply-chain companies that tap into the Marcellus and Utica shale formations, said in its filing to the court.

The Superior Court reversed the summary judgment and remanded the case back to the trial court for further proceeding. It isn’t known when the court will rule on the application for reargument.

The case is Briggs v. Sw. Energy Prod. Co., Pa. Super. Ct., No. 1351 MDA 2017, Opinion 4/2/18.

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