CHAPTER 9 UPDATE ON THE REGULATION AND DEVELOPMENT OF METHANE PRODUCED FROM COAL FORMATIONS
| Jurisdiction | United States |
(Nov 2004)
UPDATE ON THE REGULATION AND DEVELOPMENT OF METHANE PRODUCED FROM COAL FORMATIONS
Jon Tjornehoj
Davis Graham & Stubbs LLP
Denver, Colorado
Greg received his undergraduate degree from the University of Colorado in 1979 and obtained his J.D. in 1983 from the University of Denver. Since graduation, Greg has primarily represented oil and gas companies in a variety of matters including business transactions, title examinations and bankruptcy law. Greg is currently a partner in the law firm of Davis Graham & Stubbs LLP.
Greg is an active participant with the Rocky Mountain Mineral Law Foundation, and served as a Trustee, 2000 to 2002, and co-chaired the 2002 special institute on the Regulation and Development of Coalbed Methane. Greg has been a lecturer and author for various industry groups. His published papers include: "Title Examination of State and Federal Lands," Mineral Title Examination III, Paper No. 4 (Rocky Mt. Min. L. Fdn., 1992); "Liability Associated with Federal Record Title Leasehold Rights," 32 Public Land Resources L. Dig. 283 (1995); "Due Diligence for the Purchase of Pipeline Systems," Institute on Rights of Way, Paper No. 14 (Rocky Mt. Min. L. Fdn., 1998); and "Lease Maintenance and the Development of Coalbed Methane," 46 Rocky Mt. Min. L. Inst. 5-1 (2000) and "The Perfect Oil and Gas Lease: Why Bother!" 50 Rocky Mt. Min. L. Inst. 19-1 (2004).
Greg is a member of the Colorado Bar Association (Chair, Natural Resources and Energy Law Section, 2003-2004), American Bar Association, American Association of Professional Landmen and the Denver Association of Petroleum Landmen.
Jon Tjornehoj is an associate with the Natural Resources Department at Davis Graham & Stubbs in Denver, Colorado. Jon's practice focuses on environmental litigation related to mineral development on federal public lands. His practice also includes work on oil and gas royalty matters and permitting issues arising from mineral exploration and development. Jon is admitted to practice in the states of Wyoming and Colorado. Jon received his Bachelor of Arts in anthropology from Colorado State University in 1997. He subsequently worked as an archaeologist on numerous energy development projects throughout the Rocky Mountain region. Jon received his Juris Doctorate, with honor, from the University of Wyoming in 2002.
I. INTRODUCTION
II. LAND AND CONTRACTUAL ISSUES
A. Title Issues
1. Wyoming
a. Newman v. RAG Wyoming Land Co.
b. Caballo Coal Co. v. Fidelity Exploration & Production
2. West Virginia
B. Oil and Gas Lease Royalty Issues
1. Federal Royalty Decisions Related to CBM Production
a. Amoco Production Co. v. Baca
b. Devon Decision
2. Distributing Proceeds Under the Wyoming Royalty Payment Act
a. Background
b. Post Production Costs Under the WRPA
c. Reporting Obligations and Liability Under the WRPA
3. Oil and Gas Lease Maintenance Issues -- Dewatering Clause
C. Wyoming Split Estate Initiative
III. PUBLIC LAND ISSUES
A. Coal-CBM Development Conflicts
B. Challenges to Federal Leasing In The Powder River Basin
1. Background
2. IBLA Proceedings
3. Wyoming District Court
4. Tenth Circuit
5. The Outcome
IV. ENVIRONMENTAL ISSUES
A. Produced Water and the Clean Water Act
B. Dredge and Fill Permits in Wyoming
I. INTRODUCTION
In November 2002, the Rocky Mountain Mineral Law Foundation presented a two-day special institute on the regulation and development of coalbed methane 1 (hereafter referred to as the "CBM Special Institute"). At the time of the CBM Special Institute, coalbed natural gas production ("CBM") was gaining recognition as a significant contributor to the nation's energy supply. 2 The production of natural gas from coal seams has continued to grow and as of 2003 represented 9% of the nation's energy supply. 3 The Rocky Mountain region and in particular the Powder River Basin continue to be one of the most active areas for the development of coalbed methane. In the Powder River Basin alone there are more than 12,000 producing coalbed natural gas wells with production of 900 MMCFD, which is approximately 1.25% of the domestic demand within the United States. 4 The intense development activity in the Powder River Basin has resulted in a number of legal decisions since the date of the last CBM Special Institute and will be the focus of much of the discussion in this paper.
The 2002 CBM Special Institute covered a broad array of topics ranging from land and transactional issues to environmental issues. This paper will discuss some of the legal issues that have arisen and cases that have been decided since November of 2002. The first part of the paper will cover traditional land issues related to ownership of coalbed methane. The second part of the paper will address a broad spectrum of environmental issues ranging from legal challenges to the issuance of federal oil and gas leases to regulation of produced water.
II. LAND AND CONTRACTUAL ISSUES
A. Title Issues
The CBM Special Institute included an in-depth discussion of the various decisions concerning conveyances and reservations of minerals insofar as they pertain to ownership of coalbed methane. 5 That paper recognized a split in the cases in determining whether the gas produced from coal formations was owned by the coal or gas estate. The cases have split along a geographic line of "western vs. eastern." 6 The eastern jurisdiction cases holding that the coal owner owns and controls coalbed methane and the western states finding that the methane is owned by the owner of the gas estate.
This eastern vs. western split has continued to some degree, as evidenced by recent cases decided in Wyoming and West Virginia.
1. Wyoming
a. Newman v. RAG Wyoming Land Co. 7
Meadowlark Farms, the predecessor to RAG Wyoming Land Co., acquired a 1,560-acre ranch which included both the surface and mineral estate. The deed conveyed "all coal and minerals commingled with coal that may be mined or extracted in association therewith or in conjunction with such coal operations" and reserved to the grantor "all oil, gas and other minerals except as set forth above." 8 The deed was subject to a prior oil and gas lease and there was existing production under the terms of that lease. Subsequently, a number of coalbed methane wells were drilled upon the lease. The Morgan mineral heirs as successors to the grantors under the warranty deed demanded payment of royalties for the methane gas production. RAG, the coal operator, claimed ownership of the methane production based upon language of the same deed.
The District Court granted summary judgment in favor of the coal company. On appeal the Wyoming Supreme Court held that the gas was not "mined or extracted in association therewith or in conjunction with the coal operations" but was produced through wells like any other gas. RAG argued that its right to mine the coal and thereby ventilate or waste the coalbed methane implied ownership. Following the reasoning in the Southern Ute 9 case the Court stated that it could safely presume the parties to the warranty deed knew generally that methane gas existed in the coalbed, posed some safety problems and was not viewed as having independent value. 10 The Court found the general intent of the parties to be that the landowners would retain any oil and gas found within the property and the coal operator would be able to fully exploit the coal resource. The Court held that the right to vent the gas which is an essential element of the right to mine was not equivalent to ownership.
b. Caballo Coal Co. v. Fidelity Exploration & Production 11
In this case the Wyoming Supreme Court considered whether two 1970 warranty deeds in favor of Carter Oil Company covered coalbed methane. Both deeds granted all of grantor's interest in the coal together with "all of grantor's undivided interest in and to all of their minerals, metallic or nonmetallic contained in or associated with the deposits of coal conveyed hereby or which may be mined or produced with said coal subject to the reserved royalty hereinafter provided." 12 Fidelity Exploration acquired oil and gas leases from the successor to the Carter Oil Company, Caballo Coal Co. After drilling methane wells on the property covered by the deeds, Fidelity filed an interpleader action in the District Court seeking a determination of who was entitled to royalties on the production. In this case, the deed did not contain a reservation of oil, gas and other minerals. The Court found the deeds to be unambiguous and the party's intent clear to convey all minerals including coalbed methane.
2. West Virginia
In Energy Development Corp. v. Moss, 13 the West Virginia Supreme Court of Appeals affirmed a Circuit Court decision holding that a particular oil and gas lease did not cover coalbed methane (CBM). In the mid 1980s Energy Development Company ("EDC") obtained an oil and gas lease covering two tracts of land in which the lessors owned all minerals, including the oil, gas and coal. The oil and gas lease let and leased to the lessee "all of the oil and gas and all the constituents of either in and under the land hereinafter described in all possible productive formations therein...." EDC drilled seven conventional wells but did not test the coal formations for CBM. In 1998 a dispute arose over royalty payments and EDC filed a counterclaim for a declaratory judgment determining that the oil and gas lease covered CBM.
The Supreme Court of West Virginia framed the issue as follows: "whether a gas lease executed in 1986, before the widespread commercial production of coalbed methane in West Virginia, signed by a lessor who owned the land, coal, oil and gas, conveyed to the oil and gas lessee the right to develop coalbed methane, absent any specific language on the issue." The Court...
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