Canfield v. Statoil U.S. Onshore Props. Inc., CIVIL ACTION NO. 3:16-0085

CourtUnited States District Courts. 3th Circuit. United States District Court of Middle District of Pennsylvania
Writing for the CourtJUDGE MANNION
Decision Date22 March 2017
Docket NumberCIVIL ACTION NO. 3:16-0085


CIVIL ACTION NO. 3:16-0085


March 22, 2017



Currently before the court are a motion to dismiss filed by defendant Statoil Natural Gas LLC ("SNG"), (Doc. 25), and a motion to dismiss filed by defendants Statoil USA Onshore Properties, Inc. ("SOP") and Statoil ASA ("Statoil ASA"), (Doc. 31). The defendants' motions seek dismissal of all of the putative class actions claims brought by plaintiff Cheryl B. Canfield ("Canfield"), as detailed in her complaint, (Doc. 1). SOP and SNG are both wholly owned, indirect subsidiaries of Statoil ASA.1 Canfield is the lessor of a lease currently held, in part, by lessee SOP. Having reviewed the parties submissions regarding Canfield's putative class action claims, and based on

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the foregoing, SNG's motion, (Doc. 25), is GRANTED in its entirety and Statoil ASA's and SOP's motion, (Doc. 31), is GRANTED IN PART and DENIED IN PART.


Canfield is the owner of property located at 3835 State Route 3004, Meshoppen, Pennsylvania in the Marcellus Shale region. The Marcellus and Utica shale regions in and around Pennsylvania contain one of the largest natural gas formations in the world. On May 6, 2008, Canfield entered into an oil and gas lease with Cabot Oil & Gas Corporation ("Cabot Oil") for the exploration of oil and natural gas on her land. Her lease was subsequently acquired in part by defendant SOP, in part by Chesapeake Appalachia, L.L.C. ("Chesapeake"), and in part by Epsilon Energy Ltd. Although Canfield's complaint, (Doc. 1), asserts various claims against the defendants, her dispute primarily revolves around the royalty clause in her lease agreement as it has been interpreted by lessee SOP.

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A. Canfield's Oil & Gas Lease

The royalty clause in Canfield's lease provides for both an in-kind percentage of oil or natural gas products to be delivered to Canfield's tank and for a percentage of the "amount realized" from the sale of any oil or natural gas products extracted from her land.3 Specifically, clause three of the lease provides as follows:

Lessee . . . shall pay the Lessor on gas, including casinghead gas and other gaseous substances, produced and sold from the premises fifteen percent (15%) of the amount realized from the sale of gas at the well. "The amount realized from the sale of the well" shall mean the amount realized from the sale of the gas after deducting gathering, transportation, compression, fuel, line loss, and any other post-production costs and/or expenses incurred for the gas whether provided by a third party, Lessee or by a wholly owned subsidiary of Lessee. Lessee is authorized by Lessor to provide gathering, transportation, compression, fuel, and other services for Lessor's gas either on its own or through one or more wholly owned subsidiaries of Lessee and to deduct from the royalty to be paid to the Lessor the costs and/or expenses of providing such services including, without limitation, line-loss.

(Doc. 1-2, at 1, ¶3) (emphases added).

The above language in Canfield's royalty clause allowed for the deduction of post-production fees. Post-production fees are normally incurred in order to transform the raw natural gas product into a finished, marketable product to be sold downstream in the commercial chain. (See Doc. 1, at ¶30). A superceding addendum to the primary lease document that was attached

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to the lease and signed and dated the same day as the initial lease document modified the original lease terms. (Doc. 1-2, at 3-4). The addendum states that if there are any inconsistences between the added terms in the addendum and the printed lease terms, the added terms will control and supercede the printed terms of the lease. (Id. at 3). Within this addendum is a "ready for sale or use clause" directing the lessee to exclude any production or post-production costs in its calculation of royalties, stating as follows:

Royalties shall be paid without deductions for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, transporting, or otherwise making the oil and/or gas produced from the lease premises ready for sale or use.

(Id. at 4, ¶13).4 This language modified the royalty provision of the lease, and expressly provides that the lessee shall not deduct certain post-production fees.

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B. The Relationship Between Canfield and the Statoil Entities

Though Canfield originally entered into the lease agreement with Cabot Oil, at some time in or around 2006, Chesapeake engaged in an aggressive lease acquisition program to exploit natural gas from properties in the Marcellus shale region, which included Canfield's property. At some point after she had entered into the agreement with Cabot Oil in 2008, Canfield's lease was transferred to Chesapeake, presumably as part of Chesapeake's overall plan to acquire leasehold interests in the area. In or around November 2008, Chesapeake also entered into industry participation agreements or joint venture agreements with SOP.5 Under this agreement, SOP was to receive a minority interest in Chesapeake's holdings, including its lease interests. In return, SOP was to provide Chesapeake with an up front cash payment and would finance 75% of Chesapeake's drilling and completion costs until $2.125 billion had been paid. Canfield is unsure whether her specific lease was assigned to SOP from Chesapeake pursuant to this joint venture agreement or if an assignment to SOP occurred simultaneously with the assignment to Chesapeake from Cabot Oil. In any event, both companies now own a partial interest in her lease originally entered into with Cabot Oil.

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SOP's natural gas operations are distinct, however, from Chesapeake's operations, which ultimately results in noticeably different royalty payments to Canfield. Upon extraction at the wellhead, SOP takes title to its in-kind percentage of the natural gas extracted from Canfield's land and immediately sells the natural gas to its own affiliate, defendant SNG, pursuant to an agreement between the two entities.6 Under this agreement, SNG takes title to the raw product at the wellhead and then contracts with third parties for post-production services, transforming the raw product into a finished product. SNG also contracts with pipeline companies to transport the natural gas through the interstate pipeline system. SNG, ultimately, resells the final product to third-party buyers at receipt/delivery gates along the interstate system, at Citygates. Thus, SOP holds the lease interests for immediate sale and SNG serves as a marketing company, taking title at the well, transforming the product into a finished one, and then selling the post-production product to distribution companies, industrial customers, and power generators downstream.

Partly at issue in this action is the agreement between SOP and SNG for the price of the raw natural gas at the wellhead where title is transferred

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from SOP to SNG. Their agreement fixes the price of the raw natural gas to a uniform hub price or index price for natural gas, regardless of whether the natural gas is ever delivered to that particular hub on the interstate pipeline system. SOP does not dispute that it fixes the price at the wellhead to an index price. The Fifth Circuit Court of Appeals has explained the use of index prices as follows:

Natural gas is transported throughout North America via a network of pipelines. The gas transportation network is centered around 'hubs,' which are geographical locations where major pipeline systems interlink. These hubs act as separate markets, at which supply and demand dictate prices that may differ between the hubs.

* * *
The market index prices for physical gas are most prominently published in two privately owned newsletters: [Platts'] Inside FERC Gas Market Report ("Inside FERC") and Natural Gas Intelligence ("NGI"). Both of these publications publish the natural gas price marketing indicators at the major pipeline hubs and market centers in the United States, and it is undisputed that both publications are highly influential to market prices for physical gas. The indexes are also are used to determine royalties and public gas contracts, among other things. The publications gather pricing information about the various markets and pipeline hubs by requesting data about physical gas transactions from natural gas traders. After receiving data from the gas traders, and taking a variety of other factors into account, the publications release indexes that purport to represent the price of natural gas at different delivery points.

United States v. Brooks, 681 F.3d 678, 685 (5th Cir. 2012).

In or around April 2010, SOP and SNG began using this index price as opposed to what Canfield describes as an "actual negotiated price" at the direction of Statoil ASA. (Doc. 1, at 26). Canfield alleges that the original hub price was set at the Dominion South Point Hub ("DSPH"), with this hub

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changing to the Tennessee Zone 4 "300 Leg" index price or hub in or around September 2013. Canfield's royalties are calculated using this fixed, index price.

In contrast to SOP, Chesapeake pays a royalty to leaseholders based on a price paid by third-parties downstream of the wellhead. Chesapeake's royalty price is, thus, based on the final natural gas product after the deduction of post-production costs and is calculated using the sale price of the finished product. Like SOP, Chesapeake also deals with an affiliate marketing entity. This marketing entity aggregates all the natural gas held under various leases and sells it downstream from the well. To calculate royalties to landowners, Chesapeake uses a weighted average sales price ("WASP") that uses prices paid by downstream buyers. According to Canfield, Chesapeake also deducts any...

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