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Industry Leaseholds Face Scrutiny in Pennsylvania, Ohio

The Pennsylvania Superior Court has thrown out a lawsuit brought by Fayette County family, which wanted an oil and gas lease agreement voided by claiming that some drilling activities weren't contemplated when the contract was executed. However, similar lawsuits in the state and in Ohio are facing new scrutiny as well.

Chevron U.S.A. Inc.'s lease with a Marcellus Shale landowner in Fayette County, PA, allows the producer to construct an 11-acre freshwater impoundment to assist in drilling for natural gas, the state's high court ruled. Paul F. Humberston and family members own about 133 acres of land in the county, and in 2006 they entered into a lease agreement with Keeton Group LLC, subsequently taken over by Chief Exploration & Development Co. and then by Chevron.

To begin unconventional drilling using hydraulic fracturing techniques, Keystone Vacuum Inc. performed construction work for Chevron for a freshwater storage impoundment covering 11 acres of the leasehold and the surrounding area, known collectively as the Humberston unit.

In 2011, the Humberstons filed a lawsuit in the Court of Common Pleas of Fayette County, alleging that the impoundment was not contemplated when the lease was executed and said Chevron and Keystone had no right to build it (Court of Common Pleas of Fayette County Civil Division, No 2068 of 20011). When the Common Court dismissed their case last year, they appealed (Humberston et al v. Chevron et al, No. 1270, WDA 2012).

At the heart of the matter are the leasing and unitization clauses, which state that the lessor has the "exclusive right to explore for, develop, produce, measure and market production from the leasehold and from adjoining lands using methods and techniques which are not restricted to current technology," such as unconventional drilling using fracking. One of the Humberstons' main objections was to the use of fracking.

Chevron and Keystone objected and the court dismissed the complaint, noting that the lease language "is clear and unambiguous." The family appealed, asking the higher court panel if the objections were enough to dismiss the lawsuit all together; it also sought to add evidence regarding fracking operations. The Superior Court dismissed the lawsuit, noting that the lease contract's language and Pennsylvania law "allow for the use of the surface area of the property as is reasonably necessary or convenient to develop the natural gas" under the property in question.

"There is no apparent ambiguity or vagueness in the language of the lease," said the court. "Moreover, we note that the Humberstons do not allege that the freshwater impoundment is unnecessary to the extraction of gas from the Marcellus Shale strata. Accordingly, without contradictory language in the lease, parol evidence that the Humberstons seek to introduce to a jury is not admissible."

Meanwhile, in June six families in Fayette County sued Chevron Corp., Williams and subsidiary Laurel Mountain Midstream, as well as former Williams unit WPX Energy Inc., now an independent producer, claiming that gas operations are a nuisance and "unreasonably interfering with the enjoyment of their property." The case is to be heard in the Court of Common Pleas in Allegheny County (Headley v. Chevron Appalachia LLC). The families claim that gas drilling operations have polluted their water supplies with methane. They also allege that employees of the companies intimidated them and ruined a breeding stock of Black Angus cows.

What appears to differentiate the latest allegations is the focus of the lawsuit, challenging the byproducts of the operations rather than specific drilling techniques such as fracking, said attorney Charlie Speer, who is representing the families. He said he didn't think a lawsuit of this kind had ever been filed. The case, he said, is a "quality of life" lawsuit.

"This country was founded on private property rights," Speer said. "Our homes are our biggest investment in life and we want to be comfortable and safe in our homes. They feel like their government has failed to protect them, failed to listen to them." The lawsuit is seeking unspecified compensation from the companies for chemical leaks, noise, dust and property damage caused by 12 gas wells and a compressor station.

A class action lawsuit also is pending in a Youngstown court that could affect property owners attempting to rid themselves of original lease agreements. In Ohio, land in the pre-boom days of the Utica/Marcellus shales was leased from 2001 to 2006 for as little as $50.00/acre.

Six landowners in Monroe County, OH, are testing the agreements in the Seventh District Court of Appeals. The case concerns a lawsuit filed in 2011 against Ohio-based Beck Energy Corp., alleging that a blanket lease drafted in 1983 was for drilling rights into the Clinton Sandstone formation, which was never developed (Hupp v. Beck Energy Corp.). Two months after the lawsuit was filed, Beck in December 2011 sold 21,000 acres of deep mineral rights in Ohio, including the Monroe leaseholds, to ExxonMobil Corp. subsidiary XTO Energy Inc. XTO attempted to intervene in the lawsuit, which was denied, and a sales provision required Beck to defend the lease titles.

In July 2012, the Common Pleas Court of Monroe County found for the plaintiffs, ruling that the leases violated state public policy that encourages oil and natural gas production. The trial court also held that Beck had breached the implied covenant to reasonably develop the land by failing to drill any wells. All of Beck's rights to the land also was forfeited.

The leases in question "clearly, unequivocally and seriously offend public policy," said the lower court. Beck appealed the ruling, but the appellate brief was postponed pending the final order. With the appeal on hold, the plaintiffs filed a motion to certify the case as a class action by claiming that up to 700 landowners had executed similar contracts with Beck across the 21,000 acres.

In February, the lower court granted the class action, and in March, Beck and XTO filed another notice of appeal. According to attorney Rick Zurz, who is representing landowners, records for the sale to XTO indicate that Beck sold the rights "for a lot of money...likely in the millions of dollars. The landowners got nothing."

The Ohio Oil and Gas Association and more than a dozen industry-affiliated groups since have filed friends of the court briefs in support of Beck's argument that the leases have to be reinstated. Beck's lawyers said if the lower court ruling were to stand, it could jeopardize the state's oil and gas industry and disrupt the way lease agreements are negotiated.

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