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Decision: Gas Producers Can Hold Marcellus Lease With Shallow Drilling
Natural gas producers don’t owe a duty to develop each and every “economically exploitable strata” under a landowner’s property, the Pennsylvania Superior Court ruled last month.
The state’s intermediate appeals court ruling affirmed a trial court decision to dismiss claims by landowners that gas producers had violated the express and implied terms of their oil and gas leases for failing to develop Marcellus Shale beneath the property (Caldwell et al. v. Kriebel Resources Co. et al, No. 1305).
Early last year Terry L. Caldwell and his wife Carol A. Caldwell filed a lawsuit against Kriebel Resources Co., Range Resources–Appalachia LLC and others regarding a lease executed in January 2001.
The lease with Kriebel covered “all oil, gas, surface and drilling rights” that were owned or claimed by landowners, with a primary term of two years that would extend as long as oil or gas was produced.
According to the court documents, the defendants drilled several shallow wells on the property held under the lease terms. However, plaintiffs claimed that, among other things, the defendants breached their implied duty to develop the property by not drilling deeper wells to exploit the Marcellus and, based on such potential unexploited value, the current output was not enough to produce paying quantities.
The landowners also argued that the defendants only intended the lease to cover the shallow strata, and they asked that the lease be reformed to reflect that understanding. The defendants filed a motion to dismiss, and the court agreed.
The plaintiffs argued that regarding the operators’ duty to develop, the court should follow a Louisiana court case from 1992 (Goodrich v. Exxon Co., 608 So. 2d 1019. In that case the court held that Exxon’s duty to develop as a reasonably prudent operator included an obligation to develop oil-producing sands underlying the leased premises. The plaintiffs claimed that there is an implied duty to “develop all strata, not simply to extract shallow gas…”
The superior court rejected the Goodrich case and said it was “not compelled to follow Louisiana law.” The production from various shallow wells was found to be sufficient to hold the entirety of the leased estate. It also rejected the plaintiffs’ claim that the concept of “paying quantities” should be based on all potential gas strata with the leasehold and impose some obligation relating good faith.
The court made clear that “paying quantities” in Pennsylvania only require a well to “consistently” pay a profit, “however small.” There is no “legal effect” that the profits were “not to the extent appellants desire.”
Landowners’ request to reform the lease was not addressed.
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