Over the last 18 months natural gas operators from all over the world have converged on Western Pennsylvania.
Their goal has been to secure new leases from landowners holding valuable mineral rights in the deeper
Marcellus Shale formation. This rush to access the Marcellus Shale is now creating tension between
landowners with existing oil/gas leases and their respective lessees. The royalty payments generated from
these older, shallow well leases pale in comparison to the large signing bonuses and high-volume royalties
associated with deeper Marcellus wells. As such, many of these landowners are now trying to “get out” of
their existing leases and sign new, potentially more lucrative, Marcellus leases.
The Superior Court of Pennsylvania recently sided with a lessee in a class action royalty dispute. In Hall v. CNX Gas Co., LLC, the lease contained a royalty provision providing that royalties were to be calculated on the net amount realized at the point of sale.
Throughout Pennsylvania it is not uncommon to encounter gas wells that were drilled over 100 years ago. These ancient wells were drilled pursuant to oil/gas leases that often pre-date the turn of the century. In many cases, the original lessee only drilled a single well and never developed the remaining acreage under the lease. Can that single well drilled in the 1920’s now hold an entire 200 tract of land? This is a common and troubling issue for landowners throughout the Commonwealth. In a recent decision of the federal district court in Pittsburgh, the trial court recognized this hardship and allowed a lease cancellation suit filed by the landowner to move forward.
This is a familiar but troubling issue for a growing number of landowners throughout the Marcellus Shale fairway. Imagine you own 145 acres in Tioga County, Pennsylvania. You sign a lease with a modest signing bonus in 2007. You soon realize that your signing bonus is considerably less than your neighbor who signed after you. You contact the landman and inquire why. He tells you not to worry because a Marcellus well will soon be drilled on your property and the monthly royalties will be “tens of thousands” of dollars.
Oil and Gas Case Law Update: Recent Decisions Impacting Oil and Gas PracticeLisa McManus
Pennsylvania oil and gas jurisprudence continues to evolve. On April 2, 2015, PBI's panel of energy law practitioners provided a webinar update on the latest appellate decisions that are shaping energy law practice. Included is an overview of Sabella v. Appalachian Dev. Corp.; Citizens for Pennsylvania’s Future v. Ultra Resources, Inc.; Sisson v. Stanley; Harrison v. Cabot Oil & Gas; Pennsylvania Environmental Defense Foundation v. Commonwealth.
The document analyzes data from the Minerals Management Service (MMS) and Bureau of Land Management (BLM) on federal oil and gas leases from 1997 to 2004. It finds that while the number of non-producing leases is often cited, the leases are constantly changing over 8 years as companies explore, drill, and either begin production or allow leases to expire. The percentage of producing leases and acreage under production increased over this period. It concludes that companies are actively exploring the leases through drilling and that non-producing leases represent a working inventory being evaluated for potential production.
Many investors are looking for a safe place to put their money with the wild fluctuations in the financial market. Stable, predictable investment vehicles are increasingly hard to find, but smart investors do have choices. One of the better choices is to invest in single-tenant, net-leased properties, which many investors also call a corporate bond combined with real estate investments that still make sense today.
The document discusses investing in oil shale deposits in the United States. It notes that U.S. reliance on foreign oil has decreased to its lowest level in over 20 years due to production from oil shale deposits, with imports down to 40% from 60% a few years ago. The largest known oil shale deposits in the world are in the U.S., with total known reserves of nearly 5 trillion barrels. Investing in finding, extracting, and delivering oil from these large domestic shale deposits is promoted as a way to profit from America's largest petroleum resource. Specific formations like the Bakken in North Dakota and Montana and areas in Texas and Louisiana are highlighted as particularly promising for continued oil and gas production.
The Superior Court of Pennsylvania recently sided with a lessee in a class action royalty dispute. In Hall v. CNX Gas Co., LLC, the lease contained a royalty provision providing that royalties were to be calculated on the net amount realized at the point of sale.
Throughout Pennsylvania it is not uncommon to encounter gas wells that were drilled over 100 years ago. These ancient wells were drilled pursuant to oil/gas leases that often pre-date the turn of the century. In many cases, the original lessee only drilled a single well and never developed the remaining acreage under the lease. Can that single well drilled in the 1920’s now hold an entire 200 tract of land? This is a common and troubling issue for landowners throughout the Commonwealth. In a recent decision of the federal district court in Pittsburgh, the trial court recognized this hardship and allowed a lease cancellation suit filed by the landowner to move forward.
This is a familiar but troubling issue for a growing number of landowners throughout the Marcellus Shale fairway. Imagine you own 145 acres in Tioga County, Pennsylvania. You sign a lease with a modest signing bonus in 2007. You soon realize that your signing bonus is considerably less than your neighbor who signed after you. You contact the landman and inquire why. He tells you not to worry because a Marcellus well will soon be drilled on your property and the monthly royalties will be “tens of thousands” of dollars.
Oil and Gas Case Law Update: Recent Decisions Impacting Oil and Gas PracticeLisa McManus
Pennsylvania oil and gas jurisprudence continues to evolve. On April 2, 2015, PBI's panel of energy law practitioners provided a webinar update on the latest appellate decisions that are shaping energy law practice. Included is an overview of Sabella v. Appalachian Dev. Corp.; Citizens for Pennsylvania’s Future v. Ultra Resources, Inc.; Sisson v. Stanley; Harrison v. Cabot Oil & Gas; Pennsylvania Environmental Defense Foundation v. Commonwealth.
The document analyzes data from the Minerals Management Service (MMS) and Bureau of Land Management (BLM) on federal oil and gas leases from 1997 to 2004. It finds that while the number of non-producing leases is often cited, the leases are constantly changing over 8 years as companies explore, drill, and either begin production or allow leases to expire. The percentage of producing leases and acreage under production increased over this period. It concludes that companies are actively exploring the leases through drilling and that non-producing leases represent a working inventory being evaluated for potential production.
Many investors are looking for a safe place to put their money with the wild fluctuations in the financial market. Stable, predictable investment vehicles are increasingly hard to find, but smart investors do have choices. One of the better choices is to invest in single-tenant, net-leased properties, which many investors also call a corporate bond combined with real estate investments that still make sense today.
The document discusses investing in oil shale deposits in the United States. It notes that U.S. reliance on foreign oil has decreased to its lowest level in over 20 years due to production from oil shale deposits, with imports down to 40% from 60% a few years ago. The largest known oil shale deposits in the world are in the U.S., with total known reserves of nearly 5 trillion barrels. Investing in finding, extracting, and delivering oil from these large domestic shale deposits is promoted as a way to profit from America's largest petroleum resource. Specific formations like the Bakken in North Dakota and Montana and areas in Texas and Louisiana are highlighted as particularly promising for continued oil and gas production.
The document provides guidance on accounting for costs incurred in oil and gas exploration and production activities. It defines key terms and outlines the major activities in the upstream petroleum industry - acquisition of rights, exploration, development and production. For each activity, it describes the nature of costs incurred and how they are treated under Indian GAAP. The major accounting methods covered are successful efforts and full cost methods.
Over 500 landowners in Ohio have attended tax and financial meetings sponsored by OSU Extension about oil and gas leases. The meetings aimed to help landowners understand the federal, state, and local taxes owed on lease revenue which can be substantial, up to $6,000 per acre. Landowners reported gaining knowledge, with post-test scores 1.79 to 2.05 points higher than pre-test on average. Most plan to take financial actions like meeting with tax professionals. OSU Extension plans more educational outreach to help landowners and tax preparers manage the financial implications of the new revenue stream from oil and gas leases.
A bill introduced into the 129th General Assembly in Ohio by Rep. Mark Okey (D-Carrollton) in July 2012. The bill is supposed to fix "predatory" practices by oil and gas companies. But it also introduces new drilling rules aside from leasing practices. This is anti-drilling legislation.
Law firm Harrington, Hoppe & Mitchell have issued a memo with some great tips for landowners--things to mull over as you think about whether or not to re-lease, and if you do, under what conditions.
Grant Thornton provided corporate finance advisory services to Advanced Insulation plc, a leading supplier of high performance insulation and fireproofing services to the offshore oil and gas industry. They helped the company find a private equity partner, Growth Capital Partners, to take the business to its next phase of growth and achieve the company's objectives of incentivizing management and securing value for shareholders. Grant Thornton managed a three stage bidding process that generated significant interest and secured an outcome that was beneficial for all involved parties.
New Nominations for Oil and Gas Leases Received in Colorado Joshua Wolcott
Combining his project management and investment banking abilities, Joshua “Josh” Neale Wolcott of Denver brokers deals around the United States to lease and develop lands using environmentally friendly processes. As part of the management team of Cimmaron Resources, Inc., headquartered in Denver, Joshua “Josh” Neale Wolcott is the director of operations and land.
An ebook published by the law firm Porter Wright Morris & Arthur LLP. Contains several blog posts they've published on the topic of oil and gas lease issues for landowners. Our favorite article: My Sister is a Fractivist and Won’t Sign an Oil and Gas Lease. What Can We Do?
Oil & Gas Programs
This session is a follow up to the introduction to private oil and gas investments given last October. The focus will be on recent Reg. D activity in leases, drilling, and royalty acquisitions. Discussion will also include opinions as to how this asset class differs from other alternatives and how it continues to deliver competitive economic benefits for investors. Additional topics include: Recent trends/opportunities, how to separate the excellent companies from the chaff, how to evaluate opportunities and implement due diligence best practices, liquidity considerations and exit plan strategies.
Moderator: Brad Updike, Mick & Associates
Panelists: Brett Evans, Hull, Evans, Kob LLP; Shawn Smith, FactRight LLC; Gail Schneck, Buttonwood Investment Services
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are currently finalizing the accounting regulations for leases, expecting to issue the new standards before the end of 2015. The new regulations will require organizations to capitalize many of their operating leases and record them in their balance sheets as assets and obligations.
With high volumes of complex lease contracts for drilling, equipment and joint operations, oil and gas operators are one of the groups that are most affected by the upcoming lease accounting standards. To ensure that they have the IT systems, applications, processes and controls ready to comply and to allow for potentially lengthy lead times, experts strongly recommend organizations to start considering today how technology can help them prepare, long before adopting the standard.
The document is an agenda for the Oil & Gas Technology Forum Drilling Day conference taking place on March 25, 2010 in London. The one-day conference will focus on maximizing resources and minimizing risks in drilling operations through technology and best practices. It will feature case studies, keynote speakers from major energy companies, and panels on topics like reducing costs, ensuring successful HPHT well delivery, and overcoming drilling challenges through innovation. Attendees can participate in speed networking and networking during meals and breaks to discuss issues with over 40 industry peers.
Payment of Delay Rentals Alone Cannot Extend Lease Into Secondary TermRobert Burnett
The Pennsylvania Superior Court recently addressed the issue of whether the mere payment of delay rentals
can extend a gas lease beyond its primary term. In Hite v. Falcon Partners, et al., 2011 WL 9632 (January 4,
2011), the Superior Court rejected the gas producer’s argument that a non-producing lease can be preserved
indefinitely simply by making delay rental payments. In siding with the landowner, the Superior Court affirmed
the trial court’s cancellation of the non-producing lease and sent a clear warning to gas operators throughout
the Commonwealth. Following Hite, there is no question that the so-called “automatic termination rule” is
alive and well in Pennsylvania. As such, landowners and gas operators alike should carefully review the Hite
decision and its potential impact on non-producing leases.
Allocation Wells and What Makes Them DifferentBailey LeRoux
This document summarizes key information about oil and gas permitting and regulation in Texas, including:
- The Texas Railroad Commission permits wells if the applicant has a good faith claim to the property, even if title is disputed.
- Horizontal wells are permitted to drill across multiple tracts of land without clear pooling authority from lessors.
- The rule of capture historically led to issues like excessive drilling that pooling requirements and Railroad Commission regulations were designed to address.
- Browning Oil Co. v. Luecke established that for horizontal wells, each tract penetrated is considered a drillsite tract entitled to a share of production attributable to that tract.
This is a familiar yet troubling question. Imagine that you own 150 acres in southwestern
Pennsylvania. You have received offers from several prominent gas producers but have not yet
signed a lease. Your neighbor, however, did sign a Marcellus lease a few years ago. A typical
Marcellus well pad site was erected about 600 yards from your property line. Hydraulic
fracturing operations are now complete and the horizontal well is now producing 15 mcf of
gas per week. You were told that the horizontal well bore—which is approximately 6,000 feet
below the ground—does not encroach or cross your surface boundary. Nonetheless, you are
concerned that your neighbor could be draining gas from underneath your property. If so, can
you stop your neighbor from taking “your” gas? As with many oil/gas issues, the answer to
this question is based on a unique aspect of oil/gas law: the rule of capture.
Tenants operated a gas station on a property owned by SCH for 23 years under a lease agreement. The lease required tenants to return the property to its original condition upon termination. SCH claims tenants breached the lease because the property is contaminated and unsuitable for SCH's planned residential development. However, the lease must be interpreted based on the circumstances and tenants' intended use of the property as a gas station. Tenants received the property for use as a gas station and returned it in a condition suitable for that use after remediating contamination. SCH was aware of the gas station use and cannot now require further remediation beyond the lease terms to suit its new planned residential use.
On the Rocks Presentation - Lease Maintenance (February 2015)Burleson LLP
This document provides a summary of key provisions in oil and gas leases, including continuous development provisions and shut-in royalty provisions. Continuous development provisions aim to allow lessees to complete wells begun during the primary term and continue the lease without production. Shut-in royalty provisions provide for constructive production when wells are capable of producing but shut-in. Both provisions contain ambiguous terms that have been subject to litigation regarding their precise meaning and requirements. The document advises lessees to clearly define terms in their leases to avoid disputes.
NY Court of Appeals Decision in Walter R Beardslee v Inflection EnergyMarcellus Drilling News
The decision in a case before New York's highest court, the Court of Appeals, that finds the concept of force majeure does not grant energy companies the right to extend oil and gas leases beyond the initial term even if a state government moratorium or ban is placed on shale drilling. In essence, it guts the force majeure clause in state contracts, rendering such a clause useless and screwing contract law in New York State. A very poor decision.
Energy Bulletin - Uncertainty Rises for Energy Sector BankruptciesCohenGrigsby
In recent years, the energy sector has struggled with low commodity prices, oversupply, and logistical constraints — challenges which are poised to continue in the months ahead. These issues are putting a significant strain on the capital-intensive oil and gas sector, and a segment of the industry will labor to balance operating costs with profitability (or survival). Eventually, the financial constraints will require some operators to seek relief, either through an out-of-court restructuring, a reorganization, or liquidation under bankruptcy laws. As this wave of distressed enterprises progresses, there will be a residual impact on all facets of the infrastructure and supply chain supporting the oil and gas sector.
The Texas Oilfield Anti-Indemnity Statute was passed in 1973 to prevent oil companies from requiring contractors to indemnify them against their own negligence. The statute voids agreements that purport to indemnify a party against liability caused by their sole or concurrent negligence arising from personal injury, death or property damage. It does not apply to joint operating agreements or if the indemnity agreement meets fair notice requirements of expressing negligence and being conspicuous. The statute also has exceptions if liability insurance supports the indemnity obligation. Additional states like Louisiana and New Mexico have similar anti-indemnity statutes limiting agreements in oil and gas contracts.
Oil and Gas Leasing from the Operator's PerspectiveLisa McManus
This document summarizes considerations when leasing oil and gas rights from an operator's perspective. It discusses evaluating the lessee's reputation and financial stability, negotiating key lease terms like bonuses, royalties and extensions, lease covenants regarding development and marketing, pooling and unitization, and provisions for surface use. The lease terms have evolved from simple agreements to produce for a set term, to complex contracts addressing these various operational, economic and environmental factors. Professional responsibility and developing rapport with lessees are also important aspects of the leasing process from the operator's view.
Correlative rights are inherent property rights landowners have in a common reservoir or aquifer. They refer to each owner having a fair opportunity to produce their share of the resource. Case law establishes that correlative rights exist because of the physical properties of subsurface resources, not because of statutes. They require equal treatment of all owners overlying the same resource. Disparate rules between aquifers or unequal treatment of owners in one aquifer may amount to an unconstitutional taking of property under the correlative rights and fair share doctrines.
The document provides guidance on accounting for costs incurred in oil and gas exploration and production activities. It defines key terms and outlines the major activities in the upstream petroleum industry - acquisition of rights, exploration, development and production. For each activity, it describes the nature of costs incurred and how they are treated under Indian GAAP. The major accounting methods covered are successful efforts and full cost methods.
Over 500 landowners in Ohio have attended tax and financial meetings sponsored by OSU Extension about oil and gas leases. The meetings aimed to help landowners understand the federal, state, and local taxes owed on lease revenue which can be substantial, up to $6,000 per acre. Landowners reported gaining knowledge, with post-test scores 1.79 to 2.05 points higher than pre-test on average. Most plan to take financial actions like meeting with tax professionals. OSU Extension plans more educational outreach to help landowners and tax preparers manage the financial implications of the new revenue stream from oil and gas leases.
A bill introduced into the 129th General Assembly in Ohio by Rep. Mark Okey (D-Carrollton) in July 2012. The bill is supposed to fix "predatory" practices by oil and gas companies. But it also introduces new drilling rules aside from leasing practices. This is anti-drilling legislation.
Law firm Harrington, Hoppe & Mitchell have issued a memo with some great tips for landowners--things to mull over as you think about whether or not to re-lease, and if you do, under what conditions.
Grant Thornton provided corporate finance advisory services to Advanced Insulation plc, a leading supplier of high performance insulation and fireproofing services to the offshore oil and gas industry. They helped the company find a private equity partner, Growth Capital Partners, to take the business to its next phase of growth and achieve the company's objectives of incentivizing management and securing value for shareholders. Grant Thornton managed a three stage bidding process that generated significant interest and secured an outcome that was beneficial for all involved parties.
New Nominations for Oil and Gas Leases Received in Colorado Joshua Wolcott
Combining his project management and investment banking abilities, Joshua “Josh” Neale Wolcott of Denver brokers deals around the United States to lease and develop lands using environmentally friendly processes. As part of the management team of Cimmaron Resources, Inc., headquartered in Denver, Joshua “Josh” Neale Wolcott is the director of operations and land.
An ebook published by the law firm Porter Wright Morris & Arthur LLP. Contains several blog posts they've published on the topic of oil and gas lease issues for landowners. Our favorite article: My Sister is a Fractivist and Won’t Sign an Oil and Gas Lease. What Can We Do?
Oil & Gas Programs
This session is a follow up to the introduction to private oil and gas investments given last October. The focus will be on recent Reg. D activity in leases, drilling, and royalty acquisitions. Discussion will also include opinions as to how this asset class differs from other alternatives and how it continues to deliver competitive economic benefits for investors. Additional topics include: Recent trends/opportunities, how to separate the excellent companies from the chaff, how to evaluate opportunities and implement due diligence best practices, liquidity considerations and exit plan strategies.
Moderator: Brad Updike, Mick & Associates
Panelists: Brett Evans, Hull, Evans, Kob LLP; Shawn Smith, FactRight LLC; Gail Schneck, Buttonwood Investment Services
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are currently finalizing the accounting regulations for leases, expecting to issue the new standards before the end of 2015. The new regulations will require organizations to capitalize many of their operating leases and record them in their balance sheets as assets and obligations.
With high volumes of complex lease contracts for drilling, equipment and joint operations, oil and gas operators are one of the groups that are most affected by the upcoming lease accounting standards. To ensure that they have the IT systems, applications, processes and controls ready to comply and to allow for potentially lengthy lead times, experts strongly recommend organizations to start considering today how technology can help them prepare, long before adopting the standard.
The document is an agenda for the Oil & Gas Technology Forum Drilling Day conference taking place on March 25, 2010 in London. The one-day conference will focus on maximizing resources and minimizing risks in drilling operations through technology and best practices. It will feature case studies, keynote speakers from major energy companies, and panels on topics like reducing costs, ensuring successful HPHT well delivery, and overcoming drilling challenges through innovation. Attendees can participate in speed networking and networking during meals and breaks to discuss issues with over 40 industry peers.
Payment of Delay Rentals Alone Cannot Extend Lease Into Secondary TermRobert Burnett
The Pennsylvania Superior Court recently addressed the issue of whether the mere payment of delay rentals
can extend a gas lease beyond its primary term. In Hite v. Falcon Partners, et al., 2011 WL 9632 (January 4,
2011), the Superior Court rejected the gas producer’s argument that a non-producing lease can be preserved
indefinitely simply by making delay rental payments. In siding with the landowner, the Superior Court affirmed
the trial court’s cancellation of the non-producing lease and sent a clear warning to gas operators throughout
the Commonwealth. Following Hite, there is no question that the so-called “automatic termination rule” is
alive and well in Pennsylvania. As such, landowners and gas operators alike should carefully review the Hite
decision and its potential impact on non-producing leases.
Allocation Wells and What Makes Them DifferentBailey LeRoux
This document summarizes key information about oil and gas permitting and regulation in Texas, including:
- The Texas Railroad Commission permits wells if the applicant has a good faith claim to the property, even if title is disputed.
- Horizontal wells are permitted to drill across multiple tracts of land without clear pooling authority from lessors.
- The rule of capture historically led to issues like excessive drilling that pooling requirements and Railroad Commission regulations were designed to address.
- Browning Oil Co. v. Luecke established that for horizontal wells, each tract penetrated is considered a drillsite tract entitled to a share of production attributable to that tract.
This is a familiar yet troubling question. Imagine that you own 150 acres in southwestern
Pennsylvania. You have received offers from several prominent gas producers but have not yet
signed a lease. Your neighbor, however, did sign a Marcellus lease a few years ago. A typical
Marcellus well pad site was erected about 600 yards from your property line. Hydraulic
fracturing operations are now complete and the horizontal well is now producing 15 mcf of
gas per week. You were told that the horizontal well bore—which is approximately 6,000 feet
below the ground—does not encroach or cross your surface boundary. Nonetheless, you are
concerned that your neighbor could be draining gas from underneath your property. If so, can
you stop your neighbor from taking “your” gas? As with many oil/gas issues, the answer to
this question is based on a unique aspect of oil/gas law: the rule of capture.
Tenants operated a gas station on a property owned by SCH for 23 years under a lease agreement. The lease required tenants to return the property to its original condition upon termination. SCH claims tenants breached the lease because the property is contaminated and unsuitable for SCH's planned residential development. However, the lease must be interpreted based on the circumstances and tenants' intended use of the property as a gas station. Tenants received the property for use as a gas station and returned it in a condition suitable for that use after remediating contamination. SCH was aware of the gas station use and cannot now require further remediation beyond the lease terms to suit its new planned residential use.
On the Rocks Presentation - Lease Maintenance (February 2015)Burleson LLP
This document provides a summary of key provisions in oil and gas leases, including continuous development provisions and shut-in royalty provisions. Continuous development provisions aim to allow lessees to complete wells begun during the primary term and continue the lease without production. Shut-in royalty provisions provide for constructive production when wells are capable of producing but shut-in. Both provisions contain ambiguous terms that have been subject to litigation regarding their precise meaning and requirements. The document advises lessees to clearly define terms in their leases to avoid disputes.
NY Court of Appeals Decision in Walter R Beardslee v Inflection EnergyMarcellus Drilling News
The decision in a case before New York's highest court, the Court of Appeals, that finds the concept of force majeure does not grant energy companies the right to extend oil and gas leases beyond the initial term even if a state government moratorium or ban is placed on shale drilling. In essence, it guts the force majeure clause in state contracts, rendering such a clause useless and screwing contract law in New York State. A very poor decision.
Energy Bulletin - Uncertainty Rises for Energy Sector BankruptciesCohenGrigsby
In recent years, the energy sector has struggled with low commodity prices, oversupply, and logistical constraints — challenges which are poised to continue in the months ahead. These issues are putting a significant strain on the capital-intensive oil and gas sector, and a segment of the industry will labor to balance operating costs with profitability (or survival). Eventually, the financial constraints will require some operators to seek relief, either through an out-of-court restructuring, a reorganization, or liquidation under bankruptcy laws. As this wave of distressed enterprises progresses, there will be a residual impact on all facets of the infrastructure and supply chain supporting the oil and gas sector.
The Texas Oilfield Anti-Indemnity Statute was passed in 1973 to prevent oil companies from requiring contractors to indemnify them against their own negligence. The statute voids agreements that purport to indemnify a party against liability caused by their sole or concurrent negligence arising from personal injury, death or property damage. It does not apply to joint operating agreements or if the indemnity agreement meets fair notice requirements of expressing negligence and being conspicuous. The statute also has exceptions if liability insurance supports the indemnity obligation. Additional states like Louisiana and New Mexico have similar anti-indemnity statutes limiting agreements in oil and gas contracts.
Oil and Gas Leasing from the Operator's PerspectiveLisa McManus
This document summarizes considerations when leasing oil and gas rights from an operator's perspective. It discusses evaluating the lessee's reputation and financial stability, negotiating key lease terms like bonuses, royalties and extensions, lease covenants regarding development and marketing, pooling and unitization, and provisions for surface use. The lease terms have evolved from simple agreements to produce for a set term, to complex contracts addressing these various operational, economic and environmental factors. Professional responsibility and developing rapport with lessees are also important aspects of the leasing process from the operator's view.
Correlative rights are inherent property rights landowners have in a common reservoir or aquifer. They refer to each owner having a fair opportunity to produce their share of the resource. Case law establishes that correlative rights exist because of the physical properties of subsurface resources, not because of statutes. They require equal treatment of all owners overlying the same resource. Disparate rules between aquifers or unequal treatment of owners in one aquifer may amount to an unconstitutional taking of property under the correlative rights and fair share doctrines.
Overview of current trends in oil and gas royalty litigation. Covers post-production cost deductions, royalty calculation, lease royalty clauses, and some applicable statutory provisions.
What is Pooling? An Overview of Pooling in Five Oil and Gas Producing States....RAFI-USA
Layla Cummings
Research Fellow, DENR
February 8, 2013
An Overview of Pooling in Five Oil and Gas Producing States
Slides:
What is Pooling?
Unitization
Policy Behind Pooling
Pooling in Other States
Pooling in Arkansas
Pooling in Colorado
Pooling in Ohio
Pooling in Texas
Pooling in West Virginia
Issues to Consider
The doctrine of privity of contract provides that only the parties to a contract can enforce rights or obligations under that contract. Over time, courts developed several exceptions to privity, including collateral contracts, agency relationships, and restrictive covenants that run with land. Academic debate questioned whether privity should be further modified or abolished. The Contracts (Rights of Third Parties) Act 1999 reformed English law by allowing expressly intended third party beneficiaries to directly enforce contract terms in certain circumstances.
Balancing the right of a cotenant to develop his oil and gas rights and the rights of an unwilling or unlocatable cotenant has become an increasing challenge for industry and landowners alike. This PowerPoint was presented at the PBI Sixth Annual Oil and Gas Law Colloquium in a program examining current Pennsylvania law relating to unleased, undivided fractional interests.
This document summarizes cases related to the discharge of contracts through performance, agreement, breach, and frustration. It provides examples of when contracts can and cannot be discharged through each method. It also discusses the effects of a finding of frustration, such as allowing recovery of payments made prior to the frustrating event. The document is intended to serve as a reference for students studying contract law.
1) Pennsylvania law differs from Texas law in how it treats the severance of mineral interests from surface interests. In Pennsylvania, a reservation of "minerals" does not necessarily include oil and gas under the Dunham Rule.
2) Pennsylvania has additional regulations under the Coal and Gas Resources Coordination Act and Oil and Gas Act to address interactions between oil/gas drilling and underground coal mining. This may restrict proposed drilling locations.
3) In Pennsylvania, a "life estate with right of consumption" allows the life tenant to produce and dispose of minerals without the remainderman's consent.
Development of Oil and Gas in Pennsylvania Where Subsurface Owners Are Unknow...Lisa McManus
Leasing property for oil and gas development is complicated by the inability to identify or locate heirs who own record title to all or a fraction of the oil and gas. This presentation reviews the current Dormant Oil and Gas Act law in Pennsylvania, as well as pending legislation to address this thorny issue.
The document summarizes recent court decisions impacting oil and gas law in Pennsylvania. Key cases discussed include:
- Harrison v. Cabot Oil & Gas, where the Pennsylvania Supreme Court ruled that merely filing a lawsuit challenging a lease's validity does not constitute repudiation and does not entitle the lessee to an equitable extension of the primary lease term.
- Nolt v. TS Calkins & Associates, where the Superior Court affirmed that only the lessor's signature is required for an oil and gas lease to be valid, and the lessee exercised proper due diligence in searching records.
- Suessenbach Family Ltd. Partnership v. Access Midstream Partners, where the court
Similar to To Drill or Not to Drill: Does PA Recognize an Implied Covenant of Further Exploration? (20)
To Drill or Not to Drill: Does PA Recognize an Implied Covenant of Further Exploration?
1. To Drill or Not to Drill?
Three Gateway Center Does Pennsylvania Recognize an Implied Covenant of Further Exploration?
401 Liberty Ave By Robert J. Burnett, Esquire
22nd floor Over the last 18 months natural gas operators from all over the world have converged on Western Pennsylvania.
Pittsburgh, PA 15222 Their goal has been to secure new leases from landowners holding valuable mineral rights in the deeper
www.hh-law.com Marcellus Shale formation. This rush to access the Marcellus Shale is now creating tension between
landowners with existing oil/gas leases and their respective lessees. The royalty payments generated from
these older, shallow well leases pale in comparison to the large signing bonuses and high-volume royalties
associated with deeper Marcellus wells. As such, many of these landowners are now trying to “get out” of
their existing leases and sign new, potentially more lucrative, Marcellus leases.
Terminating a producing gas lease is difficult. Almost all gas leases have secondary terms of indefinite
duration so long as gas is being produced “in paying quantities.” Essentially, this means that an operator can
maintain and hold the leased acreage with a single producing well. Does the operator, however, now have an
obligation to explore the deeper Marcellus formation? Put another way, can the operator ignore the Marcellus
formation and still maintain the lease? Some states have recognized an implied lease covenant which requires
the operator to drill exploratory gas wells into unproven formations and strata or risk cancellation of the
unexplored portions of the lease. This controversial covenant is popularly known as the “implied covenant of
further exploration.” This covenant, if recognized in Pennsylvania, could give many landowners the grounds to
cancel older, shallow gas leases in favor of a Marcellus lease.
Pennsylvania currently recognizes three (3) implied covenants: i) the implied duty to protect the leased premises
from drainage caused by adjoining operations; ii) the implied duty to reasonably develop the leased premises;
and iii) the implied duty to market the gas extracted from the land. These duties will be implied in every gas
lease unless expressly negated by the parties’ written lease. In order to appreciate the significance of the
implied covenant of further exploration, a brief description of the currently recognized covenants is warranted.
The implied covenant to protect against drainage requires the operator to drill an offset well in certain situations.
Gas is fugitive and can migrate from one part of a reservoir to another. Without an offset well to capture the
gas, the resource may be depleted by gas wells outside the leasehold but within a common reservoir. In the
absence of an express clause to the contrary, Pennsylvania courts have recognized an implied covenant to drill
a well “offsetting” those on adjoining tracts. In Kleppner v. Lemon, the Pennsylvania Supreme Court observed
that the operator “...shall put down so many wells as may be reasonably necessary to secure the oil, for the
common advantage of both lessor and lessee.” See, Kleppner v. Lemon, 35 A. 109 (Pa. 1896). A breach of this
covenant results in the permanent loss of the gas resource and can justify cancellation of the entire lease.
Pennsylvania also recognizes an implied duty to reasonably market the gas. This covenant requires the operator
to diligently market the gas. The covenant is generally implicated when the operator takes little or no effort to
secure a pipeline to the well, thereby denying the landowner his or her extraction royalty. The Pennsylvania
Supreme Court long ago noted that upon the discovery of gas, the operator is “under an obligation to operate
for the common good of both parties” and pay the extraction royalty. See, Iams v. Carnegie Natural Gas, 45 A.
54, 54-55 (Pa. 1899). Without a pipeline to transport the gas to market, no royalty is ever generated and the
operator runs the risk of breaching this covenant.
2. To Drill or Not to Drill?
Finally, Pennsylvania law generally requires an operator to reasonably develop proven formations. Upon the
discovery of gas in paying quantities, the operator is under an obligation to drill additional wells as reasonably
necessary to recover as much of the gas from that formation. The operator is required to engage in further
development only if the additional wells would be “profitable” This covenant, however, was recently limited by
the Pennsylvania Supreme Court in Jacobs v. CNG Transmission Corp., 772 A.2d 445 (Pa. 2001). In Jacobs,
the court held that there is no duty to develop if the lease itself provides the lessor compensation (i.e., delay
rentals, gas storage fees, etc.) during the period of non-production. “An implied covenant to develop...exists
only when the only compensation to the landowner...is royalty payments resulting from extraction.” Jacobs,
772 A.2d at 455. If the lease provides for the payment of delay rentals or gas storage fees, Pennsylvania will
no longer imply a duty to develop the leasehold.
As noted above, the implied covenant of reasonable development, even in its post-Jacobs form, only applies
to proven formations. In other words, the obligation to develop the leasehold only arises after gas is
discovered “in paying quantities.” What about unproven formations or strata? Is there a duty to explore all
horizons and strata located within a leasehold? A minority of courts and commentators have suggested that
there exists an implied duty to explore such unproven formations.
The covenant, in essence, requires the operator to drill exploratory wells in the unproven formations or
horizons located within the leasehold footprint. Colorado and Arkansas have both recognized this covenant
as a means of discouraging the practice of holding a large leasehold with a minimally producing well.
“Production on only a small portion of the leased land does not justify allowing the lessee to hold the entire
leasehold indefinitely, thus depriving the lessor of receiving royalties from another arrangement.” Bryd v.
Bradham, 655 S.W.2d 366, 367 (Ark. 1983). Colorado has further observed that the operator “may not hold
the land merely for speculation in the hope that non-viable mineral holdings will become economic at some
unknown time in the future...” North York Land Associates v. Bryon Oil Industries, 695 P.2d 1188, 1191 (Colo.
Ct. App. 1985). Thus, in jurisdictions that recognize this covenant, an operator cannot simply drill a well and
then cease all further exploratory operations. See, Ezzel v. Oil Associates, 22 S.W.2d 1015 (Ark. 1930)
(lessee’s obligation to explore is ongoing, even after paying quantities are discovered); See also Davis v. Ross
Production, 910 S.W.2d 209, 212 (Ark. 1995) (an implied covenant exists on the part of the lessee to explore
the property with reasonable diligence). The operator is under a duty to investigate, test and explore other
areas of the leasehold or risk cancellation of the lease. See, Carter v. Arkansas Louisiana Gas Co., 36 So. 2d
26 (La. 1948) (it is an implied condition that the lessee will test every part of the leased premises).
In establishing a breach of this covenant, the landowner does not have to demonstrate that the unproven
formations or horizons would be profitable. “[T]he implied covenant of further exploration does not need such
proof, but rather requires the lessor to show unreasonability by the lessee in not exploring further...” See,
Gillette v. Pepper Tank Co., 694 P.2d 369, 372 (Colo. Ct.App. 1984). The inquiry does not focus on whether gas
“in paying quantities” would be found. Instead the focus is on whether a reasonably prudent operator would
have “tested” the unproven formations. The loss or damage to the landowner from the lack of exploratory
testing is difficult to quantify. As such, the usual remedy has been cancellation of the unexplored portions of
the lease. See, Gillette v. Pepper Tank Co., supra; North York Land Associates v. Bryon Oil Industries, supra.
Several prominent oil and gas jurisdictions, such as Texas and Oklahoma, have expressly rejected the
covenant. Texas has held that no implied covenant of further exploration exists independent of the implied
covenant of reasonable development. Sun Exploration & Production Company v. Jackson, 783 S.W.2d 202
(Texas 1989). In Jackson, the Supreme Court of Texas explained that there is no distinction between an
exploratory well and a developmental well: the operator need not drill unless there is an expectation of profit.
The Jackson court further held that, in a “failure to explore” case, the landowner must still prove a
“reasonable expectation of profit” in the unproven formations. See Jackson, 783 S.W.2d at 204. This standard
requires the landowner to prove that a reasonably prudent operator would have “a reasonable expectation of
profit” in drilling on a unproven formation. Id. at 204; See also Clifton v. Koontz, 325 S.W.2d 684 (Texas 1959).
A landowner in Texas has a steep burden and must prove that gas exists in profitable quantities. See Jackson,
783 S.W.2d at 204; See also Mitchell v. Amerada Hess Corp., 638 P.2d 441, 449 (Okl 1982) (following Texas
and holding there is no implied covenant to further explore after paying production is obtained). Colorado,
Arkansas, Louisiana and possibly Kansas have rejected this approach and do not consider profitability when
analyzing a breach of the implied covenant of further exploration.
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3. To Drill or Not to Drill?
It is unclear whether Pennsylvania recognizes this covenant. In Aye v. Philadelphia Co., 44 A. 555 (Pa. 1899), a For more information, contact:
lease provided that a test well would be drilled within six months and, if oil was discovered, a production well
would be drilled. Aye, 44 A. at 556. A test well was drilled but it was dry and no oil was discovered. The
Robert J. Burnett, Esq.
operator never conducted any further exploration. The Pennsylvania Supreme Court held that there was an 412.288.2221
implied duty to drill other test wells: rburnett@hh-law.com
“. . . there is an implied obligation on the lessee to proceed with the exploration and
development of the land with reasonable diligence. . . “
Aye, 44 A. at 556. Because the operator had failed to conduct any further exploratory activities, the Aye court
found that the operator had abandoned the lease. See also, Calhoon v. Neely, 50 A. 967, 968 (Pa. 1902).
(failure to explore premises for over nine years after drilling dry hole constituted surrender of the lease). While
the Aye court did not expressly announce or state that an implied covenant of further exploration exists in
Pennsylvania, the court did recognize an implied duty to drill test wells.
More recently, in Jacobs v. CNG Transmission Corp., 332 F. Supp. 2d 759 (W.D. Pa. 2004), the Western District
of Pennsylvania concluded that the operator had surrendered its rights to the deeper gas formations by failing
to conduct any exploratory activities for nearly forty years:
“[H]ere the defendant failed to conduct any exploration or development of the leasehold
during the primary term and in the subsequent thirty-eight years that followed.”
Jacobs, 332 F. Supp. 2d at 796. The Jacobs court further than noted that the operator’s protracted inactivity
had deprived the landowner “of the right to have exploration of the property undertaken.” Id. at 796. In order
to remedy this breach, the court cancelled the operator’s rights in any substrata below “the hundred foot
sands” where the operator had been engaged in gas storage. Id. The unexplored, deeper gas formations were
therefore severed from the original lease so as to give another operator the opportunity to explore and Robert J. Burnett is a Director at the
develop those deeper horizons. In support of this remedy, the Jacobs court cited the Aye opinion and observed downtown law firm Houston Harbaugh, P.C.
that “[P]ennsylvania law has consistently recognized that an unexplained failure to develop an oil and gas His practice is concentrated in business and
lease.. . . gives rise to a fair presumption of abandonment.” Id. at 796. Although the Jacobs court did not
commercial litigation. Robert is a member
specifically reference the implied covenant by name, it arguably applied the policy behind the covenant and
prevented the operator from holding unexplored horizons for an indefinite period of time. But see, Penneco of the Environment, Energy and Resources
Pipeline Co. v. Dominion Transmission Inc., 2007 WL 1847391 (W.D. Pa. 2007) (rejecting landowner’s claim section of the American Bar Association as
that deeper strata should be severed due to inactivity and non-production). As such, Jacobs could be a subtle well as the Pennsylvania Independent Oil
sign that Pennsylvania may soon be joining the minority of jurisdictions that recognize this implied covenant. and Gas Association.
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