Bracewell & Giuliani
On June 21, the Superior Court of Pennsylvania held that a lessee does not owe a duty to a lessor to develop each and every "economically exploitable strata" under an oil and gas lease.
In early 2012, plaintiffs Terry L. and Carol A. Caldwell sued Kriebel Resources Co., Range Resources Appalachia LLC, and others regarding an oil and gas lease executed on Jan. 19, 2001.
The lease provided for a primary term of 24 months with drilling requrements and extended terms on production.
A number of shallow wells were drilled, which the defendents claimed were suitable to hold the lease terms. The plaintiffs' suit, filed in 2012, alleged that the defendents breached the implied duty to develop the property by not drilling deeper wells to exploit the valuable Marcellus shale and, based on such potential unexploited value, the current production did not amount to production in paying quantities.
The trial court sustained certain preliminary objections raised by the defendants which resulted in a dismissal of plaintiffs' claims. In Terry L. Caldwell et al. v. Kriebel Resources Co. et al. (1305 WDA 2012), the Court affirmed the trial court's dismissal of the case.
Regarding the duty to develop, plaintiffs argued that without direct Pennsylvania case law on point, the Court should follow a Louisiana case, Goodrich v. Exxon Co., 608 So.2d 1019 (La. App. 1992), which held that Exxon's duty to develop as a reasonably prudent operator included the obligation to develop valuable oil-producing sands underlying the leased premises. Based on this rationale, plaintiffs alleged that there is an implied duty to "develop all strata, not simply to extract shallow gas..." The court rejected the application of the Goodrich rationale and held that the specific terms of the lease controlled.
According to the ruling, production from various shallow wells was sufficient to hold the entirety of the leased estate. Because the lease provided for the continued validity of the lease upon production of gas and allows for the guarantee of delay rentals if no gas is produced, the court found that it was "not compelled to follow Louisiana law."
The court also rejected the plaintiffs' claim that the concept of "paying quantities" should be based on all potential gas strata underlying the lease and should impose an obligation relating to good faith. The court quickly dismissed this claim and made clear that "paying quantities" in Pennsylvania merely requires the well to "consistently pay a profit, however small." It is of no legal effect that the extent of the profit produced from these shallow wells is "not to the extent appellants desire." Due to the continued production in paying quantities and the absence of a duty on behalf of the defendants to develop all potentially economic strata, the court chose not to terminate the defendants' lease.
Stephen Boone is an associate in Bracewell & Giuliani's Houston office. He represents developers, exploration and production companies, private equity funds, purchasers, sellers, borrowers and lenders in upstream and midstream oil and gas transactions.
Bryan Loocke is a partner in the firm's Houston office. He represents international and domestic clients in the oil and gas sector with a particular focus on joint venture transactions, unconventional and shale oil and gas transactions, and Gulf of Mexico transactions.