Lessees and owners of mineral interests should take note of two recent Pennsylvania cases decided in favor of the surface estate owners. On July 25, 2012, the U.S. District Court for the Middle District of Pennsylvania, in a memorandum opinion in Exco Resources (PA), LLC v. New Forestry, LLC, held that a conveyance of oil and gas rights and the space occupied by the oil and gas did not include the implied right to use the depleted formation for disposal of liquid waste from drilling operations. On July 27, 2012, the Superior Court of Pennsylvania, in Heasley v. KSM Energy, Inc., held that an oil and gas lease which could be held by production, but which also provided for flat rental payments rather than a percentage royalty, could not be held by payment of the agreed rent in the absence of production after expiration of the initial lease term.
Exco Resources (PA), LLC v. New Forestry, LLC
In the Exco Resources case, the mineral estate had been separated from the surface estate in 1965 by a deed conveying the "rights, titles, and interests in and to all of the oil and gas … and the space occupied thereby." In 2008 the owner of the mineral estate leased its interest to plaintiff Exco, conveyed to Exco a depleted gas well on the leasehold, and assigned to Exco a license from defendant and surface owner New Forestry permitting disposal of salt water in the well. After New Forestry notified Exco in 2010 that the license had terminated because Exco had failed to renew it, Exco filed suit to ascertain its rights under both the lease and the license. In a motion for summary judgment, New Forestry argued that Exco's leasehold interest did not include the right to dispose of liquid waste in the depleted gas well; in a cross-motion Exco argued that its subsurface rights under the lease gave it the right to access the surface and use the depleted formation for disposal purposes. The parties also disputed whether Exco had properly renewed the waste disposal license.
The court, relying on the Pennsylvania Supreme Court's holding in U.S. Steel Corp. v. Hoge, found that the mineral owner's interest in the space occupied by oil and gas was in the nature of a determinable estate that reverted to the grantor following removal of the oil and gas. It also found that the mineral owners, by their conduct in entering into and then seeking to renew a license for disposal of salt water in the depleted gas well, indicated that they did not construe the 1965 deed as having conveyed such disposal rights. Finally, the court found that because the 1965 deed did not convey rights of disposal, the mineral owner's implied right of access to the surface terminated once the oil and gas had been removed.
Lessees or purchasers of oil and gas interests in Pennsylvania should pay careful attention to the language describing the interest conveyed by a lease or deed. If the right to dispose of liquid waste is required, an express grant of that right should be included in the instrument of conveyance or obtained by agreement with the surface owner.
Heasley v. KSM Energy, Inc.
The Heasley case involved construction of two 1942 oil and gas leases subsequently assigned to defendant KSM. Each lease provided for a primary term of 20 years and could be extended for "as long thereafter as oil or gas … is produced." Each lease further provided for payment of a flat quarterly royalty payment, the amount of which was tied to measured gas pressure, if a well produced gas that was used off the leased premises. Although KSM had made the required quarterly payments to plaintiff Heasley who accepted them through 2008, there was no production on the leasehold, and Heasley brought an action in Jefferson County seeking a declaration that the leases were terminated. The trial court entered judgment in Heasley's favor and KSM appealed. On appeal, KSM relied on the Pennsylvania Supreme Court's decision in T.W. Phillips Gas and Oil Co. v. Komar for the proposition that a lease providing for a flat royalty rather than one based on a percentage of production could be held by making the required payments.
In the Phillips case, the lease at issue required payment of a flat quarterly royalty, the amount of which was based on measured gas pressure, from completion of a well until its abandonment, regardless of whether there was production from the well. Although the leases at issue in Heasley also provided for a flat quarterly royalty based on measured gas pressure, payment was to be made while gas from the leased premises was used off the premises, and the leases further provided for extension of the primary term by production. The Superior Court distinguished Phillips on this basis, found that when production had ceased, the lease had become an at-will tenancy, and affirmed the order of the lower court.
Parties who acquire an older lease providing for fixed royalty payments tied to measured gas pressure should take particular note of the lease habendum clause to ascertain how the lease can be held after termination of the primary term.