On March 26, the Pennsylvania Supreme Court issued an opinion affirming the Superior Court decision in the case of T.W. Phillips Gas and Oil Co. v. Jedlicka. In the case, the gas company filed suit seeking a declaratory judgment concerning the rights of the parties under an oil and gas lease from 1928. The Supreme Court examined the issue of the proper test for determining whether an oil and gas lease produced “in paying quantities.” The landowner argued that the lease terminated because the wells under the lease did not produce a profit in 1959. The Supreme Court held that “where, as here, production on a well has been marginal or sporadic, such that for some period profits did not exceed operating costs, the phrase ‘in paying quantities’ must be construed with reference to an operator’s good faith judgment.” In this case, the Supreme Court affirmed the finding of the trial court finding that the operator exercised good faith under the lease at issue. Therefore, the court affirmed the finding that the lease remained valid and produced in paying quantities. The concurring opinion indicated that it did not believe a review of the operator’s good faith is necessary at this time or that the court should discuss a subjective productivity analysis contained in Texas precedent. The dissenting opinion asserted that the test to determine whether an oil and gas lease produced “in paying quantities” is a two step process. First, it must be determined that profits exceed operating. Next, if profits exceed operating expenses, the operator’s good faith is presumed and unless the lessor rebuts the good faith presumption the lease is producing “in paying quantities.”
Click here to read the majority opinion
Click here to read the concurring opinion
Click here to read the dissenting opinion
Written by Dan McGraw, Research Assistant
March 29, 2012
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