Monday, July 15, 2013

Superior Court declines to establish implied covenant to explore further

On July 12, 2013, the Pennsylvania Superior Court declined to terminate an oil and gas lease based on landowners’ claims that the well operator had not satisfied an implied covenant to develop the lease, and the well had not produced “in paying quantities.” Caldwell v. Kriebel Resources Co., LLC, 2013 WL 3486851 (Pa. Super, 2013).

Kriebel Resources, the well operator, and the Caldwells, landowners, entered into an oil and gas lease in 2001 that allowed for extension of the lease so long as oil or gas was produced, and also included a delayed rental provision. The well operator only engaged in drilling and operating shallow wells, which produced gas. The landowners received royalties for this production.

The landowners argued the well operator had an implied duty to develop the lease which it violated by not exploring and drilling the Marcellus shale, and that the well was not producing in paying quantities because “all gas strata” were not being produced. At trial, the court sustained preliminary objections by the well operator and dismissed the landowner’s complaint.

On appeal, the superior court upheld the trial court’s ruling. It held when a landowner is compensated for leasing their mineral rights only by royalty, that the well operator has an implied obligation to actively extract the resource. The court stated, however, where the landowner is provided compensation for the opportunity to develop and produce oil and gas, extraction need not occur. Here, Kriebel paid royalties to the landowner, and the lease provided for delayed rental payments if production was halted during the primary term of the lease.

Further, the court declined to attach the duty to develop to each “strata” of natural gas because they were not authorized to do so in light of the facts. The landowners were provided royalties or delayed rental payments for the right to explore and produce, and there was no statute which imposed such a duty on the well operator.

Lastly, the court held that the well was producing “in paying quantities” to satisfy Jedlicka, 42 A.3d 261, because the landowners received royalty payments consistently. 

Written by: Garrett Lent, Research Assistant
Agricultural Law Resource and Reference Center
July 2013

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