Alert: Federal Court Refuses to Extend Marcellus Shale Leases

In a ruling issued March 8, 2011 that may suggest the beginning of a large volume of litigation, United States District Judge John E. Jones III of the Middle District of Pennsylvania refused to grant a group of defendant oil and gas companies extensions of their leases to account for their suspending operations during an unsuccessful legal challenge to the leases.

A group of landowners filed separate lawsuits in late 2008 challenging the leases under the Pennsylvania Minimum Royalty Act. After the lawsuits were initiated, the defendant drilling companies stopped their drilling and development activities on the properties, claiming they did so due to the uncertainty of the litigation. The federal court consolidated the cases and, in October 2010, granted the defendants’ motions for summary judgment, holding that the leases were valid. 

After the summary judgment decision, the defendants pursued their counterclaims, asking the court to hold that the landowners’ lawsuits constituted a repudiation of the leases, and that the proper remedy was to equitably extend the leases by the amount of time the litigation had been pending and drilling activities suspended. The defendants’ argued that they were deprived of the full benefit of the lease term during their suspension of activities. The plaintiffs argued in opposition that the suspension of activity was voluntary. 

Judge Jones noted at the outset that that “the discovery of Marcellus Shale has revealed gaps in Pennsylvania’s jurisprudence on the various legal issues that arise from natural gas drilling projects. However, in ruling that the lease terms should not be extended the cour found “extremely persuasive” the Pennsylvania Superior Court decision in Derrickheim Company v. Brown, 305 Pa. Super. 173 (Pa. Super. Ct. 1982), which reversed the trial court’s decision to extend the term of an oil and gas lease when the lessee stopped drilling pending litigation concerning a cloud on the lessor’s title. Although defendants tried to distinguish the Derrickheim case because the lessees, not the lessors, had initiated the current litigation, Judge Jones found that “this distinction puts too fine a point on the matter by placing undue emphasis on the party initiating the legal action.” 

Judge Jones further emphasized that the oil companies “wield significant, if not exclusive, power in the drafting of oil and gas leases” and that “a determination that Plaintiffs had repudiated their leases via the filing of these actions further tips the balance in favor of the oil companies” and “would likely dissuade lessors from bringing potentially meritorious actions. 

Given the increase in Marcellus Shale operations in Pennsylvania, and especially Judge Jones’ astute comment that there are gaps in Pennsylvania law concerning the relevant legal issues, we expect that there indeed will be many disputes and lawsuits coming in this area. We are happy to answer questions or provide guidance on any issues of concern. 

For more information on this case or advice concerning oil and gas leases, please contact Julie Beddingfield at (215) 569-1639 or jbeddingfield@klehr.com.