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December 2, 2013

Decision Rejecting Duty to Develop All Strata Stands; PA Supreme Court Declines to Hear Appeal

In good news, the Pennsylvania Supreme Court has declined to hear a case in which a couple sought to terminate their oil and gas lease under the auspices that the operator had an implied obligation to develop all strata underlying their property and had failed to meet its responsibility to drill for gas in the Marcellus Shale.

As we previously reported, in Caldwell v. Kriebel Resources Co., LLC et al (No. 1305 WDA 2012), the Pennsylvania Superior Court affirmed a lower court’s ruling that the defendants did not have a duty to drill for gas in the Marcellus Shale. The case involved an oil and gas lease which contained a two year term that would be extended so long as oil or gas was being produced. Although it was undisputed that gas was being produced from a shallow formation, the plaintiffs claimed that the defendants breached an implied duty to produce gas in paying quantities and develop gas from the Marcellus Shale. More specifically, relying on precedent from outside Pennsylvania, the plaintiffs argued that there was an implied duty to develop all strata and not simply to extract gas from a shallow formation and pay minimum royalties.

The Superior Court completely rejected plaintiffs’ arguments and found that the disputed oil and gas lease remained in full force and effect for all strata. The Court declined to imply the duty to develop urged by the plaintiffs due to contract language in the lease and also the undisputed fact that some gas was being produced from the leased premises. It also looked to Pennsylvania precedent holding that some profit over operating expenses, even if small, is sufficient production in paying quantities and found sufficient production despite plaintiffs’ desire for greater production and royalties through development of the Marcellus Shale.

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