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May 6, 2014

Federal Court Finds Lease Expired By Its Own Terms Despite 3 Wells and $4 Million In Development Costs

A federal judge sitting in Pennsylvania has ruled that Range Resources (“Range”) failed to properly extend an oil and gas lease despite commencing operations during the lease’s primary term.  Thomas Neuhard et al. v. Range Resources-Appalachia LLC, No. 4:11-cv-01989 (E.D. Pa).  Although Range drilled and completed a trio of wells at an expense of approximately $4 million, U.S. District Court Judge Matthew Brann held that Range failed to comply with the lease’s terms because its drilling operations, which were not on the leased property, exceeded the 350-acre maximum unit size in the agreement. 

In June 2006, the Parties entered into an oil and gas lease (“Lease”) which provided Range with the rights to procure oil and gas from 47 acres owned by the Neuhards in Lewis Township, Lycoming County, Pennsylvania.  The Lease contained a primary term of five years such that, unless extended by the commencement of drilling operations or as otherwise provided, the Lease was set to expire by its own terms on June 21, 2011.

On June 13, 2011, Range executed a Designation of Unit document for the “Null Eugene A Unit,” which indicated that “by virtue of the authority conferred by the terms of the leases,” a 395.0638 acre production unit comprised of nine separately owned parcels of land, including the Neuhards’ 47 acres, had been created.  Range filed the Designation of Unit Document with the Lycoming County Recorder of Deeds on June 15, 2011. 

Shortly thereafter, Range also acquired a Road Right of Way Agreement signed by Barbara Neuhard for which she was paid $3,000.  Range also engaged in numerous other preparatory activities prior to drilling throughout the spring of 2011, including obtaining several mandatory permits from state and local regulatory agencies and constructing the access roads and well pad site.

On July 1, 2011, the Neuhards’ counsel  notified Range that it was the Neuhards’ position that Range had failed to commence a well on the Neuhards’ “Leased Premises,” within the five year primary term of the Lease, and therefore, that the Lease expired by its own terms.  Range responded by maintaining that the Lease had been extended by the commencement of a well on acreage unitized with the Neuhards’ Leased Premises prior to the expiration of the Lease’s primary term.  Range then continued its development and, between May 28 and September 15, 2012, Range drilled three wells utilizing horizontal drilling.  The wellbores of two of the three wells passed under and through the Neuhards’ 47 acres.

Although finding that Range’s activities prior to the expiration of the Lease’s primary term were sufficient to constitute the commencement of a well as a matter of law, the Court granted summary judgment to the Neuhards due to its findings that Range exceeded its authority under the Lease, which by its terms limited the size of a unit to 350 acres.  According to the Court,

“Range’s unit designation violates its unitization authority under the plain and unambiguous terms of the lease, because the lease is clear that a unit cannot be larger than 350 acres surrounding each well in the unit, and a unit cannot contain more than one well without the permission of the lessor, which Range did not obtain.”

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