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July 16, 2013

PA Court Affirms Operator’s Surface Rights To Develop Subsurface Gas

On July 12, 2013, the Superior Court of Pennsylvania affirmed a lower court’s ruling which found that Chevron’s oil and gas lease with the landowner allowed it to construct an 11-acre freshwater impoundment as part of its exclusive rights to develop minerals from the property’s subsurface (No. 1270 WDA 2012).  The three-judge panel held that Chevron’s rights under the lease included the right to use the surface area of the leasehold as reasonably necessary to develop natural gas from the Marcellus Shale.

In Humberston v. Chevron et al, the plaintiffs leased 133 acres of land in Fayette County, Pennsylvania thereby leasing to Chevron, as the current assignee, the oil and gas underlying the land "together with such exclusive rights as may be necessary or convenient for Lessee … to explore for, develop, produce, measure, and market production from the Leasehold."  Chevron therefore hired a contractor, its co-defendant Keystone Vacuum, to construct an 11-acre freshwater impoundment on the Humberstons’ property.

The Humberstons then filed an action to quiet title and in trespass, alleging that (1) Chevron’s freshwater impoundment was not contemplated at the time their lease was executed, (2) the lease did not grant Chevron the right to construct the freshwater impoundment, and (3) Chevron improperly intended to use the impoundment to serve potential wells on other parcels.  The Humberstons’ complaint sought declaratory relief as well as actual and punitive damages.

In addition to the parties’ lease, the Humberstons relied on a surface damage release they entered into with the prior lessee, Chief Exploration & Development LLC, which paid them $10,000 in advance for damages to 7 acres of their property stemming from the initial drilling operations.  The Humberstons maintained that the absence of any mention of the freshwater impoundment in the surface damage release was significant in that the release defined the type of activities that could occur on the leasehold.

In response to the Complaint, Chevron and Keystone filed preliminary objections in which they asserted that the Humberstons had failed to state a claim for relief.

On appeal, the Pennsylvania Superior Court affirmed the trial court’s ruling which sustained the defendants’ preliminary objections and dismissed the complaint with prejudice.  The Court interpreted the lease, as with any contract, by looking to the language of the agreement to ascertain the parties’ intent.  In doing so, the Court rejected the Humberstons’ attempt to use parole evidence and found that the lease allowed for surface use "as is reasonably necessary or convenient to develop the natural gas under the Humberstons’ property and that of property constituting the Humberston Unit."  The Court also rejected the Humbestons’ reliance on the surface damage release, finding that "[t]he Release does not incorporate the Lease and therefore cannot limit in any way the use of the surface as contemplated in the Lease."

Of further note, the Humberstons argued that at the time the lease was executed (April 6, 2006) hydraulic fracturing (and the corresponding need for freshwater impoundments) had not been used in Fayette County and, thus, could not have been a foreseeable or contemplated method for extracting gas from the leasehold.  The Court rejected this as a basis to narrowly construe Chevron’s lease rights finding that "the express language of the Lease provides for the use of "methods and techniques … not restricted to current technology[.]"  And to this point, the lower court found that:

"we do not find hydrofracking to be a new and novel method for the recovery of natural gas. Hydraulic fracturing of the strata to stimulate recovery of natural gas has been utilized in the drilling industry for many years.  As noted by our Supreme Court in United States Steel Corporation v. Hoge, 503 Pa. 140, 468 A.2d 1380 (1983), the use of hydrofracking to stimulate gas recovery was developed by the drilling industry in the late 1940’s."

The Humbertson decision is good news for operators, both as to its contract interpretation and its factual findings regarding the long-standing history of hydraulic fracturing.


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