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August 16, 2013

PA Federal Judge: Actual Drilling Not Required To Extend Oil & Gas Leases

A federal judge sitting in Pennsylvania ruled on Tuesday, August 13, 2013 that certain oil and gas leases held by Chief Exploration & Development LLC (Chief) had been properly extended by Chief’s predrilling activities on property that had been pooled with the challenged leases. The plaintiffs in Roe v. Chief Exploration & Development LLC (M.D. Pa Dkt. No. 11-cv-00816-MWB) were all lessors of oil and gas leases executed with Chief in October 2005 for five year terms.  Each of the leases subject to the litigation provided Chief with the exclusive right to “all the oil, gas, and coalbed methane and their constituents … underlying the [land leased by the plaintiffs], together with such exclusive rights as may be necessary or convenient for [Chief] … to explore for, develop, produce, measure, and market production from [the land leased by plaintiffs].”  They also included a unitization clause which granted Chief the right to pool or combine the leased properties with other lands to create a drilling unit as well as a habendum clause that provided for lease extension beyond the primary term by operations “conducted … in search of oil, gas, or their constituents.” Prior to the expiration of the leases’ primary term, Chief pooled plaintiffs’ properties into a unit and began to conduct various predrilling activities on property included in the unit.  Such activities included establishing the location of the well, conducting field surveys, obtaining the required permits to drill and withdraw water for use in completing the well, delivering a bulldozer to the site and starting the process of clearing lumber.  The well was ultimately drilled and completed on the pooled property in March 2011, approximately 5 months after expiration of the leases’ primary term. Plaintiffs’ lawsuits, which were originally brought in the Sullivan County Court of Common Pleas in March and April 2011, concerned whether their leases expired or had been extended.  After removing the cases to federal court, Chief moved for summary judgment.  Chief argued that its predrilling activities on the pooled parcel prior to the expiration of plaintiffs’ leases, combined with the prompt completion of a well on that property, constituted “operations … in search of production of oil, gas, or their constituents” sufficient to extend the leases beyond their primary terms. In granting Chief partial summary judgment, U.S. District Judge Matthew Brann concluded that Chief's clearing and staking activities on another property that was part of the pooled unit was sufficient to extend the leases and rejected the plaintiffs’ argument that “only actual drilling” during the primary term was required to extend the leases. Referencing the Pennsylvania Supreme Court decision in Henderson v. Ferrell, 183 Pa. 547, 38 A. 1018 (1898), the court held that the “material issue [was] … whether the activity — minimal or extensive — is undertaken ‘in good faith, and with a determination on [the lessee’s] part to prosecute with due diligence the work [the lessee was] authorized by the lease to do.’”  Then, looking at all of Chief’s efforts and activities on the pooled property, as well as its continued work to develop a well that was operational a few months later, the court found that the company had demonstrated sufficient good faith to extend plaintiffs’ leases. The Chief decision is good precedent for the industry, establishing solid precedent in Pennsylvania similar to that seen in case law from other jurisdictions, that to extend a lease by commencement of “operations” a lessee simply needs to begin steps necessary to the drilling process, as opposed to putting a drill bit into the ground, and have a good faith intention to continue work until a well is completed.    

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