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June 26, 2013

Pennsylvania Court Rejects Attempt to Terminate Lease Under Guise of Implied Duty to Develop Shale

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 had been entered into on January 19, 2001 with 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 here is an implied duty to develop all strata and not simply to extract gas from a shallow formation and pay minimum royalties. The Court completely rejected plaintiffs’ arguments and found that the disputed oil and gas lease remained in full force and effect for all strata. In doing so, it 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. The Court 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. The Caldwell case is good precedent for rejecting a lessor’s attempt to broaden lease obligations, whether as to the extent of drilling required to avoid lease termination or what it means to have production in paying quantities. A key lesson from the Caldwell case is to pay close attention to express language in an oil and gas, particularly language that dispels attempts to read implied duties into the lease.

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