Oil and Gas Lease • Marcellus Shale Gas • Mineral Estate

Caldwell v. Kriebel Resources Co., LLC, PICS Case No 12-1909 (C.P. Clearfield Aug. 2, 2012) Ammerman, P.J. (5 pages).

The transference of “all” gas rights included both Marcullus Shale gas and gas in shallower formations and plainiffs could not show that defendants breached the lease agreement. Defendants preliminary objections were granted and the complaint was dismissed.

Plaintiffs Terry and Carol Caldwell sought a declaratory judgment terminating an oil and gas lease entered into with defendant Kreibel Resources, Co., LLC. Plaintiffs alleged four bases for terminating the lease: 1) the gas trapped in the Marcellus Shale was part of the mineral estate and only oil, gas and surface rights were transferred by the agreement; 2) defendants did not develop the Marcellus Shale gas; 3) defendants breached an implied duty to produce gas in paying quantities; and 4) the parties intended to convey the rights to shallow gas only, not Marcellus Shale gas.

The Kriebel defendants and defendant Range Resources-Appalachia, LLC demurred to all counts.

Plaintiffs first alleged that Marcellus Shale gas was not transferred by the agreement because that gas was part of the mineral estate. Plaintiffs did not cite supporting case law.

Defendants cited federal authority to counter plaintiff’s position. In Hoffman v. Acelormittal Pristine Resources, Inc., 2011 WL 1791709,4 (W.D. Pa 2011), the district court interpreted a reservation clause in a deed reserving “‘all gas and oil within and underlying’ the subject land.” The plaintiff in Hoffman claimed the term referred only to shallow natural gas; the parties could not have referred to Marcellus Shale gas because such gas was not commercially exploitable at the time. The district court disagreed, finding such an interpretation ignored the clear meaning of the word “all.”

The court agreed with this reasoning. The term “all” was not ambiguous, the court observed, and included all gas – whether in the Marcellus Shale or a shallower formation.

Plaintiffs also argued that if Marcellus Shale constituted a mineral, then whoever owned the shale owned the gas contained within the shale. The court, however, pointed out that the issue was the contractual transference of “all” gas rights by lease, not the reservation of “minerals” within a deed. Further, a reservation of minerals does not include gas and oil. Therefore, plaintiffs’ mineral estate would not include gas and oil.

Next, plaintiffs argued that defendants breached the lease by failing to develop Marcellus Shale gas production. However, plaintiffs did not cite any lease provision in support of this argument. Instead, plaintiffs relied on an implied duty of defendants based on the contract.

The court recognized that the lease guaranteed delay rentals; therefore there was no implied duty to develop production. In any event, defendants currently had a gas-producing well on plaintiffs’ property. The court found it was irrelevant whether the well drew Marcellus Shale gas or gas from a shallower formation since the lease remained in effect as long as gas was being produced from the property. Plaintiffs admitted that gas was being produced.

Next, plaintiffs claimed defendants breached their implied duty to produce natural gas in paying quantities under the lease. The lease, however, only required that gas or oil be produced from the property.

Finally, plaintiffs argued for reformation of the contract based on the ambiguity of the term “gas.” The court disagreed. Plaintiffs did not show the term was ambiguous. Additionally, the court could not reform a contract in a declaratory judgment action or in the absence of fraud accident or mistake.