Tuesday, December 3, 2013

Default under the Operative Oil and Gas Lease?

Frank Kosir, Jr.
Caldwell v. Kriebel Resources Co., LLC, et al; 2013 PA Super 188, 2013 Pa. Super. LEXIS 1642 (2013)

This matter addressed the issue of whether a gas exploration company’s failure to extract gas from the Marcellus Shale formation while extraction of shallow gas took place constituted a default under the operative oil and gas lease.  On January 19, 2001, Terry L. Caldwell and Carol A. Caldwell (“Caldwells”) and Kriebel Resources (“Kriebel”) entered into agreement (“Agreement”) whereby the Caldwells leased “all oil, gas, surface and Drilling Rights ... owned or claimed by landowners” in a 105-acre parcel of real property (“Property”)  situated in Clearfield County, Pennsylvania.  The Agreement provided for an initial 2-year term commencing on April 1, 2001, which term would be extended if oil or gas were being produced.   Pursuant to the Agreement, Kriebel commenced shallow gas drilling on the Property, drilling which has consistently produced gas in paying quantities, thereby extending the term of the Agreement.  However, concerned that the gas reserves under the Property were not being fully utilized, the Caldwells commenced an action in the Clearfield County Court of Common Pleas seeking to terminate the Agreement on the basis of Kreibel’s failure to commence drilling activities in the Marcellus Shale formation.  The Defendants filed Preliminary Objection in the nature of a demurrer, which the trial court sustained, concluding that Kriebel had no obligation under the Agreement to commence exploration of the Marcellus Shale formation.

On appeal, our Superior Court affirmed.  In issuing its ruling, the court noted that the Caldwells were essentially asking the court to create an implied duty on the part of an oil and gas lessee to develop different strata.  However, a review of the Agreement found that it included language providing that no inference or covenant would be implied as to either of the parties.  Therefore, as the parties’ respective duties were plainly set forth in the Agreement, and the Agreement did not require Kriebel to develop different levels of strata, the court could not impose such a duty upon Kriebel or its assigns.  Furthermore, since there was no dispute that the shallow gas wells were producing revenue, Kriebel had satisfied its obligations under the Agreement and the Caldwells were not entitled to terminate the contract.

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