The Oil and Gas Addendum

A dual purpose oil and gas lease transitions into its secondary term, and remains in its secondary term, if oil and gas is produced from the leasehold or if the leasehold is used for oil and gas storage. See, Smith v. Steckman Ridge, LP, 590 F. App'x 189, 194 (3d Cir. 2014). Therefore, a dual purpose oil and gas lease can remain operational indefinitely, but without generating any production royalty payments. However, principles of pore space ownership in Pennsylvania raise questions about the validity of any dual purpose lease held by storage where the lease was executed by the owner of a severed oil and gas estate.

Underground gas storage is common in Pennsylvania, with several dozen storage fields across the state. The underground storage process injects gas into depleted gas fields. Basically, gas is injected into the ground for storage, taking the place of oil or gas that had previously existed in that reservoir and was produced years ago. The dual purpose oil and gas lease allows a driller to maintain its rights to the oil and gas in a leasehold by producing the gas or by injecting the gas back into the ground for storage.

The nature of a dual purpose oil and gas lease and gas storage raises a basic question: does the oil and gas owner “own” the rights for gas storage? This implicates principles of pore space ownership. In Pennsylvania, the surface, minerals, and oil and gas in a given piece of property can be owned separately. See, Consolidation Coal Co. v. White, 875 A.2d 318, 326 (Pa. Super. Ct. 2005). The owner of the subsurface rights, whether oil, gas or minerals, owns those subsurface resources, but aside from coalbed methane gas, does not own the geologic strata in which the oil, gas or minerals are found. See, Butler v. Charles Powers Est. ex rel. Warren, 65 A.3d 885, 899 (Pa. 2013); U.S. Steel Corp. v. Hoge, 468 A.2d 1380 (Pa. 1983); Chartiers Block Coal Co. v. Mellon, 25 A. 597, 599 (Pa. 1893) (“When the coal is all removed, the estate ends, for the plain reason that the subject of it has been carried away.. The space it occupied reverts to the grantor by operation of law. It needs no reservation in the deed, because it was never granted”); Belden & Blake Corp. v. Commonwealth, Department of Conservation & Natural Resources, 969 A.2d 528, 532, n. 6 (Pa. 2009) (“Chartiers remains the seminal case setting forth a subsurface owner's rights with respect to the surface owner's rights”).

In a situation where the surface of a property in Pennsylvania has been severed from the oil and gas in the property, logic suggests that the oil and gas owner could not agree to a dual purpose oil and gas lease, because the oil and gas owner does not own the geologic strata in which the gas would be stored. While the oil and gas owner in a severed estate in Pennsylvania owns the hydrocarbons naturally occurring in the ground, the ownership is comprised of those hydrocarbon molecules; not the geologic structures in which the hydrocarbons are found. See, Chartiers Block Coal Co., 25 A. at 599. That pore space in the rock where naturally occurring hydrocarbons used to be is owned by the surface owner in Pennsylvania. Id.

This suggests two interrelated conclusions. First, if a Pennsylvania dual purpose oil and gas lease is being maintained by storage and the lease was obtained from the oil and gas owner in a property where the oil and gas was severed from the surface, that lease may not be effective because the party that granted the lease (the oil and gas owner) had no pore space ownership to grant for storage purposes. Second, if the oil and gas in a Pennsylvania property was severed from the surface estate and gas storage is occurring, that storage activity may be unlawful if the gas storage operator did not secure a storage lease from the surface estate owner.

If you have a Pennsylvania dual purpose oil and gas lease or if you have a property being used for underground gas storage, the oil and gas attorneys at Houston Harbaugh can assist you by evaluating the validity of these arrangements. Contact Brendan O’Donnell at 412-288-2226 or odonnellba@hh-law.com.