The Oil and Gas Addendum

As we have written about before, a troubling issue facing landowners in the Marcellus Shale region is the practice of retroactive pooling and unitization. Retroactive pooling and unitization occurs when a driller records an amended declaration of pooling, but makes it effective at some date in the past. There may be good faith and legitimate reasons for some retroactive pooling and unitization, such as correcting a parcel size to match a survey, or correcting the unit size to account for an updated size of a constituent property, where certain acreage was “always” in the pool or unit; it was just misidentified. But, the practice of retroactive pooling and unitization can be abused by drillers.

Here is how it can play out. Let’s assume you own 165 acres in Greene County.  In March 2016, you sign an oil and gas lease with Bull Dawg Drilling (the “2016 Lease”).  The 2016 Lease contains a pooling and unitization clause which allows Bull Dawg Drilling to pool and unitize the Leased Premises into a production unit.  [BAO1] 

The primary term of the 2016 Lease expires in March 2021.  At that time there is no producing well on the Leased Premises, nor has the Leased Premises been pooled or unitized into a production unit with active drilling operations or producing wells.  Nothing at that time satisfied the obligations of the 2016 Lease to extend it into its secondary term. Given these facts, you rightfully assume that the 2016 Lease has automatically expired due to non-production.

In January 2023 you receive a letter from Bull Dawg Drilling informing you that 26 acres of the Leased Premises were “pooled” into the XYZ production unit (the “XYZ Unit”). The declaration of pooling forming the XYZ Unit was recorded on January 30, 2023 but says it is effective as of January 30, 2021 – two months prior to the expiration of your 2016 Lease.  The letter further states you will start receiving production royalties from the two wells previously drilled in the XYZ Unit back in January 2021.  You are shocked, confused and angry. 

You contact Bull Dawg Drilling and inform them that the 2016 Lease expired two years ago.  They disagree and assert that the January 2021 drilling operations were sufficient to maintain the 2016 Lease in effect.  You respond by pointing out that the Leased Premises was not even part of the XYZ Unit in January 2021.  They say it doesn’t matter – you are now.  How can Bull Dawg Drilling travel “back in time” and claim that the January 2021 drilling operations in the XYZ Unit now have the effect of maintaining the 2016 Lease?  And can Bull Dawg Drilling make the declaration of pooling “effective” as of January 30, 2021?

With retroactive pooling and unitization, a driller amends a unit declaration to include new property, and makes the pooling and unitization retroactive to a date in the past. Drillers may do that to argue that the newly pooled and unitized property was somehow “always” in the unit. But, in reality, the property was just added to the unit. Timing is very important and, in an environment of retroactive pooling and unitization, there is a significant difference between the recording of the declaration of pooling and the “effective date” of the instrument.

Several principles come into play when evaluating the legality of retroactive pooling.  First, there is no implied right or authority to pool.  It is well-established throughout the United States that absent express written authority in the lease, a lessee has no power or authority to pool.  See, Southeastern Pipeline Co. v. Tichacek, 997 S.W. 2d 166, 170 (Tex. 1999) (“A lessee has no power to pool without the lessor’s express authorization, usually contained in the lease’s pooling clause”).  See also, Amoco Production Co. v. Heimann, 904 F.2d 1405 (10^th Cir. 1990) (“Without such a clause, the lessee has no authority to pool or unitize the interest of the lessor”).  In other words, the authority to pool is contractual and is derived solely from the lease itself.  If the lease expires, so does the contractual right to pool.[1] 

Second, pooling is typically effective only upon recording.  This means that regardless of the date arbitrarily selected in the declaration of pooling, the date that it is actually recorded in the public records is the only date that matters.  For example, in Sauder v. Frye, 613 S.W.2d 63 (Tex. Civ. App. 1981), the primary term of the underlying oil and gas lease was set to expire on May 24, 1979.  Prior to that date, the driller executed and signed a declaration of pooling including the underlying lease in a production unit where drilling operations were actively underway.  A few days later the unit well was completed and went into production on May 26, 1979.  The unit declaration, however, was not recorded until May 31, 1979 – seven days after the primary term expired.  The Texas Court of Appeals ruled that the belated declaration of pooling could not maintain the lease:

“[W]e find that the provision in the Frye lease evidenced the intent of the parties that for unitization to be effective one of its required conditions was the recordation of the designation of pooling.  Only at that point would the unitization validity come into being under the terms of the lease…”

Since the declaration was not recorded until May 31, 1979, the court opined that the driller had failed to effectively pool the underlying lease into a production unit prior to expiration of the primary term.  As such, the court rejected the driller’s effort to make the declaration retroactive to May 7, 1979 and ruled that the underlying lease expired due to non-production.   

Other Texas courts have followed this same logic.  See, Tittizer v. Union Gas Corp., 171 S.W.3d 857, 860 – 861 (Tex. 2005) (“…this lease does not authorize the lessee to execute a pooling designation with retroactive effect”); Ohrt v. Union Gas Corp., 398 S.W.3d 315, 326 (Tex. App. 2012) (“…pooling is effectuated upon recordation of an instrument identifying the pooled unit and the lessee cannot effect pooling on a date prior to the recordation.”). Texas courts are on the right track with retroactive pooling and unitization in general and Pennsylvania courts should adopt and apply this logic.

However, there is no reason to focus on the pooling and unitization clause of a lease when the retroactive pooling or unitization occurs after the lease primary term expires and no provisions of the lease were satisfied at the end of the primary term in order to extend the lease into its secondary term. In that case, the lease automatically terminated at the expiration of its primary term. As such, there is no “lease” containing any pooling and unitization language. The contractual basis for any pooling and unitization rights no longer exists because the lease expired.

Returning to our example, the 2016 Lease expired in March 2021.  Bull Dawg Drilling’s to make its pooling and unitization the declaration retroactive to January 30, 2021 lacks any basis because Bull Dawg Drilling had no more pooling and unitization rights. When the 2016 Lease expired due to non-production, so did the contractual right to pool.  Bull Dawg Drilling should not be able to revive the expired 2016 Lease through retroactive pooling and unitization because it had no lease to retroactively pool and unitize.

How can landowners guard against improper retroactive pooling?  Promptly ask the driller to record a lease surrender instrument if you believe your lease has expired. A lease surrender in the public records makes it much harder for a driller to argue that a lease remained operative as a result of retroactive pooling and unitization when the date of the “surrender” is compared to the retroactive pooling and unitization effective date.

If you believe that your lease has terminated and you need assistance securing a formal lease surrender from the driller, contact attorney Robert J. Burnett at rburnett@hh-law.com, 412-288-2221 or Brendan O’Donnell at odonnellba@hh-law.com, 412-288-2226 for assistance.

[1] In Pennsylvania, West Virginia and Ohio, if the primary term of a lease expires, and there is no active production from Leasehold or lands pooled therewith, then, as a matter of law, the lease automatically terminates. Brown v. Haight, 255 A.2d 508 (Pa. 1969); T.W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261 (Pa. 2012); Bryan v. Big Two Mile Gas Co, 577 S.E. 2d 258 (W.Va. 2001); McCullough Oil, Inc. v. Rezek, 346 S.E. 2d 788 (W.Va. 1986); Rudolph v. Viking International Resources Co., Inc., 84 N.E. 3d 1066 (Ohio. Ct. App. 2017); Potts v. Unglaciated Industries, Inc., 77 N.E. 3d 415 (Ohio Ct. App. 2016).