The Oil and Gas Addendum

Middle District of Pennsylvania Determines that Meaning of Oil and Gas Lease “Marketing” Language Cannot Be Determined as a Matter of Law in Chambers v. Equinor USA Onshore Properties, Inc.

On September 6, 2024, the United States District Court for the Middle District of Pennsylvania denied dueling summary judgment motions concerning the interpretation of a royalty provision in Chambers v. Equinor USA Onshore Properties, Inc., Civil Action No. 3:18-cv-00437. Although the federal court denied the royalty owners’ request for summary judgment on the royalty issue, this determination is still a “win” of sorts for royalty owners because it allows the interpretation of a royalty clause to go to trial, versus being dismissed based on an oil and gas operator’s self-serving definition.

This decision is part of a lawsuit that the Chambers plaintiffs filed against Equinor USA Onshore Properties, Inc. (”EOP”) and Chesapeake Appalachia, LLC related to the payment of royalties under several oil and gas leases. The oil and gas leases in question contain a royalty provision which states:

To pay to the Lessor, as royalty for the oil, gas, and/or coalbed methane gas marketed and used off the premises and produced from each well drilled thereon, the sum of one eight (⅛) of teh price paid to Lessee per thousand cubic feet of such oil, gas, and/or coalbed methane gas so marketed and used. . .

Chambers at *1 (the “Royalty Clause”). The Chambers plaintiffs’ theory was that the Royalty Clause required the lessee to “market” the gas, versus just “sell” the gas. The lessees were selling gas at the wellhead to marketing affiliates (who moved the gas downstream and sold it to different buyers). Related to EOP, it sold gas at the wellhead to a marketing affiliate for an index price. The plaintiffs contended that was a breach of the leases’ Royalty Clause and that the plaintiffs were entitled to the actual price received for the sale of gas marketed and sold off the premises, which included sales to end users (beyond the wellhead sales to an affiliate).

Several years ago, the gas company defendants moved to dismiss that claim. The District Court denied those efforts, reasoning that the Royalty Clause’s references to “market”, versus “sell”, set forth a legally sufficient claim that could proceed.

This time, at summary judgment, the arguments were the same, but after discovery had taken place. The District Court remarked that “. . . the parties present competing interpretations of the phrase ‘marketed and used of the premise’ from the challenged royalty clauses and dispute whether Defendant EOP had an implied duty to market gas produced under the Leases to downstream third parties.” Chambers at *4. Framing its analysis of the oil and gas lease contract language, the District Court recited the relevant standards applicable to contract interpretation. Applying these standards, the District Court found that “. . . the disputed ‘marketed and used off the premises” wording is ‘reasonably susceptible of different constructions and capable of being understood in more than one sense’. Chambers at *5. Building on this, the Chambers court wrote that:

The historic usage of the clause ‘marketed and used off the premises’, the record, caselaw, and the term ‘marketed’s’ ordinary meaning, and the absence of expert testimony supports this Court’s finding that there are multiple interpretations of the royalty clause that could be reasonable in this case. Accordingly, teh Court finds the ambiguities before it are better resolved by a finder of fact.

Chambers at *5. As a result, the meaning of the Royalty Clause will be determined at trial. By concluding that the interpretation of the Royalty Clause must be determined at trial the District Court rejected efforts by the royalty owners and EOP to have the meaning of the Royalty Clause decided in their favor as a matter of law.

Seeking judgment in its favor, EOP relied on the purported history of the clause and case law. EOP argued that the “marketed and used off the premises” phraseology was adopted in oil and gas leases over a century ago and was purportedly “. . . understood to delineate merely whether any royalty was owed at all.” Chambers at *5. EOP pointed to the Court of Appeals of Ohio’s 2020 decision Gateway Royalty, LLC v. Chesapeake Exploration as support for its position in this matter. In Gateway Royalty, the Ohio Court of Appeals examined a lease with “marketed and used off the premises” to determine if the gas company’s post-production cost charges against the royalty were proper. The Gateway Royalty court found that the meaning of the “marketed and used off the premises” was not ambiguous and rejected the argument that “marketing” had to occur off the leasehold.

The Chambers plaintiffs argued that EOP’s historical arguments about the Royalty Clause’s meaning could not carry the day because the meaning of oil and gas terminology had changed substantially over the last century. Likewise, the plaintiffs argued that the the cases and decisional authority cited by EOP were distinguishable from and did not address the claim at-issue in this case. The Chambers plaintiffs also heavily relied on the testimony of an EOP witness who testified that EOP’s marketing affiliate, Equinor Natural Gas (“ENG”), “works in ‘the marketing segment’ of parent Equnior and that its function is to take gas ‘from the wellhead and move it downstream of the wellhead’” and that the leases at-issue were “proceeds” leases. Chambers at *6. The plaintiffs contended that this “. . . testimony and Equinor’s vertical business structure [ ] suggest that while ‘Defendant EOP does nothing to market Plaintiffs’ gas,’ off the premises, it is ‘undisputed that Defendant EOP understands the term ‘marketing’ to mean downstream advertising.” Chambers at *7.

Despite the parties’ arguments that the meaning of the Royalty Clause could be determined as a matter of law, the District Court still found ambiguity that needed to be resolved by the factfinder at trial.  The District Court noted that dictionary definitions of “market” and “marketing” could support both the plaintiff’s theory and EOP’s theory. Chambers at *8. The District Court remarked that “[c]onsidering these concerns and the lack of expert testimony from someone in the oil and gas industry knowledgeable about the types of leases now at issue, the Court cannot conclude the ‘marketed and used off the premises’ language in the royalty clauses of the Leases is ‘so clear’ that it can be read only one way.” Chambers at *8.

While the Chambers court did reject the landowners’ request for judgment as a matter of law, this decision is still a “win” for royalty owners because the District Court also denied EOP’s request for judgment as a matter of law on this breach of contract claim. It is not uncommon for oil and gas drillers to argue that many clauses and phrases in oil and gas leases are “terms of art” or carry historical meanings that happen to support the oil and gas drillers’ present conduct even if that proffered meaning does not make sense in the present context. It is also not unusual for courts to accept oil and gas drillers’ suggested interpretations of lease provisions, even without any demonstration that the lessors’ knew or intended that terminology to carry that meaning. The royalty owners’ ability to present their breach of contract claim, and desired interpretation of the Royalty Clause at trial, before the factfinder, allows the royalty owners to have their “day in court”.

As with any oil and gas lease dispute, the Chambers decision also highlights the importance of clearly drafting the parties’ intent into an oil and gas lease. If the intent and meaning of a lease provision is not clearly stated (or even if it is) it is not unusual for an oil and gas driller to point to a purported century-old meaning of that phraseology instead, like what happened in Chambers. We will continue to monitor this interesting case and its impact on royalty calculations, especially in the realm of sales from exploration and production companies, who are frequently the “lessees” to marketing affiliates, who move gas downstream and market and sell the gas to unaffiliated, third-party users.

Houston Harbaugh’s Oil and Gas Practice Group assists oil and gas owners with both oil and gas lease negotiations and litigation, as well as confirming that royalty payments are being made pursuant to the oil and gas lease contract. If you have any questions, contact Brendan A. O’Donnell at 412-288-2226 or odonnellba@hh-law.com.