The Oil and Gas Addendum

The United States District Court for the Western District of Pennsylvania’s recent decision in Bootes v. PPP Future Development, Inc., C.A. No. 22-154 (W.D.Pa. March 21, 2023) denying a gas company’s request to dismiss oil and gas owners’ claims suggests a new approach for oil and gas lease termination. Although not a final ruling on the merits, the Bootes decision breaks a recent trend limiting the scope of oil and gas lease termination cases. But, while beneficial for oil and gas owners, the Bootes case warrants careful attention to ensure that distinct legal concepts regarding lease termination are not combined.

The Bootes case arose from oil and gas owners’ claim that the 1979 oil and gas lease (the “Lease”) burdening their property in Erie County, Pennsylvania had terminated. The Lease had a one year primary term and remained operative thereafter as long as the leasehold property was operated by the lessee in the search for or production of oil or gas. Id. at 3. In addition to a royalty, the Lease allowed the oil and gas owners the use of 200,000 cubic feet of gas a year from one of the two wells on the property and provided for a cash equivalent equal to 200,000 cubic feet associated with the other well. Id. at 2-3.

Interestingly, the Lease obligated the gas company to “conduct its operations under the Lease ‘with reasonable diligence, continuously, in good faith, with first class equipment and appliances, and in accordance with the best customary practices in the field’” and also to “comply with all governmental laws, orders, rules and regulations applicable to Lessee's operations.” Id. at 3. As a final point, the Lease also stipulated that when the gas company determined that its wells on the leasehold were “no longer commercially feasible, Lessor shall have the option of purchasing the well and pipeline for the sum of One ($1.00) Dollar,” or having the wells plugged.” Id. at 3.

In recent years, the gas company did not pay royalties, did not provide written statements of gas production required by the Lease, did not supply required volumes of house gas, including during the winter, disassembled one of the wells and had other issues due to equipment deterioration. Id. at 3-4. As a result, the Pennsylvania Department of Environmental Protection cited the lessee with violations of the Pennsylvania Oil and Gas Act and the Pennsylvania Storm Water Management Act. Id. at *4.

The oil and gas owners provided notice to the gas company that the Lease had terminated due to the gas company’s material breaches of the Lease, including “. . . failure to: (i) operate the wells in compliance with Pennsylvania law; (ii) provide monthly statements of production and royalties; (iii) provide Plaintiffs with up to 200,000 cubic feet of gas from one well to supply their house with gas; and (iv) provide the Cash Equivalent Payment for the second well.” Id. at 4. The gas company did not surrender the Lease, so the oil and gas owners filed suit, asserting claims for Declaratory Judgment, Breach of Contract, Trespass, Public Nuisance, Private Nuisance and Negligence per se. The gas company moved to dismiss all of the oil and gas owners’ claims.

Of particular interest is the Court’s discussion of the Declaratory Judgment claim. The oil and gas owners asserted that there was a dispute because the oil and gas owners terminated the lease and the oil and gas company refused to recognize it. Id. at 5. The gas company argued that there was no actual dispute because the oil and gas owners “manufactured a controversy” which was inconsistent with part of the lease stating that:

When Envirogas, Inc. [now, Defendant], in its sole discretion, determines that the well is no longer commercially feasible, Lessor [Plaintiffs] shall have the option of purchasing the well and pipeline for the sum of One ($1.00) Dollar, or having [Defendant] plug the well.

Id. From this point, the gas company argued that the oil and gas owners had no ability to unilaterally terminate the lease until the gas company determined that the wells were no longer commercially feasible and therefore there could be no dispute about lease termination. Id. at 5-6.

The District Court rejected the gas company’s argument. The Court interpreted the Lease provision cited by the driller as an option for the oil and gas owners to purchase wells and “... does not, in any way, make termination of the Lease solely contingent upon Defendant’s discretionary determination that the wells are no longer feasible, nor does it foreclose Plaintiffs’ right to terminate the Lease based upon Defendant’s material breach of other provisions of the Lease.” Id. at 6. The District Court did observe that the Lease did not expressly state a right for the oil and gas owners to terminate the leaves or clearly identify the parties’ rights and duties if termination occurred. Id. However, in a footnote, the Court suggested that other parts of the Lease implied the right for the oil and gas owners to terminate the Lease. Id.

In addition to the Declaratory Judgment claim, the oil and gas owners’ breach of contract, trespass, public nuisance, private nuisance and part of their negligence per se claims also survived dismissal. The Court’s allowance of this case to proceed is not a final adjudication on the merits, so no conclusive statements about the effect of this case can be made, but avoidance of dismissal is beneficial, and, in particular, the rejection of the gas company’s claim to exercise “discretion” over the termination of an oil and gas lease. Moreover, focusing on the gas company’s numerous failures to perform as a basis to terminate the Lease based on material breaches is a new approach for oil and gas lease termination after recent decisions like SLT Holdings v. Mitch-Well Energy, Inc., 249 A.3d 888 (Pa. 2021) that pared back lease termination theories.

While the Bootes case certainly bears watching, one particular item for oil and gas owners to be aware of is the concept of lease termination. It appears in Bootes that the oil and gas owners’ theory was that the lease terminated as a result of the lessee’s material breaches. While that theory survived early dismissal, it is possible that a later decision may conflate that theory with the automatic termination of the oil and gas lease fee simple determinable if the lessee fails to satisfy the habendum clause of the lease. T.W. Phillips Gas & Oil Co. v. Jedlicka, 42 A.3d 261, 267 (Pa. 2012).

While the Bootes plaintiffs asserted that their Lease terminated as a result of a material breach, the automatic termination theory is not premised on such a material breach. Rather, it is based on the lessee’s failure to satisfy the provisions that maintain the lease in effect. It is important that these distinct concepts are kept separate and oil and gas owners should pay attention to Bootes into the future for this reason. An oil and gas lessee’s failure to satisfy the requirements necessary to keep the lease in effect is not a material breach and it is not a situation where a court terminates a lease. If the lessee fails to satisfy the requirements to maintain a lease in effect, the lease automatically terminates and, in any legal proceeding related to that, the court just recognizes that the lease has already terminated.

If you have an oil and gas lease that you believe has been terminated or that you believe the lessee is materially breaching, contact Brendan A. O’Donnell at 412-288-2226.