The Oil and Gas Addendum

Let’s assume you own a 95 acre farm in Tioga County.  Your family has owned the farm since the early 1900’s.  However, in 1961, your grandfather severed the oil and gas rights from the surface and sold those oil and gas rights to his neighbor, Mr. Jones.  Two years later, Mr. Jones signed an oil and gas lease with XYZ Gas Company (the “1963 Lease”). The 1963 Lease was a so-called “dual purpose lease” that ostensibly authorized not only gas drilling but also the storage of gas. In 1975, a single shallow gas well was drilled on the farm. That well ceased production in 1986. During the COVID-19 pandemic, you re-acquired the oil and gas rights underlying the family farm from the heirs of Mr. Jones. In May 2022, you receive a gas storage rental check from XYZ Gas Company. You are surprised and confused. How can the 1963 Lease remain in effect given the lack of production over the last 30 years? And how could Mr. Jones give XYZ Gas Company the right to store gas under the family farm? The question of who can actually grant gas storage rights is often misunderstood by gas drillers and landowners alike. As explained below, it is likely that a Pennsylvania court would conclude that Mr. Jones did not have the right or authority to grant any storage rights in the 1963 Lease.

Many Pennsylvania oil and gas owners have property that is “held by storage” under an oil and gas lease. While oil and gas leases usually remain in effect beyond their primary terms as a result of oil and gas production, that is not always the case. “In the Appalachian Basin, it is common for oil and gas leases to contain a savings clause that permits storage of non-native gas to extend the lease into the secondary term.” See, Mason v. Range Res.-Appalachia LLC, 120 F. Supp. 3d 425, 440–41 (W.D. Pa. 2015). Non-native natural gas (known as “working gas”) is typically stored in the geological voids created after the native oil and gas is extracted and removed from subsurface strata. Working gas is injected into to these voids and is then stored in what is known as the “pore space”. Oil and gas leases that can remain in effect beyond their primary terms through oil and gas production or through gas storage are known as “dual purpose” leases.

While “dual purpose” leases are fairly common in Pennsylvania, an often overlooked question is whether gas storage rights were actually granted in the original oil and gas lease. If gas storage rights were not granted in the oil and gas lease, then the driller has no right under the lease to store gas and the driller also has no right to claim that the lease remains “held by storage”.  This threshold legal question is significant as Pennsylvania has approximately 774,309 million cubic feet of gas storage capacity located in forty-eight (48) active gas storage fields across 26 different counties. Pennsylvania’s storage capacity is currently ranked fourth in the United States, behind only Texas, Michigan and Illinois. Hundreds, if not thousands, of oil and gas leases in Pennsylvania have been allegedly maintained solely by the storage of non-native gas.

Even if an oil and gas lease is a “dual purpose” lease granting both production and storage rights, that does not mean that the lessor who signed the original lease had the ability to grant storage rights in the first place. That is because only the owner of the “pore space” has the legal authority to grant storage rights. And the owner of the surface estate typically owns the “pore space”. If the owner of the oil and gas estate also owned the surface, then an oil and gas lease could conceivably function as a “dual purpose” lease. But, if the owner of the oil and gas estate did not own the surface, (and hence did not own the “pore space”), then any lease signed by that individual could not grant any gas storage rights. Such a clause would be null and void since the purported lessor had no ownership rights in that subsurface strata.

This distinction is based on the limits of oil and gas ownership. While there is no question that an owner of the oil and gas estate owns the oil and gas “in place” under the ground, the oil and gas owner does not own or control the subsurface strata in which the gas is found. Once the native gas is extracted and removed, the owner of the oil and gas estate has no independent right or authority to control the use or disposition of the depleted reservoir and the  related subsurface caverns or voids. More importantly, this means that they do not have the ability to enter into a lease allowing others to store non-native gas in those same caverns or voids.

The theoretical foundation for this concept was set forth in Chartiers Block Coal Co. v. Mellon, 152 Pa. 286, 296–97, 25 A. 597, 599 (1893), one of the most influential mineral rights cases in Pennsylvania. In that case, the Pennsylvania Supreme Court made it clear that ownership of the underlying coal or oil is based on the resource itself as it exists in the ground and is not based on control of the actual subsurface strata where the coal or oil is found. The Chartiers Block Coal court observed that:

“The grantee of the coal owns the coal, but nothing else, save the right of access to it, and the right to take it away. Practically considered, the grant of the coal is the grant of a right to remove it. This right is sometimes limited in point of time; in others it is without limit. In either event, it is the grant of an estate determinable upon the removal of the coal. It is, moreover, a grant of an estate which owes a servitude of support to the surface. 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. The grantee has the right to use and occupy it while engaged in the removal of the coal, for the reason that such use is essential to the enjoyment of the grant. It cannot be seriously contended that, after the coal is removed, the owner of the surface may not utilize the space it had occupied for his own purposes, either for shafts or wells, to reach the underlying strata.”     

More recently, in Shawville Coal Co. v. Menard, 280 Pa. Super. 610, 620, 421 A.2d 1099, 1104 fn. 4 (1980) the Pennsylvania Superior Court noted in a footnote that:

“Several Pennsylvania cases suggest that where a party is granted the right to mine coal under a property it also has an implicit if not explicit right to move other coal owned by it through the passageways under the property while the coal is being mined. Webber v. Vogel, 189 Pa. 156, 42 A. 4 (1899); Lillibridge v. Coal Co., 143 Pa. 293, 22 A. 1035 (1891) (limited by Webber). The cases reason that since a grantee owns the coal, and in essence the space occupied by that coal while it is being mined, he may use that space as he wishes as it becomes available. Lillibridge v. Coal Co., supra. The grantee loses this right once the mine is exhausted or abandoned. Webber v. Vogel, supra. 

It appears clear from these cases that, at most, the owner of the subsurface resource has a right to possess and use the subsurface strata only in connection with the removal and extraction of said resource (i.e. the coal, oil or gas).  But, once that resource is removed, there is nothing to own, because the resource has been extracted and produced.  Just because a void may exist in the ground where a mined-out coal seam used to be does not mean that the coal owner can “move in” to that underground cavern and possess and utilize the same. The coal owner owned the coal, not the subsurface strata where the coal was found. Once the coal is removed, there is nothing for the coal owner to own or possess.

The same concept applies to oil and gas. The owner of the oil and gas estate “owns” the oil and gas “in place”. That does not include ownership of the subsurface rock formations where the gas is found.  Likewise, once the native oil and gas “in place” has been removed and extracted, there is nothing else that the owner of the oil and gas estate owns or controls. See, Jones-Noland Drilling Company v. Bixby, 282 P.2d 382 ( N.M. 1929)( “[T]he lessee is not the owner of the solids of the earth….He, at most, is the owner of the oil and gas, in place, and merely has the right to use the solid portion so far as necessary to bore for, discover, and bring to the surface the oil and gas”). Returning to our example, Mr. Jones did not own or control the “pore space” underlying the family farm in 1963. Those rights were retained by your grandfather- the owner of the surface estate. As such, the purported gas storage clause in the 1963 Lease is arguably unenforceable and invalid. Moreover, an argument could be made that XYZ Gas Company presently has no right or privilege to inject and store non-native gas under the family farm. They would need to enter into a new lease with you specifically granting those storage rights. Given the lack of production and the lack of any storage rights, it is likely that the 1963 Lease expired and terminated and is no longer in effect.

These authors submit that the owner of the surface of the property (as the owner of the “pore space”) has the sole and exclusive right to grant gas storage rights. If your lease is “held by storage”, you should consider contacting experienced oil and gas counsel to evaluate and assess whether you, or whoever signed a lease allegedly authorizing storage under your property, actually had the legal right to grant and lease storage rights. If the lessor only owned the oil and gas estate at the time the lease was signed, then there may be a legitimate claim that the storage is unauthorized and, at minimum, the unauthorized storage did not, and could not, maintain the lease.