Joint ownership of oil and gas rights is fairly routine here in Pennsylvania. But what happens when one co-tenant unilaterally signs an oil and gas lease without informing the others? Does that co-tenant have superior rights? Perhaps. Let’s examine how such a situation typically arises. Assume that your family (i.e., the Crosbys) and the Malkins each owned ½ of a 100-acre dairy farm in Greene County. In 1975, your grandparents sell the surface of the dairy farm to the Malkins but reserve the oil and gas rights from the conveyance. The Malkins own and operate the surface (and the dairy farm), but each family still owns ½ of the underlying oil and gas. In 1985, the Malkins sell the dairy farm, along with their ½ interest in the oil and gas rights, to the Jarry Family. The Jarry Family then enters into an oil and gas lease with XYZ Drilling in 1987 (the “1987 Lease”). Two shallow vertical wells are drilled in 1990, but XYZ Drilling only pays royalties to the Jarry Family. In 2020, your family discovers the 1975 deed and realizes that the family still owns ½ of the oil and gas rights under the dairy farm. You approach XYZ Drilling about a new lease for your family’s ½ interest. But, much to your dismay, XYZ Drilling informs you that the Jarry Family now owns 100% of the rights due to “adverse possession.” The representative from XYZ Drilling explains that because the 1987 Lease was signed over twenty-one years ago and your family never took any action disputing or contesting that lease or the drilling of the two shallow wells, the Jarry Family now owned all of the oil and gas rights. You are shocked, angry, and confused. Could your family have lost oil and gas rights simply due to inaction?
A recent controversial decision from Ohio suggests that landowner inaction could have dire consequences. At issue in Tomechko v. Garrett was a sixty (60) acre parcel in Beaver Township, Noble County, Ohio. John and Herbert Garrett jointly owned the parcel for many years. Herbert died in 1965, and his ½ interest went to his wife, Mary. In 1977, Mary conveyed her ½ interest to the John Garrett Family but excepted and reserved the oil/gas rights (the “1977 Reservation”). The Garret Family eventually sells its ½ interest to James Anderson, who then enters into an oil/gas lease with Trans Atlantic Energy Corporation in 1989 (the “1989 Lease”). Trans Atlantic drills two shallow wells pursuant to the 1989 Lease but only pays royalties to Anderson. In 2010, the Andersons convey the parcel and their underlying oil/gas rights to the Tomechkos. In 2013, the heirs of Mary Garrett lease their ½ interest to Gulfport Energy Corporation (the “Gulfport Lease”). Thereafter, Northwood Energy Corporation, who had acquired the 1989 Lease, informed the Tomechkos that their royalty interest under the 1989 Lease would be reduced to 50% because of the 1977 Reservation. The Tomechkos then file suit in 2016 alleging that they had adversely possessed the underlying oil/gas estate for twenty-one years, thereby rendering the 1977 Reservation ineffective and inoperative.
In their Complaint, the Tomechkos argued that the execution of the 1989 Lease and the subsequent drilling of the two shallow wells was sufficient to establish adverse possession of the entire oil and gas estate. As such, they requested a declaration from the Court that they owned 100% of the oil and gas estate and that the Gulfport Lease was null and void. In July 2019, the Tomechkos moved for summary judgment on their adverse possession claim.
The trial court partially agreed with the Tomechkos. The trial court opined that because the Mary Garrett Heirs did not challenge or contest the 1989 Lease or the drilling and operation of the two shallow wells for over twenty-one years, the Tomechkos had acquired the oil and gas rights between the surface and 2,414 feet – the deepest depth of the two shallow wells. However, the trial court ruled that the Tomechkos did not acquire any rights below 2,414 feet. These rights were retained by the Mary Garrett Heirs because the Tomechkos never exercised “possession” of the deep rights. The trial court further ruled that the Gulfport Lease was valid and effective but only as to the deep rights. The Tomechkos appealed the ruling to Ohio’s Seventh Appellate District.
Before we address the substance of the appeal, a brief review of the interplay between oil/gas rights and adverse possession is warranted. Adverse possession is an ancient rule of law that enables an individual to acquire property ownership through “actual” and “hostile” possession of another’s estate. Generally, to establish adverse possession, the claimant must demonstrate “actual, continuous, exclusive, visible, notorious, distinct, and hostile possession of the land for twenty-one years.” Baylor v. Soska, 658 A.2d 743, 744 (Pa. 1995). In the context of oil and gas rights, it is well-settled under Pennsylvania law that where oil and gas rights have been severed from the surface, possession of the surface estate alone will not become adverse possession of the oil and gas estate unless there is an “actual entry upon and use” of the underlying oil and gas for the requisite twenty-one years. See, Plummer v. Hillside Coal & Iron, 28 A. 853 (Pa. 1894) (“[T]o affect the title of the owner of the coal, there must be entry upon his estate, and adverse possession of it”); See also, Hoffman v. Arcelormittal Pristine Resources, 2011 Lexis 50170 (W.D. Pa. 2011) (“Without belaboring the point, since there has never been any drilling on the property, it necessarily follows then, that Plaintiff has failed to demonstrate other crucial elements of adverse possession.”); Northern Forest, II, Inc. v. Keta Realty Company, No. 88-02356 (May 20, 2014, Lycoming County) (“[T]his court must conclude that only actual drilling and production will suffice to establish actual possession”). Further, mere leasing of the subsurface oil and gas estate is typically insufficient to establish actual possession. See, Hoffman v. Arcelormittal Pristine Resources, supra; See also, Thomas v. Oviatt, 4 D&C 4th 83, (Warren County 1989) (“[P]laintiff’s contention, that Plaintiff’s intention to hold subsurface for themselves, was manifested by the granting of the aforementioned three leases is woefully lacking in that one may not lose title to realty by one claiming a right thereto”); see also Schaneman v. Wright, 470 N.W. 2d 566 (Neb. 1991) (mere execution of oil and gas lease will not constitute adverse possession). Thus, without actual entry upon and use (i.e., actual drilling) of the hydrocarbon formations by a surface owner for the statutorily required period, the surface owner cannot establish adverse possession of the underlying oil and gas estate.
On appeal, the Tomechkos argued that the trial court erred when it concluded that the Mary Garrett Heirs still owned the deep rights. They asserted that because the 1989 Lease covered all hydrocarbon formations and did not contain a depth severance, the lease itself was sufficient to adversely possess all hydrocarbon formations and strata. In their view, the drilling and operation of the two shallow wells was sufficient to “possess” the entire oil and gas estate. In support of their broad and dangerously expansive view of adverse possession, the Tomechkos cited a 143-year-old case, Humphries v. Huffman, 33 Ohio St. 395 (Ohio 1878). In Humphries, the Ohio Supreme Court opined that “…the adverse claimant’s use of a portion of the property will extend to the entire property, even if the adverse claimant only occupied part of the property during the 21-year period.” The Mary Garrett Heirs argued that Humphries was distinguishable as it did not consider or address the unique differences between shallow conventional gas formations and unconventional shale formations. Moreover, the Mary Garrett Heirs noted that the Tomechkos could only adversely possess that which they actually possessed – the shallow rights. The Seventh Appellate District agreed with the Tomechkos and reversed the trial court’s opinion.
The Seventh Appellate District concluded that the drilling of the two shallow wells nonetheless “altered” the subsurface strata and that such alteration was sufficient to constitute “possession” of all strata. The Court based this remarkable conclusion on the “fugacious nature of oil and gas…” In other words, the Court assumed that the two shallow vertical wells altered and modified the subterranean structure of the deeper shale formations. The Court further opined that:
“[A]dverse possession of the deep rights should follow the shallow rights due to the alteration of the surface and subsurface from drilling and removing the oil and gas. Merely because drilling had not yet affected the deep rights should not yield a finding that there is no adverse possession of the deep rights. The Court finds appellee possesses the deep rights in this case based upon the permeating nature of drilling and production of oil and gas and the lease with Trans Atlantic which provides for drilling of all strata.”
The Seventh Appellate District’s opinion is problematic on several levels: First and foremost, the opinion is contrary to well-established precedent that mere leasing is not enough to establish adverse possession. Here, the Seventh Appellate District apparently put significant weight on the fact that the 1989 Lease applied to all formations. The existence of the 1989 Lease itself is irrelevant to the salient question of “possession.” Second, the Seventh Appellate District’s opinion fails to recognize or appreciate the low permeability of shale formations. Hydrocarbons do not easily move through shale formations. That is why drillers must perforate and hydraulically stimulate these formations in order to induce flow into the wellbore. The Seventh Appellate District’s opinion wrongly assumed that the two shallow wells could somehow induce flow from the deeper shale formations. This was, and is, a clear error. The extraction of hydrocarbons from the two shallow vertical wells would have no bearing on the tight shale formation located thousands of feet below. Finally, the opinion appears re-write the elements of adverse possession. Both Ohio and Pennsylvania law requires actual possession in order to establish a legitimate claim for adverse possession. Here, it is undisputed that neither the Tomechkos nor Trans Atlantic made any effort to actually drill into the deeper shale formations or extract hydrocarbons from the same. Under the Seventh Appellate District’s logic, the drilling and operation of a fifty (50) foot water well for twenty-one years could result in the adverse possession of the underlying oil and gas estate. This makes no sense and exposes the internal inconsistency of the opinion.
The author submits that Tomechko was wrongly decided and that the Ohio Supreme Court will have to clarify and re-define the relationship between adverse possession and oil and gas rights in the near future. In the meantime, the Tomechko decision is not binding on Pennsylvania courts, but landowners and drillers alike should be mindful of the potential effects of that decision.