New Lease Negotiations
What is an Oil and Gas Lease in Pennsylvania?
The Pennsylvania Supreme Court has observed that “[t]he traditional oil and gas ‘lease’ is far from the simplest of property concepts.” Brown v. Haight, 255 A.2d 508, 510 (Pa. 1969). In 2012, the Pennsylvania Supreme Court confirmed that when an oil and gas lease is executed, “the title conveyed in an oil and gas lease is inchoate, and is initially for the purpose of exploration and development.” T.W. Phillips Gas and Oil Co. v. Jedlicka, 42 A3d 261, 267 (Pa. 2012).
As an “inchoate” interest, the initial rights granted to the gas company in a lease are incomplete. If oil and gas development during the initial term granted by the lease is unsuccessful, then the gas company has no further rights, the “inchoate” interest ends, and the lease terminates. Id.
But, if oil and gas development is successful during the initial term granted by the lease, then the “inchoate” interest transforms into a “fee simple determinable” interest. Jedlicka, 42 A.3d at 267. That is a type of “ownership” that automatically terminates upon the occurrence of a specific event. Id. That “specific event” is identified in the lease, and is usually the cessation of oil and gas production in paying quantities. When the lease ends, all rights that were granted in the lease “revert” back to the original lessor, or the lessor’s heirs and successors. Id.
As a result, the grant of an oil and gas lease can function as a transfer of oil and gas ownership from the lessor to the lessee gas company. If the oil and gas company satisfies the lease requirements, it can potentially hold the lease for decades; there is no fixed end-point for most oil and gas leases. In that way, the oil and gas lease almost functions as a sale of the oil and gas, with the lessor (and its heirs & successors) only having the right to receive a royalty from production and the right to the leased oil and gas when the oil and gas lease is over.
But, the oil and gas lease also functions like a contract. It is governed by principles of contract law. Jedlicka, 42 A.3d at 267. There are many duties and obligations in oil and gas leases that can be breached, like in any contract.
What is Coalbed Methane Gas?
Coalbed methane gas (CBM) is natural gas that is associated with coal seams. Coal bed methane gas originates from coal in the coal seam, even if much of the coal is mined-out. Much of the coal bed methane gas remains in the coal seam, though it can migrate out. Methane gas can be dangerous for coal mining operations, so coalbed methane gas is often extracted through wells before mining takes place.
Although coalbed methane gas is natural gas, in Pennsylvania the coalbed methane gas in the coal seam is owned by the owner of that coal seam and not the oil and gas owner.
Oil and gas leases are complex contracts that are drafted and proposed by sophisticated businesses. While a lease “signing bonus” and the potential for royalty payments may be enticing, the modern oil and gas lease contains many provisions that could have a substantial impact on your rights as a royalty owner for decades. Before entering into an oil and gas lease, it is important that you are informed about the contract and what rights that you are granting to the gas company. The oil and gas attorneys at Houston Harbaugh have assisted many clients with the review and negotiation of oil and gas leases to help level the playing field for landowners and royalty owners in their interactions with oil and gas companies.
