Abandonment of an Oil and Gas Lease
Can an Oil and Gas Lease Be Abandoned? Can an Oil and Gas Lease Be Terminated for Abandonment?
SLT Holdings, LLC (“SLT”) and Jack McLaughlin and Zureya McLaughlin (collectively “McLaughlin”), owners of oil, gas and mineral rights (“OGM”) for two different parcels of land situated in Warren County, Pennsylvania, leased the OGM with the leases being assigned to Mitch-Well Energy, Inc. (“Mitch-Well”). The leases for the two parcels were similar in that both leases contained provisions requiring Mitch-Well to drill a certain number of wells on the two parcels and to make specified minimum payments to the lessors each year if the royalties did not exceed the minimum payments.
Beginning around 1996 and ending around 2013, the wells operated by Mitch-Well did not produce OGM in marketable quantities. Accordingly, Mitch-Well made no royalty payments to SLT and McLaughlin on their respective leases during that time. Mitch-Well also did not make minimum payments required by both leases. For approximately 16 years, Mitch-Well violated the leases by failing to either pay royalties in excess of the minimum payments or to make the minimum payments. Although Mitch-Well did visit the wells in question during this period, it did so to ensure that the wells remained safe and in compliance with applicable law. Mitch-Well did not attempt to achieve marketable levels of OGM production between 1996 and 2013, as the prevailing OGM prices hindered production and it was not economical for Mitch-Well to produce at that time.
SLT and McLaughlin brought an action against Mitch-Well arguing that Mitch-Well had defaulted on the leases and as such the leases terminated or else had been abandoned by Mitch-Well. They sought a declaration that Mitch-Well had no interest in their respective parcels under their respective leases. They also sought a permanent injunction barring Mitch-Well from entering onto the parcels. SLT and McLaughlin filed a partial motion for summary judgment on their claims for declaratory relief and for injunctive relief.
The trial court granted SLT and McLaughlin’s motion for partial summary judgment, declaring that Mitch-Well had no interest in the two parcels and concluding that the leases had been abandoned. The trial court also granted SLT and McLaughlin’s partial motion for summary judgment on their claim for a permanent injunction, enjoining Mitch-Well from physically entering upon the two parcels and from removing, selling, transferring or otherwise disposing of any material from either property, “including fixtures, whether oil, gas or mineral.” Mitch-Well appealed.
In SLT Holdings, LLC v. Mitch-Well Energy, Inc., 217 A.3d 1258 (Pa. Super. 2019), the Superior Court affirmed the trial court, noting that a party seeking to terminate oil and gas lease bears the burden of proof. Jefferson County Gas Co. v. United Natural Gas Co., 247 Pa. 283, 286, 93 A. 340, 341 (1915). SLT and McLaughlin met their burden as they demonstrated abandonment by Mitch-Well.
Under paragraph 17 of both leases, Mitch-Well promised to drill one well during the first year and five additional wells each year thereafter, until a total of 30 wells were drilled on the McLaughlin Lease, and a total of 20 were drilled under the SLT lease. Each lease also stated that it would terminate if Mitch-Well failed to perform this drilling commitment.
On February 6, 2012, Sheffield Land and Timber Company, SLT’s predecessor-in-interest, filed an Affidavit of Non-Production with respect to the SLT Lease and on October 18, 2015, McLaughlin filed an Affidavit Non-Production with respect to the McLaughlin Lease. Each affidavit stated there had been no production of oil and gas on the property at issue.
In their affidavit, McLaughlin stated that at least from January 17, 1991 through November 3, 2013, they received no payments of any kind, including royalty payments, delay rental payments or any other type of payments. Similarly, Richard C. Cochran, Manager of SLT, testified that neither SLT nor Sheffield Land and Timber Company had ever received royalty payments, delay rental payments or any other type of payments. Furthermore, there was no physical indication at well sites drilled in 1986 that the wells were either producing or capable of producing oil and gas. In addition, the affidavit of Jack McLaughlin indicated that fallen timber and logs blocked the paths used to access the well site, and that the pathways were impassible for over two consecutive years. Further, a report filed by the Pennsylvania Department of Environmental Protection indicated that as early as March 27, 1990, the well sites had been abandoned.
In affirming the trial court, the Superior Court noted that the doctrine of abandonment was first applied to an oil and gas lease in Aye v. Philadelphia Co., 193 Pa. 451, 44 A. 555 (1899). The Aye court found that the lessee under an oil and gas lease has an obligation to diligently develop the property and failure to do so constitutes abandonment. The question of whether or not abandonment has occurred is one of fact and the court is required to analyze the intentions of the parties to the lease. Id. The Aye court specifically found that four years of inaction by the lessee gave rise to a presumption of abandonment. Id. If the lessee fails to present a valid explanation for the inaction, then judgment as a matter of law is appropriate. Id.
In the instant case, the Superior Court noted that there was a prolonged period of inactivity by Mitch-Well concerning production at the relevant wells. The period was approximately 16 years long, which was far longer than the four year period contemplated by the Aye court. In addition, deposition testimony suggested that the explanation for the inactivity was that the price of OGM had fallen so dramatically that the lessees could not make money by producing at the wells in question. The court, however, did not find this to be a valid explanation that would defeat the presumption of abandonment. The court noted that if it found otherwise, then the leases would be reduced to mere options and the implied covenant to produce would be practically insignificant. The Superior Court discerned no genuine issue of material fact and deemed the trial court’s finding of abandonment to be adequately supported by the record. The Superior Court also found that the trial court did not commit an error of law or abuse its discretion when it granted SLT and McLaughlin’s motion for summary judgment on their request for declaratory relief and their request for a permanent injunction.
Yes, an oil and gas lease can be abandoned and an oil and gas lease can be terminated for abandonment. If there is a prolonged period of inactivity, the oil and gas lease and the surrounding circumstances should be looked at in order to determine whether there has been an abandonment and termination of the lease.
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