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Foreign Gas

By Paul R. Yagelski, Esquire

How to Stop the Transportation of Foreign Gas Across Your Property.

It is not unusual to find a provision in a proposed oil and gas lease that allows an oil and gas company to transport foreign gas across a landowner’s property or to transport gas that is not being produced from the landowner’s property, from property with which the landowner’s property is pooled or unitized or from neighboring and conjointly developed property.  If the landowner does not want foreign gas transported across his property, the landowner should negotiate a clause prohibiting this type of transportation.  If the landowner does not negotiate such a clause, the landowner may be faced with the type of situation that occurred in Walls v. Repsol Oil and Gas USA, LLC, No.4:20-CV-00782, 2020 WL 5502151 (M.D. Pa. October 11, 2020).

In Walls, a contract dispute occurred between three Pennsylvania landowners (“Landowners”) and a Texas oil and gas company, Repsol Oil and Gas USA, LLC (“Repsol”), as to whether a provision in an oil and gas lease agreement allowed for the use of the Landowners’ property, located in Tioga County, Pennsylvania, for the transportation of foreign gas across the Landowners’ property.  On March 12, 2020, the Landowners filed a one-count complaint seeking declaratory judgment against Repsol in the Court of Common Pleas of Tioga County requesting that: (1) Repsol cease using a pipeline to transport gas from property outside the unit with which the Landowners’ land was unitized, the Chicken Hawk Unit, and other non-neighboring lands; (2) remove the pipeline; and (3) abstain from entering the Landowners’ property except to remove the pipeline.  Repsol removed the case to Federal District Court for the Middle District of Pennsylvania and at the same time filed a Motion to Dismiss.

In their Complaint, the Landowners alleged that in 2002, they entered into an oil and gas lease (the “Lease”) with Repsol’s predecessor-in-interest, Victory Energy Corporation.  Since that time, Repsol succeeded to the Lease and now operates the Chicken Hawk Unit.  In approximately October 2019, Repsol began construction of a pipeline on the Landowners’ property.  Some time after Repsol began installing the pipeline, Repsol and the Landowners entered into negotiations for a proposed “Pipeline Right of Way Agreement,” which would “authorize the installation” of the pipeline.  On or around November 1, 2019, negotiations were terminated after the Landowners rejected Repsol’s offers.  Repsol continued the installation of the pipeline, completing the project in December 2019.

In their Complaint, the Landowners claimed that the pipeline transports natural gas from production units that “do not unitize any of the Lease’s acreage” and from other production units that do not neighbor the Lease’s leasehold.  The Landowners also alleged that the construction and installation of the pipeline was not authorized by the Lease, and that they never granted Repsol the right to construct the pipeline.  Likewise, the Landowners alleged that the Lease does not permit Repsol to transport gas from non-unitized and non-neighboring lands, and that therefore, Repsol is in violation of the Lease.

The Landowners argued that, under the Lease, Repsol may only install a pipeline “to transport gas from units including the Lease’s acreage.”  The Landowners further asserted that the Lease does not allow Repsol to build a pipeline to “transport gas from multiple distant production units that do not include any of the Lease acreage and are not neighboring and conjointly developed lands with Plaintiffs’ leasehold.”

As this was a contract dispute, the Court, as the courts will do in all oil and gas lease interpretation cases, went directly to the Lease to examine what the language of the Lease said about the issue under consideration; i.e., whether the Lease allowed for the transportation of foreign gas across the Landowners’ property.

In reviewing the Lease, the Court held that the Landowners argument failed as a matter of law, based on the plain reading of the Lease itself.  The Court stated that the Lease granted Repsol the right of:

Drilling, producing, and otherwise operating for oil and gas and their constituents, including the right to conduct geophysical, seismic and other exploratory tests, and of laying pipe lines, and building tanks, roads, stations and electric power lines, houses for valves, meters, regulators and other appliances, with all other rights and privileges necessary, incident to or convenient for the operation of this land alone and conjointly with other lands[.] (emphasis added).

The Landowners claimed that this provision prohibited Repsol from installing a pipeline unless the pipeline transported gas exclusively from units of land including the Lease’s acreage or neighboring lands.  The Court noted, however, that such a limitation on Repsol’s right to install pipe is simply nowhere to be found in the Lease.  Instead, the Landowners agreed to a contract granting the lessee (now Repsol) authority to perform a set number of tasks, including “laying pipe lines.”  Beyond those enumerated rights, Landowners gave Repsol “all other rights and privileges necessary, incident to or convenient for” the operation of the Lease’s acreage and neighboring lands.  In other words, only the rights and privileges not specifically enumerated in the Lease must be “necessary, incident to or convenient for” the operation of the land.  In the Court’s view, this interpretation was clearly supported by the text itself, which is not “reasonably susceptible of different constructions.”  As Repsol noted, if the parties intended that all rights and privileges be so-limited, there would be no reason to enumerate any rights at all.  Instead, the Lease is clear that some rights were intended to be limited, while others were not.  The Court noted further support in the Lease’s use of a comma separating the enumerated rights from the more restrictive “other rights,” again suggesting a distinction between the two.

The Court found that based on the text of the contract, Repsol’s right to lay pipe lines on the Landowners’ property is not subject to the Landowners’ proposed restriction.  For the same reasons, Repsol’s right to transport gas from properties outside the Chicken Hawk Unit or neighboring lands is also not restricted by the “necessary, incident to or convenient for” clause.  As such, Repsol was not required to cease using the pipeline or to remove it.  Accordingly, the Court granted Repsol’s Motion to Dismiss.  The Court, however, granted the Landowners leave to amend their Complaint.

The upshot of the Court’s decision is that the Landowners’ lease language needed to be more specific as to the prohibition of the transportation of foreign gas across their property.

If a landowner wants to prohibit the transportation of foreign gas across his property, a clause needs to be negotiated into the oil and gas lease, most likely into an addendum, which specifically prohibits the transportation of foreign gas across the landowner’s property.  The following language is one example of language that may be used to prohibit the transportation of foreign gas across a landowner’s property:

The transportation of gas across Lessor’s property that is not produced from Lessor’s property or from lands with which Lessor’s property is pooled or unitized is strictly prohibited.

Transportation of gas across a landowner’s property should always be a consideration in a landowner’s negotiation of an oil and gas lease.  If the landowner does not want foreign gas transported across his property, then language needs to be inserted in the lease or in an addendum to prohibit this. If you need assistance with an oil and gas lease, contact us online or call (412) 338-1124.