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There Is No Implied Right to Pool And Unitize an Oil And Gas Lease with Nearby Mineral Estates

By Paul R. Yagelski, Esquire

In Ascent Resources-Marcellus, LLC v. Huffman, 851 S.E. 2d 782 (W. Va. 2020) the Supreme Court of Appeals of West Virginia held that the implied right to pool and unitize could not be inferred from an unambiguous lease.  In the absence of language, in an oil and gas lease showing that the parties contemplated that a lessee has a right to pool and unitize the lease with other estates, there can be no implied covenant to pool or unitize.  The case concerned a ninety-four-acre tract of land (“Tract”) in Tyler County, West Virginia.

On February 6, 1980, the defendants’ predecessor in interest executed an oil and gas lease (“1980 Lease”) permitting the drilling of wells on the Tract to produce oil and gas.  The 1980 Lease remained in effect because the wells on the Tract continued to produce oil and gas.  Ascent held the right to drill wells on the Tract and produce oil and gas.

On June 8, 2016, Ascent brought an action against the defendants seeking a declaratory judgment regarding the 1980 Lease.  Ascent sought a declaration that the 1980 Lease contained an implied covenant to pool or unitize the lease with other mineral interests.  Ascent declared that it wanted to drill modern, horizontal well bores into the Marcellus shale formation beneath the Tract, hydraulically fracture the shale and produce oil and gas.  However, Ascent contended that oil and gas could only be economically produced from the Marcellus shale formation if the “drilling units” were large enough to accommodate a well bore that extends horizontally at least 2,500 feet in length.  Ascent maintained that the Tract, operating alone, was too small to support the drilling of the horizontal well bore.

In its declaratory judgment complaint, Ascent admitted that the 1980 Lease only granted Ascent the right to drill, develop and operate for oil and gas on the Tract.  Ascent also admitted that there is no language in the 1980 Lease expressly permitting Ascent to unitize or pool the lease with other nearby mineral interests to create a drilling unit large enough to justify exploiting the shale formations.

To enable Ascent to economically drill the horizontal well bore, it asked the circuit court of Tyler County, West Virginia, for a declaration that the 1980 Lease contained an implied covenant to unitize or pool the lease with other mineral interests.  Ascent sought the implied right given that modern leases often have language that allows lessees to aggregate mineral interests to create drilling units sufficient in size to support drilling in shale formations.

Ascent filed a motion for summary judgment asserting that there were no questions of material fact existing for resolution.  Ascent asked the circuit court to declare that pooling and unitization are reasonably necessary to develop the minerals, and that pooling and unitization would place no unreasonable burden on the owner of any interest in the Tract.  Furthermore, Ascent, as lessee of the mineral and gas rights, requested a declaration adding five paragraphs to the 1980 Lease.  Specifically, Ascent moved the circuit court for an order declaring that Ascent had the implied right to pool and unitize the 1980 Lease with other mineral leases or mineral interests as a necessary adjunct to its right to drill and operate the premises for oil and gas upon the following terms and conditions:

1. Lessee shall have the right to pool, unitize, or combine all or parts to the Leasehold with other lands, whether contiguous or not contiguous, leased or unleased, whether owned by Lessee or by others, at a time before or after drilling, to create drilling or production units.
2. Pooling or unitizing in one or more instances shall not exhaust Lessee’s pooling and unitizing rights, and Lessee shall have the right to change the size, shape, and conditions of operation of any unit created and to make concomitant changes in payment.
3. Lessee sale allocate production from each well in a unit among each of the leases in the unit as a percentage of that leasehold’s acreage in the unit compared to the total leasehold acreage in the unit. Lessee shall then pay the royalties specified in each lease based upon the sale price of the production allocated to that lease.
4. Drilling, operations and preparation for drilling, production, shut-in production from the unit, or payment of royalty on any part of the unit (including non-Leasehold land) shall have the same effect upon the terms of the 1980 Lease as if a well were located on, or the subject activity were attributable to, the Leasehold.
5. Lessee shall record among the land records of the county the declaration of pooling and any amendments thereto and attempt to furnish a copy to Lessor or their known successors and assigns, although failure to furnish a copy to any Lessor shall not operate to void or terminate any drilling unit that has been formed.

In an order filed on March 5, 2019, the circuit court found that the 1980 Lease did not grant Ascent an express right to pool or unitize the lease with other oil and gas interests.  More importantly, the circuit court found that nothing in the lease was unclear or unambiguous regarding pooling and unitization.  The circuit court concluded that, in the absence of ambiguity, there is nothing for the circuit court to interpret, and, therefore, the court was powerless to write a new or different contract for the parties.  Furthermore, the circuit court found that implying a covenant of pooling and unitization would impose burdens upon the estate that were never bargained for or contemplated by the parties in 1980 and are not reflected in the terms of the lease.  Hence, the circuit court refused to imply a new covenant into the 1980 Lease permitting pooling and unitization and refused to imply the five “customary” terms and conditions regarding pooling and unitization that Ascent sought to have judicially incorporated into the lease.  The circuit court denied Ascent’s motion for summary judgment and rejected it’s request for a declaratory judgment.  Ascent appealed the circuit court’s order to the Supreme Court of Appeals.

On appeal, Ascent argued that without an implied covenant permitting pooling and unitization, the purpose of the 1980 Lease would be thwarted, and the oil and gas in the Marcellus shale would not be developed and would thus be wasted.

In addressing Assent’s appeal, the Supreme Court of Appeals noted that the 1980 Lease is “to be construed like any other contract.”  Chesapeake Appalachia, L.L.C. v. Hickman, 236 W.Va. 421, 434, 781 S.E. 2d 181, 211 (2015).  The authorities agree that the modern lease is both a conveyance and a contract.  A lease is by definition a contract.  All rights and protections are controlled by the principles of contract law and depend on proper construction.  In construing a contract, the intent of the parties sought to be reached is the intent existing at the time the contract was made.  Bruen v. Thaxton, 126 W.Va. 330, 334, 28 S.E. 2d 59, 64 (1943).  Accordingly, the Supreme Court of Appeals held that a lease will be interpreted and construed as of the date of its execution.

Applying principles of contract interpretation, the Supreme Court of Appeals noted that before a lease may be interpreted and construed, a court must find that the lease is ambiguous.  If the lease is not ambiguous and plainly expresses the intent of the parties, then it must be enforced according to that intent.  An oil and gas lease which is clear in its provisions and free from ambiguity, either latent or patent, should be construed on the basis of its express provisions and is not subject to a practical construction by the parties.  Little Coal Land Co. v. Owens-Illinois Glass Co., 135 W.Va. 277, 63 S.E. 2d 528 (1951).  A valid written instrument which expresses the intent of the parties in plain and unambiguous language is not subject to judicial construction or interpretation but will be applied and enforced according to such intent.  Cotiga Dev. Co. v. United Fuel Gas Co., 147 W.Va. 484, 128 S.E. 2d 626, 628 (1962).  It is not the right or providence of the court to alter, pervert or destroy the clear meaning and intent of the parties as expressed in unambiguous language in their written contract or to make a new or different contract for them.

In the instant case, the Supreme Court of Appeals found no error in the circuit court’s conclusion that the 1980 Lease was unambiguous.  The lease contained no language suggesting that pooling and unitization were considered by the parties when they negotiated and executed the document.  The lease secured production of oil and gas in paying quantities, quickly, and for the last four decades had permitted production from the mineral estate under the Tract without need for pooling and unitization.  The circuit court did not have the right to alter, pervert or destroy the clear meaning and intent of the parties to the 1980 Lease.  If the circuit court had inferred the existence of a covenant to pool or unitize, then it would have substantially and materially altered the anticipated burden on the estate.

The Supreme Court of Appeals concluded by holding that in the absence of language in an oil and gas lease expressing a right to pool or unitize the lease with other mineral estates, the Court would not infer such a right.  In the instant case, Ascent wanted to impute a covenant to pool or unitize, accompanied by five paragraphs of specific rights and obligations, without paying additional consideration.  The implied covenant Ascent seeks was neither contemplated nor bargained for when the lease was signed.  Therefore, the Supreme Court of Appeals found no error in the circuit court’s decision refusing Ascent’s invitation to rewrite the parties’ Lease.

In short, in the absence of language in an oil and gas lease expressing a right to pool or unitize the lease with other mineral estates, West Virginia will not infer such a right.

If you have questions about an oil and gas lease or issue, contact us online or call (412) 338-1124.