Senate Bill 259, Is it constitutional?
By Paul R. Yagelski, Esq.
The section of the Act that allows for this type of pooling is Section 34.1. This section states, in pertinent part, that:
When an operator has the right to develop multiple contiguous leases separately, the operator may develop those leases jointly by horizontal drilling, unless expressly prohibited by a lease.
Section 34.1 raises a number of constitutional issues; namely, whether the Act is an ex post facto law or a law impairing the obligation of contracts, whether the Act deprives landowners of property rights and amounts to a taking without compensation, and whether the Act violates the inherent and indefeasible right to possess and protect property.
These constitutional questions were addressed in a lawsuit filed in Allegheny County by EQT Production Company against 57 landowners involving sixteen leases.
In the action, Defendants argued that applying Section 34.1 to leases created before the Act became effective would violate Article I, Section 17, of the Pennsylvania Constitution, and Article I, Section 10 of the United States Constitution, which bars the passage of any ex post facto law or any law impairing the obligation of contracts. The court did not agree.
The court found that the Defendants presented no support for their claim that they implicitly retained the right to dictate the manner of EQT’s subsurface development of its lease. According to the court, Defendants have little right to dictate the manner of EQT’s use of the surface estate while it is developing the subsurface estate as long as EQT’s methods are reasonably necessary. So long as the lessor’s rights granted by lease and law are not impinged upon, the lessee has broad powers to develop the oil and gas estate as it sees fit, including crossing property lines between contiguous leases while engaging in horizontal drilling.
The court found that EQT already has the right to jointly develop contiguous leases. As such, Section 34.1 merely clarifies existing rights, which means, according to the court, that the Act neither impairs obligations of contract nor is it considered to be an ex post facto law.
As to the taking of private property, the court concluded that Section 34.1 does not deprive the Defendants of the right to determine whether or not their property may be developed jointly. Defendants had already transferred this right with their lease with EQT when they did not retain this right. Unless specifically retained, an oil and gas lease transfers from the lessor to the lessee the right to determine how to develop the oil and gas estate of the lease.
Lastly, Defendants argued that, in restricting their ability to negotiate whether their land would be jointly developed if the issue is not mentioned in the lease, Section 34.1 violated their inherent and indefeasible right to possess and protect property. As it did on the issue of the taking of private property, the court found that Defendants no longer retained the right to negotiate the joint development of their leases because the right was transferred when the leases were executed and Defendants did not retain the right.
The court concluded that Section 34.1 of the Oil and Gas Lease Act does not violate the Constitution of the Commonwealth of Pennsylvania nor the United States Constitution and that where EQT has the right to develop multiple contiguous oil and gas leases separately, it may develop these leases jointly by horizontal drilling unless expressly prohibited by the lease. See EQT Production Company v. Opatkiewicz, G.D. No. 13-013489 (Allegheny Cty. Pa. April 8, 2014).
At this time, the court’s order is not a final order; however, it has been certified for appeal. The case bears watching. Significant rights of landowners are at stake.