We have summarized two recent Ohio oil and gas cases that may be of interest to you.

Mobberly v. Wade (7th Dist.) – Ohio’s Seventh District Court of Appeals granted summary judgment in favor of an oil and gas lessee in a lease forfeiture action. The lessor argued that the lease terminated due to lack of production from the lessor’s property. The lessor’s claim, in part, was based on the allegation that the lessee had commingled oil produced from the lessor’s land with oil produced from a neighboring property. The lessor also challenged the lease on the grounds that the lessee failed to file production statements with the Ohio Department of Natural Resources (ODNR) and that the lessee purchased gas from the lessor for the lessee’s own use in violation of the lessee’s covenant to market.

The court rejected the lessor’s claims and denied forfeiture. First, the court found that the evidence established that the lease was producing in accordance with its terms. While the lessee admitted to commingling oil on one occasion, the lessee did so as a result of mechanical issues with a storage tank that previously held oil produced from the lessor’s land. The mechanical difficulties with the tank forced the lessee to store both the oil from the lessor’s land and oil from the adjoining property in another storage tank. Prior to commingling the oil, the lessee measured the oil in both tanks and allocated royalties to the lessor, and the neighboring owner, in accordance with those measurements. The court, looking to decisions from Texas and New Mexico, concluded that the lessee acted properly, finding that “the oil from each respective property . . . was similar in value and it was possible to determine each parties’ share of the mass.” Further, the court found that the lessee’s failure to file production statements with ODNR was not relevant in establishing whether the lease was held by production. Here, notwithstanding the lessee’s failure to file production statements, other evidence established that the lease was held by production. Finally, the court found that the lessee’s sale of the lessor’s gas to himself—for which the lessee paid the lessor a royalty and a reasonable price for the gas—did not result in the forfeiture of the lease. The terms of the lease required the production of oil or gas (but not both) and only required the lessee to pay the lessor a royalty on gas produced (which the lessee did). Finally, the lease did not prohibit the lessee from selling gas to himself. Therefore, the court did not find grounds to forfeit the lease.

Click here to read the Mobberly decision.

Cooper v. EQT Prod. Co. (S.D. Ohio) – The Federal District Court for the Southern District of Ohio reconciled allegedly conflicting provisions in an oil and gas lease and found that the lease was properly extended notwithstanding a clause requiring the lessee to commence a well by a certain date. The lease at issue provided for a five year primary term from October 6, 2008 to October 6, 2013. The lease also gave the lessee a unilateral option to extend the primary term for an additional five years by making an extension payment to the lessors. Finally, the lease obligated the lessee to “commence a well on said premises on or before the 6th of October, 2013.” The lessee exercised the option to extend the primary term of the lease. However, the lessee did not commence a well prior to October 6, 2013. The lessor argued that the lease had terminated on the basis that the lease created an express obligation that the lessee commence a well by October 6, 2013, and that the lessee’s extension of the primary term did not relieve the lessee of this obligation. Had the parties intended otherwise, the lease could have required the lessee to commence a well “on or before the end of the primary term (or extended primary term),” the lessor argued.

The court reconciled the well commencement clause with the lessee’s right to extend the lease and concluded that the extension of the primary term until October 6, 2018 relieved the lessee of the obligation to commence the well by October 6, 2013. The lease—which provided that the lessee “may drill or not drill on the leased premises as it may elect” during the primary term—also relieved the lessee of any obligation to commence a well during the primary term. The extension of the primary term until October 6, 2018 therefore delayed the obligation to commence a well. The lessor’s contrary interpretation would have placed the lessee in a position to “make a good faith effort to commence a well [the lessee] rightly has no intention to develop.”

Click here to read the Cooper decision.