On June 21, 2013, the Superior Court of Pennsylvania (the “Court”) held that a lessee does not owe a duty to a lessor to develop each and every “economically exploitable strata” under an oil as gas lease in Pennsylvania.
In early 2012, Terry L. Caldwell and Carol A. Caldwell, husband and wife (“Plaintiffs”) sued Kriebel Resources Co., Range Resources—Appalachia, LLC and others (“Defendants”) regarding an oil and gas lease executed between the Plaintiffs and Defendants on January 19, 2001 (the “Lease”). The Lease provided for a primary term of twenty four (24) months and so long thereafter as oil or gas was being produced. The Defendants drilled a number of shallow wells on the property that Defendants alleged held the entire property under the terms of the Lease. Plaintiffs brought suit against the Defendants in early 2012 alleging that, among other things, Defendants breached the implied duty to develop the property by not drilling deeper wells to exploit the valuable Marcellus Shale and, based on such potential unexploited value, the current production did not amount to production in paying quantities. The trial court sustained certain preliminary objections raised by the Defendants that resulted in a dismissal of Plaintiffs’ claims. In Terry L. Caldwell et al. v. Kriebel Resources Co. et al. (1305 WDA 2012), the Court affirmed the trial court’s dismissal of the case.
Regarding the duty to develop, Plaintiffs argued that without direct Pennsylvania case law on topic the Court should follow a Louisiana case, Goodrich v. Exxon Co., 608 So.2d 1019 (La. App. 1992), which held that Exxon’s duty to develop as a reasonably prudent operator included the obligation to develop valuable oil-producing sands underlying the leased premises. Based on this rationale, Plaintiffs alleged there is an implied duty to “develop all strata, not simply to extract shallow gas . . .” The Court rejected the application of the Goodrich rationale and held that the specific terms of the Lease were to control. Therefore, because the Lease provides for the continued validity of the Lease upon production of gas and allows for the guarantee of delay rentals if no gas is produced, the Court found that it was “not compelled to follow Louisiana law.” The production from various shallow wells was found to be sufficient to hold the entirety of the leased estate.
The Court also rejected Plaintiffs’ claim that the concept of “paying quantities” should be based on all potential gas strata underlying the Lease and should impose some obligation relating to good faith. The Court quickly dismissed this claim and made clear that “paying quantities” in Pennsylvania merely requires the well to “consistently pay a profit, however small.” It is of no legal effect that the extent of the profit produced from these shallow wells is “not to the extent appellants desire.” Due to the continued production in paying quantities and the Court’s failure to impose a duty on Defendants to develop all potentially economic strata, the Court chose not to terminate Defendants’ Lease.