A provision in a Pennsylvania budget bill designed to clarify divergent court opinions could end up making it harder for landowners with depleted oil and gas wells to negotiate more lucrative terms with modern drillers who hold old leases.
Advocates for mineral rights owners say the clause in the Fiscal Code bill that the Senate passed by a large margin on July 27 upends principles of property law that have long held that oil and gas leases expire automatically when wells stop flowing.
In its place, the bill creates a pathway for companies to bring old leases — and their outdated financial terms — back from the dead.
Section 1610 of the budget bill establishes a new general rule: Landowners waive their right to try to terminate a lease after it stopped producing oil or gas if — before they claimed the lease had expired — a company either restarted production from the lease and the landowner accepted a royalty payment, or a company drilled a new well on the lease after giving the landowner three months to object.
Unless a contract has specific provisions defining how an unproductive lease ends, the period without production is defined as “temporary” — no matter how long it lasted.
The change, which was not proposed in standalone legislation and which was added to the budget bill on the day before it passed, came as a surprise to both royalty owner advocates and some members of the oil and gas industry.
EQT Corp. worked with lawmakers to craft the provision to address an issue created by outdated case law, spokeswoman Linda Robertson said. It is “unlikely to affect the majority of lessors in Pennsylvania,” she said, but it will help avoid disputes and provide a quicker path to oil and gas production.
The bill’s language could have an impact on thousands of Western Pennsylvania landowners whose properties host old wells that might have been out of production for years or decades, said attorney Robert Burnett, a board member of the state chapter of the National Association of Royalty Owners.
It is a situation he sees regularly in his law practice at Downtown-based Houston Harbaugh.
A company that acquires old leases with plans to exploit the Marcellus and Utica shale beneath them will try to operate under the payment terms of often century-old contracts, even if production from the leases was sporadic or had stopped.
When challenged, companies will often negotiate new leases that have market terms — like bonus payments and higher royalties — that are much more favorable for landowners.
The new clause eliminates landowners’ bargaining power, invites litigation and essentially endorses trespassing, Mr. Burnett said.
“It is operating as some magical device,” he said, “that will allow an operator to revive a lease that may have expired 20, 30 years ago due to non-production.”
He called it “a pro-industry statute that does not benefit landowners.”
“A bill of this magnitude that dramatically changes Pennsylvania law should have been subject to an open and deliberative legislative process,” he said.
The Pennsylvania Independent Oil & Gas Association, a Wexford-based trade group, had no knowledge of the proposal before it was added to the bill and has not yet taken a position on it, the association’s general counsel Kevin Moody said.
Ms. Robertson of EQT said the Fiscal Code provision “does not change any lease terms, but merely acts as a guide for courts” in determining whether a period without production should trigger the end of a lease.
“In so doing, it provides additional certainty regarding the legal relationships of lessees and lessors in Pennsylvania, which will allow for more efficient development of oil and gas and help avoid costly litigation for all parties,” she said.
The Downtown-based energy company had assembled drilling rights to about 435,000 acres in Pennsylvania over its nearly 130-year history, as of the end of last year. It generally retains the right to exploit deep layers, like the Marcellus Shale, on acres held through production from shallower wells.
It is expected to add 187,000 acres to its core Pennsylvania Marcellus holdings and become the nation’s largest natural gas producer with the purchase of Canonsburg-based Rice Energy Inc. this year.
Jackie Root, president of the Pennsylvania chapter of the National Association of Royalty Owners, said, “There is a lot at stake” in allowing companies to hold onto their claims to unproductive leases.
More than 4,500 active conventional oil and gas wells reported producing no oil or gas last year because flows were halted “temporarily,” according to company data reported to the state.
The Fiscal Code bill, like other elements of the proposed state budget package, must still be passed by the state House of Representatives before it can reach Gov. Tom Wolf’s desk. The House’s next scheduled session day is Sept. 11, but legislators could be asked to return to the Capitol before then.
Laura Legere: email@example.com.
First Published August 22, 2017 8:15 AM