United States District Court, W.D. Pennsylvania
Rugh A. Mason and Sherry L. Mason, Plaintiffs,
Range Resources-Appalachia LLC and NiSource Energy Ventures LLC, Defendants
For RUGH A. MASON, and, SHERRY L. MASON, husband and wife, Plaintiffs: Tyler J. Smith, LEAD ATTORNEY, Bordas & Bordas, PLLC, Wheeling, WV.
For RANGE RESOURCES-APPALACHIA, LLC, and, Defendant: Donald T. Dulac , Jr., Kenneth J. Witzel, LEAD ATTORNEYS, Barnes Dulac Watkins, Pittsburgh, PA.
For NISOURCE ENERGY VENTURES, LLC, Defendant: Laura A. Lange, Paul K. Stockman, LEAD ATTORNEYS, McGuireWoods LLP, Pittsburgh, PA.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Joy Flowers Conti, Chief United States District Judge.
Plaintiffs Rugh A. Mason and Sherry L. Mason (collectively the " Masons" or " plaintiffs" ) seek a declaration that they own the oil and gas production rights associated with their property in Washington County, Pennsylvania. In 1961, prior owners of the Masons' property leased the oil and gas rights to that property. The Masons assert that the 1961 lease expired before they acquired the property or, alternatively, a novation extinguished the 1961 lease. Defendants Range Resources-Appalachia LLC (" Range Resources" ) and NiSource Energy Ventures LLC (" NiSource" and together with Range Resources, " defendants" ) assert that the lease from 1961 remains valid and controls the oil and gas rights associated with the Masons' property. Defendants also raise the affirmative defenses of latches, waiver, and estoppel.
This matter is before the court following a bench trial held November 13, November 14, and December 2, 2014. The Masons (ECF No. 174) and defendants (ECF No. 175) filed proposed findings of fact and conclusions of law. The court considered the evidence adduced at trial, the written submissions of the parties, and the applicable law. Pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, the court makes the following findings of fact and conclusions of law:
II. Findings of Fact
A. The Parties
FOF 1. The Masons are husband and wife, and they own a 151-acre property in Washington County, Pennsylvania, on which they reside. (Joint Stipulations of Fact ¶ 1, ECF No. 96 [hereinafter " JSF" ].)
FOF 2. Range Resources is a limited liability company whose members are Range Resources-Pine Mountain Inc. and Range Production Co., which are both Delaware corporations with principal places of business in Texas. Prior to a name change in 2007, Range Resources was known as Great Lakes Energy Partners LLC. (Pls.' Proposed Findings of Fact ¶ 2, ECF No. 174; Defs.' Proposed Findings of Fact ¶ ¶ 3-4, ECF No. 175.)
FOF 3. NiSource is a Delaware limited liability company whose sole member is Columbia Energy Group, a Delaware corporation with a principal place of business in Columbus, Ohio. (Defs.' Proposed Findings of Fact ¶ 2, ECF No. 175.)
B. History of Natural Gas Development in Western Pennsylvania
FOF 4. Natural gas production began in western Pennsylvania and surrounding states in the Appalachian Basin in the late 1890s. (Maddox Test. 4:56-68, Ex. D21, ECF No. 143.)
FOF 5. The gas-producing formations exploited by this early development were relatively shallow and contained reasonably small amounts of gas. (Kramer Test. 4:96-98, Ex. D20, ECF No. 142.)
FOF 6. The demand for natural gas increased greatly between 1910 and 1920, and production from gas fields in the Appalachian Basin declined as those fields were depleted. (Maddox Test. 4:71-73, Ex. D21, ECF No. 143.)
FOF 7. After the depletion of the shallow gas fields, natural gas development in the Appalachian Basin fell to very low levels until around 2002, when increasing gas prices spurred renewed drilling. ( Id. at 13:308-319.)
FOF 8. Deep shale formations in the Appalachian Basin such as the Marcellus Shale and Utica Shale contain natural gas, but oil and gas producers did not consider production from these formations to be economically viable until the early 2000s, when rising gas prices and enhanced horizontal drilling and hydraulic fracturing techniques made production feasible. ( Id. at 20:483-97.)
FOF 9. The first Marcellus Shale well was drilled in Washington County in 2003, and production from that well began in 2005. ( Id. at 20:498-99.)
C. Natural Gas Storage Fields
FOF 10. To meet the demand for natural gas in the Midwest and Northeast during winter, gas companies use natural gas storage fields. Natural gas storage fields are commonly created from the same geologic formations from which gas was extracted. Once a natural gas formation is depleted, a storage field operator injects gas into the formation during warm months when demand is low. The gas is pumped back out when demand is high. ( Id. at 5:82-106.)
FOF 11. The portion of a gas storage field that holds the gas is known as the storage reservoir. A storage reservoir must be sufficiently porous and permeable to hold the injected gas and allow it to flow. It should also have an impermeable rock " cap" and low or no permeability around the edges to prevent the gas from escaping upward or to the side. In short, a storage reservoir " acts like a giant underground container." ( Id. at 6:108-127.)
FOF 12. Due to the inability to know the exact location or extent of various rock formations deep underground, the boundary of the storage reservoir cannot be precisely determined. Because of the uncertainty over the actual extent of the stored gas, the operator designates a protective area or buffer area around the predicted storage reservoir area. The protective area insures that the storage reservoir will not be inadvertently breached by drilling activity in the surrounding area. The protective area is an integral component of a natural gas storage field. ( Id. at 8:186-9:193.)
FOF 13. Natural gas storage fields in Pennsylvania must comply with Pennsylvania regulations and regulations adopted by the Federal Energy Regulatory Commission (" FERC" ). A storage field owner must obtain a certificate of public convenience and necessity from FERC authorizing operation of a storage field. The certificate application includes a map of the boundaries of the storage reservoir and the protective area. The storage field boundary represents a " best assessment of where the storage field contains stored gas." ( Id. at 7:154-9:193)
FOF 14. The FERC-issued certificate of public convenience and necessity permits operators to exercise the right of eminent domain to obtain rights-of-way, easements, or property necessary for storage. (Trial Tr. 41:7-23, Nov. 14, 2014, ECF No. 167.)
FOF 15. It is possible to drill through a natural gas storage field to reach gas contained in deeper formations, but drilling though a storage field involves risks to safety and the integrity of the storage field and adds additional technical challenges and expenses to the drilling. (Maddox Test. 13:301-14:335, Ex. D21, ECF No. 143.)
FOF 16. Pennsylvania imposes strict requirements on wells drilled through storage fields. ( Id. at 15:349-353.)
FOF 17. Columbia Gas Transmission LLC (" Columbia" ), not a party to this action, is an interstate natural gas pipeline company. Columbia owns and operates thirty-seven natural gas storage fields in New York, Pennsylvania, Ohio, and West Virginia, including the Donegal Storage Field. (JSF ¶ 3, ECF No. 96; Maddox Test. 7:136-140, Ex. D21, ECF No. 143.)
FOF 18. The Donegal Storage Field is located under approximately 11,000 acres of land in Washington County, Pennsylvania. (JSF ¶ 3, ECF No. 96.)
FOF 19. FERC issued a certificate of public convenience and necessity to Columbia for the Donegal Storage Field. (Trial Tr. 38:19-40:6, Nov. 14, 2014, ECF No. 167; Order Issuing Certificate, 64 FERC ¶ 62176, 1993 WL 343820 (Sept. 13, 1993), Ex. D7.)
FOF 20. Columbia's certificate of public convenience and necessity covers the area within the boundary of the storage reservoir and the protective area, and permits Columbia to continue operating the Donegal Storage Field. (Trial Tr. 40:15-19, Nov. 14, 2014, ECF No. 167; Order Issuing Certificate, 64 FERC ¶ 62176, 1993 WL 343820 (Sept. 13, 1993), Ex. D7.)
FOF 21. Columbia's predecessor, the Manufacturers Light and Heat Company, began operating the Donegal Storage Field in 1940. (JSF ¶ 3, ECF No. 96.)
FOF 22. With the development of storage fields, it became relatively common for oil and gas leases in the Appalachian Basin to be " dual purpose"
leases permitting production or storage of gas. (Kramer Test. 3:79-4:106, Ex. D20, ECF No. 142.)
FOF 23. The Manufacturers Light and Heat Company entered into leases or easements with landowners permitting it to use the subsurface for the storage reservoir and protective area of the Donegal Storage Field. (Maddox Test. 10:214-231, Ex. D21, ECF No. 143.)
FOF 24. The Masons' property is located over the eastern edge of the Donegal Storage Field. Approximately two-thirds of the Masons' property is in the storage field protective area. Approximately one-third of their property is outside of the storage field area. No part of their property is over the storage field reservoir. ( Id. at 11:243-258; Joint Ex. 17.)
D. Historical Ownership of the Masons' Property
FOF 25. In 1984, Sherry Mason, then known as Sherry Roth, and her former husband purchased the 151-acre property from Jacqueline Walker. (Joint Ex. 13; Trial Tr. 18:16-22, 100:9-101:23, Nov. 13, 2014, ECF No. 169.)
FOF 26. Rugh Mason moved to the property in 2000. The Masons were married in 2001. ( Id. at 18:1-2, 65:22-23.)
FOF 27. Jacqueline Walker acquired the property from the estate of John A. Burig in 1973. (Joint Ex. 14.)
FOF 28. John A. Burig, Flora W. Burig, and Anna C. Burig (collectively the " Burigs" ) owned 165 acres. The Masons' 151-acre property is a portion of the land previously owned by the Burigs. (JSF ¶ 8, ECF No. 96.)
FOF 29. In 1961, the Burigs entered into an oil and gas lease (the " 1961 lease" ) with the Manufacturers Light and Heat Company for their 165-acre property. ( Id. ¶ 6.)
FOF 30. Columbia is the successor in interest to the Manufacturers Light and Heat Company's rights as lessee under the 1961 lease. (Compl. ¶ 39, ECF No. 1-2.)
E. The 1961 Lease
FOF 31. The 1961 lease is a three-page preprinted form with blanks that are filled by typed or handwritten terms. (Ex. D9.)
FOF 32. The lease is dated March 22, 1961, and is between John A. Burig, Flora W. Burig, and Anna C. Burig and the Manufacturers Light and Heat Company. ( Id.)
FOF 33. The leasing or granting clause states:
1. LEASING CLAUSE The Lessor in consideration of One Dollar ($1.00) paid by the Lessee, the receipt of which is hereby acknowledged, does hereby grant, demise and lease unto the Lessee all the oil and gas, in and underlying all that certain parcel of land situate in Donegal Township, Washington County, and State of Pennsylvania as hereinafter described, with the exclusive right in the Lessee to enter upon said land to explore and drill for, produce and market all such oil and gas thereunder, to utilize such land and the underlying strata or sands, including the oil and gas formations, for injecting, storing and withdrawing gas of any kind, regardless of the source thereof, and for protecting the gas stored therein as well as under adjoining and neighboring lands; said parcel ... [c]ontaining 165 acres, more or less, and being the same property secured from William C. Burig. No new well to be drilled, however,
within two hundred feet of the dwelling house or barn now on the premises without the consent of Lessor.
The Lessor further grants Lessee during the term of this lease the exclusive right to enter upon the above described land to drill, maintain and operate new wells and to recondition, reopen, operate and maintain all existing and abandoned wells located thereon for the production of oil and gas and for the storage of gas, by injecting, storing, and withdrawing the same by pumping or otherwise through such wells or other wells located on adjoining or neighboring lands in the same vicinity; the rights of way and servitudes on, over, and through such tract for pipelines, drips, tanks, meters and regulators, together with the structures to house the same; the right to use oil, gas and water from said land free of cost to the Lessee for all such purposes; the right of ingress and egress over such tract for exercising any of the aforesaid rights, and all other rights and privileges necessary, incident to, or convenient for the operation of the above described tract, alone and conjointly with other lands for the production and transportation of oil and gas, and for the injection, storage and withdrawal of gas, with the right of removing either during or after the term hereof all machinery, pipe lines and other equipment placed on said land by the Lessee, including the right to draw and remove casing. The Lessee will pay Lessor for any damages caused to growing crops, trees and fences on the demised premises caused by Lessee's operations hereunder.
( Id. § 1.)
FOF 34. The terms or habendum clause states:
2. TERMS The parties hereto agree that this lease shall remain in force for the term of ten (10) years from April 1, 1961, and as long thereafter as the above described land or any portion thereof is operated by the Lessee, in search for or in production of oil or gas or as long as such land is utilized by Lessee alone or conjointly with neighboring lands for either the storage of gas by injection, storage and removal of gas through well or wells operated on either the land herein demised or other adjoining or neighboring lands comprising a part of the same gas storage field, or for the protection of any gas stored in such storage field. The parties hereto agree that the Lessee shall be the sole judge as to whether such land is being used for any of the aforesaid gas storage purposes, including protection of stored gas, and Lessee's determination thereof shall be final and conclusive.
( Id. § 2.)
FOF 35. The payment or royalty clause states:
3. PAYMENT TO LESSOR A. Royalties--The Lessee covenants and agrees in consideration of the premises: (a) to deliver to the credit of the Lessor, free of cost, in the pipeline to which Lessee may connect its wells, a royalty of the equal one-eighth (1/8) part of all oil produced and saved from the above described land; and (b) to pay the Lessor an annual production or storage well royalty of Three Hundred Dollars ($300.00) per year for each well drilled, reconditioned or reopened upon said premises and thereafter operated by Lessee to produce gas in paying quantities as a
gas production well or utilized by Lessee for a gas storage well as hereinbefore provided; such annual gas production or storage royalty to be paid Lessor quarterly in advance, beginning as of the date of such utilization and continuing thereafter until any such well is either plugged or abandoned or this lease terminated.
B. Rentals--The Lessee covenants and agrees to pay, and the Lessor covenants and agrees to accept an annual acreage rental of One Hundred Sixty Five and 00/100 Dollars ($165), payable quarterly in advance, beginning April 1, 1961, until a well is completed and operated by Lessee on the above described land for either the production of gas or oil, or storage of gas as hereinbefore provided, or this lease surrendered; any rental paid for time beyond the date of utilization of such gas well for either the production or storage of gas shall be credited to the first royalty due upon the same. It is agreed that the said Lessee shall be the sole judge as to whether to drill or not drill on said land, and the consideration and rentals paid and agreed to be paid hereunder constitute adequate compensation for such privilege. In the event that Lessee is not paying royalty upon any other well on the leased premises at the time any new or existing well is abandoned for any reason before being utilized by the Lessee for any of purposes named herein or in the event the Lessee should later abandon and cease to use all the wells previously utilized by Lessee on the property for any of the aforesaid purposes, Lessee may continue to hold all its production and storage rights granted hereunder by continuing either to make the said acreage rental payments as provided herein or by resuming the payment of such acreage rental payments on this lease in lieu of such royalty payment within three (3) months from the time Lessee has ceased to operate the last well on this lease for any of the aforesaid gas production or storage purposes.
C. Manner of Payment . . . .
( Id. § 3.)
FOF 36. The " free gas" section of the lease provides:
4. FREE GAS If gas is either being produced, marketed from or is available in sufficient quantity from any well or wells located on the said premises, the Lessor excepts and reserves from the premises herein demised, gas in a total amount not to exceed 150,000 cubic feet per year free of cost, for heat and light in one dwelling house on the premises, which amount of gas Lessor may receive by laying the necessary lines and making connections at Lessor's cost at such point on the demised premises as may be designated by the Lessee, provided said gas is used with economical appliances and is measured by meter furnished by Lessee as in the case of other consumers. . . .
( Id. § 4.)
FOF 37. The lease provides that either party may assign its " entire interest or estate" in the lease " or any part thereof." ( Id. § 6.)
F. Events Subsequent to the 1961 Lease
1. Course of Dealing
FOF 38. No well was drilled on the property subject to the 1961 lease during the ten-year primary term of the 1961 lease or afterward. (Trial Tr. 64:3-65:1, Nov. 13, 2014, ECF No. 169.)
FOF 39. The Masons' property was used for the protection of gas stored in the Donegal Storage Field during the ten-year primary term of the 1961 lease and has been continually used for the protection of stored gas since that time. (JSF ¶ 4, ECF No. 96.)
FOF 40. Since 1985, Sherry Mason has received rental payments under the 1961 lease from Columbia. The payment checks state that they are for payment of a " storage land rental due party or parties under combination (oil, gas, storage) lease described for the period stated." The checks identify the lessor as John A. Burig et al. (Trial Tr. 115:8-17, Nov. 13, 2014, ECF No. 169; Ex. D1.)
2. Columbia Subleases and Assigns Rights
FOF 41. In 2005, Columbia subleased its oil and gas production rights in leases covering the Donegal Storage Field to Great Lakes Energy Partners LLC, a predecessor to Range Resources. This sublease included Columbia's oil and gas production rights to the Masons' property under the 1961 lease. (Maddox Test. 20:502-04, Ex. D21, ECF No. 143.)
FOF 42. The oil and gas leases that Columbia had with landowners in the Donegal Storage Field area were primarily entered into in the late 1950s and early 1960s. (Trial Tr. 68:1-25, Dec. 2, 2014, ECF No. 170.)
FOF 43. These older leases were not compatible with modern horizontal drilling techniques. Modern wells can extend horizontally several thousand feet and cross multiple property lines. In order to permit drilling under multiple properties at once, leases must contain " pooling" and " unitization" clauses. (Trial Tr. 24:2-25, Dec. 2, 2014, ECF No. 170.)
FOF 44. In 2009, Columbia assigned its rights as sublessor under the sublease with Range Resources to NiSource. (Maddox Test. 20:504-05, Ex. D21, ECF No. 143.)
3. The Masons Seek to Lease the Oil and Gas Production Rights Associated with Their Land
FOF 45. In the early 2000s, landmen representing oil and gas producers began approaching the Masons to see if the Masons would be interested in leasing their oil and gas rights. (Trial Tr. 20:18-25, Nov. 13, 2014, ECF No. 169.)
FOF 46. The Masons consulted with an attorney, who advised them to obtain a copy of the 1961 lease. ( Id. at 22:5-8.)
FOF 47. The Masons did not enter into any agreements in the early 2000s because they felt the compensation being offered was insufficient. ( Id. at 22:9-15.)
FOF 48. In 2007, the Masons learned that Range Resources (then Great Lakes Energy Partners LLC) was in the early stages of acquiring oil and gas leases in western Pennsylvania for deep-well production. ( Id. at 25:5-7.)
FOF 49. The Masons contacted Range Resources and were put in touch with Dave Szuhay (" Szuhay" ), a landman who was acquiring oil and gas leases for Range Resources in western Pennsylvania. ( Id. at 25:8-20.)
FOF 50. In 2007, oil and gas producers, including Range Resources, were rushing to sign leases in western Pennsylvania. The process was " chaotic" and " like the Wild West," with landmen from Range Resources trying ...