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By Paul R. Yagelski, Esq.
Rothman Gordon
Pittsburgh, Pennsylvania

The primary term of an oil and gas lease is about to expire.  No activity has taken place to develop the oil and gas and the land subject to the oil and gas lease has not been pooled with any other property.  Just before the lease is about to expire, the oil and gas company pools the land or places the land into a unit, which the oil and gas company contends continues the lease in effect.  The royalty owner believes that the lease has expired; the oil and gas company pooled the land simply to avoid the expiration of the lease.  Does this constitute bad faith pooling?  What is bad faith pooling and under what circumstances is there a viable basis for claiming that an oil and gas lease has expired due to bad faith pooling?  Is bad faith pooling a basis in Pennsylvania for asserting that an oil and gas lease has expired?

Voluntary pooling, which is what is being addressed as opposed to compulsory pooling, can be accomplished through lease provisions that authorize a lessee to pool a leased area with nearby tracts.  See Kramer & Martin. The Law of Pooling and Unitization §§ 7.03 – 7.05.  For example, you may find in a lease a pooling clause such as the following:

Lessee is hereby granted the right to pool, unitize or combine all or any part of the Property with any other lease or leases, land or lands so as to create one or more drilling or production units.  Drilling operations in preparation for drilling, the drilling of a well or the production from a well on such a unit shall have the same effect upon the term of this Lease as if the drilling operations in preparation for drilling, the drilling of a well or the production from a well occurred or were located on the Property.[1]

The primary legal consequence of pooling pursuant to such clause is that drilling operations in preparation for drilling, the drilling of a well, or the production from a well anywhere on the pooled unit are treated as if they have taken place on each tract within the unit.

In a bad faith pooling claim, the lessor usually asserts that the pooling was done only to evade the expiration of the oil and gas lease or the pooling was done simply to hold the lease.  Bad faith pooling has been asserted in Pennsylvania state and federal courts.  It is a viable basis in Pennsylvania for claiming that an oil and gas lease has expired.  See Snyder Bros., Inc. v. Peoples Natural Gas Co., 450 Pa. Super. 371, 676 A.2d 1226 (1996); Roman v. Chesapeake Appalachia, L.L.C., No. 3:11-CV-1614, 2012 WL 2076846 (M.D. Pa. June 8, 2012); Stewart v. SWEPI, L.P., 918 F. Supp. 2d 333 (M.D. Pa. 2013); Dansbury v. EOG Resources, Inc., No. 3:12-CV-00391, 2014 WL 2737841(M.D. Pa. June 13, 2014).

Where a claim for bad faith pooling is asserted, an oil and gas lessee’s pooling decision will be upheld unless the lessee pools in bad faith.  Where a lessee pools oil and gas leases in good faith, the lessee is relieved of the obligation to reasonably develop each tract separately.  If oil and gas leases are not pooled in good faith, production will be considered to take place only on the actual tract upon which it occurs, and production from a unit well will not maintain off-site leases.  See Butters Living Trust v. SWEPI, Inc., No. 4:12-CV-272, 2013 WL 5707787, n.1 (M.D. Pa. October 18, 2013).

In asserting bad faith pooling, normally two matters are involved: the terms of the lease itself and the circumstances surrounding the pooling.

As to the lease itself, two clauses are normally of primary importance in asserting a bad faith pooling claim; i.e., the habendum or term clause and the pooling clause.  The habendum clause sets forth the conditions upon which the primary term of the lease will be extended into the secondary term.  For example, the habendum clause may provide that in order to extend the primary term into the secondary term of the lease, drilling operations in preparation for drilling, the drilling of a well or actual production from a well has to be taking place on either the land subject to the oil and gas lease or upon land or lands with which the land is pooled.  The pooling clause will normally include a provision to the effect that even though drilling operations in preparation for drilling, the drilling of a well or actual production from a well may not be occurring on the land subject to the oil and gas lease, if the drilling operations in preparation for drilling, the drilling of a well or actual production from a well is being conducted on lands with which the land subject to the oil and gas lease is pooled, then the lease is extended.

As to the factual circumstances, the habendum clause will be reviewed with what is happening on the leased land and with what is happening on the land with which the leased land is pooled in order to determine if bad faith pooling has occurred.  In other words, and using the pooling clause set forth above, are drilling operations in preparation for drilling, the drilling of a well or actual production from a well taking place at the time of pooling on the land(s) with which the leased land is pooled?  If not, then there may be a basis for claiming that the oil and gas lease has expired due to bad faith pooling.

A bad faith pooling claim is usually asserted in an action requesting declaratory relief, i.e., a request for a declaration that the oil and gas lease has expired due to bad faith pooling.  See Stewart v. SWEPI, LP, 918 F. Supp. 2d 333 (M.D. Pa. 2013); Roman v. Chesapeake, LLC, No. 3:11-CV-1617, 2012 WL 2076846 (M.D. Pa. June 8, 2012).  In addition, a bad faith pooling claim is sometimes asserted as a breach of the duty of good faith and fair dealing, which is implied in every contract in Pennsylvania.  See Dansbury v. EOG Resources, Inc., No. 3:12-CV-00391 2014 WL 2737841 (M.D. Pa. June 13, 2914).

If you feel that your lease has expired due to bad faith pooling, you should contact an oil and gas lawyer.  We can help you.

 


[1] This is only one version of a pooling clause.  There are numerous other versions.