A Pennsylvania high court has sided with oil and gas driller Seneca Resources Corp. in a lease dispute involving 25,000 acres of land in Elk and Jefferson counties and an obscure state law governing reasonable expectations for its development.
The decision handed down this month by the Pennsylvania Superior Court found Seneca Resources was still entitled to 10,000 acres of the parcel that remained undeveloped. This after landowners sought the right to severe their lease with Seneca for the unused portions, arguing the driller had violated an “implied covenant to develop” and breached the terms of their contract.
The “implied covenant to develop” has been used by litigants in the past to severe or shrink oil and gas leases, with courts gauging what is reasonable or typical development of parcels by energy companies and determining whether a particular driller is skimping on its duties to produce gas and in turn royalty payments to a lessor.
In Seneca’s case, the Superior Court ruled the implied covenant to develop did not apply, with Seneca taking over a lease first inked by different landowners with a different gas company in 1962, and one the court found said nothing about requiring drilling on undeveloped portions in order to extend its terms.
According to Law360.com, the 1962 lease was drafted between Jefferson County Gas Co. and Humphrey Industries Inc.
Since then, Seneca has taken over the gas company role and a bank, several trusts and private individuals that of land-owner.
Those owners, unsatisfied with Seneca’s development of the 10,000 acres, attempted to bring in a new driller and new lease, prompting a legal challenge from Seneca in 2009.
Law360.com says that in 2013, after a lengthy period of litigation, a Jefferson County Court of Common Pleas judge ruled in favor of Seneca, prompting the landowners to appeal, led by S&T Bank.
At a minimum, the landowners wanted the court to allow a severing of the lease, meaning unused portions of the land would be taken from Seneca and made available for new development and a new leasee.
But in his decision, Senior Superior Court Judge John Musmanno said, “We conclude that the lease between the appellants and Seneca forecloses a finding of a breach of the implied covenant to develop and produce oil and gas on the unoperated acreage” and “makes no mention of any duty or mandate to drill or operate the unoperated acreage … to continue the lease.”
Court records show that by the time Seneca took over the lease, Jefferson County Gas Co. had already drilled more than 300 wells on the land, 100 of them reportedly still producing.
Seneca did not respond to requests for comment Monday.
