Jacobs v. CNG Transmission Corp.

772 A.2d 445, 565 Pa. 228, 151 Oil & Gas Rep. 453, 2001 Pa. LEXIS 1117
CourtSupreme Court of Pennsylvania
DecidedMay 29, 2001
DocketCivil Action 96-319
StatusPublished
Cited by31 cases

This text of 772 A.2d 445 (Jacobs v. CNG Transmission Corp.) is published on Counsel Stack Legal Research, covering Supreme Court of Pennsylvania primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Jacobs v. CNG Transmission Corp., 772 A.2d 445, 565 Pa. 228, 151 Oil & Gas Rep. 453, 2001 Pa. LEXIS 1117 (Pa. 2001).

Opinion

OPINION

CASTILLE, Justice.

This matter comes before this Court on a Petition for Certification of Questions of Law from the United States Court of Appeals for the Third Circuit. This Court granted the petition and directed the parties to brief two questions: (1) whether a finding that the contract between the parties is ambiguous is a prerequisite to applying the doctrine of sever-ability set forth in Heilwood Fuel Co. v. Manor Real Estate Co., 405 Pa. 319, 175 A.2d 880 (1961); and (2) whether Pennsylvania jurisprudence recognizes an implied covenant to develop and produce oil or natural gas that imposes upon the lessee the obligation to attempt to produce oil and gas from the leased property.

These questions arise in the context of an equity action filed by appellants against appellee. Appellants purchased 120 acres of real estate in South Bend Township, Armstrong County on December 7, 1994. The deed contained the following encumbrance: “UNDER AND SUBJECT to a certain oil and gas lease given by Frank F. George and Sarah T. George, his wife, to New York State Natural Gas Corporation, dated February 21,1956.” 1 The 1956 lease was a modification of an earlier lease dating from 1907. The 1956 lease permitted appellee to drill and operate wells for the production of oil and gas as well as to use the land for pooling or storage of gas. Appellants were aware of the existence of and had an opportunity to review the lease before purchasing the subject property. In addition, before consummating the purchase, they were aware that appellee was operating an underground natural gas storage pool in a subsurface geological sand formation.

Appellee had not drilled any wells for oil or gas exploration or production on any property since at least 1986 and has never drilled any wells on appellants’ property. The parties agree that sand formations underlying appellants’ property, *231 and underlying the presently used storage pool, likely contain commercially productive deposits of natural gas. On February 8, 1995, after appellants took possession of the property, they notified appellee of the purchase and demanded that appellee either surrender the gas-bearing sands not being used for storage or begin the development and production of the sand formations. Appellee refused to surrender the gas-bearing sands or develop them. Appellants, believing that the production rights in the lease with appellee had “ceased,” entered into an oil and gas lease with Penneco on March 21, 1995. 2

On January 11, 1996, appellants purported to cancel the oil and gas lease with appellee by letter and then initiated suit against appellee in the Court of Common Pleas of Armstrong County on January 19, 1996. Appellee removed the action to the United States District Court for the Western District of Pennsylvania based upon diversity. 3 In their equity action, appellants sought an accounting of natural gas extracted, withdrawn or produced on the property, a finding that the oil and gas lease has terminated, and to quiet title to the oil and gas interests underlying the property.

The parties conducted discovery and appellee then filed a motion for partial summary judgment. Appellee argued in part that appellants’ claim that the lease had been terminated failed because it was premised upon a theory that Pennsylvania recognizes an implied covenant to develop and produce natural gas. Appellee argued that it had no obligation to drill for oil and gas as Pennsylvania does not recognize such an implied covenant. Appellants countered that the oil and gas lease is severable i.e., that the lease grants two distinct rights, the right to drill and operate gas wells for the production of oil and gas and the right to store natural gas. Appellants acknowledged that the “storage” portion of the agreement was *232 still in effect, but claimed that the severable oil/gas production portion of the agreement terminated due to appellee’s prolonged failure to even attempt to produce gas from the property.

The District Court granted appellee’s motion for partial summary judgment, and appellants appealed to the United States Court of Appeals for the Third Circuit. The Third Circuit petitioned this Court for Certification of Questions of Law, which this Court granted, framing the questions to be answered as previously set forth.

The lease at issue commenced on June 16, 1956 and had a primary term of ten years that could then be conditionally extended for an indefinite term. 4 The first paragraph of the lease at issue, entitled “Leasing Clause,” sets forth the parameters of the lease:

That the Lessor, for and in consideration of the sum of One ($1.00) Dollar in hand well and truly paid by the Lessee, the receipt whereof is hereby acknowledged, and of the covenants and agreements hereinafter contained on the part of the Lessee to be paid, kept and performed, has leased and let and by these presents does lease and let unto the Lessee for the purpose of drilling and operating for and producing oil and gas, and for the further purpose and with the exclusive right in the Lessee, as it may see fit to store any *233 kind of gas therein by pumping or otherwise introducing the same into any sand or sands, substrata or horizon in and under said land, and the right to remove the same by pumping or otherwise through any well or wells on said land or other lands with the right to open, repair, maintain and use a roadway or roadways to wells or well locations on this or other lands and the right to construct, lay, maintain, operate, change and remove pipe lines, telephone and telegraph lines and all other appliances and structures on, over and through said lands, and with all other rights and privileges, including free oil, gas, gasoline and water from the land, necessary or convenient for the operation of this land alone or conjointly with other lands for the transportation of oil and gas produced from said land or other lands or for introducing, storing or withdrawing of gas from this land or other lands....

The clause then goes on to identify the property in question, and to apportion % of all “working interest” of oil and gas produced to Lessee, and to address other points not relevant to the resolution of this question.

Three different methods of compensation are outlined in paragraph 5 of the lease (entitled “Payment to Lessor: Royalties,” “Delay Rental” and “Payment for Storage Privileges.”) Under the royalty provision, and specifically with respect to gas, the contemplated payment depends upon whether the gas was retrieved from a designated “shallow” or “deep” well. As to “shallow” gas, the lessee agrees to pay $50 quarterly as a royalty for each well beginning thirty days after a well is drilled and ending whenever the lessee ceases to use the well, gives written notice of its intention to abandon the well or in fact plugs and abandons the well, or ceases to save and market the gas from the property.

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Bluebook (online)
772 A.2d 445, 565 Pa. 228, 151 Oil & Gas Rep. 453, 2001 Pa. LEXIS 1117, Counsel Stack Legal Research, https://law.counselstack.com/opinion/jacobs-v-cng-transmission-corp-pa-2001.