Historically, the practical effect of the secondary term under the habendum clause of an oil and gas lease is that the lease may extend indefinitely as long as oil, gas, or their constituents are found in paying quantities. Recently, the Fourth District of Appeals limited this notion. In Pottmeyer v. E. Ohio Gas Co., 2016-Ohio-1294, 2016 Ohio App. LEXIS 1194 (4th Dist.) the Court held that “the landowners’ personal use of the gas does not count towards the calculation of gas produced in paying quantities. Rather, the landowners’ use of the gas is incidental to the purpose of the leases.”
In Pottmeyer, the Fourth District examined consolidated appeals by two landowners where a single well had been drilled on each of their properties under oil and gas leases. The landowners were the current operators of the wells under the leases. Both leases had seen sporadic sales of oil and gas; however, neither property had produced more than three to four sales in the last decade. All other gas produced on the property was consumed by the landowner in heating their homes or other buildings located on the property. Both landowners filed complaints in the trial court requesting “a judgment declaring the oil and gas lease forfeited and void arguing that it expired when there was insufficient production of oil or gas.” In both cases, ultimately the trial court found that neither oil nor gas had been produced in paying quantities and granted the landowners’ Motions for Summary Judgment.
On appeal, the Fourth District upheld the trial court’s decision in both cases, holding that “the landowners’ personal use of the gas does not count towards the calculation of gas produced in paying quantities. Rather, the landowners’ use of gas is incidental to the purpose of the leases.” The court echoed the reasoning of the Seventh District Court of Appeals decision in Gardner v. Oxford Oil Co., 2013–Ohio–5885, 7 N.E.3d 510 (7th Dist.), which stated that a landowners’ domestic use of gas under an oil and gas lease was “incidental to the purpose of the lease and did not count towards the calculation of gas produce in paying quantities under the habendum clause.”
Additionally, the Fourth District held that the “sporadic sale of oil from the wells [does not] constitute[] production in paying quantities.” It acknowledged that one of the wells produced oil in paying quantities on three occasions and the other well produced oil in paying quantities on four occasions; however, the court did “not believe that such sporadic and de minimis production constitute[d] production in paying quantities.” Finally, the Fourth District noted that other courts “have held that operations mean those conducted by the oil and gas company, not the landowner, even though a landowner had been assigned the rights to the well.” Consequently, where the landowner has been assigned the shallow rights by the oil and gas lessee, and the only producing well has been taken out of the production and used for domestic gas purposes only, the lease has not been maintained by the landowner’s operation of the well.
The Pottmeyer decision is important for two reasons: (1) it reinforces the definition of paying quantities adopted by the Seventh District Court of Appeals, which holds that they do not include oil and gas produced for domestic purpose by the landowner; and (2) it raises the bar for what constitutes sustained sales sufficient to maintain an oil and gas lease. With the prolific oil and gas production in the Marcellus and Utica shale plays within the last several years, many landowners are seeking ways to disclaim older oil and gas leases in order to free up mineral rights for new, more profitable, leases. As a consequence of Pottmeyer, both lessors and lessees should be cognizant of the production and ultimate use of any oil and gas wells on leased property.
If you would like a copy of the Pottmeyer decision or have any questions with respect to oil, gas, or any other energy related issue, please contact a member of the Oil, Natural Gas and Energy Practice Group.
