Please ensure Javascript is enabled for purposes of website accessibility
Home / Opinion Digests / Business Law / Oil & Gas Lease Not Divisible

Oil & Gas Lease Not Divisible

An oil and gas lease that gave the lessee certain rights to engage in alternative activities, including exploration or production of gas or oil; or storage of gas or protection of gas storage, on a 180-acre tract in West Virginia, was not divisible, and the 4th Circuit reverses a district court decision that granted plaintiff a right to use the premises.

On Dec. 2, 1989, Henry and Sylvia Wallace executed an oil and gas lease with Equitrans Inc. covering 180 acres of land in Tyler County, W.Va. Appellant K&D Holdings is the successor-in-interest to the lessors and Equitrans LP is the successor in interest to the lessee, Equitrans Inc. Equitrans LP subleased to EQT Production Co. the rights to produce and sell gas from the “premises and subsurface formations that are not used for the storage of gas or protection of stored gas.” The Lease now governs the relationship between K&D and EQT.

The Lease grants EQT the right to use the premises to explore for and produce oil and gas, or to store gas, or to protect stored gas. The term of the Lease is established in a durational provision, which provided in part, for use “during a period of 5 years from December 2, 1989, and as long after commencement of operations as said land, or any portion thereof or any other land pooled,” for the specified alternative activities.

EQT land use

Since entering into the Lease, EQT has not engaged in exploration, production or gas storage on the premises. It has, however, engaged in protection of gas storage. Equitrans LP owns and operates a nearby natural gas storage facility known as the Shirley Storage Field, which is authorized and regulated by the Federal Energy Regulatory Commission. FERC established a 2,000-foot buffer zone around Shirley Storage Field for the protection of the gas storage facilities. Because EQT has not used the premises to engage in gas or oil production, K&D now seeks to enter into a more lucrative oil and gas lease agreement with Antero Inc., but has been unable to do so because of the EQT lease.

In federal court, K&D argued that because EQT had spent no money to explore, test or drill for over 20 years, the lease was canceled by operation of law under W. Va. Code § 36-4-9a and that K&D should be permitted to lease the unused portion of the premises to another corporation for oil and gas production.

The district court concluded, sua sponte, that the Lease was divisible into two separate segments – one for production and exploration, and one for gas storage and protection of gas storage – and found that the production and exploration segment of the Lease had terminated after the Lease’s initial five-year term. In its final order, the district court said plaintiff could drill exploration and production wells on areas which are not within the gas storage protection area and which extend horizontally under the gas storage protection to “the Marcellus Shale area.”

Lease not severable

We agree with EQT that the district court erred in finding sua sponte that the Lease was divisible. A fair construction of the Lease terms compels the conclusion that the Lease was intended to be entire not divisible. To hold otherwise would be to ignore the disjunctive use of the word “or” in the durational provision. The Lease expressly sets out a list of activities and makes plain that engaging in any one of them constitutes an exercise of rights such that the entirety of the Lease would remain in effect. As the West Virginia Supreme Court of Appeals has held, the word “or,” in the absence of a contrary intent of the parties appearing from other parts of the lease, shall be given its ordinary meaning and not considered as meaning “and.”

Because we agree with EQT that the language of the durational provision is clear and that the Lease does not evince any intent of the parties to enter into a divisible lease agreement, we conclude that the district court erred in holding to the contrary. Because there is no disagreement that EQT is engaging in one of the activities enumerated in the durational provision – using a portion of the land for protection of gas storage – we find that EQT continues to hold all rights under the original Lease.

Reversed and remanded with instructions to enter judgment for EQT.

K&D Holdings LLC v. Equitrans LP (Duncan) No. 15-1166, Dec. 28, 2015; Published Feb. 8, 2016; USDC at Wheeling, W.Va. (Bailey) Nicolle R.S. Bagnell for appellant; Stephen A. Wickland for appellee. VLW 016-2-020, 16 pp.

VLW 016-2-020

Leave a Reply