Pennsylvania Court: Using Property for Gas Storage Holds Production Rights Under “Dual Purpose” Leases

July 28, 2015

A recent trial victory for Range Resources – Appalachia LLC and Columbia Energy Ventures LLC (CEV) fills gaps left by the prior leading decisions on “dual purpose” storage and production leases, and cements the rights of lessees under such leases. Because of the prevalence of natural gas storage in the Northeast, large tracts of promising Marcellus and Utica Shale production horizons are encumbered by “dual purpose” leases, which allow the lessee to conduct both oil and gas production and natural gas storage, with either activity holding the lease in effect for all purposes. As a result of the explosion in gas production in the area, landowners have been challenging these “dual purpose” leases, trying to reclaim production rights associated with properties otherwise within or near gas storage fields. The financial consequences of this determination can be substantial. Contrasting results from two prior federal court decisions analyzing dual purpose leases under Pennsylvania law have led to confusion and uncertainty for lessees. See Penneco Pipeline Corp. v. Dominion Transmission, Inc., No. 05–49, 2007 WL 1847391, at *13 (W.D. Pa. June 25, 2007), aff’d, 300 Fed. Appx. 186 (3d Cir. 2008); Jacobs v. CNG Transmission Corp., 332 F. Supp. 2d 759 (W.D. Pa. 2004).

However, the recent decision in Mason v. Range Resources – Appalachia LLC and NiSource Energy Ventures LLC, No. 12-369 (W.D. Pa. July 27, 2015), has answered several questions left open following the Penneco decision. In Mason, the plaintiffs challenged the validity of a dual purpose lease as applied to a property located partially in the protective buffer area of a storage field operated by Columbia Gas Transmission, LLC. The habendum clause provided that the lease would remain in force so long as the property is utilized (1) in search for oil or gas; or (2) in production of oil or gas; or (3) alone or conjointly with neighboring lands for storage of gas through well or wells operated on either the land or adjoining or neighboring lands comprising a part of the same gas storage field; or (4) for the protection of any gas stored in such storage field. Columbia Gas Transmission subleased production rights under the lease to Range, and subsequently assigned its interest in the sublease to NiSource Energy Ventures (now CEV). The plaintiffs argued that the lease could not maintain both the storage and production rights because only a portion of their land was located in the buffer area, and because none of their land was located above the area designated as containing stored gas. They further argued that the sublease to Range operated as an assignment, severing the production and storage rights − a challenge left open by the court in Penneco.

After a bench trial, Chief Judge Joy Flowers Conti found that Columbia was in fact using the property for the protection of stored gas, and that this held the lease in effect for all purposes, and thus allowed CEV and Range to retain the benefit of the associated production rights. Significantly, the decision was the first case to confront directly the argument that storage and production rights are severable, an argument left open in Penneco. The court held that even if production and storage rights were severable, the lease remained in effect for all purposes. The ruling in Mason seemingly closes the door on attacks on dual purpose lease, even where lessees sublease production rights to production companies.