Fourth Circuit Joins Courts in Pennsylvania and Ohio in Holding that Dual Purpose Oil and Gas Lease Is Not Severable

January 6, 2016

As we have often reported, landowners’ efforts to evade the plain terms of “dual purpose” leases, providing for both production and natural gas storage, have almost universally failed. Most recently, on December 28, 2015, the U.S. Court of Appeals for the Fourth Circuit, applying West Virginia law, ruled in K&D Holdings, LLC. v. EquiTrans, L.P. et al., No. 15-1166, that lessees retain both production and storage rights under a “dual purpose” lease where they engage in either production or storage activities, and that either activity will continue the lease into its secondary term for all purposes. The Fourth Circuit reversed the district court’s aberrational decision, which had been the only case in the Appalachian Basin to find that production and storage rights under dual purpose leases were severable from each other, and that a lessee could only hold production rights beyond the lease’s primary term if it in fact engaged in gas production activities during that term. The Fourth Circuit’s opinion thus adds to the growing chorus of cases construing dual purpose leases according to their express terms, including decisions in Pennsylvania and Ohio, as McGuireWoods has previously reported here, here, here and here.

The dual purpose lease at issue in K&D Holdings provided that the lease remained in effect following its five-year primary term so long as the land was used (1) for the exploration or production of gas or oil, or (2) for gas storage, or (3) for the protection of gas storage. The parties stipulated to the district court that the land governed by the lease at issue was used for the protection of gas storage, as the land fell within a storage field expressly authorized and regulated by the Federal Energy Regulatory Commission. Nevertheless, the district court held that the lease was severable, and that the defendants’ failure to explore for or produce oil or gas during the lease’s primary term caused the production rights set forth in the lease to expire. (Interestingly, the district court reached this conclusion sua sponte – severability had not been raised by either party.)

On appeal, the Fourth Circuit reversed the district court, holding that the lease’s unambiguous language – whereby the lessee would hold production and storage rights past the primary term if it engaged in either exploration or production, or gas storage, or the protection of gas storage, “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.” Accordingly, because EQT was utilizing a portion of the land for the protection of gas storage, the Court held that “EQT continues to hold all rights under the original Lease.”

The Fourth Circuit’s opinion, although designated as unpublished and therefore without binding precedential effect, demonstrates the emerging unanimity among courts in the Appalachian Basin that lessees retain all rights under a dual purpose lease when they engage in storage activities during the lease’s primary term. In reversing one of the only Appalachian Basin decisions to hold otherwise, the Fourth Circuit’s opinion serves further to close the door on attacks on the express terms of dual purpose leases.