We spotted a write-up on a recent court decision coming from the U.S. Court of Appeals for the Fourth Circuit in which a West Virginia landowner had a signed Marcellus lease requiring PetroEdge (later Statoil) to drill three wells on or under their property. And yet the courts have sided with the driller, essentially allowing the driller to wiggle out of the terms of the lease.
This case is, for us, disturbing. We have a copy of the full decision below, along with a write-up from Law360 explaining the case. Bear in mind Law360 writes for lawyers, not for laymen. In lay terms, here’s how we understand this case:
- The landowner, Pine Resources, signed a lease contract with PetroEdge which required the driller to drill three shale wells on or under their property, on a certain schedule.
- The schedule slipped. Eventually PetroEdge drilled one of the wells, but never completed/fracked it.
- Then PetroEdge sold their lease to Statoil.
- Using a legal loophole (a “meter tap” PetroEdge never built, a precondition for drilling the wells) Statoil told Pine Resources to stop harassing about drilling and completing the wells.
- Statoil didn’t complete the already-drilled Marcellus well, and refused to drill the two additional wells.
- Because Pine Resources pressured them, Statoil sued Pine Resources, threatening them by saying “we will bankrupt you.”
- The case was decided and appealed and appealed again. In the end, the court found that drilling one of the three wells was “enough” and that actual gas flowing was not a requirement under the lease, meaning Statoil (now Equinor) wins.
We think the landowner got a royal screwing. The landowner specifically required, in the original lease, that three wells would be drilled, laying out the timing. The driller (first PetroEdge, then Statoil) violated that contract. And now the driller has somehow wiggled out of it. Maddening.
Here’s what Law360 says about the case:
The Fourth Circuit on Wednesday affirmed a win for an Equinor ASA unit in a breach of contract dispute over drilling gas wells on property atop the Marcellus Shale, agreeing with the lower court that the agreement between the company and the property owner doesn’t require actual gas production.
In its second crack at considering the long-running dispute between Equinor USA Onshore Properties Inc. and Pine Resources LLC, the appeals court said a West Virginia federal judge correctly held that Pine Resources’ breach of contract claim failed because it hasn’t suffered any damages due to lost gas royalties even though Equinor, known as Statoil prior to a March 2018 name change, had failed to spud a pair of gas wells — an industry term that refers to the start of a well-drilling process. That’s because the purchase and sale agreement of mineral rights on Pine Resources’ land doesn’t explicitly require any gas to be produced, a Fourth Circuit panel said in a unanimous opinion.
The purchase and sale agreement originally brokered between Pine and drilling company PetroEdge — which conveyed its interest to Statoil in 2012 — doesn’t spell out how minerals were to be produced or require a specific type of well, the Fourth Circuit panel said in its opinion. It also doesn’t set any production deadlines or describe any way of calculating damages or lost royalties based on a failure to produce, so the lower court correctly concluded that it would be nearly impossible to enforce an implied production requirement in the contract, the panel said in its opinion.
“While there is evidence that Pine Resources believed the PSA required production, the record as a whole supports the district court’s conclusion that the intent of the parties to the PSA was not that PetroEdge or its assigns would complete the three wells to production in the timeframe established by [the agreement],” the appeals court said. “The PSA contemplates mineral production but stops short of requiring it.”
The litigation has its roots in Pine’s 2008 conveyance of Marcellus Shale mineral rights on a 565-acre tract to PetroEdge. The contract contained a provision that required the purchaser to spud one well within a year and another two wells within five years, according to the judgment.
PetroEdge conveyed its interest to Statoil in 2012, and that purchase and sale agreement indicated that PetroEdge had spudded the first well, according to the judgment. After Pine Resources raised concerns that Statoil’s lack of drilling activity could lead to a breach of contract, Statoil filed suit in 2014 seeking a declaratory judgment that the spudding provisions in the original contract didn’t apply to it. In 2015, a West Virginia federal judge agreed, concluding that certain contract provisions were applicable only to PetroEdge and not to its successors.
However, the Fourth Circuit reversed that ruling in January 2017, holding that Statoil had taken PetroEdge’s place for purposes of the agreement with Pine and establishing that Statoil had breached the contract by failing to spud the additional two wells.
Back in the district court, Statoil and Pine swapped summary judgment motions on damages stemming from Statoil’s breach, with Pine arguing that spudding a well can be interpreted to include drilling, completing and producing gas from it and Statoil arguing that spudding only means starting to drill a well.
U.S. District Judge Irene C. Berger sided with Statoil in the definition of spudding a well, yet denied summary judgment to both parties in June 2017, saying that the contract could be read as a whole to require gas production. She held a two-day bench trial the following month to deal with whether the contract, together with additional evidence, actually required production and, if it did, how much in damages was Berger required to pay for its failure to drill the wells and produce gas.
In February 2018, Judge Berger ruled that while the agreement required Statoil to spud the two wells, it didn’t contain any explicit requirement to produce gas from any drilled wells. Pine’s evidence of damages was entirely based on gas royalty losses, so it couldn’t show that it has suffered any damages from Statoil’s failure to spud the two wells and its breach of contract claim must fail, Judge Berger said.
That was the right call, the Fourth Circuit panel said Wednesday.
“No separate evidence of damages sustained solely due to the failure to spud the second and third wells was introduced,” the Fourth Circuit panel said in its opinion. “Absent evidence of damages flowing from Statoil’s failure to begin drilling the second and third wells, the district court committed no error in granting judgment to Statoil.”*
*Law360 (Mar 6, 2019) – 4th Circ. Affirms Equinor Win In Drilling Contract Fight
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