Much like the long-suffering Job, the defendants in Heasley v. KSM Energy, Inc. et al, did not like the words they were hearing. In this case, the words were their own, in the sense that the words were in the oil and gas lease. The Pennsylvania court reminded litigants that the words actually used in their contract will govern disputes between them. The court held that language in a lease executed in 1942 calling for an annual rental conditioned on production did not continue the lease once production ceased. Despite the lessees’ best arguments, the condition in the lease was not an “either/or” choice.
The habendam clause called for a primary term of 20 years and as long thereafter as oil or gas was being produced. The royalty clause provided for a royalty on production and annual rent to the lessor on each well “while the gas from said well is so used.” Production ceased and the lessor sued to terminate the lease based on lack of production. The lessees admitted that oil or gas was not being produced off the land, but contended that annual rental, not continued production, was all that was required to maintain the lease.
The court pointed out that the duration of an oil and gas lease can be tied to the lessor’s compensation in two ways. First, where a lessor’s compensation is subject to the volume of production, the duration of the lease is determined by the period of active production. Second, where a lessor’s compensation is a fixed amount unrelated to the volume of production, the duration of the lease is determined by how long the lessee continues to pay rent, regardless of whether the wells are still producing. In this case, the lease provided for both the payment of a royalty based on the volume of production and a fixed rental per well. But the fixed rental could maintain the lease only as long as “gas from said well is so used.” Accordingly, the payment of the rental was still tied to production and could not extend the lease. Once production ceased, the lease became a tenancy-at-will subject to termination by the lessor at any time.
Incidentally, the “et als” in this case were subsidiaries of Texas-based Exco Resources and EOG Resources.
P.S.: There was no evidence that the lessees complained as much as Job did.
Thanks to Lydia Webb for her valuable assistance with this post.