Lessor Beware: The Importance of Use Restrictions in an Oil and Gas Lease Humberston v. Chevron, 75 A.3d 504 (Pa. Super. Ct. 2013)December 2013 – Articles In the Zone
When you rent your cabin in the Poconos to a friend for a few weeks, you don’t expect the friend to build a swimming pool in the back yard while he or she is there. In fact, you probably don’t even think about telling the friend not to do this, let alone writing it down. However, if you or your business decides to lease land to an oil and gas company, you should most certainly consider limiting in writing exactly what the oil and gas company can do on the property. A recent Pennsylvania Superior Court case demonstrates what can happen when a landowner leasing property to an oil and gas company fails to set forth these limitations in the written lease. Without express restrictions, oil and gas companies have wide latitude under Pennsylvania law to do what is reasonably necessary to find and extract resources on leased land, and what these companies do to extract resources can be very surprising to some landowners.
In Humberston v. Chevron, the surprise the Humberstons encountered was a freshwater storage impoundment, a large water source for hydraulic fracturing, covering 11 acres of their property. In 2006, the Humberstons entered into a lease that permitted Chevron to explore for and remove natural gas from their 133-acre property in Fayette County, Pennsylvania. Because hydraulic fracturing requires a large amount of freshwater, Chevron constructed a freshwater storage impoundment on the Humberstons’ land. In 2011, the Humberstons filed suit against Chevron, and they argued the lease did not permit Chevron to construct this impoundment on their property.
The Pennsylvania Superior Court disagreed and ruled in Chevron’s favor. The court initially looked to the contract and held that the plain language of the lease contradicted the Humberstons’ argument. The court determined the lease unambiguously stated Chevron could use “as much of the surface as is necessary or convenient … to explore for, develop, and produce [oil and gas] … using methods and techniques which are not restricted to current technology.” The court evaluated this contractual language and found Chevron had used the land in an acceptable manner pursuant to the lease. Because access to large amounts of water is necessary for the hydraulic fracturing process, the construction of the freshwater storage impoundment was reasonably necessary “to explore for, develop, and produce [oil and gas].”
In addition to interpreting the express terms of the contract, the Superior Court reiterated that Pennsylvania law states: unless parties to the lease agree otherwise, the party who has the right to remove subsurface oil and gas from land has the right to go onto the land and use a reasonable portion of the surface to retrieve the natural resource. Without express restrictions in the lease, Chevron had the right to go onto the Humberstons’ land and use as much of the surface as was reasonably necessary to remove the gas; and because extraction of the natural gas requires hydraulic fracturing and therefore access to large quantities of freshwater, Chevron had the right to build the 11-acre impoundment.
Before entering into a land lease with an oil and gas company, landowners must consider what use restrictions they would like in the agreement. If a landowner does not expressly limit the oil and gas company, Pennsylvania law permits the company to access and use the land in a way that is reasonably necessary to extract the subsurface oil and gas, which can include the construction of freshwater impoundments. And freshwater impoundments for hydraulic fracturing tend to be much larger than your average-sized swimming pool.