On January 24, 2023, the U.S. District Court for the Middle District of Pennsylvania upheld the constitutionality of Act 85 of 2019, which amended the Pennsylvania Oil and Gas Lease Act to permit the drilling of horizontal oil and gas wells across existing drilling units.
Lessor Warner Valley Farm LLC sued Lessees SWN Production Co. LLC and Repsol Oil & Gas USA LLC, alleging that they breached the terms of a 2006 oil and gas lease by drilling a well that crossed the boundary of the lessor’s unit. Warner Valley also sought a declaration that Act 85 was void under the Contracts Clauses of the U.S. and Pennsylvania constitutions.
The District Court granted summary judgment in favor of both SWN and Repsol, ruling that Act 85 was valid and that the lessor’s 2006 lease permitted cross-unit drilling. The District Court found that Act 85 did not impair the 2006 lease because the Act does not prevent parties from contractually prohibiting cross-unit drilling.
The District Court further held that Act 85 did not modify the property interest conveyed in the 2006 Lease because cross-unit drilling did not constitute a more expansive use of the fee simple determinable interest conveyed by oil and gas leases. In addition, Act 85’s requirement that the lessees reasonably allocate production between existing units did not impair any existing provisions of the lease. The District Court further held that even if Act 85 substantially impaired the 2006 lease, it was justified by the policy goals of reducing economic costs and environmental impacts associated with oil and gas drilling.
Finally, the District Court held that both the granting clause and unitization and pooling provision of the 2006 lease did not prohibit cross-unit drilling, citing the broad terms of those provisions of the lease.
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