Business Workshop: Landowners can terminate oil leases
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Unknown to many Pennsylvania landowners who have signed contracts to allow drilling for oil and gas on their land is the fact that in some cases they can terminate the contract the exact moment that the well stops producing any oil or gas.
This right to terminate the oil and gas lease as soon as the energy stops flowing exists only if the contract calls for royalty payments based on the volume of gas or oil actually produced by the wells on the land, which is called a "production royalty." If the contract calls for flat rental payments or royalties based on well pressure, other termination rules come into play that are much less onerous for producers. Many producers prefer a production royalty lease because they pay royalties only on gas and oil that they are shipping out for sale.
A recent Pennsylvania Superior Court decision reaffirmed the automatic termination rule for oil and gas leases that use production royalties as the means of paying the landowner. The oil and gas producers that lost the original lawsuit and the Superior Court appeal decided not to take the case to the Pennsylvania Supreme Court.
What that means is that producers in Pennsylvania with production royalty leases do not even have a reasonable period of time to take a well off-line for maintenance or repair without risking lease termination. As soon as the gas or oil stops flowing, the landowner can walk away from the lease.
The only way that a producer can get around this termination rule is if the lease specifically includes a cessation of production clause granting the producer a grace period in which to recommence production for reasons that are explicitly stated in the lease, for example after a mechanical breakdown.
-- Ryan James
Meyer, Unkovic & Scott
First Published December 31, 2012 12:00 am