Proposed changes to Pennsylvania’s Dormant Oil and Gas Act may lead to disputes over the validity of existing oil and gas leases. In Pennsylvania, it has been long understood that the oil and gas subsurface estate may be severed from the surface estate. U.S. Steel Corp v. Hoge, 450 A.2d 162, 167 (Pa. Super. Ct. 1982). The severance may have occurred recently or, more likely, it occurred many years ago and both the surface estate and the oil and gas estate have separate and possibly lengthy chains of title. So when an oil and gas exploration and production company leases the rights to explore, drill, and develop oil and gas, they do so from the owner of the oil and gas subsurface estate – not the owner of the surface estate. Occasionally, the owner of the oil and gas subsurface estate is unknown or the oil and gas interests have not been used in many years. These situations are governed by Pennsylvania’s Dormant Oil and Gas Act, 58 Pa. Stat. §§ 701.1-701.7.
The statute currently allows any person with an interest in oil and gas underlying land to petition the Court of Common Pleas in that county to declare a trust in favor of all unknown owners of an interest in the oil and gas at issue. 58 Pa. Stat. § 701.4(a) ("The petitioner’s interest may be in fee, by lease, a royalty or by ownership of correlative rights in an oil and gas reservoir."). Unlike dormant mineral statutes in a number of other mineral-producing states, Pennsylvania’s Dormant Oil and Gas Act does not provide for vesting of title to severed oil and gas interests in the surface owner. However, proposed legislation would change that.1
Last session, HB 375 sought to amend the Dormant Oil and Gas Act. Although it was not passed, Representative Bob Godshall is sponsoring the bill again this session (the "Amendment").2 If passed, it would add substantially to the current Dormant Oil and Gas Act. The Amendment would provide for the vesting of oil and gas rights in the surface owner if the oil and gas interest is deemed abandoned after 20 years of dormancy. The Amendment describes "dormancy" as occurring if, within a 20-year period, an oil and gas interest (1) was not sold, leased, mortgaged, or transferred of record, (2) was not the subject of a permit to drill an oil or gas well, (3) has had no actual production of oil or gas from the land or land it is pooled/unitized with, or (4) was not used in underground gas storage operations. In order for an abandoned oil and gas interest to be vested in the surface owner, the surface owner must record a verified written notice describing the land and stating that the oil and gas interest has been dormant for a 20-year period. The Amendment, as drafted, does not require notice to the oil and gas interest holder that the interest is being deemed abandoned and vested in the surface owner.
The Amendment also allows the holder of oil and gas interests to prevent an interest from being deemed abandoned by recording a claim of interest with the Recorder of Deeds for the appropriate county. The claim of interest must (1) be verified, (2) include an adequate description of the land, and (3) be recorded within 20 years of the last sale, lease, mortgage, transfer of record of the interest, issuance of a drilling permit, actual production from the land or land it is pooled/unitized with, or use for underground gas storage. If the holder of oil and gas interests records such a claim of interest, the oil and gas interest cannot be deemed abandoned for a 20-year period following the recording.
Because the Amendment, as drafted, does not require any notice to the oil and gas interest holder before the interest can be deemed abandoned and vested in the surface owner, it could pose threats to existing oil and gas leases and lead to litigation. If leased oil and gas interests are deemed abandoned and vested in the surface owner, then the oil and gas lease may be exposed to questions of validity and enforceability, and any wells or other infrastructure on the property may be lost.
Ohio and North Dakota, both states that have recently experienced an increase in oil and gas exploration and production similar to Pennsylvania’s,3 also have recently amended their dormant oil and gas acts within the past 10 years. Notably, both of the statutes in these two states governing dormant oil and gas interests have procedural safeguards in place to protect the rights and interests of the holders of oil and gas interests. Each state statute requires the surface owner to provide written notice to the record oil and gas interest holder and record an affidavit of that notice and abandonment with the county Recorder of Deeds. Ohio Rev. Code § 5301.56(E), (H)(2) (West 2012); North Dakota Cent. Code § 38-18.1-06 (West 2012).
An oil and gas litigation team led by Kevin Abbott, and including Nicolle Snyder Bagnell, Stacey Jarrell, and Stefanie Burt, is handling a case of first impression regarding Ohio’s Dormant Mineral Act, where the validity of oil and gas leases is challenged.
1. Representative Bob Godshall is also sponsoring a second amendment to the Dormant Oil and Gas Act, which is similar to the current version of the Act. It would allow landowners to petition the Court of Common Pleas to hold an unknown or non-locatable owner’s oil and gas estate in a trust. It would also then allow the surface owner to purchase the interest, which the current Dormant Oil and Gas Act does not allow.
2. The co-sponsorship memo is available here: http://www.legis.state.pa.us/cfdocs/Legis/CSM/showMemoPublic.cfm?chamber=H&SPick=20130&cosponId=10323.
3. See, e.g., Ben Casselman, Oil Industry Booms–in North Dakota, Wall St. J., Feb. 26, 2010, at 1.
Client Alert 2013-038