Proposed Pennsylvania legislation would create additional requirements for oil and gas exploration and production companies when releasing oil and gas leases. Currently, there are no statutory duties for lessees regarding the documentation of released or cancelled oil and gas leases. Although, as a matter of industry practice, oil and gas leases are often released, terminated, or cancelled, and the lessor notified, there is no requirement to provide such notification to the lessor or the Recorder of Deeds. The proposed legislation would change that.

As drafted, House Bill 402 (the Bill) proposes a new statutory act – “The Recording of Release from Oil and Natural Gas Lease Act ” – not an amendment or addition to the existing Oil and Gas Act. The Bill, which was proposed by Representative Tina Pickett into Pennsylvania’s House of Representatives, would require a lessee to deliver a Release of the oil and gas lease to the owner(s) of the oil and gas rights, at least 30 days prior to the termination or cancellation of that oil and gas lease. After the date of termination or cancellation of the oil and gas lease, the lessee also is required to record the written Release with the Recorder of Deeds for the appropriate county. The Bill provides a list of information that lessees must provide in a Release, including a description of the land, a statement that the oil and gas lease is terminated or cancelled pursuant to its terms, and the date of termination or cancellation.

Although the proposed legislation does not apply to any oil and gas lease where the lessee and owner have expressed a written interest in renewing the lease or negotiating a new lease, there are several concerns with the Bill. First, the proposed legislation contains a provision that allows the owner of the oil and gas rights to serve a notice on the lessee stating that if a Release is not received by the date of termination or cancellation, then the owner will record an affidavit of termination or cancellation of the oil and gas lease with the Recorder of Deeds. See HB 402, Section 4. This provision could cause uncertainty regarding when an oil and gas lease is – or can be – released, and then lead to subsequent litigation over the validity and enforceability of the lease.

A second area of concern is that the Bill, as drafted, seems to suggest that a lessee is required to provide a Release for oil and gas leases that cannot be terminated or released – i.e., oil and gas leases that have a well located on the property and are held by production. See HB 402, Section 4(a)(6). Lastly, if any version of the proposed legislation is enacted, it will require lessees to draft and record numerous Releases, which will be costly and time-consuming.

Similar statutes have been enacted in a number of other mineral-producing states, including New York, Oklahoma, and Kansas, and have led to litigation in those states.

Reed Smith’s Oil & Gas Litigation Group has successfully handled lease disputes throughout the Marcellus and Utica Shales. If you have any questions on the proposed legislation or other oil & gas-related issues, please contact the author of this Alert or any member of the Reed Smith Oil & Gas Litigation Group.

Client Alert 2013-053