The Severability of Dual-Purpose Leases in the Appalachia

Abstract

Oil and gas leases have undergone frequent evolution since the Drake Well sparked the first oil boom in the United States. One development evidencing this evolution is the creation of the dual-purpose oil and gas lease. In the years following the Drake Well, many leases only granted lessees the right to produce oil and gas. These leases would extend beyond their primary term only for so long as oil and gas were produced from leased premises, and would terminate after a certain period of non-production per the terms of the contract. As geological formations containing oil and gas in the Appalachian states became depleted in the 1930s and 1940s, it became necessary to pipe in gas from out-of-state to stockpile for the winter months. The inadequacy of pipeline infrastructure at the time necessitated that foreign gas be stored in geological formations depleted of their own gas. As such, lessees sought to amend existing leases as well as enter into new leases granting them not only the right to produce oil and gas, but also the right to store and to protect stored oil and gas. According to their express terms, these leases would extend beyond their primary term for so long as said lands were producing oil and gas, or being used for the storage or the protection of stored oil and gas. These leases allowing for production, storage and protection of storage are known as dual-purpose leases. Pennsylvania, Ohio and West Virginia courts have recently addressed challenges from lessors asserting that production provisions of dual-purpose leases expire following the primary term if the leases are extended into their secondary term only by virtue of storage, and not production. Lessors contend that the production and storage provisions in dual-purpose leases are severable. Courts in Pennsylvania and Ohio have examined some dual-purpose leases and determined that these lease provisions are generally entire, not severable; thus, lessees properly storing and making storage rental payments under such leases retain all of the rights under the lease, including the right to production. A Federal District Court for West Virginia reached the opposite conclusion. This article examines how courts in the Appalachian region have ruled on the issue of severability and also the factors the courts have considered in reaching their conclusions.